NAME: MACALINAO, ROMIELYN, P.
Whether or not the term “capital” in Section 11, Article
SUBJECT: CORPORATION LAW
TITLE: GAMBOA V. TEVES
REFERENCE: G.R. No. 176579 June 28, 2011
FACTS
Act No. 3436 was enacted which granted PLDT a
franchise and the right to engage in telecommunications
business. In 1969, General Telephone and Electronics
Corporation (GTE), an American company and a major PLDT
stockholder, sold 26 percent of the outstanding common shares
of PLDT to PTIC.
In 1977, Prime Holdings, Inc. (PHI) became the owner
of 111,415 shares of stock of PTIC by virtue of three Deeds of
Assignment executed by PTIC stockholders.
The 111,415 shares of stock which represented
46.125% of the outstanding captial stock of PTIC were
sequestered by PCGG and later declared to be property of the
Republic of the Phil.
In 1999, First Pacific, a Hong Kong-based investment
firm, acquired the remaining 54% of the outstanding capital
stock of PTIC.
The Philippine Government decided to sell the 111,415
PTIC share in a bidding. They notified First Pacific, the majority
owner of PTIC shares, of the bidding results and gave First Pacific
to exercise its right of first refusal. In 2007, First Pacific bought
the 46.125% of the outstanding capital stock of PTIC, with the
Philippine Government. Since PTIC is a stockholder of PLDT, the
sale by the Philippine Government of 46.125% of PTIC shares is
actually an indirect sale of about 6.3% of the outstanding
common shares of PLDT. With the sale, the common
shareholdings of foreigners in PLDT increased to about 81.47%.
This violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a
public utility to not more than 40%.
petitioner filed the instant petition for prohibition,
injunction, declaratory relief, and declaration of nullity of sale of
the 111,415 PTIC shares. That the sale would result to a total
foreign common shareholdings in PLDT of 51.56% which is over
the 40% constitutional limit. He contended that this violated
Section 11, Article XII of the 1987 Constitution which limits
foreign ownership of the capital of a public utility to not more
that 40%, to wit:
“Section 11. No franchise, certificate, or any
other form of authorization for the operation of a
public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized
under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens; xxx
ISSUES
1. Whether or not the sale violated the foreign ownership
limit for public utilities prescribed by the Constitution?
2.
XII of the Constitution refers to the total common shares only or
to the total outstanding capital stock?
RULINGS
1. Yes.
The sale violated the foreign ownership limit in PLDT.
The term capital refers only to common shares entitled to vote.
Considering that common shares have voting rights
which translate to control, as opposed to preferred shares
which usually have no voting rights, the term “capital” in
Section 11, Article XII of the Constitution refers only to
common shares. However, if the preferred shares also have the
right to vote in the election of directors, then the term “capital”
shall include such preferred shares because the right to
participate in the control or management of the corporation is
exercised through the right to vote in the election of directors.
In short, the term “capital” in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the
election of directors.
The evident purpose of the citizenship requirement is
to prevent aliens from assuming control of public utilities, which
may be inimical to the national interest. This specific provision
explicitly reserves to Filipino citizens control of public utilities,
pursuant to an overriding economic goal of the 1987
Constitution: to “conserve and develop our patrimony” and
ensure “a self-reliant and independent national economy
effectively controlled by Filipinos.”
Hence, for a corporation to be granted authority to
operate a public utility, at least 60 percent of its “capital” must
be owned by Filipino citizens.
3. The term “capital” in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to
common shares, and not to the total outstanding capital stock
comprising both common and non-voting preferred shares.
The Corporation Code of the Philippines classifies
shares as common or preferred, thus:
Sec. 6. Classification of shares.—The shares of stock
of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have
such rights, privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as
“preferred” or “redeemable” shares, unless otherwise
provided in this Code xxx
Indisputably, construing the term “capital” in Section
11, Article XII of the Constitution to include both voting and non-
voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear
abdication of the State’s constitutional duty to limit control of
public utilities to Filipino citizens. Such an interpretation
certainly runs counter to the constitutional provision reserving
certain areas of investment to Filipino citizens, such as the
exploitation of natural resources as well as the ownership of
land, educational institutions and advertising businesses.
