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Whether or not the term “capital” in Section 11, Article

SUBJECT: CORPORATION LAW XII of the Constitution refers to the total common shares only or
TITLE: GAMBOA V. TEVES to the total outstanding capital stock?
REFERENCE: G.R. No. 176579 June 28, 2011 RULINGS
FACTS 1. Yes.
Act No. 3436 was enacted which granted PLDT a The sale violated the foreign ownership limit in PLDT.
franchise and the right to engage in telecommunications The term capital refers only to common shares entitled to vote.
business. In 1969, General Telephone and Electronics
Considering that common shares have voting rights
Corporation (GTE), an American company and a major PLDT
which translate to control, as opposed to preferred shares
stockholder, sold 26 percent of the outstanding common shares
which usually have no voting rights, the term “capital” in
of PLDT to PTIC.
Section 11, Article XII of the Constitution refers only to
In 1977, Prime Holdings, Inc. (PHI) became the owner common shares. However, if the preferred shares also have the
of 111,415 shares of stock of PTIC by virtue of three Deeds of right to vote in the election of directors, then the term “capital”
Assignment executed by PTIC stockholders. shall include such preferred shares because the right to
The 111,415 shares of stock which represented participate in the control or management of the corporation is
46.125% of the outstanding captial stock of PTIC were exercised through the right to vote in the election of directors.
sequestered by PCGG and later declared to be property of the In short, the term “capital” in Section 11, Article XII of the
Republic of the Phil. Constitution refers only to shares of stock that can vote in the
In 1999, First Pacific, a Hong Kong-based investment election of directors.
firm, acquired the remaining 54% of the outstanding capital The evident purpose of the citizenship requirement is
stock of PTIC. to prevent aliens from assuming control of public utilities, which
The Philippine Government decided to sell the 111,415 may be inimical to the national interest. This specific provision
PTIC share in a bidding. They notified First Pacific, the majority explicitly reserves to Filipino citizens control of public utilities,
owner of PTIC shares, of the bidding results and gave First Pacific pursuant to an overriding economic goal of the 1987
to exercise its right of first refusal. In 2007, First Pacific bought Constitution: to “conserve and develop our patrimony” and
the 46.125% of the outstanding capital stock of PTIC, with the ensure “a self-reliant and independent national economy
Philippine Government. Since PTIC is a stockholder of PLDT, the effectively controlled by Filipinos.”
sale by the Philippine Government of 46.125% of PTIC shares is Hence, for a corporation to be granted authority to
actually an indirect sale of about 6.3% of the outstanding operate a public utility, at least 60 percent of its “capital” must
common shares of PLDT. With the sale, the common be owned by Filipino citizens.
shareholdings of foreigners in PLDT increased to about 81.47%. 3. The term “capital” in Section 11, Article XII of the
This violates Section 11, Article XII of the 1987 Philippine Constitution refers only to shares of stock entitled to vote in the
Constitution which limits foreign ownership of the capital of a election of directors, and thus in the present case only to
public utility to not more than 40%. common shares, and not to the total outstanding capital stock
petitioner filed the instant petition for prohibition, comprising both common and non-voting preferred shares.
