V.

CLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
SEC. 3. Classes of Corporations. - Corporations formed or organized under this Code may be
stock or nonstock corporations. Stock corporations are those which have capital stock divided
into shares and are authorized to distribute to the holders of such shares, dividends, or
allotments of the surplus profits on the basis of the shares held. All other corporations are
nonstock corporations.

a) Public Corporation (Sec. 3, Act No. 1459).

- one formed or organized for the government or a portion of the
state
- its purpose is for general good and welfare
b) Quasi-public Corporation.
- marriage of both a public and a private corp.
- it is granted the same powers as a private corp. but they have
no incorporators, SH’s or members
- example: A water district, although established as a
corporation, it was established for the greater good and with no
stockholders. They are also placed under the jurisdiction of the
LWUA not the SEC
c) Private Corporation (Sec. 3, Act 1459).
- one formed for some private purpose, benefit or end.

 Government’s majority shares does not make an entity a public

corporation.
 A corporation is created by operation of law under the Corporation
Code while a government corporation is normally created by special
law referred to often as a charter.
 The test to determine whether a corporation is government owned or
controlled, or private in nature is simple. Is it created by its own
charter for the exercise of a public function, or by incorporation under
the general corporation law? Those with special charters are
government corporations subject to its provisions, and its employees
are under the jurisdiction of the Civil Service Commission, and are
compulsory members of the GSIS.
 While public benefit and public welfare may be attributable to the
operation of the Bases Conversion and Development Authority
(BCDA), yet it is certain that the functions it performs are basically
proprietary in nature—the promotion of economic and social
 development of Central Luzon, particularly, and the country’s goal for
enhancement. Therefore, the rule that prescription does not run
against the State will not apply to BCDA, it being said that when title
of the Republic has been divested, its grantees, although artificial
bodies of its own creation, are in the same category as ordinary
persons.
 Although Boy Scouts of the Philippines does not receive any
monetary or financial subsidy from the Government, and its funds and
assets are not considered government in nature and not subject to
audit by the COA, the fact that it received a special charter from the
government, that its governing board are appointed by the
Government, and that its purpose are of public character, for they
pertain to the educational, civic and social development of the youth
which constitute a very substantial and important part of the nation, it
is not a public corporation in the same sense that municipal
corporation or local governments are public corporation since its does
not govern a portion of the state, but it also does not have proprietary
functions in the same sense that the functions or activities of
government-owned or controlled corporations, is may still be
considered as such, or under the 1987 Administrative Code as an
instrumentality of the Government, and it employees are subject to
the Civil Service Law.
 But being a GOCC makes it liable for laws and provisions applicable
to the Government or its entities and subject to the control of the
Government.
 Beyond cavil, a GOCC has a personality of its own, distinct and
separate from that of the government, and the intervention in a
transaction of the Office of the President through the Executive
Secretary does not change the independent existence of a
government entity as it deals with another government entity.
 The doctrine that employees of GOCCs, whether created by special
law or formed as subsidiaries under the general corporation law are
governed by the Civil Service Law and not by the Labor Code, has
been supplanted by the 1987 Constitution. The present doctrine in
determining whether a GOCC is subject to the Civil Service Law is
the manner of its creation, such that government corporations created
by special charter are subject the Civil Service Law, while those
incorporated under the general corporation law are governed by the
Labor Code.
  Section 31 of Corporation Code (Liability of Directors and Officers) is
applicable to corporations which have been organized by special
charters since Sec. 4 of Corporation Code renders the provisions
supplementarily applicable to all corporations, including those with
special or individual charters, such as cooperatives organized under
P.D. 269, so long as those provisions are not inconsistent with such
charters.
 Water districts can validly exists as corporate entities under PD 198,
and provided they are government-owned or controlled, and their
board of directors and other personnel are government employees
subject to civil service laws and anti-graft laws.

2. As to Place of Incorporation:
(a) Domestic Corporation - incorporated in the Philippines
(b) Foreign Corporation
- SEC. 140. Definition and Rights of Foreign Corporations. For purposes of
this Code, a foreign corporation is one formed, organized or existing under laws
other than those of the Philippines' and whose laws allow Filipino citizens and
corporations to do business in its own country or State. It shall have the right to
transact business in the Philippines after obtaining a license for that purpose in
accordance with this Code and a certificate of authority from the appropriate
government agency.

- incorporated in another country and that country grants the same

rights to Filipinos in terms of doing business there; it shall have the
right to transact business in the Philippines after it shall have
obtained a license to transact business in this country in
accordance with this code & a certificate of authority from the
appropriate government agency (SEC license after obtaining BOI
certificate )

3. As to Purpose of Incorporation:
(a) Municipal Corporation – LGU’s
- can sue be sued without their consent ( as provided for by the LGC)
- in certain instances considered as an adjunct to the national
government but has been recognized to have a personality separate
and distinct from the national government.

(b)Religious Corporation
SEC. 107. Classes of Religious Corporations. - Religious corporations may be incorporated
by one (1) or more persons. Such corporations may be classified into corporations sole and
religious societies.
 Religious corporations shall be governed by this Chapter and by the general provisions
on nonstock corporations insofar as applicable.

SEC. 114 Religious Societies. -Unless forbidden by competent authority, the Constitution,
pertinent. rules, regulations, or discipline of the religious denomination, sect or church of which it
is a part, any religious society, religious order, diocese, or synod, or district organization of any
religious denomination, sect or church, may, upon written consent and/or by an affirmative vote
at a meeting called for the purpose of at least two -thirds of (2/3) of its membership, incorporate
for the administration of its temporalities or for the the management of its affairs, properties, and
estate by filing with the Commission, articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of such religious society or religious order,
or diocese, synod, or district organization of the religious denomination, sect or church, setting
forth the following:
a. That the religious society or religious order, or diocese, synod, or district organization is
a religious organization of a religious denomination, sect or church;
b. That at least two-thirds (2/3) of its membership has given written consent or has voted to
incorporate, at a duly convened meeting of the body;
c. That the incorporation of the religious society or religious order, or diocese, synod, or
district organization is not forbidden by competent authority or by the Constitution, rules,
regulations or discipline of the religious denomination, sect or church of which it forms
part;
d. That the religious society or religious order, or diocese, synod, or district organization
desires to incorporate for the administration of its affairs, properties and estate;
e. The place within the Philippines where the principal office of the corporation is to be
established and located; and
f. The names, nationalities, and residence addresses of the trustees, not less than five (5)
nor more than fifteen (15), elected by the religious society or religious order, or the
diocese, synod, or district organization to serve for the first year or such other period as
may be prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization.

- Since in matters purely ecclesiastical the decisions of the proper church

tribunals are conclusive upon the civil tribunals, then a church member
who is expelled from the membership by the church authorities, or a
priest or minister who is by them deprived of his sacred office, is without
remedy in the civil courts.

(c) Educational Corporations

SEC. 105. Incorporation. - Educational corporations shall be governed by special laws and by
the general provisions of this Code.

SEC. 106. Board of Trustees. - Trustees of educational institutions organized as nonstock

corporations shall not be less than five (5) nor more than fifteen (15): Provided, That the number
of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation or bylaws, the board of
trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as
organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall
expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of
a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill
vacancies
caused by expiration of term shall hold office for five (5) years. A maJonty of the trustees
shall constitute a quorum for the transaction of business. The powers and authority of trustees
shall be defined in the bylaws.
For institutions organized as stock corporations, the number and term of directors shall
be governed by the provisions on stock corporations.

Section 25. Establishment of Schools - All schools shall be established in accordance with law. The
establishment of new national schools and the conversion of existing schools from elementary to
national secondary or tertiary schools shall be by law: Provided, That any private school proposed to
be established must incorporate as an non-stock educational corporation in accordance with the
provisions of the Corporation Code of the Philippines. This requirement to incorporate may be
waived in the case of family-administered pre-school institutions.

(d)Charitable, Scientific or Vocational Corporations

(e) Business Corporation

4. As to Number of Members:
(a) Aggregate Corporation
(b) Corporation Sole

SEC. 108. Corporation Sole. - For the purpose of administering and managing, as trustee, the
affairs, property and temporalities of any religious denomination, sect or church, a corporation
sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding
elder of such religious denomination, sect or church.

