SECOND DIVISION be in any wise interested in any other corporation engaged in provisions of this Act, transferring all corporate
d in provisions of this Act, transferring all corporate interests to the new
[G.R. No. L-7231. March 28, 1956.]
BENGUET CONSOLIDATED MINING CO., Petitioner, vs.
MARIANO PINEDA, in his capacity as Securities and
Exchange Commissioner, Respondent. CONSOLIDATED
MINES, INC., Intervenor.
DECISION
REYES, J. B. L., J.:
Appeal under Rule 43 from a decision of the Securities and
Exchange Commissioner, denying the right of a sociedad anonima
to extend its corporate existence by amendment of its original
articles of association, or alternatively, to reform and continue
existing under the Corporation Law (Act 1459) beyond the
original period.
The Petitioner, the Benguet Consolidated Mining Co. (hereafter
termed “Benguet” for short), was organized on June 24,1903, as a
sociedad anonima regulated by Articles 151 et seq., of the Spanish
Code of Commerce of 1886, then in force in the Philippines. The
articles of association expressly provided that it was organized for
a term of fifty (50) years. In 1906, the governing Philippine
Commission enacted Act 1459, commonly known as the
Corporation Law, establishing in the islands the American type of
juridical entities known as corporation, to take effect on April 1,
1906. Of its enactment, this Court said in its decision in Harden
vs. Benguet Consolidated Mining Co., 58 Phil., 141, at pp. 145-
146, and 147:chanroblesvirtuallawlibrary
“When the Philippine Islands passed to the sovereignty of the
United States, the attention of the Philippine Commission was
early drawn to the fact there is no entity in Spanish law exactly
corresponding to the motion of the corporation in English and
American law; chan roblesvirtualawlibraryand in the Philippine
Bill, approved July 1, 1906, the Congress of the United States
inserted certain provisions, under the head of Franchises, which
were intended to control the lawmaking power in the Philippine
Islands in the matter of granting of franchises, privileges and
concessions. These provisions are found in sections 74 and 75 of
the Act. The provisions of section 74 have been superseded by
section 28 of the Act of Congress of August 29, 1916, but in
section 75 there is a provision referring to mining corporations,
which still remains the law, as amended. This provision, in its
original form, reads as
follows:chanroblesvirtuallawlibrary cralaw it shall be unlawful for
any member of a corporation engaged in agriculture or mining and
for any corporation organized for any purpose except irrigation to
1
agriculture or in mining.
Under the guidance of this and certain other provisions thus
enacted by Congress, the Philippine Commission entered upon
the enactment of a general law authorizing the creation of
corporations in the Philippine Islands. This rather elaborate piece
of legislation is embodied in what is called our Corporation Law
(Act No. 1459 of the Philippine Commission). The evident
purpose of the commission was to introduce the American
corporation into the Philippine Islands as the standard
commercial entity and to hasten the day when the sociedad
anonima of the Spanish law would be obsolete. That statute is a
sort of codification of American corporate law.”
“As it was the intention of our lawmakers to stimulate the
introduction of the American corporation into the Philippine law
in the place of the sociedad anonima, it was necessary to make
certain adjustment resulting from the continued co-existence, for
a time, of the two forms of commercial entities. Accordingly, in
section 75 of the Corporation Law, a provision is found making
the sociedad anonima subject to the provisions of the
Corporation Law ‘so far as such provisions may be applicable’
and giving to the sociedades anonimas previously created in the
Islands the option to continue business as such or to reform and
organize under the provisions of the Corporation Law. Again, in
section 191 of the Corporation Law, the Code of Commerce is
repealed in so far as it relates to sociedades anonimas. The
purpose of the commission in repealing this part of the Code of
Commerce was to compel commercial entities thereafter
organized to incorporate under the Corporation Law, unless they
should prefer to adopt some form or other of the partnership. To
this provision was added another to the effect that existing
sociedades anonimas, which elected to continue their business as
such, instead of reforming and reorganizing under the
Corporation Law, should continue to be governed by the laws
that were in force prior to the passage of this Act ‘in relation to
their organization and method of transacting business and to the
rights of members thereof as between themselves, but their
relations to the public and public officials shall be governed by
the provisions of this Act.’“
Specifically, the two sections of Act No. 1459 referring to
sociedades anonimas then already existing, provide as
follows:chanroblesvirtuallawlibrary
“SEC. 75. Any corporation or a sociedad anonima formed,
organized, and existing under the laws of the Philippines on the
date of the passage of this Act, shall be subject to the provisions
hereof so far as such provisions may be applicable and shall be
entitled at its option either to continue business as such
corporation or to reform and organize under and by virtue of the
corporation which, if a stock corporation, is authorized to issue its
shares of stock at par to the stockholders or members of the old
corporation according to their interests.”
“SEC. 191. The Code of Commerce, in so far as it relates to
corporation or sociedades anonimas, and all other Acts or parts of
Acts in conflict or inconsistent with this Act, are hereby repealed
with the exception of Act Numbered fifty-two, entitled ‘An Act
providing for examinations of banking institutions in the
Philippines, and for reports by their officers,’ as amended, and Act
Numbered Six hundred sixty-seven, entitled ‘An Act prescribing the
method of applying to governments of municipalities, except the
city of Manila and of provinces for franchises to contract and
operate street railway, electric light and power and telephone lines,
the conditions upon which the same may be granted, certain powers
of the grantee of said franchises, and of grantees of similar
franchises under special Act of the Commission, and for other
purposes.’ Provided, however, That nothing in this Act contained
shall be deemed to repeal the existing law relating to those classes
of associations which are termed sociedades colectivas, and
sociedades de cuentas en participacion, as to which association the
existing law shall be deemed to be still in force; chan
roblesvirtualawlibraryAnd provided, further, That existing
corporations or sociedades anonimas, lawfully organized as such,
which elect to continue their business as such sociedades anonimas
instead of reforming and reorganizing under and by virtue of the
provisions of this Act, shall continue to be governed by the laws that
were in force prior to the passage of this Act in relation to their
organization and method of transacting business and to the rights of
members thereof as between themselves, but their relations to the
public and public officials shall be governed by the provisions of
this Act.”
As the expiration of its original 50 year term of existence
approached, the Board of Directors of Benguet adopted in 1946 a
resolution to extend its life for another 50 years from July 3, 1946
and submitted it for registration to the Respondent Securities and
Exchange Commissioner. Upon advice of the Secretary of Justice
(Op. No. 45, Ser. 1917) that such extension was contrary to law, the
registration was denied. The matter was dropped, allegedly because
the stockholders of Benguet did not approve of the Directors’
action.
Some six years later in 1953, the shareholders of Benguet adopted a
resolution empowering the Director to “effectuate the extension of
the Company’s business life for not less than 20 and not more than
50 years, and this by either (1) an amendment to the Articles of
Association or Charter of this Company or (2) by reforming and
reorganizing the Company as a Philippine Corporation, or (3) by
both or (4) by any other means.” Accordingly, the Board of
Directors on May 27, 1953, adopted a resolution to the following
effect —
“Be It
Resolved, that the Company be reformed, reorganized and
organized under the provisions of section 75 and other provisions
of the Philippine Corporation Law as a Philippine corporation with
a corporate life and corporate powers as set forth in the Articles of
Incorporation attached hereto as Schedule ‘I’ and made a part
hereof by this reference; chan roblesvirtualawlibraryand
Be It
‘FURTHER RESOLVED, that any five or more of the following
shareholders of the Company be and they hereby are authorized as
instructed to act for and in behalf of the share holders of the
Company and of the Company as Incorporators in the reformation,
reorganization and organization of the Company under and in
accordance with the provisions aforesaid of said Philippine
Corporation Law, and in such capacity, they are hereby authorized
and instructed to execute the aforesaid Articles of Incorporation
attached to these Minutes as Schedule ‘I’ hereof, with such
amendments, deletion and additions thereto as any five or more of
those so acting shall deem necessary, proper, advisable or
convenient to effect prompt registration of said Articles under
Philippine Law; chan roblesvirtualawlibraryand five or more of
said Incorporators are hereby further authorized and directed to do
all things necessary, proper, advisable or convenient to effect such
registration.”
In pursuance of such resolution, Benguet submitted in June, 1953,
to the Securities and Exchange Commissioner, for alternative
registration, two documents:chanroblesvirtuallawlibrary (1)
Certification as to the Modification of (the articles of association
of) the Benguet Consolidated Mining Company, extending the
term of its existence to another fifty years from June 15,
1953; chan roblesvirtualawlibraryand (2) articles of incorporation,
covering its reformation or reorganization as a corporation in
accordance with section 75 of the Philippine Corporation Law.
Relying mainly upon the adverse opinion of the Secretary of
Justice (Op. No. 180, s. 1953), the Securities and Exchange
Commissioner denied the registration and
ruled:chanroblesvirtuallawlibrary
(1) That the Benguet, as sociedad anonima, had no right to extend
the original term of corporate existence stated in its Articles of
Association, by subsequent amendment thereof adopted after
enactment of the Corporation Law (Act No. 1459); chan
roblesvirtualawlibraryand
(2) That Benguet, by its conduct, had chosen to continue as
sociedad anonima, under section 75 of Act No. 1459, and could no
2
longer exercise the option to reform into a corporation, specially
since it would indirectly produce the effect of extending its life.
This ruling is the subject of the present appeal.
Petitioner Benguet contends:chanroblesvirtuallawlibrary
(1) That the proviso of section 18 of the Corporation Law to the
effect —
“that the life of said corporation shall not be extended by
amendment beyond the time fixed in the original articles.”
does not apply to sociedades anonimas already in existence at the
passage of the law, like Petitioner herein;
(2) That to apply the said restriction imposed by section 18 of
the Corporation Law to sociedades anonimas already functioning
when the said law was enacted would be in violation of
constitutional inhibitions;
(3) That even assuming that said restriction was applicable to it,
Benguet could still exercise the option of reforming and
reorganizing under section 75 of the Corporation Law, thereby
prolonging its corporate existence, since the law is silent as to the
time when such option may be exercised or availed of.
The first issue arises because the Code of Commerce of 1886
under which Benguet was organized, contains no prohibition (to
extend the period of corporate existence), equivalent to that set
forth in section 18 of the Corporation Law. Neither does it
expressly authorize the extension. But the text of Article 223,
reading:chanroblesvirtuallawlibrary
“ART. 223. After the termination of the period for which
commercial associations are constituted, it shall not be
understood as extended by the implied or presumed will of the
members; chan roblesvirtualawlibraryand if the members desire
to continue in association, they shall draw up new articles,
subject to all the formalities prescribed for their creation as
provided in Article 119.” (Code of Commerce.)
would seem to imply that the period of existence of the sociedad
anonimas (or of any other commercial association for that
matter) may be extended if the partners or members so agree
before the expiration of the original period.
While the Code of Commerce, in so far as sociedades anonimas
are concerned, was repealed by Act No 1459, Benguet claims
that article 223 is still operative in its favor under the last proviso
of section 191 of the Corporation law (ante, p. 4 to the effect that
existing sociedades anonimas would continue to be governed by
the law in force before Act 1459,
“in relation to their organization and method of transacting
business and to the rights of members among themselves, but
their relations to the public and public officials shall be governed by
the provisions of this Act.”
Benguet contends that the period of corporate life relates to its
organization and the rights of its members inter se, and not to its
relations to the public or public officials.
We find this contention untenable.
The term of existence of association (partnership or sociedad
anonima) is coterminous with their possession of an independent
legal personality, distinct from that of their component members.
When the period expires, the sociedad anonima loses the power to
deal and enter into further legal relations with other persons; chan
roblesvirtualawlibraryit is no longer possible for it to acquire new
rights or incur new obligations, have only as may be required by the
process of liquidating and winding up its affairs. By the same token,
its officers and agents can no longer represent it after the expiration
of the life term prescribed, save for settling its business.
Necessarily, therefore, third persons or strangers have an interest in
knowing the duration of the juridical personality of the sociedad
anonima, since the latter cannot be dealt with after that period; chan
roblesvirtualawlibrarywherefore its prolongation or cessation is a
matter directly involving the company’s relations to the public at
large.
On the importance of the term of existence set in the articles of
association of commercial companies under the Spanish Code of
Commerce, D. Lorenzo Benito y Endar, professor of mercantile law
in the Universidad Central de Madrid, has this to
say:chanroblesvirtuallawlibrary
“La duracion de la Sociedad. — La necesidad de consignar este
requisito en el contrato social tiene un valor analogo al que dijimos
tenia el mismo al tratar de las compañias colectivas, aun cuando
respecto de las anonimas no haya de tenerse en cuenta para nada lo
que dijimos entonces acerca de la trascendencia que ello tiene para
los socios; chan roblesvirtualawlibraryporque no existiendo en las
anonimas la serie de responsibilidades de caracter personal que
afectan a los socios colectivos, es claro que la duracion de la
sociedad importa conocerla a los socios y los terceros, porque ella
marca al limite natural del desenvolvimiento de la empresa
constituida y el comienzo de la liquidacion de la sociedad.” (3
Benito, Derecho Mercantil, 292-293.)
“Interesa, pues, la fijacion de la vida de la compañia,
desenvolviendose con normalidad y regularidad, tanto a los
asociados como a los terceros. A aquellos, porque su libertad
economica, en cierto modo limitada por la existencia del contrato de
compañia, se recobra despues de realizada, mas o menos
cumplidamente, la finalidad comun perseguida; chan
roblesvirtualawlibraryy a los terceros, porque les advierte el
momento en que, extinguida la compañia, no cabe y a la creacion
con ella de nuevas relaciones juridicas, de que nazcan
reciprocamente derechos y obligaciones, sino solo la liquidacion
de los negocios hasta entonces convenidos, sin otra excepcion que
la que luego mas adelante habremos de señalar”. (3 Benito,
Derecho Mercantil, p. 245.)
The State and its officers also have an obvious interest in the term
of life of associations, since the conferment of juridical capacity
upon them during such period is a privilege that is derived from
statute. It is obvious that no agreement between associates can
result in giving rise to a new and distinct personality, possessing
independent rights and obligations, unless the law itself shall
decree such result. And the State is naturally interested that this
privilege be enjoyed only under the conditions and not beyond the
period that it sees fit to grant; chan roblesvirtualawlibraryand,
particularly, that it be not abused in fraud and to the detriment of
other parties; chan roblesvirtualawlibraryand for this reason it has
been ruled that “the limitation (of corporate existence) to a definite
period is an exercise of control in the interest of the public” (Smith
vs. Eastwood Wire Manufacturing Co., 43 Atl. 568).
We cannot assent to the thesis of Benguet that its period of
corporate existence has relation to its “organization”. The latter
term is defined in Webster’s International Dictionary
as:chanroblesvirtuallawlibrary
“The executive structure of a business; chan
roblesvirtualawlibrarythe personnel of management, with its
several duties and places in administration; chan
roblesvirtualawlibrarythe various persons who conduct a business,
considered as a unit.”
The legal definitions of the term “organization” are concordant
with that given above:chanroblesvirtuallawlibrary
“Organize or ‘organization,’ as used in reference to corporations,
has a well-understood meaning, which is the election of officers,
providing for the subscription and payment of the capital stock, the
adoption of by-laws, and such other steps as are necessary to
endow the legal entity with the capacity to transact the legitimate
business for which it was created. Waltson vs. Oliver, 30 P. 172,
173, 49 Kan. 107, 33 Am. St. Rep. 355; chan
roblesvirtualawlibraryTopeka Bridge Co. vs. Cummings, 3 Kan.
55, 77; chan roblesvirtualawlibraryHunt vs. Kansas & M. Bridge
Co., 11 Kan. 412, 439; chan roblesvirtualawlibraryAspen Water &
Light Co., vs. City of Aspen, 37 P. 728, 730, 6 Colo. App.
12; chan roblesvirtualawlibraryNemaha Coal & Mining Co., vs.
Settle 38 P. 483, 484, 54 Kan. 424.
Under a statute providing that, until articles of incorporation
should be recorded, the corporation should transact no business
except its own organization, it is held that the term “organization”
means simply the process of forming and arranging into suitable
3
disposition the parties who are to act together in, and defining theassociation; chan roblesvirtualawlibraryand its members had not
objects of, the compound body, and that this process, even when entered into any agreement that such period should be extended. It is
complete in all its parts, does not confer a franchise either valid safe to say that none of the members of Benguet anticipated in 1906
or defective, but, on the contrary, it is only the act of the any need to reach an agreement to increase the term of its corporate
individuals, and something else must be done to secure the life, barely three years after it had started. The prorogation was
corporate franchise. Abbott vs. Omaha Smelting & Refining Co. purely speculative; chan roblesvirtualawlibrarya mere possibility
4 Neb. 416, 421.” (30 Words and Phrases, p. 282.) that could not be taken for granted. It was as yet conditional,
It is apparent from the foregoing definitions that the term depending upon the ultimate decision of the members and directors.
“organization” relates merely to the systematization and orderly They might agree to extend Benguet’s existence beyond the original
arrangement of the internal and managerial affairs and organs of 50 years; chan roblesvirtualawlibraryor again they might not. It
the Petitioner Benguet, and has nothing to do with the must be remembered that in 1906, the success of Benguet in its
prorogation of its corporate life. mining ventures was by no means so certain as to warrant
continuation of its operations beyond the 50 years set in its articles.
From the double fact that the duration of its corporate life (and The records of this Court show that Benguet ran into financial
juridical personality) has evident connection with the Petitioner’s difficulties in the early part of its existence, to the extent that, as late
relations to the public, and that it bears none to the Petitioner’s
as 1913, ten years after it was found, 301,100 shares of its capital
organization and method of transacting business, we derive the stock (with a par value of $1 per share) were being offered for sale
conclusion that the prohibition contained in section 18 of the
at 25 centavos per share in order to raise the sum of P75,000 that
Corporation Law (Act No. 1459) against extension of corporate was needed to rehabilitate the company (Hanlon vs. Hausermann
life by amendment of the original articles was designed and and Beam, 40 Phil., 796). Certainly the prolongation of the
intended to apply to “compañias anonimas” that, corporate existence of Benguet in 1906 was merely a possibility in
like Petitioner Benguet, were already existing at the passage of futuro, a contingency that did not fulfill the requirements of a vested
said law. This conclusion is reinforced by the avowed policy of right entitled to constitutional protection, defined by this Court in
the law to hasten the day when compañias anonimas would be Balboa vs. Farrales, 51 Phil., 498, 502, as
extinct, and replace them with the American type of corporation follows:chanroblesvirtuallawlibrary
(Harden vs. Benguet Consolidated Mining Co., supra), for the
indefinite prorogation of the corporation life of sociedades “Vested right is ‘some right or interest in the property which has
become fixed and established, and is no longer open to doubt or
anonimas would maintain the unnecessary duality of
organizational types instead of reducing them to a single controversy,”
one; chan roblesvirtualawlibraryand what is more, it would “A ‘vested’ right is defined to be an immediate fixed right of present
confer upon these sociedades anonimas, whose obsolescence was or future enjoyment, and rights are ‘vested’ in contradistinction to
sought, the advantageous privilege of perpetual existence that the being expectant or contingent” (Pearsall vs. Great Northern R. Co.,
new corporation could not possess. 161 U. S. 646, 40 L. Ed. 838).
Of course, the retroactive application of the limitations on the In Corpus Juris Secundum we find:chanroblesvirtuallawlibrary
terms of corporate existence could not be made in violation of
“Rights are vested when the right to enjoyment, present or
constitutional inhibitions specially those securing equal prospective, has become the property of some particular person or
protection of the laws and prohibiting impairment of the
persons as a present interest. The right must be absolute, complete,
obligation of contracts. It needs no argument to show that if Act and unconditional, independent of a contingency, and a mere
No. 1459 allowed existing compañias anonimas to be governed
expectancy of future benefit, or a contingent interest in property
by the old law in respect to their organization, methods of founded on anticipated continuance of existing laws, does not
transacting business and the rights of the members among
constitute a vested right. So, inchoate rights which have not been
themselves, it was precisely in deference to the vested rights acted on are not vested.” (16 C.J.S. 214-215.)
already acquired by the entity and its members at the time the
Corporation Law was enacted. But we do not agree Since there was no agreement as yet to extend the period of
with PetitionerBenguet (and here lies the second issue in this Benguet’s corporate existence (beyond the original 50 years) when
appeal) that the possibility to extend its corporate life under the the Corporation Law was adopted in 1906, neither Benguet nor its
Code of Commerce constituted a right already vested when Act members had any actual or vested right to such extension at that
No. 1459 was adopted. At that time, Benguet’s existence was time. Therefore, when the Corporation Law, by section 18, forbade
well within the 50 years period set in its articles of
extensions of corporate life, neither Benguet nor its members were
deprived of any actual or fixed right constitutionally protected.
To hold, as Petitioner Benguet asks, that the legislative power
could not deprive Benguet or its members of the possibility to
enter at some indefinite future time into an agreement to extend
Benguet’s corporate life, solely because such agreements were
authorized by the Code of Commerce, would be tantamount to
saying that the said Code was irrepealable on that point. It is a well
settled rule that no person has a vested interest in any rule of law
entitling him to insist that it shall remain unchanged for his
benefit. (New York C. R. Co. vs. White, 61 L. Ed (U.S.) 667; chan
roblesvirtualawlibraryMondou vs. New York N. H. & H. R. Co.,
56 L. Ed. 327; chan roblesvirtualawlibraryRainey vs. U. S., 58 L.
Ed. 617; chan roblesvirtualawlibraryLilly Co. vs. Saunders, 125
ALR. 1308; chan roblesvirtualawlibraryShea vs. Olson, 111 ALR.
