G.R. No. 148187. April 16, 2008.
* maturity date for the advances to become due and demandable, and the manner of payment was
PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
Ponente: Ynares-Santiago, J.
Summary:
Petitioner Philex Mining entered into an agreement with Baguio Gold for Philex to manage and
operate Baguio Gold’s mining claim (Sto. Nino Mine).
- The parties’ agreement was denominated as “Power of Attorney”
- Mine suffered continuing losses over the year which resulted to Philex Mining’s withdrawal as
manager of the mine and eventual cessation of mine operations on Feb 20 1982. Thereafter, parties
executed a Compromise with Dation in Payment wherein Baguio Gold admitted an
indebtedness to Philex Mining. Parties executed an Amendment to Compromise with Dation in
Payment where parties determined Baguio Gold’s indebtedness was higher. These liabilities pertain
to long-term loans contracted by Baguio Gold.
- Philex Mining wrote off in its 1982 books of accounts the remaining outstanding indebtedness of
Baguio Gold and in its 1982 annual ITR, Philex deducted it from its gross income as loss on
settlement of receivables from Baguio Gold against reserves and allowances. BIR disallowed the
amount as deduction for bad debt. Thereafter, Philex emphasized that debt arose out of valid
management contract it entered into with Baguio Gold and represents the advances made by Philex
however, BIR denied petitioner’s protest.
- CTA: rejected petitioner’s assertion that the advances it made for the Sto. Nino mine were in the
nature of a loan. It instead characterized the advances as petitioner’s investment in a partnership
with Baguio Gold for the development and exploitation of the Sto. Nino mine. The CTA held that the
“Power of Attorney” executed by petitioner and Baguio Gold was actually a partnership agreement.
Since the advanced amount partook of the nature of an investment, it could not be deducted as a
bad debt from petitioner’s gross income.
- CA: affirmed CTA
- Petitioner Philex Mining: Insists that in determining the nature of its business relationship with
Baguio Gold, we should not only rely on the “Power of Attorney,” but also on the subsequent
“Compromise with Dation in Payment” and “Amended Compromise with Dation in Payment” that the
parties executed in 1982. These documents, allegedly evinced the parties’ intent to treat the
advances and payments as a loan and establish a creditor-debtor relationship between them.
Issues: (1) WON the Power of Attorney is the instrument that is material in determining the true
nature of the business relationship between Philex Mining and Baguio Gold (Yes)
(2) WON an examination of the “Power of Attorney” reveals that a partnership or joint venture was
indeed intended by the parties (Yes)
- SC: An examination of the “Power of Attorney” reveals that a partnership or joint venture
was indeed intended by the parties.
Contract of partnership Corporation
Under a contract of partnership, two or more While a corporation, like petitioner, cannot
persons bind themselves to contribute money, generally enter into a contract of partnership
property, or industry to a common fund, with the unless authorized by law or its charter, it has
intention of dividing the profits among been held that it may enter into a joint venture
themselves which is akin to a particular partnership:
- Perusal of the agreement denominated as the “Power of Attorney” indicates that the parties had
intended to create a partnership and establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing in the income of the mine.
- The wording of the parties’ agreement as to petitioner’s contribution to the common fund does not
detract from the fact that petitioner transferred its funds and property to the project as specified in
par 5, thus rendering effective the other stipulations of the contract, particularly par 5(c) which
prohibits petitioner from withdrawing the advances until termination of the parties’ business relations.
- It should be stressed that the main object of the “Power of Attorney” was not to confer a power in
favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a business
relationship between petitioner and Baguio Gold, in which the former was to manage and operate
the latter’s mine through the parties’ mutual contribution of material resources and industry.
- In this case, the totality of the circumstances and the stipulations in the parties’ agreement
indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio
Gold. It does not appear that Baguio Gold was unconditionally obligated to return the advances
made by petitioner under the agreement. It was unlikely for a business corporation to lend hundreds
of millions of pesos to another corporation with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans. The parties also did not provide a specific
unclear. All these point to the inevitable conclusion that the advances were not loans but capital
contributions to a partnership.
- The strongest indication that petitioner was a partner in the Sto. Niño mine is the fact that it
would receive 50% of the net profits as “compensation” under paragraph 12 of the
agreement. The entirety of the parties’ contractual stipulations simply leads to no other
conclusion than that petitioner’s “compensation” is actually its share in the income of the
joint venture.
Facts:
Petition for review on certiorari of CA Decision which affirmed CTA Decision.
- On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement  with Baguio Gold Mining Company (”Baguio Gold”) for the former to manage and
4
operate the latter’s mining claim, known as the Sto. Nino mine, located in Atok and Tublay, Benguet
Province.
- The parties’ agreement was denominated as “Power of Attorney” and provided for the
following terms:
“4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to the MANAGERS (Philex
Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from time to time may be required by the MANAGERS
within the said 3-year period, for use in the MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS
(P11,000,000.00) shall be deemed, for internal audit purposes, as the owner’s account in the Sto. Nino PROJECT. Any part of any
income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino PROJECT, shall be added to such owner’s
account.
5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT of the STO.
NINO MINE, they may transfer their own funds or property to the Sto. Nino PROJECT, in accordance with the following arrangements:
(a)  The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nino PROJECT as a
special fund to be known as the MANAGERS’ account.
(b) The total of the MANAGERS’ account shall not exceed P11,000,000.00, except with prior approval of the
PRINCIPAL; provided, however, that if the compensation of the MANAGERS as herein provided cannot be paid in cash
from the Sto. Nino PROJECT, the amount not so paid in cash shall be added to the MANAGERS’ account.
(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until termination of this
Agency.
(d) The MANAGERS’ account shall not accrue interest. Since it is the desire of the PRINCIPAL to extend to the
MANAGERS the benefit of subsequent appreciation of property, upon a projected termination of this Agency, the ratio
which the MANAGERS’ account has to the owner’s account will be determined, and the corresponding proportion of the
entire assets of the STO. NINO MINE, excluding the claims, shall be transferred to the MANAGERS, except that such
transferred assets shall not include mine development, roads, buildings, and similar property which will be valueless, or of
slight value, to the MANAGERS. The MANAGERS can, on the other hand, require at their option that property originally
transferred by them to the Sto. Nino PROJECT be re-transferred to them. Until such assets are transferred to the
MANAGERS, this Agency shall remain subsisting.
x x x x
12.  The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto. Nino PROJECT before
income tax. It is understood that the MANAGERS shall pay income tax on their compensation, while the PRINCIPAL shall pay income
tax on the net profit of the Sto. Nino PROJECT after deduction therefrom of the MANAGERS’ compensation.
x x x x
16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future, may incur other obligations
in favor of the MANAGERS. This Power of Attorney has been executed as security for the payment and satisfaction of all such
obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the same. Therefore, this Agency shall be
irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS’ account.
After all obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full, this Agency shall be revocable
by the PRINCIPAL upon 36-month notice to the MANAGERS.
17. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to the contrary, the
MANAGERS may withdraw from this Agency by giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in any manner
be held liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof shall be operative in case of the
MANAGERS’ withdrawal.
x x x x”
5
- In the course of managing and operating the project, Philex Mining made advances of cash and
property in accordance with paragraph 5 of the agreement.
- However, the mine suffered continuing losses over the years which resulted to petitioner’s
withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of mine
operations on February 20, 1982. 6
- Thereafter, on September 27, 1982, the parties executed a “Compromise with Dation in
Payment”  wherein Baguio Gold admitted an indebtedness to petitioner in the amount
7
of P179,394,000 and agreed to pay the same in 3 segments by:
- 1st assigning Baguio Gold’s tangible assets to petitioner
- Transferring to the latter Baguio Gold’s equitable title in its Philodrill assets and
- Finally settling the remaining liability through properties that Baguio Gold may acquire in
the future.
- On Dec 31, 1982, the parties executed an “Amendment to Compromise with Dation in
Payment”  where the parties determined that Baguio Gold’s indebtedness to petitioner actually
8
amounted to P259,137,245, which sum included liabilities of Baguio Gold to other creditors that
petitioner had assumed as guarantor. These liabilities pertained to long-term loans amounting to
US$11,000,000 contracted by Baguio Gold from the Bank of America NT & SA and Citibank N.A.
This time, Baguio Gold undertook to pay petitioner in 2 segments by:
- 1st assigning its tangible assets for P127,838,051 and
- Then transferring its equitable title in its Philodrill assets for P16,302,426.
- The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to
petitioner in the amount of P114,996,768.
- Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P112,136,000 to allowances and reserves that were set
up in 1981 and P2,860,768 to the 1982 operations.
- In its 1982 annual income tax return, petitioner deducted from its gross income the amount
of P112,136,000 as “loss on settlement of receivables from Baguio Gold against reserves and
allowances.”   9
- However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction for bad debt
and assessed petitioner a deficiency income tax of P62,811,161.39.
Petitioner Philex Mining:
- Protested before the BIR arguing that the deduction must be allowed since all requisites for a bad
debt deduction were satisfied:
(a) there was a valid and existing debt;
(b) the debt was ascertained to be worthless; and
(c) it was charged off within the taxable year when it was determined to be worthless.
- Petitioner emphasized that the debt arose out of a valid management contract it entered into
with Baguio Gold. The bad debt deduction represented advances made by petitioner which,
pursuant to the management contract, formed part of Baguio Gold’s “pecuniary obligations” to
petitioner. It also included payments made by petitioner as guarantor of Baguio Gold’s long-term
loans which legally entitled petitioner to be subrogated to the rights of the original creditor.
- Petitioner also asserted that due to Baguio Gold’s irreversible losses, it became evident that it
would not be able to recover the advances and payments it had made in behalf of Baguio Gold.