SEC. 109. Articles of Incorporation. - In order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi, or presiding elder of any religious denomination, sect
or church must file with the Commission articles of incorporation setting forth the following:
a. That the applicant chief archbishop, bishop, priest, minister, rabbi, or presiding elder
represents the religious denomination, sect or church which desires to become a
corporation sole;
b. That the rules, regulations and discipline of the religious denomination, sect or church
are consistent with becoming a corporation sole and do not forbid it;
c. That such chief archbishop, bishop, priest, minister, rabbi, or presiding elder is charged
with the administration of the temporalities and the management of the affairs, estate
and properties of the religious denomination, sect or church within the territorial
jurisdiction, so described succinctly in the articles of incorporation;
d. The manner by which any vacancy occurring in the office of chief archbishop, bishop,
priest, minister, rabbi, or presiding elder is required to be filled, according to the rules,
regulations or discipline of the religious denomination, sect or church; and
e. The place where the principal office of the corporation sole is to be established and
located, which place must be within the territory of the Philippines.

The articles of incorporation may include any other provision not contrary to law for the
regulation of the affairs of the corporation.
SEC. 110. Submission of the Articles of Incorporation. - The articles of incorporation must
be verified, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi, or
presiding elder, as the case may be, and accompanied by a copy of the commission, certificate
of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi, or
presiding elder, duly certified to be correct by any notary public.
From and after filing with the Commission of the said articles of incorporation, verified by
affidavit or affirmation, and accompanied by the documents mentioned in the preceding
paragraph, such chief archbishop, bishop, priest, minister, rabbi, Qr presiding elder shall
become a corporation sole and all temporalities, estate and properties of the religious
denomination, sect or church theretofore administered or managed as such chief archbishop,
bishop, priest, minister,
rabbi, or presiding elder shall be personally held in trust as a corporation sole, for the use,
purpose, exclusive benefit and on behalf of the religious denomination · sect or church including
hospitals, schools, colleges, orphan asylums'. parsonages, and cemeteries thereof.

SEC. 111. Acquisition and Alienation of Property. - A corporation sole may purchase and
hold real estate and personal property for its church, charitable, benevolent, or educational
purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or
mortgage real property held by it by obtaining an order for that purpose from the Regional Trial
Court of the province where the property is situated upon proof that the notice of the application
for leave to sell or mortgage has been made through publication or as directed by the Court,
and that it is in the interest of the corporation that leave to sell or mortgage be granted. The
application for leave to by sell the or mortgage must be made by petition, duly verified, by the
chief archbishop, bishop, priest, minister, or rabbi, or presiding elder acting as corporation sole,
and may be opposed by any member of the religious denomination, sect or church represented
by the corporation sole: Provided, That in cases where the rules, regulations, and discipline of
the religious denomination, sect or church, religious society, or order concerned represented by
such corporation sole regulate the method of acquiring, holding, selling, and mortgaging real
estate and personal property, such rules, regulations and discipline shall govern, and the
intervention of the courts shall
not be necessary.

SEC. 112. Filling of Vacancies. - The successors in office of any chief archbishop, bishop,
priest, minister, rabbi, or presiding elder in a corporation sole shall become the corporation sole
on their accession to office and shall be permitted to transact business as such upon filing a
copy of their commission, certificate of election or letters of appointment, duly certified by any
notary public with the Commission.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi, or
presiding elder of any religious denomination, sect or church incorporated as a corporation sole,
the person or persons authorized by the rules, regulations or discipline of the religious
denomination, sect or church represented by the corporation sole to administer the temporalities
and manage the affairs, estate, and properties of the corporation sole shall exercise all the
powers and authority of the corporation sole during such vacancy.

SEC. 113. Dissolution. -A corporation sole may be dissolved and its affairs settled voluntarily
by submitting to the Commission a verified declaration of dissolution, setting forth:
a. The name of the corporation;
b. The reason for dissolution and winding up;
c. The authorization for the dissolution of the corporation by the particular religious
denomination, sect or church; and
 d. The names and addresses of the persons who are to supervise the winding up of the
affairs of the corporation.

Upon approval of such declaration of dissolution by the Commission, the corporation

shall cease to carry on its operations except for the purpose of winding up its affairs.

SEC. 115. Applicability of Provisions to One Person Corporations. -The provisions of this
Title shall primarily apply to One Person Corporations. Other provisions of this Code apply
suppletorily, except as otherwise provided in this Title.

SEC. 116. One Person Corporation. -A One Person Corporation is a corporation with a single
stockholder: Provided, That only a natural person, trust, or an estate may form a One Person
Corporation.
Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies,
and non-chartered governmentowned and -controlled corporations may not incorporate as One
Person Corporations: Provided, further, That a natural person who is licensed to exercise a
profession may not organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws.

SEC. 117. Minimum Capital Stock Not Required for One Person Corporation. - A One
Person Corporation shall not be required to have a minimum authorized capital stock except as
otherwise provided by special law.

SEC. 118. Articles of Incorporation. - A One Person Corporation shall file articles of
incorporation in accordance with the requirements under Section 14 of this Code. It shall
likewise substantially contain the following:
a. If the single stockholder is a trust or an estate, the name, nationality, and residence of
the trustee, administrator, executor, guardian, conservator, custodian, or other person
exercising fiduciary duties together with the proof of such authority to act on behalf of the
trust or estate; and
b. Name, nationality, residence of the nominee and alternate nominee, and the extent,
coverage and limitation of the authority.

SEC. 119. Bylaws. - The One Person Corporation is not required to submit and file corporate
bylaws.

SEC. 120. Display of Corporate Name. - A One Person Corporation shall indicate the letters
"OPC" either below or at the end of its corporate name.

SEC. 121. Single Stockholder as Director, President. - The single stockholder shall be the
sole director and president of the One Person Corporation.

SEC. 122. Treasurer, Corporate Secretary, and Other Officers. - Within fifteen (15) days
from the issuance of its certificate of incorporation, the One Person Corporation shall appoint a
treasurer, corporate secretary, and other officers as it may deem necessary, and notify the
Commission thereof within five (5) days from appointment.
The single stockholder may not be appointed as the corporate secretary.
A single stockholder who is likewise the self-appointed treasurer of the corporation shall
give a bond to the Commission in such a sum as may be required: Provided, That the said
stockholder/treasurer shall undertake in writing to faithfully administer the One Person
Corporation's funds to be received as treasurer, and to disburse and invest the same according
to the articles of incorporation as approved by the Commission. The bond shall be renewed
every two (2) years or as often as may be required.

SEC. 123. Special Functions of the Corporate Secretary. - In addition to the functions
designated by the One Person Corporation, the corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or records of the corporation;
b. Notify the nominee or alternate nominee of the death or incapacity of the single
stockholder, which notice shall be given no later than five (5) days from such
occurrence;
c. Notify the Commission of the death of the single stockholder within five (5) days from
such occurrence and stating in such notice the names, residence addresses, and
contact details of all known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heirs to a meeting and
advise the legal heirs with regard to, among others, the election of a new director,
amendment of the articles of incorporation, and other ancillary and/or consequential
matters.

SEC. 124. Nominee and Alternate Nominee. - The single stockholder shall designate a
nominee and an alternate nominee who shall, in the event of the single stockholder's death or
incapacity, take the place of the single stockholder as director and shall manage the
corporation's affairs.
The articles of incorporation shall state the names, residence addresses and contact
details of the nominee and
alternate nominee, as well as the extent and limitations of their authority in managing the affairs
of the One Person Corporation.
The written consent of the nominee and alternate nominee shall be attached to the
application for incorporation. Such consent may be withdrawn in writing any time before the
death or incapacity of the single stockholder.

SEC. 125. Term of Nominee and Alternate Nominee. -When the incapacity of the single
stockholder is temporary, the nominee shall sit as director and manage the affairs of the One
Person Corporation until the stockholder, by self determination, regains the capacity to assume
such duties.
In case of death or permanent incapacity of the single stockholder, the nominee shall sit
as director and manage the affairs of the One Person Corporation until the legal heirs of the
single stockholder have been lawfully determined, and the heirs have designated one of them or
have agreed that the estate shall be the single stockholder of the One Person Corporation.
The alternate nominee shall sit as director and manage the One Person Corporation in
case of the nominee's inability, incapacity, death, or refusal to discharge the functions as
director and manager of the corporation, and only for the same term and under the same
conditions applicable to the nominee.

SEC. 126. Change of Nominee or Alternate Nominee. - The single stockholder may, at any
time, change its nominee and alternate nominee by submitting to the Commission the names of
the new nominees and their corresponding written consent. For this purpose, the articles of
incorporation need not be amended.

SEC. 127. Minutes Book. - A One Person Corporation shall maintain a minutes book which
shall contain all actions, decisions, and resolutions taken by the One Person Corporation.
SEC. 128. Records in Lieu of Meetings. - When action is needed on any matter, it shall be
sufficient to prepare a written resolution, signed and dated by the single stockholder, and
recorded in the minutes book of the One Person Corporation. The date of recording in the
minutes book shall be determined to be the date of the meeting for all purposes under this
Code.