998).
“There can be no vested right in the continued existence of a
statute or rule of the common law which precludes its change or
repeal, nor in any omission to legislate on a particular matter or
subject. Any right conferred by statute may be taken away by
statute before it has become vested, but after a right has vested,
repeal of the statute or ordinance which created the right does not
and cannot affect much right.” (16 C.J. S. 222-223.)
It is a general rule of constitutional law that a person has no vested
right in statutory privileges and exemptions” (Brearly School vs.
Ward, 201 NY. 358, 40 LRA NS. 1215; chan
roblesvirtualawlibraryalso, Cooley, Constitutional Limitations, 7th
ed., p. 546).
It is not amiss to recall here that after Act No. 1459 the Legislature
found it advisable to impress further restrictions upon the power of
corporations to deal in public lands, or to hold real estate beyond a
maximum area; chan roblesvirtualawlibraryand to prohibit any
corporation from endeavouring to control or hold more than 15 per
cent of the voting stock of an agricultural or mining corporation
(Act No. 3518). These prohibitions are so closely integrated with
our public policy that Commonwealth Act No. 219 sought to
extend such restrictions to associations of all kinds. It would be
subversive of that policy to enable Benguet to prolong its peculiar
status of sociedad anonimas, and enable it to cast doubt and
uncertainty on whether it is, or not, subject to those restrictions on
corporate power, as it once endeavoured to do in the previous case
of Harden vs. Benguet Mining Corp. 58 Phil., 149.
Stress has been laid upon the fact that the Compañia Maritima
(like Benguet, a sociedad anonima established before the
enactment of the Corporation Law) has been twice permitted to
extend its corporate existence by amendment of its articles of
association, without objection from the officers of the defunct
4
Bureau of Commerce and Industry, then in charge of the
enforcement of the Corporation Laws, although the exact
question was never raised then. Be that as it may, it is a well
established rule in this jurisdiction that the government is never
estopped by mistake or error on the part of its agents” (Pineda vs.
Court of First Instance of Tayabas, 52 Phil., 803, 807), and that
estopped cannot give validity to an act that is prohibited by law
or is against public policy (Eugenio vs. Perdido, (97 Phil., 41,
May 19, 1955; chan roblesvirtualawlibrary19 Am. Jur.
802); chan roblesvirtualawlibraryso that the Respondent,
Securities and Exchange Commissioner, was not bound by the
rulings of his predecessor if they be inconsistent with law. Much
less could erroneous decisions of executive officers bind this
Court and induce it to sanction an unwarranted interpretation or
application of legal principles.
We now turn to the third and last issue of this appeal, concerning
the exercise of the option granted by section 75 of the
Corporation Law to every sociedad anonima “formed, organized
and existing under the laws of the Philippines on the date of the
passage of this Act” to either continue business as such sociedad
anonima or to reform and organize under the provisions of the
Corporation Law. Petitioner-Appellant Benguet contends that as
the law does not determine the period within which such option
may be exercised, Benguet may exercise it at any time during its
corporate existence; chan roblesvirtualawlibraryand that in fact
on June 22, 1953, it chose to reform itself into a corporation for a
period of 50 years from that date, filing the corresponding papers
and by-laws with the Respondent Commissioner of Securities
and Exchange registration; chan roblesvirtualawlibrarybut the
latter refused to accept them as belatedly made.
The Petitioner’s argument proceeds from the unexpressed
assumption that Benguet, as sociedad anonima, had not exercised
the option given by section 75 of the Corporation Law until
1953. This we find to be incorrect. Under that section, by
continuing to do business as sociedad anonima, Benguet in fact
rejected the alternative to reform as a corporation under Act No.
1459. It will be noted from the text of section 75 (quoted earlier
in this opinion) that no special act or manifestation is required by
the law from the existing sociedades anonimas that prefer to
remain and continue as such. It is when they choose to reform
and organize under the Corporation Law that they must, in the
words of the section, “transfer all corporate interests to the new
corporation”. Hence if they do not so transfer, the sociedades
anonimas affected are to be understood to have elected the
alternative “to continue business as such corporation” (sociedad
anonima) 2
The election of Benguet to remain a sociedad anonima after the
enactment of the Corporation Law is evidence, not only by its
failure, from 1906 to 1953, to adopt the alternative to transfer its
corporate interests to a new corporation, as required by section
75; chan roblesvirtualawlibraryit also appears from positive acts.
Thus around 1933, Benguet claimed and defended in court its
acquisition of shares of the capital stock of the Balatoc Mining
Company, on the ground that as a sociedad anonima it (Benguet)
was not a corporation within the purview of the laws prohibiting a
mining corporation from becoming interested in another mining
corporation (Harden vs. Benguet Mining Corp., 58 Phil., p. 149).
Even in the present proceedings, Benguet has urged its right to
amend its original articles of association as “sociedad anonima” and
extend its life as such under the provisions of the Spanish Code of
Commerce. Such appeals to privileges as “sociedad anonima” under
the Code of 1886 necessarily imply that Benguet has rejected the
alternative of reforming under the Corporation Law.
As Respondent Commissioner’s order, now under appeal, has stated
—
“A sociedad anonima could not claim the benefit of both, but must
have to choose one and discard the other. If it elected to become a
corporation it could not continue as a sociedad anonima; chan
roblesvirtualawlibraryand if it choose to remain as a sociedad
anonima, it could not become a corporation.”
Having thus made its choice, Benguet may not now go back and
seek to change its position and adopt the reformation that it had
formerly repudiated. The election of one of several alternatives is
irrevocable once made (as now expressly recognized in article 940
of the new Civil Code of the
Philippines):chanroblesvirtuallawlibrary such rule is inherent in the
nature of the choice, its purpose being to clarify and render definite
the rights of the one exercising the option, so that other persons may
act in consequence. While successive choices may be provided there
is nothing in section 75 of the Corporation Law to show or hint that
a sociedad anonima may make more than one choice thereunder,
since only one option is provided for.
While no express period of time is fixed by the law within which
sociedades anonimas may elect under section 75 of Act No. 1459
either to reform or to retain their status quo, there are powerful
reasons to conclude that the legislature intended such choice to be
made within a reasonable time from the effectivity of the Act. To
enable a sociedad anonima to choose reformation when its
stipulated period of existence is nearly ended, would be to allow it
to enjoy a term of existence far longer than that granted to
corporations organized under the Corporation Law; chan
roblesvirtualawlibraryin Benguet’s case, 50 years as sociedad
anonima, and another 50 years as an American type of corporation
under Act 1459; chan roblesvirtualawlibrarya result incompatible
with the avowed purpose of the Act to hasten the disappearance of
the sociedades anonimas. Moreover, such belated election, if
permitted, would enable sociedades anonimas to reap the full
advantage of both types of organization. Finally, it would permit
sociedades anonimas to prolong their corporate existence
indirectly by belated reformation into corporations under Act No.
1459, when they could not do so directly by amending their
articles of association.
Much stress is laid upon allegedly improper motives on the part of
the intervenor, Consolidated Mines, Inc., in supporting the orders
appealed from, on the ground that intervenor seeks to terminate
Benguet’s operating contract and appropriate the profits that are
the result of Benguet’s efforts in developing the mines of the
intervenor. Suffice it to say that whatever such motives should be,
they are wholly irrelevant to the issues in this appeal, that
exclusively concern the legal soundness of the order of
the Respondent Securities and Exchange Commissioner rejecting
the claims of the Benguet Consolidated Mining Company to
extend its corporate life.
Neither are we impressed by the prophesies of economic chaos
that would allegedly ensure with the cessation of Benguet’s
activities. If its mining properties are really susceptible of
profitable operation, inexorable economic laws will ensure their
exploitation; chan roblesvirtualawlibraryif, on the other hand, they
can no longer be worked at a profit, then catastrophe becomes
inevitable, whether or not Petitioner Benguet retains corporate
existence.
Sustaining the opinions of the Respondent Securities and
Exchange Commissioner and of the Secretary of Justice, we rule
that:chanroblesvirtuallawlibrary
(1) The prohibition contained in section 18 of Act No. 1459,
against extending the period of corporate existence by amendment
of the original articles, was intended to apply, and does apply, to
sociedades anonimas already formed, organized and existing at the
time of the effectivity of the Corporation Law (Act No. 1459) in
1906;
(2) The statutory prohibition is valid and impairs no vested rights
or constitutional inhibition where no agreement to extend the
original period of corporate life was perfected before the
enactment of the Corporation Law;
(3) A sociedad anonima, existing before the Corporation Law,
that continues to do business as such for a reasonable time after its
enactments, is deemed to have made its election and may not
subsequently claim to reform into a corporation under section 75
of Act No. 1459.
In view of the foregoing, the order appealed from is affirmed.
Costs against Petitioner-AppellantBenguet Consolidated Mining
Company.
5
Padilla, Montemayor, Reyes, A. Labrador, Concepcion and York, which as noted, is the domiciliary administrator of the estate
Endencia, JJ., concur. of the deceased.2 Then came this portion of the appellant's brief:
G.R. No. L-23145 November 29, 1968 "On August 12, 1960, Prospero Sanidad instituted ancillary
administration proceedings in the Court of First Instance of Manila;
TESTATE ESTATE OF IDONAH SLADE PERKINS, Lazaro A. Marquez was appointed ancillary administrator, and on
deceased. RENATO D. TAYAG, ancillary administrator- January 22, 1963, he was substituted by the appellee Renato D.
appellee, Tayag. A dispute arose between the domiciary administrator in New
vs.
York and the ancillary administrator in the Philippines as to which
BENGUET CONSOLIDATED, INC., oppositor-appellant. of them was entitled to the possession of the stock certificates in
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee. question. On January 27, 1964, the Court of First Instance of Manila
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor- ordered the domiciliary administrator, County Trust Company, to
appellant. "produce and deposit" them with the ancillary administrator or with
FERNANDO, J.: the Clerk of Court. The domiciliary administrator did not comply
with the order, and on February 11, 1964, the ancillary administrator
Confronted by an obstinate and adamant refusal of the petitioned the court to "issue an order declaring the certificate or
domiciliary administrator, the County Trust Company of New
certificates of stocks covering the 33,002 shares issued in the name
York, United States of America, of the estate of the deceased of Idonah Slade Perkins by Benguet Consolidated, Inc., be declared
Idonah Slade Perkins, who died in New York City on March 27, [or] considered as lost."3
1960, to surrender to the ancillary administrator in the
Philippines the stock certificates owned by her in a Philippine It is to be noted further that appellant Benguet Consolidated, Inc.
corporation, Benguet Consolidated, Inc., to satisfy the legitimate admits that "it is immaterial" as far as it is concerned as to "who is
claims of local creditors, the lower court, then presided by the entitled to the possession of the stock certificates in question;
Honorable Arsenio Santos, now retired, issued on May 18, 1964, appellant opposed the petition of the ancillary administrator because
an order of this tenor: "After considering the motion of the the said stock certificates are in existence, they are today in the
ancillary administrator, dated February 11, 1964, as well as the possession of the domiciliary administrator, the County Trust
opposition filed by the Benguet Consolidated, Inc., the Court Company, in New York, U.S.A...."4
hereby (1) considers as lost for all purposes in connection with It is its view, therefore, that under the circumstances, the stock
the administration and liquidation of the Philippine estate of certificates cannot be declared or considered as lost. Moreover, it
Idonah Slade Perkins the stock certificates covering the 33,002 would allege that there was a failure to observe certain requirements
shares of stock standing in her name in the books of the Benguet of its by-laws before new stock certificates could be issued. Hence,
Consolidated, Inc., (2) orders said certificates cancelled, and (3) its appeal.
directs said corporation to issue new certificates in lieu thereof,
As was made clear at the outset of this opinion, the appeal lacks
the same to be delivered by said corporation to either the merit. The challenged order constitutes an emphatic affirmation of
incumbent ancillary administrator or to the Probate Division of
judicial authority sought to be emasculated by the wilful conduct of
this Court."1 the domiciliary administrator in refusing to accord obedience to a
From such an order, an appeal was taken to this Court not by the court decree. How, then, can this order be stigmatized as illegal?
domiciliary administrator, the County Trust Company of New As is true of many problems confronting the judiciary, such a
York, but by the Philippine corporation, the Benguet response was called for by the realities of the situation. What cannot
Consolidated, Inc. The appeal cannot possibly prosper. The be ignored is that conduct bordering on wilful defiance, if it had not
challenged order represents a response and expresses a policy, to actually reached it, cannot without undue loss of judicial prestige, be
paraphrase Frankfurter, arising out of a specific problem, condoned or tolerated. For the law is not so lacking in flexibility and
addressed to the attainment of specific ends by the use of specific resourcefulness as to preclude such a solution, the more so as deeper
remedies, with full and ample support from legal doctrines of reflection would make clear its being buttressed by indisputable
weight and significance. principles and supported by the strongest policy considerations.
The facts will explain why. As set forth in the brief of appellant It can truly be said then that the result arrived at upheld and
Benguet Consolidated, Inc., Idonah Slade Perkins, who died on vindicated the honor of the judiciary no less than that of the country.
March 27, 1960 in New York City, left among others, two stock Through this challenged order, there is thus dispelled the
certificates covering 33,002 shares of appellant, the certificates atmosphere of contingent frustration brought about by the
being in the possession of the County Trust Company of New
persistence of the domiciliary administrator to hold on to the stock
certificates after it had, as admitted, voluntarily submitted itself to
the jurisdiction of the lower court by entering its appearance
through counsel on June 27, 1963, and filing a petition for relief
from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart
vitality and effectiveness to what was decreed. For without it, what
it had been decided would be set at naught and nullified. Unless
such a blatant disregard by the domiciliary administrator, with
residence abroad, of what was previously ordained by a court
order could be thus remedied, it would have entailed, insofar as
this matter was concerned, not a partial but a well-nigh complete
paralysis of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power
of the appellee ancillary administrator to gain control and
possession of all assets of the decedent within the jurisdiction of
the Philippines. Nor could it. Such a power is inherent in his duty
to settle her estate and satisfy the claims of local creditors.5 As
Justice Tuason speaking for this Court made clear, it is a "general
rule universally recognized" that administration, whether principal
or ancillary, certainly "extends to the assets of a decedent found
within the state or country where it was granted," the corollary
being "that an administrator appointed in one state or country has
no power over property in another state or country."6
It is to be noted that the scope of the power of the ancillary
administrator was, in an earlier case, set forth by Justice Malcolm.
Thus: "It is often necessary to have more than one administration
of an estate. When a person dies intestate owning property in the
country of his domicile as well as in a foreign country,
administration is had in both countries. That which is granted in
the jurisdiction of decedent's last domicile is termed the principal
administration, while any other administration is termed the
ancillary administration. The reason for the latter is because a
grant of administration does not ex proprio vigore have any effect
beyond the limits of the country in which it is granted. Hence, an
administrator appointed in a foreign state has no authority in the
[Philippines]. The ancillary administration is proper, whenever a
person dies, leaving in a country other than that of his last
domicile, property to be administered in the nature of assets of the
deceased liable for his individual debts or to be distributed among
his heirs."7
It would follow then that the authority of the probate court to
require that ancillary administrator's right to "the stock certificates
covering the 33,002 shares ... standing in her name in the books of
[appellant] Benguet Consolidated, Inc...." be respected is equally
beyond question. For appellant is a Philippine corporation owing
full allegiance and subject to the unrestricted jurisdiction of local
6
courts. Its shares of stock cannot therefore be considered in any upon in the pursuit of legitimate ends have played an important part
wise as immune from lawful court orders. in its development."11
Our holding in Wells Fargo Bank and Union v. Collector of Speaking of the common law in its earlier period, Cardozo could
Internal Revenue8 finds application. "In the instant case, the state fictions "were devices to advance the ends of justice, [even if]
actual situs of the shares of stock is in the Philippines, the clumsy and at times offensive."12 Some of them have persisted
corporation being domiciled [here]." To the force of the above even to the present, that eminent jurist, noting "the quasi contract,
undeniable proposition, not even appellant is insensible. It does the adopted child, the constructive trust, all of flourishing vitality, to
not dispute it. Nor could it successfully do so even if it were so attest the empire of "as if" today."13 He likewise noted "a class of
minded. fictions of another order, the fiction which is a working tool of
2. In the face of such incontrovertible doctrines that argue in a thought, but which at times hides itself from view till reflection and
rather conclusive fashion for the legality of the challenged order, analysis have brought it to the light."14
how does appellant, Benguet Consolidated, Inc. propose to carry What cannot be disputed, therefore, is the at times indispensable
the extremely heavy burden of persuasion of precisely role that fictions as such played in the law. There should be then on
demonstrating the contrary? It would assign as the basic error the part of the appellant a further refinement in the catholicity of its
allegedly committed by the lower court its "considering as lost condemnation of such judicial technique. If ever an occasion did
the stock certificates covering 33,002 shares of Benguet call for the employment of a legal fiction to put an end to the
belonging to the deceased Idonah Slade Perkins, ..."9 More anomalous situation of a valid judicial order being disregarded with
specifically, appellant would stress that the "lower court could apparent impunity, this is it. What is thus most obvious is that this
not "consider as lost" the stock certificates in question when, as a particular alleged error does not carry persuasion.
matter of fact, his Honor the trial Judge knew, and does know, 3. Appellant Benguet Consolidated, Inc. would seek to bolster the
and it is admitted by the appellee, that the said stock certificates above contention by its invoking one of the provisions of its by-laws
are in existence and are today in the possession of the which would set forth the procedure to be followed in case of a lost,
domiciliary administrator in New York."10 stolen or destroyed stock certificate; it would stress that in the event
There may be an element of fiction in the above view of the of a contest or the pendency of an action regarding ownership of
lower court. That certainly does not suffice to call for the reversal such certificate or certificates of stock allegedly lost, stolen or
of the appealed order. Since there is a refusal, persistently destroyed, the issuance of a new certificate or certificates would
adhered to by the domiciliary administrator in New York, to await the "final decision by [a] court regarding the ownership
deliver the shares of stocks of appellant corporation owned by [thereof]."15
the decedent to the ancillary administrator in the Philippines, Such reliance is misplaced. In the first place, there is no such
there was nothing unreasonable or arbitrary in considering them occasion to apply such by-law. It is admitted that the foreign
as lost and requiring the appellant to issue new certificates in lieu
domiciliary administrator did not appeal from the order now in
thereof. Thereby, the task incumbent under the law on the question. Moreover, there is likewise the express admission of
ancillary administrator could be discharged and his responsibility appellant that as far as it is concerned, "it is immaterial ... who is
fulfilled. entitled to the possession of the stock certificates ..." Even if such
Any other view would result in the compliance to a valid judicial were not the case, it would be a legal absurdity to impart to such a
order being made to depend on the uncontrolled discretion of the provision conclusiveness and finality. Assuming that a contrariety
party or entity, in this case domiciled abroad, which thus far has exists between the above by-law and the command of a court
shown the utmost persistence in refusing to yield obedience. decree, the latter is to be followed.
Certainly, appellant would not be heard to contend in all It is understandable, as Cardozo pointed out, that the Constitution
seriousness that a judicial decree could be treated as a mere scrap overrides a statute, to which, however, the judiciary must yield
of paper, the court issuing it being powerless to remedy its deference, when appropriately invoked and deemed applicable. It
flagrant disregard. would be most highly unorthodox, however, if a corporate by-law
It may be admitted of course that such alleged loss as found by would be accorded such a high estate in the jural order that a court
the lower court did not correspond exactly with the facts. To be must not only take note of it but yield to its alleged controlling
more blunt, the quality of truth may be lacking in such a force.
conclusion arrived at. It is to be remembered however, again to
The fear of appellant of a contingent liability with which it could be
borrow from Frankfurter, "that fictions which the law may rely saddled unless the appealed order be set aside for its inconsistency
with one of its by-laws does not impress us. Its obedience to a
lawful court order certainly constitutes a valid defense, assuming
that such apprehension of a possible court action against it could
possibly materialize. Thus far, nothing in the circumstances as
they have developed gives substance to such a fear. Gossamer
possibilities of a future prejudice to appellant do not suffice to
nullify the lawful exercise of judicial authority.
4. What is more the view adopted by appellant Benguet
Consolidated, Inc. is fraught with implications at war with the
basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an
artificial being created by operation of law...."16 It owes its life to
the state, its birth being purely dependent on its will. As Berle so
aptly stated: "Classically, a corporation was conceived as an
artificial person, owing its existence through creation by a
sovereign power."17 As a matter of fact, the statutory language
employed owes much to Chief Justice Marshall, who in the
Dartmouth College decision defined a corporation precisely as "an
artificial being, invisible, intangible, and existing only in
contemplation of law."18
The well-known authority Fletcher could summarize the matter
thus: "A corporation is not in fact and in reality a person, but the
law treats it as though it were a person by process of fiction, or by
regarding it as an artificial person distinct and separate from its
individual stockholders.... It owes its existence to law. It is an
artificial person created by law for certain specific purposes, the
extent of whose existence, powers and liberties is fixed by its
charter."19Dean Pound's terse summary, a juristic person,
resulting from an association of human beings granted legal
personality by the state, puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the
basic theme of which to quote from Friedmann, "is the reality of
the group as a social and legal entity, independent of state
recognition and concession."21 A corporation as known to
Philippine jurisprudence is a creature without any existence until it
has received the imprimatur of the state according to law. It is
logically inconceivable therefore that it will have rights and
privileges of a higher priority than that of its creator. More than
that, it cannot legitimately refuse to yield obedience to acts of its
state organs, certainly not excluding the judiciary, whenever called
upon to do so.