- For a debt to be considered worthless, petitioner claimed that it was neither required to institute a
judicial action for collection against the debtor nor to sell or dispose of collateral assets in
satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to enforce collection and
exhausted all reasonable means to collect.
BIR:
- On October 28, 1994, the BIR denied petitioner’s protest for lack of legal and factual basis.
- It held that the alleged debt was not ascertained to be worthless since Baguio Gold remained
existing and had not filed a petition for bankruptcy; and that the deduction did not consist of a valid
and subsisting debt considering that, under the management contract, petitioner was to be paid 50%
of the project’s net profit.
10
Petitioner appealed before Court of Tax Appeals.
CTA:
- Denied petition for review for lack of merit.
- CTA rejected petitioner’s assertion that the advances it made for the Sto. Nino mine were in
the nature of a loan. It instead characterized the advances as petitioner’s investment in a
partnership with Baguio Gold for the development and exploitation of the Sto. Nino mine.
- The CTA held that the “Power of Attorney” executed by petitioner and Baguio Gold was
actually a partnership agreement. Since the advanced amount partook of the nature of an
investment, it could not be deducted as a bad debt from petitioner’s gross income.
- The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of
Baguio Gold could not be allowed as a bad debt deduction. At the time the payments were made,
Baguio Gold was not in default since its loans were not yet due and demandable. What petitioner did
was to pre-pay the loans as evidenced by the notice sent by Bank of America showing that it was
merely demanding payment of the installment and interests due. Moreover, Citibank imposed and
collected a “pre-termination penalty” for the pre-payment.
CA:
- Affirmed CTA
Hence, upon denial of its MR,  petitioner took this recourse under Rule 45 of the ROC, alleging that:
13
- CA erred in construing that advances made by Philex in management of Sto. Nino Mine pursuant
to Power of Atty partook of the nature of investment rather than a loan
- CA erred in ruling that 50-50 sharing in net profits of Sto Nino Mine indicates that Philex is a
partner of Baguio Gold in the development of Sto. Nino Mine notwithstanding the clear absence
of any intent on the part of Philex and Baguio Gold to form a partnership
- CA erred in relying on Power of Atty and in completely disregarding the Compromise Agreements
when it construed the nature of advances made by Philex
- CA erred in refusing to delve upon the issue of propriety of the bad debts write-off
Petitioner Philex Mining:
- Insists that in determining the nature of its business relationship with Baguio Gold, we should
not only rely on the “Power of Attorney,” but also on the subsequent “Compromise with Dation in
Payment” and “Amended Compromise with Dation in Payment” that the parties executed in 1982.
These documents, allegedly evinced the parties’ intent to treat the advances and payments
as a loan and establish a creditor-debtor relationship between them.
Issues:
(1) WON the Power of Attorney is the instrument that is material in determining the true nature of the
business relationship between Philex Mining and Baguio Gold (Yes)
(2) WON an examination of the “Power of Attorney” reveals that a partnership or joint venture was
indeed intended by the parties (Yes)
Held:
Petition denied. CA decision affirmed.
Petitioner Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982
income in the amount of P62,811,161.31, with 20% delinquency interest computed from February
10, 1995, which is the due date given for the payment of the deficiency income tax, up to the actual
date of payment.
Ratio:The petition lacks merit.
(1)
The lower courts correctly held that the “Power of Attorney” is the instrument that is material
in determining the true nature of the business relationship between petitioner and Baguio
Gold. Before resort may be had to the 2 compromise agreements, the parties’ contractual
intent must first be discovered from the expressed language of the primary contract under
which the parties’ business relations were founded.
- It should be noted that the compromise agreements were mere collateral documents executed
by the parties pursuant to the termination of their business relationship created under the “Power of
Attorney.”
- On the other hand, it is the “Power of Attorney” which established the juridical relation of the
parties and defined the parameters of their dealings with one another.
- The execution of the 2 compromise agreements can hardly be considered as a subsequent or
contemporaneous act that is reflective of the parties’ true intent. The compromise agreements were
executed 11 years after the “Power of Attorney” and merely laid out a plan/ procedure by which
petitioner could recover the advances and payments it made under the “Power of Attorney.” The
parties entered into the compromise agreements as a consequence of the dissolution of their
business relationship. It did not define that relationship or indicate its real character.
(2) - In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
An examination of the “Power of Attorney” reveals that a partnership or joint venture was principal due to an interest of a third party that depends upon it, or the mutual interest of both
indeed intended by the parties. principal and agent.19

- In this case, the non-revocation or non-withdrawal under paragraph 5(c) applies to

Contract of partnership Corporation the advances made by petitioner who is supposedly the agent and not the principal under the
Under a contract of partnership, two or more While a corporation, like petitioner, cannot contract. Thus, it cannot be inferred from the stipulation that the parties’ relation under the
persons bind themselves to contribute money, generally enter into a contract of partnership agreement is one of agency coupled with an interest and not a partnership.