SEC. 129. Reportorial Requirements. - The One Person Corporation shall submit the following
within such period as the Commission may prescribe:
a. Annual financial statements audited by an independent certified public accountant:
Provided, That if the total assets or total liabilities of the corporation are less than Six
hundred thousand pesos (P600,000.00), the financial statements shall be certified under
oath by the corporation's treasurer and president;
b. A report containing explanations or comments by the president on every qualification,
reservation, or adverse remark or disclaimer made by the auditor in the latter's report;
c. A disclosure of all self-dealings and related party transactions entered into between the
One Person Corporation and the single stockholder; and
d. Other reports as the Commission may require.

For purposes of this provision, the fiscal year of a One Person Corporation shall be that
set forth in its articles of incorporation or, in the absence thereof, the calendar year.
The Commission may place the corporation under delinquent status should the
corporation fail to submit the reportorial requirements three (3) times, consecutively or
intermittently, within a period of five (5) years.

SEC. 130. Liability of Single Shareholder. - A sole shareholder claiming limited liability has
the burden of affirmatively showing that the corporation was adequately financed.
Where the single stockholder cannot prove that the property of the One Person
Corporation is independent of the stockholder's personal property, the stockholder shall be
jointly and severally liable for the debts and other liabilities of the One Person Corporation.
The principles of piercing the corporate veil applies with equal force to One Person
Corporations as with other corporations.

SEC. 131. Conversion from an Ordinary Corporation to a One Person Corporation. - When
a single stockholder acquires all the stocks of an ordinary stock corporation, the latter may apply
for conversion into a One Person Corporation, subject to the submission of such documents as
the Commission may require. If the application for conversion is approved, the Commission
shall issue a certificate of filing of amended articles of incorporation reflecting the conversion.
The One Person Corporation converted from an ordinary stock corporation shall succeed the
latter and be legally responsible for all the latter's outstanding liabilities as of the date of
conversion.

SEC. 132. Conversion from a One Person Corporation to an Ordinary Stock Corporation.
- A One Person Corporation may be converted into an ordinary stock corporation after due
notice to the Commission of such fact and of the circumstances leading to the conversion, and
after compliance with all other requirements for stock corporations under this Code and
applicable rules. Such notice shall be filed with the Commission within sixty (60) days from the
occurrence of the circumstances leading to the conversion into an ordinary stock corporation. If
all requirements have been complied with, the Commission shall issue a certificate of filing of
amended articles of incorporation reflecting the conversion.
 In case of death of the single stockholder, the nominee or alternate nominee shall
transfer the shares to the duly designated legal heir or estate within seven (7) days from receipt
of either an affidavit of heirship or self-adjudication executed by a sole heir, or any other legal
document declaring the legal heirs of the single stockholder and notify the Commission of the
transfer. Within sixty (60) days from the transfer of the shares, the legal heirs shall notify the
Commission of their decision to either wind up and dissolve the One Person Corporation or
convert it into an ordinary stock corporation.
The ordinary stock corporation converted from a One Person Corporation shall succeed
the latter and be legally responsible for all the latter's outstanding liabilities as of the date of
conversion.

5. As to Legal Status:
(a) De Jure Corporation
(b) De Facto Corporation (

SEC. 19. De facto Corporations. - The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a quo warranto proceeding.

SEC. 20. Corporation by Estoppel. - All persons who assume to act as a corporation knowing
it to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use its lack of corporate personality as a
defense. Anyone who assumes an obligation to an ostensible corporation as such cannot resist
performance thereof on the ground that there was in fact no corporation

6. As to Existence of Shares (Secs. 3 and 5):

SEC. 3. Classes of Corporations. - Corporations formed or organized under this Code may be
stock or nonstock corporations. Stock corporations are those which have capital stock divided
into shares and are authorized to distribute to the holders of such shares, dividends, or
allotments of the surplus profits on the basis of the shares held. All other corporations are
nonstock corporations.

SEC. 5. Corporators and Incorporators, Stockholders and Members. - Corporators are

those who compose a corporation, whether as stockholders or shareholders in a stock
corporation or as members in a nonstock corporation. Incorporators are those stockholders or
members mentioned in the articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.

Corporators in a non-stock corporation are called stockholders or

shareholders. Corporators in a non-stock corporation are called members.
 (a) Stock Corporation
(b)Non-Stock Corporation

VI. CORPORATE CONTRACT LAW

INTRODUCTION: Corporate Contract Law à contracts shaped by

corporate law.
- Form v. substance à substance prevails
- In the levels of the legal relationship, corporate contract law is used to
resolve issues between the different levels – between the juridical entity
level, the contract relationship level and the business entity level.

Q: Why is there a need to distinguish corporate contract law from

contract law? A: There is a need to distinguish between the two
because there are certain instances where an application of corporate
contract law principles are in direct conflict with contract law principles.
An example would be in the situation where a corporation is being
incorporated, the corporation code in certain instances recognize the
binding effect of contracts entered into in the pre-incorporation stage.
But if contract law was strictly applied such a contract would be void
since it lacks one vital element which is consent of the contracting
parties. How does a corporation that does not exist yet give consent?
This is where corporate contract law find its relevance. The conflict
between the juridical entity level is reconciled with the contractual
relationship level. (DOCTRINE: to validate the contract entered into by
the supposed corporation)

PROMOTER’S CONTRACT à C. BY ESTOPPEL à DE FACTO or DE

JURE à DISSOLUTION
Q: In order to reach the level of corporation by estoppel, what is the
essential ingredient of such doctrine?
A: When there is a representation that a corporation exists when in fact
there is none and at least one party thought that there was a
corporation.
Q: Distinguish promoter’s contract principles from the corporation by
estoppel doctrine?
A: In both the corporation does not exist. But in promoter’s contracts there
is no misrepresentation that the corporation does not yet exist. When the
contracts are entered into by persons who in behalf of the corporation,
acknowledging that the corporation does not yet exist and is still in the
process of incorporation, you do not apply the doctrine of corporation by
estoppel. It is still what one may call as the promoter’s contract. (The
moment there is no corporation and contracts are entered into under the
representation that the corporation does exist then that is the only time
you apply the doctrine of corporation by estoppel.)

1. Pre-Incorporation Contracts
(a) Who Are Promoters?

“Promoter” is a person who, acting alone or with others, takes initiative in

founding and organizing the business or enterprise of the issuer and
receives consideration therefor. (Sec. 3.10, Securities Regulation Code
[R.A. 8799])

CLV: The definition of promoter is important to determine the liability for

promoter’s contract. Before you can make a promoter liable, you must be
able to determine who is the promoter. He must be the one who takes
initiative on the founding and organization of the business venture which
eventually ends up as the corporation being organized.

Q: At the promoter’s stage there is no juridical personality until the SEC

issues the certificate of incorporation. Until the certificate is issued, the
stage of the de facto corporation has not yet been reached. Prior to the
de facto corporation stage what then is the status of the contract entered
into by a promoter for and in behalf of the person or agent who had
undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not
given consent to the authority of the person or agent who had
undertaken the transaction.

Q: How can ratification be done?

A: Ratification can be done in two ways: (1) express ratification – a mere
board resolution making the corporation liable by accepting the contract
and (2) implied ratification – by accepting of benefits
(b) Nature of Pre-incorporation Agreements
SEC. 59. Subscription Contract. - Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some
other contract.

SEC. 60. Pre-incorporation Subscription. - A subscription of shares in a corporation still to be

formed shall be irrevocable for a period of at least six (6) months from the date of subscription,
unless all of the other subscribers consent to the revocation, or the corporation fails to
incorporate within the same period or within a longer period stipulated in the contract of
subscription. No pre-incorporation subscription may be revoked after the articles of
incorporation is submitted to the Commission.