As a matter of fact, a corporation once it comes into being,
following American law still of persuasive authority in our
jurisdiction, comes more often within the ken of the judiciary than
the other two coordinate branches. It institutes the appropriate
court action to enforce its right. Correlatively, it is not immune
from judicial control in those instances, where a duty under the
7
law as ascertained in an appropriate legal proceeding is cast upon of their orders could be made to depend on the whim or caprice of
it. alien entities. It is difficult to imagine of a situation more offensive
To assert that it can choose which court order to follow and to the dignity of the bench or the honor of the country.
which to disregard is to confer upon it not autonomy which may Yet that would be the effect, even if unintended, of the proposition
be conceded but license which cannot be tolerated. It is to argue to which appellant Benguet Consolidated seems to be firmly
that it may, when so minded, overrule the state, the source of its committed as shown by its failure to accept the validity of the order
very existence; it is to contend that what any of its governmental complained of; it seeks its reversal. Certainly we must at all pains
organs may lawfully require could be ignored at will. So see to it that it does not succeed. The deplorable consequences
extravagant a claim cannot possibly merit approval. attendant on appellant prevailing attest to the necessity of negative
5. One last point. In Viloria v. Administrator of Veterans response from us. That is what appellant will get.
Affairs,22 it was shown that in a guardianship proceedings then That is all then that this case presents. It is obvious why the appeal
pending in a lower court, the United States Veterans cannot succeed. It is always easy to conjure extreme and even
Administration filed a motion for the refund of a certain sum of oppressive possibilities. That is not decisive. It does not settle the
money paid to the minor under guardianship, alleging that the issue. What carries weight and conviction is the result arrived at, the
lower court had previously granted its petition to consider the just solution obtained, grounded in the soundest of legal doctrines
deceased father as not entitled to guerilla benefits according to a and distinguished by its correspondence with what a sense of
determination arrived at by its main office in the United States. realism requires. For through the appealed order, the imperative
The motion was denied. In seeking a reconsideration of such requirement of justice according to law is satisfied and national
order, the Administrator relied on an American federal statute dignity and honor maintained.
making his decisions "final and conclusive on all questions of WHEREFORE, the appealed order of the Honorable Arsenio
law or fact" precluding any other American official to examine Santos, the Judge of the Court of First Instance, dated May 18,
the matter anew, "except a judge or judges of the United States 1964, is affirmed. With costs against oppositor-appelant Benguet
court."23 Reconsideration was denied, and the Administrator Consolidated, Inc.
appealed.
G.R. No. 125469 October 27, 1997
In an opinion by Justice J.B.L. Reyes, we sustained the lower
court. Thus: "We are of the opinion that the appeal should be PHILIPPINE STOCK EXCHANGE, INC., petitioner,
rejected. The provisions of the U.S. Code, invoked by the vs.
appellant, make the decisions of the U.S. Veterans' Administrator THE HONORABLE COURT OF APPEALS, SECURITIES
final and conclusive when made on claims property submitted to AND EXCHANGE COMMISSION and PUERTO AZUL
him for resolution; but they are not applicable to the present case, LAND, INC., respondents.
where the Administrator is not acting as a judge but as a litigant.
There is a great difference between actions against the TORRES, JR., J.:
Administrator (which must be filed strictly in accordance with
the conditions that are imposed by the Veterans' Act, including The Securities and Exchange Commission is the government
the exclusive review by United States courts), and those actions agency, under the direct general supervision of the Office of the
where the Veterans' Administrator seeks a remedy from our President, 1 with the immense task of enforcing the Revised
courts and submits to their jurisdiction by filing actions therein. Securities Act, and all other duties assigned to it by pertinent laws.
Our attention has not been called to any law or treaty that would Among its inumerable functions, and one of the most important, is
make the findings of the Veterans' Administrator, in actions the supervision of all corporations, partnerships or associations, who
where he is a party, conclusive on our courts. That, in effect, are grantees of primary franchise and/or a license or permit issued
would deprive our tribunals of judicial discretion and render by the government to operate in the Philippines. 2 Just how far this
them mere subordinate instrumentalities of the Veterans' regulatory authority extends, particularly, with regard to the
Administrator." Petitioner Philippine Stock Exchange, Inc. is the issue in the case at
bar.
It is bad enough as the Viloria decision made patent for our
judiciary to accept as final and conclusive, determinations made In this Petition for Review on Certiorari, petitioner assails the
by foreign governmental agencies. It is infinitely worse if resolution of the respondent Court of Appeals, dated June 27, 1996,
through the absence of any coercive power by our courts over which affirmed the decision of the Securities and Exchange
juridical persons within our jurisdiction, the force and effectivity Commission ordering the petitioner Philippine Stock Exchange, Inc.
to allow the private respondent Puerto Azul Land, Inc. to be listed
in its stock market, thus paving the way for the public offering of
PALI's shares.
The facts of the case are undisputed, and are hereby restated in
sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate
corporation, had sought to offer its shares to the public in order to
raise funds allegedly to develop its properties and pay its loans
with several banking institutions. In January, 1995, PALI was
issued a Permit to Sell its shares to the public by the Securities and
Exchange Commission (SEC). To facilitate the trading of its
shares among investors, PALI sought to course the trading of its
shares through the Philippine Stock Exchange, Inc. (PSE), for
which purpose it filed with the said stock exchange an application
to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a
perusal of PALI's application, recommended to the PSE's Board of
Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application,
the Board of Governors of the PSE received a letter from the heirs
of Ferdinand E. Marcos, claiming that the late President Marcos
was the legal and beneficial owner of certain properties forming
part of the Puerto Azul Beach Hotel and Resort Complex which
PALI claims to be among its assets and that the Ternate
Development Corporation, which is among the stockholders of
PALI, likewise appears to have been held and continue to be held
in trust by one Rebecco Panlilio for then President Marcos and
now, effectively for his estate, and requested PALI's application to
be deferred. PALI was requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto
Azul Beach Hotel and Resort Complex were not claimed by PALI
as its assets. On the contrary, the resort is actually owned by
Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club,
entities distinct from PALI. Furthermore, the Ternate
Development Corporation owns only 1.20% of PALI. The
Marcoses responded that their claim is not confined to the
facilities forming part of the Puerto Azul Hotel and Resort
Complex, thereby implying that they are also asserting legal and
beneficial ownership of other properties titled under the name of
PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol
Gunigundo of the Presidential Commission on Good Government
(PCGG) requesting for comments on the letters of the PALI and
the Marcoses. On March 4, 1996, the PSE was informed that the
Marcoses received a Temporary Restraining Order on the same
date, enjoining the Marcoses from, among others, "further
impeding, obstructing, delaying or interfering in any manner by or
8
any means with the consideration, processing and approval by
the PSE of the initial public offering of PALI." The TRO was
issued by Judge Martin S. Villarama, Executive Judge of the
RTC of Pasig City in Civil Case No. 65561, pending in Branch
69 thereof.
In its regular meeting held on March 27, 1996, the Board of
Governors of the PSE reached its decision to reject PALI's
application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that
adversely affect the suitability of listing PALI's shares in the
stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to
the then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the
SEC's attention the action taken by the PSE in the application of
PALI for the listing of its shares with the PSE, and requesting
that the SEC, in the exercise of its supervisory and regulatory
powers over stock exchanges under Section 6(j) of P.D. No. 902-
A, review the PSE's action on PALI's listing application and
institute such measures as are just and proper under the
circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the
PSE, attaching thereto the letter of PALI and directing the PSE to
file its comments thereto within five days from its receipt and for
its authorized representative to appear for an "inquiry" on the
matter. On April 22, 1996, the PSE submitted a letter to the SEC
containing its comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the
PSE's decision. The dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the
Commissioner's authority and jurisdiction under
Section 3 of the Revised Securities Act, in conjunction
with Section 3, 6(j) and 6(m) of Presidential Decree
No. 902-A, the decision of the Board of Governors of
the Philippine Stock Exchange denying the listing of
shares of Puerto Azul Land, Inc., is hereby set aside,
and the PSE is hereby ordered to immediately cause the
listing of the PALI shares in the Exchange, without
prejudice to its authority to require PALI to disclose
such other material information it deems necessary for
the protection of the investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April Dismiss.
29, 1996, which was, however denied by the Commission in its
May 9, 1996 Order which states:
WHEREFORE, premises considered, the
Commission finds no compelling reason to
reconsider its order dated April 24, 1996, and in
the light of recent developments on the adverse
claim against the PALI properties, PSE should
require PALI to submit full disclosure of
material facts and information to protect the
investing public. In this regard, PALI is hereby
ordered to amend its registration statements filed
with the Commission to incorporate the full
disclosure of these material facts and
information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals
on May 17, 1996 a Petition for Review (with Application for Writ
of Preliminary Injunction and Temporary Restraining Order),
assailing the above mentioned orders of the SEC, submitting the
following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN ISSUING THE
ASSAILED ORDERS WITHOUT POWER,
JURISDICTION, OR AUTHORITY; SEC HAS NO
POWER TO ORDER THE LISTING AND SALE OF
SHARES OF PALI WHOSE ASSETS ARE
SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN FINDING THAT PSE
ACTED IN AN ARBITRARY AND ABUSIVE
MANNER IN DISAPPROVING PALI'S LISTING
APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL
AND VOID FOR ALLOWING FURTHER
DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS
AND WHICH FORM PART OF NAVAL/MILITARY
RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
PROPERLY PROMULGATED AND ITS
IMPLEMENTATION AND APPLICATION IN THIS
CASE VIOLATES THE DUE PROCESS CLAUSE OF
THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review
and subsequently, a Comment and Motion to Dismiss. On June 10,
1996, PSE fled its Reply to Comment and Opposition to Motion to
On June 27, 1996, the Court of Appeals promulgated its
Resolution dismissing the PSE's Petition for Review. Hence, this
Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction
and authority to look into the decision of the petitioner PSE,
pursuant to Section 3 3 of the Revised Securities Act in relation to
Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b)5 of
the Revised Securities Act, and for the purpose of ensuring fair
administration of the exchange. Both as a corporation and as a
stock exchange, the petitioner is subject to public respondent's
jurisdiction, regulation and control. Accepting the argument that
the public respondent has the authority merely to supervise or
regulate, would amount to serious consequences, considering that
the petitioner is a stock exchange whose business is impressed
with public interest. Abuse is not remote if the public respondent
is left without any system of control. If the securities act vested the
public respondent with jurisdiction and control over all
corporations; the power to authorize the establishment of stock
exchanges; the right to supervise and regulate the same; and the
power to alter and supplement rules of the exchange in the listing
or delisting of securities, then the law certainly granted to the
public respondent the plenary authority over the petitioner; and the
power of review necessarily comes within its authority.
All in all, the court held that PALI complied with all the
requirements for public listing, affirming the SEC's ruling to the
effect that:
. . . the Philippine Stock Exchange has acted in an
arbitrary and abusive manner in disapproving the
application of PALI for listing of its shares in the face of
the following considerations:
1. PALI has clearly and admittedly complied with the
Listing Rules and full disclosure requirements of the
Exchange;
2. In applying its clear and reasonable standards on the
suitability for listing of shares, PSE has failed to justify
why it acted differently on the application of PALI, as
compared to the IPOs of other companies similarly
situated that were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to
PALI's properties were even less serious than the claims
against the assets of the other companies in that, the
assertions of the Marcoses that they are owners of the
disputed properties were not substantiated enough to
overcome the strength of a title to properties issued
under the Torrens System as evidence of ownership
thereof;
9
4. No action has been filed in any court of competent decisions of the stock exchange. Authorities are in abundance even
jurisdiction seeking to nullify PALI's ownership over in the United States, from which the country's security policies are
the disputed properties, neither has the government patterned, to the effect of giving the Securities Commission less
instituted recovery proceedings against these control over stock exchanges, which in turn are given more lee-way
properties. Yet the import of PSE's decision in denying in making the decision whether or not to allow corporations to offer
PALI's application is that it would be PALI, not the their stock to the public through the stock exchange. This is in
Marcoses, that must go to court to prove the legality of accord with the "business judgment rule" whereby the SEC and the
its ownership on these properties before its shares can courts are barred from intruding into business judgments of
be listed. corporations, when the same are made in good faith. the said rule
In addition, the argument that the PALI properties belong to the precludes the reversal of the decision of the PSE to deny PALI's
Military/Naval Reservation does not inspire belief. The point is, listing application, absent a showing of bad faith on the part of the
the PALI properties are now titled. A property losses its public PSE. Under the listing rules of the PSE, to which PALI had
character the moment it is covered by a title. As a matter of fact, previously agreed to comply, the PSE retains the discretion to
the titles have long been settled by a final judgment; and the final accept or reject applications for listing. Thus, even if an issuer has
decree having been registered, they can no longer be re-opened complied with the PSE listing rules and requirements, PSE retains
considering that the one year period has already passed. Lastly, the discretion to accept or reject the issuer's listing application if the
the determination of what standard to apply in allowing PALI's PSE determines that the listing shall not serve the interests of the
application for listing, whether the discretion method or the investing public.
system of public disclosure adhered to by the SEC, should be Moreover, PSE argues that the SEC has no jurisdiction over
addressed to the Securities Commission, it being the government sequestered corporations, nor with corporations whose properties
agency that exercises both supervisory and regulatory authority are under sequestration. A reading of Republic of the Philippines
over all corporations. vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal
On August 15, 19961 the PSE, after it was granted an extension, that the properties of PALI, which were derived from the Ternate
filed the instant Petition for Review on Certiorari, taking Development Corporation (TDC) and the Monte del Sol
exception to the rulings of the SEC and the Court of Appeals. Development Corporation (MSDC). are under sequestration by the
Respondent PALI filed its Comment to the petition on October PCGG, and subject of forfeiture proceedings in the Sandiganbayan.
17, 1996. On the same date, the PCGG filed a Motion for Leave This ruling of the Court is the "law of the case" between the
Republic and TDC and MSDC. It categorically declares that the
to file a Petition for Intervention. This was followed up by the
PCGG's Petition for Intervention on October 21, 1996. A assets of these corporations were sequestered by the PCGG on
March 10, 1986 and April 4, 1988.
supplemental Comment was filed by PALI on October 25, 1997.
The Office of the Solicitor General, representing the SEC and theIt is, likewise, intimated that the Court of Appeals' sanction that
Court of Appeals, likewise filed its Comment on December 26, PALI's ownership over its properties can no longer be questioned,
1996. In answer to the PCGG's motion for leave to file petition since certificates of title have been issued to PALI and more than
for intervention, PALI filed its Comment thereto on January 17, one year has since lapsed, is erroneous and ignores well settled
1997, whereas the PSE filed its own Comment on January 20, jurisprudence on land titles. That a certificate of title issued under
1997. the Torrens System is a conclusive evidence of ownership is not an
On February 25, 1996, the PSE filed its Consolidated Reply to absolute rule and admits certain exceptions. It is fundamental that
the comments of respondent PALI (October 17, 1996) and the forest lands or military reservations are non-alienable. Thus, when a
Solicitor General (December 26, 1996). On May 16, 1997, PALI title covers a forest reserve or a government reservation, such title is
filed its Rejoinder to the said consolidated reply of PSE. void.
PSE submits that the Court of Appeals erred in ruling that the PSE, likewise, assails the SEC's and the Court of Appeals reliance
SEC had authority to order the PSE to list the shares of PALI in on the alleged policy of "full disclosure" to uphold the listing of
the stock exchange. Under presidential decree No. 902-A, the PALI's shares with the PSE, in the absence of a clear mandate for
powers of the SEC over stock exchanges are more limited as the effectivity of such policy. As it is, the case records reveal the
compared to its authority over ordinary corporations. In truth that PALI did not comply with the listing rules and disclosure
connection with this, the powers of the SEC over stock requirements. In fact, PALI's documents supporting its application
exchanges under the Revised Securities Act are specifically contained misrepresentations and misleading statements, and
enumerated, and these do not include the power to reverse the concealed material information. The matter of sequestration of
PALI's properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's
application.
It is undeniable that the petitioner PSE is not an ordinary
corporation, in that although it is clothed with the markings of a
corporate entity, it functions as the primary channel through which
the vessels of capital trade ply. The PSE's relevance to the
continued operation and filtration of the securities transactions in
the country gives it a distinct color of importance such that
government intervention in its affairs becomes justified, if not
necessarily. Indeed, as the only operational stock exchange in the
country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the
country's economy.
Due to this special nature of stock exchanges, the country's
lawmakers has seen it wise to give special treatment to the
administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of
jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the special
mandate to be vigilant in the supervision of the affairs of stock
exchanges so that the interests of the investing public may be fully
safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough
authority to uphold the SEC's challenged control authority over the
petitioner PSE even as it provides that "the Commission shall have
absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the grantees of
primary franchises and/or a license or permit issued by the
government to operate in the Philippines. . ." The SEC's regulatory
authority over private corporations encompasses a wide margin of
areas, touching nearly all of a corporation's concerns. This
authority springs from the fact that a corporation owes its
existence to the concession of its corporate franchise from the
state.
The SEC's power to look into the subject ruling of the PSE,
therefore, may be implied from or be considered as necessary or
incidental to the carrying out of the SEC's express power to insure
fair dealing in securities traded upon a stock exchange or to ensure
the fair administration of such exchange. 7 It is, likewise, observed
that the principal function of the SEC is the supervision and
control over corporations, partnerships and associations with the
end in view that investment in these entities may be encouraged
and protected, and their activities for the promotion of economic
development. 8
Thus, it was in the alleged exercise of this authority that the SEC
reversed the decision of the PSE to deny the application for listing
10
in the stock exchange of the private respondent PALI. The SEC's Questions of policy and of management are left to the honest
action was affirmed by the Court of Appeals. decision of the officers and directors of a corporation, and the courts
We affirm that the SEC is the entity with the primary say as to are without authority to substitute their judgment for the judgment
whether or not securities, including shares of stock of a of the board of directors. The board is the business manager of the
corporation, may be traded or not in the stock exchange. This is corporation, and so long as it acts in good faith, its orders are not
in line with the SEC's mission to ensure proper compliance with reviewable by the courts. 12
the laws, such as the Revised Securities Act and to regulate the Thus, notwithstanding the regulatory power of the SEC over the
sale and disposition of securities in the country. 9 As the PSE, and the resultant authority to reverse the PSE's decision in
appellate court explains: matters of application for listing in the market, the SEC may
Paramount policy also supports the authority of the exercise such power only if the PSE's judgment is attended by bad
public respondent to review petitioner's denial of the faith. In Board of Liquidators vs. Kalaw,13 it was held that bad faith
listing. Being a stock exchange, the petitioner performs does not simply connote bad judgment or negligence. It imports a
a function that is vital to the national economy, as the dishonest purpose or some moral obliquity and conscious doing of
business is affected with public interest. As a matter of wrong. It means a breach of a known duty through some motive or
fact, it has often been said that the economy moves on interest of ill will, partaking of the nature of fraud.
the basis of the rise and fall of stocks being traded. By In reaching its decision to deny the application for listing of PALI,
its economic power, the petitioner certainly can dictate the PSE considered important facts, which, in the general scheme,
which and how many users are allowed to sell brings to serious question the qualification of PALI to sell its shares
securities thru the facilities of a stock exchange, if to the public through the stock exchange. During the time for
allowed to interpret its own rules liberally as it may receiving objections to the application, the PSE heard from the
please. Petitioner can either allow or deny the entry to representative of the late President Ferdinand E. Marcos and his
the market of securities. To repeat, the monopoly, family who claim the properties of the private respondent to be part
unless accompanied by control, becomes subject to of the Marcos estate. In time, the PCGG confirmed this claim. In
abuse; hence, considering public interest, then it should fact, an order of sequestration has been issued covering the
be subject to government regulation. properties of PALI, and suit for reconveyance to the state has been
filed in the Sandiganbayan Court. How the properties were
The role of the SEC in our national economy cannot be
minimized. The legislature, through the Revised Securities Act, effectively transferred, despite the sequestration order, from the
TDC and MSDC to Rebecco Panlilio, and to the private respondent
Presidential Decree No. 902-A, and other pertinent laws, has
entrusted to it the serious responsibility of enforcing all laws PALI, in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise to serious
affecting corporations and other forms of associations not
otherwise vested in some other government office. 10 doubt as to the integrity of PALI as a stock issuer. The petitioner
was in the right when it refused application of PALI, for a contrary
This is not to say, however, that the PSE's management ruling was not to the best interest of the general public. The purpose
prerogatives are under the absolute control of the SEC. The PSE of the Revised Securities Act, after all, is to give adequate and
is, alter all, a corporation authorized by its corporate franchise toeffective protection to the investing public against fraudulent
engage in its proposed and duly approved business. One of the representations, or false promises, and the imposition of worthless
PSE's main concerns, as such, is still the generation of profit for ventures. 14
its stockholders. Moreover, the PSE has all the rights pertaining
to corporations, including the right to sue and be sued, to hold It is to be observed that the U.S. Securities Act emphasized its
property in its own name, to enter (or not to enter) into contracts avowed protection to acts detrimental to legitimate business, thus:
with third persons, and to perform all other legal acts within its The Securities Act, often referred to as the "truth in
allocated express or implied powers. securities" Act, was designed not only to provide investors
A corporation is but an association of individuals, allowed to with adequate information upon which to base their
transact under an assumed corporate name, and with a distinct decisions to buy and sell securities, but also to protect
legal personality. In organizing itself as a collective body, it legitimate business seeking to obtain capital through
waives no constitutional immunities and perquisites appropriate honest presentation against competition from crooked
to such a body. 11 As to its corporate and management decisions, promoters and to prevent fraud in the sale of securities.