In fact, under the Corporation Code only preferred or
redeemable shares can be deprived of the right to vote.46
Common shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of
incorporation restricting the right of common shareholders to
vote is invalid.
60 percent of the “capital” assumes, or should result in,
“controlling interest” in the corporation. Reinforcing this
interpretation of the term “capital,” as referring to controlling
interest or shares entitled to vote, is the definition of a
“Philippine national” in the Foreign Investments Act of 1991
which emphasizes that mere legal title is insufficient to meet
the 60 percent Filipino-owned “capital” required in the
Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the
voting rights, is required. The legal and beneficial ownership of
60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is
“considered as non-Philippine nationals.
TITLE: LIVESEY VS. BINSWANGER PHILIPPINES, INC. AND KEITH
ELLIOT
REFERENCE: G.R. No. 177493, 19 March 2014
FACTS
Livesey filed a complaint for illegal dismissal with
money claims against Chesterton Blumenauer Binswanger
Philippines Strategic Property Services, Inc. (CBB) and Keith
Elliot. CBB was a domestic corporation engaged in real estate
brokerage and Keith Elliot was its President. Livesey alleged that
CBB failed to pay him a significant portion of his salary. For this
reason, he was compelled to resign. He claimed CBB owed him
unpaid salaries. CBB denied liability. It alleged that it engaged
Livesey as a corporate officer. It claimed that Livesey was later
designated as Managing Director when it became an extension
office of its principal in Hongkong. CBB posited that the labor
arbiter (LA) had no jurisdiction as the complaint involved an
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.
The parties entered into a compromise agreement.
Under the agreement, Livesey was to receive US$31,000.00.
Further, the agreement provided that unless and until the
agreement is fully satisfied, CBB shall not sell, alienate, or
otherwise dispose of all or substantially all of its assets or
business; suspend its business operations; substantially change
the nature of its business; and declare bankruptcy or insolvency.
CBB made an initial payment to Livesey but not the next
two installments as the company ceased operations. Livesey
moved for the issuance of a writ of execution. He learned that
CBB, in a clear and willful attempt to avoid their liabilities to
complainant x x x have organized another corporation,
[Binswanger] Philippines. He claimed that there was evidence
showing that CBB and Binswanger Philippines, Inc. (Binswanger)
are one and the same corporation. Invoking the doctrine of
piercing the veil of corporate fiction, Livesey prayed that an alias
writ of execution be issued against respondents Binswanger and
Keith Elliot, CBB’s former President. LA denied Livesey’s motion
for an alias writ of execution. He explained that the stockholders
of the two corporations were not the same. Livesey filed an
appeal which the NLRC granted, reversing the LA Laderas’ order.
The Binswanger and Elliot moved for reconsideration. The NLRC
denied the motion. They then sought relief from the CA through
a petition for certiorari. The CA granted the petition and
reversed the NLRC decision. Livesey moved for reconsideration,
but the CA denied the motion.
Livesey prays for a reversal of the CA rulings on the
basis of the following arguments: The CA erred in not applying
the doctrine of piercing the veil of corporate fiction to the case.
He insists that CBB and Binswanger are one and the same
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
substantial amount of CBB shares changed hands (c) Summons
served on Binswanger in an earlier labor case was received by
Binswanger using CBB’s receiving stamp (d) In a letter dated,
Elliot noted a Binswanger bid solicitation for a project with the
Philippine National Bank (PNB) which was actually a CBB project
as shown by a CBB draft (e) Hazel de Guzman who also filed an
illegal dismissal case against the company, attested that Elliot
told her of CBB’s plan to close the corporation and to organize
another for the purpose of evading CBB’s liabilities. Livesey
posits that the closure of CBB and its immediate replacement by
Binswanger could not have been possible without Elliot’s guiding
hand, such that when CBB ceased operations, Elliot (CBB’s
President and CEO) moved to Binswanger in the same position.
ISSUES
Whether the doctrine of piercing the veil of corporate
fiction is applicable?
RULING
YES.
It has long been settled that the law vests a
corporation with a personality distinct and separate from its
stockholders or members. In the same vein, a corporation, by
legal fiction and convenience, is an entity shielded by a
protective mantle and imbued by law with a character alien to
the persons comprising it. Nonetheless, the shield is not at all
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
corporate fiction.”
Piercing the veil of corporate fiction is an equitable
doctrine developed to address situations where the separate
corporate personality of a corporation is abused or used for
wrongful purposes. Under the doctrine, the corporate
existence may be disregarded where the entity is formed or
used for non-legitimate purposes, such as to evade a just and
due obligation, or to justify a wrong, to shield or perpetrate
fraud or to carry out similar or inequitable considerations,
other unjustifiable aims or intentions, in which case, the fiction
will be disregarded and the individuals composing it and the
two corporations will be treated as identical.
In the present case, the Court sees an indubitable link
between CBB’s closure and Binswanger’s incorporation. CBB
ceased to exist only in name; it re–emerged in the person of
Binswanger for an urgent purpose — to avoid payment by CBB
of the last two installments of its monetary obligation to Livesey,
as well as its other financial liabilities. It was not just coincidence
that Binswanger is engaged in the same line of business CBB
embarked on: (1) it even holds office in the very same building
and on the very same floor where CBB once stood; (2) CBB’s key
officers, Elliot, no less, and Catral moved over to Binswanger (3)
the use of Binswanger of CBB’s paraphernalia (receiving stamp)
(4) Binswanger’s takeover of CBB’s project with the PNB.
While the ostensible reason for Binswanger’s
establishment is to continue CBB’s business operations in the
Philippines, which by itself is not illegal, the close proximity
between CBB’s disestablishment and Binswanger’s coming into
existence was to evade CBB’s unfulfilled financial obligation to
Livesey under the compromise agreement.
Thus, applying the “doctrine of piercing the veil of
corporate fiction”, the Court finds Elliot as liable as Binswanger
for CBB’s unfulfilled obligation to Livesey.
TITLE: NARRA NICKEL MINING AND DEVELOPMENT CORP. VS.
REDMONT CONSOLIDATED MINES CORP.
REFERENCE: G.R. No. 195580, April 21, 2014
FACTS
Sometime in December 2006, respondent Redmont
Consolidated Mines Corp. (Redmont), a domestic corporation
organized and existing under Philippine laws, took interest in
mining and exploring certain areas of the province of Palawan.
After inquiring with the Department of Environment and Natural
Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities were already
covered by Mineral Production Sharing Agreement (MPSA)
applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur Narra and Tesoro, filed an
application for an MPSA and Exploration Permit (EP) which was
subsequently issued.
Redmont filed before the Panel of Arbitrators (POA) of
the DENR three (3) separate petitions for the denial of
petitioners’ applications for MPSA.
Redmont alleged that at least 60% of the capital stock
of McArthur, Tesoro and Narra are owned and controlled by
MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
Redmont reasoned that since MBMI is a considerable
stockholder of petitioners, it was the driving force behind
petitioners’ filing of the MPSAs over the areas covered by
applications since it knows that it can only participate in mining
activities through corporations which are deemed Filipino
citizens. Redmont argued that given that petitioners’ capital
stocks were mostly owned by MBMI, they were likewise
disqualified from engaging in mining activities through MPSAs,
which are reserved only for Filipino citizens.
McArthur Mining, Inc., is composed, among others, by
Madridejos Mining Corporation (Filipino) owning 5,997 out of
10,000 shares, and MBMI Resources, Inc. (Canadian) owning
3,998 out of 10,000 shares; MBMI also owns 3,331 out of 10,000
shares of Madridejos Mining Corporation;
Tesoro and Mining and Development, Inc., is
composed, among others, by Sara Marie Mining, Inc. (Filipino)
owning 5,997 out of 10,000 shares, and MBMI Resources, Inc.
(Canadian) owning 3,998 out of 10,000 shares; MBMI also owns
3,331 out of 10,000 shares of Sara Marie Mining, Inc.;
Narra Nickel Mining and Development Corporation, is
composed, among others, by Patricia Louise Mining &
Development Corporation (Filipino) owning 5,997 out of 10,000
shares, and MBMI Resources, Inc. (Canadian) owning 3,998 out
of 10,000 shares; MBMI also owns 3,396 out of 10,000 shares of
Patricia Louise Mining & Development Corporation;
Petitioners averred that they were qualified persons
under Section 3 of RA 7942 or the Philippine Mining Act of 1995.
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
corporations. Nevertheless, they claimed that the issue on
nationality should not be raised since McArthur, Tesoro and
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
gaining MPSAs. The POA considered petitioners as foreign
corporations being "effectively controlled" by MBMI, a 100%
Canadian company and declared their MPSAs null and void.
Pending the resolution of the appeal filed by petitioners
with the Mines Adjudication Board (MAB), Redmont filed a
Complaint with the SEC, seeking the revocation of the
certificates for registration of petitioners on the ground that
they are foreign-owned or controlled corporations engaged in
mining in violation of Philippine laws.
 MAB issued an Order reversing the resolution of POA,
hence, the petition for review filed by Redmont before the CA,
assailing the Orders issued by the MAB.
CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common
major investor, MBMI, a corporation composed of 100%
Canadians. Pursuant to the first sentence of paragraph 7 of DOJ
Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules
which implemented the requirement of the Constitution and
other laws pertaining to the exploitation of natural resources,
the CA used the "grandfather rule" to determine the
nationality of petitioners.
In determining the nationality of petitioners, the CA
looked into their corporate structures and their corresponding
common shareholders. Using the grandfather rule, the CA
discovered that MBMI in effect owned majority of the common
stocks of the petitioners as well as at least 60% equity interest
of other majority shareholders of petitioners through joint
venture agreements. The CA found that through a "web of
corporate layering, it is clear that one common controlling
investor in all mining corporations involved is MBMI." Thus, it
concluded that petitioners McArthur, Tesoro and Narra are also
in partnership with, or privies-in-interest of, MBMI.
ISSUES
Whether or not petitioner corporations are Filipino and
can validly be issued MPSA?
Whether or not the CA’s ruling that Narra, Tesoro and
McArthur are foreign corporations based on the "Grandfather
Rule" is contrary to law, particularly the express mandate of the
Foreign Investments Act of 1991, as amended, and the FIA
Rules?
RULING
Both NO.
There are two acknowledged tests in determining the
nationality of a corporation: the control test and the
grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of
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
of natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or
partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of
Philippine nationality (CONTROL TEST), but if the
percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of
shares corresponding to such percentage shall be
counted as of Philippine nationality (GRANDFATHER
RULE). Thus, if 100,000 shares are registered in the
name of a corporation or partnership at least 60% of
the capital stock or capital, respectively, of which
belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or
say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to
Filipino citizens, only 50,000 shares shall be counted as
owned by Filipinos and the other 50,000 shall be
recorded as belonging to aliens.
Petitioners contention: The grandfather rule,
petitioners reasoned, has no leg to stand on in the instant case
since the definition of a "Philippine National" under Sec. 3 of the
FIA does not provide for it. They further claim that the
grandfather rule "has been abandoned and is no longer the
applicable rule." They also opined that the last portion of Sec. 3
of the FIA admits the application of a "corporate layering"
scheme of corporations. Petitioners claim that the clear and
unambiguous wordings of the statute preclude the court from
construing it and prevent the court’s use of discretion in applying
the law. They said that the plain, literal meaning of the statute
meant the application of the control test is obligatory.
SC disagreed: "Corporate layering" is admittedly
allowed by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes illegal.
Further, the pronouncement of petitioners that the grandfather
rule has already been abandoned must be discredited for lack of
basis.
Petitioners are not Filipino since MBMI, a 100%
Canadian corporation, owns 60% or more of their equity
interests. Such conclusion is derived from grandfathering
petitioners’ corporate owners, namely: MMI, SMMI and PLMDC.
The "control test" is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation, within the
ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the
Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity
ownership in the corporation, then it may apply the
"grandfather rule."
TITLE: PHILIPPINE NATIONAL BANK VS. COURT OF APPEALS,
RITA GUECO TAPNIO, CECILIO GUECO AND THE PHILIPPINE
AMERICAN GENERAL INSURANCE COMPANY, INC.
REFERENCE: 83 SCRA 237
FACTS
Mrs. Tapnio had an export sugar quota of 1,000 piculs
for the agricultural year which she did not need. She entered into
a contract of lease of sugar allotment to allow Mr. Tuazon to use
said quota for the consideration of P2,500.00. At the time of the
agreement, Mrs. Tapnio was indebted to the PNB.
Her indebtedness was known as a crop loan and was
secured by a mortgage on her standing crop including her sugar
quota allocation for the agricultural year corresponding to said
standing crop. This arrangement was necessary in order that
when Mrs. Tapnio harvests, the P.N.B., having a lien on the crop,
may effectively enforce collection against her. Her sugar cannot
be exported without sugar quota allotment. Sometimes,
however, a planter harvest less sugar than her quota, so her
excess quota is utilized by another who pays her for its use. This
is the arrangement entered into between Mrs. Tapnio and Mr.
Tuazon regarding the former’s excess quota.
Since the quota was mortgaged to the P.N.B., the
contract of lease had to be approved by said Bank. The branch
manager of PNB in San Fernando, Pampanga required the
parties to raise the consideration of P2.80 per picul or a total of
P2,800.00, which Tuazon accepted. However, the board of
directors required that the amount be raised to P3.00 per picul,
in which case Tuazon informed the bank that he was no longer
interested to continue the the lease of sugar quota allotment in
favor of defendant Rita Gueco Tapnio. The result is that the
latter lost the sum of P2,800.00 which she should have received
from Tuazon and which she could have paid the Bank to cancel
off her indebtedness.
Eventually, Tapnio was sued by the insurance company
Philamgen, who indemnified PNB in favor of Tapnio, that the
latter pay Philamgen. Tapnio filed a third party complaint against
PNB where she alleged that her failure to pay her debts was
because of PNB’s negligence and unreasonableness. The CA held
that failure of the negotiation for the lease of the sugar quota
allocation of Rita Gueco Tapnio to Tuazon was due to the fault
of the directors of the PNB. The refusal on the part of the bank
to approve the lease at the rate of P2.80 per picul which, as
stated above, would have enabled Rita Gueco Tapnio to realize
the amount of P2,800.00 which was more than sufficient to pay
off her indebtedness to the Bank, and its insistence on the rental
price of P3.00 per picul thus unnecessarily increasing the value
by only a difference of P200.00, inevitably brought about the
rescission of the lease contract to the damage and prejudice of
Rita Gueco Tapnio in the aforesaid sum of P2,800.00.
Petitioner filed its MR but was denied by CA. Hence, this
petition for Certiorari.
ISSUE
Whether or not the Corporation Bank (PNB) is liable to
Tapnio?
RULING
YES.
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.
While PNB had the ultimate authority of approving or
disapproving the proposed lease since the quota was
mortgaged to the Bank, the latter certainly cannot escape its
responsibility of observing, for the protection of the interest of
private respondents, that degree of care, precaution and
vigilance which the circumstances justly demand in approving
or disapproving the lease of said sugar quota. The law makes it
imperative that every person "must in the exercise of his rights
and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith, This
petitioner failed to do.
Certainly, it knew that the agricultural year was about
to expire, that by its disapproval of the lease private respondents
would be unable to utilize the sugar quota in question. In failing
to observe the reasonable degree of care and vigilance which the
surrounding circumstances reasonably impose, petitioner is
consequently liable for the damages caused on private
respondents. Under Article 21 of the New Civil Code, "any
person who willfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall
compensate the latter for the damage." The afore-cited
provisions on human relations were intended to expand the
concept of torts in this jurisdiction by granting adequate legal
remedy for the untold number of moral wrongs which is
impossible for human foresight to specifically provide in the
statutes.
A corporation is civilly liable in the same manner as
natural persons for torts because the rules governing the
liability of a principal or master for a tort committed by an
agent or servant are the same whether the principal or master
be a natural person or a corporation, and whether the servant
or agent be a natural or artificial person. All of the authorities
agree that a principal or master is liable for every tort which he
expressly directs or authorizes, and this is just as true of a
corporation as of a natural person, A corporation is liable,
therefore, whenever a tortious act is committed by an officer
or agent under express direction or authority from the
stockholders or members acting as a body, or, generally, from
the directors as the governing body."
TITLE: REYNOSO VS. COURT OF APPEALS
REFERENCE: 345 SCRA 335 [GR No. 116124-25 November 23,
2000]
FACTS
In early 1960s, the Commercial Credit Corporation
(CCC), a financing company and investment firm, decided to
organize franchise companies in different parts of the country,
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
the franchise in Quezon City, known as the Commercial Credit
Corporation of Quezon City (CCC-QC).
CCC-QC entered into an exclusive agreement
management contract with CCC whereby the latter was granted
the management and full control of the business activities of the
former. Under the contract, CCC-QC shall sell, discount and/or
assign its receivables to CCC. Subsequently, however, this
discounting arrangement was discontinued pursuant to the so
called DOSRI rule, prohibiting the lending of funds by
corporations to its directors, officers, stockholders and other
persons with related interest therein.
On account of the new restrictions imposed by the
Central Bank policy by virtue of the DOSRI rule, CCC decided to
form CCC Equity Corporation, a wholly-owned subsidiary, to
which CCC transferred its 30% equity in CCC-QC, together with 2
seats in the latter’s Board of Directors.
Under the new set-up, several officials of Commercial
Credit Corporation, including petitioner Reynoso, became
employees of CCC-Equity. While petitioner continued to be the
Resident Manager of CCC-QC, he drew his salaries and
allowances from CCCEquity. Furthermore, although an
employee of CCC-Equity, petitioner, as well as all employees of
CCC-QC, became qualified members of the Commercial Credit
Corporation Employees Pension Plan.
As Resident Manager of CCC-QC, petitioner oversaw
the operations of CCC-QC and supervised its employees. The
business activities of CCC-QC pertain to the acceptance of funds
from depositors who are issued interest-bearing promissory
notes. The amounts deposited are then loaned out to various
borrowers. Petitioner, in order to boost the business activities of
CCC-QC, deposited his personal funds in the company. In return,
CCC-QC issued to him its interest-bearing promissory notes.
A complaint filed by CCC-equity against petitioner
which alleged that petitioner embezzled the funds of CCC-QC
which was used for the purchase of a house and lot. The
property was mortgaged to CCC, and was later foreclosed.
RTC dismissed the complaint for lack of merit and
ordered CCC to pay Reynoso for damages.
Judgement remained unsatisfied, so Reynoso filed a
motion for alias Writ of Execution. Meanwhile, CCC became
known as the General Credit Corporation, in which case the
court issued an Order directing General Credit Corporation to file
its comment on petitioner’s motion for alias writ of execution.
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
levied upon to satisfy the monetary judgment in favor of
petitioner. In short, respondent raises corporate fiction as its
defense.
ISSUE
Whether or not the judgement in favor of the petitioner
may be executed against respondent General Credit
Corporation?
RULING
YES.
A corporation is an artificial being created by operation
of law, having the right of succession and the powers, attributes,
and properties expressly authorized by law or incident to its
existence. It is an artificial being invested by law with a
personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to
which it may be related. It was evolved to make possible the
aggregation and assembling of huge amounts of capital upon
which big business depends. It also has the advantage of non-
dependence on the lives of those who compose it even as it
enjoys certain rights and conducts activities of natural persons.
Any piercing of the corporate veil has to be done with
caution. However, the court will not hesitate to use its
supervisory and adjudicative powers where the corporate fiction
is used as an unfair device to achieve an inequitable result
defraud creditors, evade contracts and obligations, or to shield
it from the effects of a court decision. The corporate fiction has
to be disregarded when necessary in the interest of justice.
The defense of separateness will be disregarded when
the business affairs of a subsidiary corporation are so controlled
by the mother corporation to the extent that it becomes an
instrument or agent of its parent. But even when there is
dominance over the affairs of the subsidiary, the doctrine of
piercing the veil of corporate fiction applies only when such
fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime.
It is obvious that the use by CCC-QC of the same name
of Commercial Credit Corporation was intended to publicly
identify it as a component of the CCC group of companies
engaged in one and the same business, i.e., investment and
financing. Aside from CCCQuezon City, other franchise
companies were organized such as CCC-North Manila and CCC-
Cagayan Valley.
The organization of subsidiary corporations as what
was done here is usually resorted to for aggrupation of capital
the ability to cover more territory and population, 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
honest business judgement, when the corporate device is used
by the parent to avoid its liability for legitimate obligations of
the subsidiary, and when the corporate fiction is used to
perpetrate fraud or promote injustice, the law steps in to
remedy the problem. When that happens, the corporate
character is not necessarily abrogated. It continues for
legitimate objectives. However, it is pursued in order to remedy
injustice, such as that inflicted in this case.
The discounting agreements through which CCC
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
borrowing from their company. Instead of adhering to the letter
and spirit of the regulations by avoiding DOSRI loans altogether,
CCC used the corporate device to continue the prohibited
practice. CCC organized still another corporation, the CCC-Equity
Corporation. However, as a wholly owned subsidiary, CCC-Equity
was in fact only another name for CCC. Key officials of CCC,
including the resident managers of subsidiary corporations,
were appointed to positions in CCC-Equity.
It is very obvious; that respondent “seeks the
protective shield of a corporate fiction whose veil the present
case could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation of its
employees.
If the corporate fiction is sustained, it becomes a handy
deception to avoid a judgment debt and work an injustice.
TITLE: SAW VS. COURT OF APPEAL
REFERENCE: G.R. No. 90580 April 8, 1991.
FACTS
A collection suit with preliminary attachment was filed
by Equitable Banking Corporation 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. The motion 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
Whether or not the denial of petitioner’s motion for
intervention was proper?
RULING
YES.
Petitioners have no legal interest in the subject matter
in litigation so as to entitle them to intervene in the proceedings
below.
In a case, the court held that, “As clearly stated in
Section 2 of Rule 12 of the Rules of Court, to be permitted to
intervene in a pending action, the party must have a legal
interest in the matter in litigation, or in the success of either of
the parties or an interest against both, or he must be so
situated as to be adversely affected by a distribution or other
disposition of the property in the custody of the court or an
officer thereof.”
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.
The words “an interest in the subject” mean a direct
interest in the cause of action as pleaded, and which would put
the intervenor in a legal position to litigate a fact alleged in the
complaint, without the establishment of which plaintiff could
not recover.
In the present case, the interest, if it exists at all, of
petitioners/movants is indirect, contingent, remote, conjectural,
consequential and collateral. 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 corporation, 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 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.

TITLE: SIA VS. COURT OF APPEALS

REFERENCE: 166 SCRA 263
FACTS
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.
ISSUE
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
charged?
RULING
NO.
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