Bayla v Silang Traffic Co

.GR. No. L-48195-96,
May 01, 1942Ozaeta, J.:

FACTS: Sofronio Bayla, along with the other petitioners in this case, individually
purchasedshares of stock of Silang Traffic Co. Each of the petitioners had different specified
terms andconditions of payment. Similar among them is that 5% is to be paid upon the execution
of thecontract, and the remainder in installments of 5% quarterly due within the first month of
thequarter. Deferred payments will incur 6% interest per annum until paid, and failure to pay any
ofsaid installments when they are due will revert the shares back to the seller and
the paymentsalready made are to be forfeited in favor of the company, without resort to court
proceedings.Petitioners have already paid sums of money for the shares of stock they wanted
to purchase. However, they failed to pay the installment which fell due on or before July 31,
1937.On August 1, 1937, the board of directors of Silang Traffic Co. released a resolution stating
arescission was to be made for the good of the corporation and in order to terminate the
then pending civil case involving the validity of the sale of the shares in question. Those who
wouldagree can refund the installments already paid. The petitioners agreed to the rescission
anddemanded for the refund of the amounts they had paid. Silang Traffic Co. refused to refund
the petitioners’ money stating that because of their failure to pay the installmen
t due on or before July 31, the clause stating that their shares would revert back to the
corporation and their payments forfeited had taken effect, and that there was nothing to refund.
Moreover, a laterresolution on August 22 already cancelled the resolution of August 1.
The trial court absolved the corporation and forfeited the petitioners’ shares
and payments to the corporation. The Court of Appeals affirmed the decision but allowed
the petitioners 30 days to pay the arrears in their subscription. From this decision, petitioner
andrespondent appealed to the Supreme Court.

ISSUE: Were the petitioners’shares of stock automatically forfeited in favor of Silang

TrafficCorporation upon their failure to pay the installment due on or before July 31?

RULING: No. The Court held that for their stocks to be forfeited to the corporation, a
demandmust first be given by the corporation for the payments due on or before July 31. It did
notautomatically revert to the corporation. Under Article 1100 of the Civil Code, persons obliged
todeliver or do something are not in default until the moment the creditor demands of
them judicially or extra-judicially the fulfillment of their obligation. The current situation does
not fallunder the any of the exceptions. The contract itself did not expressly provide that the
failure ofthe purchaser to pay any installment would give rise to forfeiture and cancellation
without thenecessity of any demand from the seller. In fact, it states that there would be a 6%
interest ondeferred payments which shows that there was no intention of automatic forfeiture
andcancellation of contract. As such, the Court reversed the decision of the Court of Appeals and
ordered Silang Traffic Co. to refund the petitioners’ money.

(c) Theories on Liabilities for Promoter's Contracts

CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO

Facts: Manuel Tabora , as owner of four parcels of land in Cagayan
mortgaged the said properties to secure his loan – 1st mortgage to PNB:
P8000; 2nd mortgage to PNB: P7000; and 3rd mortgage to Bauzon: P2900
which was registered and annotated on the titles of the property. In 1930
Tabora sold said parcels to Cagayan Fishing Development Co., said to be
under process of incorporation, subject to the mortgages and with the
condition that title will not be transferred until the corporation has paid
Tabora’s indebtedness. Cagayan Fishing filed its Articles of Incorporation
with the Bureau of Commerce. The Board of Directors adopted a resolution
authorizing its President Ventura to sell the four parcels of land to Sandiko
with the condition that he would shoulder the mortgage debts. Sandiko
issued promissory notes to that effect. When Sandiko failed to comply with
the obligation, the corporation filed a recovery suit. The lower court held
that the contract is void since it was entered into with a corporation that has
no corporate existence at the time the properties were transferred to it.

Issue: WON Sandiko can be held liable for the mortgage debt?

Held: The SC affirmed the decision of the TC. The fact of the matter is
Sandiko cannot be held liable for the mortgage debt since there was no
valid sale of the property, since at the time when Cagayan supposedly
acquired the property, it still had no juridical personality to acquire property.
There was no transfer of lots from Tabora to Cagayan since Cagayan was
only incorporated five months after the sale.
1.) A corporation should have full and complete organization and existence
as an entity before it can enter into any kind of contract or transact any
business. A corporation until organized has no being, franchises or
faculties nor do those engaged in bringing it into being have no power to
bind it by contract, unless so authorized by the charter.
2.) The contract entered into was not between Tabora and the corporation
instead it was between Tabora, as owner and Tabora, wife, plus others,
as promoters of a corporation, since the corporation was still non-
existent. These promoters could not have acted as agents for a
projected corporation since that which had no legal existence could have
no agent. Although a corporation has no life until organized, it does not
mean that under no circumstances may the act of promoters of a
corporation be ratified by the corporation if and when subsequently
organized. But said doctrine of ratification is not applicable here.
3.) Cagayan could not have and did not acquire the four parcels of land. It
follows that it did not possess any reluctant right to dispose of them by
sale to Sandiko. It was not even a de facto corporation at the time of
transfer so that it does not have the personality to enter into contracts.
4.) Some peculiar circumstances: (a) Tabora formed a corporation by
himself, wife and others but subscribed to P45,000 of P48,700 (capital
stock subscribed); (b) the lands remained in Tabora’s name despite the
sale to the corporation and Sandiko regarded Tabora as the owner; (c)
Ventura signed the contract in behalf of Tabora; (d) P/N issued by
Sandiko was payable to the corporation to avoid being attached by
Tabora’s creditors.

Q: Why are we studying Cagayan?

A: This case espouses the element of contract law which is the lack of the
element of consent; there being one party, the corporation, lacking a
juridical personality; the contract was thus declared void. Cagayan and
Rizal provides us the doctrine that promoter’s contract must be adopted
and ratified by the corporation. If the act of the promoter’s is ratified then
that act is binding on the corporation.

CLV: The court here dismissed the action against Sandiko on the basis
that at the time the properties were sold to the corporation, it had no legal
existence, therefore, it could not purchase anything.
Having bought nothing when it sold the said properties to Sandiko, it
had in fact nothing to sell – therefore there was no valid assumption of
loans and neither were there promissory notes supported by valid
consideration.

Q: What if Sandiko was aware at the time that the contract was entered
that the corporation did not exist? What if the corporation invokes the
doctrine of the corporation by estoppel so that Sandiko could not raise
the defense that at the time the fraud was committed, the corporation
has no juridical personality?
A: Remember that the doctrine of corporation by estoppel is only applicable
if at least one of the parties knew that a corporation existed when in fact
it did not. In this case, the doctrine cannot apply because nobody was in
the belief that it existed at the time when fraud was being committed.
Even Tabora himself knew from the start that at the time of the transfer,
the corporation did not exist.

RIZAL LIGHT & ICE CO. INC. v. MUNICIPALITY OF MORONG

Facts: Rizal Light and Ice Co. Inc. is a domestic corporation granted by the
Public Service Commission, a certificate of public convenience for the
installation, operation and management of an electric light, heat, and power
service in Morong, Rizal. PSC required Rizal light to show cause why it
should not be penalized for violation of the conditions of its CPC and for
failure to comply with directions to raise its service voltage, etc. Rizal failed
to comply so the PSC ordered the cancellation and revocation of Rizal’s
CPC and forfeiture of its franchise. The order of revocation was set aside
when it was known that the company representative failed to appear due to
illness.
The municipality of Rizal formally asked the PSC to revoke Rizal’s
CPC and forfeiture of its franchise. PSC found that Rizal failed to comply
with its directive and violated the conditions of the CPC. PSC ordered the
cancellation and revocation of Rizal’s CPC and the forfeiture of its
franchise.
Later, Morong Electric, having been granted a franchise by the
Municipality of Morong, filed with the PSC an application for CPC. It later
brought up the issue that Morong Electric had no legal personality because
its certificate of incorporation was issued only on October 17, 1962, while
the application was filed on September 10,1962. The motion to dismiss was
denied on the ground that Morong Electric is a de facto corporation. Thus,
the PSC granted Morong Electric a CPC. Thus, this petition.

Held: Decision affirmed.

 Under the law, before any CPC may be granted, three requisites
must be present: (1) citizen of the Philippines or the US or a corporation,
co-partnership, association or joint-stock co. constituted and organized
under the laws of the Philippines, 60% at least of the stock or paid up
capital of which belongs entirely to citizens of the Philippines or the US; (2)
financially capable of undertaking the service; (3) prove that the operation
of the public service proposed will promote public interest.
Petitioner contend that until a corporation has come into being, by the
issuance of a certificate of incorporation by the SEC, it cannot enter into
any contract as a corporation and that its application was null and void for
being done prior to said issuance.
Its contention that Morong Electric, at the moment of application and
grant of franchise did not yet have a legal personality is correct. The legal
existence of Morong Electric began upon issuance of the certificate of
incorporation before said time, the incorporators cannot be considered as
de facto corporation.
But the fact that Morong Electric at the moment of the application and
grant of franchise was granted does not render the franchise invalid
because Morong later obtained its certificate of incorporation and accepted
the franchise in accordance with the terms and conditions thereof. While a
franchise cannot take effect until the grantee corporation is organized, the
franchise, may, nevertheless be applied for before the company is fully
organized.
The incorporation of Morong and its acceptance of the franchise as
shown by its action in prosecuting the application filed with the PSC for the
approval of said franchise, not only perfected a contract between the
Municipality of Morong and Morong Electric.