(Tenth Annual Report, U.S. Securities & Exchange
therefore, the state will generally not interfere with the same.
Commission, p. 14).
 As has been pointed out, the effects of such an act are
chiefly (1) prevention of excesses and fraudulent
transactions, merely by requirement of that their details
be revealed; (2) placing the market during the early
stages of the offering of a security a body of information,
which operating indirectly through investment services
and expert investors, will tend to produce a more
accurate appraisal of a security, . . . Thus, the
Commission may refuse to permit a registration
statement to become effective if it appears on its face to
be incomplete or inaccurate in any material respect, and
empower the Commission to issue a stop order
suspending the effectiveness of any registration
statement which is found to include any untrue statement
of a material fact or to omit to state any material fact
required to be stated therein or necessary to make the
statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has established
its name and goodwill, and it has the right to protect such goodwill
by maintaining a reasonable standard of propriety in the entities
who choose to transact through its facilities. It was reasonable for
the PSE, therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are
trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of
government absolutism is a thing of the past, and should remain
so.
The observation that the title of PALI over its properties is
absolute and can no longer be assailed is of no moment. At this
juncture, there is the claim that the properties were owned by TDC
and MSDC and were transferred in violation of sequestration
orders, to Rebecco Panlilio and later on to PALI, besides the claim
of the Marcoses that such properties belong to the Marcos estate,
and were held only in trust by Rebecco Panlilio. It is also alleged
by the petitioner that these properties belong to naval and forest
reserves, and therefore beyond private dominion. If any of these
claims is established to be true, the certificates of title over the
subject properties now held by PALI map be disregarded, as it is
an established rule that a registration of a certificate of title does
not confer ownership over the properties described therein to the
person named as owner. The inscription in the registry, to be
effective, must be made in good faith. The defense of
indefeasibility of a Torrens Title does not extend to a transferee
who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted
correctly in refusing the application of PALI, the true ownership of
the properties of PALI need not be determined as an absolute fact.
What is material is that the uncertainty of the properties'
11
ownership and alienability exists, and this puts to question the
qualification of PALI's public offering. In sum, the Court finds
that the SEC had acted arbitrarily in arrogating unto itself the
discretion of approving the application for listing in the PSE of
the private respondent PALI, since this is a matter addressed to
the sound discretion of the PSE, a corporation entity, whose
business judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in
approving the registration and sale of securities in the SEC is not
for the Court to determine, but is left to the sound discretion of
the Securities and Exchange Commission. In mandating the SEC
to administer the Revised Securities Act, and in performing its
other functions under pertinent laws, the Revised Securities Act,
under Section 3 thereof, gives the SEC the power to promulgate
such rules and regulations as it may consider appropriate in the
public interest for the enforcement of the said laws. The second
paragraph of Section 4 of the said law, on the other hand,
provides that no security, unless exempt by law, shall be issued,
endorsed, sold, transferred or in any other manner conveyed to
the public, unless registered in accordance with the rules and
regulations that shall be promulgated in the public interest and
for the protection of investors by the Commission. Presidential
Decree No. 902-A, on the other hand, provides that the SEC, as
regulatory agency, has supervision and control over all
corporations and over the securities market as a whole, and as
such, is given ample authority in determining appropriate
policies. Pursuant to this regulatory authority, the SEC has
manifested that it has adopted the policy of "full material
disclosure" where all companies, listed or applying for listing,
are required to divulge truthfully and accurately, all material
information about themselves and the securities they sell, for the
protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In connection with
this, a fact is deemed material if it tends to induce or otherwise
effect the sale or purchase of its securities. 15 While the
employment of this policy is recognized and sanctioned by the
laws, nonetheless, the Revised Securities Act sets substantial and
procedural standards which a proposed issuer of securities must
satisfy. 16 Pertinently, Section 9 of the Revised Securities Act
sets forth the possible Grounds for the Rejection of the
registration of a security:
— The Commission may reject a registration statement
and refuse to issue a permit to sell the securities
included in such registration statement if it finds that
— PSE acted correctly in refusing the listing of PALI in its stock
(1) The registration statement is on its face incomplete
or inaccurate in any material respect or includes any
untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the provisions of
this Act, or the rules promulgated pursuant thereto, or any
order of the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission may, in
the public interest and for the protection of investors,
impose before the security can be registered;
(iv) has been engaged or is engaged or is about to engage
in fraudulent transaction;
(v) is in any way dishonest or is not of good repute; or
(vi) does not conduct its business in accordance with law
or is engaged in a business that is illegal or contrary to
government rules and regulations.
(3) The enterprise or the business of the issuer is not
shown to be sound or to be based on sound business
principles;
(4) An officer, member of the board of directors, or
principal stockholder of the issuer is disqualified to be
such officer, director or principal stockholder; or
(5) The issuer or registrant has not shown to the
satisfaction of the Commission that the sale of its security
would not work to the prejudice of the public interest or as
a fraud upon the purchasers or investors. (Emphasis
Ours)
A reading of the foregoing grounds reveals the intention of the
lawmakers to make the registration and issuance of securities
dependent, to a certain extent, on the merits of the securities
themselves, and of the issuer, to be determined by the Securities and
Exchange Commission. This measure was meant to protect the
interests of the investing public against fraudulent and worthless
securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The
absolute reliance on the full disclosure method in the registration of
securities is, therefore, untenable. As it is, the Court finds that the
private respondent PALI, on at least two points (nos. 1 and 5) has
failed to support the propriety of the issue of its shares with
unfailing clarity, thereby lending support to the conclusion that the
exchange. This does not discount the effectivity of whatever method
the SEC, in the exercise of its vested authority, chooses in setting
the standard for public offerings of corporations wishing to do so.
However, the SEC must recognize and implement the mandate of
the law, particularly the Revised Securities Act, the provisions of
which cannot be amended or supplanted by mere administrative
issuance.
In resume, the Court finds that the PSE has acted with justified
circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is
justified by the law and by the circumstances attendant to this
case.
ACCORDINGLY, in view of the foregoing considerations, the
Court hereby GRANTS the Petition for Review on Certiorari. The
Decisions of the Court of Appeals and the Securities and
Exchange Commission dated July 27, 1996 and April 24, 1996
respectively, are hereby REVERSED and SET ASIDE, and a new
Judgment is hereby ENTERED, affirming the decision of the
Philippine Stock Exchange to deny the application for listing of
the private respondent Puerto Azul Land, Inc.
SO ORDERED.
G.R. No. 142936 April 17, 2002
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR
DEVELOPMENT CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC & ENGINEERING
COMPANY, respondent.
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct
and separate from the persons and entities owning it. The
corporate veil may be lifted only if it has been used to shield fraud,
defend crime, justify a wrong, defeat public convenience, insulate
bad faith or perpetuate injustice. Thus, the mere fact that the
Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill
(PASUMIL), which had earlier been foreclosed and purchased at
the resulting public auction by the Development Bank of the
Philippines (DBP), will not make PNB liable for the PASUMIL’s
contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000
Decision1 of the Court of Appeals (CA) in CA-GR CV No. 57610.
The decretal portion of the challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby
AFFIRMED."2
12
The Facts
The factual antecedents of the case are summarized by the Court
of Appeals as follows:
"In its complaint, the plaintiff [herein respondent]
alleged that it is a partnership duly organized, existing,
and operating under the laws of the Philippines, with
office and principal place of business at Nos. 794-812
Del Monte [A]venue, Quezon City, while the defendant
[herein petitioner] Philippine National Bank (herein
referred to as PNB), is a semi-government corporation
duly organized, existing and operating under the laws
of the Philippines, with office and principal place of
business at Escolta Street, Sta. Cruz, Manila; whereas,
the other defendant, the National Sugar Development
Corporation (NASUDECO in brief), is also a semi-
government corporation and the sugar arm of the PNB,
with office and principal place of business at the 2nd
Floor, Sampaguita Building, Cubao, Quezon City; and
the defendant Pampanga Sugar Mills (PASUMIL in
short), is a corporation organized, existing and
operating under the 1975 laws of the Philippines, and
had its business office before 1975 at Del Carmen,
Floridablanca, Pampanga; that the plaintiff is engaged
in the business of general construction for the repairs
and/or construction of different kinds of machineries
and buildings; that on August 26, 1975, the defendant
PNB acquired the assets of the defendant PASUMIL
that were earlier foreclosed by the Development Bank
of the Philippines (DBP) under LOI No. 311; that the
defendant PNB organized the defendant NASUDECO
in September, 1975, to take ownership and possession
of the assets and ultimately to nationalize and
consolidate its interest in other PNB controlled sugar
mills; that prior to October 29, 1971, the defendant
PASUMIL engaged the services of plaintiff for
electrical rewinding and repair, most of which were
partially paid by the defendant PASUMIL, leaving
several unpaid accounts with the plaintiff; that finally,
on October 29, 1971, the plaintiff and the defendant
PASUMIL entered into a contract for the plaintiff to
perform the following, to wit –
‘(a) Construction of one (1) power house
building;
‘(b) Construction of three (3) reinforced
concrete foundation for three (3) units 350
KW diesel engine generating set[s];
‘(c) Construction of three (3) reinforced concrete
foundation for the 5,000 KW and 1,250 KW
turbo generator sets;
‘(d) Complete overhauling and reconditioning
tests sum for three (3) 350 KW diesel engine
generating set[s];
‘(e) Installation of turbine and diesel generating
sets including transformer, switchboard,
electrical wirings and pipe provided those stated
units are completely supplied with their
accessories;
‘(f) Relocating of 2,400 V transmission line,
demolition of all existing concrete foundation
and drainage canals, excavation, and earth
fillings – all for the total amount of P543,500.00
as evidenced by a contract, [a] xerox copy of
which is hereto attached as Annex ‘A’ and made
an integral part of this complaint;’
that aside from the work contract mentioned-above, the
defendant PASUMIL required the plaintiff to perform
extra work, and provide electrical equipment and spare
parts, such as:
‘(a) Supply of electrical devices;
‘(b) Extra mechanical works;
‘(c) Extra fabrication works;
‘(d) Supply of materials and consumable items;
‘(e) Electrical shop repair;
‘(f) Supply of parts and related works for turbine
generator;
‘(g) Supply of electrical equipment for
machinery;
‘(h) Supply of diesel engine parts and other
related works including fabrication of parts.’
that out of the total obligation of P777,263.80, the
defendant PASUMIL had paid only P250,000.00, leaving
an unpaid balance, as of June 27, 1973, amounting to
P527,263.80, as shown in the Certification of the chief
accountant of the PNB, a machine copy of which is
appended as Annex ‘C’ of the complaint; that out of said
unpaid balance of P527,263.80, the defendant PASUMIL
made a partial payment to the plaintiff of P14,000.00, in
broken amounts, covering the period from January 5, 1974
up to May 23, 1974, leaving an unpaid balance of
P513,263.80; that the defendant PASUMIL and the
defendant PNB, and now the defendant NASUDECO,
 failed and refused to pay the plaintiff their just, valid and
demandable obligation; that the President of the
NASUDECO is also the Vice-President of the PNB, and
this official holds office at the 10th Floor of the PNB,
Escolta, Manila, and plaintiff besought this official to
pay the outstanding obligation of the defendant
PASUMIL, inasmuch as the defendant PNB and
NASUDECO now owned and possessed the assets of the
defendant PASUMIL, and these defendants all benefited
from the works, and the electrical, as well as the
engineering and repairs, performed by the plaintiff; that
because of the failure and refusal of the defendants to
pay their just, valid, and demandable obligations,
plaintiff suffered actual damages in the total amount of
P513,263.80; and that in order to recover these sums, the
plaintiff was compelled to engage the professional
services of counsel, to whom the plaintiff agreed to pay a
sum equivalent to 25% of the amount of the obligation
due by way of attorney’s fees. Accordingly, the plaintiff
prayed that judgment be rendered against the defendants
PNB, NASUDECO, and PASUMIL, jointly and
severally to wit:
‘(1) Sentencing the defendants to pay the
plaintiffs the sum of P513,263.80, with annual
interest of 14% from the time the obligation
falls due and demandable;
‘(2) Condemning the defendants to pay
attorney’s fees amounting to 25% of the
amount claim;
‘(3) Ordering the defendants to pay the costs of
the suit.’
"The defendants PNB and NASUDECO filed a joint
motion to dismiss the complaint chiefly on the ground
that the complaint failed to state sufficient allegations to
establish a cause of action against both defendants,
inasmuch as there is lack or want of privity of contract
between the plaintiff and the two defendants, the PNB
and NASUDECO, said defendants citing Article 1311 of
the New Civil Code, and the case law ruling in Salonga
v. Warner Barnes & Co., 88 Phil. 125; and Manila Port
Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in
its Order of November 27, 1980; in the same order, that
court directed the defendants to file their answer to the
complaint within 15 days.
"In their answer, the defendant NASUDECO reiterated
the grounds of its motion to dismiss, to wit:
13
‘That the complaint does not state a sufficient
cause of action against the defendant
NASUDECO because: (a) NASUDECO is
not x x x privy to the various electrical
construction jobs being sued upon by the
plaintiff under the present complaint; (b) the
taking over by NASUDECO of the assets of
defendant PASUMIL was solely for the
purpose of reconditioning the sugar central of
defendant PASUMIL pursuant to martial law
powers of the President under the
Constitution; (c) nothing in the LOI No. 189-
A (as well as in LOI No. 311) authorized or
commanded the PNB or its subsidiary
corporation, the NASUDECO, to assume the
corporate obligations of PASUMIL as that
being involved in the present case; and, (d)
all that was mentioned by the said letter of
instruction insofar as the PASUMIL
liabilities [were] concerned [was] for the
PNB, or its subsidiary corporation the
NASUDECO, to make a study of, and submit
[a] recommendation on the problems
concerning the same.’
"By way of counterclaim, the NASUDECO averred
that by reason of the filing by the plaintiff of the
present suit, which it [labeled] as unfounded or
baseless, the defendant NASUDECO was constrained
to litigate and incur litigation expenses in the amount
of P50,000.00, which plaintiff should be sentenced to
pay. Accordingly, NASUDECO prayed that the
complaint be dismissed and on its counterclaim, that
the plaintiff be condemned to pay P50,000.00 in
concept of attorney’s fees as well as exemplary
damages.
"In its answer, the defendant PNB likewise reiterated
the grounds of its motion to dismiss, namely: (1) the
complaint states no cause of action against the
defendant PNB; (2) that PNB is not a party to the
contract alleged in par. 6 of the complaint and that the
alleged services rendered by the plaintiff to the
defendant PASUMIL upon which plaintiff’s suit is
erected, was rendered long before PNB took possession
of the assets of the defendant PASUMIL under LOI
No. 189-A; (3) that the PNB take-over of the assets of
the defendant PASUMIL under LOI 189-A was solely
for the purpose of reconditioning the sugar central so
that PASUMIL may resume its operations in time for
the 1974-75 milling season, and that nothing in the said
LOI No. 189-A, as well as in LOI No. 311, authorized or
directed PNB to assume the corporate obligation/s of
PASUMIL, let alone that for which the present action is
brought; (4) that PNB’s management and operation under
LOI No. 311 did not refer to any asset of PASUMIL
which the PNB had to acquire and thereafter [manage],
but only to those which were foreclosed by the DBP and
were in turn redeemed by the PNB from the DBP; (5) that
conformably to LOI No. 311, on August 15, 1975, the
PNB and the Development Bank of the Philippines (DBP)
entered into a ‘Redemption Agreement’ whereby DBP
sold, transferred and conveyed in favor of the PNB, by
way of redemption, all its (DBP) rights and interest in and
over the foreclosed real and/or personal properties of
PASUMIL, as shown in Annex ‘C’ which is made an
integral part of the answer; (6) that again, conformably
with LOI No. 311, PNB pursuant to a Deed of Assignment
dated October 21, 1975, conveyed, transferred, and
assigned for valuable consideration, in favor of
NASUDECO, a distinct and independent corporation, all
its (PNB) rights and interest in and under the above
‘Redemption Agreement.’ This is shown in Annex ‘D’
which is also made an integral part of the answer; [7] that
as a consequence of the said Deed of Assignment, PNB on
October 21, 1975 ceased to managed and operate the
above-mentioned assets of PASUMIL, which function
was now actually transferred to NASUDECO. In other
words, so asserted PNB, the complaint as to PNB, had
become moot and academic because of the execution of
the said Deed of Assignment; [8] that moreover, LOI No.
311 did not authorize or direct PNB to assume the
corporate obligations of PASUMIL, including the alleged
obligation upon which this present suit was brought; and
[9] that, at most, what was granted to PNB in this respect
was the authority to ‘make a study of and submit
recommendation on the problems concerning the claims of
PASUMIL creditors,’ under sub-par. 5 LOI No. 311.
"In its counterclaim, the PNB averred that it was
unnecessarily constrained to litigate and to incur expenses
in this case, hence it is entitled to claim attorney’s fees in
the amount of at least P50,000.00. Accordingly, PNB
prayed that the complaint be dismissed; and that on its
counterclaim, that the plaintiff be sentenced to pay
defendant PNB the sum of P50,000.00 as attorney’s fees,
aside from exemplary damages in such amount that the
court may seem just and equitable in the premises.
 "Summons by publication was made via the Philippines
Daily Express, a newspaper with editorial office at 371
Bonifacio Drive, Port Area, Manila, against the
defendant PASUMIL, which was thereafter declared in
default as shown in the August 7, 1981 Order issued by
the Trial Court.
"After due proceedings, the Trial Court rendered
judgment, the decretal portion of which reads:
‘WHEREFORE, judgment is hereby rendered
in favor of plaintiff and against the defendant
Corporation, Philippine National Bank (PNB)
NATIONAL SUGAR DEVELOPMENT
CORPORATION (NASUDECO) and
PAMPANGA SUGAR MILLS (PASUMIL),
ordering the latter to pay jointly and severally
the former the following:
‘1. The sum of P513,623.80 plus
interest thereon at the rate of 14%
per annum as claimed from
September 25, 1980 until fully paid;
‘2. The sum of P102,724.76 as
attorney’s fees; and,
‘3. Costs.
‘SO ORDERED.