injunction, declaratory relief, and declaration of nullity of sale of The Corporation Code of the Philippines classifies
the 111,415 PTIC shares. That the sale would result to a total shares as common or preferred, thus:
foreign common shareholdings in PLDT of 51.56% which is over
Sec. 6. Classification of shares.—The shares of stock
the 40% constitutional limit. He contended that this violated
of stock corporations may be divided into classes or series of
Section 11, Article XII of the 1987 Constitution which limits
shares, or both, any of which classes or series of shares may have
foreign ownership of the capital of a public utility to not more
such rights, privileges or restrictions as may be stated in the
that 40%, to wit:
articles of incorporation: Provided, That no share may be
“Section 11. No franchise, certificate, or any deprived of voting rights except those classified and issued as
other form of authorization for the operation of a “preferred” or “redeemable” shares, unless otherwise
public utility shall be granted except to citizens of the provided in this Code xxx
Philippines or to corporations or associations organized
Indisputably, construing the term “capital” in Section
under the laws of the Philippines, at least sixty per
11, Article XII of the Constitution to include both voting and non-
centum of whose capital is owned by such citizens; xxx
voting shares will result in the abject surrender of our
ISSUES telecommunications industry to foreigners, amounting to a clear
1. Whether or not the sale violated the foreign ownership abdication of the State’s constitutional duty to limit control of
limit for public utilities prescribed by the Constitution? public utilities to Filipino citizens. Such an interpretation
certainly runs counter to the constitutional provision reserving CBB made an initial payment to Livesey but not the next
certain areas of investment to Filipino citizens, such as the two installments as the company ceased operations. Livesey
exploitation of natural resources as well as the ownership of moved for the issuance of a writ of execution. He learned that
land, educational institutions and advertising businesses. CBB, in a clear and willful attempt to avoid their liabilities to
In fact, under the Corporation Code only preferred or complainant x x x have organized another corporation,
redeemable shares can be deprived of the right to vote.46 [Binswanger] Philippines. He claimed that there was evidence
Common shares cannot be deprived of the right to vote in any showing that CBB and Binswanger Philippines, Inc. (Binswanger)
corporate meeting, and any provision in the articles of are one and the same corporation. Invoking the doctrine of
incorporation restricting the right of common shareholders to piercing the veil of corporate fiction, Livesey prayed that an alias
vote is invalid. writ of execution be issued against respondents Binswanger and
Keith Elliot, CBB’s former President. LA denied Livesey’s motion
60 percent of the “capital” assumes, or should result in,
for an alias writ of execution. He explained that the stockholders
“controlling interest” in the corporation. Reinforcing this
of the two corporations were not the same. Livesey filed an
interpretation of the term “capital,” as referring to controlling
appeal which the NLRC granted, reversing the LA Laderas’ order.
interest or shares entitled to vote, is the definition of a
The Binswanger and Elliot moved for reconsideration. The NLRC
“Philippine national” in the Foreign Investments Act of 1991
denied the motion. They then sought relief from the CA through
which emphasizes that mere legal title is insufficient to meet
a petition for certiorari. The CA granted the petition and
the 60 percent Filipino-owned “capital” required in the
reversed the NLRC decision. Livesey moved for reconsideration,
Constitution. Full beneficial ownership of 60 percent of the
but the CA denied the motion.
outstanding capital stock, coupled with 60 percent of the
voting rights, is required. The legal and beneficial ownership of Livesey prays for a reversal of the CA rulings on the
60 percent of the outstanding capital stock must rest in the basis of the following arguments: The CA erred in not applying
hands of Filipino nationals in accordance with the the doctrine of piercing the veil of corporate fiction to the case.
constitutional mandate. Otherwise, the corporation is He insists that CBB and Binswanger are one and the same
“considered as non-Philippine nationals. corporation as shown by the “overwhelming evidence” (a) CBB
stands for “Chesterton Blumenauer Binswanger, (b) After
executing the compromise agreement with him, through Elliot,
CBB ceased operations following a transaction where a
TITLE: LIVESEY VS. BINSWANGER PHILIPPINES, INC. AND KEITH substantial amount of CBB shares changed hands (c) Summons
ELLIOT served on Binswanger in an earlier labor case was received by
REFERENCE: G.R. No. 177493, 19 March 2014 Binswanger using CBB’s receiving stamp (d) In a letter dated,
FACTS Elliot noted a Binswanger bid solicitation for a project with the
Philippine National Bank (PNB) which was actually a CBB project
Livesey filed a complaint for illegal dismissal with
as shown by a CBB draft (e) Hazel de Guzman who also filed an
money claims against Chesterton Blumenauer Binswanger
illegal dismissal case against the company, attested that Elliot
Philippines Strategic Property Services, Inc. (CBB) and Keith
told her of CBB’s plan to close the corporation and to organize
Elliot. CBB was a domestic corporation engaged in real estate
another for the purpose of evading CBB’s liabilities. Livesey
brokerage and Keith Elliot was its President. Livesey alleged that
posits that the closure of CBB and its immediate replacement by
CBB failed to pay him a significant portion of his salary. For this
Binswanger could not have been possible without Elliot’s guiding
reason, he was compelled to resign. He claimed CBB owed him
hand, such that when CBB ceased operations, Elliot (CBB’s
unpaid salaries. CBB denied liability. It alleged that it engaged
President and CEO) moved to Binswanger in the same position.