CLV: The theory used here by the SC to validate the contract is the
continuing offer theory. A grant of the franchise according to the SC, prior
to the time that the corporation actually existed is like a conditional grant
that will be effective upon the corporation’s becoming a legal entity. Prior to
that, it is merely a continuing offer (on the part of the government).

CARAM Jr. v CA
Facts: Baretto and Garcia contracted the services of plaintiff Arellano to
prepare a project study for the organization of Filipinas Orient Airways. For
failure to pay such services, Arellano sued the corporation, Baretto and
Garcia and petitioner Fermin and Rosa Caram as stockholders. They were
held solidarily liable with their co-defendants. Hence, this petition.
Peitioner Canson claims that said decision finds no support because
they were mere investors in the corporation later created. They should not
be held solidarily liable with the corporation, who has a separate juridical
personality.

Held: Petition granted.

The services were acquired by virtue of the request of Baretto and
Garcia so that a report can be represented to financiers. Petitioners are not
really involved in the initial steps that finally led to the incorporation of
Filipinas Orient Airways which were being directed by Baretto. Petitioners
were merely among the financiers whose interest was to be invited and
who were persuaded to invest in the airline.
There was no showing that Filipinas was a fictitious corporation and
did not have a separate juridical personality to justify making the petitioner,
as principal stockholders, responsible for its obligations. As a bona fide
corporation, Filipinas should alone be liable for its corporate acts as duly
authorized by its officers and directors. Thus, petitioner could not have
been personally liable for the compensation claimed by Arellano.

CLV: The case tried to distinguish participation of a promoter from that of a

promotee, in a venture that actually becomes a corporation late on. Not
every person, who participates in a venture that will later become a
corporation is a promoter.

Q: How do you distinguish a participation of a promoter from that of a

promotee who acts together to form a corporation?
A: The promotees are merely passive investors. A plan is given to them
and if they like it, they invest. Promoters are the active participants. They
found and they organize the corporation.
According to Caram only the promoters should be liable. The SC
held that a mere promotee (those who merely subscribe to the shares of
stock) should not be held liable for a promoter’s contract (just as an
ordinary stockholder after a corporation has already been incorporated
cannot be held liable for more that beyond his investment).

CLV: Remember that once a corporation is formed, it usually follows that

all promoter’s contracts get ratified because the corporation actually arises
out of these contracts. The corporation usually has no choice. It rarely
rejects the contracts for such would be commercial suicide. Once the
corporation is formed, the promoter’s contract of the corporation (if the
latter accepts) and not the promoter’s. This is why the promoter, once the
corporation accepts, escapes liability. Remember that a promoter in a
promoter’s contract signs not in his own name but always for and in behalf
of the corporation.

Q: What are the three theories in pre-incorporation contracts?

Theory #1 – Therefore, since a promoter’s contract is really the
promoter’s own, the only reason why the corporation, once it is
organized becomes liable is when the corporation adopts it as its
own. The promoter’s real contract theory is one of the three theories
by which to validate a contract prior to incorporation.
Theory #2 – The 2nd theory as adopted by Jurisprudence is what is
termed as a continuing offer. The continuing offer that exists as to the
time of the issuance of the certificate of incorporation. And if it is
accepted, then the offer means the acceptance, and there arises a
contract.
Theory #3 – Once the promoter enters into a contract for and in behalf of
a non-existent principal, the promoter becomes personally liable like
an agent who acts without authority from the principal. The contract
entered into then is valid unless the agent acted without authority. But
it is possible for the contract to be adopted by the principal by
accepting it.
- In all three instances, there is deemed to be a valid contract of a valid
offer. That is the basis of the promoter’s contract – so that the people
will be willing to risk without much fear, investing their money into a
venture prior to the incorporation of a company or a corporation.

Q: Promoter v. Agent
A: The promoters are not the corporation itself, and although they may be
regarded, for certain purposes as sustaining to the corporation a
relationship similar to that of an agent, strictly speaking they cannot be
regarded as such, there being at that time no existing principal.

Q: Promoter v. Trustee
A: A promoter is also sometimes likened to a trustee. But a trustee is
supposed to be entirely disinterested, while persons engaged in
promotion expect to receive and seek to obtain a liberal award or profit
for their initiative.
3. De Facto Corporation (Sec. 20)
SEC. 19. De facto Corporations. - The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a quo warranto proceeding.

- Every corporation is deemed de jure until proven otherwise.

- De Jure Corporation – formed in accordance with law; perfectly
incorporated; consequences: separate juridical personality and perfect
liability.
- De Facto Corporation – formed also in accordance with law but falls
short of the requirements provided by law. Such is awarded a separate
juridical personality, it may thus enter into contracts, it may sue and be
sued (note: third parties may sue the corporation, incorporators may sue
but the corporation cannot sue). Note also that such has imperfect
liability à only the actors will be held liable. In proceeding against such,
compliance with due process must be had.
- The doctrine of de facto corporation applies as to the first level
relationship (as between the State and corporations) and also to the
third level of relationship (as between third persons and corporations). If
it primarily concerns the first level, why does it draw its vitality from the
third level? Because without such, transactions shall have no effect but
with such, despite the defects, the contracts are valid and enforceable.
But because of its primary relation to the first level, third persons cannot
question the legal personality of such de facto corporation.

Only the State through a quo warranto proceeding may do such.

- Not all corporations which lack elements are de facto corporations.
- Elements for Existence of De Facto Corporation:
1) Valid law under which it is incorporated: The Corporation Code
2) Attempt in good faith to incorporate – colorable compliance: The
corporation must have filed its Articles of Incorporation and the SEC
duly issued a Certificate of Incorporation. The minimum requirement
for this requisite is the issuance of a certificate such that even if you
honestly believed that you incorporated (and all the other requisites
are present), it is still not a de facto corporation.
- The above is need to prove reliance in good faith.
- If any of the above element is absent can the principle be
invoked by third persons? No, but they may have a remedy
under the principle of corporation by estoppel. Can such be
 used in all instances? No, when both parties knew that no
corporation existed, such may not be invoked.
- Issuance of certificate of incorporation – minimum requirement
under this number.
3) Assumption of corporate powers: Minimum requirement: election of
the Board of Directors.

Q: Why must there be an election of the BoD?

A: The basic principle is a de facto corporation is a mutual going about of
the transaction in good faith. Since the corporation has a juridical
personality, the only way by which it can be said that there was good
faith in entering a transaction is that there must be a BoD by which a
corporation can act. If there is no BoD there is no good faith on the part
of the corporation because it knows that it can only act through the BoD
not on the part of the parties dealing with the corporation because it
knows that there must be BoD for the corporation to bind itself. This is
also important because this is by which the corporation manifests itself.
(Remember: notion of a ghost – A ghost manifest itself through signs, in
the same manner, a corporation manifests its existence through the
existence of the BoD).

(a) Elements:

ARNOLD HALL v. PICCIO

Facts: Petitioner Arnold Hall and Bradley Hall and respondent Fred Brown,
Emma Brown, Hipolita Chapman and Ceferino Abella signed and
acknowledged the Articles of Incorporation of the Far Eastern Lumber and
Commercial Co., Inc. a general lumber business. 23,428 shares of stock
were subscribed and fully paid for and certain properties were transferred
to the corporation.
The Articles of Incorporation were filed with the SEC for the issuance
of the corresponding certificates of incorporation. The corporation
proceeded to do business.
Pending the issuance of the certificates by SEC, the respondents
Brown et. al. filed before the CFI of Leyte a civil case entitled “Fred Brown
v. Arnold Hall” alleging among others, that the Far Eastern Lumber and
Commercial Co. was an unregistered partnership; that they wish to have it
dissolved because of a bitter dissension among the members,
mismanagement and fraud by the managers and heavy financial losses.
Hall, et. al. filed a motion to dismiss alleging the lack of jurisdiction by the
court. Judge Piccio ordered the dissolution of the company.

Held: The SEC had not issued the corresponding certificate of

incorporation. All of them know or ought to know that the personality of a
corporation begins to exist only from the moment such certificate is issued,
not before. Here, the complaining associate have not represented to the
others that they were incorporated any more than the defendant had made
similar representations. Since nobody was led to believe anything to his
prejudice and damage, the principle of estoppel does not apply.
The section on de facto corporations does not apply in this case: (1) First,
Far Eastern Lumber, even its stockholders, may not probably claim in
“good faith” to be a corporation not having obtained the certificate of
incorporation. Thus the immunity of collateral attack granted to corporations
claiming in good faith to be a corporation does not apply here. (2) Second,
this suit is not one in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation for the purpose of
obtaining its dissolution. Even the existence of a de jure corporation may
be terminated in a private suit for its dissolution between stockholders,
without intervention of the State.