‘Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO
‘Judge’"3
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the
basic tenets of justice and equity for a corporation to take over and
operate the business of another corporation, while disavowing or
repudiating any responsibility, obligation or liability arising
therefrom.4
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following errors for the
Court’s consideration:
"I
The Court of Appeals gravely erred in law in holding the
herein petitioners liable for the unpaid corporate debts of
PASUMIL, a corporation whose corporate existence has
not been legally extinguished or terminated, simply
because of petitioners[’] take-over of the management
14
and operation of PASUMIL pursuant to the mandates Equally well-settled is the principle that the corporate mask may be
of LOI No. 189-A, as amended by LOI No. 311. removed or the corporate veil pierced when the corporation is just
"II an alter ego of a person or of another corporation.14 For reasons of
public policy and in the interest of justice, the corporate veil will
The Court of Appeals gravely erred in law in not justifiably be impaled15 only when it becomes a shield for fraud,
applying [to] the case at bench the ruling enunciated in illegality or inequity committed against third persons.16
Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415."6
Hence, any application of the doctrine of piercing the corporate veil
Succinctly put, the aforesaid errors boil down to the principal should be done with caution.17 A court should be mindful of the
issue of whether PNB is liable for the unpaid debts of PASUMIL milieu where it is to be applied.18 It must be certain that the
to respondent.
corporate fiction was misused to such an extent that injustice, fraud,
This Court’s Ruling or crime was committed against another, in disregard of its
The Petition is meritorious. rights.19 The wrongdoing must be clearly and convincingly
established; it cannot be presumed.20 Otherwise, an injustice that
Main Issue: was never unintended may result from an erroneous application.21
Liability for Corporate Debts This Court has pierced the corporate veil to ward off a judgment
As a general rule, questions of fact may not be raised in a petition credit,22 to avoid inclusion of corporate assets as part of the estate
for review under Rule 45 of the Rules of Court.7To this rule, of the decedent,23 to escape liability arising from a debt,24 or to
however, there are some exceptions enumerated in Fuentes v. perpetuate fraud and/or confuse legitimate issues25 either to
Court of Appeals.8 After a careful scrutiny of the records and the promote or to shield unfair objectives26 or to cover up an otherwise
pleadings submitted by the parties, we find that the lower courts blatant violation of the prohibition against forum-shopping.27 Only
misappreciated the evidence presented.9 Overlooked by the CA in these and similar instances may the veil be pierced and
were certain relevant facts that would justify a conclusion disregarded.28
different from that reached in the assailed Decision.10 The question of whether a corporation is a mere alter ego is one of
Petitioners posit that they should not be held liable for the fact.29 Piercing the veil of corporate fiction may be allowed only if
corporate debts of PASUMIL, because their takeover of the the following elements concur: (1) control -- not mere stock control,
latter’s foreclosed assets did not make them assignees. On the but complete domination -- not only of finances, but of policy and
other hand, respondent asserts that petitioners and PASUMIL business practice in respect to the transaction attacked, must have
should be treated as one entity and, as such, jointly and severally been such that the corporate entity as to this transaction had at the
held liable for PASUMIL’s unpaid obligation.1âwphi1.nêt time no separate mind, will or existence of its own; (2) such control
must have been used by the defendant to commit a fraud or a wrong
As a rule, a corporation that purchases the assets of another will
to perpetuate the violation of a statutory or other positive legal duty,
not be liable for the debts of the selling corporation, provided the
former acted in good faith and paid adequate consideration for or a dishonest and an unjust act in contravention of plaintiff’s legal
such assets, except when any of the following circumstances is right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of.30
present: (1) where the purchaser expressly or impliedly agrees to
assume the debts, (2) where the transaction amounts to a We believe that the absence of the foregoing elements in the present
consolidation or merger of the corporations, (3) where the case precludes the piercing of the corporate veil. First, other than
purchasing corporation is merely a continuation of the selling the fact that petitioners acquired the assets of PASUMIL, there is no
corporation, and (4) where the transaction is fraudulently entered showing that their control over it warrants the disregard of corporate
into in order to escape liability for those debts.11 personalities.31 Second, there is no evidence that their juridical
personality was used to commit a fraud or to do a wrong; or that the
Piercing the Corporate
separate corporate entity was farcically used as a mere alter ego,
Veil Not Warranted business conduit or instrumentality of another entity or
A corporation is an artificial being created by operation of law. It person.32 Third, respondent was not defrauded or injured when
possesses the right of succession and such powers, attributes, and petitioners acquired the assets of PASUMIL.33
properties expressly authorized by law or incident to its Being the party that asked for the piercing of the corporate veil,
existence.12 It has a personality separate and distinct from the respondent had the burden of presenting clear and convincing
persons composing it, as well as from any other legal entity to evidence to justify the setting aside of the separate corporate
which it may be related.13 This is basic.
personality rule.34 However, it utterly failed to discharge this
burden;35 it failed to establish by competent evidence that
petitioner’s separate corporate veil had been used to conceal fraud,
illegality or inequity.36
While we agree with respondent’s claim that the assets of the
National Sugar Development Corporation (NASUDECO) can be
easily traced to PASUMIL,37 we are not convinced that the
transfer of the latter’s assets to petitioners was fraudulently entered
into in order to escape liability for its debt to respondent.38
A careful review of the records reveals that DBP foreclosed the
mortgage executed by PASUMIL and acquired the assets as the
highest bidder at the public auction conducted.39 The bank was
justified in foreclosing the mortgage, because the PASUMIL
account had incurred arrearages of more than 20 percent of the
total outstanding obligation.40 Thus, DBP had not only a right, but
also a duty under the law to foreclose the subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No.
311,43 PNB acquired PASUMIL’s assets that DBP had foreclosed
and purchased in the normal course. Petitioner bank was likewise
tasked to manage temporarily the operation of such assets either
by itself or through a subsidiary corporation.44
PNB, as the second mortgagee, redeemed from DBP the
foreclosed PASUMIL assets pursuant to Section 6 of Act No.
3135.45 These assets were later conveyed to PNB for a
consideration, the terms of which were embodied in the
Redemption Agreement.46 PNB, as successor-in-interest, stepped
into the shoes of DBP as PASUMIL’s creditor.47By way of a
Deed of Assignment,48 PNB then transferred to NASUDECO all
its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,49 we
had the occasion to resolve a similar issue. We ruled that PNB,
DBP and their transferees were not liable for Marinduque
Mining’s unpaid obligations to Remington Industrial Sales
Corporation (Remington) after the two banks had foreclosed the
assets of Marinduque Mining. We likewise held that Remington
failed to discharge its burden of proving bad faith on the part of
Marinduque Mining to justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial court’s
lifting of the corporate mask.50 The CA did not point to any fact
evidencing bad faith on the part of PNB and its transferee.51 The
corporate fiction was not used to defeat public convenience, justify
a wrong, protect fraud or defend crime.52 None of the foregoing
exceptions was shown to exist in the present case.53 On the
contrary, the lifting of the corporate veil would result in manifest
injustice. This we cannot allow.
No Merger or Consolidation
15
Respondent further claims that petitioners should be held liable ANTONIO VAZQUEZ, petitioner,
for the unpaid obligations of PASUMIL by virtue of LOI Nos. vs.
189-A and 311, which expressly authorized PASUMIL and PNB FRANCISCO DE BORJA, respondent.
to merge or consolidate. On the other hand, petitioners contend x---------------------------------------------------------x
that their takeover of the operations of PASUMIL did not involve
any corporate merger or consolidation, because the latter had G.R. No. L-48931 February 23, 1944
never lost its separate identity as a corporation. FRANCISCO DE BORJA, petitioner,
A consolidation is the union of two or more existing entities to vs.
form a new entity called the consolidated corporation. A merger, ANTONIO VAZQUEZ, respondent.
on the other hand, is a union whereby one or more existing OZAETA, J.:
corporations are absorbed by another corporation that survives This action was commenced in the Court of First Instance of Manila
and continues the combined business.54 by Francisco de Borja against Antonio Vazquez and Fernando
The merger, however, does not become effective upon the mere Busuego to recover from them jointly and severally the total sum of
agreement of the constituent corporations.55 Since a merger or P4,702.70 upon three alleged causes of action, to wit: First, that in
consolidation involves fundamental changes in the corporation, or about the month of January, 1932, the defendants jointly and
as well as in the rights of stockholders and creditors, there must severally obligated themselves to sell to the plaintiff 4,000 cavans of
be an express provision of law authorizing them.56 For a valid palay at P2.10 per cavan, to be delivered during the month of
merger or consolidation, the approval by the Securities and February, 1932, the said defendants having subsequently received
Exchange Commission (SEC) of the articles of merger or from the plaintiff in virtue of said agreement the sum of P8,400; that
consolidation is required.57These articles must likewise be duly the defendants delivered to the plaintiff during the months of
approved by a majority of the respective stockholders of the February, March, and April, 1932, only 2,488 cavans of palay of the
constituent corporations.58 value of P5,224.80 and refused to deliver the balance of 1,512
cavans of the value of P3,175.20 notwithstanding repeated demands.
In the case at bar, we hold that there is no merger or
consolidation with respect to PASUMIL and PNB. The Second, that because of defendants' refusal to deliver to the plaintiff
the said 1,512 cavans of palay within the period above mentioned,
procedure prescribed under Title IX of the Corporation
Code59 was not followed. the plaintiff suffered damages in the sum of P1,000. And, third, that
on account of the agreement above mentioned the plaintiff delivered
In fact, PASUMIL’s corporate existence, as correctly found by to the defendants 4,000 empty sacks, of which they returned to the
the CA, had not been legally extinguished or plaintiff only 2,490 and refused to deliver to the plaintiff the balance
terminated.60 Further, prior to PNB’s acquisition of the of 1,510 sacks or to pay their value amounting to P377.50; and that
foreclosed assets, PASUMIL had previously made partial on account of such refusal the plaintiff suffered damages in the sum
payments to respondent for the former’s obligation in the amount of P150.
of P777,263.80. As of June 27, 1973, PASUMIL had paid
P250,000 to respondent and, from January 5, 1974 to May 23, The defendant Antonio Vazquez answered the complaint, denying
1974, another P14,000. having entered into the contract mentioned in the first cause of
action in his own individual and personal capacity, either solely or
Neither did petitioner expressly or impliedly agree to assume the together with his codefendant Fernando Busuego, and alleging that
debt of PASUMIL to respondent.61 LOI No. 11 explicitly the agreement for the purchase of 4,000 cavans of palay and the
provides that PNB shall study and submit recommendations on payment of the price of P8,400 were made by the plaintiff with and
the claims of PASUMIL’s creditors.62Clearly, the corporate to the Natividad-Vasquez Sabani Development Co., Inc., a
separateness between PASUMIL and PNB remains, despite corporation organized and existing under the laws of the
respondent’s insistence to the contrary.63 Philippines, of which the defendant Antonio Vazquez was the acting
WHEREFORE, the Petition is hereby GRANTED and the manager at the time the transaction took place. By way of
assailed Decision SET ASIDE. No pronouncement as to costs. counterclaim, the said defendant alleged that he suffered damages in
SO ORDERED. the sum of P1,000 on account of the filing of this action against him
by the plaintiff with full knowledge that the said defendant had
G.R. No. L-48930 February 23, 1944 nothing to do whatever with any and all of the transactions
mentioned in the complaint in his own individual and personal
capacity.
The trial court rendered judgment ordering the defendant Antonio
Vazquez to pay to the plaintiff the sum of P3,175.20 plus the sum
of P377.50, with legal interest on both sums, and absolving the
defendant Fernando Busuego (treasurer of the corporation) from
the complaint and the plaintiff from the defendant Antonio
Vazquez' counterclaim. Upon appeal to the Court of Appeals, the
latter modified that judgment by reducing it to the total sum of
P3,314.78, with legal interest thereon and the costs. But by a
subsequent resolution upon the defendant's motion for
reconsideration, the Court of Appeals set aside its judgment and
ordered that the case be remanded to the court of origin for further
proceedings. The defendant Vazquez, not being agreeable to that
result, filed the present petition for certiorari (G.R. No. 48930) to
review and reverse the judgment of the Court of Appeals; and the
plaintiff Francisco de Borja, excepting to the resolution of the
Court of Appeals whereby its original judgment was set aside and
the case was ordered remanded to the court of origin for further
proceedings, filed a cross-petition for certiorari (G.R. No. 48931)
to maintain the original judgment of the Court of Appeals.
The original decision of the Court of Appeals and its subsequent
resolutions on reconsideration read as follows:
Es hecho no controvertido que el 25 de Febrero de 1932,
el demandado-apelante vendio al demandante 4,000
cavanes de palay al precio de P2.10 el cavan, de los
cuales, dicho demandante solamente recibio 2,583
cavanes; y que asimismo recibio para su envase 4,000
sacos vacios. Esta provbado que de dichos 4,000 sacos
vacios solamente se entregaron, 2,583 quedando en
poder del demandado el resto, y cuyo valor es el de
P0.24 cada uno. Presentada la demanda contra los
demandados Antonio Vazquez y Fernando Busuego para
el pago de la cantidad de P4,702.70, con sus intereses
legales desde el 1.o de marzo de 1932 chuchuchu
Upon consideration of the motion of the attorney for the
plaintiff-appellee in case CA-G.R. No. 8676, Francisco
de Borja vs. Antonio Vasquez et al., praying, for the
reasons therein given, that the resolution of December
22, 1942, be reconsidered: Considering that said
resolution remanding the case to the lower court is for
the benefit of the plaintiff-appellee to afford him
opportunity to refute the contention of the defendant-
appellant Antonio Vazquez, motion denied.
The action is on a contract, and the only issue pleaded and tried is
whether the plaintiff entered into the contract with the defendant
Antonio Vazquez in his personal capacity or as manager of the
Natividad-Vazquez Sabani Development Co., Inc. The Court of
Appeals found that according to the preponderance of the evidence
"the sale made by Antonio Vazquez in favor of Francisco de Borja
16
of 4,000 cavans of palay was in his capacity as acting president fraudulent purpose. No such thing has been alleged or proven in this
and manager of the corporation Natividad-Vazquez Sabani case. It has not been alleged nor even intimated that Vazquez
Development Co., Inc." That finding of fact is final and, it personally benefited by the contract of sale in question and that he is
resolving the only issue involved, should be determinative of the merely invoking the legal fiction to avoid personal liability. Neither
result. is it contended that he entered into said contract for the corporation
The Court of Appeals doubly erred in ordering that the cause be in bad faith and with intent to defraud the plaintiff. We find no legal
remanded to the court of origin for further trial to determine and factual basis upon which to hold him liable on the contract
whether the corporation had sufficient stock of palay at the time either principally or subsidiarily.
appellant sold, 1500 cavans of palay to Kwong Ah Phoy. First, if The trial court found him guilty of negligence in the performance of
that point was material to the issue, it should have been proven the contract and held him personally liable on that account. On the
during the trial; and the statement of the court that it had not been other hand, the Court of Appeals found that he "no solamente obro
sufficiently discussed and proven was no justification for con negligencia, sino interveniendo culpa de su parte, por lo que de
ordering a new trial, which, by the way, neither party had acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe
solicited but against which, on the contrary, both parties now ser responsable subsidiariamente del pago de la cantidad objeto de
vehemently protest. Second, the point is, in any event, beside the la demanda." We think both the trial court and the Court of Appeals
issue, and this we shall now discuss in connection with the erred in law in so holding. They have manifestly failed to
original judgment of the Court of Appeals which the plaintiff distinguish a contractual from an extracontractual obligation, or an
cross-petitioner seeks to maintain. obligation arising from contract from an obligation arising
The action being on a contract, and it appearing from the from culpa aquiliana. The fault and negligence referred to in
preponderance of the evidence that the party liable on the articles 1101-1104 of the Civil Code are those incidental to the
contract is the Natividad-Vazquez Sabani Development Co., Inc. fulfillment or nonfullfillment of a contractual obligation; while the
which is not a party herein, the complaint should have been fault or negligence referred to in article 1902 is the culpa
dismissed. Counsel for the plaintiff, in his brief as respondent, aquiliana of the civil law, homologous but not identical to tort of
argues that altho by the preponderance of the evidence the trial the common law, which gives rise to an obligation independently of
court and the Court of Appeals found that Vazquez celebrated the any contract. (Cf. Manila R.R. Co. vs. Cia. Trasatlantica, 38 Phil.,
contract in his capacity as acting president of the corporation and 875, 887-890; Cangco vs. Manila R.R. Co., 38 Phil. 768.) The fact
altho it was the latter, thru Vazquez, with which the plaintiff had that the corporation, acting thru Vazquez as its manager, was guilty
contracted and which, thru Vazquez, had received the sum of of negligence in the fulfillment of the contract, did not make
P8,400 from Borja, and altho that was true from the point of view Vazquez principally or even subsidiarily liable for such negligence.
of a legal fiction, "ello no impede que tambien sea verdad lo Since it was the corporation's contract, its nonfulfillment, whether
alegado en la demanda de que la misma persona de Vasquez fue due to negligence or fault or to any other cause, made the
la que contrato con Borja y que la misma persona de Vasquez fue corporation and not its agent liable.
quien recibio la suma de P8,400." But such argument is invalid On the other hand if independently of the contract Vazquez by his
and insufficient to show that the president of the corporation is fault or negligence cause damaged to the plaintiff, he would be
personally liable on the contract duly and lawfully entered into liable to the latter under article 1902 of the Civil Code. But then the
by him in its behalf. plaintiff's cause of action should be based on culpa aquiliana and
It is well known that a corporation is an artificial being invested not on the contract alleged in his complaint herein; and Vazquez'
by law with a personality of its own, separate and distinct from liability would be principal and not merely subsidiary, as the Court
that of its stockholders and from that of its officers who manage of Appeals has erroneously held. No such cause of action was
and run its affairs. The mere fact that its personality is owing to a alleged in the complaint or tried by express or implied consent of
legal fiction and that it necessarily has to act thru its agents, doesthe parties by virtue of section 4 of Rule 17. Hence the trial court
not make the latter personally liable on a contract duly entered had no jurisdiction over the issue and could not adjudicate upon it
into, or for an act lawfully performed, by them for an in its (Reyes vs. Diaz, G.R. No. 48754.) Consequently it was error for the
Court of Appeals to remand the case to the trial court to try and
behalf. The legal fiction by which the personality of a
corporation is created is a practical reality and necessity. Without decide such issue.
it no corporate entities may exists and no corporate business may It only remains for us to consider petitioner's second assignment of
be transacted. Such legal fiction may be disregarded only when error referring to the lower courts' refusal to entertain his
an attempt is made to use it as a cloak to hide an unlawful or counterclaim for damages against the respondent Borja arising from
the bringing of this action. The lower courts having sustained
plaintiff's action. The finding of the Court of Appeals that
according to the preponderance of the evidence the defendant
Vazquez celebrated the contract not in his personal capacity but as
acting president and manager of the corporation, does not warrant
his contention that the suit against him is malicious and tortious;
and since we have to decide defendant's counterclaim upon the
facts found by the Court of Appeals, we find no sufficient basis
upon which to sustain said counterclaim. Indeed, we feel that a a
matter of moral justice we ought to state here that the indignant
attitude adopted by the defendant towards the plaintiff for having
brought this action against him is in our estimation not wholly
right. Altho from the legal point of view he was not personally
liable for the fulfillment of the contract entered into by him on
behalf of the corporation of which he was the acting president and
manager, we think it was his moral duty towards the party with
whom he contracted in said capacity to see to it that the
corporation represented by him fulfilled the contract by delivering
the palay it had sold, the price of which it had already received.
Recreant to such duty as a moral person, he has no legitimate
cause for indignation. We feel that under the circumstances he not
only has no cause of action against the plaintiff for damages but is
not even entitled to costs.
The judgment of the Court of Appeals is reversed, and the
complaint is hereby dismissed, without any finding as to costs.
WENSHA SPA VS YUNG
This is a petition for review on certiorari under Rule 45 of the
Rules of Court filed by an employer who was charged before the
National Labor Relations Commission (NLRC) for dismissing an
employee upon the advice of a Feng Shui master. In this action,
the petitioners assail the May 28, 2008 Decision[1] and October
23, 2008 Resolution[2] of the Court of Appeals (CA) in CA-G.R.
SP No. 98855 entitled Loreta T. Yung v. National Labor Relations
Commission, Wensha Spa Center, Inc. and/or Xu Zhi Jie.
THE FACTS:
Wensha Spa Center, Inc. (Wensha) in Quezon City is in the
business of sauna bath and massage services. Xu Zhi Jie a.k.a.
Pobby Co (Xu) is its president,[3] respondent Loreta T.
Yung (Loreta) was its administrative manager at the time of her
termination from employment.
17
In her position paper,[4] Loreta stated that she used to be
employed by Manmen Services Co., Ltd. (Manmen) where Xu
was a client. Xu was apparently impressed by Loretas
performance. After he established Wensha, he convinced Loreta
to transfer and work at Wensha. Loreta was initially reluctant to
accept Xus offer because her job at Manmen was stable and she
had been with Manmen for seven years. But Xu was persistent
and offered her a higher pay. Enticed, Loreta resigned from
Manmen and transferred to Wensha. She started working
on April 21, 2004 as Xus personal assistant and interpreter at a
monthly salary of P12,000.00.
Loreta introduced positive changes to Wensha which resulted in
increased business. This pleased Xu so that on May 18, 2004, she
was promoted to the position of Administrative Manager.[5]
Loreta recounted that on August 10, 2004, she was asked to leave
her office because Xu and a Feng Shui master were exploring the
premises. Later that day, Xu asked Loreta to go on leave with
pay for one month. She did so and returned on September 10,
2004. Upon her return, Xu and his wife asked her to resign from
Wensha because, according to the Feng Shui master, her aura did
not match that of Xu. Loreta refused but was informed that she
could no longer continue working at Wensha. That same
afternoon, Loreta went to the NLRC and filed a case for illegal
dismissal against Xu and Wensha.
Wensha and Xu denied illegally terminating Loretas
employment. They claimed that two months after Loreta was
hired, they received various complaints against her from the
employees so that on August 10, 2004, they advised her to take a
leave of absence for one month while they conducted an
investigation on the matter. Based on the results of the
investigation, they terminated Loretas employment on August
31, 2004 for loss of trust and confidence.[6]
The Labor Arbiter (LA) Francisco Robles dismissed Loretas
complaint for lack of merit. He found it more probable that
Loreta was dismissed from her employment due to Wenshas loss
of trust and confidence in her. The LAs decision[7] partly reads:
However, this office has found it dubious and hard to
believe the contentions made by the complainant that
she was dismissed by the respondents on the sole
ground that she is a mismatch in respondents' business as
advised by an alleged Feng Shui Master.The complainant
herself alleged in her position paper that she has done
several improvements in respondents business such as
uplifting the morale and efficiency of its employees and
increasing respondents clientele, and that respondent Co
was very much pleased with the improvements made by
the complainant that she was offered twice a promotion
but she nevertheless declined. It would be against human
experience and contrary to business acumen to let go of
someone, who was an asset and has done so much for the
company merely on the ground that she is a mismatch to
the business. Absent any proof submitted by the
complainant, this office finds it more probable that the
complainant was dismissed due to loss of trust and
confidence.[8]
This ruling was affirmed by the NLRC in its December 29, 2006
Resolution,[9] citing its observation that Wensha was still
considering the proper action to take on the day Loreta left Wensha
and filed her complaint. The NLRC added that this finding was
bolstered by Wenshas September 10, 2004 letter to Loreta asking
her to come back to personally clarify some matters, but she
declined because she had already filed a case.
Loreta moved for a reconsideration of the NLRCs ruling but her
motion was denied. Loreta then went to the CA on a petition for
certiorari. The CA reversed the ruling of the NLRC on the ground
that it gravely abused its discretion in appreciating the factual bases
that led to Loretas dismissal. The CA noted that there were
irregularities and inconsistencies in Wenshas position. The CA
stated the following:
We, thus, peruse the affidavits and documentary evidence
of the Private Respondents and find the
following: First, on the affidavits of their witnesses, it
must be noted that the same were mere photocopies. It
was held that [T]he purpose of the rule in requiring the
production of the best evidence is the prevention of fraud,
because if a party is in possession of such evidence and
withholds it, and seeks to substitute inferior evidence in its
place, the presumption naturally arise[s] that the better
evidence is withheld for fraudulent purposes which its
production would expose and defeat. Moreover, the
affidavits were not executed under oath. The rule is that
an affiant must sign the document in the presence of
and take his oath before a notary public as evidence that
the affidavit was properly made. Guided by these
principles, the affidavits cannot be assigned any weighty
probative value and are mere scraps of paper the
contents of which are hearsay. Second, on the sales
report and order slips, which allegedly prove that Yung
had been charging her food and drinks to Wensha, the
said pieces of evidence do not, however, bear Yungs
name thereon or even her signature. In fact, it does not
state anyones name, except that of Wensha. Hence, it
would simply be capricious to pinpoint, or impute, on
Yung as the author in charging such expenses to Wensha
on the basis of hearsay evidence. Third, while the
affidavit of Wenshas Operations Manager, Princess
delos Reyes (delos Reyes), may have been duly executed
under oath, she did not, however, specify the alleged
infractions that Yung committed. If at all, delos Reyes
only made general statements on the alleged complaints
against Yung that were not even substantiated by any
other piece of evidence. Finally, the daily time records
(DTRs) of Yung, which supposedly prove her habitual
tardiness, were mere photocopies that are not even
signed by Wenshas authorized representative, thus
suspect, if not violative of the best evidence rule and,
therefore, incompetent evidence. x x x [Emphases
appear in the original]
x x x x.
Finally, after the Private Respondents filed their position
paper, they alleged mistake on the part of their former
counsel in stating that Yung was dismissed on August
31, 2004. Thus, they subsequently moved for the
admission of their rejoinder. Notably, however, the said
rejoinder was dated October 4, 2004, earlier than the
date when their position paper was filed, which was
on November 3, 2004. It is also puzzling that their
position paper was dated November 25, 2004, much
later than its date of filing. The irregularities are simply
too glaring to be ignored. Nevertheless, the Private
Respondents admission of Yungs termination on August
31, 2004 cannot be retracted. They cannot use the
mistake of their counsel as an excuse considering that
the position paper was verified by their Operations
Manager, delos Reyes, who attested to the truth of the
contents therein.[10] [Emphasis supplied]
Hence, the fallo of the CA decision reads:
18
WHEREFORE, the instant petition is GRANTED.
Wensha Spa Center, Inc. and Xu Zhi Jie are
ORDERED to, jointly and severally, pay Loreta T.
Yung her full backwages, other privileges, and
benefits, or their monetary equivalent, corresponding to
the period of her dismissal from September 1, 2004 up
to the finality of this decision, and damages in the
amounts of fifty thousand pesos (Php50,000.00) as
moral damages, twenty five thousand pesos
(Php25,000.00) as exemplary damages, and twenty
thousand pesos (Php20,000.00) as attorneys fees. No
costs.
SO ORDERED.[11]
Wensha and Xu now assail this ruling of the CA in this petition
presenting the following:
V. GROUNDS FOR THE ALLOWANCE
OF THE PETITION
5.1 The following are the reasons and arguments,
which are purely questions of law and some questions
of facts, which justify the appeal by certiorari under
Rule 45 of the 1997 Revised Rules of Civil Procedure,
as amended, to this Honorable SUPREME COURT of
the assailed Decision and Resolution, to wit:
5.1.1 The Honorable COURT OF APPEALS
gravely erred in reversing that factual
findings of the Honorable Labor Arbiter and
the Honorable NLRC (Third Division)
notwithstanding recognized and established
rule in our jurisdiction that findings of facts
of quasi-judicial agencies who have gained
expertise on their respective subject matters
are given respect and finality;
5.1.2 The Honorable COURT OF APPEALS
committed grave abuse of discretion and
serious errors when it ruled that findings of
facts of the Honorable Labor Arbiter and the
Honorable NLRC are not supported by
substantial evidence despite the fact that the
records clearly show that petitioner therein was
not dismissed but is under investigation, and
that she is guilty of serious infractions that
warranted her termination;
5.1.3 The Honorable COURT OF APPEALS
grave[ly] erred when it ordered herein petitioner
to pay herein respondent her separation pay, in
lieu of reinstatement, and full backwages, as
well as damages and attorneys fees;
5.1.4 The Honorable COURT OF APPEALS
committed grave abuse of discretion and serious
errors when it held that petitioner XU ZHI JIE
to be solidarily liable with WENSHA, assuming
that respondent was illegally dismissed;
5.2 The same need to be corrected as they would work
injustice to the herein petitioner, grave and irreparable
damage will be done to him, and would pose dangerous
precedent.[12]
THE COURTS RULING:
Loretas security of tenure is guaranteed by the Constitution and the
Labor Code. The 1987 Philippine Constitution provides in Section
18, Article II that the State shall protect the rights of workers and
promote their welfare. Section 3, Article XIII also provides that all
workers shall be entitled to security of tenure. Along that line,
Article 3 of the Labor Code mandates that the State shall assure the
rights of workers to security of tenure.
Under the security of tenure guarantee, a worker can only be
terminated from his employment for cause and after due process.
For a valid termination by the employer: (1) the dismissal must be
for a valid cause as provided in Article 282, or for any of the
authorized causes under Articles 283 and 284 of the Labor Code;
and (2) the employee must be afforded an opportunity to be heard
and to defend himself. A just and valid cause for an employees
dismissal must be supported by substantial evidence, and before the
employee can be dismissed, he must be given notice and an
adequate opportunity to be heard.[13] In the process, the employer
bears the burden of proving that the dismissal of an employee was
for a valid cause. Its failure to discharge this burden renders the
dismissal unjustified and, therefore, illegal.[14]
As a rule, the factual findings of the court below are conclusive on
Us in a petition for review on certiorari where We review only
errors of law. This case, however, is an exception because the CAs
factual findings are not congruent with those of the NLRC and the
LA.
According to Wensha in its position paper,[15] it dismissed Loreta
on August 31, 2004 after investigating the complaints against
her. Wensha asserted that her dismissal was a valid exercise of an
employers right to terminate a managerial employee for loss of
trust and confidence. It claimed that she caused the resignation of
an employee because of gossips initiated by her. It was the reason
she was asked to take a leave of absence with pay for one month
starting August 10, 2004.[16]
Wensha also alleged that Loreta was sowing intrigues in the
company which was inimical to Wensha. She was also accused of
dishonesty, serious breach of trust reposed in her, tardiness, and
abuse of authority.[17]
In its Rejoinder, Wensha changed its position claiming that it did
not terminate Loretas employment on August 31, 2004. It even
sent her a notice requesting her to report back to work. She,
however, declined because she had already filed her
complaint.[18]
As correctly found by the CA, the cause of Loretas dismissal is
questionable. Loss of trust and confidence to be a valid ground for
dismissal must have basis and must be founded on clearly
established facts.[19]
The Court finds the LA ruling that states, [a]bsent any proof
submitted by the complainant, this office finds it more probable
that the complainant was dismissed due to loss of trust and
confidence,[20] to be utterly erroneous as it is contrary to the
applicable rules and pertinent jurisprudence. The onus of proving a
valid dismissal rests on the employer, not on the employee.[21] It
is the employer who bears the burden of proving that its dismissal
of the employee is for a valid or authorized cause supported by
substantial evidence. [22]
19
According to the NLRC, [p]erusal of the entire records show that
complainant left the respondents premises when she was
confronted with the infractions imputed against her.[23] This
information was taken from the affidavit[24] of Princess Delos
Reyes (Delos Reyes) which was dated March 21, 2005, not in
Wenshas earlier position paper or pleadings submitted to the LA.
The affidavits[25] of employees attached to Delos Reyes
affidavit were all dated November 19, 2004 indicating that they
were not yet executed when the complaints against Loreta were
supposedly being investigated in August 2004.
It is also noteworthy that Wenshas position paper related that
because of the gossips perpetrated by Loreta, a certain Oliva
Gonzalo (Gonzalo) resigned from Wensha. Because of the
incident, Gonzalo, whose father was a policeman, reportedly got
angry with complainant and of the management telling her
friends at respondent company that she would retaliate thus
creating fear among those concerned.[26] As a result, Loreta was
advised to take a paid leave of absence for one month while
Wensha conducted an investigation.
According to Loreta, however, the reason for her termination was
her aura did not match that of Xu and the work environment at
Wensha. Loreta narrated:
On August 10, 2004 however, complainant was called
by respondent Xu and told her to wait at the lounge
area while the latter and a Feng Shui Master were
doing some analysis of the office. After several hours
of waiting, respondent Xu then told complainant that
according to the Feng Shui master her Chinese Zodiac
sign is a mismatch with that of the respondents; that
complainant should not enter the administrative office
for a month while an altar was to be placed on the left
side where complainant has her table to allegedly
correct the mismatch and that it is necessary that
offerings and prayers have to be made and said for
about a month to correct the alleged jinx. Respondent
Xu instructed complainant not to report to the office
for a month with assurance of continued and regular
salary. She was ordered not to seek employment
elsewhere and was told to come back on the 10th of
September 2004.[27]
Although she was a little confused, Loreta did as she was
instructed and did not report for work for a month. She returned
to work on September 10, 2004. This is how Loreta recounted the
events of that day:
On September 10, 2004, in the morning, complainant
reported to the office of respondents. As usual, she
punched-in her time card and signed in the logbook of the
security guard. When she entered the administrative
office, some of its employees immediately contacted
respondent Xu. Respondent Xu then contacted
complainant thru her mobile phone and told her to leave
the administrative office immediately and instead to wait
for him in the dining area.
xxx
Complainant waited for respondent Xu in the dining
area. After waiting for about two (2) hours, respondent Xu
was nowhere. Instead, it was Jiang Xue Qin a.k.a Annie
Co, the Chinese wife of respondent Xu, who arrived and
after a short conversation between them, the former
frankly told complainant that she has to resign allegedly
she is a mismatch to respondent Xu according to the Feng
Shui master and therefore she does not fit to work (sic)
with the respondents. Surprised and shocked, complainant
demanded of Jiang Xue Qin to issue a letter of termination
if it were the reason therefor.
Instead of a termination letter issued, Jiang Xue Qin
insisted for the complainant's resignation. But when
complainant stood her ground, Jian Xue Qin shouted
invectives at her and told to leave the office immediately.
Respondent Xu did not show up but talked to the
complainant over the mobile phone and convinced her
likewise to resign from the company since there is no way
to retain her because her aura unbalanced the area of
employment according to the Feng Shui, the Chinese
spiritual art of placement. Hearing this from no lees than
respondent Xu, complainant left the office and went
straight to this Office and filed the present case
on September 10, 2004. xxx[28]
Loreta also alleged that in the afternoon of that day, September 10,
2004, a notice was posted on the Wensha bulletin board that reads:

TO ALL EMPLOYEES OF WENSHA SPA CENTER
WE WOULD LIKE TO INFORM YOU THAT MS.
LORIE TSE YUNG, FORMER ADMINISTRATIVE
OFFICER OF WENSHA SPA CENTER IS NO
LONGER CONNECTED TO THIS COMPANY
STARTING TODAY SEPTEMBER 10, 2004.
ANY TRANSACTION MADE BY HER IS NO
LONGER A LIABILITY OF THE COMPANY.
(SGD.) THE MANAGEMENT [Italics were in red
letters.][29]
The Court finds Loretas complaint credible. There is consistency
in her pleadings and evidence. In contrast, Wenshas pleadings and
evidence, taken as a whole, suffer from inconsistency. Moreover,
the affidavits of the employees only pertain to petty matters that,
to the Courts mind, are not sufficient to support Wenshas alleged
loss of trust and confidence. To be a valid cause for termination of
employment, the act or acts constituting breach of trust must have
been done intentionally, knowingly, and purposely; and they must
be founded on clearly established facts.
The CA decision is supported by evidence and logically flows
from a review of the records. Loretas narration of the events
surrounding her termination from employment was simple and
straightforward. Her claims are more credible than the affidavits
which were clearly prepared as an afterthought.
More importantly, the records are bereft of evidence that Loreta
was duly informed of the charges against her and that she was
given the opportunity to respond to those charges prior to her
dismissal. If there were indeed charges against Loreta that Wensha
had to investigate, then it should have informed her of those
charges and required her to explain her side. Wensha should also
have kept records of the investigation conducted while Loreta was
on leave. The law requires that two notices be given to an
employee prior to a valid termination: the first notice is to inform
the employee of the charges against her with a warning that she
may be terminated from her employment and giving her
reasonable opportunity within which to explain her side, and the
20
second notice is the notice to the employee that upon due
consideration of all the circumstances, she is being terminated
from her employment.[30] This is a requirement of due process
and clearly, Loreta did not receive any of those required notices.
We are in accord with the pronouncement of the CA that the
reinstatement of Loreta to her former position is no longer
feasible in the light of the strained relations between the
parties. Reinstatement, under the circumstances, would no longer
be practical as it would not be in the interest of both parties.
Under the law and jurisprudence, an illegally dismissed
employee is entitled to two reliefs - backwages and
reinstatement, which are separate and distinct. If reinstatement
would only exacerbate the tension and further ruin the relations
of the employer and the employee, or if their relationship has
been unduly strained due to irreconcilable differences,
particularly where the illegally dismissed employee held a
managerial or key position in the company, it would be prudent
to order payment of separation pay instead of
reinstatement.[31] In the case of Golden Ace Builders v.
Talde,[32] We wrote:
Under the doctrine of strained relations, the
payment of separation pay has been considered an
acceptable alternative to reinstatement when the latter
option is no longer desirable or viable. On the one
hand, such payment liberates the employee from what
could be a highly oppressive work environment. On
the other, the payment releases the employer from the
grossly unpalatable obligation of maintaining in its
employ a worker it could no longer trust.
In the case at bench, the CA, upon its own assessment,
pronounced that the relations between petitioners and the
respondent have become strained because of her dismissal
anchored on dubious charges. The respondent has not contested
the finding. As she is not insisting on being reinstated, she should
be paid separation pay equivalent to one (1) month salary for
every year of service.[33] The CA, however, failed to decree
such award in the dispositive portion. This should be rectified.
Nevertheless, the Court finds merit in the argument of petitioner
Xu that the CA erred in ruling that he is solidarily liable with
Wensha.
Elementary is the rule that a corporation is invested by lawMONFORT
with a
personality separate and distinct from those of the persons
composing it and from that of any other legal entity to which it
may be related. Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality.[34]
In labor cases, corporate directors and officers may be held
solidarily liable with the corporation for the termination of
employment only if done with malice or in bad faith.[35] Bad faith
does not connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it
means breach of a known duty through some motive or interest or ill
will; it partakes of the nature of fraud.[36]
In the subject decision, the CA concluded that petitioner Xu and
Wensha are jointly and severally liable to Loreta.[37] We have read
the decision in its entirety but simply failed to come across any
finding of bad faith or malice on the part of Xu. There is, therefore,
no justification for such a ruling. To sustain such a finding, there
should be an evidence on record that an officer or director acted
maliciously or in bad faith in terminating the services of an
employee.[38] Moreover, the finding or indication that the dismissal
was effected with malice or bad faith should be stated in the
decision itself.[39]
WHEREFORE, the petition is PARTIALLY
GRANTED. The decretal portion of the May 28, 2008 Decision of
the Court of Appeals, in CA-G.R. SP No. 98855, is
hereby MODIFIED to read as follows:
WHEREFORE, the petition is GRANTED. Wensha Spa
Center, Inc. is hereby ordered to pay Loreta T. Yung her
full backwages, other privileges, and benefits, or their
monetary equivalent, and separation pay reckoned from
the date of her dismissal, September 1, 2004, up to the
finality of this decision, plus damages in the amounts of
Fifty Thousand (P50,000.00) Pesos, as moral damages;
Twenty Five Thousand (P25,000.00) Pesos as exemplary
damages; and Twenty Thousand (P20,000.00) Pesos, as
attorneys fees. No costs.
SO ORDERED.
[A.M. No. MTJ-01-1357. March 28, 2001]
HERMANOS AGRICULTURAL DEVELOPMENT
CORPORATION complainant, vs. JUDGE ROLANDO V.
RAMIREZ, respondent.
 RESOLUTION
MELO, J.:
At bar is an administrative complaint dated April 30, 1998,
filed by Monfort Hermanos Agricultural Corporation, represented
by its president Ma. Antonia M. Salvatiera, charging Judge
Rolando V. Ramirez of the Municipal Trial Court of Cadiz City,
with serious inefficiency, misconduct, and gross incompetence,
relative to Civil Case No. 822 entitled Monfort Hermanos
Agricultural Development Corp. vs. Antonio Monfort III, et al.
The present controversy stemmed from a civil case filed on
April 18, 1997, by complainant against the children, nephews, and
nieces of the original incorporators of the Monfort Hermanos
Agricultural Corporation. In the civil case, complainant alleged
that Ildefonso B. Monfort and Antonio Monfort III, acting for
themselves and in behalf of the other defendants, in gross and
evident bad faith, unlawfully took possession of the four haciendas
owned by the plaintiff corporation and harvested the produce
thereon, without the knowledge and consent of the plaintiff
corporation.
In a decision dated February 18, 1998, respondent ruled in
favor of defendants and dismissed Civil Case No. 822. This caused
complainant, as plaintiff, to question said decision before Branch
60 of the Regional Trial Court of Cadiz City. The regional trial
court rendered a decision on August 14, 1998 reversing and setting
aside respondents decision and remanding the records of the case
to the court of origin. The defendants thereafter filed a petition for
review with the Court of Appeals which still pends therein as CA-
GR-SP No. 53652.
On April 30, 1998, complainants filed an administrative
complaint against respondent raising two main
issues. Complainants foremost grumble is with regard to the ruling
of respondent that there was not enough proof that the corporation
was deprived of possession of the four haciendas.Complainant
claimed that respondents dismissal of the complaint is not only a
blatant indication of his partiality or bias in favor of the
defendants, but also shows grave misconduct, serious inefficiency,
and gross incompetence. According to complainant, had
respondent considered the mass of documents, he would have
arrived at a different conclusion in the case, but because of bias,
grave or serious inefficiency, gross incompetence, and
misconduct, respondent came out with a prejudiced and
questionable decision. Complainant further charged respondent
with gross violation of the Law on Summary Procedure in civil
cases, specifically Section 10 of said Rules which requires cases to
be decided: a) within 30 days after receipt of the last affidavits and
position papers, or after the expiration of the period for filing the
same; or b) within 15 days after the receipt of the last clarificatory
21
affidavits, or the expiration of the period for filing the same, of the evidence of the parties. In such case the remedy of the
should the court find it necessary to clarify certain material complainant are those found in the Rules of Court and not an
facts. Civil Case No. 822, being a forcible entry case, falls within administrative case.
the period set forth in Section 10 of said law. According to
The issues of prior physical possession and lack of sufficient
complainant, the case was submitted for decision on October 24, basis in arriving at a decision in Civil Case No. 822,
1997, upon the filing of the comment to plaintiffs summary of
are subjudice due to the fact that the Court of Appeals has yet to
argument in support of their position paper. However, respondent render its decision on the matter. Complainants remedy regarding
rendered his decision only on February 18, 1998, or almost four
these matters is the final resolution of Civil Case No. 822 which,
months after the last pleading was filed, which obviously understandably, cannot be treated in this administrative case.
violated the Rules on Summary Procedure.
Anent the issue of delay raised by the complainant, we find
In his comment/return indorsement dated August 10, 1998, respondent liable.
respondent reasoned out that his failure to decide the case within
the reglementary period was the result of the filing by the No less than the Constitution of the Philippines mandates that
litigants of numerous voluminous pleadings, motions, and papers all persons shall have the right to a speedy disposition of their cases
after the issuance of the pre-trial order which continued even up before all judicial, quasi-judicial, and administrative bodies (Section
to the time the decision was ultimately rendered. Respondent 16, Article III, 1987 Constitution). Indeed, in every case a judge
further contended that facts said by complainant to have been left shall dispose of the courts business promptly and decide cases
out in the decision are unnecessary in resolving the issues raised. within the required periods (Rule 3.05, Canon 3, Code of Judicial
Conduct). Rule 3.01 compels them to be faithful to the law and
Both complainant and respondent in response to our prompts them to maintain professional competence. Thus, the Court
Resolution dated July 10, 2000, manifested that they were has constantly impressed upon judges the need to decide cases
submitting the case for resolution without further pleadings and
promptly and expeditiously, for it cannot be gainsaid that justice
arguments. delayed is justice denied. Delay in the disposition of cases
In the previous report and recommendation dated June 5, undermines the peoples faith and confidence in the judiciary. Hence,
2000 submitted by then Court Administrator Alfredo L. judges are enjoined to decide cases with dispatch. Their failure to do
Benipayo, it was pertinently observed that respondents ruling so constitutes gross inefficiency and warrants the imposition of
regarding the issue of prior physical possession and the alleged administrative sanction on them (Sanchez vs. Vestil, 297 SCRA 679
insufficiency of respondents findings of fact and law are matters [1998]).
which are subjudice since the case is currently pending and In the case at bar, complainant alleged in its administrative
awaiting decision in the Court of Appeals. complaint that the last pleading was filed on October 24, 1997. This
On the matter of the delay in resolving Civil Case No. 822, would have meant that the rendition of judgment should have been
the Court Administrator recommended that respondent be fined made 30 days thereafter following Section 10 of the Rules on
for delay in the resolution of the case with a warning that a Summary Procedure. This was not specifically denied by
repetition of the offense shall be dealt with more severely. respondent. Instead, he reasoned that the decision was rendered only
We agree with the findings and recommendation of the on February 18, 1998, or after the lapse of four months, due to the
Office of the Court Administrator. parties filing of numerous voluminous pleadings, motions, and
papers after the issuance of the pre-trial order which extended even
Subjudice is defined as, under or before a judge or court; up to the time the decision was ultimately rendered.
under judicial consideration; undetermined (Blacks Law
Dictionary, Sixth Edition, 1990). A case in point is Evan B. This excuse is not enough to justify a four-month delay in the
Calleja vs. Judge Rafael Santalecis (A.M. No. RTJ-99-1443, rendition of judgment, especially when it falls under the Rule of
March 14, 2000) wherein the Court made the following Summary Procedure. To condone this defense will defeat the very
pronouncement: purpose of the Rule of achieving expeditious and inexpensive
determination of cases.
The issue of whether or not the plaintiff made admissions as to
its liability and whether or not the plaintiff was WHEREFORE, respondent Judge Rolando V. Ramirez,
presiding judge of the Municipal Trial Court of Cadiz City, Negros
caught in flagrante delicto are still subjudice. The trial of the
merits of Civil Case No. 9441 before the regional trial court is Occidental, is hereby found GUILTY of delay in deciding Civil
still going on and besides the question poised by these issues are Case No. 822 of his court and is hereby ordered to pay a fine of Five
judicial in character as these go to the assessment by respondent
Thousand Pesos (P5,000.00), with the warning that the
commission of similar acts in the future will be dealt with more
severely.
SO ORDERED.
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY
CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY
& HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S.
LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND
SURETY CORPORATION, BORDER MACHINERY and
HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO
MAGLANA, respondents.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision
of the Court of Appeals in CA-G.R. CV No. 66195 which
modified the decision of the then Court of First Instance of Manila
in Civil Case No. 66135. The plaintiffs complaint (petitioner in
G.R. No. 84197) against all defendants (respondents in G.R. No.
84197) was dismissed but in all other respects the trial court's
decision was affirmed.
The dispositive portion of the trial court's decision reads as
follows:
WHEREFORE, judgment is rendered against defendant
Jacob S. Lim requiring Lim to pay plaintiff the amount
of P311,056.02, with interest at the rate of 12% per
annum compounded monthly; plus 15% of the amount
awarded to plaintiff as attorney's fees from July 2,1966,
until full payment is made; plus P70,000.00 moral and
exemplary damages.
It is found in the records that the cross party plaintiffs
incurred additional miscellaneous expenses aside from
Pl51,000.00,,making a total of P184,878.74. Defendant
Jacob S. Lim is further required to pay cross party
plaintiff, Bormaheco, the Cervanteses one-half and
Maglana the other half, the amount of Pl84,878.74 with
interest from the filing of the cross-complaints until the
22
amount is fully paid; plus moral and exemplary On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA)
damages in the amount of P184,878.84 with interest and Lim entered into and executed a sales contract (Exhibit A) for
from the filing of the cross-complaints until the amount the sale and purchase of two (2) DC-3A Type aircrafts and one (1)
is fully paid; plus moral and exemplary damages in the set of necessary spare parts for the total agreed price of US
amount of P50,000.00 for each of the two Cervanteses. $109,000.00 to be paid in installments. One DC-3 Aircraft with
Furthermore, he is required to pay P20,000.00 to Registry No. PIC-718, arrived in Manila on June 7,1965 while the
Bormaheco and the Cervanteses, and another other aircraft, arrived in Manila on July 18,1965.
P20,000.00 to Constancio B. Maglana as attorney's On May 22, 1965, Pioneer Insurance and Surety Corporation
fees. (Pioneer, petitioner in G.R. No. 84197) as surety executed and
issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in
xxx xxx xxx
behalf of its principal, Lim, for the balance price of the aircrafts and
WHEREFORE, in view of all above, the complaint of spare parts.
plaintiff Pioneer against defendants Bormaheco, the
Cervanteses and Constancio B. Maglana, is dismissed. It appears that Border Machinery and Heavy Equipment Company,
Instead, plaintiff is required to indemnify the Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses)
defendants Bormaheco and the Cervanteses the amount and Constancio Maglana (respondents in both petitions) contributed
of P20,000.00 as attorney's fees and the amount of some funds used in the purchase of the above aircrafts and spare
P4,379.21, per year from 1966 with legal rate of parts. The funds were supposed to be their contributions to a new
interest up to the time it is paid. corporation proposed by Lim to expand his airline business. They
executed two (2) separate indemnity agreements (Exhibits D-1 and
Furthermore, the plaintiff is required to pay Constancio D-2) in favor of Pioneer, one signed by Maglana and the other
B. Maglana the amount of P20,000.00 as attorney's fees jointly signed by Lim for SAL, Bormaheco and the Cervanteses.
and costs. The indemnity agreements stipulated that the indemnitors
No moral or exemplary damages is awarded against principally agree and bind themselves jointly and severally to
plaintiff for this action was filed in good faith. The fact indemnify and hold and save harmless Pioneer from and against
that the properties of the Bormaheco and the any/all damages, losses, costs, damages, taxes, penalties, charges
Cervanteses were attached and that they were required and expenses of whatever kind and nature which Pioneer may incur
to file a counterbond in order to dissolve the in consequence of having become surety upon the bond/note and to
attachment, is not an act of bad faith. When a man tries pay, reimburse and make good to Pioneer, its successors and
to protect his rights, he should not be saddled with assigns, all sums and amounts of money which it or its
moral or exemplary damages. Furthermore, the rights representatives should or may pay or cause to be paid or become
exercised were provided for in the Rules of Court, and liable to pay on them of whatever kind and nature.
it was the court that ordered it, in the exercise of its On June 10, 1965, Lim doing business under the name and style of
discretion. SAL executed in favor of Pioneer as deed of chattel mortgage as
No damage is decided against Malayan Insurance security for the latter's suretyship in favor of the former. It was
Company, Inc., the third-party defendant, for it only stipulated therein that Lim transfer and convey to the surety the two
secured the attachment prayed for by the plaintiff aircrafts. The deed (Exhibit D) was duly registered with the Office
Pioneer. If an insurance company would be liable for of the Register of Deeds of the City of Manila and with the Civil
damages in performing an act which is clearly within Aeronautics Administration pursuant to the Chattel Mortgage Law
its power and which is the reason for its being, then and the Civil Aeronautics Law (Republic Act No. 776),
nobody would engage in the insurance business. No respectively.
further claim or counter-claim for or against anybody is Lim defaulted on his subsequent installment payments prompting
declared by this Court. (Rollo - G.R. No. 24197, pp. JDA to request payments from the surety. Pioneer paid a total sum
15-16) of P298,626.12.
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was Pioneer then filed a petition for the extrajudicial foreclosure of the
engaged in the airline business as owner-operator of Southern said chattel mortgage before the Sheriff of Davao City. The
Air Lines (SAL) a single proprietorship. Cervanteses and Maglana, however, filed a third party claim
alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure
with an application for a writ of preliminary attachment against
Lim and respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed
cross-claims against Lim alleging that they were not privies to the
contracts signed by Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the
aircrafts in question.
After trial on the merits, a decision was rendered holding Lim
liable to pay Pioneer but dismissed Pioneer's complaint against all
other defendants.
As stated earlier, the appellate court modified the trial court's
decision in that the plaintiffs complaint against all the defendants
was dismissed. In all other respects the trial court's decision was
affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY
ERRED WHEN IT DISMISSED THE APPEAL OF
PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE
PROCEEDS OF THE REINSURANCE ON ITS BOND
IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE
AMOUNT FROM HEREIN PRIVATE
RESPONDENTS AS DEFENDANTS IN THE TRIAL
COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate
court:
We find no merit in plaintiffs appeal. It is undisputed
that plaintiff Pioneer had reinsured its risk of liability
under the surety bond in favor of JDA and subsequently
collected the proceeds of such reinsurance in the sum of
P295,000.00. Defendants' alleged obligation to Pioneer
amounts to P295,000.00, hence, plaintiffs instant action
for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is
not the real party in interest to institute the instant action
as it does not stand to be benefited or injured by the
judgment.
Plaintiff Pioneer's contention that it is representing the
reinsurer to recover the amount from defendants, hence,
it instituted the action is utterly devoid of merit. Plaintiff
did not even present any evidence that it is the attorney-
in-fact of the reinsurance company, authorized to
23
institute an action for and in behalf of the latter. To
qualify a person to be a real party in interest in whose
name an action must be prosecuted, he must appear to
be the present real owner of the right sought to be
enforced (Moran, Vol. I, Comments on the Rules of
Court, 1979 ed., p. 155). It has been held that the real
party in interest is the party who would be benefited or
injured by the judgment or the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co.,
Ltd., 88 Phil. 125, 131). By real party in interest is
meant a present substantial interest as distinguished
from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David,
67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52
N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW
2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669,
quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer
cannot be considered as the real party in interest as it
has already been paid by the reinsurer the sum of
P295,000.00 — the bulk of defendants' alleged
obligation to Pioneer.
In addition to the said proceeds of the reinsurance
received by plaintiff Pioneer from its reinsurer, the
former was able to foreclose extra-judicially one of the
subject airplanes and its spare engine, realizing the total
amount of P37,050.00 from the sale of the mortgaged
chattels. Adding the sum of P37,050.00, to the
proceeds of the reinsurance amounting to P295,000.00,
it is patent that plaintiff has been overpaid in the
amount of P33,383.72 considering that the total amount
it had paid to JDA totals to only P298,666.28. To allow
plaintiff Pioneer to recover from defendants the amount
in excess of P298,666.28 would be tantamount to
unjust enrichment as it has already been paid by the
reinsurance company of the amount plaintiff has paid
to JDA as surety of defendant Lim vis-a-vis defendant
Lim's liability to JDA. Well settled is the rule that no
person should unjustly enrich himself at the expense of
another (Article 22, New Civil Code). (Rollo-84197,
pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent
court based its finding that petitioner was paid by its reinsurer in
the aforesaid amount, as this matter has never been raised by any
of the parties herein both in their answers in the court below and
in their respective briefs with respondent court; (Rollo, p. 11) (2)
even assuming hypothetically that it was paid by its reinsurer,
still none of the respondents had any interest in the matter since
the reinsurance is strictly between the petitioner and the re-insurer
pursuant to section 91 of the Insurance Code; (3) pursuant to the
indemnity agreements, the petitioner is entitled to recover from
respondents Bormaheco and Maglana; and (4) the principle of
unjust enrichment is not applicable considering that whatever
amount he would recover from the co-indemnitor will be paid to the
reinsurer.
The records belie the petitioner's contention that the issue on the
reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that
two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with
respect to so much of its obligations to JDA as has been
paid with reinsurance money?
2. If the answer to the preceding question is in the
negative, has Pioneer still any claim against defendants,
considering the amount it has realized from the sale of the
mortgaged properties? (Record on Appeal, p. 359, Annex
B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability
under the surety bond it had executed in favor of JDA,
collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its
alleged liability to JDA under the said surety bond, it is
plain that on this score it no longer has any right to collect
to the extent of the said amount.
On the question of why it is Pioneer, instead of the
reinsurance (sic), that is suing defendants for the amount
paid to it by the reinsurers, notwithstanding that the cause
of action pertains to the latter, Pioneer says: The reinsurers
opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar
as the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in
the complaint that Pioneer is suing as attorney-in- fact of
the reinsurers for any amount. Lastly, and most important
of all, Pioneer has no right to institute and maintain in its
own name an action for the benefit of the reinsurers. It is
well-settled that an action brought by an attorney-in-fact
in his own name instead of that of the principal will not
 prosper, and this is so even where the name of the
principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides
that 'Every action must be prosecuted in the name of the
real party in interest.' This provision is mandatory. The
real party in interest is the party who would be benefitted
or injured by the judgment or is the party entitled to the
avails of the suit.
This Court has held in various cases that an attorney-in-
fact is not a real party in interest, that there is no law
permitting an action to be brought by an attorney-in-fact.
Arroyo v. Granada and Gentero, 18 Phil. Rep. 484;
Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial Corporation v. San Diego G.R. No.
L- 22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is
P299,666.29. Since Pioneer has collected P295,000.00
from the reinsurers, the uninsured portion of what it paid
to JDA is the difference between the two amounts, or
P3,666.28. This is the amount for which Pioneer may
sue defendants, assuming that the indemnity agreement
is still valid and effective. But since the amount realized
from the sale of the mortgaged chattels are P35,000.00
for one of the airplanes and P2,050.00 for a spare engine,
or a total of P37,050.00, Pioneer is still overpaid by
P33,383.72. Therefore, Pioneer has no more claim
against defendants. (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not
disputed in the appellate court. Considering this admitted payment,
the only issue that cropped up was the effect of payment made by
the reinsurers to the petitioner. Therefore, the petitioner's argument
that the respondents had no interest in the reinsurance contract as
this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the
Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the
same rights by subrogation as are acquired in similar
cases where the original insurer pays a loss (Universal
Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd
925).
The rules of practice in actions on original insurance
policies are in general applicable to actions or contracts
of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire
Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to
wit:
24
Art. 2207. If the plaintiffs property has been insured,
and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong
or breach of contract complained of, the insurance
company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has
violated the contract. If the amount paid by the
insurance company does not fully cover the injury or
loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil.
Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957])
which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650
[1987]):
Note that if a property is insured and the owner
receives the indemnity from the insurer, it is provided
in said article that the insurer is deemed subrogated to
the rights of the insured against the wrongdoer and if
the amount paid by the insurer does not fully cover the
loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal
provision, the real party in interest with regard to the
portion of the indemnity paid is the insurer and not the
insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and
not as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible
error in dismissing the petitioner's complaint as against the
respondents for the reason that the petitioner was not the real
party in interest in the complaint and, therefore, has no cause of
action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the
counter indemnitors should not have been dismissed on the
premise that the evidence on record shows that it is entitled to
recover from the counter indemnitors. It does not, however, cite
any grounds except its allegation that respondent "Maglanas
defense and evidence are certainly incredible" (p. 12, Rollo) to
back up its contention.
On the other hand, we find the trial court's findings on the matter
replete with evidence to substantiate its finding that the counter-
indemnitors are not liable to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity
agreement ceased to be valid and effective after the
execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and
Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and
the spare parts involved, agreed to issue the bond provided
that the same would be mortgaged to it, but this was not
possible because the planes were still in Japan and could
not be mortgaged here in the Philippines. As soon as the
aircrafts were brought to the Philippines, they would be
mortgaged to Pioneer Insurance to cover the bond, and
this indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the
original complaint:
The various conflicting claims over the
mortgaged properties have impaired
and rendered insufficient the security
under the chattel mortgage and there is
thus no other sufficient security for the
claim sought to be enforced by this
action.
This is judicial admission and aside from the chattel
mortgage there is no other security for the claim sought to
be enforced by this action, which necessarily means that
the indemnity agreement had ceased to have any force and
effect at the time this action was instituted. Sec 2, Rule
129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having
foreclosed the chattel mortgage on the planes and spare
parts, no longer has any further action against the
defendants as indemnitors to recover any unpaid balance
of the price. The indemnity agreement was ipso jure
extinguished upon the foreclosure of the chattel mortgage.
These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of the New
Civil Code of the Philippines.
Independently of the preceding proposition Pioneer's
election of the remedy of foreclosure precludes any further
action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight
and last installments to JDA and Pioneer as surety having
made of the payments to JDA, the alternative remedies
open to Pioneer were as provided in Article 1484 of the
New Civil Code, known as the Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant
suit. Such being the case, as provided by the
 aforementioned provisions, Pioneer shall have no further
action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz,
et al. v. Filipinas Investment & Finance Corp. No. L-
24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be
escaped from through the contention that Pioneer is not
the vendor but JDA. The reason is that Pioneer is
actually exercising the rights of JDA as vendor, having
subrogated it in such rights. Nor may the application of
the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee
but indemnitors. Pascual, et al. v. Universal Motors
Corporation, G.R. No. L- 27862, Nov. 20,1974, 61
SCRA 124.
The restructuring of the obligations of SAL or Lim, thru
the change of their maturity dates discharged these
defendants from any liability as alleged indemnitors. The
change of the maturity dates of the obligations of Lim, or
SAL extinguish the original obligations thru novations
thus discharging the indemnitors.
The principal hereof shall be paid in eight equal
successive three months interval installments, the first of
which shall be due and payable 25 August 1965, the
remainder of which ... shall be due and payable on the
26th day x x x of each succeeding three months and the
last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a
memorandum executed by SAL or Lim and JDA,
modifying the maturity dates of the obligations, as
follows:
The principal hereof shall be paid in eight equal
successive three month interval installments the first of
which shall be due and payable 4 September 1965, the
remainder of which ... shall be due and payable on the
4th day ... of each succeeding months and the last of
which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported
promissory notes bearing maturity dates different from
that fixed in the aforesaid memorandum; the due date of
the first installment appears as October 15, 1965, and
those of the rest of the installments, the 15th of each
succeeding three months, that of the last installment
being July 15, 1967.
These restructuring of the obligations with regard to
their maturity dates, effected twice, were done without
the knowledge, much less, would have it believed that
25
these defendants Maglana (sic). Pioneer's official
Numeriano Carbonel would have it believed that these
defendants and defendant Maglana knew of and
consented to the modification of the obligations. But if
that were so, there would have been the corresponding
documents in the form of a written notice to as well as
written conformity of these defendants, and there are
no such document. The consequence of this was the
extinguishment of the obligations and of the surety
bond secured by the indemnity agreement which was
thereby also extinguished. Applicable by analogy are
the rulings of the Supreme Court in the case of
Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563,
and the case of Asiatic Petroleum Co. v. Hizon David,
45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor
by the creditor without the consent of the
guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand
payment after the debt has become due does
not of itself constitute any extension time
referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp.
562-563, M.F. Stevenson & Co., Ltd., v. Climacom et
al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already
prescribed when Pioneer paid the same. Consequently,
Pioneer has no more cause of action to recover from
these defendants, as supposed indemnitors, what it has
paid to JDA. By virtue of an express stipulation in the
surety bond, the failure of JDA to present its claim to
Pioneer within ten days from default of Lim or SAL on
every installment, released Pioneer from liability from
the claim.
Therefore, Pioneer is not entitled to exact
reimbursement from these defendants thru the
indemnity.
Art. 1318. Payment by a solidary debtor shall
not entitle him to reimbursement from his co-
debtors if such payment is made after the
obligation has prescribed or became illegal. We first state the principles.
These defendants are entitled to recover damages and
attorney's fees from Pioneer and its surety by reason of
the filing of the instant case against them and the
attachment and garnishment of their properties. The
instant action is clearly unfounded insofar as plaintiff
drags these defendants and defendant Maglana.'
(Record on Appeal, pp. 363-369, Rollo of G.R. No.
84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not
meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-
investors whose agreement was to do business through the
corporate vehicle but who failed to incorporate the entity
in which they had chosen to invest? How are the losses to
be treated in situations where their contributions to the
intended 'corporation' were invested not through the
corporate form? This Petition presents these fundamental
questions which we believe were resolved erroneously by
the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a
result of the failure of respondents Bormaheco, Spouses Cervantes,
Constancio Maglana and petitioner Lim to incorporate, a de
facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses and/or
gains of the venture in proportion to their contribution. The
petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the respondents
to the petitioner as their contributions to the intended corporation, to
wit:
However, defendant Lim should be held liable to pay his
co-defendants' cross-claims in the total amount of
P184,878.74 as correctly found by the trial court, with
interest from the filing of the cross-complaints until the
amount is fully paid. Defendant Lim should pay one-half
of the said amount to Bormaheco and the Cervanteses and
the other one-half to defendant Maglana. It is established
in the records that defendant Lim had duly received the
amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the
ownership of the subject airplanes and spare parts (Exhibit
58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.
While it has been held that as between themselves the
rights of the stockholders in a defectively incorporated
association should be governed by the supposed charter
and the laws of the state relating thereto and not by the
rules governing partners (Cannon v. Brush Electric Co.,
54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily
 held that persons who attempt, but fail, to form a
corporation and who carry on business under the
corporate name occupy the position of partners inter se
(Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas.
