[No. 11897. September 24, 1918.

]
J. F. RAMIREZ, plaintiff and appellee, vs. THE ORIENTALIST Co., and RAMON J. FERNANDEZ,
defendants and appellants.
1. 1. PLEADING; DUE EXECUTION OF CONTRACT; AUTHORITY OF OFFICER TO BIND
CORPORATION.Where the name of a corporation is signed to the document which
is the basis of an action, the failure of the defendant corporation to put in issue, by
denial under oath the due execution of the instrument, as required in section 103 of
the Code of Civil Procedure, operates as an admission of the authority of the officer
to execute the contract, since the authority of the officer to bind the company is
essential to the due execution of its contract.
1. 2. ID.; CORPORATIONS; WANT OF AUTHORITY IN AGENT AS SPECIAL DEFENSE.
Where a corporation seeks to evade liability on a contract on the ground of lack of
authority on the part of the person who assumed to act for it, such defense should
be specially pleaded.

meeting of stockholders refusing to recognize the contract or repudiating it is

without effect.
1. 7. CONTRACTS; SURETY; PAROL EVIDENCE TO SHOW CHARACTER IN WHIGH PARTY
IS BOUND.The written contract which was the subject of this action contained the
corporate name signed at the lower right-hand corner of the contract, in the
manner usual with a party signing in the character of principal obligor. The name of
another individual was signed somewhat below and to the left of the corporate
signature, after the customary manner of those who sign in a subsidiary capacity;
but no words were written to indicate clearly whether this individual signed as a
principal obligor or as surety. Held: That parol evidence that the intention was that
he should be bound as surety and not jointly with the other party.
APPEAL from a judgment of the Court of First Instance of Manila. Harvey, J.
The facts are stated in the opinion of the court.
Jose Moreno Lacalle for appellant Fernandez.

1. 3. ID.; AMENDMENTS.While immaterial variances between allegations in the

pleadings and the proof adduced at the hearing may be disregarded, it is,
nevertheless, still true that relief can be granted only upon matter which is put in
issue by the pleadings; and if the proof varies materially from the allegations, the
pleadings may, upon the application of the party interested, be amended in order to
bring them into conformity with the facts proved.
1. 4. ID.; ID.; SPECIAL DEFENSE.The rule above stated applies equally to a special
defense stated in the answer as to the plaintiff's cause of action.
1. 5. CORPORATIONS; CONTRACTS; POWER OF BOARD; RATIFICATION.The power to
make corporate contracts resides primarily in the company's board of directors; but
the board may ratify an unauthorized contract made by an officer of the
corporation. Ratification in this case is held to have occurred when the board, with
knowledge that the contract had been made, adopted a resolution recognizing the
existence of the contract and directing that steps be taken to enable the
corporation to utilize its benefits.
1. 6. ID.; ID.; ACTION OF STOCKHOLDERS.Where a corporate contract has been
effected with the approval of the board of directors, a resolution adopted at a

Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."

No appearance for appellee.
STREET, J.:
The Orientalist Company is a corporation, duly organized under the laws of the Philippine
Islands, and in 1913 and 1914, the time of the occurrences which gave rise to this lawsuit,
was engaged in the "business of maintaining and conducting a theater in the city of Manila
for the exhibition of cinematographic films. Under the articles of incorporation the company
is authorized to manufacture, buy, or otherwise obtain all accessories necessary for
conducting such a business. The plaintiff J. F. Ramirez was, at the same time, a resident of
the city of Paris, France, and was engaged in the business of marketing films for a
manufacturer or manufacturers, there engaged in the production or distribution of
cinematographic material. In this enterprise the plaintiff was represented in the city of
Manila by his son, Jose Ramirez.
In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila,
became apprised of the fact that the plaintiff in Paris had control of the agencies for two
different marks of films, namely, the "Eclair Films" and the "Milano Films;" and negotiations

were begun with said officials of the Orientalist Company by Jose Ramirez, as agent of the
plaintiff, for the purpose of placing the exclusive agency of these films- in the hands of the
Orientalist Company. The defendant Ramon J. Fernandez, one of the directors of the
Orientalist Company and also its .treasurer, was chiefly active in this matter, being moved
by the suggestions and representations of Vicente Ocampo, manager of the Oriental
Theater, to the effect that the securing of the exclusive agency of said films was necessary
to the success of the corporation,
Near the end of July of the year aforesaid, Jose Ramirez, as representative of his f ather,
placed in the hands of Ramon J. Femandez an offer, dated July 4, 1913, stating in detail the
terms upon which the plaintiff would undertake to supply from Paris the aforesaid films.
This offer was declared to be good until the end of July; and as only about two days of this
period remained, it appeared important for the Orientalist Company to act upon the matter
speedily, if it desired to take advantage of said offer. Accordingly, Ramon J. Fernandez, on
July 30, had an informal conference with all the members of the company's board of
directors except one, and with the approval of those with whom he had communicated,
addressed a letter to Jose Ramirez, in Manila, accepting the offer contained in the
memorandum of July 4th for the exclusive agency of the Eclair films. A few days later, on
August 5, he addressed another letter couched in the same terms, likewise accepting the
offer of the exclusive agency for the Milano.films,
The memorandum offer contained a statement of the price at which the films would be
sold, the quantity which the representative of each was required to take, and information
concerning the manner and intervals of time for the respective shipments. The expenses of
packing, transportation and other incidentals were to be at the cost of the purchaser. There
was added a clause in which J. F. Ramirez described his function in such transactions as that
of a commission agent and stated that he would see to the prompt shipment of the films,
would pay the manufacturer, and take care that the films were insuredhis commission for
such services being fixed at 5 per cent.
What we consider to be the most material portion of the two letters of acceptance written
by R. J. Fernandez to Jose Rarnirez is in the following terms:
"We willingly accepted the offer under the terms communicated by your father in his letter
dated at Paris on July 4th of the present year."
These communications were signed in the following form, in which it will be noted the
separate signature of R. J. Fernandez, as an individual, is placed somewhat below and to the
left of the signature of the Orientalist Company as signed by R. J. Fernandez, in the capacity
of treasurer:

"THE
"By
Treasurer.

ORIENTALIST
R.

J.

COMPANY,
FERNANDEZ,

"R. J. FERNANDEZ."
Both of these letters also contained a request that Jose Ramirez should at once telegraph to
his father in Paris that his offer had been accepted by the Orientalist Company and instruct
him to make a contract with the film companies, according to the tenor of the offer, and in
the capacity of attorney-in-fact for the Orientalist Company. The idea behind the latter
suggestion apparently was that the contract for the films would have to be made directly
between the film-producing companies and the Orientalist Company; and it seemed
convenient, in order to save time, that the Orientalist Company should clothe J. F. Ramirez
with full authority as its attorney-in-fact. This idea was never given effect; and so far as the
record shows, J. F. Ramirez himself procured the films upon his own responsibility, as he
indicated in the offer of July 4 that he would do, with the result that the only contracting
parties in this case are J. F. Ramirez, of the one part, and the Orientalist Company, with
Ramon J. Fernandez, of the other.
ln due time the films began to arrive in Manila, a draft for the cost and expenses incident to
each shipment being attached to the proper bill of lading. It appears that the Orientalist
Company was without funds to meet these obligations and the first few drafts were dealt
with in the following manner: The drafts, upon presentment through the bank, were
accepted in the name of the Orientalist Company by its president B. Hernandez, and were
taken up by the latter with his own funds. As the drafts had thus been paid by B. Hernandez,
the films which had been procured by the payment of said drafts were treated by him as his
own property; and they in fact never came into the actual possession of the Orientalist
Company as owner at all, though it is true Hernandez rented the films to the Orientalist
Company and they were exhibited by it in the Oriental Theater under an arrangement which
was made between him and the theater's manager.
During the period, between February 27, 1914, and April 30, 1914, there arrived in the city
of Manila several remittances of films from Paris, and it is these shipments which have given
occasion for the present action. All of the drafts accompanying these films were drawn, as
on former occasions, upon the Orientalist Company; and all were accepted in the name of
the Orientalist Company by its president, B. Hernandez, except the last, which was
accepted. by B. Hernandez individually. None of the drafts thus accepted were taken up by
the drawee or by B. Hernandez when they fell due; and it was finally necessary for the
plaintiff himself to take them up as dishonored by nonpayment.

Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist
Company, and Ramon J. Fernandez. As the films which accompanied the dishonored drafts
were liable to deteriorate, the court, upon application of the plaintiff, and apparently
without opposition on the part of the defendants, appointed a receiver who took charge of
the films and sold them. The amount realized from this sale was applied to the satisfaction
of the plaintiff's claim and was accordingly delivered to him in part payment thereof. At trial
judgment was given for the balance due to the plaintiff, namely, P6,018.93, with interest
from May 19r 1914, the date of the institution of the action. In the judgment of the trial
court the Orientalist Company was declared to be a principal debtor and Ramon J.
Fernandez was declared to be liable subsidiarily, as guarantor. From this judgment both of
the parties defendant appealed.

As to the liability of the corporation a preliminary point of importance arises upon the
pleadings. The action, as already stated, is based upon documents purporting to be signed
by the Orientalist Company, and copies of the documents are set out in the complaint. It
was therefore incumbent upon the corporation, if it desired to question the authority of
Fernandez to bind it, to deny the due execution of said contracts under oath, as prescribed
in section 103 of the Code of Civil Procedure. Said section, in the part pertinent to the
situation now under consideration, reads as follows:

In this Court neither of the parties appellant make any question with respect to the right of
the plaintiff to recover from somebody the amount awarded by the lower court; but each of
the defendants insists the other is liable for the whole. It results that the r&al contention
upon this appeal is between the two defendants.

No sworn answer denying the genuineness and due execution of the contracts in question
or questioning the authority of Ramon J. Fernandez to bind the Orientalist Company was
filed in this case; but evidence was admitted without objection from the plaintiff, tending to
show that Ramon J. Fernandez had no such authority. This evidence consisted of extracts f
rom the minutes of the proceedings of the company's board of directors and also of extracts
from the minutes of the proceedings of the company's stockholders, showing that the
making of this contract had been under consideration in both bodies and that the authority
to make the same had been withheld by the stockholders. It theref ore becomes necessary f
or us to consider whether the admission resulting from the failure of the defendant
company to deny the execution of the contracts under oath is binding upon it for all
purposes of this lawsuit, or whether such failure should be considered a mere irregularity of
procedure which was waived when the evidence referred to was admitted without
objection from the plaintiff. The proper solution of this problem makes it necessary to
consider carefully the principle underlying the provision above quoted.

It is stated in the brief of the appellant Ramon J. Fernandez, and the statement is not
challenged by the Orientalist Company, that the judgment has already been executed as
against the company and that the full amount has been made, so that if this Court should
find that the Orientalist Company is exclusively and primarily liable for the entire
indebtedness, the question as to the liability of Ramon J. Fernandez would be academic. But
if the latter is liable as principal obligor for the whole or any part of the debt, it will be
necessary to modify the judgment in order to adjust the rights of the defendants in
accordance with such finding.
It will be noted that the action is primarily founded upon the liability created by the letters
dated July 30th and August 5, 1913, in connection with the plaintiff's offer of July 4, 1913;
and both of the letters mentioned are copied into the complaint as the foundation of the
action. The action is not based upon the dishonored drafts which were accepted by B.
Hernandez in the name of the Orientalist Company; and although these drafts, as well as the
last draft, which was accepted by B. Hernandez individually, have been introduced in
evidence, this was evidently done for the purpose of proving the amount of damages which
the plaintiff was entitled to Eecover.
In the discussion which is to follow we shall consider, first, the question of the liability of the
corporation upon the contracts contained in the letters of July 30 and August 5, 1913, and,
secondly, the question of the liability of Ramon J. Fernandez, based upon his personal
signature to the same documents.

"When an action is brought upon a written instrument and the complaint contains or has
annexed a copy of such instrument, the genuinenesi3 and due execution of the instrument
shall be deemed admitted, unless specifically denied under oath in the answer."

That the situation was one in which an answer under oath denying the authority of the
agent should have been interposed, supposing that the company desired to contest this
point, is not open to question. ln the case of Merchant vs. International Banking'
Corporation (6 Phil. Rep., 314), it appeared that one Brown had signed the name of the
defendant bank as guarantor of a promissory note. The bank was sued upon this guaranty
and at the hearing attempted to prove that Brown had no authority to bind the bank by
such contract. It was held that, by failing to deny the contract under oath, the bank had
admitted the genuineness and due execution thereof, and that this admission extended not
only to the authenticity of the signature of Brown but also to his authority. Said Justice
Willard: "The failure of the defendant to deny the genuineness and due execution of this
guaranty under oath was an admission, not only of the signature of Brown, but also of his
authority to make the contract in behalf of the defendant and, of the power of the
defendant to enter into such a contract."

The rule thus stated is in entire accord with the doctrine prevailing in the United States, as
will be seen by reference to the following, among other authorities:
The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a corporation
upon an appeal bond. The name of the company had been affixed to the obligation by an
agent, and no sufficient affidavit was filed by the corporation questioning its signature or
the authority of the agent to bind the company. It was held that the plaintiff did not have to
prove the due execution of the bond and that the corporation was to be taken as admitting
the authority of the agent to make the signature. Among other things the court said: "But it
is said that the authority of Barrett to execute the bond is distinguishable from the signing
and, although the signature must be denied under oath, the authority of the agent need not
be. Upon this we observe that the statute manifestly refers to the legal effect of the
signature, rather than the manual act of signing. If the name of the obligor, in a bond, is
subscribed by one in his presence, and by his direction, the effect is the same as if his name
should be signed with his own hand, and under such circumstances we do not doubt that
the obligor must deny his signature under oath, in order to put the obligee to proof of the
fact. Quit facit per aliam facit per se, and when the name is signed by one thereunto
authorized, it is as much the signature of the principal as if written with his own hand.
Therefore, if the principal would deny the authority of the agent, as the validity of the
signature is thereby directly attacked, the denial must be under oath."
In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note
purporting to have been given by one A. B., as the treasurer of the defendant company. Said
the court: "Under the Judiciary Act of 1799, requiring the defendant to deny on oath an
instrument of writing, upon which he is sued, the plea in this case should have been verified.

forth, as a special defense, any such lack of authority in him. Upon well established
principles of pleading lack of authority in an officer of a corporation to bind it by a contract
executed by him in its name is a defense which should be specially pleadedand this quite
apart from the requirement, contained in section 103, that the answer setting up such
defense should be verified. by oath. But it should not here escape observation that section
103 also requiresin conf ormity with the general principle above statedthat the denial
contemplated in that section shall be specific. An attack on the instrument in general terms
is insufficient, even though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)
In the first edition of a well-known treatise on the law of corporations we find the following
proposition:
"If an action is brought against a corporation upon a contract alleged to be its contract, if it
desires to set up the defense that the contract was executed by one not authorized as its
agent, it must plead non est factum." (Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)
Again, says the same author:
"A corporation can not avail itself of the defense that it had no power to enter into the
obligation to enforce which the suit is brought, unless it pleads that defense. This principle
applies equally where the defendant intends to challenge the power of its officer or agent to
execute in its behalf the contract upon which the action is brought and where it intends to
defend on the ground of a total want of power in the corporation to make such a contract."
(Opus citat. sec. 7619.)
In Simon vs. Calfee (80 Ark., 65), it was said:

If the person who signed this note for the company, and upon which they are sued, was not
authorized to make it, let them say so upon oath, and the onus is then on the plaintiff to
overcome the plea."
It should be noted that the provision contained in section 103 of our Code of Civil Procedure
is embodied in some form or other in the statutes of probably all of the American States,
and it is not by any means peculiar to the laws of California, though it appears to have been
taken immediately from the statutes of that State. (Secs. 447 448, California Code of Civil
Procedure.)
There is really a broader question here involved than that which relates merely to the
formality of verifying the answer with an affidavit. This question arises from the
circumstance that the answer of the corporation does not in any way challenge the
authority of Ramon J. Fernandez to bind it by the contracts in question and does not set

"Though the power of the officers of a business corporation to issue negotiable paper in its
name is not presumed, such corporation can not avail itself of a want of power in its officers
to bind it unless the defense was made on such ground."
The rule has been applied where the question was whether a corporate officer, having
admitted power to make a contract, had in the particular instance exceeded that authority,
(Merrill vs. Consumers' Coal Co., 114 N. Y., 216); and it has been held that where the answer
in a suit against a corporation on its note relies simply on the want of power of the
corporation to issue notes, the defendant can not afterwards object that the plaintiff has
not shown that the officers executing the note were empowered to do so. (Smith vs. Eureka
Flour Mills Co., 6 Cal., 1.)

The reason for the rule enunciated in the foregoing authorities will, we think, be readily
appreciated. In dealing with corporations the public at large is bound to rely to a large
extent upon outward appearances. If a man is found acting for a corporation with the
external indicia of authority, any person, not having notice of want of authority, may usually
rely upon those appearances; and if it be found that the directors had permitted the agent
to exercise that authority and thereby held him out as a person competent to bind the
corporation, or had acquiesced in a contract and retained the benefit supposed to have
been conferred by it, the corporation will be bound, notwithstanding the actual authority
may never have been granted. The public is not supposed nor required to know the
transactions which happen around the table where the corporate board of directors or the
stockholders are from time to time convoked. Whether a particular officer actually
possesses the authority which he assumes to exercise is frequently known to very few, and
the proof of it usually is not readily accessible to the stranger who deals with the
'corporation on the faith of the ostensible authority exercised by some of the corporate
officers. It is therefore reasonable, in a case where an officer of a corporation has made a
contract in its name, that the corporation should be required, if it denies his authority, to
state such defense in its answer. By this means the plaintiff is apprised of the fact that the
agent's authority is contested; and he is given. an opportunity to adduce evidence showing
either that the authority existed or that the contract was ratified and approved.

It is true that it is declared in section 109 of the Code of Civil Profcedure that immaterial
variances between the allegations of a pleading and the proof shall be distregarded and the
facts shall be found according to the evidence. The same section, however, recognizes the
necessity for an amendment of the pleadings, in all cases where the variance is substantial,
to bring them into conformity with the facts proved. That section has, in our opinion, by no
means abrogated the general and fundamental principle that relief can only be granted
upon matters which are put in issue by the pleadings. A judgment must be in conformity
with the case made in the pleadings and established by the proof, and relief can not be
granted that is substantially inconsistent with either. A party can no more succeed upon a
case proved but not alleged than upon a case alleged but not proved. This rule, of course,
operates with like effect upon both parties, and applies equally to the defendant's special
defense as to the plaintiff's cause of action.

We are of the opinion that the failure of the defendant corporation to make any issue in its
answer with regard to the authority of Ramon J. Fernandez to bind it, and particularly its
failure to deny specifically under oath the genuineness and due execution of the contracts
sued upon, have the effect of eliminating the question of his authority from the case,
considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a written
instrument, the foundation of the suit, is not denied upon oath, it shall be deemed to be
admitted. It is familiar doctrine that an admission made in a pleading can not be
controverted by the party making such admission; and all proof submitted by him contrary
thereto or inconsistent therewith should simply be ignored by the court, whether objection
is interposed by the opposite party or not. We can see no reason why a constructive
admission, created by the express -words of the statute, should be considered to have less
effect than any other admission.

That we may not appear to have overlooked the matter, we will observe that two cases are
cited from California in which the Supreme Court of the State has held that where a release
is pleaded by way of defense and evidence tending to destroy its effect is introduced
without objection, the circumstance that it was not denied under oath is immaterial. In the
earlier of these cases, Crowley vs. Railroad. Co. (60 Cal., 628), an action was brought against
a railroad company to recover damages for the death of the plaintiff's minor son, alleged to
have been killed by the negligence of the defendant. The defendant company pleaded by
way of defense a release purporting to be signed by the plaintiff, and in its answer inserted
a copy of the release. The execution of the release was not denied under oath; but at the
trial evidence was submitted on behalf of the plaintiff tending to show that at the time he
signed the release, he was incompetent by reason of drunkenness to bind himself thereby. It
was held that inasmuch as this evidence had been submitted by the plaintiff without
objection, it was proper for the court to consider it. We do not question the propriety of
that decision, especially as the issue had been passed upon by a jury; but we believe that
the decision would have been more soundly planted if it had been said that the incapacity of
the plaintiff, due to his drunken condition, was a matter which did not involve either the
genuineness or due execution of the release. Like the defenses of fraud, coercion, imbecility,
and mistake, it was a matter which could be proved under the general issue and did not
have to be set up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A
somewhat similar explanation can, we think, be given of the case of Clark vs. Child (66 Cal.,

The parties to an action are required to submit their respective contentions to the court in
their complaint and answer. These documents supply the materials which the court must
use in order to discover the points of contention between the parties; and where the statute
says that the due execution of a document which supplies the foundation of an action is to
be taken as admitted unless denied under oath, the failure of the defendant to make such
denial must be taken to operate as a conclusive admission, so long as the pleadings remain
in that form.

Of course this Court, under section 109 of the Code of Civil Procedure, has authority even
now to permit the answer of the defendant to be amended; and if we believed that the
interests of justice so required, we would either exercise that authority or remand the cause
for a new trial in the court below. As will appear further on in this opinion, however, we
think that the interests of justice will best be promoted by deciding the case, without more
ado, upon the issues presented in the record as it now stands.

87), in which the rule declared in the earlier case was followed. With respect to both
decisions we merely observe that upon the point of procedure which they are supposed to
maintain, the reasoning of the court is in our opinion unconvincing.
We shall now consider the liability of the defendant company on the merits just as if that
liability had been properly put in issue by a specific answer under oath denying the authority
of Fernandez to bind it. Upon this question it must at the outset be premised that Ramon J.
Fernandez, as treasurer, had no independent authority to bind the company by signing its
name to the letters in question. It is declared in section 28 of the Corporation Law that
corporate powers shall be exercised, and all corporate business conducted. by the board of
directors; and this principle is recognized in the by-laws of the corporation in question which
contain a provision declaring that the power to make contracts shall be vested in the board
of directors, It is true that it is also declared in the same by-laws that the president shall
have the power, and it shall be his duty, to sign contracts; but this has reference rather to
the formality of reducing to proper form the contracts which are authorized by the board
and is not intended to confer an independent power to make contracts binding on the
corporation.
The fact that the power to make corporate contracts is thus vested in the board of directors
does not signify that a formal vote of the board must always be taken before contractual
liability can be fixed upon a corporation; for the board, can create liability, like an individual,
by other means than by a formal expression of its will. In this connection the case of Robert
Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. It there appeared that the
secretary of the defendant corporation had signed an obligation on its behalf binding it as
guarantor of the perf ormance of an important contract upon which the name of another
corporation appeared as principal. The defendant company set up by way of defense that its
secretary had no authority to bind it by such an engagement. The court found that the
guaranty was given with the knowledge and consent of the president and directors, and that
this consent was given with as much observance of formality as was customary in the
transaction of the business of the company. It was held that, so far as the authority of the
secretary was concerned, the contract was binding. In discussing this point, the court
quoted with approval the f ollowing language from one of its prior decisions:
"The authority of the subordinate agent, of a corporation often depends upon the course of
dealings which the company or its directors have sanctioned. It may be established
sometimes without reference to official record of the proceedings of the board, by proof of
the usage which the company had permitted to grow up in the business, and of the
acquiescenee of the board charged with the duty of supervising and controlling the
company's business."

It appears in evidence, in the case now before us, that on July 30, the date upon which the
letter accepting the offer of the Bclair films was dispatched, the board of directors of the
Orientalist Company convened in special session in the office of Ramon J. Fernandez at the
request of the latter. There were present the four members, including the president, who
had already signified their consent to the making of the contracts. At this meeting, as
appears from the minutes, Fernandez informed the board of the offer which had been
received from the plaintiff with reference to the importation of films. The minutes add that
the terms of this offer' were approved; but at the suggestion of Fernandez it was decided to
call a special meeting of the stockholders to consider the matter, and definitive action was
postponed.
The stockholders meeting was convoked upon September 18, 1913, upon which occasion
Fernandez informed those present of the offer in question and of the terms upon which the
films could be procured. He estimated that he company would have to make an outlay of
about P5,500 per month, if the offer f or the two films should be accepted by it.
The following extracts from the minutes of this meeting are here pertinent:
"Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for
the purpose of avoiding that other importers should get ahead of the corporation in this
regard, he and Messrs. B. Hernandez, Leon Monroy, and Dr. Papa met for the purpose of
considering the acceptance of the offer together with the responsibilities attached thereto,
made to the corporation by the film manufacturers of Eclair and Milano of Paris and Italy
respectively, inasmuch as the first shipment of films was then expected to arrive.
"At the same time he informed the said stockholders that he had already made
arrangements with respect to renting said films after they have been once exhibited in the
Cine Oriental, and that the corporation could, very well meet the expenditure involved and
net a certain profit, but that, if we could enter into a contract with about nine
cinematographs, big gains would be obtained through such a step."
The possibility that the corporation might not see fit to authorize the contract, or might for
lack of funds be unable to make the necessary outlay, was foreseen; and in such
contingency, the stockholders were informed, that the four gentlemen above mentioned
(Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at their
own account and risk, and shall be entitled only to a compensation of 10 per cent of their
outlay in importing the films, said payment to be made in shares of said corporation,
inasmuch as the corporation is lacking available funds for the purpose, and also because
there are 88 shares of stock remaining still unsold."

In view of this statement, the stockholders adopted a resolution to the effect that the
agencies of the Eclair and Milano films should be accepted, if the corporation could obtain
the money with which to meet the expenditure involved, and to this end appointed a
committee to apply to the bank for a credit. The evidence shows that an attempt was made,
on behalf of the corporation, to obtain a credit of P10,000 from the Bank of the Philippine
Islands for the purpose indicated, but that the bank declined to grant this credit. Thereafter
another special meeting of the shareholders of the defendant corporation was called at
which the failure of their committee to obtain a credit from the bank was made known. A
resolution was thereupon passed to the effect that the company should pay to Hernandez,
Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay in importing
the films, said payment to be made in shares of the company in accordance with the
suggestion made at the previous meeting. At the time this meeting was held three shipment
of the films had already been received in Manila.
We believe it is a fair inference from the recitals of the minutes of the stockholder's meeting
of September 18, and especially from the first paragraph above quoted, that this body was
then cognizant that the offer had already been accepted in the name of the Orientalist
Company and that the films which were then expected to arrive were being imported by
virtue of such acceptance. Certainly four members of the board of directors there present
were aware of this fact, as the letters accepting the offer had been sent with their
knowledge and consent. In view of this circumstance, a certain doubt arises whether the
stockholders meant by their final resolution really to repudiate the contracts which had
been made in the name of the company or whether they meant to utilize the financial
assistance of the four so-called importers in order that the corporation might get the benefit
of the contracts for the films, just as it would have utilized the credit of the bank if such
credit had been extended. If such was the intention of the stockholders their action
amounted to a virtual, though indirect, approval of the contracts. It is not, however,
necessary to found the judgment on this interpretation of the stockholder's proceedings,
inasmuch as we think, for reasons presently to be stated, that the corporation is bound, and
we will here assume that in the end the contracts were not approved by the stockholders.
It will be observed that Ramon J. Fernandez Was the particular officer and member of the
board of directors who was most active in the effort to secure the films for the corporation.
The negotiations were conducted by him with the knowledge and consent of other
members of the board; and the contract was made with their prior approval. As appears
from the papers in this record, Fernandez was the person to whose keeping was confided
the printed stationery bearing the official style of the corporation, as well as a rubber stencil
with which the name of the corporation could be signed to documents bearing its name.

Ignoring now, for a moment, the transactions of the stockholders, and reverting to the
proceedings of the board of directors of the Orientalist Company; we find that upon
October 27, 1913, after Fernandez had departed from the Philippine Islands, to be absent
for many months, said board adopted a resolution conferring the following among other
powers on Vicente Ocampo, the manager of the Oriental theater, namely:
1. "(1) To rent a box for the films in the 'Kneedler Building.'
2. " (4) T'o be in charge of the films and of the renting of the same.
3. " (5) To advertise in the different newspapers that we are importing films to be
exhibited in the Cine Oriental.
4. " (6) Not to deliver any film for rent without first receiving the rental therefor or the
guaranty for the payment thereof.
5. "(7) To buy a book and cards for indexing the names of the films.
6. " (10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the
Hon. R. Acufia to enter into agreements with cinematograph proprietors in the
provinces for the purpose of renting films from us."
It thus appears that the board of directors, before the financial inability of the corporation
to proceed with the project was revealed, had already recognized the contracts as being in
existence and had proceeded to take the steps necessary to utilize the films. Particularly
suggestive is the direction given at this meeting for the publication of announcements in the
newspapers to the effect that the company was engaged in importing films. ln the light of all
the circumstances of the case, we are of the opinion that the contracts in question were
thus inferentially approved by the company's board of directors and that the company is
bound unless the subsequent failure of the stockholders to approve said contracts had the
effect of abrogating the liability thus created.
Both upon principle and authority it is clear that the action of the stockholders, whatever its
character, must be ignored. The functions of the stockholders of a corporation are, it must
be remembered, of a limited nature. The_ theory of a corporation is that the stockholders
may have all the profits but shall turn over the complete management of the enterprise to
their representatives and agents, called directors. Accordingly there is little for the
stockholders to do beyond electing directors, making by-laws, and exercising certain other
special powers defined by law. In conformity with this idea it is settled that contracts
between a corporation and third persons must be made by the directors and not by the
stockholders. The corporation, in such matters, is represented by the former and not by the
latter. (Cook on Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely accordant
with the provisions of section 28 of our Corporation Law already referred to. It results that
where a meeting of the stockholders is called f or the purpose of passing on the propriety of

making a corporate contract, its resolutions are at most advisory and not in any wise binding
on the board.

purpose of guaranteeing, not the approval of the contract, but its performance. We are
convinced that the latter was the real intention of the contracting parties.

In passing upon the liability of a corporation in cases of this kind it is always well to keep in
mind the situation as it presents itself to the third party with whom the contract is made.
Naturally he can have little or no information as to what occurs in corporate meetings; and
he must necessarily rely upon the external manifestations of corporate consent. The
integrity of commercial transactions can only be maintained by holding the corporation
strictly to the liability fixed upon it by its agents in accordance with law; and we would be
sorry to announce a doctrine which would permit the property of a man in the city of Paris
to be whisked out of his hands and carried into a remote quarter of the earth without
recourse against the corporation whose name and authority had been used in the manner
disclosed in this case. As already observed, it.is familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent, to do acts within the scope of an
apparent authority, and thus holds him out to the public as possessing power to do those
acts, the corporation will, as against any one who has in good f aith dealt with the
corporation through such agent, be estopped from denying his authority; and where it is
said "if the corporation permits" this means the same as "if the thing is permitted by the
directing power "of the corporation."

We are not unmindful of the force of that rule of law which declares that oral evidence is
inadmissible to vary the effect of a written contract. But it must be remembered that
ambiguities with respect to the meaning of the language used by the parties may be
explained by parol evidence and we see no reason why an ambiguity arising, as in this case,
from the form in which the contract was signed may not be explained in the same way. It is
certainly the duty of a court to seek the means, of giving effect to the intention of the
contracting parties rather than to seek pretexts for defeating it.

It being determined that the corporation is bound by the contracts in question, it remains to
consider the character of the liability assumed by Ramon J. Fernandez, in affixing his
personal signature to said contracts. The question here is whether Fernandez is liable jointly
with the Orientalist Company as a principal obligor, or whether his liability is that of a
guarantor merely.
As appears upon the face of the contracts, the signature of Fernandez, in his individual
capacity, is not in line with the signature of the Orientalist Company, but is set off to the left
of the company's signature and somewhat below. Observation teaches that it is customary
for persons who sign contracts in some capacity other than that of principal obligor to place
their signatures to one side; but we hardly think that this circumstance alone would justify a
court in holding that Fernandez here took upon himself the responsibility of a guarantor
rather than that of a principal obligor. We do, however, think that the form in which the
contract is signed raises a doubt as to what the real intention was; and we feel justified, in
looking to the evidence to discover that intention. ln -this connection it is entirely clear,
from the testimony of both Ramirez and Ramon J. Fernandez, that the responsibility of the
latter was intended to be that of a guarantor. There is, to be sure, a certain difference
between these witnesses as to the nature of this guaranty, inasmuch as Fernandez would
have us believe that his name was signed as a guaranty that the contract would be approved
by the corporation, while Ramirez says that the name was put on the contract for the

If the name of a person not interested in the performance of these contracts had appeared
written in the place where the name of Ramon J. Fernandez is signed, and the evidence had
shown that such name was there written merely to attest the signature of the corporation,
or of Ramon J. Fernandez.as treasurer, no court would have had any hesitation in holding
that no liability had been incurred though words were wanting to show how the name was
signed.
We are of the opinion that where a name is signed ambiguously, parol evidence is
admissible to show the character in which the signature was affixed. This conclusion is
perhaps supported by the language of the second paragraph of article 1281 of the Civil
Code, which declares that if the words of a contract should appear contrary to the evident
intention of the parties, the intention shall prevail. But the conclusion reached is, we think,
deducible from the general principle that in case of ambiguity parol evidence is admissible
to show the intention of the contracting parties.
It should be stated in conclusion that as the issues in this case have been framed, the only
question presented to this court is: To what extent are the signatory parties to the contract
liable to the plaintiff J. F. Ramirez ? No contentious issue is raised directly between the def
endants, the Orientalist Company and Ramon J. Fernandez; nor does the present action
involve any question as to the undertaking of Fernandez and his three associates to effect
the importation of the films upon their own account and risk. Whether they may be bound
to hold the company harmless is a matter upon which we express no opinion.
The judgment appealed from is affirmed, with costs equally against the two appellants. So
ordered.
Torres, Johnson, Malcolm, Avancena, and Fisher, JJ., concur.Judgment affirmed.

No. L-23428. November 29, 1968.

DETECTIVE & PROTECTIVE BUREAU, INC., petitioner, vs. THE HONORABLE GAUDENCIO
CLORIBEL, in his capacity as Presiding Judge of Branch VI, Court of First Instance of Manila,
and FAUSTO S. ALBERTO, respondents.
Special civil action; Preliminary injunction; Dissolution;
When verification of motion for dissolution of writ of preliminary injunction is required.
From the rulings in Sy Yam Bio, et al. v. Barrios, et al., 63 Phil. 203; Caluya, et al. v. Ramos, et
al., 79 Phil. 640, and Canlas, et al. v. Aquino, et al., L-16815, July 24, 1961, as well as from
the terminology of Section 6 of Rule 58 of the new Rules of Court, it is evident that whether
the application for dissolution of a writ of preliminary injunction must be verified or not
depends upon the ground upon which such application is based. If the application or motion
for dissolution is based on the insufficiency of the complaint, the motion need not be
verified. If the motion is based on the ground that the injunction would cause great damage
to defendant while the plaintiff can be fully compensated for such damages as he may
suffer, the motion should be verified.
Same; A preliminary injunction issued after hearing and in accordance with Rule 58 may still
be set aside; Reason: A writ of preliminary injunction is an interlocutory order; Sec. 6 of Rule
58 construed; Writ may be dissolved without giving the other party an opportunity to be
heard.The provision of Section 6 of Rule 58 that "the injunction may be refused, or, if
granted ex parte, may be dissolved" cannot be construed as putting beyond the reach of the
court the dissolution of an injunction which was granted after hearing. The reason is
because a writ of preliminary injunction is an interlocutory order, and as such it is always
under the control of the court before final judgment (Manila Electric Co. v. Artiaga, et al., 50
Phil. 144; Caluya, et al. v. Ramos, et al., 79 Phil 640; Clarke v. Philippine Ready Mix Concrete
Co., Inc., 88 Phil. 460).
Corporation law; Director; Stock; To qualify as a director of a corporation, one must own at
least one share of stock therein.Every director must own in his own right at least one
share of the capital stock of the stock corporation of which he is a director, which stock shall
stand in his name on the books of the corporation (Sec. 30, Corporation Law). So that, if the
By-Laws of the Corporation provides that "The manager shall be elected by the Board of
Directors from among its members," one could not be a managing director of said
corporation unless he owns at least one share of stock thereof.

Same; Dispute as to who owns the controlling interest in the corporation; Party in control or
in possession of the controlling interest is presumed to have the better right to the position
of managing corporate director.Where ownership of the controlling interest in the
corporation is in dispute, the party in control or in possession of the disputed interest is
presumed to have the better right (to the position of managing' corporate director) until the
contrary is adjudged, and hence, that party should not be deprived of the control or
possession until the court is prepared to adjudicate the controverted right in favor of the
other party (Gordillo, et al. v. Del Rosario, et al., 39 Phil. 829). Relevant here is: "The rule
that a court should not, by means of a preliminary injunction, transfer property in litigation
from the possession of one party to another is more particularly applicable where the legal
title is in dispute and the party having possession asserts ownership in himself" (Gordillo, et
al. v. Del Rosario, supra; Rodulfa v. Alfonso, et al., 79 Phil. 225).
Special civil action; Writ of preliminary injunction; Issuance discretionary upon trial court;
Limitation of court's discretion; Wide latitude of trial court's discretion in the modifica-tion or
dissolution of the writ.It is a settled rule that the issuance of the writ of preliminary
injunction as an ancillary or preventive remedy to secure the rights of a party in a pending
case is 'entirely within the discretion of the court taking cognizance of the casethe only
limitation being that this discretion should be exercised based upon the grounds and in the
manner provided by law (Agno River Gold Dredging Co., Inc. v. De Leon, et al., 61 Phil. 190),
and it is equally well-settled that a wide latitude is given under Section 7 of Rule 58 of the
Rules of Court to the trial court to modify or dissolve the injunction as justice' may require.
The court which is to exercise that discretion is the trial court, not the appellate court (North
Negros Co., Inc. v. Hidalgo, 63 Phil. 664). The exercise of sound judicial discretion by the
lower court in injunctive matters should not be interfered with except in cases of manifest
abuse (Rodulfa v. Alfonso, supra; North Negros Sugar Co. v. Hidalgo, supra).
Same; Petition for certiorari against a trial court's order dissolving writ of preliminary
injunction; Prior motion for reconsideration filed with trial court required; Exception.
Before a petition for certiorari should be filed with the Supreme Court, against an order
dissolving the writ of preliminary injunction the petitioner -should first give the respondent
Judge (or trial court) a chance or opportunity to correct his error, if any, in an appropriate
motion for reconsideration. An omission to comply with this procedural requirement
justifies a denial of the writ of certiorari applied for (Herrera v. Barreto, et al., 25 Phil. 245;
Uy Chu v. Imperial, et al, 44 Phil. 27; Alvarez, et al. v. Ibaez, et al., 83 Phil. 104; Ricafort v.
Duran, 54 O.G. 2539; Cueto v. Ortiz, L-11555, May 31, 1960; Pagkakaisa Samahang
Manggagawa ng San Miguel Brewery v. Enriquez, L-12999, July 26, 1960; Maritime Company
of the Philippines, et al. v. Paredes, et al., L-24811, March 3, 1967). The exceptions to the
application of this procedural rule are: (1) where the question of jurisdiction has been
squarely raised, argued before, submitted to, and met and decided by the respondent court;

(2) where the questioned order is a patent nullity; and (3) where there is a deprivation of
the petitioner's fundamental right to due process (Moran, Comments on the Rules of Court,
1963 ed., Vol. III, p. 154).
ORIGINAL PETITION in the Supreme Court. Certiorari with preliminary injunction.
The facts are stated in the opinion of the Court.
Crispin D. Baizas & Associates and Jose S. Sarte for petitioner.
Gaudencio T. Bocobo for respondents.
ZALDIVAR, J.:
The complaint, in Civil Case No. 56949 of the Court of First Instance of Manila, dated May 4,
1964, filed by Detective and Protective Bureau, Inc., therein plaintiff (petitioner herein)
against Fausto S. Alberto, therein defendant (respondent herein), for accounting with
preliminary injunction and receivership, alleged that plaintiff was a corporation duly
organized and existing under the laws of the Philippines; that defendant was managing
director of plaintiff corporation from 1952 until January 14, 1964; that in June, 1963,
defendant illegally seized and took control of all the assets as well as the books, records,
vouchers and receipts of the corporation from the accountantcashier, concealed them
illegally and refused to allow any member of the corporation to see and examine the same;
that on January 14, 1964, the stockholders, in a meeting, removed defendant as managing
director and elected Jose de la Rosa in his stead; that defendant not only had refused to
vacate his office and to deliver the assets and books to Jose de la Rosa, but also continued
to perform unauthorized acts for and in behalf of plaintiff corporation; that defendant had
been required to submit a financial statement and to render an accounting of his
administration from 1952 but defendant has failed to do so; that defendant, contrary to a
resolution adopted by the Board of Directors on November 24, 1963, had been illegally
disposing of corporate funds; that defendant, unless immediately restrained ex-parte, would
continue discharging the functions of managing director; and that it was necessary to
appoint a receiver to take charge of the assets and receive the income of the corporation.
Plaintiff prayed that a preliminary in junction ex-parte be issued restraining defendant from
exercising the functions of managing director and from disbursing and disposing of its funds;
that Jose M. Barredo be appointed receiver; that, after judgment, the injunction be made
permanent and defendant be ordered to render an accounting.

Herein respondent Judge, the Honorable Gaudencio Cloribel, set for hearing plaintiff's
prayer for ancillary relief and required the parties to submit their respective memoranda.
On June 18, 1964, respondent Judge granted the writ of preliminary injunction prayed for,
conditioned upon plaintiff's filing a bond of P5,000.00. Plaintiff filed the bond, but while the
same was pending approval defendant Fausto S. Alberto filed, on July 1, 1964, a motion to
admit a counter-bond for the purpose of lifting the order granting the writ of preliminary
injunction. In spite of the opposition filed by plaintiff, respondent Judge issued, on August 5,
1964, an order admitting the counterbond and setting aside the writ of preliminary
injunction.
On the belief that the order approving the counter-bond and lifting the writ of preliminary
injunction was contrary to law and the act of respondent Judge constituted a grave abuse of
discretion, and that there was no plain, speedy and adequate remedy available to it, plaintiff
filed with this Court the instant petition for certiorari, praying that a writ of preliminary
injunction enjoining defendant Fausto S. Alberto from exercising the functions of managing
director be issued, and that the order dated August 5, 1964 of respondent Judge approving
the counter-bond and lifting the writ of preliminary injunction he had previously issued be
set aside and declared null and void. This Court gave due course to the petition but did not
issue a preliminary injunction.
In his answer, now respondent Fausto S. Alberto traversed the material allegations of the
petition, justified the order complained of, and prayed for the dismissal of the petition.
From the pleadings, it appears that the only issue to be resolved is whether the order of
respondent Judge dated August 5, 1964, admitting and approving the counter-bond of
P5,000 and setting aside the writ of preliminary injunction granted in his order dated June
18, 1964, was issued contrary to law and with grave abuse of discretion.
Now petitioner contends that the setting aside of the order granting the writ was contrary
to law and was done with a grave abuse of discretion, because: (1) the motion to admit
defendant's counter-bond was not supported by affidavits showing why the counter-bond
should be admitted, as required by Section 6 of Rule 58; (2) the preliminary injunction was
not issued ex-parte but after hearing, and the admission of the counter-bond rendered said
writ ineffective; (3) the writ was granted in accordance with Rule 58 of the Rules of Court
and established precedents; (4) public interest required that the writ be not set aside
because respondent had arrogated unto himself all the powers of petitioning corporation,
to the irreparable damage of the corporation; and that (5) the counter-bond could not
compensate petitioner's damage.

1. The first reason given by petitioner in support of its contention that the dissolution of the
writ of preliminary injunction was contrary to law is that the motion to admit respondent's
counter-bond for the dissolution of the writ was not supported by affidavits as required by
section 6 of Rule 58 of the Rules of Court. The controverted motion, however, does not
appear in the record. However, the record shows that respondent Alberto had filed a
verified answer to the complaint and a verified opposition to the issuance of the writ of
preliminary injunction.
Regarding the necessity of verification of the motion for dissolution of a writ of preliminary
injunction, this Court has ruled that the requirement of verification is not absolute but is
dependent on the circumstances obtaining in a particular case. In the case of Sy Sam Bio, et
al. vs. Barrios and Buyson Lampa,1 the only question raised was whether the respondent
Judge exceeded his jurisdiction and abused his discretion in setting aside an order directing
the issuance of a writ of preliminary injunction. In maintaining the affirmative, petitioners in
that case alleged that the questioned order was issued in violation of the provisions of
Section 169 of Act 190 (which is one of the sources of Sec. 6 of Rule 58 of the revised Rules
of Court) inasmuch as the Judge set aside said order and directed the dissolution of the
preliminary injunction without any formal petition of the parties and without having
followed the procedure prescribed by the statute. There was, however, a verbal application
for the dissolution of the writ, based upon the ground of the insufficiency of the complaint
which was the basis of the application for the issuance of said writ of preliminary injunction.
This Court said:
"Section 169 of Act 1909 does not prescribe the manner of filing the application to annul or
modify a writ of preliminary injunction. It simply states that if a temporary injunction be
granted without notice, the defendant, at any time before trial, may apply, upon reasonable
notice to the adverse party, to the judge who granted the injunction, or to the judge of the
court of which the action was brought, to dissolve or modify the same."
On the strength of the decision in the above-cited case, this Court in Caluya, et al. vs.
Ramos, et al.,2 said;
"Petitioners' criticism that the motion to dissolve filed by the defendants in Civil Case No.
4634 was not verified, is also groundless inasmuch as even an indirect verbal application for
the dissolution of an ex parte order of preliminary injunction has been held to be a sufficient
compliance with the provisions of section 6 of Rule 60 (Moran, Comments on the Rules of
Court, Second Edition, Vol. II, p. 65, citing the case of Sy Yam Bio v. Barrios, etc., 63 Phil.
206), the obvious reason being that said rule does not prescribe the form by which an
application for the dissolution or modification of an order of preliminary injunction should
be presented."

If according to the above rulings, Section 6 of Rule 60 (now sec. 6, Rule 58) of the Rules of
Court did not require any form for the application for the dissolution of the writ of
preliminary injunction, then respondent Fausto Alberto's motion to ift the preliminary
injunction in the court below need not be verified, ied, and much less must the motion be
supported by affidavits, as urged by petitioner.
However, in Canlas, et al. vs. Aquino, et al.,3 this Court ruled that a motion for the
dissolution of a writ of preliminary injunction should be verified. In that case, respondent
Tayag filed an unverified motion for the dissolution of a writ of preliminary injunction,
alleging that the same "would work great damage to the defendant who had already spent a
considerable sum of money" and that petitioners "can be fully compensated for any
damages that they may suffer." The court granted the motion and dissolved the preliminary
injunction. In an original action f or a writ of certiorari filed with this Court to annul said
order, this Court remarked in part:
"Petitioners herein are entitled to the writ prayed for. The motion of respondent Tayag for
the dissolution of the writ of preliminary injunction issued on October 22, 1959, was
unverified x x x."
From the precedents quoted above, as well as from the terminology of Section 6 of Rule 58
of the new Rules of Court, it is evident that whether the application f or the dissolution of
the writ of preliminary injunction must be verified or not depends upon the ground upon
which such application is based. If the application is based on the insufficiency of the
complaint, the motion need not be verified. If the motion is based on the ground that the
injunction would cause great damage to defendant while the plaintiff can be fully
compensated for such damages as he may suffer, the motion should be verified.
In the instant case, it is alleged by petitioner that the motion for the dissolution of the writ
of preliminary injunction was not verified. This allegation was not denied in the answer. But
because said motion does not appear in the record of the case now before this Court, We
cannot determine what are the grounds for the dissolution that are alleged therein, and so
We cannot rule on whether the motion should have been verified or not, This Court.
therefore, has to rely on the order of respondent Judge, dated August 5, 1964, which states
that "the filing of the counter-bond is in accordance with law." Consequently, the f irst
ground alleged by petitioner must be brushed aside.
2. The second and third reasons alleged by petitioner in its petition for certiorari assume
that a preliminary injunction issued after hearing and in accordance with Rule 58 cannot be
set aside. This contention is untenable. The provision of Section 6 of Rule 58 that "the
injunction may be refused, or, if granted ex parte, may be dissolved" cannot be construed as

putting beyond the reach of the court the dissolution of an injunction which was granted
after hearing. The reason is because a writ of preliminary injunction is an interlocutory
order, and as such it is always under the control of the court before final judgment. Thus, in
Caluya, et al. vs. Ramos, et al.,4 this Court said:

There is in the record no showing that Jose de la Rosa owned a share of stock in the
corporation. If he did not own any share of stock, certainly he could not be a director
pursuant to the mandatory provision of Section 30 of the Corporation Law, which in part
provides:

"The first contention of the petitioners is that, as said injunction was issued after a hearing,
the same cannot be dissolved, specially on the strength of an unverified motion for
dissolution and in the absence of proper evidence to support it. Reliance is placed on
Section 6 of Rule 60 of the Rules of Court which provides that 'the injunction may be
reduced, or, if granted ex parte, may be dissolved,' thereby arguing that if an injunction is
not issued ex parte the same cannot be dissolved. The contention is clearly erroneous.
Although said section prescribes the grounds for objecting to, or for moving the dissolution
of, a preliminary injunction prior to its issuance or after its granting ex parte, it does not
thereby outlaw a dissolution if the injunction has been issued after a hearing. This is to be
so, because a writ of preliminary injunction is an interlocutory order which is always under
the control of the court before final judgment. (Manila Electric Company vs. Artiaga and
Green, 50 Phil. 144, 147)."

"SEC. 30. Every director must own in his own right at least one share of the capital stock of
the stock corporation of which he is a director, which stock shall stand in his name on the
books of the corporation. x x x"

This Court has also ruled that the dissolution of a writ of preliminary injunction issued after
hearing, even if the dissolution is ordered without giving the other party an opportunity to
be heard, does not constitute an abuse of discretion and may be cured not by certiorari but
by appeal. In Clarke vs. Philippine Ready Mix Concrete Co., Inc., et al.,5 one of the issues
presented was whether a writ of preliminary injunction granted the plaintiff by a trial court
after hearing, might be dissolved upon an ex parte application by the defendant, and this
Court ruled that:
"The action of a trial court in dissolving a writ of preliminary injunction already issued after
hearing, without giving petitioner an opportunity to be heard, does not constitute lack or
excess of jurisdiction or an abuse of discretion, and any irregularity committed by the trial
court on this score may be cured not by certiorari but by appeal."
3. The fourth reason alleged by petitioner in support of its stand is that public interest
demanded that the writ enjoining respondent Fausto Alberto from exercising the functions
of managing director be maintained. Petitioner contended that respondent Alberto had
arrogated to himself the powers of the Board of Directors of the corporation because he
refused to vacate the office and surrender the same to Jose de la Rosa who had been
elected managing director by the Board to succeed him. This assertion, however, was
disputed by respondent Alberto who stated that Jose de la Rosa could not be elected
managing director because he did not own any stock in the corporation.

If he could not be a director, be could also not be a managing director of the corporation,
pursuant to Article V. Section 3 of the By-Laws of the Corporation which provides that:
"The manager shall be elected by the Board of Directors from among its members. x x x"
(Record, p. 48)
If the managing director-elect was not qualified to become managing director, respondent
Fausto Alberto could not be compelled to vacate his office and cede the same to the
managing director-elect because the by-laws of the corporation provides in Article IV,
Section 1 that "Directors shall serve until the election and qualification of their duly qualified
successor."
4. The fifth reason alleged by herein petitioner in support of its contention that respondent
Judge gravely abused his discretion when he lifted the preliminary injunction upon the filing
of the counter-bond was that said counter-bond could not compensate for the irreparable
damage that the corporation would suffer by reason of the continuance of respondent
Fausto Alberto as managing director of the corporation. Respondent Alberto, on the
contrary, contended that he really was the owner of the controlling interest in the business
carried on in the name of the petitioner, having invested therein a total of P57,-727.29 as
against the sum of P4,000 only invested by one other director, Jose M. Barredo. We find
that there was a question as to who own the controlling interest in the corporation. Where
ownership is in dispute, the party in control or possession of the disputed interest is
presumed to have the better right until the contrary is adjudged, and hence that party
should not be deprived of the control or possession until the court is prepared to adjudicate
the controverted right in favor of the other party.'6
Should it be the truth that respondent Alberto is the controlling stockholder, then the
damages said respondent would suffer would be the same, if not more, as the damages that
the corporation would suffer if the injunction were maintained. If the bond of P5,000 filed
by petitioner for the injunction would be sufficient to answer for the damages that would be

suffered by respondent Alberto by reason of the injunction, there seems to be 110 reason
why the same amount would not be suf f icient to answer for the damages that might be
suffered by the petitioning corporation by reason of the lifting of the injunction. The
following ruling of this Court has a persuasive application in this case:
"The rule that a court should not, by means of a preliminary injunction, transfer property in
litigation from the possession 01 one party to another is more particularly applicable where
the legal title is in dispute and the party having possession asserts ownership in himself."7
Let it be stated, in relation to all the reasons given by petitioner, that it is a settled rule that
the issuance of the writ of preliminary injunction as an ancillary or preventive remedy to
secure the rights of a party in a pending case is entirely within the discretion of the court
taking cognizance of the casethe only limitation being that this discretion should be
exercised based upon the grounds and in the manner provided by law,8 and it is equally well
settled that a wide latitude is given under Section 7 of Rule 58 of the Rules of Court to the
trial court to modify or dissolve the injunction as justice may require. The court which is to
exercise that discretion is the trial court, not the appellate court.9 The exercise of sound
judicial discretion by the lower court in injunctive matters should not be interfered with
except in cases of manifest abuse.10 In the instant case, We find that petitioner failed to
show manifest abuse of discretion by respondent Judge in setting aside the writ of
preliminary injunction.
There is, however, one vital reason why the instant petition for certiorari should be denied.
And it is, that from the order dissolving the writ of preliminary injunction the petitioner has
gone directly to this Court without giving the respondent Judge (or trial court) a chance or
opportunity to correct his error, if any, in an appropriate motion for reconsideration. An
omission to comply with this procedural requirement justifies a denial of the writ applied
for.11
The instant case is not one of the exceptions in the application of this rule, which are: where
the question of jurisdiction has been squarely raised, argued before, submitted to, and met
and decided by the respondent court; where the questioned order is a patent nullity; and
where there is a deprivation of the petitioner's f undamental right to due process.12
It being our considered view that respondent Judge had not committed grave abuse of
discretion in issuing the order dated August 5, 1964 lifting the writ of preliminary injunction
which had previously been granted in the order dated June 18, 1964, and the herein petition
for certiorari having been filed without previously complying with a well settled procedural
requirement, there is no alternative for this Court but to order its dismissal.

WHEREFORE, the instant petition for certiorari with preliminary injunction is dismissed, with
costs against the petitioner. It is so ordered.
Concepcion, CJ., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Fernando and
Capistrano, JJ., concur.
Petition dismissed.

own in his right at least one share of the capital stock of the stock corporation of which he is
a director * * *.
Gokongwei, Jr. vs. Securities and Exchange Commission
*

No. L-45911. April 11, 1979.

JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE COMMISSION,

ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO
BUAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
Supreme Court; Judgments; Securities and Exchange Commission; Corporation Law; Supreme
Court always strives to settle a legal controversy in a single proceeding.xxx In the case at
bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted
by the Board of Directors of the San Miguel Corporation in the exercise of the power
delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law;
that in a special meeting on February 10, 1977 held specially for that purpose, the amended
by-laws were ratified by more than 80% of the stockholders of record; that the foreign
investment in the Hongkong Brewery and Distillery, a beer manufacturing company in
Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders
annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.
Corporation Law; While reasonableness of a by-law is a legal question, where
reasonableness of a by-law provision is one in which reasonable minds may differ a court will
not be justified in subsisting its judgment for those authorized to make the by-laws.The
validity or reasonableness of a by-law of a corporation is purely a question of law. Whether
the by-law is in conflict with the law of the land, or with the charter of the corporation, or is
in a legal sense unreasonable and therefore unlawful is a question of law. This rule is
subject, however, to the limitation that where the reasonableness of a by-law is a mere
matter of judgment, and one upon which reasonable minds must necessarily differ, a court
would not be warranted in substituting its judgment instead of the judgment of those who
are authorized to make by-laws and who have exercised their authority.
Same; Under the Corporation Law a corporation is authorized to prescribe the qualification
of its directors.In this jurisdiction, under Section 21 of the Corporation Law, a corporation
may prescribed in its by-laws the qualifications, duties and compensation of directors,
officers and employees ***. This must necessarily refer to a qualification in addition to that
specified by section 30 of the Corporation Law, which provides that every director must

Same; Stockholder has no vested right to be elected as stockholder.Any person who buys
stock in a corporation does so with the knowledge that its affairs are dominated by a
majority of the stockholders and that he implied contracts that the will of the majority shall
govern in all matters within the limits of the act of incorporation and lawfully enacted bylaws and not forbidden by law. To this extent, therefore, the stockholder may be
considered to have parted with his personal right or privilege to regulate the disposition of
his property which he has invested in the capital stock of the corporation and surrendered it
to the will of the majority or his fellow incorporators. **** It can not therefore be justly said
that the contract, express or implied, between the corporation and the stockholders is
infringed *** by any act of the former which is authorized by a majority, ***.
Same; A director stands in a fiduciary relation to the competition and its stockholders. The
disqualification of a competition from being elected to the board of directors is a reasonable
exercise of corporate authority. Although in the strict and technical sense, directors of a
private corporation are not regarded as trustees, there cannot be any doubt that their
character is that of a fiduciary insofar as the corporation for the collective benefit of the
stockholders, they occupy a fiduciary relation, and in these sense the relation is one of
trust.
Same; Same.It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of competing
corporation, from taking advantage of the information which he acquires as director to
promote his individual or corporate interests to the prejudice of San Miguel Corporation and
its stockholders, that the questioned amendment of the by-laws was made. Certainly, where
two corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty
to both corporations and place the performance of his corporate duties above his personal
concerns.
Same; Same.Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty to loyalty may well require that he disclose
this information to a competitive rival. These dangers are enhanced considerably where the
common director such as the petitioner is a controlling stockholder of two of the competing
corporations. It would seem manifest that in such situations, the director has an economic
incentive to appropriate for the benefit of his own corporation the corporate plans and
policies of the corporation where he sits as director.

Same; Another reason for upholding a by-law provision that forbids a competitor to be
elected as corporate director are the laws prohibiting cartels.There is another important
consideration in determining whether or not the amended by-laws are reasonable. The
Constitution and the law prohibit combinations in restraint of trade or unfair competition.
Thus, Section 2 of Article XIV of the Constitution provides: That State shall regulate or
prohibit private monopolies when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be allowed.
Same; Same.Basically, these anti-trust laws or laws against monopolies or combinations in
restraint of trade are aimed at raising levels of competition by improving the consumers
effectiveness as the final arbiter in free markets. These laws are designed to preserve free
and unfettered competition as the rule of trade. It rests on the premise that the
unrestrained interaction of competitive forces will yield the best allocation of our economic
resources, the lowest prices and the highest quality ***. They operate to forestall
concentration of economic power. The law against monopolies and combinations in
restraint of trade is aimed at contracts and combinations that, by reason of the inherent
nature of the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade.
Same; Election of petitioner as San Miguel Corporation Director may run counter to the
prohibition contained in Section 13(5) of Corporation Law on investments in corporations
engaged in agriculture.Finally, considering that both Robina and SMC are, to a certain
extent, engaged in agriculture, then the election of petitioner to the Board of SMC may
constitute a violation of the prohibition contained in Section 13(5) of the Corporation Law.
Said section provides in part that any stockholder of more than one corporation organized
for the purpose of engaging in agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or attempting to bring about a
combination to exercise control of such corporations. ***.
Same; The by-law amendment of SMC applies equally to all and does not discriminate
against petitioner only.However, the by-law, by its terms, applies to all stockholders. The
equal protection clause of the Constitution requires only that the by-laws operate equally
upon all persons of a class. Besides, before petitioner can be declared ineligible to run for
director, there must be hearing and evidence must be submitted to bring his case within the
ambit of the disqualification. Sound principles of public policy and management, therefore,
support the view that a by-law which disqualifies a competitor from election to the Board of
Directors of another corporation is valid and reasonable.
Same; Petitioner is not ipso facto disqualified to run on SMC director. He must be given full
opportunity by the SEC to show that he is not covered by the disqualification.While We

here sustain the validity of the amended by-laws, it does not follow as a necessary
consequence that petitioner is ipso facto disqualified. Consonant with the requirement of
due process, there must be due hearing at which the petitioner must be given the fullest
opportunity to show that he is not covered by the disqualification. As trustees of the
corporation and of the stockholders, it is the responsibility of directors to act with fairness
to the stockholders. Pursuant to this obligation and to remove any suspicion that this power
may be utilized by the incumbent members of the Board to perpetuate themselves in
power, any decision of the Board to disqualify a candidate for the Board of Directors should
be reviewed by the Securities and Exchange Commission en banc and its decision shall be
final unless reversed by this Court on certiorari.
Same; Every stockholder has the right to inspect corporate books and records.The
stockholders right of inspection of the corporations books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated
upon the necessity of selfprotection. It is generally held by majority of the courts that where
the right is granted by statute to the stockholder, it is given to him as such and must be
exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. In other words, the inspection has to
germane to the petitioners interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation.
Same; The right of stockholder to inspect corporate books extends to a wholly-owned
subsidiary.In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would be more in
accord with equity, good faith and fair dealing to construe the statutory right of petitioner
as stockholder to inspect the books and records of the corporation as extending to books
and records of such wholly owned subsidiary which are in respondent corporations
possession and control.
Same; Purely ultra vires corporate acts of corporate officers to invest corporate funds in
another business or corporation, i.e., acts not contrary to law, morals, public order as public
policy, may be ratified by the stockholders holding 2/3 of the voting power.Assuming
arguendo that the Board of Directors of San Miguel Corporation had no authority to make
the assailed investment, there is no question that a corporation, like an individual, may
ratify and thereby render binding upon it the originally unauthorized acts of its officers or
other agents. This is true because the questioned investment is neither contrary to law,
morals, public order or public policy. It is a corporate transaction or contract which is within
the corporate powers, but which is defective from a purported failure to observe in its

execution the requirement of the law that the investment must be authorized by the
affirmative vote of the stockholders holding twothirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment and its ratification by said
stockholders obliterates any defect which it may have had at the outset. Mere ultra vires
acts, said this Court in Pirovano, or those which are not illegal and void ab initio, but are
not merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
Corporation Law; Judgment; The doctrine of the law of the case.We hold on our part that
the doctrine of the law of the case invoked by Mr. Justice Barredo has no applicability for
the following reasons: a) Our jurisprudence is quite clear that this doctrine may be invoked
only where there has been a final and conclusive determination of an issue in the first case
later invoked as the law of the case.
Same; Same; When doctrine of the law of the case not applicable.The doctrine of the law
of the case, therefore, has no applicability whatsoever herein insofar as the question of the
validity or invalidity of the amended by-laws is concerned. The Courts judgment of April 11,
1979 clearly shows that the voting on this question inconclusive with six against four Justices
and two other Justices (the Chief Justice and Mr. Justice Fernando) expressly reserving their
votes thereon, and Mr. Justice Aquino while taking no part in effect likewise expressly
reserved his vote thereon. No final aad conclusive determination could be reached on the
issue and pursuant to the provisions of Rule 56, section 11, since this special civil action
originally commenced in this Court, the action was simply dismissed with the result that no
law of the case was laid down insofar as the issue of the validity or invalidity of the
questioned by-laws is concerned, and the relief sought herein by petitioner that this Court
bypass the SEC which has yet to hear and determine the same issue pending before it below
and that this Court itself directly resolve the said issue stands denied.
Same; Same; Constitutional Law; Due Process; When procedural due process was not
observed.The entire Court, therefore, recognized that petitioner had not been given
procedural due process by the SMC board on the matter of his disqualification and that he
was entitled to a new and proper hearing. It stands to reason that in such hearing,
petitioner could raise not only questions of fact but questions of law, particularly questions
of law affecting the investing public and their right to representation on the board as
provided by lawnot to mention that as borne out by the fact that no restriction
whatsoever appears in the Courts decision, it was never contemplated that petitioner was
to be limited questions of fact and could not raise the fundamental question of law bearing
on the invalidity of the questioned amended by-laws at such hearing before the SMC board.
Furthermore, it was expressly provided unanimously in the Courts decision that the SMC

boards decision on the disqualification of petitioner (assuming the board of directors of

San Miguel Corporation should, after the proper hearing, disqualify him as qualified in Mr.
Justice Barredos own separate opinion, at page 2) shall be appealable to respondent
Securities and Exchange Commission deliberating and acting en banc and ultimately to
this Court.
Same; Same; Reservation of the vote of the Chief Justice.As expressly stated in the Chief
Justices reservation of his vote, the matter of the question of the applicability of the said
section 13(5) to petitioner would be heard by this Court at the appropriate time after the
proceedings below (and necessarily the question of the validity of the amended by-laws
would be taken up anew and the Court would at that time be able to reach a final and
conclusive vote).
Same; Same; Validity of the amended by-laws.The six votes cast by Justices Makasiar,
Antonio, Santos, Abad Santos, De Castro and this writer in favor of validity of the amended
by-laws in question, with only four members of this Court, namely, Justices Teehankee,
Concepcion Jr., Fernandez and Guerrero opining otherwise, and with Chief Justice Castro
and Justice Fernando reserving their votes thereon and Justice Aquino and Melencio Herrera
not voting, thereby resulting in the dismissal of the petition insofar as it assails the validity
of the amended by-laws . . . . for lack of necessary votes, has no other legal consequence
than that it is the law of the case far as the parties herein are concerned, albeit the majority
opinion of six against four Justices is not doctrinal in the sense that it cannot be cited as
necessarily a precedent for subsequent cases. This means that petitioner Gokongwei and
the respondents, including the Securities and Exchange Commission, are bound by the
foregoing result, namely, that the Court en banc has not found merit in the claim that the
amended by-laws in question are invalid. Indeed, it is one thing to say that dismissal of the
case is not doctrinal and entirely another thing to maintain that such dismissal leaves the
issue unsettled.
Same; Same; Where petitioner can no longer revive the issue validity of the amended bylaws.I reiterate, therefore, that as between the parties herein, the issue of validity of the
challenged bylaws is already settled. From which it follows that the same are already
enforceable insofar as they are concerned. Petitioner Gokongwei may not hereafter act on
the assumption that he can revive the issue of validity whether in the Securities Exchange
Commission, in this Court or in any other forum, unless he proceeds on the basis of a factual
milieu different from the setting of this case. Not even the Securities and Exchange
Commission may pass on such question anymore at the instance of herein petitioner or
anyone acting in his stead or on his behalf. The vote of four justices to remand the case
thereto cannot alter the situation.

Same; Same; Where Court has not found merit in the claim that the amended by-laws in
question are valid.I concur in Justice Barredos statement that the dismissal (for lack of
necessary votes) of the petition to the extent that it assails the validity of the amended bylaws, is the law of the case at bar, which means in effect that as far and only in so far as the
parties and the Securities and Exchange Commission are concerned, the Court has not found
merit in the claim that the amended by-laws in question are valid.
Same; Same; Term and meaning of farming.This is my view, even as I am for a restrictive
interpretation of Section 13(5) of the Philippine Corporation Law, under which I would limit
the scope of the provision to corporations engaged in agriculture, but only as the word
agriculture refers to its more limited meaning as distinguished from its general and broad
connotation. The term would then mean farming or raising the natural products of the
soil, such as by cultivation, in the acquisition of agricultural land such as by homestead,
before the patent may be issued.
Same; Same; Poultry raising or piggery is included in the term agriculture.It is my
opinion that under the public land statute, the development of a certain portion of the land
applied for a specified in the law as a condition precedent before the applicant may obtain a
patent, is cultivation, not let us say, poultry raising or piggery, which may be included in the
term Agriculture in its broad sense. For under Section 13(5) of the Philippine Corporation
Law, construed not in the strict way as I believe it should because the provision is in
derogation of property rights, the petitioner in this case would be disqualified from
becoming an officer of either the San Miguel Corporation or his own supposedly agricultural
corporations.
ORIGINAL ACTION in the Supreme Court. Certiorari, mandamus and injunction.
The facts are stated in the opinion of the Court.

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ
of preliminary injunction, arose out of two cases filed by petitioner with the Securities and
Exchange Commission, as follows:
SEC CASE NO. 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed
with the Securities and Exchange Commission (SEC) a petition for declaration of nullity of
amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and
damages with prayer for a preliminary injunction against the majority of the members of
the Board of Directors and San Miguel Corporation as an unwilling petitioner. The petition,
entitled John Gokongwie, Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel,
Antonio Roxas, Emeterio Buao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and
San Miguel Corporation, was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961, when the outstanding capital
stock of respondent corporation was only P70,139,740.00, divided into 5,513,974 common
shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time
of the amendment, the outstanding and paid up shares totalled 30,127,043 with a total par
value of P301,270,430.00. It was contended that according to section 22 of the Corporation
Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal
or adopt new by-laws may be delegated to the Board of Directors only by the affirmative
vote of stockholders representing not less than 2/3 of the subscribed and paid up capital
stock of the corporation, which 2/3 should have been computed on the basis of the
capitalization at the time of the amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted without authority and in
usurpation of the power of the stockholders.

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos.
Sequion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

As a second cause of action, it was alleged that the authority granted in 1961 had already
been exercised in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors
had changed since the authority was given in 1961, there being six (6) new directors.

R. T. Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
substantial stockholder thereof; that as a stockholder, petitioner had acquired rights

inherent in stock ownership, such as the rights to vote and to be voted upon in the election
of directors; and that in amending the by-laws, respondents purposely provided for
petitioners disqualification and deprived him of his vested right as afore-mentioned, hence
the amended by-laws are null and void.1
As additional causes of action, it was alleged that corporations have no inherent power to
disqualify a stockholder from being elected as a director and, therefore, the questioned act
is ultra vires and void; that Andres M. Soriano, Jr., and/or Jose M. Soriano, while
representing other corporations, entered into contracts (specifically a management
contract) with respondent corporation, which was allowed because the questioned
amendment gave the Board itself the prerogative of determining whether they or other
persons are engaged in competitive or antagonistic business; that the portion of the
amended bylaws which states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as business and family
relationship, is unreasonable and oppressive and, therefore, void; and that the portion of
the amended by-laws which requires that all nominations for election of directors * * *
shall be submitted in writing to the Board of Directors at least five (5) working days before
the date of the Annual Meeting is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof be cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities
and Exchange Commission an Urgent Motion for Production and Inspection of Documents,
alleging that the Secretary of respondent corportion refused to allow him to inspect its
records despite request made by petitioner for production of certain documents
enumerated in the request, and that respondent corporation had been attempting to
suppress information from its stockholders despite a negative reply by the SEC to its query
regarding their authority to do so. Among the documents requested to be copied were (a)
minutes of che stockholders meeting held on March 13, 1961; (b) copy of the management
contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest
balance sheet of San Miguel International, Inc.; (d) authority of the stockholders to invest
the funds of respondent corporation in San Miguel International, Inc.; and (e) lists of
salaries, allowances, bonuses, and other compensation, if any, received by Andres M.
Soriano, Jr. and/or its successor-in-interest.
The Urgent Motion for Production and Inspection of Documents was opposed by
respondents, alleging, among others, that the motion has no legal basis; that the demand is
not based on good faith; that the motion is premature since the materiality or relevance of

the evidence sought cannot be determined until the issues are joined; that it fails to show
good cause and constitutes continued harrasment; and that some of the information sought
are not part of the records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation,
Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition denying
the substantial allegations therein and stating, by way of affirmative defenses that the
action taken by the Board of Directors on September 18, 1976 resulting in the * * *
amendments is valid and legal because the power to amend, modify, repeal or adopt new
By-laws delegated to said Board on March 13, 1961 and long prior thereto has never been
revoked, withdrawn or otherwise nullified by the stockholders of SMC; that contrary to
petitioners claim, the vote requirement for a valid delegation of the power to amend,
repeal or adopt new by-laws is determined in relation to the total subscribed capital stock at
the time the delegtion of said power is made, not when the Board opts to exercise said
delegated power; that petitioner has not availed of his intracorporate remedy for the
nullification of the amendment, which is to secure its repeal by vote of the stockholders
representing a majority of the subscribed capital stock at any regular or special meeting, as
provided in Article VIII, section 1 of the by-laws and section 22 of the Corporation Law,
hence the petition is premature; that petitioner is estopped from questioning the
amendments on the ground of lack of authority of the Board, since he failed to object to
other amendments made on the bais of the same 1961 authorization; that the power of the
corporation to amend its by-laws is broad, subject only to the condition that the by-laws
adopted should not be inconsistent with any existing law; that respondent corporation
should not be precluded from adopting protective measures to minimize or eliminate
situations where its directors might be tempted to put their personal interests over that of
the corporation; that the questioned amended by-laws is a matter of internal policy and the
judgment of the board should not be interfered with; that the by-laws, as amended, are
valid and binding and are intended to prevent the possibility of violation of criminal and civil
laws prohibiting combinations in restraint of trade; and that the petition states no cause of
action. It was, therefore, prayed that the petition be dismissed and that petitioner be
ordered to pay damages and attorneys fees to respondents. The application for writ of
preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the
petition, denying the material averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina Corporation (Robina), a corporation
engaged in business competitive to that of respondent corporation, began acquiring shares
therein, until September 1976 when its total holding amounted to 622,987 shares; that in
October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in
respondent corporation, until its total holdings amounted to P543,959.00 in September

1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of
Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and Robina, conducted malevolent
and malicious publicity campaign against SMC to generate support from the stockholder
in his effort to secure for himself and in representation of Robina and CFC interests, a seat
in the Board of Directors of SMC, that in the stockholders meeting of March 18, 1976,
petitioner was rejected by the stockholders in his bid to secure a seat in the Board of
Directors on the basic issue that petitioner was engaged in a competitive business and his
securing a seat would have subjected respondent corporation to grave disadvantages; that
petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual
meeting; that thereafter the Board of Directors amended the by-laws as afore-stated.

2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries,
allowances, bonuses, compensation and/or remuneration received by respondent Jose M.
Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-ininterest, the Petition to produce and inspect the same is hereby DENIED, as petitionermovant is not a stockholder of San Miguel International, Inc. and has, therefore, no
inherent, right to inspect said documents;

As counterclaims, actual damages, moral damages, exemplary damages, expenses of

litigation and attorneys fees were presented against petitioner.

4. Finally, the Commission holds in abeyance the resolution on the matter of production and
inspection of the authority of the stockholders of San Miguel Corporation to invest the funds
of respondent corporation in San Miguel International, Inc., until after the hearing on the
merits of the principal issues in the above-entitled case.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and
inspection of documents was filed by all the respondents. This was duly opposed by
petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were
allowed to intervene as oppositors and they accordingly filed their oppositionsinintervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in
part as follows:
Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and photographing, by or
on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders
meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in
the possession, custody and control of the said corporation, it appearing that the same is
material and relevant to the issues involved in the main case. Accordingly, the respondents
should allow petitionr-movant entry in the principal office of the respondent Corporation,
San Miguel Corporation on January 14, 1977, at 9:30 oclock in the morning for purposes of
enforcing the rights herein granted; it being understood that the inspection, copying and
photographing of the said documents shall be undertaken under the direct and strict
supervision of this Commission. Provided, however, that other documents and/or papers
not heretofore included are not covered by this Order and any inspection thereof shall
require the prior permission of this Commission;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976,

withdrawing his request to copy and inspect the management contract between San Miguel
Corporation and A. Soriano Corporation and the renewal and amendments thereof for the
reason that he had already obtained the same, the Commission takes note thereof; and

This Order is immediately executory upon its approval.2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent
corporation issued a notice of special stockholders meeting for the purpose of ratification
and confirmation of the amendment to the By-laws, setting such meeting for February 10,
1977. This prompted petitioner to ask respondent Commission for a summary judgment
insofar as the first cause of action is concerned, for the alleged reason that by calling a
special stockholders meeting for the aforesaid purpose, private respondents admitted the
invalidity of the amendments of September 18, 1976. The motion for summary judgment
was opposed by private respondents. Pending action on the motion, petitioner filed an
Urgent Motion for the Issuance of a Temporary Restraining Order, praying that pending
the determination of petitioners application for the issuance of a preliminary injunction
and/or petitioners motion for summary judgment, a temporary restraining order be issued,
restraining respondents from holding the special stockholders meeting as scheduled. This
motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for
issuance of temporary restraining order. After receipt of the order of denial, respondents
conducted the special stockholders meeting wherein the amendments to the by-laws were

ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt and for
nullification the special stockholders meeting.
A motion for reconsideration of the order denying petitioners man for summary judgment
was filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges
that up to the time of the filing of the instant petition, the said motion had not yet been
scheduled for hearing. Likewise, the motion for reconsideration of the order granting in part
and denying in part petitioners motion for production of records had not yet been resolved.
In view of the die fact that the annual stockholders meeting of respondent corporation had
been scheduled for May 10, 1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position of director of respondent
corporation. Thereafter, respondents filed a Manifestation with respondent Commission,
submitting a Resolution of the Board of Directors of respondent corporation disqualifying
and precluding petitioner from being a candidate for director unless he could submit
evidence on May 3, 1977 that he does not come within the disqualifications specified in the
amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof,
petitioner filed a manifestation and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents were seeking to nullify and
render ineffectual the exercise of jurisdiction by the respondent Commission, to petitioners
irreparable damage and prejudice. Allegedly despite a subsequent Manifestation to prod
respondent Commission to act, petitioner was not heard prior to the date of the
stockholders meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the
SEC to act, hence petitioner came to this Court.
SEC CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been
investing corporate funds in other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17-1/2 of the Corporation Law, he
filed with respondent Commission, on January 20, 1977, a petition seeking to have private
respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent
corporation declared guilty of such violation, and ordered to account for such investments
and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a
consolidated motion to strike and to declare individual respondents in default and an

opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said
motions were filed as early as February 4, 1977, the Commission acted thereon only on April
25, 1977, when it denied respondents motions to dismiss and gave them two (2) days
within which to file their answer, and set the case for hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders meeting, including in the Agenda
thereof, the following:
6. Reaffirmation of the authorization to the Board of Directors by the stockholders at the
meeting on March 20, 1972 to invest corporate funds in other companies or businesses or
for purposes other than the main purpose for which the Corporation has been organized,
and ratification of the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion
for the issuance of a writ of preliminary injunction to restrain private respondents from
taking up Item 6 of the Agenda at the annual stockholders meeting, requesting that the
same be set for hearing on May 3, 1977, the date set for the second hearing of the case on
the merits. Respondent Commission, however, cancelled the dates of hearing originally
scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual
stockholders meeting. For the purpose of urging the Commission to act, petitioner filed an
urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up
to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioners contention before this
Court that respondent Commission gravely abused its discretion when it failed to act with
deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary
impositions or limitations upon his rights as stockholder of respondent corporation, and that
respondent are acting oppressively against petitioner, in gross derogation of petitioners
rights to property and due process. He prayed that this Court direct respondent SEC to act
on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being voted
as director of respondent corporation and from submitting for ratification or confirmation
or from causing the ratification or confirmation of Item 6 of the Agenda of the annual
stockholders meeting on May 10, 1977, or from making effective the amended by-laws of
respondent corporation, until further orders from this Court or until the Securities and Exchange Commission acts on the matters complained of in the instant petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining
order had been issued by this Court, or on May 9, 1977, the respondent Commission served
upon petitioner copies of the following orders:
1. (1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioners motion
for reconsideration, with its supplement, of the order of the Commission denying in
part petitioners motion for production of documents, petitioners motion for
reconsideration of the order denying the issuance of a temporary restraining order
denying the issuance of a temporary restraining order, and petitioners consolidated
motion to declare respondents in contempt and to nullify the stockholders
meeting;
2. (2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a
director of respondent corporation but stating that he should not sit as such if
elected, until such time that the Commission has decided the validity of the by-laws
in dispute, and denying deferment of Item 6 of the Agenda for the annual
stockholders meeting; and
3. (3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioners motion
for reconsideration of the order of respondent Commission denying petitioners
motion for summary judgment;
It is petitioners assertions, anent the foregoing orders, (1) that respondent Commission
acted with indecent haste and without circumspection in issuing the aforesaid orders to
petitioners irreparable damage and injury; (2) that it acted without jurisdiction and in
violation of petitioners right to due process when it decided en banc an issue not raised
before it and still pending before one of its Commissioners, and without hearing petitioner
thereon despite petitioners request to have the same calendared for hearing; and (3) that
the respondents acted oppressively against the petitioner in violation of his rights as a
stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared null
and void and that respondent Commission be ordered to allow petitioner to undertake
discovery proceedings relative to San Miguel International, Inc. and thereafter to decide SEC
Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their
comment, alleging that the petition is without merit for the following reasons:
1. (1) that the petitioner and the interests he represents are engaged in businesses
competitive and antagonistic to that of respondent San Miguel Corporation, it
appearing that he owns and controls a greater portion of his SMC stock thru the

Universal Robina Corporation and the Consolidated Foods Corporation, which

corporations are engaged in businesses directly and substantially competing with
the allied businesses of respondent SMC and of corporations in which SMC has
substantial investments. Further, when CFC and Robina had accumulated shares in
SMC, the Board of Directors of SMC realized the clear and present danger that
competitors or antagonistic parties may be elected directors and thereby have easy
and direct access to SMCs business and trade secrets and plans;
2. (2) that the amended by-laws were adopted to preserve and protect respondent
SMC from the clear and present danger that business competitors, if allowed to
become directors, will illegally and unfairly utilize their direct access to its business
secrets and plans for their own private gain to the irreparable prejudice of
respondent SMC, and, ultimately, its stockholders. Further, it is asserted that
membership of a competitor in the Board of Directors is a blatant disregard of no
less than the Constitution and pertinent laws against combinations in restraint of
trade;
3. (3) that by-laws are valid and binding since a corporation has the inherent right and
duty to preserve and protect itself by excluding competitors and antagonistic
parties, under the law of self-preservation, and it should be allowed a wide latitude
in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423
was due to petitioners own acts or omissions, since he failed to have the petition to
suspend, pendente lite, the amended by-laws calendared for hearing. It was
emphasized that it was only on April 29, 1977 that petitioner calendared the
aforesaid petition for suspension (preliminary injunction) for hearing on May 3,
1977. The instant petition being dated May 4, 1977, it is apparent that respondent
Commission was not given a chance to act with deliberate dispatch, and
1. (5) that even assuming that the petition was meritorious, it has become moot and
academic because respondent Commission has acted on the pending incidents
complained of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G. Tanjuatco, Sr. filed his comment, alleging that the
petition has become moot and academic for the reason, among others, that the acts of
private respondents sought to be enjoined have reference to the annual meeting of the
stockholders of respondent San Miguel Corporation, which was held on May 10, 1977; that
in said meeting, in compliance with the order of respondent Commission, petitioner was
allowed to run and be voted for as director; and that in the same meeting, Item 6 of the
Agenda was discussed, voted upon, ratified and confirmed. Further, it was averred that the
questions and issues raised by petitioner are pending in the Securities and Exchange

Commission which has acquired jurisdiction over the case, and no hearing on the merits has
been had; hence the elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against petitioner,
warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is
not rendered academic by the act of a majority of stockholders, such that the discussion,
ratification and confirmation of Item 6 of the Agenda of the annual stockholders meeting of
May 10, 1977 did not render the case moot; that the amendment to the bylaws which
specifically bars petitioner from being a director is void since it deprives him of his vested
rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that
after receiving a copy of the restraining order issued by this Court and noting that the
restraining order did not foreclose action by it, the Commission en banc issued Orders Nos.
449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which
denied deferment of Item 6 of the Agenda of the annual stockholders meeting of
respondent corporation, took into consideration an urgent manifestation filed with the
Commission by petitioner on May 3, 1977 which prayed, among others, that the discussion
of Item 6 of the Agenda be deferred. The reason given for denial of deferment was that
such action is within the authority of the corporation as well as falling within the sphere of
stockholders right to know, deliberate upon and/or to express their wishes regarding
disposition of corporate funds considering that their investments are the ones directly
affected. It was alleged that the main petition has, therefore, become moot and academic.
On September 29, 1977, petitioner filed a second supplemental petition with prayer for
preliminary injunction, alleging that the actuations of respondent SEC tended to deprive him
of his right to due process, and that all possible questions on the facts now pending before
the respondent Commission are now before this Honorable Court which has the authority
and the competence to act on them as it may see fit. (Rollo, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are valid
and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioners
request for an examination of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders Meeting on May 10, 1977,
and the ratification of the investment in a foreign corporation of the corporate funds,
allegedly in violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question, which public interest
requires to be resolved
It is the position of the petitioner that it is not necessary to remand the case to respondent
SEC for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance
with the principle of exhaustion of administrative remedies, considering that: first:
whether or not the provisions of the amended by-laws are intrinsically valid * * * is purely
a legal question. There is no factual dispute as to what the provisions are and evidence is
not necessary to determine whether such amended by-laws are valid as framed and
approved * * *; second: it is for the interest and guidance of the public that an immediate
and final ruling on the question be made * * *; third: petitioner was denied due process
by SEC when Commissioner de Guzman had openly shown prejudice against petitioner * *
*, and Commissioner Sulit * * * approved the amended by-laws ex-parte and obviously
found the same intrinsically valid; and finally: to remand the case to SEC would only entail
delay rather than serve the ends of justice.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court
resolve the legal issues raised by the parties in keeping with the cherished rules of
procedure that a court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future ligiation, citing Gayos v.
Gayos.3 To the same effect is the prayer of San Miguel Corporation that this Court resolve
on the merits the validity of its amended bylaws and the rights and obligations of the parties
thereunder, otherwise the time spent and effort exerted by the parties concerned and,
more importantly, by this Honorable Court, would have been for naught because the main
question will come back to this Honorable Court for final resolution. Respondent Eduardo
R. Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC
for hearing and decision of the issues involved, invoking the latters primary jurisdiction to
hear and decide cases involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the
entire controversy in a single proceeding, leaving no root or branch to bear the seeds of
future litigation.4 Thus, in Francisco v. City of Davao,5 this Court resolved to decide the case
on the merits instead of remanding it to the trial court for further proceedings since the
ends of justice would not be subserved by the remand of the case. In Republic v. Security
Credit and Acceptance Corporation, et al.,6 this Court, finding that the main issue is one of
law, resolved to decide the case on the merits because public interest demands an early
disposition of the case, and in Republic v. Central Surety and Insurance Company,7 this
Court denied remand of the third-party complaint to the trial court for further proceedings,
citing precedents where this Court, in similar situations, resolved to decide the cases on the
merits, instead of remanding them to the trial court where (a) the ends of justice would not
be subserved by the remand of the case; or (b) where public interest demands an early
disposition of the case; or (c) where the trial court had already received all the evidence
presented by both parties and the Supreme Court is now in a position, based upon said
evidence, to decide the case on its merits.8 It is settled that the doctrine of primary
jurisdiction has no application where only a question of law is involved.8a Because uniformity
may be secured through review by a single Supreme Court, questions of law may
appropriately be determined in the first instance by courts.8b In the case at bar, there are
facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of
Directors of the San Miguel Corporation in the exercise of the power delegated by the
stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special
meeting on February 10, 1977 held specially for that purpose, the amended by-laws were
ratified by more tna 80% of the stockholders of record; that the foreign investment in the
Hongkong Brewery and Distillery, a beer manufacturing company in Hongkong, was made by
the San Miguel Corporation in 1948; and that in the stockholders annual meeting held in
1972 and 1977, all foreign investments and operations of San Miguel Corporation were
ratified by the stockholders.

corporation, or is in a legal sense unreasonable and therefore unlawful is a question of

law.10 This rule is subject, however, to the limitation that where the reasonableness of a bylaw is a mere matter of judgment, and one upon which reasonable minds must necessarily
differ, a court would not be warranted in substituting its judgment instead of the judgment
of those who are authorized to make by-laws and who have exercised their authority.11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were
tailored to suppress the minority and prevent them from having representation in the
Board, at the same time depriving petitioner of his vested right to be voted for and to
vote for a person of his choice as director.

Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or
election to the Board of Directors of SMC are valid and reasonable

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that exclusion of a competitor from the Board is legitimate corporate
purpose, considering that being a competitor, petitioner cannot devote an unselfish and
undivided loyalty to the corporation; that it is essentially a preventive measure to assure
stockholders of San Miguel Corporation of reasonable protection from the unrestrained selfinterest of those charged with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in the promotion of the interest
of the competitor at the expense of the San Miguel Corporation, or the promotion of both
the interests of petitioner and respondent San Miguel Corporation, which may, therefore,
result in a combination or agreement in violation of Article 186 of the Revised Penal Code by
destroying free competition to the detriment of the consuming public. It is further argued
that there is not vested right of any stockholder under Philippine Law to be voted as director
of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or
thru two corporations owned or controlled by him, control over the following shareholdings
in San Miguel Corporation, vis.: (a) John Gokongwei, Jr.6,325 shares; (b) Universal Robina
Corporation788,647 shares; (c) CFC Corporation658,313 shares, or a total of 1,403,285
shares. Since the outstanding capital stock of San Miguel Corporation, as of the present
date, is represented by 33,139,749 shares with a par value of P10.00, the total shares
owned or controlled by petitioner represents 4.2344% of the total outstanding capital stock
of San Miguel Corporation. It is also contended that petitioner is the president and
substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which
are allegedly controlled by petitioner and members of his family. It is also claimed that both
the Universal Robina Corporation and the CFC Corporation are engaged in businesses
directly and substantially competing with the allied businesses of San Miguel Corporation,
and of corporations in which SMC has substantial investments.

The validity or reasonableness of a by-law of a corporation is purely a question of law.9

Whether the by-law is in conflict with the law of the land, or with the charter of the

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONERS CORPORATIONS AND SAN

MIGUEL COR PORATION

II

According to respondent San Miguel Corporation, the areas of, competition are enumerated
in its Board the areas of competition are enumerated in its Board Resolution dated April 28,
1978, thus:
Product Line
Table Eggs
Layer Pullets
Dressed Chicken
Poultry & Hog Feeds
Ice Cream
Instant Coffee
Woven Fabrics

Estimated
1977 SMC
0.6%
33.0%
35.0%
40.0%
70.0%
45.0%
17.5%

Market
Robina-CFC
10.0%
24.0%
14.0%
12.0%
13.0%
40.0%
9.1%

Share Total
10.6%
57.0%
49.0%
52.0%
83.0%
85.0%
26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC
involved product sales of over P400 million or more than 20% of the P2 billion total product
sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina in layer
pullets, dressed chicken, poultry and hog feeds, ice cream, instant coffee and woven fabrics
would result in a position of such dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on
product lines which, for SMC, represented sales amounting to more than P478 million. In
addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary of
SMC, which product line represented sales for SMC amounting to more than P275 million.
The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is
purportedly also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in product
sales amounting to more than P95 million. The areas of competition between SMC and CFCRobina in 1977 represented, therefore, for SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders Meeting of March 18, 1976,
9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than
90% of the total outstanding shares of SMC, rejected petitioners candidacy for the Board of
Directors because they realized the grave dangers to the corporation in the event a
competitor gets a board seat in SMC. On September 18, 1978, the Board of Directors of
SMC, by virtue of powers delegated to it by the stockholders, approved the amendment to
the by-laws in question. At the meeting of February 10, 1977, these amendments were
confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80%
of the total outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed

the confirmation and ratification. At the Annual Stockholders Meeting of May 10, 1977,
11,349 shareholders, owning 27,257.014 shares, or more than 90% of the outstanding
shares, rejected petitioners candidacy, while 946 stockholders, representing 1,648,801
shares voted for him. On the May 9, 1978 Annual Stockholders Meeting, 12,480
shareholders, owning more than 30 million shares, or more than 90% of the total
outstanding shares, voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY
CON FERRED BY LAW
Private respondents contend that the disputed amended bylaws were adopted by the Board
of Directors of San Miguel Corporation as a measure of self-defense to protect the
corporation from the clear and present danger that the election of a business competitor to
the Board may cause upon the corporation and the other stockholders irreparable
prejudice. Submitted for resolution, therefore, is the issuewhether or not respondent
San Miguel Corporation could, as a measure of self-protection, disqualify a competitor from
nomination and election to its Board of Directors.
It is recognized by all authorities that every corporation has the inherent power to adopt
by-laws for its internal government, and to regulate the conduct and prescribe the rights
and duties of its members towards itself and among themselves in reference to the
management of its affairs. 12 At common law, the rule was that the power to make and
adopt by-laws was inherent in every corporation as one of its necessary and inseparable
legal incidents. And it is settled throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has this inherent power as one of
its necessary and inseparable legal incidents, independent of any specific enabling provision
in its charter or in general law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation.13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in
its by-laws the qualifications, duties and compensation of directors, officers and employees
* * *. This must necessarily refer to a qualification in addition to that specified by section
30 of the Corporation Law, which provides that every director must own in his right at least
one share of the capital stock of the stock corporation of which he is a director * * *. In
Government v. El Hogar,14 the Court sustained the validity of a provision in the corporate bylaw requiring that persons elected to the Board of Directors must be holders of shares of the
paid up value of P5,000.00, which shall be held as security for their action, on the ground
that section 21 of the Corporation Law expressly gives the power to the corporation to
provide in its by-laws for the qualifications of directors and is highly prudent and in
conformity with good practice.

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person who buys stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the act of incorporation and
lawfully enacted by-laws and not forbidden by law.15 To this extent, therefore, the
stockholder may be considered to have parted with his personal right or privilege to
regulate the disposition of his property which he has invested in the capital stock of the
corporation, and surrendered it to the will of the majority of his fellow incorporators. * * * It
can not therefore be justly said that the contract, express or implied, between the
corporation and the stockholders is infringed * * * by any act of the former which is
authorized by a majority * * *.16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least two-thirds
of the subscribed capital stock of the corporation. If the amendment changes, diminishes or
restricts the rights of the existing shareholders, then the dissenting minority has only one
right, viz.: to object thereto in writing and demand payment for his share. Under section
22 of the same law, the owners of the majority of the subscribed capital stock may amend
or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a
vested right to be elected director, in the face of the fact that the law at the time such right
as stockholder was acquired contained the prescription that the corporate charter and the
by-law shall be subject to amendment, alteration and modification.17
It being settled that the corporation has the power to provide for the qualifications of its
directors, the next question that must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a reasonable exercise of
corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a fiduciary
insofar as the corporation and the stockholders as a body are concerned. As agents
entrusted with the management of the corporation for the collective benefit of the
stockholders, they occupy a fiduciary relation, and in this sense the relation is one of
trust.18 The ordinary trust relationship of directors of a corporation and stockholders,
according to Ashaman v. Miller,19 is not a matter of statutory or technical law. It springs
from the fact that directors have the control and guidance of corporate affairs and property

and hence of the property interests of the stockholders. Equity recognizes that stockholders
are the proprietors of the corporate interests and are ultimately the only beneficiaries
thereof * * *.
Justice Douglas, in Pepper v. Litton,20 emphatically restated the standard of fiduciary
obligation of the directors of corporations, thus:
A director is a fiduciary. * * * Their powers are powers in trust. * * * He who is in such
fiduciary position cannot serve himself first and his cestuis second. * * * He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity violate
the ancient precept against serving two masters. * * * He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of fair
play by doing indirectly through the corporation what he could not do so directly. He cannot
violate rules of fair play by doing indirectly through the corporation what he could not do so
directly. He cannot use his power for his personal advantage and to the detriment of the
stockholders and creditors no matter how absolute in terms that power may be and no
matter how meticulous he is to satisfy technical requirements. For that power is at all times
subject to the equitable limitation that it may not be exercised for the aggrandizement,
preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co.,21 it was said:
* * * A person cannot serve two hostile and adverse masters without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can a
director. Human nature is too weak for this. Take whatever statute provision you please
giving power to stockholders to choose directors, and in none will you find any express
prohibition against a discretion to select directors having the companys interest at heart,
and it would simply be going far to deny by mere implication the existence of such a salutary
power.
* * * If the by-law is to be held reasonable in disqualifying a stockholder in a competing
company from being a director, the same reasoning would apply to disqualify the wife and
immediate member of the family of such stockholder, on account of the supposed interest
of the wife in her husbands affairs, and his supposed influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish and dangerous to the best
interest of the corporation until tried and tested. So it is also true that we cannot condemn
as selfish and dangerous and unreasonable the action of the board in passing the by-law.
The strife over the matter of control in this corporation as in many others is perhaps carried
on not altogether in the spirit of brotherly love and affection. The only test that we can

apply is as to whether or not the action of the Board is authorized and sanctioned by law. *
* *.22

competing interests. This doctrine rests fundamentally on the unfairness, in particular

circumstances, of an officer or director taking advantage of an opportunity for his own
personal profit when the interest of the corporation justly calls for protection.30

These principles have been applied by this Court in previous cases.23

AN AMENDMENT TO THE CORPORATE BY-LAW WHICH RENDERS A STOCKHOLDER
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS
IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS
VALID
It is a settled state law in the United States, according to Fletcher, that corporations have
the power to make by-laws declaring a person employed in the service of a rival company to
be ineligible for the corporations Board of Directors. * * * (A)n amendment which renders
ineligible, or if elected, subjects to removal, a director if he be also a director in a
corporation whose business is in competition with or is antagonistic to the other
corporation is valid.24 This is based upon the principle that where the director is so
employed in the service of a rival company, he cannot serve both, but must betray one or
the other. Such an amendment advances the benefit of the corporation and is good. An
exception exists in New Jersey, where the Supreme Court held that the Corporation Law in
New Jersey prescribed the only qualification, and therefore the corporation was not
empowered to add additional qualifications.25 This is the exact opposite of the situation in
the Philippines because as stated heretofore, section 21 of the Corporation Law expressly
provides that a corporation may make by-laws for the qualifications of directors. Thus, it has
been held that an officer of a corporation cannot engage in a business in direct competition
with that of the corporation where he is a director by utilizing information he has received
as such officer, under the established law that a director or officer of a corporation may not
enter into a competing enterprise which cripples or injures the business of the corporation
of which he is an officer or director.26
It is also well established that corporate officers are not permitted to use their position of
trust and confidence to further their private interests.27 In a case where directors of a
corporation cancelled a contract of the corporation for exclusive sale of a foreign firms
products, and after establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the court held that equity
would regard the new contract as an offshoot of the old contract and, therefore, for the
benefit of the corporation, as a faultless fiduciary may not reap the fruits of his misconduct
to the exclusion of his principal.28
The doctrine of corporate opportunity29 is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities with

It is not denied that a member of the Board of Directors of the San Miguel Corporation has
access to sensitive and highly confidential information, such as: (a) marketing strategies and
pricing structure; (b) budget for expansion and diversification; (c) research and
development; and (d) sources of funding, availability of personnel, proposals of mergers or
tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director to promote his individual
or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that
the questioned amendment of the by-laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties above his personal
concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra, the court sustained as valid
and reasonable an amendment to the by-laws of a bank, requiring that its directors should
not be directors, officers, employees, agents, nominees or attorneys of any other banking
corporation, affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the
reasons of the court, thus:
* * * A bank director has access to a great deal of information concerning the business and
plans of a bank which would likely be injurious to the bank if known to another bank, and it
was reasonable and prudent to enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney of any other bank in California. The
Ashkins case, supra, specifically recognizes protection against rivals and others who might
acquire information which might be used against the interests of the corporation as a
legitimate object of by-law protection. With respect to attorneys or persons associated with
a firm which is attorney for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent leakage of confidential
information through casual office discussions or accessibility of files. Defendants directors
determined that its welfare was best protected if this opportunity for conflicting loyalties
and potential misuse and leakage of confidential information was foreclosed.
In McKee, the Court further listed qualificational by-laws upheld by the courts, as follows:

1.
2.

3.
4.
5.

(1) A director shall not be directly or indirectly interested as a stockholder in any

other firm, company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in
any other firm, company, or association which competes with the subject
corporation.
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any
other firm, company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to
holding office.
(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board. (At p. 7.)

These are not based on theorical abstractions but on human experiencethat a person
cannot serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be discussed, would not detract from
the validity and reasonableness of the by-laws here involved. Apart from the impractical
results that would ensue from such arrangement, it would be inconsistent with petitioners
primary motive in running for board memberhsipwhich is to protect his investments in
San Miguel Corporation. More important, such a proposed norm of conduct would be
against all accepted principles underlying a directors duty of fidelity to the corporation, for
the policy of the law is to encourage and enforce responsible corporate management. As
explained by Oleck:31 The law will not tolerate the passive attitude of directors * * *
without active and conscientious participation in the managerial functions of the company.
As directors, it is their duty to control and supervise the day to day business activities of the
company or to promulgate definite policies and rules of guidance with a vigilant eye toward
seeing to it that these policies are carried out. It is only then that directors may be said to
have fulfilled their duty of fealty to the corporation.
Sound principles of corporate management counsel against sharing sensitive information
with a director whose fiduciary duty of loyalty may well require that he disclose this
information to a competitive rival. These dangers are enhanced considerably where the
common director such as the petitioner is a controlling stockholder of two of the competing
corporations. It would seem manifest that in such situations, the director has an economic
incentive to appropriate for the benefit of his own corporation the corporate plans and
policies of the corporation where he sits as director.

Indeed, access by a competitor to confidential information regarding marketing strategies

and pricing policies of San Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor
of the strategies for the development of existing or new markets of existing or new products
could enable said competitor to utilize such knowledge to his advantage.32
There is another important consideration in determining whether or not the amended bylaws are reasonable. The Constitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides: The
State shall regulate or prohibit private monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall be allowed.
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade.The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.
2. Any person who shall monopolize any merchandise or object of trade or commerce, or
shall combine with any other person or persons to monopolize said merchandise or object in
order to alter the price thereof by spreading false rumors or making use of any other artifice
to restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any merchandise or
object of commerce or an importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire
or agree in any manner with any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise or object of commerce or with
any other persons not so similarly engaged for the purpose of making transactions
prejudicial to lawful commerce, or of increasing the market price in any part of the
Philippines, or any such merchandise or object of commerce manufactured, produced,
processed, assembled in or imported into the Philippines, or of any article in the
manufacture of which such manufactured, produced, processed, or imported merchandise
or object of commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and combinations
in restraint of trade.33

to aid one corporation at the expense of another, thereby stifling competition. This situation
has been aptly explained by Travers, thus:

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of

trade are aimed at raising levels of competition by improving the consumers effectiveness
as the final arbiter in free markets. These laws are designed to preserve free and unfettered
competition as the rule of trade. It rests on the premise that the unrestrained interaction
of competitive forces will yield the best allocation of our economic resources, the lowest
prices and the highest quality * * *.34 they operate to forestall concentration of economic
power.35 The law against monopolies and combinations in restraint of trade is aimed at
contracts and combinations that, by reason of the inherent nature of the contemplated acts,
prejudice the public interest by unduly restraining competition or unduly obstructing the
course of trade.36

The argument for prohibiting competing corporations from sharing even one director is
that the interlock permits the coordination of policies between nominally independent firms
to an extent that competition between them may be completely eliminated. Indeed, if a
director, for example, is to be faithful to both corporations, some accommodation must
result. Suppose X is a director of both Corporation A and Corporation B. X could hardly vote
for a policy by A that would injure B without violating his duty of loyalty to B; at the same
time he could hardly abstain from voting without depriving A of his best judgment. If the
firms really do competein the sense of vying for economic advantage at the expense of the
otherthere can hardly be any reason for an interlock between competitors other than the
suppression of competition.43 (Italics supplied.)

The terms monopoly, combination in restraint of trade and unfair competition appear
to have a well defined meaning in other jurisdictions. A monopoly embraces any
combination the tendency of which is to prevent competition in the broad and general
sense, or to control prices to the detriment of the public.37 In short, it is the concentration of
business in the hands of a few. The material consideration in determining its existence is not
that prices are raised and competition actually excluded, but that power exists to raise
prices or exclude competition when desired.38 Further, it must be considered that the idea
of monopoly is now understood to include a condition produced by the mere act of
individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression
of competition by the unification of interest or management, or it may be thru agreement
and concert of action. It is, in brief, unified tactics with regard to prices.39

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9
of the Clayton Act, it was established that: By means of the interlocking directorates one
man or group of men have been able to dominate and control a great number of
corporations * * * to the detriment of the small ones dependent upon them and to the
injury of the public.44

From the foregoing definitions, it is apparent that the contentions of petitioner are not in
accord with reality. The election of petitioner to the Board of respondent Corporation can
bring about an illegal situation. This is because an express agreement is not necessary for
the existence of a combination or conspiracy in restraint of trade.40 It is enough that a
concert of action is contemplated and that the defendants conformed to the
arrangements,41 and what is to be considered is what the parties actually did and not the
words they used. For instance, the Clayton Act prohibits a person from serving at the same
time as a director in any two or more corporations, if such corporations are, by virtue of
their business and location of operation, competitors so that the elimination of competition
between them would constitute violation of any provision of the anti-trust laws.42 There is
here a statutory recognition of the anti-competitive dangers which may arise when an
individual simultaneously acts as a director of two or more competing corporations. A
common director of two or more competing corporations would have access to confidential
sales, pricing and marketing information and would be in a position to coordinate policies or

Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead to control
of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the
products of San Miguel Corporation, the essence of competition in a free market for the
purpose of serving the lowest priced goods to the consuming public would be frustrated.
The competitor could so manipulate the prices of his products or vary its marketing
strategies by region or by brand in order to get the most out of the consumers. Where the
two competing firms control a substantial segment of the market this could lead to collusion
and combination in restraint of trade. Reason and experience point to the inevitable
conclusion that the inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry between the
corporations, to seek out ways of compromising opposing interests, and thus eliminate
competition. As respondent SMC aptly observes, knowledge by CFC-Robina of SMCs costs in
various industries and regions in the country will enable the former to practice price
discrimination. CF-Robina can segment the entire consuming population by geographical
areas or income groups and change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most profitable volume at which it could
produce for every product line in which it competes with SMC. Access to SMC pricing policy

by CFC-Robina would in effect destroy free competition and deprive the consuming public of
opportunity to buy goods of the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a violation of
the prohibition contained in section 13(5) of the Corporation Law. Said section provides in
part that any stockholder of more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such corporations solely for investment and not
for the purpose of bringing about or attempting to bring about a combination to exercise
control of such corporations * *).
Neither are We persuaded by the claim that the by-law was intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in the case
of one stockholder but waived in the case of another, then it could be reasonably claimed
that the by-law was being applied in a discriminatory manner. However, the by-law, by its
terms, applies to all stockholders. The equal protection clause of the Constitution requires
only that the by-law operate equally upon all persons of a class. Besides, before petitioner
can be declared ineligible to run for director, there must be hearing and evidence must be
submitted to bring his case within the ambit of the disqualification. Sound principles of
public policy and management, therefore, support the view that a by-law which disqualifies
a competition from election to the Board of Directors of another corporation is valid and
reasonable.

therefore, obvious that not every person or entity engaged in business of the same kind is a
competitor. Such factors as quantum and place of business, identity of products and area of
competition should be taken into consideration. It is, therefore, necessary to show that
petitioners business covers a substantial portion of the same markets for similar products
to the extent of not less than 10% of respondent corporations market for competing
products. While We here sustain the validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso facto disqualified. Consonant with the
requirement of due process, there must be due hearing at which the petitioner must be
given the fullest opportunity to show that he is not covered by the disqualification. As
trustees of the corporation and of the stockholders, it is the responsibility of directors to act
with fairness to the stockholders.48 Pursuant to this obligation and to remove any suspicion
that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of
Directors should be reviewed by the Securities and Exchange Commission en banc and its
decision shall be final unless reversed by this Court on certiorari.49 Indeed, it is a settled
principle that where the action of a Board of Directors
is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires,
or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or
misapplication of the corporation assets, a court of equity has the power to grant
appropriate relief.50
III

In the absence of any legal prohibition or overriding public policy, wide latitude may be
accorded to the corporation in adopting measures to protect legitimate corporate interests.
Thus, where the reasonableness of a by-law is a mere matter of judgment, and upon which
reasonable minds must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-laws and who
have expressed their authority.45
Although it is asserted that the amended by-laws confer on the present Board powers to
perpetuate themselves in power, such fears appear to be misplaced. This power, by its very
nature, is subject to certain well established limitations. One of these is inherent in the very
concept and definition of the terms competition and competitor. Competition implies
a struggle for advantage between two or more forces, each possessing, in substantially
similar if not identical degree, certain characteristics essential to the business sought. It
means an independent endeavor of two or more persons to obtain the business patronage
of a third by offering more advantageous terms as an inducement to secure trade.46 The test
must be whether the business does in fact compete, not whether it is capable of an indirect
and highly unsubstantial duplication of an isolated or non-characteristic activity.47 It is,

Whether or not respondent SEC gravely abused its discretion in denying petitioners request
for an examination of the records of San Miguel International, Inc., a fully owned subsidiary
of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioners claim that
he was denied inspection rights as stockholder of SMC was made in the teeth of
undisputed facts that, over a specific period, petitioner had been furnished numerous
documents and information, to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual
stockholders meeting of May 18, 1975; (3) a copy of the minutes of the stockholders
meeting of March 18, 1976; (4) a breakdown of SMCs P186.6 million investment in
associated companies and other companies as of December 31, 1975; (5) a listing of the
salaries, allowances, bonuses and other compensation or remunerations received by the
directors and corporate officers of SMC; (6) a copy of the US$100 million EuroDollar Loan
Agreement of SMC; and (7) copies of the minutes of all meetings of the Board of Directors

from January 1975 to May 1976, with deletions of sensitive data, which deletions were not
objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September
18, 1976; (1) that SMCs foreign investments are handled by San Miguel International, Inc.,
incorporated in Bermuda and wholly owned by SMC; this was SMCs first venture abroad,
having started in 1948 with an initial outlay of P500,000.00, augmented by a loan of
Hongkong $6 million from a foreign bank under the personal guaranty of SMCs former
President, the late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated
value of SMI would amount to almost P400 million; (3) that the total cash dividends received
by SMC from SMI since 1953 has amount to US$9.4 million; and (4) that from 1972-1975,
SMI did not declare cash or stock dividends, all earnings having been used in line with a
program for the setting up of breweries by SMI.
These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents.51
Pursuant to the second paragraph of section 51 of the Corporation Law, (t)he record of all
business transactions of the corporation and minutes of any meeting shall be open to the
inspection of any director, member or stockholder of the corporation at reasonable hours.
The stockholders right of inspection of the corporations books and records is based upon
their ownership of the assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a quasi-ownership.52 This right is predicated
upon the necessity of self-protection. It is generally held by majority of the courts that
where the right is granted by statute to the stockholder, it is given to him as such and must
be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation.53 In other words, the inspection has
to be germane to the petitioners interest as a stockholder, and has to be proper and lawful
in character and not inimical to the interest of the corporation.54 In Grey v. Insular Lumber,55
this Court held that the right to examine the books of the corporation must be exercised in
good faith, for specific and honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on application for
mandamus to enforce the right, it is proper for the court to inquire into and consider the
stockholders good faith and his purpose and motives in seeking inspection.56 Thus, it was
held that the right given by statute is not absolute and may be refused when the
information is not sought in good faith or is used to the detriment of the corporation. 57 But
the impropriety of purpose such as will defeat enforcement must be set up the corporation
defensively if the Court is to take cognizance of it as a qualification. In other words, the

specific provisions take from the stockholder the burden of showing propriety of purpose
and place upon the corporation the burden of showing impropriety of purpose or motive.58
It appears to be the general rule that stockholders are entitled to full information as to the
management of the corporation and the manner of expenditure of its funds, and to
inspection to obtain such information, especially where it appears that the company is being
mismanaged or that it is being managed for the personal benefit of officers or directors or
certain of the stockholders to the exclusion of others.59
While the right of a stockholder to examine the books and records of a corporation for a
lawful purpose is a matter of law, the right of such stockholder to examine the books and
records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a
different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it
has been held that, where a corporation owns approximately no property except the shares
of stock of subsidiary corporations which are merely agents or instrumentalities of the
holding company, the legal fiction of distinct corporate entities may be disregarded and the
books, papers and documents of all the corporations may be required to be produced for
examination,60 and that a writ of mandamus may be granted, as the records of the
subsidiary were, to all intents and parposes, the records of the parent even though the
subsidiary was not named as a party.61 Mandamus was likewise held proper to inspect both
the subsidiarys and the parent corporations books upon proof of sufficient control or
dominion by the parent showing the relation of principal or agent or something similar
thereto.62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary
corporation is a separate and distinct corporation domiciled and with its books and records
in another jurisdiction, and is not legally subject to the control of the parent company,
although it owned a vast majority of the stock of the subsidiary.63 Likewise, inspection of the
books of an allied corporation by a stockholder of the parent company which owns all the
stock of the subsidiary has been refused on the ground that the stockholder was not within
the class of persons having an interest.64
In the Nash case,65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect
corporations subsidiaries books and records which were in corporations possession and
control in its office in New York.

In the Bailey case,66 stockholders of a corporation were held entitled to inspect the records
of a controlled subsidiary corporation which used the same offices and had identical officers
and directors.
In his Urgent Motion for Production and Inspection of Documents before respondent SEC,
petitioner contended that respondent corporation had been attempting to suppress
information from the stockholders and that petitioner, as stockholder of respondent
corporation, is entitled to copies of some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the petitioner notwithstanding the
fact that no harm would be caused thereby to the corporation.67 There is no question that
stockholders are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial condition of the
corporation, and generally take an account of the stewardship of the officers and
directors.68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent
San Miguel Corporation and, therefore, under its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of the corporation as extending to books and
records of such wholly owned subsidiary which are in respondent corporations possession
and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of
respondent corporation to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation
invested corporate funds in SMI without prior authority of the stockholders, thus violating
section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have
investigated the charge, being a statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SECs position is that submission of the investment to the stockholders for
ratification is a sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was
organized provided that its Board of Directors has been so authorized by the affirmative

vote of stockholders holding shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the corporate purpose, it does not
need the approval of the stockholders. It is only when the purchase of shares is done solely
for investment and not to accomplish the purpose of its incorporation that the vote of
approval of the stockholders holding shares entitling them to exercise at least two-thirds of
the voting power is necessary.69
As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC
was an investment in the same business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It appears that the original
investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a
beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and
marketing of San Miguel beer thereat. Restructuring of the investment was made in 19701971 thru the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Maao Sugar Central Co., Inc., supra,
appears relevant. In said case, one of the issues was the legality of an investment made by
Ma-ao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of
2/3 of the stockholders voting power, in the Philippine Fiber Processing Co., Inc., a company
engaged in the manufacture of sugar bags. The lower court said that there is more logic in
the stand that if the investment is made in a corporation whose business is important to the
investing corporation and would aid it in its purpose, to require authority of the
stockholders would be to unduly curtail the power of the Board of Directors. This Court
affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara,
said:
j. Power to acquire or dispose of shares or securities.A private corporation, in order to
accomplish is purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not
need the approval of stockholders; but when the purchase of shares of another corporation
is done solely for investment and not to accomplish the purpose of its incorporation, the vote
of approval of the stockholders is necessary. In any case, the purchase of such shares or
securities must be subject to the limitations established by the Corporation law; namely, (a)
that no agricultural or raining corporation shall in anywise be interested in any other
agricultural or mining corporation; or (b) that a non-agricultural or non-mining corporation
shall be restricted to own not more than 15% of the voting stock of any agricultural or
mining corporation; and (c) that such holdings shall be solely for investment and not for the
purpose of bringing about a monopoly in any line of commerce or combination in restraint

of trade. (The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Italics
ours.)
40. Power to invest corporate funds.A private corporation has the power to invest its
corporate funds in any other corporation or business, or for any purpose other than the
main purpose for which it was organized, provided that its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such a
proposal at a stockholders meeting called for that purpose, and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural or
mining corporation. When the investment is necessary to accomplish its purpose or purposes
as stated in its articles of incorporation, the approval of the stockholders is not necessary.
(Id., p. 108.) (Italics ours.) (pp. 258-259.)
Assuming arguendo that the Board of Directors of SMC had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may ratify
and thereby render binding upon it the originally unauthorized acts of its officers or other
agents.70 This is true because the questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or contract which is within the
corporate powers, but which is defective from a purported failure to observe in its
execution the requirement of the law that the investment must be authorized by the
affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment and its ratification by said
stockholders obliterates any defect which it may have had at the outset. Mere ultra vires
acts, said this Court in Pirovano,71 or those which are not illegal and void ab initio, but are
not merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities
which is apparently relevant to the corporate purpose. The mere fact that respondent
corporation submitted the assailed investment to the stockholders for ratification at the
annual meeting of May 10, 1977 cannot be construed as an admission that respondent
corporation had committed an ultra vires act, considering the common practice of
corporations of periodically submitting for the ratification of their stockholders the acts of
their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be
allowed to examine the books and records of San Miguel International, Inc., as specified by
him.
On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad
Santos and De Castro, voted to sustain the validity per se of the amended by-laws in
question and to dismiss the petition without prejudice to the question of the actual
disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of
respondent San Miguel Corporation being decided, after a new and proper hearing by the
Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc, and
ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition
in the afore-mentioned amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the
issue on the validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws,
pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to
petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but
otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero filed
a separate opinion, wherein they voted against the validity of the questioned amended
bylaws and that this question should properly be resolved first by the SEC as the agency of
primary jurisdiction. They concur in the result that petitioner may be allowed to run for and
sit as director of respondent SMC in the scheduled May 6, 1979 election and subsequent
elections until disqualified after proper hearing by the respondents Board of Directors and
petitioners disqualification shall have been sustained by respondent SEC en banc and
ultimately by final judgment of this Court.
In resum, subject to the qualifications afore-stated, judgment is hereby rendered
GRANTING the petition by allowing petitioner to examine the books and records of San
Miguel International, Inc. as specified in the petition. The petition,* insofar as it assails the
validity of the amended by-laws and the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

No. L-52129. April 21, 1980.*

JOHN GOKONOWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, SAN
MIGUEL CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO,ENRIQUE ZOBEL,
ANTONIO ROXAS, EMETERIO BUAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, EMIGDIO
TANJUATCO and EDUARDO VISAYA, respondents.

course where the Court is closely or evenly divided, the petition at bar should be given due
course, so that the Court may study the case at length and try to reach a decisive vote,
unlike in the first case which ended in a dismissal for lack of necessary votes which, as we
then stated, is of no doctrinal value and does not in any manner resolve the issue of the
validity of the questioned amended by-laws nor foreclose the same.

Corporation Law; A plea to disqualify other members of the board of directors from being
members thereof should be specifically raised in issue before the Securities & Exchange
Commission and buttressed by evidence.The alleged disqualification of some members of
the Board was never in issue during the hearing of the disqualification case, and petitioner
has not submitted any evidence in support of his contention. Petitioners assertion that the
order of respondent Commission disqualifying him is based on evidence which are at the
most, contingent and flimsy appears unsupported by the records.

Same; Same; Same; The petition should be given due course as it raises fundamental
question of lack of due process in the Securities and Exchange Commission.The petition
raises questions of procedural due process, viz, that petitioner was not given the new and
proper hearing by the board of directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange Commission deliberating and acting
en banc, and ultimately to this Court, as ordered in the decision of April 11, 1979, and
questions of substantive due process as well, viz, that the questioned amended by-laws are
oppressive, arbitrary and unreasonable and specifically tailored to discriminate against
petitioner and deprive him of his vested substantial rights as a substantial SMC stockholder.

Same; SEC order disqualifying petitioner to be a corporate director is supported by

unrebutted evidence. Its factual findings are entitled to great respect.The order of
respondent Commission was based principally on the affidavits of Nazario Avendao,
Ruperto Sarandi, Jr., Fernando Constantino, Jose Picornell and Mabini Antonio and
documentary evidence showing that petitioner is engaged in agricultural and poultry
business competitive with that of San Miguel Corporation. Petitioner did not adduce any
evidence to rebut the evidence of his disqualification. It is well-settled chat findings of fact
of administrative bodies will not be interferred with by the courts in the absence of grave
abuse of discretion on the part of said agencies, or unless the aforementioned findings are
not supported by substantial evidence (Central Bank v. Cloribel, 44 SCRA 307 [1972]).

Same; Same; Same; The petition should be given due course because it raises questions not
heretofore resolved by this Court in the previous dispute between the parties.By all
standards and the Courts own guidelines that a petition which questions an appealed
decision of the Securities and Exchange Commission on the ground that it has decided a
question of substance not theretofore determined by the Supreme Court, the petition
should be granted due course and the justiciable and transcendental issues raised therein
should, after full briefs and due hearing, be squarely addressed and conclusively determined
by the Court.
ANTONIO, J.:

Fernando, C.J., concurring in the result:

Corporation Law; The subject of the petition at bar is covered by the doctrine of the case as
far as petitioner only is concerned.I concur in the result by virtue of the doctrine of the law
of the case insofar as petitioner is concerned but leaves the principal legal question open if
raised in an appropriate legal proceeding.
Teehankee, J., dissenting:
Corporation Law; Certiorari; Supreme Court; The petition at bar should be given due course
as the Justices votes are closely divided.The present vote of dismissal would be by an even
vote of four to four Justices had Justices Aquino and De Castro maintained here their
abstentions in the first case. Following the usual procedure of the Court of granting due

In this petition for review, petitioner seeks to nullify and set aside the resolution en banc
dated May 7, 1979 of respondent Securities and Exchange Commission in SEC Case No.
1375, sustaining the findings of the San Miguel Corporations Board of Directors that
petitioner is engaged in a business competitive with or antagonistic to that of the San
Miguel Corporation and, therefore, ineligible for election as director, pursuant to Section 3,
Article III of the amended by-laws. Petitioner alleges that the matter of petitioners
disqualification should not have been heard in view of the pendency of petitioners motion
for reconsideration with this Court; that when respondent Commission sustained the
disqualification of petitioner, it failed to consider that private respondents are precluded
from disqualifying petitioner because of the rule of pari delicto; and that the resolution of
disqualification of the respondent Board of Directors was an over exertion of corporate
power because by this act the afore-mentioned Board of Directors intended to perpetuate

themselves in power. Considering the afore-mentioned allegations and the comments

thereto, We find no merit in the petition.
Aside from the presumptive validity of the amended by-laws at the time the questioned
resolution was rendered by respondent Securities and Exchange Commission, the Chief
Justice and six (6) Justices of this Court had already promulgated their opinions that the
validity of the amended by-laws insofar and only insofar as the parties herein are
concerned, can no longer be relitigated on the basis of the law of the case doctrine and,
therefore, the enforcement of the amended by-laws could not have been ipso factor stayed
by the motion for reconsideration. Petitioners allegation that respondent Commission
(Securities and Exchange Commission) could not have validly sustained the resolution of the
San Miguel Corporation Board because some members of the Board were also disqualified
as they were situated like petitioner appears inapposite. The alleged disqualification of
some members of the Board was never in issue during the hearing of the disqualification
case, and petitioner has not submitted any evidence in support of his contention.
Petitioners assertion that the order of respondent Commission disqualifying him is based
on evidence which are at the most, contingent and flimsy appears unsupported by the
records. The order of respondent Commission was based principally on the affidavits of
Nazario Avendao, Ruperto Sarandi, Jr., Fernando Constantino, Jose Picornell and Mabini
Antonio and documentary evidence showing that petitioner is engaged in agricultural and
poultry business competitive with that of San Miguel Corporation. Petitioner did not adduce
any evidence to rebut the evidence of his disqualification. It is well-settled that findings of
fact of administrative bodies will not be interferred with by the courts in the absence of
grave abuse of discretion on the part of said agencies, or unless the afore-mentioned
findings are not supported by substantial evidence (Central Bank v. Cloribel, 44 SCRA 307
[1972]).

Melencio-Herrera, J., took no part.

I, E. Fernando, C.J., certifies that, with only Justices Teehankee, Concepcion Jr., Fernandez,
and Guerrero voting to grant the petition, it is hereby dismissed in accordance with the
opinion of Justice Antonio concurred in by Justices Barredo, Makasiar, Aquino, Abad Santos,
and de Castro, the necessary eight votes to grant the same not having been obtained. The
undersigned concurred in the result.
Teehankee, J., dissents in a separate opinion.
The peremptory dismissal of the petition for review for lack of merit by an inconclusive
vote of six (namely, Justices Barredo, Makasiar, Antonio, Aquino, Abad Santos and De
Castro) to four (namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero) is in
disregard of the clear and express intendment and disposition of this Court in its decision of
April 11, 1979 in the first action (of which the present case is but a sequel), a special civil
action, viz, L-45911 involving exactly the same petitioner and respondents for declaration
of nullity of the amended by-laws of respondent San Miguel Corporation which would
disqualify petitioner from being elected to the board of directors of said respondent
corporation, wherein the Court, while dismissing the petition by an inconclusive vote,
expressly qualified that such dismissal was without prejudice to the question of the actual
disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of
respondent San Miguel Corporation being decided, after a new and proper hearing by the
Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc, and
ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition
in the aforementioned by-laws shall not apply to petitioner.1

WHEREFORE, in view of the foregoing, the Court resolves to DISMISS the petition for lack of
merit.

The late Chief Justice Fred Ruiz Castro and the now Chief Justice Enrique M. Fernando
reserved their votes, as follows:

SO ORDERED.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of tne amended by-laws,
pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to
petitioner.

Fernando, C.J., concurs in the result by virtue of the doctrine of the law of the case
insofar as petitioner is concerned but leaves the principal legal question open if raised in an
appropriate legal proceeding.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but
otherwise concurs in the result.2

Barredo, Makasiar, Aquino, Abad Santos and De Castro, JJ., concur.

Concepcion Jr., Fernandez and Guerrero, JJ., concurs in the dissent of Justice Teehankee.

The present vote of dismissal would be by an even vote of four to four Justices had Justices
Aquino and De Castro maintained here their abstentions in the first case. Following the

usual procedure of the Court of granting due course where the Court is closely or evenly
divided, the petition at bar should be given due course, so that the Court may study the case
at length and try to reach a decisive vote, unlike in the first case which ended in a dismissal
for lack of necessary votes which, as we then stated, is of no doctrinal value and does not
in any manner resolve the issue of the validity of the questioned amended by-laws nor
foreclose the same.3
(Justice Aquino took no part in the decision of April 11, 1979 and the subsequent Resolution
of May 8, 1979 which denied for lack of necessary votes petitioners urgent motion for a
restraining order against his disqualification in the SMC elections to be held that very
afternoon, which in our view was an unjustified refusal of this Court to enforce its
unanimous twelve-member decision of April 11, 1979 that petitioner could run for and sit, if
elected, on the SMC board until it shall have taken a second look at petitioners foreseen
disqualification under the questioned by-laws amendment.4 The Chief Justice [then Acting
Chief Justice] voted to issue a restraining order in accordance with his reservation in the
decision of this petition on the question of the validity of the assailed amendment to the bylaws. Justice Aquino likewise took no part in the Resolution of November 27, 1979 which
denied for lack of necessary votes petitioners motion for reconsideration of the decision.
Justice De Castro, who initially took part in the decision and voted for dismissal of the
petition and likewise for denial of petitioners urgent motion for restraining order in the
Resolution of May 8, 1979, subsequently abstained from taking part in the Resolution of
November 27, 1979 denying reconsideration of the decision. Mme. Justice Amuerfina
Melencio Herrera abstained completely in that case and in the present case.)
In consonance with the foregoing considerations and the reasons stated in our separate
opinion of April 1, 1979 in the first case, our separate statements in the Resolutions of May
8, 1979 and November 27, 1979, we vote to grant due course to the petition.
The present petition is precisely by way of appeal for a review of respondent commissions
lightning Resolution of May 7, 1979 sustaining respondent SMC boards unilateral action of
disqualifying petitioner by the simple expedient of declaring him to be engaged in a
competitive or antagonistic business. The petition raises questions of procedural due
process, viz, that petitioner was not given the new and proper hearing by the board of
directors of said corporation, whose decision shall be appealable to the respondent
Securities and Exchange Commission deliberating and acting en banc, and ultimately to this
Court, as ordered in the decision of April 11, 1979, and questions of substantive due
process as well, viz, that the questioned amended by-laws are oppressive, arbitrary and
unreasonable and specifically tailored to discriminate against petitioner and deprive him of
his vested substantial rights as a substantial SMC stockholder.

More, and contrary to the statement of the main resolution that the alleged
disqualification of some members of the Board was never in issue during the hearing of the
disqualification case, the petition raises precisely the question of pari delicto and equal
application of the questioned by-law amendment to other board members who should
likewise be disqualified for being engaged in competitive or antagonistic business.
Furthermore, the petition involves the issue of the application of section 13(5) of the
Corporation Law on which question the late Chief Justice Castro, as per his reserved vote
quoted above in the decision of April 11, 1979, precisely called for a hearing by this Court
on its applicability. Justice Barredo had in his written vote of April 3, 1979 expressly voted:
Considering that the issue regarding the application of section 13(5) has not been fully
discussed by the parties, and it is an issue that is of utmost importance, what with its
transcendental implications, apart from being unprecedented, my vote is to leave the issue
open .....5
By all standards and the Courts own guidelines that a petition which questions an appealed
decision of the Securities and Exchange Commission on the ground that it has decided a
question of substance not theretofore determined by the Supreme Court,6 the petition
should be granted due course and the justiciable and transcendental issues raised therein
should, after full briefs and due hearing, be squarely addressed and conclusively determined
by the Court.
Petition denied.
Notes.The failure of a stockholder to take remedial steps against the corporation within
two years from the commission of fraud is not fatal to its suit. (Reyes vs. Tan, 3 SCRA 198).
A stockholder has a cause of action to annul certain actions of the Board of Directors of a
bank which actions were considered anomalous and a breach of trust prejudicial to the
bank. (Republic Bank vs. Cuaderno, 19 SCRA 671).
The approval by the stockholders of the amendment of the articles of incorporation
changing the corporate name does not automatically change the name of the corporation as
of that date. (Philippine First Insurance Co. vs. Hartigan, 34 SCRA 252).
Where corporate directors are guilty of a breach of trust, a stockholder may institute a suit
in behalf of himself and other stockholders and for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly upon the corporation and indirectly upon the
stockholders. (Reyes vs. Tan, 3 SCRA 198).

The real defendant in a suit against a corporation with no valid existence is the person who
has control of its proceedings. (Albert vs. University Publishing Co., 13 SCRA 84).
Ratification by a corporation of an unauthorized act or contract by its officers relates back to
the time of the act or contract ratified and is equivalent to original authority. (Board of
Liquidators vs. Kalaw, 20 SCRA 987).
A corporation is an artificial being created by operation of law; thus, it can not refuse, to
yield obedience to acts of its state organs, including the judiciary, when called upon to do
so. (Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242.)
Where corporate directors are guilty of a breach of trust, a stockholder may institute a suit
in behalf of himself and other stockholders and for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly upon corporation and indirectly upon the
stockholders. (Reyes vs. Tan, 3 SCRA 198.)
Officers of a corporation, who acted within the scope of their authority, are not solidarity
liable with the corporation, for back wages. (Mindanao Motor Line, Inc. vs. Court of
Industrial Relations, 6 SCRA 710.)
Equity will not intervene to restrain litigations incident to the struggle for the control and
management of a corporation conducted within the frame of corporation rules and in
accordance with the usual court procedures. (Marsman & Company, Inc. vs. Syquia, 14 SCRA
981.)
To qualify as a director of a corporation, one must own at least one share of stock therein.
(Detective & Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255.)

Lee vs. Court of Appeals

G.R. No. 93695. February 4,1992.*
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners, vs. THE HON. COURT OF APPEALS,
SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS GONZALES,
respondents.
Mercantile Law; Corporation Code; Every director must own at least one (1) share of the
capital stock of the corporation of which he is a director which share shall stand in his name
on the books of the corporation. Any director who ceases to be the owner of at least one (1)
share of the capital stock of the corporation of which he is a director shall thereby cease to
be a director.Under the old Corporation Code, the eligibility of a director, strictly speaking,
cannot be adversely affected by the simple act of such director being a party to a voting
trust agreement inasmuch as he remains owner (although beneficial or equitable only) of
the shares subject of the voting trust agreement pursuant to which a transfer of the
stockholder's shares in favor of the trustee is required (section 36 of the old Corporation
Code). No disqualification arises by virtue of the phrase "in his own right" provided under
the old Corporation Code. With the omission of the phrase "in his own right" the election of
trustees and other persons who in fact are not the beneficial owners of the shares
registered in their names on the books of the corporation becomes formally legalized (see
Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear indication that in order to
be eligible as a director, what is material is the legal title to, not beneficial ownership of, the
stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law of
Private Corporations, section 300, p. 92 [1969] citing People v. Lihme, 269111. 351, 109 N.E.
1051).
Same; Same; Voting Trusts; A voting trust agreement results in the separation of the voting
rights of a stockholder from his other rights such as the right to receive dividends and other
rights to which a stockholder may be entitled until the liquidation of the corporation.There
can be no reliance on the inference that the five-year period of the voting trust agreement
in question had lapsed in 1986 so that the legal title to the stocks covered by the said voting
trust agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the
6th paragraph of section 59 of the new Corporation Code which reads:
"Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificates as well as the

certificates of stock in the name of the trustee or trustees shall thereby be deemed
cancelled and new certificates of stock shall be reissued in the name of the transferors." On
the contrary, it is manifestly clear from the terms of the voting trust agreement between
ALFA and the DBP that the duration of the agreement is contingent upon the fulfillment of
certain obligations of ALFA with the DBP.
Remedial Law; Civil Procedure; Service of summons; If the defendant is a corporation
organized under the laws of the Philippines, service may be made on the president, manager,
secretary, cashier, agent or any of its directors.It is a basic principle in Corporation Law
that a corporation has a personality separate and distinct from the officers or members who
compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v.
Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990).
Thus, the above rule on service of processes on a corporation enumerates the
representatives of a corporation who can validly receive court processes on its behalf. Not
every stockholder or officer can bind the corporation considering the existence of a
corporate entity separate from those who compose it. The rationale of the aforecited rule is
that service must be made on a representative so integrated with the corporation sued as to
make it a priori supposable that he will realize his responsibilities and know what he should
do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197 [1986]
citing Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 303 [1978]).
PETITION for certiorari to review the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.
GUTIERREZ, JR., J.:
What is the nature of the voting trust agreement executed between two parties in this case?
Who owns the stocks of the corporation under the terms of the voting trust agreement?
How long can a voting trust agreement remain valid and effective? Did a director of the
corporation cease to be such upon the creation of the voting trust agreement? These are
the questions the answers to which are necessary in resolving the principal issue in this
petition for certiorariwhether or not there was proper service of summons on Alfa
Integrated Textile Mills (ALFA, for short) through the petitioners as president and

vicepresident, allegedly, of the subject corporation after the execution of a voting trust
agreement between ALFA and the Development Bank of the Philippines (DBP, for short).

On January 2,1989, the trial court upheld the validity of the service of summons on ALFA
through the petitioners, thus, denying the latter's motion for reconsideration and requiring
ALFA to file its answer through the petitioners as its corporate officers.

From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the International
Corporate Bank, Inc. against the private respondents who, in turn, filed a third party
complaint against ALFA and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint
which the Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party complaint.
Meanwhile, on July 12,1988, the trial court issued an order requiring the issuance of an alias
summons upon ALFA through the DBP as a consequence of the petitioners' letter informing
the court that the summons for ALFA was erroneously served upon them considering that
the management of ALFA had been transferred to the DBP.
In a manifestation dated July 22,1988, the DBP claimed that it was not authorized to receive
summons on behalf of ALFA since the DBP had not taken over the company which has a
separate and distinct corporate personality and existence.
On August 4,1988, the trial court issued an order advising the private respondents to take
the appropriate steps to serve the summons to ALFA.
On August 16,1988, the private respondents filed a Manifestation and Motion for the
Declaration of Proper Service of Summons which the trial court granted on August 17, 1988.
On September 12,1988, the petitioners filed a motion for reconsideration submitting that
Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no longer
officers of ALFA and that the private respondents should have availed of another mode of
service under Rule 14, Section 16 of the said Rules, i.e., through publication to effect proper
service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988, the private
respondents argued that the voting trust agreement dated March 11,1981 did not divest the
petitioners of their positions as president and executive vicepresident of ALFA so that
service of summons upon ALFA through the petitioners as corporate officers was proper.

On January 19, 1989, a second motion for reconsideration was filed by the petitioners
reiterating their stand that by virtue of the voting trust agreement they ceased to be officers
and directors of ALFA, hence, they could no longer receive summons or any court processes
for or on behalf of ALFA. In support of their second motion for reconsideration, the
petitioners attached thereto a copy of the voting trust agreement between all the
stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the other
hand, whereby the management and control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated
January 2, 1989 and declared that service upon the petitioners who were no longer
corporate officers of ALFA cannot be considered as proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the above Order
which was affirmed by the court in its Order dated August 14,1989 denying the private
respondents' motion for reconsideration.
On September 18,1989, a petition for certiorari was belatedly submitted by the private
respondent before the public respondent which, nonetheless, resolved to give due course
thereto on September 21,1989.
On October 17, 1989, the trial court, not having been notified of the pending petition for
certiorari with the public respondent issued an Order declaring as final the Order dated April
25, 1989. The private respondents in the said Order were required to take positive steps in
prosecuting the third party complaint in order that the court would not be constrained to
dismiss the same for failure to prosecute. Subsequently, on October 25, 1989 the private
respondents filed a motion for reconsideration on which the trial court took no further
action.
On March 19,1990, after the petitioners filed their answer to the private respondents'
petition for certiorari, the public respondent rendered its decision, the dispositive portion of
which reads:
"WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25, 1989
and August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered to file its
answer within the reglementary period." (CA Decision, p. 8; Rollo, p. 24)

On April 11,1990, the petitioners moved for a reconsideration of the decision of the public
respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners filed
this certiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction
on the part of the public respondent in reversing the questioned Orders dated April 25, 1989
and August 14,1989 of the court a quo, thus, holding that there was proper service of
summons on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment on July
16,1990 erroneously applying the rule that the period during which a motion for
reconsideration has been pending must be deducted from the 15-day period to appeal.
However, in its Resolution dated January 3, 1991, the public respondent set aside the
aforestated entry of judgment after further considering that the rule it relied on applies to
appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to appeals
from its decision to us pursuant to our ruling in the case of Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments, to wit:
1. "(1) that the execution of the voting trust agreement by a stockholder whereby all
his shares to the corporation have been transferred to the trustee deprives the
stockholder of his position as director of the corporation; to rule otherwise, as the
respondent Court of Appeals did, would be violative of section 23 of the Corporation
Code (Rollo, pp. 270-273); and
2. (2) that the petitioners were no longer acting or holding any of the positions
provided under Rule 14, Section 13 of the Rules of Court authorized to receive
service of summons for and in behalf of the private domestic corporation so that the
service of summons on ALFA effected through the petitioners is not valid and
ineffective; to maintain the respondent Court of Appeals' position that ALFA was
properly served its summons through the petitioners would be contrary to the
general principle that a corporation can only be bound by such acts which are within
the scope of its officers' or agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant case, we
dwell first on the nature of a voting trust agreement and the consequent effects upon its
creation in the light of the provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:

"(a) trust created by an agreement between a group of the stockholders of a corporation

and the trustee or by a group of identical agreements between individual stockholders and a
common trustee, whereby it is provided that for a term of years, or for a period contingent
upon a certain event, or until the agreement is terminated, control over the stock owned by
such stockholders, either for certain purposes or for all purposes, is to be lodged in the
trustee, either with or without a reservation to the owners, or persons designated by them,
of the power to direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J 2d
Corp. sec. 685)."
Under Section 59 of the new Corporation Code which expressly recognizes voting trust
agreements, a more definite meaning may be gathered. The said provision partly reads:
"Section 59. Voting TrustsOne or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees the right to vote and
other rights pertaining to the shares for a period not exceeding five (5) years at any one
time: Provided, that in the case of a voting trust specifically required as a condition in a loan
agreement, said voting trust may be for a period exceeding (5) years but shall automatically
expire upon full payment of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees stating that they are issued pursuant
to said agreement. In the books of the corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to said voting trust agreement."
By its very nature, a voting trust agreement results in the separation of the voting rights of a
stockholder from his other rights such as the right to receive dividends, the right to inspect
the books of the corporation, the right to sell certain interests in the assets of the
corporation and other rights to which a stockholder may be entitled until the liquidation of
the corporation. However, in order to distinguish a voting trust agreement from proxies and
other voting pools and agreements, it must pass three criteria or tests, namely: (1) that the
voting rights of the stock are separated from the other attributes of ownership; (2) that the
voting rights granted are intended to be irrevocable for a definite period of time; and (3)
that the principal purpose of the grant of voting rights is to acquire voting control of the
corporation. (5 Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976]
p. 331 citing Tankersly v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon
a trustee not only the stockholder's voting rights but also other rights pertaining to his

shares as long as the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations in restraint of trade or
used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code). Thus, the
traditional concept of a voting trust agreement primarily intended to single out a
stockholder's right to vote from his other rights as such and made irrevocable for a limited
duration may in practice become a legal device whereby a transfer of the stockholder's
shares is effected subject to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between the
equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand,
and the legal title thereto on the other hand.

"The 'transferring stockholder', also called the 'depositing stockholder', is equitable owner
of the stocks represented by the voting trust certificates and the stock reversible on
termination of the trust by surrender. It is said that the voting trust agreement does not
destroy the status of the transferring stockholders as such, and thus render them ineligible
as directors. But a more accurate statement seems to be that for some purposes the
depositing stockholder holding voting trust certificates in lieu of his stock and being the
beneficial owner thereof, remains and is treated as a stockholder. It seems to be deducible
from the case that he may sue as a stockholder if the suit is in equity or is of an equitable
nature, such as, a technical stockholders' suit in right of the corporation. [Commercial Laws
of the Philippines by Agbayani, Vol. 3, pp. 492-493, citing 5 Fletcher 326,327]" (Rollo, p. 291)
We find the petitioners' position meritorious.

The law simply provides that a voting trust agreement is an agreement in writing whereby
one or more stockholders of a corporation consent to transfer his or their shares to a
trustee in order to vest in the latter voting or other rights pertaining to said shares for a
period not exceeding five years upon the fulfillment of statutory conditions and such other
terms and conditions specified in the agreement. The five year-period may be extended in
cases where the voting trust is executed pursuant to a loan agreement whereby the period
is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of the creation of the
voting trust agreement. The petitioners maintain that with the execution of the voting trust
agreement between them and the other stockholders of ALFA, as one party, and the DBP, as
the other party, the former assigned and transferred all their shares in ALFA to DBP, as
trustee. They argue that by virtue of the voting trust agreement the petitioners can no
longer be considered directors of ALFA. In support of their contention, the petitioners
invoke section 23 of the Corporation Code which provides, in part, that:
"Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director which share shall stand in his name on the books of the corporation.
Any director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be director x x x." (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement between
ALFA and the DBP had all the more safeguarded the petitioners' continuance as officers and
directors of ALFA inasmuch as the general object of voting trust is to insure permanency of
the tenure of the directors of a corporation. They cited the commentaries by Prof. Aguedo
Agbayani on the right and status of the transferring stockholder, to wit:

Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a party
to its executionfrom legal titleholder or owner of the shares subject of the voting trust
agreement, he becomes the equitable or beneficial owner. (Salonga, Philippine Law on
Private Corporations, 1958 ed., p. 268; Pineda and Carlos, the Law on Private Corporations
and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code;
Comments, Notes & Selected Cases, 1981 ed., p. 386; Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The
penultimate question, therefore, is whether the change in his status deprives the
stockholder of the right to qualify as a director under section 23 of the present Corporation
Code which deletes the phrase "in his own right." Section 30 of the old Code states that:
"Every director must own in his own right at least one share of the capital stock of the stock
corporation of which he is a director, which stock shall stand in his name on the books of the
corporation. A director who ceases to be the owner of at least one share of the capital stock
of a stock corporation of which is a director shall thereby cease to be a director xxx." (Italics
supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be
adversely affected by the simple act of such director being a party to a voting trust
agreement inasmuch as he remains owner (although beneficial or equitable only) of the
shares subject of the voting trust agreement pursuant to which a transfer of the
stockholder's shares in favor of the trustee is required (section 36 of the old Corporation
Code). No disqualification arises by virtue of the phrase "in his own right" provided under
the old Corporation Code.

With the omission of the phrase "in his own right" the election of trustees and other
persons who in fact are not the beneficial owners of the shares registered in their names on
the books of the corporation becomes formally legalized (see Campos and Lopez-Campos,
supra, p. 296). Hence, this is a clear indication that in order to be eligible as a director, what
is material is the legal title to, not beneficial ownership of, the stock as appearing on the
books of the corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations, section
300, p. 92 [1969] citing People v. Lihme, 269 III. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting trust agreement
executed in 1981 disposed of all their shares through assignment and delivery in favor of the
DBP, as trustee. Consequently, the petitioners ceased to own at least one share standing in
their names on the books of ALFA as required under Section 23 of the new Corporation
Code. They also ceased to have anything to do with the management of the enterprise. The
petitioners ceased to be directors. Hence, the transfer of the petitioners' shares to the DBP
created vacancies in their respective positions as directors of ALFA. The transfer of shares
from the stockholders of ALFA to the DBP is the essence of the subject voting trust
agreement as evident from the following stipulations:
1. "1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the
shares of stocks owned by them respectively and shall do all things necessary for the
transfer of their respective shares to the TRUSTEE on the books of ALFA.
2. 2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the
number of shares transferred, which shall be transferrable in the same manner and
with the same effect as certificates of stock subject to the provisions of this
agreement;

have the same force and effect upon that said stockholder." (CA Rollo, pp. 137-138;
Italics supplied)
Considering that the voting trust agreement between ALFA and the DBP transferred legal
ownership of the stocks covered by the agreement to the DBP as trustee, the latter became
the stockholder of record with respect to the said shares of stocks. In the absence of a
showing that the DBP had caused to be transferred in their names one share of stock for the
purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have
retained their status as officers of ALFA which was the case before the execution of the
subject voting trust agreement. There appears to be no dispute from the records that DBP
has taken over full control and management of the firm.
Moreover, in the Certification dated January 24,1989 issued by the DBP through one Elsa A.
Guevarra, Vice-President of its Special Accounts Department II, Remedial Management
Group, the petitioners were no longer included in the list of officers of ALFA "as of April
1982". (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim that the
subject voting trust agreement did not deprive the petitioners of their position as directors
of ALFA, the public respondent committed a reversible error when it ruled that:
"xxx while the individual respondents (petitioners Lee and Lacdao) may have ceased to be
president and vice-president, respectively, of the corporation at the time of service of
summons on them on August 21, 1987, they were at least up to that time, still directors
xxx".

3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual
or special, upon any resolution, matter of business that may be submitted to any
such meeting, and shall possess in that respect the same powers as owners of the
equitable as well as the legal title to the stock;

The aforequoted statement is quite inaccurate in the light of the express terms of
Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA and the DBP,
were aware at the time of the execution of the agreement that by virtue of the transfer of
shares of ALFA to the DBP, all the directors of ALFA were stripped of their positions as such.

4. The TRUSTEE may cause to be transferred to any person one share of stock for
the purpose of qualifying such person as director of ALFA, and cause a certificate of
stock evidencing the share so transferred to be issued in the name of such person;

There can be no reliance on the inference that the five-year period of the voting trust
agreement in question had lapsed in 1986 so that the legal title to the stocks covered by the
said voting trust agreement ipso facto reverted to the petitioners as beneficial owners
pursuant to the 6th paragraph of section 59 of the new Corporation Code which reads:

xxx

xxx

xxx

9. Any stockholder not entering into this agreement may transfer his shares to the
same trustee, without the need of revising this agreement, and this agreement shall

"Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificates as well as the

certificates of stock in the name of the trustee or trustees shall thereby be deemed
cancelled and new certificates of stock shall be reissued in the name of the transferors."

the voting trust agreement in question was not yet terminated so that the legal title to the
stocks of ALFA, then, still belonged to the DBP.

On the contrary, it is manifestly clear from the terms of the voting trust agreement between
ALFA and the DBP that the duration of the agreement is contingent upon the fulfillment of
certain obligations of ALFA with the DBP. This is shown by the following portions of the
agreement.

In view of the foregoing, the ultimate issue of whether or not there was proper service of
summons on ALFA through the petitioners is readily answered in the negative.

"WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first
mortgage on the manufacturing plant of said company;

"Sec. 13. Service upon private domestic corporation or partnership.lf the defendant is a
corporation organized under the laws of the Philippines or a partnership duly registered,
service may be made on the president, manager, secretary, cashier, agent or any of its
directors."

WHEREAS, ALFA is also indebted to other creditors for various financial accommodations
and because of the burden of these obligations is encountering very serious difficulties in
continuing with its operations.
WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA has
offered and the TRUSTEE has accepted participation in the management and control of the
company and to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have
agreed to execute a voting trust covering their shareholding in ALFA in favor of the TRUSTEE;

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

It is a basic principle in Corporation Law that a corporation has a personality separate and
distinct from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta,
Inc., 72 SCRA 347 [1976]; Osias Academy v. Department of Labor and Employment, et al.,
G.R. Nos. 83257-58, December 21,1990). Thus, the above rule on service of processes on a
corporation enumerates the representatives of a corporation who can validly receive court
processes on its behalf. Not every stockholder or officer can bind the corporation
considering the existence of a corporate entity separate from those who compose it.

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx

xxx

xxx

6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as the
obligations of ALFA with DBP, or any portion thereof, remains outstanding;' (CA Rollo, pp.
137-138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP would not
have transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the
national government through the Asset Privatization Trust (APT) as attested to in a
Certification dated January 24,1989 of the Vice President of the DBP's Special Accounts
Department II. In the same certification, it is stated that the DBP, from 1987 until 1989, had
handled APT's account which included ALFA's assets pursuant to a management agreement
by and between the DBP and APT. (CA Rollo, p. 142) Hence, there is evidence on record that
at the time of the service of summons on ALFA through the petitioners on August 21, 1987,

The rationale of the aforecited rule is that service must be made on a representative so
integrated with the corporation sued as to make it a priori supposable that he will realize his
responsibilities and know what he should do with any legal papers served on him. (Far
Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East Motor
Corp., 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated officers. The service of
summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as
correctly argued by the petitioners, will contravene the general principle that a corporation
can only be bound by such acts which are within the scope of the officer's or agent's
authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973].)
WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision
dated March 19,1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE
and the Orders dated April 25, 1989 and October 17, 1989 issued by the Regional Trial Court
of Makati, Branch 58 are REINSTATED.
SO ORDERED.

G.R. No. 144880. November 17, 2004.*

PASCUAL AND SANTOS, INC., petitioner, vs. THE MEMBERS OF THE TRAMO WAKAS
NEIGHBORHOOD ASSOCIATION, INC. represented by DOMINGA MAGNO, respondents.
Rules of Court; Sworn Certification against Forum Shopping; Section 6 (d) of Rule 43 in
relation to Section 2 of Rule 42 of the Rules of Court mandates that a petition for review shall
contain a sworn certification against forum shopping in which petitioner shall attest that he
has not commenced any other action involving the same issues in this Court, the Court of
Appeals or different divisions thereof, or any other tribunal or agency; if there is such other
action or proceeding, he must state status of the same; and if he should thereafter learn that
a similar action or proceeding has been filed or is pending before this Court, the Court of
Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to
promptly inform the aforesaid courts and other tribunal or agency thereof within five days
therefrom.Section 6 (d) of Rule 43 in relation to Section 2 of Rule 42 of the Rules of Court
mandates that a petition for review shall contain a sworn certification against forum
shopping in which the petitioner shall attest that he has not commenced any other action
involving the same issues in this Court, the Court of Appeals or different divisions thereof, or
any other tribunal or agency; if there is such other action or proceeding, he must state the
status of the same; and if he should thereafter learn that a similar action or proceeding has
been filed or is pending before this Court, the Court of Appeals, or different divisions
thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid
courts and other tribunal or agency thereof within five days therefrom.

corporate powers. Physical acts, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate by-laws or by a specific act of
the board of directors.
Remedial Law; Relaxation of Rules of Court; Corporation Law; Corporate Authority; This
Court has ruled that the subsequent submission of proof of authority to act on behalf of a
petitioner corporation justifies the relaxation of the Rules for the purpose of allowing its
petition to be given due course.This Court has ruled that the subsequent submission of
proof of authority to act on behalf of a petitioner corporation justifies the relaxation of the
Rules for the purpose of allowing its petition to be given due course.
Same; Same; Equity and Substantial Justice; At all events, strict adherence to rules of
procedure must give way to considerations of equity and substantial justice where, as in this
case, there is evidence showing that the appeal was filed on time.At all events, strict
adherence to rules of procedure must give way to considerations of equity and substantial
justice where, as in this case, there is evidence showing that the appeal was filed on time.
PETITION for review on certiorari of the resolutions of the Court of Appeals.
The facts are stated in the opinion of the Court.
Sycip, Salazar, Hernandez and Gatmaitan for petitioner.
Alfonso A. Orioste for respondent.

Same; Same; The requirement that the petitioner should sign the certificate of non-forum
shopping applies even to corporations, considering that the mandatory directives of the
Rules of Court make no distinction between natural and juridical persons.The requirement
that the petitioner should sign the certificate of non-forum shopping applies even to
corporations, considering that the mandatory directives of the Rules of Court make no
distinction between natural and juridical persons.
Corporation Law; Corporations; Board of Directors; Corporate Officers; Except for the powers
which are expressly conferred on it by the Corporation Code and those that are implied by or
are incidental to its existence, a corporation has no powers. It exercises its powers through
its board of directors and/or its duly authorized officers and agents.Except for the powers
which are expressly conferred on it by the Corporation Code and those that are implied by
or are incidental to its existence, a corporation has no powers. It exercises its powers
through its board of directors and/or its duly authorized officers and agents. Thus, its power
to sue and be sued in any court is lodged with the board of directors that exercises its

CARPIO-MORALES, J.:
At bar is a petition for review on certiorari assailing the May 17, 2000 and August 8, 2000
Resolutions1 of the Court of Appeals (CA) in CA-G.R. No. 57274 which respectively, dismissed
the appeal instituted by petitioner Pascual and San-tos, Inc. (petitioner) and denied its
motion for reconsideration.
The Members of Tramo Wakas Neighborhood Association, represented by Dominga Magno
(respondents), lodged before the Presidential Action Center a petition dated January 12,
1994 praying that ownership over three (3) parcels of land situated in Barangay San
Dionisio, Paraaque, Metro Manila, identified as Lot Nos. 4087, 4088 and 5003, Psu-118886,
Cad. 229 with an aggregate area of 35,195 square meters be awarded to them. In their
petition, respondents alleged that petitioner claims ownership of the subject lots which they
have openly, peacefully and continuously occupied since 1957.

The petition was referred to the Land Management Bureau (LMB) where it was docketed as
LMB Case No. 2-96, for investigation and hearing.
By Decision2 of February 21, 1996, Director Abelardo G. Palad, Jr. of the LMB found for
respondents. The dispositive portion of the decision reads, quoted verbatim:

validly acquired by petitioner; or in the alternative, (1) allowing it to present additional

evidence in support of its claim to the subject lots, (2) reversing and setting aside the
aforementioned Decisions and Order of the OP and the DENR, and (3) declaring the subject
lots as no longer forming part of the public domain and have been validly acquired by
petitioner.11

WHEREFORE, it is ordered that the claim of Pascual and Santos, Inc., over Lot 4087, Lot
4088 and Lot 5003, situated at Brgy. San Dionisio, Paraaque, Metro Manila be, as hereby it
is, dismissed. The individual members of TRAMO WAKAS NEIGHBORHOOD ASSOCIATION,
now represented by Dominga Magno, if qualified may file appropriate public land
applications over the land they actually possessed and occupied. An individual survey shall
be conducted on the land at their own expense and after approval of the said survey the
same shall be given due course.

By Resolution of May 17, 2000, the CA dismissed the appeal due to infirm Verification and
Certification of non-forum shopping and belated filing.

SO ORDERED.3

For another, and importantly, the petition for review was filed a day after the period
petitioner corporation expressly sought. As indicated in its Petition for Time, petitioner
corporation asked for an additional fifteen (15) days, or until March 2, 2000, within which to
file its petition, which was granted by the Court per Resolution dated February 21, 2000.
However, despite the foregoing, petitioner corporation filed the same only on MARCH 3,
2000 as indicated by the date stamped on the envelope which contains the petition for
review.12 (Citations omitted; underscoring supplied)

Its Motion for Reconsideration having been denied by Order of June 26, 1996, petitioner
lodged an appeal before the Office of the Department of Environment and Natural
Resources (DENR) Secretary, docketed as DENR Case No. 7816.
By Decision4 of November 25, 1997, then DENR Secretary Victor O. Ramos dismissed the
appeal for lack of merit and affirmed in toto the decision of the Director of the LMB.
Petitioners Motion for Reconsideration of the decision having been denied by Order5 of
May 18, 1998, it filed an appeal before the Office of the President (OP), docketed as O.P.
Case No. 98-F-8459, which was likewise dismissed for lack of merit by Decision6 of January
20, 2000. The November 25, 1997 DENR decision was affirmed in toto.
Petitioner received a copy of the OPs dismissal of its appeal on February 1, 2000,7 following
which or on February 16, 2000, it filed a Petition for Time8 before the CA for an additional
period of fifteen days or until March 2, 2000 within which to file its petition for review.

For one, the Verification and Certification of non-forum shopping was signed merely by
Estela Lombos and Anita Pascual who allege that they are the duly authorized
representatives of petitioner corporation, without showing any proof whatsoever of such
authority.

On June 14, 2000, petitioner filed a Motion for Reconsideration13 of the CA May 17, 2000
Resolution, arguing that there was no showing that the persons acting on its behalf were
not authorized to do so and that its petition was filed within the additional 15-day period
granted by the CA. Attached to the Motion was a Secretarys Certificate14 dated June 14,
2000 showing that petitioners Board of Directors approved a Resolution on February 11,
2000 appointing Estela Lombos and Anita Pascual, incumbent directors of the corporation,
as its duly authorized representatives who may sign all papers, execute all documents, and
do such other acts as may be necessary to prosecute the petition for review that it would
file with the CA assailing the decision rendered in OP Case No. 98-G-8459.15

By Resolution9 of February 21, 2000, the CA granted petitioners Petition for Time, giving it a
non-extendible period of fifteen days from February 16, 2000 or until March 2, 2000 within
which to file the petition.

By Resolution of August 23, 2000, the CA denied petitioners Motion for Reconsideration for
lack of merit.

Petitioner subsequently filed its Petition for Review10 dated March 2, 2000 with the CA,
praying that judgment be rendered (1) reversing and setting aside the January 20, 2000 OP
Decision and the November 25, 1997 DENR Decision and May 18, 1998 Order, and (2)
declaring the subject lots as no longer forming part of the public domain and have been

x x x It must be stressed that any person who claims authority to sign, in behalf of another,
the Certificate of Non-Forum Shopping, as required by the rules, must show sufficient proof
thereof. Bare allegations are not proof, and the representation of one who acts in behalf of
another cannot, by itself, serve as proof of his authority to act as agent or of the extent of

his authority as agent. Thus, absent such clear proof, the Court cannot accept at face value,
such authority to sign in behalf of the corporation.
xxx
Another perusal of the registry return receipts attached to the petition for review (Nos. 182,
183 and 184) shows that copies of the Manifestation and Petition for Review were served to
private respondents (sic) counsel, the Office of the President, and the Department of
Environment and Natural Resources, on March 2, 2000. However, it does not indicate
therein when the petition for review was filed with the Court. The registry return receipts
(No. 185, 186, 187 and 188) being referred to by petitioner shows (sic) the date March 2,
2000 only on that numbered 188, and does (sic) not show the dates on those numbered
185-187. In fact, said receipts do not even indicate which pertain to the copy filed with the
Court.
Moreover, the Court cannot sustain petitioners supposition that a post office employee
might have stamped the wrong date, March 3, 2000, without any proof whatsoever of such
error. The date stamped on the envelope which contained the Manifestation and Petition for
Review clearly shows that the same was filed on March 3, 2000, and petitioner having failed
to rebut the presumption of regularity in the performance of official functions, the same
must prevail.16 (Citations omitted; emphasis in the original; italics supplied)
Petitioner thus filed on September 27, 2000 before this Court a Petition For Time to file its
petition for review.
On October 30, 2000, petitioner filed a Petition for Review on Certiorari raising the following
issues:
I
WHETHER OR NOT THE PERSONS WHO EXECUTED THE VERIFICATION AND CERTIFICATION
OF NON-FORUM SHOPPING ATTACHED TO PSIS MANIFESTATION/PETITION FOR REVIEW
FILED WITH THE COURT OF APPEALS WERE AUTHORIZED TO DO SO.
II
WHETHER OR NOT PSIS MANIFESTATION/PETITION FOR REVIEW WAS FILED WITHIN THE
REGLEMENTARY PERIOD.17

By Resolution18 of December 6, 2000, this Court denied the Petition for Review in view of
petitioners failure to submit a valid affidavit of service pursuant to Section 13 of Rule 13
and Sections 3 and 5 of Rule 45 in relation to Section 5 (d) of Rule 56 of the Rules of Court
and attach to the petition a duplicate original or certified true copy of the assailed CA
resolutions pursuant to Sections 4 (d) and 5 of Rule 45 in relation to Section 5 (d) of Rule 56
of the Rules of Court.
Petitioner filed a Motion for Reconsideration,19 averring that it had already attached
certified true copies of the assailed resolutions of the CA in its Petition for Time filed
before this Court on September 27, 2000, and while it was the affidavit before the CA which
was inadvertently attached to its petition before this Court, the messengerial staff of
petitioners counsel did in fact serve copies of the petition on counsel for respondents, the
DENR, the OP and the court a quo as evidenced by registry receipts and return cards20 which
it attached to its Motion for Reconsideration.
By Resolution21 of March 7, 2001, this Court, finding petitioners explanation satisfactory,
granted the Motion for Reconsideration and reinstated the petition, now the subject of this
Decision.
The petition is impressed with merit.
Section 6 (d) of Rule 43 in relation to Section 2 of Rule 42 of the Rules of Court mandates
that a petition for review shall contain a sworn certification against forum shopping in which
the petitioner shall attest that he has not commenced any other action involving the same
issues in this Court, the Court of Appeals or different divisions thereof, or any other tribunal
or agency; if there is such other action or proceeding, he must state the status of the same;
and if he should thereafter learn that a similar action or proceeding has been filed or is
pending before this Court, the Court of Appeals, or different divisions thereof, or any other
tribunal or agency, he undertakes to promptly inform the aforesaid courts and other
tribunal or agency thereof within five days therefrom.
For failure to comply with this mandate, Section 7 of Rule 43 provides:
SEC. 7. Effect of failure to comply with requirements.The failure of the petitioner to
comply with any of the foregoing requirements regarding the payment of the docket and
other lawful fees, the deposit for costs, proof of service of the petition, and the contents of
and the documents which should accompany the petition shall be sufficient ground for the
dismissal thereof.

The requirement that the petitioner should sign the certificate of non-forum shopping
applies even to corporations, considering that the mandatory directives of the Rules of
Court make no distinction between natural and juridical persons.22

It must also be kept in mind that while the requirement of the certificate of non-forum
shopping is mandatory, nonetheless the requirements must not be interpreted too literally
and thus defeat the objective of preventing the undesirable practice of forum shopping.28

In the case at bar, the CA dismissed the petition before it on the ground that Lombos and
Pascual, the signatories to the verification and certification on non-forum shopping, failed to
show proof that they were authorized by petitioners board of directors to file such a
petition.

As for the timeliness of the filing of its petition for review before the CA, petitioner
maintains in the affirmative.

Except for the powers which are expressly conferred on it by the Corporation Code and
those that are implied by or are incidental to its existence, a corporation has no powers. It
exercises its powers through its board of directors and/or its duly authorized officers and
agents.23 Thus, its power to sue and be sued in any court is lodged with the board of
directors that exercises its corporate powers.24 Physical acts, like the signing of documents,
can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the board of directors.25

SEC. 3. Manner of filing.The filing of pleadings, appearances, motions, notices, orders,

judgments and all other papers shall be made by presenting the original copies thereof,
plainly indicated as such, personally to the clerk of court or by sending them by registered
mail. In the first case, the clerk of court shall endorse on the pleading the date and hour of
filing. In the second case, the date of the mailing of motions, pleadings, or any other papers
or payments or deposits, as shown by the post office stamp on the envelope or the registry
receipt, shall be considered as the date of their filing, payment, or deposit in court. The
envelope shall be attached to the record of the case.

It is undisputed that when the petition for certiorari was filed with the CA, there was no
proof attached thereto that Lombos and Pascual were authorized to sign the verification
and non-forum shopping certification. Subsequent to the CAs dismissal of the petition,
however, petitioner filed a motion for reconsideration to which it attached a certificate
issued by its board secretary stating that on February 11, 2000 or prior to the filing of the
petition, Lombos and Pascual had been authorized by petitioners board of directors to file
the petition before the CA.
This Court has ruled that the subsequent submission of proof of authority to act on behalf of
a petitioner corporation justifies the relaxation of the Rules for the purpose of allowing its
petition to be given due course.26
Thus, in Shipside Incorporated v. Court of Appeals,27 this Court held:
x x x Moreover, in Loyola, Roadway and Uy, the Court excused non-compliance with the
requirement as to the certificate of non-forum shopping. With more reason should we allow
the instant petition since petitioner herein did submit a certification on non-forum shopping,
failing only to show proof that the signatory was authorized to do so. That petitioner
subsequently submitted a secretarys certificate attesting that Balbin was authorized to file
an action on behalf of petitioner likewise mitigates this oversight.

Sections 3 and 12 of Rule 13 of the Rules of Court provide:

SEC. 12. Proof of filing.The filing of a pleading or paper shall be proved by its existence in
the record of the case. If it is not in the record, but is claimed to have been filed personally,
the filing shall be proved by the written or stamped acknowledgment of its filing by the clerk
of court on a copy of the same; if filed by registered mail, by the registry receipt and by the
affidavit of the person who did the mailing, containing a full statement of the date and place
of depositing the mail in the post office in a sealed envelope addressed to the court, with
postage fully prepaid, and with instructions to the postmaster to return the mail to the
sender after ten (10) days if not delivered.
Registry Receipt Nos. 185-188 covering the envelopes bearing the copies of the petition
which were sent to the CA indicate that such copies were filed by registered mail at the
Domestic Airport Post Office (DAPO) on March 2, 2000.29
The Affidavit of Service30 filed by the person who did the mailing of the petition in behalf of
petitioner states that such petition was filed by registered mail by depositing seven copies
thereof in four separate sealed envelopes and mailing the same to the Clerk of Court of the
CA through the DAPO on March 2, 2000. The affidavit likewise states that on even date, the
petition was served on counsel for respondents, the DENR and the OP by depositing copies
of the same in sealed envelopes and mailing them to said parties respective addresses
through the DAPO.

And in the Certification31 dated October 26, 2000 issued by Postmaster Cesar A. Felicitas of
the DAPO, he states that the registered mail matter covered by Registry Receipt Nos. 185188 addressed to the Clerk of Court of the CA was posted at their office for mailing on
March 2, 2000, but that it was dispatched to the CMEC on March 3, 2000 for proper
disposition. This could very well explain why the latter date was stamped on the envelope
received by the CA containing the petition.
At all events, strict adherence to rules of procedure must give way to considerations of
equity and substantial justice where, as in this case, there is evidence showing that the
appeal was filed on time.32
WHEREFORE, the petition is GRANTED. The Resolutions dated May 17, 2000 and August 23,
2000 of the Court of Appeals are SET ASIDE. The case, CA-G.R. SP No. 57274, is REMANDED
to the appellate court which is hereby directed to give due course to the appeal of
petitioner.
No costs.
SO ORDERED.
Panganiban (Chairman), Sandoval-Gutierrez and Garcia, JJ., concur.
Corona, J., On Leave.
Petition granted, assailed resolutions set aside.
Note.The requirement of a certificate of non-forum shopping applies to the filing of
petitions for review on certiorari of the decisions of the Court of Appeals. (Eslaban, Jr. vs.
Vda. De Onorio, 360 SCRA 230 [2001])
o0o

SALVADOR P. LOPEZ, President of the University of the Philippines; BOARD OF REGENTS,

University of the Philippines ; and OSEAS DEL ROSARIO, Officer-in-Charge, College of
Education. University of the Philippines, petitioners, vs. HON.VICENTE ERICTA, Judge of
the Court of First Instance of Rizal, Branch XVIII (Quezon City), and DR.CONSUELO S.
BLANCO, respondents.

Pedrosa and Virata appearing in the minutes may not be interpreted as evidence of nothing
more than their feeling that the matter be left entirely to the decision of those who would
vote, such that if the majority were to vote in favor, they would not have any further
objections to the result of such voting.

Public Officers; University of the Philippines; Abstentions not considered affirmative if

reasons for them are known. It should be noted that an abstention, according to the
respondents citations, is counted as an affirmative vote insofar as it may be construed as an
acquiescence in the action of those who voted affirmatively. This manner of counting is
obviously based on what is deemed to be a presumption as to the intent of the one
abstaining, namely to acquiesce in the action of those who vote affirmatively, but which
presumption, being merely prima facie, would not hold in the face of clear evidence to the
contrary.

The facts are stated in the opinion of the Court.

Same; Same; Action of the Board of Regents, previous to adjournment, cancelling past
discussion is valid.Before it adjourned, the Board of Regents resolved to cancel the action
which had been taken, including the result of the voting, and to return the case to its
original statusto render the case subject to further thinking. It cannot be seriously argued
that the Board had no authority to do what it did: the meeting had not yet been adjourned,
the subject of the deliberations had not yet been closed, and as in the case of any
deliberative body the Board had the right to reconsider its action. No title to the office of
Dean of the College of Education had yet vested in respondent Blanco at the time of such
reconsideration.
BARREDO, J., concurring.
Same; Same; Chairman of Board of Regents not entitled to vote, exception.I would like to
reserve my opinion as to whether or not the announcement of Secretary Corpuz, as
chairman of the Board of Regents, that the vote is not a majority is correct from the legal
standpoint. To start with, the secretary who was then presiding counted his own negative
vote. In the absence of a role clearly authorizing him to vote, I am inclined to believe he
should have done so only in case of a tie.
Same; Same; Different interpretation of two abstainine votes.With respect to the question
as to how the recorded abstentions should be counted, while I see the point in the
explanation in the main opinion that abstentions may be considered as presumptively
affirmative votes only if there are no circumstances indicating the view of those abstaining
to be otherwise, I am not prepared to draw the conclusion that the remarks of Regents

ORIGINAL PETITION in the Supreme Court. Certiorari.

Solicitor General Felix Q. Antonio, Assistant Solicitor General Jaime M. Lantin and Special
Counsel Jose Espinosa for petitioners.
Sison, Dominguez & Magno for respondents.
MAKALINTAL, J.:
This case presents the question of whether or not respondent Dr. Consuelo S. Blanco was
duly elected Dean of the College of Education, University of the Philippines, in the meeting
of the Board of Regents on July 9, 1970, at which her ad interim appointment by University
President Salvador P. Lopez, one of the petitioners here, was submitted for consideration.
The question was originally ventilated in a petition for certiorari filed by Dr. Blanco in the
Court of First Instance of Quezon City, presided by respondent Judge Vicente Ericta, who
decided the question affirmatively on December 3, 1970. The dispositive portion of the
decision was amended three days later, or on December 6, to read as follows:
x x x WHEREFORE, the Court readers judgment:
1. ( 1 ) Declaring petitioner, CONSUELO S. BLANCO, the duly elected Dean of the
College of Education, University of the Philippines, and as such entitled to occupy
the position with a three-year term of office from May 1, 1970 to April 80, 1973;
2. ( 2 ) Declaring null and void the appointment of respondent Oseas A. del Rosario as
Officer-in-Charge of the College of Education, University of the Philippines; and
(8) Issuing a permanent injunction (a) commanding re-spondent Oseas A. del Rosario to
desist from further exercising the functions and duties pertaining to the Office of the Dean
of the College of Education, University of the Philippines, and (b) commanding respondent
Board of Regents from further proceeding in the matter of the appointment or election of
another person as Dean of said college.

XXX

XXX

XX X

The case is before this Court on appeal by certiorari taken by the President and the Board of
Regents of the University and by Oseas A. del Rosario, respondents below, the last as
officer-in-charge appointed to discharge the duties and functions of the office of Dean of the
College of Education.1 The petition for review was filed on January 5, 1971. On January 11,
1971 this Court, pursuant to its resolution of January 7, issued a writ of preliminary
injunction to stop the immediate execution of the judgment appealed from, as ordered by
respondent Judge.
The facts and circumstances surrounding the ad interim appointment of Dr. Consuelo S.
Blanco and the action taken thereon by the Board of Regents have a material bearing on the
question at issue. The first such appointment was extended on April 27, 1970, effective
May 1, 1970 until April 30, 1971, unless sooner terminated and subject to the approval of
the Board of Regents and to pertinent University regulations. Pursuant thereto Dr. Blanco
assumed office as ad interim Dean on May 1, 1970.

addressed to the Board, from a majority of the faculty and from a number of alumni... The
deferment for further study having been approved, the matter was referred to the
Committee on Personnel, which was thereupon reconstituted with the following
composition: Regent Ambrosio F. Tangco, chairman; Regent Pio Pedrosa and Regent Liceria
B. Soriano, members. The opinion was then expressed by the Chainnan of the Board that in
view of its decision to defer action Dr. Blancos appointment had lapsed, but (on the
Presidents query) that there should be no objection to another ad interim appointment in
favor of Dr. Blanco pending final action by the Board.
Accordingly, on the same day, May 26, 1970, President Lopez extended another ad interim
appointment to her, effective from May 26, 1970 to April 30, 1971, with the same
conditions as the first, namely, unless sooner terminated, and subject to the approval of
the Board of Regents and to pertinent University regulations.
The next meeting of the Board of Regents was held on July 9, 1970. The minutes show:
xxx

The only provisions of the U.P. Charter (Act No. 1870) which may have a bearing on the
question at issue read as follows:
SEC. 7. A quorum of the Board of Regents shall consist of a majority of all the members
holding office at the time the meeting of the Board is called. All processes against the
Board of Regents shall be served on the president or secretary thereof.
SEC. 10. The body of instructors of each college shall constitute its faculty, and as presiding
officer of each faculty, there shall be a dean elected from the members of such faculty by
the Board of Regents on nomination by the President of the University.
Article 78 of the Revised Code of the University provides :
Art. 78. For each college or school, there shall be a Dean or Director who shall be elected by
the Board of Regents from the members of the faculty of the University unit concerned, on
nomination by the President of the University.
The Board of Regents met on May 26, 1970, and President Lopez submitted to it the ad
interim appointment of Dr. Blanco for reconsideration. The minutes of that meeting disclose
that the Board voted to defer action on the matter in view of the objections cited by
Regent Kalaw (Senator Eva Estrada Kalaw) based on the petition against the appointment,

xxx

xxx

2. Deanship of the College, the President having issued an ad interim appointment for Dr.
Consuelo Blanco as Dean effective May 26, 1970:
Note:

The Personnel Committee, to which this case was referred, recommended that the
Board request the President of the University to review his nomination for the
Deanship of the College of Education in the light of the testimonies received and
discussions held during the Committees meeting on June 4 and June 11, 1970 on
this matter.
Chairman Tangco asked that the documents received by the Committee on the
matter be entered in the official record, the same attached hereto as Appendix A
pages 57 to 179.
Board Following some discussion on what Regent Tangco explained to be the rationale or
action: intention (i.e., that the President would discuss with Dr. Consuelo S. Blanco a
proposal to withdraw her appointment as Dean) behind the wording of the
Personnel Committees recommendation, and in view of some uncertainty over
whether the Board would be acting upon the recommendation as diplomatically
stated in the agenda or as really intended according to Regent Tangcos
explanation, the Personnel Committee withdrew its recommendation as stated in
the Agenda. The Chairman took a roll-call vote on the appointment of Dr. Blanco as
Dean. The Chairman having ruled that Dr. Blanco had not obtained the necessary
number of votes, the Board agreed to expunge the result of the voting, and, on

motion of Regent Agbayani duly seconded, suspended action on the ad interim

appointment of Dr. Blanco. The Chair stated that this decision of the Board would
in effect render the case subject to further thinking and give the Board more time
on the question of the deanship of the College of Education, and, since the Board
had not taken action on the appointment of Dr. Blanco either adversely or
favorably, her ad interim appointment as Dean effective May 26, 1970 terminated
as of July 9, 1970.
The roll-call voting on which the Chairman of the Board of Regents based his ruling aforesaid
gave the following results: five (5) votes in favor of Dr. Blancos ad interim appointment,
three (3) votes against, and four (4) abstentionsall the twelve constituting the total
membership of the Board of the time.2 The next day, July 10, 1970, Dr. Blanco addressed a
letter to the Board requesting a reconsideration of the interpretation made by the Board as
to the legal effect of the vote of five in favor, three against and four abstentions on my ad
interim appointment. On August 18, 1970 Dr. Blanco wrote the President of the University,
protesting the appointment of Oseas A. del Rosario as Officer-in-Charge of the College of
Education. Neither communication having elicited any official reply, Dr. Blanco went to the
Court of First Instance of Quezon City on a petition for certiorari and prohibition with
preliminary injunction, the decision wherein is the subject of the present appeal.
Considerable arguments have been adduced by the parties on the legal effect and
implications of the 5-3-4 vote of the Board of Regents. Authorities, mostly judicial
precedents in the American jurisdictions, are cited in support of either side of the belabored
question as to whether an abstention should be counted as an affirmative or as a negative
vote on a particular proposition that is being voted on. Thus it is submitted, on the part of
the petitioners, that if the abstentions were considered as affirmative votes a situation
might arise wherein a nominee (for the office of Dean as in this case) is elected by only one
affirmative vote with eleven members of the Board abstaining; and, on the part of the
respondent, that according to the prevailing view an abstention vote should be recorded in
the affirmative on the theory that refusal to vote indicates acquiescence in the action of
those who vote; ... that the silence of the members present, but abstaining, is construed
to be acquiescence so far as any construction is necessary. A logician could make a
creditable case for either proposition. It does seem absurd that a minorityeven only one
of the twelve members of the Board of Regents who are present could elect a Dean just
because the others abstain. On the other hand, there is no lack of logic either in saying that
a majority vote of those voting will be sufficient to decide an issue on the ground that if
construction is at all necessary the silence of the members who abstain should be construed
as an indication of acquiescence in the action of those who vote affirmatively. This apparent

dichotomy, indeed, accounts for the conflict in the. American court decisions, from which
both parties here, have drawn extensively in support of their respective positions.
In the present case, however, this Court does not find itself confronted with an ineluctable
choice between the two legal theories. It should be noted that an abstention, according to
the respondents citations, is counted as an affirmative vote insofar as it may be construed
as an acquiescence in the action of those who vote affirmatively. This manner of counting is
obviously based on what is deemed to be a presumption as to the intent of the one
abstaining, namely, to acquiesce in the action of those who vote affirmatively, but which
presumption, being merely prima facie, would not hold in the face of clear evidence to the
contrary. It is pertinent, therefore, to inquire into the facts and circumstances which
attended the voting by the members of the Board of Regents on the ad interim appointment
of Dr. Blanco in order to determine whether or not such a construction would govern. The
transcript of the proceedings in the meeting of July 9, 1970 show the following statements
by the Regents who participated in the discussion:
Regent
Tangco:

Mr. Chairman, I would like to put on record that this statement here is
a compromise statement. The Committee, after hearing the
testimonies and going over the materials presented to the
Committee, was in favor of recommending to the Board that the
nomination of Professor Blanco cannot be accepted by the Board, but
it was felt that it should be presented in a more diplomatic way to
avoid any embarrassment on the part of both the appointee and the
President. And. so means were .studied as to how it could be done
and it was felt that it could be done in such a way that the appointee
could request relief from the appointment, that it would be the best to
save embarrassment all around. And so the final decision was to ask
the President to review the matter, but with the un
derstanding that he will talk this
over with Dean Blanco and for the
appointment to be withdrawn. So
actually although this statement
here is not in that light, again that
is the decision of the Committee.
Inasmuch as apparently either the
meaning of the decision was not
made clear or maybe was not
understood very well, I would like
to put that on the record.

Regent Kalaw:

Regent Tangco:

Regent Pedrosa:

Regent Tangco:
Regent Pedrosa:

I would like to take note of the

comments of Dr. Tangco here on a
previous agreement. I understand
that while the Committee
recommended the disapproval of
the appointment of Dr. Blanco, the
Committee felt that it was more
tactful and diplomatic to present
the motion on this level but
premised by the findings of the
Committee that the President
would make an agreement with
Dean Blanco to make a
withdrawal xxx.
Mr. Chairman, I wish to just make
a correction that the decision was
to ask the President for her to
request relief and not to consult. I
want to put that on record now. It
was only that we wanted to avoid
any. thing on this on the record of
the Board to save embarrassment.
But inasmuch as that statement
has been made, I want to make it
of record that the agreement was
for the President to ask her to
submit or better ask her to the
withdrawal.
Mr. Chairman, in order to cut this
matter once and for all, may I
suggest that the members of the
Committee inhibit themselves
from voting in this matter. I dont
think it would affect the majority
vote or whatever the rest of the
members of the Board decide.
Mr. Chairman, I was going to
inhibit myself from the start.
And I am inhibiting myself. We are

only two members now; Dr.

Soriano is not here, so that we
leave the votation on this matter
to the other members of the
Board.
Regent Kalaw:
Mr. Chairman, what is the
votation for?
Chairman:
The question before this Board is
the Committee recommendation.
Incidentally, if the Board accepts
the Committee recommendation
it is also a lack of confirmation of
the ad interim appointment of
Dean Blanco x x x.
xxx xxx xxx
Chairman:
There is only one more question
before this Board to discuss fully, I
believe. The question is, the Chair
asks
the Board to vote on the Committee action in the form of a
recommendation as presented in the Agenda. Regent Tangco, the
Chairman of that Committee, says that this is merely a polite cover, a
diplomatic cover, according to Regent Kalaw, for the reaction of the
Committee, and Regent Tangco requests that we act not on the Committee
recommendation in this form as presented in the Agenda but in terms of
the gentlemans agreement.
Chairman: In brief, Regent Tangco informs the Board of the action that the Committee
was to request the President to call Dr. Blanco and prevail upon her to
withdraw.
Regent
On what basis?
Escobar:
Regent
On the testimonies presented to us and also to avoid further
Tangco: embarrassment on the part of the appointee. The decision of the
Committee was to ask Dean Blanco because there will be too much
embarrassment which I think is not going to gain any matter one way or
the other.
Chairman: We have to make a ruling. I think that we cannot act on the gentlemens

agreement because we do not have that gentlemens agreement before

us.
Regent
Mr. Chairman, may I interrupt you. In view of the fact that I have
Pedrosa: announced that I would desist from participating in the Board and Regent
Tangco has done likewise then I presume the President will not also
participate. Why doesnt the Board proceed to the decision of whether...
Chairman: Yes, I am saying, Mr. Regent, there is a ruling that this Board will have to
act on the Committee recommendation presented here, unless the
Committee withdraws this recommendation.
Regent
The Committee is so doing, Mr. Chairman.
Tangco:
Chairman: The Committee will withdraw this recommendation, in which case the issue
is simply we only have to act on the issue of to confirm or not to confirm
the ad interim appointment issued to Dr. Blanco.
xxx xxx xxx
Chairman: The Committee is withdrawing this recommendation.
Regent
Per se, as it is written. But I think the Committee, if I get it right, is actually
Silva:
putting a recommendation for non-confirmation.
Regent Since the Committee is withdrawing the
Kalaw: recommendation and the Board would
act on it per se, I think Regent Silva is
right. (Italics supplied)
The voting which followed shows the following result:
Affirmative votes:
Regent Fonacier
Escobar
Barican
Lopez
Agbayani

Negative votes:
Regent Kalaw
Silva
Corpuz
Abstentions:
Regent Tangco
Leocadio (Substituting for Regent Soriano)
Pedrosa
Virata
Regent Leonides Virata, who was not a member of the Personnel Committee, made the
following explanation before casting his vote:
A. I abstain, but I want to say this. There must be some other way of solving this problem. I
am at sea in this, because although I have been reading all these documents here, but a
decision is being asked now that I am not ready myself.
After the result of the voting was known the Board Chairman, Secretary Corpuz., announced
that the vote is not a majority... (and that) there is no ruling in the Code of the University
on the counting of votes and the treatment of abstention.
What transpired immediately afterwards appears in the transcript of the proceedings, as
follows:
Regent Agbayani:

Mr. Chairman, could I ask for

another one-minute recess?

(ONE-MINUTE RECESS AT THIS POINT)

Chairman: The meeting is resumed. Mr. Regent?
(Addressing Regent Agbayani)
Regent Agbayani:
Mr. Chairman, I move that we do not proceed with the

Chairman:
Regent Agbayani:
Chairman:

Regent Agbayani:

Chairman:

Regent Escobar:

Chairman:
Regent Escobar:

Regent Silva:
Chairman:

Regent Silva:

action now on this matter.

To suspend in effect the action of the Board?
The result brings us back to the previous status, that no
action has been taken.
There is a motion to suspend action; that is to say, to
suspend the voting of the Board on this matter with the
effect, first, to return the case to Us original statusto
render the case subject to further thinkingand second,
that the Board has not confirmed the appointment. The
appointment, in other words, will be good from May 26 up
to today.
Mr. Chairman, the Board did not confirm exactly. It cannot
be said that the Board confirmed or did not confirm, but
the appointment terminates. The ad interim appointment
terminates when the Board meets, just like in Congress,
where the ad interim appointment is good only up to the
first day of the session.
So in effect, suspending action on this matter now, the
Board in effect gives itself time to study the question not of
Dean Blanco but the question of the deanship of the
College, and the Board has not taken action on the
confirmation either adversely or favorably, but that the ad
interim appointment has terminated today.
Mr. Chairman, does it mean that all the deliberations
regarding this matter should be erased from the record ?
Because the record of the voting is there.
Well, it follows.
It follows suit, because we are now asking for a
reconsideration of any deliberations to the effect that if
there was a voting it should be banned from appearing in
the record.
We have made statements here today.
The record of the voting, which is incomplete by the way
because there was no circulation to consider, will not
appear in the record.
The result of the votes; the deliberations regarding this
matter.

Regent Agbayani:
Chairman:

I have no objection.
The record of the voting will not appear. Any objection to
the motion for reconsideration? No objection, approved.

From the foregoing record of the meeting of the Board of Regents it is very clear: (1) that
the Personnel Committee, to which the matter of Dr. Blancos appointment had been
referred for study, was for recommending that it be rejected; (2) that, however, the
rejection should be done in a diplomatic way to avoid any embarrassment on the part of
both the appointee and the President; and (3) that the final decision of the committee
was to ask the President of the University to talk to Dr. Blanco for the appointment to be
withdrawn. That decision, as announced by Regent Tangco, Chairman of the Personnel
Committee, was restated and clarified by Regent Kalaw, and then reiterated first by Regent
Tangco and then by the Chairman. On that note Regent Pedrosa suggested that the
members of the Personnel Committee, as well as the President, should inhibit themselves
from voting. When the matter was actually submitted to a vote, however, the definition of
the issue became somewhat equivocal. Regent Tangco announced that the committee was
withdrawing its recommendation, whereupon the Chairman stated that the issue was to
confirm or not to confirm the ad interim appointment issued to Dr. Blanco. This was then
followed by a remark from Regent Silva that the withdrawal by the committee referred to
the recommendation per se, as it is written, but that the committee, he thought, was
actually putting a recommendation for non-confirmation. Regent Kalaw thereupon
expressed her concurrence with Regent Silvas opinion.
The votes of abstention, viewed in their setting, can in no way be construed as votes for
confirmation of the appointment. There can be no doubt whatsoever as to the decision and
recommendation of the three members of the Personnel Committee: it was for rejection of
the appointment. If the committee opted to withdraw the recommendation it was on the
understanding (also referred to in the record as gentlemens agreement) that the President
would talk to Dr. Blanco for the purpose of having her appointment withdrawn in order to
save them from embarrassment. No inference can be drawn from this that the members of
the Personnel Committee, by their abstention, intended to acquiesce in the action taken by
those who voted affirmatively. Neither, for that matter, can such inference be drawn from
the abstention that he was abstaining because he was not then ready to make a decision.
All arguments on the legal question of how an abstention should be treated, all authorities
cited in support of one or the other position, become academic and purposeless in the face
of the fact that respondent Dr. Blanco was clearly not the choice of a majority of the
members of the Board of Regents, as unequivocally demonstrated by the transcript of the
proceedings. This fact cannot be ignored simply because the Chairman, in submitting the

question to the actual vote, did not frame it as accurately as the preceding discussion called
for, such that two of the Regents present (Silva and Kalaw) had to make some kind of
clarification.
In any event, in the same meeting of July 9, 1970, before it adjourned, the Board of Regents
resolved, without a vote of dissent, to cancel the action which had been taken, including the
result of the voting, and to return the case to its original statusto render the case subject
to further thinking. In effect, as announced by the Chairman, the Board has not acted on
the confirmation either adversely or favorably, but that the ad interim appointment has
terminated. Indeed the formal decision of the Board was that all deliberations on the
matter should not appear in the record. And it cannot be seriously argued that the Board
had no authority to do what it did: the meeting had yet been adjourned, the subject of the
deliberations had not yet been closed, and as in the case of any deliberative body the Board
had the right to reconsider its action. No title to the office of Dean of the College of
Education had yet vested in respondent Blanco at the time of such reconsideration.
One of the prayers of Dr. Blanco in her petition below is that she be declared duly elected as
Dean of the College of Education and, as such, legally entitled to the said position with a 3year tenure of office as provided in the Revised Code of the University of the Philippines
(Art. 79, Ch. 6, Title Two). Obviously this prayer is not in order inasmuch as she has not been
elected to said position. On the other hand, Dr. Blanco does not ask that she be recognized
as Dean by virtue of her ad interim appointment dated May 26, 1970, effective up to April
30, 1971. Aside from the fact that the point has become moot, since the tenure has expired,
it is seriously to be doubted whether such an appointment is authorized under the law and
regulations. It should be noted that both under the Charter (Sec. 10) and under the Revised
Code of the University (Art. 78) the Dean of a college is elected by the Board of Regents on
nomination by the President of the University. In other words the Presidents function is
only to nominate, not to extend an appointment, even if only ad interim; and the power of
the Board of Regents is not merely to confirm, but to elect or appoint. At any rate the ad
interim appointment extended to Dr. Blanco on May 26, 1970, although made effective until
April 30, 1971, was subject to the following condition: unless sooner terminated and
subject to the approval of the Board of Regents. The Board, as has been shown, not only
did not elect Dr. Blanco in its meeting of July 9, 1970, but declared the appointment
terminated as of that day.
WHEREFORE, the decision appealed from is reversed and set aside; the petition of
respondent Consuelo S. Blanco for certiorari and prohibition before respondent Court is
ordered dismissed; and the writ of preliminary injunction issued by this Court is made
permanent, without pronouncement as to costs.

Concepcion, C.J., Zaldivar, Castro, Fernando, Teehankee and Makasiar, JJ., concur.
Reyes, J.B.L. and Antonio, JJ., did not take part.
Barredo, J., concurs in separate opinion.

SECUNDINO MENDEZONA, plaintiff and appellant, vs. THE PHILIPPINE SUGAR ESTATES
DEVELOPMENT COMPANY, LIMITED, and MANUEL DE GARAY, defendants. THE PHILIPPINE
SUGAR ESTATES DEVELOPMENT COMPANY, LIMITED, appellant.
1. 1. EVIDENCE; BURDEN OF PROOF.He who attempts to impugn a fact which in an
unequivocal manner appears in an authentic document has the burden of proving
the contrary with clear, convincing and more than merely preponderant evidence.
1. 2. CORPORATIONS; OFFICERS AND AGENTS; ACTS AND DECLARATIONS OF
AGENTS.The declarations of an individual director relating to the affairs of the
corporation, but not made in the course of, or connected with, the performance of
the authorized duties of such director, are held not binding on the corporation. So,
false statements made by a single director, for the purpose of defrauding the
creditors of the corporation, including the corporation itself, could not affect or bind
it. The general rule is that officers of corporations acting within the scope of their
authority may bind the corporation in the same way and to the same extent as if
they were the agents of natural persons, unless the charter or by-laws otherwise
provide. They cannot, in general, bind the corporation by acts in excess of the
authority with which they are clothed unless such acts are ratified. * * * (2
Thompson on Corporations, pars. 1073 and 1408.)
APPEAL from a judgment of the Court of First Instance of Manila. Ostrand, J.
The facts are stated in the opinion of the court.
Gibbs, McDonough & Johnson for plaintiff and appellant.
Orense & Vera for defendant and appellant.
VlLLAMOR, J.:
This action was instituted on June 19, 1914, in the Court of First Instance of the city of
Manila by the plaintiff Secundino Mendezona against the "The Philippine Sugar Estates
Development Company, Limited" and the def endant Manuel de Garay to recover of the
defendant company by way of damages the sum of P228,023.36 arising from a breach of
contract.

The plaintiff alleges that he entered into that contract with the defendant company on July
14, 1913, the corresponding document copied in the complaint having been executed in
which the name of Manuel de Garay was made to appear as the tenant on shares for the
sole purposes of satisfying the scruples of one of the directors of the company, but with the
understanding between the parties that the plaintiff was to be the real tenant on shares;
that by virtue of that mutual understanding, and in order to carry it into effect, he entered
with the defendant Manuel de Garay on July 14, 1913, with the consent of the
representatives of the defendant company, into a contract in which the said Manuel de
Garay admitted that he was merely a subordinate of the plaintiff, with a right to only 10 per
cent of the plaintiff's share in the profits which as tenant he might receive from the
Hacienda de Bucal, which the defendant had in Calamba, Laguna; and that, said defendant
Manuel de Garay, conniving with the defendant company, attempted to defraud him,
claiming to be the true tenant, for which reason he lost his right to the share otherwise
accruing to him under said contract.
The defendant corporation answered the complaint of the plaintiff Secundino Mendezona,
denying his claims, and alleging, by way of special defense: That the defendant company
had not entered into any rental contract on shares with /the plaintiff and that the latter
intervened in the work of cultivation of the Hacienda de Bucal as a mere attorney in fact of
the defendant Manuel de Garay, who was discharged from that place when the company
learned that the plaintiff had entered it in violation of the rental contract on shares which
the defendant Manuel de Garay had with the defendant company.
The def endant Manuel de Garay denies all of the allegations of the complaint and by way of
special defense alleges: (1) That the contract which he entered into with the plaintifF on
July, 1913, was to the effect that he would sign a contract of rental on shares which said
plaintiff had arranged with the defendant company, and in return, the plaintiff would make
him an employee on the Hacienda de Bucal, with the right to receive 10 per cent of the
profits which might accrue to the plaintiff, as tenant on shares; that, later, when he found
out that the contract which he was to sign absolutely prohibited the transfer of the rental
contract and required him to give a bond, then, at his instance and with the consent of the
plaintiff, the terms of his contract were altered, in the sense that between them the work of
the hacienda would be divided, De Gray acting as tenant on shares and Mendezona as his
attorney in fact, and the profits were to be divided equally among them; (2) that they took
possession of the hacienda to cultivate it under this contract, but on January 9, 1914,
Mendezona left the hacienda at the instance of the company because he had violated the
terms of his obligation; (3) that in March, 1914, when the crops were being harvested the
plaintiff Mendezona required him to take steps to have the defendant company pay 30 per
cent of the harvest in payment for his services, and that he took steps to that end but failed

to get it because said share of 30 per cent had not yet been liquidated at the time that the
rental contract came to an end at the will of the defendant company.
The defendant Manuel de Garay also filed a complaint in intervention against "The
Philippine Sugar Estates Development Company, Limited" to recover the sum of P217,660 as
damages alleged to have been caused to him because of the unjustified rescission by the
defendant of the rental contract on shares which was entered into with him.
The defendant company in its answer denied generally the allegations of the complaint,
except the fact that the rental contract was entered into with Manuel de Garay and by way
of counterclaim, the defendant alleged: (1) That by virtue of said contract the def fendant
made advances to Manuel de Garay as required by the terms thereof, which, together -with
the stipulated interest thereon, amount to P59,745.09, and delivered all the material for
work to him which existed on the hacienda, as well as other sums used in the purchase of
animals and materials for work, the value of all of which amounting to P1,285.05 on which
the tenant De Garay should pay to the defendant company 6 per cent interest a year as
agreed upon; (2) that the defendant company spent for the milling of the harvest for the
first months of 1914, the sum of P26,245.50, of which the tenant De Garay should pay 30
per cent according to the terms of the contract; (3) that the tenant De Garay did not comply
with his obligations, as tenant of the hacienda to handle the same with due care and
diligence, and the investments made by him with the money advanced to him did not
produce any satisfactory results to the company; and (4) .that to comply with the
obligations contracted by said Manuel de Garay, the latter mortgaged a launch belonging to
him and named Gora Jell. In view of its allegations the defendant company asked that it be
absolved from the complaint of Manuel de Garay, and that judgment be rendered ordering
the latter to pay to the defendant company the advances referred to together with the
stipulated interest, and that upon failure to do so the launch mortgaged be ordered sold
and' the proceeds applied to the payment of said sums.
Upon trial, at which evidence was introduced by the plaintiff Secundino Mendezona and the
defendant corporation, the defendant De Garay not having offered any, he having limited
himself to appearing in the case on February 6, 1917, that is, one month after the
termination of the trial, the court, on October 17, 1917, rendered judgment, absolving each
party from the complaint of all the others, whether original, in intervention or counterclaim,
and without any special pronouncement as to costs.
To this decision exception was taken by the plaintiff Mendezona and the defendant
company, both of whom asked for a new trial, on the ground that the decision was against
the weight of the evidence and the law. Said motion having been denied, they excepted
against and took the appeal to this court.

The plaintiff assigns in his brief, as errors committed by the trial court, the following:
1. 1. In not declaring that the plaintiff Secundino Mendezona was the true tenant, on
shares, by virtue of the rental contract and the other evidence adduced in support
of his claim, and in declaring that the evidence did not show the existence of any
juridical relation between the plaintiff and the defendant corporation.
2. 2. In declaring that neither the acts of the officers of the corporation recognizing the
plaintiff as such tenant on shares, nor the knowledge that the members of the
board of directors of the company had to the effect that he was acting as such
tenant and was in fact the person managing the hacienda, nor the public knowledge
that he was such, which obligated the corporation to consider him as the tenant on
shares of the hacienda.
3. 3. In not declaring that by virtue of the contract entered into between the def
endant De Garay and the plaintiff with the knowledge and consent of the
defendant, the plaintiff became a partner, or interested party in the rental contract
on shares with the right to ask for the rescission thereof by reason of
noncompliance therewith and to require a rendering of accounts and the
consequent indemnity for damages.
4. 4. In not declaring that the defendant corporation had violated the rental contract
with the plaintiff and that the latter had suffered the damages claimed by him as
well as in dismissing the complaint and in denying the motion for a new trial.
The principal question raised in the briefs of the parties is whether the juridical bond
created by the contract of rental on shares, which is transcribed in their pleadings, really
existed between the plaintiff Mendezona and the defendant corporation, or between the
latter and the defendant Manuel de Garay.
The facts which gave rise to the present litigation are the following:
On June 9, 1913, the plaintiff Secundino Mendezona addressed a letter to the manager of
'The Philippine Sugar Estates Development Company, Limited," proposing to rent, on shares,
the Hacienda de Bucal which said company had in the municipality of Calamba, Laguna, with
the conditions which are mentioned in detail in his letter. This communication having been
submitted to the board of directors of the defendant corporation, said board rejected the
proposition by resolution of July 3, 1913, which was transmitted to the plaintiff by the
manager..
Upon being notified of said resolution, Mendezona addressed the following letter to the
president of the corporation:

"Mr.
PRESIDENT
OF
THE'
VELOPMENT COMPANY, LlMITED.'

PHILIPPINE

SUGAR

ESTATES

DE

"Very respectfully,
"JOSE MA. SUAREZ."

"DEAR SIR: Having been informed by your manager that my proposition of rental, on shares,
has been rejected by the Board of Directors, of which you are the president, due to my
connection therewith, and as my only object is to cultivate the land, I take the liberty of
suggesting that a contract be entered into, not with me, but with Manuel de Garay, in order
that it may not be said that I am in your service. Mr. Garay, in whom I have absolute
confidence, has been manager of a hacienda of the Tabacalera in Negros as well as having
been connected with their sugar warehouse in Shanghai, which company, I understand, can
give him the best of recommendations.
"Hoping that the board will reconsider my proposition in the form herewith submitted, I
remain,
"Very sincerely,

In its session of July 11, 1913, the Board of Directors of the defendant corporation approved
the following resolution:
"The acting president reported favorably as to the qualifications and efficiency of Mr.
Manuel de Garay given by the manager on the 7th instant. In view of such information, and
after proposing and approving several amendments to the rental proposition as to the
haciendas of Bucal and of Calamba, it was decided to vote on said rental proposition with
Mr. Manuel de Garay. The result was the approval, by a unanimous vote, of said rental
proposition together with the following rental contract of Bucal and Calamba between 'The
Philippine Sugar Estates Development Co., Ltd.' and D. Manuel de Garay. "* * * "
On July 13, 1913, the president of the company sent to the manager the letter Exhibit L
which is as follows:

"S. MENDEZONA."
"MANILA, July 13, 1913.
This letter having been submitted to the board of directors of the company, said board in its
session of July 7, 1913, agreed to the following:
"The president asked the board if it was willing to reconsider the contract of rental, on
shares, of the Hacienda de Bucal proposed by Mr. Mendezona but rejected in the preceding
meeting, on condition that the execution of said contract should be with Mr. Garay. The
board reconsidered said contract of Mendezona and decided that the manager investigate
the said Garay and that the result be submitted to the board for its action."
On July 9, 1913, the manager of the corporation sent the following letter to the plaintiff
Mendezona:

"The
MANAGER
OF
THE
VELOPMENT COMPANY LlMITED, INC.'

PHILIPPINE

SUGAR

ESTATES

DE

"DEAR SIR: I wish to inform you that the Board of Directors of this Company in its session of
the 7th instant, in view of the new policy to be established in the hacienda de Bucal and as a
result of the last agricultural harvest, decided to cancel the appointment of D. Manuel
Guazo as administrator of Bucal and Calamba.

"Mr. SECUNDINO MENDEZONA.

"You will, therefore, as soon as possible communicate this resolution of the Board of
Directors to him, requesting him to deliver an inventory to the person named below, settle
his accounts at the proper time, and lastly to express to him, in the name of our company,
our appreciation of his faithful service.

"DEAR SIR: In answer to your letter I have the honor to state that the vice-president, acting
president of this corporation, informs me in his letter of yesterday, that the board has
decided to reconsider the proposition of rental, on shares, offered by you in the name of
Mr. Garay. The Board also discussed the matter of a bond, the number of hectares to be
cultivated, etc., which will be taken up with you later.

"I also wish to inform you that the board, in its session of the 11th instant, decided to
reconsider the rental proposition of Bucal made by Mr. Mendezona, but rejected at the
preceding session, on condition that the contract be made with D. Manuel de Garay, it
having been agreed upon to give him the contract as to Bucal and Calamba under the
following conditions:

General contract of rental on shares of Bucal in favor of Manuel de Garay:

new owner shall recognize the contract of rental on shares or otherwise compensate the
tenant.

"First. * * *
"*

"(e) The general tenant cannot transfer, or cede to another person this contract of rental, on
shares, without the permission of the company.

"Sixteenth. * * *
"I 'would be very much obliged if you will inform me of the conformity of Manuel de Garay
to this contract.
"M.
"Acting President."

G.

GRANDE,

Vice-President,

At the f oot of said letter appear these words: "Having read and understood the foregoing
communication I accept it in all its parts. Manila, July 14, 1913. M. de Garay."

"(f) The corporation shall make advances in cash to the tenant at the rate of seventy-five
pesos (P75) for each hectare actually planted or which may hereafter be planted. Provided
that this bonus of P75 for each hectare shall be from the time of planting to that of
harvesting. These advances constitute the maximum amount which the tenant may dispose
of during the year, and he shall make use thereof as the work on the hacienda may require,
subject to weekly inspection and approval of the manager. In these advances are included
the expenses of administration, traveling expenses of the tenant, compensation of
subordinates, ordinary expenses for the preservation of the house of the hacienda and
those of Calamba, fines for the violation of municipal ordinances, fees for the branding and
transfer of cattle and expenses incident to compliance with municipal health ordinances
with respect to persons and animals.

Subsequently the parties executed the f ollowing contract of rental on shares:

"GENERAL CONTRACT OF RENTAL ON SHARES EXECUTED BETWEEN THE PHILIPPINE SUGAR
ESTATES DEVELOPMENT CO., LIMITED, INCORPORATED, AND MANUEL DE GARAY.
"First. That D. Jose Ma. Garcia Suarez, in the representative capacity in which he acts, grants
to D. Manuel de Garay in general rental contract on shares, the Hacienda de Bucal, which
includes the parcels denominated Bucal, Lecheria, Real, Najada, Mayapa and houses at
Calamba, subject to the following conditions:
" (a) Manuel de Garay will assume the agricultural part of the exploitation of the hacienda.
"(b) It shall be a necessary condition that the tenant shall permanently live and reside on the
hacienda, the company having the right to be indemnified for damages suffered on account
of lack of inspection and vigilance due to continuous and long absences.
"(c) The period of this contract shall be for one year, from the time of planting to that of
harvesting, the period still lacking of the former being counted as the period for the taking
of possession of and the preparation of the soil.
" (d) The company reserves the right to sell or dispose of, wholly or partly, the lots which are
the object of this contract, during the period of its duration, with the understanding that the

"For the purposes of the bonus granted amounting to P75, by one hectare of land newly
cultivated, shall be understood all surface area of that extent, cleaned and harrowed,
without trunks or roots, and plowed two or three times, so that it may be ready for
immediate planting.
"(g) These advances shall bear interest at 10 per cent per annum.
"(h) At the expiration of each year there shall be a settlement of interest, all that which may
be due from the tenant being capitalized up to the time of the harvest, at which time it shall
be paid, with interest due from December 31, to the date of payment. During said harvest
time the capital advanced for animals and agricultural implements shall also be settled.
"(i) The company shall furnish all work animals and materials which may, in its opinion, be
necessary in connection with the cultivated hectares, or which are to be cultivated. The
tenant shall take possession of all the cattle on the hacienda at the time of the execution of
this contract, and shall be responsible for their assessed value. He shall also take possession
of those which may afterwards be acquired and be responsible for them at their cost price.
He shall also take charge and be responsible for the farm implements at their assessed value
and cost price. Of the animals and materials thus capitalized an account shall be kept on
which the tenant shall pay to the company interest at the rate of 6 per cent per annum.

"(j) With respect to the loss of animals, the following rules shall be observed:
"(a) The loss of animals which may imply abandonment, as disappearance, robbery, etc.,
shall be for the account of the tenant.
"(b) The loss of animals due to epidemic or plague shall be for the account of the company.
" (c) The loss of animals f or other causes shall be equally apportioned among the parties.
"Furthermore:
" (a) The disappearance of agricultural implements, furniture and fixtures of the house and
the hacienda which imply lack of care or abandonment shall be for the account of the
tenant.
"(b) The disappearance of agricultural implements, furniture and fixtures of the house on
the hacienda, for wear and tear,' and use shall be equally borne by both parties.
"(c) The rents of the houses of Calamba and others, the annuities on the land, the rent of
animals, proceeds of the sale of timber, bamboo, and other forest products and of every
other kind of products shall be for the account of the company as well as of the general
tenant.
"(k) The sugar and alcohol which may be obtained, as well as any other harvest which may
be produced, shall be divided half and half between the company and the tenant, who at
the same time obligates himself to mill his part of the cane harvest in the central of the
company.
"(l) The means of transportation from the fields to the road shall be for the account of the
tenant, and from that place to the central for the account of the company. It shall also be
the duty of the tenant to furnish the personnel, animals and fire materials needed at the
central during the milling season.
"(m) At any time before the expiration of this contract the company shall have the right to
inspect the exploitation and investment of the advances, and if, in its opinion, the result is
not satisfactory, it may rescind the contract, take possession of the guaranty, without any
right on the part of the tenant to indemnification of any kind, and all the improvements on
the land shall be for the benefit of the company.

"(n) With respect to the existing plants, which are of different seasons and represent to the
company an investment of more than thirty thousand pesos, the f ollowing shall be
followed:
"(a) The share of the general tenant in the actual harvest of sugar and alcohol shall be 30
per cent, the remaining 70 per cent being for the company.
"(b) The advances given for the time which may remain of the actual harvest until the time
of gathering it, shall not be more than P10 for each hectare, and this sum shall be reduced
according to the greater or less delay of the harvesting. These advances shall be the
maximum which the tenant may dispose of during the actual harvest, including *. * *. See
letter (f).
"() The tenant obligates himself to cultivate at least fifty hectares. The company reserves
the right to order the tenant not to cultivate or work a greater number of hectares or not to
cultivate any, if the company deems it for its benefit.
"(o) The tenant shall pay one-half of the taxes on the lands rented by him and on the houses
of Calamba, and also the other provincial and .municipal taxes.
"Secondly. As a guaranty for the fulfillment of the obligations imposed by this contract and
especially of the reimbursement of the advances and payment of interest thereon and of
the capital and interest represented by the animals and the materials for work, D. Manuel
de Garay gives a first special mortgage upon a launch belonging to him, valued at P5,700
and known as Gora Jell, which measures 42 feet long, 8 feet deep, 9 feet wide, made of teak
wood and supplied with a petroleum motor of 15-horse power. He also obligates himself to
insure it against all risk for that sum and to indorse the policy or policies of insurance in
favor of the company, as well as to deposit with the company the title deeds thereof. This
guaranty is without prejudice to the responsibility of the part pertaining to the tenant of the
harvest of cane and other profits belonging to him.
"Thirdly. D. Jose Maria Garcia Suarez, in the representative capacity in which he acts,
accepts this guaranty in favor of the company as good."
On the same day, July 14, 1913, the plaintiff Mendezona and the defendant Manuel de
Garay executed a contract, in writing, in which Manuel de Garay delivered to Secundino
Mendezona the direction and management of the work to be performed on the hacienda
for the fulfillment of the contract of rental, executed by Manuel de Garay with the company,
and he acknowledged himself as a mere subordinate of Secundino Mendezona, with the

right to receive only 10 per cent of the profits which may belong to the tenant. In the
contract the subscribing witnesses were two employees of the company.
The contracting parties immediately established themselves on the hacienda to begin the
agricultural work. On July 15 and 22, 1913, the manager of the corporation sent to the
plaintiff two letters in which he stated that the latter should show activity and that if the
administrator did not like to deliver the hacienda through peaceful means he would get it by
force and that he would not be afraid because the "company and the Vicar" were one and
all on his side.
Secundino Mendezona has been receiving money from the company for the work on the
hacienda, but he signed the receipts from July 14, 1913, until December of that year, as
follows: "Pp. Manuel de Garay, (Sgd.) S. Mendezona."
About October, 1913, the acting president of the defendant corporation, Miguel Garcia
Grande, left the Philippines, and before leaving, he sent Mendezona a card advising him of
his departure and a gift as a testimonial of gratitude for the services he rendered to the
Hacienda de Bucal, and during his voyage he sent the plaintiff post cards in which, after
greeting him and his family, he goes on to praise his work and belittle that of Manuel de
Garay.
Miguel Garcia Grande was succeeded by Valentin Marin as president. The latter inspected
the hacienda several times, and after a month of observation, he reported to the board on
the condition of things on the hacienda and stated that Mendezona was usurping the
powers of the tenant De Garay and that the latter was being ignored. As a result of said
report the Board of Directors agreed on January 7, 1914, to end that state of affairs and the
resolution was transmitted by the manager to Manuel de Garay on January 8th of that year.
Nevertheless Mendezona continued to stay on the hacienda until May 7, 1914, when
Manuel de Garay addressed him the letter Exhibit 31 in which he told him to leave the
house on the Hacienda de Bucal.
Finally, the conduct of De Garay was not satisfactory to the company, and the latter on May
20, 1914, agreed to advise De Garay as was in effect done by the acting president Valentin
Marin, but the situation did not seem to change, and, by a resolution of the Board of
Directors of the corporation, the rental contract, on shares, with De Garay was rescinded,
said resolution having been sent by letter on June 10, 1914, signed by the acting president
and the manager of the company and addressed to Manuel de Garay.

Under the circumstances stated which unquestionably result from the documents in the
record, the plaintiff Mendezona claims that the rental contract, on shares, was in reality
entered into between him and the defendant corporation, and in support of his claim he
took the stand as a witness and testified extensively on the acts performed by him and the
representatives of the defendant corporation, which he alleges show an acknowledgment
that in reality the contract of rental, on shares, was entered into with him and not with
Manuel de Garay. But his claim cannot be sustained.
In the same letter in which Mendezona asked the president of the defendant corporation to
reconsider his proposition, stating that he had no objection to the execution of the contract
with Manuel de Garay, he stated that the latter was a person in whom he had great
confidence and that as to his personal ability the Tabacalera Company could give
information. If his intention was that Manuel de Garay was to be merely a fictitious tenant,
there was no need of such information. The defendant company on the other hand did not
immediately execute the contract with De Garay, and only after having received favorable
information as to him did it decide to execute the contract of rental on shares. And in order
to make it clearly appear that it was contracting with De Garay and not with Mendezona, it
took special care to insert in the document containing the contract paragraph (e) of the first
clause in which it forbids the general tenant to transfer or cede the contract to another
without the knowledge of the corporation, from which it is seen that the company wanted
to avoid Mendezona from being put in the place of De Garay one way or another to avoid
having to deal with him as tenant, when he could not give to the corporation any guaranty
for the fulfillment of the obligation created by the contract, he being an insolvent merchant
who had been convicted of estafa and served his sentence in prison.
In the correspondence had between the plaintiff Mendezona and the defendant
corporation, no word, not even the slightest indication, can be found to the effect that
Manuel de Garay was to be a mere fictitious tenant. In the letters f rom which Mendezona
inf ers the idea that the corporation treated him as the real tenant, the only thing that can
be found is an indication that certain officers and employees of the def endant corporation
considered him as the attorney in fact of Manuel de Garay, but this cannot be understood in
the sense that they considered him as the real tenant, inasmuch as on July 14, 1913, he took
money from the company to be spent on the hacienda and he signed a receipt as attorney in
fact of Manuel de Garay, from which it is evident that the officers of the corporation could
not have considered him as tenant, but as a mere attorney in fact of Manuel de Garay. And
as he had also signed many other receipts in the same or identical form, whatever capacity
was conceded to him by the officers of the company, he could not be more than an attorney
in fact of De Garay, it not appearing in a clear manner in the documents issued by said
officers or in their acts that they considered Mendezona as the true tenant connected with
the corporation by virtue of the contract executed with Manuel de Garay.

The plaintiff lays stress upon the alleged attitude of the president Miguel Garcia Grande and
of the manager Jose Ma. Suarez in consenting to the contract of partnership executed
between the plaintiff Mendezona and the defendant Manuel de Garay, in which contract
Manuel de Garay was recognized as a mere subordinate of Secundino Mendezona.
With respect to this, it should be noted, in the first place, that the contract of partnership
between Mendezona and De Garay contains no indication that said Garay was a fictitious
tenant; on the contrary, it is stated therein that in order to effect the rental contract which
De Garay had executed with the defendant corporation, he and Mendezona associated
themselves, and in order that Mendezona might supervise the work on the field, De Garay
gave him ample powers and recognized himself as a subordinate of Mendezona. It here
expressly appears that the real tenant was De Garay, and that Mendezona was a mere
subordinate. That De Garay recognized Mendezona as technician is perfectly compatible
with the proposition that De. Garay was the real tenant, f or although Mendezona was the
one to superintend the work in the field, nevertheless, it appears in the same contract, that
Mendezona was a mere agent of De Garay and that the latter was the tenant. The fact that
De Garay was the subordinate of Mendezona because of the nature of the work which each
had to do does not prove that De Garay was not the tenant; and the fact that the company
permitted the services of Mendezona on the hacienda does not prevent this conclusion, for
it is proved that said company, having no confidence that Mendezona would fulfill his
obligations to whom it would have to make advances in great sums, it did not like to deal
with him but with. Manuel de Garay, who, according to its information, was a person of
responsibility.
In the second place, it is hard to believe that said officers of the corporation, if they had any
intervention in this contract between Mendezona and De Garay, should have made it to be
understood that the real tenant was Mendezona and not De Garay, because the letter
Exhibit L signed by president Garcia, addressed to manager Suarez, read by Mendezona and
approved by Manuel de Garay, clearly states that the hacienda was to be delivered to
Manuel de Garay as tenant. These two officers of the corporation had full knowledge that
the board of directors did not like to contract with Mendezona and if it adjudicated the
rental contract to De Garay, it was merely because of the good information which the
company received as to him which was furnished by the manager himself, and which must
have brought to their knowledge the fact that the board of directors wanted to contract
with De Garay and not with Mendezona; and therefore it can not be believed that, as they
acted contrary to the will of the board of directors, they had made it understood that
Mendezona was the real, and De Garay the fictitious, tenant. But supposing that they had
acted against the will of the board, then their conduct does not bind the corporation,
because "The declarations of an individual director relating to the affairs of the corporation,
but not made in the course of, or connected with, the performance of the authorized duties

of such director, are held not binding on the corporation. So, false statements made by a
single director, for the purpose of defrauding the creditors of the corporation, including the
corporation itself, could not affect or bind it." (2 Thompson, paragraph 1073.) "The general
rule is that officers of corporations acting within the scope of their authority may bind the
corporation in the same way and to the same extent as if they were the agents of natural
persons, unless the charter or by-laws otherwise provide. They cannot, in general, bind the
corporation by acts in excess of the authority with which they are clothed unless such acts
are ratified * * *." (2 Thompson, paragraph 1408.) Under these well-settled principles of
law, whatever be the nature of the acts performed by president Garcia Grande and manager
Suarez, they can not prejudice the corporation in the sense that it is estopped to deny that
they ever contracted with Mendezona, because said officers, in executing such acts, acted
outside of their sphere of action and contrary to the resolutions of the board of directors of
the defendant corporation, the terms of which are so clear and explicit as not to leave any
doubt that they wanted to enter into a contract with Manuel de Garay and not with
Secundino Mendezona.
The cards which president Garcia Grande had sent to the plaintiff Mendezona appear to the
latter as another proof that. he has been considered as the true tenant, but these cards far
from justifying this conclusion rather imply that it was Manuel de Garay who was the real
tenant. In effect, while president Garcia Grande praises, in said cards, the services of
Mendezona on the hacienda, he also discredits those of De Garay. Now, if the tenant really
was Mendezona, there was no reason for discrediting or mentioning the services of De
Garay, inasmuch as if he was not the tenant but merely an ordinary subordinate of
Mendezona, there was no reason why president Garcia Grande should recall him. He was
the officer of the corporation who favored the proposition of Mendezona and therefore was
against that of De Garay, as stated by the witness Valentin Marin, his successor; hence,
when the services of Mendezona became satisfactory and those of De Garay did not, he
attempted to criticise indirectly the resolution of the board of directors of which he had
been a member and which approved the proposition of De Garay against his opposition and
he also discredited the services of the latter.
Lastly, the true and incontrovertible fact is that it appears in a clear and unequivocal manner
in a public document that the tenant with whom the def endant corporation contracted was
Manuel de Garay and not Secundino Mendezona. In order to contradict this, as the plaintiff
attempted to do, it was incumbent upon him to prove his claim with clear, convincing and
more than merely preponderant evidence (Camacho vs. Municipality of Baliuag, 28 Phil.,
466 and Centenera vs. Garcia Palicio, 29 Phil., 470), something which the appellant
Mendezona did not do.

That the agreement of October 17, 1916, between the plaintiff and the defendant De Garay,
attached to the record on February 6, 1917, folio 610 of the third part, cannot favor the
plaintiff, is beyond question for the following reasons: (1) Said document was attached to
the record without the knowledge of the opposing party and after the close of the evidence,
for the order of December 16, 1916, ordered a new trial for the only purpose of taking the
testimony of the witness Nickelson and the evidence in rebuttal of the latter; (2) because
the defendant De Garay cannot agree with the plaintiff, recognizing him as the real tenant,
when in his answer to the complaint he denies this fact, alleging that he (De Garay) was the
real tenant; and (3) because, after having subscribed the rental contract, Exhibit A, as such
tenant, he cannot legally say, as he does, in said stipulation, that the tenant is the plaintiff
Mendezona.
What has been said disposes of the first two errors assigned in the plaintiff's brief.
Errors Nos. 3 and 4 refer to the right, which the plaintiff alleges he has, to ask for the
rescission of the contract, the rendering of accounts by the defendant corporation and the
consequent indemnification for damages. These last two assignments of error are based
upon the supposition that the plaintiff is the tenant in the contract in question As it has
been shown that he is a party to said contract, said errors have no foundation. Therefore,
we conclude that there is no merit in the action instituted by the plaintiff Mendezona
against "The Philippine Sugar Estates Development Company, Limited," and the judgment of
the trial court must be affirmed.
We will now pass to the appeal interposed by the defendant corporation. This appeal is
limited to that part of the trial court's decision which dismisses the counterclaim for the sum
of P61,030.15 filed by said defendant against the intervenor and tenant De Garay. The latter
did not appeal, and therefore, the judgment has become final and subject to execution in so
far as it declares that he had given sufficient motives for the defendant corporation to
rescind the contract, that his claim for damages on account of the loss of expected profits
can not be granted, and that he has not shown that the def endant corporation was guilty of
negligence to such extent as to entitle him to damages for the loss of the profits from the
harvest collected while he was yet a tenant.
The defendant company, as appellant, makes the following assignment of errors in its brief:
1. 1. In finding that the sum of P59,745.09 received by the tenant as advances has
been wholly used in the improvement of the hacienda and the purchase of animals
and tools.
2. 2. In finding that the expenses of maintenance of the plaintiff and of the intervenor
De Garay may be charged against the improvements as expenses of supervision.

3. 3. In not adjudicating in its favor the balance of P44,593.85 against the tenant.
4. 4. In dismissing the counterclaim filed by said defendant corporation.
The errors assigned by the corporation refer principally to the interpretation of the contract
in question and this requires a revision of its most pertinent parts. By subdivision (/) of said
contract, the company bound itself to make advances in cash to the tenant at the rate of
P75 per hectare actually cultivated or which may thereafter be cultivated. With these
advances it is believed that the corporation gave the tenant facilities for the cultivation of
the hacienda, which the latter should repay at the time of the harvest with interest at 10 per
cent per annum. (Subdivision g.) By subdivision (h) the liquida-tion of the capital advanced
during the year is provided. By subdivision (i) the tenant takes charge of the animals on the
hacienda at the time of the signing of the contract at their assessed value as well as of those
which may afterwards be acquired at their cost price, an annual interest of 6 per cent being
paid to the corporation on the capital invested in animals and agricultural implements. By
subdivision (k) the parties agree to divide half and half the harvest f or the year 1914-1915;
and by subdivision (n) the tenant shall receive only 30 per cent of the harvest for the year
1913-1914.
From the examination which we have made of the evidence it appears that the following
should be charged to the debit and credit of the tenant De Garay:
Debit
Advances in accordance with letter (g) of the
contract,with
interest
at
10
per
cent
..................................................
P59,745.10
Interest at 6 per cent on P39,658.18 invested
in the purchase of animals and work materials, from the taking effect of the contract
until
Dec.
31,
1913.
(Letter
[i]
of
the
contract)
............................................................................................
941.45
Interest at 6 per cent on P11,010.56 invested
in the purchase of animals, work materials,
from Jan. 1 to the termination of the contract.
(Letter
[i]
of
the
contract)
.......................................................
293.60
Amounts to be proved from April 2 until June
10, 1914. (P. 495 et seq., s. n., third part) 10,650.00

Credit

Debit

Credit

.........................................
Fifty
percent
of
the
expenses
of
transportation and commission on the sale of the harvest of 1913-1914 which amounts to P416.60.
(P.
486,
s.
n.,
third
part)
....................................................................
208.30
Fifty
percent
of
the
expenses
of
transportation and commission on the sale of the harvest of 1914-1915 which amounts to P2,708.78.
(P.
540,
s.
n.,
third
part)
....................................................................
1,354.39
Debit.
Credit.
Thirty
per
cent
of
the
harvest
of
1913-1914
amounting
to
P6,072.34,
subdivision
(a)
of
the
division
(n)
of
the
contract
............................................................................
P1,821.70
Fifty
per
cent
of
P33,555.90,
the
value
of
the
harvest
of
1914-1915,
subdivision
(c)
of
divisions
(j)
and
(k)
of
the
contract
...........................................................................
16,777.95
Fifty
per
cent
of
P250.29
the
value
of
the
maize
harvested
in
1914-1915
.............................................................................
125.14
Fifty
per
cent
of
P1,023.36,
the
amount
of
rents
collected
during
the
terms
of
the
contract
....................................................................................................................
512.68
.
___________ __________
Total
_
_
.....................................................................................
P73,192.84 19,237.47
Balance
against
the
tenant
M.
de P53,955.37
Garay...........................................
There is nothing in the contract which provides that all the incidental expenses of
commission and transportation of the sugar sold shall be charged to the tenant only, and we
believe it equitable to divide this item between the tenant and the corporation, as stated in

the preceding liquidation, made in view of the evidence adduced at the trial. The defendant
corporation includes in its counterclaim the 30 per cent of P26,245.50, or, P7,273.50, which
it alleges was spent in the milling of the cane harvested during the first months of 1914, a
sum which the tenant should pay according to the contract. We are of the opinion that this
claim is not maintainable, because we do not find any evidence which shows that the tenant
had assumed the responsibility of paying for the expenses incurred in the preparation and
planting of the plants existing on the hacienda at the time of the signing of the contract;
that the share of the tenant of 30 per cent of the harvest of 1914, instead of the 50 per cent
assigned to him in the harvest of 1915, was undoubtedly determined in view of his having to
take care only of the existing plants until the period of harvesting, for which purpose the
amount which he was to receive as advances was limited to P10 per hectare (subsection [6]
of section [n] of the contract) for the time that still remained for the harvesting of the crops
in 1914 when the contract took effect.
The preceding liquidation shows that the counterclaim presented against the intervenor De
Garay for the sum of P61,030.15 should be reduced to P53,955.37, which the def endant
corporation is entitled to be paid by the tenant De Garay. The judgment appealed from
should be reversed in this respect.
From what has been said, the judgment should be affirmed, in so far as it absolves the
defendant "The Philippine Sugar Estates Development Company, Limited" from the claims of
the plaintiff Secundino Mendezona, and reversed, in so far as it dismisses the counterclaim
of the defendant corporation against the other defendant, tenant, and intervenor, Manuel
de Garay, who is sentenced to pay to said corporation the sum of P53,955.37, with legal
interest from the date of the judgment appealed from, without special pronouncement as
to costs. So ordered.
Mapa, C. J., Street, and Avancea, JJ,, concur.
MALCOLM, J., concurring in part:
I would affirm the judgment without modification.
Judgment affirmed in part and reversed in part.

No. L-18805. August 14, 1967,

THE BOARD OF LIQUIDATORS 1 representing THE GOVERNMENT OF THE REPUBLIC OF THE
PHILIPPINES, plaintiff-appellant, vs. HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE
OF THE DECEASED CASIMIRO GARCIA,3 and LEONOR MOLL, defendants-appellees.
Courts; Judgment; Appeals.An appellate court may base its decision of affirmance of the
judgment below on a point or points ignored by the trial court on which said court was in
error.
Corporations; Three methods of winding up corporate affairs.Accepted in this jurisdiction
are three methods by which a corporation may wind up its affairs: (1) under Section 3, Rule
104, of the Rules of Court (which superseded Section 66 of the Corporation Law), whereby,
upon voluntary dissolution of a corporation, the court may direct "such disposition of its
assets as justice requires, and may appoint a receiver to collect such assets and pay the
debts of the corporation"; (2) under Section 77 of the Corporation Law, whereby a
corporation whose corporate existence is terminated, "shall nevertheless be continued as a
body corporate for three years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and of enabling it gradually to
settle and close its affairs, to dispose of and convey its property and to divide its capital
stock, but not for the purpose of continuing the business for which it was established"; and
(3) under Section 78 of the Corporation Law, by virtue of which the corporation, within the
three-year period just mentioned, "is authorized and empowered to convey all of its
property to trustees for the benefit of members, stockholders, creditors, and others
interested,"
Board of Liquidators; Trustee for government.By Executive Order No. 372, the
government, the sole stockholder, abolished the National Coconut Corporation (NACOCO)
and placed its assets in the hands of the Board of Liquidators. The Board thus became the
trustee on behalf of the government. It was an express trust. The legal interest became
vested in the trustee, the Board of Liquidators. The beneficial interest remained with the
sole stockholder, the government. The Board took the place of the dissolved government
corporations after the expiration of the statutory three-year period for the liquidation of
their affairs.

Same; No term for life of Board.No time limit has been tacked to the existence of the
Board of Liquidators and its function of closing the affairs of various government
corporations. Its term of life is not fixed.
Same; Right of Board of Liquidators to proceed as partyplaintiff; Case at bar.At no time
had the government withdrawn the property. or the authority to continue the present suit,
from the Board of Liquidators. Hence, the Board can prosecute this case to its final
conclusion. The provisions of Section 78 of the Corporation Law, the third method of
winding up corporate affairs, find application. The Board has personality to proceed as
party-plaintiff in this case.
Settlement of decedent's estate; Actions; Actions that survive; Executors and
administrators.The actions that survive against a decedent's executors or administrators
are: (1) actions to recover real and personal property from the estate; (2) actions to enforce
a lien thereon; and (3) actions to recover damages for an injury to person or property. A suit
to recover damages, based on the alleged tortious acts of the manager of a government
corporation, survives. It is not a mere money claim that is extinguished upon the death of a
party.
Corporations; Implied authority of corporate officer to enter into contracts.A corporate
officer, entrusted with the general management and control of its business, has implied
authority to make any contract or do any other act which is necessary or appropriate to the
conduct of the ordinary business of the corporation. As such officer, he may, without any
special authority from the Board of Directors, perform all acts of an ordinary nature, which
by usage or necessity are incident to his office, and may bind the corporation by contracts in
matters arising in the usual course of business.
Same; Where similar acts of manager were approved by directors.Where similar acts have
been approved by the directors as a matter of general practice, custom, and policy, the
general manager may bind the company without formal authorization of the board of
directors. In varying language, existence of such authority is established by proof of the
course of business, the usages and practices of the company and by the knowledge which
the board of directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. Where the practice of the
corporation has been to allow its general manager to negotiate and execute contracts in its
copra trading activities for and in Nacoco's behalf without prior board approval, and the
board itself, by its acts and through acquiescence, practically laid aside the by-law
requirement of prior approval, the contracts of the general manager, under the given
circumstances, are valid corporate acts.

Same; Ratification by corporation of unauthorized contract of its officers.Ratification by a

corporation of an unauthorized act or contract by its officers or others relates back to the
time of the act or contract ratified and is equivalent to original authority. The corporation
and the other party to the transaction are in precisely the same position as if the act or
contract had been authorized at the time. The adoption or ratif ication of a contract by a
corporation is nothing more nor less than the making of an original contract. The theory of
corporate ratification is predicated on the right of a corporation to contract, and any
ratification or adoption is equivalent to a grant of prior authority.
Contracts; Bad faith.Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it
means breach of a known duty through some motive or interest or ill-will; it partakes of the
nature of fraud.
Damages; Damnum absque injuria.The present case is one of damnum absque injuria.
Conjunction of damage and wrong is here absent. There cannot be an actionable wrong if
either one or the other is wanting.

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and
Casimiro Garcia were members of the Board; defendant Leonor Moll became director only
on December 22, 1947,
NACOCO, after the passage of Republic Act 5, embarked on copra trading activities.
Amongst the scores of contracts executed by general manager Kalaw are the disputed
contracts, for the delivery of copra, viz:
1. (a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00 per ton,
f.o.b., delivery: August and September, 1947. This contract was later assigned to
Louis Dreyfus & Co. (Overseas) Ltd.
1.

2.
3.

APPEAL from a judgment of the Court of First Instance of Manila, Enriquez, J.

4.
The facts are stated in the opinion of the Court.
5.
Simeon M. Gopengco for plaintiff-appellant.
6.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion
Reyna, Montecillo & Belo for defendants-appellees.

7.

SANCHEZ, J.:
8.
The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit
governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the
protection, preservation and development of the coconut industry in the Philippines, On
August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that corporation
the express power "to buy, sell, barter, export, and in any other manner deal in, coconut,
copra, and dessicated coconut, as well as their by-products, and to act as agent, broker or
commission merchant of the producers, dealers or merchants" thereof. The charter
amendment was enacted to stabilize copra prices, to serve coconut producers by securing
advantageous prices for them, to cut down to a minimum, if not altogether eliminate, the
margin of middlemen, mostly aliens.4

(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per
long ton, f .o.b., Philippine ports, to be shipped: September-October, 1947. This
contract was also assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery:
September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton,
c.i.f., Los Angeles, California, delivery: November, 1947.
(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for
1,500 long tons, $164,00 per ton, c.i.f., New York, to be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons,
$154.00 per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery:
November and December, 1947. This contract was assigned to Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f.,
Pacific ports, delivery: December, 1947 and January, 1948. This contract was
assigned to Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f.,
Pacific ports, delivery: January. 1948, This contract was assigned to Pacific Vegetable
Co.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts.
Nature supervened. Four devastating typhoons visited the Philippines: the first in October,
the second and third in November, and the fourth in December, 1947. Coconut trees
throughout the country suffered extensive damage. Copra production decreased. Prices
spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export
facilities increased the time necessary to accumulate shiploads of copra. Quick turnovers
became impossible, financing a problem.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to
the board for approval. It was not until December 22, 1947 when the membership was
completed. Defendant Moll took her oath on that date.
A meeting was then held. Kalaw made a full disclosure of the situation, apprised the board
of the impending heavy losses. No action was taken on the contracts. Neither did the board
vote thereon at the meeting of January 7, 1948 following. Then, on January 11, 1948,
President Roxas made a statement that the NACOCO head did his best to avert the losses,
emphasized that government concerns faced the same risks that confronted private
companies, that NACOCO was recouping its losses, and that Kalaw was to remain in his post.
Not long thereafter, that is, on January 30, 1948, the board met again with Kalaw, Bocar,
Garcia and Moll in attendance. They unanimously approved the contracts hereinbefore
enumerated.
As was to be expected, NACOCO but partially performed the contracts, as follows:
Buyers
Pacific Vegetable Oil
Spencer Kellog
Franklin Baker
Louis Dreyfus
Louis
Dreyfus
(Adamson
tract of July 30, 1947)
Louis
Dreyfus
(Adamson
tract of August 14, 1947)
T O T A L S

Tons Delivered
2,386.45
None
1,000
800

Undelivered
4,613.55
1,000
500
2,200

con
1,150

850

1,755
7,091.45

245
9,408.55

Con-

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable
Oil Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation,
P78,210.00; Spencer Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Co. (Overseas) Ltd., did in fact sue before the Court of First
Instance of Manila, upon claims as follows: For the undelivered copra under the July 30
contract (Civil Case 4459); P287,028.00; for the balance on the August 14 contract (Civil Case
4398), P75,098.63; for that per the September 12 contract reduced to judgment (Civil Case
4322, appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-ofcourt amicable settlement when the Kalaw management was already out. The corporation
thereunder paid Dreyfus P567,024.52 representing 70% of the total claims. With particular

reference to the Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were
void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do business here;
and (2) failure to deliver was due to force majeure, the typhoons. To project the utter
unreasonableness of this compromise, we reproduce 'in haec verba this finding below:
"x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co.
(Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim of
P345,654.68 wherein defendant set up same defenses as above, plaintiff accepted a promise
of P5,000.00 only (Exhs. 31 & 32Heirs.) Following the same proportion, the claim of Dreyfus
against NACOCO should have been compromised for only P10,000.00, if at all. Now, why
should defendants be held liable for the large sum paid as compromise by the Board of
Liquidators? This is just a sample to show how unjust it would be to hold defendants liable
for the readiness with which the Board of Liquidators disposed of the NACOCO funds,
although there was much possibility of successfully resisting the claims, or at least
settlement for nominal sums like what happened in the Syjuco case."5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the above sum of
P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors
Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article
1902 of the old Civil Code (now Article 2176, new Civil Code); and defendant board
members, including Kalaw, with bad faith and/or breach of trust for having approved the
contracts. The fifth amended complaint, on which this case was tried, was filed on July 2,
1959. Defendants resisted the action upon defenses hereinafter in this opinion to be
discussed.
The lower court came out with a judgment dismissing the complaint without costs as well as
defendants' counterclaims, except that plaintiff was ordered to pay the heirs of Maximo
Kalaw the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw
from NACOCO. Plaintiff appealed direct to this Court.
Plaintiff's brief did not question the judgment on Kalaw's counterclaim for the sum of
P2,601.94.
Right at the outset, two preliminary questions raised before, but adversely decided by, the
court below, arrest our attention. On appeal, defendants renew their bid. And this, upon
established jurisprudence that an appellate court may base its decision of affirmance of the

judgment below on a point or points ignored by the trial court or in which said court was in
error.6
1. First of the threshold questions is that advanced by defendants that plaintiff Board of
Liquidators has lost its legal personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a corporation may wind up its
affairs: (1) under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of
the Corporation Law]7 whereby, upon voluntary dissolution of a corporation, the court may
direct "such disposition of its assets as justice requires, and may appoint a receiver to collect
such assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation
Law, whereby a corporation whose corporate existence is terminated, "shall nevertheless be
continued as a body corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling
it gradually to settle and close its affairs, to dispose of and convey its property and to divide
its capital stock, but not for the purpose of continuing the business for which it was
established"; and (3) under Section 78 of the Corporation Law, by virtue of which the
corporation, within the threeyear period just mentioned, "is authorized and empowered to
convey all of its property to trustees for the benefit of members, stockholders, creditors,
and others interested."8
It is defendants' pose that their case comes within the coverage of the second method. They
reason out that suit der 372, dated November 24, 1950, NACOCO, together with other
government-owned corporations, was abolished, and the Board of Liquidators was
entrusted with the function of settling and closing its affairs; and that, since the threeyear
period has elapsed, the Board of Liquidators may not now continue with, and prosecute, the
present case to its conclusion, because Executive Order 372 provides in Section 1 thereof
that
"SECTION 1. The National Abaca and Other Fibers Corporation, the National Coconut
Corporation, the National Tobacco Corporation, the National Food Products Corporation
and the former enemy-owned or controlled corporations or associations, xxx are hereby
abolished. The said corporations shall be liquidated in accordance with law, the provisions
of this Order, and/or in such manner as the President of the Philippines may direct;
Provided, however, That each of the said corporations shall nevertheless be continued as a
body corporate for a period of three (3) years from the effective date of this Executive Order
for the purpose of prosecuting and defending suits by or against it and of enabling the Board
of Liquidators gradually to settle and close its affairs, to dispose of and convey its property
in the manner hereinafter provided."

Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found
impossible within the 3-year period to reduce disputed claims to judgment, nonetheless,
"suits by or against a corporation abate when it ceases to be an entity capable of suing or
being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris
Secundum likewise is authority for the statement that "[t]he dissolution of a corporation
ends its existence so that there must be statutory authority for prolongation of its life even
for purposes of pending litigation"9 and that suit "cannot be continued or revived; nor can a
valid judgment be rendered therein, and a judgment, if rendered, is not only erroneous, but
void and subject to collateral attack."10 So it is, that abatement of pending actions follows as
a matter of course upon the expiration of the legal period for liquidation,11 unless the
statute merely requires a commencement of suit within the added time.12 For, the court
cannot extend the time alloted by statute.13
We, however, express the view that the executive order abolishing NACOCO and creating
the Board of Liquidators should be examined in context. The proviso in Section 1 of
Executive Order 372, whereby the corporate existence of NACOCO was continued for a
period of three years from the effectivity of the order for "the purpose of prosecuting and
defending suits by or against it and of enabling the Board of Liquidators gradually to settle
and close its affairs, to dispose of and convey its property in the manner hereinafter
provided", is to be read not as an isolated provision but in conjunction with the whole. So
reading, it will be readily observed that no time limit has been tacked to the existence of the
Board of Liquidators and its function of closing the affairs of the-various governmentowned
corporations, including NACOCO.
By Section 2 of the executive order, while the boards of directors of the various corporations
were abolished, their powers and functions and duties under existing laws were to be
assumed and exercised by the Board of Liquidators, The President thought it best to do
away with the boards of directors of the defunct corporations; at the same time, however,
the President had chosen to see to it that the Board of Liquidators step into the vacuum.
And nowhere in the executive order was there any mention of the lifespan of the Board of
Liquidators. A glance at the other provisions of the executive order buttresses our
conclusion. Thus, liquidation by the Board of Liquidators may, under section 1, proceed in
accordance with law, the provisions of the executive order, "and/or in such manner as the
President of the Philippines may direct" By Section 4, when any property, fund, or project is
transferred to any governmental instrumentality "for administration or continuance of any
project," the necessary funds therefor shall be taken from the corresponding special fund
created in Section 5. Section 5, in turn, talks of special funds established from the "net
proceeds of the liquidation" of the various corporations abolished. And by Section 7, fifty
per centum of the fees collected from the copra standardization and inspection service shall
accrue "to the special fund created in section 5 hereof for the rehabilitation and

development of the coconut industry." Implicit in all these, is that the term of life of the
Board of Liquidators is without time limit. Contemporary history gives us the fact that the
Board of Liquidators still exists as an office with officials and numerous employees
continuing the job of liquidation and prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to proceed to the final
determination of the present case is without jurisprudential support. The first judicial test
before this Court is National Abaca and Other Fibers Corporation vs. Pore, L-16779, August
16, 1961. In that case, the corporation, already dissolved, commenced suit within the threeyear extended period for liquidation. That suit was for recovery of money advanced to
defendant for the purchase of hemp in behalf of the corporation. She failed to account for
that money. Defendant moved to dismiss, questioned the corporation's capacity to sue. The
lower court ordered plaintiff to include as co-party plaintiff, The Board of Liquidators, to
which the corporation's liquidation was entrusted by Executive Order 372. Plaintiff failed to
effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider. Ground:
excusable negligence. in that its counsel prepared the amended complaint, as directed, and
instructed the board's incoming and outgoing correspondence clerk, Mrs. Receda Vda. de
Ocampo, to mail the original thereof to the court and a copy of the same to defendant's
counsel. She mailed the copy to the latter but f ailed to send the original to the court. This
motion was rejected below. Plaintiff came to this Court on appeal. We there said that "the
rule appears to be well settled that, in the absence of statutory provision to the contrary,
pending actions by or against a corporation are abated upon expiration of the period
allowed by law for the liquidation of its affairs." We there noted that "[o]ur Corporation Law
contains no provision authorizing a corporation, after three (3) years from the expiration of
its lifetime, to continue in its corporate name actions instituted by it within said period of
three (3) years."14 However, these precepts notwithstanding, we, in effect, held in that case
that the Board of Liquidators escapes f rom the operation thereof for the reason that
"[o]bviously, the complete loss of plaintiffs corporate existence after the expiration of the
period of three (3) years for the settlement of its affairs is what impelled the President to
create a Board of Liquidators, to continue the management of such matters as may then be
pending."15 We accordingly directed the record of said case to be returned to the lower
court, with instructions to admit plaintiff's amended complaint to include, as party plaintiff,
the Board of Liquidators.
Defendants' position is vulnerable to attack from another direction.
By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and
placed its assets in the hands of the Board of Liquidators. The Board of Liquidators thus
became the trustee on behalf of the government. It was an express trust. The legal interest
became vested in the trusteethe Board of Liquidators. The beneficial interest remained

with the sole stockholderthe government. At no time had the government withdrawn the
property, or the authority to continue the present suit, from the Board of Liquidators. If for
this reason alone, we cannot stay the hand of the Board of Liquidators from prosecuting this
case to its final conclusion.16 The provisions of Section 78 of the Corporation Lawthe third
method of winding up corporate affairsfind application.
We, accordingly, rule that the Board of Liquidators has personality to proceed as partyplaintiff in this case.
2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss,17 which was overruled, and in their
nineteenth special defense, that plaintiff's action is personal to the deceased Maximo M.
Kalaw, and may not be deemed to have survived after his death.18 They say that the
controlling statute is Section 5, Rule 87, of the 1940 Rules of Court,19 which provides that
"[a]ll claims for money against the decedent, arising from contract, express or implied",
must be filed in the estate proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having entered into the
questioned contracts without prior approval of the board of directors, to the damage and
prejudice of plaintiff; and is against Kalaw and the other directors for having subsequently
approved the said contracts in bad faith. and/or breach of trust." Clearly then, the present
case is not a mere action for the recovery of money nor a claim for money arising from
contract, The suit involves alleged tortious acts. And the action is embraced in suits filed "to
recover damages for an injury to person or property, real or personal", which survive.20
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107; August 30, 1962.
There, plaintiffs sought to recover damages from defendant Llemos. The complaint averred
that Llemos had served plaintiff by registered mail with a copy of a petition for a writ of
possession in Civil Case 4824 of the Court of First Instance at Catbalogan, Samar. with notice
that the same would be submitted to the Samar court on February 23, 1960 at 8:00 a.m.;
that in view of the copy and notice served, plaintiffs proceeded to the said court of Samar
from their residence in Manila accompanied by their lawyers, only to discover that no such
petition had been filed; and that defendant Llemos maliciously failed to appear in court, so
that plaintiffs' expenditure and trouble turned out to be in vain, causing them mental
anguish and undue embarrassment. Defendant died before he could answer the complaint.
Upon leave of court, plaintiffs amended their complaint to include the heirs of the
deceased. The heirs moved to dismiss. The court dismissed the complaint on the ground
that the legal representative, and not the heirs, should have been made the party
defendant; and that, anyway, the action being for recovery of money, testate or intestate

proceedings should be initiated and the claim filed therein. This Court, thru Mr. Justice Jose
B. L. Reyes, there declared:
"Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the
Rules of Court, those concerning claims that are barred if not filed in the estate settlement
proceedings (Rule 87, sec. 5) and those defining actions that survive and may be prosecuted
against the executor or administrator (Rule 88, see. 1), it is apparent that actions for
damages caused by tortious conduct of a defendant (as in the case at bar) survive the death
of the latter. Under Rule 87, section 5, the actions that are abated by death are: (1) claims
for funeral expenses and those for the last sickness of the decedent; (2) judgments for
money; and (3) 'all claims for money against the decedent, arising from contract express or
implied.' None of these includes that of the plaintiffs-appellants; for it is not enough that the
claim against the deceased party be for money, but it must arise from 'contract express or
implied', and these words (also used by the Rules in connection with attachments and
derived from the common law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182.
189194,
'to include all purely personal obligations other than
those which have their source in delict or tort.'
Upon the other hand, Rule 88, section 1, enumerates actions that survive against a
decedent's executors or administrators, and they are: (1) actions to recover real and
personal property from the estate; (2) actions to enforce a lien thereon; and (3) actions to
recover damages for an injury to person or property. The present suit is one for damages
under the last class, it having been held that 'injury to property' is not limited to injuries to
specific property, but extends to other wrongs by which personal estate is injured or
diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause
a party to incur unnecessary expenses, as charged in this case, is certainly injury to that
party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953)."
The ruling in the preceding case was hammered out of facts comparable to those of the
present. No cogent reason exists why we should break away from the views just expressed.
And, the conclusion remains: Action against the Kalaw heirs and, for the matter, against the
Estate of Casimiro Garcia survives.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered
into the controverted contracts without the prior approval of the corporation's directorate,
Plaintiff leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof,
recites, as amongst the duties of the general manager, the obligation: "(b) To perform or
execute on behalf of the Corporation upon prior approval of the Board, all contracts
necessary and essential to the proper accomplishment f or which the Corporation was
organized."
Not of de minimis importance in a proper approach to the problem at hand, is the nature of
a general manager's position in the corporate structure. A rule that has gained acceptance
through the years is that a corporate officer "intrusted with the general management and
control of its business, has implied authority to make any contract or do any other act which
is necessary or appropriate to the conduct of the ordinary business of the corporation."21 As
such officer, "he may, without any special authority from the Board of Directors perform all
acts of an ordinary nature, which by usage or necessity are incident to his office, and may
bind the corporation by contracts in matters arising in the usual course of business."22
The problem, therefore, is whether the case at bar is to be taken out of the general concept
of the powers of a general manager, given the cited provision of the NACOCO 'by-laws
requiring prior directorate approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in
this enterprise are copra sales for future delivery. The movement of the market requires
that sales agreements be entered into, even though the goods are not yet in the hands of
the seller. Known in business parlance as forward sales, it is concededly the practice of the
trade. A certain amount of speculation is inherent in the undertaking. NACOCO was much
more conservative than the exporters with big capital. This short-selling was inevitable at
the time in the light of other factors such as availability of vessels, the quantity required
before being accepted for loading, the labor needed to prepare and sack the copra for
market. To NACOCO, forward sales were a necessity. Copra could not stay long in its hands;
it would lose weight, its value decrease. Above all, NACOCO's limited funds necessitated a
quick turnover. Copra contracts then had to be executed on short noticeat times within
twenty-four hours. To be appreciated then is the difficulty of calling a formal meeting of the
board.
Such were the environmental circumstances when Kalaw went into copra trading.

The preliminaries out of the way, we now go to the core of the controversy.
Long before the disputed contracts came into being, Kalaw contractedby himself alone as
general managerfor forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw
signed some 60 such contracts for the sale of copra to divers parties. During that period,

from those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased was
NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it voted to
grant him a special bonus "in recognition of the signal achievement rendered by him in
putting the Corporation's business on a self-sufficient basis within a few months after
assuming office, despite numerous handicaps and difficulties."

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed
upon by the board, not the sales contracts themselves. And even those fee agreements
were submitted only when the commission exceeded the ceiling fixed by the board.

These previous contracts, it should be stressed, were signed by Kalaw without prior
authority from the board. Said contracts were known all along to the board members.
Nothing was said by them. The aforesaid contracts stand to prove one thing: Obviously,
NACOCO board met the difficulties attendant to forward sales by leaving the adoption of
means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.

When the board met on May 10. 1947. the directors discussed the copra situation: There
was a slow downward trend but belief was entertained that the nadir might have already
been reached and an improvement in prices was expected. In view thereof, Kalaw informed
the board that "he intends to wait until he has signed contracts to sell before starting to buy
copra."23

Liberally spread on the record are instances of contracts executed by NACOCO's general
manager and submitted to the board after their consummation, not before. These
agreements were not Kalaw's alone. One at least was executed by a predecessor way back
in 1940, soon after NACOCO was chartered. It was a contract of lease executed on
November 16, 1940 by the then general manager and board chairman, Maximo Rodriguez,
and A. Soriano y Cia., for the lease of a space in Soriano Building. On November 14, 1946,
NACOCO, thru its general manager Kalaw, sold 3,000 tons of copra to the Food Ministry,
London, thru Sebastian Palanca. On December 22, 1947, when the controversy over the
present contracts cropped up, the board voted to approve a lease contract previously
executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of the
latter. On the same date, the board gave its nod to a contract for renewal of the services of
Dr. Manuel L. Roxas. In fact, also on that date, the board requested Kalaw to report for
action all copra contracts signed by him "at the meeting immediately following the signing
of the contracts" This practice was observed in a later instance when, on January 7, 1948,
the board approved two previous contracts for the sale of 1,000 tons of copra each to a
certain "SCAP" and a certain "GNAPO".

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then
current: The copra market appeared to have become fairly steady; it was not expected that
copra prices would again rise very high as in the unprecedented boom during January-April,
1947; the prices seemed to oscillate between $140 to $150 per ton; a radical rise or
decrease was not indicated by the trends. Kalaw continued to say that "the Corporation has
been closing contracts for the sale of copra generally with a margin of P5.00 to P7.00 per
hundred kilos."24

And more. On December 19,1946, the board resolved to ratify the brokerage commission of
2% of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French
Government. Such ratification was necessary because, as stated by Kalaw in that same
meeting, "under an existing resolution he is authorized to give a brokerage fee of only 1% on
sales of copra made through brokers." On January 15, 1947, the brokerage fee agreements
of 1-% on three export contracts, and 2% on three others, for the sale of copra were
approved by the board with a proviso authorizing the general manager to pay a commission
up to the amount of 1-% "without further action by the Board" On February 5, 1947, the
brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably
acted upon by the board. On March 19, 1947, a 2% brokerage commission was similarly
approved by the board for Pacific Trading Corporation on the sale of 2,000 tons of copra.

Knowledge by the board is also discernible from other recorded instances.

We now lift the following excerpts from the minutes of that same board meeting of July 29,
1947:
"521. In connection with the buying and selling of copra the Board inquired whether it is the
practice of the Management to close contracts of sale first before buying. The General
Manager replied that this practice is generally followed but that it is not always possible to
do so for two reasons:
1. (1) The role of the Nacoco to stabilize the prices of copra requires that it should not
cease buying even when it does not have actual contracts of sale since the
suspension of buying by the Nacoco will result in middlemen taking advantage of
the temporary inactivity of the Corporation to lower the prices to the detriment of
the producers.
2. (2) The movement of the market is such that it may not be practical always to wait
for the consummation of contracts of sale before beginning to buy copra.
The General Manager explained that in this connection a certain amount of speculation is
unavoidable. However, he said that the Nacoco is much more conservative than the other
big exporters in this respect."25

Settled jurisprudence has it that where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general manager may bind the company
without formal authorization of the board of directors.26 In varying language, existence of
such authority is established, by proof of the course of business, the usages and practices of
the company and by the knowledge which the board of directors has, or must be presumed
to have, of acts and doings of its subordinates in and about the affairs of the corporation.27
So also,
"x x x authority to act for and bind a corporation may be presumed f rom acts of recognition
in other instances where the power was in fact exercised."28
"x x x Thus, when, in the usual course of business of a corporation, an officer has been
allowed in his official capacity to manage its affairs, his authority to represent the
corporation may be implied from the manner in which he has been permitted by the
directors to manage its business."29
In the case at bar, the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf
without prior board approval. If the bylaws were to be literally followed, the board should
give its stamp of prior approval on all corporate contracts. But that board itself, by its acts
and through acquiescence, practically laid aside the by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
4. But if more were required, we need but turn to the board's ratification of the contracts in
dispute on January 30, 1948, though it is our (and the lower court's) belief that ratification
here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification by a corporation of an
unauthorized act or contract by its officers or others relates back to the time of the act or
contract ratified, and is equivalent to original authority;" and that " [t]he corporation and
the other party to the transaction are in precisely the.same position as if the act or contract
had been authorized at the time."30 The language of one case is expressive: "The adoption
or ratification of a contract by a corporation is nothing more or less than the making of an
original contract. The theory of corporate ratification is predicated on the right of a
corporation to contract, and any ratif ication or adoption is equivalent to a grant of prior
authority."31

Indeed, our law pronounces that " [r] atification cleanses the contract from all its' defects
from the moment it was constituted."32 By corporate confirmation, the contracts executed
by Kalaw are thus purged of whatever vice or defect they may have.33
In sum, a case is here presented whereunder, even in the face of an express by-law
requirement of prior approval, the law on corporations is not to be held so rigid and
inflexible as to fail to recognize equitable considerations. And, the conclusion inevitably is
that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes; to read the record in terms of "bad faith
and/or breach of trust" in the board's ratification of the contracts without prior approval of
the board. For, in reality, all that we have on the government's side of the scale is that the
board knew that the contracts so confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the contracts without need of
prior approval. Everybody, including Kalaw himself, thought so, and for a long time. Doubts
were first thrown on the way only when the contracts turned out to be unprofitable for
NACOCO.
Rightf ully had it been said that bad f aith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes
of the nature of fraud.34 Applying this precept to the given facts herein, we find that there
was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or
"breach of a known. duty," or "some motive or interest or ill will" that "partakes of the
nature of fraud."
Nor was it even intimated here that the NACOCO directors acted f or personal reasons, or to
serve their own private interests, or to pocket money at the expense of the corporation.35
We have had occasion to affirm that bad faith contemplates a "state of mind affirmatively
operating with furtive design or with some motive of self-interest or ill will or for ulterior
purposes."36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with
approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close
examination of all the reported cases, although there are many dicta not easily reconcilable,
yet I have found no judgment or decree which has held directors to account, except when
they have themselves been personally guilty of some f raud on the corporation, or have
known and connived at some fraud in others, or where such fraud might have been
prevented had they given ordinary attention to their duties. x x x." Plaintiff did not even
dare charge its defendant-directors with any of these malevolent acts.

Obviously, the board thought that to jettison Kalaw's contracts would contravene basic
dictates of fairness. They did not think of raising their voice in protest against past contracts
which brought in enormous profits to the corporation. By the same token, fair dealing
disagrees with the idea that similar contracts, when unprofitable, should not merit the same
treatment. Profit or loss resulting f rom business ventures is no justification for turning one's
back on contracts entered into. The truth, then, of the matter is thatin the words of the
trial courtthe ratif ication of the contracts was "an act of simple justice and fairness to the
general manager and the best interest of the corporation whose prestige would have been
seriously impaired by a rejection by the board of those contracts which proved
disadvantageous."37
The directors are not liable.38

suffered was because of Kalaw's negligence, or for that matter, by reason of the board's
ratification of the contracts,41
Indeed, were it not for the typhoons,42 NACOCO could have, with ease, met its contractual
obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread
throughout the islands. It could purchase 2,000 tons of copra a day, The various contracts
involved delivery of but 16,500 tons over a five-month period. Despite the typhoons,
NACOCO was still able to deliver a little short of 50% of the tonnage required under the
contracts.
As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of
damage and wrong is here absent. There cannot be an actionable wrong if either one or the
other is wanting.43

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing
regions. Result: Copra production was impaired, prices spiralled, warehouses destroyed.
Quick turnovers could not be expected. NACOCO was not alone in this misfortune. The
record discloses that private traders, old, experienced, with bigger f acilities, were not
spared; also suff ered tremendous losses. Roughly estimated, eleven principal trading
concerns ,did, run losses to about P10,300,000,00. Plaintiff's witness Sisenando Barretto,
head of the copra marketing department of NACOCO, observed that from late 1947 to early
1948 "there were many; who lost money in ,the trade."39 NACOCO was not immune from
such usual business risk,
The typhoons were known to plaintiff, In fact, NACOCO resisted the; suits filed by Louis
Dreyfus & Co. by pleading in its answers force majeure as an affirmative defense, and there
vehemently asserted that "as a result of the said typhoons, extensive damage was caused to
-the coconut trees in the copra producing regions of the Philippines and according to
estimates of competent authorities, it will take about one year until the coconut producing
regions will be able to produce their normal coconut yield and it will take some time until
the price of copra will reach normal levels;" and that "it had never been the intention of the
contracting parties in entering into the contract in question that, in the event of a sharp rise
in the price of copra in the Philippine market produce by force majeure or by causes beyond
defendant's control, the defendant should buy the copra contracted for at exorbitant prices
far beyond the buying price of the plaintiff under the contract."40
A high regard for formal judicial admissions made in court pleadings would suffice to deter
us from permitting plaintiff to stray away therefrom, to charge now that the damage

7. On top of all these, is that no assertion is made and no proof is presented which would
link Kalaw's actsratified by the boardto a matrix for defraudation of the government.
Kalaw is clear of the stigma of bad faith. Plaintiff's corporate counsel44 concedes that Kalaw
all along thought that he had authority to enter into the contracts; that he did so in the best
interests of the corporation; that he entered into the contracts in pursuance of an overall
policy to stabilize prices, to free the producers from the clutches of the middlemen. The
prices for which NACOCO contracted in the disputed agreements, were at a level calculated
to produce profits and higher than those prevailing in the local market. Plaintiff's witness,
Barretto, categorically stated that "it would be f oolish to think that one would sign (a)
contract when you are going to lose money" and that no contract was executed "at a price
unsafe for the Nacoco."45 Really, on the basis of prices then prevailing, NACOCO envisioned
a profit of around P752,440.00.46
Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted
with NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The
dailies and quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of prof its. He could not be expected to
predict the coming of unpredictable typhoons. And even as typhoons supervened, Kalaw
was not remissed in his duty. He exerted efforts to stave off losses. He asked the Philippine
National Bank to implement its commitment to extend a P400,000.00 loan. The bank did not
release the loan, not even the sum of P200,000.00, which, in October, 1947, was approved
by the bank's board of directors. In frustration, on December 12, 1947, Kalaw turned to the
President, complained about the bank's short-sighted policy. In the end, nothing came out
of the negotiations with the bank. NACOCO eventually faltered in its contractual obligations.

That Kalaw cannot be tagged with. crassa negligentia or as much as simple negligence,
would seem to be supported by the fact that even as the contracts were being questioned in
Congress and in the NACOCO board itself, President Roxas defended the actuations of
Kalaw. On December 27, 1947, President Roxas expressed his desire "that the Board of
Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National
Coconut Corporation."47 And, on January 7, 1948, at a time when the contracts had already
been openly disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as
acting general manager of the corporation.
Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling
Co., Inc., L-15092, May 18, 1962:
"'They (the directors) 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 a business depression, or closed 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 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 for the 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.)"48
Kalaw's good faith, and that of the other directors, clinch the case for defendants.49
Viewed in the light of the entire record, the judgment under review must be, as it is hereby,
affirmed.
Without costs. So ordered.
Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and Angeles, JJ., concur.

VlLLA-REAL, J.:
ZAMBOANGA TRANSPORTATION COMPANY, INC., plaintiff and appellee, vs. THE
BACHRACH MOTOR CO., INC., defendant and appellant.
[No. 27997. October 24, 1928]
THE BACHRACH MOTOR CO., INC., plaintiff and appellee, vs. ZAMBOANGA
TRANSPORTATION COMPANY, INC., defendant and appellant.
1. 1. CORPORATIONS; CHATTEL MORTGAGE.When the president of a corporation,
who is one of the principal stockholders and at the same time its general manager,
auditor, attorney or legal adviser, is empowered by its by-laws to enter into chattel
mortgage contracts, subject to the approval of the board of directors, and enters
into such contracts with the tacit approval of two members of the board of
directors, one of whom is a principal shareholder, both of whom, together with the
president, form a majority, and said corporation takes advantage of the benefits
afforded by said contract, such acts are equivalent to an implied ratification of said
contract by the board of directors and binds the corporation even if not formally
approved by said board of directors as required by the by-laws of the aforesaid
corporation.
1. 2. ID.; ID.Though a chattel mortgage contract entered into by a public service
corporation is ineffective without the authorization and approval of the Public
Utility Commission, it may be valid if it contains all the material and formal
requisites demanded by the law for its validity, and said Public Utility Commission
may make it retroactive by nunc pro tunc authorization and approval.
APPEAL from two judgments of the Courts of First Instance of Zamboanga and Manila.
Horrilleno and Imperial, JJ.
The facts are stated in the opinion of the court.
Gibbs & McDonough and Roman Ozaeta for appellant in case No. 27694 and ic or appellee
in case No. 27997.
C. A. Sobral and Jose Erquiaga, for appellee in case No. 27694 and for appellant in case No.
27997.

We are here concerned with two appeals, one taken by the defendant the Bachrach Motor
Co., Inc., from the judgment of the Court of First Instance of Zamboanga in civil case No.
1286 of said court (G. R. No. 27694), holding that the chattel mortgage executed by the
president and general manager of the plaintiff corporation, the Zamboanga Transportation
Co., Inc;, is null and void, and ordering the register of deeds of said province to cancel the
registration of said mortgage at the instance of said defendant, the Bachrach Motor Co.,
Inc., with costs; and the other by the defendant Zamboanga Transportation Co., Inc., from
the judgment of the Court of First Instance of Manila in civil case No. 28123 (G. R. No.
27997) ordering said defendant Zamboanga Transportation Co., Inc., to pay the plaintiff
corporation, the Bachrach Motor Co., Inc., the sum of P18,298.58, with 10 per cent interest
on the sum of P6,254.81, from May 19, 1925, and legal interest on the balance of said sum ic
rom May 23, 1925, when the complaint was filed, plus the costs, and dismissing all the
counterclaims and cross complaints set up by the defendant corporation.
In support of its appeal, the Bachrach Motor Co., Inc., assigns the following alleged errors as
committed by the Court of First Instance of Zamboanga in its judgment to wit:
1. "1. The trial court erred in not finding that Mr. Jose Erquiaga, president, general
manager, director, stockholder,auditor, attorney and legal adviser, and principal
witness of the Zamboanga Transportation Co., Inc., personified and practically
constituted that corporation at the time he signed the chattel mortgage in question
in its behalf;
1. "2. The trial court erred in not finding that the so-called board of directors of the
Zamboanga Transportation Co., Inc., was composed of 'dummy' directors, who were
mere puppets in the hands of the said Jose Erquiaga;
2. "3. The trial court erred in not finding that the pretended resolution of the said socalled board of directors dated May 20, 1925 (Exhibit FF), purporting to disapprove
the chattel mortgage in question was a mere contrivance of the said Jose Erquiaga,
framed up for the purpose of attempting to avoid the obligation of said mortgage;
3. "4. The trial court erred in holding that the chattel mortgage in question was void
and of no effect because it had not been previously approved by the Public Utility
Commission;
4. "5. The trial court erred in not dismissing plaintiff's complaint."
In support of its appeal the Zamboanga Transportation Co., Inc., in turn assigns the following
alleged errors as committed by the Court of First Instance of Manila, to wit:

1. "1. The Manila trial court erred in holding that chattel mortgage in question was
valid and binding upon the corporation notwithstanding the fact that it was
disapproved by a resolution of its board of directors and that it had not been
previously approved by the Public Utility Commission as required by law;
2. "2. In not finding that Jose Erquiaga, president and general manager of the
corporation, executed and signed said mortgage upon the express condition that it
would not be valid unless it was ratified by a resolution of the board of directors, as
required by the by-laws of the corporation and that it was agreed that in case said
mortgage was not approved by said board of directors, Bachrach would be at liberty
to foreclose the other two previous mortgages which were the real basis of the debt
represented by the mortgage in question;
"3. In not finding as a fact that all previous contracts of any kind signed by Jose
Erquiaga, as president or general manager or by his predecessors in office, affecting
the company, had to be submitted for approval or ratification by the board of
directors, as shown by the minutes kept by the secretary of the corporation, and
that Bachrach was in possession of and knew the by-laws of the company at least
since 1923;
"4. In not finding that it was verbally agreed between the said Jose Erquiaga and E.
M. Bachrach that the chattel mortgage in question would not be registered in the
offices of the registers of deeds concerned until it was approved by the board of
directors of the mortgagor and by the Public Utility Commission;
"5. In not finding that it was also agreed between said Jose Erquiaga, E. M.
Bachrach, and Mons. Jose Clos, Bishop of Zamboanga, in connection with the
execution of the agreement of February 14, 1925, that the mortgagee would not
foreclose said mortgage before the return of the Bishop of Zamboanga from his trip
to Rome calculated to last six months, and without first giving the bishop
opportunity to pay the' whole amount of the mortgage with a ten per cent rebate;
"6. In utterly disregarding the testimony, in support of mortgagor's contention, of
the Right Rev. Jose Clos, Bishop of Zamboanga, and in not admitting his deposition,
as corrected by deponent, notwithstanding the fact that said deposition was
obtained at mortgagee's request, and the questions made to the bishop were made
by mortgagee's attorney in the absence of the mortgagor or his attorney;
"7. In not finding as a fact that at least two of the directors, Jose Camins and Ciriaco
Bernal, were big stockholders owning nearly twenty thousand pesos of stock each

and were not dummy directors who were mere puppets in the hands of said Jose
Erquiaga, president and general manager of the corporation;
"8. In finding that the mortgagor took advantage of the alleged benefits of the
mortgage in question with the full knowledge of said board of directors and that the
validity of the mortgage was not disputed until af ter the mortgagee began
proceedings for the foreclosure of said mortgage, when as a matter of fact the
mortgagor filed the action in the Zamboanga court asking that the mortgage, be
declared null and void as soon as he discovered that the mortgage had been
registered with the register of deeds of Zamboanga, contrary to what had been
stipulated, and before the mortgagor had any notice that the mortgagee was going
to foreclose said mortgage;
"9. In finding that the execution of the chattel mortgage in question was merely a
novation of the two previous mortgages in favor of the mortgagee and of the
mortgage in ic avor of the Bishop of Zamboanga;
"10. In not rendering judgment in favor of the mortgagor declaring said mortgage
null and void, as was done by the Zamboanga court upon the same issues and
identical evidence, and in not rendering judgment against the mortgagee for the full
value of mortgagor's property and business which was seized at mortgagee's
instance, upon filing a two hundred thousand pesos bond and ic or the damages
sustained by the mortgagor as stated in mortgagor's counterclaim in the Manila
case."
The complaint filed by the Zamboanga Transportation Co., Inc., against the Bachrach Motor
Co., Inc., in the Court of First Instance of Zamboanga seeks the annulment of a chattel
mortgage executed on February 14, 1925 (Exhibits B. and C), by the plaintiff's president and
general manager in favor of the Bachrach Motor Co., Inc.
The complaint filed by the Bachrach Motor Co., Inc., against the Zamboanga Transportation
Co., Inc., in the Court of First Instance of Manila seeks the foreclosure of said chattel
mortgage.
By their respective assignments of error both appellants raise questions of fact as well as of
law, rendering it necessary to make our findings of facts.
The preponderance of the evidence establishes the following pertinent and essential facts:

Both appellants are corporations created and organized under the laws of the Philippine
Islands. The Zamboanga Transportation Co., Inc., is managed by a board of directors
composed of five stockholders elected at a general annual meeting of the stockholders. The
directors for the year 1925 were elected at the general meeting of the stockholders on
January 26th of that year, as appears from the following copy of the minutes:
"MINUTES OF THE GENERAL MEETING OF STOCKHOLDERS OF THE ZAMBOANGA
TRANSPORTATION CO., INC., HELD ON JANUARY 26, 1925, IN THE OFFICES OF THE
COMPANY AT NO. 20 CORCUERA STREET, ZAMBOANGA, P. I.
"The meeting was called to order with the Vice-President, Mr. Jose Erquiaga, in the absence
of the President, Mr. Jose Longa, as chairman at (5 o'clock in the afternoon of this 26th day
of January 1925, the following stockholders being present either personally or by proxy:

Carlos Camins, in his own behalf .................................................

Jose Erquiaga, in his own behalf ...................................................
Valera C. de Erquiaga, for Jose Erquiaga .....................................
Eduardo Montenegro, for Jose Erquiaga ......................................
Mons. Jose Clos, Bishop of Zamboanga, for Jose Erquiaga ...............
Mission of the society of Jesus, for Jose Erquiaga .................
Melecio Ramos, for Jose Erquiaga .......................................
Jose Arguirre, for Jose Erquiaga ...........................................
Ciriaco Bernal, in his own behalf ...........................................
Superior of the Jesuit Fathers, for Jose Erquiaga ....................
Dolores C. de Longa, for G. J. Cristobal ...............................
G. J. Cristobal, in his own behalf ...........................................
Total .............................................................

Shares
1
466
1,800
1,000
2,410
115
40
200
1,854
200
1,950
1
10,017

"There being a total of 10,017 shares represented, which constitute a majority or quorum
according to the by-laws, the following business was considered:
"Upon motion of Mr. G. J. Cristobal, seconded by Mr. Ciriaco Bernal, the minutes of the
previous general meeting were read and approved. The Manager's Annual Report of the
condition of the business and the accounts corresponding thereto for 1924 were submitted

for consideration. After the reading and examination of said report and accounts, on motion
of Mr. C. Camins, seconded by Mr. G. J., Cristobal, said report was approved.
"Immediately afterwards they proceeded to the election of the directors for the year 1925,
the following being elected:
Votes
10,505
10,500
10,055
9,755
9,270

Mr. Jose Erquiaga ......................................

Mr. C. Camins ...........................................
Mr. Jose Camins ........................................
Mr. G. J. Cristobal .....................................
Mr. Ciriaco Bernal .....................................
"There being no further business the meeting adjourned at 6.30 p. m.

"I certify that the foregoing minutes are correct, and that the same were approved at the
abovementioned general meeting.
(Sgd.)
"President
(Sgd.)
"Secretary"

"JOSE
ad
"C.

ERQUIAGA
interim
CAMINS

For nearly ten years the two associations have had business relations with each other, the
Zamboanga Transportation Co., Inc., purchasing trucks, automobiles, repair and accessory
parts for use in the business of transportation in which it is engaged, ic rom the Bachrach
Motor Co., Inc. Payments were made by installments, and for the security of the vendor, the
Bachrach Motor Co., Inc., the purchaser, the Zamboanga Transportation Co., Inc., executed
in its favor several chattel mortgages.
From the year 1920 Jose Erquiaga, one of the stockholders and directors of the Zamboanga
Transportation Co., Inc., has been also its attorney and legal adviser. In March 1924, he was
appointed general manager, and in January 1925 was elected president. Lastly, he also acted
as auditor.
In February 1925, the Zamboanga Transportation Co., Inc., owed the Bachrach Motor Co.,
Inc., the sum of P44,095.78, which was the balance due on the purchase price of several
White trucks and accessory parts, bought on the installment plan from the latter. This

balance was secured by two chattel mortgages, executed on February 17, 1923 (Exhibit 2)
and December 4, 1923 (Exhibit 1), respectively.
During the last five years the Zamboanga Transportation Co., Inc., found itself in financial
straits and on several occasions appealed to Mons. Jose CIos, Bishop of Zamboanga ic or
loans of money. As the latter, who was the principal stockholder of the Zamboanga
Transportation Co., Inc., was leaving for Rome in February 1925 and could not continue to
loan money to said corporation to pay the installments stipulated in the chattel mortgages
Exhibits 1, and 2, and in view of the fact that the hypothecated trucks were in a bad state or
repair, and that the mortgagee required more security, additional agreements were entered
between Mons. Clos and the Bachrach Motor Co., Inc. These agreements, in which the
Zamboanga Transportation Co., Inc., intervened and took part, are evidenced in the letter
quoted below:
"February 14, 1925
"The

RIGHT
"Bishop

REVEREND

JOSE
of

CLOS
Zamboanga

"Manila, P. I.
"MOST REVEREND SIR: The purpose of this letter is to set forth in writing certain conditions
and stipulations connected with the transfer to us of certain securities now held by you
consisting of a mortgage made and executed in your favor by the Zamboanga
Transportation Co., Inc., covering certain equipment, business credits, privileges, etc., as set
forth therein.
1. "1. You agree to release, and hereby do release and cancel said mortgage made and
executed in your favor by the Zamboanga Transportation Co. under date of January
10th, 1925.
2. "2. The Zamboanga Transportation Co. is to be permitted to execute in our favor a
new mortgage covering all property, business credits and privileges mentioned and
set forth therein, excepting the second mortgage on property mortgaged by the
Zamboanga Transportation Company to the Standard Oil Company. This is in
addition to and to be included with property already mortgaged to us by the
Zamboanga Transportation Company for which purpose an entirely new document,
bearing a new schedule of payments inclusive of interest thereon to dates of
maturity, will be made and executed in our favor by the said Zamboanga
Transportation Company.
3. "3. For and in. consideration of the release and cancellation .of the mortgage now
held by you and your permission to remortgage to us the property mentioned

therein . by the Zamboanga Transportation Company, we agree to accept a reduced

schedule of payments for a period of six months from date, after which period the
former schedule of payments will be taken up and resumed as set forth in our
memorandum of January 10th. It is further agreed that such payments instead of
falling due on the 15th of each month shall become due and payable on the 1st day
of the succeeding month as set ic orth and made of record in the new notes and
mortgages to be made and executed in our favor by the Zamboanga Transportation
Company. We also agree to permit the transfer of trucks and equipment now
mortgaged to us by the Zamboanga Transportation Company or such portion
thereof as may be necessary for their purpose to Dansalan, Lanao.
4. "4. As a further consideration, we also agree to permit you to liquidate the entire
indebtedness of the ZamboangaTransportation Company by paying to us at any
time that may be convenient for you to do so the entire amount due less a discount
of 10 per cent as outlined in our letter of December 26, 1924; such discount,
how)ever, is to be based on the amount actually due by the Zamboanga
Transportation Company at that time inclusive of balance due by them on their
current account.
1. "5. It is ic urther stipulated and agreed that the President and General Manager of
the Zamboanga Transportation Company will furnish us a copy of the Resolution of
the board of directors authorizing him to execute this new mortgage in our favor.
"Kindly confirm and ratify this agreement by signing with us at the bottom of this letter.
"Very truly yours,
"THE BACHRACH MOTOR CO., INC.
By (Sgd.) "E. M. BACHRACH
"Conforme: .
"THE ZAMBOANGA TRANSPORTATION Co., INC.
By (Sgd.) "JOSE ERQUIAGA
"I agree to and accept conditions outlined.
(Sgd.) "JOSE CLOS"

In pursuance of said agreement the new chattel mortgage (Exhibits B. and C) was executed
on February 14, 1925 by the Zamboanga Transportation Co., Inc., represented by its
president, general manager, and attorney, Jose Erquiaga. In this last mortgage the same
goods were pledged that had been hypothecated by the Zamboanga Transportation Co.,
Inc., to the Bachrach Motor Co., by virtue of instruments Exhibits 1, and 2, and to Mons.
Jose Clos Bishop of Zamboanga, by virtue of the deed Exhibit 3.

period of business depression we be allowed to make smaller payments and furthermore

that we be authorized by you to sell our equipments in Cebu and Dansalan, or part of it,
upon the condition that any amount obtained from such sales, will be paid to you to apply
to our monthly payments as per contract. Should you not be satisfied with this letter, "I
request that you send a man of your confidence down here to examine our business and
report to you.

In a letter written on February 28, 1925, Jose Erquiaga submitted said mortgage deed to the
board of directors through its secretary, and upon his return to Zamboanga from Manila,
discussed said mortgage with directors Carlos Camins and Ciriaco Bernal, who expressed
their satisfaction with the advantages obtained by their president and general manager.

"I will try to be in Manila by the twelve of this month, passing thru Cebu and will take this
matter with you personally. In this connection, "I may tell you that "I have already advanced
some of my personal funds to help the company. Inasmuch as Bishop Clos who holds a
second mortgage on our properties, is not here at present and he is not expected to be back
until August, it is requested that no action be taken by you until he returns.

The Zamboanga Transportation Co., Inc., partially complied with the conditions of said
mortgage deed, paying the Bachrach Motor Co., Inc., on March 1, and April 1, 1925.
During the latter half of the month of April 1925, the mortgagor received a letter dated April
13, 1925, through its president and general manager, Jose Erquiaga, from the mortgagee,
enclosing the cancellation of the two former chattel mortgages Exhibits 1, and 2, in order to
be recorded in the registries of deeds of Cebu and Zamboanga, respectively, where said
mortgages were registered. On April 27, 1925, said president and general manager, Jose
Erquiaga, sent the mortgagee a letter (Exhibits HH and 14) in which, replying to the latter's
communication dated April 13, 1925, he informed it that said cancellations could not be
registered, because the new chattel mortgage had not been approved by the mortgagor's
board of directors, according to the express stipulation of the parties, and that as soon as it
was approved it would be submitted to the Public Utility Commission ic or approval in
conformity with the law.
On May 3, 1925, the Zamboanga Transportation Co., Inc., through its general manager, Jose
Erquiaga, addressed the letter marked Exhibit C) to the Bachrach Motor Co., Inc., which,
among other things, said the following:
"This is to inform you that on account of our Dansalan's Branch failure to send us any money
so far, we are utterly unable, for the present, to make our remittances to you in accordance
with our last contract.
*

"In view of all this and having in .mind the fact that you hold now a mortgage practically on
all our business and your credit is perfectly secured we would request that during this

"Expecting to see you personally within a few days and hoping a favorable consideration, "I
am,
"Yours very truly,
"ZAMBOANGA TRANSPORTATION CO., INC.
"By (Sgd.) JOSE ERQUIAGA
"President and General Manager"
When, as announced in the foregoing letter, Jose Erquiaga interviewed E. M. Bachrach,
president of the Bachrach Motor Co., Inc., in the latter's office in Manila on May 6, and 12,
1925, in order to secure his consent to the sale of some trucks in Cebu and Dansalan, the
same being included in those mortgaged, in order to apply the proceeds to the payment of
the unpaid debt, said E. M. Bachrach asked Jose Erquiaga why the board of directors of the
Zamboanga Transportation had not approved the mortgage yet, and without waiting for an
answer, denied his request saying that the mortgagor was "at their mercy" and that they did
not care whether the board of directors approved the mortgage or not, adding, "You cannot
impose conditions now." After this interview Jose Erquiaga returned to Zamboanga and
immediately made special efforts to have the mortgagor's board of directors meet and take
definite action on said mortgage, which was done, said mortgage being rejected by the
resolution of May 20, 1925. At that time the mortgagor discovered that the mortgagee had
registered the chattel mortgage in question in the registry of deeds of Zamboanga, by a
letter dated February 17, 1924, addressed to the register of deeds of Zamboanga, without
the knowledge or consent of said mortgagor, and without having first registered the

cancellations of the two previous mortgages which included part of the goods afpp ected by
the mortgage in question, as required by the law, which cancellations, as stated, were sent
to the mortgagor only two months afterwards with the communication of April 13, 1925.
This discovery was the cause of the resolution adopted by the board of directors of the
Zamboanga Transportation Co., Inc., dated May 21, 1925, directing its attorney to institute
an action for the annulment of said mortgage, which was done on May 21, 1925, the
complaint being registered in the Court of First Instance of Zamboanga as No. 2186.
The Bachrach Motor Co., Inc., acting through its president, filed a complaint against the
Zamboanga Transportation Co., Inc., in the Court of First Instance of ,Manila on May 23,
1925, and by means of a bond fixed by the court, obtained through the sheriff of
Zamboanga, possession of all the chattels described in the chattel mortgages (Exhibits B.
and C) and their sale at public auction in conformity with the provision of section 14 of the
Chattel Mortgage Law, and having been the highest bidder they were awarded to it for the
sum of P35,000, which amount was reduced to P34,642.63, after deducting the expenses of
the auction and the sheriff's fees, which amounted to P357.37. The aforesaid sum of
P34,642.63 having been applied to the defendant's account, there remained a balance of
P18,298.58 which is the amount owed by the Zamboanga Transportation Co., Inc., to the
Bachrach Motor Co., Inc., including the stipulated penalty.
The Zamboanga Transportation Co., Inc., tried to prove that at the time the chattel
mortgage was executed, there existed an oral agreement between the parties, which
contained the following stipulations: (1) That the mortgage would not be valid until it was
approved by resolution of the board of directors of the mortgagor; (2) that it would not be
recorded in the proper registry of deeds until such approval was obtained; (3) that after the
mortgagor's board of directors had approved it, the approval of the Public Utility
Commission as required by Act No. 3108 would also be requested; (4) that should the
mortgagor's board of directors disapprove said mortgage, the mortgagee would have a right
to foreclose the two previous mortgages at any time; (5) that even if the mortgage be
approved by the mortgagor's board of directors, the mortgagee would not foreclose said
mortgage in case of violation of the condition until after the return of the Bishop of
Zamboanga from his trip to Rome, which, it was calculated would take about six months and
without first giving said Bishop the option to pay the whole debt to the mortgagee with a 10
per cent discount; (6) that notwithstanding the fact that said mortgage is not valid without
the approval of the board of directors of the Zamboanga Transportation Co., Inc., its
conditions would go into effect immediately after being signed by Jose Erquiaga, as
president of the mortgagor, the sum and the amount of the monthly payments being
suspended from the date; (7) that in view of this stipulation Jose Erquiaga, as president and
general manager of the mortgagor, made two payments in accordance with the terms of

said mortgage, but without the knowledge of the board of directors and before the formal
disapproval of the said mortgage by resolution dated May 20, 1925.
In view of the facts recited above as proven at the trial, partly by a preponderance of the
evidence and partly by the admission of the parties, the following questions of law are
raised:
1. (1) Whether the chattel mortgage evidenced by Exhibits B. and C, dated February
14, 1925, and executed by Jose Erquiaga, president, general manager, attorney, and
auditor of the Zamboanga Transportation Co., Inc., in behalf thereof, is valid and
binding upon said corporation, after payments have been made to the Bachrach
Motor Co., Inc., by virtue thereof, notwithstanding the fact that it was disapproved
by the mortgagor's board of directors four months after its execution.
2. (2) If so, whether said mortgage was effective notwithstanding the fact that the
authorization and approval of the Public Utility Commission were not obtained until
after an action for annulment had been instituted by the Zamboanga Transportation
Co., Inc., on May 21, 1925, and almost a year after said mortgage had been
executed.
With regard to the first question, we have seen that Jose Erquiaga is one of the largest
stockholders of the Zamboanga Transportation Co., Inc., and represented the greatest
majority of the stock at the general meeting of stockholders held on January 26, 1925 at
which he was elected president. In addition to this office, he acted as general manager,
auditor, and attorney or legal adviser of said corporation. In this manifold capacity Jose
Erquiaga entered into the chattel mortgage contract here in question with the Bachrach
Motor Co., Inc., by virtue of which the Zamboanga Transportation Co., Inc., obtained greater
advantages; and upon his return to Zamboanga after having entered into said contract, he
discussed the new chattel mortgage with the directors of said corporation, Carlos Camins
and Ciriaco Bernal, who expressed their satisfaction with the advantages obtained by their
president and general manager, and the Zamboanga Transportation Co., Inc., availed itself
of these advantages, making two payments under the new contract to the Bachrach Motor
Co., Inc.: The first on March 1, 1925, and the second on the first of April of the same year.
While it is true that said last chattel mortgage contract was not approved by the board of
directors of the Zamboanga Transportation Co., Inc., whose approval was necessary in order
to validate it according to the by-laws of said corporation, the broad powers vested in Jose
Erquiaga as president, general manager, auditor, attorney or legal adviser, and one of the
largest shareholders; the approval of his acts in connection with said chattel mortgage
contract in question, with which two other directors expressed satisfaction, one of which is
also one of the largest shareholders, who together with the president constitute a majority:

The payments made under said contract with the knowledge of said three directors are
equivalent to a tacit approval by the board of directors of said chattel mortgage contract
and binds the Zamboanga Transportation Co., Inc. In truth and in fact Jose Erquiaga, in his
multiple capacity, was and is the factotum of the corporation and may be said to be the
corporation itself.
In the case of Halley First National Bank vs. G. V. B. Min. Co. (89 Fed., 439), the following
rule was laid down:
"Where the chief officers of a corporation are in reality its owners, holding nearly all of its
stock, and are permitted to manage the business by the directors, who are only interested
nominally or to a small extent, and are controlled entirely by the officers, the acts of such
officers are binding on the corporation, which cannot escape liability as to third persons
dealing with it in good faith on the pretense that such acts were ultra vires."
We therefore conclude that when the president of a corporation, who is one of the principal
stockholders and at the same time its general manager, auditor, attorney or legal adviser, is
empowered by its by-laws to enter into chattel mortgage contracts, subject to the approval
of the board of directors, and enters into such contracts with the tacit approval of two other
members of the board of directors, one of whom is also a principal shareholder, both of
whom, together with the president, form a majority, and said corporation takes advantage
of the benefits afforded by said contract, such acts are equivalent to an implied ratification
of said contract by the board of directors and binds the corporation even if not ic ormally
approved by said board of directors as required by the by-laws of the aforesaid corporation.
With respect to the second question, having arrived at the conclusion that the chattel
mortgage deed, which is the subject matter of this litigation, is valid and effective, the lack
of previous authorization and approval of the Public Utility Commission, while it, indeed,
rendered said contract ineffective, was cured by the nunc pro tunc authorization and
approval granted by said Commission, and the contract was made effective from its
execution, for, as this court held in the case of Zamboanga Transportation Co., vs. Public
Utility Commission (50 Phil., 237), although the authorization and approval of said
Commission were needed to render said chattel mortgage contract effective, they were not
necessary for the intrinsic validity of said contract so long as the legal elements necessary to
give it juridical life are present.
In consideration of the premises, we are of the opinion and so hold, that while a chattel
mortgage contract entered into by a public service corporation is ineffective without the
authorization and approval of the Public Utility Commission, it may be valid if it contains all

the material and formal requisites demanded by the law for its validity, and said Public
Utility Commission may make it retroactive by nunc pro tunc authorization and approval.
Wherefore, the judgment appealed from in the case of Zamboanga Transportation Co., Inc.,
vs. Bachrach Motor Co., Inc., of the Court of First Instance of Zamboanga, G. R. No. 27694, is
reversed with costs against the appellee, and the judgment in the case of Bachrach Motor
Co., Inc., vs. Zamboanga Transportation Co., Inc., rendered by the Court of First Instance of
Manila, is affirmed, with the costs against the appellant. So ordered.
Avancea, C. J., Street, Malcolm, Villamor, Ostrand, and Romualdez, JJ., concur.
Judgment in case No. 27694 is reversed, and affirmed in case No. 27997.

presented but not as a basis f or deciding the f actual issue itself. That issue should await a
trial on the merits.
Acua vs. Batac Producers Cooperative Marketing Association, Inc.
No. L-20333. June 30, 1967.

APPEAL from an order of dismissal rendered by the Court of First Instance of Rizal, Quezon
City Branch.

EMILIANO ACUA, plaintiff-appellant, vs. BATAC PRODUCERS COOPERATIVE MARKETING

ASSOCIATION, INC., JUSTINO GALANO, TEODORO NARCISO, PABLO BACTIN, (DR.)
EMMANUEL BUMANGLAG, VENANCIO DlRIC, MARCOS ESQUIVEL, EVARISTO CAOILI, FlDEL
BATTULAYAN, DAMIAN ROSSINI, RAYMUNDO BATALLONES, PLACIDO QUIAOIT, and LEON
Q. VERANO, defendants-appellees.

The facts are stated in the opinion of the Court.

Pleading and Practice; Actions; Dismissal of actions.When a motion to dismiss is based on

lack of cause of action, the averments in the complaint are deemed hypothetically admitted.
The inquiry is limited to whether or not such allegations make out a case on which relief can
be granted. If the motion assails directly or indirectly the veracity of the allegations, it is
improper to grant the motion upon the assumption that the averments therein are true and
those of the complaint are not true.

MAKALINTAL, J.:

Same; Sufficiency of cause of motion is determined from the allegations of the complaint.
The sufficiency of a motion to dismiss, based on failure to state a cause of action, should be
tested on the strength of the allegations of facts contained ,in the complaint and no other. If
these allegations show a cause of action, or furnish sufficient basis by which the complaint
can be maintained, the complaint should be dismissed regardless of the defenses that may
be averred by the defendants.
Same; Contracts; Ratification; Acts showing ratification of contract for services.The
ratification of a contract may be express or implied. Implied ratification may take diverse
forms. such as by silence or acquiescence; by acts showing approval or adoption of the
contract; or by acceptance and retention of benefits flowing therefrom.
Same; Where allegations of complaint show ratification of contract for services.A
complaint should not be dismissed on the ground that the contract for services, on which
plaintiff's action was based, was allegedly not ratified by the Board of Directors of defendant
corporation, where the complaint contains sufficient allegations indicating approval or
subsequent ratification of said contract by the Board.
Same; Affidavits in support of motion to dismiss.Affidavits in support of a motion to
dismiss can only be considered for the purpose of ascertaining whether an issue of fact is

Marquez & Marquez for plaintiff-appellant.

Estanislao A. Fernandez for defendants-appellees.

Appeal taken from the order dated September 10, 1962 of the Court of First Instance of
Rizal, Branch V (Quezon City) dismissing plaintiff's complaint on the ground that it states no
cause of action, and discharging the writ of preliminary attachment issued therein.
On August 9, 1962, plaintiff Emiliano Acua filed a complaint, which was later amended on
August 13, against the defendant Batac Producers Cooperative Marketing Association, Inc.,
hereinafter called the Batac Procoma, Inc., or alternatively, against all the other defendants
named in the caption. The complaint alleged, inter alia, that on or about May 5, 1962 it was
tentatively agreed upon between plaintiff and defendant Leon Q. Verano, as Manager of the
defendant Batac Procoma, Inc., that the former would seek and obtain the sum of not less
than P20,000.00 to be advanced to the defendant Batac Procoma, Inc., to be utilized by it as
additional funds for its Virginia tobacco buying operations during the current redrying
season; that plaintiff would be constituted as the corporation's representative in Manila to
assist in handling and facilitating its continuous shipments of tobacco and their delivery to
the redrying plants and in speeding up the prompt payment and collection of all amounts
due to the corporation for such shipments; that for his services plaintiff would be paid a
remuneration at the rate of P0.50 per kilo of tobacco; that said tentative agreement was
favorably received by the Board of Directors of the defendant Batac Procoma, Inc., and on
May 6, 1962 all the defendants named above, who constituted the entire Board of Directors
of said corporation (except Leon Q. Verano, who was its Manager), together with
defendants Justino Galano and Teodoro Narciso, as President and Vice-President,
respectively, unanimously authorized defendant Leon Q. Verano, by a formal resolution, "to
execute any agreement with any person or entity, on behalf of the corporation, for the
purpose of securing additional funds for the corporation, as well as to secure the services of
such person or entity, in the collection of all payments due to the corporation from the

PVTA for any tobacco sold and delivered to said administration; giving and conferring upon
the Manager, full and complete authority to bind the corporation with such person or entity
in any agreement, and under such considerations, which the said Manager may deem
expedient and necessary for that purpose; that plaintiff was made to understand by all of
said defendants that the original understanding between him and defendant Leon Q.
Verano was acceptable to the corporation, except that the remuneration for the plaintiff's
services would be P0.30 per kilo of tobacco; that on May 10, 1962, the formal "Agreement"
was executed between plaintiff and defendant Leon Q. Verano, as Manager of the
defendant corporation, duly authorized by its Board of Directors for such purpose, and
signed by defendants Justino Galano and Dr. Emmanuel Bumanglag as instrumental
witnesses and acknowledged by Atty. Fernando Alcantara, the Secretary and Legal Counsel
of the defendant corporation; that upon plaintiff's inquiry, he was assured by these
defendants that a formal approval of said "Agreement" by the Board was no longer
necessary, as it was a mere "formality" appended to its authorizing resolution and as all the
members of the Board had already agreed to the same; that on the same date, May 10,
1962, plaintiff gave and turned over to the defendant corporation, thru its treasurer,
Dominador T. Cocson, the sum of P20,000.00, in the presence of defendants Leon Q.
Verano, Justino Galano, Dr. Emmanuel Bumanglag and Atty. Fernando Alcantara, for which
said treasurer issued to plaintiff its corresponding Official Receipt No. 130852; that from
then on, plaintiff diligently and religiously kept his part of the "Agreement;" that plaintiff
even furnished the defendant corporation, upon request of its Manager Leon Q. Verano,
three thousand (3,000) sacks which it utilized in the shipment of its tobacco costing
P6,000.00 and that plaintiff had personally advanced out of his own personal funds the total
sum of P5,000.00 with the full knowledge, acquiescence and consent of all the individual
defendants; that after the def endant corporation was enabled to replenish its funds with
continuous collections from the PVTA for tobacco delivered due to the help, assistance and
intervention of plaintiff, for which the said corporation collected from the PVTA the total
sum of P381,495.00, the "Agreement" was disapproved by its Board of Directors on June 6,
1962. Upon the foregoing allegations plaintiff prays: (a) that an order of attachment be
issued against the properties of defendant corporation ;(b) that after due trial, judgment be
rendered condemning defendant corporation, or alternatively, all the other individual
defendants, jointly and severally, to comply with their contractual obligations and to pay
plaintiff the sum of P300,000.00 for his services, plus P31,000.00 for cash advances made by
him and P25,000.00 for attorney's fees.
On August 14, 1962, the lower court ordered the issuance of a writ of preliminary
attachment against the. properties of the defendants and on the following day, after the
plaintiff had posted the required bond, the writ was accordingly issued by the Clerk of Court.

On August 22, 1962, the defendants filed a motion to dismiss the complaint on the ground
that it stated no cause of action and to discharge the preliminary attachment on the ground
that it was improperly or irregularly issued. In support of the motion defendants alleged that
the contract for services was never perfected because it was not approved or ratified but
was instead disapproved by the Board of Directors of defendant Batac Procoma, Inc., and
that on the basis of plaintiffs pleadings the contract is void and unenforceable. Defendants
further denied the fact that plaintiff had performed his part of the contract, alleging that he
had not in any manner intervened in the delivery and payment of tobacco pertaining to the
defendant corporation.
On August 25, 1962, plaintiff filed a written opposition to the motion to dismiss and to
discharge the preliminary attachment.
On September 10, 1962, the trial court sustained defendants' motion and issued the
following order:
"In resume, the Court believes that the complaint states no cause of action and that
contract in question is void ab initio.
IN VIEW OF THE FOREGOING, the amended complaint filed in this case is hereby ordered
DISMISSED, without special pronouncement as to costs. Consequently, the writ of
preliminary attachment issued herein is ordered discharged. However, it is of record that
the defendants has (sic) deposited the Court the amount of P20,400.00 representing the
amount of money invested by the plaintiff plus the corresponding interest thereon. Plaintiff,
by virtue of this order, may withdraw the same in due time, if he so desires, upon proper
receipt therefor."
From the foregoing order plaintiff interposed the present appeal.
Appellant has assigned four errors, which we shall consider seriatim:
The first assignment reads: "As the defendants' motion to dismiss the complaint and to
discharge the preliminary attachment was based on the specific ground that the complaint
states no cause of action (Sec. 1 [f], Rule 8, Rules of Court), the lower court should not have
gone beyond, and it should have limited itself, to the facts alleged in the complaint in
considering and resolving said motion to dismiss."
It is a settled principle that when a motion to dismiss is based on the ground that the
complaint does not state a cause of action (Rule 8, Section 1, par, 7 of the old Rules; Rule 16,

Section 1, par. [g] of the Revised Rules) the averments in the complaint are deemed
hypothetically admitted and the inquiry is limited to whether or not they make out a case on
which relief can be granted. If said motion assails directly or indirectly the veracity of the
allegations, it is improper to grant the motion upon the assumption that the averments
therein are true and those of the complaint are not. (Carreon vs. Prov. Board of Pampanga,
52 O.G. 6557.) The sufficiency of the motion should be tested on the strength of the
allegations of facts contained in the complaint, and no other. If these allegations show a
cause of action, or furnish sufficient basis by which the complaint can be maintained, the
complaint should not be dismissed regardless of the defenses that may be averred by the
defendants. (Josefa de Jesus, et al. vs. Santos Belarmino, 50 O.G. 3004-3068; Verzosa vs.
Rigonan, G.R. No. L-6459, April 23, 1954; Dimayuga vs. Dimayuga, 51 O.G. 2397-2400.)
The first ground upon which the order of dismissal issued by the lower court is predicated is
that the Board of Directors of defendant corporation did not approve the agreement in
questionin fact disapproved it by a resolution passed on June 6, 1962and that as a
consequence the "suspensive condition" attached to the agreement was never fulfilled. The
specific stipulation referred to by the Court as a suspensive condition states: "provided,
however, that the contract entered into by said manager to carry out the purposes abovementioned shall be subject to the approval by the Board."
A perusal of the complaint reveals that it contains sufficient allegations indicating such
approval or at least subsequent ratification. On the first point we note the following
averments: that on May 9th the plaintiff met with each and all of the individual defendants
(who constituted the entire Board of Directors) and discussed with them extensively the
tentative agreement and he was made to understand that it was acceptable to them, except
as to plaintiff's remuneration; that it was finally agreed between plaintiff and all said
Directors that his remuneration would be P0.30 per kilo (of tobacco); and that after the
agreement was formally executed he was assured by said Directors that there would be no
need of formal approval by the Board. It should be noted in this connection that although
the contract required such approval it did not specify just in what manner the same should
be given.
On the question of ratification the complaint alleges that plaintiff delivered to the defendant
corporation the sum of P20,000.00 as called for in the contract; that he rendered the
services he was required to do; that he furnished said defendant 3,000 sacks at a cost of
P6,000.00 and advanced to it the further sum of P5,000.00; and that he did all of these
things with the f ull knowledge, acquiescence and consent of each and all of the individual
defendants who con'stitute the Board of Directors of the defendant corporation.

There is abundant authority in support of the proposition that ratification may be express or
implied, and that implied ratification may take diverse forms, such as by silence or
acquiescence; by acts showing approval or adoption of the contract; or by acceptance and
retention of benefits flowing therefrom.
Significantly the very resolution of the Board of Directors relied upon by defendants appears
to militate against their contention. It refers to plaintiff's failure to comply with. certain
promises he had made, as well as to his interpretation of the contract with respect to his
remuneration which, according to the Board, was contrary to the intention of the parties.
The resolution then proceeds to "disapprove and/or rescind" the said contract. The idea of
conflicting interpretation, or rescission on the ground that one of the parties has failed to
fulfill his obligation under the contract, is certainly incompatible with defendants' theory
here that no contract had yet been perfected for lack of approval by the Board of Directors.
Appellants' second assignment of error reads: "Assuming that in resolving the defendants'
motion to dismiss the lower court could consider the new facts alleged therein and the
documents annexed thereto it committed an error in extending such consideration beyond
ascertaining only if an issue of fact has been presented and in actually deciding instead such
fact in issue."
The assignment is well taken, and is the logical corollary of the rule that a motion to dismiss
on the ground that the complaint fails to state a cause of action addresses itself to the
averments in the complaint and, admitting their veracity, merely questions their sufficiency
to make out a case on which the court can grant relief. Affidavits, such as those presented
by defendants in support of the motion, can only be considered for the purpose of
ascertaining whether an issue of fact is presented, but not as a basis for deciding the factual
issue itself. This should await the trial on the merits.
The third assignment of error assails the lower court's ruling that even assuming that a
contract had been perfected no action can be maintained thereon because its object was
illegal and therefore void. Specific reference was made by said court to an affidavit executed
by appellant on May 10, 1962 which reads:
'That I, EMILIANO ACUA, the party of the Second Part in the contract entered into with the
Batac Procoma, Inc., the party of the First Part in same contract declares that the amount of
P0.30 per kilo is referred to upgraded tobacco only as delivered. This supplements
paragraph three of the contract referred to. Deliveries downgraded or maintained at the
redrying plant are deemed not included."

The lower court, in its order of dismissal, held that "the upgrading of tobaccos is clearly
prohibited under our laws," and hence the contract cannot be validly ratif ied. Evidently the
court had in mind a fraudulent upgrading of tobacco by appellant as part of the services
called for under the contract. This conclusion, however, is squarely traversed by appellant in
another affidavit attached to his reply and opposition to the motion to dismiss, in which he
explained the circumstances which led to the execution of the one relied upon by the court,
and the real meaning of the word "upgraded" therein. It is therein stated:
"That after the execution of the agreement (Annex "B" to the amended complaint in said
Civil Case No. Q-6547), Messrs. Verano, Galano and Dr. Bumanglag of the defendant
Corporation indicated to me that if the price of P0.30 per kilo stipulated there to be paid to
me were \& be indiscriminately applied to all deliveries of tobaccos, the Corporation would
be placed in a disadvantageous and losing position, and they proceeded to explain to me the
following,
1. (a) that when the farmers sell their tobaccos to the Facoma, they do so in bunches
of assorted qualities which may belong either to Class A, B, C, D and E, and upon
such purchase they are initially given an arbitrary classification of any of such classes
as the case may be, the tendency generally being to give them a lower classification
to equalize or average the assorted qualities as much as possible, and this is what is
termed "downgrading;" ,
2. (b) that after the tobaccos have been purchased by the Facoma from the farmers,
they are then reassorted and re-classified in accordance with their actual quality or
grade as found by the officials of the Facoma,thus in a bunch which are purchased
as Class C, D or E, upon reclassification those found to belong to Class A are
separated from Class B, those belonging to Class B are separated from Class C, and
so on, and these bunches so reclassified necessarily have a higher grade than the
farmers, and this is what is termed 'upgrading' upon delivery original arbitrary
classification given when purchased from the which was used in the addendum;
1. (c) the Facoma, in turn, delivers these properly re-classified tobaccos to the redrying
plant and there, a group of officials composed of a representative of the redrying
plant, the Bureau of Internal Revenue, the General Auditing Office, the PVTA and
the Facoma representative, then examines and grades the tobaccos, and if the
classification given by the Facoma is found correct and not changed, then and only
then would or should I be entitled to collect the P0.30 per kilo, and this they said is
what is termed 'grade maintained'on the other hand, if these officials found the
classification incorrect and lowers the classification given by the Facoma, thus class
A to B, or from B to C, then the tobaccos are considered or said to be 'downgraded'

and in that event I should not receive any centavo for such deliveries, and it is in this
sense that I was made to understand the term;
Believing implicitly in the foregoing explanations of the defendants and in the
reasonableness of their proposal, I agreed readily and Atty. Fernando Alcantara, Legal
Counsel and Secretary of the defendant Corporation forthwith prepared, drafted and typed
the "addendum" in question in their own typewriter of the Corporation; and as I am not a
lawyer and was not well versed with the usage, customs and phraseology usually used in
tobacco trading, I relied in absolute good faith that, as explained by the defendants, there
was nothing. wrong nor illegal in the use of the words upgrading' and 'downgrading' used in
said addendum, which Atty. Alcantara unfortunately used in the same;
Apart from the above, defendants knew the physical impossibility of 'upgrading' the
tobaccos at the redrying plant, because at the time of the transaction, only the PTFC & RC
was allowed to accept tobacco for redrying and under the existing regulations and practices
the delivery area for tobaccos at the redrying plant is enclosed by a high wire fence
inaccessible to the general public and the only ones who actually make the grading of
tobaccos delivered, are the (1) American representative of the redrying plant (PTFC & RC),
(2) the PVTA, (3) the BIR, and (4) the General Auditing Office in the presence of the
representative of the FACOMA, and since the redrying plant is compelled to purchase 41 %
of all tobaccos delivered and redried under their negotiated management contract, it is
highly improbable that the representative of the redrying plant (PTFC & RC) whose
conformity to the actual grading done must appear in the corresponding 'guia' or tally sheet,
would allow the 'upgrading' of tobaccos, aside from the fact that stringent measures had
been devised under the present administration to prevent the 'upgrading' of tobaccos by
any party. Certainly, an impossible condition could not have been contemplated by me and
the defendants;" (Record on Appeal, pp. 171-175).
The foregoing explanation, on its face, is satisfactory and deprives the term "upgraded" of
the sinister and illegal connotation attributed to it by the lower court. To be sure, whether
the allegations in this subsequent affidavit are true or not is a question of fact; but it is
precisely for this reason that they can neither be summarily admitted nor rejected for
purposes of a motion to dismiss. Due process demands that they be the subject of proof and
considered only after trial on the merits.
The other errors assigned by appellant are merely incidental to those already discussed, and
require no separate treatment.
Wherefore, the order appealed from is set aside and the case is remanded to the court a
quo for further proceedings, without prejudice to the right of plaintiff-appellant to ask for

another writ of attachment in said court, as the circumstances may warrant. Costs against
defendants-appellees.
Concepcion, C.J., Reyes, J.B.L., Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Dizon, J., took no part.
Order of dismissal set aside; case remanded to lower court for further proceedings.
Note.See Acua vs. Yatco, L-20560, July 31, 1967. post, as to incident regarding
dissolution attachment.

[No. L-10556. April 30, 1958]

RICARDO GURREA, plaintiff and appellant, vs. JOS MANUEL LEZAMA, ET AL., defendants
and appellees.
1. 1. CORPORATION LAW; WHO ARE CONSIDERED OFFICERS OF THE CORPORATION;
CASE AT BAR.The only officers of a corporation are those given that character
either by the Corporation Law or by its by-laws. The rest can be considered merely
as employees or subordinate officials. In the case at bar; considering that plaintiff
has been appointed manager by the board ofdirectors and as such does not have
the character of an officer, the conclusion is inescapable that he can be suspended
or removed by said board of directors under such terms as it may see fit and not as
provided for in the by-laws. Evidently, the power to appoint carries with it the
power to remove, and it would be incongruous to hold that having been appointed
by the board of directors he could only be removed by the stockholders.
1. 2. ID.; ID.; ID.; LIABILITY FOR VIOLATION OF PENAL PROVISIONS OF STATUTES DOES
NOT MAKE MANAGER OFFICER OF CORPORATION.The fact that the "manager" of
the corporation in the several statutes enacted by Congress is held criminally liable
for violation of any of the penal provisions therein prescribed does not make him an
"officer" of the corporation. This liability flows from the nature of his duties which
are delegated to him by the board of directors. He is paid for them. Hence, he has to
answer for them should he use it in violation of law.
APPEAL from a judgment of the Court of First Instance of Iloilo. Makalintal, J.
The facts are stated in the opinion of the Court.
Fulgencio Vega and Felix D. Bacabac for appellant.
Jos Manuel Lezama for appellees Jos Manuel Lezama and Genivera F. de Lezama.
Domingo B. Lauren for the other appellees.
BAUTISTA ANGELO, J.:

Plaintiff instituted this action in the Court of First Instance of Iloilo to have Resolution No. 65
of the Board of Directors of the La Paz Ice Plant and Cold Storage Co., Inc., removing him
from his position of manager of said corporation declared null and void and to recover
damages incident thereto. The action is predicated on the ground that said resolution was
adopted in contravention of the provisions of the by-laws of the corporation, of the
Corporation Law and of the understanding, intention and agreement reached among its
stockholders.
Defendant answered the complaint setting up as defense that plaintiff had been removed
by virtue of a valid resolution.
In connection with this complaint, plaintiff moved for the issuance of a writ of preliminary
injunction to restrain defendant Jos Manuel Lezama from managing the corporation
pending the determination of this case, but after hearing where parties presented
testimonial and documentary evidence, the court denied the motion. Thereafter, by
agreement of the parties and without any trial on the merits, the case was submitted for
judgment on the sole legal question of whether plaintiff could be legally removed as
manager of the corporation merely by resolution of the board of directors or whether the
affirmative vote of 2/3 of the paid shares of stocks was necessary for that purpose. And
passing upon this legal point, the trial court held that the removal of plaintiff was legal and
dismissed the complaint without pronouncement as to costs. Plaintiff appealed to the Court
of Appeals but finding that the question at issue is one of law, the latter certified the case to
us for decision. Section 33 of the Corporation Law provides: "Immediately after the election,
the directors of a corporation must organize by the election of a president, who must be
one of their number, a secretary or clerk who shall be a resident of the Philippines * * * and
such other officers as may be provided for in the by-laws." The by-laws of the instant
corporation in turn provide that in the board of directors there shall be a president, a vicepresident, a secretary and a treasurer. These are the only ones mentioned therein as
officers of the corporation. The manager is not included although the latter is mentioned as
the person in whom the administration of the corporation is vested, and with the exception
of the president, the by-laws provide that the officers of the corporation may be removed or
suspended by the affirmative vote of 2/3 of the paid-up shares of the corporation (Exhibit
A).
From the above the following conclusion is clear: that we can only regard as officers of a
corporation those who are given that character either by the Corporation Law or by its byIaws. The rest can be considered merely as employees or subordinate officials. And
considering that plaintiff has been appointed manager by the board of directors and as such
does not have the character of an officer, the conclusion is inescapable that he can be
suspended or removed by said board of directors under such terms as it may see fit and not

as provided for in the by-laws. Evidently, the power to appoint carries with it the power to
remove, and it would be incongruous to hold that having been appointed by the board of
directors he could only be removed by the stockholders.
The above interpretation finds also support in the American authorities. Fletcher, in his
treatise, states the rule in the following wise: "It is sometimes important to determine
whether a person representing a corporation is to be classed as an officer of the company or
merely as an agent or employee, especially in construing statutes relating only to 'officers'
of corporations. Generally the officers of a corporation are enumerated in its charter or bylaws, and include a president, vice-president, secretary, treasurer and sometimes others.
The statutes in most of the states expressly provide for the election of a president, secretary
and treasurer, and then provide that there shall be such other officers, agents and factors as
the corporation shall authorize for that purpose. If the charter expressly enumerates who
shall be officers of the company, a person whose position is not enumerated is not an officer
as to members of the corporation, since the charter is conclusive upon them" (Fletcher,
Cyclopedia of the Law of Private Corporations, Vol. II, p, 19). It has been likewise held "that
the offices pertaining to a private corporation are defined in its charter and by-Iaws, and
that no other positions in the service of the corporation are offices" (Ann. 53 A.L.R., 599).
Indeed, there are authorities galore that hold that a general manager is not an officer of a
corporation, even if his powers and influence may be as great as those of any officer in said
organization.
"Officers Distinguished from Mere Employees.As already stated, both officers and
employees are agents of the corporation and the difference between them is largely one of
degree; the officers are the most important employees exercising greater authority or
power in the management of the business. Ordinarily, too, the principal offices are
designated by statute, charter or by-law provisions, and specific duties are imposed upon
certain officers. Thus the state statute or a by-law may provide that stock certificates shall
be signed by the president and countersigned by the secretary or treasurer. The general
manager of a corporation is not ordinarily classed as an officer, but his powers and influence
may be quite as great as those of any person in the organization" (Grange, Corporation Law
for Officers and Directors, p. 432; Italics supplied.)
"One distinction between officers and agents of a corporation lies in the manner of their
creation. An officer is created by the charter of the corporation, and the officer is elected by
the directors or the stockholders. An agency is usually created by the officers, or one or more
of them, and the agent is appointed by the same authority. It is clear that the two terms
officers and agents are by no means interchangeable. One, deriving its existence from the
other, and being dependent upon that other for its continuation, is necessarily restricted in

its powers and duties, and such powers and duties are not necessarily the same as those
pertaining to the authority creating it. The officers, as such, are the corporation. An agent is
an employee. (A mere employment, however liberally compensated, does not rise to the
dignity of an office.' 21 Am. & Eng. Enc. Law (2d Ed.) 836. In Wheeler & Wilson Mfg. Co. vs.
Lawson, 57 Wis. 400, 15 N. W. 398, it was held that under a statute requiring an affidavit to
be made by an officer of a corporation, the general agent or managing agent, within the
state, of a foreign corporation is not an officer. ,In Farmers' Loan & Trust Co. vs. Warring 20
Wis 305 service was made upon the 'principal agent' of a corporation holding in trust a
railroad, when the statute required service upon a principal officer.' In answering the
question whether or not the agent was a principal officer the court said: 'It is evident he was
not, and must be regarded only as an agent, not as an officer of any kind, much less a
principal officer.' A ruling that a 'general manager of a corporation was not authorized to
verify pleadings under a statute requiring verification by 'an officer' was made in Meton vs
Isham Wagon Co. (Sup.) 4 N. Y. Supp. 215. In Raleigh, held Co. vs. an Co., 122 Ga' 704, 50 S.E. 1008
(4), it was held that the term 'general manager.' as applied to one representing a
corporation, and especially a railroad corporation, imported an agent of a very extensive
authority; but it was not ruled that even the term 'general manager' would import that the
person holding that position was necessarily an officer of the company, One distinction
between an officer and an agent suggested in Commonwealth vs. Christian, 9 Phila. (Pa.)
558, is that an officer of a corporation, if illegally excluded from his office, may by
mandamus compel the corporation to reinstate him; while an agent may be dismissed
without cause, and his only remedy would be compensation in damages. It would not be
contended that the 'general agent of the defendant at Columbus,' in the event of his
discharge, could be reinstated by mandamus. We do not think the general agent at
Columbus was an officer of the defendant company. Therefore his alleged waiver of a
condition in the policy was not binding upon the company." (Vardeman vs. Penn. Mut. Life
Ins. Co., 125 Ga. 117, 54 S.E. p. 66; Italics supplied.)
"The plaintiff predicates this action on said contract, and claims that the same being signed
by the defendant through its 'general manager' if admitted in evidence, would show
sufficient authority prima facie to do any act which the directors could authorize or ratify.
The instrument in question being signed by James W. Codle, 'General Manager', and no
evidence on the trial being produced showing the duties of said manager or what kind of an
office he was general manager of, the words 'general manager' without proof as to the
nature of services performed by the person called 'general manager', have no meaning in
law, excepting that the person bearing the title is an employee who has been designated
with a title. It does not make him an officer of the company employing him." (Studebaker
Bros. Co. vs. R. M. Rose Co., 119 N.Y.S. pp. 970, 97; Italics supplied.)

We therefore hold that plaintiff has been properly removed when the board of directors of
the instant corporation approved its Resolution No. 65 on June 3, 1948.
We will now clarify some of the points raised by the distinguished dissenter in his dissenting
opinion.
The fact that the "manager" of the corporation in the several statutes enacted by Congress
is held criminally liable for violation of any of the penal provisions therein prescribed does
not make him an "officer" of the corporation. This liability flows from the nature of his
duties which are delegated to him by the board of directors. He is paid for them. Hence, he
has to answer for them should he use it in violation of law. In the case of Robinson vs.
Moark-Nemo Consol Mining Co., et al., 163 S. W. 889, in connection with the liability of the
manager, the court said:
"Common justice and common sense demand that, where those in charge and control of the
management of a corporation direct it along paths of wrongdoing, they should be held
accountable by law * * *. This doctrine will prevent many wrongs, and have a salutary
influence in bringing about the lawful and orderly management of corporations."
It is claimed that the cases of Meton vs. Isham Wagon, 4 N.Y.S., 215 and State vs. Bergs, 217
N. W., 736, supporting the theory that a manager is not necessarily an officer, are in illo
tempore.1 It is submitted that we do not adopt a rule just because it is new nor reject
another just because it is old. We adopt a rule because it is a good and sound rule. The fact
however is that they are not the only authorities supporting that theory. Additional cases
are cited by Fletcher in support thereof, such as the cases of Vardeman vs. Penn. Mut. Life
Ins. Co., supra; Studebaker Bros. Co. vs. R. M. Rose Co., supra.
The dissenting opinion quotes from Thompson and Fletcher to support the theory that the
general manager of a corporation may be considered as its principal officer even though not
so mentioned in its charter or bylaws. We have examined the cases cited in support of that
theory but we have found that they are not in point. Thus, we have found (1) that the
parties involved are mostly outsiders who press their transactions against the corporation;
(2) that the point raised is whether the acts of the manager bind the corporation; (3) that
the tendency of the courts is to hold the corporation liable for the acts of the manager so
long as they are within the powers granted, hence, the courts emphasized the importance
of the position of manager; and (4) the position of manager was discussed from the point of
view of an outsider and not from the internal organization of the corporation, or in
accordance with its charter or by-laws. In the present case, however, the parties are the
manager and the corporation. And the solution of the problem hinges on the internal
government of the corporation where the charter and the by-laws are necessarily involved

in the determination of the rights of the parties. Indeed, it has been held: "But it is urged
that a corporation may have officers not recognized by the charter and by-laws. It is possible
this may be so as to matters arising between strangers and the corporation." [Com. vs.
Christian, 9 Phila. (Pa.) 556; italics supplied].
The cases on all fours with the present are those of State ex rel Blackwood vs. Brast, et al.,
127 S. E. 507 and Denton Milling Co. vs. Blewitt, 254 S. W. 236, 288, where the parties
involved are the manager and the corporation. The issue raised is the relation of the
manager towards the corporation. The position of the manager is discussed from the point
of view of its internal government. And the holding of the court is that the manager is the
creation of the board of directors and the agent through whom the corporate duties of the
board are performed. Hence, the manager holds his position at the pleasure of the board.
This stipulation is well expressed in the following words of Thompson:
"The word 'manager' implies agency, control, and presumptively sufficient authority to bind
a corporation in a case in which the corporation was an actual party. It has been said that
such agent must have the same general supervision of the corporation as is associated with
the office of cashier or secretary. By whatever name he may be called, such managing agent
is a mere employee of the board of directors and holds his position subject to the particular
contract of employment; and unless the contract of employment fixes his term of office, it
may be terminated at the pleasure of the board. * * * The manager, like any other
appointed agent, is subject to removal when his term expires and on the request of the
proper officer he should turn over his business to the corporation and, where he refuses to
comply, he may be restrained from the further performance of work for the corporation."
(Thompson on Corporations, Vol. III, 3rd., pp. 209-210; Italics supplied.)
It is not correct to hold that the theory that a manager is not classed as an officer of a
corporation is only the minority view. If we consider the states that hold that managers are
merely agents or employees as among those that hold the theory that managers are not
necessarily officers, then our theory is supported by the majority view. Indeed, this view is
upheld by nine states,2 whereas only six states adopt the view that managers are considered
principal officers of the corporation.3
The dissenting opinion quotes the provision of the bylaws relative to the administration of
the affairs of the instant corporation. It is there provided that the affairs of the corporation
shall be successively administered by (1) the stockholders; (2) the board of directors; and (3)
the manager. From this it concludes that the manager should be considered an officer.
The above enumeration only emphasizes the different organs through which the affairs of
the corporation should be administered and the order in which the powers should be

exercised. The stockholders are the entity composing the whole corporation. The board of
directors is the entity elected by the stockholders to manage the affairs of the corporation.
And the manager is the individual appointed by the board of directors to carry out the
powers delegated to him. In other words, the manager is the creation of the board of
directors. He is an alter ego of the board. As our law provides that only those enumerated in
the charter or in the by-laws are considered officers, the manager who has not been so
enumerated therein, but only incidentally mentioned in the order of management, cannot
be considered an officer of the corporation within their purview,
The mere fact that the directors are not mentioned in the by-laws as officers does not
deprive them of their category 'as such for their character as officers is secured in the
charter. The same is not true with the manager. Customs and corporate usages cannot
prevail over the express provisions of the charter and the by-laws.
There is no comparison between an appointee of the President, especially one in the
judiciary, and the appointee of the board of directors of a corporation. In the first case,
removal is especially provided for by law and in the second, the appointee holds office at
the pleasure of the board. And with regard to the powers of the board of directors to
remove a manager of the corporation, Thompson has the following to say:
"* * * Below the grade of director and such other officers as are elected by the corporation
at large, the general rule is that the officers of private corporations hold their offices during
the will of the directors, and are hence removable by the directors without assigning any
cause for the removal, except so far as their power may be restrained by contract with the
particular officer,just as any other employer may discharge his employee. Speaking
generally, it may be said that the power to appoint carries with it the power to remove. * *
* the directors who appoint a ministerial officer may undoubtedly remove him at pleasure,
and he has no remedy other than an action for damages against the corporation for a
breach of contract. * * * The ordinary ministerial and other lesser officers, however, hold
their offices during the pleasure of the directors and may be removed at will, without
assigned cause. Of this class of officers and agents are the secretary and treasurer of the
corporation, the general manager, the assistant manager, the field manager, the attorney of
the company, an assistant horticulturist, and the bookkeepers." (Thompson on
Corporations, Vol. III, 521-523.)
Wherefore, the decision appealed from is affirmed, with costs against appellant.
Pars, C. J., Montemayor, Concepcin, Reyes, J. B. L., and Endencia, JJ., concur.

was deposited with the Bank of the Philippine Islands and the amount of it credited to the
defendant on its current account.
[No. 21644. October 2, 1924]
PUA CASIM & Co., plaintiff and appellee, vs. W. NEUMARK & Co., defendant and
appellant.
1. 1. CORPORATION; AUTHORITY OF MANAGER TO BORROW MONEY; GENERAL RULE
IN THE ABSENCE OF EXPRESS AUTHORITY CONFERRED BY THE BOARD OF DlRECTORS
OF A CORPORATION.The general rule is that an officer of a corporation has no
implied power to borrow money in its behalf; but where a general business manager
of a corporation is clothed with apparent authority to borrow and the amount
borrowed does not exceed the ordinary requirements of the business, it has often
been held that the authority is implied and that the corporation is bound.
1. 2. ID.; ID.; EXCEPTION TO THE GENERAL RULE.Where it appears that the
corporation was in need of funds to carry on its business and it does not appear that
the amount borrowed was disproportionate to the volume of the business, the
corporation will be held responsible for any loan obtained in its behalf by an officer
who, at the same time, was president, general manager, and principal stockholder
in said corporation and was clothed with apparent authority to do everything
necessary for the conduct of its business.
APPEAL from a judgment of the Court of First Instance of Manila. Del Rosario, J.
The facts are stated in the opinion of the court.
Hartigan & Welch for appellant.
Recto & Cardenas for appellee.
OSTRAND, J.:
This action is brought to recover the sum of P15,000 with interest and costs. It is alleged in
the complaint that on or about January 20, 1922, the defendant corporation represented by
its president and principal stockholder, W. Neumark, borrowed from the plaintiff the sum of
P15,000 which was delivered to the said defendant by means of a check drawn in favor of
the defendant against the plaintiff's account in the China Banking Corporation, which check

The def endant's answer is a general denial together with a special defense to the effect
that W. Neumark had never been authorized by the defendant corporation to borrow
money for its account from the plaintiff ,to the amount of P15,000 and that said defendant
has never received nor made use of the sum alleged to have been so borrowed.
The court below rendered a judgment in favor of the plaintiff for the sum of P15,000 with
legal interest from October 30, 1922, and with the costs. From this judgment the defendant
appeals to this court.
The appellant presents two assignments of errors, viz.: (1) That the court erred in holding
the defendant responsible for the payment of the money borrowed by Neumark, and (2)
that the court erred in giving the plaintiff judgment for P15,000 with interest and costs.
The first assignment of error cannot be sustained. The evidence shows that Neumark was
the principal stockholder, the president and the general business manager of the defendant
corporation. On behalf of the corporation he solicited a loan from the plaintiff and, as
alleged in the complaint, was given the plaintiff's check in favor of the corporation for the
sum of P15,000, which check was endorsed by him in his capacity as president of the
corporation and deposited to the corporation's account. It may be true that a large part of
the amount so deposited was diverted by Neumark to his own use, but that does not alter
the fact that the money was borrowed for the corporation and was placed in its possession.
It is conceded that Neumark was not expressly authorized by the board of directors to
borrow the money in question and the general rule is that a business manager or other
officer of a corporation has no implied power to borrow money on its behalf. But much
depends upon the circumstances of each particular case and the rule stated is subject to
important exceptions. Thus, where a general business manager of a corporation is clothed
with apparent authority to borrow and the amount borrowed does not exceed the ordinary
requirements of the business, it has often been held that the authority is implied and that
the corporation is bound. (G. V. B. Mining Co. vs. First National Bank of Hailey, 95 Fed., 23;
Matson vs. Alley, 141 111., 284; Topeka Primary Association University of Builders vs.
Martin, 39 Kan., 750; Africa vs. Duluth News Tribune Co., 82 Minn., 283; Rosemond vs.
Northwestern Autographic Register Co., 62 Minn., 374; Helena National Bank vs. Rocky
Mountain Telegraph Co., 20 Mont., 879; Fensterer vs. Pressure Lighting Co., 149 N. Y. S., 49;
Clark vs. Freeport Clays etc., Co., 52 Pa. Super., 1.)

In the present case there are ample indications in the record that the corporation was in
need of funds to carry on its business and it does not appear that the amount borrowed was
disproportionate to the volume of the business. As president, general manager and principal
stock holder Neumark appeared, in a sense, to be almost the whole corporation and was
clothed with apparent authority to do everything necessary for the .conduct of its business.
In these circumstances he must be held to have been impliedly authorized to borrow the
money here in question.
The second assignment of error is well taken; the plaintiff admits that he has received
P5,000 from the corporation on account of the loan.
The judgment appealed from is therefore modified by reducing the amount of the recovery
to the sum of P10,000, with interest at the legal rate from October 30, 1922, and with the
costs. So ordered.
Johnson, Street, Malcolm, Avancea, Villamor, and Romualdez, JJ., concur.
Judgment modified
_____________

Yao Ka Sin Trading vs. Court of Appeals

G.R, No. 53820. June 15, 1992.*
YAO KA SIN TRADING, owned and operated by YAO KA SIN, petitioner, vs. HONORABLE
COURT OF APPEALS and PRIME WHITE CEMENT CORPORATION, represented by its
President-Chairman, CONSTANCIO B. MAGLANA, respondents.
Actions; A sole proprietorship does not have legal capacity to sue. Its owner shall be deemed
the plaintiff.The complaint then should have been amended to implead Yao Ka Sin as
plaintiff in substitution of Yao Ka Sin Trading. However, it is now too late in the history of
this case to dismiss this petition and, in effect, nullify all proceedings had before the trial
court and the respondent Court on the sole ground of petitioner's lack of capacity to sue,
Considering that private respondent did not pursue this issue before the respondent Court
and this Court; that, as We held in Juasing, the defect is merely formal and not substantial,
and an amendment to cure such defect is expressly authorized by Section 4, Rule 10 of the
Rules of Court which provides that "[a] defect in the designation of the parties may be
summarily corrected at any stage of the action provided no prejudice is caused thereby to
the adverse party;" and that "[a] sole proprietorship does not, of course, possess any
juridical personality separate and apart from the personality of the owner of the enterprise
and the personality of the persons acting in the name of such proprietorship," We hold and
declare that Yao Ka Sin should be deemed as the plaintiff in Civil Case No. 5064 and the
petitioner in the instant case.
Corporations; Contracts; A contract signed by the President and Board Chairman without
authority from the Board of Directors is void; Exceptions.While there can be no question
that Mr, Maglana was an officerthe President and Chairmanof private respondent
corporation at the time he signed Exhibit "A", the above provisions of said private
respondent's By-Laws do not in any way confer upon the President the authority to enter
into contracts for the corporation independently of the Board of Directors. That power is
exclusively lodged in the latter. Nevertheless, to expedite or facilitate the execution of the
contract, only the Presidentand not all the members of the Board, or so much thereof as
are required for the actshall sign it for the corporation. This is the import of the words
through the president in Exhibit "8-A" and the clear intent of the power of the chairman "to
execute and sign for and in behalf of the corporation all contracts and agreements which the
corporation may enter into" in Exhibit "1-1". Both powers presuppose a prior act of the
corporation exercised through the Board of Directors. No greater power can be implied

from such express, but limited, delegated authority. Neither can it be logically claimed that
any power greater than that expressly conferred is inherent in Mr. Maglana's position as
president and chairman of the corporation.
Same; Same; Same.Petitioner's last refuge then is his alternative proposition, namely, that
private respondent had clothed Mr. Maglana with the apparent power to act for it and had
caused persons dealing with it to believe that he was conferred with such power. The rule is
of course settled that "[a]lthough an officer or agent acts without, or in excess of, his actual
authority if he acts within the scope of an apparent authority with which the corporation
has clothed him by holding him out or permitting him to appear as having such authority,
the corporation is bound thereby in favor of a person who deals with him in good faith in
reliance on such apparent authority, as where an officer is allowed to exercise a particular
authority with respect to the business, or a particular branch of it, continuously and publicly,
for a considerable time." Also, "if a private corporation intentionally or negligently clothes
its officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparant authority is real, as to innocent third persons dealing
in good faith with such officers or agents." This "apparent authority may result from (1) the
general manner by which the corporation holds out an officer or agent as having power to
act or, in other words, the apparent authority with which it clothes him to act in general, or
(2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, whether within or without the scope of his ordinary powers."
Same; Same; Petitioner failed to prove President of herein corporation clothe with apparent
authority to constract with it.lt was incumbent upon the petitioner to prove that indeed
the private respondent had clothed Mr. Maglana with the apparent power to execute
Exhibit "A" or any similar contract. This could have been easily done by evidence of similar
acts executed either in its favor or in favor of other parties. Petitioner miserably failed to do
that. Upon the other hand, private respondent's evidence overwhelmingly shows that no
contract can be signed by the president without first being approved by the Board of
Directors; such approval may only be given after the contract passes through, at least, the
comptroller, who is the NIDC representative, and the legal counsel.
Same; Same; Acceptance of goods and receipt therefor without protest, resulted in a new
transaction.The second ground is based on a wrong premise. It assumes, contrary to Our
conclusion above, that Exhibit "A" is a valid contract binding upon the private respondent. It
was effectively disapproved and rejected by the Board of Directors which, at the same time,
considered the amount of P243,000.00 received by Maglana as payment for 10,000 bags of
white cement, treated as an entirely different contract, and forthwith notified petitioner of
its decision that "If within ten (10) days from date hereof we will not hear from you but you
will withdraw cement at P24.30 per bag from our plant, then we will deposit your check of

P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per
instruction of the Board." Petitioner received a copy of this notification and thereafter
accepted without any protest the Delivery Receipt covering the 10,000 bags and the Official
Receipt for the P243,000.00. The respondent Court thus correctly ruled that petitioner had
in fact agreed to a new transaction involving only 10,000 bags of white cement.

The root of this controversy is the undated letter-offer of Constancio B. Maglana, President
and Chairman of the Board of private respondent Prime White Cement Corporation,
hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter referred to as YKS, which
describes itself as "a business concern of single proprietorship,"3 and is represented by its
manager, Mr. Henry Yao; the letter reads as follows:

Same; Same; Option given without consideration is void.The third ground must likewise
fail. Exhibit "A" being unenforceable, the option to renew it would have no leg to stand on.
The river cannot rise higher than its source. In any event, the option granted in this case is
without any consideration. Article 1324 of the Civil Code expressly provides that: "When the
offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at
any time before acceptance by communicating such withdrawal, except when the option is
founded upon a consideration, as something paid or promised."

'PRIME
602
Herran Street, Manila
Yao
Tacloban City

WHITE
Cardinal

CEMENT
Life

Ka

CORPORATION
Building

Sin

Gentlemen:
Actions; Sec. 8, Rule 8 of the Rules of Court on how to contest genuineness of a document
does not apply to a person not privy thereto.lt is clear that the petitioner is not a party to
any of the documents attached to the private respondent's Answer. Thus, the above quoted
rule is not applicable. While the respondent Court erred in holding otherwise, the
challenged decision must, nevertheless, stand in view of the above disquisitions on the first
to the third grounds of the petition.
PETITION for review from the decision of the Court of Appeals. San Diego, J.
The facts are stated in the opinion of the Court.
Leonardo A. Amores for petitioner.
Lauro G. Noel co-counsel for petitioner.
Constancio B. Maglana and Ireneo R. Clapano, Jr. for private respondent.
DAVIDE, JR., J.:
Assailed in this petition for review is the decision of the respondent Court of Appeals in C.A.G.R. No. 61072-R,1 promul-gated on 21 December 1979, reversing the decision2 of the then
Court of First Instance (now Regional Trial Court) of Leyte dated 20 November 1975 in Civil
Case No. 5064 entitled "Yao Ka Sin Trading versus Prime White Cement Corporation."

We have the pleasure to submit hereby our firm offer to you under the following
quotations, terms, and conditions, to wit:
1. 1) CommodityPrime White Cement
2. 2) PriceAt your option: a) P24.30 per 94 Ibs. bag net, FOB Cebu City; and b) P23.30
per 94 Ibs. bag net, FOB Asturias Cebu.
3. 3) QualityAs fully specified in certificate No. 224-73 by Bureau of Public Works,
Republic of the Philippines.
4. 4) QuantityForty-five Thousand (45,000) bags at 94 Ibs. net per bag withdrawable
in guaranteed monthly quantity of Fifteen Thousand (15,000) bags minimum
effective from June, 1973 to August 1973.
5. 5) Delivery ScheduleShipment be made within four (4) days upon receipt of your
shipping instruction.
6. 6) Bag/Containera) All be made of Standard Kraft (water resistant paper, 4 ply,
with bursting strength of 220 pounds, and b) Breakage allowanceadditional four
percent (4%) over the quantity of each shipment.
7. 7) Terms of PaymentDown payment of PESOS: TWO HUNDRED FORTY THREE
THOUSAND (P243,000.00) payable on the signing of this contract and the balance to
be paid upon presentation of corresponding shipping documents.
It is understood that in the event of a delay in our shipment, you hold the option to discount
any price differential resulting from a lower market price vis-a-vis the contract price. In
addition, grant (sic) you the option to extend this contract until the complete delivery of

Forty Five Thousand (45,000) bags of 94 Ibs. each is made by us. You are also hereby granted
the option to renew this contract under the same price, terms and conditions.

The records disclose the following material operative facts:

In its meeting in Cebu City on 30 June 1973, or twenty-three

Please countersign on the space provided for below as your acknowledgement and
confirmation of the above transaction. Thank You.

(23) days after the signing of Exhibit "A", the Board of Directors of PWCC disapproved the
same; the rejection is evidenced by the following Minutes (Exhibit "10"):

Very truly yours,

PRIME
WHlTE
BY:
(SGD)
President & Chairman

CEMENT
CONSTANCIO

B.

CORPORATION
MAGLANA

"the 10,000 bags of white cement sold to Yao Ka Sin Trading is sold not because of the
alleged letter -contract adhered to by them, but must be understood as a new separate
contract, and has in no way to do with the letter-offer which they (sic) distinct
consideration, as the letter-contract which they now hang on (sic) as consummated is by this
resolution totally disapproved and is unacceptable to the corporation."

CONFORME:
On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of the disapproval of
Exhibit "A". Pursuant, however, to its decision with respect to the 10,000 bags of cement, it
issued the corresponding Delivery Order (Exhibit "4") and Official Receipt No. 0394 (Exhibit
"5") for the payment of the same in the amount of P243,000.00. This is the same amount
received and acknowledged by Maglana in Exhibit "A".

YAO KA SIN TRADING

BY: (SGD) HENRY YAO
WITNESSES:

YKS accepted without protest both the Delivery and Official Receipts.
(SGD) T. CATINDIG

(SGD) ERNESTO LIM

RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in pursuance of the above offer, the
sum of Pesos: TWO HUNDRED FORTY THREE THOUSAND ONLY (P243,000.00) in the form of
Producers' Bank of the Philippines Check No. C-153576 dated June 7, 1973.
PRIME
BY:
(SGD)
President & Chairman"

WHITE

CONSTANCIO

CEMENT

CORPORATION

B.

MAGLANA

This letter-offer, hereinafter referred to as Exhibit "A", was prepared, typed and signed on 7
June 1973 in the office of Mr. Teodoro Catindig, Senior Vice-President of the Consolidated
Bank and Trust Corporation (Solid Bank).5
The principal issue raised in this case is whether or not the aforesaid letter-offer, as
accepted by YKS, is a contract that binds the PWCC. The trial court ruled in favor of the
petitioner, but the respondent Court held otherwise.

While YKS denied having received a copy of Exhibit "1", it was established that the original
thereof was shown to Mr. Henry Yao; since no one would sign a receipt for it, the original
was left at the latter's office and this fact was duly noted in Exhibit "1" (Exhibit "1-A").
On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to the latter's 4 August
1973 letter stating that it is "withdrawing or taking delivery of not less than 10,000 bags of
white cement on August 6-7,1973 at Asturias, Cebu, thru M/V Taurus." In said reply, PWCC
reminded YKS of its (PWCC's) 5 July 1973 letter (Exhibit "1") and told the latter that PWCC
"only committed to you and which you correspondingly paid 10,000 bags of white cement of
which 4,150 bags were already delivered to you as of August 1, 1973."6 Unfortunately, no
copy of the said 4 August 1973 letter of YKS was presented in evidence.
On 21 August 1973, PWCC wrote another letter (Exhibit "3")7 to YKS in reply to the latter's
letter of 15 August 1973. Enclosed in the reply was a copy of Exhibit "2". While the records
reveal that YKS received this reply also on 21 August 1973 (Exhibit "3-A"),8 it still denied
having received it. Likewise, no copy of the so-called 15 August 1973 letter was presented in
evidence.

On 10 September 1973, YKS, through Henry Yao, wrote a letter9 to PWCC as a follow-up to
the letter of 15 August 1973; YKS insisted on the delivery of 45,000 bags of white cement.10

YKS is solely to blame for the failure to take complete delivery of 10,000 bags for it did not
send its boat or truck to PWCC's plant; and (i) YKS has, therefore, no cause of action.

On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC calling the latter's
attention to the statement of delivery dated 24 August 1973, particularly the price change
from P23.30 to P24.30 per 94 Ibs. bag net FOB Asturias, Cebu.11

In its Counterclaim, PWCC asks for moral damages in the amount of not less than
P10,000.00, exemplary damages in the sum of P500,000.00 and attorney's fees in the sum of
P10,000.00,

On 2 November 1973, YKS sent a telegram (Exhibit "C")12 to PWCC insisting on the full
compliance with the terms of Exhibit "A" and informing the latter that it is exercising the
option therein stipulated.

On 24 July 1974, YKS filed its Answer to the Counterclaim.21

On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a follow-up to the 2
November 1973 telegram, but this was returned to sender as unclaimed.13
As of 7 December 1973, PWCC had delivered only 9,775 bags of white cement.
On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for the last time,
compliance by the latter with its obligation under Exhibit "A".14
On 27 February 1974, PWCC sent an answer (Exhibit "7") to the aforementioned letter of 9
February 1974; PWCC reiterated the unenforceability of Exhibit "A".15
On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a complaint for
Specific Performance with Damages against PWCC. The complaint16 was based on Exhibit
"A" and was docketed as Civil Case No. 5064.
In its Answer with Counterclaim17 filed on 1 July 1974, PWCC denied under oath the material
averments in the complaint and alleged that: (a) YKS "has no legal personality to sue having
no legal personality even by fiction to represent itself;" (b) Mr. Maglana, its President and
Chairman, was lured into signing Exhibit "A"; (c) such signing was subject to the condition
that Exhibit "A" be approved by the Board of Directors of PWCC, as corporate commitments
are made through it; (d) the latter disapproved it, hence Exhibit "A" was never
consummated and is not enforceable against PWCC; (e) it agreed to sell 10,000 bags of
white cement, not under Exhibit "A", but under a separate contract prepared by the Board;
(f) the rejection by the Board of Exhibit "A" was made known to YKS through various letters
sent to it, copies of which were attached to the Answer as Annexes 1, 2 and 3; 18 (g) YKS
knew, per Delivery Order19 and Official Receipt20 issued by PWCC, that only 10,000 bags
were sold to it, without any terms or conditions, at P24.30 per bag FOB Asturias, Cebu; (h)

Issues having been joined, the trial court conducted a pretrial.22 On that occasion, the
parties admitted that according to the By-Laws of PWCC, the Chairman of the Board, who is
also the President of the corporation, "has the power to execute and sign, for and in behalf
of the corporation, all contracts or agreements which the corporation enters into," subject
to the qualification that "all the president's actuations, prior to and after he had signed and
executed said contracts, shall be given to the board of directors of defendant Corporation."
Furthermore, it was likewise stated for the record "that the corporation is a semi-subsidiary
of the government because of the NIDC participation in the same, and that all contracts of
the corporation should meet the approval of the NIDC and/or the PNB Board because of an
exposure and financial involvement of around P10 million therein."23
During the trial, PWCC presented evidence to prove that Exhibit "A" is not binding upon it
because Mr. Maglana was not authorized to make the offer and sign the contract in behalf
of the corporation. Per its By-Laws (Exhibit "8"), only the Board of Directors has the power
"x x x (7) To enter into (sic) agreement or contract of any kind with any person in the name
and for and in behalf of the corporation through its President, subject only to the declared
objects and purpose of the corporation and the existing provisions of law."24 Among the
powers of the President is "to operate and conduct the business of the corporation
according to his own judgment and discretion, whenever the same is not expressly limited
by such orders, directives or resolutions."25 Per standard practice of the corporation,
contracts should first pass through the marketing and intelligence unit before they are
finalized. Because of its interest in the PWCC, the NIDC, through its comptroller, goes over
contracts involving funds of and white cement produced by the PWCC. Finally, among the
duties of its legal counsel is to review proposed contracts before they are submitted to the
Board. While the president may be tasked with the preparation of a contract, it must first
pass through the legal counsel and the comptroller of the corporation.26
On 20 November 1975, after trial on the merits, the court handed down its decision in favor
of herein petitioner, the dispositive portion of which reads:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. (1) Ordering defendant to complete the delivery of 45,000 bags of prime white
cement at 94 Ibs. net per bag at the price agreed, with a breakage allowance of
empty bags at 4% over the quantity agreed;
2. (2) Ordering defendant to pay P50,000.00 as moral damages; P5,000.00 as
exemplary damages; P3,000.00 as attorney's fees; and the costs of these
proceedings.

The trial court, however, ruled that the option to sell is not valid because it is not supported
by any consideration distinct from the price; it was exercised before compliance with the
original contract by PWCC; and the repudiation of the original contract by PWCC was
deemed a withdrawal of the option before acceptance by the petitioner.
Both parties appealed from the said decision to the respondent Court of Appeals before
which petitioner presented the following Assignment of Errors:
"I

SO ORDERED."

27

In disregarding PWCC's theory, the trial court interpreted the provision of the By-Laws
granting its Board of Directors the power to enter into an agreement or contract of any kind
with any person through the Presidentto mean that the latter may enter into such
contract or agreement at any time and that the same is not subject to the ratification of the
board of directors but "subject only to the declared objects and purpose of the corporation
and existing laws." It then concluded:
"It is obvious therefore, that it is not the whole membership of the board of directors who
actually enters into any contract with any person in the name and for and in behalf of the
corporation, but only its president. It is likewise crystal clear that this automatic
representation of the board by the president is limited only by the 'declared objects and
purpose of the corporation and existing provisions of law.'"28

THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO RENEW THE CONTRACT OF
SALE IS NOT ENFORCEABLE BECAUSE THE OPTION WAS MADE EVEN BEFORE THE
COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY DEFENDANT AND THAT DEFENDANT'S
PROMISE TO SELL IS NOT SUPPORTED BY ANY CONSIDERATION DISTINCT FROM THE PRICE.
II
THE TRIAL COURT ERRED IN NOT AWARDING TO THE PLAINTIFF ACTUAL DAMAGES,
SUFFICIENT EXEMPLARY DAMAGES AND ATTORNEY'S FEES AS ALLEGED IN THE COMPLAINT
AND PROVEN DURING THE TRIAL."31
while the private respondent cited the following errors:
"I

It likewise interpreted the provision on the power of the president to "operate and conduct
the business of the corporation according to the orders, directives or resolutions of the
board of directors and according to his own judgment and discretion whenever the same is
not expressly limited by such orders, directives and resolutions," to mean that the president
can operate and conduct the business of the corporation according to his own judgment and
discretion as long as it is not expressly limited by the orders, directives or resolutions of the
board of directors.29 The trial court found no evidence that the board had set a prior
limitation upon the exercise of such judgment and discretion; it further ruled that the ByLaws does not require that Exhibit "A" be approved by the Board of Directors. Finally, in the
light of the Chairman's power to "execute and sign for and in behalf of the corporation all
contracts or agreements which the corporation may enter into" (Exhibit "1-1"), it concluded
that Mr. Maglana merely followed the By-Laws "presumably both as president and chairman
of the board thereof."30 Hence, Exhibit "A" was validly entered into by Maglana and thus
binds the corporation.

THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A VALID CONTRACT OR PLAINTIFF
CAN CLAIM THAT THE PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY
ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED PROPOSAL, NOT HAVING BEEN
PREVIOUSLY AUTHORIZED TO BE ENTERED INTO OR LATER ON RATIFIED BY THE
DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A" WAS TOTALLY REJECTED AND
DISAPPROVED IN TOTO BY THE DEFENDANTS BOARD OF DIRECTORS IN CLEAR, PLAIN
LANGUAGE AND DULY INFORMED AND TRANSMITTED TO PLAINTIFF.
II
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN LEGALLY UTILIZE THE COURTS AS
THE FORUM TO GIVE LIFE AND VALIDITY TO A TOTALLY UNENFORCEABLE OR NONEXISTING
CONTRACT.

III
THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO IMPUGN AND CONTRADICT HIS VERY
OWN ACTUATIONS AND REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF BENEFITS FROM
THE COUNTER-OFFER OF DEFENDANT FOR 10,000 BAGS OF CEMENT ONLY, UNDER THE
PRICE, TERMS AND CONDITIONS TOTALLY FOREIGN TO AND WHOLLY DIFFERENT FROM
THOSE WHICH APPEAR IN EXHIBIT "A".
IV

you will withdraw cement at P24.30 per bag from our plant, then we will deposit your check
of P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per
instruction of the Board.' (Annex "1" to defendant's Answer).
2. Letter of defendant to plaintiff dated August 4, 1973 that defendant 'only committed to
you and which you accordingly paid 10,000 bags of white cement of which 4,150 bags were
already delivered to you as of August 1, 1973' (Annex "2" of defendant's Answer).
3. Letter dated August 21, 1973 to plaintiff reiterating defendant's letter of August 4, 1973
(Annex "3" to defendant's Answer).

THE TRIAL COURT ERRED IN DISMISSING DEFENDANTS COUNTER-CLAIMS AS THE SAME ARE
DULY SUPPORTED BY CLEAR AND INDUBITABLE EVIDENCE."32

4. Letter to stores dated August 21, 1973,

In its decision33 promulgated on 21 December 1979, the respondent Court reversed the
decision of the trial court, thus:

5. Receipt from plaintiff (sic) P243,000.00 in payment of 10,000 bags of white cement at
24.30 per bag (Annex "5" to defendant's Answer).

"WHEREFORE, the judgment appealed from is REVERSED and set aside, Plaintiff s complaint
is dismissed with costs. Plaintiff is ordered to pay defendant corporation P25,000.00
exemplary damages, and P10,000.00 attorney's fees.

plaintiff is deemed to have admitted, not only the due execution and genuineness (sic) of
said documents, (Rule 8, Sec. 8, Rules of Court) but also the allegations therein (Rule 9, Sec.
1, Rules of Court). All of the foregoing documents tend to prove that the letter-offer, Exhibit
"A", was rejected by defendant corporation's Board of Directors and plaintiff was duly
notified thereof and that the P243,000.00 check was considered by both parties as payment
of the 10,000 bags of cement under a separate transaction. As proof of which plaintiff did
not complain nor protest until February 9, 1974, when he threatened legal action.

SO ORDERED."
Such conclusion is based on its findings, to wit:
"Before resolving the issue, it is helpful to bring out some preliminary facts. First, the
defendant corporation is supervised and principally financed by the National Investment
and Development Corporation (NIDC), a subsidiary investment of the Philippine National
Bank (PNB), with cash financial exposure of some P10,000,000.00. PNB is a government
financial institution whose Board is chairmaned (sic) by the Minister of National Defense.
This fact is very material to the issue of whether defendant corporation's president can bind
the corporation with his own act.
Second, for failure to deny under oath the following actionable documents in support of
defendant's counterclaim:
1. The resolution contained in defendant's letter to plaintiff dated July 5, 1973, on the
10,000 bags of white cement delivered to plaintiff was not by reason of the letter contract,
Exhibit "A", which was totally disapproved by defendant corporation's board of directors,
clearly stating that 'If within ten (10) days from date hereof, we will not hear from you but

Third. Maglana's signing the letter-offer prepared for him in the Solidbank was made clearly
upon the condition that it was subject to the approval of the board of directors of defendant
corporation. We find consistency herein because according to the Corporation Law, and the
By-Laws of defendant corporation, all corporate commitments and business are conducted
by, and contracts entered into through, the express authority of the Board of Directors (Sec.
28, Corp. Law, Exh. "I" or "8").
Fourth. What Henry Yao and Maglana agreed upon as embodied in Exhibit "A", insofar as
defendant corporation is concerned, was an unauthorized contract (Arts. 1317 and 1403 (1),
Civil Code). And because Maglana was not authorized by the Board of Directors of
defendant corporation nor was his actuation ratified by the Board, the agreement is
unenforceable (Art. 1403 (1), Civil Code; Raquiza et al. vs, Lilles et al,, 13 CA Rep. 343; Gana
vs. Archbishop of Manila, 43 O.G. 3224).

While it may be true that Maglana is President of defendant corporation nowhere in the
Articles of Incorporation nor in the ByLaws of said corporation was he empowered to enter
into any contract all by himself and bind the corporation without first securing the authority
and consent of the Board of Directors. Whatever authority Maglana may have must be
derived from the Board of Directors of defendant corporation. A corporate officer's power
as an agent must be sought from the law, the articles of incorporation and the By-Laws or
from a resolution of the Board (Vicente vs. Geraldez, 52 SCRA 227, Board of Liquidators vs.
Kalaw, 20 SCRA 987).
It clearly results from the foregoing that the judgment appealed from is untenable. Having
no cause of action against defendant corporation, plaintiff is not entitled to any relief. We
see no justification, therefore, for the court a quo's awards in its favor. x x x"34
Its motion for reconsideration having been denied by the respondent Court in its
resolution35 dated 15 April 1980, petitioner filed the instant petition based on the following
grounds:
1. "1. That the contract (Exh. "A") entered into by the President and Chairman of the
Board of Directors Constancio B. Maglana in behalf of the respondent corporation
binds the said corporation.
2. 2. That the contract (Exh. "A") was never novated nor superceded (sic) by a
subsequent contract.
3. 3. That the option to renew the contract as contained in Exhibit "A" is enforceable.
4. 4. That Sec. 8, Rule 8 of the Rules of Court only applies when the adverse party
appear (sic) to be a party to the instrument but not to one who is not a party to the
instrument and Sec. 1, Rule 9 of the said Rules with regards (sic) to denying under
oath refers only to allegations of usury."36
We gave due course37 to the petition after private respondent filed its Comment38 and
required the parties to submit simultaneously their Memoranda, which the parties
subsequently complied with.39
Before going any further, this Court must first resolve an issue which, although raised in the
Answer of private respondent, was neither pursued in its appeal before the respondent
Court nor in its Comment and Memorandum in this case. It also eluded the attention of the
trial court and the respondent Court. The issue, which is of paramount importance,
concerns the lack of capacity of plaintiff/petitioner to sue. In the caption of both the
complaint and the instant petition, the plaintiff and the petitioner, respectively, is:

YAO
owned
YAO KA SIN.40

KA
and

SIN
operated

TRADING,
by

and is described in the body thereof as "a business concern of single proprietorship owned
and operated by Yao Ka Sin."41 In the body of the petition, it is described as "a single
proprietorship business concern."42 It also appears that, as gathered from the decision of
the trial court, no Yao Ka Sin testified. Instead, one Henry Yao took the witness stand and
testified that he is the "manager of Yao Ka Sin Trading" and "it was in representation of the
plaintiff" that he signed Exhibit "A".43 Under Section 1, Rule 3 of the Rules of Court, only
natural or juridical persons or entities authorized by law may be parties in a civil action. In
Juasing Hardware vs. Mendoza,44 this Court held that a single proprietorship is neither a
natural person nor a juridical person under Article 44 of the Civil Code; it is not an entity
authorized by law to bring suit in court:
"The law merely recognizes the existence of a sole proprietorship as a form of business
organization conducted for profit by a single individual, and requires the proprietor or
owner thereof to secure licenses and permits, register the business name, and pay taxes to
the national government. It does not vest juridical or legal personality upon the sole
proprietorship nor empower it to file or defend an action in court."45
Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN.46
The complaint then should have been amended to implead Yao Ka Sin as plaintiff in
substitution of Yao Ka Sin Trading. However, it is now too late in the history of this case to
dismiss this petition and, in effect, nullify all proceedings had before the trial court and the
respondent Court on the sole ground of petitioner's lack of capacity to sue. Considering that
private respondent did not pursue this issue before the respondent Court and this Court;
that, as We held in Juasing, the defect is merely formal and not substantial, and an
amendment to cure such defect is expressly authorized by Section 4, Rule 10 of the Rules of
Court which provides that "[a] defect in the designation of the parties may be summarily
corrected at any stage of the action provided no prejudice is caused thereby to the adverse
party;" and that "[a] sole proprietorship does not, of course, possess any juridical
personality separate and apart from the personality of the owner of the enterprise and the
personality of the persons acting in the name of such proprietorship,"47 We hold and declare
that Yao Ka Sin should be deemed as the plaintiff in Civil Case No. 5064 and the petitioner in
the instant case. As this Court stated nearly eighty (80) years ago in Alonso vs. Villamor:48
"No one has been misled by the error in the name of the party plaintiff. If we should by
reason of this error send this case back for amendment and new trial, there would be on the

retrial the same complaint, the same answer, the same defense, the same interests, the
same witnesses, and the same evidence. The name of the plaintiff would constitute the only
difference between the old trial and the new. In our judgment there is not enough in a
name to justify such action."

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."52

And now to the merits of the petition.

While there can be no question that Mr. Maglana was an officerthe President and
Chairmanof private respondent corporation at the time he signed Exhibit "A", the above
provisions of said private respondent's By-Laws do not in any way confer upon the President
the authority to enter into contracts for the corporation independently of the Board of
Directors. That power is exclusively lodged in the latter. Nevertheless, to expedite or
facilitate the execution of the contract, only the Presidentand not all the members of the
Board, or so much thereof as are required for the actshall sign it for the corporation. This
is the import of the words through the president in Exhibit "8-A" and the clear intent of the
power of the chairman "to execute and sign for and in behalf of the corporation all contracts
and agreements which the corporation may enter into" in Exhibit "1-1". Both powers
presuppose a prior act of the corporation exercised through the Board of Directors. No
greater power can be implied from such express, but limited, delegated authority. Neither
can it be logically claimed that any power greater than that expressly conferred is inherent
in Mr. Maglana's position as president and chairman of the corporation.

The respondent Court correctly ruled that Exhibit "A" is not binding upon the private
respondent. Mr. Maglana, aglana, its President and Chairman, was not empowered to
execute it. Petitioner, on the other hand, maintains that it is a valid contract because Mr.
Maglana has the power to enter into contracts for the corporation as implied from the
following provisions of the By-Laws of private respondent:
1. a) The power of the Board of Directors to ". . . enter into (sic) agreement or contract
of any kind with any person in the name and for and in behalf of the corporation
through its President, subject only to the declared objects and purpose of the
corporation and the existing provisions of law" (Exhibit "8-A"); and
2. b) The power of the Chairman of the Board of Directors to "execute and sign, for
and in behalf of the corporation, all contracts or agreements which the corporation
may enter into" (Exhibit "1-1").
And even admitting, for the sake of argument, that Mr. Maglana was not so authorized
under the By-Laws, the private respondent, pursuant to the doctrine laid down by this Court
in Francisco vs. Government Service Insurance System49 and Board of Liquidators vs. Kalaw,50
is still bound by his act for clothing him with apparent authority.
We are not persuaded.
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."51 Moreover, "x x x a corporate
officer or agent may represent and bind the corporation in transactions with third persons
to the extent that 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

Although there is authority "that if the president is given general control and supervision
over the affairs of the corporation, it will be presumed that he has authority to make
contracts and do acts within the course of its ordinary business,"53 We find such inapplicable
in this case. We note that the private corporation has a general manager who, under its ByLaws has, inter alia, the following powers: "(a) to have the active and direct management of
the business and operation of the corporation, conducting the same according to the order,
directives or resolutions of the Board of Directors or of the president." It goes without
saying then that Mr. Maglana did not have a direct and active hand in the management of
the business and operations of the corporation. Besides, no evidence was adduced to show
that Mr. Maglana had, in the past, entered into contracts similar to that of Exhibit "A" either
with the petitioner or with other parties.
Petitioner's last refuge then is his alternative proposition, namely, that private respondent
had clothed Mr. Maglana with the apparent power to act for it and had caused persons
dealing with it to believe that he was conferred with such power. The rule is of course
settled that "[a]lthough an officer or agent acts without, or in excess of, his actual authority
if he acts within the scope of an apparent authority with which the corporation has clothed
him by holding him out or permitting him to appear as having such authority, the
corporation is bound thereby in favor of a person who deals with him in good faith in
reliance on such apparent authority, as where an officer is allowed to exercise a particular

authority with respect to the business, or a particular branch of it, continuously and publicly,
for a considerable time."54 Also, "if a private corporation intentionally or negligently clothes
its officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent third persons dealing
in good faith with such officers or agents."55 This "apparent authority may result from (1)
the general manner by which the corporation holds out an officer or agent as having power
to act or, in other words, the apparent authority with which it clothes him to act in general,
or (2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or without the scope of his ordinary powers."56
It was incumbent upon the petitioner to prove that indeed the private respondent had
clothed Mr. Maglana with the apparent power to execute Exhibit "A" or any similar contract.
This could have been easily done by evidence of similar acts executed either in its favor or in
favor of other parties. Petitioner miserably failed to do that. Upon the other hand, private
respondent's evidence overwhelmingly shows that no contract can be signed by the
president without first being approved by the Board of Directors; such approval may only be
given after the contract passes through, at least, the comptroller, who is the NIDC
representative, and the legal counsel.
The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are hopelessly
unavailing to the petitioner. In said cases, this Court found sufficient evidence, based on the
conduct and actuations of the corporations concerned, of apparent authority conferred
upon the officer involved which bound the corporations on the basis of ratification. In the
first case, it was established that the offer of compromise made by plaintiff in the letter,
Exhibit "A", was validly accepted by the GSIS. The terms of the offer were clear, and over the
signature of defendant's general manager, Rodolfo Andal, plaintiff was informed
telegraphically that her proposal had been accepted. It was sent by the GSIS' Board
Secretary and defendant did not disown the same. Moreover, in a letter remitting the
payment of P30,000 advanced by her father, plaintiff quoted verbatim the telegram of
acceptence. This was in itself notice to the corporation of the terms of the allegedly
unauthorized telegram. Notwithstanding this notice, GSIS pocketed the amount and kept
silent about the telegram. This Court then ruled that:

such reason having ceased, the person who has a right to invoke it should execute an act
which necessarily implies an intention to waive his right.' "
In the second case, this Court found:
"In the case at bar, the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf
without prior board approval. If the by-laws were to be literally followed, the board should
give its stamp of prior approval on all corporate contracts. But that board itself, by its acts
and through acquiescence, practically laid aside the by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts."
The inevitable conclusion then is that Exhibit "A" is an unenforceable contract under Article
1317 of the Civil Code which provides as follows:
"ARTICLE 1317. No one may contract in the name of another without being authorized by
the latter, or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before
it is revoked by the other contracting party."

"This silence, taken together with the unconditional acceptance of three other subsequent
remittances from plaintiff, constitutes in itself a binding ratification of the original
agreement (Civil Code, Art 1393).

The second ground is based on a wrong premise. It assumes, contrary to Our conclusion
above, that Exhibit "A" is a valid contract binding upon the private respondent. It was
effectively disapproved and rejected by the Board of Directors which, at the same time,
considered the amount of P243,000.00 received by Maglana as payment for 10,000 bags of
white cement, treated as an entirely different contract, and forthwith notified petitioner of
its decision that "If within ten (10) days from date hereof we will not hear from you but you
will withdraw cement at P24.30 per bag from our plant, then we will deposit your check of
P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per
instruction of the Board."57 Petitioner received a copy of this notification and thereafter
accepted without any protest the Delivery Receipt covering the 10,000 bags and the Official
Receipt for the P243,000.00. The respondent Court thus correctly ruled that petitioner had
in fact agreed to a new transaction involving only 10,000 bags of white cement.

'ART. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a
tacit ratification if, with knowledge of the reason which renders the contract voidable and

The third ground must likewise fail. Exhibit "A" being unenforceable, the option to renew it
would have no leg to stand on. The river cannot rise higher than its source. In any event, the

option granted in this case is without any consideration. Article 1324 of the Civil Code
expressly provides that:

SO ORDERED.
Gutierrez, Jr. (Chairman), Feliciano, Bidin and Romero, JJ., concur.

"When the offerer has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when
the option is founded upon a consideration, as something paid or promised."
while Article 1749 of the same Code provides:
"A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promissor if the promise is supported by a consideration distinct from the
price."
Accordingly, even if it were accepted, it can not validly bind the private respondent.58
The fourth ground is, however, meritorious.
Section 8, Rule 8 of the Rules of Court provides:
"SECTION 8. How to contest genuineness of such documents.When an action or defense is
founded upon a written instrument, copied in or attached to the corresponding pleading as
provided in the preceding section, the genuineness and due execution of the instrument
shall be deemed admitted unless the adverse party, under oath, specifically denies them,
and sets forth what he claims to be the facts; but this provision does not apply when the
adverse party does not appear to be a party to the instrument or when compliance with an
order for an inspection of the original instrument is refused."
It is clear that the petitioner is not a party to any of the documents attached to the private
respondent's Answer. Thus, the above quoted rule is not applicable.59 While the respondent
Court erred in holding otherwise, the challenged decision must, nevertheless, stand in view
of the above disquisitions on the first to the third grounds of the petition.
WHEREFORE, judgment is hereby rendered AFFIRMING the decision of respondent Court of
Appeals in C.A.-G.R. No. 61072-R promulgated on 21 December 1979. Costs against
petitioner.

Judgment affirmed.
Note.If a private corporation intentionally or negligently clothes its officers or agents with
apparent power to perform acts for it, the corporation will be estopped to deny that such
apparent authority is real, as to innocent third persons dealing in good faith with such
officers or agents (Francisco vs. Government Service Insurance System, L-18287 and L-18155,
March 30, 1963, 7 SCRA 577).
o0o
_______________

VOL. 247, AUGUST 11, 1995

Lopez Realty, Inc. vs. Fontecha

183

G.R. No. 76801. August 11, 1995.*

LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners, vs. FLORENTINA
FONTECHA, ET AL., AND THE NATIONAL LABOR RELATIONS COMMISSION, respondents.
Actions; Pleadings and Practice; Appeals; It is well settled that questions not raised in the
lower courts cannot be raised for the first time on appeal.Indeed, it would be offensive to
the basic rules of fair play and justice to allow petitioners to raise questions which have not
been passed upon by the labor arbiter and the public respondent NLRC. It is well settled that
questions not raised in the lower courts cannot be raised for the first time on appeal. Hence,
petitioners may not invoke any other ground, other than those it specified at the labor
arbiter level, to impugn the validity of the subject resolutions.
Corporation Law; A corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law.The general
rule is that a corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law. Thus, directors
must act as a body in a meeting called pursuant to the law or the corporations by-laws,
otherwise, any action taken therein may be questioned by any objecting director or
shareholder.
Same; An action of the board of directors during a meeting, which was illegal for lack of
notice, may be ratified either expressly, by the action of the directors in subsequent legal
meeting, or impliedly, by the corporations subsequent course of conduct.Be that as it may,
jurisprudence tells us that an action of the board of directors during a meeting, which was
illegal for lack of notice, may be ratified either expressly, by the action of the directors in
subsequent legal meeting, or impliedly, by the corporations subsequent course of conduct.
Same; Ultra Vires Acts; Words and Phrases; In legal parlance, ultra vires act refers to one
which is not within the corporate powers conferred by the Corporation Code or articles of
incorporation or not necessary or incidental in the exercise of the powers so conferred.
Assuming,arguendo, that there was no notice given to Asuncion Lopez Gonzales during the
special meetings held on August 17, 1981 and September 1, 1981, it is erroneous to state
that the resolutions passed by the board during the said meetings were ultra vires. In legal

parlance, ultra vires act refers to one which is not within the corporate powers conferred
by the Corporation Code or articles of incorporation or not necessary or incidental in the
exercise of the powers so conferred.
Same; Same; Providing gratuity pay for its employees is one of the express powers of the
corporation under the Corporation Code.The assailed resolutions before us cover a subject
which concerns the benefit and welfare of the companys employees. To stress, providing
gratuity pay for its employees is one of the express powers of the corporation under the
Corporation Code, hence, petitioners cannot invoke the doctrine of ultra vires to avoid any
liability arising from the issuance of the subject resolutions.
Same; Section 28 1/2 of the Corporation Law (now Section 40 of the Corporation Code)
requiring authorization of the stockholders of record for action taken by the board of
directors applies to the sale, lease, exchange or disposition of all or substantially all of the
corporations assets.Petitioners try to convince us that the subject resolutions had no
force and effect in view of the non-approval thereof during the Annual Stockholders
Meeting held on March 1, 1982. To strengthen their position, petitioners cite section 28 1/2
of the Corporation Law (Section 40 of the Corporation Code). We are not persuaded. The
cited provision is not applicable to the case at bench as it refers to the sale, lease, exchange
or disposition of all or substantially all of the corporations assets, including its goodwill. In
such a case, the action taken by the board of directors requires the authorization of the
stockholders on record.
Same; Where the stockholders of petitioner, except for one, also sit as members of the board
of directors, it will be illogical and superfluous to require the stockholders approval of
certain resolutions adopted by the board of directors.It will be observed that, except for
Arturo Lopez, the stockholders of petitioner corporation also sit as members of the board of
directors. Under the circumstances in field, it will be illogical and superfluous to require the
stockholders approval of the subject resolutions. Thus, even without the stockholders
approval of the subject resolutions, petitioners are still liable to pay private respondents
gratuity pay.
SPECIAL CIVIL ACTION in the Supreme Court. Certiorari.
The facts are stated in the opinion of the Court.
Roberto B. Capoon, Jr. for private respondents.
PUNO, J.:

The controversy at bench arose from a complaint filed by private respondents,1 namely,
Florentina Fontecha, Mila Refuerzo, Marcial Mamaril, Perfecto Bautista, Edward Mamaril,
Marissa Pascual and Allan Pimentel, against their employer, Lopez Realty Incorporated
(petitioner) and its majority stockholder, Asuncion Lopez Gonzales, for alleged non-payment
of their gratuity pay and other benefits.2 The case was docketed as NLRC-NCR Case No. 22176-82.
Lopez Realty, Inc., is a corporation engaged in real estate business, while petitioner
Asuncion Lopez Gonzales is one of its majority shareholders. Her interest in the company
vis-a-vis the other shareholders is as follows:
1. Asuncion Lopez Gonzales
2. Teresita Lopez Marquez
3. Arturo F. Lopez
4. Rosendo de Leon
5. Benjamin Bernardino
6. Leo Rivera

7,831 shares
7,830 shares
7,830 shares
4 shares
1 share
1 share

Except for Arturo F. Lopez, the rest of the shareholders also sit as members of the Board of
Directors.
As found by the labor arbiter,3 sometime in 1978, Arturo Lopez submitted a proposal
relative to the distribution of certain assets of petitioner corporation among its three (3)
main shareholders. The proposal had three (3) aspects, viz: (1) the sale of assets of the
company to pay for its obligations; (2) the transfer of certain assets of the company to its
three (3) main shareholders, while some other assets shall remain with the company; and
(3) the reduction of employees with provision for their gratuity pay. The proposal was
deliberated upon and approved in a special meeting of the board of directors held on April
17, 1978.
It appears that petitioner corporation approved two (2) resolutions providing for the
gratuity pay of its employees, viz: (a) Resolution No. 6, Series of 1980, passed by the
stockholders in a special meeting held on September 8, 1980, resolving to set aside, twice a
year, a certain sum of money for the gratuity pay of its retiring employees and to create a
Gratuity Fund for the said contingency; and (b) Resolution No. 10, Series of 1980, setting
aside the amount of P157,750.00 as Gratuity Fund covering the period from 1950 up to
1980.

Meanwhile, on July 28, 1981, board member and majority stockholder Teresita Lopez
Marquez died.
On August 17, 1981, except for Asuncion Lopez Gonzales who was then abroad, the
remaining members of the Board of Directors, namely: Rosendo de Leon, Benjamin
Bernardino, and Leo Rivera, convened a special meeting and passed a resolution which
reads:
Resolved, as it is hereby resolved that the gratuity (pay) of the employees be given as
follows:
1. (a) Those who will be laid off be given the full amount of gratuity;
2. (b) Those who will be retained will receive 25% of their gratuity (pay) due on
September 1, 1981, and another 25% on January 1, 1982, and 50% to be retained by
the office in the meantime. (emphasis supplied)
Private respondents were the retained employees of petitioner corporation. In a letter,
dated August 31, 1981, private respondents requested for the full payment of their gratuity
pay. Their request was granted in a special meeting held on September 1, 1981. The
relevant portion of the minutes of the said board meeting reads:
In view of the request of the employees contained in the letter dated August 31, 1981, it
was also decided that all those remaining employees will receive another 25% (of their
gratuity) on or before October 15, 1981 and another 25% on or before the end of November,
1981 of their respective gratuity.
At that time, however, petitioner Asuncion Lopez Gonzales was still abroad. Allegedly, while
she was still out of the country, she sent a cablegram to the corporation, objecting to certain
matters taken up by the board in her absence, such as the sale of some of the assets of the
corporation. Upon her return, she filed a derivative suit with the Securities and Exchange
Commission (SEC) against majority shareholder Arturo F. Lopez.
Notwithstanding the corporate squabble between petitioner Asuncion Lopez Gonzales
and Arturo Lopez, the first two (2) installments of the gratuity pay of private respondents
Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista were paid by
petitioner corporation.
Also, petitioner corporation had prepared the cash vouchers and checks for the third
installments of gratuity pay of said private respondents (Florentina Fontecha, Mila Refuerzo,

Marcial Mamaril and Perfecto Bautista). For some reason, said vouchers were cancelled by
petitioner Asuncion Lopez Gonzales.
Likewise, the first, second and third installments of gratuity pay of the rest of private
respondents, particularly, Edward Mamaril, Marissa Pascual and Allan Pimentel, were
prepared but cancelled by petitioner Asuncion Lopez Gonzales. Despite private respondents
repeated demands for their gratuity pay, petitioner corporation refused to pay the same.4
On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered judgment in favor of
private respondents.5
Petitioners appealed the adverse ruling of the labor arbiter to public respondent National
Labor Relations Commission. The appeal focused on the alleged non-ratification and nonapproval of the assailed August 17, 1981 and September 1, 1981 Board Resolutions during
the Annual Stockholders Meeting held on March 1, 1982. Petitioners further insisted that
the payment of the gratuity to some of the private respondents was a mere mistake on
the part of petitioner corporation since, pursuant to Resolution No. 6, dated September 8,
1980, and Resolution No. 10, dated October 6, 1980, said gratuity pay should be given only
upon the employees retirement.
On November 20, 1985, public respondent, through its Second Division, dismissed the
appeal for lack of merit, the pertinent portion of which states:6

for the payment of complainants gratuities. This disproves respondents argument allowing
gratuities upon retirement of employees. Additionally, the proposed distribution of assets
(Exh. C-1) filed by Mr. Arturo F. Lopez also made mention of gratuity pay, x x x (wherein) an
employee who desires to resign from LRI will be given the gratuity pay he or she earned.
(Italics supplied) Let us be reminded, too, that complainants resignation was not voluntary
but it was pressurized (sic) due to power struggle which is evident between Arturo Lopez
and Asuncion Gonzales.
The respondents (petitioners) contention of a mistake to have been committed in
granting the first two (2) installments of gratuities to complainants Perfecto Bautista,
Florentina Fontecha, Marcial Mamaril and Mila Refuerzo, (has) no legal leg to stand on. The
record is bereft of any evidence that the Board of Directors had passed a resolution nor is
there any minutes of whatever nature proving mistakes in the award of damages (sic).
With regard to the award of service incentive leave and others, the Commission finds no
cogent reason to disturb the appealed decision.
We affirm.
WHEREFORE, let the appealed decision be, as it is hereby, AFFIRMED and let the instant
appeal (be) dismissed for lack of merit.
SO ORDERED.

We cannot agree with the contention of respondents (petitioners) that the Labor Arbiter a
quo committed abuse of discretion in his decision.
Respondents (petitioners) contention that the two (2) resolutions dated 17 August 1981
and 1 September 1981 x x x which were not approved in the annual stockholders meeting
had no force and effect, deserves scant consideration. The records show that the
stockholders did not revoke nor nullify these resolutions granting gratuities to complainants.
On record, it appears that the said resolutions arose from the legitimate creation of the
Board of Directors who steered the corporate affairs of the corporation. x x x.
Respondents (petitioners) allegation that the three (3) complainants, Mila E. Refuerzo,
Marissa S. Pascual and Edward Mamaril, who had resigned after filing the complaint on
February 8, 1982, were precluded to (sic) receive gratuity because the said resolutions
referred to only retiring employee could not be given credence. A reading of Resolutions
dated 17 August 1981 and 1 September 1981 disclosed that there were periods mentioned

Petitioners reconsidered.7 In their motion for reconsideration, petitioners assailed the

validity of the board resolutions passed on August 17, 1981 and September 1, 1981,
respectively, and claimed, for the first time, that petitioner Asuncion Lopez Gonzales was
not notified of the special board meetings held on said dates. The motion for
reconsideration was denied by the Second Division on July 24, 1986.
On September 4, 1986, petitioners filed another motion for reconsideration. Again, the
motion was denied by public respondent in a Minute Resolution dated November 19, 1986.8
Hence, the petition. As prayed for, we issued a Temporary Restraining Order,9 enjoining
public respondent from enforcing or executing the Resolution, dated November 20, 1986
(sic), in NLRC-NCR-2-2176-82.10

The sole issue is whether or not public respondent acted with grave abuse of discretion in
holding that private respondents are entitled to receive their gratuity pay under the assailed
board resolutions dated August 17, 1981 and September 1, 1981.
Petitioners contend that the board resolutions passed on August 17, 1981 and September 1,
1981, granting gratuity pay to their retained employees, are ultra vires on the ground that
petitioner Asuncion Lopez Gonzales was not duly notified of the said special meetings. They
aver, further, that said board resolutions were not ratified by the stockholders of the
corporation pursuant to Section 28 1/2 of the Corporation Law (Section 40 of the
Corporation Code). They also insist that the gratuity pay must be given only to the retiring
employees, to the exclusion of the retained employees or those who voluntarily resigned
from their posts.
At the outset, we note that petitioners allegation on lack of notice to petitioner Asuncion
Lopez Gonzales was raised for the first time in their motion for reconsideration filed before
public respondent National Labor Relations Commission, or after said public respondent had
affirmed the decision of the labor arbiter. To stress, in their appeal before the NLRC,
petitioners never raised the issue of lack of notice to Asuncion Lopez Gonzales. The appeal
dealt with (a) the failure of the stockholders to ratify the assailed resolutions and (b) the
alleged mistake committed by petitioner corporation in giving the gratuity pay to some of
its employees who are yet to retire from employment.
In their Comment,11 private respondents maintain that the new ground of lack of notice was
not raised before the labor arbiter, hence, petitioners are barred from raising the same on
appeal. Private respondents claim, further, that such failure on the part of petitioners, had
deprived them the opportunity to present evidence that, in a subsequent special board
meeting held on September 29, 1981, the subject resolution dated September 1, 1981, was
unanimously approved by the board of directors of petitioner corporation, including
petitioner Asuncion Lopez Gonzales.12
Indeed, it would be offensive to the basic rules of fair play and justice to allow petitioners to
raise questions which have not been passed upon by the labor arbiter and the public
respondent NLRC. It is well settled that questions not raised in the lower courts cannot be
raised for the first time on appeal.13 Hence, petitioners may not invoke any other ground,
other than those it specified at the labor arbiter level, to impugn the validity of the subject
resolutions.
We now come to petitioners argument that the resolutions passed by the board of
directors during the special meetings on August 17, 1981, and September 1, 1981, were
ultra vires for lack of notice.

The general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general law.14
Thus, directors must act as a body in a meeting called pursuant to the law or the
corporations by-laws, otherwise, any action taken therein may be questioned by any
objecting director or shareholder.15
Be that as it may, jurisprudence16 tells us that an action of the board of directors during a
meeting, which was illegal for lack of notice, may be ratified either expressly, by the action
of the directors in subsequent legal meeting, or impliedly, by the corporations subsequent
course of conduct. Thus, in one case,17 it was held:
. . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations (Perm. Ed.) sec. 429, at
page 290, it is stated:
Thus, acts of directors at a meeting which was illegal because of want of notice may be
ratified by the directors at a subsequent legal meeting, or by the corporations course of
conduct . . .
Fletcher, supra, further states in sec. 762, at page 1073-1074:
Ratification by directors may be by an express resolution or vote to that effect, or it may be
implied from adoption of the act, acceptance or acquiescence. Ratification may be effected
by a resolution or vote of the board of directors expressly ratifying previous acts either of
corporate officers or agents; but it is not necessary, ordinarily, to show a meeting and
formal action by the board of directors in order to establish a ratification.
In American Casualty Co., v. Dakota Tractor and Equipment Co., 234 F. Supp. 606, 611
(D.N.D. 1964), the court stated:
Moreover, the unauthorized acts of an officer of a corporation may be ratified by the
corporation by conduct implying approval and adoption of the act in question. Such
ratification may be express or may be inferred from silence and inaction.
In the case at bench, it was established that petitioner corporation did not issue any
resolution revoking nor nullifying the board resolutions granting gratuity pay to private
respondents. Instead, they paid the gratuity pay, particularly, the first two (2) installments
thereof, of private respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and
Perfecto Bautista.

Despite the alleged lack of notice to petitioner Asuncion Lopez Gonzales at that time the
assailed resolutions were passed, we can glean from the records that she was aware of the
corporations obligation under the said resolutions. More importantly, she acquiesced
thereto. As pointed out by private respondents, petitioner Asuncion Lopez Gonzales affixed
her signature on Cash Voucher Nos. 81-10-510 and 81-10-506, both dated October 15, 1981,
evidencing the 2nd installment of the gratuity pay of private respondents Mila Refuerzo and
Florentina Fontecha.18
We hold, therefore, that the conduct of petitioners after the passage of resolutions dated
August 17, 1981 and September 1, 1981, had estopped them from assailing the validity of
said board resolutions.
Assuming, arguendo, that there was no notice given to Asuncion Lopez Gonzales during the
special meetings held on August 17, 1981 and September 1, 1981, it is erroneous to state
that the resolutions passed by the board during the said meetings were ultra vires. In legal
parlance, ultra vires act refers to one which is not within the corporate powers conferred
by the Corporation Code or articles of incorporation or not necessary or incidental in the
exercise of the powers so conferred.19

goodwill. In such a case, the action taken by the board of directors requires the
authorization of the stockholders on record.
It will be observed that, except for Arturo Lopez, the stockholders of petitioner corporation
also sit as members of the board of directors. Under the circumstances in field, it will be
illogical and superfluous to require the stockholders approval of the subject resolutions.
Thus, even without the stockholders approval of the subject resolutions, petitioners are still
liable to pay private respondents gratuity pay.
IN VIEW WHEREOF, the instant petition is DISMISSED for lack of merit and the temporary
restraining order we issued on February 9, 1987 is LIFTED. Accordingly, the assailed
resolution of the National Labor Relations Commission in NLRC-NCR-2-2176-82 is AFFIRMED.
This decision is immediately executory. Costs against petitioners.
SO ORDERED.
Narvasa (C.J., Chairman), Regalado, Mendoza and Francisco, JJ., concur.
Petition dismissed. Resolution affirmed.

The assailed resolutions before us cover a subject which concerns the benefit and welfare of
the companys employees. To stress, providing gratuity pay for its employees is one of the
express powers of the corporation under the Corporation Code, hence, petitioners cannot
invoke the doctrine of ultra vires to avoid any liability arising from the issuance of the
subject resolutions.20
We reject petitioners allegation that private respondents, namely, Mila Refuerzo, Marissa
Pascual and Edward Mamaril who resigned from petitioner corporation after the filing of the
case, are precluded from receiving their gratuity pay. Pursuant to board resolutions dated
August 17, 1981 and September 1, 1981, respectively, petitioner corporation obliged itself
to give the gratuity pay of its retained employees in four (4) installments: on September 1,
1981; October 15, 1981; November, 1981; and January 1, 1982. Hence, at the time the
aforenamed private respondents tendered their resignation, the aforementioned private
respondents were already entitled to receive their gratuity pay. Petitioners try to convince
us that the subject resolutions had no force and effect in view of the non-approval thereof
during the Annual Stockholders Meeting held on March 1, 1982. To strengthen their
position, petitioners cite section 28 1/2 of the Corporation Law (Section 40 of the
Corporation Code). We are not persuaded.
The cited provision is not applicable to the case at bench as it refers to the sale, lease,
exchange or disposition of all or substantially all of the corporations assets, including its

Notes.A corporation is an entity separate and distinct from its stockholders and from
other corporations to which it may be connected. (Philippine Veterans Investment
Development Corporation vs. Court of Appeals, 181 SCRA 669 [1990])
A party is not estopped to challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. (Georg Grotjahn GMBH & Co. vs.
Isnani, 235 SCRA 216 [1994])

tances from plaintiff, constitutes a binding ratification of the original agreement between
them (Civil Code, Article 1393).578

No. L-18287. March 30, 1963.

TRINIDAD J. FRANCISCO, plaintiff-appellee, vs. GOVERNMENT SERVICE INSURANCE SYSTEM,
defendant-appellant.

Same; Same; Same; Maxim that the one who made it possible for a wrong to be done should
suffer.The equitable maxim that between two innocent parties the one who made it
possible for the wrong to be done should be the one to bear the resulting loss, applies when
as in the instant case a corporation allows one of its officers, now alleged to be
without the proper authority, to send a telegram binding the corporation.
Damages; Breach of contract; Moral damages not warranted if breach is not malicious or
fraudulent.Award of moral damages under Article 2220 of the Civil Code is not warranted
if the breach of contract is not malicious or fraudulent (Ventanilla vs. Centeno, L-14333, 28
Jan. 1961; Fores vs. Miranda, L-12163, 4 March 1959).

No. L-18155. March 30, 1963.

TRINIDAD J. FRANCISCO, plaintiff-appellant, vs. GOVERNMENT SERVICE INSURANCE SYSTEM,
defendant-appellee.

Same; Same; When exemplary damages allowed.Exemplary damages are only allowed in
addition to moral, temperate, liquidated, or compensatory damages (Art. 2234, Civil Code;
Velayo vs. Shell Co. of P.I., L-7817, Res. July 30, 1957; Singson, et al. vs. Aragon and Lorza, L5164, Jan. 27, 1953, 49 0.G. No. 2, 515).

Corporations; Binding effect of acts of corporate officers.A corporation cannot evade the
binding effect produced by a telegram sent by its board secretary, and the addressee of
such telegram cannot be blamed for relying upon it, because if every person dealing with a
corporation were held duty-bound to disbelieve every act of its responsible officers no
matter how regular it should appear on its face, corporate transactions would speedily come
to a standstill.

Attorneys fees; Award essentially discretionary with trial court.The award of attorneys
fees is essentially discretionary with the trial court, and no abuse of discretion is committed
when the court refuses to make an award because of the absence of gross and evident bad
faith in defendants refusal to satisfy plaintiffs claim, or of any of the other grounds enumerated in Article 2208 of the Civil Code.

Same; Same; When corporation estopped to deny apparent authority of its officers.If a
private corporation intentionally or negligently clothes its officers or agents with apparent
power to perform acts for it, the corporation will be estopped to deny that such apparent
authority is real, as to innocent third persons dealing in good faith with such officers or
agents. (2 Fletchers Encyclopedia, Priv. Corp. 255, Perm. Ed.)
Same; Same; Same; When notice of lands by a corporate officer is notice to corporation.
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the
course of his employment, and in relation to matters within the scope of his authority, is
notice to the corporation, whether he communicates such knowledge or not. (Ballentine,
Law on Corporations, section 112.)
Same; Same; Same; Silence of corporation as ratification of agreement.The silence of the
corporation, taken together with the unconditional acceptance of three subsequent remit-

APPEAL from a decision of the Court of First Instance of Rizal. Mojica, J.

The facts are stated in the opinion of the Court.
Vicente J. Francisco for plaintiff-appellee.
The Government Corporate Counsel for defendant-appellant.
REYES, J.B.L., J.:
Appeal by the Government Service Insurance System from the decision of the Court of First
Instance of Rizal (Hon. Angel H. Mojica, presiding), in its Civil Case No. 2088-P, entitled
Trinidad J. Francisco, plaintiff, vs. Government Service Insurance System, defendant, the
dispositive part of which reads as follows:

WHEREFORE, judgment is hereby rendered: (a) Declaring null and void the consolidation in
the name of the defendant, Government Service Insurance System, of the title of the VICMARI Compound; said title shall be restored to the plaintiff; and all payments made by the
plaintiff, after her offer had been accepted by the defendant, must be credited as
amortizations on her loan; and (b) Ordering the defendant to abide by the terms of the
contract created by plaintiffs offer and its unconditional acceptance, with costs against the
defendant.
The plaintiff, Trinidad J. Francisco, likewise appealed separately (L-18155), because the trial
court did not award the P535,000.00 damages and attorneys fees she claimed. Both
appeals are, therefore, jointly treated in this decision.
The following facts are admitted by the parties: On 10 October 1956, the plaintiff, Trinidad J.
Francisco, in consideration of a loan in the amount of P400,000.00, out of which the sum of
P336,100.00 was released to her, mortgaged in favor of the defendant, Government Service
Insurance System (hereinafter referred to as the System) a parcel of land containing an area
of 18,232 square meters, with twenty-one (21) bungalows, known as Vic-Mari Compound,
located at Baesa, Quezon City, payable within ten (10) years in monthly installments of
P3,902.41, and with interest of 7% per annum compounded monthly.

pay the security guard, the street-caretaker, the Meralco Bill for the street lights and sundry
items.
It will be noted that the collectible income each month from the mortgaged property, which
as I said consists of installments amounting to about P5,000, is more than enough to cover
the monthly amortization on Miss Franciscos loan. Indeed, had she not encountered
difficulties, due to unforeseen circumstances, in collecting the said installments, she could
have paid the amortizations as they fell due and there would have been really no need for
the GSIS to resort to foreclosure.
The proposed administration by the GSIS of the mortgaged property will continue even after
Miss Franciscos account shall have been kept up to date. However, once the arrears shall
have been paid, whatever amount of the monthly installments collected in excess of the
amortization due on the loan will be turned over to Miss Francisco.
I make the foregoing proposal to show Franciscos sincere desire to work out any fair
arrangement for the settlement of her obligation. I trust that the GSIS, under the
broadminded policies of your administration, would give it serious consideration.
Sincerely,

On 6 January 1959, the System extrajudicially foreclosed the mortgage on the ground that
up to that date the plaintiff-mortgagor was in arrears on her monthly installments in the
amount of P52,000.00. Payments made by the plaintiff at the time of foreclosure amounted
to P130,000.00. The System itself was the buyer of the property in the foreclosure sale.
On 20 February 1959, the plaintiffs father, Atty. Vicente J. Francisco, sent a letter to the
general manager of the defendant corporation, Mr. Rodolfo P. Andal, the material portion
of which recited as follows:
Yesterday, I was finally able to collect what the Government owed me and I now propose
to pay said amount of P30,000 to the GSIS if it would agree that after such payment the
foreclosure of my daughters mortgage would be set aside. I am aware that the amount of
P30,000 which I offer to pay will not cover the total arrearage of P52,000 but as regards the
balance, I propose this arrangement: for the GSIS to take over the administration of the
mortgaged property and to collect the monthly installments, amounting to about P5,000,
due on the unpaid purchase price of more than 31 lots and houses therein and the monthly
installments collected shall be applied to the payment of Miss Franciscos arrearage until the
same is fully covered. It is requested, however, that from the amount of the monthly
installments collected, the sum of P350.00 be deducted for necessary expenses, such as to

s/ Vicente J. Francisco
t/ VICENTE J. FRANCISCO
On the same date, 20 February 1959, Atty. Francisco received the following telegram:
VICENTE
SAMANILLO BLDG. ESCOLTA.

FRANCISCO

GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF FORECLOSED PROPERTY OF

YOUR DAUGHTER
ANDAL

On 28 February 1959, Atty. Francisco remitted to the System, through Andal, a check for
P30,000.00, with an accompanying letter, which reads:

I am sending you herewith BPI Check No. B-299484 for Thirty Thousand Pesos (P30,000.00)
in accordance with my letter of February 20th and your reply thereto of the same date,
which reads: GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF FORECLOSED
PROPERTY OF YOUR DAUGHTER
xxxx

xxxx

xxxx

copy of the excerpts of the resolution of the Board of Directors (No. 380, February 20, 1959)
was attached to the letter, showing the approval of Franciscos offer
x x x subject to the condition that Mr. Vicente J. Francisco shall pay all expenses incurred by
the GSIS in the foreclosure of the mortgage.

x x x x

The defendant received the amount of P30,000.00, and issued therefor its official receipt
No. 1209874, dated 4 March 1959. It did not, however, take over the administration of the
compound. In the meantime, the plaintiff received the monthly payments of some of the
occupants thereat; then on 4 March 1960, she remitted, through her father, the amount of
P44,121.29, representing the total monthly installments that she received from the
occupants for the period from March to December 1959 and January to February 1960,
minus expenses and real estate taxes. The defendant also received this amount, and issued
the corresponding official receipt.
Remittances, all accompanied by letters, corresponding to the months of March, April, May,
and June, 1960 and totalling P24,604.81 were also sent by the plaintiff to the defendant
from time to time, all of which were received and duly receipted for.
Then the System sent three (3) letters, one dated 29 January 1960, which was signed by its
assistant general manager, and the other two letters, dated 19 and 26 February 1960,
respectively, which were signed by Andal, asking the plaintiff for a proposal for the payment
of her indebtedness, since according to the System the one-year period for redemption had
expired.
In reply, Atty. Francisco sent a letter, dated 11 March 1960, protesting against the Systems
request for proposal of payment and inviting its attention to the concluded contract
generated by his offer of 20 February 1959, and its acceptance by telegram of the same
date, the compliance of the terms of the offer already commenced by the plaintiff, and the
misapplication by the System of the remittances she had made, and requesting the proper
corrections.
By letter, dated 31 May 1960, the defendant countered the preceding protest that, by all
means, the plaintiff should pay attorneys fees of P35,644.14, publication expenses, filing
fee of P301.00, and surcharge of P23.64 for the foreclosure work done; that the telegram
should be disregarded in view of its failure to express the contents of the board resolution
due to the error of its minor employees in couching the correct wording of the telegram. A

Inasmuch as, according to the defendant, the remittances previously made by Atty.
Francisco were allegedly not sufficient to pay off her daughters arrears, including attorneys
fees incurred by the defendant in foreclosing the mortgage, and the one-year period for
redemption has expired, said defendant, on 5 July 1960, consolidated the title to the
compound in its name, and gave notice thereof to the plaintiff on 26 July 1960 and to each
occupant of the compound.
Hence, the plaintiff instituted the present suit, for specific performance and damages. The
defendant answered, pleading that the binding acceptance of Franciscos offer was the
resolution of the Board, and that Andals telegram, being erroneous, should be disregarded.
After trial, the court below found that the offer of Atty. Francisco, dated 20 February 1959,
made on behalf of his daughter, had been unqualifiedly accepted, and was binding, and
rendered judgment as noted at the start of this opinion.
The defendant-appellant corporation assigns six (6) errors allegedly committed by the lower
court, all of which, however, are resolvable on the single issue as to whether or not the
telegram generated a contract that is valid and binding upon the parties.
We find no reason for altering the conclusion reached by the court below that the offer of
compromise made by plaintiff in the letter, Exhibit A, had been validly accepted, and was
binding on the defendant. The terms of the offer were clear, and over the signature of
defendants general manager, Rodolfo Andal, plaintiff was informed telegraphically that her
proposal had been accepted. There was nothing in the telegram that hinted at any anomaly,
or gave ground to suspect its veracity, and the plaintiff, therefore, can not be blamed for
relying upon it. There is no denying that the telegram was within Andals apparent authority,
but the defense is that he did not sign it, but that it was sent by the Board Secretary in his
name and without his knowledge. Assuming this to be true, how was appellee to know it?
Corporate transactions would speedily come to a standstill were every person dealing with a
corporation held duty-bound to disbelieve every act of its responsible officers, no matter
how regular they should appear on their face. This Court has observed in Ramirez vs.
Orientalist Co., 38 Phil. 634, 654-655, that

In passing upon the liability of a corporation in cases of this kind it is always well to keep in
mind the situation as it presents itself to the third party with whom the contract is made.
Naturally he can have little or no information as to what occurs in corporate meetings; and
he must necessarily rely upon the external manifestations of corporate consent. The
integrity of commercial transactions can only be maintained by holding the corporation
strictly to the liability fixed upon it by its agents in accordance with law; and we would be
sorry to announce a doctrine which would permit the property of a man in the city of Paris
to be whisked out of his hands and carried into a remote quarter of the earth without
recourse against the corporation whose name and authority had been used in the manner
disclosed in this case. As already observed, it is familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent, to do acts within the scope of an
apparent authority, and thus holds him out to the public as possessing power to do those
acts, the corporation will, as against any one who has in good faith dealt with the
corporation through such agent, be estopped from denying his authority; and where it is
said if the corporation permits this means the same as if the thing is permitted by the
directing power of the corporation.
It has also been decided that
A very large part of the business of the country is carried on by corporations. It certainly is
not the practice of persons dealing with officers or agents who assume to act for such
entities to insist on being shown the resolution of the board of directors authorizing the
particular officer or agent to transact the particular business which he assumes to conduct.
A person who knows that the officer or agent of the corporation habitually transacts certain
kinds of business for such corporation under circumstances which necessarily show
knowledge on the part of those charged with the conduct of the corporate business
assumes, as he has the right to assume, that such agent or officer is acting within the scope
of his authority. (Curtis Land & Loan Co. vs. Interior Land Co., 137 Wis. 341, 118 N.W. 853,
129 Am. St. Rep. 1068; as cited in 2 Fletchers Encyclopedia, Priv. Corp. 263, perm. Ed.)
Indeed, it is well-settled that
If a private corporation intentionally or negligently clothes its officers or agents with
apparent power to perform acts for it, the corporation will be estopped to deny that such
apparent authority is real, as to innocent third persons dealing in good faith with such
officers or agents. (2 Fletchers Encyclopedia, Priv. Corp. 255, Perm. Ed.)
Hence, even if it were the board secretary who sent the telegram, the corporation could not
evade the binding effect produced by the telegram.

The defendant-appellant does not disown the telegram, and even asserts that it came from
its offices, as may be gleaned from the letter, dated 31 May 1960, to Atty. Francisco, and
signed R. P. Andal, general manager by Leovigildo Monasterial, legal counsel, wherein
these phrases occur: the telegram sent x x x by this office and the telegram we sent your
(emphasis supplied), but it alleges mistake in couching the correct wording. This alleged
mistake cannot be taken seriously, because while the telegram is dated 20 February 1959,
the defendant informed Atty. Francisco of the alleged mistake only on 31 May 1960, and all
the while it accepted the various other remittances, starting on 28 February 1959, sent by
the plaintiff to it in compliance with her performance of her part of the new contract.
The inequity of permitting the System to deny its acceptance become more patent when
account is taken of the fact that in remitting the payment of P30,000 advanced by her
father, plaintiffs letter to Mr. Andal quoted verbatim the telegram of acceptance. This was
in itself notice to the corporation of the terms of the allegedly unauthorized telegram, for as
Ballentine says:
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the
course of his employment, and in relation to matters within the scope of his authority, is
notice to the corporation, whether he communicates such knowledge or not. (Ballentine,
Law on Corporations, section 112.)
since a corporation cannot see, or know, anything except through its officers.
Yet, notwithstanding this notice, the defendant System pocketed the amount, and kept
silent about the telegram not being in accordance with the true facts, as it now alleges. This
silence, taken together with the unconditional acceptance of three other subsequent
remittances from plaintiff, constitutes in itself a binding ratification of the original
agreement (Civil Code, Art. 1393).
ART. 1393. Ratification may be effected expressly or tacitly. It is understood that there is
a tacit ratification if, with knowledge of the reason which renders the contract voidable and
such reason having ceased, the person who has a right to invoke it should execute an act
which necessarily implies an intention to waive his right.
Nowhere else do the circumstances call more insistently for the application of the equitable
maxim that between two innocent parties, the one who made it possible for the wrong to
be done should be the one to bear the resulting loss.

The defendants assertion that the telegram came from it but that it was incorrectly worded
renders unnecessary to resolve the other point on controversy as to whether the said
telegram constitutes an actionable document.
Since the terms offered by the plaintiff in the letter of 20 February 1959 (Exhibit A)
provided for the setting aside of the foreclosure effected by the defendant System, the
acceptance of the offer left the account of plaintiff in the same condition as if no foreclosure
had taken place. It follows, as the lower court has correctly held, that the right of the System
to collect attorneys fees equivalent to 10% of the due (P35,694.14) and the expenses and
charges of P3,300.00 may no longer be enforced, since by the express terms of the
mortgage contract, these sums were collectible only in the event of foreclosure.
The court a quo also called attention to the unconscionability of defendants charging the
attorneys fees, totaling over P35,000.00; and this point appears well-taken, considering
that the foreclosure was merely extra-judicial, and the attorneys work was limited to
requiring the sheriff to effectuate the foreclosure. However, in view of the parties
agreement to set the same aside, with the consequential elimination of such incidental
charges, the matter of unreasonableness of the counsel fees need not be labored further.
Turning now to the plaintiffs separate appeal (Case G.R. No. L-18155): Her prayer for an
award of actual or compensatory damages for P83,333.33 is predicated on her alleged
unrealized profits due to her inability to sell the compound for the price of P750,000.00
offered by one Vicente Alunan, which sale was allegedly blocked because the System
consolidated the title to the property in its name. Plaintiff reckons the amount of
P83,333.33 by placing the actual value of the property at P666,666.67, a figure arrived at by
assuming that the Systems loan of P400,000.00 constitutes 60% of the actual value of the
security. The court a quo correctly refused to award such actual or compensatory damages
because it could not determine with reasonable certainty the difference between the
offered price and the actual value of the property, for lack of competent evidence. Without
proof we cannot assume, or take judicial notice, as suggested by the plaintiff, that the
practice of lending institutions in the country is to give out as loan 60% of the actual value of
the collateral. Nor should we lose sight of the fact that the price offered by Alunan was
payable in installments covering five years, so that it may not actually represent true market
values.
Nor was there error in the appealed decision in denying moral damages, not only on
account of the plaintiffs failure to take the witness stand and testify to her social
humiliation, wounded feelings, anxiety, etc., as the decision holds, but primarily because a
breach of contract like that of defendant, not being malicious or fraudulent, does not

warrant the award of moral damages under Article 2220 of the Civil Code (Ventanilla vs.
Centeno, L-14333, 28 Jan. 1961; Fores vs. Miranda, L-12163, 4 March 1959).587
There is no basis for awarding exemplary damages either, because this species of damages is
only allowed in addition to moral, temperate, liquidated, or compensatory damages, none
of which have been allowed in this case, for reasons herein before discussed (Art. 2234, Civil
Code; Velayo vs. Shell Co. of P.I., L-7817, Res. July 30, 1957; Singson, et al. vs. Aragon and
Lorza, L-5164, Jan. 27, 1953, 49 O.G. No. 2, 515).
As to attorneys fees, we agree with the trial courts stand that in view of the absence of
gross and evident bad faith in defendants refusal to satisfy the plaintiffs claim, and there
being none of the other grounds enumerated in Article 2208 of the Civil Code, such absence
precludes a recovery. The award of attorneys fees is essentially discretionary in the trial
court, and no abuse of discretion has been shown.
FOR THE FOREGOING REASONS, the appealed decision is hereby affirmed, with costs against
the defendant Government Service Insurance System, in G.R. No.L-18287.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon,
Regala and Makalintal, JJ., concur.
Decision affirmed.

Notes.The doctrine of apparent authority applied in the above Francisco case, may not
apply to acts of the Government and its agents, or to acts of a public corporation and its
officers. Thus, in Pineda v. CGI of Tayabas, 52 Phil. 803, it was held that the government is
neither estopped by mistake or error on the part of its agents. To the same effect is Benguet
Consolidated Mining Co. v. Pineda, et al., L-7231, March 28, 1956; Romero vs. Director of
Lands, 39 Phil. 314; Army & Navy Club v. Trinidad, 44 Phil. 383; and Government of P.I. v.
Galarosa, 36 Phil. 346, where the substance of the ruling is that the government can neither
be estopped nor prejudiced by the illegal acts of its servants. See, however, Bachrach v.
Unson, 50 Phil. 981, where it was held that the government may be estopped through
affirmative acts of its officers acting within their authority.
_______________

G.R. No. 171993. December 12, 2011.*

MARC II MARKETING, INC. and LUCILA V. JOSON, petitioners, vs. ALFREDO M. JOSON,
respondent.
Labor Law; Illegal Dismissals; Corporation Law; Intra-corporate Controversies; The dismissal
of a corporate officer is always regarded as a corporate and/or an intra-corporate
controversy; Intra-corporate controversies also includes controversies in the election or
appointments of directors, trustees, officers or managers of such corporations, partnerships
or associations.While Article 217(a)2 of the Labor Code, as amended, provides that it is
the Labor Arbiter who has the original and exclusive jurisdiction over cases involving
termination or dismissal of workers when the person dismissed or terminated is a corporate
officer, the case automatically falls within the province of the RTC. The dismissal of a
corporate officer is always regarded as a corporate act and/or an intra-corporate
controversy. Under Section 5 of Presidential Decree No. 902-A, intra-corporate
controversies are those controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and the
State insofar as it concerns their individual franchise or right to exist as such entity. It also
includes controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations.
Same; Same; Same; Same; Corporate Officers; Corporate officers are those officers of a
corporate who are given that character either by the Corporation Code or by the
corporations by-laws.In Easycall Communications Phils., Inc. v. King, 478 SCRA 102 (2005),
this Court held that in the context of Presidential Decree No. 902-A, corporate officers are
those officers of a corporation who are given that character either by the Corporation Code
or by the corporations by-laws. Section 25 of the Corporation Code specifically
enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3)
treasurer; and (4) such other officers as may be provided for in the by-laws.
Same; Same; Same; Same; Same; The phrase such other officers as may be provided for in
the bylaws clarified and elaborated in Matling Industrial and Commercial Corporation vs.
Coros, 633 SCRA 12 (2010).The aforesaid Section 25 of the Corporation Code, particularly
the phrase such other officers as may be provided for in the by-laws, has been clarified
and elaborated in this Courts recent pronouncement in Matling Industrial and Commercial

Corporation v. Coros, 633 SCRA 12 (2010), where it held, thus: Conformably with Section 25,
a position must be expressly mentioned in the [b]y-[l]aws in order to be considered as a
corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling
provision is not enough to make a position a corporate office. [In] Guerrea v. Lezama
[citation omitted] the first ruling on the matter, held that the only officers of a corporation
were those given that character either by the Corporation Code or by the [b]y-[l]aws; the
rest of the corporate officers could be considered only as employees or subordinate
officials. Thus, it was held in Easycall Communications Phils., Inc. v. King [citation omitted]:
An office is created by the charter of the corporation and the officer is elected by the
directors or stockholders. On the other hand, an employee occupies no office and generally
is employed not by the action of the directors or stockholders but by the managing officer of
the corporation who also determines the compensation to be paid to such employee. x x x x
This interpretation is the correct application of Section 25 of the Corporation Code, which
plainly states that the corporate officers are the President, Secretary, Treasurer and such
other officers as may be provided for in the [b]y-[l]aws. Accordingly, the corporate officers
in the context of PD No. 902-A are exclusively those who are given that character either by
the Corporation Code or by the corporations [b]y[l]aws.37
Same; Same; Same; Same; Same; Corporate officers are composed of (1) Chairman; (2)
President; (3) One or more Vice-President; (4) Treasurer; and (5) Secretary.A careful
perusal of petitioner corporations by-laws, particularly paragraph 1, Section 1, Article IV,
would explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2)
President; (3) one or more Vice-President; (4) Treasurer; and (5) Secretary. The position of
General Manager was not among those enumerated.
Same; Same; Same; Same; Same; The board of directors has no power to create other
corporate offices without first amending the corporate by-laws so as to include therein the
newly created corporate office.With the given circumstances and in conformity with
Matling Industrial and Commercial Corporation v. Coros, 633 SCRA 12 (2010), this Court
rules that respondent was not a corporate officer of petitioner corporation because his
position as General Manager was not specifically mentioned in the roster of corporate
officers in its corporate by-laws. The enabling clause in petitioner corporations by-laws
empowering its Board of Directors to create additional officers, i.e., General Manager, and
the alleged subsequent passage of a board resolution to that effect cannot make such
position a corporate office. Matling clearly enunciated that the board of directors has no
power to create other corporate offices without first amending the corporate by-laws so as
to include therein the newly created corporate office. Though the board of directors may
create appointive positions other than the positions of corporate officers, the persons
occupying such positions cannot be viewed as corporate officers under Section 25 of the
Corporation Code.

Same; Same; Same; Same; Same; The corporate officers enumerated in the by-laws are the
exclusive officers of the corporation while the rest could only be regarded as mere employees
or subordinate officials.It is also of no moment that respondent, being petitioner
corporations General Manager, was given the functions of a managing director by its Board
of Directors. As held in Matling, the only officers of a corporation are those given that
character either by the Corporation Code or by the corporate by-laws. It follows then that
the corporate officers enumerated in the by-laws are the exclusive officers of the
corporation while the rest could only be regarded as mere employees or subordinate
officials. Respondent, in this case, though occupying a high ranking and vital position in
petitioner corporation but which position was not specifically enumerated or mentioned in
the latters by-laws, can only be regarded as its employee or subordinate official.
Same; Same; Same; Same; Same; Not all conflicts between the stockholders and the
corporation are classified as intra-corporate; Other factors such as the status or relationship
of the parties and the nature of the question that is the subject of the controversy must be
considered in determining whether the dispute involves corporate matters so as to regard
them as intra-corporate controversies.That respondent was also a director and a
stockholder of petitioner corporation will not automatically make the case fall within the
ambit of intra-corporate controversy and be subjected to RTCs jurisdiction. To reiterate, not
all conflicts between the stockholders and the corporation are classified as intra-corporate.
Other factors such as the status or relationship of the parties and the nature of the question
that is the subject of the controversy must be considered in determining whether the
dispute involves corporate matters so as to regard them as intra-corporate controversies. As
previously discussed, respondent was not a corporate officer of petitioner corporation but a
mere employee thereof so there was no intra-corporate relationship between them. With
regard to the subject of the controversy or issue involved herein, i.e., respondents dismissal
as petitioner corporations General Manager, the same did not present or relate to an intracorporate dispute.

burden of proving just and valid cause for dismissing an employee from his employment
rests upon the employer. The latters failure to discharge that burden would necessarily
result in a finding that the dismissal is unjustified.
Same; Same; The closure or cessation of operations of establishment or undertaking may
either be due to serious business losses or financial reverses or otherwise.Under Article
283 of the Labor Code, as amended, one of the authorized causes in terminating the
employment of an employee is the closing or cessation of operation of the establishment
or undertaking. From the afore-quoted provision, the closure or cessation of operations of
establishment or undertaking may either be due to serious business losses or financial
reverses or otherwise. If the closure or cessation was due to serious business losses or
financial reverses, it is incumbent upon the employer to sufficiently and convincingly prove
the same. If it is otherwise, the employer can lawfully close shop anytime as long as it was
bona fide in character and not impelled by a motive to defeat or circumvent the tenurial
rights of employees and as long as the terminated employees were paid in the amount
corresponding to their length of service.
Same; Same; Three Requisites for a Valid Cessation of Business Operations.Under Article
283 of the Labor Code, as amended, there are three requisites for a valid cessation of
business operations: (a) service of a written notice to the employees and to the
Department of Labor and Employment (DOLE) at least one month before the intended
date thereof; (b) the cessation of business must be bona fide in character; and (c) payment
to the employees of termination pay amounting to one month pay or at least one-half
month pay for every year of service, whichever is higher.

Same; Same; Same; Same; Same; Respondents dismissal as petitioner corporations General
Manager did not amount to an intra-corporate controversy.With all the foregoing, this
Court is fully convinced that, indeed, respondent, though occupying the General Manager
position, was not a corporate officer of petitioner corporation rather he was merely its
employee occupying a high-ranking position. Accordingly, respondents dismissal as
petitioner corporations General Manager did not amount to an intra-corporate
controversy. Jurisdiction therefor properly belongs with the Labor Arbiter and not with the
RTC.

Same; Same; Due Process; The requirement of due process shall be deemed complied with
upon service of a written notice to the employee and the appropriate Regional Office of the
Department of Labor and Employment at least thirty days before effectivity of the
termination, specifying the ground or grounds for termination.As previously discussed,
respondents dismissal was due to an authorized cause, however, petitioner corporation
failed to observe procedural due process in effecting such dismissal. In Culili v. Eastern
Telecommunications Philippines, Inc., 642 SCRA 338 (2011), this Court made the following
pronouncements, thus: x x x x For termination of employment as defined in Article 283 of
the Labor Code, the requirement of due process shall be deemed complied with upon
service of a written notice to the employee and the appropriate Regional Office of the
Department of Labor and Employment at least thirty days before effectivity of the
termination, specifying the ground or grounds for termination.

Same; Same; In termination cases, the burden of proving just and valid cause for dismissing
an employee from his employment rests upon the employer.In termination cases, the

Same; Same; Same; The necessary consequence for such failure to comply with the onemonth prior written notice rule which constitutes a violation of an employees right to

statutory due process is the payment of indemnity in the form of nominal damages.The
records of this case disclosed that there was absolutely no written notice given by petitioner
corporation to the respondent and to the DOLE prior to the cessation of its business
operations. This is evident from the fact that petitioner corporation effected respondents
dismissal on the same date that it decided to stop and cease its business operations. The
necessary consequence of such failure to comply with the one-month prior written notice
rule, which constitutes a violation of an employees right to statutory due process, is the
payment of indemnity in the form of nominal damages.
Corporate Officers; Corporate Liability; Corporate officers are not personally liable for their
official acts unless it is shown that they have exceeded their authority.As a rule,
corporation has a personality separate and distinct from its officers, stockholders and
members such that corporate officers are not personally liable for their official acts unless
it is shown that they have exceeded their authority. However, this corporate veil can be
pierced when the notion of the legal entity is used as a means to perpetrate fraud, an illegal
act, as a vehicle for the evasion of an existing obligation, and to confuse legitimate issues.
Under the Labor Code, for instance, when a corporation violates a provision declared to be
penal in nature, the penalty shall be imposed upon the guilty officer or officers of the
corporation.

controversy. Nonetheless, the Court of Appeals remanded the case to the NLRC for further
proceedings to determine the proper amount of monetary awards that should be given to
respondent.
Assailed as well is the Court of Appeals Resolution4 dated 7 March 2006 denying their
Motion for Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized
and existing under and by virtue of the laws of the Philippines. It is primarily engaged in
buying, marketing, selling and distributing in retail or wholesale for export or import
household appliances and products and other items.5 It took over the business operations
of Marc Marketing, Inc. which was made non-operational following its incorporation and
registration with the Securities and Exchange Commission (SEC). Petitioner Lucila V. Joson
(Lucila) is the President and majority stockholder of petitioner corporation. She was also the
former President and majority stockholder of the defunct Marc Marketing, Inc.
Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager,
incorporator, director and stockholder of petitioner corporation.
The controversy of this case arose from the following factual milieu:

PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Aguirre, Abao, Pamfilo, Paras, Pineda & Agustin Law Offices for petitioners.
Edilberto G. Carmelo for respondent.
PEREZ, J.:
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein
petitioners Marc II Marketing, Inc. and Lucila V. Joson assailed the Decision1 dated 20 June
2005 of the Court of Appeals in CA-G.R. SP No. 76624 for reversing and setting aside the
Resolution2 of the National Labor Relations Commission (NLRC) dated 15 October 2002,
thereby affirming the Labor Arbiters Decision3 dated 1 October 2001 finding herein
respondent Alfredo M. Josons dismissal from employment as illegal. In the questioned
Decision, the Court of Appeals upheld the Labor Arbiters jurisdiction over the case on the
basis that respondent was not an officer but a mere employee of petitioner Marc II
Marketing, Inc., thus, totally disregarding the latters allegation of intra-corporate

Before petitioner corporation was officially incorporated,6 respondent has already been
engaged by petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to work as
the General Manager of petitioner corporation. It was formalized through the execution of a
Management Contract7 dated 16 January 1994 under the letterhead of Marc Marketing,
Inc.8 as petitioner corporation is yet to be incorporated at the time of its execution. It was
explicitly provided therein that respondent shall be entitled to 30% of its net income for his
work as General Manager. Respondent will also be granted 30% of its net profit to
compensate for the possible loss of opportunity to work overseas.9
Pending incorporation of petitioner corporation, respondent was designated as the General
Manager of Marc Marketing, Inc., which was then in the process of winding up its business.
For occupying the said position, respondent was among its corporate officers by the express
provision of Section 1, Article IV10 of its by-laws.11
On 15 August 1994, petitioner corporation was officially incorporated and registered with
the SEC. Accordingly, Marc Marketing, Inc. was made non-operational. Respondent
continued to discharge his duties as General Manager but this time under petitioner
corporation.

Pursuant to Section 1, Article IV12 of petitioner corporations by-laws,13 its corporate

officers are as follows: Chairman, President, one or more Vice-President(s), Treasurer and
Secretary. Its Board of Directors, however, may, from time to time, appoint such other
officers as it may determine to be necessary or proper.
Per an undated Secretarys Certificate,14 petitioner corporations Board of Directors
conducted a meeting on 29 August 1994 where respondent was appointed as one of its
corporate officers with the designation or title of General Manager to function as a
managing director with other duties and responsibilities that the Board of Directors may
provide and authorized.15
Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its
operations, as evidenced by an Affidavit of Non-Operation16 dated 31 August 1998, due to
poor sales collection aggravated by the inefficient management of its affairs. On the same
date, it formally informed respondent of the cessation of its business operation.
Concomitantly, respondent was apprised of the termination of his services as General
Manager since his services as such would no longer be necessary for the winding up of its
affairs.17
Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against
petitioners before the Labor Arbiter which was docketed as NLRC NCR Case No. 00-0304102-99.
In his complaint, respondent averred that petitioner Lucila dismissed him from his
employment with petitioner corporation due to the feeling of hatred she harbored towards
his family. The same was rooted in the filing by petitioner Lucilas estranged husband, who
happened to be respondents brother, of a Petition for Declaration of Nullity of their
Marriage.18
For the parties failure to settle the case amicably, the Labor Arbiter required them to
submit their respective position papers. Respondent complied but petitioners opted to file a
Motion to Dismiss grounded on the Labor Arbiters lack of jurisdiction as the case involved
an intra-corporate controversy, which jurisdiction belongs to the SEC [now with the Regional
Trial Court (RTC)].19 Petitioners similarly raised therein the ground of prescription of
respondents monetary claim.
On 5 September 2000, the Labor Arbiter issued an Order20 deferring the resolution of
petitioners Motion to Dismiss until the final determination of the case. The Labor Arbiter
also reiterated his directive for petitioners to submit position paper. Still, petitioners did not

comply. Insisting that the Labor Arbiter has no jurisdiction over the case, they instead filed
an Urgent Motion to Resolve the Motion to Dismiss and the Motion to Suspend Filing of
Position Paper.
In an Order21 dated 15 February 2001, the Labor Arbiter denied both motions and declared
final the Order dated 5 September 2000. The Labor Arbiter then gave petitioners a period of
five days from receipt thereof within which to file position paper, otherwise, their Motion to
Dismiss will be treated as their position paper and the case will be considered submitted for
decision.
Petitioners, through counsel, moved for extension of time to submit position paper. Despite
the requested extension, petitioners still failed to submit the same. Accordingly, the case
was submitted for resolution.
On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its
decretal portion reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered declaring [respondents]
dismissal from employment illegal. Accordingly, [petitioners] are hereby ordered:
1. To reinstate [respondent] to his former or equivalent position without loss of
seniority rights, benefits, and privileges;
2. Jointly and severally liable to pay [respondents] unpaid wages in the amount of
P450,000.00 per month from [26 March 1996] up to time of dismissal in the total
amount of P6,300,000.00;
3. Jointly and severally liable to pay [respondents] full backwages in the amount of
P450,000.00 per month from date of dismissal until actual reinstatement which at the
time of promulgation amounted to P21,600,000.00;
4. Jointly and severally liable to pay moral damages in the amount of P100,000.00
and attorneys fees in the amount of 5% of the total monetary award.22 [Emphasis
supplied.]
In the aforesaid Decision, the Labor Arbiter initially resolved petitioners Motion to Dismiss
by finding the ground of lack of jurisdiction to be without merit. The Labor Arbiter
elucidated that petitioners failed to adduce evidence to prove that the present case
involved an intra-corporate controversy. Also, respondents money claim did not arise from

his being a director or stockholder of petitioner corporation but from his position as being
its General Manager. The Labor Arbiter likewise held that respondent was not a corporate
officer under petitioner corporations by-laws. As such, respondents complaint clearly arose
from an employer-employee relationship, thus, subject to the Labor Arbiters jurisdiction.
The Labor Arbiter then declared respondents dismissal from employment as illegal.
Respondent, being a regular employee of petitioner corporation, may only be dismissed for
a valid cause and upon proper compliance with the requirements of due process. The
records, though, revealed that petitioners failed to present any evidence to justify
respondents dismissal.
Aggrieved, petitioners appealed the aforesaid Labor Arbiters Decision to the NLRC.
In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving
credence to the Secretarys Certificate, which evidenced petitioner corporations Board of
Directors meeting in which a resolution was approved appointing respondent as its
corporate officer with designation as General Manager. Therefrom, the NLRC reversed and
set aside the Labor Arbiters Decision dated 1 October 2001 and dismissed respondents
Complaint for want of jurisdiction.23
The NLRC enunciated that the validity of respondents appointment and termination from
the position of General Manager was made subject to the approval of petitioner
corporations Board of Directors. Had respondent been an ordinary employee, such board
action would not have been required. As such, it is clear that respondent was a corporate
officer whose dismissal involved a purely intra-corporate controversy. The NLRC went
further by stating that respondents claim for 30% of the net profit of the corporation can
only emanate from his right of ownership therein as stockholder, director and/or corporate
officer. Dividends or profits are paid only to stockholders or directors of a corporation and
not to any ordinary employee in the absence of any profit sharing scheme. In addition, the
question of remuneration of a person who is not a mere employee but a stockholder and
officer of a corporation is not a simple labor problem. Such matter comes within the ambit
of corporate affairs and management and is an intra-corporate controversy in
contemplation of the Corporation Code.24
When respondents Motion for Reconsideration was denied in another Resolution25 dated
23 January 2003, he filed a Petition for Certiorari with the Court of Appeals ascribing grave
abuse of discretion on the part of the NLRC.

On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the
Labor Arbiter has jurisdiction over the present controversy. It upheld the finding of the
Labor Arbiter that respondent was a mere employee of petitioner corporation, who has
been illegally dismissed from employment without valid cause and without due process.
Nevertheless, it ordered the records of the case remanded to the NLRC for the
determination of the appropriate amount of monetary awards to be given to respondent.
The Court of Appeals, thus, decreed:
WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED to
have jurisdiction over the controversy. The records are REMANDED to the NLRC for further
proceedings to determine the appropriate amount of monetary awards to be adjudged in
favor of [respondent]. Costs against the [petitioners] in solidum.26
Petitioners moved for its reconsideration but to no avail.27
Petitioners are now before this Court with the following assignment of errors:
I.
THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN
DECIDING THAT THE NLRC HAS THE JURISDICTION IN RESOLVING A PURELY INTRACORPORATE MATTER WHICH IS COGNIZABLE BY THE SECURITIES AND EXCHANGE
COMMISSION/REGIONAL TRIAL COURT.
II.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE, STILL
THE COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO EMPLOYEREMPLOYEE RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO M. JOSON AND MARC II
MARKETING, INC. [PETITIONER CORPORATION].
III.
ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE CASE, THE
COURT OF APPEALS ERRED IN NOT RULING THAT THE LABOR ARBITER COMMITTED GRAVE
ABUSE OF DISCRETION IN AWARDING MULTI-MILLION PESOS IN COMPENSATION AND
BACKWAGES BASED ON THE PURPORTED GROSS INCOME OF [PETITIONER CORPORATION].
IV.

THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION
IN NOT MAKING ANY FINDINGS AND RULING THAT [PETITIONER LUCILA] SHOULD NOT BE
HELD SOLIDARILY LIABLE IN THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH ON HER
PART.28
Petitioners fault the Court of Appeals for having sustained the Labor Arbiters finding that
respondent was not a corporate officer under petitioner corporations by-laws. They insist
that there is no need to amend the corporate by-laws to specify who its corporate officers
are. The resolution issued by petitioner corporations Board of Directors appointing
respondent as General Manager, coupled with his assumption of the said position, positively
made him its corporate officer. More so, respondents position, being a creation of
petitioner corporations Board of Directors pursuant to its by-laws, is a corporate office
sanctioned by the Corporation Code and the doctrines previously laid down by this Court.
Thus, respondents removal as petitioner corporations General Manager involved a purely
intra-corporate controversy over which the RTC has jurisdiction.
Petitioners further contend that respondents claim for 30% of the net profit of petitioner
corporation was anchored on the purported Management Contract dated 16 January 1994.
It should be noted, however, that said Management Contract was executed at the time
petitioner corporation was still nonexistent and had no juridical personality yet. Such being
the case, respondent cannot invoke any legal right therefrom as it has no legal and binding
effect on petitioner corporation. Moreover, it is clear from the Articles of Incorporation of
petitioner corporation that respondent was its director and stockholder. Indubitably,
respondents claim for his share in the profit of petitioner corporation was based on his
capacity as such and not by virtue of any employer-employee relationship.
Petitioners further avow that even if the present case does not pose an intra-corporate
controversy, still, the Labor Arbiters multi-million peso awards in favor of respondent were
erroneous. The same was merely based on the latters self-serving computations without
any supporting documents.
Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with
petitioner corporation. There was neither allegation nor iota of evidence presented to show
that she acted with malice and bad faith in her dealings with respondent. Moreover, the
Labor Arbiter, in his Decision, simply concluded that petitioner Lucila was jointly and
severally liable with petitioner corporation without making any findings thereon. It was,
therefore, an error for the Court of Appeals to hold petitioner Lucila solidarily liable with
petitioner corporation.

From the foregoing arguments, the initial question is which between the Labor Arbiter or
the RTC, has jurisdiction over respondents dismissal as General Manager of petitioner
corporation. Its resolution necessarily entails the determination of whether respondent as
General Manager of petitioner corporation is a corporate officer or a mere employee of the
latter.
While Article 217(a)229 of the Labor Code, as amended, provides that it is the Labor Arbiter
who has the original and exclusive jurisdiction over cases involving termination or dismissal
of workers when the person dismissed or terminated is a corporate officer, the case
automatically falls within the province of the RTC. The dismissal of a corporate officer is
always regarded as a corporate act and/or an intra-corporate controversy.30
Under Section 531 of Presidential Decree No. 902-A, intra-corporate controversies are those
controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and the State insofar
as it concerns their individual franchise or right to exist as such entity. It also includes
controversies in the election or appointments of directors, trustees, officers or managers
of such corporations, partnerships or associations.32
Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the
controversy, the status or relationship of the parties and the nature of the question that is
the subject of their controversy must be taken into consideration.33
In Easycall Communications Phils., Inc. v. King, this Court held that in the context of
Presidential Decree No. 902-A, corporate officers are those officers of a corporation who
are given that character either by the Corporation Code or by the corporations by-laws.
Section 2534 of the Corporation Code specifically enumerated who are these corporate
officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such other officers as may
be provided for in the by-laws.35
The aforesaid Section 25 of the Corporation Code, particularly the phrase such other
officers as may be provided for in the by-laws, has been clarified and elaborated in this
Courts recent pronouncement in Matling Industrial and Commercial Corporation v. Coros,
where it held, thus:
Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in
order to be considered as a corporate office. Thus, the creation of an office pursuant to or

under a [b]y-[l]aw enabling provision is not enough to make a position a corporate office.
[In] Guerrea v. Lezama [citation omitted] the first ruling on the matter, held that the only
officers of a corporation were those given that character either by the Corporation Code or
by the [b]y-[l]aws; the rest of the corporate officers could be considered only as
employees or subordinate officials. Thus, it was held in Easycall Communications Phils., Inc.
v. King [citation omitted]:
An office is created by the charter of the corporation and the officer is elected by
the directors or stockholders. On the other hand, an employee occupies no office
and generally is employed not by the action of the directors or stockholders but by
the managing officer of the corporation who also determines the compensation to
be paid to such employee.
xxxx
This interpretation is the correct application of Section 25 of the Corporation Code, which
plainly states that the corporate officers are the President, Secretary, Treasurer and such
other officers as may be provided for in the [b]y-[l]aws. Accordingly, the corporate officers
in the context of PD No. 902-A are exclusively those who are given that character either by
the Corporation Code or by the corporations [b]y[l]aws.
A different interpretation can easily leave the way open for the Board of Directors to
circumvent the constitutionally guaranteed security of tenure of the employee by the
expedient inclusion in the [b]y-[l]aws of an enabling clause on the creation of just any
corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency administering the
Corporation Code, adopted a similar interpretation of Section 25 of the Corporation Code
in its Opinion dated November 25, 1993 [citation omitted], to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever
are the corporate officers enumerated in the by-laws are the exclusive Officers of
the corporation and the Board has no power to create other Offices without
amending first the corporate [b]y-laws. However, the Board may create appointive
positions other than the positions of corporate Officers, but the persons occupying
such positions are not considered as corporate officers within the meaning of
Section 25 of the Corporation Code and are not empowered to exercise the functions
of the corporate Officers, except those functions lawfully delegated to them. Their

functions and duties are to be determined by the Board of Directors/Trustees.36

[Emphasis supplied.]
A careful perusal of petitioner corporations by-laws, particularly paragraph 1, Section 1,
Article IV,37 would explicitly reveal that its corporate officers are composed only of: (1)
Chairman; (2) President; (3) one or more Vice-President; (4) Treasurer; and (5) Secretary.38
The position of General Manager was not among those enumerated.
Paragraph 2, Section 1, Article IV of petitioner corporations by-laws, empowered its Board
of Directors to appoint such other officers as it may determine necessary or proper.39 It is
by virtue of this enabling provision that petitioner corporations Board of Directors allegedly
approved a resolution to make the position of General Manager a corporate office, and,
thereafter, appointed respondent thereto making him one of its corporate officers. All of
these acts were done without first amending its by-laws so as to include the General
Manager in its roster of corporate officers.
With the given circumstances and in conformity with Matling Industrial and Commercial
Corporation v. Coros, this Court rules that respondent was not a corporate officer of
petitioner corporation because his position as General Manager was not specifically
mentioned in the roster of corporate officers in its corporate by-laws. The enabling clause in
petitioner corporations by-laws empowering its Board of Directors to create additional
officers, i.e., General Manager, and the alleged subsequent passage of a board resolution to
that effect cannot make such position a corporate office. Matling clearly enunciated that
the board of directors has no power to create other corporate offices without first
amending the corporate by-laws so as to include therein the newly created corporate office.
Though the board of directors may create appointive positions other than the positions of
corporate officers, the persons occupying such positions cannot be viewed as corporate
officers under Section 25 of the Corporation Code.40 In view thereof, this Court holds that
unless and until petitioner corporations by-laws is amended for the inclusion of General
Manager in the list of its corporate officers, such position cannot be considered as a
corporate office within the realm of Section 25 of the Corporation Code.
This Court considers that the interpretation of Section 25 of the Corporation Code laid down
in Matling safeguards the constitutionally enshrined right of every employee to security of
tenure. To allow the creation of a corporate officer position by a simple inclusion in the
corporate by-laws of an enabling clause empowering the board of directors to do so can
result in the circumvention of that constitutionally well-protected right.41
It is also of no moment that respondent, being petitioner corporations General Manager,
was given the functions of a managing director by its Board of Directors. As held in Matling,

the only officers of a corporation are those given that character either by the Corporation
Code or by the corporate by-laws. It follows then that the corporate officers enumerated in
the by-laws are the exclusive officers of the corporation while the rest could only be
regarded as mere employees or subordinate officials.42 Respondent, in this case, though
occupying a high ranking and vital position in petitioner corporation but which position was
not specifically enumerated or mentioned in the latters by-laws, can only be regarded as its
employee or subordinate official. Noticeably, respondents compensation as petitioner
corporations General Manager was set, fixed and determined not by the latters Board of
Directors but simply by its President, petitioner Lucila. The same was not subject to the
approval of petitioner corporations Board of Directors. This is an indication that respondent
was an employee and not a corporate officer.
To prove that respondent was petitioner corporations corporate officer, petitioners
presented before the NLRC an undated Secretarys Certificate showing that corporations
Board of Directors approved a resolution making respondents position of General Manager
a corporate office. The submission, however, of the said undated Secretarys Certificate will
not change the fact that respondent was an employee. The certification does not amount to
an amendment of the by-laws which is needed to make the position of General Manager a
corporate office.
Moreover, as has been aptly observed by the Court of Appeals, the board resolution
mentioned in that undated Secretarys Certificate and the latter itself were obvious
fabrications, a mere afterthought. Here we quote with conformity the Court of Appeals
findings on this matter stated in this wise:
The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29
August 1994], why did not [herein petitioners] attach it to their [M]otion to [D]ismiss filed
on [26 August 1999], when it could have been the best evidence that [herein respondent]
was a corporate officer? Secondly, why did they report the [respondent] instead as [herein
petitioner corporations] employee to the Social Security System [(SSS)] on [11 October
1994] or a later date than their [29 August 1994] board resolution? Thirdly, why is there no
indication that the [respondent], the person concerned himself, and the [SEC] were
furnished with copies of said board resolution? And, lastly, why is the corporate
[S]ecretarys [C]ertificate not notarized in keeping with the customary procedure? That is
why we called it manipulative evidence as it was a shameless sham meant to be thrown in
as a wild card to muddle up the [D]ecision of the Labor Arbiter to the end that it be
overturned as the latter had firmly pointed out that [respondent] is not a corporate officer
under [petitioner corporations by-laws]. Regrettably, the [NLRC] swallowed the bait hookline-and sinker. It failed to see through its nature as a belatedly manufactured evidence.
And even on the assumption that it were an authentic board resolution, it did not make

[respondent] a corporate officer as the board did not first and properly create the position
of a [G]eneral [M]anager by amending its by-laws.
(2) The scope of the term officer in the phrase and such other officers as may be
provided for in the by-laws[] (Sec. 25, par. 1), would naturally depend much on the
provisions of the by-laws of the corporation. (SEC Opinion, [4 December 1991.]) If the bylaws enumerate the officers to be elected by the board, the provision is conclusive, and the
board is without power to create new offices without amending the by-laws. (SEC Opinion,
[19 October 1971.])
(3) If, for example, the general manager of a corporation is not listed as an officer, he is to
be classified as an employee although he has always been considered as one of the principal
officers of a corporation [citing De Leon, H. S., The Corporation Code of the Philippines
Annotated, 1993 Ed., p. 215.]43 [Emphasis supplied.]
That respondent was also a director and a stockholder of petitioner corporation will not
automatically make the case fall within the ambit of intra-corporate controversy and be
subjected to RTCs jurisdiction. To reiterate, not all conflicts between the stockholders and
the corporation are classified as intra-corporate. Other factors such as the status or
relationship of the parties and the nature of the question that is the subject of the
controversy44 must be considered in determining whether the dispute involves corporate
matters so as to regard them as intra-corporate controversies.45 As previously discussed,
respondent was not a corporate officer of petitioner corporation but a mere employee
thereof so there was no intra-corporate relationship between them. With regard to the
subject of the controversy or issue involved herein, i.e., respondents dismissal as petitioner
corporations General Manager, the same did not present or relate to an intra-corporate
dispute. To note, there was no evidence submitted to show that respondents removal as
petitioner corporations General Manager carried with it his removal as its director and
stockholder. Also, petitioners allegation that respondents claim of 30% share of petitioner
corporations net profit was by reason of his being its director and stockholder was without
basis, thus, self-serving. Such an allegation was tantamount to a mere speculation for
petitioners failure to substantiate the same.
In addition, it was not shown by petitioners that the position of General Manager was
offered to respondent on account of his being petitioner corporations director and
stockholder. Also, in contrast to NLRCs findings, neither petitioner corporations by-laws
nor the Management Contract stated that respondents appointment and termination from
the position of General Manager was subject to the approval of petitioner corporations
Board of Directors. If, indeed, respondent was a corporate officer whose termination was
subject to the approval of its Board of Directors, why is it that his termination was effected

only by petitioner Lucila, President of petitioner corporation? The records are bereft of any
evidence to show that respondents dismissal was done with the conformity of petitioner
corporations Board of Directors or that the latter had a hand on respondents dismissal. No
board resolution whatsoever was ever presented to that effect.
With all the foregoing, this Court is fully convinced that, indeed, respondent, though
occupying the General Manager position, was not a corporate officer of petitioner
corporation rather he was merely its employee occupying a high-ranking position.
Accordingly, respondents dismissal as petitioner corporations General Manager did not
amount to an intra-corporate controversy. Jurisdiction therefor properly belongs with the
Labor Arbiter and not with the RTC.
Having established that respondent was not petitioner corporations corporate officer but
merely its employee, and that, consequently, jurisdiction belongs to the Labor Arbiter, this
Court will now determine if respondents dismissal from employment is illegal.
It was not disputed that respondent worked as petitioner corporations General Manager
from its incorporation on 15 August 1994 until he was dismissed on 30 June 1997. The cause
of his dismissal was petitioner corporations cessation of business operations due to poor
sales collection aggravated by the inefficient management of its affairs.
In termination cases, the burden of proving just and valid cause for dismissing an employee
from his employment rests upon the employer. The latters failure to discharge that burden
would necessarily result in a finding that the dismissal is unjustified.46
Under Article 283 of the Labor Code, as amended, one of the authorized causes in
terminating the employment of an employee is the closing or cessation of operation of the
establishment or undertaking. Article 283 of the Labor Code, as amended, reads, thus:
ART. 283. Closure of establishment and reduction of personnel.The employer may
also terminate the employment of any employee due to the installation of labor savingdevices, redundancy, retrenchment to prevent losses or the closing or cessation of
operation of the establishment or undertaking unless the closing is for the purpose of
circumventing the provisions of this Title, by serving a written notice on the workers and the
Department of Labor and Employment at least one (1) month before the intended date
thereof. x x x In case of retrenchment to prevent losses and in cases of closures or cessation
of operations of establishment or undertaking not due to serious business losses or
financial reverses, the separation pay shall be equivalent to one (1) month pay or to at

least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of
at least six (6) months shall be considered one (1) whole year. [Emphasis supplied.]
From the afore-quoted provision, the closure or cessation of operations of establishment
or undertaking may either be due to serious business losses or financial reverses or
otherwise. If the closure or cessation was due to serious business losses or financial
reverses, it is incumbent upon the employer to sufficiently and convincingly prove the same.
If it is otherwise, the employer can lawfully close shop anytime as long as it was bona fide in
character and not impelled by a motive to defeat or circumvent the tenurial rights of
employees and as long as the terminated employees were paid in the amount
corresponding to their length of service.47
Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for
a valid cessation of business operations: (a) service of a written notice to the employees
and to the Department of Labor and Employment (DOLE) at least one month before the
intended date thereof; (b) the cessation of business must be bona fide in character; and (c)
payment to the employees of termination pay amounting to one month pay or at least
one-half month pay for every year of service, whichever is higher.
In this case, it is obvious that petitioner corporations cessation of business operations was
not due to serious business losses. Mere poor sales collection, coupled with
mismanagement of its affairs does not amount to serious business losses. Nonetheless,
petitioner corporation can still validly cease or close its business operations because such
right is legally allowed, so long as it was not done for the purpose of circumventing the
provisions on termination of employment embodied in the Labor Code.48 As has been
stressed by this Court in Industrial Timber Corporation v. Ababon, thus:
Just as no law forces anyone to go into business, no law can compel anybody to continue
the same. It would be stretching the intent and spirit of the law if a court interferes with
managements prerogative to close or cease its business operations just because the
business is not suffering from any loss or because of the desire to provide the workers
continued employment.49
A careful perusal of the records revealed that, indeed, petitioner corporation has stopped
and ceased business operations beginning 30 June 1997. This was evidenced by a notarized
Affidavit of Non-Operation dated 31 August 1998. There was also no showing that the
cessation of its business operations was done in bad faith or to circumvent the Labor Code.
Nevertheless, in doing so, petitioner corporation failed to comply with the one-month prior
written notice rule. The records disclosed that respondent, being petitioner corporations
employee, and the DOLE were not given a written notice at least one month before

petitioner corporation ceased its business operations. Moreover, the records clearly show
that respondents dismissal was effected on the same date that petitioner corporation
decided to stop and cease its operation. Similarly, respondent was not paid separation pay
upon termination of his employment.

(d) In all cases of termination of employment, the following standards of due

process shall be substantially observed:

As respondents dismissal was not due to serious business losses, respondent is entitled to
payment of separation pay equivalent to one month pay or at least one-half month pay for
every year of service, whichever is higher. The rationale for this was laid down in Reahs
Corporation v. National Labor Relations Commission,50 thus:

For termination of employment as defined in Article 283 of the Labor Code, the
requirement of due process shall be deemed complied with upon service of a
written notice to the employee and the appropriate Regional Office of the
Department of Labor and Employment at least thirty days before effectivity of the
termination, specifying the ground or grounds for termination.

The grant of separation pay, as an incidence of termination of employment under Article

283, is a statutory obligation on the part of the employer and a demandable right on the
part of the employee, except only where the closure or cessation of operations was due to
serious business losses or financial reverses and there is sufficient proof of this fact or
condition. In the absence of such proof of serious business losses or financial reverses, the
employer closing his business is obligated to pay his employees and workers their
separation pay.
The rule, therefore, is that in all cases of business closure or cessation of operation or
undertaking of the employer, the affected employee is entitled to separation pay. This is
consistent with the state policy of treating labor as a primary social economic force,
affording full protection to its rights as well as its welfare. The exception is when the
closure of business or cessation of operations is due to serious business losses or financial
reverses duly proved, in which case, the right of affected employees to separation pay is lost
for obvious reasons.51 [Emphasis supplied.]
As previously discussed, respondents dismissal was due to an authorized cause, however,
petitioner corporation failed to observe procedural due process in effecting such dismissal.
In Culili v. Eastern Telecommunications Philippines, Inc.,52 this Court made the following
pronouncements, thus:
x x x there are two aspects which characterize the concept of due process under the Labor
Code: one is substantivewhether the termination of employment was based on the
provision of the Labor Code or in accordance with the prevailing jurisprudence; the other is
proceduralthe manner in which the dismissal was effected.
Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:

xxxx

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of notices was intended not only to
enable the employees to look for another employment and therefore ease the impact
of the loss of their jobs and the corresponding income, but more importantly, to give
the Department of Labor and Employment (DOLE) the opportunity to ascertain the
verity of the alleged authorized cause of termination.53 [Emphasis supplied].
The records of this case disclosed that there was absolutely no written notice given by
petitioner corporation to the respondent and to the DOLE prior to the cessation of its
business operations. This is evident from the fact that petitioner corporation effected
respondents dismissal on the same date that it decided to stop and cease its business
operations. The necessary consequence of such failure to comply with the one-month prior
written notice rule, which constitutes a violation of an employees right to statutory due
process, is the payment of indemnity in the form of nominal damages.54 In Culili v. Eastern
Telecommunications Philippines, Inc., this Court further held:
In Serrano v. National Labor Relations Commission [citation omitted], we noted that a job is
more than the salary that it carries. There is a psychological effect or a stigma in
immediately finding ones self laid off from work. This is exactly why our labor laws have
provided for mandating procedural due process clauses. Our laws, while recognizing the
right of employers to terminate employees it cannot sustain, also recognize the
employees right to be properly informed of the impending severance of his ties with the
company he is working for. x x x.
x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed
upon employers who fail to comply with the procedural due process requirements in
terminating its employees. In Agabon v. National Labor Relations Commission [citation

omitted], this Court reverted back to the doctrine in Wenphil Corporation v. National Labor
Relations Commission [citation omitted] and held that where the dismissal is due to a just
or authorized cause, but without observance of the due process requirements, the
dismissal may be upheld but the employer must pay an indemnity to the employee. The
sanctions to be imposed however, must be stiffer than those imposed in Wenphil to achieve
a result fair to both the employers and the employees.

mentioned therein, unless said period is extended or the corporation is sooner dissolved in
accordance with law. [Emphasis supplied.]
Logically, there is no corporation to speak of prior to an entitys incorporation. And no
contract entered into before incorporation can bind the corporation.

Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under
Article 282 but the employer failed to comply with the notice requirement, the
sanction to be imposed upon him should be tempered because the dismissal process
was, in effect, initiated by an act imputable to the employee; and (2) if the dismissal is
based on an authorized cause under Article 283 but the employer failed to comply
with the notice requirement, the sanction should be stiffer because the dismissal
process was initiated by the employers exercise of his management prerogative.55
[Emphasis supplied.]

As can be gleaned from the records, the Management Contract dated 16 January 1994 was
executed between respondent and petitioner Lucila months before petitioner corporations
incorporation on 15 August 1994. Similarly, it was done when petitioner Lucila was still the
President of Marc Marketing, Inc. Undeniably, it cannot have any binding and legal effect on
petitioner corporation. Also, there was no evidence presented to prove that petitioner
corporation adopted, ratified or confirmed the Management Contract. It is for the same
reason that petitioner corporation cannot be considered estopped from questioning its
binding effect now that respondent was invoking the same against it. In no way, then, can it
be enforced against petitioner corporation, much less, its provisions fixing respondents
compensation as General Manager to 30% of petitioner corporations net profit.
Consequently, such percentage cannot be the basis for the computation of respondents
separation pay. This finding, however, will not affect the undisputed fact that respondent
was, indeed, the General Manager of petitioner corporation from its incorporation up to the
time of his dismissal.

Thus, in addition to separation pay, respondent is also entitled to an award of nominal

damages. In conformity with this Courts ruling in Culili v. Eastern Telecommunications
Philippines, Inc. and Shimizu Phils. Contractors, Inc. v. Callanta, both citing Jaka Food
Processing Corporation v. Pacot,56 this Court fixed the amount of nominal damages to
P50,000.00.

Accordingly, this Court finds it necessary to still remand the present case to the Labor
Arbiter to conduct further proceedings for the sole purpose of determining the
compensation that respondent was actually receiving during the period that he was the
General Manager of petitioner corporation, this, for the proper computation of his
separation pay.

With respect to petitioners contention that the Management Contract executed between
respondent and petitioner Lucila has no binding effect on petitioner corporation for having
been executed way before its incorporation, this Court finds the same meritorious.

As regards petitioner Lucilas solidary liability, this Court affirms the same.

In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from
Agabon, held that since there is a clear-cut distinction between a dismissal due to a just
cause and a dismissal due to an authorized cause, the legal implications for employers who
fail to comply with the notice requirements must also be treated differently:

Section 19 of the Corporation Code expressly provides:

Sec. 19. Commencement of corporate existence.A private corporation formed or
organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors shall constitute a body politic
and corporate under the name stated in the articles of incorporation for the period of time

As a rule, corporation has a personality separate and distinct from its officers, stockholders
and members such that corporate officers are not personally liable for their official acts
unless it is shown that they have exceeded their authority. However, this corporate veil
can be pierced when the notion of the legal entity is used as a means to perpetrate fraud, an
illegal act, as a vehicle for the evasion of an existing obligation, and to confuse legitimate
issues. Under the Labor Code, for instance, when a corporation violates a provision declared
to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of the
corporation.57

Based on the prevailing circumstances in this case, petitioner Lucila, being the President of
petitioner corporation, acted in bad faith and with malice in effecting respondents dismissal
from employment. Although petitioner corporation has a valid cause for dismissing
respondent due to cessation of business operations, however, the latters dismissal
therefrom was done abruptly by its President, petitioner Lucila. Respondent was not given
the required one-month prior written notice that petitioner corporation will already cease
its business operations. As can be gleaned from the records, respondent was dismissed
outright by petitioner Lucila on the same day that petitioner corporation decided to stop
and cease its business operations. Worse, respondent was not given separation pay
considering that petitioner corporations cessation of business was not due to business
losses or financial reverses.
WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7
March 2006, respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are hereby
AFFIRMED with the MODIFICATION finding respondents dismissal from employment legal
but without proper observance of due process. Accordingly, petitioner corporation, jointly
and solidarily liable with petitioner Lucila, is hereby ordered to pay respondent the
following; (1) separation pay equivalent to one month pay or at least one-half month pay for
every year of service, whichever is higher, to be computed from the commencement of
employment until termination; and (2) nominal damages in the amount of P50,000.00.
This Court, however, finds it proper to still remand the records to the Labor Arbiter to
conduct further proceedings for the sole purpose of determining the compensation that
respondent was actually receiving during the period that he was the General Manager of
petitioner corporation for the proper computation of his separation pay.
Costs against petitioners.
SO ORDERED.
Carpio (Chairperson), Brion, Sereno and Reyes, JJ., concur.
Judgment and resolution affirmed with modification.
Note.Corporate directors and officers are solidarily liable with the corporation for the
termination of employees done with malice or bad faith. (Mandaue Dinghow Dimsum House
Co., Inc. vs. National Labor Relations CommissionFourth Division, 547 SCRA 402 [2008])

G.R. No. 178678. April 16, 2009.*

DR. HANS CHRISTIAN M. SEERES, petitioner, vs. COMMISSION ON ELECTIONS and
MELQUIADES A. ROBLES, respondents.
Election Law; Election Contests; Electoral Tribunals; Certiorari; While certiorari is the proper
remedy to question any final order, ruling and decision of the COMELEC rendered in the
exercise of its adjudicatory or quasi-judicial powers, there must be a showing that the
COMELEC acted with grave abuse of discretion and that there is no appeal or any plain,
speedy and adequate remedy in the ordinary course of law.A special civil action for
certiorari may be availed of when the tribunal, board, or officer exercising judicial or quasijudicial functions has acted without or in excess of jurisdiction and there is no appeal or any
plain, speedy, and adequate remedy in the ordinary course of law for the purpose of
annulling the proceeding. It is the proper remedy to question any final order, ruling and
decision of the COMELEC rendered in the exercise of its adjudicatory or quasi-judicial
powers. For certiorari to prosper, however, there must be a showing that the COMELEC
acted with grave abuse of discretion and that there is no appeal or any plain, speedy and
adequate remedy in the ordinary course of law. In the present case, a plain, speedy and
adequate remedy in the ordinary course of law was available to Seeres. The 1987
Constitution cannot be more explicit in this regard. Its Article VI, Section 17 states: Sec. 17.
The Senate and the House of Representatives shall each have an Electoral Tribunal which
shall be the sole judge of all contests relating to the election, returns and qualifications of
their respective Members. x x x
Same; Same; Same; Once a winning candidate has been proclaimed, taken his oath, and
assumed office as a Member of the House of Representatives, COMELECs jurisdiction over
elections relating to the election, returns, and qualifications ends, and the House of
Representatives Electoral Tribunals (HRETs) own jurisdiction begins.The House of
Representatives Electoral Tribunals (HRETs) sole and exclusive jurisdiction over contests
relative to the election, returns and qualifications of the members of the House of
Representatives begins only after a candidate has become a member of the House of
Representatives. Thus, once a winning candidate has been proclaimed, taken his oath, and
assumed office as a Member of the House of Representatives, COMELECs jurisdiction over
elections relating to the election, returns, and qualifications ends, and the HRETs own
jurisdiction begins.

Same; Same; Same; Party-List System; Where the right of the nominees as party-list
representatives had been recognized and declared by a Resolution of the COMELEC and the
nominees had taken their oath and already assumed their offices in the House of
Representatives, the proper recourse would have been to file a petition for quo warranto
before the House of Representatives Electoral Tribunal (HRET) within ten (10) days from
receipt of the Resolution and not a petition for certiorari before the Supreme Court.
Without a doubt, at the time Seeres filed this petition before this Court on July 23, 2007,
the right of the nominees as party-list representatives had been recognized and declared in
the July 19, 2007 Resolution and the nominees had taken their oath and already assumed
their offices in the House of Representatives. As such, the proper recourse would have been
to file a petition for quo warranto before the HRET within ten (10) days from receipt of the
July 19, 2007 Resolution and not a petition for certiorari before this Court. Since Seeres
failed to file a petition for quo warranto before the HRET within 10 days from receipt of the
July 19, 2007 Resolution declaring the validity of Robles Certificate of Nomination, said
Resolution of the COMELEC has already become final and executory. Thus, this petition has
now become moot and can be dismissed outright. And even if we entertain the instant
special civil action, still, petitioners postulations are bereft of merit.
Same; Party-List System; Electioneering; Partisan Political Activity; Words and Phrases; As
long as the acts embraced under Sec. 79 of the Omnibus Election Code pertain to or are in
connection with the nomination of a candidate by a party or organization, then such are
treated as internal matters and cannot be considered as electioneering or partisan political
activitythe twin acts of signing and filing a Certificate of Nomination are purely internal
processes of the party or organization and are not designed to enable or ensure the victory
of the candidate in the elections.Guided by the above perspective, Robles act of
submitting a nomination list for BUHAY cannot, without more, be considered electioneering
or partisan political activity within the context of the Election Code. First of all, petitioner did
not aver that Robles committed any of the five (5) acts defined in the aforequoted Sec. 79(b)
of the Code, let alone adduce proof to show the fact of commission. Second, even if Robles
performed any of the previously mentioned acts, Sec. 79 of the Code is nonetheless
unequivocal that if the same is done only for the purpose of enhancing the chances of
aspirants for nominations for candidacy to a public office by a political party, agreement, or
coalition of parties, it is not considered as a prohibited electioneering or partisan election
activity. From this provision, one can conclude that as long as the acts embraced under Sec.
79 pertain to or are in connection with the nomination of a candidate by a party or
organization, then such are treated as internal matters and cannot be considered as
electioneering or partisan political activity. The twin acts of signing and filing a Certificate of
Nomination are purely internal processes of the party or organization and are not designed
to enable or ensure the victory of the candidate in the elections. The act of Robles of
submitting the certificate nominating Velarde and others was merely in compliance with the

COMELEC requirements for nomination of party-list representatives and, hence, cannot be

treated as electioneering or partisan political activity proscribed under by Sec. 2(4) of Art.
IX(B) of the Constitution for civil servants. Moreover, despite the fact that Robles is a
nominating officer, as well as Chief of the LRTA, petitioner was unable to cite any legal
provision that prohibits his concurrent positions of LRTA President and acting president of a
party-list organization or that bars him from nominating.
Same; Same; Same; Same; It is irrelevant who among a party-list organizations officials sign
the Certificate of Nomination, as long as the signatory was so authorized by said
organization.The nomination of Velarde, Coscolluela, Tieng, Monsod, and Villarama to the
2007 party-list elections was, in the final analysis, an act of the National Council of BUHAY.
Robles role in the nominating process was limited to signing, on behalf of BUHAY, and
submitting the partys Certificate of Nomination to the COMELEC. The act of nominating
BUHAYs representatives was veritably a direct and official act of the National Council of
BUHAY and not Robles. Be that as it may, it is irrelevant who among BUHAYs officials signs
the Certificate of Nomination, as long as the signatory was so authorized by BUHAY. The
alleged disqualification of Robles as nominating officer is indeed a non-issue and does not
affect the act of the National Council of nominating Velarde and others. Hence, the
Certificate of Nomination, albeit signed by Robles, is still the product of a valid and legal act
of the National Council of BUHAY. Robles connection with LRTA could not really be
considered as a factor invalidating the nomination process.
Same; Same; Hold-Over Doctrine; As a general rule, officers and directors of a corporation
hold over after the expiration of their terms until such time as their successors are elected or
appointed.Petitioner Seeres further maintains that at the time the Certificate of
Nomination was submitted, Robles term as President of BUHAY had already expired, thus
effectively nullifying the Certificate of Nomination and the nomination process. Again,
petitioners contention is untenable. As a general rule, officers and directors of a
corporation hold over after the expiration of their terms until such time as their successors
are elected or appointed. Sec. 23 of the Corporation Code contains a provision to this effect,
thus: Section 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. The holdover doctrine has, to be
sure, a purpose which is at once legal as it is practical. It accords validity to what would
otherwise be deemed as dubious corporate acts and gives continuity to a corporate
enterprise in its relation to outsiders. This is the analogical situation obtaining in the present
case.

Same; Same; Same; De Facto Officers; Authorities are almost unanimous that one who
continues with the discharge of the functions of an office after the expiration of his or her
legal termno successor having, in the meantime, been appointed or chosenis commonly
regarded as a de facto officer, even where no provision is made by law for his holding over
and there is nothing to indicate the contrary.Authorities are almost unanimous that one
who continues with the discharge of the functions of an office after the expiration of his or
her legal termno successor having, in the meantime, been appointed or chosenis
commonly regarded as a de facto officer, even where no provision is made by law for his
holding over and there is nothing to indicate the contrary. By fiction of law, the acts of such
de facto officer are considered valid and effective. So it must be for the acts of Robles while
serving as a hold-over Buhay President. Among these acts was the submission of the
nomination certificate for the May 14, 2007 elections.
Same; Same; Estoppel; As a principle of equity rooted on natural justice, the bar of estoppel
precludes a person from going back on his own acts and representations to the prejudice of
another whom he has led to rely upon them.As a final consideration, it bears to state that
petitioner is estopped from questioning the authority of Robles as President of BUHAY. As a
principle of equity rooted on natural justice, the bar of estoppel precludes a person from
going back on his own acts and representations to the prejudice of another whom he has
led to rely upon them. Again, it cannot be denied that Robles, as BUHAY President, signed all
manifestations of the partys desire to participate in the 2001 and 2004 elections, as well as
all Certificates of Nomination. In fact, the corresponding certificate for the 2004 elections
included petitioner as one of the nominees. During this time, Robles term as President had
already expired, and yet, petitioner never questioned Robles authority to sign the
Certificate of Nomination. As a matter of fact, petitioner even benefited from the
nomination, because he earned a seat in the House of Representatives as a result of the
partys success. Clearly, petitioner cannot now be heard to argue that Robles term as
president of BUHAY has long since expired, and that his act of submitting the Certificate of
Nomination and the manifestation to participate in the 2007 elections is null and void. He is
already precluded from doing so.
SPECIAL CIVIL ACTION in the Supreme Court. Certiorari.
The facts are stated in the opinion of the Court.
Antonio R. Bautista and Partners for petitioner.
Romulo B. Macalintal for private respondent Melquiades A. Robles.

VELASCO, JR., J.:

The Case

government-controlled corporation. Robles, so Seeres would charge, was into a partisan

political activity which civil service members, like the former, were enjoined from engaging
in.

Before us is a Petition for Certiorari1 under Rule 65 with a prayer for a temporary restraining
order and/or preliminary injunction to nullify and enjoin the implementation of the
Resolution2 dated July 19, 2007 of the Commission on Elections (COMELEC), which declared
respondent Melquiades Robles (Robles) as the President of Buhay Hayaan Yumabong
(Buhay).

On May 10, 2007, the National Council of BUHAY adopted a resolution10 expelling Seeres
as party member for his act of submitting a Certificate of Nomination for the party. The
resolution reads in part:

The Undisputed Facts

WHEREAS, Hans Christian M. Seeres, without authority from the National Council, caused
the filing of his Certificate of Nomination with the Comelec last 27 March 2007.

In 1999, private respondent Robles was elected president and chairperson of Buhay, a partylist group duly registered with COMELEC.3 The constitution of BUHAY provides for a threeyear term for all its party officers, without re-election.4 BUHAY participated in the 2001 and
2004 elections, with Robles as its president. All the required Manifestations of Desire to
Participate in the said electoral exercises, including the Certificates of Nomination of
representatives, carried the signature of Robles as president of BUHAY.5 On January 26,
2007, in connection with the May 2007 elections, BUHAY again filed a Manifestation of its
Desire to Participate in the Party-List System of Representation.6 As in the past two
elections, the manifestation to participate bore the signature of Robles as BUHAY president.
On March 29, 2007, Robles signed and filed a Certificate of Nomination of BUHAYs
nominees for the 2007 elections containing the following names: (i) Rene M. Velarde, (ii)
Ma. Carissa Coscolluela, (iii) William Irwin C. Tieng, (iv) Melchor R. Monsod, and (v) Teresita
B. Villarama. Earlier, however, or on March 27, 2007, petitioner Hans Christian Seeres,
holding himself up as acting president and secretary-general of BUHAY, also filed a
Certificate of Nomination with the COMELEC, nominating: (i) himself, (ii) Hermenegildo C.
Dumlao, (iii) Antonio R. Bautista, (iv) Victor Pablo C. Trinidad, and (v) Eduardo C. Solangon,
Jr.7
Consequently, on April 17, 2007, Seeres filed with the COMELEC a Petition to Deny Due
Course to Certificates of Nomination.8 In it, petitioner Seeres alleged that he was the
acting president and secretary-general of BUHAY, having assumed that position since August
17, 2004 when Robles vacated the position. Pushing the point, Seeres would claim that the
nominations made by Robles were, for lack of authority, null and void owing to the
expiration of the latters term as party president. Furthermore, Seeres asserted that Robles
was, under the Constitution,9 disqualified from being an officer of any political party, the
latter being the Acting Administrator of the Light Railway Transport Authority (LRTA), a

WHEREAS, Hans Christian M. Seeres, again without authority from the National Council,
listed in his Certificate of Nomination names of persons who are not even members of the
Buhay party.
WHEREAS, Hans Christian M. Seeres, knowing fully well that the National Council had
previously approved the following as its official nominees, to wit x x x to the 2007 Party-List
elections; and that Mr. Melquiades A. Robles was authorized to sign and submit the partys
Certificate of Nomination with the Comelec; and, with evident premeditation to put the
party to public ridicule and with scheming intention to create confusion, still proceeded with
the filing of his unauthorized certificate of nomination even nomination persons who are
not members of Buhay.
WHEREAS, Hans Christian M. Seeres, in view of the foregoing, underwent Party Discipline
process pursuant to Article VII of the Constitution and By-Laws of the Party.
xxxx
WHEREAS, after a careful examination of the [evidence] on his case, the National Council
found Hans Christian M. Seeres to have committed acts in violation of the constitution and
by-laws of the party and decided to expel him as a member of the party.
NOW THEREFORE, be it RESOLVED as it is hereby RESOLVED that the National Council has
decided to expel Hans M. Seeres as a member of the party effective close of business hour
of 10 May 2007.

BE IT RESOLVED FURTHER, that all rights and privileges pertaining to the membership of
Hans M. Seeres with the party are consequently cancelled.
BE IT RESOLVED FURTHER, that the President and Chairman of the National Council of
Buhay, Mr. Melquiades A. Robles, is hereby authorized to cause the necessary filing of
whatever documents/letters before the House of Representatives and/or to any other
entity/agency/person to remove/drop Mr. Seeres name in the roll of members in the said
lower house.11

On July 20, 2007, the first three (3) listed nominees of BUHAY for the May 2007 elections, as
per the Certificate of Nomination filed by Robles, namely Rene M. Velarde, Ma. Carissa
Coscolluela, and William Irwin C. Tieng, took their oaths of office as BUHAY party-list
representatives in the current Congress.19 Accordingly, on September 3, 2007, the
COMELEC, sitting as National Board of Canvassers, issued a Certificate of Proclamation to
BUHAY and its nominees as representatives to the House of Representatives.20
Aggrieved, petitioner filed the instant petition.

Later developments saw Robles filing a petition praying for the recognition of Jose D.
Villanueva as the new representative of BUHAY in the House of Representatives for the
remaining term until June 30, 2007.12 Attached to the petition was a copy of the expelling
resolution adverted to. Additionally, Robles also filed on the same day an Urgent Motion to
Declare Null and Void the Certificate of Nomination and Certificates of Acceptance filed by
Hans Christian M. Seeres, Hermenegildo Dumlao, Antonio R. Bautista, Victor Pablo Trinidad
and Eduardo Solangon, Jr.13

The Issue

On July 9 and July 18, 2007, respectively, the COMELEC issued two resolutions proclaiming
BUHAY as a winning party-list organization for the May 2007 elections entitled to three (3)
House seats.14

Our Ruling

This was followed by the issuance on July 19, 2007 by the en banc COMELEC of Resolution
E.M. No. 07-043 recognizing and declaring Robles as the president of BUHAY and, as such,
was the one duly authorized to sign documents in behalf of the party particularly the
Manifestation to participate in the party-list system of representation and the Certification
of Nomination of its nominees.15 Explaining its action, COMELEC stated that since no party
election was held to replace Robles as party president, then he was holding the position in a
hold-over capacity.16

Petition for Certiorari Is an Improper Remedy

The COMELEC disposed of the partisan political activity issue with the terse observation that
Seeres arguments on the applicability to Robles of the prohibition on partisan political
activity were unconvincing.17 The dispositive portion of the COMELEC Resolution reads:
WHEREFORE, premises considered, this Commission (En Banc) hereby recognizes
Melquiades A. Robles as the duly authorized representative of Buhay Hayaan Yumabong
(Buhay) and to act for and in its behalf pursuant to its Constitution and By-Laws.
SO ORDERED.18

Whether or not the COMELEC acted without or in excess of jurisdiction or with grave abuse
of discretion amounting to lack or excess of jurisdiction in issuing its challenged Resolution
dated June 19, 2007, which declared respondent Robles as the duly authorized
representative of BUHAY, and there is no appeal or any other plain, speedy or adequate
remedy in the ordinary course of law except the instant petition.

The petition should be dismissed for lack of merit.

A crucial matter in this recourse is whether the petition for certiorari filed by Seeres is the
proper remedy.
A special civil action for certiorari may be availed of when the tribunal, board, or officer
exercising judicial or quasi-judicial functions has acted without or in excess of jurisdiction
and there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of
law for the purpose of annulling the proceeding.21 It is the proper remedy to question any
final order, ruling and decision of the COMELEC rendered in the exercise of its adjudicatory
or quasi-judicial powers.22 For certiorari to prosper, however, there must be a showing
that the COMELEC acted with grave abuse of discretion and that there is no appeal or any
plain, speedy and adequate remedy in the ordinary course of law.
In the present case, a plain, speedy and adequate remedy in the ordinary course of law was
available to Seeres. The 1987 Constitution cannot be more explicit in this regard. Its Article
VI, Section 17 states:

Sec. 17. The Senate and the House of Representatives shall each have an Electoral
Tribunal which shall be the sole judge of all contests relating to the election, returns and
qualifications of their respective Members. x x x

Resolutions dated July 9, 2007 and July 18, 2007,28 respectively. Said resolutions are official
proclamations of COMELEC considering it is BUHAY that ran for election as party-list
organization and not the BUHAY nominees.

This constitutional provision is reiterated in Rule 14 of the 1991 Revised Rules of the
Electoral Tribunal of the House of Representatives, to wit:

The following day, on July 19, 2007, the COMELEC issued the assailed resolution declaring
Melquiades A. Robles as the duly authorized representative of Buhay Hayaan Yumabong
(Buhay) and to act in its behalf pursuant to its Constitution and By-Laws. COMELEC
affirmed that his Certificate of Nomination was a valid one as it ruled that Robles is the
President of Buhay Party-List and therefore duly authorized to sign documents in behalf of
the party particularly the Manifestation to participate in the pary-list system of
representation and the Certificate of Nomination of its nominees.29 The September 3,
2007 proclamation merely confirmed the challenged July 19, 2007 Resolution. The July 19,
2007 Resolution coupled with the July 9, 2007 and July 18, 2007 proclamations vested the
Robles nominees the right to represent BUHAY as its sectoral representatives.

RULE 14. Jurisdiction.The Tribunal shall be the sole judge of all contests relating to the
election, returns and qualifications of the Members of the House of Representatives.
In Lazatin v. House Electoral Tribunal, the Court elucidated on the import of the word sole
in Art. VI, Sec. 17 of the Constitution, thus:
The use of the word sole emphasizes the exclusive character of the jurisdiction conferred.
The exercise of the power by the Electoral Commission under the 1935 Constitution has
been described as intended to be as complete and unimpaired as if it had remained
originally in the legislature. Earlier, this grant of power to the legislature was characterized
by Justice Malcolm as full, clear and complete. Under the amended 1935 Constitution, the
power was unqualifiedly reposed upon the Electoral Tribunal and it remained as full, clear
and complete as that previously granted the legislature and the Electoral Commission. The
same may be said with regard to the jurisdiction of the Electoral Tribunals under the 1987
Constitution.23
Then came Rasul v. COMELEC and Aquino-Oreta, in which the Court again stressed that the
word sole in Sec. 17, Art. VI of the 1987 Constitution and Sec. 250 of the Omnibus Election
Code underscore the exclusivity of the Tribunals jurisdiction over election contests relating
to its members.24
The House of Representatives Electoral Tribunals (HRETs) sole and exclusive jurisdiction
over contests relative to the election, returns and qualifications of the members of the
House of Representatives begins only after a candidate has become a member of the
House of Representatives.25 Thus, once a winning candidate has been proclaimed, taken
his oath, and assumed office as a Member of the House of Representatives, COMELECs
jurisdiction over elections relating to the election, returns, and qualifications ends, and the
HRETs own jurisdiction begins.26
It is undisputed that the COMELEC, sitting as National Board of Canvassers, proclaimed
BUHAY as a winning partylist organization for the May 14, 2007 elections, entitled to three
(3) seats in the House of Representatives.27 The proclamation came in the form of two

Consequently, the first three (3) nominees in the Certificate of Nomination submitted by
Robles then took their oaths of office before the Chief Justice on July 20, 2007 and have
since then exercised their duties and functions as BUHAY Party-List representatives in the
current Congress.
Without a doubt, at the time Seeres filed this petition before this Court on July 23, 2007,
the right of the nominees as party-list representatives had been recognized and declared in
the July 19, 2007 Resolution and the nominees had taken their oath and already assumed
their offices in the House of Representatives. As such, the proper recourse would have been
to file a petition for quo warranto before the HRET within ten (10) days from receipt of the
July 19, 2007 Resolution and not a petition for certiorari before this Court.30
Since Seeres failed to file a petition for quo warranto before the HRET within 10 days from
receipt of the July 19, 2007 Resolution declaring the validity of Robles Certificate of
Nomination, said Resolution of the COMELEC has already become final and executory. Thus,
this petition has now become moot and can be dismissed outright. And even if we entertain
the instant special civil action, still, petitioners postulations are bereft of merit.
Act of Nominating Is Not Partisan Political Activity
Petitioner Seeres contends that Robles, acting as BUHAY President and nominating officer,
as well as being the Administrator of the LRTA, was engaging in electioneering or partisan
political campaign. He bases his argument on the Constitution, which prohibits any officer or
employee in the civil service from engaging, directly or indirectly, in any electioneering or

partisan political campaign.31 He also cites Sec. 4 of the Civil Service Law which provides
that no officer or employee in the Civil Service x x x shall engage in any partisan political
activity. Lastly, he mentions Sec. 26(i) of the Omnibus Election Code which makes it an
election offense for any officer in the civil service to directly or indirectly x x x engage in any
partisan political activity.

and does not affect the act of the National Council of nominating Velarde and others.
Hence, the Certificate of Nomination, albeit signed by Robles, is still the product of a valid
and legal act of the National Council of BUHAY. Robles connection with LRTA could not
really be considered as a factor invalidating the nomination process.
Hold-Over Principle Applies

This contention lacks basis and is far from being persuasive. The terms electioneering and
partisan political activity have well-established meanings in the Omnibus Election Code, to
wit:
Second, even if Robles performed any of the previously mentioned acts, Sec. 79 of the Code
is nonetheless unequivocal that if the same is done only for the purpose of enhancing the
chances of aspirants for nominations for candidacy to a public office by a political party,
agreement, or coalition of parties, it is not considered as a prohibited electioneering or
partisan election activity.
From this provision, one can conclude that as long as the acts embraced under Sec. 79
pertain to or are in connection with the nomination of a candidate by a party or
organization, then such are treated as internal matters and cannot be considered as
electioneering or partisan political activity. The twin acts of signing and filing a Certificate of
Nomination are purely internal processes of the party or organization and are not designed
to enable or ensure the victory of the candidate in the elections. The act of Robles of
submitting the certificate nominating Velarde and others was merely in compliance with the
COMELEC requirements for nomination of party-list representatives and, hence, cannot be
treated as electioneering or partisan political activity proscribed under by Sec. 2(4) of Art.
IX(B) of the Constitution for civil servants.
Moreover, despite the fact that Robles is a nominating officer, as well as Chief of the LRTA,
petitioner was unable to cite any legal provision that prohibits his concurrent positions of
LRTA President and acting president of a party-list organization or that bars him from
nominating.
Last but not least, the nomination of Velarde, Coscolluela, Tieng, Monsod, and Villarama to
the 2007 party-list elections was, in the final analysis, an act of the National Council of
BUHAY. Robles role in the nominating process was limited to signing, on behalf of BUHAY,
and submitting the partys Certificate of Nomination to the COMELEC.32 The act of
nominating BUHAYs representatives was veritably a direct and official act of the National
Council of BUHAY and not Robles. Be that as it may, it is irrelevant who among BUHAYs
officials signs the Certificate of Nomination, as long as the signatory was so authorized by
BUHAY. The alleged disqualification of Robles as nominating officer is indeed a non-issue

Petitioner Seeres further maintains that at the time the Certificate of Nomination was
submitted, Robles term as President of BUHAY had already expired, thus effectively
nullifying the Certificate of Nomination and the nomination process.
Again, petitioners contention is untenable. As a general rule, officers and directors of a
corporation hold over after the expiration of their terms until such time as their successors
are elected or appointed.33 Sec. 23 of the Corporation Code contains a provision to this
effect, thus:
Section 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.
The holdover doctrine has, to be sure, a purpose which is at once legal as it is practical. It
accords validity to what would otherwise be deemed as dubious corporate acts and gives
continuity to a corporate enterprise in its relation to outsiders.34 This is the analogical
situation obtaining in the present case. The voting members of BUHAY duly elected Robles
as party President in October 1999. And although his regular term as such President expired
in October 2002,35 no election was held to replace him and the other original set of
officers.36 Further, the constitution and by-laws of BUHAY do not expressly or impliedly
prohibit a hold-over situation. As such, since no successor was ever elected or qualified,
Robles remained the President of BUHAY in a hold-over capacity.
Authorities are almost unanimous that one who continues with the discharge of the
functions of an office after the expiration of his or her legal termno successor having, in
the meantime, been appointed or chosenis commonly regarded as a de facto officer, even
where no provision is made by law for his holding over and there is nothing to indicate the
contrary.37 By fiction of law, the acts of such de facto officer are considered valid and
effective.38

So it must be for the acts of Robles while serving as a hold-over Buhay President. Among
these acts was the submission of the nomination certificate for the May 14, 2007 elections.
As a final consideration, it bears to state that petitioner is estopped from questioning the
authority of Robles as President of BUHAY. As a principle of equity rooted on natural justice,
the bar of estoppel precludes a person from going back on his own acts and representations
to the prejudice of another whom he has led to rely upon them.39
Again, it cannot be denied that Robles, as BUHAY President, signed all manifestations of the
partys desire to participate in the 2001 and 2004 elections, as well as all Certificates of
Nomination.40 In fact, the corresponding certificate for the 2004 elections included
petitioner as one of the nominees. During this time, Robles term as President had already
expired, and yet, petitioner never questioned Robles authority to sign the Certificate of
Nomination. As a matter of fact, petitioner even benefited from the nomination, because he
earned a seat in the House of Representatives as a result of the partys success.41 Clearly,
petitioner cannot now be heard to argue that Robles term as president of BUHAY has long
since expired, and that his act of submitting the Certificate of Nomination and the
manifestation to participate in the 2007 elections is null and void. He is already precluded
from doing so.
WHEREFORE, the petition is DISMISSED. Resolution E.M. No. 07-043 of the COMELEC dated
July 19, 2007 is AFFIRMED. No costs.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio, Austria-Martinez, Corona, Carpio-Morales, Tinga,
Chico-Nazario, Nachura, Leonardo-De Castro, Brion, Peralta and Bersamin, JJ., concur.
Puno (C.J.), No part. Close to the parties.
Petition dismissed.
Notes.Even assuming that party-list representatives comprise a sufficient number and
have agreed to designate common nominees to the HRET and the CA, the primary recourse
clearly rests with the House of Representatives and not with the Supreme Court. Under the
doctrine of primary jurisdiction, prior recourse to the House of Representatives is necessary
before petitioners may bring the instant case to the court. (Pimentel, Jr. vs. House of
Representatives Electoral Tribunal, 393 SCRA 227 [2002])

While PDP-Laban and Bayan Muna both have members in Congress, the former, unlike the
latter, is not represented therein as a party-list organization, thus entitling Bayan Muna to
participate in the legislative process in a way that cannot be said of PDP-Laban. (Senate of
the Philippines vs. Ermita, 495 SCRA 170 [2006])
o0o

G.R. No. 145817. October 19, 2011.*

URBAN BANK, INC, petitioner, vs. MAGDALENO M. PEA, respondent.
G.R. No. 145822. October 19, 2011.*
DELFIN C. GONZALEZ, JR., BENJAMIN L. DE LEON, and ERIC L. LEE, petitioners, vs.
MAGDALENO M. PEA, respondent.
G.R. No. 162562. October 19, 2011.*
MAGDALENO M. PEA, petitioner, vs. URBAN BANK, INC., TEODORO BORLONGAN, DELFIN
C. GONZALEZ, JR., BENJAMIN L. DE LEON, P. SIERVO H. DIZON, ERIC L. LEE, BEN T. LIM, JR.,
CORAZON BEJASA, and ARTURO MANUEL, JR., respondents.
Civil Law; Agency; The basis of the civil law relationship of agency is representation, the
elements of which include the following: (a) the relationship is established by the parties
consent, express or implied; (b) the object is the execution of a juridical act in relation to a
third person; (c) the agents act as representatives and not for themselves; and (d) agents act
within the scope of their authority.In a contract of agency, agents bind themselves to
render some service or to do something in representation or on behalf of the principal, with
the consent or authority of the latter. The basis of the civil law relationship of agency is
representation, the elements of which include the following: (a) the relationship is
established by the parties consent, express or implied; (b) the object is the execution of a
juridical act in relation to a third person; (c) agents act as representatives and not for
themselves; and (d) agents act within the scope of their authority.
Same; Same; Agency is presumed to be for compensation. Unless the contrary is shown, a
person who acts as an agent does so with the expectation of payment according to the
agreement and to services rendered or results effected.Agency is presumed to be for
compensation. Unless the contraryintent is shown, a person who acts as an agent does so
with the expectation of payment according to the agreement and to the services rendered
or results effected. We find that the agency of Pea comprised of services ordinarily
performed by a lawyer who is tasked with the job of ensuring clean possession by the owner
of a property. We thus measure what he is entitled to for the legal services rendered.
Same; Same; When an agent performs for a principal at the latters request, the law will
normally imply a promise on the part of the principal to pay for the reasonable worth of
those services. The intent of the principal to compensate the agent for services performed on

behalf of the former will be inferred from the principals request for the agents.A
stipulation on a lawyers compensation in a written contract for professional services
ordinarily controls the amount of fees that the contracting lawyer may be allowed to collect,
unless the court finds the amount to be unconscionable. In the absence of a written
contract for professional services, the attorneys fees are fixed on the basis of quantum
meruit, i.e., the reasonable worth of the attorneys services. When an agent performs
services for a principal at the latters request, the law will normally imply a promise on the
part of the principal to pay for the reasonable worth of those services. The intent of a
principal to compensate the agent for services performed on behalf of the former will be
inferred from the principals request for the agents.
Attorneys; Quantum Meruit; Lawyering is not a business; it is a profession in which duty to
public service, not money, is the primary consideration. The principle of quantum meruit
applies if lawyers are employed without a price ageed upon for their services, in which case
they would be entitled to receive what they merit for their services, or as much as they have
earned.Lawyering is not a business; it is a profession in which duty to public service, not
money, is the primary consideration. The principle of quantum meruit applies if lawyers are
employed without a price agreed upon for their services, in which case they would be
entitled to receive what they merit for their services, or as much as they have earned. In
fixing a reasonable compensation for the services rendered by a lawyer on the basis of
quantum meruit, one may consider factors such as the time spent and extent of services
rendered; novelty and difficulty of the questions involved; importance of the subject matter;
skill demanded; probability of losing other employment as a result of acceptance of the
proffered case; customary charges for similar services; amount involved in the controversy
and the resulting benefits for the client; certainty of compensation; character of
employment; and professional standing of the lawyer.420
Corporation Law; A corporation, as a juridical entity, may act only through its directors,
officers and employees. Obligations incurred as a result of the acts of the directors and
officers as corporate agents are not their personal liabilities but those of the corporation
they represent.A corporation, as a juridical entity, may act only through its directors,
officers and employees. Obligations incurred as a result of the acts of the directors and
officers as corporate agents are not their personal liabilities but those of the corporation
they represent. To hold a director or an officer personally liable for corporate obligations,
two requisites must concur: (1) the complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of the corporation, or that the officer
was guilty of gross negligence or bad faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or bad faith. To hold a director, a trustee
or an officer personally liable for the debts of the corporation and, thus, pierce the veil of

corporate fiction, bad faith or gross negligence by the director, trustee or officer in directing
the corporate affairs must be established clearly and convincingly.
Judgments; A void judgment never acquires finality. In contemplation of law, that void
decision is deemed non-existent.A void judgment never acquires finality. In contemplation
of law, that void decision is deemed non-existent. Quod nullum est, nullum producit
effectum. Hence, the validity of the execution pending appeal will ultimately hinge on the
courts findings with respect to the decision in which the execution is based.
Same; Appeals; Although discretionary execution can proceed independently while the
appeal on the merits is pending, the outcome of the main case will greatly impact the
execution pending appeal, especially in instances where there is a complete reversal of the
trial courts decision.Although discretionary execution can proceed independently while
the appeal on the merits is pending, the outcome of the main case will greatly impact the
execution pending appeal, especially in instances where as in this case, there is a complete
reversal of the trial courts decision. Thus, if the decision on the merits is completely
nullified, then the concomitant execution pending appeal is likewise without any effect. In
fact, the Rules of Court expressly provide for the possibility of reversal, complete or partial,
of a final judgment which has been executed on appeal. Precisely, the execution pending
appeal does not bar the continuance of the appeal on the merits, for the Rules of Court
explicitly provide for restitution according to equity and justice in case the executed
judgment is reversed on appeal.421
Same; Same; Execution of Judgments; Execution Pending Appeal; The pendency of a
collection suit by a third party creditor which credit was obtained by the winning judgment
creditor in another case, is not a sufficiently good reason to allow execution pending appeal
as the Rules of Court provide. Execution pending appeal is an extraordinary remedy allowed
only when there are reasons to believe that judgment debtor will not be able to satisfy the
judgment debt if the appeals process will still have to be awaited.We rule that the
pendency of a collection suit by a third party creditor which credit was obtained by the
winning judgment creditor in another case, is not a sufficiently good reason to allow
execution pending appeal as the Rules of Court provide. Execution pending appeal is an
extraordinary remedy allowed only when there are reasons to believe that the judgment
debtor will not be able to satisfy the judgment debt if the appeals process will still have to
be awaited. It requires proof of circumstances such as insolvency or attempts to escape,
abscond or evade a just debt.
Same; Execution Pending Appeals; In Florendo v. Paramount Insurance, Corp., 610 SCRA 377
(2010), this Court explained that the execution pending appeal is an exception to the general
rule that execution issues as a matter of right, when a judgment has become final and

executory.In Florendo v. Paramount Insurance, Corp., 610 SCRA 377 (2010), the Court
explained that the execution pending appeal is an exception to the general rule that
execution issues as a matter of right, when a judgment has become final and executory: As
such exception, the courts discretion in allowing it must be strictly construed and firmly
grounded on the existence of good reasons. Good reasons, it has been held, consist of
compelling circumstances that justify immediate execution lest the judgment becomes
illusory. The circumstances must be superior, outweighing the injury or damages that might
result should the losing party secure a reversal of the judgment. Lesser reasons would make
of execution pending appeal, instead of an instrument of solicitude and justice, a tool of
oppression and inequity. (Emphasis supplied)
Same; Same; The presence or the absence of good reasons remains the yardstick in allowing
the remedy of execution pending appeal, which should consist of exceptional circumstances
of such urgency as to outweigh the injury or damage that the losing party may suffer, should
the appealed judgment be reversed later.The presence or the absence of good reasons
remains the yardstick in allowing the remedy of execution pending appeal, which should
consist of exceptional circumstances of such urgency as to outweigh the injury or damage
that the losing party may suffer, should the appealed judgment be
422 reversed later. Thus, the Court held that even the financial distress of the prevailing
company is not sufficient reason to call for execution pending appeal:
Same; Same; In Philippine Bank of Communications vs. Court of Appeals, 279 SCRA 364
(1997), the Court ruled that financial distress of the prevailing party in a final judgment
which was still pending appeal may not be likened to the situation of a natural person who is
ill, of advanced age or dying as to justify execution pending appeal.In Philippine Bank of
Communications v. Court of Appeals, 279 SCRA 364 (1997), the Court denied execution
pending appeal to a juridical entity which allegedly was in financial distress and was facing
civil and criminal suits with respect to the collection of a sum of money. It ruled that the
financial distress of the prevailing party in a final judgment which was still pending appeal
may not be likened to the situation of a natural person who is ill, of advanced age or dying
as to justify execution pending appeal.
Same; Same; In cases where two or more defendants are made subsidiarily or solidarily liable
by the final judgment of the trial court, discretionary execution can be allowed if all the
defendants have been found to be insolvent.In cases where the two or more defendants
are made subsidiarily or solidarily liable by the final judgment of the trial court, discretionary
execution can be allowed if all the defendants have been found to be insolvent. Considering
that only Urban Bank, and not the other eight individual defendants, was later on
considered by the Court of Appeals to have been in danger of insolvency, is not sufficient

reason to allow execution pending appeal, since the liability for the award to Pea was
made (albeit, mistakenly) solidarily liable together with the bank officers.
Same; Same; As an exception to the general rule that only final judgments may be executed,
the grant of execution pending appeal must perforce be based on good reasons.As an
exception to the general rule that only final judgments may be executed, the grant of
execution pending appeal must perforce be based on good reasons. These reasons must
consist of compelling or superior circumstances demanding urgency which will outweigh the
injury or damages suffered, should the losing party secure a reversal of the judgment or final
order. The circumstances that would reasonably justify superior urgency, demanding interim
execution of Peas claims for compensation and/or damages, have already been settled by
the financial capacity of the eight other co-defendants, the approval of the supersedeas
bonds, the subsequent takeover by EIB, and the successor banks stable financial condition,
423 which can answer for the judgment debt. Thus, Peas interest as a judgment creditor is
already well-protected.
Same; Same; The rule is that, where the executed judgment is reversed totally or partially, or
annulledon appeal or otherwisethe trial court may, on motion, issue such orders of
restitution or reparation of damages as equity and justice may warrant under the
circumstances.The rule is that, where the executed judgment is reversed totally or
partially, or annulledon appeal or otherwisethe trial court may, on motion, issue such
orders of restitution or reparation of damages as equity and justice may warrant under the
circumstances. The Rules of Court precisely provides for restitution according to equity, in
case the executed judgment is reversed on appeal. In an execution pending appeal, funds
are advanced by the losing party to the prevailing party with the implied obligation of the
latter to repay the former, in case the appellate court cancels or reduces the monetary
award.

execution is considered to have lost its legal bases. The situation necessarily requires
equitable restitution to the party prejudiced thereby. As a matter of principle, courts are
authorized at any time to order the return of property erroneously ordered to be delivered
to one party, if the order is found to have been issued without jurisdiction.
Same; Same; In cases in which restitution of the prematurely executed property is not longer
possible, compensation shall be made in favour of the judgment debtor.The Court adopts
with modification the rules of restitution expounded by retired Justice Florenz D. Regalado
in his seminal work on civil procedure, which the appellate court itself cited earlier. In cases
in which restitution of the prematurely executed property is no longer possible,
424 compensation shall be made in favor of the judgment debtor in the following manner:
a. If the purchaser at the public auction is the judgment creditor, he must pay the full value
of the property at the time of its seizure, with interest. b. If the purchaser at the public
auction is a third party, and title to the property has already been validly and timely
transferred to the name of that party, the judgment creditor must pay the amount realized
from the sheriffs sale of that property, with interest. c. If the judgment award is reduced on
appeal, the judgment creditor must return to the judgment debtor only the excess received
over and above that to which the former is entitled under the final judgment, with interest.
PETITIONS for review on certiorari of the decisions and resolutions of the Court of Appeals.
The facts are stated in the opinion of the Court.
Ponce Enrile, Reyes and Manalastas for Eric Lee.
Baterina, Baterina, Casals, Lozada & Tiblani for Urban Bank, Inc.
Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles co-counsel for Urban Bank, Inc.

Same; Same; Although execution pending appeal is sanctioned under the rules and
jurisprudence, when the executed decision is reversed, the premature execution is considered
to have lost its legal bases. The situation necessarily requires equitable restitution to the
party prejudiced thereby. As a matter of principle, courts are authorized at any time to order
the return of property erroneously ordered to be delivered to one party, if the order is found
to have been issued without jurisdiction.Due to the complete reversal of the trial courts
award for damages, which was the basis of the Special Order and Writ of Execution allowing
execution pending appeal, intervenor Unimega and other bidders who participated in the
public auction sales are liable to completely restore to petitioner-respondent bank all of the
properties sold and purchased therein. Although execution pending appeal is sanctioned
under the rules and jurisprudence, when the executed decision is reversed, the premature

Angara, Abello, Concepcion, Regala & Cruz for Gonzalez, De Leon & Lee.
Fortun, Narvasa & Salazar for Borlongan, Bejasa and Manuel.
Poblador, Bautista and Reyes for Ben Lim and P. Siervo Dizon.
Sayuno, Mendoza & San Jose for intervenor Unimega Properties Holdings Corporation.
Solis & Medina Law Offices for movant Makati Sports Club, Inc.

Chato & Eleazar Law Offices for Bejasa and Manuel, Jr.
425SERENO, J.:
These consolidated petitions began as a simple case for payment of services rendered and
for reimbursement of costs. The case spun a web of suits and counter-suits because of: (1)
the size of the award for agents fee rendered in favor of Atty. Magdaleno Pea (Pea)
PhP24,000,000rendered by the trial court; (2) the controversial execution of the full
judgment award of PhP28,500,000 (agents fee plus reimbursement for costs and other
damages) pending appeal; and (3) the finding of solidary liability against Urban Bank, Inc.,
and several of its corporate officers and directors together with the concomitant levying and
sale in execution of the personal (even conjugal) properties of those officers and directors;
and (4) the fact that assets with declared conservative values of at least PhP181 Million
which, together with those with undeclared values could reach very much more than such
amount,1 were levied or sold on execution pending appeal to satisfy the PhP28.5 Million
award in favor of Atty. Pea. Incidentally, two supersedeas bonds worth PhP80 Million (2.8
times the amount of the judgment) were filed by Urban Bank and some of its officers and
directors to stay the execution pending appeal.
Had the four attendant circumstances not afflicted the original case, it would have been an
open-and-shut review where this Court, applying even just the minimum equitable principle
against unjust enrichment would have easily affirmed the grant of fair recompense to Atty.
Pea for services he rendered for Urban Bank if such had been ordered by the trial court.
That Atty. Pea should be paid something by Urban Bank is not in disputethe Court of
Appeals (CA) and the Regional Trial Court (RTC) of Bago City, agreed on that. What they
disagreed on is the basis and the size of the award. The trial court claims that the basis is an
oral contract of agency and the award should be PhP28,500,000; while, the appellate court
said that Atty. Pea can only be paid under the legal principle against unjust enrichment,
and the total award in his favor should only amount to PhP3,000,000.
In the eyes of the trial court, the controlling finding is that Atty. Pea should be believed
when he testified that in a telephone conversation, the president of Urban Bank, Teodoro
Borlongan, a respondent herein, agreed to pay him for his services 10% of the value of the
property then worth PhP240,000,000, or PhP24,000,000. Costs and other awards
additionally amount to PhP4,500,000, for a total award of PhP28,500,000 according to the
trial court. To the Court of Appeals, such an award has no basis, as in fact, no contract of
agency exists between Atty. Pea and Urban Bank. Hence, Atty. Pea should only be
recompensed according to the principle of unjust enrichment, and that he should be
awarded the amount of PhP3,000,000 only for his services and reimbursements of costs.

The disparity in the size of the award given by the trial court vis--vis that of the Court of
Appeals (PhP28,500,000 v. PhP3,000,000) must be placed in the context of the service that
Atty. Pea proved that he rendered for Urban Bank. As the records bear, Atty. Peas
services consisted of causing the departure of unauthorized sub-tenants in twenty-three
commercial establishments in an entertainment compound along Roxas Boulevard. It
involved the filing of ejectment suits against them, Peas personal defense in the countersuits filed against him, his settlement with them to the tune of PhP1,500,000, which he
advanced from his own funds, and his retention of security guards and expenditure for
other costs amounting to more or less PhP1,500,000. There is no claim by Atty. Pea of any
service beyond those. He claims damages from the threats to his life and safety from the
angry tenants, as well as a vexatious collection suit he had to face from a creditor-friend
from whom he borrowed
427PhP3,000,000 to finance the expenses for the services he rendered Urban Bank.
At the time the award of PhP28,500,000 by the trial court came out in 1999, the net worth
of Urban Bank was PhP2,219,781,104.2 While the bank would be closed by the Bangko
Sentral ng Pilipinas (BSP) a year later for having unilaterally declared a bank holiday contrary
to banking rules, there was no reason to believe that at the time such award came out it
could not satisfy a judgment of PhP28,500,000, a sum that was only 1% of its net worth, and
a miniscule 0.2% of its total assets of PhP11,933,383,630.3 In fact, no allegation of
impending insolvency or attempt to abscond was ever raised by Atty. Pea and yet, the trial
court granted execution pending appeal.
Interestingly, Pea had included as co-defendants with Urban Bank in the RTC case, several
officers and board directors of Urban Bank. Not all board directors were sued, however.
With respect to those included in the complaint, other than against Teodoro Borlongan,
Corazon Bejasa, and Arturo Manuel, no evidence was ever offered as to their individual
actions that gave rise to Atty. Peas cause of actionthe execution of the agency contract
and its breachand yet, these officers and directors were made solidarily liable by the trial
court with Urban Bank for the alleged breach of the alleged corporate contract of agency.
Execution pending appeal was also granted against them for this solidary liability resulting in
the levy and sale in execution pending appeal of not only corporate properties of Urban
Bank but also personal properties of the individual bank officers and directors. It would have
been interesting to find out what drove Atty. Pea to sue the bank officers and directors of
Urban Bank and why he chose to sue only some, but not all of the board directors of Urban
Bank, but there is nothing on the record with which this analysis can be pursued.

Before us are: (a) the Petitions of Urban Bank (G.R. No. 145817) and the De Leon Group (G
R. No. 145822) questioning the propriety of the grant of execution pending appeal, and (b)
the Petition of Atty. Pea (G.R. No. 162562) assailing the CAs decision on the substantive
merits of the case with respect to his claims of compensation based on an agency
agreement.
Ordinarily, the final resolution by the Supreme Court of an appeal from a trial court decision
would have automatic, generally-understood consequences on an order issued by the trial
court for execution pending appeal. But this is no ordinary case, and the magnitude of the
disproportions in this case is too mind-boggling that this Court must exert extra effort to
correct whatever injustices have been occasioned in this case. Thus, our dispositions will
include detailed instructions for several judicial officials to implement.
At core, these petitions can be resolved if we answer the following questions:
1. What is the legal basis for an award in favor of Pea for the services he rendered
to Urban Bank? Should it be a contract of agency the fee for which was orally agreed
on as Pea claims? Should it be the application of the Civil Code provisions on unjust
enrichment? Or is it to be based on something else or a combination of the legal
findings of both the RTC and the CA? How much should the award be?
2. Are the officers and directors of Urban Bank liable in their personal capacities for
the amount claimed by Pea?
3. What are the effects of our answers to questions (1) and (2), on the various
results of the execution pending appeal that happened here?
Factual Background of the Controversy
Urban Bank, Inc. (both petitioner and respondent in these two consolidated cases),4 was a
domestic Philippine corporation, engaged in the business of banking.5 The eight individual
respondents in G.R. No. 162562 were officers and members of Urban Banks board of
directors, who were sued in their official and personal capacities.6 On the other hand,
Benjamin L. De Leon, Delfin C. Gonzalez, Jr., and Eric L. Lee, (hereinafter the de Leon Group),
are the petitioners in G.R. No. 145822 and are three of the same bank officers and directors,
who had separately filed the instant Petition before the Court.

Petitioner-respondent Atty. Magdaleno M. Pea (Pea)7 is a lawyer by profession and was

formerly a stockholder, director and corporate secretary of Isabel Sugar Company, Inc.
(ISCI).8
ISCI owned a parcel of land9 located in Pasay City (the Pasay property).10 In 1984, ISCI
leased the Pasay property for a period of 10 years.11 Without its consent12 and in violation
of the lease contract,13 the lessee subleased the land to several tenants, who in turn put up
23 establishments, mostly beer houses and night clubs, inside the compound.14 In 1994, a
few months before the lease contract was to expire, ISCI informed the lessee15 and his
tenants16 that the lease would no longer be renewed and that it intended to take over the
Pasay property17 for the purpose of selling it.18
Two weeks before the lease over the Pasay property was to expire, ISCI and Urban Bank
executed a Contract to Sell, whereby the latter would pay ISCI the amount of
PhP241,612,000 in installments for the Pasay property.19 Both parties agreed that the final
installment of PhP25,000,000 would be released by the bank upon ISCIs delivery of full and
actual possession of the land, free from any tenants.20 In the meantime, the amount of the
final installment would be held by the bank in escrow. The escrow provision in the Contract
to Sell, thus, reads:
The SELLER (ISCI) agrees that from the proceeds of the purchase prices of the subject
Property (Pasay property), the BUYER (Urban Bank) shall withhold the amount of PHP
25,000,000.00 by way of escrow and shall release this amount to the SELLER only upon its
delivery to the BUYER of the full and actual possession and control of the Subject
Property, free from tenants, occupants, squatters or other structures or from any liens,
encumbrances, easements or any other obstruction or impediment to the free use and
occupancy by the buyer of the subject Property or its exercise of the rights to ownership
over the subject Property, within a period of sixty (60) days from the date of payment by
the BUYER of the purchase price of the subject Property net of the amounts authorized to
be deducted or withheld under Item II (a) of this Contract.21 (Emphasis supplied)
ISCI then instructed Pea, who was its director and corporate secretary, to take over
possession of the Pasay property22 against the tenants upon the expiration of the lease.
ISCIs president, Mr. Enrique G. Montilla III (Montilla), faxed a letter to Pea, confirming the
latters engagement as the corporations agent to handle the eviction of the tenants from
the Pasay property, to wit:23
MEMORANDUM

TO:

Atty.
FROM:Enrique

Magdaleno
G.

M.
Montilla

Pena
Director
III

President
DATE:26 November 1994
You are hereby directed to recover and take possession of the property of the corporation
situated at Roxas Boulevard covered by TCT No. 5382 of the Register of Deeds for Pasay
City immediately upon the expiration of the contract of lease over the said property on 29
November 1994. For this purpose you are authorized to engage the services of security
guards to protect the property against intruders. You may also engage the services of a
lawyer in case there is a need to go to court to protect the said property of the corporation.
In addition you may take whatever steps or measures are necessary to ensure our continued
possession of the property.
(sgd.) ENRIQUE G. MONTILLA III
President24
On 29 November 1994, the day the lease contract was to expire, ISCI and Urban Bank
executed a Deed of Absolute Sale25 over the Pasay property for the amount agreed upon in
the Contract to Sell, but subject to the above escrow provision.26 The title to the land was
eventually transferred to the name of Urban Bank on 05 December 1994.27
On 30 November 1994, the lessee duly surrendered possession of the Pasay property to
ISCI,28 but the unauthorized sub-tenants refused to leave the area.29 Pursuant to his
authority from ISCI, Pea had the gates of the property closed to keep the sub-tenants
out.30 He also posted security guards at the property,31 services for which he advanced
payments.32 Despite the closure of the gates and the posting of the guards, the sub-tenants
would come back in the evening, force open the gates, and proceed to carry on with their
businesses.33 On three separate occasions, the sub-tenants tried to break down the gates of
the property, threw stones, and even threatened to return and inflict greater harm on those
guarding it.34
In the meantime, a certain Marilyn G. Ong, as representative of ISCI, faxed a letter to Urban
Bankaddressed to respondent Corazon Bejasa, who was then the banks Senior VicePresidentrequesting the issuance of a formal authority for Pea.35 Two days thereafter,
Ms. Ong faxed another letter to the bank, this time addressed to its president, respondent

Teodoro Borlongan.36 She repeated therein the earlier request for authority for Pea, since
the tenants were questioning ISCIs authority to take over the Pasay property.37
In response to the letters of Ms. Ong, petitioner-respondent bank, through individual
respondents Bejasa and Arturo E. ManuelSenior Vice-President and Vice-President,
respectivelyadvised Pea38 that the bank had noted the engagement of his services by
ISCI and stressed that ISCI remained as the lawyers principal.39
To prevent the sub-tenants from further appropriating the Pasay property,40 petitionerrespondent Pea, as director and representative of ISCI, filed a complaint for injunction41
(the First Injunction Complaint) with the RTC-Pasay City.42 Acting on ISCIs prayer for
preliminary relief, the trial court favorably issued a temporary restraining order (TRO),43
which was duly implemented.44 At the time the First Injunction Complaint was filed, a new
title to the Pasay property had already been issued in the name of Urban Bank.45
On 19 December 1994, when information reached the judge that the Pasay property had
already been transferred by ISCI to Urban Bank, the trial court recalled the TRO and issued a
break-open order for the property. According to Pea, it was the first time that he was
apprised of the sale of the land by ISCI and of the transfer of its title in favor of the bank.46
It is not clear from the records how such information reached the judge or what the breakopen order was in response to.
On the same day that the TRO was recalled, petitioner-respondent Pea immediately
contacted ISCIs president, Mr. Montilla, who in turn confirmed the sale of the Pasay
property to Urban Bank.47 Pea told Mr. Montilla that because of the break-open order of
the RTC-Pasay City, he (Pea) would be recalling the security guards he had posted to secure
the property. Mr. Montilla, however, asked him to suspend the planned withdrawal of the
posted guards, so that ISCI could get in touch with petitioner-respondent bank regarding the
matter.48
Later that same day, Pea received a telephone call from respondent Bejasa. After Pea
informed her of the situation, she allegedly told him that Urban Bank would be retaining his
services in guarding the Pasay property, and that he should continue his efforts in retaining
possession thereof. He insisted, however, on talking to the Banks president. Respondent
Bejasa gave him the contact details of respondent Borlongan, then president of Urban
Bank.49
The facts regarding the following phone conversation and correspondences are highlycontroverted. Immediately after talking to respondent Bejasa, Pea got in touch with Urban

Banks president, respondent Borlongan. Pea explained that the policemen in Pasay City
were sympathetic to the tenants and were threatening to force their way into the premises.
He expressed his concern that violence might erupt between the tenants, the city police,
and the security guards posted in the Pasay property. Respondent Borlongan supposedly
assured him that the bank was going to retain his services, and that the latter should not
give up possession of the subject land. Nevertheless, petitioner-respondent Pea demanded
a written letter of authority from the bank. Respondent Borlongan acceded and instructed
him to see respondent Bejasa for the letter.50
In the same telephone conversation, respondent Borlongan allegedly asked Pea to
maintain possession of the Pasay property and to represent Urban Bank in any legal action
that might be instituted relative to the property. Pea supposedly demanded 10% of the
market value of the property as compensation and attorneys fees and reimbursement for
all the expenses incurred from the time he took over land until possession was turned over
to Urban Bank. Respondent Borlongan purportedly agreed on condition that possession
would be turned over to the bank, free of tenants, not later than four months; otherwise,
Pea would lose the 10% compensation and attorneys fees.51

In line with our warranties as the Seller of the said property and our undertaking to deliver
to you the full and actual possession and control of said property, free from tenants,
occupants or squatters and from any obstruction or impediment to the free use and
occupancy of the property by Urban Bank, we have engaged the services of Atty.
Magdaleno M. Pea to hold and maintain possession of the property and to prevent the
former tenants or occupants from entering or returning to the premises. In view of the
transfer of the ownership of the property to Urban Bank, it may be necessary for Urban
Bank to appoint Atty. Pea likewise as its authorized representative for purposes of
holding/maintaining continued possession of the said property and to represent Urban Bank
in any court action that may be instituted for the abovementioned purposes.
It is understood that any attorneys fees, cost of litigation and any other charges or
expenses that may be incurred relative to the exercise by Atty. Pea of his
abovementioned duties shall be for the account of Isabela Sugar Company and any loss or
damage that may be incurred to third parties shall be answerable by Isabela Sugar
Company.53 (Emphasis supplied)
The following narration of subsequent proceedings is uncontroverted.

Later that afternoon, Pea received the banks letter dated 19 December 1994, which was
signed by respondents Bejasa and Manuel, and is quoted below:
This is to confirm the engagement of your services as the authorized representative of
Urban Bank, specifically to hold and maintain possession of our abovecaptioned property
[Pasay property] and to protect the same from former tenants, occupants or any other
person who are threatening to return to the said property and/or interfere with your
possession of the said property for and in our behalf.
You are likewise authorized to represent Urban Bank in any court action that you may
institute to carry out the aforementioned duties, and to prevent any intruder, squatter or
any other person not otherwise authorized in writing by Urban [B]ank from entering or
staying in the premises.52 (Emphasis supplied)
On even date, ISCI sent Urban Bank a letter, which acknowledged ISCIs engagement of Pea
and commitment to pay for any expenses that may be incurred in the course of his services.
ISCIs letter reads:
This has reference to your property located along Roxas Boulevard, Pasay City [Pasay
property] which you purchased from Isabela Sugar Company under a Deed of Absolute Sale
executed on December 1, 1994.

Pea then moved for the dismissal of ISCIs First Injunction Complaint, filed on behalf of ISCI,
on the ground of lack of personality to continue the action, since the Pasay property, subject
of the suit, had already been transferred to Urban Bank.54 The RTC-Pasay City dismissed the
complaint and recalled its earlier break-open order.55
Thereafter, petitioner-respondent Pea, now in representation of Urban Bank, filed a
separate complaint56 (the Second Injunction Complaint) with the RTC-Makati City, to enjoin
the tenants from entering the Pasay property.57 Acting on Urban Banks preliminary prayer,
the RTC-Makati City issued a TRO.58
While the Second Injunction Complaint was pending, Pea made efforts to settle the issue
of possession of the Pasay property with the sub-tenants. During the negotiations, he was
exposed to several civil and criminal cases they filed in connection with the task he had
assumed for Urban Bank, and he received several threats against his life.59 The sub-tenants
eventually agreed to stay off the property for a total consideration of PhP1,500,000.60 Pea
advanced the payment for the full and final settlement of their claims against Urban Bank.61
Pea claims to have borrowed PhP3,000,000 from one of his friends in order to maintain
possession thereof on behalf of Urban Bank.62

According to him, although his creditor-friend granted him several extensions, he failed to
pay his loan when it became due, and it later on became the subject of a separate collection
suit for payment with interest and attorneys fees.63 This collection suit became the basis
for Atty. Peas request for discretionary execution pending appeal later on.
On 07 February 1995, within the four-month period allegedly agreed upon in the telephone
conversation, Pea formally informed Urban Bank that it could already take possession of
the Pasay property.64 There was however no mention of the compensation due and owed
to him for the services he had rendered.
On 31 March 1995, the bank subsequently took actual possession of the property and
installed its own guards at the premises.65

bank officers were found to be solidarily liable with the bank for the payment of agencys
fees. The trial court thus ordered Urban Bank and all eight defendant bank directors and
officers whom Pea sued to pay the total amount of PhP28,500,000 (excluding costs of suit):
WHEREFORE, premised from the foregoing, judgment is hereby rendered ordering
defendants to pay plaintiff jointly and severally the following amounts:
1. P24,000,000 as compensation for plaintiffs services plus the legal rate of interest from
the time of demand until fully paid;
2. P3,000,000 as reimbursement of plaintiffs expenses;
3. P1,000,000 as and for attorneys fees;

Pea thereafter made several attempts to contact respondents Borlongan and Bejasa by
telephone, but the bank officers would not take any of his calls. On 24 January 1996, or
nearly a year after he turned over possession of the Pasay property, Pea formally
demanded from Urban Bank the payment of the 10% compensation and attorneys fees
allegedly promised to him during his telephone conversation with Borlongan for securing
and maintaining peaceful possession of the property.66
Proceedings on the Complaint for Compensation
On 28 January 1996, when Urban Bank refused to pay for his services in connection with the
Pasay property, Pea filed a complaint67 for recovery of agents compensation and
expenses, damages and attorneys fees in RTC-Bago City in the province of Negros
Occidental.68 Interestingly, Pea sued only six out of the eleven members of the Board of
the Directors of Urban Bank.69 No reason was given why the six directors were selected and
the others excluded from Peas complaint. In fact, as pointed out, Atty. Pea mistakenly
impleaded as a defendant, Ben Y. Lim, Jr., who was never even a member of the Board of
Directors of Urban Bank; while, Ben T. Lim, Sr., father and namesake of Ben Y. Lim, Jr., who
had been a director of the bank, already passed away in 1997.70
In response to the complaint of Atty. Pea, Urban Bank and individual bank officers and
directors argued that it was ISCI, the original owners of the Pasay property, that had
engaged the services of Pea in securing the premises; and, consequently, they could not be
held liable for the expenses Pea had incurred.71
On 28 May 1999, the RTC-Bago City72 ruled in favor of Pea, after finding that an agency
relationship had indeed been created between him and Urban Bank. The eight directors and

4. P500,000 as exemplary damages;

5. Costs of suit.
SO ORDERED.73
Urban Bank and the individual defendant bank directors and officers filed a common Notice
of Appeal,74 which was given due course.75 In the appeal, they questioned the factual
finding that an agency relationship existed between the bank and Pea.76
Although they put up a single defense in the proceedings in the lower court, Urban Bank and
individual defendants contracted different counsel and filed separate Briefs on appeal in the
appellate court.
In its Brief,77 Urban Bank78 assigned as errors the trial courts reliance on the purported
oral contract of agency and Peas claims for compensation during the controverted
telephone conversation with Borlongan, which were allegedly incredible.
Meanwhile, Benjamin L. de Leon, Delfin Gonzalez, Jr., and Eric L. Lee (the De Leon Group),79
the petitioners in the instant Petition docketed as G.R. No. 145822, argued that, even on the
assumption that there had been an agency contract with the bank, the trial court committed
reversible error in holding themas bank directorssolidarily liable with the
corporation.80

On the other hand, Teodoro Borlongan, Corazon M. Bejasa, Arturo Manuel, Jr., Ben Y. Lim,
Jr., and P. Siervo H. Dizon (the Borlongan Group)81 reiterated similar arguments as those of
the De Leon Group, adding that the claimed compensation of 10% of the purchase price of
the Pasay property was not reasonable.82 Pea refuted all of their arguments83 and prayed
that the trial courts Decision be affirmed.84
Acting favorably on the appeal, the Court of Appeals85 annulled the Decision of the RTCBago City and ruled that no agency relationship had been created. Nevertheless, it ordered
Urban Bank to reimburse Pea for his expenses and to give him reasonable compensation
for his efforts in clearing the Pasay property of tenants in the amount of PhP3,000,000, but
absolved the bank directors and officers from solidary liability. The dispositive portion of the
CA decision reads as follows:
WHEREFORE, in view of the foregoing considerations, the May 28, 2000 Decision [sic] and
the October 19, 2000 [sic] Special Order of the RTC of Bago City, Branch 62,86 are hereby
ANNULLED AND SET ASIDE. However, the plaintiff-appellee [Pea] in CA-GR CV No. 65756
is awarded the amount of P3 Million as reimbursement for his expenses as well as
reasonable compensation for his efforts in clearing Urban Banks property of unlawful
occupants. The award of exemplary damages, attorneys fees and costs of suit are deleted,
the same not having been sufficiently proven. The petition for Indirect Contempt against all
the respondents is DISMISSED for utter lack of merit.87 (Emphasis supplied)
Pea duly filed a Motion for Reconsideration of the unfavorable CA Decision.88 The
appellate court, however, denied his motion.89 The CA Decision and Resolution were
appealed by Pea to this Court, through one of the three consolidated Rule 45 Petitions
before us (G.R. No. 162562).
Execution Pending Appeal
On 07 June 1999, prior to the filing of the notice of appeal of Urban Bank and individual
bank officers,90 Pea moved for execution pending appeal91 of the Decision rendered by
the RTC-Bago City,92 which had awarded him a total of PhP28,500,000 in compensation and
damages.93
In supporting his prayer for discretionary execution, Pea cited the pending separate civil
action for collection filed against him by his creditor-friend, who was demanding payment of
a PhP3,000,000 loan.94 According to Pea, he had used the proceeds of the loan for
securing the banks Pasay property. No other reason for the prayer for execution pending
appeal was given by Pea other than this collection suit.95

In opposition to the motion, Urban Bank countered that the collection case was not a
sufficient reason for allowing execution pending appeal.96
On 29 October 1999, the RTC-Bago City, through Judge Henry J. Trocino,97 favorably
granted Peas motion and issued a Special Order authorizing execution pending appeal.98
In accordance with this Special Order, Atty. Josephine Mutia-Hagad, the clerk of court and
ex officio sheriff, issued a Writ of Execution99 on the same day.100 The Special Order and
Writ of Execution were directed at the properties owned by Urban Bank as well as the
properties of the eight individual bank directors and officers.
On 04 November 1999, affected by the trial courts grant of execution pending appeal,
Urban Bank101 filed a Rule 65 Petition with the CA to enjoin the Special Order and Writ of
Execution issued by the trial court with a prayer for a TRO.102
On 09 November 1999, the appellate court favorably granted the TRO and preliminarily
prohibited the implementation of the Special Order and Writ of Execution.103
On 12 January 2000, the CA eventually granted Urban Banks Rule 65 Petition, and the RTCs
Special Order and Writ of Execution, which permitted execution pending appeal, were
annulled. The appellate court ruled:104
WHEREFORE, the instant petition is GRANTED. The Special Order and writ of execution,
both dated October 29, 1999, are ANNULLED and SET ASIDE.
Respondents are directed to desist from further implementing the writ of execution and to
lift the garnishment and levy made pursuant thereto.105
On 02 February 2000, Pea moved for the reconsideration of the CAs Decision;106 while
petitioners filed their corresponding Comment/Opposition thereto.107
During the pendency of Peas Motion for Reconsideration, Urban Bank declared a bank
holiday on 26 April 2000 and was placed under receivership of the Philippine Deposit
Insurance Corporation (PDIC).108
In its Amended Decision dated 18 August 2000, the CA109 favorably granted Peas Motion
for Reconsideration, and reversed its earlier Decision to allow execution pending appeal.110
The appellate court found that the bank holiday declared by the BSP after the promulgation
of its earlier Decision, PDICs receivership of Urban Bank, and the imminent insolvency

thereof constituted changes in the banks conditions that would justify execution pending
appeal.111
On 29 August 2000, Urban Bank and its officers moved for the reconsideration of the
Amended Decision.112 The De Leon Group subsequently filed several Supplemental
Motions for Reconsideration.113 Thereafter, respondents Teodoro Borlongan and Corazon
M. Bejasa also filed their separate Supplemental Motion for Reconsideration,114 as did
petitioner Ben T. Lim, Jr.115
On 19 October 2000, the Court of Appeals denied the motion for reconsideration for lack of
merit and the other subsequent Supplemental Motions for Reconsideration for being filed
out of time.116 The appellate court also ordered Pea to post an indemnity bond.117 The
Amended Decision and the Resolution were the subjects of several Rule 45 Petitions filed by
Urban Bank and individual petitioners (G.R. Nos. 145817, 145818 and 145822).
On the same day the CA denied its Motion for Reconsideration, the De Leon Group
immediately moved for the stay of execution pending appeal upon the filing of a
supersedeas bond.118
On 31 October 2000, the CA119 granted the stay of the execution upon the filing by the De
Leon Group of a PhP40,000,000 bond in favor of Pea.120 Pea moved for the
reconsideration of the stay order.121
In its Resolution dated 08 December 2000,122 the appellate court denied Peas Motion for
Reconsideration and a stay order over the execution pending appeal was issued in favor of
the De Leon Group, after they had filed their supersedeas bond.123 The stay of execution
pending appeal, however, excluded Urban Bank.124
On 08 December 2000, Pea posted his indemnity bond as required by the CA.125

12 July 2001, or almost a year after the Court of Appeals amended its decision to allow
execution pending appeal, the rehabilitation plan of Urban Bank was approved by the
Monetary Board of the BSP.126 Thus, the Monetary Board subsequently lifted PDICs
statutory receivership of the bank.127
On 14 September 2001, Urban Bank, trying to follow the lead of the De Leon Group, made a
similar request with the Court of Appeals for approval of its own supersedeas bond,128 for
the same amount of PhP40,000,000, and prayed that the execution of the RTC-Bago Citys
Decision against it be stayed as well.129
Sometime in September and October 2001, Urban Bank began receiving notices of levy and
garnishment over its properties. After it received Notice of the impending public execution
sale of its shares in the Tagaytay Highlands International Golf Club,130 Urban Bank
reiterated its request for the approval of the supersedeas bond with the Court of Appeals
and the issuance of the corresponding stay order.131
The appellate court, however, merely noted Urban Banks motion on the ground that there
was no showing whether a petition to the Supreme Court had been filed or given due course
or denied.132
After the denial by the Court of Appeals of Urban Banks motion for approval of its
supersedeas bond, some of the levied properties of Urban Bank and the other bank officers
were sold on public auction. The table below lists the properties that appear on record to
have been levied and/or sold on execution pending appeal and the approximate value of
some of these properties. They do not include properties covered by the Petition docketed
as G.R. No. 145818.
Table
of
Levied,
Properties Pending Appeal

As mentioned earlier, Urban Bank, the De Leon Group, and the Borlongan Group filed
around December 2000 separate Rule 45 Petitions in this Court, to assail the unfavorable CA
Amended Decision and Resolution that affirmed the execution pending appeal. The details
of these Rule 45 Petitions will be discussed in detail later on.

Owner/ Property
Defendant Description

In the meantime, Export and Industry Bank (EIB) submitted its proposal for rehabilitation of
Urban Bank to the BSP, and requested that the troubled bank be removed from receivership
of the PDIC. On

Urban
Bank

Garnished

and/or

Executed

Estimated
Value
Total
or Price at Public
Remarks
Amount
Auction
Three Club Shares As of 06 December
Tagaytay Highlands 1999, one share was
4,800,000
International
Golf selling
at
P1.6
Club133
Million.134
Three Club Shares in As of 06 December
Atty. Pea was
2,000,000137
Makati Sports, Club, 1999, MSCI Club Shares
one of the winning

Estimated
Value
Total
or Price at Public
Amount
Auction
Inc. (MSCI) [Covered A and B were selling
by Stock Certificate at PhP650,000 and
Nos. A-1893, A-2305 PhP700,000,
and B-762]135
respectively.136

Owner/ Property
Defendant Description

Remarks
bidders in the
auction
sale
together with his
creditor
friend,
Roberto Ignacio,
and Atty. Ramon
Ereeta.

The highest bid price

Intervenor
Unimega
85 Condominium Units obtained
for
the
purchased
the
10
in the Urban Bank Plaza, condominium units was 85,000,000 condominium units in the
Makati City138
PhP1M at the time of the
auction sale for P1M each
execution sale.139
or a total of P10 M.140
A
155
sqm.
condominium
unit,
12,400,000
Makati City (CCT No.
57697) 141
Estimates are based on
A
12.5
sqm. report of Urban Bank142
condominium
parking
space (Parking Three,
500,000
Unit P-46) in Makati City
(CCT No. 57698)143
A 64,677 sqm. land in
Value based on estimate
Tagaytay City (TCT No.
35,572,350
of Urban Bank145
20471)144

Teodoro
Borlongan

One Club Share

Notice of Sale on
Borlongans club share
in Manila Polo
Execution on Personal
was estimated to be 1,000,000
Club
(No.
Property dated 25
valued at P1,000,000.147
3433)146
August 2000148
One Club Share in One club share was
Subic Bay Yacht estimated to be valued at 500,000
Club149
P500,000.150
One Club Share As of 06 December 1999, 870,000

Teodoro
Borlongan

One Club Share

Notice of Sale on
Borlongans club share
in Manila Polo
Execution on Personal
was estimated to be 1,000,000
Club
(No.
Property dated 25
valued at P1,000,000.147
3433)146
August 2000148
in Baguio Country one share was selling at
Club151
P870,000.152
As of 06 December 1999,
MSCI Club Shares A and B
One Club Share
were selling at PhP650,000 650,000
in MSCI153
and
PhP700,000
respectively.154
No estimate available on
Real Property155
record.

Notice of Sale on
One Club Share in Gonzales club share was
Execution
on
Manila Polo Club estimated to be valued at 4,000,000 Personal Property
Delfin C. (No. 3818)156
P4,000,000.157
dated 25 August
Gonzales,
2000158
Jr.
One Club Share in Gonzales club share was
Baguio Country estimated to be valued at 1,077,000
Club.159
P1,077,000.160
One Club Share in Alabang Country Gonzales club share was estimated to be
2,000,000
Club (Member No. 550)161
valued at P2,000,000.162
30,585 shares of stock in D. C.
P20.00 per share164
611,700
Gonzales, Jr., Inc. 163
40 Shares of stock in D. C. Gonzales,
P50.00 per share166
2,000
Jr., Inc.165

One Club Share in

Notice of Sale on
De Leons Share was
Manila Polo Club
Execution
on
estimated at P4 M for the
Benjamin (with
Associate
5,050,000 Personal Property
share and P1.05 M for the
L. de Leon Membership)
[No.
dated 25 August
associate membership.168
0597]167
2000169

One Club Share in

Notice of Sale on
De Leons Share was
Manila Polo Club
Execution
on
estimated at P4 M for the
Benjamin (with
Associate
5,050,000 Personal Property
share and P1.05 M for the
L. de Leon Membership)
[No.
dated 25 August
associate membership.168
0597]167
2000169
One Club Share in
MSCI
(Stock De Leons share was
450,000
Certificate No. A- estimated at P450,000.171
175)170
One Club Share in As of 06 December 1999,
Baguio Country Club one share was selling at 870,000
(5523)172
least P870,000.173
P.
Siervo
G.
Dizon

Eric
Lee

No records available as
to properties levied,
garnished or executed
pending appeal.
Notice of Sale on
One Club Share in Lees club share was
Execution on Personal
Manila Polo Club estimated to be valued at 4,000,000
Property dated 25
(2038)174
P4,000,000.175
August 2000176
One Club Share in Lees club share was
L.
Manila Golf Club, estimated to be valued at 15,750,000
Inc.177
P15,750,000.178
One Club Share in
Lees club share was
Sta. Elena Golf Club,
estimated to be valued at 2,000,000
Inc.
(Class
A
P2,000,000.180
Share) 179

Notice
of
Sale
on
Two Club Shares in Lees club shares were
Execution on Personal
Tagaytay Highlands Intl estimated to be valued at 1,000,000
Property dated 25 August
Golf Club, Inc. 181
P1,000,000.182
2000183
Lees club share was
One Club Share in Subic
estimated to be valued at 500,000
Yacht Club184
P500,000.185
60,757 Shares of stock P20.00 per share
1,214,140

Notice
of
Sale
on
Two Club Shares in Lees club shares were
Execution on Personal
Tagaytay Highlands Intl estimated to be valued at 1,000,000
Property dated 25 August
Golf Club, Inc. 181
P1,000,000.182
2000183
in
EQL
Properties,
Inc.186
40 Shares of stock in
P50.00 per share
2,000
EQL Properties, Inc.187
Cash garnished from
BPI Account188

100,000
No records available as to
properties levied, garnished or
executed pending appeal.

Ben T. Lim,
Jr.
Corazon
Bejasa

Real Property189

Arturo
Real Property190
Manuel, Jr.
TOTAL
VALUE

No
estimated
value.
No
estimated
value.

181,919,190

The sum of PhP181,919,190 does not include many other properties and it is not difficult to
believe that the total value covered reached more than that.191 In summary, the estimated
values and/or purchase prices at the auction sale of the properties of Urban Bank and its
officers amounted to no less than PhP181,919,190 already. This amounts to almost six times
the value of the award given by the trial court. Otherwise stated, Pea, as judgment
creditor, was overly secured by the levied and/or garnished properties for the amount of
PhP28,500,000, where the judgment award was still subject of reversal on appeal.
On 22 October 2001, Urban Bank, with respect to its pending Rule 45 Petition in this Court,
moved for the approval of its PhP40,000,000 supersedeas bond192 and requested that the
Court stay the execution pending appeal.193 Pea opposed the motion on the ground that
it had already been rendered moot and academic by the sale of the properties of the
bank.194

On 23 October 2002, or almost a year after some of the condominium units were sold in a
public auction, EIB, as the successor of Urban Bank, expressed to the sheriff of RTC-Bago City
an intent to redeem the said condominium units.195 Thus, EIB tendered three managers
checks in the total amount of PhP22,108,800196 to redeem the properties that were
previously under the name of Urban Bank.197 Although the trial court noted the banks
Manifestation,198 the sheriff returned the EIBs managers checks. Thus, on 29 October
2002, EIB, through a motion, was prompted to turn over the checks to the trial court
itself.199
When Urban Bank supposedly failed to redeem the condominium units according to the
sheriff,200 final Certificates of Sale were issued in favor of Unimega on 04 November
2002.201 Upon the latters motion, RTC-Bago City, in its Order dated 13 November 2002,
ordered the Register of Deeds of Makati to transfer the Condominium Certificates of Title to
the name of Unimega.202 It has not been shown, though, whether this Order was followed.
This Court, acting on Urban Banks earlier motion to approve its supersedeas bond, granted
the same in its Resolution dated 19 November 2001.203 Pea moved for reconsideration of
the approval,204 but his motion was subsequently denied by the Court.205
463Proceedings
in
(G.R. Nos. 145817, 145818 & 145822)

the

Supreme

Court

On 21 December 2000, Urban Bank,206 represented by its receiver, PDIC,207 filed a Rule 45
Petition with this Court (docketed as G.R. No. 145817) to assail the CAs Amended Decision
and Resolution granting execution pending appeal.208 In response, Pea moved for the
denial of the petition on the grounds of lack merit, violation of the rule against forum
shopping, and non-payment of docket fees, among others.209 In a separate Comment,210
Pea also argued that the appellate court had committed no error when it considered the
banks imminent insolvency as a good reason for upholding the validity of the execution
pending appeal.
On the other hand, the Borlongan Group211 filed a separate Rule 45 Petition questioning
the same Decision and Resolution, docketed as G.R. No. 145818.212 This Court initially
denied their petition on the ground that it failed to sufficiently show that the CA committed
reversible order.213 The Borlongan Group twice moved for the reconsideration of the denial
of their petition; but the Court nonetheless denied both motions for lack of merit.214 This
denial of the petition in G.R. No. 145818 became final and executory, with the issuance of
the Entry of Judgment.215

Meanwhile, another Rule 45 Petition (G.R. No. 145822)216 was filed by the De Leon Group,
assailing the same Decisions of the appellate court. The Court also preliminarily denied this
petition on the ground that the De Leon Group failed to file the appeal within the
reglementary period and to pay certain fees.217
Despite the denial of the Rule 45 Petition in G.R. No. 145822 filed by the De Leon Group, the
Court nonetheless ordered that the case be consolidated with Urban Banks own Rule 45
Petition in G.R. No. 145817.218 The Court subsequently gave due course to both of these
petitions.219 In compliance with the Courts Order,220 Urban Bank221 and the De Leon
Group222 filed their respective Memoranda.
As detailed earlier, the Court granted and approved Urban Banks supersedeas bond and
stayed the execution pending appeal.
Considering the favorable stay of execution pending appeal, EIB, as the new owner and
successor of Urban Bank, immediately wrote to tell223 the corporate secretary of MSCI not
to effect the cancellation or transfer of Urban Banks three MSCI stock certificates previously
sold in a public auction.224 In reply, MSCI explained that since there was no injunction or
stay order, it had no other option but to comply with the trial courts Order for the transfer.
Eventually, however, it could not effect the transfer of one of the shares to Pea because a
club share had already been previously registered in his name, and the clubs bylaws
prohibited a natural person from owning more than one share.225 Meanwhile, one of the
winning bidders in the public auction sale of the MSCI shares wrote to the latter to demand
that the club share previously owned by Urban Bank be transferred to him.226
On 04 February 2002, considering the conflicting claims of Urban Bank (through EIB) and the
winning bidders of the club shares, MSCI filed a Motion for Clarification of the Courts
Resolution staying the execution pending appeal.227
In its Motion for Clarification dated 06 August 2002, Urban Bank likewise requested
clarification of whether the stay order suspended, as well, its right to redeem the properties
sold at a public auction.228 The copy of Urban Banks motion for clarification intended for
Pea was mistakenly sent to the wrong counsel.
In its Resolution dated 13 November 2002, the Court explained that its earlier stay order
prohibited the MSCI from transferring the shares, and that the one-year period for
redemption of the banks properties was likewise suspended:

WHEREFORE, the Court hereby RESOLVES to clarify that as a consequence of its approval of
the supersedeas bond, the running of the one-year period for petitioner Urban Bank to
redeem the properties sold at the public auctions held on October 4, 11 and 25, 2001 as
well as the consolidation of the titles in favor of the buyers, is SUSPENDED OR STAYED.
MSCI is also prohibited from transferring petitioner Urban Banks MSCI club shares to the
winning bidders in the execution sale held on October 11, 2001.229 (Emphasis supplied)
On 09 December 2002, Pea moved that the Courts Resolution be recalled, because he was
not given an opportunity to be heard on Urban Banks Motion for Clarification, which was
sent to a different counsel.230 Interposing its objection, the bank argued that the error in
mistakenly sending the Motion for clarification to a different counsel was by sheer
inadvertence,231 but Pea was nonetheless aware of the motion, and that the Courts
clarification did not create or diminish his rights in any case.232
The Motion for Clarification filed by Urban Bank, the Courts Resolution dated 13 November
2002 and Peas Omnibus Motion praying for the recall of the said Resolution became the
subject of an administrative case (Administrative Case No. 6332), which was treated as a
separate matter and later on de-consolidated with the instant Petitions.233 The Court had
even called for an executive session234 in which Pea, among others, appeared and was
questioned by the then members of the Courts First Division, namely retired Chief Justice
Hilario Davide, Justices Jose Vitug, Antonio Carpio and Adolfo Azcuna. Although the Petitions
had earlier been assigned to Justice Carpio, he has since taken no part in the proceedings of
this case and this resulted in the re-raffling of the Petitions. The transfer and unloading of
the case by the subsequently assigned Justices as well as Peas numerous motions for
inhibition and/or re-raffle has likewise cause considerable delay in the disposition of the
instant Petitions and the Administrative Case.
Unimega, which was the winning bidder of some of the publicly executed condominium
units of Urban Bank, moved to intervene in the case and to have the Courts same
Resolution suspending the one-year period of redemption of the properties be
reconsidered.235 Unimega claimed that ownership of the banks titles to the 10
condominium units had already been transferred to the former at the time the Court issued
the Resolution; and, thus, there was no more execution to be suspended or stayed. Only
Urban Bank236 opposed the motion237 of intervenor Unimega on the ground that the
latter was not a buyer in good faith, and that the purchase price was grossly disproportional
to the fair market value of the condominium units.238
The Court eventually granted the Motion to Intervene considering that the intervenors title
to the condominium units purchased at the public auction would be affected, favorably or
otherwise, by the judgment of the Court in this case. However, it held in abeyance the

resolution of intervenors Motion for Reconsideration, which might preempt the decision
with respect to the propriety of execution pending appeal.239 Thereafter, the bank adopted
its earlier Opposition to the intervention as its answer to Unimegas petition-inintervention.240 Also in answer thereto, the De Leon Group adopted its earlier
Manifestation and Comment.241
Intervenor Unimega then requested that a writ of possession be issued in its favor covering
the 10 condominium units sold during the public auction.242 The Court required the parties
to file their comments on the request.243 The Lim244 and Borlongan Groups245 manifested
separately that they would not be affected by a resolution of the request of intervenor
Unimega, since the latter was not among the contending parties to the incident. Pea
similarly interposed no objection to the issuance of the writ of possession.246 In contrast,
Urban Bank opposed the application of Unimega on the ground that the latter was not
entitled to possession of the levied properties, because the rules of extrajudicial foreclosure
were not applicable to execution sales under Rule 39, and that intervenor was also not a
buyer in good faith.247 In a similar vein, the De Leon Group opposed the application for a
writ of possession, and further argued that the Court had already suspended the running of
the one-year period of redemption in the execution sale.248 Accordingly, intervenor
Unimega countered that the right of redemption of the levied properties had already
expired without having been exercised by the judgment debtor.249
In summary, the Court shall resolve the substantial issues in the following: (a) the Petition of
Pea (G.R. No. 162562) assailing the CAs decision on the substantive merits of the case with
respect to his claims of compensation based on an agency agreement; and (b) the Petitions
of Urban Bank (G.R. No. 145817) and the De Leon Group (G.R. No. 145822) questioning the
propriety of the grant of execution pending appeal.
Our Ruling
I
Pea is entitled to payment for compensation for services rendered as agent of
Urban Bank, but on the basis of the principles of unjust enrichment and quantum
meruit, and not on the purported oral contract.
The Court finds that Pea should be paid for services rendered under the agency
relationship that existed between him and Urban Bank based on the civil law principle
against unjust enrichment, but the amount of payment he is entitled to should be made,
again, under the principle against unjust enrichment and on the basis of quantum meruit.

In a contract of agency, agents bind themselves to render some service or to do something

in representation or on behalf of the principal, with the consent or authority of the
latter.250 The basis of the civil law relationship of agency is representation,251 the
elements of which include the following: (a) the relationship is established by the parties
consent, express or implied; (b) the object is the execution of a juridical act in relation to a
third person; (c) agents act as representatives and not for themselves; and (d) agents act
within the scope of their authority.252
Whether or not an agency has been created is determined by the fact that one is
representing and acting for another.253 The law makes no presumption of agency; proving
its existence, nature and extent is incumbent upon the person alleging it.254
With respect to the status of Atty. Peas relationship with Urban Bank, the trial and the
appellate courts made conflicting findings that shall be reconciled by the Court. On one end,
the appellate court made a definitive ruling that no agency relationship existed at all
between Pea and the bank, despite the services performed by Pea with respect to the
Pasay property purchased by the bank. Although the Court of Appeals ruled against an
award of agents compensation, it still saw fit to award Pea with Ph3,000,000 for expenses
incurred for his efforts in clearing the Pasay property of tenants.255 On the other extreme,
the trial court heavily relied on the sole telephone conversation between Pea and Urban
Banks President to establish that the principal-agent relationship created between them
included an agreement to pay Pea the huge amount of PhP24,000,000. In its defense,
Urban Bank insisted that Pea was never an agent of the bank, but an agent of ISCI, since
the latter, as seller of the Pasay property committed to transferring it free from tenants.
Meanwhile, Pea argues on the basis of his successful and peaceful ejectment of the subtenants, who previously occupied the Pasay property.
Based on the evidence on records and the proceedings below, the Court concludes that
Urban Bank constituted Atty. Pea as its agent to secure possession of the Pasay property.
This conclusion, however, is not determinative of the basis of the amount of payment that
must be made to him by the bank. The context in which the agency was created lays the
basis for the amount of compensation Atty. Pea is entitled to.
The transactional history and context of the sale between ISCI and Urban Bank of the Pasay
property, and Atty. Peas participation in the transfer of possession thereof to Urban Bank
provide crucial linkages that establish the nature of the relationship between the lawyer and
the landowner-bank.
The evidence reveals that at the time that the Contract to Sell was executed on 15
November 1994, and even when the Deed of Absolute Sale was executed two weeks later

on 29 November 1994, as far as Urban Bank was concerned, Pea was nowhere in the
picture. All discussions and correspondences were between the President and Corporate
Secretary of Urban Bank, on one hand, and the President of ISCI, on the other. The title to
the Pasay property was transferred to Urban Bank on 5 December 1994. Interestingly, Pea
testifies that it was only on 19 December 1994 that he learned that the land had already
been sold by ISCI to Urban Bank, notwithstanding the fact that Pea was a director of ISCI.
Pea was not asked to render any service for Urban Bank, neither did he perform any
service for Urban Bank at that point.
ISCI undertook in the Contract to Sell, to physically deliver the property to Urban Bank,
within 60 days from 29 November 1994,256 under conditions of full and actual possession
and control ..., free from tenants, occupants, squatters or other structures or from any liens,
encumbrances, easements or any other obstruction or impediment to the free use and
occupancy by the buyer of the subject Property or its exercise of the rights to ownership
over the subject Property....257 To guarantee this undertaking, ISCI agreed to the escrow
provision where PhP25,000,000 (which is a little over 10% of the value of the Pasay
property) would be withheld by Urban Bank from the total contract price until there is full
compliance with this undertaking.
Apparently to ensure that ISCI is able to deliver the property physically clean to Urban Bank,
it was ISCIs president, Enrique Montilla who directed on 26 November 1994 one of its
directors, Pea, to immediately recover and take possession of the property upon expiration
of the contract of lease on 29 November 1994.258 Pea thus first came into the picture as a
director of ISCI who was constituted as its agent to recover the Pasay property against the
lessee as well as the sub-tenants who were occupying the property in violation of the lease
agreement.259 He was able to obtain possession of the property from the lessee on the
following day, but the unauthorized sub-tenants refused to vacate the property.
It was only on 7 December 1994, that Urban Bank was informed of the services that Pea
was rendering for ISCI. The faxed letter from ISCIs Marilyn Ong reads:
Atty. Magdaleno M. Pea, who has been assigned by Isabela Sugar Company, Inc., to take
charge of inspecting the tenants would like to request an authority similar to this from the
Bank, as new owners. Can you please issue something like this today as he needs this.260
Two days later, on 9 December 1994, ISCI sent Urban Bank another letter that reads:

Dear Mr. Borlongan, I would like to request for an authorization from Urban Bank as per
attached immediatelyas the tenants are questioning the authority of the people there
who are helping us to take over possession of the property. (Emphasis supplied)261
It is clear from the above that ISCI was asking Urban Bank for help to comply with ISCIs own
contractual obligation with the bank under the terms of the sale of the Pasay property.
Urban Bank could have ignored the request, since it was exclusively the obligation of ISCI, as
the seller, to deliver a clean property to Urban Bank without any help from the latter.
A full-bodied and confident interpretation of the contracts between ISCI and Urban Bank
should have led the latter to inform the unauthorized sub-tenants that under its obligation
as seller to Urban Bank, it was under duty and had continuing authority to recover clean
possession of the property, despite the transfer of title. Yet, what unauthorized sub-tenant,
especially in the kind of operations being conducted within the Pasay property, would care
to listen or even understand such argument?
Urban Bank thus chose to cooperate with ISCI without realizing the kind of trouble that it
would reap in the process. In an apparent attempt to allow the efforts of ISCI to secure the
property to succeed, it recognized Peas role in helping ISCI, but stopped short of granting
him authority to act on its behalf. In response to the two written requests of ISCI, Urban
Bank sent this letter to Pea on 15 December 1994:
This is to advise you that we have noted the engagement of your services by Isabela Sugar
Company to recover possession of the Roxas Boulevard property formerly covered by TCT
No. 5382, effective November 29, 1994. It is understood that your services have been
contracted by and your principal remains to be the Isabela Sugar Company, which as seller
of the property and under the terms of our Contract to Sell dated November 29, 1994, has
committed to deliver the full and actual possession of the said property to the buyer, Urban
Bank, within the stipulated period.262 (Emphasis supplied)
Up to this point, it is unmistakable that Urban Bank was staying clear from making any
contractual commitment to Pea and conveyed its sense that whatever responsibilities
arose in retaining Pea were to be shouldered by ISCI.
According to the RTC-Bago City, in the reversed Decision, Atty. Pea only knew of the sale
between ISCI and Urban Bank at the time the RTC-Pasay City recalled the TRO and issued a
break-open order:

when information reached the (Pasay City) judge that the Pasay property had already
been transferred by ISCI to Urban Bank, the trial court recalled the TRO and issued a breakopen order for the property. According to Pea, it was the first time that he was apprised of
the sale of the land by ISCI and of the transfer of its title in favor of the bank.263
There is something contradictory between some of the trial courts factual findings and
Peas claim that it was only on 19 December 1994 that he first learned of the sale of the
property to Urban Bank. It is difficult to believe Pea on this point considering: (1) that he
was a board director of ISCI and a sale of this significant and valuable property of ISCI
requires the approval of the board of directors of ISCI; and (2) that ISCI twice requested
Urban Bank for authority to be issued in his favor (07 and 9 December 1994), 12 and 10 days
before 19 December 1994, since it would be contrary to human experience for Pea not to
have been informed by an officer of ISCI beforehand that a request for authority for him was
being sent to Urban Bank.
The sequence of fast-moving developments, edged with a sense of panic, with respect to
the decision of the RTC-Pasay City to recall the temporary restraining order and issue a
break-open order on 19 December 1994 in the First Injunction Complaint, is highly
enlightening to this Court.
First, Pea allegedly called up the president of ISCI, Montilla, who, according to Pea,
confirmed to him that the Pasay property had indeed been sold to Urban Bank.
Second, Pea allegedly told Montilla that he (Pea) would be withdrawing his guards from
the property because of the break-open order from the RTC-Pasay City.
Third, Montilla requested Pea to suspend the withdrawal of the guards while ISCI gets in
touch with Urban Bank.
Fourth, apparently in view of Montillas efforts, Bejasa, an officer of Urban Bank called Pea
and according to the latter, told him that Urban Bank would continue retaining his services
and for him to please continue with his effort to secure the property.
Fifth, this statement of Bejasa was not enough for Pea and he insisted that he be enabled
to talk with no less than the President of Urban Bank, Borlongan. At this point, Bejasa gave
him the phone number of Borlongan.

Sixth, immediately after the conversation with Bejasa, Pea calls Borlongan and tells
Borlongan that violence might erupt in the property because the Pasay City policemen, who
were sympathetic to the tenants, were threatening to force their way through the property.
At this point, if indeed this conversation took place, which Borlongan contests, what would
have been the response of Borlongan? Any prudent president of a bank, which has just
purchased a PhP240,000,000 property plagued by unauthorized and unruly sub-tenants of
the previous owner, would have sought to continue the possession of ISCI, thru Pea, and
he would have agreed to the reasonable requests of Pea. Borlongan could also have said
that the problem of having the sub-tenants ejected is completely ISCIs and ISCI should
resolve the matter on its own that without bothering the bank, with all its other problems.
But the specter of violence, especially as night was approaching in a newly-bought property
of Urban Bank, was not something that any publicly-listed bank would want publicized. To
the extent that the violence could be prevented by the president of Urban Bank, it is
expected that he would opt to have it prevented.
But could such response embrace the following legal consequences as Pea claims to have
arisen from the telephone conversation with Borlongan: (1) A contract of agency was
created between Pea and Urban Bank whereby Borlongan agreed to retain the services of
Pea directly; (2) This contract of agency was to be embodied in a written letter of authority
from Urban Bank; and (3) The agency fee of Pea was to be 10% of the market value as
attorneys fees and compensation and reimbursement of all expenses of Pea from the
time he took over the land until possession is turned over to Urban Bank.
This Court concludes that the legal consequences described in statements (1) and (2) above
indeed took place and that the facts
478 support them. However, the evidence does not support Peas claim that Urban Bank
agreed to attorneys fees and compensation of 10% of the market value of the property.
Urban Banks letter dated 19 December 1994 confirmed in no uncertain terms Peas
designation as its authorized representative to secure and maintain possession of the Pasay
property against the tenants. Under the terms of the letter, petitioner-respondent bank
confirmed his engagement (a) to hold and maintain possession of the Pasay property; (b)
to protect the same from former tenants, occupants or any other person who are
threatening to return to the said property and/or interfere with your possession of the said
property for and in our behalf; and (c) to represent the bank in any instituted court action
intended to prevent any intruder from entering or staying in the premises.264

These three express directives of petitioner-respondent banks letter admits of no other

construction than that a specific and special authority was given to Pea to act on behalf of
the bank with respect to the latters claims of ownership over the property against the
tenants. Having stipulated on the due execution and genuineness of the letter during
pretrial,265 the bank is bound by the terms thereof and is subject to the necessary
consequences of Peas reliance thereon. No amount of denial can overcome the
presumption that we give this letterthat it means what it says.
In any case, the subsequent actions of Urban Bank resulted in the ratification of Peas
authority as an agent acting on its behalf with respect to the Pasay property. By ratification,
even an unauthorized act of an agent becomes an authorized act of the principal.266
Both sides readily admit that it was Pea who was responsible for clearing the property of
the tenants and other occupants, and who turned over possession of the Pasay property to
petitioner-respondent bank.267 When the latter received full and actual possession of the
property from him, it did not protest or refute his authority as an agent to do so. Neither did
Urban Bank contest Peas occupation of the premises, or his installation of security guards
at the site, starting from the expiry of the lease until the property was turned over to the
bank, by which time it had already been vested with ownership thereof. Furthermore, when
Pea filed the Second Injunction Complaint in the RTC-Makati City under the name of
petitioner-respondent bank, the latter did not interpose any objection or move to dismiss
the complaint on the basis of his lack of authority to represent its interest as the owner of
the property. When he successfully negotiated with the tenants regarding their departure
from its Pasay property, still no protest was heard from it. After possession was turned over
to the bank, the tenants accepted PhP1,500,000 from Pea, in full and final settlement of
their claims against Urban Bank, and not against ISCI.268
In all these instances, petitioner-respondent bank did not repudiate the actions of Pea,
even if it was fully aware of his representations to third parties on its behalf as owner of the
Pasay property. Its tacit acquiescence to his dealings with respect to the Pasay property and
the tenants spoke of its intent to ratify his actions, as if these were its own. Even assuming
arguendo that it issued no written authority, and that the oral contract was not substantially
established, the bank duly ratified his acts as its agent by its acquiescence and acceptance of
the benefits, namely, the peaceful turnover of possession of the property free from subtenants.
Even if, however, Pea was constituted as the agent of Urban Bank, it does not necessarily
preclude that a third party would be liable for the payment of the agency fee of Pea. Nor
does it preclude the legal fact that Pea while an agent of Urban Bank, was also an agent of
ISCI, and that his agency from the latter never terminated. This is because the authority

given to Pea by both ISCI and Urban Bank was commonto secure the clean possession of
the property so that it may be turned over to Urban Bank. This is an ordinary legal
phenomenonthat an agent would be an agent for the purpose of pursuing a shared goal
so that the common objective of a transferor and a new transferee would be met.
Indeed, the Civil Code expressly acknowledged instances when two or more principals have
granted a power of attorney to an agent for a common transaction.269 The agency
relationship between an agent and two principals may even be considered extinguished if
the object or the purpose of the agency is accomplished.270 In this case, Peas services as
an agent of both ISCI and Urban Bank were engaged for one shared purpose or transaction,
which was to deliver the property free from unauthorized sub-tenants to the new ownera
task that Pea was able to achieve and is entitled to receive payment for.
That the agency between ISCI and Pea continued, that ISCI is to shoulder the agency fee
and reimbursement for costs of Pea, and that Urban Bank never agreed to pay him a 10%
agency fee is established and supported by the following:
First, the initial agency relationship between ISCI and Pea persisted. No proof was ever
offered that the letter of 26 November 1994 of Mr. Montilla of ISCI to Pea, for the latter
to immediately recover and take possession of the property upon expiration of the
contract of lease on 29 November 1994 was terminated. It is axiomatic that the
appointment of a new agent for the same business or transaction revokes the previous
agency from the day on which notice thereof was given to the former agent.271 If it is true
that the agency relationship was to be borne by Urban Bank alone, Pea should have
demonstrated that his previous agency relationship with ISCI is incompatible with his new
relationship with Urban Bank, and was thus terminated.
Second, instead, what is on the record is that ISCI confirmed the continuation of this agency
between Pea and itself and committed to pay for the services of Pea, in its letter to Urban
Bank dated 19 December 1994 which reads:
In line with our warranties as the Seller of the said property and our undertaking to deliver
to you the full and actual possession and control of said property, free from tenants,
occupants or squatters and from any obstruction or impediment to the free use and
occupancy of the property by Urban Bank, we have engaged the services of Atty.
Magdaleno M. Pea to hold and maintain possession of the property and to prevent the
former tenants or occupants from entering or returning to the premises. In view of the
transfer of the ownership of the property to Urban Bank, it may be necessary for Urban
Bank to appoint Atty. Pea likewise as its authorized representative for purposes of

holding/maintaining continued possession of the said property and to represent Urban Bank
in any court action that may be instituted for the abovementioned purposes.
It is understood that any attorneys fees, cost of litigation and any other charges or
expenses that may be incurred relative to the exercise by Atty. Pea of his
abovementioned duties shall be for the account of Isabela Sugar Company and any loss or
damage that may be incurred to third parties shall be answerable by Isabela Sugar
Company.272 (Emphasis supplied)
Third, Pea has never shown any written confirmation of his 10% agency fee, whether in a
note, letter, memorandum or board resolution of Urban Bank. An agency fee amounting to
PhP24,000,000 is not a trifling amount, and corporations do not grant their presidents
unilateral authority to bind the corporation to such an amount, especially not a banking
corporation which is closely supervised by the BSP for being a business seriously imbued
with public interest. There is nothing on record except the self-serving testimony of Pea
that Borlongan agreed to pay him this amount in the controverted telephone conversation.
Fourth, while ordinarily, uncontradicted testimony will be accorded its full weight, we
cannot grant full probative value to the testimony of Pea for the following reasons: (a)
Pea is not a credible witness for testifying that he only learned of the sale of the property
of 19 December 1994 when the acts of ISCI, of Urban Bank and his own up to that point all
indicated that he must have known about the sale to Urban Bank; and (b) it is incredible that
Urban Bank will agree to add another PhP24,000,000 to the cost of the property by agreeing
to the agency fee demanded by Pea. No prudent and reasonable person would agree to
expose his corporation to a new liability of PhP24,000,000 even if, in this case, a refusal
would lead to the Pasay City policemen and unauthorized sub-tenants entering the guarded
property and would possibly erupt in violence.
Peas account of an oral agreement with Urban Bank for the payment of PhP24,000,000 is
just too much for any court to believe. Whatever may be the agreement between Pea and
ISCI for compensation is not before this Court. This is not to say, however, that Urban Bank
has no liability to Pea. It has. Payment to him is required because the Civil Code demands
that no one should be unjustly enriched at the expense of another. This payment is to be
measured by the standards of quantum meruit.
Amount of Compensation
Agency is presumed to be for compensation. But because in this case we find no evidence
that Urban Bank agreed to pay Pea a specific amount or percentage of amount for his

services, we turn to the principle against unjust enrichment and on the basis of quantum
meruit.483
Since there was no written agreement with respect to the compensation due and owed to
Atty. Pea under the letter dated 19 December 1994, the Court will resort to determining
the amount based on the well-established rules on quantum meruit.
Agency is presumed to be for compensation.273 Unless the contrary intent is shown, a
person who acts as an agent does so with the expectation of payment according to the
agreement and to the services rendered or results effected.274 We find that the agency of
Pea comprised of services ordinarily performed by a lawyer who is tasked with the job of
ensuring clean possession by the owner of a property. We thus measure what he is entitled
to for the legal services rendered.
A stipulation on a lawyers compensation in a written contract for professional services
ordinarily controls the amount of fees that the contracting lawyer may be allowed to collect,
unless the court finds the amount to be unconscionable.275 In the absence of a written
contract for professional services, the attorneys fees are fixed on the basis of quantum
meruit,276 i.e., the reasonable worth of the attorneys services.277 When an agent
performs services for a principal at the latters request, the law will normally imply a
promise on the part of the principal to pay for the reasonable worth of those services.278
The intent of a principal to compensate the agent for services performed on behalf of the
former will be inferred from the principals request for the agents.279
In this instance, no extra-ordinary skills employing advanced legal training nor sophisticated
legal maneuvering were required to be employed in ejecting 23 sub-tenants who have no
lease contract with the property owner, and whose only authority to enter the premises was
unlawfully given by a former tenant whose own tenancy has clearly expired. The 23 subtenants operated beer houses and nightclubs, ordinary retail establishments for which no
sophisticated structure prevented easy entry. After Pea succeeded in locking the gate of
the compound, the sub-tenants would open the padlock and resume their businesses at
night. Indeed, it appears that only security guards, chains and padlocks were needed to keep
them out. It was only the alleged connivance of Pasay City policemen that Peas ability to
retain the possession was rendered insecure. And how much did it take Pea to enter into a
settlement agreement with them and make all these problems go away? By Peas own
account, PhP1,500,000 only. That means that each tenant received an average of
PhP65,217.40 only. Surely, the legal services of Pea cannot be much more than what the
sub-tenants were willing to settle for in the first place. We therefore award him the
equivalent amount of PhP1,500,000 for the legal and other related services he rendered to
eject the illegally staying tenants of Urban Banks property.

The Court of Appeals correctly reversed the trial court and found it to have acted with grave
abuse of discretion in granting astounding monetary awards amounting to a total of
PhP28,500,000 without any basis.280 For the lower court to have latched on to the selfserving claims of a telephone agreement as sufficient support for extending a multi-million
peso award is highly irregular. Absent any clear basis for the amount of the lawyers
compensation, the trial court should have instinctively resorted to quantum meruit, instead
of insisting on a figure with circumstantial and spurious justification.
We cannot also agree with the Decision penned by Judge Edgardo L. Catilo characterizing
Penas 10% fee as believable because it is nearly congruent to the PhP25 Million retention
money held in escrow for ISCI until a clean physical and legal turn-over of the property is
effected:
We now come to the reasonableness of the compensation prayed for by the plaintiff which
is 10% of the current market value which defendants claim to be preposterous and glaringly
excessive. Plaintiff [Pea] testified that defendant Borlongan agreed to such an amount and
this has not been denied by Ted Borlongan. The term current market value of the property
is hereby interpreted by the court to mean the current market value of the property at the
time the contract was entered into. To interpret it in accordance with the submission of the
plaintiff that it is the current market value of the property at the time payment is made
would be preposterous. The only evidence on record where the court can determine the
market value of the property at the time the contract of agency was entered into between
plaintiff and defendant is the consideration stated in the sales agreement between Isabela
Sugar Company, Inc. and Urban bank which is P241,612,000.00. Ten percent of this amount
is a reasonable compensation of the services rendered by the plaintiff considering the no
cure, no pay arrangement between the parties and the risks which plaintiff had to
undertake.281
In the first place, the Decision of Judge Catilo makes Peas demand of an agency fee of
PhP24 Million, an additional burden on Urban Bank. The Decision does not make the
retention money responsible for the same, or acquit Urban Bank of any liability to ISCI if it
pays the PhP24 Million directly to Pea instead of ISCI. In the second place, the amount of
money that is retained by transferees of property transactions while the transferor is
undertaking acts to ensure a clean and peaceful transfer to the transferee does not normally
approximate a one-to-one relationship to the services of ejecting unwanted occupants. They
may be inclusive of other costs, and not only legal costs, with enough allowances for
contingencies, and may take into consideration other liabilities as well. The amount can
even be entirely arbitrary, and may have been caused by the practice followed by Urban
Bank as advised by its officers and lawyers or by industry practice in cases where an
expensive property has some tenancy problems. In other words, Judge Catilos statement is

a non sequitur, is contrary to normal human experience, and sounds like an argument being
made to fit Peas demand for a shocking pay-out.
In any case, 10% of the purchase price of the Pasay propertya staggering PhP24,161,200
is an unconscionable amount, which we find reason to reduce. Neither will the Court
accede to the settlement offer of Pea to Urban Bank of at least PhP38,000,000 for alleged
legal expenses incurred during the course of the proceedings,282 an amount that he has not
substantiated at any time.
Lawyering is not a business; it is a profession in which duty to public service, not money, is
the primary consideration.283 The principle of quantum meruit applies if lawyers are
employed without a price agreed upon for their services, in which case they would be
entitled to receive what they merit for their services, or as much as they have earned.284 In
fixing a reasonable compensation for the services rendered by a lawyer on the basis of
quantum meruit, one may consider factors such as the time spent and extent of services
rendered; novelty and difficulty of the questions involved; importance of the subject matter;
skill demanded; probability of losing other employment as a result of acceptance of the
proffered case; customary charges for similar services; amount involved in the controversy
and the resulting benefits for the client; certainty of compensation; character of
employment; and professional standing of the lawyer.285
Hence, the Court affirms the appellate courts award of PhP3,000,000 to Pea, for expenses
incurred corresponding to the performance of his services. An additional award of
PhP1,500,000 is granted to him for the services he performed as a lawyer in securing the
rights of Urban Bank as owner of the Pasay property.
II
The corporate officers and directors of Urban Bank are not solidarily or personally
liable with their properties for the corporate liability of Urban Bank to Atty. Pea.
The obligation to pay Peas compensation, however, falls solely on Urban Bank. Absent any
proof that individual petitioners as bank officers acted in bad faith or with gross negligence
or assented to a patently unlawful act, they cannot be held solidarily liable together with the
corporation for services performed by the latters agent to secure possession of the Pasay
property. Thus, the trial court had indeed committed grave abuse of discretion when it
issued a ruling against the eight individual defendant bank directors and officers and its
Decision should be absolutely reversed and set aside.

_______________
A corporation, as a juridical entity, may act only through its directors, officers and
employees.286 Obligations incurred as a result of the acts of the directors and officers as
corporate agents are not their personal liabilities but those of the corporation they
represent.287 To hold a director or an officer personally liable for corporate obligations, two
requisites must concur: (1) the complainant must allege in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.288 To hold a director, a trustee or an officer
personally liable for the debts of the corporation and, thus, pierce the veil of corporate
fiction, bad faith or gross negligence by the director, trustee or officer in directing the
corporate affairs must be established clearly and convincingly.289
Pea failed to allege and convincingly show that individual defendant bank directors and
officers assented to patently unlawful acts of the bank, or that they were guilty of gross
negligence or bad faith. Contrary to his claim, the Complaint290 in the lower court never
alleged that individual defendants acquiesced to an unlawful act or were grossly negligent
or acted in bad faith.291 Neither is there any specific allegation of gross negligence or action
in bad faith that is attributable to the individual defendants in performance of their official
duties.
In any event, Pea did not adduce any proof that the eight individual defendants performed
unlawful acts or were grossly negligent or in bad faith. Aside from the general allegation
that they were corporate officers or members of the board of directors of Urban Bank, no
specific acts were alleged and proved to warrant a finding of solidary liability. At most,
petitioners Borlongan, Bejasa and Manuel were identified as those who had processed the
agency agreement with Pea through their telephone conversations with him and/or
written authorization letter.
Aside from Borlongan, Bejasa and Manuel, Atty. Pea in the complaint pointed to no specific
act or circumstance to justify the inclusion of Delfin C. Gonzalez, Jr., Benjamin L. de Leon, P.
Siervo H. Dizon, Eric L. Lee, and Ben T. Lim, Jr., except for the fact that they were members
of the Board of Directors of Urban Bank at that time. That the five other members of the
Board of Directors were excluded from Peas complaint highlights the peculiarity of their
inclusion. What is more, the complaint mistakenly included Ben Y. Lim, Jr., who had not
even been a member of the Board of Directors of Urban Bank. In any case, his father and
namesake, Ben T. Lim, Sr., who had been a director of the bank at that time, had already
passed away in 1997.

In ruling for the solidary liability of the other bank directors, the decision of the trial court
hinged solely on the purported admission of Arturo Manuel, Jr., that the transactions with
Atty. Pea were approved by the Board of Directors:
In this case, plaintiff testified as to the personal participation of defendants Ted Borlongan
and Corazon Bejasa in the subject transaction. On the other hand, with respect to the other
defendants, it was the defendants themselves, through witness Arturo Manuel, Jr., who
admitted that all the transactions involved in this case were approved by the board of
directors. Thus, the court has sufficient basis to hold the directors jointly and severally liable
with defendant Urban Bank, Inc.292 (Emphasis supplied)
The Decision of the RTC-Bago City must be utterly rejected on this point because its
conclusion of any cause of action, much less actual legal liability on the part of Urban Banks
corporate officers and directors are shorn of any factual finding. That they assented to the
transactions of the bank with respect to Atty. Peas services without any showing that
these corporate actions were patently unlawful or that the officers were guilty of gross
negligence or bad faith is insufficient to hold them solidarily liable with Urban Bank. It seems
absurd that the trial court will hold the impleaded selected members of the Board of
Directors only, but not the others who also purportedly approved the transactions. Neither
is the reason behind the finding of solidariness with Urban Bank in such liability explained
at all. It is void for completely being devoid of facts and the law on which the finding of
liability is based.
The Court of Appeals correctly rejected the claim of personal liability against the individual
petitioners when it held as follows:
The plaintiff-appellees complaint before the court a quo does not point to any particular
act of either one or all of the defendants-appellants that will subject them to personal
liability. His complaint merely asserts that defendant Borlongan and Atty. Bejasa acted for
and in behalf of Urban Bank in securing his services in protecting the banks newly acquired
property. Hence, We cannot allow the same.293
Pea had argued that individual defendant bank directors and officers should be held
personally and solidarily liable with petitioner-respondent bank, since they failed to argue
for limited corporate liability.294 The trial court subscribed to his reasoning and held that
the failure to resort to the said defense constituted a waiver on the part of individual
defendants.295 The Court is not persuaded.

As the complainant on the trial court level, Pea carried the burden of proving that the eight
individual defendants performed specific acts that would make them personally liable for
the obligations of the corporation. This he failed to do. He cannot capitalize on their alleged
failure to offer a defense, when he had not discharged his responsibility of establishing their
personal liabilities in the first place. This Court cannot sustain the individual liabilities of the
bank officers when Pea, at the onset, has not persuasively demonstrated their assent to
patently unlawful acts of the bank, or that they were guilty of gross negligence or bad faith,
regardless of the weaknesses of the defenses raised. This is too basic a requirement that this
Court must demand sufficient proof before we can disregard the separate legal personality
of the corporation from its offices.
Hence, only Urban Bank, not individual defendants, is liable to pay Peas compensation for
services he rendered in securing possession of the Pasay property. Its liability in this case is,
however, without prejudice to its possible claim against ISCI for reimbursement under their
separate agreements.
III
Considering the absolute nullification of the trial courts Decision, the proceedings
arising from the execution pending appeal based on the said Decision is likewise
completely vacated.
Since the trial courts main Decision awarding PhP28,500,000 in favor of Pea has been
nullified above, the execution pending appeal attendant thereto, as a result, no longer has
any leg to stand on and is thus completely vacated.
To recall, prior to the filing of Urban Bank of its notice of appeal in the main case,296 Pea
moved on 07 June 1999 for execution pending appeal297 of the Decision,298 which had
awarded him a total of PhP28,500,000 in compensation and damages.299 In supporting his
prayer for discretionary execution, Pea cited no other reason than the pending separate
civil action for collection filed against him by a creditor, who was demanding payment of a
PhP3,000,000 loan.300 According to him, he had used the proceeds of the loan for securing
the banks Pasay property.301 In opposition to the motion, Urban Bank countered that the
collection case was not a sufficient reason for allowing execution pending appeal.302
Favorably acting on Peas motion, the RTC-Bago City, through Judge Henry J. Trocino,303
issued a Special Order authorizing execution pending appeal on the basis of Peas
indebtedness to his creditor-friend.304 In accordance with this Special Order, Atty.
Josephine Mutia-Hagad, the clerk of court and ex officio sheriff, expeditiously issued a Writ

of Execution on the same day.305 The trial courts Special Order and Writ of Execution were
the subjects of a Rule 65 Petition filed by Urban Bank with the CA.306
Both the Special Order and Writ of Execution are nullified for two reasons:
(1) Since the Decision of the RTC-Bago City is completely vacated, all its issuances
pursuant to the Decision, including the Special Order and the Writ of Execution are
likewise vacated; and
(2) The Special Order authorizing execution pending appeal based on the collection
suit filed against Atty. Pea had no basis under the Rules of Court, and the same
infirmity thus afflicts the Writ of Execution issued pursuant thereto.
Since
the
vacated,
all
are likewise vacated.

Decision
orders

of
and

the

RTC-Bago
writs
pursuant

City

is
thereto

Considering that the Special Order and Writ of Execution was a result of the trial courts
earlier award of PhP28,500,000, the nullification or complete reversal of the said award
necessarily translates to the vacation as well of the processes arising therefrom, including all
the proceedings for the execution pending appeal.
Considering the unconscionable award given by the trial court and the unjustified imposition
of solidary liability against the eight bank officers, the Court is vacating the Decision of the
RTC-Bago City Decision. The trial court erroneously made solidarily liable Urban Banks
directors and officers without even any allegations, much less proof, of any acts of bad faith,
negligence or malice in the performance of their duties. In addition, the trial court
mistakenly anchored its astounding award of damages amounting PhP28,500,000 on the
basis of the mere account of Atty. Pea of a telephone conversation, without even
considering the surrounding circumstances and the sheer disproportion to the legal services
rendered to the bank.
A void judgment never acquires finality.307 In contemplation of law, that void decision is
deemed non-existent.308 Quod nullum est, nullum producit effectum.309 Hence, the validity
of the execution pending appeal will ultimately hinge on the courts findings with respect to
the decision in which the execution is based.
Although discretionary execution can proceed independently while the appeal on the merits
is pending, the outcome of the main case will greatly impact the execution pending appeal,

especially in instances where as in this case, there is a complete reversal of the trial courts
decision. Thus, if the decision on the merits is completely nullified, then the concomitant
execution pending appeal is likewise without any effect. In fact, the Rules of Court expressly
provide for the possibility of reversal, complete or partial, of a final judgment which has
been executed on appeal.310 Precisely, the execution pending appeal does not bar the
continuance of the appeal on the merits, for the Rules of Court explicitly provide for
restitution according to equity and justice in case the executed judgment is reversed on
appeal.311
Considering that the Decision of the RTC-Bago City has been completely vacated and
declared null and void, it produces no effect whatsoever. Thus, the Special Order and its
concomitant Writ of Execution pending appeal is likewise annulled and is also without
effect. Consequently, all levies, garnishment and sales executed pending appeal are
declared null and void, with the concomitant duty of restitution under the Rules of Court, as
will be discussed later on.
In
any
case,
pending
appeal
law and jurisprudence.

the
lacks

trial

courts
sufficient

grant
basis

of
execution
under
the

We rule that the pendency of a collection suit by a third party creditor which credit was
obtained by the winning judgment creditor in another case, is not a sufficiently good reason
to allow execution pending appeal as the Rules of Court provide. Execution pending appeal
is an extraordinary remedy allowed only when there are reasons to believe that the
judgment debtor will not be able to satisfy the judgment debt if the appeals process will still
have to be awaited. It requires proof of circumstances such as insolvency or attempts to
escape, abscond or evade a just debt.
In Florendo v. Paramount Insurance, Corp.,312 the Court explained that the execution
pending appeal is an exception to the general rule that execution issues as a matter of right,
when a judgment has become final and executory:
As such exception, the courts discretion in allowing it must be strictly construed and firmly
grounded on the existence of good reasons. Good reasons, it has been held, consist of
compelling circumstances that justify immediate execution lest the judgment becomes
illusory. The circumstances must be superior, outweighing the injury or damages that might
result should the losing party secure a reversal of the judgment. Lesser reasons would make
of execution pending appeal, instead of an instrument of solicitude and justice, a tool of
oppression and inequity. (Emphasis supplied)

Indeed, the presence or the absence of good reasons remains the yardstick in allowing the
remedy of execution pending appeal, which should consist of exceptional circumstances of
such urgency as to outweigh the injury or damage that the losing party may suffer, should
the appealed judgment be reversed later.313 Thus, the Court held that even the financial
distress of the prevailing company is not sufficient reason to call for execution pending
appeal:
In addressing this issue, the Court must stress that the execution of a judgment before its
finality must be founded upon good reasons. The yardstick remains the presence or the
absence of good reasons consisting of exceptional circumstances of such urgency as to
outweigh the injury or damage that the losing party may suffer, should the appealed
judgment be reversed later. Good reason imports a superior circumstance that will
outweigh injury or damage to the adverse party. In the case at bar, petitioner failed to show
paramount and compelling reasons of urgency and justice. Petitioner cites as good reason
merely the fact that it is a small-time building contractor that could ill-afford the protracted
delay in the reimbursement of the advances it made for the aforesaid increased costs of . . .
construction of the [respondents] buildings.
Petitioners allegedly precarious financial condition, however, is not by itself a
jurisprudentially compelling circumstance warranting immediate execution. The financial
distress of a juridical entity is not comparable to a case involving a natural personsuch as a
very old and sickly one without any means of livelihood, an heir seeking an order for support
and monthly allowance for subsistence, or one who dies.
Indeed, the alleged financial distress of a corporation does not outweigh the long standing
general policy of enforcing only final and executory judgments. Certainly, a juridical entity
like petitioner corporation has, other than extraordinary execution, alternative remedies
like loans, advances, internal cash generation and the like to address its precarious financial
condition. (Emphasis supplied)
In Philippine Bank of Communications v. Court of Appeals,314 the Court denied execution
pending appeal to a juridical entity which allegedly was in financial distress and was facing
civil and criminal suits with respect to the collection of a sum of money. It ruled that the
financial distress of the prevailing party in a final judgment which was still pending appeal
may not be likened to the situation of a natural person who is ill, of advanced age or dying
as to justify execution pending appeal:
It is significant to stress that private respondent Falcon is a juridical entity and not a natural
person. Even assuming that it was indeed in financial distress and on the verge of facing
civil or even criminal suits, the immediate execution of a judgment in its favor pending

appeal cannot be justified as Falcons situation may not be likened to a case of a natural
person who may be ill or may be of advanced age. Even the danger of extinction of the
corporation will not per se justify a discretionary execution unless there are showings of
other good reasons, such as for instance, impending insolvency of the adverse party or the
appeal being patently dilatory. But even as to the latter reason, it was noted in Aquino vs.
Santiago (161 SCRA 570 [1988]), that it is not for the trial judge to determine the merit of a
decision he rendered as this is the role of the appellate court. Hence, it is not within
competence of the trial court, in resolving a motion for execution pending appeal, to rule
that the appeal is patently dilatory and rely on the same as its basis for finding good reason
to grant the motion. Only an appellate court can appreciate the dilatory intent of an appeal
as an additional good reason in upholding an order for execution pending appeal which may
have been issued by the trial court for other good reasons, or in cases where the motion for
execution pending appeal is filed with the appellate court in accordance with Section 2,
paragraph (a), Rule 39 of the 1997 Rules of Court.
What is worse, only one case was actually filed against Falcon and this is the complaint for
collection filed by Solidbank. The other cases are impending, so it is said. Other than said
Solidbank case, Falcons survival as a body corporate cannot be threatened by anticipated
litigation. This notwithstanding, and even assuming that there was a serious threat to
Falcons continued corporate existence, we hold that it is not tantamount nor even similar
to an impending death of a natural person. The material existence of a juridical person is not
on the same plane as that of human life. The survival of a juridical personality is clearly
outweighed by the long standing general policy of enforcing only final and executory
judgments. (Emphasis supplied)
In this case, the trial court supported its discretionary grant of execution based on the
alleged collection suit filed against Pea by his creditor friend for PhP3,000,000:
It has been established that the plaintiff secured the loan for the purpose of using the
money to comply with the mandate of defendant bank to hold and maintain possession of
the parcel of land in Pasay City and to prevent intruders and former tenants from occupying
the said property. The purpose of the loan was very specific and the same was made known
to defendant bank through defendant Teodoro Borlongan. The loan was not secured for
some other purpose. Truth to tell, the plaintiff accomplished his mission in clearing the
property of tenants, intruders and squatters, long before the deadline given him by the
defendant bank. The plaintiff was assured by no less than the President of defendant bank
of the availability of funds for his compensation and reimbursement of his expenses. Had he
been paid by defendant bank soon after he had fulfilled his obligation, he could have settled
his loan obligation with his creditor.499

Defendants were benefitted by the services rendered by the plaintiff. While plaintiff has
complied with the undertaking, the defendants, however, failed to perform their obligation
to the plaintiff.

In fact, the Court of Appeals noted Atty. Peas admission of sufficient properties to answer
for any liability arising from the collection suit arising from his creditor-friend. In initially
denying the execution pending appeal, the appellate court held that:

The plaintiff stands to suffer greatly if the collection case against him is not addressed.
Firstly, as shown in Exhibit C, plaintiffs total obligation with Roberto Ignacio as of May
1999 is PhP24,192,000.00. This amount, if left unpaid, will continue to increase due to
interest charges being imposed by the creditor to the prejudice of plaintiff. Secondly, a
preliminary attachment has already been issued and this would restrict the plaintiff from
freely exercising his rights over his property during the pendency of the case.

On the other hand, private respondents claim that the only way he could pay his
indebtedness to Roberto Ignacio is through the money that he expects to receive from
petitioners in payment of his services is belied by his testimony at the hearing conducted by
the trial court on the motion for execution pending appeal wherein petitioners were able to
secure an admission from him that he has some assets which could be attached by Roberto
Ignacio and that he would probably have other assets left even after the attachment.319

In their opposition, defendants claim that plaintiffs indebtedness is a ruse, however,

defendants failed to adduce evidence to support its claim.

Hence, to rule that a pending collection suit against Atty. Pea, which has not been shown
to result in his insolvency, would be to encourage judgment creditors to indirectly and
indiscriminately instigate collection suits or cite pending actions, related or not, as a good
reason to routinely avail of the remedy of discretionary execution.320 As an exception to
the general rule on execution after final and executory judgment, the reasons offered by
Atty. Pea to justify execution pending appeal must be strictly construed.

The court finds that the pendency of the case for collection of money against plaintiff is a
good reason for immediate execution.315
The mere fact that Atty. Pea was already subjected to a collection suit for payment of the
loan proceeds he used to perform his services for Urban Bank is not an acceptable reason to
order the execution pending appeal against the bank. Financial distress arising from a lone
collection suit and not due to the advanced age of the party is not an urgent or compelling
reason that would justify the immediate levy on the properties of Urban Bank pending
appeal. That Pea would made liable in the collection suit filed by his creditor-friend would
not reasonably result in rendering illusory the final judgment in the instant action for agents
compensation.
Peas purported difficulty in paying the loan proceeds used to perform his services does
not outweigh the injury or damages that might result should Urban Bank obtain a reversal of
the judgment, as it did in this case. Urban Bank even asserts that the collection suit filed
against Pea was a mere ruse to provide justification for the execution pending appeal, no
matter how flimsy.316 As quoted above, the trial court noted Atty. Peas total obligation to
his creditor-friend as of May 1999 was already the incredible amount of PhP24,192,000.00,
even when the Complaint dated 03 April 1999 itself, which spawned the collection suit
included only a prayer for payment of PhP3,500,000 with attorneys fees of PhP100,000.317
It seems absurd that Atty. Pea would agree to obtaining a loan from his own friend, when
the Promissory Notes provided for a penalty of 5% interest per month or 60% per annum for
delay in the payment.318 It sounds more like a creative justification of the immediate
execution of the PhP28.5 Million judgment notwithstanding the appeal.

Neither will the Court accept the trial courts unfounded assumption that Urban Banks
appeal was merely dilatory, as in fact, the PhP28,500,000 award given by the trial court was
overturned by the appellate court and eventually by this Court.
Moreover, at the time the Special Order of Judge Henry Trocio of the RTC-Bago City came
out in 1999, Urban Bank had assets worth more than PhP11 Billion and had a net worth of
more than PhP2 Billion. There was no reason then to believe that Urban Bank could not
satisfy a judgment of PhP28,500,000, a sum that was only 1% of its net worth, and 1/5 of 1%
of its total assets of PhP11,933,383,630.321 Urban Bank was even given a Solvency, Liquidity
and Management Rating of 82.89 over 100 by no less than the BSP322 and reportedly had
liquid assets amounting to PhP2,036,878.323 In fact, no allegation of impending insolvency
or attempt to abscond was ever raised by Atty. Pea and yet, the trial court granted
execution pending appeal.
Since the original order granting execution pending appeal was completely void for
containing no justifiable reason, it follows that any affirmance of the same by the Court of
Appeals is likewise void.
The Decision of the Court of Appeals in the case docketed as CA-G.R. SP No. 55667, finding a
new reason for granting execution pending appeal, i.e., the receivership of Urban Bank, is
likewise erroneous, notwithstanding this Courts ruling in Lee v. Trocino.324 In accordance

with the subsequent Resolution of the Court in abovementioned case of Lee v. Trocino,325
we directly resolve the issue of the insufficiency of the reasons that led to the grant of
execution pending appeal.
In cases where the two or more defendants are made subsidiarily or solidarily liable by the
final judgment of the trial court, discretionary execution can be allowed if all the
defendants have been found to be insolvent. Considering that only Urban Bank, and not the
other eight individual defendants, was later on considered by the Court of Appeals to have
been in danger of insolvency, is not sufficient reason to allow execution pending appeal,
since the liability for the award to Pea was made (albeit, mistakenly) solidarily liable
together with the bank officers.
In Flexo Manufacturing Corp. v. Columbus Food, Inc., and Pacific Meat Company, Inc.,326
both Columbus Food, Inc., (Columbus Food) and Pacific Meat Company, Inc., (Pacific Meat)
were found by the trial court therein to be solidarily liable to Flexo Manufacturing, Inc.,
(Flexo Manufacturing) for the principal obligation of PhP2,957,270.00. The lower court also
granted execution pending appeal on the basis of the insolvency of Columbus Food, even if
Pacific Meat was not found to be insolvent. Affirming the reversal ordered by the Court of
Appeals, this Court ruled that since there was another party who was solidarily liable to pay
for the judgment debt, aside from the insolvent Columbus Food, there was no good reason
to allow the execution pending appeal:
Regarding the state of insolvency of Columbus, the case of Philippine National Bank v. Puno,
held:
While this Court in several cases has held that insolvency of the judgment debtor or
imminent danger thereof is a good reason for discretionary execution, otherwise to
await a final and executory judgment may not only diminish but may nullify all
chances for recovery on execution from said judgment debtor, We are constrained to
rule otherwise in this particular case. In the aforecited cases, there was either only
one defeated party or judgment debtor who was, however, insolvent or there were
several such parties but all were insolvent, hence the aforesaid rationale for
discretionary execution was present. In the case at bar, it is undisputed that,
assuming MMIC is insolvent, its co-defendant PNB is not. It cannot, therefore, be
plausibly assumed that the judgment might become illusory; if MMIC cannot satisfy
the judgment, PNB will answer for it. It will be observed that, under the dispositive
portion of the judgment hereinbefore quoted, the liability of PNB is either subsidiary
or solidary.

Thus, when there are two or more defendants and one is not insolvent, the insolvency of a
co-defendant is not a good reason to justify execution pending appeal if their liability
under the judgment is either subsidiary or solidary. In this case, Pacific was adjudged to be
solidarily liable with Columbus. Therefore, the latter is not the only party that may be
answerable to Flexo. Its insolvency does not amount to a good reason to grant execution
pending appeal. (Emphasis supplied)
Similarly, the trial court in this case found Urban Bank and all eight individual bank officers
solidarily liable to Atty. Pea for the payment of the PhP28,500,000 award. Hence, had the
judgment been upheld on appeal, Atty. Pea could have demanded payment from any of
the nine defendants. Thus, it was a mistake for the Court of Appeals to have affirmed
execution pending appeal based solely on the receivership of Urban Bank, when there were
eight other individual defendants, who were solidarily liable but were not shown to have
been insolvent. Since Urban Banks co-defendants were not found to have been insolvent,
there was no good reason for the Court of Appeals to immediately order execution pending
appeal, since Atty. Peas award could have been satisfied by the eight other defendants,
especially when the de Leon Group filed its supersedeas bond.
It seems incongruous for Atty. Pea to be accorded the benefit of erroneously impleading
several bank directors, who had no direct hand in the transaction, but at the same time,
concentrating solely on Urban Banks inability to pay to justify execution pending appeal,
regardless of the financial capacity of its other co-defendants. Worse, he capitalized on the
insolvency and/or receivership of Urban Bank to levy or garnish properties of the eight other
individual defendants, who were never shown to have been incapable of paying the
judgment debt in the first place. The disposition on the execution pending appeal may have
been different had Atty. Pea filed suit against Urban Bank alone minus the bank officers
and the same bank was found solely liable for the award and later on declared under
receivership.
In addition, a judgment creditor of a bank, which has been ordered by the BSP to be subject
of receivership, has to fall in line like every other creditor of the bank and file its claim under
the proper procedures for banks that have been taken over by the PDIC. Under Section 30 of
Republic Act No. 7653, otherwise known as the New Central Bank Act, which prevailed at
that time, once a bank is under receivership, the receiver shall immediately gather and take
charge of all the assets and liabilities of the bank and administer the same for the benefit of
its creditors and all of the banks assets shall be considered as under custodia legis and
exempt from any order of garnishment, levy, attachment or execution.327 In the Minute
Resolution of the Monetary Board of the BSP, Urban Bank was not only prevented from
doing business in the Philippines but its asset and affairs were placed under receivership as
provided for under the same law.328 In fact, even Pea himself assured the PDIC, as

receiver of Urban Bank, that he would not schedule or undertake execution sales of the
banks assets for as long as the bank remains in receivership.329 Until the approval of the
rehabilitation or the initiation of the liquidation proceedings, all creditors of the bank under
receivership shall stand on equal footing with respect to demanding satisfaction of their
debts, and cannot be extended preferred status by an execution pending appeal with
respect to the banks assets:
[t]o execute the judgment would unduly deplete the assets of respondent bank to the
obvious prejudice of other creditors. After the Monetary Board has declared that a bank is
insolvent and has ordered it to cease operations, the Board becomes the trustee of its
assets for the equal benefit of all the depositors and creditors. After its insolvency, one
creditor cannot obtain an advantage or preference over another by an attachment,
execution or otherwise. Until there is an approved rehabilitation or the initiation of the
liquidation proceedings, creditors of the bank stand on equal footing with respect to
demanding satisfaction of their debts, and cannot be afforded special treatment by an
execution pending appeal with respect to the banks assets.330 (Emphasis supplied)
Moreover, assuming that the CA was correct in finding a reason to justify the execution
pending appeal because of the supervening event of Urban Banks closure, the assumption
by the EIB of the liabilities of Urban Bank meant that any execution pending appeal can be
granted only if EIB itself is shown to be unable to satisfy Peas judgment award of
PhP28,500,000. That is not at all the case. In just one particular sale on execution herein, EIB
offered to answer in cash for a substantial part of Peas claims, as evidenced by EIBs
capacity and willingness to redeem the executed properties (condominium units sold to
intervenor Unimega) by tendering managers checks for more than PhP22 Million331 which
is already 77.57% of Peas total award from the trial court.332 The fact that EIBs offer to
take over Urban Bank means it was able to satisfy the BSPs concern that all legitimate
liabilities of Urban Bank be duly discharged.
As an exception to the general rule that only final judgments may be executed,333 the grant
of execution pending appeal must perforce be based on good reasons. These reasons
must consist of compelling or superior circumstances demanding urgency which will
outweigh the injury or damages suffered, should the losing party secure a reversal of the
judgment or final order.334 The circumstances that would reasonably justify superior
urgency, demanding interim execution of Peas claims for compensation and/or damages,
have already been settled by the financial capacity of the eight other co-defendants, the
approval of the supersedeas bonds, the subsequent takeover by EIB, and the successor
banks stable financial condition,335 which can answer for the judgment debt. Thus, Peas
interest as a judgment creditor is already well-protected.

While there is a general rule that a final and executory judgment in the main case will
render moot and academic a petition questioning the exercise of the trial courts discretion
in allowing execution pending appeal, we find it necessary to rule categorically on this
question because of the magnitude of the aberrations that attended the execution pending
appeal in the Decision of the RTC-Bago City.
Irregularities
in
cution Pending Appeal

the

Levy

and

Sale

on

Exe-

Assuming that the Special Order granting execution pending appeal were valid, issues have
been raised on alleged irregularities that mar the levy and sale on execution of the
properties of Urban Bank and its officers and directors. Many of the facts have not been
sufficiently litigated before the trial and appellate courts for us to fully rule on the issue,
nevertheless, from what is on record, the following are the observations of this Court:
First, contrary to the general rules on execution, no opportunity was given to Urban Bank or
the other co-defendants to pay the judgment debt in cash or certified check.336 Before
proceeding on the levying and garnishing personal and real properties, demand must be
made by the sheriff against the judgment debtors, Urban Bank and the eight other
individual bank officers, for the immediate payment of the award subject of the execution
pending appeal. It has not been shown whether Urban Bank and its officers and directors
were afforded such an opportunity. Instead of garnishing personal properties of the bank,
the sheriff inexplicably proceeded to levy substantial real properties of the bank and its
officers at the onset.
Second, assuming that Urban Bank and its officers did not possess sufficient cash or funds to
pay for the judgment debt pending appeal, they should have been given the option to
choose which of their properties to be garnished and/or levied. In this case, Urban Bank
exercised its option by presenting to the sheriff various parcels of land, whose values
amount to more than PhP76,882,925 and were sufficient to satisfy the judgment debt.337
Among those presented by the bank, only the property located in Tagaytay was levied upon
by the sheriff.338 No sufficient reason was raised why the banks chosen properties were
rejected or inadequate for purposes of securing the judgment debt pending appeal. Worse,
the Sheriff proceeded with garnishing and levying on as many properties of Urban Bank and
its officers, in disregard of their right to choose under the rules.
Third, the public auction sales conducted in the execution pending appeal sold more
properties of Urban Bank and the directors than what was sufficient to satisfy the debt.
Indeed, the conservative value of the properties levied herein by the sheriff amounting to
more than PhP181,919,190, consisting of prime condominium units in the heart of the

Makati Business district, a lot in Tagaytay City, shares in exclusive clubs, and shares of stock,
among others, was more than sufficient to answer for the PhP28,500,000 judgment debt six
times over. Rather than stop when the properties sold had approximated the monetary
award, the execution sale pending appeal continued and unduly benefitted Atty. Pea, who,
as judgment creditor and, at times, the winning bidder, purchased most of the properties
sold.

the Court to find measures to improve the safeguards against abuse of court processes. It is
for this reason that the Office of the Court Administrator will be given a special task by the
Court on this matter. Judge Henry Trocino of RTC-Bago City, who issued the Special Order
and had supervisory authority over the proceedings of the execution pending appeal, would
have been included under such administrative investigation by the Office of the Court
Administrator, were it not for his retirement from the judicial service.

Fourth, it was supremely disconcerting how Urban Bank, through its successor EIB, was
unduly deprived of the opportunity to redeem the properties, even after presenting
managers checks339 equal to the purchase price of the condominium units sold at the
execution sale. No reason was offered by the trial court340 or the sheriff341 for rejecting
the redemption price tendered by EIB in order to recover the properties executed and sold
in public auction pending appeal.

The
Courts
tion Pending Appeal

Finally, the Court cannot turn a blind eye to the fact that there was already a sufficient
supersedeas bond given to answer for whatever monetary award will be given in the end. To
recall, the De Leon Group had already tendered a supersedeas bond of PhP40,000,000 in the
Court of Appeals to prevent execution pending appeal over their properties. In fact, even
Urban Bank tendered a separate supersedeas bond of equal amount with this Court, for a
total of PhP80,000,000 to secure any judgment to be awarded to Atty. Pea. That execution
sales over the properties of judgment debtors proceeded despite the three-fold value of
securities compared to the amount of the award indicates bad faith, if not malice, with
respect to the conduct of the execution pending appeal.
Inasmuch as the RTC Decision has already been vacated and an independent finding has
been made by this Court of the complete nullity of the order granting execution pending
appeal, it follows that all acts pursuant to such order and its writ are also void. It does not
follow however, that the Courts Decision in Co v. Sillador,342 is nullified, inasmuch as an
equally-important legal doctrinethe immutability of Supreme Court final decisionsis also
to be considered. In any case, the factual circumstances and the ruling on that case were
limited to the actions of Sheriff Allan Sillador with respect to properties levied under the
same Special Order and Writ of Execution, which were subject of third party claims made by
the spouses of Teodoro Borlongan, Corazon Bejasa and Arturo Manuel, Jr.343 It does not
encompass other specific events and acts committed in the course of the execution pending
appeal that may warrant administrative or disciplinary actions. Having said that, this Court
leaves it to the parties to explore avenues for redress in such a situation.
The observation on the irregularities above-enumerated are made for the purpose of
correcting the injustice that has been committed herein, by allowing the Court to pursue the
question of who was responsible for such gross violation of the rules on execution, and for

Suspension

Order

of

Execu-

Acting on Atty. Peas Omnibus Motion dated 09 December 2002344 and Unimegas Motion
for Reconsideration dated 10 December 2002345 with respect to the Courts Order dated 13
November 2002346 that clarified the earlier stay order against the execution pending
appeal,347 the Court hereby denies both motions. The Court is fully correct in suspending
the period for the running of the redemption period of the properties of Urban Bank and its
officers and directors that were levied and subject of execution sale to satisfy the judgment
debt in favor of Atty. Pea, the Court having conclusively determined that the supersedeas
bond filed was sufficient and considering the subsequent finding that the said execution
pending appeal lacks any sufficient ground for the grant thereof.
As to the theory of Atty. Pea that the actuations of Justice Carpio, the then ponente of this
case, in drafting the questioned Order should positively impact his motion for
reconsideration of the same, the Court finds this argument utterly devoid of merit.
In the first place, that questioned Order was not the decision of only a single member of the
Court, Justice Carpio, but of the entire division to which he belonged, then composed of
retired Chief Justice Hilario Davide, Justices Jose Vitug, Consuelo Ynares-Santiago and Adolfo
Azcuna. This Order was affirmed by the same Division as its duly-promulgated order. In
relation to this, the affirmation by the Division of this Order demonstrates that there is no
truth to Atty. Peas claim that Justice Carpio fabricated the Order.
In the second place, Atty. Peas claim of undue interest against Justice Carpio specifically
with respect to the latter having the instant case transferred to his new Division, is based on
ignorance of the system of assignment of cases in the Supreme Court. When a
reorganization of the Court takes place in the form of a change in the composition of
Divisions, due to the retirement or loss of a member, the Justices do not thereby lose their
case assignments but bring the latter with them to their new Divisions.348 The cases are
then transferred to the Justices new Divisions, by way of the corresponding request from
each justice. Each justice is in fact, required to make this request, otherwise the rollo of the

cases of which he is Member-in-Charge will be retained by a Division in which he is no

longer a member. Indeed, Atty. Peas imagination has gotten the better of him.
Thirdly, his insinuation (which he denies) that Justice Carpio may have been bribed because
the latter has a new Mercedes Benz349 is highly offensive and has no place where his points
should have been confined to legal reasons and arguments.
Incidentally, Atty. Pea has voiced the fear in the Letter of Complaint filed in the Courts
Committee on Ethics and Ethical Standards,350 which he brought against the ponente of
this Decision, that she will suppress material information regarding the issuance of the
Order suspending the redemption period because of her close relationship to Justice Carpio.
Contrary to this fear, this Decision is frontally disposing of this claim by stating that there is
no basis to believe that the questioned Order was anything than the joint decision of the
five members of the then First Division, and that his arguments in his motion to reconsider
does not persuade this Court to vary in any form the questioned order. Moreover, our
disposition of this case renders moot his motion to reconsider the order.
It must be emphasized that the prolonged resolution of the procedural issue in the Petitions
in G.R. Nos. 145817 and 145822 on the execution pending appeal is due in no small part to
the delays arising from Peas peculiar penchant for filing successive motions for inhibition
and re-raffle.351 The Court cannot sanction Peas repeated requests for voluntary
inhibition of members of the Court based on the sole ground of his own self-serving
allegations of lack of faith and trust, and would like to reiterate, at this point, the policy of
the Court not to tolerate acts of litigants who, for just about any conceivable reason, seek to
disqualify a judge (or justice) for their own purpose, under a plea of bias, hostility, prejudice
or prejudgment.352 The Court cannot allow the unnecessary and successive requests for
inhibition, lest it opens the floodgates to forum-shopping where litigants look for a judge
more friendly and sympathetic to their cause than previous ones.353
Restitution of the Banks Executed Properties
The Court is still confronted with the supervening acts related to the execution pending
appeal and the reversal of the award of damages, which affect the rights of the parties as
well as of the intervenors to the case, specifically, intervenor Unimega. In completely
resolving the differing claims and performing its educational function, the Court shall briefly
encapsulate and restate the operational rules governing execution pending appeal when
there has been a reversal of the trial courts Decision on the award of damages in order to
guide the parties as well as the bench and bar in general. The necessity of making these
detailed instructions is prompted by the most natural question an ordinary person with a
sense of justice will ask after reading the facts: How can an obligation to pay for the services

of a lawyer so that 23 unwanted tenants leave a corporations property lead to the loss or
the impairment of use of more than PhP181 Million worth of properties of that corporation
and of its officers and directors? Obviously, this Court must undertake corrective actions
swiftly.
The rule is that, where the executed judgment is reversed totally or partially, or annulled
on appeal or otherwisethe trial court may, on motion, issue such orders of restitution or
reparation of damages as equity and justice may warrant under the circumstances.354 The
Rules of Court precisely provides for restitution according to equity, in case the executed
judgment is reversed on appeal.355 In an execution pending appeal, funds are advanced by
the losing party to the prevailing party with the implied obligation of the latter to repay the
former, in case the appellate court cancels or reduces the monetary award.356
In disposing of the main case subject of these Petitions, the Court totally reversed the
staggering amount of damages given by the trial court, and limited on a quantum meruit
basis the agents compensation to PhP4,500,000 only. However, properties of Urban Bank
and individual petitioners have been garnished and levied upon in the amount of
supposedly more than PhP85,399,350.357
Applying the foregoing rules, petitioner-respondent bank is entitled to complete and full
restitution of its levied properties, subject to the payment of the PhP4,500,000. Meanwhile,
petitioners bank officers, all of whom have not been found individually or solidarily liable,
are entitled to full restitution of all their properties levied upon and garnished, since they
have been exonerated from corporate liability with respect to the banks agency
relationship with Pea.
Considering the monetary award to Pea and the levy on and execution of some of its
properties pending appeal, Urban Bank, now EIB, may satisfy the judgment in the main case
and at the same time fully recover all the properties executed owing to the complete
reversal of the trial courts awarded damages. It must immediately and fully pay the
judgment debt before the entire lot of levied properties, subject of the execution pending
appeal, is restored to it.358
Due to the complete reversal of the trial courts award for damages, which was the basis of
the Special Order and Writ of Execution allowing execution pending appeal, intervenor
Unimega and other bidders who participated in the public auction sales are liable to
completely restore to petitioner-respondent bank all of the properties sold and purchased
therein. Although execution pending appeal is sanctioned under the rules and
jurisprudence, when the executed decision is reversed, the premature execution is
considered to have lost its legal bases. The situation necessarily requires equitable

restitution to the party prejudiced thereby.359 As a matter of principle, courts are

authorized at any time to order the return of property erroneously ordered to be delivered
to one party, if the order is found to have been issued without jurisdiction.360

judgments, both the judgment creditor and the third parties who participate in auction sales
pending appeal are deemed to knowingly assume and voluntarily accept the risks of a
possible reversal of the decision in the main case by the appellate court.

As a purchaser of properties under an execution sale, with an appeal on the main case still
pending, intervenor Unimega knew or was bound to know that its title to the properties,
purchased in the premature public auction sale, was contingent on the outcome of the
appeal and could possibly be reversed. Until the judgment on the main case on which the
execution pending appeal hinges is rendered final and executory in favor of the prevailing
judgment creditor, it is incumbent on the purchasers in the execution sale to preserve the
levied properties. They shall be personally liable for their failure to do so, especially if the
judgment is reversed, as in this case.361 In fact, if specific restitution becomes
impracticablesuch as when the properties pass on to innocent third partiesthe losing
party in the execution even becomes liable for the full value of the property at the time of
its seizure, with interest. The Court has ruled:

Therefore, intervenor Unimega is required to restore the condominium units to Urban Bank.
Although the intervenor has caused the annotation of the sale and levied on the titles to
those units, the titles have remained under the name of the bank, owing to the supersedeas
bond it had filed and the Courts own orders that timely suspended the transfer of the titles
and further execution pending appeal.

When a judgment is executed pending appeal and subsequently overturned in the

appellate court, the party who moved for immediate execution should, upon return of the
case to the lower court, be required to make specific restitution of such property of the
prevailing party as he or any person acting in his behalf may have acquired at the execution
sale. If specific restitution becomes impracticable, the losing party in the execution
becomes liable for the full value of the property at the time of its seizure, with interest.
While the trial court may have acted judiciously under the premises, its action resulted in
grave injustice to the private respondents. It cannot be gainsaid that it is incumbent upon
the plaintiffs in execution (Arandas) to return whatever they got by means of the judgment
prior to its reversal. And if perchance some of the properties might have passed on to
innocent third parties as happened in the case at bar, the Arandas are duty bound
nonetheless to return the corresponding value of said properties as mandated by the
Rules. (Emphasis supplied)362
In this case, the rights of intervenor Unimega to the 10 condominium units bought during
the public auction sale under the Special Order are rendered nugatory by the reversal of the
award of unconscionable damages by the trial court. It cannot claim to be an innocent thirdparty purchaser of the levied condominium units, since the execution sale was precisely
made pending appeal. It cannot simply assume that whatever inaction or delay was incurred
in the process of the appeal of the main Decision would automatically render the remedy
dilatory in character.363 Whatever rights were acquired by intervenor Unimega from the
execution sale under the trial courts Special Orders are conditional on the final outcome of
the appeal in the main case. Unlike in auction sales arising from final and executory

The obligation to restore the properties to petitioner-respondent bank is, however, without
prejudice to the concurrent right of intervenor Unimega to the return of the PhP10,000,000
the latter paid for the condominium units, which Pea received as judgment creditor in
satisfaction of the trial courts earlier Decision.364 Consequently, intervenors earlier
request for the issuance of a writ of possession365 over those units no longer has any leg to
stand on. Not being entitled to a writ of possession under the present circumstances,
Unimegas ex parte petition is consequently denied.
Upon the reversal of the main Decision, the levied properties itself, subject of execution
pending appeal must be returned to the judgment debtor, if those properties are still in the
possession of the judgment creditor, plus compensation to the former for the deprivation
and the use thereof.366 The obligation to return the property itself is likewise imposed on a
third-party purchaser, like intervenor Unimega, in cases wherein it directly participated in
the public auction sale, and the title to the executed property has not yet been
transferred. The third-party purchaser shall, however, be entitled to reimbursement from
the judgment creditor, with interest.
Considering the foregoing points, the Court adopts with modification the rules of restitution
expounded by retired Justice Florenz D. Regalado in his seminal work on civil procedure,367
which the appellate court itself cited earlier.368 In cases in which restitution of the
prematurely executed property is no longer possible, compensation shall be made in favor
of the judgment debtor in the following manner:
a. If the purchaser at the public auction is the judgment creditor, he must pay the
full value of the property at the time of its seizure, with interest.
b. If the purchaser at the public auction is a third party, and title to the property
has already been validly and timely transferred to the name of that party, the

judgment creditor must pay the amount realized from the sheriffs sale of that
property, with interest.
c. If the judgment award is reduced on appeal, the judgment creditor must return
to the judgment debtor only the excess received over and above that to which the
former is entitled under the final judgment, with interest.
In summary, Urban Bank is entitled to complete restoration and return of the properties
levied on execution considering the absolute reversal of the award of damages, upon the
payment of the judgment debt herein amounting to PhP4,500,000, with interest as
indicated in the dispositive portion. With respect to individual petitioners, they are entitled
to the absolute restitution of their executed properties, except when restitution has become
impossible, in which case Pea shall be liable for the full value of the property at the time of
its seizure, with interest. Whether Urban Bank and the bank officers and directors are
entitled to any claim for damages against Pea and his indemnity bond is best ventilated
before the trial court, as prescribed under the procedural rules on execution pending
appeal.
WHEREFORE, the Court DENIES Atty. Magdaleno Peas Petition for Review dated 23 April
2004 (G.R. No. 162562) and AFFIRMS WITH MODIFICATION the Court of Appeals Decision
dated 06 November 2003 having correctly found that the Regional Trial Court of Bago City
gravely abused its discretion in awarding unconscionable damages against Urban Bank, Inc.,
and its officers. The Decision of the Regional Trial Court of Bago City dated 28 May 1999 is
hence VACATED.
Nevertheless, Urban Bank, Inc., is ORDERED to pay Atty. Pea the amount of PhP3,000,000
as reimbursement for his expenses and an additional PhP1,500,000 as compensation for his
services, with interest at 6% per annum from 28 May 1999, without prejudice to the right of
Urban Bank to invoke payment of this sum under a right of set-off against the amount of
PhP25,000,000 that has been placed in escrow for the benefit of Isabela Sugar Company,
Inc. The Complaint against the eight other individual petitioners, namely Teodoro Borlongan
(+), Delfin C. Gonzales, Jr., Benjamin L. de Leon, P. Siervo G. Dizon, Eric L. Lee, Ben Y. Lim, Jr.,
Corazon Bejasa, and Arturo Manuel, Jr., is hereby DISMISSED.
The Petitions for Review on Certiorari filed by petitioners Urban Bank (G.R. No. 145817)
and Benjamin L. de Leon, Delfin Gonzalez, Jr., and Eric L. Lee (G.R. No. 145822) are hereby
GRANTED under the following conditions:

a. Urban Bank, Teodoro Borlongan, Delfin C. Gonzalez, Jr., Benjamin L. de Leon, P.

Siervo H. Dizon, Eric L. Lee, Ben Y. Lim, Jr., Corazon Bejasa, and Arturo Manuel, Jr.,
(respondent bank officers) shall be restored to full ownership and possession of all
properties executed pending appeal;
b. If the property levied or garnished has been sold on execution pending appeal
and Atty. Magdaleno Pea is the winning bidder or purchaser, he must fully restore
the property to Urban Bank or respondent bank officers, and if actual restitution of
the
524 property is impossible, then he shall pay the full value of the property at the time
of its seizure, with interest;
c. If the property levied or garnished has been sold to a third party purchaser at the
public auction, and title to the property has not been validly and timely transferred
to the name of the third party, the ownership and possession of the property shall
be returned to Urban Bank or respondent bank officers, subject to the third partys
right to claim restitution for the purchase price paid at the execution sale against the
judgment creditor;
d. If the purchaser at the public auction is a third party, and title to the property
has already been validly and timely transferred to the name of that party, Atty.
Pea must pay Urban Bank or respondent bank officers the amount realized from the
sheriffs sale of that property, with interest from the time the property was seized.
The Omnibus Motion dated 09 December 2002 filed by Atty. Pea and Motion for
Reconsideration dated 10 December 2002 filed by Unimega with respect to the Courts
Order dated 13 November 2002 is hereby DENIED.
The Office of the Court Administrator is ordered to conduct an investigation into the
possible administrative liabilities of Atty. Josephine Mutia-Hagad, the then RTC-Bago Citys
Clerk of Court, and Allan D. Sillador, the then Deputy Sheriff of Bago City, for the
irregularities attending the execution pending appeal in this case, including all judicial
officers or sheriffs in the various places in which execution was implemented, and to submit
a report thereon within 120 days from receipt of this Decision.
The Office of the Court Administrator is also directed to make recommendations for the
prevention of abuses of judicial processes in relation to executions, especially those pending
appeal, whether thru administrative circulars from this Court or thru a revision of the Rules

of Court, within 30 days from submission of the report on administrative liabilities adverted
to above. Let a copy of the Courts Decision in this case be sent to the Office of the Court
Administrator.525

Discretionary execution is allowed only when the period to appeal has already commenced
but before the trial court loses jurisdiction over the case; The pendency of a motion for
reconsideration, therefore, prevents the running of the period to appeal. (Id.)

The Presiding Judge of RTC Bago City shall make a full report on all incidents related to the
execution in this case, including all returns on the writ of execution herein.

Where there is a pending motion for reconsideration of the RTC decision, an order of
execution pending appeal is improper and premature. (Id.)

Because so much suspicious circumstances have attended the execution in this case by the
Regional Trial Court of Bago City, the proceedings with respect to any restitution due and
owing under the circumstances shall be transferred to the Regional Trial Court in the
National Capital Region, Makati City, a court with venue to hear cases involving Urban
Bank/Export and Industry Bank whose headquarters is located in Makati City. The Executive
Judge of the Regional Trial Court of Makati City is ordered to include the execution of the
Decision and the proceedings for the restitution of the case in the next available raffle.

The good reasons allowing execution pending appeal must constitute superior
circumstances demanding urgency that will outweigh the injuries or damages to the adverse
party if the decision is reversed. (Id.)

The Regional Trial Court of Makati City, to which the case shall be raffled, is hereby
designated as the court that will fully implement the restorative directives of this Decision
with respect to the execution of the final judgment, return of properties wrongfully
executed, or the payment of the value of properties that can no longer be restored, in
accordance with Section 5, Rule 39 of the Rules of Court. The parties are directed to address
the implementation of this part of the Decision to the sala to which the case will be raffled.
No pronouncement as to costs.
SO ORDERED.
Brion (Actg. Chairperson), Villarama, Jr.**, Mendoza*** and Perlas-Bernabe,**** JJ.,
concur.

Petition in G.R. No. 162562 denied, judgment affirmed with modification; while petitions in
G.R. No. 145817 and G.R. No. 145822 granted.
Notes.Execution pending appeal or immediate execution is not called discretionary
execution. (JP Latex Technology, Inc. vs. Balloons Granger Ballons, Inc., 581 SCRA 533
[2009])

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.204
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.
Corporation Law; Board of Directors; Holdover; Words and Phrases; Term and Tenure,
Distinguished; Term is distinguished from tenure in that an officers tenure represents the
term during which the incumbent actually holds officethe tenure may be shorter (or, in
case of holdover, longer) than the term for reasons within or beyond the power of the
incumbent.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. The term of office is not affected by the holdover. 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.
Same; Same; Same; Same; When Section 23 of the Corporation Code declares that the
board of directorsshall hold office for one (1) year until their successors are elected and
qualified, it means that the term of the members of the board of directors shall be only for
one yeartheir term expires one year after election to the office; The holdover periodthat
time from the lapse of one year from a members election to the Board and until his
successors election and qualificationis not part of the directors original term of office, nor
is it a new term.Based on the above discussion, when Section 23 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 periodthat time from the lapse of one year from
a members election to the Board and until his successors election and qualificationis not
part of the directors original term of office, nor is it a new term; the holdover period,

Same; Same; Theory of Delegated Power; 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.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.
Same; Same; Same; The 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 his
predecessor in office.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 corporations 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 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.
PETITION for review on certiorari of a decision of the Regional Trial Court of Manila, Br. 152.

The facts are stated in the opinion of the Court.

Santiago & Santiago for petitioner.
BRION, J.:
In this petition for review on certiorari,1 the parties raise a legal question on corporate
governance: Can the members of a corporations board of directors elect another director
to fill in a vacancy caused by the resignation of a hold-over director?
The Factual Antecedents
On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle Verde
Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of
Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal
(Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee,
Augusto Sunico, and Ray Gamboa.2 In the years 1997, 1998, 1999, 2000, and 2001,
however, the requisite quorum for the holding of the stockholders meeting could not be
obtained. Consequently, the above-named directors continued to serve in the VVCC Board
in a hold-over capacity.
On 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.
xxxx
Sec. 29. Vacancies in the office of director or trustee.Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled
by the stockholders in a regular or special meeting called for that purpose. A director or
trustee so elected to fill a vacancy shall be elected only for the unexpired term of his
predecessor in office. x x x. [Emphasis supplied.]
Africa claimed that a year after Makalintals election as member of the VVCC Board in 1996,
his [Makalintals] termas well as those of the other members of the VVCC Boardshould
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 Hogar6 case which
states:
Owing to the failure of a quorum at most of the general meetings since the respondent
has been in existence, it has been the practice of the directors to fill in vacancies in the
directorate by choosing suitable persons from among the stockholders. This custom finds
its sanction in Article 71 of the By-Laws, which reads as follows:
Art. 71. The directors shall elect from among the shareholders members to fill the
vacancies that may occur in the board of directors until the election at the general
meeting.

xxxx
Upon failure of a quorum at any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and qualified. Unless the law or the
charter of a corporation expressly provides that an office shall become vacant at the
expiration of the term of office for which the officer was elected, the general rule is to allow
the officer to hold over until his successor is duly qualified. Mere failure of a corporation to
elect officers does not terminate the terms of existing officers nor dissolve the corporation.
The doctrine above stated finds expression in article 66 of the by-laws of the respondent
which declares in so many words that directors shall hold office for the term of one year or
until their successors shall have been elected and taken possession of their offices. x x x.
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.
The Courts Ruling
We are not persuaded by VVCCs arguments and, thus, find its petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining directors of a
corporations Board, still constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director. The resolution of this legal issue
is significantly hinged on the determination of what constitutes a directors term of office.
The
holdover
term
of
board of directors

period
office

is
of

not
a

part
member

of
of

the
the

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 periodthat time from the lapse of one year from a members
election to the Board and until his successors election and qualificationis not part of the
directors original term of office, nor is it a new term; the holdover period, however,
constitutes part of his tenure. Corollary, when an incumbent member of the board of
directors continues to serve in a holdover capacity, it implies that the office has a fixed
term, which has expired, and the incumbent is holding the succeeding term.10
After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintals term of office is deemed to have already expired. That he continued to serve in
the VVCC Board in a holdover capacity cannot be considered as extending his term. To be
precise, Makalintals term of office began in 1996 and expired in 1997, but, by virtue of the
holdover doctrine in Section 23 of the Corporation Code, he continued to hold office until
his resignation on 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 assumeas VVCC doesthat 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
board
stockholders

powers
of

of
directors

the
emanate

from

corporations
its

VVCCs construction of Section 29 of the Corporation Code on the authority to fill up

vacancies in the board of directors, in relation to Section 23 thereof, effectively weakens the
stockholders power to participate in the corporate governance by electing their
representatives to the board of directors. The board of directors is the directing and
controlling body of the corporation. It is a creation of the stockholders and derives its power

to control and direct the affairs of the corporation from them. The board of directors, in
drawing to themselves the powers of the corporation, occupies a position of trusteeship in
relation to the stockholders, in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of corporate affairs.12
The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis. Only
in that way can the directors continued accountability to shareholders, and the legitimacy
of their decisions that bind the corporations stockholders, be assured. The shareholder vote
is critical to the theory that legitimizes the exercise of power by the directors or officers over
properties that they do not own.13
This theory of delegated power of the board of directors similarly explains why, under
Section 29 of the Corporation Code, in cases where the vacancy in the corporations board
of directors is caused not by the expiration of a members term, the successor so elected to
fill in a vacancy shall be elected only for the unexpired term of 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.
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.

G.R. No. 178158. December 4, 2009.*

STRATEGIC ALLIANCE DEVELOPMENT CORPORATION, petitioner, vs. RADSTOCK SECURITIES
LIMITED and PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, respondents. ASIAVEST
MERCHANT BANKERS BERHAD, intervenor.
G.R. No. 180428. December 4, 2009.*
LUIS SISON, petitioner, vs. PHILIPPINE NATIONAL CONSTRUCTION CORPORATION and
RADSTOCK SECURITIES LIMITED, respondents.
Actions; Pleadings and Practice; Intervention; While the motion to intervene should be filed
before rendition of judgment by the trial court, the rule is not absoluteinterventions have
been allowed even beyond the prescribed period in the Rule in the higher interest of
justice.The Court of Appeals denied STRADECs motion for intervention on the ground that
the motion was filed only after the Court of Appeals and the trial court had promulgated
their respective decisions. Section 2, Rule 19 of the 1997 Rules of Civil Procedure provides:
SECTION 2. Time to intervene.The motion to intervene may be filed at any time before
rendition of judgment by the trial court. A copy of the pleading-in-intervention shall be
attached to the motion and served on the original parties. The rule is not absolute. The rule
on intervention, like all other rules of procedure, is intended to make the powers of the
Court completely available for justice. It is aimed to facilitate a comprehensive adjudication
of rival claims, overriding technicalities on the timeliness of the filing of the claims. This
Court has ruled: [A]llowance or disallowance of a motion for intervention rests on the sound
discretion of the court after consideration of the appropriate circumstances. Rule 19 of the
Rules of Court is a rule of procedure whose object is to make the powers of the court fully
and completely available for justice. Its purpose is not to hinder or delay but to facilitate and
promote the administration of justice. Thus, interventions have been allowed even beyond
the prescribed period in the Rule in the higher interest of justice. Interventions have been
granted to afford indispensable parties, who have not been impleaded, the right to be heard
even after a decision has been rendered by the trial court, when the petition for review of
the judgment was already submitted for decision before the Supreme Court, and even
where the assailed order has already become final and executory. In Lim v. Pacquing (310
Phil. 722 (1995)], the motion for intervention filed by the Republic of the Philippines was
allowed by this Court to avoid grave injustice and injury and to settle once and for all the
substantive issues raised by the parties.

Same; Same; Same; A judgment creditor has a direct and material interest in the approval or
disapproval of a compromise agreement involving its judgment debtorits interest is actual
and material, direct and immediate characterized by either gain or loss from the judgment
that the Court may render.STRADECs interest is dependent on the outcome of Civil Case
No. 05-882. Unless STRADEC can show that RTC Branch 146 had already decided in its favor,
its legal interest is simply contingent and expectant. However, Asiavest has a direct and
material interest in the approval or disapproval of the Compromise Agreement. Asiavest is a
judgment creditor of PNCC in G.R. No. 110263 and a court has already issued a writ of
execution in its favor. Asiavests interest is actual and material, direct and immediate
characterized by either gain or loss from the judgment that this Court may render.
Considering that the Compromise Agreement involves the disposition of all or substantially
all of the assets of PNCC, Asiavest, as PNCCs judgment creditor, will be greatly prejudiced if
the Compromise Agreement is eventually upheld.
Same; Same; Same; Corporation Law; Derivative Suits; A stockholder may sue on behalf of
the corporation to assail a compromise agreement entered into by the corporation; A
derivative action is a suit by a stockholder to enforce a corporate cause of actionan
individual stockholder may file a derivative suit on behalf of the corporation to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the
ones to be sued, or hold control of the corporation.Sison has legal standing to challenge
the Compromise Agreement. Although there was no allegation that Sison filed the case as a
derivative suit in the name of PNCC, it could be fairly deduced that Sison was assailing the
Compromise Agreement as a stockholder of PNCC. In such a situation, a stockholder of PNCC
can sue on behalf of PNCC to annul the Compromise Agreement. A derivative action is a suit
by a stockholder to enforce a corporate cause of action. Under the Corporation Code, where
a corporation is an injured party, its power to sue is lodged with its board of directors or
trustees. However, an individual stockholder may file a derivative suit on behalf of the
corporation to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. In
such actions, the corporation is the real party-in-interest while the suing stockholder, on
behalf of the corporation, is only a nominal party.
Same; Same; Same; Procedural Rules and Technicalities; The Supreme Court should exercise
its prerogative to set aside technicalities in the Rules, because after all, the power of the
Court to suspend its own rules whenever the interest of justice requires is well recognized.
In the interest of substantial justice and for compelling reasons, such as the nature and
importance of the issues raised in this case, this Court must take cognizance of Sisons
action. This Court should exercise its prerogative to set aside technicalities in the Rules,
because after all, the power of this Court to suspend its own rules whenever the interest of
justice requires is well recognized. In Solicitor General v. The Metropolitan Manila Authority,

204 SCRA 837 (1991) this Court held: Unquestionably, the Court has the power to suspend
procedural rules in the exercise of its inherent power, as expressly recognized in the
Constitution, to promulgate rules concerning pleading, practice and procedure in all courts.
In proper cases, procedural rules may be relaxed or suspended in the interest of substantial
justice, which otherwise may be miscarried because of a rigid and formalistic adherence to
such rules. x x x
Corporation Law; Boards of Directors; In this jurisdiction, the members of the board of
directors have a three-fold duty: duty of obedience, duty of diligence, and duty of loyalty.In
this jurisdiction, the members of the board of directors have a three-fold duty: duty of
obedience, duty of diligence, and duty of loyalty. Accordingly, the members of the board of
directors (1) shall direct the affairs of the corporation only in accordance with the purposes
for which it was organized; (2) shall not willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or act in bad faith or with gross negligence in
directing the affairs of the corporation; and (3) shall not acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees.
Prescription; Settled is the rule that actions prescribe by the mere lapse of time fixed by
law.Settled is the rule that actions prescribe by the mere lapse of time fixed by law. Under
Article 1144 of the Civil Code, an action upon a written contract, such as a loan contract,
must be brought within ten years from the time the right of action accrues. The prescription
of such an action is interrupted when the action is filed before the court, when there is a
written extrajudicial demand by the creditor, or when there is any written acknowledgment
of the debt by the debtor.
Government-Owned or Controlled Corporations (GOCCs); Philippine National Construction
Corporation (PNCC); Office of the Government Corporate Counsel (OGCC); The Philippine
National Construction Corporation (PNCC) Board acted in bad faith in relying on the opinion
of a private lawyer knowing that PNCC, a Government-Owned or Controlled Corporation
(GOCC), is required to rely exclusively on the Office of the Government Corporate Counsels
(OGCCs) opinion.The PNCC Board admitted liability for the P10.743 billion Marubeni loans
without seeing, reading or discussing the Feria opinion which was the sole basis for its
admission of liability. Such act surely goes against ordinary human nature, and amounts to
gross negligence and utter bad faith, even bordering on fraud, on the part of the PNCC
Board in directing the affairs of the corporation. Owing loyalty to PNCC and its stockholders,
the PNCC Board should have exercised utmost care and diligence in admitting a gargantuan
debt of P10.743 billion that would certainly force PNCC into insolvency, a debt that previous
PNCC Boards in the last two decades consistently refused to admit. Instead, the PNCC Board
admitted PNCCs liability for the Marubeni loans relying solely on a mere opinion of a private
law office, which opinion the PNCC Board members never saw, except for Atty. Valdecantos

and Atty. Francisco. The PNCC Board knew that PNCC, as a government owned and
controlled corporation (GOCC), must rely exclusively on the opinion of the OGCC. Section
1 of Memorandum Circular No. 9 dated 27 August 1998 issued by the President states:
SECTION 1. All legal matters pertaining to government-owned or controlled corporations,
their subsidiaries, other corporate off-springs and government acquired asset corporations
(GOCCs) shall be exclusively referred to and handled by the Office of the Government
Corporate Counsel (OGCC). The PNCC Board acted in bad faith in relying on the opinion of a
private lawyer knowing that PNCC is required to rely exclusively on the OGCCs opinion.
Worse, the PNCC Board, in admitting liability for P10.743 billion, relied on the
recommendation of a private lawyer whose opinion the PNCC Board members have not
even seen.
Same; Same; The Philippine National Construction Corporation (PNCC) Board Resolutions,
being unlawful and criminal acts, are void ab initio and cannot be implemented or in any
way given effect by the Executive or Judicial branch of the Government.In approving PNCC
Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board caused undue injury
to the Government and gave unwarranted benefits to Radstock, through manifest partiality,
evident bad faith or gross inexcusable negligence of the PNCC Board. Such acts are declared
under Section 3(e) of RA 3019 or the Anti-Graft and Corrupt Practices Act, as corrupt
practices xxx and xxx unlawful. Being unlawful and criminal acts, these PNCC Board
Resolutions are void ab initio and cannot be implemented or in any way given effect by the
Executive or Judicial branch of the Government.
Same; Same; Compromise Agreements; Commission on Audit (COA); Government Audit;
Section 36 of Presidential Decree No. 1445, enacted on 11 June 1978, has been superseded
by a later law, Section 20(1), Chapter IV, Subtitle B, Title I, Book V of Executive Order No. 292
or the Administrative Code of 1987the authority to compromise a settled claim or liability
exceeding 100,000.00 involving a government agency is vested not in COA but exclusively in
Congress.Section 36 of PD 1445, enacted on 11 June 1978, has been superseded by a
later lawSection 20(1), Chapter IV, Subtitle B, Title I, Book V of Executive Order No. 292 or
the Administrative Code of 1987, which provides: Section 20. Power to Compromise
Claims.(1) When the interest of the Government so requires, the Commission may
compromise or release in whole or in part, any settled claim or liability to any government
agency not exceeding ten thousand pesos arising out of any matter or case before it or
within its jurisdiction, and with the written approval of the President, it may likewise
compromise or release any similar claim or liability not exceeding one hundred thousand
pesos. In case the claim or liability exceeds one hundred thousand pesos, the application
for relief therefrom shall be submitted, through the Commission and the President, with
their recommendations, to the Congress[.] x x x Under this provision, the authority to
compromise a settled claim or liability exceeding P100,000.00 involving a government

agency, as in this case where the liability amounts to P6.185 billion, is vested not in COA but
exclusively in Congress. Congress alone has the power to compromise the P6.185 billion
purported liability of PNCC. Without congressional approval, the Compromise Agreement
between PNCC and Radstock involving P6.185 billion is void for being contrary to Section
20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987.
Same; Same; Same; Philippine National Construction Corporation (PNCC) is a government
agency, a government-owned or controlled corporation.PNCC is a government agency
because Section 2 on Introductory Provisions of the Revised Administrative Code of 1987
provides thatAgency of the Government refers to any of the various units of the
Government, including a department, bureau, office, instrumentality, or governmentowned or controlled corporation, or a local government or a distinct unit therein. Thus,
Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987
applies to PNCC, which indisputably is a government owned or controlled corporation.
Same; Same; Same; The provision of the Revised Administrative Code on the power to settle
claims or liabilities was precisely enacted to prevent government agencies from admitting
liabilities against the government, then compromising such settled liabilitiesthe present
case is exactly what the law seeks to prevent, a compromise agreement on a creditors claim
settled through admission by a government agency without the approval of Congress for
amounts exceeding 100,000.00.The provision of the Revised Administrative Code on the
power to settle claims or liabilities was precisely enacted to prevent government agencies
from admitting liabilities against the government, then compromising such settled
liabilities. The present case is exactly what the law seeks to prevent, a compromise
agreement on a creditors claim settled through admission by a government agency
without the approval of Congress for amounts exceeding P100,000.00. What makes the
application of the law even more necessary is that the PNCC Boards twin moves are
manifestly and grossly disadvantageous to the Government. First, the PNCC admitted
solidary liability for a staggering P10.743 billion private debt incurred by a private
corporation which PNCC does not even control. Second, the PNCC Board agreed to pay
Radstock P6.185 billion as a compromise settlement ahead of all other creditors, including
the Government which is the biggest creditor.
Same; Same; Same; To hold that a corporation incorporated under the Corporation Code,
despite its being 90.3% owned by the Government, is an autonomous entity that could
solely through its Board of Directors compromise, and transfer ownership of, substantially all
its assets to a private third party without the approval required under the Administrative
Code of 1987, is to invite the plunder of all such government owned corporations.The
Dissenting Opinion is woefully wide off the mark. The PNCC is not just like any other
private corporation precisely because it is not a private corporation but indisputably a

government owned corporation. Neither is PNCC an autonomous entity considering that

PNCC is under the Department of Trade and Industry, over which the President exercises
control. To claim that PNCC is an autonomous entity is to say that it is a lost command in
the Executive branch, a concept that violates the Presidents constitutional power of control
over the entire Executive branch of government. The government nominees in the PNCC
Board, who practically compose the entire PNCC Board, are public officers subject to the
Anti-Graft and Corrupt Practices Act, accountable to the Government and the Filipino
people. To hold that a corporation incorporated under the Corporation Code, despite its
being 90.3% owned by the Government, is an autonomous entity that could solely
through its Board of Directors compromise, and transfer ownership of, substantially all its
assets to a private third party without the approval required under the Administrative Code
of 1987, is to invite the plunder of all such government owned corporations.
Same; Same; Same; Words and Phrases; The phrase government-owned or controlled
corporations refers to both those created by special charter as well as those incorporated
under the Corporate Code.The Dissenting Opinions claim that PNCC is an autonomous
entity just like any other private corporation is inconsistent with its assertion that Section
36(2) of the Government Auditing Code is the governing law in determining PNCCs power
to compromise. Section 36(2) of the Government Auditing Code expressly states that it
applies to the governing bodies of government-owned or controlled corporations. The
phrase government-owned or controlled corporations refers to both those created by
special charter as well as those incorporated under the Corporation Code.
Same; Same; Toll Regulatory Board (TRB); With the expiration of Philippine National
Construction Corporations (PNCCs) franchise, the assets and facilities of PNCC were
automatically turned over, by operation of law, to the government at no cost; The TRB does
not have the power to give back to PNCC the toll assets and facilities which were
automatically turned over to the Government, by operation of law, upon the expiration of
the franchise of the PNCC on 1 May 2007.With the expiration of PNCCs franchise, the
assets and facilities of PNCC were automatically turned over, by operation of law, to the
government at no cost. Sections 2(e) and 9 of PD 1113 and Section 5 of PD 1894 provide: x x
x The TRB does not have the power to give back to PNCC the toll assets and facilities which
were automatically turned over to the Government, by operation of law, upon the
expiration of the franchise of the PNCC on 1 May 2007. Whatever power the TRB may have
to grant authority to operate a toll facility or to issue a Tollway Operation Certificate, such
power does not obviously include the authority to transfer back to PNCC ownership of
National Government assets, like the toll assets and facilities, which have become National
Government property upon the expiry of PNCCs franchise. Such act by the TRB would
repeal Section 5 of PD 1894 which automatically vested in the National Government
ownership of PNCCs toll assets and facilities upon the expiry of PNCCs franchise. The TRB

obviously has no power to repeal a law. Further, PD 1113, as amended by PD 1894, granting
the franchise to PNCC, is a later law that must necessarily prevail over PD 1112 creating the
TRB. Hence, the provisions of PD 1113, as amended by PD 1894, are controlling.

foreign corporation, with unknown owners whose nationalities are also unknown, Radstock
is not qualified to own land in the Philippines pursuant to Section 7, in relation to Section 3,
Article XII of the Constitution.

Same; Same; The governments ownership of Philippine National Construction Corporations

(PNCCs) toll assets and facilities inevitably results in the governments ownership of the toll
fees and the net income derived from these toll assets and facilitiesthe toll fees form part
of the National Governments General Fund.The governments ownership of PNCCs toll
assets and facilities inevitably results in the governments ownership of the toll fees and the
net income derived from these toll assets and facilities. Thus, the toll fees form part of the
National Governments General Fund, which includes public moneys of every sort and other
resources pertaining to any agency of the government.

Same; Same; Same; Same; Same; Since Radstock is disqualified to own lands in the
Philippines, it is also disqualified to own the rights to ownership of lands in the Philippines
it is basic that an assignor or seller cannot assign or sell something he does not own at the
time the ownership, or the rights to the ownership, are to be transferred to the assignee or
buyer; The assignment by PNCC of the real properties to a nominee to be designated by
Radstock is a circumvention of the Constitutional prohibition against a private foreign
corporation owning lands in the Philippines.There is no dispute that Radstock is
disqualified to own lands in the Philippines. Consequently, Radstock is also disqualified to
own the rights to ownership of lands in the Philippines. Contrary to the OGCCs claim,
Radstock cannot own the rights to ownership of any land in the Philippines because
Radstock cannot lawfully own the land itself. Otherwise, there will be a blatant
circumvention of the Constitution, which prohibits a foreign private corporation from
owning land in the Philippines. In addition, Radstock cannot transfer the rights to ownership
of land in the Philippines if it cannot own the land itself. It is basic that an assignor or seller
cannot assign or sell something he does not own at the time the ownership, or the rights
to the ownership, are to be transferred to the assignee or buyer. The third party assignee
under the Compromise Agreement who will be designated by Radstock can only acquire
rights duplicating those which its assignor (Radstock) is entitled by law to exercise. Thus, the
assignee can acquire ownership of the land only if its assignor, Radstock, owns the land.
Clearly, the assignment by PNCC of the real properties to a nominee to be designated by
Radstock is a circumvention of the Constitutional prohibition against a private foreign
corporation owning lands in the Philippines. Such circumvention renders the Compromise
Agreement void.

Same; Same; Appropriations; A law must first be enacted by Congress appropriating 6.185
billion as compromise money before payment to Radstock can be made, otherwise, such
payment violates a prohibitory law and thus void under Article 5 of the Civil Code.Applying
Section 29(1), Article VI of the Constitution, as implanted in Sections 84 and 85 of the
Government Auditing Code, a law must first be enacted by Congress appropriating P6.185
billion as compromise money before payment to Radstock can be made. Otherwise, such
payment violates a prohibitory law and thus void under Article 5 of the Civil Code which
states that [a]cts executed against the provisions of mandatory or prohibitory laws shall
be void, except when the law itself authorizes their validity. Indisputably, without an
appropriation law, PNCC cannot lawfully pay P6.185 billion to Radstock. Any contract
allowing such payment, like the Compromise Agreement, shall be void as provided in
Section 87 of the Government Auditing Code.
Same; Same; Same; Government funds or property shall be spent or used solely for public
purposes.In addition, to pay Radstock P6.185 billion violates the fundamental public
policy, expressly articulated in Section 4(2) of the Government Auditing Code, that
government funds or property shall be spent or used solely for pubic purposes, thus:
Section 4. Fundamental Principles. x x x (2) Government funds or property shall be spent or
used solely for public purposes. There is no question that the subject of the Compromise
Agreement is CDCP Minings private debt to Marubeni, which Marubeni subsequently
assigned to Radstock. Counsel for Radstock admits that Radstock holds a private debt of
CDCP Mining.
Same; Same; Same; Corporation Law; Land Titles; Ownership; Radstock, a foreign
corporation, with unknown owners whose nationalities are also unknown, is not qualified to
own land in the Philippines.Radstock is a private corporation incorporated in the British
Virgin Islands. Its office address is at Suite 14021 Duddell Street, Central Hongkong. As a

Bids and Bidding; The disposition of government lands to private parties requires public
bidding.Under Section 79 of the Government Auditing Code, the disposition of
government lands to private parties requires public bidding. COA Circular No. 89-926, issued
on 27 January 1989, sets forth the guidelines on the disposal of property and other assets of
the government. Part V of the COA Circular provides: x x x Under the Compromise
Agreement, PNCC shall dispose of substantial parcels of land, by way of dacion en pago, in
favor of Radstock. Citing Uy v. Sandiganbayan, 433 SCRA 424 (2004) PNCC argues that a
dacion en pago is an exception to the requirement of a public bidding. PNCCs reliance on Uy
is misplaced. There is nothing in Uy declaring that public bidding is dispensed with in a
dacion en pago transaction.

Sales; Dacion en Pago; A dacion en pago is in essence a form of sale, which basically involves
a disposition of a property.A dacion en pago is in essence a form of sale, which basically
involves a disposition of a property. In Filinvest Credit Corp. v. Philippine Acetylene, Co., Inc.,
111 SCRA 421 (1982) the Court defined dacion en pago in this wise: Dacion en pago,
according to Manresa, is the transmission of the ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of obligation. In dacion en pago, as a
special mode of payment, the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. The undertaking really partakes in one
sense of the nature of sale, that is, the creditor is really buying the thing or property of the
debtor, payment for which is to be charged against the debtors debt. As such, the
essential elements of a contract of sale, namely, consent, object certain, and cause or
consideration must be present. In its modern concept, what actually takes place in dacion en
pago is an objective novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the object of the contract of
sale, while the debt is considered as the purchase price. In any case, common consent is an
essential prerequisite, be it sale or innovation to have the effect of totally extinguishing the
debt or obligation.
Concurrence and Preference of Credits; In giving priority and preference to Radstock, the
Compromise Agreement is certainly in fraud of Philippine National Construction
Corporations (PNCCs) other creditors, including the National Government, and violates the
provisions of the Civil Code on concurrence and preference of credits.In giving priority and
preference to Radstock, the Compromise Agreement is certainly in fraud of PNCCs other
creditors, including the National Government, and violates the provisions of the Civil Code
on concurrence and preference of credits. This Court has held that while the Corporation
Code allows the transfer of all or substantially all of the assets of a corporation, the transfer
should not prejudice the creditors of the assignor corporation. Assuming that PNCC may
transfer all or substantially all its assets, to allow PNCC to do so without the consent of its
creditors or without requiring Radstock to assume PNCCs debts will defraud the other
PNCC creditors since the assignment will place PNCCs assets beyond the reach of its other
creditors.
Same; There is a presumption that there is fraud of creditors when property is alienated by
the debtor after judgment has been rendered against him.The law, specifically Article
1387 of the Civil Code, presumes that there is fraud of creditors when property is alienated
by the debtor after judgment has been rendered against him, thus: Alienations by onerous
title are also presumed fraudulent when made by persons against whom some judgment
has been rendered in any instance or some writ of attachment has been issued. The
decision or attachment need not refer to the property alienated, and need not have been
obtained by the party seeking rescission. As stated earlier, Asiavest is a judgment creditor of

PNCC in G.R. No. 110263 and a court has already issued a writ of execution in its favor. Thus,
when PNCC entered into the Compromise Agreement conveying several prime lots in
favor of Radstock, by way of dacion en pago, there is a legal presumption that such
conveyance is fraudulent under Article 1387 of the Civil Code. This presumption is
strengthened by the fact that the conveyance has virtually left PNCCs other creditors,
including the biggest creditorthe National Governmentwith no other asset to garnish or
levy.
Same; Insolvency; Neither a declaration of insolvency nor the institution of insolvency
proceedings is a condition sine qua non for a transfer of all or nearly all of a debtors assets
to be regarded in fraud of creditorsit is sufficient that a debtor is greatly embarrassed
financially.The presumption of fraud or intention to defraud creditors is not just limited to
the two instances set forth in the first and second paragraphs of Article 1387 of the Civil
Code. Under the third paragraph of the same article, the design to defraud creditors may
be proved in any other manner recognized by the law of evidence. In Oria v. Mcmicking, 21
Phil. 243 (1912) this Court considered the following instances as badges of fraud: 1. The fact
that the consideration of the conveyance is fictitious or is inadequate. 2. A transfer made by
a debtor after suit has begun and while it is pending against him. 3. A sale upon credit by an
insolvent debtor. 4. Evidence of large indebtedness or complete insolvency. 5. The transfer
of all or nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially. 6. The fact that the transfer is made between father and son,
when there are present other of the above circumstances. 7. The failure of the vendee to
take exclusive possession of all the property. Among the circumstances indicating fraud is a
transfer of all or nearly all of the debtors assets, especially when the debtor is greatly
embarrassed financially. Accordingly, neither a declaration of insolvency nor the institution
of insolvency proceedings is a condition sine qua non for a transfer of all or nearly all of a
debtors assets to be regarded in fraud of creditors. It is sufficient that a debtor is greatly
embarrassed financially.
Same; Same; Taxation; Articles 2241, 2242 and 2243 of the Civil Code expressly mandate
that taxes and fees due the National Government shall be preferred and shall first be
satisfied over claims like those arising from the Marubeni loans which shall enjoy no
preference under Article 2244.PNCC owes the National Government substantial taxes and
fees amounting to billions of pesos. The P36 billion debt to the National Government was
acknowledged by the PNCC Board in the same board resolution that recognized the
Marubeni loans. Since PNCC is clearly insolvent with a huge negative net worth, the
government enjoys preference over Radstock in the satisfaction of PNCCs liability arising
from taxes and duties, pursuant to the provisions of the Civil Code on concurrence and
preference of credits. Articles 2241, 2242 and 2243 of the Civil Code expressly mandate that
taxes and fees due the National Government shall be preferred and shall first be

satisfied over claims like those arising from the Marubeni loans which shall enjoy no
preference under Article 2244.
Supreme Court; The Supreme Court cannot, and must not, bring itself down to the level of
legitimizer of violations of the Constitution, existing laws or public policy.This Court is not,
and should never be, a rubber stamp for litigants hankering to pocket public funds for their
selfish private gain. This Court is the ultimate guardian of the public interest, the last
bulwark against those who seek to plunder the public coffers. This Court cannot, and must
never, bring itself down to the level of legitimizer of violations of the Constitution, existing
laws or public policy.
CARPIO-MORALES, J., Concurring Opinion:
Compromise Agreements; Government Audit; Words and Phrases; The phrase any settled
claim or liability to any government agency includes not just liabilities to the government
but also claims against the government.Furthermore, Executive Order No. 292 or the
Administrative Code of 1987 requires congressional approval on the compromise of claims
valued at more than P100,000, thus the pertinent section provides: Section 20. Power to
Compromise Claims.(1) When the interest of the Government so requires, the
Commission [on Audit] may compromise or release in whole or in part, any settled claim or
liability to any government agency not exceeding ten thousand pesos arising out of any
matter or case before it or within its jurisdiction, and with the written approval of the
President, it may likewise compromise or release any similar claim or liability not exceeding
one hundred thousand pesos. In case the claim or liability exceeds one hundred thousand
pesos, the application for relief therefrom shall be submitted, through the Commission
and the President, with their recommendations, to the Congress x x x. At the outset, it
bears clarification that the phrase any settled claim or liability to any government agency
includes not just liabilities to the government but also claims against the government.
Although the two relevant cases (infra) so far decided by this Court involved only liabilities
to the government, there is nothing in the law that prohibits the government from amicably
settling its own liability to a person, subject to the same stringent qualifications and
conditions. That the State has the whole government machinery to contest any alleged
liability and protect the release of government funds to pay off such claim is not in
consonance with the avowed State policy expressed by law that encourages settlement of
civil cases.
Same; A claim or liability is settled once it has been liquidated or determined and no issue
remains as to the amount or identity of the liability.In his dissent, Justice Lucas Bersamin
states that the liability of PNCC to Radstock was not yet settled at the time of the execution
of the Compromise Agreement since the case was still the subject of litigation, in which

PNCC resisted liability by pleading various defenses. He expounds: The exception of a

compromise or release of a claim or liability yet to be settled from the requirement for
presidential or congressional approval is realistic and practical. In a settlement by
compromise agreement, the negotiating party must have the freedom to negotiate and
bargain with the other party. Otherwise, tying the hands of the Government representative
by requiring him to submit each step of the negotiation to the President and to Congress will
unduly hinder him from effectively entering into any compromise agreement. The majority
opinion, meanwhile, declares that the claim was already settled upon recognition of the
obligation in the books of PNCC via the Board Resolution. [It] was precisely enacted to
prevent government agencies from admitting liabilities against the government, then
compromising such settled liabilities. The present case is exactly what the law seeks to
prevent, a compromise agreement on a creditors claim settled through admission by a
government agency without the approval of Congress for amounts exceeding P100,000.00.
What makes the application of the law even more necessary is that the PNCC Boards twin
moves are manifestly and grossly disadvantageous to the Government. x x x I submit that a
claim or liability is settled once it has been liquidated or determined and no issue remains as
to the amount or identity of the liability.
LEONARDO-DE CASTRO, J., Concurring Opinion:
Government Audit; Compromise Agreements; The language of Section 36 of the Government
Auditing Code, as amended by Section 20, Chapter 4, Title I-B, Book V, E.O. No. 292
(Administrative Code of 1987) does not authorize the compromise of an indebtedness of the
government or a liability of the government to any party.First, I do not believe that
Section 36 of the Government Auditing Code grants government agencies any power to
compromise, and thereby admit, any indebtedness of the government to another party.
Section 36, as amended by Section 20, Chapter 4, Title I-B, Book V, E.O. No. 292 (the
Administrative Code of 1987), provides: x x x Plainly, pursuant to the above-quoted
provision, the power to compromise or release involves a claim or liability to a government
agency, i.e. an indebtedness to a government agency, which term by definition under E.O.
No. 292 includes government owned or controlled corporations. The language of Section
36 does not authorize the compromise of an indebtedness of the government or a liability
of the government to any party.427
Same; Same; It is precisely because the claim is still unsettled that Section 36 should not
come into play at all and the concerned government agency should be deemed to have no
authority to compromise such claim.The dissenting opinion characterizes Radstocks claim
against PNCC as an unsettled claim since its validity and its amount had not yet been
determined with judicial finality and in fact, the Compromise Agreement was entered into
by the parties during the pendency of the case with the Court of Appeals. However, I

respectfully beg to disagree with the proposition that since Radstocks claim is not yet
settled, the requirement under Section 36 for Presidential or Congressional approval does
not apply. On the contrary, it is precisely because the claim is still unsettled that Section 36
should not come into play at all and the concerned government agency should be deemed
to have no authority to compromise such claim. Under Section 36, the authority to
compromise must involve a settled claim or liability regardless of amount, the latter being
significant only to determine the approving authority. This is the clear import of Section 36.
Same; Same; This is an opportune time for the Court to revisit and reexamine the doctrine in
Benedicto v. Board of Administrators of Television Stations, 207 SCRA 659 (1992), insofar as
it rules that Presidential and/or Congressional approval may be dispensed with in the
compromise of unsettled claims.This is an opportune time for the Court to revisit and
reexamine the doctrine in Benedicto, insofar as it rules that Presidential and/or
Congressional approval may be dispensed with in the compromise of unsettled claims. The
authority to compromise granted in cases of settled claims, under Section 36, as amended
by E.O. 292, subject to the approval of the offices concerned depending on the amount of
the claim cannot, by any rational reasoning, be construed as to confer absolute authority to
compromise, that is, sans any condition or approval at all, if the claim is unsettled or not yet
established. Rather, the inescapable deduction from the language of Section 36 is that no
compromise is allowed if the claim is unsettled. Besides, it should be emphasized that the
claim in Benedicto did not involve a claim against the government but a claim due to the
government. Hence, it cannot be invoked as a precedent.
Same; Same; It seems absurd that a compromise that will require a disbursement of public
funds or property will not require Congressional approval when the Constitution and the law
demand legislative action and a public purpose before such a disbursement can be made.If
a settled claim (i.e. a claim that has been adjudged valid and has been competently
computed based on evidence) that exceeds P100,000.00 requires Presidential endorsement
and Congressional approval, with more reason, an unsettled claim (i.e. one that is still of
questionable validity or legality) of any amount should require Presidential endorsement
and Congressional approval before it can be compromised. This is especially true in the case
of a compromise of a supposed debt of the government to another party. It seems absurd
that a compromise that will require a disbursement of public funds or property will not
require Congressional approval when the Constitution and the law demand legislative action
and a public purpose before such a disbursement can be made.
BERSAMIN, J., Dissent:
Actions; Intervention; The purpose of interventionnever an independent action, but
ancillary and supplemental to the existing litigationis not to obstruct or to unnecessarily

delay the placid operation of the machinery of trial, but merely to afford one not an original
party, yet having a certain right or interest in the pending case, the opportunity to appear
and be joined so he can assert or protect such right or interest.The purpose of
interventionnever an independent action, but ancillary and supplemental to the existing
litigationis not to obstruct or to unnecessarily delay the placid operation of the machinery
of trial, but merely to afford one not an original party, yet having a certain right or interest
in the pending case, the opportunity to appear and be joined so he can assert or protect
such right or interest. Accordingly, as a general guide for determining whether a party may
be allowed to intervene or not, the trial court, in the exercise of its sound discretion, shall
consider whether or not the intervention will unduly delay or prejudice the adjudication of
the rights of the original parties, and whether or not the intervenors rights may be fully
protected in a separate proceeding.
Same; Same; The alleged possibility that STRADEC might be left with worthless shares was
no reason to allow its intervention in order only to assail the compromise agreement, for
such intervention would not enable Philippine National Construction Corporation (PNCC) to
avoid its liability to Radstock, or to save PNCC from being liable with its own assets for its
obligations to Radstock, should the courts ultimately find that the obligations were justly due
and demandable.STRADECs apprehensions would not be assuaged through its
intervention in the action between Radstock and PNCC or through the nullification of the
compromise agreement. STRADEC was a stranger in relation to the transaction by which
PNCC had incurred the obligations subject of the compromise agreement. Indeed, it would
be irregular to subordinate to STRADECs unsettled claim the right of Radstock to collect as
PNCCs creditor. The alleged possibility that STRADEC might be left with worthless shares
was no reason to allow its intervention in order only to assail the compromise agreement,
for such intervention would not enable PNCC to avoid its liability to Radstock, or to save
PNCC from being liable with its own assets for its obligations to Radstock, should the courts
ultimately find that the obligations were justly due and demandable. On the other hand,
STRADEC could still hold PNCCs remaining assets liable should it prevail in Civil Case No. 05882. Based on COAs earlier cited compliance, PNCC had remaining assets by which it could
start anew and pursue its plans to revitalize its operation.
Judgments; Annulment of Judgments; Rule 47 of the 1997 Rules of Civil Procedure applies
only to petitions for the nullification of judgments rendered by regional trial courts filed with
the Court of Appealsit does not pertain to the nullification of decisions of the Court of
Appeals.The jurisdiction to annul a judgment rendered by the Regional Trial Court is
expressly granted to the CA by Section 9 (2) of Batas Pambansa Blg. 129, otherwise known
as the Judiciary Reorganization Act. The procedure for the purpose is governed by Rule 47,
1997 Rules of Civil Procedure, whose Section 1 provides: Section 1. Coverage.This Rule
shall govern the annulment by the Court of Appeals of judgments or final orders and

resolutions in civil actions of Regional Trial Courts for which the ordinary remedies of new
trial, appeal, petition for relief or other appropriate remedies are no longer available
through no fault of the petitioner. Explaining the coverage of the procedure under Rule 47
in Grande v. University of the Philippines, 502 SCRA 67 (2006), the Court definitely ruled out
the application of Rule 47 to the nullification of a decision of the CA, viz.: The annulment of
judgments, as a recourse, is equitable in character, allowed only in exceptional cases, as
where there is no available or other adequate remedy. It is generally governed by Rule 47 of
the 1997 Rules of Civil Procedure. Section 1 thereof expressly states that the Rule shall
govern the annulment by the Court of Appeals of judgments of final orders and resolutions
in civil action of Regional Trial Courts for which the ordinary remedies of new trial, appeal,
petition for relief or other appropriate remedies are no longer available through no fault of
the petitioner. Clearly, Rule 47 applies only to petitions for the nullification of judgments
rendered by regional trial courts filed with the Court of Appeals. It does not pertain to the
nullification of decisions of the Court of Appeals.
Corporation Law; Derivative Suits; Requisites.In this jurisdiction, the stockholder must
comply with the essential requisites for the filing of a derivative suit. The requisites are set
forth in Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies, namely: 1. That he was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the action was filed; 2. That he
exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the
relief he desires, and alleges the same with particularity in the complaint; 3. No appraisal
rights are available for the act or acts complained of; and 4. The suit is not a nuisance or
harassment suit.
Compromise Agreements; Section 20, Chapter 4, Sub-Title B, Title 1, Book 5, of Executive
Order No. 292 (Administrative Code 1997), which requires such approval in the disposition of
properties valued at more than 100,000.00 did not apply, considering that the liability of
Philippine National Construction Corporation (PNCC) to Radstock was not yet settled at the
time of the execution of the compromise agreement.During the oral arguments held on
January 13, 2009, a concern about the validity of the compromise agreement due to the lack
of presidential or congressional approval was raised. Allegedly, the lack of presidential or
congressional approval contravened the law, particularly Section 20, Chapter 4, Sub-Title B,
Title 1, Book 5, of Executive Order No. 292, which required such approval in the disposition
of properties valued at more than P100,000.00. I contend and hold that the cited law did
not apply, considering that the liability of PNCC to Radstock was not yet settled at the time
of the execution of the compromise agreement.

Same; The exception of a compromise or release of a claim or liability yet to be settled from
the requirement for presidential and congressional approval is realistic and practicalin a
settlement by compromise agreement, the negotiating party must have the freedom to
negotiate and bargain with the other party.The exception of a compromise or release of a
claim or liability yet to be settled from the requirement for presidential and congressional
approval is realistic and practical. In a settlement by compromise agreement, the
negotiating party must have the freedom to negotiate and bargain with the other party.
Otherwise, tying the hands of the Government representative by requiring him to submit
each step of the negotiation to the President and to Congress will unduly hinder him from
effectively entering into any compromise agreement.
Same; Philippine National Construction Corporation (PNCC); Franchises; It is incorrect to
state that Presidential Decree No. 1113 and its amendatory law, Presidential Decree No.
1894, constituted the charter of Philippine National Construction Corporation (PNCC),
because said laws merely granted to PNCC a secondary franchisethe existence of PNCC
was independent of the operation of said laws; The primary franchise of a corporation
should not be confused with its secondary franchise, if any.It is incorrect to state that P.D.
1113 and its amendatory law, P.D. 1894, constituted the charter of PNCC, because said laws
merely granted to PNCC a secondary franchise. The existence of PNCC was independent of
the operation of said laws. Hence, the silence of P.D. 1113 and P.D. 1894 on the grant to
PNCC of the power to enter into compromise agreements was irrelevant. It becomes
appropriate to stress, for purposes of clarity, that the primary franchise of a corporation
should not be confused with its secondary franchise, if any. According to J.R.S. Business
Corp. v. Imperial Insurance, Inc., 11 SCRA 634 (1964): For practical purposes, franchises, so
far as relating to corporations, are divisible into (1) corporate or general franchises; and (2)
special or secondary franchises. The former is the franchise to exist as a corporation, while
the latter are certain rights and privileges conferred upon existing corporations, such as
the right to use the streets of a municipality to lay pipes or tracks, erect poles or string
wires. The distinction between the two franchises of a corporation should always be
delineated. The primary franchise (or the right to exist as such) is vested in the individuals
composing the corporation, not in the corporation itself, and cannot be conveyed in the
absence of a legislative authority to do so; but the special or secondary franchise of a
corporation is vested in the corporation itself, and may ordinarily be conveyed or mortgaged
under a general power granted to the corporation to dispose of its property, except such
special or secondary franchises as are charged with a public use.
Same; Same; As an autonomous entity, Philippine National Construction Corporation (PNCC)
undoubtedly has the power to compromise and to enter into a settlement through its Board
of Directors, just like any other private corporation organized under the Corporation Code.
Not being a government corporation created by special law, PNCC does not owe its creation

to some charter or special law, but to the Corporation Code. Its powers are enumerated in
the Corporation Code and its articles of incorporation. As an autonomous entity, it
undoubtedly has the power to compromise and to enter into a settlement through its Board
of Directors, just like any other private corporation organized under the Corporation Code.
To maintain otherwise is to ignore the character of PNCC as a corporate entity organized
under the Corporation Code, by which it was vested with a personality and an identity
distinct and separate from those of its stockholders or members.
Bids and Bidding; While as a rule, divestment or disposal of government property should be
undertaken primarily through public bidding, the mode of disposition of Government
properties and assets is not limited to public bidding, because there are recognized
exceptions, including when public bidding is not the most advantageous means for the
Government to divest or dispose of its properties.The rationale for requiring a public
bidding is the need to prevent the Government from being shortchanged by minimizing the
occasions for corruption and the temptations to commit abuse of discretion on the part of
government authorities. As a rule, divestment or disposal of government property should be
undertaken primarily through public bidding. The mode of disposition of Government
properties and assets is not limited to public bidding, however, because there are
recognized exceptions, including when public bidding is not the most advantageous means
for the Government to divest or dispose of its properties.
Same; Sales; Dacion en Pago; The modern concept of dation in payment considers it as a
novation by change of the object; The dispositions made in the compromise agreement,
being in the nature of a dacion en pago, did not require public bidding.The cited rule does
provide an exception. According to COAs compliance, supra, the audit guidelines under COA
Circular No. 89-296 did not apply to the compromise agreement due to its being akin to a
dacion en pago. Under Article 1245 of the Civil Code, a dacion en pago or a dation in
payment involves the alienation of property to the creditor in satisfaction of a debt in
money. The modern concept of dation in payment considers it as a novation by change of
the object. Thus, the compromise agreement was a dacion en pago, in that a novation by a
change of the object took place due to the original obligation of PNCC to pay its liability
(adjudged in the amount of P13,151,956,528) being thereby converted into another
obligation whereby PNCC would transfer the real properties listed in the compromise
agreement to the qualified assignees nominated by Radstock. Regardless of the pegging of
the values of the listed properties at specified amounts, the transfer to Radstocks assignees
would already constitute a performance of PNCCs obligations. In other words, the
obligation of PNCC to Radstock would be deemed fulfilled, although Radstock might realize
a lesser value from the assignees for the properties. Verily, the dispositions made in the
compromise agreement, being in the nature of a dacion en pago, did not require public
bidding. This conclusion accords with the holding in Uy v. Sandiganbayan, 433 SCRA 424

(2004) where the Court sustained the argument of PCGG that the dacion en pago
transactions were beyond the ambit of COA Circular No. 89-296.
Actions; Pleadings and Practice; Admissions; The rule on admissions does not apply to a
wrong interpretation and mistaken application of the laws, and the Court is not to be bound
by a mistaken interpretation of the law made by a counsel, even if said interpretation is
adverse to the client.The majority pointedly assert that Radstocks counsel already
admitted during the oral argument that all of PNCCs assets and properties had reverted to
the National Government. The assertion of the majority is too sweeping. It ignores that the
so-called admission of Radstocks counsel was not, properly speaking, a judicial admission
that bound Radstock on the matter of reversion. To begin with, the statements in question
made by Radstocks counsel did not relate to facts, but to conclusions of law. Indeed, a
judicial admission is an admission made in the course of the proceeding in the same case,
verbal or written, by a party accepting for the purposes of the suit the truth of some alleged
fact, which said party cannot thereafter disprove. Clearly, the rule on admissions does not
apply to a wrong interpretation and mistaken application of the laws, and the Court is not to
be bound by a mistaken interpretation of the law made by a counsel, even if said
interpretation is adverse to the client.
Toll Regulatory Board (TRB); The Toll Regulatory Board (TRB) has the statutory authority to
enter in behalf of the National Government into a contract for the construction, operation
and maintenance of toll facilities; to determine and decide the kind, type, and nature of
public improvement to be constructed and operated as toll facilities; and to issue a Toll
Operation Certificate (TOC) to authorize a grantee to operate a toll facility.Undoubtedly,
TRB had the statutory authority to enter in behalf of the National Government into a
contract for the construction, operation and maintenance of toll facilities; to determine and
decide the kind, type, and nature of public improvement to be constructed and operated as
toll facilities; and to issue a TOC to authorize a grantee to operate a toll facility. In addition,
P.D. No. 1894, amending P.D. No. 1113, invested TRB with the jurisdiction and supervision
over PNCC as the grantee with respect to the Expressways, and the toll facilities necessarily
appurtenant thereto. Its Section 4 states, viz.: Section 4. The Toll Regulatory Board is hereby
given jurisdiction and supervision over the GRANTEE with respect to the Expressways, the
toll facilities necessarily appurtenant thereto and, subject to the provisions of Section 8 and
9 hereof, the toll that the GRANTEE will charge the users thereof. By its issuance of the TOC,
therefore, TRB was simply exercising its powers under P.D. No. 1112. It did not thereby
extend PNCCs legislative franchise, which it could not legally do. Its issuance of the TOC was
proper, not ultra vires, even if the effect was to permit PNCC, through MNTC, to continue to
operate the toll facilities.434

Actions; Pleadings and Practice; It hardly requires clarification that an opinion on a matter of
law given in the course of the proceedings is not binding on the party on whose behalf it is
made, because the question of law is best left to the determination of the court.In this
connection, the claim of the majority that Radstocks counsel admitted during the oral
arguments that an appropriation law was needed to authorize the payment by PNCC out of
the toll fees is unwarranted. The supposed admission was apparently counsels response to
the query of whether the collection of toll fees went to the general fund of the National
Government. As such, the response was an expression of counsels interpretation of the law,
which, albeit sounding like an admission, has no legal significance for purposes of this
resolution. It hardly requires clarification that an opinion on a matter of law given in the
course of the proceedings is not binding on the party on whose behalf it is made, because
the question of law is best left to the determination of the court.
Concurrence and Preference of Credit; The credit preference set by the Civil Code may not be
invoked to assail the compromise agreement, considering that these cases were neither
proceedings for bankruptcy or insolvency, nor general judicial liquidation proceedings.To
begin with, the credit preference set by the Civil Code may not be invoked herein to assail
the compromise agreement, considering that these cases were neither proceedings for
bankruptcy or insolvency, nor general judicial liquidation proceedings. Cogently, the Court
explained when preference of credit may be invoked in Development Bank of the Philippines
v. Secretary of Labor, 179 SCRA 630 (1989) thus: xxx A preference of credit bestows upon
the preferred creditor an advantage of having his credit satisfied first ahead of other claims
which may be established against the debtor. Logically, it becomes material only when the
properties and assets of the debtor are insufficient to pay his debts in full; for if the debtor is
amply able to pay his various creditors in full, how can the necessity exist to determine
which of his creditors shall be paid first or whether they shall be paid out of the proceeds of
the sale of the debtors specific property? Indubitably, the preferential right of credit attains
significance only after the properties of the debtor have been inventoried and liquidated,
and the claims held by his various creditors have been established. In this jurisdiction,
bankruptcy, insolvency and general judicial liquidation proceedings provide the only proper
venue for the enforcement of a creditors preferential right xxx for these are in rem
proceedings binding against the whole world where all persons having interest in the assets
of the debtors are given the opportunity to establish their respective credits. Nor will it be
automatic for the National Government to be preferred as to the assets of any individual or
corporation in financial straits.435
Actions; Insolvency; Words and Phrases; The meanings of the terms insolvent and insolvency
have not been fixed, their definitions being dependent upon the business or factual situation
to which the terms are applied; Until and unless there is an insolvency proceeding or a
judicial declaration that a person is insolvent, however, any state of insolvency of a debtor

remains legally insignificant as far as his capacity to dispose of his properties is concerned.
Sisons insistence cannot be given any significance in relation to the compromise agreement.
The meanings of the terms insolvent and insolvency have not been fixed, their definitions
being dependent upon the business or factual situation to which the terms are applied.
Ordinarily, a person is insolvent when all his properties are not sufficient to pay all of his
debts. This definition is the general and popular meaning of the term insolvent. In this
jurisdiction, the state of insolvency is governed by special laws to the extent that they are
not inconsistent with the Civil Code. In other words, the state of insolvency is primarily
governed by the Civil Code and subsidiarily by the Insolvency Law (Act No. 1956, as
amended). Under Act No. 1956, there are two distinct proceedings by which to declare a
person insolvent, namely: a) the voluntary or debtor-initiated proceedings; and b) the
involuntary or creditor-initiated proceedings, which require that the petition be filed by
three or more creditors. The judicial declaration that a person (either natural or juridical) is
insolvent produces legal effects, particularly on the disposition of the debtors assets. Until
and unless there is an insolvency proceeding or a judicial declaration that a person is
insolvent, however, any state of insolvency of a debtor remains legally insignificant as far as
his capacity to dispose of his properties is concerned. This capacity to dispose is not in itself
iniquitous or questionable, for the creditor is not meanwhile left without recourse. There
are remedies for the creditor in case any disposition of the debtors assets is in fraud of
creditors.
Same; Sales; Corporation Law; Derivative Suits; The law defines a sale or disposition of
substantially all assets and property as one by which the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it was
incorporatedany disposition short of this will not need stockholder action.The law
defines a sale or disposition of substantially all assets and property as one by which the
corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated. Any disposition short of this will not need
stockholder action. The text and tenor of Section 40, supra, are clear and do not require
interpretation, that the Court must not read any other meaning to the law. Sison himself
admitted that even after the compromise agreement was approved, PNCC still had assets by
which to continue its businesses. Thus, because the assets to be covered by the compromise
agreement were not substantially all the assets of PNCC within the context of Section 40,
supra, the stockholders approval was not required. The disposition through the compromise
agreement, although involving a substantial portion of the total assets, would not amount to
the sale or disposition of substantially all assets and property as to render PNCC incapable of
continuing the business or accomplishing the purpose for which it was incorporated.
Ownership; Although it may be argued that the right to designate the qualified assignee to
the property is an attribute of ownership, it does not necessarily follow that the presence of

such right already means that the person holding the right has become the owner of the
propertythere is more to ownership than being able to designate an assignee for the
property.Although it may be argued that the right to designate the qualified assignee to
the property is an attribute of ownership, it does not necessarily follow that the presence
of such right already means that the person holding the right has become the owner of the
property. There is more to ownership than being able to designate an assignee for the
property. The attributes of ownership are: jus utendi (right to possess and enjoy), jus fruendi
(right to the fruits), jus abutendi (right to abuse or consume), jus disponendi (right to dispose
or alienate), and jus vindicandi (right to recover or vindicate). An owner of a thing or
property may agree to transfer, assign, or limit the rights attributed to his ownership, but
this does not mean that he loses his ownership over the thing. Accordingly, one may lease
his property to others without affecting his title over it; or he may enter into a contract
limiting his enjoyment or use of the property; or he may bind himself to first offer a thing for
sale to a particular person before selling it to another; or he may agree to let another person
designate an assignee to whom the property will be transferred or sold in consideration of
an obligation. In any of such situations, there is no actual or legal transfer of ownership, for
ownership still pertains, legally and for all intents and purposes, to the owner, not to the
other person to whom an attribute of ownership has been transferred.
Same; Trusts; Words and Phrases; Trust is the legal relationship between one person having
an equitable ownership in property and another person owning the legal title to such
property, the equitable ownership of the former entitling him to the performance of certain
duties and the exercise of certain powers by the latter.It is also wrong for Sison to insist
that the compromise agreement would create a trust relationship between PNCC and
Radstock. Trust is the legal relationship between one person having an equitable ownership
in property and another person owning the legal title to such property, the equitable
ownership of the former entitling him to the performance of certain duties and the exercise
of certain powers by the latter. By definition, trust relations between parties are either
express or implied. Express trusts are created by the direct and positive acts of the parties,
by some writing or deed, or will, or by words evincing an intention to create a trust. The
compromise agreement would not vest in Radstock any equitable ownership over the
property. The required performance of certain duties by PNCC (mainly the transfer of the
real properties to the qualified assignees nominated by Radstock) under the compromise
agreement would not emanate from Radstocks equitable ownership, which Radstock would
not have. The performance of such duty would not arise either upon the approval of the
compromise agreement, but upon the fulfillment by Radstock of its obligation to nominate
the qualified assignees. PNCC and Radstock had no intention to create a trust, because the
circumstances of the transaction negated the formation of a trust agreement between them
resulting from the compromise agreement.

Same; Land Titles; On the assumption, for the sake of argument, that the compromise
agreement gives Radstock a right that is an attribute of ownership, such grant may still be
justified nonetheless by the totality of the circumstances as the end result of the whole
operation of the compromise agreement; and, as such, it would still be consistent with, not
violative of, the constitutional ban on foreign ownership of lands.On the assumption, for
the sake of argument, that the compromise agreement gives Radstock a right that is an
attribute of ownership, such grant may still be justified nonetheless by the totality of the
circumstances as the end result of the whole operation of the compromise agreement; and,
as such, it would still be consistent with, not violative of, the constitutional ban on foreign
ownership of lands. In La Bugal-BLaan Tribal Association, Inc. v. Ramos, 445 SCRA 1 (2004)
the Court ratiocinated: Petitioners sniff at the citation of Chavez v. Public Estates Authority,
and Halili v. C.A., claiming that the doctrines in these cases are wholly inapplicable to the
instant case. Chavez clearly teaches: Thus, the Court has ruled consistently that where a
Filipino citizen sells land to an alien who later sells land to a Filipino, the invalidity of the
first transfer is corrected by the subsequent sale to a citizen. Similarly, where the alien who
buys the land subsequently acquires Philippine citizenship, the sale is validated since the
purpose of the constitutional ban to limit land ownership to Filipinos has been achieved. In
short, the law disregards the constitutional disqualification of the buyer to hold land if the
land is subsequently transferred to a qualified party, or the buyer himself becomes a
qualified party.
Same; Same; The compromise agreement does not attempt to create any kind of title over
the properties in favor of Radstockit simply allows Radstock to designate a qualified
assignee to whom the properties may be assigned or transferred.The situation herein is
even more favorable than that in La Bugal. Firstly, the compromise agreement does not
attempt to transfer any of the subject real properties to any non-qualified person. The title
or ownership of the lands is to be transferred only upon designation by Radstock of a
qualified assignee, and the transfer is to be effected by PNCC directly to the assignee,
without the title passing to Radstock in the interim. Secondly, the compromise agreement
does not attempt to create any kind of title over the properties in favor of Radstock. It
simply allows Radstock to designate a qualified assignee to whom the properties may be
assigned or transferred. It does not give any other right to Radstock. Thirdly, the
arrangement may even be more beneficial to PNCC, considering that PNCC gets to settle its
much lessened obligation for a definite and sure amount of 75% of the assessed values of
the subject properties, regardless of the price that Radstock gets from its designated
assignee. Incidentally, this is a better bargain for PNCC (and ultimately for the Government),
compared to a bidding out of the properties in which there are ever-present risks of
recovering a much lower value). Fourthly, the arrangement transfers from PNCC to Radstock
the obligation and task of looking for a qualified assignee of the properties. And, lastly, the
present case involves a series of interrelated and dependent transactions that will always

result in a situation not inconsistent with the Constitution, considering that the assignee will
always be a qualified person or entity.
Actions; Judgments; Words and Phrases; Law of the Case, Explained.Law of the case is
defined as the opinion delivered on a former appeal. More specifically, it means that
whatever is once irrevocably established as the controlling legal rule between the same
parties in the same case continues to be the law of the case, whether correct on general
principles or not, so long as the facts on which such decision was predicated continue to be
facts of the case before the court, notwithstanding that the rule laid down may have been
reversed in other cases. Indeed, after the appellate court has issued a pronouncement on a
point presented to it with a full opportunity to be heard having been accorded to the
parties, that pronouncement should be regarded as the law of the case and should not be
reopened on a remand of the case. The concept of the law of the case is explained in
Mangold v. Bacon, thus: The general rule, nakedly and badly put, is that legal conclusions
announced on a first appeal, whether on the general law or the law as applied to the
concrete facts, not only prescribe the duty and limit the power of the trial court to strict
obedience and conformity thereto, but they become and remain the law of the case in all
after steps below or above on subsequent appeal. The rule is grounded on convenience,
experience, and reason. Without the rule there would be no end to criticism, re-agitation,
re-examination, and reformulation. In short, there would be endless litigation. It would be
intolerable if parties litigant were allowed to speculate on changes in the personnel of a
court, or on the change of our rewriting propositions once gravely ruled on solemn
argument and handed down as the law of a given case. An itch to reopen questions
foreclosed on a first appeal would result in the foolishness of the inquisitive youth who
pulled up his corn to see how it grew. Courts are allowed, if they so choose, to act like
ordinary sensible persons. The administration of justice is a practical affair. The rule is a
practical and a good one of frequent and beneficial use.
Same; Evidence; Judicial Notice; Congressional Deliberations; Words and Phrases; The
speeches of legislators delivered on the floor and the testimonies of resource persons given
in Congressional committee hearings, like those quoted in the majority opinion, have no
probative value in judicial adjudication, for they are not recognized as evidence under the
Rules of Court; The term official acts, in its general sense, may encompass all activities of the
Congress, like the laws enacted and resolutions adopted, but the statements of the
legislators and testimonies cannot be regarded, by any stretch of legal understanding, as the
official act of the legislative department; Although the Court can take cognizance of the
proceedings of the Senate, as acts of a department of the National Government, the
testimonies or statements of the persons during the hearings or sessions may not be used to
prove disputed facts in the courts of law.The majority rely heavily on the transcripts of the
Senate Committee hearings to buttress the imputation of bad faith behind the passage of

the board resolution that recognized PNCCs debts to Marubeni. They copiously quote the
privilege speech of Senator Franklin Drilon delivered during the plenary session of December
21, 2006; and the transcripts of the Senate Committee hearings held on December 14, 2006.
To me, the reliance on the privilege speech and the transcripts of the Senate Committee
hearings is unwarranted and misplaced. The speeches of legislators delivered on the floor
and the testimonies of resource persons given in Congressional committee hearings, like
those quoted in the majority opinion, have no probative value in judicial adjudication, for
they are not recognized as evidence under the Rules of Court. Even the rule on judicial
notice embodied in Section 1, Rule 129, of the Rules of Court does not accord probative
value to such speeches and testimonies, because the rule extends only to the official acts of
the Legislative Department. The term official acts, in its general sense, may encompass all
activities of the Congress, like the laws enacted and resolutions adopted, but the statements
of the legislators and testimonies cannot be regarded, by any stretch of legal understanding,
as the official act of the legislative department. At best, the courts can only take judicial
notice of the fact that such statements or speeches were made by such persons, or that
such hearings were conducted. Although this Court can take cognizance of the proceedings
of the Senate, as acts of a department of the National Government, the testimonies or
statements of the persons during the hearings or sessions may not be used to prove
disputed facts in the courts of law. They cannot substitute actual testimony as basis for
making findings of fact necessary for the determination of a controversy by the courts. In
other words, they are incompetent for purposes of judicial proceedings.
Same; Same; Separation of Powers; Courts conduct hearings to settle, through the
application of law, actual controversies arising between adverse litigants and involving
demandable rights, and the Rules of Court prescribes procedural safeguards consistent with
the principles of due process and equal protection guaranteed by the Constitution; In
contrast, the legislative bodies conduct their inquiries under less safeguards and restrictions,
because inquiries in aid of legislation are undertaken as tools to gather information, in order
to enable the legislators to act wisely and effectively, and in order to determine whether
there is a need to improve existing laws, or to enact new or remedial legislation.The
distinctions between court proceedings, on one hand, and legislative investigations in aid of
legislation, on the other hand, derive from their different purposes. Courts conduct hearings
to settle, through the application of law, actual controversies arising between adverse
litigants and involving demandable rights. In court proceedings, the persons rights to life,
liberty and property may be directly and adversely affected. The Rules of Court prescribes
procedural safeguards consistent with the principles of due process and equal protection
guaranteed by the Constitution. The manner in which disputed matters can be proven in
judicial proceedings as provided in the Rules of Court must be followed. In contrast, the
legislative bodies conduct their inquiries under less safeguards and restrictions, because
inquiries in aid of legislation are undertaken as tools to gather information, in order to

enable the legislators to act wisely and effectively, and in order to determine whether there
is a need to improve existing laws, or to enact new or remedial legislation. In particular, the
Senate is not bound by the Rules of Court. Its inquiries permit witnesses to relate matters
that are hearsay, or to give mere opinion, or to transmit information considered incompetent under the Rules of Court. The witnesses serve as resource persons, often unassisted
by counsel, and appear before the legislators, who are the inquisitors. The latter have no
obligation to act as impartial judges during the proceedings. The inquiries do not include
direct examinations and cross-examinations, and leading questions are frequent.
Same; Intervention; The interest that entitles a person to intervene in a suit already
commenced between other persons must be in the matter in litigation and of such character
that the intervenor will either gain or lose by direct legal operation and effect of the
judgment.To start with, Asiavest has no direct and material interest in the approval (or
disapproval) of the compromise agreement between PNCC and Radstock. Secondly,
Asiavests request to intervene was made too late in the proceedings. Under Section 2, Rule
19, 1997 Rules of Civil Procedure, an intervention, to be permitted, must be sought prior to
the rendition of the judgment by the trial court. Thirdly, the avowed interest of Asiavest in
PNCCs assets emanated from its being a creditor of PNCC by final judgment, and was not
related to the personal obligations of PNCC in favor of Marubeni (that is, the guarantees for
the loans) that were the subject of the compromise agreement. Such interest did not entitle
Asiavest to attack the compromise agreement between PNCC and Radstock. The interest
that entitles a person to intervene in a suit already commenced between other persons
must be in the matter in litigation and of such character that the intervenor will either gain
or lose by direct legal operation and effect of the judgment. The conditions for a proper
intervention in relation to Asiavest simply did not exist. Moreover, sustaining Asiavests
posture may mean allowing other creditors to intervene in an action involving their debtor
brought by another creditor against such debtor upon the broad pretext that they were
thereby prejudiced. The absurdity of Asiavests posture, being plain, can never be permitted
under the rules on intervention.
Evidence; Hearsay Evidence Rule; Mere newspaper reports are incompetent and inadmissible
hearsay.Lastly, Asiavests argument that the compromise agreement might be in fraud of
it as a judgment creditor of PNCC, in support of which newspaper reports are cited, is
unpersuasive. The allegation of fraud remains unsupported by admissible and credible
evidence presented by Asiavest, considering that mere newspaper reports are incompetent
and inadmissible hearsay.
PETITIONS for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.442

442 SUPREME COURT REPORTS ANNOTATED

Strategic Alliance Development Corporation vs. Radstock Securities Limited
Jose Jude R. Mutia for petitioner STRADEC.
Office of the Government Corporate Counsel for respondent PNCC.
Pacifico Agabin for Radstock.
Sycip, Salazar, Hernandez and Gatmaitan for Asiavest.
CARPIO, J.:
Prologue
This case is an anatomy of a P6.185 billion1 pillage of the public coffers that ranks among
one of the most brazen and hideous in the history of this country. This case answers the
questions why our Government perennially runs out of funds to provide basic services to
our people, why the great masses of the Filipino people wallow in poverty, and why a very
select few amass unimaginable wealth at the expense of the Filipino people.On 1 May 2007,
the 30-year old franchise of Philippine National Construction Corporation (PNCC) under
Presidential Decree No. 1113 (PD 1113), as amended by Presidential Decree No. 1894 (PD
1894), expired. During the 13th Congress, PNCC sought to extend its franchise. PNCC won
approval from the House of Representatives, which passed House Bill No. 57492 renewing
PNCCs franchise for another 25 years. However, PNCC failed to secure approval from the
Senate, dooming the extension of PNCCs franchise. Led by Senator Franklin M. Drilon, the
Senate opposed PNCCs plea for extension of its franchise.3 Senator Drilons privilege
speech4 explains why the Senate chose not to renew PNCCs franchise:
I repeat, Mr. President. PNCC has agreed in a compromise agreement dated 17 August
2006 to transfer to Radstock Securities Limited P17,676,063,922, no small money, Mr.
President, my dear colleagues, P17.6 billion.
What does it consist of? It consists of the following: 19 pieces of real estate properties with
an appraised value of P5,993,689,000. Do we know what is the bulk of this? An almost 13hectare property right here in the Financial Center. As we leave the Senate, as we go out of
this Hall, as we drive thru past the GSIS, we will see on the right a vacant lot, that is PNCC
property. As we turn right on Diosdado Macapagal, we see on our right new buildings, these

are all PNCC properties. That is 12.9 hectares of valuable asset right in this Financial Center
that is worth P5,993,689.000.

Mr. President, are we not entitled, as members of the Committee, to know who is Radstock
Securities Limited?

What else, Mr. President? The 20% of the outstanding capital stock of PNCC with a par value
of P2,300,000,000I repeat, 20% of the outstanding capital stock of PNCC worth P2,300
billionwas assigned to Radstock.

Radstock Securities Limited was allegedly incorporated under the laws of the British Virgin
Islands. It has no known board of directors, except for its recently appointed attorney-infact, Mr. Carlos Dominguez.

In addition, Mr. President and my dear colleagues, please hold on to your seats because
part of the agreement is 50% of PNCCs 6% share in the gross toll revenue of the Manila
North Tollways Corporation for 27 years, from 2008 to 2035, is being assigned to Radstock.
How much is this worth? It is worth P9,382,374,922. I repeat, P9,382,374,922.

Mr. President, are the members of the Committee not entitled to know why 20 years after
the account to Marubeni Corporation, which gave rise to the compromise agreement 20
years after the obligation was allegedly incurred, PNCC suddenly recognized this obligation
in its books when in fact this obligation was not found in its books for 20 years?

xxxx

In other words, Mr. President, for 20 years, the financial statements of PNCC did not show
any obligation to Marubeni, much less, to Radstock. Why suddenly on October 20, 2000, P10
billion in obligation was recognized? Why was it recognized?

Mr. President, P17,676,000,000, however, was made to appear in the agreement to be only
worth P6,196,156,488. How was this achieved? How was an aggregate amount of
P17,676,000,000 made to appear to be only P6,196,156,488? First, the 19 pieces of real
estate worth P5,993,689,000 were only assigned a value of P4,195,000,000 or only 70% of
their appraised value.
Second, the PNCC shares of stock with a par value of P2.3 billion were marked to market and
therefore were valued only at P713 million.
Third, the share of the toll revenue assigned was given a net present value of only
P1,287,000,000 because of a 15% discounted rate that was applied.
In other words, Mr. President, the toll collection of P9,382,374,922 for 27 years was given a
net present value of only P1,287,000,000 so that it is made to appear that the compromise
agreement is only worth P6,196,000,000.
Mr. President, my dear colleagues, this agreement will substantially wipe out all the assets
of PNCC. It will be left with nothing else except, probably, the collection for the next 25
years or so from the North Luzon Expressway. This agreement brought PNCC to the cleaners
and literally cleaned the PNCC of all its assets. They brought PNCC to the cleaners and
cleaned it to the tune of P17,676,000,000.
xxxx

During the hearing on December 18, Mr. President, we asked this question to the Asset
Privatization Trust (APT) trustee, Atty. Raymundo Francisco, and he was asked: What is
the basis of your recommendation to recognize this? He said: I based my recommendation on a legal opinion of Feria and Feria. I asked him: Who knew of this
opinion? He said: Only me and the chairman of PNCC, Atty. Renato Valdecantos. I
asked him: Did you share this opinion with the members of the board who recognized
the obligation of P10 billion? He said: No. Can you produce this opinion now? He
said: I have no copy.
Mysteriously, Mr. President, an obligation of P10 billion based on a legal opinion which,
even Mr. Arthur Aguilar, the chairman of PNCC, is not aware of, none of the members of
the PNCC board on October 20, 2000 who recognized this obligation had seen this opinion.
It is mysterious.
Mr. President, are the members of our Committee not entitled to know why Radstock
Securities Limited is given preference over all other creditors notwithstanding the fact that
this is an unsecured obligation? There is no mortgage to secure this obligation.
More importantly, Mr. President, equally recognized is the obligation of PNCC to the
Philippine government to the tune of P36 billion. PNCC owes the Philippine government P36
billion recognized in its books, apart from P3 billion in taxes. Why in the face of all of these is
Radstock given preference? Why is it that Radstock is given preference to claim P17.676
billion of the assets of PNCC and give it superior status over the claim of the Philippine

government, of the Filipino people to the extent of P36 billion and taxes in the amount of P3
billion? Why, Mr. President? Why is Radstock given preference not only over the Philippine
government claims of P39 billion but also over other creditors including a certain best
merchant banker in Asia, which has already a final and executory judgment against PNCC for
about P300 million? Why, Mr. President? Are we not entitled to know why the compromise
agreement assigned P17.676 billion to Radstock? Why was it executed?5 (Emphasis
supplied)

MR. DOMINGUEZ. ...litigious situation.6

xxxx
SEN. OSMEA. All of these financial things can be arranged. They can hire a local bank,
Filipino, to be trustee for the real estate. So ...
SEN. DRILON. Well, then, thats a dummy relationship.

Aside from Senator Drilon, Senator Sergio S. Osmea III also saw irregularities in the
transactions involving the Marubeni loans, thus:
SEN. OSMEA. Ah okay. Good.
Now, Id like to point out to the Committee thatit seems that this was a politically driven
deal like IMPSA. Because the acceptance of the 10 billion or 13 billion debt came in October
2000 and the Radstock assignment was January 10, 2001. Now, why would Marubeni sell
for $2 million three months after there was a recognition that it was owed P10 billion. Can
you explain that, Mr. Dominguez?
MR. DOMINGUEZ. Your Honor, I am not aware of the decision making process of
Marubeni. But my understanding was, the Japanese culture is not a litigious one and they
didnt want to get into a, you know, a court situation here in the Philippines having a lot of
other interest, et cetera.
SEN. OSMEA. Well, but that is beside the point, Mr. Dominguez. All I am asking is does it
stand to reason that after you get an acceptance by a debtor that he owes you 10 billion,
you sell your note for 100 million.
Now, if that had happened a year before, maybe I would have understood why he sold for
such a low amount. But right after, it seems that this was part of an orchestrated deal
wherein with certain powerful interest would be able to say, Yes, we will push through.
Well fix the courts. Well fix the board. Well fix the APT. And we will be able to do it, just
give us 55 percent of whatever is recovered, am I correct?
MR. DOMINGUEZ. As I said, Your Honor, I am not familiar with the decision making process
of Marubeni. But my understanding was, as I said, they didnt want to get into a

SEN. OSMEA. In any case, to me the main point here is that a third party, Radstock,
whoever owns it, bought Marubenis right for $2 million or P100 million. Then, they are able
to go through all these legal machinations and get awarded with the consent of PNCC of 6
billion. Thats a 100 million to 6 billion. Now, Mr. Aguilar, you have been in the business for
such a long time. I mean, this hedge funds whether its Radstock or New Bridge or Texas
Pacific Group or Carlyle or Avenue Capital, they look at their returns. So if Avenue Capital
buys something for $2 million and you give him $4 million in one year, its a 100 percent
return. Theyll walk away and dance to their stockholders. So here in this particular case, if
you know that Radstock only bought it for $2 million, I would have gotten board approval
and say, Okay, lets settle this for $4 million. And Radstock would have jumped up and
down. So what looks to me is that this was already a scheme. Marubeni wrote it off already.
Marubeni wrote everything off. They just got a $2 million and they probably have no more
residual rights or maybe theres a clause there, a secret clause, that says, I want 20 percent
of whatever youre able to eventually collect. So $2 million. But whatever it is, Marubeni
practically wrote it off. Radstocks liability now or exposure is only $2 million plus all the
lawyer fees, under-the-table, etcetera. All right. Okay. So its pretty obvious to me that if
anybody were using his brain, I would have gone up to Radstock and say, Heres $4 million.
Heres P200 million. Okay. They would have walked away. But evidently, the ninongs of
Radstock See, I dont care who owns Radstock. I want to know who is the ninong here who
stands to make a lot of money by being able to get to courts, the government agencies,
OGCC, or whoever else has been involved in this, to agree to 6 billion or whatever it was.
Thats a lot of money. And believe me, Radstock will probably get one or two billion and four
billion will go into somebody elses pocket. Or Radstock will turn around, sell that claim for
P4 billion and let the new guy just collect the payments over the years.
x x x x7
SEN. OSMEA. x x x I just wanted to know is CDCP Mining a 100 percent subsidiary of PNCC?

SEN. OSMEA. All right.

MR. AGUILAR. Hindi ho. Ah, no.

SEN. OSMEA. If theyre not a 100 percent, why would they sign jointly and severally? I just
want to plug the loopholes.
MR. AGUILAR. I think it wasif I may just speculate. It was just common ownership at that
time.

Before this Court are the consolidated petitions for review9 filed by Strategic Alliance
Development Corporation (STRADEC) and Luis Sison (Sison), with a motion for intervention
filed by Asiavest Merchant Bankers Berhad (Asiavest), challenging the validity of the
Compromise Agreement between PNCC and Radstock. The Court of Appeals approved the
Compromise Agreement in its Decision of 25 January 200710 in CA-G.R. CV No. 87971.

SEN. OSMEA. Alright. NowAlso, the ...

II.

MR. AGUILAR. Ah, 13 percent daw, Your Honor.

The Antecedents

SEN. OSMEA. Huh?

PNCC was incorporated in 1966 for a term of fifty years under the Corporation Code with
the name Construction Development Corporation of the Philippines (CDCP).11 PD 1113,
issued on 31 March 1977, granted CDCP a 30-year franchise to construct, operate and
maintain toll facilities in the North and South Luzon Tollways. PD 1894, issued on 22
December 1983, amended PD 1113 to include in CDCPs franchise the Metro Manila
Expressway, which would serve as an additional artery in the transportation of trade and
commerce in the Metro Manila area.

MR. AGUILAR. Thirteen percent ho.

SEN. OSMEA. Whats 13 percent?
MR. AGUILAR. We owned ...
xxxx
SEN. OSMEA. x x x CDCP Mining, how many percent of the equity of CDCP Mining was
owned by PNCC, formerly CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and
severally?
MS. PASETES. Yes.
SEN. OSMEA. One-three? So poor PNCC and CDCP got taken to the cleaners here. They
sign for a 100 percent and they only own 13 percent.
x x x x8 (Emphasis supplied)
I.
The Case

Sometime between 1978 and 1981, Basay Mining Corporation (Basay Mining), an affiliate of
CDCP, obtained loans from Marubeni Corporation of Japan (Marubeni) amounting to
5,460,000,000 yen and US$5 million. A CDCP official issued letters of guarantee for the
loans, committing CDCP to pay solidarily for the full amount of the 5,460,000,000 yen loan
and to the extent of P20 million for the US$5 million loan. However, there was no CDCP
Board Resolution authorizing the issuance of the letters of guarantee. Later, Basay Mining
changed its name to CDCP Mining Corporation (CDCP Mining). CDCP Mining secured the
Marubeni loans when CDCP and CDCP Mining were still privately owned and managed.
Subsequently in 1983, CDCP changed its corporate name to PNCC to reflect the extent of the
Governments equity investment in the company, which arose when government financial
institutions converted their loans to PNCC into equity following PNCCs inability to pay the
loans.12 Various government financial institutions held a total of seventy-seven point fortyeight percent (77.48%) of PNCCs voting equity, most of which were later transferred to the
Asset Privatization Trust (APT) under Administrative Orders No. 14 and 64, series of 1987
and 1988, respectively.13 Also, the Presidential Commission on Good Government holds
some 13.82% of PNCCs voting equity under a writ of sequestration and through the
voluntary surrender of certain PNCC shares. In fine, the Government owns 90.3% of the
equity of PNCC and only 9.70% of PNCCs voting equity is under private ownership.14

Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. On 20 October 2000,
during the short-lived Estrada Administration, the PNCC Board of Directors15 (PNCC Board)
passed Board Resolution No. BD-092-2000 admitting PNCCs liability to Marubeni for
P10,743,103,388 as of 30 September 1999. PNCC Board Resolution No. BD-092-2000 reads
as follows:

b). Marubeni Corporation in the amount of P10,743,103,388.00. (Emphasis supplied)

In January 2001, barely three months after the PNCC Board first admitted liability for the
Marubeni loans, Marubeni assigned its entire credit to Radstock for US$2 million or less
than P100 million. In short, Radstock paid Marubeni less than 10% of the P10.743 billion
admitted amount. Radstock immediately sent a notice and demand letter to PNCC.

RESOLUTION NO. BD-092-2000

RESOLVED, That the Board recognizes, acknowledges and confirms PNCCs obligations as of
September 30, 1999 with the following entities, exclusive of the interests and other charges
that may subsequently accrue and still become due therein, to wit:
a). the Government of the Republic of the Philippines in the amount of
P36,023,784,751.00; and
b). Marubeni Corporation in the amount of P10,743,103,388.00. (Emphasis supplied)
This was the first PNCC Board Resolution admitting PNCCs liability for the Marubeni loans.
Previously, for two decades the PNCC Board consistently refused to admit any liability for
the Marubeni loans.
Less than two months later, or on 22 November 2000, the PNCC Board passed Board
Resolution No. BD-099-2000 amending Board Resolution No. BD-092-2000. PNCC Board
Resolution No. BD-099-2000 reads as follows:

On 15 January 2001, Radstock filed an action for collection and damages against PNCC
before the Regional Trial Court of Mandaluyong City, Branch 213 (trial court). In its order of
23 January 2001, the trial court issued a writ of preliminary attachment against PNCC. The
trial court ordered PNCCs bank accounts garnished and several of its real properties
attached. On 14 February 2001, PNCC moved to set aside the 23 January 2001 Order and to
discharge the writ of attachment. PNCC also filed a motion to dismiss the case. The trial
court denied both motions. PNCC filed motions for reconsideration, which the trial court
also denied. PNCC filed a petition for certiorari before the Court of Appeals, docketed as CAG.R. SP No. 66654, assailing the denial of the motion to dismiss. On 30 August 2002, the
Court of Appeals denied PNCCs petition. PNCC filed a motion for reconsideration, which the
Court of Appeals also denied in its 22 January 2003 Resolution. PNCC filed a petition for
review before this Court, docketed as G.R. No. 156887.
Meanwhile, on 19 June 2001, at the start of the Arroyo Administration, the PNCC Board,
under a new President and Chairman, revoked Board Resolution No. BD-099-2000.
The trial court continued to hear the main case. On 10 December 2002, the trial court ruled
in favor of Radstock, as follows:

RESOLUTION NO. BD-099-2000

RESOLVED, That the Board hereby amends its Resolution No. BD-092-2000 dated October
20, 2000 so as to read as follows:
RESOLVED, That the Board recognizes, acknowledges and confirms its obligations as of
September 30, 1999 with the following entities, exclusive of the interests and other charges
that may subsequently accrue and still due thereon, subject to the final determination by
the Commission on Audit (COA) of the amount of obligation involved, and subject further to
the declaration of the legality of said obligations by the Office of the Government Corporate
Counsel (OGCC), to wit:
a). the Government of the Republic of the Philippines in the amount of
P36,023,784,751.00; and

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff

and the defendant is directed to pay the total amount of Thirteen Billion One Hundred Fifty
One Million Nine Hundred Fifty Six thousand Five Hundred Twenty Eight Pesos
(P13,151,956,528.00) with interest from October 15, 2001 plus Ten Million Pesos
(P10,000,000.00) as attorneys fees.
SO ORDERED.16
PNCC appealed the trial courts decision to the Court of Appeals, docketed as CA-G.R. CV No.
87971.
On 19 March 2003, this Court issued a temporary restraining order in G.R. No. 156887
forbidding the trial court from implementing the writ of preliminary attachment and

ordering the suspension of the proceedings before the trial court and the Court of Appeals.
In its 3 October 2005 Decision, this Court ruled as follows:
WHEREFORE, the petition is partly GRANTED and insofar as the Motion to Set Aside the
Order and/or Discharge the Writ of Attachment is concerned, the Decision of the Court of
Appeals on August 30, 2002 and its Resolution of January 22, 2003 in CA-G.R. SP No. 66654
are REVERSED and SET ASIDE. The attachments over the properties by the writ of
preliminary attachment are hereby ordered LIFTED effective upon the finality of this
Decision. The Decision and Resolution of the Court of Appeals are AFFIRMED in all other
respects. The Temporary Restraining Order is DISSOLVED immediately and the Court of
Appeals is directed to PROCEED forthwith with the appeal filed by PNCC.
No costs.
SO ORDERED.17
On 17 August 2006, PNCC and Radstock entered into the Compromise Agreement where
they agreed to reduce PNCCs liability to Radstock, supposedly from P17,040,843,968, to
P6,185,000,000. PNCC and Radstock submitted the Compromise Agreement to this Court for
approval. In a Resolution dated 4 December 2006 in G.R. No. 156887, this Court referred the
Compromise Agreement to the Commission on Audit (COA) for comment. The COA
recommended approval of the Compromise Agreement. In a Resolution dated 22 November
2006, this Court noted the Compromise Agreement and referred it to the Court of Appeals
in CA-G.R. CV No. 87971. In its 25 January 2007 Decision, the Court of Appeals approved the
Compromise Agreement.
STRADEC moved for reconsideration of the 25 January 2007 Decision. STRADEC alleged that
it has a claim against PNCC as a bidder of the National Governments shares, receivables,
securities and interests in PNCC. The matter is subject of a complaint filed by STRADEC
against PNCC and the Privatization and Management Office (PMO) for the issuance of a
Notice of Award of Sale to Dong-A Consortium of which STRADEC is a partner. The case,
docketed as Civil Case No. 05-882, is pending before the Regional Trial Court of Makati,
Branch 146 (RTC Branch 146).
The Court of Appeals treated STRADECs motion for reconsideration as a motion for
intervention and denied it in its 31 May 2007 Resolution. STRADEC filed a petition for review
before this Court, docketed as G.R. No. 178158.

Rodolfo Cuenca (Cuenca), a stockholder and former PNCC President and Board Chairman,
filed an intervention before the Court of Appeals. Cuenca alleged that PNCC had no
obligation to pay Radstock. The Court of Appeals also denied Cuencas motion for
intervention in its Resolution of 31 May 2007. Cuenca did not appeal the denial of his
motion.
On 2 July 2007, this Court issued an order directing PNCC and Radstock, their officers,
agents, representatives, and other persons under their control, to maintain the status quo
ante.
Meanwhile, on 20 February 2007, Sison, also a stockholder and former PNCC President and
Board Chairman, filed a Petition for Annulment of Judgment Approving Compromise
Agreement before the Court of Appeals. The case was docketed as CA-G.R. SP No. 97982.
Asiavest, a judgment creditor of PNCC, filed an Urgent Motion for Leave to Intervene and to
File the Attached Opposition and Motion-in-Intervention before the Court of Appeals in CAG.R. SP No. 97982.
In a Resolution dated 12 June 2007, the Court of Appeals dismissed Sisons petition on the
ground that it had no jurisdiction to annul a final and executory judgment also rendered by
the Court of Appeals. In the same resolution, the Court of Appeals also denied Asiavests
urgent motion.
Asiavest filed its Urgent Motion for Leave to Intervene and to File the Attached Opposition
and Motion-in-Intervention in G.R. No. 178158.18
Sison filed a motion for reconsideration. In its 5 November 2007 Resolution, the Court of
Appeals denied Sisons motion.
On 26 November 2007, Sison filed a petition for review before this Court, docketed as G.R.
No. 180428.
In a Resolution dated 18 February 2008, this Court consolidated G.R. Nos. 178158 and
180428.
On 13 January 2009, the Court held oral arguments on the following issues:
1. Does the Compromise Agreement violate public policy?

2. Does the subject matter involve an assumption by the government of a private entitys
obligation in violation of the law and/or the Constitution? Is the PNCC Board Resolution of
20 October 2000 defective or illegal?

Phil. 722 (1995)], the motion for intervention filed by the Republic of the Philippines was
allowed by this Court to avoid grave injustice and injury and to settle once and for all the
substantive issues raised by the parties.21

3. Is the Compromise Agreement viable in the light of the non-renewal of PNCCs

franchise by Congress and its inclusion of all or substantially all of PNCCs assets?

In Collado v. Court of Appeals,22 this Court reiterated that exceptions to Section 2, Rule 12
could be made in the interest of substantial justice. Citing Mago v. Court of Appeals,23 the
Court stated:

4. Is the Decision of the Court of Appeals annullable even if final and executory on grounds
of fraud and violation of public policy and the Constitution?
III.
Propriety of Actions
The Court of Appeals denied STRADECs motion for intervention on the ground that the
motion was filed only after the Court of Appeals and the trial court had promulgated their
respective decisions.
Section 2, Rule 19 of the 1997 Rules of Civil Procedure provides:
SECTION 2. Time to intervene.The motion to intervene may be filed at any time before
rendition of judgment by the trial court. A copy of the pleading-in-intervention shall be
attached to the motion and served on the original parties.
The rule is not absolute. The rule on intervention, like all other rules of procedure, is
intended to make the powers of the Court completely available for justice.19 It is aimed to
facilitate a comprehensive adjudication of rival claims, overriding technicalities on the
timeliness of the filing of the claims.20 This Court has ruled:
[A]llowance or disallowance of a motion for intervention rests on the sound discretion of
the court after consideration of the appropriate circumstances. Rule 19 of the Rules of Court
is a rule of procedure whose object is to make the powers of the court fully and completely
available for justice. Its purpose is not to hinder or delay but to facilitate and promote the
administration of justice. Thus, interventions have been allowed even beyond the
prescribed period in the Rule in the higher interest of justice. Interventions have been
granted to afford indispensable parties, who have not been impleaded, the right to be heard
even after a decision has been rendered by the trial court, when the petition for review of
the judgment was already submitted for decision before the Supreme Court, and even
where the assailed order has already become final and executory. In Lim v. Pacquing (310

It is quite clear and patent that the motions for intervention filed by the movants at this
stage of the proceedings where trial had already been concluded x x x and on appeal x x x
the same affirmed by the Court of Appeals and the instant petition for certiorari to review
said judgments is already submitted for decision by the Supreme Court, are obviously and,
manifestly late, beyond the period prescribed under x x x Section 2, Rule 12 of the Rules of
Court.
But Rule 12 of the Rules of Court, like all other Rules therein promulgated, is simply a rule of
procedure, the whole purpose and object of which is to make the powers of the Court fully
and completely available for justice. The purpose of procedure is not to thwart justice. Its
proper aim is to facilitate the application of justice to the rival claims of contending parties.
It was created not to hinder and delay but to facilitate and promote the administration of
justice. It does not constitute the thing itself which courts are always striving to secure to
litigants. It is designed as the means best adopted to obtain that thing. In other words, it is a
means to an end.
Concededly, STRADEC has no legal interest in the subject matter of the Compromise
Agreement. Section 1, Rule 19 of the 1997 Rules of Civil Procedure states:
SECTION 1. Who may intervene.A person who has a legal interest in the matter in
litigation, or in the success of either of the parties, or an interest against both, or is so
situated as to be adversely affected by a distribution or other disposition of property in the
custody of the court or of an officer thereof may, with leave of court, be allowed to
intervene in the action. The Court shall consider whether or not the intervention will unduly
delay or prejudice the adjudication of the rights of the original parties, and whether or not
the intervenors rights may be fully protected in a separate proceeding.
STRADECs interest is dependent on the outcome of Civil Case No. 05-882. Unless STRADEC
can show that RTC Branch 146 had already decided in its favor, its legal interest is simply
contingent and expectant.

However, Asiavest has a direct and material interest in the approval or disapproval of the
Compromise Agreement. Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a
court has already issued a writ of execution in its favor. Asiavests interest is actual and
material, direct and immediate characterized by either gain or loss from the judgment that
this Court may render.24 Considering that the Compromise Agreement involves the
disposition of all or substantially all of the assets of PNCC, Asiavest, as PNCCs judgment
creditor, will be greatly prejudiced if the Compromise Agreement is eventually upheld.
Sison has legal standing to challenge the Compromise Agreement. Although there was no
allegation that Sison filed the case as a derivative suit in the name of PNCC, it could be fairly
deduced that Sison was assailing the Compromise Agreement as a stockholder of PNCC. In
such a situation, a stockholder of PNCC can sue on behalf of PNCC to annul the Compromise
Agreement.

of Appeals approved the Compromise Agreement on 25 January 2007. To require Sison at

this stage to exhaust all the remedies within the corporation will render such remedies
useless as the Compromise Agreement had already been approved by the Court of Appeals.
PNCCs assets are in danger of being dissipated in favor of a private foreign corporation.
Thus, Sison had no recourse but to avail of an extraordinary remedy to protect PNCCs
assets.
Besides, in the interest of substantial justice and for compelling reasons, such as the nature
and importance of the issues raised in this case,30 this Court must take cognizance of
Sisons action. This Court should exercise its prerogative to set aside technicalities in the
Rules, because after all, the power of this Court to suspend its own rules whenever the
interest of justice requires is well recognized.31 In Solicitor General v. The Metropolitan
Manila Authority,32 this Court held:

A derivative action is a suit by a stockholder to enforce a corporate cause of action.25 Under

the Corporation Code, where a corporation is an injured party, its power to sue is lodged
with its board of directors or trustees.26 However, an individual stockholder may file a
derivative suit on behalf of the corporation to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold
control of the corporation.27 In such actions, the corporation is the real party-in-interest
while the suing stockholder, on behalf of the corporation, is only a nominal party.28

Unquestionably, the Court has the power to suspend procedural rules in the exercise of its
inherent power, as expressly recognized in the Constitution, to promulgate rules concerning
pleading, practice and procedure in all courts. In proper cases, procedural rules may be
relaxed or suspended in the interest of substantial justice, which otherwise may be
miscarried because of a rigid and formalistic adherence to such rules. x x x

In this case, the PNCC Board cannot conceivably be expected to attack the validity of the
Compromise Agreement since the PNCC Board itself approved the Compromise Agreement.
In fact, the PNCC Board steadfastly defends the Compromise Agreement for allegedly being
advantageous to PNCC.

Be it remembered that rules of procedure are but mere tools designed to facilitate the
attainment of justice. Their strict and rigid application, which would result in technicalities
that tend to frustrate rather than promote substantial justice, must always be avoided. x x x
Time and again, this Court has suspended its own rules and excepted a particular case from
their operation whenever the higher interests of justice so require.

Besides, the circumstances in this case are peculiar. Sison, as former PNCC President and
Chairman of the PNCC Board, was responsible for the approval of the Board Resolution
issued on 19 June 2001 revoking the previous Board Resolution admitting PNCCs liability for
the Marubeni loans.29 Such revocation, however, came after Radstock had filed an action
for collection and damages against PNCC on 15 January 2001. Then, when the trial court
rendered its decision on 10 December 2002 in favor of Radstock, Sison was no longer the
PNCC President and Chairman, although he remains a stockholder of PNCC.
When the case was on appeal before the Court of Appeals, there was no need for Sison to
avail of any remedy, until PNCC and Radstock entered into the Compromise Agreement,
which disposed of all or substantially all of PNCCs assets. Sison came to know of the
Compromise Agreement only in December 2006. PNCC and Radstock submitted the
Compromise Agreement to the Court of Appeals for approval on 10 January 2007. The Court

We have made similar rulings in other cases, thus:

IV.
The
PNCC
Board
Acted
in
Negligence in Directing the Affairs of PNCC

Bad

Faith

and

with

Gross

In this jurisdiction, the members of the board of directors have a three-fold duty: duty of
obedience, duty of diligence, and duty of loyalty.33 Accordingly, the members of the board
of directors (1) shall direct the affairs of the corporation only in accordance with the
purposes for which it was organized;34 (2) shall not willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or act in bad faith or with gross

negligence in directing the affairs of the corporation;35 and (3) shall not acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees.36
In the present case, the PNCC Board blatantly violated its duty of diligence as it miserably
failed to act in good faith in handling the affairs of PNCC.

SEN. DRILON. That is correct. So, that it was an obligation which was not recognized in the
financial statements of PNCC but revivedin the financial statements because it has
prescribed but revived by the board effectively. Thats the theory, at least, of the plaintiff.
Is that correct? Who can answer that?
Ms. Pasetes, yes.

First. For almost two decades, the PNCC Board had consistently refused to admit liability
for the Marubeni loans because of the absence of a PNCC Board resolution authorizing the
issuance of the letters of guarantee.

MS. PASETES. It is not an obligation of PNCC that is why it is not reflected in the financial
statements.39 (Emphasis supplied)

There is no dispute that between 1978 and 1980, Marubeni Corporation extended two loans
to Basay Mining (later renamed CDCP Mining): (1) US$5 million to finance the purchase of
copper concentrates by Basay Mining; and (2) Y5.46 billion to finance the completion of the
expansion project of Basay Mining including working capital.

In short, after two decades of consistently refuting its liability for the Marubeni loans, the
PNCC Board suddenly and inexplicably reversed itself by admitting in October 2000 liability
for the Marubeni loans. Just three months after the PNCC Board recognized the Marubeni
loans, Radstock acquired Marubenis receivable and filed the present collection case.

There is also no dispute that it was only on 20 October 2000 when the PNCC Board
approved a resolution expressly admitting PNCCs liability for the Marubeni loans. This was
the first Board Resolution admitting liability for the Marubeni loans, for PNCC never
admitted liability for these debts in the past. Even Radstock admitted that

Second. The PNCC Board admitted liability for the Marubeni loans despite PNCCs total
liabilities far exceeding its assets. There is no dispute that the Marubeni loans, once
recognized, would wipe out the assets of PNCC, virtually emptying the coffers of the
PNCC.40 While PNCC insists that it remains financially viable, the figures in the COA Audit
Reports tell otherwise.41 For 2006 and 2005, the Corporation has incurred negative gross
margin of P84.531 Million and P80.180 Million, respectively, and net losses that had
accumulated in a deficit of P14.823 Billion as of 31 December 2006.42 The COA even
opined that unless [PNCC] Management addresses the issue on net losses in its financial
rehabilitation plan, x x x the Corporation may not be able to continue its operations as a
going concern.

PNCCs 1994 Financial Statements did not reflect the Marubeni loans.37 Also, former PNCC
Chairman Arthur Aguilar stated during the Senate hearings that the Marubeni claim was
never in the balance sheet x x x nor was it in a contingent account.38 Miriam M. Pasetes,
SVP Finance of PNCC, and Atty. Herman R. Cimafranca of the Office of the Government
Corporate Counsel, confirmed this fact, thus:
SEN. DRILON. x x x And so, PNCC itself did not recognize this as an obligation but the board
suddenly recognized it as an obligation. It was on that basis that the case was filed, is that
correct? In fact, the case hinges onthey knew that this claim has prescribed but because
of that board resolution which recognized the obligation they filed their complaint, is that
correct?
MR. CIMAFRANCA. Apparently, its like that, Senator, because the filing of the case came
after the acknowledgement.

Notably, during the oral arguments before this Court, the Government Corporate Counsel
admitted the PNCCs huge negative net worth, thus:
JUSTICE CARPIO
x x x what is the net worth now of PNCC? Negative what? Negative 6 Billion
at least[?]
ATTY. AGRA

SEN. DRILON. Yes. In fact, the filing of the case came three months after the
acknowledgement.
MR. CIMAFRANCA. Yes. And that made it difficult to handle on our part.

Yes, your Honor.43 (Emphasis supplied)

Clearly, the PNCC Boards admission of liability for the Marubeni loans, given PNCCs huge
negative net worth of at least P6 billion as admitted by PNCCs counsel, or P14.823 billion
based on the 2006 COA Audit Report, would leave PNCC an empty shell, without any assets
to pay its biggest creditor, the National Government with an admitted receivable of P36
billion from PNCC.

MS. OGAN. On record, Mr. Chairman, we have demands starting froma series of demands
which started from May 23, 1984, letter from Marubeni to PNCC, demand payment. And we
also have the letter of September 3, 1986, letter of Marubeni to then PNCC Chair Mr. Jaime.
We have the June 24, 1986 letter from Marubeni to the PNCC Chairman. Also the March 4,
1988 letter...

Third. In a debilitating self-inflicted injury, the PNCC Board revived what appeared to have
been a dead claim by abandoning one of PNCCs strong defenses, which is the prescription
of the action to collect the Marubeni loans.

SEN. DRILON. The March 4, 1988 letter is not a demand letter.

Settled is the rule that actions prescribe by the mere lapse of time fixed by law.44 Under
Article 1144 of the Civil Code, an action upon a written contract, such as a loan contract,
must be brought within ten years from the time the right of action accrues. The prescription
of such an action is interrupted when the action is filed before the court, when there is a
written extrajudicial demand by the creditor, or when there is any written acknowledgment
of the debt by the debtor.45

SEN. DRILON. It is not a demand letter? Okay.

In this case, Basay Mining obtained the Marubeni loans sometime between 1978 and 1981.
While Radstock claims that numerous demand letters were sent to PNCC, based on the
records, the extrajudicial demands to pay the loans appear to have been made only in 1984
and 1986. Meanwhile, the written acknowledgment of the debt, in the form of Board
Resolution No. BD-092-2000, was issued only on 20 October 2000.
Thus, more than ten years would have already lapsed between Marubenis extrajudicial
demands in 1984 and 1986 and the acknowledgment by the PNCC Board of the Marubeni
loans in 2000. However, the PNCC Board suddenly passed Board Resolution No. BD-0922000 expressly admitting liability for the Marubeni loans. In short, the PNCC Board admitted
liability for the Marubeni loans despite the fact that the same might no longer be judicially
collectible. Although the legal advantage was obviously on its side, the PNCC Board threw in
the towel even before the fight could begin. During the Senate hearings, the matter of
prescription was discussed, thus:
SEN. DRILON. ... the prescription period is 10 years and there were no paymentsthe last
demands were made, when? The last demands for payment?
MS. OGAN. It was made January 2001 prior to the filing of the case.
SEN. DRILON. Yes, all right. Before that, when was the last demand made? By the time they
filed the complaint more than 10 years already lapsed.

MS. OGAN. It is exactly addressed to the Asset Privatization Trust.

MS. OGAN. And we have also...

SEN. DRILON. Anyway...465
VOL. 607, DECEMBER 4, 2009
465
Strategic Alliance Development Corporation vs. Radstock Securities Limited
THE CHAIRMAN. Please answer when you are asked, Ms. Ogan. We want to put it on the
record whether it is yes or no.
MS. OGAN. Yes, sir.
SEN. DRILON. So, even assuming that all of those were demand letters, the 10 years
prescription set in and it should have prescribed in 1998, whatever is the date, or before the
case was filed in 2001.
MR. CIMAFRANCA. The 10-year period forif the contract is written, its 10 years and it
should have prescribed in 10 years and we did raise that in our answer, in our motion to
dismiss.
SEN. DRILON. I know. You raised this in your motion to dismiss and you raised this in your
answer. Now, we are not saying that you were negligent in not raising that. What we are
just putting on the record that indeed there is basis to argue that these claims have
prescribed.

Now, the reason why there was a colorable basis on the complaint filed in 2001 was that
somehow the board of PNCC recognized the obligation in a special board meeting on
October 20, 2000. Hindi ba ganoon yon?
MS. OGAN. Yes, that is correct.
SEN. DRILON. Why did the PNCC recognize this obligation in 2000 when it was very clear
that at that point more than 10 years have lapsed since the last demand letter?
MR. AGUILAR. May I volunteer an answer?

SEN. DRILON. You mean, you acknowledged a prescribed obligation because of this
paragraph?
MR. AGUILAR. I dont know what legal advice we were following at that time, Mr.
Chairman.46 (Emphasis supplied)
Besides prescription, the Office of the Government Corporate Counsel (OGCC) originally
believed that PNCC had another formidable legal weapon against Radstock, that is, the lack
of authority of Alfredo Asuncion, then Executive Vice-President of PNCC, to sign the letter of
guarantee on behalf of CDCP. During the Senate hearings, the following exchange reveals
the OGCCs original opinion:

SEN. DRILON. Please.

THE CHAIRMAN. What was the opinion of the Office of the Government Corporate Counsel?
MR. AGUILAR. I looked into that, Mr. Chairman, Your Honor. It was as a result of and I go
to the folder letter N. In our own demand research it was not period, Your Honor, that
Punongbayan in the big folder, sir, letter N it was the period where PMO was selling
PNCC and Punongbayan and Araullo Law Office came out with an investment brochure
that indicated liabilities both to national government and to Marubeni/Radstock. So, PMO
said, For good order, can you PNCC board confirm that by board resolution? Thats the
tone of the letter.
SEN. DRILON. Confirm what? Confirm the liabilities that are contained in the Punongbayan
investment prospectus both to the national government and to PNCC. That is the reason at
least from the record, Your Honor, how the PNCC board got to deliberate on the
Marubeni466
466 SUPREME COURT REPORTS ANNOTATED
Strategic Alliance Development Corporation vs. Radstock Securities Limited
THE CHAIRMAN. What paragraph? Second to the last paragraph?
MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po yongthats to our recollection, in the
records, that was the reason.
SEN. DRILON. Is that the only reason why ...
MR. AGUILAR. From just the records, Mr. Chairman, and then interviews with people who
are still around.

MS. OGAN. The opinion of the Office of the Government Corporate Counsel is that PNCC
should exhaust all means to resist the case using all defenses available to a guarantee and a
surety that there is a valid ground for PNCCs refusal to honor or make good the alleged
guarantee obligation. It appearing that from the documents submitted to the OGCC that
there is no board authority in favor or authorizing Mr. Asuncion, then EVP, to sign or
execute the letter of guarantee in behalf of CDCP and that said letter of guarantee is not
legally binding upon or enforceable against CDCP as principals, your Honors.47
xxxx
SEN. DRILON. Now that we have read this, what was the opinion of the Government
Corporate Counsel, Mr. Cimafranca?
MR. CIMAFRANCA. Yes, Senator, we did issue an opinion upon the request of PNCC and
our opinion was that there was no valid obligation, no valid guarantee. And we
incorporated that in our pleadings in court.48 (Emphasis supplied)
Clearly, PNCC had strong defenses against the collection suit filed by Radstock, as originally
opined by the OGCC. It is quite puzzling, therefore, that the PNCC Board, which had solid
grounds to refute the legitimacy of the Marubeni loans, admitted its liability and entered
into a Compromise Agreement that is manifestly and grossly prejudicial to PNCC.
Fourth. The basis for the admission of liability for the Marubeni loans, which was an
opinion of the Feria Law Office, was not even shown to the PNCC Board.

Atty. Raymundo Francisco, the APT trustee overseeing the proposed privatization of PNCC at
the time, was responsible for recommending to the PNCC Board the admission of PNCCs
liability for the Marubeni loans. Atty. Francisco based his recommendation solely on a
mere alleged opinion of the Feria Law Office. Atty. Francisco did not bother to show this
Feria opinion to the members of the PNCC Board, except to Atty. Renato Valdecantos,
who as the then PNCC Chairman did not also show the Feria opinion to the other PNCC
Board members. During the Senate hearings, Atty. Francisco could not produce a copy of
the Feria opinion. The Senators grilled Atty. Francisco on his recommendation to
recognize PNCCs liability for the Marubeni loans, thus:

MR. FRANCISCO. That is what we usually do, sir, in the APT.

THE CHAIRMAN. x x x You were the one who wrote this letter or rather this memorandum
dated 17 October 2000 to Atty. Valdecantos. Can you tell us the background why you wrote
the letter acknowledging a debt which is non-existent?

THE CHAIRMAN. So, on the basis of the opinion of outside counsel, private, you proceeded
to, in effect, recognize an obligation which is not even entered in the books of the PNCC?
You probably resuscitated a non-existing obligation anymore?

MR. FRANCISCO. I was appointed as the trustee in charge of the privatization of the PNCC at
that time, sir. And I was tasked to do a study and engage the services of financial advisors as
well as legal advisors to do a legal audit and financial study on the position of PNCC. I bidded
out these engagements, the financial advisership went to Punongbayan and Araullo. The
legal audit went to the Feria Law Offices.

MR. FRANCISCO. Sir, I just based my recommendation on the professional findings of the
law office that we engaged, sir.

THE CHAIRMAN. Spell it. Boy Feria?

MR. FRANCISCO. FeriaFeria.
THE CHAIRMAN. Lugto?
MR. FRANCISCO. Yes. Yes, Your Honor. And this was the findings of the Feria Law Office
that the Marubeni account was a legal obligation.
So, I presented this to our board. Based on the findings of the legal audit conducted by the
Ferial Law Offices, sir.
THE CHAIRMAN. Why did you not ask the government corporate counsel? Why did you
have to ask for the opinion of an outside counsel?
MR. FRANCISCO. That was thethat was the mandate given to us, sir, that we have to
engage the ...
THE CHAIRMAN. Mandate given by whom?

THE CHAIRMAN. Ah, you get outside counsel?

MR. FRANCISCO. Yes, we...
THE CHAIRMAN. Not necessarily the government corporate counsel?
MR. FRANCISCO. No, sir.

THE CHAIRMAN. Did you not ask for the opinion of the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. Why?
MR. FRANCISCO. I felt that the engagements of the law office was sufficient, anyway we
were going to raise it to the Committee on Privatization for their approval or disapproval,
sir.
THE CHAIRMAN. The COP?
MR. FRANCISCO. Yes, sir.469
THE CHAIRMAN. Thats a cabinet level?
MR. FRANCISCO. Yes, sir. And we did that, sir.
THE CHAIRMAN. Now... So you sent your memo to Atty. Renato B. Valdecantos, who
unfortunately is not here but I think we have to get his response to this. And as part of the
minutes of special meeting with the board of directors on October 20, 2000, the board
resolved in its Board Resolution No. 092-2000, the board resolved to recognize,

acknowledge and confirm PNCCs obligations as of September 30, 1999, etcetera, etcetera.
(A), or rather (B), Marubeni Corporation in the amount of P10,740,000.

MR. FRANCISCO. Yes, sir. But Id like to be refreshed on the memorandum, sir, because I
dont have a copy.

Now, we asked to be here because the franchise of PNCC is hanging in a balance because of
theon the questions on this acknowledgement. So we want to be educated.

SEN. DRILON. Yes, this memorandum was cited earlier by Senator Arroyo, and maybe the
secretary can give him a copy? Give him a copy?

Now, the paper trail starts with your letter. So, thats itthats my kuwan, Frank.

MS. OGAN. (Handing the document to Mr. Francisco.)

Yes, Senator Drilon.

MR. FRANCISCO. Your Honor, I have here a memorandum to the PNCC board through Atty.
Valdecantos, which says thatin the last paragraph, if I may read? May we request
therefore, that a board resolution be adopted, acknowledging and confirming the
aforementioned PNCC obligations with the national government and Marubeni as borne out
by the due diligence audit.

SEN. DRILON. Thank you, Mr. Chairman.

Yes, Atty. Francisco, you have a copy of the minutes of October 20, 2000?
MR. FRANCISCO. Im sorry, sir, we dont have a copy.

SEN. DRILON. This is the memorandum referred to in these minutes. This memorandum
dated 17 October 2000 is the memorandum referred to in the minutes.

SEN. DRILON. May we ask the corporate secretary of PNCC to provide us with a copy?
MR. FRANCISCO. I would assume, Mr. Chairman.
Okay naman andiyan siya.
SEN. DRILON. Right.
(Ms. Ogan handing the document to Mr. Francisco.)
Now, the Punongbayan representative who was here yesterday, Mr...
You have familiarized yourselves with the minutes, Atty. Francisco?
THE CHAIRMAN. Navarro.
MR. FRANCISCO. Yes, sir.
SEN. DRILON. ... Navarro denied that he made this recommendation.
SEN. DRILON. Now, mention is made of a memorandum here on line 8, page 3 of this
boards minutes. It says, Director Francisco has prepared a memorandum requesting
confirmation, acknowledgement, and ratification of this indebtedness of PNCC to the
national government which was determined by Bureau of Treasury as of September 30,
1999 is 36,023,784,751. And with respect to PNCCs obligation to Marubeni, this has been
determined to be in the total amount of 10,743,103,388, also as of September 30, 1999;
that there is need to ratify this because there has already been a representation made with
respect to the review of the financial records of PNCC by Punongbayan and Araullo, which
have been included as part of the package of APTs disposition to the national governments
interest in PNCC.470
You recall having made this representation as found in the minutes, I assume, Atty.
Francisco?

THE CHAIRMAN. He asked for opinion, legal opinion.

SEN. DRILON. He said that they never made this representation and the transcript will bear
us out. They said that they never made this representation that the account of Marubeni
should be recognized.
MR. FRANCISCO. Mr. Chairman, in the memorandum, I only mentioned here the
acknowledgement and confirmation of the PNCC obligations. I was not asking for a
ratification. I never mentioned ratification in the memorandum. I just based my memo
based on the due diligence audit of the Feria Law Offices.
SEN. DRILON. Can you say that again? You never asked for a ratification...

MR. FRANCISCO. No. I never mentioned in my memorandum that I was asking for a
ratification. I was just in my memo it says, acknowledging and confirming the PNCC
obligation. This was what ...471

THE CHAIRMAN. ... but yet the action ofor rather the opinion of the Feria Law Offices was
in effect adopted by the board of directors of PNCC in its minutes of October 20, 2000
where you are the corporate secretary, Ms. Ogan.

VOL. 607, DECEMBER 4, 2009

471
Strategic Alliance Development Corporation vs. Radstock Securities Limited

MS. OGAN. Yes, Mr. Chairman.

SEN. DRILON. Isnt it the same as ratification? I mean, whats the difference?
MR. FRANCISCO. Iwell, my memorandum was meant really just to confirm the findings of
the legal audit as ...
SEN. DRILON. In your mind as a lawyer, Atty. Francisco, theres a difference between
ratification andwhats your term?acknowledgment and confirmation?
MR. FRANCISCO. Well, I guess theres no difference, Mr. Chairman.
SEN. DRILON. Right.
Anyway, just of record, the Punongbayan representatives here yesterday said that they
never made such representation.
In any case, now youre saying its the Feria Law Office who rendered that opinion? Can we
you know, yesterday we were asking for a copy of this opinion but we were never
furnished one. The ... no less than the Chairman of this Committee was asking for a copy.
THE CHAIRMAN. Well, copy of the opinion...
MS. OGAN. Yes, Mr. Chairman, we were never furnished a copy of this opinion because
its opinion rendered for the Asset Privatization Trust which is its client, not the PNCC, Mr.
Chairman.
THE CHAIRMAN. All right. The question is whetherbut you see, this is a memorandum of
Atty. Francisco to the Chairman of the Asset Privatization Trust. You say now that you were
never furnished a copy because thats supposed to be with the Asset ...
MS. OGAN. Yes, Mr. Chairman.

THE CHAIRMAN. So, what I am saying is that this opinion or rather the opinion of the Feria
Law Offices of which you dont have a copy?
MS. OGAN. Yes, sir.
THE CHAIRMAN. And the reason being that, it does not concern the PNCC because thats an
opinion rendered for APT and not for the PNCC.472
MS. OGAN. Yes, Mr. Chairman, that was what we were told although we made several
requests to the APT, sir.
THE CHAIRMAN. All right. Now, since it was for the APT and not for the PNCC, I ask the
question why did PNCC adopt it? That was not for the consumption of PNCC. It was for the
consumption of the Asset Privatization Trust. And that is what Atty. Francisco says and its
confirmed by you saying that this was a memoyou dont have a copy because this was
sought for by APT and the Feria Law Offices just provided an opinionprovided the APT
with an opinion. So, as corporate secretary, the board of directors of PNCC adopted it,
recognized the Marubeni Corporation.
You read the minutes of the October 20, 2000 meeting of the board of directors on Item V.
The resolution speaks of .. so, go ahead.
MS. OGAN. I gave my copies. Yes, sir.
THE CHAIRMAN. In effect the Feria Law Offices opinion was for the consumption of the
APT.
MS. OGAN. That was what we were told, Mr. Chairman.
THE CHAIRMAN. And you were not even provided with a copy.
THE CHAIRMAN. Yet you adopted it.

MS. OGAN. Yes, sir.

SEN DRILON. Considering you were the corporate secretary.
THE CHAIRMAN. She was the corporate secretary.

SEN. DRILON. Apparently, [it] just ended up in the personal possession of Mr. Valdecantos
because the corporate secretary, Glenda Ogan, who is supposed to be the custodian of the
records of the board never saw a copy of this.
MR. FRANCISCO. Well, sir, mythe copy that I gave was to Mr. Valdecantos because he
was the one sitting in the PNCC board, sir.

SEN. DRILON. She was just recording the minutes.

SEN. DRILON. No, you sit in the board.
THE CHAIRMAN. Yes, she was recording.
Now, we are asking you now why it was taken up?

MR. FRANCISCO. I was just an ex-officio member. And all my reports were coursed
through our Chairman, Mr. Valdecantos, sir.

MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned in the memorandum of Atty.
Francisco, memorandum to the board.

SEN. DRILON. Now, did you ever tell the board that there is a legal position taken or at
least from the documents it is possible that the claim has prescribed?

SEN. DRILON. Mr. Chairman, Mr. Francisco represented APT in the board of PNCC. And is
that correct, Mr. Francisco?

MR. FRANCISCO. I took this up in the board meeting of the PNCC at that time and I told
them about this matter, sir.

THE CHAIRMAN. Youre an ex-officio member.

SEN. DRILON. No, you told them that the claim could have, under the law, could have
prescribed?

SEN. DRILON. Yes.

MR. FRANCISCO. No, sir.
MR. FRANCISCO. Ex-officio member only, sir, as trustee in charge of the privatization of
PNCC.

SEN. DRILON. Why? You mean, you didnt tell the board that it is possible that this liability
is no longer a valid liability because it has prescribed?474

SEN. DRILON. With the permission of Mr. Chair, may I ask a question...473
THE CHAIRMAN. Oh, yes, Senator Drilon.
SEN. DRILON. Atty. Francisco, you sat in the PNCC board as APT representative, you are a
lawyer, there was a legal opinion of Feria, Feria, Lugto, Lao Law Offices which you cited in
your memorandum. Did you discussfirst, did you give a copy of this opinion to PNCC?
MR. FRANCISCO. I gave a copy of this opinion, sir, to our chairman who was also a
member of the board of PNCC, Mr. Valdecantos, sir.

MR. FRANCISCO. I did not dwell into the findings anymore, sir, because I found the
professional opinion of the Feria Law Office to be sufficient.49 (Emphasis supplied)
Atty. Franciscos act of recommending to the PNCC Board the acknowledgment of the
Marubeni loans based only on an opinion of a private law firm, without consulting the OGCC
and without showing this opinion to the members of the PNCC Board except to Atty.
Valdecantos, reflects how shockingly little his concern was for PNCC, contrary to his claim
that he only had the interest of PNCC at heart. In fact, if what was involved was his own
money, Atty. Francisco would have preferred not just two, but at least three different
opinions on how to deal with the matter, and he would have maintained his non-liability.

SEN. DRILON. And because he was...

SEN. OSMEA. x x x
MR. FRANCISCO. Because he was my immediate boss in the APT.

All right. And lastly, just to clear our minds, there has always been this finger-pointing, of
course, wheneverthis is typical Filipino. When theyre caught in a bind, they always point
a finger, they pretend they dont know. And it just amazes me that you have been appointed
trustees, meaning, representatives of the Filipino people, thats what you were at APT,
right? You were not Eraps representatives, you were representative of the Filipino people
and you were tasked to conserve the assets that that had been confiscated from various
cronies of the previous administration. And here, you are asked to recognize the P10 billion
debt and you point only to one law firm. If you have cancer, dont you to a second opinion, a
second doctor or a third doctor? This is just a question. I am just asking you for your opinion
if you would take the advice of the first doctor who tells you that hes got to open you up.

Instead, the PNCC Board admitted PNCCs liability for the Marubeni loans relying solely on a
mere opinion of a private law office, which opinion the PNCC Board members never saw,
except for Atty. Valdecantos and Atty. Francisco. The PNCC Board knew that PNCC, as a
government owned and controlled corporation (GOCC), must rely exclusively on the
opinion of the OGCC. Section 1 of Memorandum Circular No. 9 dated 27 August 1998 issued
by the President states:
SECTION 1. All legal matters pertaining to government-owned or controlled
corporations, their subsidiaries, other corporate off-springs and government acquired asset
corporations (GOCCs) shall be exclusively referred to and handled by the Office of the
Government Corporate Counsel (OGCC). (Emphasis supplied)

MR. FRANCISCO. I would go to three or more doctors, sir.

SEN. OSMEA. Three or more. Yeah, thats right. And in this case the APT did not do so.
MR. FRANCISCO. We relied on the findings of the
SEN. OSMEA. If these were your money, would you have gone also to obtain a second,
third opinion from other law firms. Kung pera mo itong 10 billion na ito. Siguro youre not
gonna give it up that easily ano, di ba?

The PNCC Board acted in bad faith in relying on the opinion of a private lawyer knowing that
PNCC is required to rely exclusively on the OGCCs opinion. Worse, the PNCC Board, in
admitting liability for P10.743 billion, relied on the recommendation of a private lawyer
whose opinion the PNCC Board members have not even seen.
During the oral arguments, Atty. Sison explained to the Court that the intention of APT was
for the PNCC Board merely to disclose the claim of Marubeni as part of APTs full disclosure
policy to prospective buyers of PNCC. Atty. Sison stated that it was not the intention of APT
for the PNCC Board to admit liability for the Marubeni loans, thus:

MR. FRANCISCO. Yes, sir.

SEN. OSMEA. Youll probably keep it in court for the next 20 years.
x x x x50 (Emphasis supplied)
This is a clear admission by Atty. Francisco of bad faith in directing the affairs of PNCCthat
he would not have recognized the Marubeni loans if his own funds were involved or if he
were the owner of PNCC.
The PNCC Board admitted liability for the P10.743 billion Marubeni loans without seeing,
reading or discussing the Feria opinion which was the sole basis for its admission of
liability. Such act surely goes against ordinary human nature, and amounts to gross
negligence and utter bad faith, even bordering on fraud, on the part of the PNCC Board in
directing the affairs of the corporation. Owing loyalty to PNCC and its stockholders, the
PNCC Board should have exercised utmost care and diligence in admitting a gargantuan debt
of P10.743 billion that would certainly force PNCC into insolvency, a debt that previous
PNCC Boards in the last two decades consistently refused to admit.

x x x It was the Asset Privatization Trust A-P-T that was tasked to sell the company. The AP-T, for purposes of disclosure statements, tasked the Feria Law Office to handle the
documentation and the study of all legal issues that had to be resolved or clarified for the
information of prospective bidders and or buyers. In the performance of its assigned task
the Feria Law Office came upon the Marubeni claim and mentioned that the APTC and/or
PNCC must disclose that there is a claim by Marubeni against PNCC for purposes of
satisfying the requirements of full disclosure. This seemingly innocent statement or
requirement made by the Feria Law Office was then taken by two officials of the Asset
Privatization Trust and with malice aforethought turned it into the basis for a multi-billion
peso debt by the now government owned and/or controlled PNCC. x x x.51 (Emphasis
supplied)
While the PNCC Board passed Board Resolution No. BD-099-2000 amending Board
Resolution No. BD-092-2000, such amendment merely added conditions for the recognition
of the Marubeni loans, namely, subjecting the recognition to a final determination by COA
of the amount involved and to the declaration by OGCC of the legality of PNCCs liability.
However, the PNCC Board reiterated and stood firm that it recognizes, acknowledges and
confirms its obligations for the Marubeni loans. Apparently, Board Resolution No. BD-099-

2000 was a futile attempt to revoke Board Resolution No. BD-092-2000. Atty. Alfredo
Laya, Jr., a former PNCC Director, spoke on his protests against Board Resolution No. BD092-2000 at the Senate hearings, thus:
MR. LAYA. Mr. Chairman, if I can

SEN. DRILON. So you are saying, Mr. Laya, that the minutes of October 20 did not
accurately reflect the decisions that you made on October 20 because you were saying
that this recognition should be subject to OGCC and COA? You seem to imply and we want
to make itand I want to get that for the record. You seem to imply that there was no
decision to recognize the obligation during that meeting because you wanted it to subject
it to COA and OGCC, is that correct?

THE CHAIRMAN. Were you also at the board?

MR. LAYA. Yes, your Honor.
MR. LAYA. At that time, yes, sir.
SEN. DRILON. So how did...
THE CHAIRMAN. Okay, go ahead.
MR. LAYA. Thats why ifmaybe this can help clarify the sequence. There was this meeting
on October 20. This matter of the Marubeni liability or account was also discussed. Mr.
Macasaet, if I may try to refresh. And there was some discussion, sir, and in fact, they were
saying even at that stage that there should be a COA or an OGCC audit. Now, that was
during the discussion of October 20. Later on, the minutes came out. The practice, then, sir,
was for the minutes to come out at the start of the meeting of the subsequent. So the
minutes of October 20 came out on November 22 and then we were going over it. And that
is in the subsequent minutes of the meeting

MR. LAYA. Thats my understanding of the proceedings at that time, thats why in the
subsequent November 22 meeting, we raised this point about obtaining a COA and OGCC
opinion.
SEN. DRILON. Yes. But you know, the November 22 meeting repeated the wording of the
resolution previously adopted only now you are saying subject to final determination which
is completely of different import from what you are saying was your understanding of the
decision arrived at on October 20.
MR. LAYA. Yes, sir. Because our thinking then...

THE CHAIRMAN. May I interrupt. You were taking up in your November 22 meeting the
October 20 minutes?
MR. LAYA. Yes, sir.

SEN. DRILON. What do you mean, yes, sir?

MR. LAYA. Its just a claim under discussion but then the way it is translated, as the minutes
of October 20 were not really verbatim.

THE CHAIRMAN. This minutes that we have?

SEN. DRILON. So, you never intended to recognize the obligation.
MR. LAYA. Yes, sir.
MR. LAYA. I think so, sir. That was ourpersonally, that was my position.
THE CHAIRMAN. All right, go ahead.
MR. LAYA. Now, in the November 22 meeting, we noticed this resolution already for
confirmation of the boardproceedings of October 20. So immediately we made
actually, protest would be a better term for thatwe protested the wording of the
resolution and thats why we came up with this resolution amending the October 20
resolution.

SEN. DRILON. How did it happen, Corporate Secretary Ogan, that the minutes did not reflect
what the board
THE CHAIRMAN. Ms. Pasetes
MS. PASETES. Yes, Mr. Chairman.
THE CHAIRMAN. you are the chief financial officer of PNCC.

MS. PASETES. Your Honor, before that November 22 board meeting, management headed
by Mr. Rolando Macasaet, myself and Atty. Ogan had a discussion about the recognition of
the obligations of 10 billion of Marubeni and 36 billion of the national government on
whether to recognize this as an obligation in our books or recognize it as an obligation in the
pro forma financial statement to be used for the privatization of PNCC because recognizing
both obligations in the books of PNCC would defeat our going concern status and that is
where the position of the president then, Mr. Macasaet, stemmed from and he went back
to the board and moved to reconsider the position of October 20, 2000, Mr. Chair.52
(Emphasis supplied)

x x x After President Estrada was ousted, I was appointed as President and Chairman of
PNCC in April of 2001, this particular board resolution was brought to my attention and I
immediately put the matter before the board. I had no problem in convincing them to
reverse the recognition as it was illegal and had no basis in fact. The vote to overturn that
resolution was unanimous. Strange to say that some who voted to overturn the recognition
were part of the old board that approved it. Stranger still, Renato Valdecantos who was still
a member of the Board voted in favor of reversing the resolution he himself instigated and
pushed. Some of the board members who voted to recognize the obligation of Marubeni
even came to me privately and said pinilit lang kami. x x x.53 (Emphasis supplied)

In other words, despite Atty. Layas objections to PNCCs admitting liability for the Marubeni
loans, the PNCC Board still admitted the same and merely imposed additional conditions to
temper somehow the devastating effects of Board Resolution No. BD-092-2000.

In approving PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board
caused undue injury to the Government and gave unwarranted benefits to Radstock,
through manifest partiality, evident bad faith or gross inexcusable negligence of the PNCC
Board. Such acts are declared under Section 3(e) of RA 3019 or the Anti-Graft and Corrupt
Practices Act, as corrupt practices xxx and xxx unlawful. Being unlawful and criminal acts,
these PNCC Board Resolutions are void ab initio and cannot be implemented or in any way
given effect by the Executive or Judicial branch of the Government.

The act of the PNCC Board in issuing Board Resolution No. BD-092-2000 expressly admitting
liability for the Marubeni loans demonstrates the PNCC Boards gross and willful disregard of
the requisite care and diligence in managing the affairs of PNCC, amounting to bad faith and
resulting in grave and irreparable injury to PNCC and its stockholders. This reckless and
treacherous move on the part of the PNCC Board clearly constitutes a serious breach of its
fiduciary duty to PNCC and its stockholders, rendering the members of the PNCC Board
liable under Section 31 of the Corporation Code, which provides:
SEC. 31. Liability of directors, trustees or officers.Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty
of gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall
be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
Soon after the short-lived Estrada Administration, the PNCC Board revoked its previous
admission of liability for the Marubeni loans. During the oral arguments, Atty. Sison
narrated to the Court:

Not content with forcing PNCC to commit corporate suicide with the admission of liability
for the Marubeni loans under Board Resolution Nos. BD-092-2000 and BD-099-2000, the
PNCC Board drove the last nail on PNCCs coffin when the PNCC Board entered into the
manifestly and grossly disadvantageous Compromise Agreement with Radstock. This time,
the OGCC, headed by Agnes DST Devanadera, reversed itself and recommended approval of
the Compromise Agreement to the PNCC Board. As Atty. Sison explained to the Court during
the oral arguments:
x x x While the case was pending in the Court of Appeals, Radstock in a rare display of
extreme generosity, conveniently convinced the Board of PNCC to enter into a compromise
agreement for the amount of the judgment rendered by the RTC or P6.5 Billion Pesos.
This time the OGCC, under the leadership of now Solicitor General Agnes Devanadera,
approved the compromise agreement abandoning the previous OGCC position that PNCC
had a meritorious case and would be hard press to lose the case. What is strange is that
although the compromise agreement we seek to stop ostensibly is for P6.5 Billion only, truth
and in fact, the agreement agrees to convey to Radstock all or substantially all of the assets
of PNCC worth P18 Billion Pesos. There are three items that are undervalued here, the real
estate that was turned over as a result of the controversial agreement, the toll revenues
that were being assigned and the value of the new shares of PNCC the difference is about
P12 Billion Pesos. x x x (Emphasis supplied)
V.

The
Compromise
for
Being
Contrary
Existing Laws, and Public Policy

Agreement
to

is
the

Void
Constitution,

For a better understanding of the present case, the pertinent terms and conditions of the
Compromise Agreement between PNCC and Radstock are quoted below:
COMPROMISE AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement made and entered into this 17th day of August 2006, in Mandaluyong City,
Metro Manila, Philippines, by and between:
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, a government acquired asset
corporation, created and existing under the laws of the Republic of the Philippines, with
principal office address at EDSA corner Reliance Street, Mandaluyong City, Philippines, duly
represented herein by its Chairman ARTHUR N. AGUILAR, pursuant to a Board Resolution
attached herewith as Annex A and made an integral part hereof, hereinafter referred to as
PNCC;
and
RADSTOCK SECURITIES LIMITED, a private corporation incorporated in the British Virgin
Islands, with office address at Suite 1402 1 Duddell Street, Central Hongkong dulyrepresented herein by its Director, CARLOS G. DOMINGUEZ, pursuant to a Board Resolution
attached herewith as Annex B and made an integral part hereof, hereinafter referred to as
RADSTOCK.
WITNESSETH:
WHEREAS, on January 15, 2001, RADSTOCK, as assignee of Marubeni Corporation, filed a
complaint for sum of money and damages with application for a writ of preliminary
attachment with the Regional Trial Court (RTC), Mandaluyong City, docketed as Civil Case
No. MC-01-1398, to collect on PNCCs guarantees on the unpaid loan obligations of CDCP
Mining Corporation as provided under an Advance Payment Agreement and Loan
Agreement;

WHEREAS, on December 10, 2002, the RTC of Mandaluyong rendered a decision in favor of
plaintiff RADSTOCK directing PNCC to pay the total amount of Thirteen Billion One Hundred
Fifty One Million Nine Hundred Fifty-Six Thousand Five Hundred Twenty-Eight Pesos
(P13,151,956,528.00) with interest from October 15, 2001 plus Ten Million Pesos
(P10,000,000.00) as attorneys fees.
WHEREAS, PNCC had elevated the case to the Court of Appeals (CA-G.R. SP No. 66654) on
Certiorari and thereafter, to the Supreme Court (G.R. No. 156887) which Courts have
consistently ruled that the RTC did not commit grave abuse of discretion when it denied
PNCCs Motion to Dismiss which sets forth similar or substantially the same grounds or
defenses as those raised in PNCCs Answer;
WHEREAS, the case has remained pending for almost six (6) years even after the main action
was appealed to the Court of Appeals;
WHEREAS, on the basis of the RTC Decision dated December 10, 2002, the current value of
the judgment debt against PNCC stands at P17,040,843,968.00 as of July 31, 2006 (the
Judgment Debt);
WHEREAS, RADSTOCK is willing to settle the case at the reduced Compromise Amount of Six
Billion One Hundred Ninety-Six Million Pesos (P6,196,000,000.00) which may be paid by
PNCC, either in cash or in kind to avoid the trouble and inconvenience of further litigation as
a gesture of goodwill and cooperation;
WHEREAS, it is an established legal policy or principle that litigants in civil cases should be
encouraged to compromise or amicably settle their claims not only to avoid litigation but
also to put an end to one already commenced (Articles 2028 and 2029, Civil Code);
WHEREAS, this Compromise Agreement has been approved by the respective Board of
Directors of both PNCC and RADSTOCK, subject to the approval of the Honorable Court;
NOW, THEREFORE, for and in consideration of the foregoing premises, and the mutual
covenants, stipulations and agreements herein contained, PNCC and RADSTOCK have agreed
to amicably settle the above captioned Radstock case under the following terms and
conditions:
1. RADSTOCK agrees to receive and accept from PNCC in full and complete settlement of
the Judgment Debt, the reduced amount of Six Billion, One Hundred Ninety-Six Million
Pesos (P6,196,000,000.00) (the Compromise Amount).

2. This Compromise Amount shall be paid by PNCC to RADSTOCK in the following manner:
a. PNCC shall assign to a third party assignee to be designated by RADSTOCK all its rights
and interests to the following real properties provided the assignee shall be duly qualified to
own real properties in the Philippines;

(7) N-3320Town and Country Estate, Antipolo (10,000 sq. m.). The transfer value
is P16,800,000.00.
(8) N-7424Antipolo (840 sq. m.). The transfer value is P940,800.00.
(9) N-7425Antipolo (850 sq. m.). The transfer value is P952,000.00.

(1) PNCCs rights over that parcel of land located in Pasay City with a total area of
One Hundred Twenty-Nine Thousand Five Hundred Forty-Eight (129,548) square
meters, more or less, and which is covered by and more particularly described in
Transfer Certificate of Title No. T-34997 of the Registry of Deeds for Pasay City. The
transfer value is P3,817,779,000.00.

(10) N-7426Antipolo (958 sq. m.). The transfer value is P1,073,100.00.

(11) T-485276Antipolo (741 sq. m.). The transfer value is P830,200.00.
(12) T-485277Antipolo (680 sq. m.). The transfer value is P761,600.00.

PNCCs rights and interests in Transfer Certificate of Title No. T-34997 of the Registry
of Deeds for Pasay City is defined and delineated by Administrative Order No. 397,
Series of 1998, and RADSTOCK is fully aware and recognizes that PNCC has an
undertaking to cede at least 2 hectares of this property to its creditor, the Philippine
National Bank; and that furthermore, the Government Service Insurance System has
also a current and existing claim in the nature of boundary conflicts, which
undertaking and claim will not result in the diminution of area or value of the
property. Radstock recognizes and acknowledges the rights and interests of GSIS over
the said property.
(2) T-452587 (T-23646)Paraaque (5,123 sq. m.) subject to the clarification of the
Privatization and Management Office (PMO) claims thereon. The transfer value is
P45,000,900.00.
(3) T-49499 (529715 including T-68146-G (S-29716) (1,9747-A)-Paraaque (107 sq.
m.) (54 sq. m.) subject to the clarification of the Privatization and Management Office
(PMO) claims thereon. The transfer value is P1,409,100.00.
(4)
5-29716Paraaque (27,762 sq. m.) subject to the clarification of the
Privatization and Management Office (PMO) claims thereon. The transfer value is
P242,917,500.00.
(5) P-169Tagaytay (49,107 sq. m.). The transfer value is P13,749,400.00.
(6) P-170Tagaytay (49,100 sq. m.). The transfer value is P13,749,400.00.

(13) T-485278Antipolo (701 sq. m.). The transfer value is P785,400.00.

(14) T-131500Bulacan (CDCP Farms Corp.) (4,945 sq, m.). The transfer value is
P6,475,000.00.
(15) T-131501Bulacan (678 sq. m.). The transfer value is P887,600.00.
(16) T-26,154 (M)Bocaue, Bulacan (2,841 sq. m.). The transfer value is
P3,779,300.00.
(17) T-29,308 (M) - Bocaue, Bulacan (733 sq. m.). The transfer value is P974,400.00.
(18) T-29,309 (M) Bocaue, Bulacan (1,141 sq. m.). The transfer value is
P1,517,600.00.
(19) T-260578 (R. Bengzon) Sta. Rita, Guiguinto, Bulacan (20,000 sq. m.). The
transfer value is P25,200,000.00.
The transfer values of the foregoing properties are based on 70% of the appraised value of
the respective properties.
b. PNCC shall issue to RADSTOCK or its assignee common shares of the capital stock of
PNCC issued at par value which shall comprise 20% of the outstanding capital stock of PNCC
after the conversion to equity of the debt exposure of the Privatization Management Office
(PMO) and the National Development Company (NDC) and other government agencies and
creditors such that the total government holdings shall not fall below 70% voting equity

subject to the approval of the Securities and Exchange Commission (SEC) and ratification of
PNCCs stockholders, if necessary. The assigned value of the shares issued to RADSTOCK is
P713 Million based on the approximate last trading price of PNCC shares in the Philippine
Stock Exchange as the date of this agreement, based further on current generally accepted
accounting standards which stipulates the valuation of shares to be based on the lower of
cost or market value.
Subject to the procurement of any and all necessary approvals from the relevant
governmental authorities, PNCC shall deliver to RADSTOCK an instrument evidencing an
undertaking of the Privatization and Management Office (PMO) to give RADSTOCK or its
assignee the right to match any offer to buy the shares of the capital stock and debts of
PNCC held by PMO, in the event the same shares and debt are offered for privatization.
c. PNCC shall assign to RADSTOCK or its assignee 50% of the PNCCs 6% share in the gross
toll revenue of the Manila North Tollways Corporation (MNTC), with a Net Present Value of
P1.287 Billion computed in the manner outlined in Annex C herein attached as an integral
part hereof, that shall be due and owing to PNCC pursuant to the Joint Venture Agreement
between PNCC and First Philippine Infrastructure Development Corp. dated August 29, 1995
and other related existing agreements, commencing in 2008. It shall be understood that as a
result of this assignment, PNCC shall charge and withhold the amounts, if any, pertaining to
taxes due on the amounts assigned.
Under the Compromise Agreement, PNCC shall pay Radstock the reduced amount of
P6,185,000,000.00 in full settlement of PNCCs guarantee of CDCP Minings debt allegedly
totaling P17,040,843,968.00 as of 31 July 2006. To satisfy its reduced obligation, PNCC
undertakes to (1) assign to a third party assignee to be designated by Radstock all its rights
and interests to the listed real properties therein; (2) issue to Radstock or its assignee
common shares of the capital stock of PNCC issued at par value which shall comprise 20% of
the outstanding capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of
PNCCs 6% share, for the next 27 years (2008-2035), in the gross toll revenues of the Manila
North Tollways Corporation.486
A. The PNCC Board has no power to compromise the P6.185 billion amount.
Does the PNCC Board have the power to compromise the P6.185 billion reduced amount?
The answer is in the negative.

The Dissenting Opinion asserts that PNCC has the power, citing Section 36(2) of Presidential
Decree No. 1445 (PD 1445), otherwise known as the Government Auditing Code of the
Philippines, enacted in 1978. Section 36 states:
SECTION 36. Power to Compromise Claims.(1) When the interest of the government so
requires, the Commission may compromise or release in whole or in part, any claim or
settled liability to any government agency not exceeding ten thousand pesos and with the
written approval of the Prime Minister, it may likewise compromise or release any similar
claim or liability not exceeding one hundred thousand pesos, the application for relief
therefrom shall be submitted, through the Commission and the Prime Minister, with their
recommendations, to the National Assembly.
(2) The respective governing bodies of government-owned or controlled corporations,
and self-governing boards, commissions or agencies of the government shall have the
exclusive power to compromise or release any similar claim or liability when expressly
authorized by their charters and if in their judgment, the interest of their respective
corporations or agencies so requires. When the charters do not so provide, the power to
compromise shall be exercised by the Commission in accordance with the preceding
paragraph. (Emphasis supplied)
The Dissenting Opinion asserts that since PNCC is incorporated under the Corporation Code,
the PNCC Board has all the powers granted to the governing boards of corporations
incorporated under the Corporation Code, which includes the power to compromise claims
or liabilities.
Section 36 of PD 1445, enacted on 11 June 1978, has been superseded by a later law
Section 20(1), Chapter IV, Subtitle B, Title I, Book V of Executive Order No. 292 or the
Administrative Code of 1987, which provides:487
Section 20. Power to Compromise Claims.(1) When the interest of the Government so
requires, the Commission may compromise or release in whole or in part, any settled claim
or liability to any government agency not exceeding ten thousand pesos arising out of any
matter or case before it or within its jurisdiction, and with the written approval of the
President, it may likewise compromise or release any similar claim or liability not exceeding
one hundred thousand pesos. In case the claim or liability exceeds one hundred thousand
pesos, the application for relief therefrom shall be submitted, through the Commission
and the President, with their recommendations, to the Congress[.] x x x (Emphasis
supplied)

Under this provision,54 the authority to compromise a settled claim or liability exceeding
P100,000.00 involving a government agency, as in this case where the liability amounts to
P6.185 billion, is vested not in COA but exclusively in Congress. Congress alone has the
power to compromise the P6.185 billion purported liability of PNCC. Without congressional
approval, the Compromise Agreement between PNCC and Radstock involving P6.185 billion
is void for being contrary to Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the
Administrative Code of 1987.
PNCC is a government agency because Section 2 on Introductory Provisions of the Revised
Administrative Code of 1987 provides that
Agency of the Government refers to any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein. (Boldfacing supplied)
Thus, Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987
applies to PNCC, which indisputably is a government owned or controlled corporation.
In the same vein, the COAs stamp of approval on the Compromise Agreement is void for
violating Section 20(1), Chapter IV, Subtitle B,
Title I, Book V of the Administrative Code of 1987. Clearly, the Dissenting Opinions reliance
on the COAs finding that the terms and conditions of the Compromise Agreement are fair
and above board is patently erroneous.
Citing Benedicto v. Board of Administrators of Television Stations RPN, BBC and IBC,55 the
Dissenting Opinion views that congressional approval is not required for the validity of the
Compromise Agreement because the liability of PNCC is not yet settled.
In Benedicto, the PCGG filed in the Sandiganbayan a civil case to recover from the
defendants (including Roberto S. Benedicto) their ill-gotten wealth consisting of funds and
other properties. The PCGG executed a compromise agreement with Roberto S. Benedicto
ceding to the latter a substantial part of his ill-gotten assets and the State granting him
immunity from further prosecution. The Court held that prior congressional approval is not
required for the PCGG to enter into a compromise agreement with persons against whom it
has filed actions for recovery of ill-gotten wealth.
In Benedicto, the Court found that the governments claim against Benedicto was not yet
settled unlike here where the PNCC Board expressly admitted the liability of PNCC for the

Marubeni loans. In Benedicto, the ownership of the alleged ill-gotten assets was still being
litigated in the Sandiganbayan and no party ever admitted any liability, unlike here where
the PNCC Board had already admitted through a formal Board Resolution PNCCs liability
for the Marubeni loans. PNCCs express admission of liability for the Marubeni loans is
essentially the premise of the execution of the Compromise Agreement. In short,
Radstocks claim against PNCC is settled by virtue of PNCCs express admission of liability
for the Marubeni loans. The Compromise Agreement merely reduced this settled liability
from P17 billion to P6.185 billion.
The provision of the Revised Administrative Code on the power to settle claims or liabilities
was precisely enacted to prevent government agencies from admitting liabilities against the
government, then compromising such settled liabilities. The present case is exactly what
the law seeks to prevent, a compromise agreement on a creditors claim settled through
admission by a government agency without the approval of Congress for amounts
exceeding P100,000.00. What makes the application of the law even more necessary is that
the PNCC Boards twin moves are manifestly and grossly disadvantageous to the
Government. First, the PNCC admitted solidary liability for a staggering P10.743 billion
private debt incurred by a private corporation which PNCC does not even control. Second,
the PNCC Board agreed to pay Radstock P6.185 billion as a compromise settlement ahead of
all other creditors, including the Government which is the biggest creditor.
The Dissenting Opinion further argues that since the PNCC is incorporated under the
Corporation Code, it has the power, through its Board of Directors, to compromise just like
any other private corporation organized under the Corporation Code. Thus, the Dissenting
Opinion states:
Not being a government corporation created by special law, PNCC does not owe its
creation to some charter or special law, but to the Corporation Code. Its powers are
enumerated in the Corporation Code and its articles of incorporation. As an autonomous
entity, it undoubtedly has the power to compromise, and to enter into a settlement through
its Board of Directors, just like any other private corporation organized under the
Corporation Code. To maintain otherwise is to ignore the character of PNCC as a corporate
entity organized under the Corporation Code, by which it was vested with a personality and
identity distinct and separate from those of its stockholders or members. (Boldfacing and
underlining supplied)
The Dissenting Opinion is woefully wide off the mark. The PNCC is not just like any other
private corporation precisely because it is not a private corporation but indisputably a
government owned corporation. Neither is PNCC an autonomous entity considering that
PNCC is under the Department of Trade and Industry, over which the President exercises

control. To claim that PNCC is an autonomous entity is to say that it is a lost command in
the Executive branch, a concept that violates the Presidents constitutional power of control
over the entire Executive branch of government.56
The government nominees in the PNCC Board, who practically compose the entire PNCC
Board, are public officers subject to the Anti-Graft and Corrupt Practices Act, accountable to
the Government and the Filipino people. To hold that a corporation incorporated under the
Corporation Code, despite its being 90.3% owned by the Government, is an autonomous
entity that could solely through its Board of Directors compromise, and transfer ownership
of, substantially all its assets to a private third party without the approval required under
the Administrative Code of 1987,57 is to invite the plunder of all such government owned
corporations.
The Dissenting Opinions claim that PNCC is an autonomous entity just like any other private
corporation is inconsistent with its assertion that Section 36(2) of the Government Auditing
Code is the governing law in determining PNCCs power to compromise. Section 36(2) of the
Government Auditing Code expressly states that it applies to the governing bodies of
government-owned or controlled corporations. The phrase government-owned or
controlled corporations refers to both those created by special charter as well as those
incorporated under the Corporation Code. Section 2, Article IX-D of the Constitution
provides:
SECTION 2. (1) The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or pertaining to,
the Government, or any of its subdivisions, agencies, or instrumentalities, including
government-owned or controlled corporations with original charters, and on a post-audit
basis: (a) constitutional bodies, commissions and offices that have been granted fiscal
autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their subsidiaries; and (d) such nongovernmental entities receiving subsidy or equity, directly or indirectly, from or through the
Government, which are required by law or the granting institution to submit to such audit as
a condition of subsidy or equity. However, where the internal control system of the audited
agencies is inadequate, the Commission may adopt such measures, including temporary or
special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep
the general accounts of the Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining thereto.
(2) The Commission shall have exclusive authority, subject to the limitations in this Article,
to define the scope of its audit and examination, establish the techniques and methods

required therefor, and promulgate accounting and auditing rules and regulations, including
those for the prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or uses of government funds and
properties. (Emphasis supplied)
In explaining the extent of the jurisdiction of COA over government owned or controlled
corporations, this Court declared in Feliciano v. Commission on Audit:58
The COAs audit jurisdiction extends not only to government agencies or
instrumentalities, but also to government-owned and controlled corporations with
original charters as well as other government-owned or controlled corporations without
original charters.
xxxx
Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction
depends on the governments ownership or control of a corporation. The nature of the
corporation, whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over government-owned and controlled
corporations with original charters, as well as government-owned or controlled
corporations without original charters. GOCCs with original charters are subject to COA
pre-audit, while GOCCs without original charters are subject to COA post-audit. GOCCs
without original charters refer to corporations created under the Corporation Code but are
owned or controlled by the government. The nature or purpose of the corporation is not
material in determining COAs audit jurisdiction. Neither is the manner of creation of a
corporation, whether under a general or special law.
Clearly, the COAs audit jurisdiction extends to government owned or controlled
corporations incorporated under the Corporation Code. Thus, the COA must apply the
Government Auditing Code in the audit and examination of the accounts of such
government owned or controlled corporations even though incorporated under the
Corporation Code. This means that Section 20(1), Chapter IV, Subtitle B, Title I, Book V of
the Administrative Code of 1987 on the power to compromise, which superseded Section
36 of the Government Auditing Code, applies to the present case in determining PNCCs
power to compromise. In fact, the COA has been regularly auditing PNCC on a post-audit
basis in accordance with Section 2, Article IX-D of the Constitution, the Government Auditing
Code, and COA rules and regulations.

B. PNCCs toll fees are public funds.

This contention is untenable.

PD 1113 granted PNCC a 30-year franchise to construct, operate and maintain toll facilities
in the North and South Luzon Expressways. Section 1 of PD 111359 provides:

The proviso in Section 2 of PD 1894 refers to the franchise granted for the Metro Manila
Expressway and all extensions linkages, stretches and diversions constructed after the
approval of PD 1894. It does not pertain to the NLEX because the term of the NLEX
franchise, which is 30 years from 1 May 1977, shall remain the same, as expressly
provided in the first sentence of the same Section 2 of PD 1894. To construe that the NLEX
franchise had a new term of 30 years starting from 2005 glaringly conflicts with the plain,
clear and unequivocal language of the first sentence of Section 2 of PD 1894. That would be
clearly absurd.

Section 1. Any provision of law to the contrary notwithstanding, there is hereby granted
to the Construction and Development Corporation of the Philippines (CDCP), a corporation
duly organized and registered under the laws of the Philippines, hereinafter called the
GRANTEE, for a period of thirty (30) years from May 1, 1977 the right, privilege and
authority to construct, operate and maintain toll facilities covering the expressways from
Balintawak (Station 9 + 563) to Carmen, Rosales, Pangasinan and from Nichols, Pasay City
(Station 10 + 540) to Lucena, Quezon, hereinafter referred to collectively as North Luzon
Expressway, respectively.
The franchise herein granted shall include the right to collect toll fees at such rates as may
be fixed and/or authorized by the Toll Regulatory Board hereinafter referred to as the Board
created under Presidential Decree No. 1112 for the use of the expressways abovementioned. (Emphasis supplied)
Section 2 of PD 1894,60 which amended PD 1113 to include in PNCCs franchise the Metro
Manila expressway, also provides:
Section 2. The term of the franchise provided under Presidential Decree No. 1113 for
the North Luzon Expressway and the South Luzon Expressway which is thirty (30) years
from 1 May 1977 shall remain the same; provided that, the franchise granted for the Metro
Manila Expressway and all extensions linkages, stretches and diversions that may be
constructed after the date of approval of this decree shall likewise have a term of thirty (30)
years commencing from the date of completion of the project. (Emphasis supplied)
Based on these provisions, the franchise of the PNCC expired on 1 May 2007 or thirty years
from 1 May 1977.
PNCC, however, claims that under PD 1894, the North Luzon Expressway (NLEX) shall have a
term of 30 years from the date of its completion in 2005. PNCC argues that the proviso in
Section 2 of PD 1894 gave toll road projects completed within the franchise period and
after the approval of PD No. 1894 on 12 December 1983 their own thirty-year term
commencing from the date of the completion of the said project, notwithstanding the expiry
of the said franchise.

There is no dispute that Congress did not renew PNCCs franchise after its expiry on 1 May
2007. However, PNCC asserts that it remains a viable corporate entity even after the
expiration of its franchise under Presidential Decree No. 1113. PNCC points out that the
Toll Regulatory Board (TRB) granted PNCC a Tollway Operation Certificate (TOC) which
conferred on PNCC the authority to operate and maintain toll facilities, which includes the
power to collect toll fees. PNCC further posits that the toll fees are private funds because
they represent the consideration given to tollway operators in exchange for costs they
incurred or will incur in constructing, operating and maintaining the tollways.
This contention is devoid of merit.
With the expiration of PNCCs franchise, the assets and facilities of PNCC were
automatically turned over, by operation of law, to the government at no cost. Sections
2(e) and 9 of PD 1113 and Section 5 of PD 1894 provide:
Section 2 [of PD 1113]. In consideration of this franchise, the GRANTEE shall:
(e) Turn over the toll facilities and all equipment directly related thereto to the
government upon expiration of the franchise period without cost.
Section 9 [of PD 1113]. For the purposes of this franchise, the Government, shall turn over
to the GRANTEE (PNCC) not later than April 30, 1977 all physical assets and facilities
including all equipment and appurtenances directly related to the operations of the North
and South Toll Expressways: Provided, That, the extensions of such Expressways shall also be
turned over to GRANTEE upon completion of their construction or of functional sections
thereof: Provided, However, That upon termination of the franchise period, said physical
assets and facilities including improvements thereon, together with equipment and

appurtenances directly related to their operations, shall be turned over to the

Government without any cost or obligation on the part of the latter. (Emphasis supplied)

Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:

Section 5 [of PD No. 1894]. In consideration of this franchise, the GRANTEE shall:
Okay. So this is now owned by the national government. [A]ny income from
these assets of the national government is national government income,
correct?

(a) Construct, operate and maintain at its own expense the Expressways; and
(b) Turn over, without cost, the toll facilities and all equipment, directly related thereto
to the Government upon expiration of the franchise period. (Emphasis supplied)
The TRB does not have the power to give back to PNCC the toll assets and facilities which
were automatically turned over to the Government, by operation of law, upon the
expiration of the franchise of the PNCC on 1 May 2007. Whatever power the TRB may have
to grant authority to operate a toll facility or to issue a Tollway Operation Certificate, such
power does not obviously include the authority to transfer back to PNCC ownership of
National Government assets, like the toll assets and facilities, which have become National
Government property upon the expiry of PNCCs franchise. Such act by the TRB would
repeal Section 5 of PD 1894 which automatically vested in the National Government
ownership of PNCCs toll assets and facilities upon the expiry of PNCCs franchise. The TRB
obviously has no power to repeal a law. Further, PD 1113, as amended by PD 1894, granting
the franchise to PNCC, is a later law that must necessarily prevail over PD 1112 creating the
TRB. Hence, the provisions of PD 1113, as amended by PD 1894, are controlling.
The governments ownership of PNCCs toll assets and facilities inevitably results in the
governments ownership of the toll fees and the net income derived from these toll assets
and facilities. Thus, the toll fees form part of the National Governments General Fund,
which includes public moneys of every sort and other resources pertaining to any agency of
the government.61 Even Radstocks counsel admits that the toll fees are public funds, to
wit:
ASSOCIATE JUSTICE CARPIO:
Okay. Now, when the franchise of PNCC expired on May 7, 2007, under the
terms of the franchise under PD 1896, all the assets, toll way assets,
equipment, etcetera of PNCC became owned by government at no cost,
correct, under the franchise?
DEAN AGABIN:

DEAN AGABIN:
Yes, Your Honor.62
xxxx
ASSOCIATE JUSTICE CARPIO:
x x x My question is very simple x x x Is the income from these assets of the
national government (interrupted)
DEAN AGABIN:
Yes, Your Honor.63
xxxx
ASSOCIATE JUSTICE CARPIO:
So, its the government [that] decides whether it goes to the general fund or
another fund. [W]hat is that other fund? Is there another fund where revenues
of the government go?
DEAN AGABIN:
Its the same fund, Your Honor, except that (interrupted)
ASSOCIATE JUSTICE CARPIO:
So it goes to the general fund?

DEAN AGABIN:

Well, in so far as the general fund is concerned, that is the absolute rule set
aside by the National Government.

Except that it can be categorized as a private fund in a commercial sense, and

it can be categorized as a public fund in a Public Law sense.

ASSOCIATE JUSTICE CARPIO:

ASSOCIATE JUSTICE CARPIO:

x x x you are saying this is general fund moneythe collection from the
assets[?]

Okay. So we agree that, okay, it goes to the general fund. I agree with you, but
you are saying it is categorized still as a private funds?

DEAN AGABIN:

DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But its part of the general fund. Now, if it is part of the general fund, who has
the authority to spend that money?

Yes.64 (Emphasis supplied)

Forming part of the General Fund, the toll fees can only be disposed of in accordance with
the fundamental principles governing financial transactions and operations of any
government agency, to wit: (1) no money shall be paid out of the Treasury except in
pursuance of an appropriation made by law, as expressly mandated by Section 29(1),
Article VI of the Constitution; and (2) government funds or property shall be spent or used
solely for public purposes, as expressly mandated by Section 4(2) of PD 1445 or the
Government Auditing Code.65

DEAN AGABIN:
Section 29(1), Article VI of the Constitution provides:
Well, the National Government itself.
ASSOCIATE JUSTICE CARPIO:
Who in the National Government, the Executive, Judiciary or Legislative?

Section 29(1). No money shall be paid out of the Treasury except in pursuance of an
appropriation made by law.
The power to appropriate money from the General Funds of the Government belongs
exclusively to the Legislature. Any act in violation of this iron-clad rule is unconstitutional.

DEAN AGABIN:
Well, the funds are usually appropriated by the Congress.
ASSOCIATE JUSTICE CARPIO:
x x x you mean to say there are exceptions that money from the general fund
can be spent by the Executive without going t[hrough] Congress, or xxx is
[that] the absolute rule?
DEAN AGABIN:

Reinforcing this Constitutional mandate, Sections 84 and 85 of PD 1445 require that before
a government agency can enter into a contract involving the expenditure of government
funds, there must be an appropriation law for such expenditure, thus:
Section 84. Disbursement of government funds.
1. Revenue funds shall not be paid out of any public treasury or depository except in
pursuance of an appropriation law or other specific statutory authority.
xxxx

Section 85. Appropriation before entering into contract.

No contract involving the expenditure of public funds shall be entered into unless there is an
appropriation therefor, the unexpended balance of which, free of other obligations, is
sufficient to cover the proposed expenditure.
xxxx
Section 86 of PD 1445, on the other hand, requires that the proper accounting official must
certify that funds have been appropriated for the purpose.66 Section 87 of PD 1445
provides that any contract entered into contrary to the requirements of Sections 85 and
86 shall be void, thus:
Section 87. Void contract and liability of officer.Any contract entered into contrary to
the requirements of the two immediately preceding sections shall be void, and the officer
or officers entering into the contract shall be liable to the government or other contracting
party for any consequent damage to the same extent as if the transaction had been wholly
between private parties. (Emphasis supplied)
Applying Section 29(1), Article VI of the Constitution, as implanted in Sections 84 and 85 of
the Government Auditing Code, a law must first be enacted by Congress appropriating
P6.185 billion as compromise money before payment to Radstock can be made.67
Otherwise, such payment violates a prohibitory law and thus void under Article 5 of the Civil
Code which states that [a]cts executed against the provisions of mandatory or prohibitory
laws shall be void, except when the law itself authorizes their validity.Indisputably, without
an appropriation law, PNCC cannot lawfully pay P6.185 billion to Radstock. Any contract
allowing such payment, like the Compromise Agreement, shall be void as provided in
Section 87 of the Government Auditing Code. In Comelec v. Quijano-Padilla,68 this Court
ruled:

duly appropriated for the purpose and the amount necessary to cover the proposed
contract for the current fiscal year is available for expenditure on account thereof.
Any contract entered into contrary to the foregoing requirements shall be VOID.
Clearly then, the contract entered into by the former Mayor Duterte was void from
the very beginning since the agreed cost for the project (P8,368,920.00) was way
beyond the appropriated amount (P5,419,180.00) as certified by the City Treasurer.
Hence, the contract was properly declared void and unenforceable in COAs 2nd
Indorsement, dated September 4, 1986. The COA declared and we agree, that:
The prohibition contained in Sec. 85 of PD 1445 (Government Auditing Code) is
explicit and mandatory. Fund availability is, as it has always been, an
indispensable prerequisite to the execution of any government contract
involving the expenditure of public funds by all government agencies at all
levels. Such contracts are not to be considered as final or binding unless such a
certification as to funds availability is issued (Letter of Instruction No. 767, s.
1978). Antecedent of advance appropriation is thus essential to government
liability on contracts (Zobel vs. City of Manila, 47 Phil. 169). This contract being
violative of the legal requirements aforequoted, the same contravenes Sec.
85 of PD 1445 and is null and void by virtue of Sec. 87.
Verily, the contract, as expressly declared by law, is inexistent and void ab initio. This is to
say that the proposed contract is without force and effect from the very beginning or from
its incipiency, as if it had never been entered into, and hence, cannot be validated either by
lapse of time or ratification. (Emphasis supplied)
Significantly, Radstocks counsel admits that an appropriation law is needed before PNCC
can use toll fees to pay Radstock, thus:
ASSOCIATE JUSTICE CARPIO:

Petitioners are justified in refusing to formalize the contract with PHOTOKINA. Prudence
dictated them not to enter into a contract not backed up by sufficient appropriation and
available funds. Definitely, to act otherwise would be a futile exercise for the contract would
inevitably suffer the vice of nullity. In Osmea vs. Commission on Audit, this Court held:
The Auditing Code of the Philippines (P.D. 1445) further provides that no contract
involving the expenditure of public funds shall be entered into unless there is an
appropriation therefor and the proper accounting official of the agency concerned
shall have certified to the officer entering into the obligation that funds have been

Okay, I agree with you. Now, you are saying that money can be paid out of the
general fund only through an appropriation by Congress, correct? Thats what
you are saying.
DEAN AGABIN:
Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:

I agree with you also. Okay, now, can PNCC xxx use this money to pay Radstock
without Congressional approval?

There is no law.
DEAN AGABIN:
Yes, except that, Your Honor, this fund has not yet gone to the general fund.

DEAN AGABIN:
ASSOCIATE JUSTICE CARPIO:
Well, I believe that that may not be necessary. Your Honor, because earlier,
the government had already decreed that PNCC should be properly paid for
the reclamation works which it had done. And so (interrupted)
ASSOCIATE JUSTICE CARPIO:

No. Its being collected everyday. As of May 7, 2007, national government

owned those assets already. All those x x x collections that would have gone to
PNCC are now national government owned. It goes to the general fund. And
any body who uses that without appropriation from Congress commits
malversation, I tell you.

No. I am talking of the funds.

DEAN AGABIN:
DEAN AGABIN:
And so it is like a foreign obligation.
ASSOCIATE JUSTICE CARPIO:
Counsel, Im talking of the general funds, collection from the toll fees. Okay.
You said, they go to the general fund. You also said, money from the general
fund can be spent only if there is an appropriation law by Congress.

That is correct, Your Honor, as long as it has already gone into the general
fund.
ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that its still being held now by the agent, PNCC. It has not
been remitted to the National Government?
DEAN AGABIN:

DEAN AGABIN:
Well, if PNCC (interrupted)
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
ASSOCIATE JUSTICE CARPIO:
But if (interrupted)
So my question is, did Congress authorize PNCC to use this money to pay
Radstock?
DEAN AGABIN:

DEAN AGABIN:
If this is the share that properly belongs to PNCC as a private entity
(interrupted)

No, Your Honor.

ASSOCIATE JUSTICE CARPIO:
ASSOCIATE JUSTICE CARPIO:

No, no. I am saying thatYou just agreed that all those collections now will go
to the National Government forming part of the general fund. If, somehow,
PNCC is holding this money in the meantime, it holds xxx it in trust, correct?
Because you said, it goes to the general fund, National Government. So it must
be holding this in trust for the National Government.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Okay. Can the person holding in trust use it to pay his private debt?

Yeah, but that is not the six percent. Out of the six percent, that goes now to
PNCC, thats entirely national government. But the National Government and
the PNCC can agree on service fees for collecting, to pay toll collectors.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But those are expenses. We are talking of the net income. It goes to the
general fund. And its only Congress that can authorize that expenditure. Not
even the Court of Appeals can give its stamp of approval that it goes to
Radstock, correct?

DEAN AGABIN:
DEAN AGABIN:
No, Your Honor.
Yes, Your Honor.69 (Emphasis supplied)
ASSOCIATE JUSTICE CARPIO:
Cannot be.

Without an appropriation law, the use of the toll fees to pay Radstock would constitute
malversation of public funds. Even counsel for Radstock expressly admits that the use of
the toll fees to pay Radstock constitutes malversation of public funds, thus:

DEAN AGABIN:
ASSOCIATE JUSTICE CARPIO:
But I assume that there must be some portion of the collections which
properly pertain to PNCC.
ASSOCIATE JUSTICE CARPIO:
If there is some portion that xxx may be [for] operating expenses of PNCC. But
that is not.
DEAN AGABIN:

x x x As of May 7, 2007, [the] national government owned those assets already.

All those x x x collections that would have gone to PNCC are now national
government owned. It goes to the general fund. And any body who uses that
without appropriation from Congress commits malversation, I tell you.
DEAN AGABIN:
That is correct, Your Honor, as long as it has already gone into the general
fund.

Even profit, Your Honor.

ASSOCIATE JUSTICE CARPIO:
ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that its still being held now by the agent, PNCC. It has not
been remitted to the National Government?

DEAN AGABIN:
Well, if PNCC (interrupted)
ASSOCIATE JUSTICE CARPIO:
But if (interrupted)
DEAN AGABIN:
If this is the share that properly belongs to PNCC as a private entity
(interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. I am saying thatYou just agreed that all those collections now will
go to the National Government forming part of the general fund. If,
somehow, PNCC is holding this money in the meantime, it holds x x x it in
trust, correct? Because you said, it goes to the general fund, National
Government. So it must be holding this in trust for the National Government.
DEAN AGABIN:
Yes, Your Honor.70 (Emphasis supplied)
Indisputably, funds held in trust by PNCC for the National Government cannot be used by
PNCC to pay a private debt of CDCP Mining to Radstock, otherwise the PNCC Board will be
liable for malversation of public funds.

ASSOCIATE JUSTICE CARPIO:

So your client is holding a private debt of CDCP Mining, correct?
DEAN AGABIN:
Correct, Your Honor.72 (Emphasis supplied)
CDCP Mining obtained the Marubeni loans when CDCP Mining and PNCC (then CDCP) were
still privately owned and managed corporations. The Government became the majority
stockholder of PNCC only because government financial institutions converted their loans to
PNCC into equity when PNCC failed to pay the loans. However, CDCP Mining have always
remained a majority privately owned corporation with PNCC owning only 13% of its equity
as admitted by former PNCC Chairman Arthur N. Aguilar and PNCC SVP Finance Miriam M.
Pasetes during the Senate hearings, thus:
SEN. OSMEA. x x xI just wanted to know is CDCP Mining a 100 percent subsidiary of
PNCC?
MR. AGUILAR. Hindi ho. Ah, no.
SEN. OSMEA. If theyre not a 100 percent, why would they sign jointly and severally? I just
want to plug the loopholes.
MR. AGUILAR. I think it wasif I may just speculate. It was just common ownership at that
time.

In addition, to pay Radstock P6.185 billion violates the fundamental public policy, expressly
articulated in Section 4(2) of the Government Auditing Code,71 that government funds or
property shall be spent or used solely for public purposes, thus:

SEN. OSMEA. Al right. NowAlso, the ...

Section 4. Fundamental Principles.x x x (2) Government funds or property shall be

spent or used solely for public purposes. (Emphasis supplied)

SEN. OSMEA. Huh?

MR. AGUILAR. Ah, 13 percent daw, your Honor.

MR. AGUILAR. Thirteen percent ho.

There is no question that the subject of the Compromise Agreement is CDCP Minings
private debt to Marubeni, which Marubeni subsequently assigned to Radstock. Counsel for
Radstock admits that Radstock holds a private debt of CDCP Mining, thus:

SEN. OSMEA. Whats 13 percent?

MR. AGUILAR. We owned ...

government funds or property shall be spent or used solely for public purposes, as provided
in Section 4(2) of the Government Auditing Code.

MS. PASETES. Thirteen percent of ...

C. Radstock is not qualified to own land in the Philippines.
SEN. OSMEA. PNCC owned ...
MS. PASETES. (Mike off) CDCP ...
SEN. DRILON. Use the microphone, please.

Radstock is a private corporation incorporated in the British Virgin Islands. Its office address
is at Suite 14021 Duddell Street, Central Hongkong. As a foreign corporation, with unknown
owners whose nationalities are also unknown, Radstock is not qualified to own land in the
Philippines pursuant to Section 7, in relation to Section 3, Article XII of the Constitution.
These provisions state:

MS. PASETES. Sorry. Your Honor, the ownership of CDCP of CDCP Basay Mining ...
SEN. OSMEA. No, no, the ownership of CDCP. CDCP Mining, how many percent of the
equity of CDCP Mining was owned by PNCC, formerly CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and
severally?
MS. PASETES. Yes.
SEN. OSMEA. One-three?
So poor PNCC and CDCP got taken to the cleaners here. They sign for a 100 percent and they
only own 13 percent.
x x x x73 (Emphasis supplied)
PNCC cannot use public funds, like toll fees that indisputably form part of the General Fund,
to pay a private debt of CDCP Mining to Radstock. Such payment cannot qualify as
expenditure for a public purpose. The toll fees are merely held in trust by PNCC for the
National Government, which is the owner of the toll fees.
Considering that there is no appropriation law passed by Congress for the P6.185 billion
compromise amount, the Compromise Agreement is void for being contrary to law,
specifically Section 29(1), Article VI of the Constitution and Section 87 of PD 1445. And since
the payment of the P6.185 billion pertains to CDCP Minings private debt to Radstock, the
Compromise Agreement is also void for being contrary to the fundamental public policy that

Section 3. Lands of the public domain are classified into agricultural, forest or timber,
mineral lands, and national parks. Agricultural lands of the public domain may be further
classified by law according to the uses to which they may be devoted. Alienable lands of the
public domain shall be limited to agricultural lands. Private corporations or associations may
not hold such lands of the public domain except by lease, for a period not exceeding twentyfive years, renewable for not more than twenty-five years, and not to exceed one hundred
thousand hectares in area. Citizens of the Philippines may lease not more than five hundred
hectares, or acquire not more than twelve hectares thereof by purchase, homestead, or
grant.
Taking into account the requirements of conservation, ecology, and development, and
subject to the requirements of agrarian reform, the Congress shall determine, by law, the
size of lands of the public domain which may be acquired, developed, held, or leased and
the conditions therefor.
xxxx
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or
conveyed except to individuals, corporations, or associations qualified to acquire or hold
lands of the public domain.
The OGCC admits that Radstock cannot own lands in the Philippines. However, the OGCC
claims that Radstock can own the rights to ownership of lands in the Philippines, thus:
ASSOCIATE JUSTICE CARPIO:
Under the law, a foreigner cannot own land, correct?

ATTY. AGRA:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Can a foreigner who xxx cannot own land assign the right of ownership to the
land?
ATTY. AGRA:
Again, Your Honor, at that particular time, it will be PNCC, not through
Radstock, that chain of events should be, theres a qualified nominee
(interrupted)
ASSOCIATE JUSTICE CARPIO:
Yes, xxx you said, Radstock will assign the right of ownership to the qualified
assignee[.] So my question is, can a foreigner own the right to ownership of a
land when it cannot own the land itself?

ATTY. AGRA:
It will be Radstock, Your Honor.
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its rights, otherwise, it
cannot assign it, correct?
ATTY. AGRA:
Pursuant to the compromise agreement, once approved, yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the rights to ownership of the
land?
ATTY. AGRA:
Yes, Your Honors.

ATTY. AGRA:
ASSOCIATE JUSTICE CARPIO:
The foreigner cannot own the land, Your Honor.
Yes?
ASSOCIATE JUSTICE CARPIO:
ATTY. AGRA:
But you are saying it can own the right of ownership to the land, because you
are saying, the right of ownership will be assigned by Radstock.

The premise, Your Honor, you mentioned a while ago was, if this Court
approves said compromise (interrupted)

ATTY. AGRA:
The rights over the properties, Your Honors, if theres a valid assignment made
to a qualified party, then the assignment will be made.
ASSOCIATE JUSTICE CARPIO:

ASSOCIATE JUSTICE CARPIO:

No, no. Whether there is such a compromise agreementIts an academic
question I am asking you, can a foreigner assign rights to ownership of a land
in the Philippines?

Who makes the assignment?

ATTY. AGRA:

Under the Compromise Agreement, Your Honors, these rights should be

respected.
ASSOCIATE JUSTICE CARPIO:
So, it can?

ASSOCIATE JUSTICE CARPIO:

But what rights will PNCC have over that land when it has already signed the
compromise? It is just waiting for instruction xxx from Radstock what to do
with it? So, its a trustee of somebody, because it does not, it cannot, [it] has
no dominion over it anymore? Its just holding it for Radstock. So, PNCC
becomes a dummy, at that point, of Radstock, correct?

ATTY. AGRA:
ATTY. AGRA:
It can. Your Honor. But again, this right must, cannot be perfected or cannot
be, could not take effect.
ASSOCIATE JUSTICE CARPIO:
But if it cannotIts not perfected, how can it assign?

No, Your Honor, I believe it (interrupted)

ASSOCIATE JUSTICE CARPIO:
Yeah, but it does not own the land, but it still holding the land in favor of the
other party to the Compromise Agreement

ATTY. AGRA:
ATTY. AGRA:
Not directly, Your Honors. Again, there must be a qualified nominee assigned
by Radstock.
ASSOCIATE JUSTICE CARPIO:
Its very clear, its an indirect way of selling property that is prohibited by law,
is it not?

Pursuant to the compromise agreement, that will happen.

ASSOCIATE JUSTICE CARPIO:
Okay. May I (interrupted)
ATTY. AGRA:

ATTY. AGRA:
Again, Your Honor, know, believe this is a Compromise Agreement. This is a
dacion en pago.

Again, Your Honor, if the compromise agreement ended with a statement that
Radstock will be the owner of the property (interrupted)
ASSOCIATE JUSTICE CARPIO:

ASSOCIATE JUSTICE CARPIO:

Yeah. Unfortunately, it says, to a qualified assignee.
So, dacion en pago is an exception to the constitutional prohibition
ATTY. AGRA:
ATTY. AGRA:
Yes, Your Honor.
No, Your Honor. PNCC, will still hold on to the property, absent a valid
assignment of properties.

ASSOCIATE JUSTICE CARPIO:

And at this point, when it is signed and execut[ed] and approved, PNCC has no
dominion over that land anymore. Who has dominion over it?
ATTY. AGRA:
Pending the assignment to a qualified party, Your Honor, PNCC will hold on to
the property.
ASSOCIATE JUSTICE CARPIO:
Hold on, but who x x x can exercise acts of dominion, to sell it, to lease it?
ATTY. AGRA:
Again, Your Honor, without the valid assignment to a qualified nominee, the
compromise agreement in so far as the transfer of these properties will not
become effective. It is subject to such condition. Your Honor.74 (Emphasis
supplied)
There is no dispute that Radstock is disqualified to own lands in the Philippines.
Consequently, Radstock is also disqualified to own the rights to ownership of lands in the
Philippines. Contrary to the OGCCs claim, Radstock cannot own the rights to ownership of
any land in the Philippines because Radstock cannot lawfully own the land itself. Otherwise,
there will be a blatant circumvention of the Constitution, which prohibits a foreign private
corporation from owning land in the Philippines. In addition, Radstock cannot transfer the
rights to ownership of land in the Philippines if it cannot own the land itself. It is basic that
an assignor or seller cannot assign or sell something he does not own at the time the
ownership, or the rights to the ownership, are to be transferred to the assignee or
buyer.75
The third party assignee under the Compromise Agreement who will be designated by
Radstock can only acquire rights duplicating those which its assignor (Radstock) is entitled
by law to exercise.76 Thus, the assignee can acquire ownership of the land only if its
assignor, Radstock, owns the land. Clearly, the assignment by PNCC of the real properties to
a nominee to be designated by Radstock is a circumvention of the Constitutional prohibition
against a private foreign corporation owning lands in the Philippines. Such circumvention
renders the Compromise Agreement void.

D. Public
bidding
the disposal of government properties.

is

required

for

Under Section 79 of the Government Auditing Code,77 the disposition of government lands
to private parties requires public bidding.78 COA Circular No. 89-926, issued on 27 January
1989, sets forth the guidelines on the disposal of property and other assets of the
government. Part V of the COA Circular provides:
V. MODE OF DISPOSAL/DIVESTMENT:
This Commission recognizes the following modes of disposal/divestment of assets and
property of national government agencies, local government units and government-owned
or controlled corporations and their subsidiaries, aside from other such modes as may be
provided for by law.
1. Public Auction
Conformably to existing state policy, the divestment or disposal of government property
as contemplated herein shall be undertaken primarily thru public auction. Such mode of
divestment or disposal shall observe and adhere to established mechanics and procedures
in public bidding, viz.:
a. adequate publicity and notification so as to attract the greatest number of interested
parties; (vide, Sec. 79, P.D. 1445)
b. sufficient time frame between publication and date of auction;
c. opportunity afforded to interested parties to inspect the property or assets to be
disposed of;
d. confidentiality of sealed proposals;
e. bond and other prequalification requirements to guarantee performance; and
f. fair evaluation of tenders and proper notification of award.
It is understood that the Government reserves the right to reject any or all of the tenders.
(Emphasis supplied)

Under the Compromise Agreement, PNCC shall dispose of substantial parcels of land, by way
of dacion en pago, in favor of Radstock. Citing Uy v. Sandiganbayan,79 PNCC argues that a
dacion en pago is an exception to the requirement of a public bidding.
PNCCs reliance on Uy is misplaced. There is nothing in Uy declaring that public bidding is
dispensed with in a dacion en pago transaction. The Court explained the transaction in Uy as
follows:
We do not see any infirmity in either the MOA or the SSA executed between PIEDRAS and
respondent banks. By virtue of its shareholdings in OPMC, PIEDRAS was entitled to subscribe
to 3,749,906,250 class A and 2,499,937,500 class B OPMC shares. Admittedly, it was
financially sound for PIEDRAS to exercise its pre-emptive rights as an existing shareholder of
OPMC lest its proportionate shareholdings be diluted to its detriment. However, PIEDRAS
lacked the necessary funds to pay for the additional subscription. Thus, it resorted to
contract loans from respondent banks to finance the payment of its additional subscription.
The mode of payment agreed upon by the parties was that the payment would be made in
the form of part of the shares subscribed to by PIEDRAS. The OPMC shares therefore were
agreed upon by the parties to be equivalent payment for the amount advanced by
respondent banks. We see the wisdom in the conditions of the loan transaction. In order to
save PIEDRAS and/or the government from the trouble of selling the shares in order to raise
funds to pay off the loans, an easier and more direct way was devised in the form of the
dacion en pago agreements.
Moreover, we agree with the Sandiganbayan that neither PIEDRAS nor the government
sustained any loss in these transactions. In fact, after deducting the shares to be given to
respondent banks as payment for the shares, PIEDRAS stood to gain about 1,540,781,554
class A and 710,550,000 class B OPMC shares virtually for free. Indeed, the question that
must be asked is whether or not PIEDRAS, in the exercise of its pre-emptive rights, would
have been able to acquire any of these shares at all if it did not enter into the financing
agreements with the respondent banks.80
Suffice it to state that in Uy, neither PIEDRAS81 nor the government suffered any loss in the
dacion en pago transactions, unlike here where the government stands to lose at least
P6.185 billion worth of assets.
Besides, a dacion en pago is in essence a form of sale, which basically involves a disposition
of a property. In Filinvest Credit Corp. v. Philippine Acetylene, Co., Inc.,82 the Court defined
dacion en pago in this wise:

Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by

the debtor to the creditor as an accepted equivalent of the performance of obligation. In
dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking
really partakes in one sense of the nature of sale, that is, the creditor is really buying the
thing or property of the debtor, payment for which is to be charged against the debtors
debt. As such, the essential elements of a contract of sale, namely, consent, object certain,
and cause or consideration must be present. In its modern concept, what actually takes
place in dacion en pago is an objective novation of the obligation where the thing offered as
an accepted equivalent of the performance of an obligation is considered as the object of
the contract of sale, while the debt is considered as the purchase price. In any case,
common consent is an essential prerequisite, be it sale or innovation to have the effect of
totally extinguishing the debt or obligation.83 (Emphasis supplied)
E. PNCC must follow rules on preference of credit.
Radstock is only one of the creditors of PNCC. Asiavest is PNCCs judgment creditor. In its
Board Resolution No. BD-092-2000, PNCC admitted not only its debt to Marubeni but also
its debt to the National Government84 in the amount of P36 billion.85 During the Senate
hearings, PNCC admitted that it owed the Government P36 billion, thus:
SEN. OSMEA. All right. Now, second question is, the management of PNCC also recognize
the obligation to the national government of 36 billion. It is part of the board resolution.
MS. OGAN. Yes, sir, it is part of the October 20 board resolution.
SEN. OSMEA. All right. So if you owe the national government 36 billion and you owe
Marubeni 10 billion, you know, I would just declare bankruptcy and let an orderly
disposition of assets be done. What happened in this case to the claim, the 36 billion claim
of the national government? How was that disposed of by the PNCC? Mas malaki ang utang
ninyo sa national government, 36 billion. Ang gagawin ninyo, babayaran lahat ang utang
ninyo sa Marubeni without any assets left to satisfy your obligations to the national
government. There should have been, at least, a pari passu payment of all your obligations,
di ba?
MS. PASETES. Mr. Chairman...
SEN. OSMEA. Yes.

MS. PASETES. PNCC still carries in its books an equity account called equity adjustments
arising from transfer of obligations to national government5.4 billionin addition to
shares held by government amounting to 1.2 billion.

In giving priority and preference to Radstock, the Compromise Agreement is certainly in

fraud of PNCCs other creditors, including the National Government, and violates the
provisions of the Civil Code on concurrence and preference of credits.

SEN. OSMEA. What is the 36 billion?

This Court has held that while the Corporation Code allows the transfer of all or substantially
all of the assets of a corporation, the transfer should not prejudice the creditors of the
assignor corporation.87 Assuming that PNCC may transfer all or substantially all its assets, to
allow PNCC to do so without the consent of its creditors or without requiring Radstock to
assume PNCCs debts will defraud the other PNCC creditors88 since the assignment will
place PNCCs assets beyond the reach of its other creditors.89 As this Court held in Caltex
(Phil.), Inc. v. PNOC Shipping and Transport Corporation:90

THE CHAIRMAN. Ms. Pasetes...

SEN. OSMEA. Wait, wait, wait.
THE CHAIRMAN. Baka ampaw yun eh.
SEN. OSMEA. Teka muna. What is the 36 billion that appear in the resolution of the board
in September 2000 (sic)? This is the same resolution that recognizes, acknowledges and
confirms PNCCs obligations to Marubeni.
And subparagraph (a) says Government of the Philippines, in the amount of
36,023,784,000 and change. And then (b) Marubeni Corporation in the amount of
10,743,000,000. So, therefore, in the same resolution, you acknowledged that had
something like P46.7 billion in obligations. Why did PNCC settle the 10 billion and did not
protect the national governments 36 billion? And then, number two, why is it now in your
books, the 36 billion is now down to five? If you use that ratio, then Marubeni should be
down to one.
MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.

While the Corporation Code allows the transfer of all or substantially all the properties and
assets of a corporation, the transfer should not prejudice the creditors of the assignor. The
only way the transfer can proceed without prejudice to the creditors is to hold the
assignee liable for the obligations of the assignor. The acquisition by the assignee of all or
substantially all of the assets of the assignor necessarily includes the assumption of the
assignors liabilities, unless the creditors who did not consent to the transfer choose to
rescind the transfer on the ground of fraud. To allow an assignor to transfer all its business,
properties and assets without the consent of its creditors and without requiring the assignee
to assume the assignors obligations will defraud the creditors. The assignment will place the
assignors assets beyond the reach of its creditors. (Emphasis supplied)
Also, the law, specifically Article 138791 of the Civil Code, presumes that there is fraud of
creditors when property is alienated by the debtor after judgment has been rendered
against him, thus:

SEN. OSMEA. And what about Marubeni? Is that just principal only?
MS. PASETES. Principal and interest.
SEN. OSMEA. So, I mean, you know, its equal treatment. Ten point seven billion is
principal plus penalties plus interest, hindi ba?
MS. PASETES. Yes, sir. Yes, Your Honor.
SEN. OSMEA. All right. So now, what you are saying is that you gonna pay Marubeni 6
billion and change and the national government is only recognizing 5 billion. I dont think
thats protecting the interest of the national government at all.86

Alienations by onerous title are also presumed fraudulent when made by persons against
whom some judgment has been rendered in any instance or some writ of attachment has
been issued. The decision or attachment need not refer to the property alienated, and need
not have been obtained by the party seeking rescission. (Emphasis supplied)
As stated earlier, Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has
already issued a writ of execution in its favor. Thus, when PNCC entered into the
Compromise Agreement conveying several prime lots in favor of Radstock, by way of
dacion en pago, there is a legal presumption that such conveyance is fraudulent under
Article 1387 of the Civil Code.92 This presumption is strengthened by the fact that the
conveyance has virtually left PNCCs other creditors, including the biggest creditorthe
National Governmentwith no other asset to garnish or levy.Notably, the presumption of
fraud or intention to defraud creditors is not just limited to the two instances set forth in

the first and second paragraphs of Article 1387 of the Civil Code. Under the third paragraph
of the same article, the design to defraud creditors may be proved in any other manner
recognized by the law of evidence. In Oria v. Mcmicking,93 this Court considered the
following instances as badges of fraud:

of such toll fees, because PNCC merely holds such toll fees in trust for the National
Government. PNCC does not own the toll fees, and such toll fees do not form part of PNCCs
assets.

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

PNCC owes the National Government P36 billion, a substantial part of which constitutes
taxes and fees, thus:

2. A transfer made by a debtor after suit has begun and while it is pending against him.

SEN. ROXAS. Thank you, Mr. Chairman.

3. A sale upon credit by an insolvent debtor.

Mr. PNCC Chairman, could you describe for us the composition of your debt of about five
billionthere are in thousands, so this looks like five and half billion. Current portion of
long-term debt, about five billion. What is this made of?

4. Evidence of large indebtedness or complete insolvency.

5. The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present
other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the property. (Emphasis
supplied)

MS. PASETES. The five billion is composed of what is owed the Bureau of Treasury and the
Toll Regulatory Board for concession fees thats almost three billion and another 2.4
billion owed Philippine National Bank.
SEN. ROXAS. So, how much is the Bureau of Treasury?
MS. PASETES. Three billion.
SEN. ROXAS. ThreeWhy do you owe the Bureau of Treasury three billion?

Among the circumstances indicating fraud is a transfer of all or nearly all of the debtors
assets, especially when the debtor is greatly embarrassed financially. Accordingly, neither a
declaration of insolvency nor the institution of insolvency proceedings is a condition sine
qua non for a transfer of all or nearly all of a debtors assets to be regarded in fraud of
creditors. It is sufficient that a debtor is greatly embarrassed financially.
In this case, PNCCs huge negative net worthat least P6 billion as expressly admitted by
PNCCs counsel during the oral arguments, or P14 billion based on the 2006 COA Audit
Reportnecessarily translates to an extremely embarrassing financial situation. With its
huge negative net worth arising from unpaid billions of pesos in debt, PNCC cannot claim
that it is financially stable. As a consequence, the Compromise Agreement stipulating a
transfer in favor of Radstock of substantially all of PNCCs assets constitutes fraud. To
legitimize the Compromise Agreement just because there is still no judicial declaration of
PNCCs insolvency will work fraud on PNCCs other creditors, the biggest creditor of which is
the National Government. To insist that PNCC is very much liquid, given its admitted huge
negative net worth, is nothing but denial of the truth. The toll fees that PNCC collects belong
to the National Government. Obviously, PNCC cannot claim it is liquid based on its collection

MS. PASETES. That represents the concession fees due Toll Regulatory Board principal plus
interest, Your Honor.
x x x x94 (Emphasis supplied)
In addition, PNCCs 2006 Audit Report by COA states as follows:
TAX MATTERS
The Company was assessed by the Bureau of Internal Revenue (BIR) of its deficiencies in
various taxes. However, no provision for any liability has been made yet in the Companys
financial statements.
1980 deficiency income tax, deficiency contractors tax and deficiency documentary
stamp tax assessments by the BIR totaling P212.523 Million.

xxxx
Deficiency business tax of P64 Million due the Belgian Consortium, PNCCs partner in
its LRT Project.
1992 deficiency income tax, deficiency value-added tax and deficiency expanded
withholding tax of P1.04 Billion which was reduced to P709 Million after the Companys
written protest.
xxxx

SEN. OSMEA. Teka muna. What is the 36 billion that appear in the resolution of the board
in September 2000 (sic)? This is the same resolution that recognizes, acknowledges and
confirms PNCCs obligations to Marubeni.
And subparagraph (a) says Government of the Philippines, in the amount of
36,023,784,000 and change. And then (b) Marubeni Corporation in the amount of
10,743,000,000. So, therefore, in the same resolution, you acknowledged that had
something like P46.7 billion in obligations. Why did PNCC settle the 10 billion and did not
protect the national governments 36 billion? And then, number two, why is it now in your
books, the 36 billion is now down to five? If you use that ratio, then Marubeni should be
down to one.

2002 deficiency internal revenue taxes totaling P72.916 Million.

MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.

x x x x.95 (Emphasis supplied)

SEN. OSMEA. And what about Marubeni? Is that just principal only?
Clearly, PNCC owes the National Government substantial taxes and fees amounting to
billions of pesos.

MS. PASETES. Principal and interest.

The P36 billion debt to the National Government was acknowledged by the PNCC Board in
the same board resolution that recognized the Marubeni loans. Since PNCC is clearly
insolvent with a huge negative net worth, the government enjoys preference over Radstock
in the satisfaction of PNCC's liability arising from taxes and duties, pursuant to the provisions
of the Civil Code on concurrence and preference of credits. Articles 2241, 96 97 and 98 of
the Civil Code expressly mandate that taxes and fees due the National Government shall be
preferred and shall first be satisfied over claims like those arising from the Marubeni
loans which shall enjoy no preference under Article 2244.99

SEN. OSMEA. So, I mean, you know, its equal treatment. Ten point seven billion is
principal plus penalties plus interest, hindi ba?

However, in flagrant violation of the Civil Code, the PNCC Board favored Radstock over the
National Government in the order of credits. This would strip PNCC of its assets leaving
virtually nothing for the National Government. This action of the PNCC Board is manifestly
and grossly disadvantageous to the National Government and amounts to fraud.

PNCC failed to explain satisfactorily why in its books the obligation to the National
Government was reduced when no payment to the National Government appeared to have
been made. PNCC failed to justify why it made it appear that the obligation to the National
Government was less than the obligation to Marubeni. It is another obvious ploy to justify
the preferential treatment given to Radstock to the great prejudice of the National
Government.

During the Senate hearings, Senator Osmea pointed out that in the Board Resolution of 20
October 2000, PNCC acknowledged its obligations to the National Government amounting
to P36,023,784,000 and to Marubeni amounting to P10,743,000,000. Yet, Senator Osmea
noted that in the PNCC books at the time of the hearing, the P36 billion obligation to the
National Government was reduced to P5 billion. PNCCs Miriam M. Pasetes could not
properly explain this discrepancy, except by stating that the P36 billion includes the principal
plus interest and penalties, thus:

MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEA. All right. So now, what you are saying is that you gonna pay Marubeni 6
billion and change and the national government is only recognizing 5 billion. I dont think
thats protecting the interest of the national government at all.100

VI.
Supreme Court is Not Legitimizer of Violations of Laws

During the oral arguments, counsels for Radstock and PNCC admitted that the Compromise
Agreement violates the Constitution and existing laws. However, they rely on this Court to
approve the Compromise Agreement to shield their clients from possible criminal acts
arising from violation of the Constitution and existing laws. In their view, once this Court
approves the Compromise Agreement, their clients are home free from prosecution, and
can enjoy the P6.185 billion loot. The following exchanges during the oral arguments reveal
this view:
ASSOCIATE JUSTICE CARPIO:
If there is no agreement, they better remit all of that to the National Government.
They cannot just hold that. They are holding that [in] trust, as you said, x x x you
agree, for the National Government.
DEAN AGABIN:
Yes, thats why, they are asking the Honorable Court to approve the compromise
agreement.

Not really, Your Honor, but I suppose that Congress would have no choice, because
this is a final judgment of the Honorable Court.101
xxxx
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its rights, otherwise, it cannot
assign it, correct?
ATTY. AGRA:
Pursuant to the compromise agreement, once approved, yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the rights to ownership of the land?
ATTY. AGRA:

ASSOCIATE JUSTICE CARPIO:

Yes, Your Honors.
We cannot approve that if the power to authorize the expenditure [belongs] to
Congress. How can we usurp x x x the power of Congress to authorize that
expenditure[?] Its only Congress that can authorize the expenditure of funds from
the general funds.
DEAN AGABIN:
But, Your Honor, if the Honorable Court would approve of this compromise
agreement, I believe that this would be binding on Congress.
ASSOCIATE JUSTICE CARPIO:
Ignore the Constitutional provision that money shall be paid out of the National
Treasury only pursuant to an appropriation by law. You want us to ignore that[?]

ASSOCIATE JUSTICE CARPIO:

Yes?
ATTY. AGRA:
The premise, Your Honor, you mentioned a while ago was, if this Court approves
said compromise (interrupted).102 (Emphasis supplied)
This Court is not, and should never be, a rubber stamp for litigants hankering to pocket
public funds for their selfish private gain. This Court is the ultimate guardian of the public
interest, the last bulwark against those who seek to plunder the public coffers. This Court
cannot, and must never, bring itself down to the level of legitimizer of violations of the
Constitution, existing laws or public policy.

DEAN AGABIN:
Conclusion

In sum, the acts of the PNCC Board in (1) issuing Board Resolution Nos. BD-092-2000 and
BD-099-2000 expressly admitting liability for the Marubeni loans, and (2) entering into the
Compromise Agreement, constitute evident bad faith and gross inexcusable negligence,
amounting to fraud, in the management of PNCCs affairs. Being public officers, the
government nominees in the PNCC Board must answer not only to PNCC and its
stockholders, but also to the Filipino people for grossly mishandling PNCCs finances.
Under Article 1409 of the Civil Code, the Compromise Agreement is inexistent and void
from the beginning, and cannot be ratified, thus:

84(1), and 85 of the Government Auditing Code; and Articles 2241, 2242, 2243 and 2244 of
the Civil Code.
We GRANT the intervention of Asiavest Merchant Bankers Berhad in G.R. No. 178158 but
DECLARE that Strategic Alliance Development Corporation has no legal standing to sue.529
VOL. 607, DECEMBER 4, 2009
529
Strategic Alliance Development Corporation vs. Radstock Securities Limited

Art. 1409. The following contracts are inexistent and void from the beginning:

SO ORDERED.

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy;

Puno (C.J.), Chico-Nazario, Abad and Villarama, Jr., JJ., concur.

xxx
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. x x x. (Emphasis supplied)
The Compromise Agreement is indisputably contrary to the Constitution, existing laws and
public policy. Under Article 1409, the Compromise Agreement is expressly declared void and
cannot be ratified. No court, not even this Court, can ratify or approve the Compromise
Agreement. This Court must perform its duty to defend and uphold the Constitution,
existing laws, and fundamental public policy. This Court must not shirk in declaring the
Compromise Agreement inexistent and void ab initio.
WHEREFORE, we GRANT the petition in G.R. No. 180428. We SET ASIDE the Decision dated
25 January 2007 and the Resolutions dated 12 June 2007 and 5 November 2007 of the Court
of Appeals. We DECLARE (1) PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000
admitting liability for the Marubeni loans VOID AB INITIO for causing undue injury to the
Government and giving unwarranted benefits to a private party, constituting a corrupt
practice and unlawful act under Section 3(e) of the Anti-Graft and Corrupt Practices Act, and
(2) the Compromise Agreement between the Philippine National Construction Corporation
and Radstock Securities Limited INEXISTENT AND VOID AB INITIO for being contrary to
Section 29(1), Article VI and Sections 3 and 7, Article XII of the Constitution; Section 20(1),
Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987; Sections 4(2), 79,

Corona, J., I join the dissent of Justice Bersamin.

Carpio-Morales, J., Please see my concurring opinion.
Velasco, Jr., J., I join the dissent of J. Bersamin.
Nachura, J., I join the dissent of J. Bersamin.
Leonardo-De Castro, J., Please see my separate concurring opinion.
Brion, J., I join concurring opinion of Justice De Castro.
Peralta and Del Castillo, JJ., No part.
Bersamin, J., Please see my dissent.

G.R. No. 173169. September 22, 2010.*

IRENE MARTEL FRANCISCO, petitioner, vs. NUMERIANO MALLEN, JR., respondent.

On 30 January 1998 to 1 February 1998, respondent took an approved sick leave. On 15

February 1998, respondent took a vacation leave. Thereafter, he availed of his paternity
leave.

Corporation Law; The rule is that obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities.In Santos v. National Labor
Relations Commission, 254 SCRA 673 (1996), the Court held that A corporation is a juridical
entity with legal personality separate and distinct from those acting for and in its behalf and,
in general, from the people comprising it. The rule is that obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole liabilities. To
hold a director or officer personally liable for corporate obligations, two requisites must
concur: (1) complainant must allege in the complaint that the director or officer assented
to patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and (2) complainant must clearly and convincingly prove such
unlawful acts, negligence or bad faith.

On 18 April 1998, respondent suffered from tonsillitis, forcing him to take a three-day sick
leave from 18 April 1998 to 20 April 1998. However, instead of his applied three-day sick
leave, respondent was given three months leave. The memorandum dated 28 April 1998
reads:

PETITION for review on certiorari of a decision of the Court of Appeals.

After a thorough review of your performance and the series of Vacation Leaves (8 days),
Paternity Leave (7 days) and Sick Leave (7 days) due to several illness within the first quarter
of the year, we have concluded that you are not physically fit and needs to recharge to
enable you to regain your physical fitness.

The facts are stated in the opinion of the Court.

TO
FROM
DATE
RE
: AS STATED

: Mr.
: VIPS
: 28

Numeriano
Dining
April

Mallen,

Jr.
Head
1998

=================================================

Hilario B. Paredes for petitioner.

Cezar F. Maravilla, Jr. for respondent.
CARPIO, J.:
The Case
This petition for review1 assails the 16 September 2005 Decision2 of the Court of Appeals in
CA-G.R. SP No. 72115. The Court of Appeals set aside the 21 December 2001 Decision3 of
the National Labor Relations Commission (NLRC) in NLRC NCR CA No. 022641-00 and
reinstated the 25 August 1999 Decision4 of the Labor Arbiter in NLRC-NCR Case No. 00-0705608-98.
The Facts
On 5 April 1994, respondent Numeriano Mallen, Jr. was hired as a waiter for VIPS Coffee
Shop and Restaurant, a fine dining restaurant which used to operate at the Harrison Plaza
Commercial Complex in Manila.

As such, we are awarding to you the rest of your Vacation/Sick Leave plus Two and a half (2
) months (without pay) to rest and regain your physical health within the prescribed
vacation.
During your vacation, you are not allowed to loiter within the premises of VIPS
RESTAURANT; but instead to rest and do some health exercise and medical check-up for
your physical fitness recovery program.
Moreover, when you report back to work, you are to present to the management a
certificate indicating that you are fit to work regularly.
Your vacation shall take effect on April 30, 1998 up to August 1, 1998.
For your information and guidance.
Sgd.
Mr. Patty C. Bocar

Noted By:

SO ORDERED.6

Sgd.
Ms. Ma. Theresa Linaja5

The Ruling of the NLRC

On 5 May 1998, respondent filed before the Department of Labor and Employment-National
Capital Region (DOLE-NCR) a complaint for underpayment of wages and non-payment of
holiday pay.
Sometime in June 1998, respondent reported back to work with a medical certificate stating
he was fit to work but he was refused work.
On 22 June 1998, the DOLE-NCR endorsed respondents complaint to the NLRC when it
determined that the issue of constructive dismissal was involved. On 23 July 1998,
respondent filed a complaint for illegal dismissal before the NLRC-NCR. On 3 August 1998,
respondent again attempted to return to work but was refused again.

The NLRC found respondents filing of a complaint for illegal dismissal premature. The NLRC
stated [t]his conclusion is supported by the fact that in respondents memorandum to
complainant directing him to avail of his vacation/sick leave, the same is to last from April
30, 1998 to August 1, 1998. The complaint therefore filed on May 5, 1998 has no legal basis
to support itself. When he filed his complaint on May 5, 1998, his cause of action based on
illegal dismissal has not yet accrued.
Nevertheless, the NLRC noted, a supervening event occurred during the pendency of the
instant case which is the closure of VIPS Coffee Shop and Restaurant effective 26 August
1999, as evidenced by the Notice and report to the Department of Labor and Employment
(Annexes 1 and 2 of Appeal). x x x This being the case, and in the spirit of compassion,
respondents are directed to pay complainant his separation pay equivalent to one half
month pay for every year of service x x x.

The Ruling of the Labor Arbiter

The dispositive portion of the NLRCs decision reads:
On 25 August 1999, Labor Arbiter Madjayran H. Ajan rendered a decision in favor of
respondent. The Labor Arbiter found that complainants dismissal was the price of his
having filed a case with DOLE-NCR against the respondents, plus his perennial absences,
which nevertheless is not a just cause. We likewise agree that the gesture of respondents to
reinstate or re-employ complainant unconditionally during the proceedings did not cure the
illegality of complainants dismissal.

WHEREFORE, the Decision of the Labor Arbiter dated August 25, 1999 is hereby MODIFIED
and respondents are instead directed to pay the complainant separation pay in the amount
of P13,750.00 plus his paternity leave pay in the amount of P1,519.00 (P217.00 x 7 days).
The award for moral and exemplary damages are deleted and set aside for lack of merit.
SO ORDERED.7

The dispositive portion of the Labor Arbiters decision reads:

The Ruling of the Court of Appeals
WHEREFORE, premises above considered a decision is hereby issued declaring the dismissal
of the complainant illegal. Consequently, respondents VIPs Coffee Shop & Restaurant
and/or Irene Francisco are ordered to reinstate complainant to his former or equivalent
position without loss of seniority rights, and to pay complainant jointly and severally his
backwages hereby fixed at P88,000.00 as of August 31, 1999, plus his paternity pay, and
attorneys fees equivalent to the monetary award, all in the aggregate of ninety nine
thousand three hundred fifty pesos and 90/100 centavos (P99,350.90).
Respondents are likewise ordered to pay complainant P50,000.00 for moral damages and
P20,000.00 for exemplary damages.

The Court of Appeals found respondent constructively dismissed for having been granted an
increased three months leave instead of the three days leave he applied for.
The dispositive portion of the Court of Appeals decision reads:
WHEREFORE, the petition is hereby GRANTED. The decision of the NLRC, First Division,
dated December 21, 2001, is hereby SET ASIDE and the decision of Labor Arbiter Madjayran
H. Ajan dated August 25, 1999 is hereby REINSTATED.
SO ORDERED.8

The Issue
The main issue in this case is whether petitioner is personally liable for the monetary awards
granted in favor of respondent arising from his alleged illegal termination.
The Ruling of this Court
The petition has merit.
In Santos v. National Labor Relations Commission,9 the Court held that A corporation is a
juridical entity with legal personality separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it. The rule is that obligations incurred by
the corporation, acting through its directors, officers and employees, are its sole
liabilities.10
To hold a director or officer personally liable for corporate obligations, two requisites must
concur: (1) complainant must allege in the complaint that the director or officer assented
to patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith;11 and (2) complainant must clearly and convincingly prove such
unlawful acts, negligence or bad faith.12
In Carag v. National Labor Relations Commission,13 the Court did not hold a director
personally liable for corporate obligations because the two requisites are lacking, to wit:
Complainants did not allege in their complaint that Carag willfully and knowingly voted
for or assented to any patently unlawful act of MAC. Complainants did not present any
evidence showing that Carag willfully and knowingly voted for or assented to any patently
unlawful act of MAC. Neither did Arbiter Ortiguerra make any finding to this effect in her
Decision.
Complainants did not also allege that Carag is guilty of gross negligence or bad faith in
directing the affairs of MAC. Complainants did not present any evidence showing that
Carag is guilty of gross negligence or bad faith in directing the affairs of MAC. Neither did
Arbiter Ortiguerra make any finding to this effect in her Decision.
xxxx
To hold a director personally liable for debts of the corporation, and thus pierce the veil of
corporate fiction, the bad faith or wrongdoing of the director must be established clearly

and convincingly. Bad faith is never presumed. Bad faith does not connote bad judgment or
negligence. Bad faith imports a dishonest purpose. Bad faith means breach of a known duty
through some ill motive or interest. Bad faith partakes of the nature of fraud. In Businessday
Information Systems and Services, Inc. v. NLRC, we held:
There is merit in the contention of petitioner Raul Locsin that the complaint against
him should be dismissed. A corporate officer is not personally liable for the money
claims of discharged corporate employees unless he acted with evident malice and
bad faith in terminating their employment. There is no evidence in this case that
Locsin acted in bad faith or with malice in carrying out the retrenchment and
eventual closure of the company (Garcia vs. NLRC, 153 SCRA 640), hence, he may not
be held personally and solidarily liable with the company for the satisfaction of the
judgment in favor of the retrenched employees.14 (Emphasis supplied)
In McLeod v. NLRC,15 the Court did not hold a director, an officer, and other corporations
personally liable for corporate obligations of the employer because the second requisite was
lacking. The Court held:
A corporation is an artificial being invested by law with a personality separate and distinct
from that of its stockholders and from that of other corporations to which it may be
connected.
While a corporation may exist for any lawful purpose, the law will regard it as an association
of persons or, in case of two corporations, merge them into one, when its corporate legal
entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of
corporate fiction. The doctrine applies only when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues, or where a corporation is the mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must be
established clearly and convincingly. It cannot be presumed.16 (Emphasis supplied)
In Lowe, Inc. v. Court of Appeals,17 the Court did not hold the officers personally liable for
corporate obligations because the second requisite was lacking, thus:

It is settled that in the absence of malice, bad faith, or specific provision of law, a director
or an officer of a corporation cannot be made personally liable for corporate liabilities.
xxxx
Gustilo and Castro, as corporate officers of Lowe, have personalities which are distinct and
separate from that of Lowes. Hence, in the absence of any evidence showing that they
acted with malice or in bad faith in declaring Mutucs position redundant, Gustilo and
Castro are not personally liable for the monetary awards to Mutuc.18 (Emphasis supplied)
In David v. National Federation of Labor Unions,19 the Court did not hold an officer liable for
corporate obligations because the second requisite was lacking. The Court held that There
was no showing of David willingly and knowingly voting for or assenting to patently unlawful
acts of the corporation, or that David was guilty of gross negligence or bad faith.20
In this case, the Labor Arbiter, whose decision was reinstated by the Court of Appeals,
stated that petitioner acted with malice and bad faith in constructively dismissing
respondent. Thus, the Labor Arbiter held petitioner personally liable for the monetary
awards to respondent.
This finding lacks basis. Based on the records, respondent failed to allege either in his
complaint or position paper that petitioner, as Vice-President of VIPS Coffee Shop and
Restaurant, acted in bad faith.21 Neither did respondent clearly and convincingly prove that
petitioner, as Vice-President of VIPS Coffee Shop and Restaurant, acted in bad faith. In fact,
there was no evidence whatsoever to show petitioners participation in respondents
alleged illegal dismissal. Clearly, the twin requisites of allegation and proof of bad faith,
necessary to hold petitioner personally liable for the monetary awards to respondent, are
lacking.
In view of the foregoing, the Court deems it unnecessary to determine whether respondent
was constructively dismissed. Besides, it appears from the records that VIPS Coffee Shop
and Restaurant did not challenge the adverse Court of Appeals decision in CA-G.R. SP No.
72115, rendering such decision final insofar as VIPS Coffee Shop and Restaurant is
concerned.22
WHEREFORE, we GRANT the petition. We MODIFY the Court of Appeals Decision, dated 16
September 2005, in CA-G.R. SP No. 72115 by holding petitioner Irene Martel Francisco not
liable for the monetary awards specified in the reinstated Labor Arbiters Decision, dated 25
August 1999, in NLRC-NCR Case No. 00-07-05608-98.

G.R. No. 179015. June 13, 2012.*

UNITED COCONUT PLANTERS BANK, petitioner, vs. PLANTERS PRODUCTS, INC., JANET
LAYSON and GREGORY GREY, respondents.
Corporation Law; A corporation like United Coconut Planters Bank (UCPB) is liable to
innocent third persons where it knowingly permits its officer, or any other agent, to perform
acts within the scope of his general or apparent authority, holding him out to the public as
possessing power to do those acts.The CA also held that Laysons assignment to PPI of the
P200,000.00 coming to her from UCPB, with respect to which UCPB may be regarded as an
obligor, is binding on the bank. A formal notice is not required to bind the bank regarding its
undertaking to make good the assignment. UCPB may be deemed to have acted in bad faith
when it delivered the proceeds of the loan to Layson, despite its undertaking to turn them
over to PPI. True, a corporation like UCPB is liable to innocent third persons where it
knowingly permits its officer, or any other agent, to perform acts within the scope of his
general or apparent authority, holding him out to the public as possessing power to do
those acts. But, here, it is plain from the guarantee Grey executed that he was acting for
himself, not in representation of UCPB.

Respondent Planters Products, Incorporated (PPI), a fertilizer manufacturer, entered into an

arrangement with respondent Janet Layson for the delivery of fertilizers to her, payable
from the proceeds of the loan that petitioner United Coconut Planters Bank (UCPB)
extended to her. On February 11, 1980 Layson executed a document called pagares,
written on the dorsal side of a UCPB promissory note.1 The pagares stated that Layson had
an approved loan with UCPB-Iloilo Branch for P200,000.00. The second portion of the
pagares, signed by that branchs manager respondent Gregory Grey, stated that the
assignment has been duly accepted and payment duly guaranteed within 60 days from
PPIs Invoice. Specifically, the pagares said:
I/We irrevocably assign the proceeds of this Promissory Note to Planters Products, Inc., for
the account of Janet Layson as payment for my fertilizer/agchemicals withdrawals covered
by Invoice Nos. _______ for application to my fertilizer line.
I/We hereby attest and affirm that I/We have an approved loan with United Coconut
Planters Bank, Iloilo Branch, in the amount of Pesos TWO HUNDRED THOUSAND
(P200,000.00) which is allotted for fertilizer.

JANET

Sgd.
LAYSON

Feb. 11, 1980

PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.

Assignment accepted and payment unconditionally guaranteed within sixty (60) days from
Planters Products, Inc. Invoice date up to Pesos: Two Hundred Thousand (P200,000.00) only.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.

Adolfo B. Ortiz for respondent G. Grey.
Gonzales, Sinense, Jimenez & Associates for respondent Planters Products.
ABAD, J.:
This case is about the liability of the bank for a transaction entered into by its branch
manager in connivance with a client.
The Facts and the Case

GREGORY

Sgd.
GREY

Manager
Subsequently, Layson executed a third document Letter Guarantee by the Dealer, stating
that she binds herself to pay PPI the face value of the pagares in case UCPB did not pay the
same at maturity. But contrary to her undertakings, on the following day, February 12, 1980,
Layson withdrew with branch manager Greys connivance the P200,000.00 loan that UCPB
granted her.
On the strength of the three documents, PPI delivered quantities of fertilizers to Layson.
Layson and Grey duplicated their transactions with PPI on February 18 and 27, 1980
covering two loans of P100,000.00 each.

On April 28, 1980 PPI presented the documents of the financed transactions to UCPB for
collection. But the bank denied the claim on the ground that it neither authorized the
transactions nor the execution of the documents which were not part of its usual banking
transactions. UCPB claimed that branch manager Grey exceeded his authority in
guaranteeing payment of Laysons purchases on credit. The pagares, said UCPB, were illegal
and void since banking laws prohibit bank officers from guaranteeing loans of bank clients.

The case presents the following issues:

Consequently, in April 1980 PPI sued Layson, UCPB, and Grey for breach of contract with
damages before the Regional Trial Court (RTC) of Makati.2 Grey died while the case was on
trial. Although the RTC ordered Greys substitution by any of his heirs, no one came to
substitute him. Trial proceeded without prejudice to the claims against his estate.

The Ruling of the Court

On April 28, 1999 the RTC rendered a decision, absolving UCPB from liability for the value of
the fertilizer products that PPI sold to Layson on credit. Since Grey acted in excess of his
authority in guaranteeing the payment of the pagares and in involving himself in the
transaction, UCPB cannot be bound by the same. Further, the promissory notes, on the
dorsal side of which appeared the pagares, were not in negotiable form. They had neither a
fixed date of maturity nor a fixed amount of obligation. The pagares is also void under the
Civil Code because the prestation, Greys act of guaranteeing the loan, is prohibited under
Section 83 of the General Banking Act.
The court held Layson liable to PPI a) for P399,966.25 with 6% interest from the time it filed
its complaint until fully paid and b) for attorneys fees of P30,000.00. Since Grey impliedly
admitted3 having no authority on his own to grant Layson the credit accommodation and
UCPBs guarantee to pay for the fertilizers she bought, the court found him subsidiarily
liable for the principal amount. PPI appealed the decision to the Court of Appeals (CA).
On March 22, 2007 the CA rendered a decision, reversing that of the RTC and declaring
UCPB jointly and severally liable with Layson for the latters obligation to PPI to the extent of
P200,000.00 covering the February 11, 1980 credit accommodation. The court deleted the
award for attorneys fees. As regard to the second and third pagares, the CA ruled that PPI
failed to prove the subsequent assignments. Essentially, the CA ruled that Laysons pagares
were in the nature of assignment of credit, consisting in the proceeds of the loan that UCPB
granted her. Since UCPB, acting through Grey, undertook to deliver those proceeds to PPI in
payment of the fertilizers she was going to buy, UCPB is bound by such undertaking.
UCPB brings the present petition for review of the CA decision.
Issues Presented

1. Whether or not UCPB is bound by Greys undertaking on its behalf to deliver to PPI the
proceeds of the banks loan to Layson in payment of the fertilizers she bought; and
2. In the negative, whether or not UCPB is entitled to an award of attorneys fees.

One. The CA held that, in executing the pagares, Layson simply assigned to PPI the
P200,000.00 proceeds of her approved loan with UCPB in payment of the fertilizers that she
wanted to buy from PPI. She wrote the pagares at the back of the pro forma promissory
note that she executed in UCPBs favor. The CA did not consider the pagares as a guaranty, a
contract, or a negotiable promissory note.
The CA also held that Laysons assignment to PPI of the P200,000.00 coming to her from
UCPB, with respect to which UCPB may be regarded as an obligor, is binding on the bank.4 A
formal notice is not required to bind the bank regarding its undertaking to make good the
assignment. UCPB may be deemed to have acted in bad faith when it delivered the proceeds
of the loan to Layson, despite its undertaking to turn them over to PPI.
True, a corporation like UCPB is liable to innocent third persons where it knowingly permits
its officer, or any other agent, to perform acts within the scope of his general or apparent
authority, holding him out to the public as possessing power to do those acts.5
But, here, it is plain from the guarantee Grey executed that he was acting for himself, not in
representation of UCPB. Grey wrote that undertaking at the bottom of the pagares as
follows:
Assignment accepted and payment unconditionally guaranteed within sixty (60) days from
Planters Products, Inc. Invoice date up to Pesos: Two Hundred Thousand (P200,000.00) only.
Sgd.
GREGORY GREY
Manager

UCPB cannot be bound by Greys above undertaking since he appears to have made it in his
personal capacity. He signed it under his own name, not in UCPBs name or as its branch
manager. Indeed, the wordings of the undertaking do not at all make any allusion to UCPB.

WHEREFORE, the Court GRANTS the petition, REVERSES the decision of the Court of Appeals
in CA-G.R. CV 67364 dated March 22, 2007, and REINSTATES in toto the decision of the
Regional Trial Court of Makati.

Besides, by its tenor, Greys undertaking was a guarantee. It says, payment unconditionally
guaranteed within sixty (60) days from Planters Products, Inc. Invoice date up to Pesos: Two
Hundred Thousand (P200,000.00) only. As it happens, bank guarantees are highly regulated
transactions under the law.6 They are undertakings that are not so casually issued by banks
or by their branch managers at the dorsal side of a clients promissory note as if an
afterthought. A bank guarantee is a contract that binds the bank and so may be entered into
only under authority granted by its board of directors. Such authority does not appear on
any document. Indeed, PPI had no right to expect branch manager Grey to issue one
without such authorization.

SO ORDERED.

Notably, the evidence shows that on February 11, 1980, claiming that UCPB had already
approved her loan of P200,000.00, Layson assigned all the proceeds of such loan to PPI in
payment of fertilizers she wanted to buy from it. For his part, Grey agreed to the assignment
and, apparently without authority from the bank, undertook to guarantee the payment of
the pagares. Notwithstanding this undertaking, however, Grey released the P200,000.00
proceeds of the loan to Layson the next day, February 12, 1980. It is evident that Grey
connived with Layson to lure PPI to deliver to her fertilizers worth P200,000.00 on credit.
UCPB also adduced evidence that Grey lent Layson that P200,000.00 without proper
authorization from the bank. The authority the bank gave him for unilaterally extending
unsecured loans has a ceiling of P10,000.00 only. Grey needed under UCPBs Revised Branch
Lending Authority7 the unanimous approval8 of the Branch Credit Committee,9 of which he
was only a member, before he can grant a higher loan of the kind.
With UCPB absolved of any liability, the Court affirms the ruling of the RTC of Makati that
finds Layson primarily liable to PPI with the latter having the right of recourse to Grey in the
event that it could not recover from her. Importantly, Layson never denied her business
dealings with PPI and her receipt of PPIs fertilizer products. This admission cements her
liability for the fertilizers she got from it.
Two. The CA properly deleted the award of attorneys fees in favor of UCPB. Such fees
may be awarded when one was compelled to litigate and incurred expenses to protect his
interests or when the suit filed was baseless or when the defendant acted in bad faith in
filing or impleading the litigant. Here, however, PPI had good reason to implead UCPB since,
after all, its branch manager played a pivotal role in facilitating the anomalous transaction.
Thus, it cannot be said that PPI acted in bad faith in impleading the bank.

Peralta (Actg. Chairperson),** Villarama, Jr.,*** Mendoza and Perlas-Bernabe, JJ., concur.
Petition granted, judgment reversed.
Note.A banking corporation is liable to innocent third persons where the representation is
made in the course of its business by an agent acting within the general scope of his
authority even though, in the particular case, the agent is secretly abusing his authority and
attempting to perpetuate fraud upon his principal or some person, for his own ultimate
benefit. (Prudential Bank and Trust Company [now Bank of the Philippine Islands] vs.
Abasolo, 631 SCRA 367 [2010])
o0o

The facts are stated in the opinion of the Court.

VOL. 264, NOVEMBER 4, 1996
Premium Marble Resources, Inc. vs. Court of Appeals

11

G.R. No. 96551. November 4, 1996.*

PREMIUM MARBLE RESOURCES, INC., petitioner, vs. THE COURT OF APPEALS and
INTERNATIONAL CORPORATE BANK, respondents.
PRINTLINE CORPORATION, petitioner, vs. THE COURT OF APPEALS and INTERNATIONAL
CORPORATE BANK, respondents.
Corporation Law; Actions; The power of a corporation to sue and be sued in any court is
lodged with the board of directors that exercises its corporate powers.We agree with the
finding of public respondent Court of Appeals, that in the absence of any board resolution
from its board of directors the [sic] authority to act for and in behalf of the corporation, the
present action must necessarily fail. The power of the corporation to sue and be sued in any
court is lodged with the board of directors that exercises its corporate powers. Thus, the
issue of authority and the invalidity of plaintiff-appellants subscription which is still
pending, is a matter that is also addressed, considering the premises, to the sound judgment
of the Securities & Exchange Commission.
Same; Securities and Exchange Commission; All corporations duly organized pursuant to the
Corporation Code are required to submit within 30 days to the Securities and Exchange
Commission the names, nationalities and residences of the directors, trustees and officers
elected.By the express mandate of the Corporation Code (Section 26), all corporations
duly organized pursuant thereto are required to submit within the period therein stated (30
days) to the Securities and Exchange Commission the names, nationalities and residences of
the directors, trustees and officers elected.
Same; In the absence of an authority from the board of directors, no person, not even the
officers of the corporation, can validly bind the corporation.The claim, therefore, of
petitioners as represented by Atty. Dumadag, that Zaballa, et al., are the incumbent officers
of Premium has not been fully substantiated. In the absence of an authority from the board
of directors, no person, not even the officers of the corporation, can validly bind the
corporation.
PETITION for review on certiorari of a decision of the Court of Appeals.

Arnulfo F. Dumadag for petitioners.

Fe Macalino & Associates for private respondent.
TORRES, JR., J.:
Assailed in the instant petition for review is the decision1 of the Court of Appeals in CA-G.R.
CV No. 16810 dated September 28, 1990 which affirmed the trial courts dismissal of
petitioners complaint for damages.
The antecedents.
On July 18, 1986, Premium Marble Resources, Inc. (Premium for brevity), assisted by Atty.
Arnulfo Dumadag as counsel, filed an action for damages against International Corporate
Bank which was docketed as Civil Case No. 14413. The complaint states, inter alia:
3. Sometime in August to October 1982, Ayala Investment and Development Corporation
issued three (3) checks [Nos. 097088, 097414 & 27884] in the aggregate amount of
P31,663.88 payable to the plaintiff and drawn against Citibank;
xxx
5. On or about August to October 1982, former officers of the plaintiff corporation headed
by Saturnino G. Belen, Jr., without any authority whatsoever from the plaintiff deposited the
abovementioned checks to the current account of his conduit corporation, Intervest
Merchant Finance (Intervest, for brevity) which the latter maintained with the defendant
bank under account No. 0200-02027-8;
6. Although the checks were clearly payable to the plaintiff corporation and crossed on
their face and for payees account only, defendant bank accepted the checks to be
deposited to the current account of Intervest and thereafter presented the same for
collection from the drawee bank which subsequently cleared the same thus allowing
Intervest to make use of the funds to the prejudice of the plaintiff;
xxx

14. The plaintiff has demanded upon the defendant to restitute the amount representing
the value of the checks but defendant refused and continue to refuse to honor plaintiffs
demands up to the present;
15. As a result of the illegal and irregular acts perpetrated by the defendant bank, the
plaintiff was damaged to the extent of the amount of P31,663.88;
Premium prayed that judgment be rendered ordering defendant bank to pay the amount of
P31,663.88 representing the value of the checks plus interest, P100,000.00 as exemplary
damages; and P30,000.00 as attorneys fees.
In its Answer, International Corporate Bank alleged, inter alia, that Premium has no
capacity/personality/authority to sue in this instance and the complaint should, therefore,
be dismissed for failure to state a cause of action.
A few days after Premium filed the said case, Printline Corporation, a sister company of
Premium also filed an action for damages against International Corporate Bank docketed as
Civil Case No. 14444. Thereafter, both civil cases were consolidated.
Meantime, the same corporation, i.e., Premium, but this time represented by Siguion Reyna,
Montecillo and Ongsiako Law Office as counsel, filed a motion to dismiss on the ground that
the filing of the case was without authority from its duly constituted board of directors as
shown by the excerpt of the minutes of the Premiums board of directors meeting.2
In its opposition to the motion to dismiss, Premium thru Atty. Dumadag contended that the
persons who signed the board resolution, namely, Belen, Jr., Nograles & Reyes, are not
directors of the corporation and were allegedly former officers and stockholders of Premium
who were dismissed for various irregularities and fraudulent acts; that Siguion Reyna Law
Office is the lawyer of Belen and Nograles and not of Premium and that the Articles of
Incorporation of Premium shows that Belen, Nograles and Reyes are not majority
stockholders.
On the other hand, Siguion Reyna Law Firm as counsel of Premium in a rejoinder, asserted
that it is the general information sheet filed with the Securities and Exchange Commission,
among others, that is the best evidence that would show who are the stockholders of a
corporation and not the Articles of Incorporation since the latter does not keep track of the
many changes that take place after new stockholders subscribe to corporate shares of
stocks.

In the interim, defendant bank filed a manifestation that it is adopting in toto Premiums
motion to dismiss and, therefore, joins it in praying for the dismissal of the present case on
the ground that Premium lacks authority from its duly constituted board of directors to
institute the action.
In its Order, the lower court concluded that:
Considering that the officers (directors) of plaintiff corporation enumerated in the Articles
of Incorporation, filed on November 9, 1979, were to serve until their successors are
elected and qualified and considering further that as of March 4, 1981, the officers of the
plaintiff corporation were Alberto Nograles, Fernando Hilario, Augusto Galace, Jose L.R.
Reyes, Pido Aguilar and Saturnino Belen, Jr., who presumably are the officers represented
by the Siguion Reyna Law Firm, and that together with the defendants, they are moving for
the dismissal of the above-entitled case, the Court finds that the officers represented by
Atty. Dumadag do not as yet have the legal capacity to sue for and in behalf of the plaintiff
corporation and/or the filing of the present action (Civil Case 14413) by them before Case
No. 2688 of the SEC could be decided is a premature exercise of authority or assumption of
legal capacity for and in behalf of plaintiff corporation.
The issues raised in Civil Case No. 14444 are similar to those raised in Civil Case No. 14413.
This Court is of the opinion that before SEC Case No. 2688 could be decided, neither the set
of officers represented by Atty. Dumadag nor that set represented by the Siguion Reyna,
Montecillo and Ongsiako Law Office, may prosecute cases in the name of the plaintiff
corporation.
It is clear from the pleadings filed by the parties in these two cases that the existence of a
cause of action against the defendants is dependent upon the resolution of the case
involving intra-corporate controversy still pending before the SEC.3
On appeal, the Court of Appeals affirmed the trial courts Order4 which dismissed the
consolidated cases. Hence, this petition.
Petitioner submits the following assignment of errors:
I
The Court of Appeals erred in giving due course to the motion to dismiss filed by the
Siguion Reyna Law Office when the said motion is clearly filed not in behalf of the petitioner
but in behalf of the group of Belen who are the clients of the said law office.

II
The Court of Appeals erred in giving due course to the motion to dismiss filed by the
Siguion Reyna Law Office in behalf of petitioner when the said law office had already
appeared in other cases wherein the petitioner is the adverse party.

However, it appears from the general information sheet and the Certification issued by the
SEC on August 19, 19868 that as of March 4, 1981, the officers and members of the board of
directors of the Premium Marble Resources, Inc. were:
Alberto C. NogralesPresident/Director

III

Fernando D. HilarioVice President/Director

The Court of Appeals erred when it ruled that undersigned counsel was not authorized by
the Board of Directors to file Civil Case Nos. 14413 and 14444.

Augusto I. GalaceTreasurer
Jose L.R. ReyesSecretary/Director

IV
Pido E. AguilarDirector
The Court of Appeals erred in concluding that under SEC Case No. 2688 the incumbent
directors could not act for and in behalf of the corporation.
V
The Court of Appeals is without jurisdiction to prohibit the incumbent Board of Directors
from acting and filing this case when the SEC where SEC Case No. 2688 is pending has not
even made the prohibition.
We find the petition without merit.
The only issue in this case is whether or not the filing of the case for damages against private
respondent was authorized by a duly constituted Board of Directors of the petitioner
corporation.
Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel Pengson,
Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes5 of the meeting
of its Board of Directors held on April 1, 1982, as proof that the filing of the case against
private respondent was authorized by the Board. On the other hand, the second set of
officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes, presented a
Resolution6 dated July 30, 1986, to show that Premium did not authorize the filing in its
behalf of any suit against the private respondent International Corporate Bank.

Saturnino G. Belen, Jr.Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly
elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and
Rodolfo Millare, petitioner failed to show proof that this election was reported to the SEC. In
fact, the last entry in their General Information Sheet with the SEC, as of 1986 appears to be
the set of officers elected in March 1981.
We agree with the finding of public respondent Court of Appeals, that in the absence of
any board resolution from its board of directors the [sic] authority to act for and in behalf of
the corporation, the present action must necessarily fail. The power of the corporation to
sue and be sued in any court is lodged with the board of directors that exercises its
corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellants
subscription which is still pending, is a matter that is also addressed, considering the
premises, to the sound judgment of the Securities & Exchange Commission.9
By the express mandate of the Corporation Code (Section 26), all corporations duly
organized pursuant thereto are required to submit within the period therein stated (30
days) to the Securities and Exchange Commission the names, nationalities and residences of
the directors, trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:

Later on, petitioner submitted its Articles of Incorporation dated November 6, 1979 with
the following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson,
and Jose Ma. Silva.

Sec. 26. Report of election of directors, trustees and officers.Within thirty (30) days after
the election of the directors, trustees and officers of the corporation, the secretary, or any

other officer of the corporation, shall submit to the Securities and Exchange Commission,
the names, nationalities and residences of the directors, trustees and officers elected. x x x
Evidently, the objective sought to be achieved by Section 26 is to give the public
information, under sanction of oath of responsible officers, of the nature of business,
financial condition and operational status of the company together with information on its
key officers or managers so that those dealing with it and those who intend to do business
with it may know or have the means of knowing facts concerning the corporations financial
resources and business responsibility.10
The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are
the incumbent officers of Premium has not been fully substantiated. In the absence of an
authority from the board of directors, no person, not even the officers of the corporation,
can validly bind the corporation.11
We find no reversible error in the decision sought to be reviewed.
ACCORDINGLY, for lack of merit, the petition is hereby DENIED.
SO ORDERED.
Regalado (Chairman), Romero, Puno and Mendoza, JJ., concur.
Petition denied.
Notes.A corporation, being a juridical entity, may act only through its directors, officers
and employees and obligations incurred by them, acting as such corporate agents are not
theirs but the direct accountabilities of the corporation they represent. (MAM Realty
Development Corporation vs. National Labor Relations Commission, 244 SCRA 797 [1995])
A corporation, through its board of directors, should act in the manner and within the
formalities, if any, prescribed by its charter or by the general law. (Lopez Realty, Inc. v.
Fontecha, 247 SCRA 183 [1995])
o0o

[No. 26555. November 18, 1926]

BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J. LACSON, petitioners, vs, Honorable
MARIANO DE LA ROSA, Auxiliary Judge of First Instance of Occidental Negros, AGUSTIN
CORUA, MAURO LEDESMA and BINALBAGAN ESTATE, INC., respondents.
CORPORATIONS; SPECIAL MEETING OF STOCKHOLDERS; POWER OF COURT OF FlRST
INSTANCE TO ISSUE PRELIMINARY INJUNCTION.Where it appears that a corporation
already has a duly functioning board of directors, -without any existing vacancies, the
election of a new board of directors at a called meeting is irregular; and a Court of First
Instance has jurisdiction to enjoin the holding of a special meeting of the shareholders called
by a committee representing a majority of the shareholders, when the call shows that the
purpose is to elect a new board of directors. The action of the court in issuing a temporary
injunction against the holding of such meeting will not be disturbed by the Supreme Court
upon petition for the writ of certiorari.
ORIGINAL ACTION in the Supreme Court. Certiorari.
The facts are stated in the opinion of the court.
Roman J. Lacson for petitioners.
The respondent judge in his own behalf.
The respondent corporation in its own behalf.
R. Nolan and Feria & La O for the respondents Corua and Ledesma.
STREET, J.:
Roxas, Enrique Echaus, and Roman J. Lacson, seek to procure the abrogation of an order of
the respondent judge granting a preliminary injunction in an action in the Court of First
Instance of Occidental Negros, instituted by Agustin Corua and Mauro Ledesma against the
petitioners and the Binalbagan Estate, Inc. The cause is now before us upon the issues made
by the answers filed by the respondents.

It appears that the Binalbagan Estate, Inc., is a corporation having its principal plant in
Occidental Negros where it is engaged in the manufacture of raw sugar from canes grown
upon farms accessible to its central. In July, 1924, the possessors of a majority of the shares
of the Binalbagan Estate, Inc., f ormed a voting trust composed of three members, namely,
Salvador Laguda, Segundo Monteblanco, and Arthur F. Fisher, as trustees. By the document
constituting this voting trust the trustees were authorized to represent and vote the shares
pertaining to their constituents, and to this end the shareholders undertook to assign their
shares to the trustees on the books of the company. The total number of outstanding shares
of the corporation is somewhat over 5,500, while the number of shares controlled by the
voting trust is less than 3,000.
On February 1, 1926, the general annual meeting of the shareholders of the Binalbagan
Estate, Inc., took place, at which Mr. J. P. Heilbronn appeared as representative of the voting
trust, his authority being recognized by the holders of all the other shares present at this
meeting: Upon said occasion Heilbronn, by virtue of controlling the majority of the shares,
was able to nominate and elect a board of directors to his own liking, without opposition
from the minority. After the board of directors had been thus elected and had qualified,
they chose a set of officers consisting of Jose M. Yusay, president, Timoteo Unson, vicepresident, Jose G. Montalvo, secretary-treasurer, and H. W. Corp and Agustin Corua, as
members. Said officials immediately entered upon the discharge of their duties and have
continued in possession of their respective offices until the present time.
Since the creation of the voting trust there have been a number of vacancies caused by
resignation or the absence of members from the Philippine Islands, with the result that
various substitutions have been made in the personnel of the voting trust. At the present
time the petitioners Roxas, Echaus, and Lacson presumably constitute its membership. We
say presumably, because in the present proceeding an issue of fact is made by the
respondents upon the point whether the three individuals named have been regularly
substituted for their several predecessors. In the view we take of the case it is not necessary
to determine this issue; and we shall assume provisionally that the three petitioners are the
lawful components of the voting trust. Although the present officers of the Binalbagan
Estate, Inc., were elected by the representative of the voting trust, the present trustees are
apparently desirous of ousting said officers, without awaiting the termination of their official
term at the expiration of one year from the date of their election. In, order to effect this
purpose the petitioners in their character as members of the voting trust, on August 2, 1926,
caused the secretary of the Binalbagan Estate, Inc., to issue to the shareholders a notice
calling for a special general meeting of shareholders to be held at 10 a. m., on August 16,
1926, "for the election of the board of directors, for the amendment of the By-Laws, and for
any other business that can be dealt with in said meeting."

Within a few days after said notice was issued Agustin Corua, as member of the existing
board, and Mauro Ledesma, as a simple shareholder of the corporation, instituted a civil
action (No. 3840) in the Court of First Instance of Occidental Negros against the trustees and
the Binalbagan Estate, Inc., for the purpose of enjoining the meeting contemplated in the
notice above-mentioned.
In response to a prayer for a preliminary injunction, in connection with said action, the
respondent judge issued the restraining order, or preliminary injunction, which gave rise to
the present petition for the writ of certiorari. In the dispositive part of said order the
Binalbagan Estate, Inc., its lawyers, agents, representatives, and all others who may be
assisting or collaborating with them, are restrained from holding the general shareholders'
meeting called for the date mentioned and from electing new directors for the company in
substitution of the present incumbents, said injunction to be effective until further order of
the court It is now asserted here by the petitioners that the making of this order was
beyond the legitimate powers of the respondent judge, and it is accordingly prayed that said
order be set aside.
We are of the opinion that this contention is untenable and that the respondent judge acted
within his legitimate powers in making the order against which relief is sought In order to
expose the true inwardness of the situation before us it is necessary to take note of the fact
that under the law the directors of a corporation can only be removed from office by a vote
of the stockholders representing at least two-thirds of the subscribed capital stock entitled
to vote (Act No. 1459, sec. 34); while vacancies in the board, when they exist, can be filled
by mere majority vote (Act No. 1459, sec. 25). Moreover, the law requires that when action
is to be taken at a special meeting to remove the directors, such purpose shall be indicated
in the call (Act No. 1459, sec. 34).

warranto to get them installed into office, even supposing that their title to the office could
be maintained. That the trial judge had jurisdiction to forestall that step and enjoin the
contemplated election is a matter about which there cannot be the slightest doubt. The law
contemplates and intends that there shall be one set of directors at a time and that new
directors shall be elected only as vacancies occur in the directorate by death, resignation,
removal, or otherwise.
It is insinuated that there was some irregularity or another in the election of the present
directorate. We see nothing upon which this suggestion can be safely planted; and at any
rate the present board of directors are de facto incumbents of the office whose acts will be
valid until they shall be lawfully removed from office or cease from the discharge of their
functions. In this case it is not necessary for us to agitate ourselves over the question
whether the respondent judge properly exercised his judicial discretion in granting the order
complained of. It suffices to know that in making the order he was acting within the limits of
his judicial powers.
It will be noted that the order in question enjoins the defendants from holding the meeting
called for August 16; and said order must not be understood as constituting any obstacle for
the holding of the regular meeting at the time appointed in the by-laws of the corporation,
For the reasons stated the petition will be denied, and it is so ordered, with costs.
Johnson, Malcolm, Ostrand, Johns, Romualdez, and VillaReal, JJ., concur.
Petition denied.
_____________

Now, upon examining into the number of shares controlled by the voting trust, it will be
seen that, while the trust controls a majority of the stock, it does not have a clear two-thirds
majority. It was therefore impolitic for the petitioners, in forcing the call for the meeting of
August 16, to come out frankly and say in the notice that one of the purposes of the
meeting was to remove the directors of the corporation from office. Instead, the call was
limited to the election of the board of directors, it being the evident intention of the voting
trust to elect a new board as if the directorate had been then vacant.
But the complaint in civil action No. 3840 directly asserts that the members of the present
directorate were regularly elected at the general annual meeting held in February, 1926;
and if that assertion be true, the proposal to elect another directorate, as per the call of
August 2, if carried into effect, would result in the election of a rival set of directors, who
would probably need the assistance of judgment of court in an independent action of quo

[No. 43413. August 31, 1937]

HIGINIO ANGELES, JOSE DE LARA and AGUEDO BERNABE, as stockholders for and in behalf
and for the benefit of the corporation, Paraaque Rice Mill, Inc., and the other
stockholders who may desire to join, plaintiffs and appellees, vs. TEODORICO B. SANTOS,
ESTANISLAO MAYUGA, APOLONIO PASCUAL, and BASILISA RODRIGUEZ, defendants and
appellants.
1. 1. CORPORATIONS; BOARD OF DIRECTORS; TRUSTEESHIP.There is ample evidence
in the present case to show that the defendants have been guilty of breach of trust
as directors of the corporation and the lower court so found. The board of directors
of a corporation is a creation of the stockholders and controls and directs the affairs
of the corporation by delegation of the stockholders. But the board of directors, or
the majority thereof, in drawing to themselves the powers of the corporation,
occupies a position of trusteeship in relation to the minority of the stock in the
sense that the board should exercise good faith, care and diligence in the
administration of the affairs of the corporation and should protect not only the
interests of the majority but also those of the minority of the stock.
1. 2. ID.; ID.; ACTION FOR THE PROTECTION OF THE RIGHTS OF THE MINORITY
STOCKHOLDERS.Where a majority of the board of directors wastes or dissipates
the funds of the corporation or fraudulently disposes of its properties, or performs
ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon showing
that intracorporate remedy is unavailing, will entertain a suit filed by the minority
members of the board of directors, for and in behalf of the corporation, to prevent
waste and dissipation and the commission of illegal acts and otherwise redress the
injuries of the minority stockholders against the wrongdoing of the majority. The
action in such a case is said to be brought derivatively in behalf of the corporation to
protect the rights of the minority stockholders thereof (7 R. C. L., pars. 293 and 294,
and authorities therein cited; 13 Fletcher, Cyc. of Corp., pars. 593, et seq., and
authorities therein cited).
1. 3. ID. ; ID. ; ID.It is well settled in this jurisdiction that where corporate directors
are guilty of a breach of trustnot of mere error of judgment or abuse of
discretionand intracorporate remedy is futile or useless, a stockholder may
institute a suit in behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the

corporation and indirectly upon the stockholders. An illustration of a suit of this kind
is found in the case of Pascual vs. Del Saz Orozco (19 Phil., 82), decided by this court
as early as 1911. In that case, the Banco Espaol-Filipino suffered heavy losses due
to fraudulent connivance between a depositor and an employee of the bank, which
losses, it was contended, could have been avoided if the president and directors had
been more vigilant in the administration of the affairs of the bank. The stockholders
constituting the minority brought a suit in behalf of the bank against the directors to
recover damages, and this over the objection of the majority of the stockholders
and the directors. This court held that the suit could properly be maintained.
1. 4. ID. ; ID. ; ID. ; RECEIVERSHIP.The action having been properly brought and by
the lower court entertained it was within its power, upon proper showing, to
appoint a receiver of the corporation pendente lite (secs. 173, 174, et seq. Code of
Civil Procedure). The appointment of a receiver upon application of the minority
stockholders is a power to be exercised with great caution. But this does not mean
that the rights of the minority stockholders may be entirely disregarded, and where
the necessity has arisen, the appointment of a receiver for a corporation is a matter
resting largely in the sound discretion of the trial court. Counsel for appellants argue
that the appointment of a receiver pendente lite in the present case has deprived
the corporation, Paraaque Rice Mill, Inc. of its property without due process of law,
But it is too plain to require argument that the receiver was precisely appointed to
preserve the properties of the corporation. The receivership in this case shall
continue until a new board of directors shall have been elected and constituted in
accordance with law and the by-laws of the corporation.
1. 5. ID.; ID.; ACCOUNTING.The lower court in its decision not only orders the
defendant S to account for the properties and funds of the corporation, but it also
and at the same time adjudges him to pay an undetermined amount which is made
to depend upon the result of such accounting. The accounting order was probably
intended by the lower court to be filed with it in this proceeding. This requirement
will delay the final disposition of the case and we are of the opinion that this
accounting should better be filed with the new board of directors whose election
has been ordered by the lower court. The decision of the lower court in this respect
is therefore modified so that the defendant S shall render a complete accounting of
all the corporate properties and funds that may have come to his possession during
the period mentioned in the judgment of the lower court to the new board of
directors to be elected by the stockholders.
1. 6. ID.; ID.; ELECTION AND REMOVAL OF THE DIRECTORS OF A CORPORATION.The
Corporation Law, as amended, in sections 29 to 34, provide for the election and

removal of the directors of a corporation. Our Corporation Law (Act No. 1459, as
amended), does not confer expressly upon the courts the power to remove a
director of a corporation. In some jurisdictions, statutes expressly provide a more or
less summary method for the confirmation of the election and for the amotion of
the directors of a corporation. This is true in New York, New Jersey, Virginia and
other states of the American Union. There are abundant authorities, however,
which hold that if the court has acquired jurisdiction to appoint a receiver because
of the mismanagement of directors these may thereafter be removed and others
appointed in their place by the court in the exercise of its equity jurisdiction (2
Fletcher, Cyc. of Corp., ftn. sec. 358, pp. 118 and 119). In the present case, however,
the properties and assets of the corporation being amply protected by the
appointment of a receiver and in view of the statutory provisions above referred to,
we are of the opinion that the removal of the directors is, under the circumstances,
unnecessary and unwarranted.
APPEAL from a judgment of the Court of First Instance of Rizal. Zandueta, J.
The facts are stated in the opinion of the court.
P. Magsalin and A. Sta. Maria for appellants.
Eulogio P. Revilla and Barrera & Reyes for appellees.
LAUREL, J.:
The plaintiffs and the defendants are all stockholders and members of the board of directors
of the "Paraaque Rice Mill, Inc.," a corporation organized for the purpose of operating a
rice mill in the municipality of Paraaque, Province of Rizal. On September 6, 1932, a
complaint entitled "Higinio Angeles, Jose de Lara, Aguedo Bernabe, as stockholders, for and
in behalf of the corporation, Paraaque Rice Mill, Inc., and other stockholders of said
corporation who may desire to join, plaintiffs, vs. Teodorico B. Santos, Estanislao Mayuga,
Apolonio Pascual, and Basilisa Rodriguez, defendants" was filed with the Court of First
Instance of Rizal. After formal allegations relative to age and residence of the parties and
the due incorporation of the Paraaque Rice Mill, Inc., the complaint avers substantially the
following: (a) That the plaintiffs are stockholders and constitute the minority and the
defendants are also stockholders and constitute the majority of the board of directors of the
Paraaque Rice Mill, Inc.; (b) that at an extraordinary meeting held on February 31, 1932,
the stockholders appointed an investigation committee of which the plaintiff Jose de Lara
was chairman and the stockholders Dionisio Tomas and Aguedo Bernabe were members, to

investigate and determine the properties, operations, and losses of the corporation as
shown in the auditor's report corresponding to the year, 1931, but the def endants,
particularly Teodorico B. Santos, who was the president of the corporation, denied access to
the properties, books and records of the corporation which were in their possession; (c) that
the defendant Teodorico B. Santos, in violation of the by-laws of the corporation, had taken
possession of the books, vouchers, and corporate records as well as of the funds and income
of the Paraaque Rice Mill, Inc., all of which, according to the by-laws, should be under the
exclusive control and possession of the secretary-treasurer, the plaintiff Aguedo Bernabe;
(d) that the said Teodorico B. Santos, had appropriated to his own benefit properties, funds,
and income of the corporation in the sum of P10,000; (e) that Teodorico B. Santos, for the
purpose of illegally controlling the affairs of the corporation, refused to sign and issue the
corresponding certificate of stock for the 600 fully paid-up shares of the plaintiff, Higinio
Angeles, of the total value of P15,000; (/) that notwithstanding written requests made in
conformity with the by-laws of the corporation of three members of the board of directors
who are holders of more than one-third of the subscribed capital stock of the corporation,
the defendant Teodorico B. Santos as president of the corporation refused to call a meeting
of the board of directors and of the stockholders; (g) that in violation of the by-laws of the
corporation, the defendants who constitute the majority of the board of directors refused to
hold ordinary monthly meetings of the board since March, 1932; (h) that Teodorico B.
Santos as president of the corporation, in connivance with his co-defendants, was disposing
of the properties and records of the corporation without authority from the board of
directors or the stockholders of the corporation and without making any report of his acts to
the said board of directors or to any other officer of the corporation, and that, to prevent
any interference with or examination of his arbitrary acts, he arbitrarily suspended plaintiff
Jose de Lara from the office of general manager to which office the latter had been lawfully
elected by the stockholders; and (i) that the corporation had gained about P4,000 during the
first half of the year 1932, but that because of the illegal and arbitrary acts of the
defendants not only the funds but also the books and records of the corporation are in
danger of disappearing.
The complaint prays: (a) That after the filing of the bond in an amount to be fixed by the
court, Melchor de Lara of Paraaque, Rizal, be appointed receiver of the properties, funds,
and business of the Paraaque Rice Mill, Inc., as well as the books and records thereof, with
authority to continue the business of the corporation; (b) that the defendant Teodorico B.
Santos be ordered to render a detailed accounting of the properties, funds and income of
the corporation from the year 1927 to date; (c) that the said defendant be required to pay
to the corporation the amount of P10,000 and other amounts which may be found due to
the said corporation as damages or for any other cause; (d) that said defendant be ordered
to sign the certificate of stock subscribed to and paid by the plaintiff Higinio Angeles; and (e)
that the members of the board of directors of the Paraaque Rice Mill, Inc., be removed and

an extraordinary meeting of the stockholders called for the purpose of electing a new board
of directors.

"tiqui-tiqui", the income of which was never turned over or reported to the treasurer of the
corporation.

On the date of the filing of the complaint, September 6, 1932, the court issued an ex parte
order of receivership appointing Melchor de Lara as receiver of the corporation upon the
filing of a bond of P1,000 by the plaintiffs-appellees. The bond of the receiver was fixed at
P4,000.

The defendants-appellants objected to the petition for the appointment of a receiver on the
ground, among others, that the court had no jurisdiction over the Paraaque Rice Mill, Inc.,
because it had not been included as party defendant in this case and that, therefore, the
court could not properly appoint a receiver of the corporation pendente lite.

Upon an urgent motion of the defendants-appellants setting forth the reasons why Melchor
de Lara should not have been appointed receiver, and upon agreement of the parties, the
trial court, by order of September 13, 1932, appointed Benigno Agco, as receiver, in lieu of
Melchor de Lara. About a month later, or on October 14, 1932, the court, after considering
the memoranda filed by both parties, revoked its order appointing Agco as receiver.

After hearing both parties, the trial court, by order of October 31, 1934, appointed Emilio
Figueroa, as receiver of the corporation, after giving a bond in the amount of P2,000. An
urgent motion for the reconsideration of this order, filed by counsel for the defendantsappellants on November 3, 1934, was denied by the court on November 7, 1934.

On July 12, 1933, the defendants-appellants presented their amended answer to the
complaint, containing a general and specific denial, and alleging as special defense that the
defendant Teodorico B. Santos refused to sign the certificate of stock in favor of the plaintiff
Higinio Angeles for 600 shares valued at P15,000, because the board of directors decided to
give Higinio Angeles only 320 shares of stock worth P8,000. The answer contains a
counterclaim for P5,000 alleged to have been suffered by the cor-poration due to the
alleged illegal and malicious procurement by the plaintiffs of an ex parte order of
receivership. Damages in the amount of P2,000 are also alleged to have been suffered by
the defendants by reason of the failure of the plaintiffs to present their grievances to the
board of directors before going to court. The amended answer sets f orth, f urthermore, a
cross-complaint against the plaintiffs, and in behalf of the Paraaque Rice Mill, Inc., based
on the -alleged failure of the plaintiff Higinio Angeles to render a report of his administration
of the corporation from February 14 to June 30, 1928, during which time the corporation is
alleged to have had accrued earnings of approximately P3,000. In both the counterclaim and
crosscomplaint Paraaque Rice Mill, Inc, is joined as party defendant.
On July 24, 1934, the plaintiffs-appellees renewed their petition for the appointment of a
receiver pendente lite alleging, among other things, that defendant Teodorico B. Santos was
using the funds of the corporation for purely personal ends; that said Teodorico B. Santos
was managing the funds of the corporation in a manner highly prejudicial to the interests of
the corporation and its stockholders; that said defendant did not render any account of his
management or of the condition of the business of the corporation; that since 1932 said
defendant called no meeting of the board of directors or of the stockholders thus enabling
him to continue holding, without any election, the position of president and, finally, that of
manager; and that, without the knowledge and consent of the stockholders and of the
board of directors, the said defendant installed a small rice mill for converting rice husk into

On November 8, 1934, the trial court, having heard the case on its merits, rendered a
decision, the dispositive part of which is as follows: "Por todo lo expuesto, el Juzgado f falla
este asunto:
1. "1. Ordenando al demandado Teodorico B. Santos a rendir cuenta detallada de las
propiedades, fondos e ingresos de la corporacin Paraaque Rice Mill, Inc., desde el
ao 1931 hasta la fecha;
2. "2. Condenando a dicho demandado a pagar a la corporacin Paraaque Rice Mill,
Inc., cualesquiera cantidad o cantidades que resultare en deber a dicha corporacin;
de acuerdo con dicha rendicin de cuentas;
3. "3. Declarando al demandante Higinio M. Angeles con derecho a tener expedido a
su nombre 600 acciones por valor par de P15,000.
4. "4. Destituyendo a los demandados de su cargo como directores de la corporacin
hasta la nueva eleccin por los accionistas que se convocar una vez firme esta
sentencia; y
5. "5. Condenando a los demandados a pagar las costas."
On November 21, 1934, the defendants-appellants, moved for reconsideration of the
decision and at the same time prayed for the dismissal of the case, because of defect of
parties defendant.
On December 6, 1934, the Paraaque Rice Mill, Inc., thru counsel for the defendants,
entered a special appearance for the sole purpose of objecting to the order of the court of
October 31, 1934, appointing a receiver, on the ground that the Paraaque Rice Mill, Inc.,
was not a party to the proceedings. And on December 8, 1934, the defendants excepted to
the decision of the trial court and moved for a new trial on the ground that the evidence

presented was insufficient to justify the decision and that said decision was contrary to law.
The motions for reconsideration and new trial and the special appearance were, by separate
orders bearing date of December 19, 1934, denied by the trial court. The case was finally
elevated to this court by bill of exceptions.
The defendants-appellants submit the following assignment of errors:
1. "1. The lower court erred in holding that it has jurisdiction to appoint a receiver of
the corporation, 'Paraaque Rice Mill, Inc.,' on October 31, 1934.
2. "2. The lower court erred in overruling the motion of the defendants to include the
defendant corporation as party defendant and in holding that it is not a necessary
party.
3. "3. The lower court erred in not granting a motion for a new trial because there is a
defect of party defendant
4. "4. The lower court erred in not dismissing the case because a necessary defendant
was not made a party in the case.
5. "5. The lower court erred in ordering the defendant Teodorico B. Santos to render a
detailed accounting of the properties, funds and income of the corporation
'Paraaque Rice Mill, Inc.,' from the year 1931 to this date.
"6. The lower court erred in condemning the defendant Teodorico B. Santos to pay
the corporation whatever sum or sums which may be found owing to said
corporation, in accordance with the said accounting to be done by him.
"7. The lower court erred in ordering the destitution of the defendants from their office
as members of the board of directors of the corporation,.until the new election of the
stockholders which shall be held once the decision has become final.
"8. The lower court erred in declaring that Higinio Angeles is entitled to have in his
name 600 shares of stock of the par value of P15,000.
"9. The lower court erred in overruling and denying appellants' motion for the
reconsideration and the dismissal of the case dated November 21, 1934.
"10. The lower court erred in denying the motion of these appellants for new trial."
In their discussion of the first, second, third, and fourth assignments of error, the
defendants-appellants vigorously assert that the Paraaque Rice Mill, Inc., is a necessary

party in this case, and that not having been made a party, the trial court was without
jurisdiction to appoint a receiver and should have dismissed the case.
There is ample evidence in the present case to show that the defendants have been guilty of
breach of trust as directors of the corporation and the lower court so found. The board of
directors of a corporation is a creation of the stockholders and controls and directs the
affairs of the corporation by delegation of the stockholders. But the board of directors, or
the majority thereof, in drawing to themselves the powers of the corporation, occupies a
position of trusteeship in relation to the minority of the stock in the sense that the board
should exercise good faith, care and diligence in the administration of the affairs of the
corporation and should protect not only the interests of the majority but also those of the
minority of the stock. Where a majority of the board of directors wastes or dissipates the
funds of the corporation or fraudulently disposes of its properties, or performs ultra vires
acts, the court, in the exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed by the minority members of
the board of directors, for and in behalf of the corporation, to prevent waste and dissipation
and the commission of illegal acts and otherwise redress the injuries of the minority
stockholders against the wrongdoing of the majority. The action in such a case is said to be
brought derivatively in behalf of the corporation to protect the rights of the minority
stockholders thereof (7 R. C. L., pars. 293 and 294, and authorities therein cited; 13 Fletcher,
Cyc. of Corp., pars. 593, et seq., and authorities therein cited).
It is well settled in this jurisdiction that where corporate directors are guilty of a breach of
trustnot of mere error of judgment or abuse of discretionand intracorporate remedy is
futile or useless, a stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong
inflicted directly upon the corporation and indirectly upon the stockholders. An illustration
of a suit of this kind is found in the case of Pascual vs. Del Saz Orozco (19 Phil., 82), decided
by this court as early as 1911. In that case, the Banco Espaol-Filipino suffered heavy losses
due to fraudulent connivance between a depositor and an employee of the bank, which
losses, it was contended, could have been avoided if the president and directors had been
more vigilant in the administration of the affairs of the bank. The stockholders constituting
the minority brought a suit in behalf of the bank against the directors to recover damages,
and this over the objection of the majority of the stockholders and the directors. This court
held that the suit could properly be maintained.
The contention of the defendants in the case at bar that the Paraaque Rice Mill, Inc.,
should have been brought in as a necessary party and the action maintained in its name and
in its behalf directly states the general rule, but not the exception recognized by this court in

the case of Everett vs. Asia Banking Corporation (49 Phil., 512, 527). In that case, upon
invocation of the general rule by the appellees there, this court said;
"Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress
Wrongs done to the corporation, but that the action must be brought by the board of
directors, the appellees argueand the court below heldthat the corporation Teal &
Company is a necessary party plaintiff and that the plaintiff stockholders, not having made
any demand on the board to bring the action, are not the proper parties plaintiff. But, like
most rules, the rule in question has its ..exceptions. It is alleged in the complaint and,
consequently, admitted through the demurrer that the corporation Teal & Company is
under the complete control of the principal defendants in the case, and, in these
circumstances it is obvious that a demand upon the board of directors to institute action
and prosecute the same effectively would have been useless, and the law does not require
litigants to perform useless acts. (Exchange Bank of Wewoka vs. Bailey, 29 Okla., 246;
Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenden,
106 Cal., 329; Glenn vs. Kittanning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water
Company, 104 U. S., 450.)"
The action having been properly brought and by the lower court entertained it was within
its power, upon proper showing, to appoint a receiver of the corporation pendente lite (secs.
173, 174, et seq. Code of Civil Procedure). The appointment of a receiver upon application of
the minority stockholders is a power to be exercised with great caution. But this does not
mean that the rights of the minority stockholders may be entirely disregarded, and where
the necessity has arisen, the appointment of a receiver for a corporation is a matter resting
largely in the sound discretion of the trial court. Counsel for appellants argue that the
appointment of a receiver pendente lite in the present case has deprived the corporation,
Paraaque Rice Mill, Inc., of its property without due process of law. But it is too plain to
require argument that the receiver was precisely appointed to preserve the properties of
the corporation. The receivership in this case shall continue until a new board of directors
shall have been elected and constituted in accordance with law and the by-laws of the
corporation,
The first, second, third, and fourth assignments of error are, therefore, overruled.
The appellants contend in their fifth and sixth assignments of error that the lower court
erred in ordering the defendant, Teodorico B. Santos, to render a detailed accounting of the
properties, f unds and income of the corporation, Paraaque Rice Mill, Inc., from the year
1931 and in condemning him to pay "the corporation whatever sum or sums which may be
found owing to said corporation, in accordance with the said accounting to be done by him."
We note that the lower court in its decision not only orders the defendant Santos to account

for the properties and funds of the corporation, but it also and at the same time adjudges
him to pay an undetermined amount which is made to depend upon the result of such
accounting. The accounting order was probably intended by the lower court to be filed with
it in this proceeding. This requirement will delay the final disposition of the case and we are
of the opinion that this accounting should better be filed with the new board of directors
whose election has been ordered by the lower court. The decision of the lower court in this
respect is therefore modified so that the defendant Santos shall render a complete
accounting of all the corporate properties and f unds that may have come to his possession
during the period mentioned in the judgment of the lower court to the new board of
directors to be elected by the stockholders.
In the seventh assignment of error, the appellants contend that the lower court erred in
ordering the removal of the defendants from their offices as members of the board of
directors of the corporation. The Corporation Law, as amended, in sections 29 to 34, provide
for the election and removal of the directors of a corporation. Our Corporation Law (Act No.
1459, as amended), does not confer expressly upon the courts the power to remove a
director of a corporation. In some jurisdictions, statutes expressly provide a more or less
summary method for the confirmation of the election and for the amotion of the directors
of a corporation. This is true in New York, New Jersey, Virginia and other states of the
American Union. There are abundant authorities, however, which hold that if the court has
acquired jurisdiction to appoint a receiver because of the mismanagement of directors
these may thereafter be removed and others appointed in their place by the court in the
exercise of its equity jurisdiction (2 Fletcher, Cyc. of Corp., ftn. sec. 358, pp. 118 and 119). In
the present case, however, the properties and assets of the corporation being amply
protected by the appointment of a receiver and in view of the statutory provisions above
referred to, we are of the opinion that the removal of the directors is, under the
circumstances, unnecessary and unwarranted. The seventh assignment of error is,
therefore, sustained.
Under the eighth assignment of error, the appellants argue that the lower court erred in
deciding that the plaintiff Higinio Angeles is entitled to the issuance in his name of a
certificate covering 600 shares of stock of the total par value of P15,000. A review of the
evidence, oral and documentary, relative to the number of shares of stock to which Higinio
Angeles is entitled, shows that Higinio Angeles brought in P15,000 partly in money and
partly in property, for 600 shares of stock. The very articles of incorporation signed by all the
incorporators, among whom are the defendants, show that Higinio Angeles paid P5,600 on
account of his subscription amounting to P10,000. The amount of P5,600 is the value of
Angeles' cinematograph building in Bacoor, Cavite, which he transferred to the municipality
of Paraaque where the same was reconstructed for the use of the corporation. The
receipts signed by the Philippine Engineering Company and the testimony of Higinio Angeles

and Aguedo Bernabe (secretary-treasurer of the corporation) show that Higinio Angeles paid
with his own funds ,the sum of P2,750 to the Philippine Engineering Co. as part of the
purchase price of the rice mill bought for the corporation. Angeles paid a further sum of
P2,397.99 to the Philippine Engineering Company. It also appears that f or the installation of
the rice mill, the construction of a camarn, and the cement paving (cementacin) of the
whole area of two camarines, and for the excavation of a well for the use of the rice mill, the
plaintiff Higinio Angeles paid with his own funds the amount of P7,431.47. Adding all these
sums together we have a total of P18,179.46. At a meeting of the board of directors on
December 27, 1931, which meeting was convoked by Angeles, it seemed to have been
agreed that Angeles was to be given shares of stock of the total par value of P15,000.
Angeles wanted to have P16,000 worth of stock to his credit for having made the
disbursements mentioned above, but he finally agreed to accept 600 shares worth only
P15,000. The certificate of stock, however, was not issued as disagreement arose between
him and the defendant Santos. We, therefore, find no error in the decision of the lower
court ordering the issuance of a certificate for 600 shares of stock of the total par value of
P15,000 to Higinio Angeles.
It is unnecessary to consider the ninth and tenth assignments of error.
In view of the foregoing, we hold:
1. (1) That the action in the present case was properly instituted by the plaintiffs as
stockholders for and in behalf of the corporation Paraaque Rice Mill, Inc., and
other stockholders of the said corporation;
2. (2) That the lower court committed no reviewable error in appointing a receiver of
the corporation pendente lite;
3. (3) That the lower court committed no error in ordering an election of the new
board of directors, which election shall be held within thirty days from the date this
decision becomes final;
4. (4) That Teodorico B. Santos shall render an accounting of all the properties, funds
and income of the corporation which may have come into his possession to the new
board of directors;
5. (5) That the receiver, Emilio Figueroa, shall continue in office until the election and
qualification of the members of the new board of directors;
6. (6) That upon the constitution of the new board of directors, the said receiver shall
turn over all the properties of the corporation in his possession to the corporation,
or such person or persons as may be duly authorized by it; and
7. (7) That Higinio Angeles, or his successor in interest, is entitled to 600 shares of
stock at the par value of P15,000 and the lower court committed no error in
ordering the issuance of the corresponding certificate of stock.

On June 10, 1937, counsel for the plaintiffs-appellees filed a motion making it appear of
record that Higinio Angeles, one of the plaintiffs and appellees, died on May 4, 1937 and
that one of his daughters, Maura Angeles y Reyes, had been granted letters of
administration as evidenced by the document attached to the motion as Exhibit A, and
praying that said Maura Angeles y Reyes be substituted as one of the plaintiffs and
appellees in lieu of Higinio Angeles, deceased. This motion is hereby granted.
Defendants-appellants shall pay the costs in both instances. So ordered.
Avancea, C. J., Villa-Real, Abad Santos, Imperial, Diaz, and Concepcion, JJ., concur.
Judgment modified.

The facts are stated in the opinion of the Court.

[No. L-4824. June 30, 1953]

Manuel L. Fernandez for appellant

Lingayen Gulf Electric Company, Inc., plaintiff and appellant, vs. Irineo Baltazar, defendant
and appellee.

Sofronio C. .Quimson and Daniel C. Macaraeg for appellee.

Montemayor, J.:

[No. L-6344. June 30 1953]

Lingayen Gulf Electric Company, Inc., plaintiff and appellee, vs. Irineo Baltazar, defendant
and appellant.
1.Corporations; Stock Subscriptions; Publication Required of Call for Payment of Unpaid
Subscriptions; Rule Different as to Insolvent Corporations.If the corporation involved is
insolvent, all unpaid stock subscription, become payable on demand and are immediately
recoverable in an action instituted by the assignee.. :But when the corporation is a solvent
concern, the law requires that notice of any call for the payment of unpaid subscription
should be made not only personally but also by publication. (Act 1459, section 40 as
amended.)
2.Id.; Release form Payment of Stock Subscription.In order to effect the release of a
stockholder from his stock subscription, there must be unanimous consent of the stockholders of the corporation. (18 C. J. 8. 1874; 2 Thompson on Corporations, pp. 186, 194.)
From this rule, however, there are exceptions: "Where it is given pursuant to a bone fide
compromise, or to set off a debt due from the corporation, release, supported by
consideration, will be effectual as against dissenting stockholders and subsequent and
existing creditors. A release which might originally have been held invalid may be sustained
after a considerable lapse of time." (18 C. J. S. 874.)
3.Id.; Salaries of Officers.The by-laws of the corporation are silent as to the salary of the
President. While resolutions of the incorporators and stockholders provide salaries for the
general manager, secretary-treasurer and other employees, there was no provision for the
President's salary. On the other hand, other resolutions provide for per diems to be paid to
the President and the directors for each meeting attended. Held: This leads to the
conclusion that the President and the board of directors were expected to serve without
salary, and that the per diems paid to them were sufficient compensation for their services.
APPEAL from a judgment of the Court of First Instance of Pangasinan. Mejia, J.

These two cases here on appeal stem from the same case, that of civil case No. 10944 of the
Court of First Instance
of Pangasinan. From the trial court's decision, plaintiff Lingayen Gulf Electric Power
Company, Inc. appealed directly to this court under G. R. No. L-4824. Defendant Ireneo
Baltazar appealed to the Court of Appeals. By a resolution of that appellate tribunal, the
appeal was ce, tified to this court pursuant to section 17, (5) and (6) of the Judiciary Act of
1948, and is now listed here under G. R. No. L-6344.
The main facts of the case are not disputed, and we are reproducing and making our own
the relation of facts contained in the decision appealed from.
"The plaintiff, Lingayen Gulf Electric Power Company is a domestic corporation with an
authorized capital stock of P300,000 divided into 3,000 shares with a par value of P100 per
share. The defendant, Irineo Baltazar appears to have subscribed for 600 shares on account
of which he had paid upon the organization of the corporation the sum of P15,000. (See
Exhibit A, page 2). After incorporation, the defendant made further payments on account of
his subscription, leaving a balance of P18,500 unpaid for, which amount, the plaintiff now
claims in this action.
"On July 23, 1946, a majority of the stockholders of the corporation, among them the herein
defendant, held a meeting and adopted stockholders' resolution No. 17. By said resolution,
it was agreed upon by the stockholders present to call the balance of all unpaid subscribed
capital stock as of July 23, 1946, the first 50 per cent payable within 60 days beginning
August 1, 1946, and the remaining 50 per cent payable within 60 days beginning October 1,
1946. The resolution also provided, that all unpaid subscription after the due dates of both
calls would be subject to 12 per cent interest per annum. Lastly, the resolution provided,
that after the expiration of 60 days' grace which would be on December 1, 1946, for the first
call, and on February 1, 1947, for the second call, all subscribed stocks remaining unpaid
would revert to the corporation. (See Exhibit F and Exhibit I)

"On September 22, 1946, the plaintiff corporation wrote a letter to the defendant reminding
him that the first 50 per cent of his unpaid subscription would be due on October 1, 1946.
The plaintiff reqUested the defendant to 'kindly advise the company thru the undersigned
your decision regarding this matter.' (See Exhibit 4). The defendant answered on September
25,1946, asking the corporation that he be allowed to pay his unpaid subscription by
February 1, 1947. In his answer, the defendant also agreed that if he could not pay the
balance of his subscription by February 1, 1947, his unpaid subscription would be reverted
to the corporation. (See: Exhibit 5).

"On September 28, 1949, the legal, counsel of the plaintiff corporation wrote a letter to the
defendant, demanding the payment of the unpaid balance of his subscription amounting to
P18,500. Copy of this letter was sent by registered mail to the defendant on September 29,
1949, (See Exhibit G). The defendant ignored the said demand. Hence this action.
"The defendant, in his answer, disclaims liability to the plaintiff corporation on the following
grounds:
'1. That the plaintiffs' action is premature because there was no valid call; and

"On December 19, 1947, the defendant wrote another letter to the members of the Board
of Directors of the plaintiff corporation, offering to withdraw completely from the
corporation by selling out to the corporation all his shares of stock in the total amount of
P23,000. (See Exhibit 8). Apparently this offer of the defendant was left unacted upon by the
plaintiff.
"On April 17, 1948, the Board of Directors of the plaintiff corporation held a meeting, and in
the course of the said meeting they adopted Resolution No. 17. This resolution in effect set
aside the stockholders resolution approved on June 23,. 1946 (Exhibit D) , on the ground
that said stockholders' resolution was null and void; and because the plaintiff corporation
was not in a. financial position to absorb the unpaid balance of the subscribed capital stock.
At the said meeting the directors also decided to call 50 per cent of the unpaicl subscription
within 30 days from April 17, 1948, the call pakable within 60 days from receipt of notice
from the Secretary-Treasurer. This resolution also authorized legal counsel of the company
to take all the necessary legal steps for the collection of the payment of the call. (See Exhibit
E-2).

2. That granting that there was a valid call, he was released from the obligation of the
balance of his subscription by stockholders' resolution No. 17 and No, 4.'
"By way of counterclaim, the defendant also claims from the plaintiff a reasonable
compensation at the rate of P700 per month as president of the company, for the period
from March 1, 1946 to December 31, 1948.
"In the light of the foregoing undisputed facts, the only questions are as follows:
'1. Was the call Exhibit E---2 valid?
'2. Was the defendant released from the obligation of the unpaid balance of his subscription
by virtue of stockholders' resolution Nos. 17 and 4?
'3. Is the defendant entitled to compensation as president of the plaintiff corporation?' "

"On June 10, 1949, the stockholders of the corporation held another meeting in which the
stockholders were all present, either in person or by proxy. At such meeting the
stockholders adopted resolution No. 4, whereby it was agreed to revalue the stocks and
assets of the company so as to attract outside investors to put in money for the
rehabilitation of the company. The president was authorized to make all arrangeMent for
such appraisal and the Secretary to call a meeting upon completion of the reassessment.
(See Exhibit 2).

In an exhaustive and well prepared decision, Judge M. Mejia of the lower court found that
the call for payment embodied in resolution No. 17 of July 23, 1946 was null and void for
lack of publication; consequently, he dismissed the complaint as premature. He further held
said resolution null and void in so far as it tried to relieve the defendant from liability on his
unpaid subscription, on the ground that the resolution was not approved by all the
stockholders of the corporation. He also dismissed the defendant's counterclaim for
compensation as president of the corporation.

"It was admitted by the defendant that he received notice from the Secretary-Treasurer of
the company, demanding payment of the unpaid balance of his subscription. It was agreed
by the parties: that the call of the Board of Directors was not published in a newspaper of
general circulation as required by section 40 of the Corporation Law.

Inasmuch as in the two appeals, the assignment of errors are related to each other, and
because they refer to the same case, we propose to determine both appeals in one single
decision.

We agree with the lower court that the law requires that notice of any call for the payment
of unpaid subscription should be made not only personally but also by publication. This is
clear from the provisions. of section 40 of the Corporation Law, Act No. 1459, as amended,
which reads as follows

the directors signed by a clerk, was held insufficient.' These cases and others proceed on the
theory that where the manner of giving notice is prescribed by law every condition
precedent must be strictly and literally complied with." (Thompson on Corporations, Vol. 5,
3rd ed.)

"SEC. 40. Notice of call for unpaid subscriptions must be either personally served upon each
stockholder or deposited in the post-office, postage prepaid, addressed to him at his place
of residence, if known, and if not known, addressed to the place whex e the principal office
of the corporation is situated. The notice must also be published once a week for four
successive weeks hi some newspaper of general circulation devoted to the publication of
general news published at the place where the principal office of the corporation is
established or located, and posted in some prominent place at the works of the corporation
if any such there he if there be no newspaper published at the place where the principal
office of the corporation is established or located, then such notice may be published in any
newspaper of general news in the Philippines."

This view is shared by Justice Fisher. In his book "The Philippine Law on Stock Corporations"
he says: "Not only must personal notice be given in one of these manners, but the notice
must also be published once a week, for four consecutive weeks, in some newspaper."
(p.110.)

It will be noted that section 40 is mandatory as regards publication, using the word "must".
As correctly stated by the trial court, the reason for the mandatory provision is not only to
assure notice to all subscribers, but also to assure equality and uniformity in the assessment
on stock-holders. (14 C. J. 639).

We find the citation of authorities made by plaintiff and appellant inapplicable. In the case
of Velasco vs. Poizat (37 Phil. 805) , the corporation involved was insolvent, in which case all
unpaid stock subscriptions become payable on demand and are immediately recoverable in
an action instituted by the assignee. Said the court in that 'case :
"* * * it is now quite well' settled that when the corporation becomes insolvent, with
proceedings instituted by creditors to wind up and distribute its assets, no call or
assessment is necessary before the institution of suits to collect unpaid balance on
subscription."
But when the corporation is a solvent concern, the rule

This rule finds support in authorities on corporation law, such as, Thompson on
Corporations, Vol. 5, 3rd edition, pages 588-590, from which we make the following
quotation:
"Sec. 3744. Provisions requiring notice Of calls.The governing statute, charter or by-laws
usually require that notice of calls be given the subscriber or stockholder. If any particular
notice or demand is required by either of these, or by the contract of subscrip- tion, then
such notice or demand must be given, and must be alleged and proved in order to maintain
an action for the call,* * *
"Sec. 3745. Notice.Compliance with requirementsFrom what has preceded it is clear
that where any particular form or kind of notice is required, such form or kind must be
giventhe requirement must be complied with. Thus, where the charter expressly required
notice to be given in certain newspapers for a certain number of days, the corporation must
show compliance with the conditions before recovery, on the call. An action is ordinarily
made effective by notice thereof to the subscribers, in accordance with the by-laws or
general regulations of the corporation in that regard. So, where there are statutory or other
regulations as to the form and sufficiency of the notice, these must be followed. Thus,
where such a notice was required to be signed by the directors, a notice with the names of

is:
"It is again insisted that plaintiffs cannot recover because the suit was not preceded by a
call, or assessment against the defendant as a subscriber, and that until this is done no right
of action accrues. In a suit by a solvent going corporation to collect a subscription, and in
certain suits provided by statute this would be true; * * *." (Id.)
Going to the claim of defendant and appellant that Resolution No. 17 of 1946 released him
from the obligation to pay for his unpaid subscription, the authorities are generally agreed
that in order to effect the release, there must be unanimous consent of the stockholders of
the corporation. We quote some authorities :
"Subject to certain exceptions, considered in subdivision (3) of this section, the general rule
is that a valid and binding subscription for tock of a. corporation cannot be cancelled so as
to release the subscriber from liability thereon without the consent of all the stockholders
or subscribers. Furthermore, a subscription cannot be cancelled by the company, even
under a secret or collateral agreement for cancellation made with the subscriber at the time

of the subscription, as against persons who subsequently subscribed or purchased without

notice of such agreement." (18 C.J.S. 874).
" (3) Exceptions.
"In particular circumstances, as where it is given pursuant to a bona fide compromise, or to
set off a debt due from the corporation, a release, supported by consideration, will be
effectual as against dissenting stockholders and subsequent and existing creditors. A release
which might originally have been held invalid may be sustained after a considerable lapse of
time." (18 C.J.S. 874).
In the present case, the release claimed, by defendant and appellant does not fall under the
exception above referred to, because it was not given pursuant to a bona fide compromise,
or to set off a debt due from the corporation, and there was no consideration for it.
Another authority :
"SEc. 850. Unanimous consent of stockholders necessary to release subscriber.* * * It may
be asserted as the first rule under this proposition that, after a valid subscription to the
capital stock of a corporation has been made and accepted, there can be no cancellation or
release from the obligation without the consent of the corporation and all the stockholders;
* * *" (2 Thompson on Corporations, p. 186).
He states the reason for the rule as follows :
"SEc. 855. Right to withdraw as against subscribers.A contract of subscription is, at least in
the sense which creates an estoppel, a contract among the several subscribers. For this
reason no one of the subscribers can withdraw from the contract without the consent of all
the others, and thereby diminish, without the universal consent, the common fund in which
all have acquired an interest. * * * (2 Thompson on Corporations, p. 194).
As already found by the trial court, the release attempted in Resolution No. 17 of 1946 was
not valid for lack of a unanimous vote. It found that at least seven stockholders were absent
from the meeting when said resolution was approved.

the trial court was called upon to pass upon it, because unless so passed upon and
determined, it might decisively affect the case on appeal. Supposing that on appeal the
appellate court decides that the call was valid, then it would be important to know whether
or not in spite of the validity of the call, defendant was nevertheless not liable because he
had been validly released by a resolution of the corporation. If that question was not
decided by the trial court, and naturally was not touched upon in the appeal, then the
appellate court would have no occasion to pass upon it, and it might be necessary to bring
another action to determine the point, which means multiplicity of suits. Moreover, the
authority given to the courts to render judgments for declaratory relief in order to
determine the rights or duties of parties over a certain transaction or under a certain
written instrument, or to remove the uncertainty or controversy over the same (Rule 66 of
the Rules of Court) , justified the trial court in passing upon this question of release.
As regards the compensation of President claimed by defendant and appellant, it is clear
that he is not entitled to the same. The by-laws of the company are silent as to the salary of
the President. And, while resolutions of the incorporators and stockholders (Exhibits G-1
and I-1) provide salaries for the general manager, secretary-treasurer and other employees,
there was no provision for the salary of the President. On the other hand, other resolutions
(Exhibits H-1 and J-3) provide for per diems to be paid to the President and the directors of
each meeting attended, P10 for the President and P8 for each director, which were later
increased to P25 and P15, respectively. This leads to the conclusions that the President and
the board of directors were expected to serve without salary, and that the per diems paid to
them were sufficient compensation for their services. Furthermore, for defendant's several
years of service as President and up to the filing of the action against him, he never filed a
claim for salary. He thought of claiming it only when this suit was brought against him.
In conclusion we hold that under the Corporation Law, notice of call for payment for unpaid
subscribed stock must be published, except when the corporation is insolvent, in which
case, payment is immediately demandable. We also rule that release from such payment
must be made by all the stockholders.
In view of the foregoing and finding no reversible error in the decision appealed, the same is
hereby affirmed.
No pronouncement as to costs.

Defendant and appellant, however, contends that after dismissing the complaint for being
premature, there was no necessity or reason for the trial court to go further and say that
defendant was not validly released from the payment for his unpaid subscription. It must be
borne in mind, however, that this was one of the principal issues involved in the case and

Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Reyes, Jugo, Bautista Angelo and Labrador, JJ.,
con

Western Institute of Technology, Inc. vs. Salas

G.R. No. 113032. August 21, 1997.*
WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS ENRIQUEZ,
PRESTON F. VILLASIS & REGINALD F. VILLASIS, petitioners, vs. RICARDO T. SALAS,
SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS &
HON. JUDGE PORFIRIO PARIAN, respondents.
Corporation Law; Two ways by which members of the board can be granted compensation
apart from reasonable per diems.There is no argument that directors or trustees, as the
case may be, are not entitled to salary or other compensation when they perform nothing
more than the usual and ordinary duties of their office. This rule is founded upon a
presumption that directors/trustees render service gratuitously, and that the return upon
their shares adequately furnishes the motives for service, without compensation. Under the
foregoing section, there are only two (2) ways by which members of the board can be
granted compensation apart from reasonable per diems: (1) when there is a provision in the
by-laws fixing their compensation; and (2) when the stockholders representing a majority of
the outstanding capital stock at a regular or special stockholders meeting agree to give it to
them.
Same; Members of the board may receive compensation, in addition to reasonable per
diems, when they render services to the corporation in a capacity other than as
directors/trustees.This proscription, however, against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Worthy of note is the clear
phraseology of Section 30 which states: x x x [T]he directors shall not receive any
compensation, as such directors, x x x. The phrase as such directors is not without
significance for it delimits the scope of the prohibition to compensation given to them for
services performed purely in their capacity as directors or trustees. The unambiguous
implication is that members of the board may receive compensation, in addition to
reasonable per diems, when they render services to the corporation in a capacity other than
as directors/trustees. In the case at bench, Resolution No. 48, s. 1986 granted monthly
compensation to private respondents not in their capacity as members of the board, but
rather as officers of the corporation, more particularly as Chairman, Vice-Chairman,
Treasurer and Secretary of Western Institute of Technology.

Same; Remedial Law; Action; Meaning of Derivative Suit; For a derivative suit to prosper, it is
required that the minority shareholder who is suing for and on behalf of the corporation
must allege in his complaint before the proper forum that he is suing on a derivative cause of
action on behalf of the corporation and all other shareholders similarly situated who wish to
join.A derivative suit is an action brought by minority shareholders in the name of the
corporation to redress wrongs committed against it, for which the directors refuse to sue. It
is a remedy designed by equity and has been the principal defense of the minority
shareholders against abuses by the majority. Here, however, the case is not a derivative suit
but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with
the RTC of Iloilo for estafa and falsification of public document. Among the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing
for and on behalf of the corporation must allege in his complaint before the proper forum
that he is suing on a derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join. This is necessary to vest jurisdiction upon
the tribunal in line with the rule that it is the allegations in the complaint that vests
jurisdiction upon the court or quasi-judicial body concerned over the subject matter and
nature of the action. This was not complied with by the petitioners either in their complaint
before the court a quo nor in the instant petition which, in part, merely states that this is a
petition for review on certiorari on pure questions of law to set aside a portion of the RTC
decision in Criminal Cases Nos. 37097 and 37098 since the trial courts judgment of
acquittal failed to impose any civil liability against the private respondents. By no amount of
equity considerations, if at all deserved, can a mere appeal on the civil aspect of a criminal
case be treated as a derivative suit.
Criminal Law; Civil Liability; Acquittal in a criminal action bars the civil action arising
therefrom where the judgment of acquittal holds that the accused did not commit the
criminal acts imputed to them.The acquittal in Criminal Cases Nos. 37097 and 37098 is not
merely based on reasonable doubt but rather on a finding that the accused-private
respondents did not commit the criminal acts complained of. Thus, pursuant to the above
rule and settled jurisprudence, any civil action ex delicto cannot prosper. Acquittal in a
criminal action bars the civil action arising therefrom where the judgment of acquittal holds
that the accused did not commit the criminal acts imputed to them.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Quisumbing, Torres & Evangelista for Western Institute of Technology.
Tranquilino R. Gale for petitioners.

Teodulfo L.C. Castro for private respondents.

There were no other business.

HERMOSISIMA, JR., J.:

The Chairman declared the meeting adjourned at 5:11 P.M.

Up for review on certiorari are: (1) the Decision dated September 6, 1993; and (2) the Order
dated November 23, 1993 of Branch 33 of the Regional Trial Court of Iloilo City in Criminal
Cases Nos. 37097 and 37098 for estafa and falsification of a public document, respectively.
The judgment acquitted the private respondents of both charges, but petitioners seek to
hold them civilly liable.

This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees
of Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the
best of my knowledge and belief.

Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S.

Salas, and Richard S. Salas, belonging to the same family, are the majority and controlling
members of the Board of Trustees of Western In-stitute of Technology, Inc. (WIT, for short),
a stock corporation engaged in the operation, among others, of an educational institution.
According to petitioners, the minority stockholders of WIT, sometime on June 1, 1986 in the
principal office of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In attendance
were other members of the Board including one of the petitioners Reginald Villasis. Prior to
aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986, were
distributed to all Board Members. The notice allegedly indicated that the meeting to be held
on June 1, 1986 included Item No. 6 which states:
Possible implementation of Art. III, Sec. 6 of the Amended ByLaws of Western Institute of
Technology, Inc. on compensation of all officers of the corporation.1
In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting monthly
compensation to the private respondents as corporate officers retroactive June 1, 1985, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja
(accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly compensation for services rendered as
follows: ChairmanP9,000.00/month, Vice ChairmanP3,500.00/month, Corporate
TreasurerP3,500.00/month and Corporate SecretaryP3,500.00/month, retroactive June
1, 1985 and the ten percen-tum of the net profits shall be distributed equally among the ten
members of the Board of Trustees. This shall amend and superceed(sic) any previous
resolution.

(Sgd)
Corporate Secretary2

ANTONIO

S.

SALAS

A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Preston Villasis,
Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private respondents
before the Office of the City Prosecutor of Iloilo, as a result of which two (2) separate
criminal informations, one for falsification of a public document under Article 171 of the
Revised Penal Code and the other for estafa under Article 315, par. 1(b) of the RPC, were
filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge for falsification of
public document was anchored on the private respondents submission of WITs income
statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC)
reflecting therein the disbursement of corporate funds for the compensation of private
respondents based on Resolution No. 4, series of 1986, making it appear that the same was
passed by the board on March 30, 1986, when in truth, the same was actually passed on
June 1, 1986, a date not covered by the corporations fiscal year 1985-1986 (beginning May
1, 1985 and ending April 30, 1986). The Information for falsification of a public document
states:
The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD
SALAS-TUBILLEJA, ANTONIO S. SALAS and RICHARD S. SALAS (whose dates and places of
birth cannot be ascertained) of the crime of FALSIFICATION OF A PUBLIC DOCUMENT, Art.
171 of the Revised Penal Code, committed as follows:
That on or about the 10th day of June, 1986, in the City of Iloilo, Philippines and within the
jurisdiction of this Honorable Court, the above-named accused, being then the Chairman,
Vice-Chairman, Treasurer, Secretary, and Trustee (who later became Secretary),
respectively, of the board of trustees of the Western Institute of Technology, Inc., a
corporation duly organized and existing under the laws of the Republic of the Philippines,
conspiring and confederating together and mutually helping one another, to better realized
(sic) their purpose, did then and there wilfully, unlawfully and criminally prepare and
execute and subsequently cause to be submitted to the Securities and Exchange

Commission an income statement of the corporation for the fiscal year 1985-1986, the same
being required to be submitted every end of the corporation fiscal year by the aforesaid
Commission, and therefore, a public document, including therein the disbursement of the
retroactive compensation of accused corporate officers in the amount of P186,470.70, by
then and there making it appear that the basis thereof Resolution No. 4, Series of 1986 was
passed by the board of trustees on March 30, 1986, a date covered by the corporations
fiscal year 1985-1986 (i.e., from May 1, 1985 to April 30, 1986), when in truth and in fact, as
said accused well knew, no such Resolution No. 48, Series of 1986 was passed on March 30,
1986.

CONTRARY TO LAW.
Iloilo City, Philippines, November 22, 1991.4 [Italics ours]
Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos. 37097 and
37098, was consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a
verdict of acquittal on both counts5 dated September 6, 1993 without imposing any civil
liability against the accused therein.

CONTRARY TO LAW.

Petitioners filed a Motion for Reconsideration6 of the civil aspect of the RTC Decision which
was, however, denied in an Order dated November 23, 1993.7

Iloilo City, Philippines, November 22, 1991.3 [Italics ours].

Hence, the instant petition.

The Information, on the other hand, for estafa reads:

Significantly on December 8, 1994, a Motion for Intervention, dated December 2, 1994, was
filed before this Court by Western Institute of Technology, Inc., supposedly one of the
petitioners herein, disowning its inclusion in the petition and submitting that Atty.
Tranquilino R. Gale, counsel for the other petitioners, had no authority whatsoever to
represent the corporation in filing the petition. Intervenor likewise prayed for the dismissal
of the petition for being utterly without merit. The Motion for Intervention was granted on
January 16, 1995.8

The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T. SALAS, SOLEDAD
SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS (whose dates and places of birth
cannot be ascertained) of the crime of ESTAFA, Art. 315, par. 1(b) of the Revised Penal Code,
committed as follows:
That on or about the 1st day of June, 1986, in the City of Iloilo, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused, being then the Chairman,
Vice-Chairman, Treasurer, Secretary, and Trustee (who later became Secretary),
respectively, of the Board of Trustees of Western Institute of Technology, Inc., a corporation
duly organized and existing under the laws of the Republic of the Philippines, conspiring and
confederating together and mutually helping one another to better realize their purpose,
did then and there wilfully, unlawfully and feloniously defraud the said corporation (and its
stockholders) in the following manner, to wit: herein accused, knowing fully well that they
have no sufficient, lawful authority to disburselet alone violate applicable laws and
jurisprudence, disbursed the funds of the corporation by effecting payment of their
retroactive salaries in the amount of P186,470.00 and subsequently paying themselves every
15th and 30th of the month starting June 15, 1986 until the present, in the amount of
P19,500.00 per month, as if the same were their own, and when herein accused were
informed of the illegality of these disbursements by the minority stockholders by way of
objections made in an annual stockholders meeting held on June 14, 1986 and every year
thereafter, they refused, and still refuse, to rectify the same to the damage and prejudice of
the corporation (and its stockholders) in the total sum of P1,453,970.79 as of November 15,
1991.

Petitioners would like us to hold private respondents civilly liable despite their acquittal in
Criminal Cases Nos. 37097 and 37098. They base their claim on the alleged illegal issuance
by private respondents of Resolution No. 48, series of 1986 ordering the disbursement of
corporate funds in the amount of P186,470.70 representing retroactive compensation as of
June 1, 1985 in favor of private respondents, board members of WIT, plus P1,453,970.79 for
the subsequent collective salaries of private respondents every 15th and 30th of the month
until the filing of the criminal complaints against them on March 1991. Petitioners maintain
that this grant of compensation to private respondents is proscribed under Section 30 of the
Corporation Code. Thus, private respondents are obliged to return these amounts to the
corporation with interest.
We cannot sustain the petitioners. The pertinent section of the Corporation Code provides:
Sec. 30. Compensation of directors.In the absence of any provision in the by-laws fixing
their compensation, the directors shall not receive any compensation, as such directors,
except for reasonable per diems: Provided, however, That any such compensation (other
than per diems) may be granted to directors by the vote of the stockholders representing at

least a majority of the outstanding capital stock at a regular or special stockholders

meeting. In no case shall the total yearly compensation of directors, as such directors,
exceed ten (10%) percent of the net income before income tax of the corporation during the
preceding year. [Italics ours]
There is no argument that directors or trustees, as the case may be, are not entitled to
salary or other compensation when they perform nothing more than the usual and ordinary
duties of their office. This rule is founded upon a presumption that directors/trustees render
service gratuitously, and that the return upon their shares adequately furnishes the motives
for service, without compensation.9 Under the foregoing section, there are only two (2)
ways by which members of the board can be granted compensation apart from reasonable
per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2)
when the stockholders representing a majority of the outstanding capital stock at a regular
or special stockholders meeting agree to give it to them.
This proscription, however, against granting compensation to directors/trustees of a
corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30
which states: x x x [T]he directors shall not receive any compensation, as such directors, x x
x. The phrase as such directors is not without significance for it delimits the scope of the
prohibition to compensation given to them for services performed purely in their capacity as
directors or trustees. The unambiguous implication is that members of the board may
receive compensation, in addition to reasonable per diems, when they render services to
the corporation in a capacity other than as directors/trustees.10 In the case at bench,
Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in
their capacity as members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of
Technology. We quote once more Resolution No. 48, s. 1986 for easy reference, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja
(accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly compensation for services rendered as
follows: ChairmanP9,000.00/month, Vice ChairmanP3,500.00/month, Corporate
TreasurerP3,500.00/month and Corporate SecretaryP3,500.00/month, retroactive June
1, 1985 and the ten percentum of the net profits shall be distributed equally among the ten
members of the Board of Trustees. This shall amend and superceed (sic) any previous
resolution.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees
of Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the
best of my knowledge and belief.
(Sgd)
ANTONIO
11
Corporate Secretary [Italics ours]

S.

SALAS

Clearly, therefore, the prohibition with respect to granting compensation to corporate

directors/trustees as such under Section 30 is not violated in this particular case.
Consequently, the last sentence of Section 30 which provides:
x x x x x x. In no case shall the total yearly compensation of directors, as such directors,
exceed ten (10%) percent of the net income before income tax of the corporation during the
preceding year. [Italics ours]
does not likewise find application in this case since the compensation is being given to
private respondents in their capacity as officers of WIT and not as board members.
Petitioners assert that the instant case is a derivative suit brought by them as minority
shareholders of WIT for and on behalf of the corporation to annul Resolution No. 48, s. 1986
which is prejudicial to the corporation.
We are unpersuaded. A derivative suit is an action brought by minority shareholders in the
name of the corporation to redress wrongs committed against it, for which the directors
refuse to sue.12 It is a remedy designed by equity and has been the principal defense of the
minority shareholders against abuses by the majority.13 Here, however, the case is not a
derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and
37098 filed with the RTC of Iloilo for estafa and falsification of public document. Among the
basic requirements for a derivative suit to prosper is that the minority shareholder who is
suing for and on behalf of the corporation must allege in his complaint before the proper
forum that he is suing on a derivative cause of action on behalf of the corporation and all
other shareholders similarly situated who wish to join.14 This is necessary to vest jurisdiction
upon the tribunal in line with the rule that it is the allegations in the complaint that vests
jurisdiction upon the court or quasi-judicial body concerned over the subject matter and
nature of the action.15 This was not complied with by the petitioners either in their

complaint before the court a quo nor in the instant petition which, in part, merely states
that this is a petition for review on certiorari on pure questions of law to set aside a portion
of the RTC decision in Criminal Cases Nos. 37097 and 3709816 since the trial courts
judgment of acquittal failed to impose any civil liability against the private respondents. By
no amount of equity considerations, if at all deserved, can a mere appeal on the civil aspect
of a criminal case be treated as a derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners,
which it is not, the same is outrightly dismissible for having been wrongfully filed in the
regular court devoid of any jurisdiction to entertain the complaint. The case should have
been filed with the Securities and Exchange Commission (SEC) which exercises original and
exclusive jurisdiction over derivative suits, they being intra-corporate disputes, per Section
5(b) of P.D. No. 902-A:
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:
xxx

xxx

xxx

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;
xxx

xxx

x x x. [Italics ours]

Once the case is decided by the SEC, the losing party may file a petition for review before
the Court of Appeals raising questions of fact, of law, or mixed questions of fact and law.17 It
is only after the case has ran this course, and not earlier, can it be brought to us via a
petition for review on certiorari under Rule 45 raising only pure questions of law.18
Petitioners, in pleading that we treat the instant petition as a derivative suit, are trying to
short-circuit the entire process which we cannot here sanction.
As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 for falsification of
public document and estafa, which this petition truly is, we have to deny the petition just

the same. It will be well to quote the respondent courts ratiocinations acquitting the
private respondents on both counts:
The prosecution wants this Court to believe and agree that there is falsification of public
document because, as claimed by the prosecution, Resolution No. 48, Series of 1986 (Exh.
1-E-1) was not taken up and passed during the Regular Meeting of the Board of Trustees of
the Western Institute of Technology (WIT), Inc. on March 30, 1986, but on June 1, 1986
special meeting of the same board of trustees.
This Court is reluctant to accept this claim of falsification. The prosecution omitted to submit
the complete minutes of the regular meeting of the Board of Trustees on March 30, 1986. It
only presented in evidence Exh. C, which is page 5 or the last page of the said minutes. Had
the complete minutes (Exh. 1) consisting of five (5) pages, been submitted, it can be readily
seen and understood that Resolution No. 48, Series of 1986 (Exh. 1-E-1) giving
compensation to corporate officers, was indeed included in Other Business, No. 6 of the
Agenda, and was taken up and passed on March 30, 1986. The mere fact of existence of Exh.
C also proves that it was passed on March 30, 1986 for Exh. C is part and parcel of the
whole minutes of the Board of Trustees Regular Meeting on March 30, 1986. No better and
more credible proof can be considered other than the Minutes (Exh. 1) itself of the Regular
Meeting of the Board of Trustees on March 30, 1986. The imputation that said Resolution
No. 48 was neither taken up nor passed on March 30, 1986 because the matter regarding
compensation was not specifically stated or written in the Agenda and that the words
possible implementation of said Resolution No. 48, was expressly written in the Agenda for
the Special Meeting of the Board on June 1, 1986, is simply an implication. This evidence by
implication to the mind of the court cannot prevail over the Minutes (Exh. 1) and cannot
ripen into proof beyond reasonable doubt which is demanded in all criminal prosecutions.
This Court finds that under the Eleventh Article (Exh. 3-D-1) of the Articles of Incorporation
(Exh. 3-B) of the Panay Educational Institution, Inc., now the Western Institute of
Technology, Inc., the officers of the corporation shall receive such compensation as the
Board of Directors may provide. These Articles of Incorporation was adopted on May 17,
1957 (Exh. 3-E). The Officers of the corporation and their corresponding duties are
enumerated and stated in Sections 1, 2, 3 and 4 of Art. III of the Amended By-Laws of the
Corporation (Exh. 4-A) which was adopted on May 31, 1957. According to Sec. 6, Art. III of
the same By-Laws, all officers shall receive such compensation as may be fixed by the Board
of Directors.
It is the perception of this Court that the grant of compensation or salary to the accused in
their capacity as officers of the corporation, through Resolution No. 48, enacted on March
30, 1986 by the Board of Trustees, is authorized by both the Articles of Incorporation and

the By-Laws of the corporation. To state otherwise is to depart from the clear terms of the
said articles and by-laws. In their defense the accused have properly and rightly asserted that
the grant of salary is not for directors, but for their being officers of the corporation who
oversee the day to day activities and operations of the school.
xxx

xxx

xxx

x x x [O]n the question of whether or not the accused can be held liable for estafa under Sec.
1(b) of Art. 315 of the Revised Penal Code, it is perceived by this Court that the receipt and
the holding of the money by the accused as salary on basis of the authority granted by the
Articles and By-Laws of the corporation are not tainted with abuse of confidence. The
money they received belongs to them and cannot be said to have been converted and/or
misappropriated by them.

In case of acquittal, unless there is a clear showing that the act from which the civil liability
might arise did not exist, the judgment shall make a finding on the civil liability of the
accused in favor of the offended party. [Italics ours]
The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely based on reasonable
doubt but rather on a finding that the accused-private respondents did not commit the
criminal acts complained of. Thus, pursuant to the above rule and settled jurisprudence, any
civil action ex delicto cannot prosper. Acquittal in a criminal action bars the civil action
arising therefrom where the judgment of acquittal holds that the accused did not commit
the criminal acts imputed to them.20
WHEREFORE, the instant petition is hereby DENIED with costs against petitioners.
SO ORDERED.

229
Padilla (Chairman), Bellosillo, Vitug and Kapunan, JJ., concur.
VOL. 278, AUGUST 21, 1997
Western Institute of Technology vs. Salas
xxx

xxx

229

x x x.19 [Italics ours]

From the foregoing factual findings, which we find to be amply substantiated by the records,
it is evident that there is simply no basis to hold the accused, private respondents herein,
civilly liable. Section 2(b) of Rule 111 on the New Rules on Criminal Procedure provides:
SEC. 2. Institution of separate civil action.
xxx

xxx

xxx

(b) Extinction of the penal action does not carry with it extinction of the civil, unless the
extinction proceeds from a declaration in a final judgment that the fact from which the civil
might arise did not exist. [Italics ours]
Likewise, the last paragraph of Section 2, Rule 120 reads:
SEC. 2. Form and contents of judgment.
xxx

xxx

xxx

Petition denied.
Note.Providing gratuity pay for its employees is one of the express powers of the
corporation under the Corporation Code. (Lopez Realty Inc. vs. Fontecha, 247 SCRA 183
[1995])

VOL. 33, JUNE 80, 1970.

Central Cooperative Exchange, Inc. vs. Tibe, Sr.

593

No. L-27972. June 30, 1970,

CENTRAL COOPERATIVE EXCHANGE, INC., petitioner, vs. CONCORDIO TIBE, SR. and THE
HONORABLE COURT OF APPEALS, respondents.
Corporation law; Board of Directors; Compensation; Directors not entitled to compensation;
Case at bar.Where the by-laws of the corporation explicitly reserved unto the
stockholders the power to determine the compensation of members of the board of
directors and the stockholders did restrict such compensation to "actual transportation
expenses plus the per diems of P30.00 and actual expenses while waiting," it is not within
the power of the board of directors to enact a resolution providing for themselves
compensation for additional duties. Even without the express reservation of said power, the
directors are not entitled to compensation, for the law is well-settled that directors of
corporations presumptively served without compensation and in the absence of an express
agreement or a resolution in relation thereto, no claim can be asserted therefor.
Same; Same; Same; Same; Power of board to control corporation's property and business
does not empower board to provide themselves compensation.Section 28 of the
Corporation Law giving the exercise of corporate powers and the control of the
corporation's business and property to the board of directors, or a provision of the by-laws
empowering the board with "general supervision and control of the affairs and property of
the (corporation)" is no justification for the adoption by the board of a resolution providing
themselves with compensation. These provisions of the law and the by-law pertain to the
general powers of the board merely and do not extend to giving the members of the board
the compensation where the matter of providing for the compensation is specifically
withheld from the board of directors and reserved to the stockholders.
Same; Suit against directors; Laches; When laches begin to attach against corporation.
Where the corporation is virtually immobilized from commencing suit against its directors
such as when the board of directors, under the by-laws of the corporation, had the control
of the affairs of the corporation, laches does not begin to attach against the corporation
until the directors cease to be such.

Same; Same; Same; Six months period of time does not amount to laches.The lapse of the
period of six months when the action was filed is too short a time for the claim to be
considered stale.
Same; Same; Same; When defense of laches deemed waived.Where the respondent
member of the board of directors admitted liability to the corporation for cash advances, he
waived all defenses thereto, including laches such that there is nothing left for the court to
do but to order payment. This admission dispenses with the need of disbursement receipts
covering the cash advances to prove the debt.
REVIEW on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Faustino, Peralta & Estacio for petitioner,
Generoso Casimpan for respondents.
REYES, J.B.L., J.:
Review, on certiorari, of a decision of the Court of Appeals (in its Case No. 36202-R),
affirming the decision of the Court of First Instance of Manila (in its Civil Case No. 44536)
dismissing after trial a complaint filed by herein petitioner, Central Cooperative Exchange,
Inc. (CCE for short), against herein respondent, Concordio Tibe, Sr., for the refund of certain
amounts received by the latter from the corporation, while he served as a member of the
board of directors of the Exchange.
The petitioner is a national federation of farmers' cooperative marketing associations, or
FACOMAS, scattered throughout the country; its single majority stockholder is the former
Agricultural Credit and Cooperative Financing Administration (ACCFA), now Agricultural
Credit Administration (ACA). As a member of the petitioner's board of directors from 23
May 1958 to 26 May 1960, representing FACOMAS in Eastern Visayas, respondent
Concordio Tibe, Sr. drew and collected from petitioner CCE cash. advances amounting to
P5,668.00; of this sum, respondent had, admittedly, already liquidated P3,317.25, leaving
the sum of P2,350.75 still to be accounted for. By admission of the petitioner the sum of
P2,350.75 has been further reduced to P2,133.45 as of 31 January 1963 on account of
partial payments made after suit was filed (Petitioners Brief, page 17). Respondent Tibe had
also drawn several sums, amounting to P14,436.95, representing commutable per diems for
attending meetings of the Board of Directors in Manila, per diems and transportation

expenses for FACOMA visitations, representation expenses and cummutable discretionary

funds. All these sums were disbursed with the approval of general manager, treasurer and
auditor of CCE.
The main issue is whether or not the board of directors of the CCE had the power and
authority to adopt various resolutions which appropriated the funds of the corporation for
the above-enumerated expenses for the members of the said board.
Section 8 of the By-Laws of petitioner federation provides:
"The compensation, if any, and the per diems for attendance at meetings of the members of
the Board of Directors shall be determined by the members at any annual meeting or special
meeting of the Exchange called for the purpose." In the annual meeting of the stockholders,
held in Manila on 31 January 1956, it was resolved that:
"The members of the Board of Directors attending the CCE board meetings be entitled to
actual transportation expenses plus the per diems of P30.00 and actual expenses while
waiting."
The resolutions of the Board of Directors under which respondent Tibe drew and collected
the sums of money sought to be recovered, and which petitioner claims are invalid
resolutions, are the following:
1. (a) Res. No, 55, May 5, 1957, authorizing:
1. 1. Visitation of FACOMAS, in order to be official, must be with prior sanction or
authority of the board, except when it is urgent, in which case Board confirmation is
needed;
2. 2. Per diem of P10.00 is authorized for visitations outside the place of residence of
the director concerned;
3. 3. Actual transportation expenses allowed for all visitations sanctioned or
authorized by the board.
1. (b) Res. No. 52, July 8, 1958, appropriating P10,000.00 as discretionary fund of the
board of directors, disbursement from which will be made upon authorization of the
board chairman and for which no supporting receipts need be presented.
1. (c) Res. No. 49, July 10, 1958, granting monthly commutable allowance of P200.00
to each director starting from July 1, 1958, in lieu of the regular waiting time per

diems and transportation expenses while in the City of Manila attending Board and
committee meetings.
2. (d) Res. No. 57, July 24, 1958, amending Res. No. 49 by adding P20.00 to the
P200.00 as commutable transportation allowances while attending meetings in
Manila.
3. (e) Res. No. 35, June 11, 1959, increasing the monthly commutable allowance for
each director from P300.00 to P500.00 per month effective June 1, 1959.
4. (f) Res. No. 87, October 9, 1959, appropriating P10.000.00 as commutable
discretionary fund of the board of directors.
We agree with the petitioner that the questioned resolutions are contrary to the By-Laws of
the federation and, therefore, are not within the power of the board of directors to enact.
The By-Laws, in the aforequoted Section 8, explicitly reserved unto the stockholders the
power to determine the compensation of members of the board of directors, and the
stockholders did restrict such compensation to "actual transportation expenses plus the per
diems of P30.00 and actual expenses while waiting/' Even without the express reservation of
said power, the directors are not entitled to compensation, for
"x x x The law is well-settled that directors of corporations presumptively serve without
compensation and in the absence of an express agreement or a resolution in relation
thereto, no claim can be asserted therefor (Sec. 2110, 5 Fletcher 375-376). Thus it has been
held that there can be no recovery of compensation, unless expressly provided for, when a
director serves as president or vice president, as secretary, as treasurer or cashier, as a
member of an executive committee, as chairman of a building committee, or similar offices
(Sec. 2112, 5 Fletcher 381-382)." (Alvendia, The Law of Private Corporations in the
Philippines, pages 275-276)
Thus, the directors, in assigning themselves additional duties, such as the visitation of
FACOMAS, acted. within their power, but, by voting far themselves compensation for such
additional duties, they acted in excess of their authority, as expressed in the By-Laws.
Nor may the directors rely on Section 28 of the Corporation Law, giving the exercise of
corporate powers and the control of the corporation's business and property to the board of
directors, or on Section 1 of Article VI of the By-Laws, empowering the board with "general
supervision and control of the affairs and property of the Exchange," as justifications for the
adoption of the questioned resolutions, because these provisions of the law and the ByLaws pertain to the board's general powers merely and do not extend to giving the
members of the said board the compensations stated in the resolution, as the matter of
providing for their compensations are specifically withheld from the board of directors, and
reserved to the stockholders,

It is vain for the respondent to rely on the good intentions of the board, that the board, for
reasons of "expediency and economy", cancelled the per diems and actual transportation
and waiting expenses provided by the stockholders and substituted these by monthly
commutable allowances of P200.00 (per Resolution No. 49) because the court is not
concerned with the propriety or wisdom of the measure of compensation already fixed by
stockholders, but which the directors wanted to correct by increase thereof (Government of
P.I. vs. El Hogar Filipino, 50 Phil. 399).
As stated earlier, respondent Tibe was a director of the corporation from May, 1958 to May,
1960. During his term, he collected the sums of money appropriated in and pursuant to the
board resolutions. Suit was filed against respondent on 22 October 1960. One of the
grounds of the appealed decision in finding for the respondent is that the petitioner's claim
is barred by laches. We do not agree. The board of directors, under the By-Laws of the
corporation, had the control of the affairs of the corporation and it is not to be expected
that the board would sue its members to recover the sums of money voted by and for
themselves. We think that, under the circumstances, where the corporation was virtually
immobilized from commencing suit against its directors, laches does not begin to attach
against the corporation until the directors cease to be such (Cf. Bates Street Shirt Co. v.
Waite, 156 Atl. 293, 297, and cases cited therein). From May, 1960, when respondent
ceased to be a director, to October, 1960, when action was filed, is too short a time for the
claim to be considered stale.
The Court of Appeals plainly erred in not granting petitioner's claim on the cash advances. In
the course of the trial, respondent admitted liability therefor (T.s.n., 4 March 1965, pages 78). Having admitted liability for the cash advances, respondent waived all defenses thereto,
including laches, and there was nothing left for the court to have done but to order
payment. The appellate court argued that it would not be easy for the respondent to
produce the disbursement receipts covering the cash advances. This is certainly no reason
for disapproving petitioner's claim; those receipts are no longer necessary, for the liability
was admitted.
FOR THE FOREGOING REASONS, the decision under review is hereby reversed, and another
one entered ordering the respondent to pay unto the petitioner the sums of P1,730.35 and
P14,436.95, with legal interests on both sums from 22 October 1960 until fully paid. Costs
against the respondent.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro and Barredo, JJ., concur.
Fernando and Teehankee, JJ., concur in the result.

Villamor, J., took no part.

Decision reversed.
Notes.Grant of compensation to directors or other corporate officers.The power to fix
the compensation of the board of directors of an association pertains to the corporation, to
be determined by its by-laws; and where the amount of such compensation is thus fixed, the
court will not concern itself with the question of propriety and wisdom of the measure of
the compensation adopted (Government of P.I vs. El Hogar Filipino, 50 Phil. 399),
A person is not entitled to compensation for acting as president of a corporation where the
by-Iaws are silent as to salary for that position and the stockholders and incorporators have
provided salaries for the general manager and other officers and employees, but none for
the president except a per diem for attending directors' meetings. The fact that the person
serving as president has acted in that capacity for several years without claiming a right to
salary may also be considered (Lingayen Gulf Electric Power Co. vs. Baltazar, L-4824, June
30, 1953, 49 O.G. 2809).
____________

The facts are stated in the opinion of the Court.

SUPREME COURT REPORTS ANNOTATED
Tramat Mercantile, Inc. vs. Court of Appeals
G.R. No. 111008. November 7, 1994.*
TRAMAT MERCANTILE, INC. AND DAVID ONG, petitioners, vs. HON. COURT OF APPEALS
AND MELCHOR DE LA CUESTA, respondents.
Corporation Law; Civil Law; Sale; There is no reason to reverse the factual findings of both
the trial court and the appellate court, particularly in holding that the contract between de la
Cuesta and TRAMAT was one of absolute, not conditional sale.We could find no reason to
reverse the factual findings of both the trial court and the appellate court, particularly in
holding that the contract between de la Cuesta and TRAMAT was one of absolute, not
conditional, sale of the tractor and that de la Cuesta did not violate any warranty on the sale
of the tractor to TRAMAT.
Same; Same; Same; It should only be the corporation, not the person acting for and on its
behalf, that properly could be made liable under the questioned transaction.It was,
nevertheless, an error to hold David Ong jointly and severally liable with TRAMAT to de la
Cuesta under the questioned transaction. Ong had there so acted, not in his personal
capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate
personality. As such, it should only be the corporation, not the person acting for and on its
behalf, that properly could be made liable thereon.
Same; Same; Same; Instances when personal liability of a corporate director, trustee or
officer along with the corporation may so validly attach.Personal liability of a corporate
director, trustee or officer along (although not necessarily) with the corporation may so
validly attach, as a rule, only when1. 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.
PETITION for review on certiorari of a decision of the Court of Appeals.

Emilio G. Abrogena for petitioners.

Constante B. Albano for private respondent.
VITUG, J.:
This petition for review on certiorari challenges the 04th March 1993 decision of the Court
of Appeals and its resolution of 01 July 1993 denying the motion for reconsideration.
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 Model MB 1100D powered by a 13 H.P. diesel engine. In payment, David Ong,
Tramats 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 (sold by de la Cuesta) was a
reconditioned unit.
On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00, as well as
attorneys 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, Inc., and not with Ong in his personal capacity;
and that the payment of the check was stopped because the subject tractor had been priced
as a brand new, not as a reconditioned, unit. On 02 November 1989, after the reception of
evidence, the trial court rendered a decision, the dispositive portions of which read:
WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered:
1. 1. Ordering the defendants, 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
2. 2. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of
P10,000.00 as attorneys fees, and the costs of this suit.
SO ORDERED.1

An appeal was timely interposed by the defendants. On 04 March 1993, the Court of
Appeals affirmed in toto the decision of the trial court. Defendant-appellants motion for
reconsideration was denied.

would be used in farming, these in themselves would not constitute the required implied
notice to the appellee as seller.
xxx

xxx

xxx.

Hence, the instant petition.

We could find no reason to reverse the factual findings of both the trial court and the
appellate court, particularly in holding that the contract between de la Cuesta and TRAMAT
was one of absolute, not conditional, sale of the tractor and that de la Cuesta did not violate
any warranty on the sale of the tractor to TRAMAT. The appellate court, in its decision,
adequately explained:
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 P33,500.00?
These payments argue against the claim now made by the defendants that the sale was
conditional.
According to the appellee, the additional amount covered the cost of replacing the oil
gasket of the tractor engine when it was repaired in Soledad Cacs 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 Cacs gasoline station in Quezon City.
Anent the first assigned error, We sustain the trial courts finding that at the time of the
purchase, the appellants did not reveal to the appellee the true purpose for which the
tractor would be used. Granting that the appellants informed the appellee that they would
be reselling the unit to the MWSS, an entity admittedly not engaged in farming, and that
they ordered the tractor without the power tiller, an indispensable accessory if the tractor

In regard to the second assigned error, We do not agree that the appellee should have
been held liable for the tractors alleged hidden defects. x x x.
18
18
SUPREME COURT REPORTS ANNOTATED
Tramat Mercantile, Inc. vs. Court of Appeals
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 that kind of mid-mounted lawn mower was
being manufactured by their competitor, Alpha Machinery, which had by then stopped
supplying the same (tsn, Nov. 29, 1988, pp. 73-74). 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. But 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.
xxx

xxx

xxx.

Although the trial court discussed it in a different light, We view the matter in the same
way the trial court didthat 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 patentinfringing 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 tractors engine was
strained beyond its limits, causing it to overheat and damage its gaskets.
No wonder, then, it was a gasket Soledad Cac had to replace, at a cost chargeable to the
appellants. 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.2

Note.A corporation is bestowed judicial personality separate and distinct from its
stockholders. (Del Rosario vs. National Labor Relations Commission, 187 SCRA 777 [1990])
o0o

It was, nevertheless, an error to hold David Ong jointly and severally liable with TRAMAT to
de la Cuesta under the questioned transaction. Ong had there so acted, not in his personal
capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate
personality. As such, it should only be the corporation, not the person acting for and on its
behalf, that properly could be made liable thereon.3
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. 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;4
2. 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;5
3. 3. He agrees to hold himself personally and solidarily liable with the corporation;6 or
4. 4. He is made, by a specific provision of law, to personally answer for his corporate
action.7
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.
SO ORDERED.
Bidin, Romero and Melo, JJ., concur.
Feliciano (Chairman), J., On leave.
Petition granted, appealed judgment affirmed with modification.

issued nor the terms and conditions relating to its issuance. The mere act of issuing a
worthless check is malum prohibitum.
VOL. 270, MARCH 26, 1997
Llamado vs. Court of Appeals

423

G.R. No. 99032. March 26, 1997.*

RICARDO A. LLAMADO, petitioner, vs. COURT OF APPEALS and PEOPLE OF THE
PHILIPPINES, respondents.
Criminal Law; Bouncing Checks Law (Batas Pambansa 22); Presumptions; Knowledge
involves a state of mind difficult to establish, thus B.P. 22 creates a prima facie presumption,
i.e., that the drawer had knowledge of the insufficiency of his funds in or credit with the bank
at the time of the issuance and on the checks presentment for payment.Petitioner denies
knowledge of the issuance of the check without sufficient funds and involvement in the
transaction with private complainant. However, knowledge involves a state of mind difficult
to establish. Thus, the statute itself creates a prima facie presumption, i.e., that the drawer
had knowledge of the insufficiency of his funds in or credit with the bank at the time of the
issuance and on the checks presentment for payment.
Same; Same; Corporation Law; Lack of involvement in the negotiation for the transaction is
not a defense to a treasurer of the corporation who signed the check in his capacity as an
officer of the corporation.Petitioner failed to rebut the presumption by paying the amount
of the check within five (5) banking days from notice of the dishonor. His claim that he
signed the check in blank which allegedly is common business practice, is hardly a defense. If
as he claims, he signed the check in blank, he made himself prone to being charged with
violation of BP 22. It became incumbent upon him to prove his defenses. As Treasurer of the
corporation who signed the check in his capacity as an officer of the corporation, lack of
involvement in the negotiation for the transaction is not a defense.
Same; Same; What the law punishes is the issuance of a bouncing check and not the purpose
for which it was issued nor the terms and conditions relating to its issuancethe mere act of
issuing a worthless check is malum prohibitum.True, it is common practice in commercial
transactions to require debtors to issue checks on which creditors must rely as guarantee of
payment, or as evidence of indebtedness, if not a mode of payment. But to determine the
reason for which checks are issued, or the terms and conditions for their issuance, will
greatly erode the faith the public reposes in the stability and commercial value of checks as
currency substitutes, and bring about havoc in trade and in banking communities. So, what
the law punishes is the issuance of a bouncing check and not the purpose for which it was

Same; Same; Novation Theory; The novation theory does not apply where the offer to pay
by the debtor, which was accepted by the creditor, turned out to be only an empty promise
which effectively delayed the aggrieved partys filing of a case for violation of BP 22.With
regard to petitioners third allegation, the novation theory recognized by this Court in
certain cases, does not apply in the case at bar. While private complainant agreed to
petitioners offer to pay him 10% of the amount of the check on November 14 or 15, 1983
and the balance to be rolled over for 90 days, this turned out to be only an empty promise
which effectively delayed private complainants filing of a case for Violation of BP 22 against
petitioner and his coaccused. As admitted by petitioner in his Memorandum, private
complainant was never paid as agreed upon.
Same; Same; The person or persons who actually sign the check in behalf of a corporation,
company or entity is liable under BP 22.Petitioners argument that he should not be held
personally liable for the amount of the check because it was a check of the Pan Asia Finance
Corporation and he signed the same in his capacity as Treasurer of the corporation, is also
untenable. The third paragraph of Section 1 of BP Blg. 22 states: Where the check is drawn
by a corporation, company or entity, the person or persons who actually signed the check in
behalf of such drawer shall be liable under this Act.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Ambrosio Padilla, Mempin & Reyes Law Offices for petitioner.
The Solicitor General for respondents.
TORRES, JR., J.:
Before us is a petition to review the decision1 of the Court of Appeals which affirmed the
decision of the Regional Trial Court of Manila in Criminal Case No. 85-38653 convicting
petitioner of Violation of Batas Pambansa Blg. 22, otherwise known as the Bouncing Checks
Law, and sentencing him to suffer imprisonment of one (1) year of prision correccional and
to pay a fine of P200,000.00 with subsidiary imprisonment in case of insolvency, and to
reimburse Leon Gaw the amount of P186,500.00 plus the costs of suit.

The facts of the case, as found by the Court of Appeals, are as follows:
Accused-appellant, Ricardo Llamado, together with Jacinto Pascual, was charged with
violation of Batas Pambansa Blg. 22 and pleaded not guilty of the crime charged.

Thereupon, private complainant went to accused Ricardo Llamado on 11 November 1983

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

__________________
1

Penned by Justice Fernando A. Santiago, concurred in by Justices Rodolfo A. Nocon and

Pedro A. Ramirez.
Accused Jacinto Pascual remained at large. Thus trial on the merits was conducted against
accused-appellant, Ricardo Llamado, only.
Accused Ricardo Llamado and his co-accused Jacinto Pascual were the Treasurer and
President, respectively, of the Pan Asia Finance Corporation. As found by the trial court,
private complainant, Leon Gaw, delivered to accused the amount of P180,000.00, with the
assurance of Aida Tan, the secretary of the accused in the corporation, that it will be repaid
on 4 November 1983, plus interests thereon at 12% plus a share in the profits of the
corporation, if any.
Upon delivery of the money, accused Ricardo Llamado took it and placed it inside a deposit
box. Accused Jacinto Pascual and Ricardo Llamado signed Philippine Trust Company Check
No. 047809, postdated 4 November 1983, in the amount of P186,500.00 in the presence of
private complainant. The aforesaid check was issued in payment of the cash money
delivered to the accused by private complainant, plus interests thereon for sixty (60) days in
the amount of P6,500.00.
On 4 November 1983, private complainant deposited the check in his current account with
the Equitable Banking Corporation which later informed the complainant that said check
was dishonored by the drawee bank because payment was stopped, and that the check was
drawn against insufficient funds. Private complainant was also notified by the Equitable
Banking Corporation that his current account was debited for the amount of P186,500.00
because of the dishonor of the said check.
Private complainant returned to Aida Tan to inform her of the dishonor of the check. Aida
Tan received the check from private complainant with the assurance that she will have said
check changed with cash. However, upon his return to Aida Tan, the latter informed him
that she had nothing to do with the check.

Accused, however, failed to remit to private complainant the aforesaid 10% on or before
15 November 1983 and to roll over the balance of the money.
Private complainant then demanded from the accused the payment of P186,500.00 but
accused failed to pay and instead, accused offered to return to private complainant only
30% of his money which was refused by the latter. Thus, the filing of the complaint for
violation of Batas Pambansa No. 22 against the accused.2
On the other hand, petitioners version of the relevant facts, is as follows:
It was the practice in the corporation for petitioner to sign blank checks and leave them
with Pascual so that Pascual could make disbursements and enter into transactions even in
the absence of petitioner.
One of the checks which petitioner signed in blank and gave to Pascual is the check in
question, Exhibit A.
The check was later issued to private complainant, filled up with the amount P186,500.00
and dated November 4, 1983.
The check was dishonored on November 7, 1983 when private complainant presented it for
payment because its payment had been stopped (Exhibits A-6 and A-7). However, there
were also no sufficient funds in the account to cover the amount of the check.
Private complainant went to see Aida Tan, the Secretary of Pan-Asia Finance Corporation,
about the dishonor of the check because she was the one who handled [sic] the check and
gave it to me. He returned the check to Aida Tan who gave him a receipt for it (Exhibit C),
and promised to return the cash money. However, she did not do so. Instead, she returned
the check to private complainant (pp. 9-11, tsn, January 6, 1986; p. 9, tsn, January 6, 1986).
On November 11, 1983, private complainant entered into an agreement (Exhibit H) with
petitioner whereby Pan-Asia Finance Corporation would pay private complainant 10% of the

P186,500.00 by November 14, or 15, and the balance will be rolled over for 90 days (pp. 1-4,
tsn, June 30, 1986). Private respondent was not however paid as agreed upon.
In late 1985, petitioner was charged with violation of BP 22 under the following
Information: x x x3
After trial on the merits, the trial court rendered judgment convicting the accused of
violation of Batas Pambansa No. 22, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered finding the Accused Ricardo A. Llamado guilty
of Violation of Batas Pambansa No. 22 and hereby sentences him to suffer imprisonment for
a period of one (1) year of prision correccional and to pay a fine of P200,000.00, with
subsidiary imprisonment in case of insolvency. The Accused is likewise condemned to
reimburse Leon Gaw the aforesaid amount of P186,500.00 plus the costs of suit.
SO ORDERED.
On appeal, the Court of Appeals affirmed the trial courts decision.
In this petition, petitioner alleges that:
1. 1. respondent Court of Appeals erred because it convicted petitioner of the charge
of violation of Batas Pambansa Blg. 22 although the check was only a contingent
payment for investment which had not been proven to be successful, thus the check
was not issued to apply on account or for value within the contemplation of the
batas;
2. 2. respondent Court of Appeals erred because it convicted petitioner of the charge
for merely signing the check in question without being actually involved in the
transaction for which the check was issued, in disregard of the pronouncement of
this Court in Dingle vs. IAC, 148 SCRA 595;
3. 3. respondent Court of Appeals erred because it refused to apply the novation
theory recognized by this Court in Ong v. Court of Appeals, 124 SCRA 578, and
Guingona, Jr. v. City Fiscal of Manila, 128 SCRA 577, despite admission by private
complainant that before the charge was filed in court or even the prosecutor he had
entered into a new agreement with petitioner supplanting the check in question;
4. 4. respondent Court of Appeals erred because it held petitioner personally liable for
the amount of the check in question, although it was a check of the Pan Asia Finance
Corporation and he signed the same in his capacity as Treasurer of the corporation.

The petition is without merit.

For clarity, petitioners second allegation shall be discussed first. Petitioner argues that
respondent court erred in disregarding the pronouncement in Dingle vs. IAC,4 that absent
knowledge by the maker or drawer of the issuance of a check much less of the transaction
and the fact of dishonor, the accused should be acquitted.
The respondent court did not err. In Dingle vs. IAC, the petitioner was acquitted because: 1.)
from the testimony of the sole prosecution witness, it was established that he dealt
exclusively with petitioners co-signatory; 2.) nowhere in the prosecution witness testimony
was the name of petitioner ever mentioned in connection with the transaction and the
issuance of the check; and, 3.) the prosecution witness therein categorically stated that it
was Nestor Dingle, petitioners cosignatory who received his two letters of demand. These
lent credence to the testimony of petitioner that she signed the questioned checks in blank
together with her husband without any knowledge of its issuance, much less of the
transaction and the fact of dishonor. Moreover, while Paz Dingle and her husband Nestor
Dingle owned the business, the business was managed by Nestor, petitioner Pazs cosignatory.
The above circumstances in Dingle vs. IAC do not obtain in the case at bar. Here, the private
complainant testified that upon delivery of the money, petitioner took it and placed it inside
a deposit box; that Jacinto Pascual and petitioner Ricardo Llamado signed the questioned
check, postdated November 4, 1983, in the amount of P186,500.00 in the presence of
private complainant; notice of the fact of dishonor of the check was made on petitioner,
who offered in writing5 to pay private complainant a portion of the amount equivalent to
10% thereof on 14 or 15 November 1983, and the balance to be rolled over for a period of
90 days.
Petitioner denies knowledge of the issuance of the check without sufficient funds and
involvement in the transaction with private complainant. However, knowledge involves a
state of mind difficult to establish. Thus, the statute itself creates a prima facie presumption,
i.e., that the drawer had knowledge of the insufficiency of his funds in or credit with the
bank at the time of the issuance and on the checks presentment for payment.6 Petitioner
failed to rebut the presumption by paying the amount of the check within five (5) banking
days from notice of the dishonor.7 His claim that he signed the check in blank which
allegedly is common business practice, is hardly a defense. If as he claims, he signed the
check in blank, he made himself prone to being charged with violation of BP 22. It became
incumbent upon him to prove his defenses. As Treasurer of the corporation who signed the
check in his capacity as an officer of the corporation, lack of involvement in the negotiation
for the transaction is not a defense.

Petitioner alleges that the respondent court erred when it convicted petitioner of violation
of BP 22 when the check was only a contingent payment for investment which had not been
proven to be successful, thus the check was not issued to apply on account or for value
within the contemplation of the batas. This contention is untenable.
The check was issued for an actual valuable consideration of P180,000.00, which private
complainant handed to Aida Tan, a secretary in petitioners office. In fact, petitioner admits
that private complainant made an investment in said amount with Pan-Asia Finance
Corporation. Petitioner contends that the money which private complainant gave the
corporation was intended for investment which they agreed will be returned to private
complainant with interests, only if the project became successful. But then, if this were true,
the check need not have been issued because a receipt and their written agreement would
have sufficed.
True, it is common practice in commercial transactions to require debtors to issue checks on
which creditors must rely as guarantee of payment, or as evidence of indebtedness, if not a
mode of payment. But to determine the reason for which checks are issued, or the terms
and conditions for their issuance, will greatly erode the faith the public reposes in the
stability and commercial value of checks as currency substitutes, and bring about havoc in
trade and in banking communities.8 So, what the law punishes is the issuance of a bouncing
check and not the purpose for which it was issued nor the terms and conditions relating to
its issuance. The mere act of issuing a worthless check is malum prohibitum.9
With regard to petitioners third allegation, the novation theory recognized by this Court
in certain cases, does not apply in the case at bar. While private complainant agreed to
petitioners offer to pay him 10% of the amount of the check on November 14 or 15, 1983
and the balance to be rolled over for 90 days, this turned out to be only an empty promise
which effectively delayed private complainants filing of a case for Violation of BP 22 against
petitioner and his co-accused. As admitted by petitioner in his Memorandum, private
complainant was never paid as agreed upon.
Petitioners argument that he should not be held personally liable for the amount of the
check because it was a check of the Pan Asia Finance Corporation and he signed the same in
his capacity as Treasurer of the corporation, is also untenable. The third paragraph of
Section 1 of BP Blg. 22 states:
Where the check is drawn by a corporation, company or entity, the person or persons who
actually signed the check in behalf of such drawer shall be liable under this Act.

IN VIEW WHEREOF, the petition is hereby DENIED and the decision of respondent court
AFFIRMED in toto.
SO ORDERED.
Regalado (Chairman), Romero, Puno and Mendoza, JJ., concur.
Petition denied, judgment affirmed in toto.
Notes.Foreign checks, provided they are either drawn and issued in the Philippines
though payable outside thereof, are within the coverage of the Bouncing Checks Law. (De
Villa vs. Court of Appeals, 195 SCRA 722 [1991])
The gravamen of the offense defined by B.P. 22 is knowingly issuing a worthless check. (Lim
vs. Court of Appeals, 251 SCRA 408 [1995]).

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

ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners, vs. NATIONAL
LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS, SHIRLEY POR-RAS, CARMEN
ELIZARDE, ET AL., respondents.
*

Labor Law; Dismissals; The Court has authorized valid reductions in the work force to
forestall business losses, the hemorrhaging of capital, or even to recognize an obvious
reduction in the volume of business which has rendered certain employees redundant.The
law recognizes the right of every business entity to reduce its work force if the same is made
necessary by compelling economic factors which would endanger its existence or stability. In
spite of overwhelming support granted by the social justice provisions of our Constitution in
favor of labor, the fundamental law itself guarantees, even during the process of tilting the
scales of social justice towards workers and employees, the right of enterprises to
reasonable returns of investment and to expansion and growth. To hold otherwise would
not only be oppressive and inhuman, but also counter-productive and ultimately subversive
of the nations thrust towards a resurgence in our economy which would ultimately benefit
the majority of our people. Where appropriate and where conditions are in accord with law
and jurisprudence, the Court has authorized valid reductions in the work force to forestall
business losses, the hemorrhaging of capital, or even to recognize an obvious reduction in
the volume of business which has rendered certain employees redundant.
Same; Same;Retrenchments or Day-Offs; Retrenchment is an act of the employer of
dismissing employees because of losses in the operation of a business, lack of work, and
considerable reduction on the volume of his business, a right consistently recognized and
affirmed by this Court.Retrenchment, or lay-off in laymans parlance, is the termination
of employment initiated by the employer through no fault of the employees and without
prejudice to the latter, resorted to by management during periods of business recession,
industrial depression, or seasonal fluctuations, or during lulls occasioned by lack of orders,
shortage of materials, conversion of the plant for a new production program or the
introduction of new methods or more efficient machinery, or of automation. Simply put, it is
an act of the employer of dismissing employees because of losses in the operation of a
business, lack of work, and considerable reduction on the volume of his business, a right
consistently recognized and affirmed by this Court.
Same; Same; Same; While it is true that retrenchment is a management prerogative, it
is still subject to faithful compliance with the substantive and procedural requirements laid
down by law and jurisprudence; Certain standards to be satisfied before any reduction of
personnel becomes legal.Nevertheless, while it is true that retrenchment is a
management prerogative, it is still subject to faithful compliance with the substantive and

procedural requirements laid down by law and jurisprudence. And since retrenchment
strikes at the very core of an individuals employment, which may be the only lifeline on
which he and his family depend for survival, the burden clearly falls upon the employer to
prove economic or business losses with appropriate supporting evidence. Any claim of
actual or potential business losses must satisfy certain established standards before any
reduction of personnel becomes legal, viz. 1. The losses expected and sought to be
avoided must be substantial and not merely de minimis in extent; 2. The substantial losses
apprehended must be reasonably imminent, as such imminence can be perceived
objectively and in good faith by the employer; 3. The retrenchment must be reasonably
necessary and likely to effectively prevent the expected losses; 4. The alleged losses, if
already realized, and the expected imminent losses sought to be forestalled, must be proved
by sufficient and convincing evidence.
Same; Same; National Labor Relations Commission;Evidence; While the rules of
evidence prevailing in the courts of law or equity are not controlling in proceedings before
the NLRC, the evidence presented before it must at least have a modicum of admissibility for
it to be given some probative value.We are more in accord with the aforequoted
observations made by the NLRC. It is true that administrative and quasi-judicial bodies like
the NLRC are not bound by the technical rules of procedure in the adjudication of cases.
However, this procedural rule should not be construed as a license to disregard certain
fundamental evidentiary rules. While the rules of evidence prevailing in the courts of law or
equity are not controlling in proceedings before the NLRC, the evidence presented before it
must at least have a modicum of admissibility for it to be given some probative value. The
Statement of Profit and Losses submitted by Crispa, Inc. to prove its alleged losses, without
the accompanying signature of a certified public accountant or audited by an independent
auditor, are nothing but self-serving documents which ought to be treated as a mere scrap
of paper devoid of any probative value. For sue, this is not the kind of sufficient and
convincing evidence necessary to discharge the burden of proof required of petitioners to
establish the alleged losses suffered by Crispa, Inc. in the years immediately preceding 1990
that would justify the retrenchment of respondent employees. In fact, petitioners, as
directors and officers of Crispa, Inc., already concede,albeit quite belatedly, in its Reply to
Comment of Public Respondent, the finding of public respondent NLRC that petitioners
utterly failed to establish the alleged financial losses borne by Crispa, Inc., thus making the
company guilty of illegal dismissal against the private respondents.
Same; Corporation Law;The general rule is that obligations, incurred by the
corporation, acting through its directors, officers and employees are its sole liabilities;
Exceptional circumstances warranting solidary liabilities.A corporation is a juridical entity

with legal personality separate and distinct from those acting for and in its behalf and, in
general, from the people comprising it. The general rule is that obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole liabilities.
There are times, however, when solidary liabilities may be incurred but only when
exceptional circumstances warrant such as in the following cases: 1. When directors and
trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent
to patently unlawful actsof the corporation; (b) act in bad faith or with gross negligence in
directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the
corporation, its stockholders or members, and other persons; 2. When a director or officer
has consented to the issuance ofwatered stocks or who, having knowledge thereof, did not
forthwith file with the corporate secretary his written objection thereto; 3. When a director,
trustee or officer has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; or 4. When a director, trustee or officer is made, by
specific provision of law, personally liable for his corporate action.
Same; Same; In labor cases, particularly, corporate directors and officers are solidarily
liable with the corporation for the termination of employment of corporate employees done
with malice or in bad faith.In labor cases, particularly, corporate directors and officers are
solidarily liable with the corporation for the termination of employment of corporate
employees done with malice or in bad faith. In this case, it is undisputed that petitioners
have a direct hand in the illegal dismissal of respondent employees. They were the ones,
who as high-ranking officers and directors of Crispa, Inc., signed the Board Resolution
retrenching the private respondents on the feigned ground of serious business losses that
had no basis apart from an unsigned and unaudited Profit and Loss Statement which, to
repeat, had no evidentiary value whatsoever. This is indicative of bad faith on the part of
petitioners for which they can be held jointly and severally liable with Crispa, Inc. for all the
money claims of the illegally terminated respondent employees in this case.

SPECIAL CIVIL ACTION in the Supreme Court. Certiorari and Prohibition.

The facts are stated in the opinion of the Court.
Go, Cojuangco, Mendoza & Ligon for petitioners.
Alfonso A. Osias for private respondents.
HERMOSISIMA, JR., J.:

Sought to be reversed in this special civil action forcertiorari and prohibition are the
Resolutions of public respondent National Labor Relations Commission (NLRC, for
brevity), dated September 30, 1993, December 7, 1995, and May 24, 1995, holding
petitioners herein liable for the illegal dismissal of private respondents and ordering
them to pay the latter separation pay plus backwages.
Private respondents were employed by Crispa, Inc. for many years in the latters
garments factory located in Pasig Boulevard, Pasig City. Sometime in September,
1991, private respondents services were terminated on the ground of retrenchment
due to alleged serious business losses suffered by Crispa, Inc. in the years
immediately preceding 1990. Thereafter, respondent employees, on November,
1991, filed before the NLRC, National Capital Region, Manila, three (3) separate
complaints for illegal dismissal and diminution of compensation against Crispa, Inc.,
Valeriano Floro, and the petitioners. Valeriano Floro was a major stockholder,
incorporator and Director of Crispa, Inc., while the petitioners were high ranking
officers and directors of the company. Said complaints were consolidated in order to
expedite the proceedings. The case was assigned to Labor Arbiter Raul Aquino.
On July 20, 1992, after due hearing, Labor Arbiter Aquino rendered a decision
dismissing the complaints for illegal dismissal but at the same time ordering Crispa,
Inc., Floro and the petitioners to pay respondent employees separation pay
equivalent to seventeen (17) days for every year of service, viz.:
WHEREFORE, premises considered, the instant complaint for illegal dismissal is hereby
DISMISSED for lack of merit. However, as discussed in this decision, respondent is (sic)
hereby directed to pay the separation pay of the complainants equivalent to seventeen (17)
days for every year of service and computed as follows:
xxx xxx xxx
All other claims are hereby dismissed for lack of merit. Respondent is hereby ordered to
pay 10% attorneys fees based on the award.
SO ORDERED.
1

Dissatisfied, private respondents appealed before the public respondent NLRC. In a

Resolution, dated September 30, 1993, the Second Division of the NLRC found
Crispa, Inc., Valeriano Floro, together with the petitioners liable for illegal dismissal,
and modified the award of separation pay in the amount of one (1) month for every
year of service instead of seventeen (17) days, to wit:
WHEREFORE, the assailed Decision is hereby Affirmed with Modification in so far as the
award of separation pay is concerned to the effect that respondents are ordered to pay

complainants one month for every year of service, instead of 17 days. All other rulings are
hereby AFFIRMED.
2

Petitioners filed a Motion for Reconsideration on November 12, 1993 but the same
was denied by the NLRC in a Resolution dated December 7, 1993, thus:
After due consideration of the Motion for Reconsideration filed by respondents on
November 12, 1995, from the Resolution of September 30, 1993, the Commission (Second
Division) RESOLVED to deny the same for lack of merit.
3

On August 8, 1994, private respondents sought a clarification of public respondent

NLRCs Resolution dated September 30, 1993 insofar as the computation of
separation pay by the Examination and Computation Division was concerned as well
as the failure of the Resolution to award them full backwages despite the finding of
illegal dismissal.
On April 21, 1995, the NLRC, treating the Motion to Clarity Judgment as an
Appeal, granted the same in this wise:
ACCORDINGLY, in view of the foregoing, the complainants-appellees Motion to Clarify
Judgment is partially GRANTED and Mr. Ricardo Atienza, Acting Chief of the Examination and
Computation Division is hereby directed to include in the computation, six months
backwages as provided for in the September 30, 1993 Resolution of the Division, which was
however omitted in the dispositive portion thereof.
SO ORDERED.
4

Petitioners filed a Motion for Reconsideration of the April 21, 1995 Resolution,
which was denied in another Resolution dated May 24, 1995.
Hence, this petition.
We shall dismiss the petition. The law recognizes the right of every business
entity to reduce its work force if the same is made necessary by compelling
economic factors which would endanger its existence or stability. In spite of
overwhelming support granted by the social justice provisions of our Constitution in
favor of labor, the fundamental law itself guarantees, even during the process of
tilting the scales of social justice towards workers and employees, the right of
enterprises to reasonable returns of investment and to expansion and growth. To
hold otherwise would not only be oppressive and inhuman, but also counterproductive and ultimately subversive of the nations thrust towards a resurgence in
our economy which would ultimately benefit the majority of our people. Where
appropriate and where conditions are in accord with law and jurisprudence, the
Court has authorized valid reductions in the work force to forestall business
5

losses, the hemorrhaging of capital, or even to recognize an obvious reduction in

the volume of business which has rendered certain employees redundant. Thus,
Article 283 of the Labor Code, which covers retrenchment, reads as follows:
8

ART. 283. Closure of establishment and reduction of personnel.The employer may also
terminate the employment of any employee due to the installation of labor saving devices,
redundancy,retrenchment to prevent losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the worker and the Ministry of Labor
and Employment at least one (1) month before the intended date thereof. In case of
termination due to the installation of labor saving devices or redundancy, the worker
affected thereby shall be entitled to a separation pay equivalent to at least his one (1)
month pay or to at least one (1) month pay for every year of service, whichever is higher. In
case of retrenchment to prevent losses and in cases of closures or cessation of operations of
establishment or undertaking not due to serious business losses or financial reverses, the
separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay
for every year of service, whichever is higher. A fraction of at least six (6) months shall be
considered as one (1) whole year.

Retrenchment, or lay-off in laymans parlance, is the termination of employment

initiated by the employer through no fault of the employees and without prejudice
to the latter, resorted to by management during periods of business recession,
industrial depression, or seasonal fluctuations, or during lulls occasioned by lack of
orders, shortage of materials, conversion of the plant for a new production program
or the introduction of new methods or more efficient machinery, or of
automation. Simply put, it is an act of the employer of dismissing employees
because of losses in the operation of a business, lack of work, and considerable
reduction on the volume of his business, a right consistently recognized and
affirmed by this Court. Nevertheless, while it is true that retrenchment is a
management prerogative, it is still subject to faithful compliance with the
substantive and procedural requirements laid down by law and jurisprudence. And
since retrenchment strikes at the very core of an individuals employment, which
may be the only lifeline on which he and his family depend for survival, the burden
clearly falls upon the employer to prove economic or business losses with
appropriate supporting evidence. Any claim of actual or potential business losses
must satisfy certain established standards before any reduction of personnel
becomes legal, viz.:
10

11

12

13

1. 1.The losses expected and sought to be avoided must be substantial and not
merely de minimis in extent;
2. 2.The substantial losses apprehended must be reasonably imminent, as such
imminence can be perceived objectively and in good faith by the employer.
3. 3.The retrenchment must be reasonably necessary and likely to effectively prevent
the expected losses.
4. 4.The alleged losses, if already realized, and the expected imminent losses sought to
be forestalled, must be proved by sufficient and convincing evidence.
14

In sustaining the companys submission that it suffered serious business losses in

1991, thus necessitating the retrenchment of respondent employees, the Labor
Arbiter found:
On the ground invoked by respondent for closing its business, i.e., serious losses and
financial straits, respondent submitted Financial Report wherein it incurred a net loss of
Fourty (sic) Three Million Four Hundred Eighteen Thousand Two Hundred Seventy Two and
Ninety Eight Centavos (P43,418,272.98) in 1991. Thus, based on all the foregoing, we are
constrained that respondent was, indeed, suffering from financial reverses that would
justify its decision to close down its business. Hence, under Section 9 (b), Book VI, Rule III of
Omnibus rules Implementing the Labor Code, it provides:
Section 9. (b) Where the termination of employment is due to retrenchment to prevent losses and in
case of closure or cessation of operations of establishment or undertaking not due to serious
business losses or financial reverses, or where the employee suffers from a disease and his continued
employment is prohibited by law or is prejudicial to his health or to the health of his co-employees,
the employee shall be entitled to termination pay equivalent to at least one-half month pay for every
year of service, a fraction of at least six months being considered as one whole year.

15

The NLRC, in its September 30, 1993 Resolution, however, reversed the foregoing
findings of the Labor Arbiter and adjudged Crispa, Inc. as well as the petitioners
liable for illegal dismissal. The NLRC ruled, thus:
We observed that the basis of the Labor Arbiter in sustaining the argument of financial
reverses is the Statement of Profit and Losses submitted by the respondent (Supra). The
same however, does not bear the signature of a certified public accountant or audited by an
independent auditor. Briefly stated, it has no evidentiary value. As such, the alleged financial
losses which caused the temporary closure of respondent CRISPA, Inc. has not been
sufficiently established. In the case of Lopez Sugar Corp. vs. FFW, 189 SCRA 179, the
Supreme Court held that alleged losses if already realized and the expected losses sought to
be forestalled must be proved by sufficient and commencing (sic) evidence. Consequently,

there being no financial reverses for (sic) men (sic) the termination of herein complainants
from their employment is perforce illegal.
16

We are more in accord with the aforequoted observations made by the NLRC. It is
true that administrative and quasijudicial bodies like the NLRC are not bound by the
technical rules of procedure in the adjudication of cases. However, this procedural
rule should not be construed as a license to disregard certain fundamental
evidentiary rules. While the rules of evidence prevailing in the courts of law or
equity are not controlling in proceedings before the NLRC, the evidence presented
before it must at least have a modicum of admissibility for it to be given some
probative value. The Statement of Profit and Losses submitted by Crispa, Inc. to
prove its alleged losses, without the accompanying signature of a certified public
accountant or audited by an independent auditor, are nothing but self-serving
documents which ought to be treated as a mere scrap of paper devoid of any
probative value. For sure, this is not the kind of sufficient and convincing evidence
necessary to discharge the burden of proof required of petitioners to establish the
alleged losses suffered by Crispa, Inc. in the years immediately preceding 1990 that
would justify the retrenchment of respondent employees. In fact, petitioners, as
directors and officers of Crispa, Inc., already concede, albeit quite belatedly, in its
Reply to Comment of Public Respondent, the finding of public respondent NLRC
that petitioners utterly failed to establish the alleged financial losses borne by
Crispa, Inc., thus making the company guilty of illegal dismissal against the private
respondents. According to petitioners, what they are actually assailing is the
decision of the NLRC holding them solidarily liable with the company for the
p0ayment of separation pay and backwages to the private respondents. It is the
contention of the petitioners that the award of backwages and separation pay is a
corporate obligation and must therefore be assumed by Crispa, Inc. alone.
We do not agree. A corporation is a juridical entity with legal personality separate
and distinct from those acting for and in its behalf and, in general, from the people
comprising it. The general rule is that obligations incurred by the corporation, acting
through its directors, officers and employees, are its sole 0liabilities. There are
times, however, when solidary liabilities may be incurred but only when exceptional
circumstances warrant such as in the following cases:
17

18

19

20

21

1. 1.When directors and trustees or, in appropriate cases, the officers of a

corporation: (a) vote for or assent topatently unlawful acts of the corporation; (b)
act inbad faith or withgross negligence in directing the corporate affairs; (c) are

guilty of conflict of interest to the prejudice of the corporation, its stockholders or

members, and other persons;
2. 2.When a director or officer has consented to the issuance ofwatered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his
written objection thereto;
3. 3.When a director, trustee or officer has contractually agreed or stipulated to hold
himself personally and solidarily liable with the corporation; or
4. 4.When a director, trustee or officer is made, by specific provision of law, personally
liable for his corporate action.
22

In labor cases, particularly, corporate directors and officers are solidarily liable with
the corporation for the termination of employment of corporate employees done
with malice or in bad faith. In this case, it is undisputed that petitioners have a direct
hand in the illegal dismissal of respondent employees. They were the ones, who as
high-ranking officers and direc-tors of Crispa, Inc., signed the Board Resolution
retrenching the private respondents on the feigned ground of serious business
losses that had no basis apart from an unsigned and unaudited Profit and Loss
Statement which, to repeat, had no evidentiary value whatsoever. This is indicative
of bad faith on the part of petitioners for which they can be held jointly and
severally liable with Crispa, Inc. for all the money claims of the illegally terminated
respondent employees in this case.
WHEREFORE, finding no grave abuse of discretion on the part of the public
respondent NLRC, the instant petition is hereby DISMISSED.
Costs against petitioners.
SO ORDERED.
Bellosillo, Vitug andKapunan, JJ., concur.
Padilla (Chairman), J., On leave.
Petition dismissed.
Note.Losses was adequately shown through an income statement to merit
retrenchment. (Catatista vs. National Labor Relations Commission, 247 SCRA
46 [1995])
23