CLV: The de facto doctrine was formulated to safeguard the security of

commercial transactions whenever they involve the corporation. Parties
dealing with said corporation are secured by the fact that the transactions
entered into with said corporations may be sued upon and they can
recover. That is why aside from the other two requisites there must be a set
of officers (i.e. assumption of corporate powers) or directors because of the
principle that a corporation can only act through its officers.
- Effect as to both parties: (1) cannot deny its existence (2) liable as
general partners.
- Not applicable to intra-corporate disputes, why? (1) it is a third level
doctrine (2) public is not expected to know, while the above are
expected to know.
- If the other party knows of the non-existence of the corporation à there is
no estoppel.

3. Corporation by Estoppel
SEC. 20. Corporation by Estoppel. - All persons who assume to act as a corporation knowing
it to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use its lack of corporate personality as a
defense. Anyone who assumes an obligation to an ostensible corporation as such cannot resist
performance thereof on the ground that there was in fact no corporation.

SALVATIERRA v. GARLITOS
Facts: Salvatierra owned a parcel of land in Leyte. She entered into a
contract of lease with Philippine Fibers Producers Co., Inc. allegedly a
corporation duly organized and existing under the Philippine laws, as
represented by its President Refuerzo. The land will be leased for ten years
and the lessor would be entitled to 30% of the net income accruing from the
harvest of any crop.
The alleged corporation did not comply with said obligation.
Salvatierra filed with the CFI a complaint against PFPC for accounting,
rescission and damages. The corporation defaulted and the court rendered
judgment in favor of Salvatierra. The court issued a writ of execution and
the three parcels of land under the name of Refuerzo were attached
because no property of PFPC was found available.
Refuerzo filed a motion claiming that the decision was null and void
since there was no allegation of his personal liability. The court granted the
motion and released his land from attachment. Hence, this petition by
Salvatierra.

Held: The failure of Salvatierra to specify Refuerzo’s personal liability was

due to the fact that Salvatierra was under the impression that PFPC,
represented by Refuerzo was a duly registered corporation, but
subsequently, inquiry with the SEC yielded otherwise. While as a general
rule, a person who has contracted or dealt with an association in such a
way as to recognize its existence as a corporate body is estopped from
denying the same in an action arising out of such transaction or dealing.
Yet, this doctrine is inapplicable where fraud takes a part in said
transaction. Here Refuerzo gave no confirmation of denial as to PFPC’s
juridical personality and Salvatierra was made to believe that the
corporation was duly organized.
The grant of separate juridical personality to corporations refer merely
to registered corporations and cannot be made applicable to the liability of
members of an unincorporated association. Since an organization which,
before the law, is non-existent and has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a
corporation, it cannot create agents or confer authority on another to ct in
its behalf, thus, those who act or purport to act as its representatives or
agents do so without authority and at their own risk.
A person acting or purporting to act in behalf of a corporation which
has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts
performed as such agent.
Here, Refuerzo as president of the unregistered corporation was the
spirit behind the consummation of the lease contract, thus, his liability
cannot be limited or restricted to that imposed upon corporate SH’s. In
acting on behalf of a corporation, which he knew to be unregistered, he
assumes the risk of reaping the consequential damages or resultant rights,
if any arising from the transaction.

ALBERT v. UNIVERSITY PUBLISHING CO.

Facts: The University Publishing Co. Inc. through its President Jose
Aruego entered into a contract with Mariano Albert whereby the corporation
agreed to pay a certain sum in installments for the exclusive right to publish
his revised commentaries in the RPC and for his share in the previous sale
of the book’s first edit edition. The corporation failed to pay the second
installment thereby making the whole amount due and demandable (i.e.
there was an acceleration clause). Albert then sued the corporation.
The lower court rendered judgment in favor of Albert and a writ of
execution was issued against the corporation. Albert however, petitioned
for a writ of execution against Aruego, as the real defendant, stating that
there is no such entity as University Publishing Co. Inc. Albert annexed to
his petition a certification from the SEC saying that their records contain no
such registered corporation.
The corporation countered by saying that Aruego is not a party to this
case and that, therefore, Albert’s petition should be denied. The corporation
countered by saying that Aruego is not a party to this case, and that
therefore, Albert’s petition should be denied. The corporation, actually did
not want Aruego to be declared a party to the present case is because
there would be no need to institute a separate action against Aruego to be
declared a party to the present case is because there would then be a need
to institute a separate action against Aruego; and if this is done, Aruego
can set up the defense of prescription under the Statute of Limitations.

Held:
1.) The corporation cannot invoke the doctrine of estoppel. The fact of non-
registration of the corporation has not been disputed because the
 corporation only raised the point that it and not Aruego is the party
defendant thereby assuming that the corporation is an existing
corporation with an independent juridical personality. HOWEVER,
precisely on account of non- registration, it cannot be considered a
corporation not even a corporation de facto. It has therefore no
personality separate from Aruego; it cannot be sued independently. The
estoppel doctrine has not been invoked and even if it had been, it is not
applicable to the case at bar:
(a) Aruego had represented a non-existing entity and induced not only
Albert but also the court to believe in such representation
(b) He signed the contract as president of the corporation stating that
this was a corporation duly organized and existing under the laws of
the Philippines. One who induced another to act upon his willful
misrepresentation that a corporation was duly organized and existing
under the law, cannot thereafter set up against his victim the principle
of corporation by estoppel.
2.) Aruego is the real defendant as he had control over the proceedings.
Had Aruego been named as party defendant instead of or together with
the corporation, there would be no room for debate as to his personal
liability. Since he was not so named, matters of due process have
arisen. Parties to a suit are persons who have a right to control the
proceedings, to make defense, to adduce and cross-examine witnesses
and to appeal from a decision. In the case at bar, Aruego, was and in
reality, the one who answered and litigated through his own firm as
counsel. He was in fact, if not on name, the defendant. Clearly then
Aruego had his day in court as the real defendant and due process of
law has been substantially observed.
3.) Aruego is the real party in interest because he reaped the benefits from
the contract.
(a) Nature of Doctrine
- Founded on principles of equity and designed to prevent injustice and
unfairness, the doctrine applies when persons assume to form a
corporation and exercise corporate functions and enter into business
relations with third persons. Where no third person is involved in the
conflict, there is no corporation by estoppel. A failed consolidation
therefore cannot result in a consolidated corporation by estoppel.
- A party cannot challenge the personality of the plaintiff as a duly
organized corporation after having acknowledged same when
entering into the contract with the plaintiff as such corporation for the
transportation of its merchandise.
 - A person who accepts employment in an unincorporated charitable
association is estopped from alleging its lack of juridical personality.
- One who deals with an organization which is not duly incorporated is
not estopped to deny its corporate existence when his purpose is not
to avoid liability.

LOZANO vs. DE LOS SANTOS AND ANDA

FACTS: On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil

Case No. 1214 for damages against respondent Antonio Anda before the
Municipal Circuit Trial Court (MCTC), Mabalacat and Magalang,
Pampanga. Petitioner alleged that he was the president of the Kapatirang
Mabalacat-Angeles Jeepney Drivers’ Association, Inc. (KAMAJDA) while
respondent Anda was the president of the Samahang Angeles-Mabalacat
Jeepney Operators’ and Drivers’ Association, Inc. (SAMAJODA); in August
1995, upon the request of the Sangguniang Bayan of Mabalacat,
Pampanga, petitioner and private respondent agreed to consolidate their
respective associations and form the Unified Mabalacat-Angeles Jeepney
Operators’ and Drivers Association, Inc. (UMAJODA); petitioner and private
respondent also agreed to elect one set of officers who shall be given the
sole authority to collect the daily dues from the members of the
consolidated association; elections were held on October 29, 1995 and
both petitioner and private respondent ran for president; petitioner won;
private respondent protested and, alleging fraud, refused to recognize the
results of the election; private respondent also refused to abide by their
agreement and continued collecting the dues from the members of his
association despite several demands to desist.

ISSUE: WON the issue is an intra-corporate dispute, properly falling under

the jurisdiction of the SEC(now RTC)

HELD: NOT intra-corporate. Petitioner and private respondent have no

intracorporate relation much less do they have an intracorporate dispute.
The SEC therefore has no jurisdiction over the complaint.
The first element requires that the controversy must arise out of
intracorporate or partnership relations between and among stockholders,
members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or
association and the State in so far as it concerns their individual franchises.
The second element requires that the dispute among the parties be
intrinsically connected with the regulation of the corporation, partnership or
association or deal with the internal affairs of the corporation, partnership or
association.