1913A 1065). Thus, where persons associate themselves
together under articles to purchase property to carry on a
business, and their organization is so defective as to
come short of creating a corporation within the statute,
they become in legal effect partners inter se, and their
rights as members of the company to the property
acquired by the company will be recognized (Smith v.
Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555;
Whipple v. Parker, 29 Mich. 369). So, where certain
persons associated themselves as a corporation for the
development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them
contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no
stock was ever issued in the corporation, it was treated as
a trustee for the associates in an action between them for
an accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed
among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal.
446). However, such a relation does not necessarily
exist, for ordinarily persons cannot be made to assume
the relation of partners, as between themselves, when
their purpose is that no partnership shall exist (London
Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S.
461, 472, 29 L.Ed. 688), and it should be implied only
when necessary to do justice between the parties; thus,
one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does
not become a partner with other subscribers who engage
in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of
the alleged partnership and contribution (Ward v.
Brigham, 127 Mass. 24). A partnership relation between
certain stockholders and other stockholders, who were
also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute
for payment of debts illegally contracted by the latter
(Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus
Juris Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared
non-suited for his failure to appear during the pretrial despite
notification. In his answer, the petitioner denied having received
any amount from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court, however, found
26
through Exhibit 58, that the petitioner received the amount of misrepresentation of the other, Jacob Lim, when the herein
P151,000.00 representing the participation of Bormaheco and plaintiff chattel mortgage (sic) allegedly executed by
Atty. Constancio B. Maglana in the ownership of the subject defendant Lim, thereby forcing them to file an adverse
airplanes and spare parts. The record shows that defendant claim in the form of third party claim. Notwithstanding
Maglana gave P75,000.00 to petitioner Jacob Lim thru the repeated oral demands made by defendants Bormaheco
Cervanteses. and Cervanteses, to defendant Lim, to surrender the
It is therefore clear that the petitioner never had the intention to possession of the two planes and their accessories and or
form a corporation with the respondents despite his return the amount advanced by the former amounting to an
representations to them. This gives credence to the cross-claims aggregate sum of P 178,997.14 as evidenced by a
of the respondents to the effect that they were induced and lured statement of accounts, the latter ignored, omitted and
by the petitioner to make contributions to a proposed corporation refused to comply with them. (Record on Appeal, pp. 341-
which was never formed because the petitioner reneged on their 342).
agreement. Maglana alleged in his cross-claim: Applying therefore the principles of law earlier cited to the facts of
... that sometime in early 1965, Jacob Lim proposed to the case, necessarily, no de facto partnership was created among the
Francisco Cervantes and Maglana to expand his airline parties which would entitle the petitioner to a reimbursement of the
business. Lim was to procure two DC-3's from Japan supposed losses of the proposed corporation. The record shows that
and secure the necessary certificates of public the petitioner was acting on his own and not in behalf of his other
convenience and necessity as well as the required would-be incorporators in transacting the sale of the airplanes and
permits for the operation thereof. Maglana sometime in spare parts.
May 1965, gave Cervantes his share of P75,000.00 for WHEREFORE, the instant petitions are DISMISSED. The
delivery to Lim which Cervantes did and Lim questioned decision of the Court of Appeals is AFFIRMED.
acknowledged receipt thereof. Cervantes, likewise, SO ORDERED.
delivered his share of the undertaking. Lim in an
undertaking sometime on or about August 9,1965, [G.R. No. 136448. November 3, 1999]
promised to incorporate his airline in accordance
LIMwith TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR
their agreement and proceeded to acquire the planes on INDUSTRIES, INC., respondent.
his own account. Since then up to the filing of this DECISION
answer, Lim has refused, failed and still refuses to set
up the corporation or return the money of Maglana. PANGANIBAN, J.:
(Record on Appeal, pp. 337-338). A partnership may be deemed to exist among parties who
while respondents Bormaheco and the Cervanteses alleged in agree to borrow money to pursue a business and to divide the profits
their answer, counterclaim, cross-claim and third party or losses that may arise therefrom, even if it is shown that they have
complaint: not contributed any capital of their own to a "common fund." Their
contribution may be in the form of credit or industry, not necessarily
Sometime in April 1965, defendant Lim lured and cash or fixed assets. Being partners, they are all liable for debts
induced the answering defendants to purchase two incurred by or on behalf of the partnership. The liability for a
airplanes and spare parts from Japan which the latter contract entered into on behalf of an unincorporated association or
considered as their lawful contribution and ostensible corporation may lie in a person who may not have
participation in the proposed corporation to be known directly transacted on its behalf, but reaped benefits from that
as SAL. Arrangements and negotiations were contract.
undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the The Case
Cervanteses and Constancio Maglana (Exh. E- 1). In the Petition for Review on Certiorari before us, Lim Tong Lim
Contrary to the agreement among the defendants, assails the November 26, 1998 Decision of the Court of Appeals in
defendant Lim in connivance with the plaintiff, signed CA-GR CV 41477,[1] which disposed as follows:
and executed the alleged chattel mortgage and surety
WHEREFORE, [there being] no reversible error in the appealed
bond agreement in his personal capacity as the alleged
decision, the same is hereby affirmed.[2]
proprietor of the SAL. The answering defendants
learned for the first time of this trickery and
 The decretal portion of the Quezon City Regional Trial
Court (RTC) ruling, which was affirmed by the CA, reads as
follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment
issued by this Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following
amounts, subject to the modifications as hereinafter made by
reason of the special and unique facts and circumstances and the
proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the
fishing nets covered by the Agreement plus P68,000.00
representing the unpaid price of the floats not covered by said
Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices
and computed on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407
for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413
for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426
for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00
representing P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage
charges on the nets counted from September 20, 1990 (date of
attachment) to September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal
obligation or for the unpaid price of nets and floats in the amount
of P532,045.00 and P68,000.00, respectively, or for the total
amount of P600,045.00, this Court noted that these items were
attached to guarantee any judgment that may be rendered in favor
of the plaintiff but, upon agreement of the parties, and, to avoid
further deterioration of the nets during the pendency of this case, it
was ordered sold at public auction for not less than P900,000.00
for which the plaintiff was the sole and winning bidder. The
proceeds of the sale paid for by plaintiff was deposited in court. In
effect, the amount of P900,000.00 replaced the attached property
as a guaranty for any judgment that plaintiff may be able to secure
in this case with the ownership and possession of the nets and
floats awarded and delivered by the sheriff to plaintiff as the
highest bidder in the public auction sale. It has also been noted that
ownership of the nets [was] retained by the plaintiff until full
payment [was] made as stipulated in the invoices; hence, in effect,
27
the plaintiff attached its own properties. It [was] for this reason cross-examine witnesses and to present evidence on his behalf,
also that this Court earlier ordered the attachment bond filed by because of his failure to appear in subsequent hearings. Lim Tong
plaintiff to guaranty damages to defendants to be cancelled and Lim, on the other hand, filed an Answer with Counterclaim and
for the P900,000.00 cash bidded and paid for by plaintiff to serve Crossclaim and moved for the lifting of the Writ of
as its bond in favor of defendants. Attachment.[6] The trial court maintained the Writ, and upon
motion of private respondent, ordered the sale of the fishing nets at
From the foregoing, it would appear therefore that whatever
judgment the plaintiff may be entitled to in this case will have to a public auction. Philippine Fishing Gear Industries won the bidding
be satisfied from the amount of P900,000.00 as this amount and deposited with the said court the sales proceeds of P900,000.[7]
replaced the attached nets and floats. Considering, however, that On November 18, 1992, the trial court rendered its Decision,
the total judgment obligation as computed above would amount ruling that Philippine Fishing Gear Industries was entitled to the
to only P840,216.92, it would be inequitable, unfair and unjust to Writ of Attachment and that Chua, Yao and Lim, as general
award the excess to the defendants who are not entitled to partners, were jointly liable to pay respondent.[8]
damages and who did not put up a single centavo to raise the The trial court ruled that a partnership among Lim, Chua and
amount of P900,000.00 aside from the fact that they are not the Yao existed based (1) on the testimonies of the witnesses presented
owners of the nets and floats. For this reason, the defendants are and (2) on a Compromise Agreement executed by the three[9] in
hereby relieved from any and all liabilities arising from the Civil Case No. 1492-MN which Chua and Yao had brought against
monetary judgment obligation enumerated above and for plaintiff Lim in the RTC of Malabon, Branch 72, for (a) a declaration of
to retain possession and ownership of the nets and floats and for nullity of commercial documents; (b) a reformation of contracts; (c)
the reimbursement of the P900,000.00 deposited by it with the
a declaration of ownership of fishing boats; (d) an injunction and (e)
Clerk of Court. damages.[10] The Compromise Agreement provided:
SO ORDERED. [3] a) That the parties plaintiffs & Lim Tong Lim agree to have the four
The Facts (4) vessels sold in the amount of P5,750,000.00 including the
fishing net. This P5,750,000.00 shall be applied as full payment
On behalf of "Ocean Quest Fishing Corporation," Antonio for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim
Chua and Peter Yao entered into a Contract dated February 7, Tong Lim;
1990, for the purchase of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein b) If the four (4) vessel[s] and the fishing net will be sold at a higher
respondent). They claimed that they were engaged in a business price than P5,750,000.00 whatever will be the excess will be
venture with Petitioner Lim Tong Lim, who however was not a divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter
signatory to the agreement. The total price of the nets amounted Yao;
to P532,045. Four hundred pieces of floats worth P68,000 were c) If the proceeds of the sale the vessels will be less
also sold to the Corporation.[4] than P5,750,000.00 whatever the deficiency shall be shouldered and
The buyers, however, failed to pay for the fishing nets and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio
the floats; hence, private respondent filed a collection suit against Chua; 1/3 Peter Yao.[11]
Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ The trial court noted that the Compromise Agreement was
of preliminary attachment. The suit was brought against the three silent as to the nature of their obligations, but that joint liability
in their capacities as general partners, on the allegation that could be presumed from the equal distribution of the profit and
Ocean Quest Fishing Corporation was a nonexistent corporation loss.[12]
as shown by a Certification from the Securities and Exchange Lim appealed to the Court of Appeals (CA) which, as already
Commission.[5] On September 20, 1990, the lower court issued a stated, affirmed the RTC.
Writ of Preliminary Attachment, which the sheriff enforced by
attaching the fishing nets on board F/B Lourdes which was then Ruling of the Court of Appeals
docked at the Fisheries Port, Navotas, Metro Manila. In affirming the trial court, the CA held that petitioner was a
Instead of answering the Complaint, Chua filed a partner of Chua and Yao in a fishing business and may thus be held
Manifestation admitting his liability and requesting a reasonable liable as a such for the fishing nets and floats purchased by and for
time within which to pay. He also turned over to respondent the use of the partnership. The appellate court ruled:
some of the nets which were in his possession. Peter Yao filed an The evidence establishes that all the defendants including herein
Answer, after which he was deemed to have waived his right to appellant Lim Tong Lim undertook a partnership for a specific
undertaking, that is for commercial fishing x x x. Obviously, the
ultimate undertaking of the defendants was to divide the profits
among themselves which is what a partnership essentially is x x
x. By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a common
fund with the intention of dividing the profits among themselves
(Article 1767, New Civil Code).[13]
Hence, petitioner brought this recourse before this
Court.[14]
The Issues
In his Petition and Memorandum, Lim asks this Court to
reverse the assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED
ON A COMPROMISE AGREEMENT THAT CHUA, YAO AND
PETITIONER LIM ENTERED INTO IN A SEPARATE CASE,
THAT A PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT
HE WAS ACTING FOR OCEAN QUEST FISHING
CORPORATION WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER
LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE
SEIZURE AND ATTACHMENT OF PETITIONER LIMS
GOODS.
In determining whether petitioner may be held liable for the
fishing nets and floats purchased from respondent, the Court must
resolve this key issue: whether by their acts, Lim, Chua and Yao
could be deemed to have entered into a partnership.
This Courts Ruling
The Petition is devoid of merit.
First and Second Issues: Existence of a Partnership and
Petitioner's Liability
In arguing that he should not be held liable for the
equipment purchased from respondent, petitioner controverts the
CA finding that a partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its finding on the
Compromise Agreement alone. Furthermore, he disclaims any
direct participation in the purchase of the nets, alleging that the
negotiations were conducted by Chua and Yao only, and that he
has not even met the representatives of the respondent
company. Petitioner further argues that he was a lessor, not a
partner, of Chua and Yao, for the "Contract of Lease" dated
February 1, 1990, showed that he had merely leased to the two the
28
main asset of the purported partnership -- the fishing boat F/B (9) That the case was amicably settled through a Compromise
Lourdes. The lease was for six months, with a monthly rental Agreement executed between the parties-litigants the terms of which
of P37,500 plus 25 percent of the gross catch of the boat. are already enumerated above.
We are not persuaded by the arguments of petitioner. The From the factual findings of both lower courts, it is clear that
facts as found by the two lower courts clearly showed that there Chua, Yao and Lim had decided to engage in a fishing business,
existed a partnership among Chua, Yao and him, pursuant to which they started by buying boats worth P3.35 million, financed by
Article 1767 of the Civil Code which provides: a loan secured from Jesus Lim who was petitioners brother. In their
Article 1767 - By the contract of partnership, two or more Compromise Agreement, they subsequently revealed their intention
persons bind themselves to contribute money, property, or to pay the loan with the proceeds of the sale of the boats, and to
industry to a common fund, with the intention of dividing the divide equally among them the excess or loss. These boats, the
profits among themselves. purchase and the repair of which were financed with borrowed
money, fell under the term common fund under Article 1767. The
Specifically, both lower courts ruled that a partnership contribution to such fund need not be cash or fixed assets; it could
among the three existed based on the following factual be an intangible like credit or industry. That the parties agreed that
findings:[15] any loss or profit from the sale and operation of the boats would be
(1) That Petitioner Lim Tong Lim requested Peter Yao who was divided equally among them also shows that they had indeed formed
engaged in commercial fishing to join him, while Antonio Chua a partnership.
was already Yaos partner; Moreover, it is clear that the partnership extended not only to
(2) That after convening for a few times, Lim Chua, and Yao the purchase of the boat, but also to that of the nets and the
verbally agreed to acquire two fishing boats, the FB Lourdes and floats. The fishing nets and the floats, both essential to fishing, were
the FB Nelson for the sum of P3.35 million; obviously acquired in furtherance of their business. It would have
(3) That they borrowed P3.25 million from Jesus Lim, brother of been inconceivable for Lim to involve himself so much in buying
Petitioner Lim Tong Lim, to finance the venture. the boat but not in the acquisition of the aforesaid equipment,
without which the business could not have proceeded.
(4) That they bought the boats from CMF Fishing Corporation,
which executed a Deed of Sale over these two (2) boats in favor Given the preceding facts, it is clear that there was, among
of Petitioner Lim Tong Lim only to serve as security for the loan petitioner, Chua and Yao, a partnership engaged in the fishing
extended by Jesus Lim; business. They purchased the boats, which constituted the main
assets of the partnership, and they agreed that the proceeds from the
(5) That Lim, Chua and Yao agreed that the refurbishing , re- sales and operations thereof would be divided among them.
equipping, repairing, dry docking and other expenses for the
boats would be shouldered by Chua and Yao; We stress that under Rule 45, a petition for review like the
present case should involve only questions of law. Thus, the
(6) That because of the unavailability of funds, Jesus Lim again foregoing factual findings of the RTC and the CA are binding on
extended a loan to the partnership in the amount of P1 million this Court, absent any cogent proof that the present action is
secured by a check, because of which, Yao and Chua entrusted embraced by one of the exceptions to the rule.[16] In assailing the
the ownership papers of two other boats, Chuas FB Lady Anne factual findings of the two lower courts, petitioner effectively goes
Mel and Yaos FB Tracy to Lim Tong Lim.
beyond the bounds of a petition for review under Rule 45.
(7) That in pursuance of the business agreement, Peter Yao and Compromise Agreement Not the Sole Basis of Partnership
Antonio Chua bought nets from Respondent Philippine Fishing
Gear, in behalf of "Ocean Quest Fishing Corporation," their Petitioner argues that the appellate courts sole basis for
purported business name. assuming the existence of a partnership was the Compromise
Agreement. He also claims that the settlement was entered into only
(8) That subsequently, Civil Case No. 1492-MN was filed in the to end the dispute among them, but not to adjudicate their
Malabon RTC, Branch 72 by Antonio Chua and Peter Yao preexisting rights and obligations. His arguments are baseless. The
against Lim Tong Lim for (a) declaration of nullity of Agreement was but an embodiment of the relationship extant among
commercial documents; (b) reformation of contracts; (c) the parties prior to its execution.
declaration of ownership of fishing boats; (4) injunction; and (e)
damages. A proper adjudication of claimants rights mandates that courts
must review and thoroughly appraise all relevant facts. Both lower
courts have done so and have found, correctly, a preexisting
partnership among the parties. In implying that the lower courts
have decided on the basis of one piece of document alone,
petitioner fails to appreciate that the CA and the RTC delved into
the history of the document and explored all the possible
consequential combinations in harmony with law, logic and
fairness. Verily, the two lower courts factual findings mentioned
above nullified petitioners argument that the existence of a
partnership was based only on the Compromise Agreement.
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioners argument that he was
merely the lessor of the boats to Chua and Yao, not a partner in the
fishing venture. His argument allegedly finds support in the
Contract of Lease and the registration papers showing that he was
the owner of the boats, including F/B Lourdeswhere the nets were
found.
His allegation defies logic. In effect, he would like this
Court to believe that he consented to the sale of his own boats to
pay a debt of Chua and Yao, with the excess of the proceeds to be
divided among the three of them. No lessor would do what
petitioner did. Indeed, his consent to the sale proved that there was
a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a
business agreement with Chua and Yao, in which debts were
undertaken in order to finance the acquisition and the upgrading of
the vessels which would be used in their fishing business. The sale
of the boats, as well as the division among the three of the balance
remaining after the payment of their loans, proves beyond cavil
that F/B Lourdes, though registered in his name, was not his own
property but an asset of the partnership. It is not uncommon to
register the properties acquired from a loan in the name of the
person the lender trusts, who in this case is the petitioner
himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for
petitioner to sell his property to pay a debt he did not incur, if the
relationship among the three of them was merely that of lessor-
lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by
estoppel, liability can be imputed only to Chua and Yao, and not to
him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines
provides:
Sec. 21. 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
29
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 as a defense its lack of
corporate personality.
One who assumes an obligation to an ostensible corporation as
such, cannot resist performance thereof on the ground that there
was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be
legally nonexistent, a party may be estopped from denying its
corporate existence. The reason behind this doctrine is obvious -
an unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and
attributes of a corporation as provided by law; it cannot create
agents or confer authority on another to act 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. And as it is an
elementary principle of law that a person who acts as an agent
without authority or without a principal is himself regarded as the
principal, possessed of all the right and subject to all the
liabilities of a principal, a person acting or purporting to act on
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.[17]
The doctrine of corporation by estoppel may apply to the
alleged corporation and to a third party. In the first instance, an
unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity
in a suit against it by a third person who relied in good faith on
such representation. It cannot allege lack of personality to be
sued to evade its responsibility for a contract it entered into and
by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an
association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from
denying its corporate existence in a suit brought against the
alleged corporation. In such case, all those who benefited from
the transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for contracts
they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing
Gear Industries, is entitled to be paid for the nets it sold. The
only question here is whether petitioner should be held
jointly[18] liable with Chua and Yao. Petitioner contests such
liability, insisting that only those who dealt in the name of the
ostensible corporation should be held liable. Since his name does
not appear on any of the contracts and since he never directly
transacted with the respondent corporation, ergo, he cannot be held
liable.
Unquestionably, petitioner benefited from the use of the nets
found inside F/B Lourdes, the boat which has earlier been proven to
be an asset of the partnership. He in fact questions the attachment of
the nets, because the Writ has effectively stopped his use of the
fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim,
Chua and Yao decided to form a corporation. Although it was never
legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in
representation of it. Clearly, under the law on estoppel, those acting
on behalf of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on
behalf of the corporation. However, having reaped the benefits of
the contract entered into by persons with whom he previously had
an existing relationship, he is deemed to be part of said association
and is covered by the scope of the doctrine of corporation by
estoppel. We reiterate the ruling of the Court in Alonso v.
Villamor:[19]
A litigation is not a game of technicalities in which one, more
deeply schooled and skilled in the subtle art of movement and
position , entraps and destroys the other. It is, rather, a contest in
which each contending party fully and fairly lays before the court
the facts in issue and then, brushing aside as wholly trivial and
indecisive all imperfections of form and technicalities of procedure,
asks that justice be done upon the merits. Lawsuits, unlike duels, are
not to be won by a rapiers thrust. Technicality, when it deserts its
proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration from courts. There
should be no vested rights in technicalities.
Third Issue: Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was
improperly issued against the nets. We agree with the Court of
Appeals that this issue is now moot and academic. As previously
discussed, F/B Lourdes was an asset of the partnership and that it
was placed in the name of petitioner, only to assure payment of the
debt he and his partners owed. The nets and the floats were
specifically manufactured and tailor-made according to their own
design, and were bought and used in the fishing venture they agreed
upon. Hence, the issuance of the Writ to assure the payment of the
price stipulated in the invoices is proper. Besides, by specific
agreement, ownership of the nets remained with Respondent
Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
 SO ORDERED.

30