property, or industry to a common fund, with the unless authorized by law or its charter, it has
intention of dividing the profits among been held that it may enter into a joint venture - Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the
themselves which is akin to a particular partnership: parties was one of agency and not a partnership. Although the said provision states that “this
Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS’ account,” it does not necessarily follow that the parties
“The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has entered into an agency contract coupled with an interest that cannot be withdrawn by Baguio Gold.
been generally understood to mean an organization formed for some temporary purpose. x x x It is in fact hardly
distinguishable from the partnership, since their elements are similar—community of interest in the business, - It should be stressed that the main object of the “Power of Attorney” was not to confer a
sharing of profits and losses, and a mutual right of control. x  x x The main distinction cited by most opinions in power in favor of petitioner to contract with third persons on behalf of Baguio Gold but to
common law jurisdictions is that the partnership contemplates a general business with some degree of continuity,
create a business relationship between petitioner and Baguio Gold, in which the former was
while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. x  x x
This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be to manage and operate the latter’s mine through the parties’ mutual contribution of material
particular or universal, and a particular partnership may have for its object a specific undertaking. x  x x It would resources and industry.
seem therefore that under Philippine law, a joint venture is a form of partnership and should be governed - The essence of an agency, even one that is coupled with interest, is the agent’s ability to represent
by the law of partnerships. The Supreme Court has however recognized a distinction between these two his principal and bring about business relations between the latter and third persons.  Where 20

business forms, and has held that although a corporation cannot enter into a partnership contract, it may however representation for and in behalf of the principal is merely incidental or necessary for the proper
engage in a joint venture with others. x x x discharge of one’s paramount undertaking under a contract, the latter may not necessarily be a
contract of agency, but some other agreement depending on the ultimate undertaking of the parties. 21

- Perusal of the agreement denominated as the “Power of Attorney” indicates that the parties had
intended to create a partnership and establish a common fund for the purpose. They also had a joint
- In this case, the totality of the circumstances and the stipulations in the parties’ agreement
interest in the profits of the business as shown by a 50-50 sharing in the income of the mine.
indubitably lead to the conclusion that a partnership was formed between petitioner and
- Under the “Power of Attorney,” petitioner and Baguio Gold undertook to contribute money, property
Baguio Gold.
and industry to the common fund known as the Sto. Niño mine.  In this regard, we note that there is
17

- It does not appear that Baguio Gold was unconditionally obligated to return the advances
a substantive equivalence in the respective contributions of the parties to the development and
made by petitioner under the agreement.
operation of the mine
- Paragraph 5 (d) thereof provides that upon termination of the parties’ business relations,
- Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold were to contribute
“the ratio which the MANAGER’S account has to the owner’s account will be determined,
equally to the joint venture assets under their respective accounts.
and the corresponding proportion of the entire assets of the STO. NINO MINE, excluding
- Baguio Gold would contribute P11M under its owner’s account plus any of its income that
the claims” shall be transferred to petitioner.
22

is left in the project, in addition to its actual mining claim.

- As pointed out by the CTA, petitioner was merely entitled to a proportionate return of the
- Philex Mining’s contribution would consist of its expertise in the management and
mine’s assets upon dissolution of the parties’ business relations. There was nothing in
operation of mines, as well as the manager’s account which is comprised of P11M in
the agreement that would require Baguio Gold to make payments of the advances to
funds and property and petitioner’s “compensation” as manager that cannot be paid in
petitioner as would be recognized as an item of obligation or “accounts payable”
cash.
for Baguio Gold. Thus, the tax court correctly concluded that the agreement provided for
a distribution of assets of the Sto. Niño mine upon termination, a provision that is more
Petitioner:
consistent with a partnership than a creditor-debtor relationship. It should be pointed
- However, petitioner asserts that it could not have entered into a partnership agreement with Baguio
out that in a contract of loan, a person who receives a loan or money or any fungible thing
Gold because it did not “bind” itself to contribute money or property to the project; that under
acquires ownership thereof and is bound to pay the creditor an equal amount of the same
paragraph 5 of the agreement, it was only optional for petitioner to transfer funds or property to the
kind and quality.  In this case, however, there was no stipulation for Baguio Gold to
23

Sto. Niño project “(w)henever the MANAGERS shall deem it necessary and convenient in
actually repay petitioner the cash and property that it had advanced, but only the return of
connection with the MANAGEMENT of the STO. NIÑO MINE.” 18

an amount pegged at a ratio which the manager’s account had to the owner’s account.
- In this connection, we find no contractual basis for the execution of the 2 compromise agreements
SC:
in which Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the
- The wording of the parties’ agreement as to petitioner’s contribution to the common fund
termination of their business relations over the Sto. Nino Mine.
does not detract from the fact that petitioner transferred its funds and property to the project
- The “Power of Attorney” clearly provides that petitioner would only be entitled to the return of a
as specified in par 5, thus rendering effective the other stipulations of the contract,
proportionate share of the mine assets to be computed at a ratio that the manager’s account had to
particularly par 5(c) which prohibits petitioner from withdrawing the advances until
the owner’s account. Except to provide a basis for claiming the advances as a bad debt deduction,
termination of the parties’ business relations.
there is no reason for Baguio Gold to hold itself liable to petitioner under the compromise
- As can be seen, petitioner became bound by its contributions once the transfers were made.
agreements, for any amount over and above the proportion agreed upon in the “Power of Attorney.”
- The contributions acquired an obligatory nature as soon as petitioner had chosen to exercise its
- Next, the tax court correctly observed that it was unlikely for a business corporation to lend
option under par 5.
hundreds of millions of pesos to another corporation with neither security, or collateral, nor a
specific deed evidencing the terms and conditions of such loans. The parties also did not
- There is no merit to petitioner’s claim that the prohibition in paragraph 5(c) against withdrawal of
provide a specific maturity date for the advances to become due and demandable, and the
advances should not be taken as an indication that it had entered into a partnership with Baguio
manner of payment was unclear. All these point to the inevitable conclusion that the
Gold; that the stipulation only showed that what the parties entered into was actually a contract of
advances were not loans but capital contributions to a partnership.
agency coupled with an interest which is not revocable at will and not a partnership.
- The strongest indication that petitioner was a partner in the Sto. Niño mine is the fact that it
would receive 50% of the net profits as “compensation” under paragraph 12 of the
agreement. The entirety of the parties’ contractual stipulations simply leads to no other
conclusion than that petitioner’s “compensation” is actually its share in the income of the
joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the “receipt by a person of a share in the
profits of a business is prima facie evidence that he is a partner in the business.”
- Petitioner asserts, however, that no such inference can be drawn against it since its share in the
profits of the Sto. Niño project was in the nature of compensation or “wages of an employee,” under
the exception provided in Article 1769 (4) (b).24
- On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold
who will be paid “wages” pursuant to an employer-employee relationship. To begin with,
petitioner was the manager of the project and had put substantial sums into the venture in order to
ensure its viability and profitability. By pegging its compensation to profits, petitioner also stood not
to be remunerated in case the mine had no income. It is hard to believe that petitioner would take
the risk of not being paid at all for its services, if it were truly just an ordinary employee.
- Consequently, we find that petitioner’s “compensation” under paragraph 12 of the agreement
actually constitutes its share in the net profits of the partnership. Indeed, petitioner would not
be entitled to an equal share in the income of the mine if it were just an employee of Baguio Gold.  It
25
G.R. No. 150976. October 18, 2004
CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES NAVARRO, MARIA ANTONIA TEMPLO and
MEDICAL CENTER PARAÑAQUE, INC., petitioners, vs.
ANGELES BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO, ROMEO FUNTILA, TERESITA GAYANILO, RUSTICO
JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, CECILIA MONTALBAN, VIRGILIO OBLEPIAS, CARMENCITA PARRENO,
CESAR REYES, REYNALDO SAVET, SERAPIO TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA, and HUMBERTO
VILLAREAL, respondents.
Summary: Petitioners and Respondents are stockholders of MCPI, with the former holding “Class B”
shares, and the latter owning “Class A” shares. MCPI was organized sometime in Sep.1977 under
the Old Corporation Law (Act 1459), and under Article VII of its original Articles of Incorporation
(AOI), only holders of “Class A” shares can have the right to vote and the right to be elected as
directors or as corporate officers. MCPI’s AOI was amended on 1981 to increase its capital stock to
P5M and retained “Class A” privileges. On 1992, Article VII was again amended to increase the
authorized capital stock to P32M, and it also provided that “Except when otherwise provided by law,
only holders of Class “A” shares have the right to vote and the right to be elected as directors or as
corporate officers.”
On the annual stockholders’ meeting and election of directors (Feb. 2001), respondent Rustico
Jimenez, citing Article VII (AOI), and notwithstanding MCPI’s history of holders of Class B
shareowners being elected as board members, declared over the objections of petitioners, that no
Class "B" shareholder was qualified to run or be voted upon as a director. Jimenez went on to
announce that the candidates holding Class "A" shares were the winners of all seats in the corporate
board. The petitioners protested, claiming that Article VII was null and void for depriving them of their
right to vote and to be voted upon, in violation of Sec. 6 of the Corporation Code, which prohibits the
deprivation of voting rights except as to preferred and redeemable shares only. They further claimed
that the privilege granted to the “Class A” shareholders was more in the nature of a right granted to
founder’s shares, and that the respondents are in estoppel for the past election of Class "B"
shareholders to the corporate board.
The respondents, on the other hand, claim that the exclusivity of the Right granted to “Class A”
holders cannot be defeated or impaired by any subsequent legislative enactment, e.g. the New
Corporation Code, as the AOI is an intra-corporate contract between the corporations and its
members; between the corporation and its stockholders; and among the stockholders. the AOI of
MCPI is in the nature of a contract between the corporation and its shareholders and Sec. 6 of the
Corp. Code could not retroactively apply to it without violating the non-impairment clause of the
Constitution.
Petitioners filed a Complaint for Injunction, Accounting and Damages, before the RTC, but the said
court ruled in favor of respondents. Hence, this petition. Can holders of Class "B" shares of the MCPI
be deprived of the right to vote and be voted for as directors in MCPI? No.
When Article VII of the AOI of MCPI was amended in 1992, the phrase "except when otherwise
provided by law" was inserted in the provision governing the grant of voting powers to Class "A"
is not surprising that petitioner was to receive a 50% share in the net profits, considering that the
“Power of Attorney” also provided for an almost equal contribution of the parties to the Sto. Nino
Mine. The “compensation” agreed upon only serves to reinforce the notion that the parties’ relations
were indeed of partners and not employer-employee.
- Lower court did not err in treating petitioner’s advances as investments in a partnership
known as the Sto. Nino Mine. The advances were not “debts” of Baguio Gold to petitioner
inasmuch as the latter was under no unconditional obligation to return the same to the former under
the “Power of Attorney.” As for the amounts that petitioner paid as guarantor to Baguio Gold’s
creditors, we find no reason to depart from the tax court’s factual finding that Baguio Gold’s debts
were not yet due and demandable at the time that petitioner paid the same. Verily, petitioner pre-
paid Baguio Gold’s outstanding loans to its bank creditors and this conclusion is supported by the
evidence on record. 26
- In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income.
Deductions for income tax purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing evidence that he is entitled to the
deduction claimed.  In this case, petitioner failed to substantiate its assertion that the
27
advances were subsisting debts of Baguio Gold that could be deducted from its gross
income. Consequently, it could not claim the advances as a valid bad debt deduction.
shareholders. The law referred to in the amendment to Article VII refers to the Corporation Code and
no other law. Sec. 6 of the Corp. Code being deemed written into Article VII of the AOI, it necessarily
follows that unless Class "B" shares of MCPI stocks are clearly categorized to be "preferred" or
"redeemable" shares, the holders of said Class "B" shares may not be deprived of their voting rights.
Note that there is nothing in the AOI nor an iota of evidence on record to show that Class "B" shares
were categorized as either "preferred" or "redeemable" shares. The only possible conclusion is that
Class "B" shares fall under neither category and thus, under the law, are allowed to exercise voting
rights.
Neither do we find merit in respondents’ position that Sec. 6 of the Corporation Code cannot apply to
MCPI without running afoul of the non-impairment clause of the Bill of Rights. Section 148 of the
Corporation Code expressly provides that it shall apply to corporations in existence at the time of the
effectivity of the Code. Hence, the non-impairment clause is inapplicable in this instance. When
Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board of directors and
stockholders must have been aware of Sec. 6 of the Corporation Code and intended that Article VII
be construed in harmony with the Code, which was then already in force and effect. Since Sec. 6 of
the Corporation Code expressly prohibits the deprivation of voting rights, except as to "preferred"
and "redeemable" shares, then Article VII of the Articles of Incorporation cannot be construed as
granting exclusive voting rights to Class "A" shareholders, to the prejudice of Class "B" shareholders,
without running afoul of the letter and spirit of the Corporation Code.
Facts:
Petitioners and the respondents are stockholders of Medical Center Parañaque, Inc. (MCPI),
with the former holding Class "B" shares and the latter owning Class "A" shares.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat, Parañaque City. It
was organized sometime in September 1977. At the time of its incorporation, Act No. 1459, the
old Corporation Law was still in force and effect. Article VII of MCPI’s original Articles of
Incorporation, as approved by the Securities and Exchange Commission (SEC) on October 26,
1977, reads as follows:
SEVENTH. That the authorized capital stock of the corporation is TWO MILLION (₱2,000,000.00) PESOS, Philippine Currency,
divided into TWO THOUSAND (2,000) SHARES at a par value of ₱100 each share, whereby the ONE THOUSAND SHARES
issued to, and subscribed by, the incorporating stockholders shall be classified as Class A shares while the other ONE THOUSAND
unissued shares shall be considered as Class B shares. Only holders of Class A shares can have the right to vote and the
right to be elected as directors or as corporate officers.
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended, to read thus:
SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION (₱5,000,000.00) PESOS, divided as follows:
CLASS NO. OF SHARES PAR VALUE
"A" 1,000 ₱1,000.00
"B" 4,000 ₱1,000.00
 Only holders of Class A shares have the right to vote and the right to be elected as directors or as corporate officers.
The foregoing amendment was approved by the SEC on June 7, 1983. While the amendment
granted the right to vote and to be elected as directors or corporate officers only to holders
of Class "A" shares, holders of Class "B" stocks were granted the same rights and privileges
as holders of Class "A" stocks with respect to the payment of dividends.
On September 9, 1992, Article VII was again amended to provide as follows:
SEVENTH: That the authorized capital stock of the corporation is THIRTY TWO MILLION PESOS (P32,000,000.00) divided as
follows:
CLASS NO. OF SHARES PAR VALUE
"A" 1,000 ₱1,000.00
"B" 31,000 ₱1,000.00
Except when otherwise provided by law, only holders of Class "A" shares have the right to vote and the right to be elected as
directors or as corporate officers
The SEC approved the foregoing amendment on September 22, 1993.On February 9, 2001, the
shareholders of MCPI held their annual stockholders’ meeting and election for directors.
During the course of the proceedings, respondent Rustico Jimenez, citing Article VII, as
amended, and notwithstanding MCPI’s history, declared over the objections of herein
petitioners, that no Class "B" shareholder was qualified to run or be voted upon as a director.
In the past, MCPI had seen holders of Class "B" shares voted for and serve as members of
the corporate board and some Class "B" share owners were in fact nominated for election as
board members. Nonetheless, Jimenez went on to announce that the candidates holding
Class "A" shares were the winners of all seats in the corporate board. The petitioners
protested, claiming that Article VII was null and void for depriving them, as Class "B"
shareholders, of their right to vote and to be voted upon, in violation of the Corporation Code
(BP 68), as amended.
On March 22, 2001, after their protest was given short shrift, herein petitioners filed a Complaint for
Injunction, Accounting and Damages, before the RTC of Parañaque City. Said complaint was
founded on two (2) principal causes of action, namely:
a. Annulment of the declaration of directors of the MCPI made during the February 9, 2001 Annual Stockholders’
Meeting, and for the conduct of an election whereat all stockholders, irrespective of the classification of the
shares they hold, should be afforded their right to vote and be voted for; and
b. Stockholders’ derivative suit challenging the validity of a contract entered into by the Board of Directors of
MCPI for the operation of the ultrasound unit.
Subsequently, the complaint was amended to implead MCPI as party-plaintiff for purposes only of
the second cause of action. Before the trial court, the herein petitioners alleged that they were
deprived of their right to vote and to be voted on as directors at the annual stockholders’ meeting
held on February 9, 2001, because respondents had erroneously relied on Article VII of the Articles
of Incorporation of MCPI, despite Article VII being contrary to the Corporation Code, thus null and
void. Additionally, respondents were in estoppel, because in the past, petitioners were allowed
to vote and to be elected as members of the board. They further claimed that the privilege
granted to the Class "A" shareholders was more in the nature of a right granted to founder’s shares.
In their Answer, the respondents averred that the provisions of Article VII clearly and categorically
state that only holders of Class "A" shares have the exclusive right to vote and be elected as
directors and officers of the corporation. They denied that the exclusivity was intended only as a
privilege granted to founder’s shares, as no such proviso is found in the Articles of Incorporation.
The respondents further claimed that the exclusivity of the right granted to Class "A" holders
cannot be defeated or impaired by any subsequent legislative enactment, e.g. the New
Corporation Code, as the Articles of Incorporation is an intra-corporate contract between the
corporation and its members; between the corporation and its stockholders; and among the
stockholders. They submit that to allow Class "B" shareholders to vote and be elected as
directors would constitute a violation of MCPI’s franchise or charter as granted by the State.
At the pre-trial, the trial court ruled that a partial judgment could be rendered on the first
cause of action and required the parties to submit their respective position papers or
memoranda.
RTC: On November 26, 2001, the RTC rendered the Partial Judgment, the dispositive portion of
which reads:
WHEREFORE, viewed in the light of the foregoing, the election held on February 9, 2001 is VALID as the
holders of CLASS "B" shares are not entitled to vote and be voted for and this case based on the First
Cause of Action is DISMISSED.
In finding for the respondents, the trial court ruled that corporations had the power to classify their shares of
stocks, such as "voting and non-voting" shares, conformably with Section 6 of the Corporation Code of
the Philippines. It pointed out that Article VII of both the original and amended Articles of Incorporation clearly
provided that only Class "A" shareholders could vote and be voted for to the exclusion of Class "B" shareholders,
the exception being in instances provided by law, such as those enumerated in Section 6, paragraph 6 of the
Corporation Code. The RTC found merit in the respondents’ theory that the Articles of Incorporation, which
defines the rights and limitations of all its shareholders, is a contract between MCPI and its shareholders.
It is thus the law between the parties and should be strictly enforced as to them. It brushed aside the
petitioners’ claim that the Class "A" shareholders were in estoppel, as the election of Class "B"
shareholders to the corporate board may be deemed as a mere act of benevolence on the part of the
officers. Finally, the court brushed aside the "founder’s shares" theory of the petitioners for lack of factual basis.
Hence, this petition submitting the sole legal issue of whether or not the Court  a quo, in rendering the Partial
Judgment dated November 26, 2001, has decided a question of substance in a way not in accord with law and
jurisprudence considering that:
1. Under the Corporation Code, the exclusive voting right and right to be voted granted by the Articles of
Incorporation of the MCPI to Class A shareholders is null and void, or already extinguished;
2. Hence, the declaration of directors made during the February 9, 2001 Annual Stockholders’ Meeting on the
basis of the purported exclusive voting rights is null and void for having been done without the benefit of an
election and in violation of the rights of plaintiffs and Class B shareholders; and
3. Perforce, another election should be conducted to elect the directors of the MCPI, this time affording the
holders of Class B shares full voting right and the right to be voted.
Contentions:
Petitioners: assert that Article VII of the Articles of Incorporation of MCPI, which denied them voting rights,
is null and void for being contrary to Section 6 of the Corporation Code. They point out that Section 6
prohibits the deprivation of voting rights except as to preferred and redeemable shares only. Hence, under
the present law on corporations, all shareholders, regardless of classification, other than holders of preferred or
redeemable shares, are entitled to vote and to be elected as corporate directors or officers. Since the Class "B"
shareholders are not classified as holders of either preferred or redeemable shares, then it necessarily follows that
they are entitled to vote and to be voted for as directors or officers.
Respondents: maintain that the grant of exclusive voting rights to Class "A" shares is clearly provided in the
Articles of Incorporation and is in accord with Section 5 of the Corporation Law (Act No. 1459), which was
the prevailing law when MCPI was incorporated in 1977. They likewise submit that as the Articles of Incorporation
of MCPI is in the nature of a contract between the corporation and its shareholders and Section 6 of the
Corporation Code could not retroactively apply to it without violating the non-impairment clause of the
Constitution.
Issue: WON holders of Class "B" shares of the MCPI may be deprived of the right to vote and be
voted for as directors in MCPI. (Yes)
Held: Yes. When Article VII of the Articles of Incorporation of MCPI was amended in 1992, the
phrase "except when otherwise provided by law" was inserted in the provision governing the
grant of voting powers to Class "A" shareholders. This particular amendment is relevant for it
speaks of a law providing for exceptions to the exclusive grant of voting rights to Class "A"
stockholders. Which law was the amendment referring to? The determination of which law to
apply is necessary. There are two laws being cited and relied upon by the parties in this case. In
this instance, the law in force at the time of the 1992 amendment was the Corporation Code (B.P.
Blg. 68), not the Corporation Law (Act No. 1459), which had been repealed by then.
We find and so hold that the law referred to in the amendment to Article VII refers to the
Corporation Code and no other law. At the time of the incorporation of MCPI in 1977, the right of a
corporation to classify its shares of stock was sanctioned by Section 5 of Act No. 1459. The law
repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of classification of stock shares
to corporations, but with a significant change.
Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights were
explicitly provided for, such that "no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in
this Code" and that "there shall always be a class or series of shares which have complete
voting rights." Section 6 of the Corporation Code being deemed written into Article VII of the
Articles of Incorporation of MCPI, it necessarily follows that unless Class "B" shares of MCPI
stocks are clearly categorized to be "preferred" or "redeemable" shares, the holders of said
Class "B" shares may not be deprived of their voting rights. Note that there is nothing in the
Articles of Incorporation nor an iota of evidence on record to show that Class "B" shares
were categorized as either "preferred" or "redeemable" shares. The only possible conclusion
is that Class "B" shares fall under neither category and thus, under the law, are allowed to
exercise voting rights.

One of the rights of a stockholder is the right to participate in the control and management of the
corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the
ownership of corporate stock, and as such is a property right. The stockholder cannot be deprived of the
right to vote his stock nor may the right be essentially impaired, either by the legislature or by the
corporation, without his consent, through amending the charter, or the by-laws.

Neither do we find merit in respondents’ position that Section 6 of the Corporation Code cannot
apply to MCPI without running afoul of the non-impairment clause of the Bill of Rights. Section 148
of the Corporation Code expressly provides that it shall apply to corporations in existence at the
time of the effectivity of the Code. Hence, the non-impairment clause is inapplicable in this
instance. When Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board
of directors and stockholders must have been aware of Section 6 of the Corporation Code and
intended that Article VII be construed in harmony with the Code, which was then already in force
and effect. Since Section 6 of the Corporation Code expressly prohibits the deprivation of voting
rights, except as to "preferred" and "redeemable" shares, then Article VII of the Articles of
Incorporation cannot be construed as granting exclusive voting rights to Class "A" shareholders, to
the prejudice of Class "B" shareholders, without running afoul of the letter and spirit of the
Corporation Code.

The respondents then take the tack that the phrase "except when otherwise provided by law" found
in the amended Articles is only a handwritten insertion and could have been inserted by anybody
and that no board resolution was ever passed authorizing or approving said amendment.

Said contention is not for this Court to pass upon, involving as it does a factual question , which is
not proper in this petition. In an appeal via certiorari, only questions of law may be reviewed. Besides,
respondents did not adduce persuasive evidence, but only bare allegations, to support their suspicion. The
presumption that in the amendment process, the ordinary course of business has been followed and that
official duty has been regularly performed on the part of the SEC, applies in this case.

WHEREFORE, the petition is GRANTED. The Partial Judgment dated November 26, 2001 of the Regional Trial Court of Parañaque
City, Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No pronouncement as to costs.