There is no intracorporate nor partnership relation between petitioner and

private respondent. The controversy between them arose out of their plan
to consolidate their respective jeepney drivers’ and operators’ associations
into a single common association. This unified association was, however,
still a proposal. It had not been approved by the SEC, neither had its
officers and members submitted their articles of consolidation is
accordance with Sections 78 and 79 of the Corporation Code.
Consolidation becomes effective not upon mere agreement of the members
but only upon issuance of the certificate of consolidation by the SEC.

NOTE:

The doctrine of corporation by estoppel advanced by private respondent

cannot override jurisdictional requirements. Jurisdiction is fixed by law and
is not subject to the agreement of the parties. It cannot be acquired through
or waived, enlarged or diminished by, any act or omission of the parties,
neither can it be conferred by the acquiescence of the court.

Corporation by estoppel is founded on principles of equity and is designed

to prevent injustice and unfairness. It applies when persons assume to form
a corporation and exercise corporate functions and enter into business
relations with third person. Where there is no third person involved and the
conflict arises only among those assuming the form of a corporation, who
therefore know that it has not been registered, there is no corporation by
estoppel.

(b) Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”
- When the incorporators represent themselves to be officers of the
corporation which was never duly registered with the SEC, and
engage in the name of the purported corporation in illegal
recruitment, they are estopped from claiming that they are not liable
as corporate officers under Sec. 25 of Corporation Code which
provides that all persons who assume to act as a corporation knowing
it to be without authority to do so shall be liable as general partners
for all the debts, liabilities and damages incurred or arising as a result
thereof.

4. TRUST FUND DOCTRINE

- The capital stock of the corporation especially its unpaid subscriptions is
a trust fund for the benefit of the general creditors of the corporation.
a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236,
Civil Code)
- Art. 2236 The debtor is liable with all his property, present and
future, for the fulfillment of his obligations, subject to the
exceptions provided by law.
b) Nature of Doctrine:

BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION v. CA AND

NILCAR FAJILANGRIÑO-AQUINO,

J.:
G.R. No. 77860 November 22, 1988
Nature: Petition for Certiorari and mandamus with preliminary attachment
Facts:

Respondent Nilcar Y. Fajilan offered in writing to resign as President and

Member of the Board of Directorsof petitioner, Boman Environmental
Development Corporation (BEDECO),

Respondent Fajilan also stated that he wants sell to the company all his
shares, rights, and interests thereinfor P 300,000 plus the transfer to him of
the company's Isuzu pick-up truck which he had been using.

At a meeting of the Board of Directors of BEDECO on June 14, 1984,

Fajilan's resignation as president wasaccepted and new officers were
elected.

Fajilan's offer to sell his shares back to the corporation was approved, the
Board promising to pay for themon a staggered basis from July 15, 1984 to
December 15, 1984 (Annex B).
<äre||anº•1à

w>The resolution of the Board was communicated to Fajilan through a

letter-agreement dated June 25,1984 to which he affixed his conformity
(Annex C).

As payment, a promissory note dated July 3, 1984, was signed by

BEDECO'S new president, AlfredoPangilinan, in the presence of two
directors, committing BEDECO to pay him P300,000 over a six-
monthperiod from July 15, 1984 to December 15, 1984.

However, BEDECO paid only P50,000 on July 15, 1984 and another
P50,000 on August 31, 1984 anddefaulted in paying the balance of
P200,000.

On April 30, 1985, Fajilan filed a complaint in the Regional Trial Court of
Makati for collection of that balancefrom BEDECO.

TC: the trial court, through Judge Ansberto Paredes, dismissed the
complaint for lack of jurisdiction.
It ruled that the controversy arose out of intracorporate relations, hence, the
Securities andExchange Commission has original and exclusive jurisdiction
to hear and decide it.

His motion for reconsideration of that order having been denied, Fajilan
filed a "Petition for Certiorari, andmandamus with Preliminary Attachment"
in the Intermediate Appellate Court.

IAC: the Court of Appeals set aside Judge Paredes' order of dismissal and
directed him to take cognizanceof the case. BEDECO's motion for
reconsideration was denied in a resolution dated March 24, 1987 of
theCourt of Appeals.

THE CA characterized the case as a suit for collection of a sum of money

as Fajilan "was merelysuing on the balance of the promissory note" which
BEDECO failed and refused to pay in full.More particularly, the Court of
Appeals held:

Issue: (1) WoN this case involves an intracorporate issue?

(2) WoN this case is cognizable by the SEC?

Held: (1) Yes. because the parties are a stockholder and the
corporation.Section 5(b) of P.D. No. 902-A,

b)
Controversies arising out of intra-corporate or partnership relations,
between and amongstockholders members, or associates;
between any or all of them and the corporation, partnershipor association
of which they are stockholders, members or associates, respectively; ...
(Emphasissupplied.)

1. the perfection of the agreement to sell Fajilan's participation and

interests in BEDECO and the execution of thepromissory note for payment
of the price of the sale did not remove the dispute from the coverage of
Section 5(b) of P.D. No. 902,2. all the signatories of both documents were
stockholders of the corporation at the time of signing the same. It wasan
intra-corporate transaction, hence, this suit is an intra-corporate
controversy3. even if he resigned as a director and president. He is still a
stockholder.> Fajilan's offer to resign as president and director "effective as
soon as my shares and interests thereto(sic) are sold and fully paid"
implied that he would remain a stockholder until his shares and interests
were fully paidfor, for one cannot be a director or president of a corporation
unless he is also a stockholder thereof.> The fact that he was replaced as
president of the corporation did not necessarily mean that he ceased to be
astockholder considering how the corporation failed to complete payment
of the consideration for the purchase of hisshares of stock and interests in
the goodwill of the business. There has been no actual transfer of his
shares to thecorporation. In the books of the corporation he is still a
stockholder.

(2) Yes. Fajilan's suit against the corporation to enforce the latter's
promissory note or compel the corporation to payfor his shareholdings is
cognizable by the SEC alone which shall determine whether such payment
will not constitutea distribution of corporate assets to a stockholder in
preference over creditors of the corporation.> The SEC has exclusive
supervision, control and regulatory jurisdiction to investigate whether the
corporation hasunrestricted retained earnings to cover the payment for the
shares, and whether the purchase is for a legitimatecorporate purpose as
provided in Sections 41 and 122 of the Corporation Code,> The
requirement of unrestricted retained earnings to cover the shares is based
on the trust fund doctrine whichmeans that the capital stock, property and
other assets of a corporation are regarded as equity in trust for thepayment
of corporate creditors.> The reason is that creditors of a corporation are
preferred over the stockholders in the distribution of corporateassets. There
can be no distribution of assets among the stockholders without first paying
corporate creditors. Hence,any disposition of corporate funds to the
prejudice of creditors is null and void.> "Creditors of a corporation have the
right to assume that so long as there are outstanding debts and liabilities,
theboard of directors will not use the assets of the corporation to purchase
its own stockWHEREFORE, the petition for certiorari is granted. The
decision of the Court of Appeals is reversed and set aside.The order of the
trial court dismissing the complaint for lack of jurisdiction is hereby
reinstated. No costs.

NTC v. CA , 311 SCRA 508 (199)

FACTS: NTC served on the PLDT the following assessment notices anddemands for payment:

1. The amount of P7,495,161.00 as supervisionand regulation fee under sec. 40(e) of the Public Service
Act (PSA) of1988, computed at P0.50 per P100.00 of the PLDT’s outstanding capitalstock as at Dec. 31,
1987 which then consisted of Serial Preferred Stockamounting to P1,277,934,390.00 and Common Stock
ofP221,097,785.00 or a total of P1,499,032,175.00

2. The amount ofP9,000,000.00 as permit fee under Sec. 40(f) of the PSA for the approvalof the PLDT
increase of its authorized capital stock from P2.7B to P4.5B;and

3. The amounts of P12,261,600.00 and P33,472,030.00 as permitfees under sec. 40(g) of the PSA in
connection with the Commissionsdecisions, approving the PLDT equity participation in the Fiber
OpticInterpacific Cable systems and X-5 Service Improvement and ExpansionProgram.

PLDT challenged the aforesaid assessments that these were being made to 1. Raise revenues and not as
mere reimbursements 2. Theassessments should only have been on the basis of the par values
PLDT’soutstanding capital stock and 3. NTC has no authority to compel PLDT ofthe assessed fees under
Sec. 40(f) for the increase since NTC did notrender any supervisory or regulatory activity and incurred no
expensesin relation thereto. NTC denied the protest of PLDT for lack of merit, MRdenied. PLDT appealed
with the CA, CA modified the NTC decisionchanging the basis of the computation of supervision and
regulation feesunder sec. 40(f) of the PSA.

Issue: w/n the capital stocks should be the basis of the payment of the fees.

Simply put, the submission of NTC is that the fee under Section 40 (e) should be based on the market
value of PLDTs outstanding capital stock inclusive of stock dividends and premium, and not on the par
value of PLDTs capital stock excluding stock dividends and premium, as contended by PLDT.

Succinct and clear is the ruling of this Court in the case of Philippine Long Distance Telephone Company
vs. Public Service Commission, 66 SCRA 341, that the basis for computation of the fee to be charged by
NTC on PLDT, is the capital stock subscribed or paid and not, alternatively, the property and equipment.

The law in point is clear and categorical. There is no room for construction. It simply calls for application.
To repeat, the fee in question is based on the capital stock subscribed or paid, nothing less nothing
more.

The term capital and other terms used to describe the capital structure of a corporation are of universal
acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the
value of the property or assets of a corporation. The capital subscribed is the total amount of the capital
that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily
be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation
receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. In the
case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to
its capital account. It is the same amount that can loosely be termed as the trust fund of the
corporation. The Trust Fund doctrine considers this subscribed capital as a trust fund for the payment of
the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may be returned or released to the stockholder (except in
the redemption of redeemable shares) without violating this principle. Thus, dividends must never
impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the consideration therefor.

In the same way that the Court in PLDT vs. PSC has rejected the value of the property and equipment as
being the proper basis for the fee imposed by Section 40(e) of the Public Service Act, as amended by
Republic Act No. 3792, so also must the Court disallow the idea of computing the fee on the par value of
[PLDTs] capital stock subscribed or paid excluding stock dividends, premiums, or capital in excess of par.
Neither, however, is the assessment made by the National Telecommunications Commission on the
basis of the market value of the subscribed or paid-in capital stock acceptable since it is itself a deviation
from the explicit language of the law.

c) To Purchase Own Shares

SEC. 8. Redeemable Shares. - Redeemable shares may be issued by the corporation when
expressly provided in the articles of incorporation. They are shares which may be purchased by
the corporation from the holders of such shares upon the expiration of a fixed period, regardless
of the existence of unrestricted retained earnings in the books of the corporation, and upon such
other terms and conditions stated in the articles of incorporation and the certificate of stock
representing the shares, subject to rules and regulations issued by the Commission.

SEC. 40. Power to Acquire Own Shares. - Provided that the corporation has unrestricted
retained earnings in its books to cover the shares to be purchased or acquired, a stock
corporation shall have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including the following cases:
a. To eliminate fractional shares arising out of stock dividends;
b. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and
c. To pay dissenting or withdrawing stockholders entitled to payment for their shares under
the provisions of this Code.
d.
SEC. 42. Power to Declare Dividends. -The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash,
property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholders until their unpaid subscription is fully paid: Provided, further,
That no stock dividend shall be issued without the approval of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one hundred
percent (100%) of their paidin capital stock, except:
 a. when justified by definite corporate expansion projects or programs approved by the
board of directors; or
b. when the corporation is prohibited under any loan agreement with financial institutions or
creditors, whether local or foreign, from declaring dividends without their consent, and
such consent has not yet been secured; or
c. when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.

G.R. No. L-19761 January 29, 1923

PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa Naval

Filipina," plaintiff-appellee,
vs.
MARCIANO RIVERA, defendant-appellant.

Araneta and Zaragoza for appellant.

Ross and Lawrence for appellee.

STREET, J.:

This action was instituted on November 21, 1921, in the Court of First Instance of Manila, by the
Philippine Trust Company, as assignee in insolvency of La Cooperativa Naval Filipina, against
Marciano Rivera, for the purpose of recovering a balance of P22,500, alleged to be due upon
defendant's subscription to the capital stock of said insolvent corporation. The trial judge having
given judgment in favor of the plaintiff for the amount sued for, the defendant appealed.

It appears in evidence that in 1918 the Cooperativa Naval Filipina was duly incorporated under the
laws of the Philippine Islands, with a capital of P100,000, divided into one thousand shares of a par
value of P100 each. Among the incorporators of this company was numbered the defendant Mariano
Rivera, who subscribed for 450 shares representing a value of P45,000, the remainder of the stock
being taken by other persons. The articles of incorporation were duly registered in the Bureau of
Commerce and Industry on October 30 of the same year.

In the course of time the company became insolvent and went into the hands of the Philippine Trust
Company, as assignee in bankruptcy; and by it this action was instituted to recover one-half of the
stock subscription of the defendant, which admittedly has never been paid.

The reason given for the failure of the defendant to pay the entire subscription is, that not long after
the Cooperativa Naval Filipina had been incorporated, a meeting of its stockholders occurred, at
which a resolution was adopted to the effect that the capital should be reduced by 50 per centum
and the subscribers released from the obligation to pay any unpaid balance of their subscription in
excess of 50 per centum of the same. As a result of this resolution it seems to have been supposed
that the subscription of the various shareholders had been cancelled to the extent stated; and fully
paid certificate were issued to each shareholders for one-half of his subscription. It does not appear
that the formalities prescribed in section 17 of the Corporation Law (Act No. 1459), as amended,
relative to the reduction of capital stock in corporations were observed, and in particular it does not
appear that any certificate was at any time filed in the Bureau of Commerce and Industry, showing
such reduction.
His Honor, the trial judge, therefore held that the resolution relied upon the defendant was without
effect and that the defendant was still liable for the unpaid balance of his subscription. In this we
think his Honor was clearly right.

It is established doctrine that subscription to the capital of a corporation constitute a find to which
creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the payment of
its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original
subscriber to its capital stock from the obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a reduction of the capital stock can take
place only in the manner an under the conditions prescribed by the statute or the charter or the
articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary (14
C. J., 498, 620).

In the case before us the resolution releasing the shareholders from their obligation to pay 50 per
centum of their respective subscriptions was an attempted withdrawal of so much capital from the
fund upon which the company's creditors were entitled ultimately to rely and, having been effected
without compliance with the statutory requirements, was wholly ineffectual.

The judgment will be affirmed with cost, and it is so ordered.

G.R. No. L-30460 March 12, 1929

Steinberg v. Velasco
Nature: Petition for review of lower court decision to dismiss P’s complaint since it held that the Board of
Driectors could legally declare dividend of P3000
Facts:
Steinberg (P) is the receiver of Sibuguey Trading Corp. P alleges that [Velasco, as president, Del Castillo, as vice-
president, Navallo, as secretary-treasurer, and Manuel, as director of the trading Company][R], at a meeting of
the board of directors held on July 24, 1922, approved and authorized various lawful purchases already made of a
large portion of the capital stock of the company from its various stockholders, thereby diverting its funds to the
injury of the creditors of the corp. At the time of such purchase, the corporation had debts amounting to
P13,807.50, most of which were unpaid at the time petition for the dissolution of the corporation was financial
condition, in contemplation of an insolvency and dissolution. P also alleges that R approved a resolution for the
payment of P3,000 as dividends to its stockholders, which was done in bad faith, and to the injury and fraud of its
creditors since it had accounts less in amount than the accounts receivable. R argues that the distribution of
dividends was authorized by the board of directors and they constitute surplus profit of the corp. The lower court
found out that R authorized the purchase of, purchased and paid for, 330 shares of the capital stock of the
corporation at the agreed price of P3,300, and that at the time the purchase was made, the corporation was
indebted in the sum of P13,807.50, and that according to its books, it had accounts receivable in the sum of
P19,126.02.
Issue:
Whether R can declare dividends.
Ruling:
No. The action of the board in purchasing the stock from the corporation and in declaring the dividends on the
stock was all done at the same meeting of the board of directors. The directors were permitted to resign so that
they could sell their stock to the corporation. The authorized capital stock was P20,000 divided into 2,000 shares
of the par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the
purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends,
there would be left P4,000 only. R acted on assumption that it appeared from the books of the corporation that it
had accounts receivable of the face value of P19,126.02, therefore it had a surplus over and above its debts and
liabilities. However, there is no stipulation as to the actual cash value of those accounts, and it does appear from
the stipulation that, P12,512.47 of those accounts had but little value. The corporation did not then have an actual
bona fide surplus from which the dividends could be paid, and that the payment of them in full at the time would
affect the financial condition of the corporation. Because of this, the directors did not act in good faith or that
they were grossly ignorant of their duties. Creditors of a corporation have the right to assume that so long as
there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to
purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent.