Topic: Classification of Corporations

Case No. 16

Manila International Airport Authority vs. CA

G.R. No. 155650, July 20, 2006

Facts:
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino
International Airport (NAIA) Complex. Executive Order No. 903 was issued on 21 July 1983 by
then President Ferdinand E. Marcos. Subsequently, Executive Order Nos. 909 and 298
amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements

and equipment within the NAIA Complex. The MIAA Charter transferred to MIAA
approximately 600 hectares of land, including the runways and buildings then under the
Bureau of Air Transportation. The MIAA Charter further provides that no portion of the land
transferred to MIAA shall be disposed of through sale or any other mode unless specifically
approved by the President of the Philippines.

The OGCC opined that the Local Government Code of 1991 withdrew the exemption
from real estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA
negotiated with respondent City of Parañaque to pay the real estate tax imposed by the
City. MIAA then paid some of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency The
OGCC opined that Section 21 of the MIAA Charter is the proof that MIAA is exempt from real
estate tax. MIAA filed with the Court of Appeals seeking to restrain the City of Parañaque
from imposing real estate tax on, levying against, and auctioning for public sale the Airport
Lands and Buildings. The Court of Appeals
dismissed the petition.

On petition for review MIAA admits that the MIAA Charter has placed the title to the
Airport Lands and Buildings in the name of MIAA. However, MIAA points out that it cannot
claim ownership over these properties since the real owner of the Airport Lands and
Buildings is the Republic of the Philippines. The MIAA Charter mandates MIAA to devote the
Airport Lands and Buildings for the benefit of the general public. Since the Airport Lands and
Buildings are devoted to public use and public service, the ownership of these properties
remains with the State. The Airport
Lands and Buildings are thus inalienable and are not subject to real estate tax by local
governments.

Issue:
Is MIAA a government-owned and-controlled corporation?

Held:
No.
Section 2(13) of the Introductory Provisions of the Administrative Code of 1987
defines a government-owned or controlled corporation as follows:
SEC. 2. General Terms Defined. –
(13) Government-owned or controlled corporation refers to any agency organized as
a stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x x.

A government-owned or controlled corporation must be "organized as a stock or

non-stock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is
not a stock corporation because it has no capital stock divided into shares. Clearly, under its
Charter, MIAA does not have capital stock that is divided into shares. Section 3 of the
Corporation Code defines a stock corporation as one whose "capital stock is divided into
shares and x x x authorized to distribute to the holders of such shares dividends x x x."
MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or
voting shares. Hence, MIAA is not a stock corporation. MIAA is also not a non-stock
corporation because it has no members.

MIAA is a government instrumentality vested with corporate powers to perform

efficiently its governmental functions. MIAA is like any other government instrumentality,
the only difference is that MIAA is vested with corporate powers.
Topic: Doctrine of Separate Juridical Personality

Case No. 16

Saw vs. CA
G.R. No. 90580 April 8, 1991

Facts:
This is a collection suit with preliminary attachment was filed by Equitable Banking
Corporatioon against Freeman, Inc. and Saw Chiao Lian, its President and General Manager.
The petitioners moved to intervene, alleging that (1) the loan transactions between Saw
Chiao Lian and Equitable Banking Corp. were not approved by the stockholders representing
at least 2/3 of corporate capital; (2) Saw Chiao Lian had no authority to contract such loans;
and (3) there was collusion between the officials of Freeman, Inc. and Equitable Banking
Corp. in securing the loans. Themotion to intervene was denied, and the petitioners
appealed to the Court of Appeals.

Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement
which they submitted to and was approved by the lower court. But because it was not
complied with, Equitable secured a writ of execution, and two lots owned by Freeman, Inc.
were levied upon and sold at public auction to Freeman Management and Development
Corp. The Court of Appeals sustained the denial of the petitioners' motion for intervention,
holding that "the compromise agreement between Freeman, Inc., through its President, and
Equitable Banking Corp. will not necessarily prejudice petitioners whose rights to corporate
assets are at most inchoate, prior to the dissolution of Freeman, Inc. .And intervention under
Sec. 2, Rule 12 of the Revised Rules of Court is proper only when one's right is actual,
material, direct and immediate and not simply contingent or expectant."

Issue:
Are the petitioners allowed to intervene in theCivil Case No. 88-44404?

Held:
No.

To allow intervention, [a] it must be shown that the movant has legal interest in the
matter in litigation, or otherwise qualified; and [b] consideration must be given as to
whether the adjudication of the rights of the original parties may be delayed or prejudiced,
or whether the intervenor's rights may be protected in a separate proceeding or not. Both
requirements must concur as the first is not more important than the second.
 The interest which entitles a person to intervene in a suit between other parties must
be in the matter in litigation and of such direct and immediate character that the intervenor
will either gain or lose by the direct legal operation and effect of the judgment. Otherwise, if
persons not parties of the action could be allowed to intervene, proceedings will become
unnecessarily complicated, expensive and interminable. And this is not the policy of the
law.

At the very least, their interest is purely inchoate, or in sheer expectancy of a right in
the management of the corporation and to share in the profits thereof and in the properties
and assets thereof on dissolution, after payment of the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the
corpora=on, it does not vest the owner thereof with any legal right or title to any of the
property, his interest in the corporate property being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of corporate property, which is owned by the
corporation as a distinct legal person.
Topic: Application of Doctrine of Piercing the Veil of Corporate Fiction

Case No. 16.

NASECO Guards Association vs. National Service Corp.

G.R. No. 165442 August 25, 2010

Facts:

Respondent National Service Corporation (NASECO) is a wholly-owned subsidiary of

the Philippine National Bank (PNB). It supplies security and manpower services to different
clients. Petitioner NASECO Guards Association-PEMA (NAGA-PEMA) is the collective
bargaining representative of the regular rank and file security guards of respondent. NEMU-
PEMA is the collective bargaining representative of the regular rank and file (non-security)
employees of respondent.

Petitioner and respondent agreed to sign a CBA on non-economic terms. Thereafter,

petitioner filed a notice of strike because of respondent’s refusal to bargain for economic
benefits in the CBA. Following conciliation hearings, the parties again commenced CBA
negotiations and started to resolve the issues on benefits but failed to reach an agreement.

Meanwhile, respondent and NEMU-PEMA entered into a CBA on non-economic

terms. Unfortunately, a dispute among the leaders of NEMU-PEMA arose and at a certain
point, leadership of the organization was unclear. Hence, the negotiations concerning the
economic terms of the CBA were put on hold until the internal dispute could be resolved.

Petitioner filed a notice of strike before the National Conciliation and Mediation
Board against respondent and PNB due to a bargaining deadlock. The following day, NEMU-
PEMA likewise filed a notice of strike against respondent and PNB on the ground of unfair
labor practices.

Issue:

Is PNB, being the undisputed owner of and exercising control over respondent, liable to
pay the CBA benefits awarded to the petitioner?

Held:
 NO.

The Court found no reason to pierce the corporate veil of respondent and go beyond
its legal personality. Control, by itself, does not mean that the controlled corporation is a
mere instrumentality or a business conduit of the mother company. Even control over the
financial and operational concerns of a subsidiary company does not by itself call for
disregarding its corporate fiction. There must be a perpetuation of fraud behind the control
or at least a fraudulent or illegal purpose behind the control in order to justify piercing the
veil of corporate fiction. Such fraudulent intent is lacking in this case.

There is no showing that such no loss, no profit scheme between respondent and
PNB was implemented to defeat public convenience, justify wrong, protect fraud or defend
crime, or is used as a device to defeat the labor laws, nor does the scheme show that
respondent is a mere business conduit or alter ego of PNB. Absent proof of these
circumstances, respondent’s corporate personality cannot be pierced.

It is apparent that petitioner wants the Court to disregard the corporate personality
of respondent and directly go after PNB in order for it to collect the CBA benefits. On the
same breath, however, petitioner argues that ultimately it is PNB, by virtue of the no loss, no
profit scheme, which shoulders and provides the funds for financial liabilities of respondent
including wages and benefits of employees. If such scheme was indeed true as the
petitioner presents it, then there was absolutely no need to pierce the veil of corporate
fiction of respondent.
Topic: Doctrine of Piecing the Veil of Corporate Fiction

Case No. 16

AZCOR Mfg. vs. NLRC

G.R. No. 117963. February 11, 1999

Facts:
Candido Capulso filed with the Labor Arbiter a complaint for constructive illegal
dismissal and illegal deduction of P50.00 per day for the period April to September 1989.
Petitioners Azcor Manufacturing, Inc. (AZCOR) and Arturo Zuluaga who were respondents
before the Labor Arbiter (Filipinas Paso was not yet a party then in that case) moved to
dismiss the complaint on the ground that there was no employer-employee relationship
between AZCOR and herein respondent Capulso; that the latter became an employee of
Filipinas Paso effective 1 March 1990 but voluntarily resigned therefrom a year after. Capulso
later amended his complaint by impleading Filipinas Paso as additional respondent before
the Labor Arbiter. The letter of resignation supposed to have been executed by Capulso
shows that he resigned from Ascor Mfg., Inc. on February 28, 1990 while the contract of
Employment issued to Candido Capulso by the personnel officer of Ascor Mfg., Inc. shows
that appellant was being hired from March 1, 1990 to August 31, 1990 by respondent Ascor
Mfg., Inc. to do jobs for Filipinas Paso.

Issue:
Is Azcor liable?

Held:
Yes.

The doctrine that a corporation is a legal entity or a person in law distinct from the
persons composing it is merely a legal fiction for purposes of convenience and to subserve
the ends of justice. This fiction cannot be
extended to a point beyond its reason and policy. Where, as in this case, the corporate
fiction was used as a means to perpetrate a social injustice or as a vehicle to evade
obligations or confuse the legitimate issues, it would
be discarded and the two (2) corporations would be merged as one, the first being merely
considered as the instrumentality, agency, conduit or adjunct of the other.

In this particular case, there was much confusion as to the identity of Capulsos
employer - whether it was AZCOR or Filipinas Paso; but, for sure, it was petitioners' own
making, as shown by the following: First, Capulso had no knowledge that he was already
working under petitioner Filipinas Paso since he continued to retain his AZCOR Identification
card; Second, his payslips contained the name of AZCOR giving the impression that AZCOR
was paying his salary; Third, he was paid the same salary and he performed the same kind of
job, in the same work area, in the same location, using the same tools and under the same
supervisor; Fourth, there was no gap in his employment as he continued to work from the
time he was hired up to the last day of his work; Fifth, the casting department of AZCOR
where Capulso was working was abolished when he, together with six (6) others,
transferred to Filipinas Paso; and Sixth, the employment contract was signed by an AZCOR
personnel officer, which showed that Capulso was being hired from 1 March 1990 to 31
August 1990 by AZCOR to do jobs for Filipinas Paso.

It is evident from the foregoing discussion that Capulso was led into believing that
while he was working with Filipinas Paso, his real employer was AZCOR. Petitioners never
dealt with him openly and in good faith, nor
was he informed of the developments within the company, i.e., his alleged transfer to
Filipinas Paso and the closure of AZCORs manufacturing operations beginning 1 March 1990.
Understandably, he sued AZCOR alone and was constrained to implead Filipinas Paso as
additional respondent only when it became apparent that the latter also appeared to be his
employer.
Topic: Test in Determining Applicability of the Doctrine of Piercing the Veil of Corporate
Fiction

Case No. 16

Jardine Davis Inc. vs JRB Realty

G.R No. 151438 July 15, 2005

Facts:
Respondent JRB Realty, Inc. built a building. An air conditioning system was needed
for the Blanco Law Firm housed at the building. Respondent’s Executive Vice-President
accepted the contract quotation of President of Aircon and Refrigeration Industries, Inc.
(Aircon). When the units with rotary compressors were installed, they could not deliver the
desired cooling temperature. Despite several adjustments and corrective measures, the
respondent conceded that Fedders Air Conditioning USAs technology for rotary
compressors for big capacity conditioners like those installed at the Blanco Center had not
yet been perfected. The parties thereby agreed to replace the units. Regrettably, however, it
could not specify a date when delivery could be effected.

Temp Control Systems, Inc. (a subsidiary of Aircon until 1987) undertook the
maintenance of the units, inclusive of parts and services. In October 1987, the respondent
learned, through newspaper ads, that Maxim Industrial and Merchandising Corporation
(Maxim, for short) was the new and exclusive licensee of Fedders Air Conditioning USA in
the Philippines for the manufacture, distribution, sale, installation and maintenance of
Fedders air conditioners. The respondent requested that Maxim honor the obligation of
Aircon, but the latter refused. Considering that the ten-year period of prescription was fast
approaching, to expire the respondent then instituted an action for specific performance
with damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA,
Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc. The
latter was impleaded as defendant, considering that Aircon was a subsidiary of the
petitioner.

RTC rendered its Decision in favor of the respondent. With the CA, the CA affirmed
the trial courts ruling in toto; hence, this petition.

Issue:
Is petitioner Jardine Davis liable following the doctrine of piercing the veil of
corporate fiction?

Held:
 No.

While a corporation is allowed to exist solely for a lawful purpose, the law will regard
it as an association of persons or in case of two corporations, merge them into one, when
this corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate
fiction which applies only when such corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime. The rationale behind piercing a corporations
identity is to remove the barrier between the corporation from the persons comprising it to
thwart the fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities.

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily
follow that Aircons corporate legal existence can just be disregarded. In applying the
doctrine, the following requisites must be established: (1) control, not merely majority or
complete stock control; (2) such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest acts in contravention of plaintiffs legal rights; and (3) the aforesaid control and
breach of duty must proximately cause the injury or unjust loss complained of.

The records bear out that Aircon is a subsidiary of the petitioner only because the
latter acquired Aircons majority of capital stock. It, however, does not exercise complete
control over Aircon; nowhere can it be gathered that the petitioner manages the business
affairs of Aircon. Indeed, no management agreement exists between the petitioner and
Aircon, and the latter is an entirely different entity from the petitioner.
Topic:Incorporation and Organization Proper: Subscription Contract

Case No. 16

Ong vs. Tiu

400 SCRA 1 April 8, 2003

Facts:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with
stoppage and incompletion when its owner, the First Landlink Asia Development
Corporation (FLADC), which was owned by the Tius, encountered dire financial difficulties. It
was heavily indebted to the Philippine National Bank (PNB) for P190 million. To stave off
foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited
the Ongs, to invest in FLADC.

Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius
agreed to maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000
shares at a par value of P100.00 each while the Tius were to subscribe to an additional
549,800 shares at P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President
and the Treasurer plus five directors while the Ongs were entitled to nominate the
President, the Secretary and six directors (including the chairman) to the board of directors
of FLADC. Moreover, the Ongs were given the right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of
stock while the Tius committed to contribute to FLADC a four-storey building and two
parcels of land respectively valued at P20 million (for 200,000 shares), P30 million (for
300,000shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 stock
subscriptiontherein. The Ongs paid in another P70 million3 to FLADC and P20 million to the
Tius over and above their P100 million investment, the total sum of which (P190 million) was
used to settle the P190 million mortgage indebtedness of FLADC to PNB.

The business harmony between the Ongs and the Tius in FLADC, however, was
shortlived because the Tius rescinded the Pre-Subscription Agreement. The Tius accused the
Ongs of (1) refusing to credit to them the FLADC shares covering their real property
contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and
performing their duties as Vice-President and Treasurer, respectively, and (3) refusing to give
them the office spaces agreed upon.

Issue:
Can the Tius could legally rescind the Pre-Subscription Agreement?
Held:
No.

A subscription contract necessarily involves the corporation as one of the contracting

parties since the subject matter of the transaction is property owned by the corporation – its
shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-
Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of
stock was, from the viewpoint of the law, one between the Ongs and FLADC, not between
the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal
capacities with the Ongs since they were not selling any of their own shares to them. It was
FLADC that did.

The Tius, in their personal capacities, cannot seek the ultimate and extraordinary
remedy of rescission of the subject agreement based on a less than substantial breach of
subscription contract. Not only are they not parties to the subscription contract between
the Ongs and FLADC; they also have other available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal standing
to sue for rescission based on breach of contract, said action will nevertheless still not
prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid
distribution of assets and property under the Corporation Code.

The Trust Fund Doctrine provides that subscriptions to the capital stock of a
corporation constitute a fund to which the creditors have a right to look for the satisfaction
of their claims. This doctrine is the underlying principle in the procedure for the distribution
of capital assets, embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of the Articles of Incorporation to
reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained earnings, and (3) dissolution and
eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41
on the power of a corporation to acquire its own sharesand in Section 122 on the prohibition
against the distribution of corporate assets and property unless the stringent requirements
therefor are complied with.

In the instant case, the rescission of the Pre-Subscription Agreement will effectively
result in the unauthorized distribution of the capital assets and property of the corporation,
thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution of capital assets and
property of the corporation is allowed.
Topic: Primary/ Secondary Purpose

Case No. 16

Asuncion vs. De Yriarte

G.R. No. 9321, September 24, 1914

Facts:

This is an action to obtain a writ of mandamus to compel the Chief of the Division of
Achieves of the Executive Bureau to file a certain articles of incorporation. The Chief of the
Division of Archives refused to file the articles of incorporation upon the ground that the
object of the corporation, as stated in the articles, was not lawful and that, in pursuance of
section 6 of Act No. 1459, they were not registerable. The proposed incorporators began an
action in the CFI of Manila to compel the Chief of the Division of Archives to receive and
register said articles of incorporation and to do any and all acts necessary for the complete
incorporation of the persons named in the articles.

Issues:

1. Does the Chief of the Division of Archives has the authority, under the Corporation
for registration, to decide not only as to the sufficiency of the form of the articles, but also
as to the lawfulness of the purpose of the proposed corporation?

2. Are the purposes of the corporation as stated in the articles of incorporation lawful
within the meaning of the Corporation Law?

Held:

1. Although the duties of an official happen to be ministerial, it does not necessarily

follow that he may not, in the administration of his office, determine questions of law. It is
his duty to determine whether the objects of the corporation as expressed in the articles are
lawful pursuant to the then Corporation Law. And just because the articles of incorporation
presented for registration are perfect in form, it does not mean that the division of archives
must accept and register them and issue the corresponding certificate of incorporation no
matter what the purpose of the corporation may be as expressed in the articles. It is not
only the right but the duty of the divisions of archives to determine the lawfulness of the
objects and purposes of the corporation before it issues a certificate of incorporation.
 2. When on the face of the articles of incorporation presented for registration it is
shown that it is organized for a purpose contrary to law or public policy, the same may be
denied outright registration. The object of the proposed corporation, as appears from the
articles offered for registration, is to make of the barrio of Pulo or San Miguel a corporation
which will become the owner of and have the right to control and administer any property
belonging to the municipality of Pasig found within the limits of that barrio. This clearly
cannot be
Topic: Classification of Shares: Treasury Shares

Case No. 16

Philippine Coconut Producers Federation vs. Republic of the Philippines

G.R. Nos. 177857-58 September 17, 2009

Facts:
COCOFED seeks the Court’s approval of the conversion of 753,848,312 Class A and
Class B common shares of San Miguel Corporation (SMC) registered in the names of
Coconut Industry Investment Fund and the so-called 14 Holding Companies (collectively
known as CIIF companies) into 753,848,312 SMC Series 1 Preferred Shares (hereinafter, the
Conversion).

COCOFED proposes to constitute a trust fund to be known as the Coconut Industry

Trust Fund (CITF) for the Benefit of the Coconut Farmers, with respondent Republic, acting
through the Philippine Coconut Authority (PCA), as trustee. As proposed, the constitution of
the CITF shall be subject to terms and conditions which, for the most part, reiterate the
features of SMCs conversion offer, albeit specific reference is made to the shares of the 14
CIIF companies.

Respondent Republic postulates that, owing to the sequestrated status of the said
common shares, only PCGG has the authority to approve the proposed conversion and seek
the necessary Court approval. Then, Jovito R. Salonga and four others sought leave to
intervene asserting that the proposed conversion is not only not advantageous to the public
interest but is in fact positively disadvantageous. They label the conversion as a devious
compromise favorable only to COCOFED and Cojuangco, Jr. The conversion, so intervenors
claim, will result in the loss of voting rights of PCGG in SMC and enable Cojuangco, Jr. to
acquire the sequestered shares, without encumbrances, using SMC funds.

Issue:
Will the conversion of common shares result in the loss of voting rights of PCGG in
SMC and enable Cojuangco, Jr. to acquire the sequestered shares, without encumbrances,
using SMC funds?

Held:
No.
 The common shares after conversion and release from sequestration become
treasury stocks or shares. Treasury shares under Sec. 9 of the Corporation Code are shares
of stock which have been issued and fully paid for, but subsequently reacquired by the
issuing corporation by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by the board of
directors.

A treasury share or stock, which may be common or preferred, may be used for a
variety of corporate purposes, such as for a stock bonus plan for management and
employees or for acquiring another company. It may be held indefinitely, resold or retired.
While held in the company’s treasury, the stock earns no dividends and has no vote in
company affairs. Thus, the CIIF common shares that would become treasury shares are not
entitled to voting rights. And should conversion push through, SMC, not Cojuangco, Jr.,
becomes the owner of the reacquired sequestered CIIF SMC common shares. Should SMC
opt, however, to sell said shares in the future, prospective buyers, including possibly
Cojuangco, Jr., have to put up their own money to acquire said common shares. Thus, it is
erroneous for intervenors to say that Cojuangco, Jr., with the use of SMC funds, will be
acquiring the CIIF SMC common shares.
Topic: Power to Sue
Case No. 16

South Cotabato Communications Corp. vs. Sto. Tomas

G.R. No. 173326 December 12, 2010

Facts:

The Department of Labor and Employment Region-XII (DOLE) conducted a Complaint

Inspection at the premises of DXCP Radio Station, which is owned by petitioner South
Cotabato Communications Corporation. The inspection yielded a finding of violation of labor
standards provisions of the Labor Code.

Consequently, the DOLE issued a Notice of Inspection Result directing petitioner

corporation and/or its president, petitioner Gauvain J. Benzonan (Benzonan), to effect
restitution and/or correction of the alleged violations within five (5) days from notice. In an
Order,the DOLE Region-XII OIC Regional Director (DOLE Regional Director) directed
petitioners to pay private respondents.

In an Order, the Secretary of Labor affirmed the findings of the DOLE Regional
Director on the postulate that petitioners failed to question, despite notice of hearing, the
noted violations or to submit any proof of compliance therewith. And in view of petitioners'
failure to present their evidence before the Regional Director, the Secretary of Labor
adopted the findings of the Labor Inspector and considered the interviews conducted as
substantial evidence.

Petitioners moved for, but was denied, reconsideration of the Secretary of Labor's
Order. Petitioners elevated the case to the Court of Appeals but it dismissed the petition
owing to procedural infirmities because petitioners failed to attach a Secretary's Certificate
evidencing the authority of petitioner Benzonan, as President, to sign the petition. On
appeal, this Court remanded the case back to the CA for determination on the merits. CA
upheld the Secretary of Labor, holding that petitioners cannot claim denial of due process,
their failure to present evidence being attributed to their negligence.

Issue:
Is the failure of petitioners to attach a Secretary’s Certificate evidencing the authority
of petitioner Benzonan, as president, fatal?
Ruling:
No.

The Court had summarized the jurisprudential principles on the matter in Cagayan
Valley Drug Corporation v. Commissioner of Internal Revenue. In said case, it held that a
President of a corporation, among other enumerated corporate officers and employees, can
sign the verification and certification against of non-forum shopping in behalf of the said
corporation without the benefit of a board resolution.

It must be stressed, however, that the Cagayan ruling qualified that the better
procedure is still to append a board resolution to the complaint or petition to obviate
questions regarding the authority of the signatory of the verification and certification.

Nonetheless, under the circumstances of this case, it bears reiterating that the
requirement of the certification of non-forum shopping is rooted in the principle that a
party-litigant shall not be allowed to pursue simultaneous remedies in different fora, as this
practice is detrimental to an orderly judicial procedure. However, the Court has relaxed,
under justifiable circumstances, the rule requiring the submission of such certification
considering that, although it is obligatory, it is not jurisdictional. Not being jurisdictional, it
can be relaxed under the rule of substantial compliance. In the case at bar, the Court holds
that there has been substantial compliance with Sections 4 and 5, Rule 7 of the 1997 Revised
Rules on Civil Procedure on the petitioners part. Petitioner Benzonan clearly satisfies the
aforementioned jurisprudential requirement because he is the President of petitioner South
Cotabato Communications Corporation. Moreover, he is also named as co-respondent of
petitioner-corporation in the labor case which is the subject matter of the special civil action
for certiorari filed in the Court of Appeals.
Topic: Corporate Powers: Power to Sue

Case No. 16

United Paragon Mining Corp. vs. CA

G.R. No. 150959 August 4, 2006

Facts:

Private respondent Cesario was a regular employee of petitioner United Paragon

Mining Corporation (UPMC). Cesario received a termination letter signed by UPMCs
Personnel Superintendent, Feliciano M. Daniel, informing Cesario that his employment is
terminated. As stated in the letter, the termination was on account of Cesarios violation of
company rules against infliction of bodily injuries on a co-employee as well as for unlawfully
possessing a deadly weapon in violation of company rules.

Accordingly, the complaint for illegal dismissal was referred to Voluntary Arbitrator
who rendered a decision in Cesario’s favor. UPMC moved for a reconsideration but the
Voluntary Arbitrator denied the desired reconsideration. Unsatisfied, UPMC, thru
its Personnel Superintendent Feliciano M. Daniel, elevated the case to the CA. CA dismissed
the same based on, among others, that the verification in the petition is ineffective and
insufficient because it was merely signed by the company's Personnel Superintendent
without alleging or showing that he is authorized for the said purpose and that the
verification was based on knowledge and information. Hence, this petition.

Issue:

Is the ruling of the CA, in dismissing the case on the ground that Daniel has no right
to file the petition in behalf of the corporation because he has no any authority from its
board of directors, correct?

Held:

Yes.

CA is correct in dismissing the case because Daniel, being not a real party-in-interest,
has no right to file the petition in CA-G.R. SP No. 44450 in behalf of the corporation without
any authority from its board of directors.
 A corporation, like petitioner UPMC, has no power except those expressly conferred
on it by the Corporation Code and those that are implied or incidental to its existence. In
turn, a corporation exercises said powers through its board of directors and/or its duly
authorized officers and agents. It has thus been observed that the power of a corporation to
sue and be sued in any court is lodged with its board of directors that exercises its corporate
powers. In turn, physical acts of the corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the purpose by the corporate by-laws
or by a specific act of the board of directors.

It is true that Cesario’s complaint for illegal dismissal was filed against the
corporation and Daniel. However, it is obvious that Daniel was merely a nominal party in that
proceedings, as in fact he was impleaded thereat in his capacity as UPMCs Personnel
Superintendent who signed the termination letter. For sure, Cesario’s complaint contains no
allegation whatsoever for specific claim or charge against Daniel in whatever capacity. As it
is, Daniel was not in anyway affected by the outcome of the illegal dismissal case because
only the corporation was made liable therein to Cesario. It is basic in law that a corporation
has a legal personality entirely separate and distinct from that of its officers and the latter
cannot act for and on its behalf without being so authorized by its governing board.
Topic: Power to invest funds in another corporation or business
Case No. 16

Dela Rama vs. Ma-ao Sugar

L- 17506 February 28, 1969

Facts:
This was a representative or derivative suit commenced by four minority
stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three
other directors of the corporation.

The complaint stated five causes of action, to wit: (1) for alleged illegal and ultra-vires
acts consisting of self-dealing, irregular loans, and unauthorized investments; (2) for alleged
gross mismanagement; (3) for allegedforfeiture of corporate rights warranting
dissolution; (4) for alleged damages and attorney's fees; and (5) for receivership.

Allegedly, private respondent President Araneta invested the corporate funds to

other corporations: Mabuhay Printing, Acoje Mining, and Philippine Fiber Corporation. The
company is engaged in Sugar Mills and plantation industry.

After trial, the Lower Court rendered its Decision dismissing the petition for
dissolution but condemns J. Amado Araneta to pay unto Ma-ao Sugar Central Co., Inc. From
this judgment both parties appealed directly to the Supreme Court.

Issue:

Are the investments valid?

Held:

As to the investments made to Mabuhay printing and Acoje Mining, said investments
are invalid. It is not the primary not the secondary purpose of the corporation. Hence, by
express provision of the law, it cannot invest its corporate funds.

As to the investments made to Philippine Fibers, the same is valid because it was
ratifies by the Board of Directors. 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.

Topic: Ultra Vires Acts

Case No. 16

Crisologo-Josev. CA

Gr. No. 80599, 15 September, 1989

Facts:

In 1980, Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-
charge of marketing and sales; and the president of the said corporation was Atty. Oscar Z.
Benares. On April 30, 1980, Atty. Benares, in accommodation of his clients, the spouses
Jaime and Clarita Ong, a check drawn against Traders Royal Bank, dated June 14, 1980, in the
amount of P45,000.00 payable to Ernestina Crisologo-Jose. Since the check was under the
account of Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z.
Benares, and the treasurer of the said corporation. However, since at that time, the
treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon Santos, Jr.,
to sign the aforesaid check as an alternate signatory, who did sign the same.

It appears that the check to Crisologo-Jose in consideration of the waiver or quitclaim

by said defendant over a certain property which the Government Service Insurance System
(GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and Clarita
Ong, with the understanding that upon approval by the GSIS of the compromise agreement
with the spouses Ong, the check will be encashed accordingly. However, since the
compromise agreement was not approved within the expected period of time, the aforesaid
check was replaced by Atty. Benares with another Traders Royal Bank check dated August
10, 1980, in the same amount. This replacement check was also signed by Atty. Benares and
by Santos, Jr. When Jose deposited this replacement check with her account, it was
dishonored for insufficiency of funds. A subsequent redepositing of the said check was
likewise dishonored by the bank for the same reason.

Issue:

Is the issuance or indorsement of negotiable paper by a corporation without

consideration and for the accommodation of another an ultra vires act?
Held:

Yes.

The provision of the Negotiable Instruments Law which holds an accommodation

party liable on the instrument to a holder for value, although such holder at the time of
taking the instrument knew him to be only an accommodation party, does not include nor
apply to corporations which are accommodation parties. This is because the issue or
indorsement of negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires. Hence, one who has taken the instrument with
knowledge of the accommodation nature thereof cannot recover against a corporation
where it is only an accommodation party.

By way of exception, an officer or agent of a corporation shall have the power to

execute or indorse a negotiable paper in the name of the corporation for the
accommodation of a third person only if specifically authorized to do so.. Since such
Topic: Election of Board of Directors

Case No. 16

Bataan Shipyard vs. PCCG

G.R.No.75885, May 27,1987

Facts:

BASECO describes itself in its petition as a ship repair and shipbuilding company
incorporated as a domestic private corporation on Aug.30,1972 by a consortium of Filipino
ship owners and shipping executives. Its main office is at Engineer Island, Port Area, Manila,
where its Engineer Island Shipyard is housed, and its main shipyard is located at Mariveles
Bataan.

Its Articles of Incorporation disclose that its authorized capital stock is P60,000,000.00
divided into 60,000 shares, of which 12,000 shares with avalue of P12,000,000.00 have been
subscribed, and on said subscription,the aggregate sum of P3,035,000.00 has been paid by
the incorporators. The same articles Identify the incorporators, numbering fifteen(15). By
1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders.
Barely sixmonths after its incorporation, BASECO acquired from National Shipyard & Steel
Corporation, or NASSCO, a government-owned or controlled corporation, the latter's
shipyard at Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and except for
NASSCO's Engineer Island Shops and certain equipment of the BNS, consigned for future
negotiation all its structures, buildings, shops, quarters, houses, plants, equipment and
facilities, in stock or in transit. This it did invirtue of a "Contract of Purchase and Sale with
Chattel Mortgage" executed on February 13,1973. A document to this effect was executed
on October 9,1973, entitled" Memorandum Agreement," and was signed for NASSCO by
Arturo Pacificador, as Presiding Officer of theB oard of Directors, and David R. Ines, as
General Manager. This agreement bore, at the top right corner of the first page, the word
"APPROVED" in the handwriting of President Marcos, followed by his usual full signature.
The document recited that a downpayment of P5,862,310.00 had been made by BASECO,
and the balance of P19,449,240.00 was payable in equal semi-annual installments over nine
(9) years after agrace period of two (2) years, with interest at 7% per annum.

Issue:

Can PCGG exercise acts of ownership over the properties sequestered?

Held:

No.

The PCGG cannot exercise acts of dominion over property sequestered, frozen or
provisionally taken over. As already earlier stressed with no little insistence, the act of
sequestration; freezing or provisional take over of property does not import or bring about
adivestment of title over said property; does not make the PCGG the owner thereof. In
relation to the property sequestered, frozen or provisionally taken over, the PCGG is a
conservator, not an owner. Therefore, it cannot perform acts of strict ownership; and this is
specially true in the situations contemplated by the sequestration rules where, unlike cases
of receivership, for example, no court exercises effective supervision or can upon due
application and hearing, grant authority for the performance of acts of dominion. The PCGG
may thus exercise only powers of administration over the property or business sequestered
or provisionally taken over, much like a court-appointed receiver. It is not that of manager,
or innovator, much less an owner.

It is within the parameters of the conditions and circumstances that the PCGG may
properly exercise the prerogative to vote sequestered stock of corporations, granted to it
by the President of the Philippines through a Memorandum dated June 26, 1986. The
Memorandum should be construed in such a manner as to be consistent with, and not
contradictory of the Executive Orders earlier promulgated on the same matter. There should
be no exercise of the right to vote simply because the right exists, or because the stocks
sequestered constitute the controlling or a substantial part of the corporate voting power.
The stock is not to be voted to replace directors, or revise the articles or by-laws, or
otherwise bring about substantial changes in policy, program or practice of the corporation
except for demonstrably weighty and defensible grounds, and always in the context of the
stated purposes of sequestration or provisional take over, i.e., to prevent the dispersion or
undue disposal of the corporate assets.

Directors are not to be voted out simply because the power to do so exists.
Substitution of directors is not to be done without reason or rhyme, should indeed be
shunned if at an possible, and undertaken only when essential to prevent disappearance or
wastage of corporate property, and always under such circumstances as assure that there
placements are truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out
of office and elect others in their stead because the evidence showed prima facie that the
former were just tools of President Marcos and were no longer owners of any stock in the
firm, if they ever were at all.
Topic: Authority of the Board of Directors

Case No. 16

Ramirez vs. Orientalist

G.R. No. 11897 September 24, 1918

Facts:

Orientalist Company was engaged in the business of maintaining and conducting a

theatre in the city of Manila for the exhibition of cinematographic films. 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. The directors of the Orientalist
Company 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.

The defendant Ramon J. Fernandez, one of the directors of the Orientalist Company
and also its treasure, was chiefly active in this matter. Ramon J. Fernandez had an informal
conference with all the members of the company’s board of directors except one, and with
approval of those with whom he had communicated, addressed a letter to Jose Ramirez, in
Manila, accepting the offer contained in the memorandum the exclusive agency of the Eclair
films and Milano films. In due time the films began to arrive in Manila, it appears that the
Orientalist Company was without funds to meet these obligations. Action was instituted by
the plaintiff to Orientalist Company, and Ramon J. Fernandez for sum of money.

Issue:

Is Orientalist Co. liable for the acts of its treasurer Fernandez?

Held:

Yes.

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. In 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.

Topic: Doctrine of Apparent Authority

Case No. 16

Sargasso vs. PPA

G.R. NO. 170530 July 5, 2010

Facts:

Plaintiff Sargasso Construction and Development Corporation, Pick and Shovel, Inc. and
Atlantic Erectors, Inc., a joint venture, was awarded the construction of Pier 2 and the rock
causeway (R.C. Pier 2) for the port of San Fernando, La Union, after a public bidding
conducted by the defendant Philippine Ports Association. Adjacent to Pier 2 is an area of
P4,280 square meters intended for the reclamation project as part of the overall port
development plan. Mr. Melecio J. Go, Executive Director of the JV plaintiff offered to
undertake the reclamation between the Timber Pier and Pier 2 of the Port of San
Fernando, La Union, as an extra work to its existing construction of R.C. Pier 2 and Rock
Causeway. A Notice of Award signed by PPA General Manager was sent to plaintiff for the
phase I Reclamation Contract. PPA General Manager presented for consideration by the
PPA Board of Directors the contract proposal for the reclamation project. The Board
decided not to approve the contract proposal. Plaintiff filed a complaint for specific
performance and damages.

Issue:

Is PPA bound by the acts of its general manager in issuing the Notice of Award
under the doctrine of apparent authority?

HELD:

No. The doctrine does not apply in this case.

This doctrine, in the realm of government contracts, has been restated to mean
that the government is NOT bound by unauthorized acts of its agents, even though
within the apparent scope of their authority.

The existence of apparent authority may be ascertained through (1) the general
manner in which the corporation holds out an officer or agent as having the power to act
or, in other words, the apparent authority to act in general, with which it clothes him; or
(2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or beyond the scope of his ordinary powers. It
requires presentation of evidence of similar act(s) executed either in its favor or in favor of
other parties. Apparent authority is determined only by the acts of the principal and not by
the acts of the agent. The principal is, therefore, not responsible where the agent’s own
conduct and statements have created the apparent authority. In this case not a single act
of the Board of Directors was cited as having clothed its general manager with apparent
authority to execute the contract with it.
Topic: Board of Directors and Trustees/ Doctrine of Apparent authority

Case No. 16

Megan Sugar Corporation vs. RTC of Iloilo

G.R. No. 170352 June 1, 2011

Facts:

New Frontier Sugar Corporation (NFSC) obtained a loan from respondent Equitable
PCI Bank (EPCIB). Said loan was secured by a real estate mortgage, and a chattel mortgage
over NFSCs sugar mill.

On November 17, 2000, because of liquidity problems and continued indebtedness to

EPCIB, NFSC entered into a Memorandum of Agreement (MOA) with Central Iloilo Milling
Corporation (CIMICO), whereby the latter agreed to take-over the operation and
management of the NFSC raw sugar factory and facilities for the period covering crop years
2000 to 2003.

NFSC filed a complaint for specific performance and collection against CIMICO for
the latters failure to pay its obligations under the MOA. In response, CIMICO filed with the
Regional Trial Court a case against NFSC for sum of money and/or breach of contract.
Because of NFSCs failure to pay its debt, EPCIB instituted extra-judicial foreclosure
proceedings over NFSCs land and sugar mill. During public auction, EPCIB was the sole
bidder and was thus able to buy the entire property and consolidate the titles in its
name. EPCIB then employed the services of Philippine Industrial Security Agency (PISA) to
help it in its effort to secure the land and the sugar mill.

Passi Iloilo Sugar Central, Inc. (Passi Sugar) filed with the RTC a Motion for
Intervention claiming to be the vendee of EPCIB. Passi Sugar claimed that it had entered into
a Contract to Sell with EPCIB after the latter foreclosed NFSCs land and sugar mill.

During the hearing on the motion for intervention, Atty. Reuben Sabig (Atty. Sabig)
appeared before the RTC and entered his appearance as counsel for MEGAN. Several
counsels objected to Atty. Sabigs appearance since MEGAN was not a party to the
proceedings; however, Atty. Sabig explained to the court that MEGAN had purchased the
interest of CIMICO and manifested that his statements would bind MEGAN.

RTC issued an Orde rgranting EPCIBs motion for the placement of millers share in
escrow. MEGAN filed before the CA and argued mainly on two points; first, that the RTC
erred when it determined that MEGAN was subrogated to the obligations of CIMICO
and; second, that the RTC had no jurisdiction over MEGAN.

Issue:

Was the petitioner Megan estopped from questioning the assailed orders because of
the acts of Atty. Sabig?

Ruling:

Yes. The Court agrees with the finding of the CA that MEGAN is already estopped
from assailing the jurisdiction of the RTC.

The Court rules that MEGAN is estopped from assailing both the authority of Atty.
Sabig and the jurisdiction of the RTC. While it is true, as claimed by MEGAN, that Atty. Sabig
said in court that he was only appearing for the hearing of Passi Sugars motion for
intervention and not for the case itself, his subsequent acts, coupled with MEGANs inaction
and negligence to repudiate his authority, effectively bars MEGAN from assailing the validity
of the RTC proceedings under the principle of estoppel.

MEGAN can no longer deny the authority of Atty. Sabig as they have already clothed
him with apparent authority to act in their behalf. It must be remembered that when Atty.
Sabig entered his appearance, he was accompanied by Concha, MEGANs director and
general manager. A corporation may be held in estoppel from denying as against innocent
third persons the authority of its officers or agents who have been clothed by it with
ostensible or apparent authority.
Topic: Personal Liability of Directors and other Corporate Officers

Case No. 16

Atrium Management vs CA

G.R. No. 121794 February 28, 2001

Facts:

In 1981, Hi-Cement Corporation through its Treasurer, Lourdes De Leon, and its
Chairman, Antonio De Las Alas (now deceased), issued four post-dated checks to E.T. Henry
and Co. The checks amount to P2 million. The checks are crossed checks and are only made
payable to E.T. Henry’s account. However, E.T. Henry still indorsed the checks to Atrium
Management Corporation (AMC). AMC then made sure that the checks were validly issued
by requesting E.T. Henry to get some confirmation from Atrium. Interestingly, De Leon
confirmed the checks and advised that the checks are okay to be rediscounted by AMC
notwithstanding the fact that the checks are crossed checks payable to no other accounts
but that of E.T. Henry. So when AMC presented the check, it was dishonored because Hi-
Cement stopped payment. Eventually, AMC sued Hi-Cement, E.T. Henry, and De Leon. The
trial court ruled in favor of AMC and made all the respondents liable.

On appeal, Hi-Cement averred that De Leon’s act of signing the check was ultra vires;
hence De Leon should be personally liable for the check. De Leon, on the other hand,
insisted that the checks were authorized by the corporation.

Issue:

Is De Leon’s act of signing the check constitutes an ultra vires act, hence making her
personally liable?

Held:

No, the act is not ultra vires but De Leon is still personally liable.

The act is not ultra vires because the act of issuing the checks was well within the
ambit of a valid corporate act. De Leon as treasurer is authorized to sign checks. When the
checks were issued, Hi-Cement has sufficient funds to cover the P2 million.
As a rule, there are four instances that will make a corporate director, trustee or officer
along, although not necessarily, with the corporation personally liable to certain obligations,
to wit:
Topic: Personal Liability of Directors and other Corporate Officers

Case No. 16

Times, Inc. vs. Reyes

G.R. No. L-28882 May 31, 1971

Facts:

Time, Inc., is an American corporation with principal offices in New York, and is the
publisher of "Time", a weekly news magazine. The petition does not allege the petitioner's
legal capacity to sue in the courts of the Philippines. Therein respondents Antonio J. Villegas
and Juan Ponce Enrile seek to recover from the herein petitioner damages upon an alleged
libel arising from a publication of Time magazine, of an essay, titled "Corruption in Asia".

Respondent judge granted them leave to take the depositions of Mr. Anthony
Gonzales, Time-Life international, and Mr. Cesar B. Enriquez, Muller & Phipps (Manila) Ltd.,
in connection with the activities and operations in the Philippines of the petitioner and
issued a writ of attachment on the real and personal estate of Time, Inc.

Petitioner received the summons and a copy of the complaint at its offices in New
York and, it filed a moton to dismiss the complaint for lack of jurisdiction and improper
venue, relying upon the provisions of Republic Act 4363. Private respondents opposed the
motion.

Issue:

Is petitioner Times’ failure to aver its legal capacity to institute the present petition is
fatal?

Held:
No. It is not fatal.
A foreign corporation may, by writ of prohibition, seek relief against the wrongful
assumption of jurisdiction. And a foreign corporation seeking a writ of prohibition against
further maintenance of a suit, on the ground of want of jurisdiction in which jurisdiction is
not bound by the ruling of the court in which the suit was brought, on a motion to quash
service of summons, that it has jurisdiction.

Respondents rely on Sec. 69 of the Corporation law, which provides: SEC. 69. No
foreign corpora=on or corporations formed, organized, or existing under any laws other
than those of the Philippines shall be permitted to ... maintain by itself or assignee any suit
for the recovery of any debt, claim, or demand whatever, unless it shall have the license
prescribed in the sec=on immediately preceding. ..."

The Court fails to see how Sec. 69 of the Corporation can be a propos in the case at
bar, since the petitioner is not "maintaining any suit" but is merely defending one against
itself; it did not file any complaint but only a corollary defensive petition to prohibit the
lower court from further proceeding with a suit that it had no jurisdiction to entertain.
Topic: Derivative Suit: Remedies to enforece personal liability

Case No. 16

Lisam Enterprise vs. BDO

G.R. No. 143264 23 April 2012

Facts:

Petitioner Lisam Enterprises (Lisam) represented by Lolita Soriano (Lolita) a

stockholder and corporate secretary, filed a complaint against respondents BDO, Lilian
Soriano, Leandro Soriano et al. for Annulment of Mortgage. The complaint alleged that Lilian
and Leandro (Spouses Soriano) in their personal capacity obtained a loan from BDO in an
amount of P20,000,000. As security for the loan, spouses Soriano in their capacity as
president and treasurer of Lisam but without authority, executed a real estate mortgage
over a property belonging to Lisam. The spouses falsified a board resolution with the
falsified signature of Lolita, as the secretary of Lisam, making it appear that the Board met
and passed said resolution authorizing the spouses to mortgage the property. BDO as also
alleged, was negligent in not exercising the required due care of a banking institution before
granting a loan. In sum, the complaint seeks to annul the mortgage contract for being based
on a void board resolution which did not confer any legal right. This prompted petitioners to
file the derivative suit considering that as provided under last sentence of paragraph 13 of
the complaint, “However, said defendants, for reason only known to them, continued and still
continue to ignore said demands, to the damage and prejudice of plaintiffs”

The spouses filed an answer basically denying the allegations of the complaint. BDO
filed a motion to dismiss on the grounds of lack of legal capacity to sue and failure to state a
cause of action amongst others.

The trial court initially dismissed the complaint. Pending motion for reconsideration,
petitioners filed a Motion to Admit Amended Complaint, amending paragraph 13 of the
original complaint adding this last sentence, “that plaintiff Lolita A. Soriano likewise made
demands upon the Board of Directors of Lisam Enterprises, Inc., to make legal steps to protect
the interest of the corporation from said fraudulent transaction, but unfortunately, until now,
no such legal step was ever taken by the Board, hence, this action for the benefit and in behalf
of the corporation”
 The trial court denied the motion for reconsideration arguing that petitioner failed to
allege that Lolita made demands upon the Board to take steps in protecting Lisam’s interest.
The motion to admit was also denied because it substantially changed the cause of action of
petitioner.

Issue:

Is the derivative suit valid?

Held:

YES.

Supreme Court admitted the amendment of the complaint arguing that while the
admission of a substantial amendment after a responsive pleading is already filed, rests
within the discretion of the court, such amendment could still be allowed when it is sought
to serve the higher interest of substantial justice, prevent delay, and secure a just, speedy
and inexpensive disposition of actions and proceedings. The courts should be liberal in
allowing amendments to pleadings to avoid a multiplicity of suits and in order that the real
controversies between the parties are presented, their rights determined, and the case
decided on the merits without unnecessary delay. This liberality is greatest in the early
stages of a lawsuit, especially in this case where the amendment was made before the trial
of the case, thereby giving the petitioners all the time allowed by law to answer and to
prepare for trial.

That being the case, it is now established that plaintiff Lolita A. Soriano likewise made
demands upon the Board of Directors of Lisam Enterprises, Inc., to make legal steps to
protect the interest of the corporation from said fraudulent transaction, but unfortunately,
until now, no such legal step was ever taken by the Board, which fact would satisfy the
requirements for a valid derivative suit:

a) the party bringing the suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed his
plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit
.