Livesey as a corporate officer. It claimed that Livesey was later
designated as Managing Director when it became an extension ISSUES
office of its principal in Hongkong. CBB posited that the labor Whether the doctrine of piercing the veil of corporate
arbiter (LA) had no jurisdiction as the complaint involved an fiction is applicable?
intra–corporate dispute. LA ordered CBB to reinstate Livesey to
his former position as Managing Director and to pay him
US$23,000.00 in accrued salaries. YES.

The parties entered into a compromise agreement. It has long been settled that the law vests a
Under the agreement, Livesey was to receive US$31,000.00. corporation with a personality distinct and separate from its
Further, the agreement provided that unless and until the stockholders or members. In the same vein, a corporation, by
agreement is fully satisfied, CBB shall not sell, alienate, or legal fiction and convenience, is an entity shielded by a
otherwise dispose of all or substantially all of its assets or protective mantle and imbued by law with a character alien to
business; suspend its business operations; substantially change the persons comprising it. Nonetheless, the shield is not at all
the nature of its business; and declare bankruptcy or insolvency. times impenetrable and cannot be extended to a point beyond
its reason and policy. Circumstances might deny a claim for
corporate personality, under the “doctrine of piercing the veil of Redmont filed before the Panel of Arbitrators (POA) of
corporate fiction.” the DENR three (3) separate petitions for the denial of
Piercing the veil of corporate fiction is an equitable petitioners’ applications for MPSA.
doctrine developed to address situations where the separate Redmont alleged that at least 60% of the capital stock
corporate personality of a corporation is abused or used for of McArthur, Tesoro and Narra are owned and controlled by
wrongful purposes. Under the doctrine, the corporate MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
existence may be disregarded where the entity is formed or Redmont reasoned that since MBMI is a considerable
used for non-legitimate purposes, such as to evade a just and stockholder of petitioners, it was the driving force behind
due obligation, or to justify a wrong, to shield or perpetrate petitioners’ filing of the MPSAs over the areas covered by
fraud or to carry out similar or inequitable considerations, applications since it knows that it can only participate in mining
other unjustifiable aims or intentions, in which case, the fiction activities through corporations which are deemed Filipino
will be disregarded and the individuals composing it and the citizens. Redmont argued that given that petitioners’ capital
two corporations will be treated as identical. stocks were mostly owned by MBMI, they were likewise
In the present case, the Court sees an indubitable link disqualified from engaging in mining activities through MPSAs,
between CBB’s closure and Binswanger’s incorporation. CBB which are reserved only for Filipino citizens.
ceased to exist only in name; it re–emerged in the person of McArthur Mining, Inc., is composed, among others, by
Binswanger for an urgent purpose — to avoid payment by CBB Madridejos Mining Corporation (Filipino) owning 5,997 out of
of the last two installments of its monetary obligation to Livesey, 10,000 shares, and MBMI Resources, Inc. (Canadian) owning
as well as its other financial liabilities. It was not just coincidence 3,998 out of 10,000 shares; MBMI also owns 3,331 out of 10,000
that Binswanger is engaged in the same line of business CBB shares of Madridejos Mining Corporation;
embarked on: (1) it even holds office in the very same building Tesoro and Mining and Development, Inc., is
and on the very same floor where CBB once stood; (2) CBB’s key composed, among others, by Sara Marie Mining, Inc. (Filipino)
officers, Elliot, no less, and Catral moved over to Binswanger (3) owning 5,997 out of 10,000 shares, and MBMI Resources, Inc.
the use of Binswanger of CBB’s paraphernalia (receiving stamp) (Canadian) owning 3,998 out of 10,000 shares; MBMI also owns
(4) Binswanger’s takeover of CBB’s project with the PNB. 3,331 out of 10,000 shares of Sara Marie Mining, Inc.;
While the ostensible reason for Binswanger’s Narra Nickel Mining and Development Corporation, is
establishment is to continue CBB’s business operations in the composed, among others, by Patricia Louise Mining &
Philippines, which by itself is not illegal, the close proximity Development Corporation (Filipino) owning 5,997 out of 10,000
between CBB’s disestablishment and Binswanger’s coming into shares, and MBMI Resources, Inc. (Canadian) owning 3,998 out
existence was to evade CBB’s unfulfilled financial obligation to of 10,000 shares; MBMI also owns 3,396 out of 10,000 shares of
Livesey under the compromise agreement. Patricia Louise Mining & Development Corporation;
Thus, applying the “doctrine of piercing the veil of Petitioners averred that they were qualified persons
corporate fiction”, the Court finds Elliot as liable as Binswanger under Section 3 of RA 7942 or the Philippine Mining Act of 1995.
for CBB’s unfulfilled obligation to Livesey. They stated that their nationality as applicants is immaterial
because they also applied for Financial or Technical Assistance
Agreements (FTAA) which are granted to foreign-owned
TITLE: NARRA NICKEL MINING AND DEVELOPMENT CORP. VS. corporations. Nevertheless, they claimed that the issue on
REDMONT CONSOLIDATED MINES CORP. nationality should not be raised since McArthur, Tesoro and
REFERENCE: G.R. No. 195580, April 21, 2014 Narra are in fact Philippine Nationals as 60% of their capital is
owned by citizens of the Philippines.
POA issued a Resolution disqualifying petitioners from
Sometime in December 2006, respondent Redmont
gaining MPSAs. The POA considered petitioners as foreign
Consolidated Mines Corp. (Redmont), a domestic corporation
corporations being "effectively controlled" by MBMI, a 100%
organized and existing under Philippine laws, took interest in
Canadian company and declared their MPSAs null and void.
mining and exploring certain areas of the province of Palawan.
After inquiring with the Department of Environment and Natural Pending the resolution of the appeal filed by petitioners
Resources (DENR), it learned that the areas where it wanted to with the Mines Adjudication Board (MAB), Redmont filed a
undertake exploration and mining activities were already Complaint with the SEC, seeking the revocation of the
covered by Mineral Production Sharing Agreement (MPSA) certificates for registration of petitioners on the ground that
applications of petitioners Narra, Tesoro and McArthur. they are foreign-owned or controlled corporations engaged in
mining in violation of Philippine laws.
Petitioner McArthur Narra and Tesoro, filed an
application for an MPSA and Exploration Permit (EP) which was
subsequently issued.
MAB issued an Order reversing the resolution of POA, recorded as owned by Filipinos. But if less than 60%, or
hence, the petition for review filed by Redmont before the CA, say, 50% of the capital stock or capital of the
assailing the Orders issued by the MAB. corporation or partnership, respectively, belongs to
CA found that there was doubt as to the nationality of Filipino citizens, only 50,000 shares shall be counted as
petitioners when it realized that petitioners had a common owned by Filipinos and the other 50,000 shall be
major investor, MBMI, a corporation composed of 100% recorded as belonging to aliens.
Canadians. Pursuant to the first sentence of paragraph 7 of DOJ Petitioners contention: The grandfather rule,
Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules petitioners reasoned, has no leg to stand on in the instant case
which implemented the requirement of the Constitution and since the definition of a "Philippine National" under Sec. 3 of the
other laws pertaining to the exploitation of natural resources, FIA does not provide for it. They further claim that the
the CA used the "grandfather rule" to determine the grandfather rule "has been abandoned and is no longer the
nationality of petitioners. applicable rule." They also opined that the last portion of Sec. 3
In determining the nationality of petitioners, the CA of the FIA admits the application of a "corporate layering"
looked into their corporate structures and their corresponding scheme of corporations. Petitioners claim that the clear and
common shareholders. Using the grandfather rule, the CA unambiguous wordings of the statute preclude the court from
discovered that MBMI in effect owned majority of the common construing it and prevent the court’s use of discretion in applying
stocks of the petitioners as well as at least 60% equity interest the law. They said that the plain, literal meaning of the statute
of other majority shareholders of petitioners through joint meant the application of the control test is obligatory.
venture agreements. The CA found that through a "web of SC disagreed: "Corporate layering" is admittedly
corporate layering, it is clear that one common controlling allowed by the FIA; but if it is used to circumvent the
investor in all mining corporations involved is MBMI." Thus, it Constitution and pertinent laws, then it becomes illegal.
concluded that petitioners McArthur, Tesoro and Narra are also Further, the pronouncement of petitioners that the grandfather
in partnership with, or privies-in-interest of, MBMI. rule has already been abandoned must be discredited for lack of
ISSUES basis.

Whether or not petitioner corporations are Filipino and Petitioners are not Filipino since MBMI, a 100%
can validly be issued MPSA? Canadian corporation, owns 60% or more of their equity
interests. Such conclusion is derived from grandfathering
Whether or not the CA’s ruling that Narra, Tesoro and
petitioners’ corporate owners, namely: MMI, SMMI and PLMDC.
McArthur are foreign corporations based on the "Grandfather
The "control test" is still the prevailing mode of determining
Rule" is contrary to law, particularly the express mandate of the
whether or not a corporation is a Filipino corporation, within the
Foreign Investments Act of 1991, as amended, and the FIA
ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the
RULING natural resources of the Philippines. When in the mind of the
Both NO. Court there is doubt, based on the attendant facts and
There are two acknowledged tests in determining the circumstances of the case, in the 60-40 Filipino-equity
nationality of a corporation: the control test and the ownership in the corporation, then it may apply the
grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of "grandfather rule."
2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the
controlling interests in enterprises engaged in the exploitation TITLE: PHILIPPINE NATIONAL BANK VS. COURT OF APPEALS,
of natural resources owned by Filipino citizens, provides: RITA GUECO TAPNIO, CECILIO GUECO AND THE PHILIPPINE
Shares belonging to corporations or AMERICAN GENERAL INSURANCE COMPANY, INC.
partnerships at least 60% of the capital of which is REFERENCE: 83 SCRA 237
owned by Filipino citizens shall be considered as of FACTS
Philippine nationality (CONTROL TEST), but if the Mrs. Tapnio had an export sugar quota of 1,000 piculs
percentage of Filipino ownership in the corporation or for the agricultural year which she did not need. She entered into
partnership is less than 60%, only the number of a contract of lease of sugar allotment to allow Mr. Tuazon to use
shares corresponding to such percentage shall be said quota for the consideration of P2,500.00. At the time of the
counted as of Philippine nationality (GRANDFATHER agreement, Mrs. Tapnio was indebted to the PNB.
RULE). Thus, if 100,000 shares are registered in the
Her indebtedness was known as a crop loan and was
name of a corporation or partnership at least 60% of
secured by a mortgage on her standing crop including her sugar
the capital stock or capital, respectively, of which
quota allocation for the agricultural year corresponding to said
belong to Filipino citizens, all of the shares shall be
standing crop. This arrangement was necessary in order that While PNB had the ultimate authority of approving or
when Mrs. Tapnio harvests, the P.N.B., having a lien on the crop, disapproving the proposed lease since the quota was
may effectively enforce collection against her. Her sugar cannot mortgaged to the Bank, the latter certainly cannot escape its
be exported without sugar quota allotment. Sometimes, responsibility of observing, for the protection of the interest of
however, a planter harvest less sugar than her quota, so her private respondents, that degree of care, precaution and
excess quota is utilized by another who pays her for its use. This vigilance which the circumstances justly demand in approving
is the arrangement entered into between Mrs. Tapnio and Mr. or disapproving the lease of said sugar quota. The law makes it
Tuazon regarding the former’s excess quota. imperative that every person "must in the exercise of his rights
Since the quota was mortgaged to the P.N.B., the and in the performance of his duties, act with justice, give
contract of lease had to be approved by said Bank. The branch everyone his due, and observe honesty and good faith, This
manager of PNB in San Fernando, Pampanga required the petitioner failed to do.
parties to raise the consideration of P2.80 per picul or a total of Certainly, it knew that the agricultural year was about
P2,800.00, which Tuazon accepted. However, the board of to expire, that by its disapproval of the lease private respondents
directors required that the amount be raised to P3.00 per picul, would be unable to utilize the sugar quota in question. In failing
in which case Tuazon informed the bank that he was no longer to observe the reasonable degree of care and vigilance which the
interested to continue the the lease of sugar quota allotment in surrounding circumstances reasonably impose, petitioner is
favor of defendant Rita Gueco Tapnio. The result is that the consequently liable for the damages caused on private
latter lost the sum of P2,800.00 which she should have received respondents. Under Article 21 of the New Civil Code, "any
from Tuazon and which she could have paid the Bank to cancel person who willfully causes loss or injury to another in a manner
off her indebtedness. that is contrary to morals, good customs or public policy shall
Eventually, Tapnio was sued by the insurance company compensate the latter for the damage." The afore-cited
Philamgen, who indemnified PNB in favor of Tapnio, that the provisions on human relations were intended to expand the
latter pay Philamgen. Tapnio filed a third party complaint against concept of torts in this jurisdiction by granting adequate legal
PNB where she alleged that her failure to pay her debts was remedy for the untold number of moral wrongs which is
because of PNB’s negligence and unreasonableness. The CA held impossible for human foresight to specifically provide in the
that failure of the negotiation for the lease of the sugar quota statutes.
allocation of Rita Gueco Tapnio to Tuazon was due to the fault A corporation is civilly liable in the same manner as
of the directors of the PNB. The refusal on the part of the bank natural persons for torts because the rules governing the
to approve the lease at the rate of P2.80 per picul which, as liability of a principal or master for a tort committed by an
stated above, would have enabled Rita Gueco Tapnio to realize agent or servant are the same whether the principal or master
the amount of P2,800.00 which was more than sufficient to pay be a natural person or a corporation, and whether the servant
off her indebtedness to the Bank, and its insistence on the rental or agent be a natural or artificial person. All of the authorities
price of P3.00 per picul thus unnecessarily increasing the value agree that a principal or master is liable for every tort which he
by only a difference of P200.00, inevitably brought about the expressly directs or authorizes, and this is just as true of a
rescission of the lease contract to the damage and prejudice of corporation as of a natural person, A corporation is liable,
Rita Gueco Tapnio in the aforesaid sum of P2,800.00. therefore, whenever a tortious act is committed by an officer
Petitioner filed its MR but was denied by CA. Hence, this or agent under express direction or authority from the
petition for Certiorari. stockholders or members acting as a body, or, generally, from
the directors as the governing body."
Whether or not the Corporation Bank (PNB) is liable to
The Supreme court said “As observed by the trial court,
time is of the essence in the approval of the lease of sugar quota
allotments, since the same must be utilized during the milling
season, because any allotment which is not filled during such
milling season may be reallocated by the Sugar Quota
Administration to other holders of allotments. There was no
proof that there was any other person at that time willing to
lease the sugar quota allotment of private respondents for a
price higher than P2.80 per picul.
TITLE: REYNOSO VS. COURT OF APPEALS court issued an Order directing General Credit Corporation to file
REFERENCE: 345 SCRA 335 [GR No. 116124-25 November 23, its comment on petitioner’s motion for alias writ of execution.
2000] General Credit Corporation alleges that that it was not a party to
the case. GCC contends that it is a corporation separate and
distinct from CCC-QC and, therefore, its properties may not be
In early 1960s, the Commercial Credit Corporation levied upon to satisfy the monetary judgment in favor of
(CCC), a financing company and investment firm, decided to petitioner. In short, respondent raises corporate fiction as its
organize franchise companies in different parts of the country, defense.
wherein it shall hold 30% equity. Employees of the CCC were
designated as resident managers of the franchise companies.
Petitioner Reynoso was designated as the resident manager of Whether or not the judgement in favor of the petitioner
the franchise in Quezon City, known as the Commercial Credit may be executed against respondent General Credit
Corporation of Quezon City (CCC-QC). Corporation?

CCC-QC entered into an exclusive agreement RULING

management contract with CCC whereby the latter was granted YES.
the management and full control of the business activities of the A corporation is an artificial being created by operation
former. Under the contract, CCC-QC shall sell, discount and/or of law, having the right of succession and the powers, attributes,
assign its receivables to CCC. Subsequently, however, this and properties expressly authorized by law or incident to its
discounting arrangement was discontinued pursuant to the so existence. It is an artificial being invested by law with a
called DOSRI rule, prohibiting the lending of funds by personality separate and distinct from those of the persons
corporations to its directors, officers, stockholders and other composing it as well as from that of any other legal entity to
persons with related interest therein. which it may be related. It was evolved to make possible the
On account of the new restrictions imposed by the aggregation and assembling of huge amounts of capital upon
Central Bank policy by virtue of the DOSRI rule, CCC decided to which big business depends. It also has the advantage of non-
form CCC Equity Corporation, a wholly-owned subsidiary, to dependence on the lives of those who compose it even as it
which CCC transferred its 30% equity in CCC-QC, together with 2 enjoys certain rights and conducts activities of natural persons.
seats in the latter’s Board of Directors. Any piercing of the corporate veil has to be done with
Under the new set-up, several officials of Commercial caution. However, the court will not hesitate to use its
Credit Corporation, including petitioner Reynoso, became supervisory and adjudicative powers where the corporate fiction
employees of CCC-Equity. While petitioner continued to be the is used as an unfair device to achieve an inequitable result
Resident Manager of CCC-QC, he drew his salaries and defraud creditors, evade contracts and obligations, or to shield
allowances from CCCEquity. Furthermore, although an it from the effects of a court decision. The corporate fiction has
employee of CCC-Equity, petitioner, as well as all employees of to be disregarded when necessary in the interest of justice.
CCC-QC, became qualified members of the Commercial Credit The defense of separateness will be disregarded when
Corporation Employees Pension Plan. the business affairs of a subsidiary corporation are so controlled
As Resident Manager of CCC-QC, petitioner oversaw by the mother corporation to the extent that it becomes an
the operations of CCC-QC and supervised its employees. The instrument or agent of its parent. But even when there is
business activities of CCC-QC pertain to the acceptance of funds dominance over the affairs of the subsidiary, the doctrine of
from depositors who are issued interest-bearing promissory piercing the veil of corporate fiction applies only when such
notes. The amounts deposited are then loaned out to various fiction is used to defeat public convenience, justify wrong,
borrowers. Petitioner, in order to boost the business activities of protect fraud or defend crime.
CCC-QC, deposited his personal funds in the company. In return, It is obvious that the use by CCC-QC of the same name
CCC-QC issued to him its interest-bearing promissory notes. of Commercial Credit Corporation was intended to publicly
A complaint filed by CCC-equity against petitioner identify it as a component of the CCC group of companies
which alleged that petitioner embezzled the funds of CCC-QC engaged in one and the same business, i.e., investment and
which was used for the purchase of a house and lot. The financing. Aside from CCCQuezon City, other franchise
property was mortgaged to CCC, and was later foreclosed. companies were organized such as CCC-North Manila and CCC-
RTC dismissed the complaint for lack of merit and Cagayan Valley.
ordered CCC to pay Reynoso for damages. The organization of subsidiary corporations as what
Judgement remained unsatisfied, so Reynoso filed a was done here is usually resorted to for aggrupation of capital
motion for alias Writ of Execution. Meanwhile, CCC became the ability to cover more territory and population, the
known as the General Credit Corporation, in which case the decentralization of activities best decentralized, and the
securing of other legitimate advantages. But when the mother
corporation and its subsidiary cease to act in good faith and compromise agreement between Freeman, Inc., through its
honest business judgement, when the corporate device is used President, and Equitable Banking Corp. will not necessarily
by the parent to avoid its liability for legitimate obligations of prejudice petitioners whose rights to corporate assets are at
the subsidiary, and when the corporate fiction is used to most inchoate, prior to the dissolution of Freeman, Inc. and
perpetrate fraud or promote injustice, the law steps in to intervention under Sec. 2, Rule 12 of the Revised Rules of Court
remedy the problem. When that happens, the corporate is proper only when one’s right is actual, material, direct and
character is not necessarily abrogated. It continues for immediate and not simply contingent or expectant.
legitimate objectives. However, it is pursued in order to remedy ISSUE
injustice, such as that inflicted in this case.
Whether or not the denial of petitioner’s motion for
The discounting agreements through which CCC intervention was proper?
controlled the finances of its subordinates became unlawful
when Central Bank adopted the DOSRI prohibitions. Under this
rule the directors, officers, and stockholders are prohibited from YES.
borrowing from their company. Instead of adhering to the letter Petitioners have no legal interest in the subject matter
and spirit of the regulations by avoiding DOSRI loans altogether, in litigation so as to entitle them to intervene in the proceedings
CCC used the corporate device to continue the prohibited below.
practice. CCC organized still another corporation, the CCC-Equity In a case, the court held that, “As clearly stated in
Corporation. However, as a wholly owned subsidiary, CCC-Equity Section 2 of Rule 12 of the Rules of Court, to be permitted to
was in fact only another name for CCC. Key officials of CCC, intervene in a pending action, the party must have a legal
including the resident managers of subsidiary corporations, interest in the matter in litigation, or in the success of either of
were appointed to positions in CCC-Equity. the parties or an interest against both, or he must be so
It is very obvious; that respondent “seeks the situated as to be adversely affected by a distribution or other
protective shield of a corporate fiction whose veil the present disposition of the property in the custody of the court or an
case could, and should, be pierced as it was deliberately and officer thereof.”
maliciously designed to evade its financial obligation of its To allow intervention, [a] it must be shown that the
employees. movant has legal interest in the matter in litigation, or
If the corporate fiction is sustained, it becomes a handy otherwise qualified; and [b] consideration must be given as to
deception to avoid a judgment debt and work an injustice. 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
REFERENCE: G.R. No. 90580 April 8, 1991.
intervene in a suit between other parties must be in the matter
in litigation and of such direct and immediate character that the
A collection suit with preliminary attachment was filed intervenor will either gain or lose by the direct legal operation
by Equitable Banking Corporation against Freeman, Inc. and Saw and effect of the judgment. Otherwise, if persons not parties of
Chiao Lian, its President and General Manager. The petitioners the action could be allowed to intervene, proceedings will
moved to intervene, alleging that (1) the loan transactions become unnecessarily complicated, expensive and interminable.
between Saw Chiao Lian and Equitable Banking Corp. were not
The words “an interest in the subject” mean a direct
approved by the stockholders representing at least 2/3 of
interest in the cause of action as pleaded, and which would put
corporate capital; (2) Saw Chiao Lian had no authority to
the intervenor in a legal position to litigate a fact alleged in the
contract such loans; and (3) there was collusion between the
complaint, without the establishment of which plaintiff could
officials of Freeman, Inc. and Equitable Banking Corp. in securing
not recover.
the loans. The motion to intervene was denied, and the
petitioners appealed to the Court of Appeals. In the present case, the interest, if it exists at all, of
petitioners/movants is indirect, contingent, remote, conjectural,
Meanwhile, Equitable and Saw Chiao Lian entered into
consequential and collateral. At the very least, their interest is
a compromise agreement which they submitted to and was
purely inchoate, or in sheer expectancy of a right in the
approved by the lower court. But because it was not complied
management of the corporation and to share in the profits
with, Equitable secured a writ of execution, and two lots owned
thereof and in the properties and assets thereof on dissolution,
by Freeman, Inc. were levied upon and sold at public auction to
after payment of the corporate debts and obligations. While a
Freeman Management and Development Corp.
share of stock represents a proportionate or aliquot interest in
The Court of Appeals sustained the denial of the the property of the corporation, it does not vest the owner
petitioners’ motion for intervention, holding that “the thereof with any legal right or title to any of the property, his
interest in the corporate property being equitable or beneficial shall be imposed upon the directors, officers, employees or
in nature. Shareholders are in no legal sense the owners of other officials or persons therein responsible for the offense,
corporate property, which is owned by the corporation as a without prejudice to the civil liabilities arising from the criminal
distinct legal person. offense.


Jose O. Sia (appellant herein), President and General
Manager of the Metal Manufacturing of the Philippines, Inc. for
and in its behalf, applied for and was granted a Letter of Credit
with the Continental Bank, Manila to cover the importation of
100 pieces of Safe Deposit Locks No. 4440. A marginal deposit
was made with the Bank and the Letter of Credit was confirmed
with its foreign correspondent. Thereafter, appellant, for and in
behalf of the Metal Manufacturing of the Philippines, Inc.,
executed a trust receipt in favor of the Continental Bank. When
the said trust receipt became due and demandable, the Metal
Manufacturing of the Philippines, Inc. failed to pay or deliver the
merchandise to the Bank despite the latter’s demands.
Consequently, an information for estafa was filed
against petitioner for violation of the trust receipt agreement
executed by him in his capacity as President and General
Manager of Metal Manufacturing of the Philippines, Inc. in favor
of Continental Bank.
The trial court entered a verdict of guilty beyond
reasonable doubt for the offense of estafa.
CA affirmed with the modification to the effect that the
accused is to indemnify the offended party. A motion for
reconsideration followed, but was denied for lack of merit.
Hence, this petition for review on certiorari.
Whether or not petitioner Sia, as President and General
Manager of Metal Manufacturing of the Phil., Inc. having acted
for and on its behalf in executing the Trust Receipt Agreement in
favor of the Continental Bank may be held liable for the crime
The court ruled that if the acts herein involved
occurred after 29 January 1975, petitioner would be criminally
liable for estafa under paragraph 1(b), Article 315 of the Revised
Penal Code, pursuant to the following provisions of PD 115
covered by a trust receipt to the extent of the amount owing to
the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the
provisions of Article 315, par 1(b) of the Revised Penal Code. If
the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty