G.R. No.

L-21601

December 17, 1966

NIELSON & COMPANY, INC., plaintiff-appellant,

vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.
W. H. Quasha and Associates for plaintiff-appellant.
Ponce Enrile, Siguion-Reyna, Montecillo and Belo for defendant-appellee.
ZALDIVAR, J.:
On February 6, 1958, plaintiff brought this action against defendant before the Court of First Instance of
Manila to recover certain sums of money representing damages allegedly suffered by the former in view
of the refusal of the latter to comply with the terms of a management contract entered into between them
on January 30, 1937, including attorney's fees and costs.
Defendant in its answer denied the material allegations of the complaint and set up certain special
defenses, among them, prescription and laches, as bars against the institution of the present action.
After trial, during which the parties presented testimonial and numerous documentary evidence, the
court a quorendered a decision dismissing the complaint with costs. The court stated that it did not find
sufficient evidence to establish defendant's counterclaim and so it likewise dismissed the same.
The present appeal was taken to this Court directly by the plaintiff in view of the amount involved in the
case.
The facts of this case, as stated in the decision appealed from, are hereunder quoted for purposes of this
decision:
It appears that the suit involves an operating agreement executed before World War II between
the plaintiff and the defendant whereby the former operated and managed the mining properties
owned by the latter for a management fee of P2,500.00 a month and a 10% participation in the
net profits resulting from the operation of the mining properties. For brevity and convenience,
hereafter the plaintiff shall be referred to as NIELSON and the defendant, LEPANTO.
The antecedents of the case are: The contract in question (Exhibit `C') was made by the parties
on January 30, 1937 for a period of five (5) years. In the latter part of 1941, the parties agreed to
renew the contract for another period of five (5) years, but in the meantime, the Pacific War broke
out in December, 1941.
In January, 1942 operation of the mining properties was disrupted on account of the war. In
February of 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand and
mines, were destroyed upon orders of the United States Army, to prevent their utilization by the
invading Japanese Army. The Japanese forces thereafter occupied the mining properties,
operated the mines during the continuance of the war, and who were ousted from the mining
properties only in August of 1945.
After the mining properties were liberated from the Japanese forces, LEPANTO took possession
thereof and embarked in rebuilding and reconstructing the mines and mill; setting up new
organization; clearing the mill site; repairing the mines; erecting staff quarters and bodegas and
repairing existing structures; installing new machinery and equipment; repairing roads and
maintaining the same; salvaging equipment and storing the same within the bodegas; doing
police work necessary to take care of the materials and equipment recovered; repairing and

renewing the water system; and remembering (Exhibits "D" and "E"). The rehabilitation and
reconstruction of the mine and mill was not completed until 1948 (Exhibit "F"). On June 26, 1948
the mines resumed operation under the exclusive management of LEPANTO (Exhibit "F-l").
Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose
between NIELSON and LEPANTO over the status of the operating contract in question which as
renewed expired in 1947. Under the terms thereof, the management contract shall remain in
suspense in case fortuitous event or force majeure, such as war or civil commotion, adversely
affects the work of mining and milling.
"In the event of inundations, floodings of mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, injury to the machinery
or other event or cause reasonably beyond the control of NIELSON and which adversely
affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and
without liability or breach of the terms of this Agreement, the same shall remain in
suspense, wholly or partially during the terms of such inability." (Clause II of Exhibit "C").
NIELSON held the view that, on account of the war, the contract was suspended during the war;
hence the life of the contract should be considered extended for such time of the period of
suspension. On the other hand, LEPANTO contended that the contract should expire in 1947 as
originally agreed upon because the period of suspension accorded by virtue of the war did not
operate to extend further the life of the contract.
No understanding appeared from the record to have been bad by the parties to resolve the
disagreement. In the meantime, LEPANTO rebuilt and reconstructed the mines and was able to
bring the property into operation only in June of 1948, . . . .
Appellant in its brief makes an alternative assignment of errors depending on whether or not the
management contract basis of the action has been extended for a period equivalent to the period of
suspension. If the agreement is suspended our attention should be focused on the first set of errors
claimed to have been committed by the court a quo; but if the contrary is true, the discussion will then be
switched to the alternative set that is claimed to have been committed. We will first take up the question
whether the management agreement has been extended as a result of the supervening war, and after
this question shall have been determined in the sense sustained by appellant, then the discussion of the
defense of laches and prescription will follow as a consequence.
The pertinent portion of the management contract (Exh. C) which refers to suspension should any event
constituting force majeure happen appears in Clause II thereof which we quote hereunder:
In the event of inundations, floodings of the mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, injury to the machinery or other
event or cause reasonably beyond the control of NIELSON and which adversely affects the work
of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or breach
of the terms of this Agreement, the same shall remain in suspense, wholly or partially during the
terms of such inability.
A careful scrutiny of the clause above-quoted will at once reveal that in order that the management
contract may be deemed suspended two events must take place which must be brought in a satisfactory
manner to the attention of defendant within a reasonable time, to wit: (1) the event constituting the force
majeure must be reasonably beyond the control of Nielson, and (2) it must adversely affect the work of
mining and milling the company is called upon to undertake. As long as these two condition exist the
agreement is deem suspended.

Does the evidence on record show that these two conditions had existed which may justify the conclusion
that the management agreement had been suspended in the sense entertained by appellant? Let us go
to the evidence.
It is a matter that this Court can take judicial notice of that war supervened in our country and that the
mines in the Philippines were either destroyed or taken over by the occupation forces with a view to their
operation. The Lepanto mines were no exception for not was the mine itself destroyed but the mill, power
plant, supplies on hand, equipment and the like that were being used there were destroyed as well. Thus,
the following is what appears in the Lepanto Company Mining Report dated March 13, 1946 submitted by
1
its President C. A. DeWitt to the defendant: "In February of 1942, our mill, power plant, supplies on hand,
equipment, concentrates on hand, and mine, were destroyed upon orders of the U.S. Army to prevent
their utilization by the enemy." The report also mentions the report submitted by Mr. Blessing, an official
of Nielson, that "the original mill was destroyed in 1942" and "the original power plant and all the installed
equipment were destroyed in 1942." It is then undeniable that beginning February, 1942 the operation of
the Lepanto mines stopped or became suspended as a result of the destruction of the mill, power plant
and other important equipment necessary for such operation in view of a cause which was clearly beyond
the control of Nielson and that as a consequence such destruction adversely affected the work of mining
and milling which the latter was called upon to undertake under the management contract. Consequently,
by virtue of the very terms of said contract the same may be deemed suspended from February, 1942
and as of that month the contract still had 60 months to go.
On the other hand, the record shows that the defendant admitted that the occupation forces operated its
2
mining properties subject of the management contract, and from the very report submitted by President
DeWitt it appears that the date of the liberation of the mine was August 1, 1945 although at the time there
3
were still many booby traps. Similarly, in a report submitted by the defendant to its stockholders dated
August 25, 1948, the following appears: "Your Directors take pleasure in reporting that June 26, 1948
marked the official return to operations of this Company of its properties in Mankayan, Mountain Province,
4
Philippines."
It is, therefore, clear from the foregoing that the Lepanto mines were liberated on August 1, 1945, but
because of the period of rehabilitation and reconstruction that had to be made as a result of the
destruction of the mill, power plant and other necessary equipment for its operation it cannot be said that
the suspension of the contract ended on that date. Hence, the contract must still be deemed suspended
during the succeeding years of reconstruction and rehabilitation, and this period can only be said to have
ended on June 26, 1948 when, as reported by the defendant, the company officially resumed the mining
operations of the Lepanto. It should here be stated that this period of suspension from February, 1942 to
5
June 26, 1948 is the one urged by plaintiff.
It having been shown that the operation of the Lepanto mines on the part of Nielson had been suspended
during the period set out above within the purview of the management contract, the next question that
needs to be determined is the effect of such suspension. Stated in another way, the question now to be
determined is whether such suspension had the effect of extending the period of the management
contract for the period of said suspension. To elucidate this matter, we again need to resort to the
evidence.
For appellant Nielson two witnesses testified, declaring that the suspension had the effect of extending
the period of the contract, namely, George T. Scholey and Mark Nestle. Scholey was a mining engineer
since 1929, an incorporator, general manager and director of Nielson and Company; and for some time
he was also the vice-president and director of the Lepanto Company during the pre-war days and, as
such, he was an officer of both appellant and appellee companies. As vice-president of Lepanto and
general manager of Nielson, Scholey participated in the negotiation of the management contract to the
extent that he initialed the same both as witness and as an officer of both corporations. This witness
testified in this case to the effect that the standard force majeure clause embodied in the management
contract was taken from similar mining contracts regarding mining operations and the understanding
regarding the nature and effect of said clause was that when there is suspension of the operation that

suspension meant the extension of the contract. Thus, to the question, "Before the war, what was the
understanding of the people in the particular trend of business with respect to the force majeure clause?",
6
Scholey answered: "That was our understanding that the suspension meant the extension of time lost."
Mark Nestle, the other witness, testified along similar line. He had been connected with Nielson since
1937 until the time he took the witness stand and had been a director, manager, and president of the
same company. When he was propounded the question: "Do you know what was the custom or usage at
that time in connection withforce majeure clause?", Nestle answered, "In the mining world the force
majeure clause is generally considered. When a calamity comes up and stops the work like in war, flood,
inundation or fire, etc., the work is suspended for the duration of the calamity, and the period of the
contract is extended after the calamity is over to enable the person to do the big work or recover his
7
money which he has invested, or accomplish what his obligation is to a third person ."
And the above testimonial evidence finds support in the very minutes of the special meeting of the Board
of Directors of the Lepanto Company issued on March 10, 1945 which was then chairmaned by Atty. C.
A. DeWitt. We read the following from said report:
The Chairman also stated that the contract with Nielson and Company would soon expire if the
obligations were not suspended, in which case we should have to pay them the retaining fee of
P2,500.00 a month. He believes however, that there is a provision in the contract suspending the
effects thereof in cases like the present, and that even if it were not there, the law itself would
suspend the operations of the contract on account of the war. Anyhow, he stated, we shall have
8
no difficulty in solving satisfactorily any problem we may have with Nielson and Company.
Thus, we can see from the above that even in the opinion of Mr. DeWitt himself, who at the time was the
chairman of the Board of Directors of the Lepanto Company, the management contract would then expire
unless the period therein rated is suspended but that, however, he expressed the belief that the period
was extended because of the provision contained therein suspending the effects thereof should any of
the case of force majeure happen like in the present case, and that even if such provision did not exist the
law would have the effect of suspending it on account of the war. In substance, Atty. DeWitt expressed
the opinion that as a result of the suspension of the mining operation because of the effects of the war the
period of the contract had been extended.
Contrary to what appellant's evidence reflects insofar as the interpretation of the force majeure clause is
concerned, however, appellee gives Us an opposite interpretation invoking in support thereof not only a
9
letter Atty. DeWitt sent to Nielson on October 20, 1945, wherein he expressed for the first time an
opinion contrary to what he reported to the Board of Directors of Lepanto Company as stated in the
portion of the minutes of its Board of Directors as quoted above, but also the ruling laid down by our
Supreme Court in some cases decided sometime ago, to the effect that the war does not have the effect
of extending the term of a contract that the parties may enter into regarding a particular transaction, citing
in this connection the cases of Victorias Planters Association v. Victorias Milling Company, 51 O.G.
4010; Rosario S. Vda. de Lacson, et al. v. Abelardo G. Diaz, 87 Phil. 150; and Lo Ching y So Young
Chong Co. v. Court of Appeals, et al., 81 Phil. 601.
To bolster up its theory, appellee also contends that the evidence regarding the alleged custom or usage
in mining contract that appellant's witnesses tried to introduce was incompetent because (a) said custom
was not specifically pleaded; (b) Lepanto made timely and repeated objections to the introduction of said
evidence; (c) Nielson failed to show the essential elements of usage which must be shown to exist before
any proof thereof can be given to affect the contract; and (d) the testimony of its witnesses cannot prevail
over the very terms of the management contract which, as a rule, is supposed to contain all the terms and
conditions by which the parties intended to be bound.
It is here necessary to analyze the contradictory evidence which the parties have presented regarding the
interpretation of the force majeure clause in the management contract.

At the outset, it should be stated that, as a rule, in the construction and interpretation of a document the
intention of the parties must be sought (Rule 130, Section 10, Rules of Court). This is the basic rule in the
interpretation of contracts because all other rules are but ancilliary to the ascertainment of the meaning
intended by the parties. And once this intention has been ascertained it becomes an integral part of the
contract as though it had been originally expressed therein in unequivocal terms (Shoreline Oil Corp. v.
Guy, App. 189, So., 348, cited in 17A C.J.S., p. 47). How is this intention determined?
One pattern is to ascertain the contemporaneous and subsequent acts of the contracting parties in
relation to the transaction under consideration (Article 1371, Civil Code). In this particular case, it is
worthy of note what Atty. C. A. DeWitt has stated in the special meeting of the Board of Directors of
Lepanto in the portion of the minutes already quoted above wherein, as already stated, he expressed the
opinion that the life of the contract, if not extended, would last only until January, 1947 and yet he said
that there is a provision in the contract that the war had the effect of suspending the agreement and that
the effect of that suspension was that the agreement would have to continue with the result that Lepanto
would have to pay the monthly retaining fee of P2,500.00. And this belief that the war suspended the
agreement and that the suspension meant its extension was so firm that he went to the extent that even if
there was no provision for suspension in the agreement the law itself would suspend it.
It is true that Mr. DeWitt later sent a letter to Nielson dated October 20, 1945 wherein apparently he
changed his mind because there he stated that the contract was merely suspended, but not extended, by
reason of the war, contrary to the opinion he expressed in the meeting of the Board of Directors already
adverted to, but between the two opinions of Atty. DeWitt We are inclined to give more weight and validity
to the former not only because such was given by him against his own interest but also because it was
10
given before the Board of Directors of Lepanto and in the presence, of some Nielson officials who, on
that occasion were naturally led to believe that that was the true meaning of the suspension clause, while
the second opinion was merely self-serving and was given as a mere afterthought.
Appellee also claims that the issue of true intent of the parties was not brought out in the complaint, but
anent this matter suffice it to state that in paragraph No. 19 of the complaint appellant pleaded that the
11
contract was extended. This is a sufficient allegation considering that the rules on pleadings must as a
rule be liberally construed.
It is likewise noteworthy that in this issue of the intention of the parties regarding the meaning and usage
concerning the force majeure clause, the testimony adduced by appellant is uncontradicted. If such were
not true, appellee should have at least attempted to offer contradictory evidence. This it did not do. Not
even Lepanto's President, Mr. V. E. Lednicky who took the witness stand, contradicted said evidence.
In holding that the suspension of the agreement meant the extension of the same for a period equivalent
to the suspension, We do not have the least intention of overruling the cases cited by appellee. We
simply want to say that the ruling laid down in said cases does not apply here because the material facts
involved therein are not the same as those obtaining in the present. The rule of stare decisis cannot be
invoked where there is no analogy between the material facts of the decision relied upon and those of the
instant case.
Thus, in Victorias Planters Association vs. Victorias Milling Company, 51 O.G. 4010, there was no
evidence at all regarding the intention of the parties to extend the contract equivalent to the period of
suspension caused by the war. Neither was there evidence that the parties understood the suspension to
mean extension; nor was there evidence of usage and custom in the industry that the suspension meant
the extension of the agreement. All these matters, however, obtain in the instant case.
Again, in the case of Rosario S. Vda. de Lacson vs. Abelardo G. Diaz, 87 Phil. 150, the issue referred to
the interpretation of a pre-war contract of lease of sugar cane lands and the liability of the lessee to pay
rent during and immediately following the Japanese occupation and where the defendant claimed the
right of an extension of the lease to make up for the time when no cane was planted. This Court, in

holding that the years which the lessee could not use the land because of the war could not be
discounted from the period agreed upon, held that "Nowhere is there any insinuation that the defendantlessee was to have possession of lands for seven years excluding years on which he could not harvest
sugar." Clearly, this ratio decidendi is not applicable to the case at bar wherein there is evidence that the
parties understood the "suspension clause by force majeure" to mean the extension of the period of
agreement.
Lastly, in the case of Lo Ching y So Young Chong Co. vs. Court of Appeals, et al., 81 Phil. 601, appellant
leased a building from appellee beginning September 13, 1940 for three years, renewable for two years.
The lessee's possession was interrupted in February, 1942 when he was ousted by the Japanese who
turned the same over to German Otto Schulze, the latter occupying the same until January, 1945 upon
the arrival of the liberation forces. Appellant contended that the period during which he did not enjoy the
leased premises because of his dispossession by the Japanese had to be deducted from the period of
the lease, but this was overruled by this Court, reasoning that such dispossession was merely a simple
"perturbacion de merohecho y de la cual no responde el arrendador" under Article 1560 of the old Civil
Code Art. 1664). This ruling is also not applicable in the instant case because in that case there was no
evidence of the intention of the parties that any suspension of the lease by force majeure would be
understood to extend the period of the agreement.
In resume, there is sufficient justification for Us to conclude that the cases cited by appellee are
inapplicable because the facts therein involved do not run parallel to those obtaining in the present case.
We shall now consider appellee's defense of laches. Appellee is correct in its contention that the defense
of laches applies independently of prescription. Laches is different from the statute of limitations.
Prescription is concerned with the fact of delay, whereas laches is concerned with the effect of delay.
Prescription is a matter of time; laches is principally a question of inequity of permitting a claim to be
enforced, this inequity being founded on some change in the condition of the property or the relation of
the parties. Prescription is statutory; laches is not. Laches applies in equity, whereas prescription applies
at law. Prescription is based on fixed time, laches is not. (30 C.J.S., p. 522; See also Pomeroy's Equity
Jurisprudence, Vol. 2, 5th ed., p. 177).
The question to determine is whether appellant Nielson is guilty of laches within the meaning
contemplated by the authorities on the matter. In the leading case of Go Chi Gun, et al. vs. Go Cho, et al.,
96 Phil. 622, this Court enumerated the essential elements of laches as follows:
(1) conduct on the part of the defendant, or of one under whom he claims, giving rise to the
situation of which complaint is made and for which the complaint seeks a remedy; (2) delay in
asserting the complainant's rights, the complainant having had knowledge or notice of the
defendant's conduct and having been afforded an opportunity to institute a suit; (3) lack of
knowledge or notice on the part of the defendant that the complainant would assert the right on
which he bases his suit; and (4) injury or prejudice to the defendant in the event relief is accorded
to the complainant, or the suit is not held barred.
Are these requisites present in the case at bar?
The first element is conceded by appellant Nielson when it claimed that defendant refused to pay its
management fees, its percentage of profits and refused to allow it to resume the management operation.
Anent the second element, while it is true that appellant Nielson knew since 1945 that appellee Lepanto
has refused to permit it to resume management and that since 1948 appellee has resumed operation of
the mines and it filed its complaint only on February 6, 1958, there being apparent delay in filing the
present action, We find the delay justified and as such cannot constitute laches. It appears that appellant
had not abandoned its right to operate the mines for even before the termination of the suspension of the
12
agreement as early as January 20, 1946 and even before March 10, 1945, it already claimed its right to

13

the extension of the contract, and it pressed its claim for the balance of its share in the profits from the
14
15
1941 operation by reason of which negotiations had taken place for the settlement of the claim and it
was only on June 25, 1957 that appellee finally denied the claim. There is, therefore, only a period of less
than one year that had elapsed from the date of the final denial of the claim to the date of the filing of the
complaint, which certainly cannot be considered as unreasonable delay.
The third element of laches is absent in this case. It cannot be said that appellee Lepanto did not know
that appellant would assert its rights on which it based suit. The evidence shows that Nielson had been
claiming for some time its rights under the contract, as already shown above.
Neither is the fourth element present, for if there has been some delay in bringing the case to court it was
mainly due to the attempts at arbitration and negotiation made by both parties. If Lepanto's documents
were lost, it was not caused by the delay of the filing of the suit but because of the war.
Another reason why appellant Nielson cannot be held guilty of laches is that the delay in the filing of the
complaint in the present case was the inevitable of the protracted negotiations between the parties
16
concerning the settlement of their differences. It appears that Nielson asked for arbitration which was
granted. A committee consisting of Messrs. DeWitt, Farnell and Blessing was appointed to act on said
17
differences but Mr. DeWitt always tried to evade the issue until he was taken ill and died. Mr. Farnell
offered to Nielson the sum of P13,000.58 by way of compromise of all its claim arising from the
18
management contract but apparently the offer was refused. Negotiations continued with the exchange
19
of letters between the parties but with no satisfactory result. It can be said that the delay due to
protracted negotiations was caused by both parties. Lepanto, therefore, cannot be permitted to take
advantage of such delay or to question the propriety of the action taken by Nielson. The defense of
laches is an equitable one and equity should be applied with an even hand. A person will not be permitted
to take advantage of, or to question the validity, or propriety of, any act or omission of another which was
committed or omitted upon his own request or was caused by his conduct (R. H. Stearns Co. vs. United
States, 291 U.S. 54, 78 L. Ed. 647, 54 S. Ct., 325; United States vs. Henry Prentiss & Co., 288 U.S. 73,
77 L. Ed., 626, 53 S. Ct., 283).
Had the action of Nielson prescribed? The court a quo held that the action of Nielson is already barred by
the statute of limitations, and that ruling is now assailed by the appellant in this appeal. In urging that the
court a quoerred in reaching that conclusion the appellant has discussed the issue with reference to
particular claims.
The first claim is with regard to the 10% share in profits of 1941 operations. Inasmuch as appellee
Lepanto alleges that the correct basis of the computation of the sharing in the net profits shall be as
provided for in Clause V of the Management Contract, while appellant Nielson maintains that the basis
should be what is contained in the minutes of the special meeting of the Board of Directors of Lepanto on
August 21, 1940, this question must first be elucidated before the main issue is discussed.
The facts relative to the matter of profit sharing follow: In the management contract entered into between
the parties on January 30, 1937, which was renewed for another five years, it was stipulated that Nielson
would receive a compensation of P2,500.00 a month plus 10% of the net profits from the operation of the
properties for the preceding month. In 1940, a dispute arose regarding the computation of the 10% share
of Nielson in the profits. The Board of Directors of Lepanto, realizing that the mechanics of the contract
was unfair to Nielson, authorized its President to enter into an agreement with Nielson modifying the
pertinent provision of the contract effective January 1, 1940 in such a way that Nielson shall receive (1)
10% of the dividends declared and paid, when and as paid, during the period of the contract and at the
end of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of any amount
20
expended during the year out of surplus earnings for capital account. Counsel for the appellee admitted
during the trial that the extract of the minutes as found in Exhibit B is a faithful copy from the
21
22
original. Mr. George Scholey testified that the foregoing modification was agreed upon.

Lepanto claims that this new basis of computation should be rejected (1) because the contract was clear
on the point of the 10% share and it was so alleged by Nielson in its complaint, and (2) the minutes of the
special meeting held on August 21, 1940 was not signed.
It appearing that the issue concerning the sharing of the profits had been raised in appellant's complaint
23
and evidence on the matter was introduced the same can be taken into account even if no amendment
of the pleading to make it conform to the evidence has been made, for the same is authorized by Section
4, Rule 17, of the old Rules of Court (now Section 5, Rule 10, of the new Rules of Court).
Coming now to the question of prescription raised by defendant Lepanto, it is contended by the latter that
the period to be considered for the prescription of the claim regarding participation in the profits is only
four years, because the modification of the sharing embodied in the management contract is merely
verbal, no written document to that effect having been presented. This contention is untenable. The
modification appears in the minutes of the special meeting of the Board of Directors of Lepanto held on
August 21, 1940, it having been made upon the authority of its President, and in said minutes the terms of
the modification had been specified. This is sufficient to have the agreement considered, for the purpose
of applying the statute of limitations, as a written contract even if the minutes were not signed by the
parties (3 A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a contract if adopted
by two persons may constitute a contract in writing even if the same is not signed by either of the parties
(3 A.L.R., 2d, pp. 812-813). Another authority says that an unsigned agreement the terms of which are
embodied in a document unconditionally accepted by both parties is a written contract (Corbin on
Contracts, Vol. 1, p. 85)
The modification, therefore, made in the management contract relative to the participation in the profits by
appellant, as contained in the minutes of the special meeting of the Board of Directors of Lepanto held on
August 21, 1940, should be considered as a written contract insofar as the application of the statutes of
limitations is concerned. Hence, the action thereon prescribes within ten (10) years pursuant to Section
43 of Act 190.
Coming now to the facts, We find that the right of Nielson to its 10% participation in the 1941 operations
accrued on December 21, 1941 and the right to commence an action thereon began on January 1, 1942
so that the action must be brought within ten (10) years from the latter date. It is true that the complaint
was filed only on February 6, 1958, that is sixteen (16) years, one (1) month and five (5) days after the
right of action accrued, but the action has not yet prescribed for various reasons which We will hereafter
discuss.
The first reason is the operation of the Moratorium Law, for appellant's claim is undeniably a claim for
money. Said claim accrued on December 31, 1941, and Lepanto is a war sufferer. Hence the claim was
covered by Executive Order No. 32 of March 10, 1945. It is well settled that the operation of the
Moratorium Law suspends the running of the statue of limitations (Pacific Commercial Co. vs. Aquino,
G.R. No. L-10274, February 27, 1957).
This Court has held that the Moratorium Law had been enforced for eight (8) years, two (2) months and
eight (8) days (Tioseco vs. Day, et al., L-9944, April 30, 1957; Levy Hermanos, Inc. vs. Perez, L-14487,
April 29, 1960), and deducting this period from the time that had elapsed since the accrual of the right of
action to the date of the filing of the complaint, the extent of which is sixteen (16) years, one (1) month
and five (5) days, we would have less than eight (8) years to be counted for purposes of prescription.
Hence appellant's action on its claim of 10% on the 1941 profits had not yet prescribed.
Another reason that may be taken into account in support of the no-bar theory of appellant is the
arbitration clause embodied in the management contract which requires that any disagreement as to any
24
amount of profits before an action may be taken to court shall be subject to arbitration. This agreement
25
to arbitrate is valid and binding. It cannot be ignored by Lepanto. Hence Nielson could not bring an
action on its participation in the 1941 operations-profits until the condition relative to arbitration had been

26

first complied with. The evidence shows that an arbitration committee was constituted but it failed to
27
accomplish its purpose on June 25, 1957. From this date to the filing of the complaint the required
period for prescription has not yet elapsed.
Nielson claims the following: (1) 10% share in the dividends declared in 1941, exclusive of interest,
amounting to P17,500.00; (2) 10% in the depletion reserves for 1941; and (3) 10% in the profits for years
prior to 1948 amounting to P19,764.70.
28

With regard to the first claim, the Lepanto's report for the calendar year of 1954 shows that it declared a
10% cash dividend in December, 1941, the amount of which is P175,000.00. The evidence in this
29
connection (Exhibits L and O) was admitted without objection by counsel for Lepanto. Nielson claims
10% share in said amount with interest thereon at 6% per annum. The document (Exhibit L) was even
30
recognized by Lepanto's President V. L. Lednicky, and this claim is predicated on the provision of
paragraph V of the management contract as modified pursuant to the proposal of Lepanto at the special
meeting of the Board of Directors on August 21, 1940 (Exh. B), whereby it was provided that Nielson
would be entitled to 10% of any dividends to be declared and paid during the period of the contract.
With regard to the second claim, Nielson admits that there is no evidence regarding the amount set aside
31
by Lepanto for depletion reserve for 1941 and so the 10% participation claimed thereon cannot be
assessed.
Anent the third claim relative to the 10% participation of Nielson on the sum of P197,647.08, which
32
appears in Lepanto's annual report for 1948 and entered as profit for prior years in the statement of
income and surplus, which amount consisted "almost in its entirety of proceeds of copper concentrates
shipped to the United States during 1947," this claim should to denied because the amount is not
"dividend declared and paid" within the purview of the management contract.
The fifth assignment of error of appellant refers to the failure of the lower court to order Lepanto to pay its
management fees for January, 1942, and for the full period of extension amounting to P150,000.00, or
P2,500.00 a month for sixty (60) months, a total of P152,500.00 with interest thereon from the date
of judicial demand.
It is true that the claim of management fee for January, 1942 was not among the causes of action in the
complaint, but inasmuch as the contract was suspended in February, 1942 and the management fees
asked for included that of January, 1942, the fact that such claim was not included in a specific manner in
the complaint is of no moment because an appellate court may treat the pleading as amended to conform
to the evidence where the facts show that the plaintiff is entitled to relief other than what is asked for in
the complaint (Alonzo vs. Villamor, 16 Phil. 315). The evidence shows that the last payment made by
33
Lepanto for management fee was for November and December, 1941. If, as We have declared, the
management contract was suspended beginning February 1942, it follows that Nielson is entitled to the
management fee for January, 1942.
Let us now come to the management fees claimed by Nielson for the period of extension. In this respect,
it has been shown that the management contract was extended from June 27, 1948 to June 26, 1953, or
for a period of sixty (60) months. During this period Nielson had a right to continue in the management of
the mining properties of Lepanto and Lepanto was under obligation to let Nielson do it and to pay the
corresponding management fees. Appellant Nielson insisted in performing its part of the contract but
Lepanto prevented it from doing so. Hence, by virtue of Article 1186 of the Civil Code, there was a
constructive fulfillment an the part of Nielson of its obligation to manage said mining properties in
accordance with the contract and Lepanto had the reciprocal obligation to pay the corresponding
management fees and other benefits that would have accrued to Nielson if Lepanto allowed it (Nielson) to
continue in the management of the mines during the extended period of five (5) years.

We find that the preponderance of evidence is to the effect that Nielson had insisted in managing the
34
mining properties soon after liberation. In the report of Lepanto, submitted to its stockholders for the
period from 1941 to March 13, 1946, are stated the activities of Nielson's officials in relation to Nielson's
insistence in continuing the management. This report was admitted in evidence without objection. We find
the following in the report:
Mr. Blessing, in May, 1945, accompanied Clark and Stanford to San Fernando (La Union) to await the
liberation of the mines. (Mr. Blessing was the Treasurer and Metallurgist of Nielson). Blessing with Clark
and Stanford went to the property on July 16 and found that while the mill site had been cleared of the
enemy the latter was still holding the area around the staff houses and putting up a strong defense. As a
result, they returned to San Fernando and later went back to the mines on July 26. Mr. Blessing made the
report, dated August 6, recommending a program of operation. Mr. Nielson himself spent a day in the
mine early in December, 1945 and reiterated the program which Mr. Blessing had outlined. Two or three
weeks before the date of the report, Mr. Coldren of the Nielson organization also visited the mine and told
President C. A. DeWitt of Lepanto that he thought that the mine could be put in condition for the delivery
of the ore within ten (10) days. And according to Mark Nestle, a witness of appellant, Nielson had several
men including engineers to do the job in the mines and to resume the work. These engineers were in fact
35
sent to the mine site and submitted reports of what they had done.
On the other hand, appellee claims that Nielson was not ready and able to resume the work in the mines,
relying mainly on the testimony of Dr. Juan Nabong, former secretary of both Nielson and Lepanto, given
in the separate case of Nancy Irving Romero vs. Lepanto Consolidated Mining Company (Civil Case No.
652, CFI, Baguio), to the effect that as far as he knew "Nielson and Company had not attempted to
operate the Lepanto Consolidated Mining Company because Mr. Nielson was not here in the Philippines
after the last war. He came back later," and that Nielson and Company had no money nor stocks with
which to start the operation. He was asked by counsel for the appellee if he had testified that way in Civil
Case No. 652 of the Court of First Instance of Baguio, and he answered that he did not confirm it fully.
When this witness was asked by the same counsel whether he confirmed that testimony, he said that
when he testified in that case he was not fully aware of what happened and that after he learned more
about the officials of the corporation it was only then that he became aware that Nielson had really sent
his men to the mines along with Mr. Blessing and that he was aware of this fact personally. He further
36
said that Mr. Nielson was here in 1945 and "he was going out and contacting his people."
Lepanto admits, in its own brief, that Nielson had really insisted in taking over the management and
operation of the mines but that it (Lepanto) unequivocally refuse to allow it. The following is what appears
in the brief of the appellee:
It was while defendant was in the midst of the rehabilitation work which was fully described
earlier, still reeling under the terrible devastation and destruction wrought by war on its mine that
Nielson insisted in taking over the management and operation of the mine. Nielson thus put
Lepanto in a position where defendant, under the circumstances, had to refuse, as in fact it did,
Nielson's insistence in taking over the management and operation because, as was obvious, it
was impossible, as a result of the destruction of the mine, for the plaintiff to manage and operate
the same and because, as provided in the agreement, the contract was suspended by reason of
the war. The stand of Lepanto in disallowing Nielson to assume again the management of the
37
mine in 1945 was unequivocal and cannot be misinterpreted, infra.
Based on the foregoing facts and circumstances, and Our conclusion that the management contract was
extended, We believe that Nielson is entitled to the management fees for the period of extension. Nielson
should be awarded on this claim sixty times its monthly pay of P2,500.00, or a total of P150,000.00.
In its sixth assignment of error Nielson contends that the lower court erred in not ordering Lepanto to pay
it (Nielson) the 10% share in the profits of operation realized during the period of five (5) years from the
resumption of its post-war operations of the Mankayan mines, in the total sum of P2,403,053.20 with
38
interest thereon at the rate of 6% per annum from February 6, 1958 until full payment.

The above claim of Nielson refers to four categories, namely: (1) cash dividends; (2) stock dividends; (3)
depletion reserves; and (4) amount expended on capital investment.
39

Anent the first category, Lepanto's report for the calendar year 1954 contains a record of the cash
dividends it paid up to the date of said report, and the post-war dividends paid by it corresponding to the
years included in the period of extension of the management contract are as follows:
POST-WAR
8

10%

November

1949

P 200,000.00

10%

July

1950

300,000.00

10

10%

October

1950

500,000.00

11

20%

December

1950

1,000,000.00

12

20%

March

1951

1,000,000.00

13

20%

June

1951

1,000,000.00

14

20%

September

1951

1,000,000.00

15

40%

December

1951

2,000,000.00

16

20%

March

1952

1,000,000.00

17

20%

May

1952

1,000,000.00

18

20%

July

1952

1,000,000.00

19

20%

September

1952

1,000,000.00

20

20%

December

1952

1,000,000.00

21

20%

March

1953

1,000,000.00

22

20%

June

1953

TOTAL

1,000,000.00
P14,000,000.00

According to the terms of the management contract as modified, appellant is entitled to 10% of the
P14,000,000.00 cash dividends that had been distributed, as stated in the above-mentioned report, or the
sum of P1,400,000.00.
With regard to the second category, the stock dividends declared by Lepanto during the period of
extension of the contract are: On November 28, 1949, the stock dividend declared was 50% of the
outstanding authorized capital of P2,000,000.00 of the company, or stock dividends worth P1,000,000.00;
and on August 22, 1950, the stock dividends declared was 66-2/3% of the standing authorized capital of
40
P3,000,000.00 of the company, or stock dividends worth P2,000,000.00.
Appellant's claim that it should be given 10% of the cash value of said stock dividends with interest
thereon at 6% from February 6, 1958 cannot be granted for that would not be in accordance with the
management contract which entitles Nielson to 10% of any dividends declared paid, when and as paid.
Nielson, therefore, is entitled to 10% of the stock dividends and to the fruits that may have accrued to said

stock dividends pursuant to Article 1164 of the Civil Code. Hence to Nielson is due shares of stock worth
P100,000.00, as per stock dividends declared on November 28, 1949 and all the fruits accruing to said
shares after said date; and also shares of stock worth P200,000.00 as per stock dividends declared on
August 20, 1950 and all fruits accruing thereto after said date.
Anent the third category, the depletion reserve appearing in the statement of income and surplus
submitted by Lepanto corresponding to the years covered by the period of extension of the contract, may
be itemized as follows:
In 1948, as per Exh. F, p. 36 and Exh. Q, p. 5, the depletion reserve set up was P11,602.80.
In 1949, as per Exh. G, p. 49 and Exh. Q, p. 5, the depletion reserve set up was P33,556.07.
In 1950, as per Exh. H, p. 37, Exh. Q, p. 6 and Exh. I, p. 37, the depletion reserve set up was
P84,963.30.
In 1951, as per Exh. I, p. 45, Exh. Q, p. 6, and Exh. J, p. 45, the depletion reserve set up was
P129,089.88.
In 1952, as per Exh. J, p. 45, Exh. Q, p. 6 and Exh. K p. 41, the depletion reserve was
P147,141.54.
In 1953, as per Exh. K, p. 41, and Exh. Q, p. 6, the depletion reserve set up as P277,493.25.
Regarding the depletion reserve set up in 1948 it should be noted that the amount given was for the
whole year. Inasmuch as the contract was extended only for the last half of the year 1948, said amount of
P11,602.80 should be divided by two, and so Nielson is only entitled to 10% of the half amounting to
P5,801.40.
Likewise, the amount of depletion reserve for the year 1953 was for the whole year and since the contract
was extended only until the first half of the year, said amount of P277,493.25 should be divided by two,
and so Nielson is only entitled to 10% of the half amounting to P138,746.62. Summing up the entire
depletion reserves, from the middle of 1948 to the middle of 1953, we would have a total of P539,298.81,
of which Nielson is entitled to 10%, or to the sum of P53,928.88.
Finally, with regard to the fourth category, there is no figure in the record representing the value of the
fixed assets as of the beginning of the period of extension on June 27, 1948. It is possible, however, to
arrive at the amount needed by adding to the value of the fixed assets as of December 31, 1947 one-half
of the amount spent for capital account in the year 1948. As of December 31, 1947, the value of the fixed
41
assets was P1,061,878.88 and as of December 31, 1948, the value of the fixed assets was
42
P3,270,408.07. Hence, the increase in the value of the fixed assets for the year 1948 was
P2,208,529.19, one-half of which is P1,104,264.59, which amount represents the expenses for capital
account for the first half of the year 1948. If to this amount we add the fixed assets as of December 31,
1947 amounting to P1,061,878.88, we would have a total of P2,166,143.47 which represents the fixed
assets at the beginning of the second half of the year 1948.
There is also no figure representing the value of the fixed assets when the contract, as extended, ended
on June 26, 1953; but this may be computed by getting one-half of the expenses for capital account made
in 1953 and adding the same to the value of the fixed assets as of December 31, 1953 is
43
P9,755,840.41 which the value of the fixed assets as of December 31, 1952 is P8,463,741.82, the
difference being P1,292,098.69. One-half of this amount is P646,049.34 which would represent the
expenses for capital account up to June, 1953. This amount added to the value of the fixed assets as of

December 31, 1952 would give a total of P9,109,791.16 which would be the value of fixed assets at the
end of June, 1953.
The increase, therefore, of the value of the fixed assets of Lepanto from June, 1948 to June, 1953 is
P6,943,647.69, which amount represents the difference between the value of the fixed assets of Lepanto
in the year 1948 and in the year 1953, as stated above. On this amount Nielson is entitled to a share of
10% or to the amount of P694,364.76.
Considering that most of the claims of appellant have been entertained, as pointed out in this decision,
We believe that appellant is entitled to be awarded attorney's fees, especially when, according to the
undisputed testimony of Mr. Mark Nestle, Nielson obliged himself to pay attorney's fees in connection with
the institution of the present case. In this respect, We believe, considering the intricate nature of the case,
an award of fifty thousand (P50,000.00) pesos for attorney's fees would be reasonable.
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a
quo and enter in lieu thereof another, ordering the appellee Lepanto to pay appellant Nielson the different
amounts as specified hereinbelow:
(1) 10% share of cash dividends of December, 1941 in the amount of P17,500.00, with legal interest
thereon from the date of the filing of the complaint;
(2) management fee for January, 1942 in the amount of P2,500.00, with legal interest thereon from the
date of the filing of the complaint;
(3) management fees for the sixty-month period of extension of the management contract, amounting to
P150,000.00, with legal interest from the date of the filing of the complaint;
(4) 10% share in the cash dividends during the period of extension of the management contract,
amounting to P1,400,000.00, with legal interest thereon from the date of the filing of the complaint;
(5) 10% of the depletion reserve set up during the period of extension, amounting to P53,928.88, with
legal interest thereon from the date of the filing of the complaint;
(6) 10% of the expenses for capital account during the period of extension, amounting to P694,364.76,
with legal interest thereon from the date of the filing of the complaint;
(7) to issue and deliver to Nielson and Co., Inc. shares of stock of Lepanto Consolidated Mining Co. at
par value equivalent to the total of Nielson's l0% share in the stock dividends declared on November 28,
1949 and August 22, 1950, together with all cash and stock dividends, if any, as may have been declared
and issued subsequent to November 28, 1949 and August 22, 1950, as fruits that accrued to said shares;
If sufficient shares of stock of Lepanto's are not available to satisfy this judgment, defendant-appellee
shall pay plaintiff-appellant an amount in cash equivalent to the market value of said shares at the time of
default (12 C.J.S., p. 130), that is, all shares of the stock that should have been delivered to Nielson
before the filing of the complaint must be paid at their market value as of the date of the filing of the
complaint; and all shares, if any, that should have been delivered after the filing of the complaint at the
market value of the shares at the time Lepanto disposed of all its available shares, for it is only then that
Lepanto placed itself in condition of not being able to perform its obligation (Article 1160, Civil Code);
(8) the sum of P50,000.00 as attorney's fees; and
(9) the costs. It is so ordered.

Concepcion, C.J., Regala, Makalintal, Bengzon, J.P., Sanchez and Castro, JJ., concur.
Reyes, J.B.L. and Barrera, JJ., took no part.

[G.R. No. 117897. May 14, 1997.]

ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES &
EXCHANGE COMMISSION, Petitioners, v. COURT OF APPEALS and IGLESIA NI
CRISTO,Respondents.
Blo Umpar Adiong, for Petitioners.
Cuevas de la Cuesta & De las Alas for Private Respondent.

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; EFFECT OF JUDGMENTS; RES JUDICATA; DUAL

ASPECTS IN ACTIONS IN PERSONAM; BAR BY PRIOR JUDGMENT AND CONCLUSIVENESS OF
JUDGMENT. Section 49 (b) of the Revised Rules of Court lays down the dual aspects of res judicata in
actions in personam. Section 49(b) enunciates the first concept of res judicata known as "bar by prior
judgment," whereas, Section 49(c) is referred to as "conclusiveness of judgment." There is "bar by former
judgment" when, between the first case where the judgment was rendered, and the second case where
such judgment is invoked, there is identity of parties, subject matter and cause of action. When the three
identities are present, the judgment on the merits rendered in the first constitutes an absolute bar to the
subsequent action. But where between the first case wherein judgment is rendered and the second case
wherein such judgment is invoked, there is only identity of parties but there as is no identity of cause of
action, the judgment is conclusive in the second case, only as to those matters actually and directly
controverted and determined, and not as to matters merely involved therein. This is what is termed
"conclusiveness of judgment."cralaw virtua1aw library
2. ID.; ID.; ID.; ID.; ID.; ID.; NOT APPLICABLE IN CASE AT BAR. Neither of the concepts of res
judicata find relevant application in the case at bench. While there may be identity of subject matter (IDP
property) in both cases, there is no identity of parties. The principal parties in G.R. No. 107751 were
mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private Respondent. The IDP, as
represented by the 1971 Board of Trustees or the Tamano Group, was only made an ancillary party in
G.R. No. 107751 as intervenor. It was never originally a principal party thereto. It must be noted that
intervention is not an independent action, but is merely collateral, accessory, or ancillary to the principal
action. It is just an interlocutory proceeding dependent on or subsidiary, to the case between the original
parties. It is only in the present case, actually, where the IDP-Tamano Group became a principal party, as
petitioner, with the Iglesia Ni Cristo, as private Respondent. Clearly, there is no identity of parties in both
cases. In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G. R. No.
107751, was entitled, "Iglesia Ni Cristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant," the
IDP can not be considered essentially a formal party thereto for the simple reason that it was not duly
represented by a legitimate Board of Trustees in that case. Granting arguendo, that IDP may be
considered a principal party in Ligon, res judicata as a "bar by former judgment" will still not set in on the
ground that the cause of action in the two cases are different. The cause of action in G. R. No. 107751 is
the surrender of the owners duplicate copy of the transfer certificates of title to the rightful possessor
thereof, whereas the cause of action in the present case is the validity of the Carpizo Group-INC Deed of
Absolute Sale. Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the
reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only
be deemed incidental to the resolution of the primary issue posed in said case which is: Who between
Ligon and INC has the better right of possession over the owners duplicate copy of the TCTs covering
the IDP property? G.R. No. 107751 cannot be considered determinative and conclusive on the matter of
the validity of the sale for this particular issue was not the principal thrust of Ligon. To rule otherwise
would be to cause grave and irreparable injustice to IDP witch never gave its consent to the sale, thru a
legitimate Board of Trustees. In any case, while it is true that the principle of res judicata is a fundamental
component of our judicial system, it should be disregarded if its rigid application would involve the
sacrifice of justice to technicality.

3. COMMERCIAL LAW; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION; AUTHORITY

TO DECIDE THE LEGITIMATE BOARD OF TRUSTEES OF IDP. There can be no question as to the
authority of the SEC to pass upon the issue as to who among the different contending groups is the
legitimate Board of Trustees of the IDP since this is a matter properly falling within the original and
exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A. If the
SEC can declare who is the legitimate IDP Board, then by parity of reasoning it can also declare who is
not the legitimate IDP Board. This is precisely what the SEC did in SEC Case. No. 4012 when it adjudged
the election of the Carpizo Group to the IDP Board of Trustees to be null and void. Consequently, the
Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind of transaction including the
sale or disposition of IDP property.
4. CIVIL LAW; CONTRACTS; REQUISITES; CONSENT; WANTING IN CASE AT BAR. Article 1318 of
the New Civil Code lays down the essential requisites of contracts. All these elements must be present to
constitute a valid contract. For, where even one is absent, the contract is void. As succinctly put by
Tolentino, consent is essential for the existence of a contract, and where it is wanting, the contract is
nonexistent. In this case, the IDP, owner of the subject parcels of land, never gave its consent, thru a
legitimate Board of Trustees, to the disputed Deed of Absolute Sale executed in favor of INC. This is,
therefore, a case not only of vitiated consent, but one where consent on the part of one of the supposed
contracting parties is totally wanting. Ineluctably, the subject sale is void and produces no effect
whatsoever.

DECISION

HERMOSISIMA, JR., J.:

The subject of this petition for review is the Decision of the public respondent Court of Appeals, 1 dated
October 28, 1994, setting aside the portion of the Decision of the Securities and Exchange Commission
(SEC, for short) in SEC Case No. 4012 which declared null and void the sale of two (2) parcels of land in
Quezon City covered by the Deed of Absolute Sale entered into by and between private respondent
Iglesia Ni Cristo (INC, for short) and the Islamic Directorate of the Philippines, Inc., Carpizo Group (IDP,
for short).chanrobles law library
The following facts appear of record.
Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal
groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC
DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic
Center in Quezon City for, the construction of a "Mosque (prayer place, Madrasah (Arabic School), and
other religious infrastructures" so as to facilitate the effective practice of Islamic faith in the area. 2
Towards this end, that is, in the same year, the Libyan government donated money to the IDP to
purchase land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace.
The land, with an area of 49,652 square meters, we covered by two titles: Transfer Certificate of Title
Nos. RT-26520 (176616) 3 and RT-26521 (170567), 4 both registered in the name of IDP.
It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of its
Articles of Incorporation:chanrob1es virtual 1aw library
Senator Mamintal Tamano 5
Congressman Ali Dimaporo

Congressman Salipada Pendatun

Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar 6
According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name
of IDP, Martial Law was declared by the late President Ferdinand Marcos. Most of the members of the
1971 Board of Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and
Congressman Al-Rashid Lucman flew to the Middle East to escape political persecution.
Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the
Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the
legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending
groups, came out with a Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group
and the Abbas Group as IDP board members to be null and void. The dispositive portion of the SEC
Decision reads:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered declaring the elections of both the petitioners 7 and
respondents 8 as null and void for being violative of the Articles of Incorporation of petitioner corporation.
With the nullification of the election of the respondents, the approved by-laws which they certified to this
Commission as members of the Board of Trustees must necessarily be likewise declared null and void.
However, before any election of the members of the Board of Trustees could be conducted, there must
be an approved by-laws to govern the internal government of the association including the conduct of
election. And since the election of both petitioners and respondents have been declared null and void, a
vacuum is created as to who should adopt the by-laws and certify its adoption. To remedy this
unfortunate situation that the association has found itself in, the members of the petitioning corporation
are hereby authorized to prepare and adopt their by-laws for submission to the Commission. Once
approved, an election of the members of the Board of Trustees shall immediately be called pursuant to
the approved by-laws.
SO ORDERED." 9
Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision,
and, thus, no valid election of the members of the Board of Trustees of IDP was ever called. Although the
Carpizo Group 10 attempted to submit a set of by-laws, the SEC found that, aside from that Engineer
Farouk Carpizo and Atty. Musib Buat, those who prepared and adopted the by-laws were not bona fide
members of the IDP, thus rendering the adoption of the by-laws likewise null and void.
On April 20, 1989, without having been properly elected as new members of the Board of Trustees of
IDP, the Carpizo Group caused to be signed an alleged Board Resolution 11 of the IDP, authorizing the
sale of the subject two parcels of land to the private respondent INC for a consideration of
P22,343,400.00, which sale was evidenced by a Deed of Absolute Sale 12 dated April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal
Tamano, or the Tamano Group, filed a petition before the SEC, docketed as SEC Case No 4012, seeking
to declare null and void the Deed of Absolute Sale signed by the Carpizo Group and the INC since the
group of Engineer Carpizo was not the legitimate Board of Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an

action for Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of
the Regional Trial Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to
clear the property of squatters and deliver complete and full physical possession thereof to INC. Likewise,
INC filed a motion in the same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the
Register of Deeds of Quezon City the owners duplicate copy of TCT Nos. RT-26521 and RT-26520
covering the aforementioned two parcels of land, so that the sale in INCs favor may be registered and
new titles issued in the name of INC. Mrs. Ligon was alleged to be the mortgagee of the two parcels of
land executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco claimed to
be in behalf of the Carpizo Group.
The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring,
inter alia:jgc:chanrobles.com.ph
"x

2. That the Intervenor has filed a case before the Securities and Exchange Commission (SEC) against
Mr. Farouk Carpizo, et, al., who, through false schemes and machinations, succeeded in executing the
Deed of Sale between the IDP and the Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of
Sale is the subject of the case at bar;
3. That the said case before the SEC is docketed as Case No. 04012, the main issue of which is whether
or not the aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void, hence,
Intervenors legal interest in the instant case. A copy of the said case is hereto attached as Annex
A;chanroblesvirtual|awlibrary
4. That, furthermore, Intervenor herein is the duly constituted body which can lawfully and legally
represent the Islamic Directorate of the Philippines;
x

x." 13

Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by
way of intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC. 14
Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioners motion
to intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues
being raised by way of intervention are intra-corporate in nature, jurisdiction thereto properly pertaining to
the SEC. 15
Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo
Group but without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered
Partial Judgment in Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its
obligation under the Deed of Sale of clearing the subject lots of squatters and of delivering the actual
possession thereof to INC. 16
Thereupon Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-906937, treated INC as the rightful owner of the real properties and disposed as
follows:jgc:chanrobles.com.ph
"WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to plaintiff 17 the owners
copy of RT-26521 (170567) and RT-26520 (176616) in open court for the registration of the Deed of
Absolute Sale in the latters name and the annotation of the mortgage executed in her favor by herein
defendant Islamic Directorate of the Philippines on the new transfer certificate of title to be issued to
plaintiff.
SO ORDERED. "18

On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon "to deliver the owners
duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of
Quezon City for the purposes stated in the Order of March 2, 1992." 19
Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R. No. SP27973, assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on
October 28, 1992. 20
Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No.
107751.
In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this
wise:jgc:chanrobles.com.ph
"1. Declaring the by-laws submitted by the respondents 21 as unauthorized, and hence, null and void.
2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale
entered into by Iglesia ni Kristo and the Islamic Directorate of the Philippines, Inc. 22 null and void.
3. Declaring the election of the Board of Directors 23 of the corporation from 1986 to 1991 as null and
void;
4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat, as members of
the IDP null and void.
No pronouncement as to cost.
SO ORDERED." 24
Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012,
but the same was denied on account of the fact that the decision of the case had become final and
executory, no appeal having been taken therefrom.25cralaw:red
INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil
action for certiorari, docketed as CA-G.R. SP No 33295. On October 28, 1994, the court a quo
promulgated a Decision in CA-G.R. SP No. 33295 granting INCs petition. The portion of the SEC
Decision in SEC Case No. 4012 which declared the sale of the two (2) lots in question to INC as void was
ordered set aside by the Court of Appeals.
Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994,
submitting that the Court of Appeals gravely erred in:chanrob1es virtual 1aw library
1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;
2) Encouraging multiplicity of suits; and
3) Not applying the principles of estoppel and laches. 26
While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No.
107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon
petition and affirmed the October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973
which sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owners
duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of
Quezon City so that the Deed of Absolute Sale in INCs favor may be properly registered.
Before we rule upon the main issue posited in this petition, we would like to point out that our disposition

in G.R. No. 107751 entitled, "Ligon v. Court of Appeal," promulgated on June 1, 1995, in no wise
constitutes res judicata such that the petition under consideration would be barred if it were the case.
Quite the contrary, the requisites of res judicata do not obtain in the case at bench.
Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in
personam, to wit:jgc:chanrobles.com.ph
"Effect of judgment. The effect of a judgment or final order rendered by a court or judge of the
Philippines, having jurisdiction to pronounce the judgment or order; may be as follows:chanrob1es virtual
1aw library
x

(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to any other
matter that could have been raised in relation thereto, conclusive between the parties and their
successors in interest by title subsequent to the commencement of the action or special proceeding,
litigating for the same thing and under the same title and in the same capacity;
(c) In any other litigation between the same parties or their successors in interest, that only is deemed to
have been adjudged in a former judgment which appears upon its face to have been so adjudged, or
which was actually and necessarily included therein or necessary thereto."cralaw virtua1aw library
Section 49(b), enunciates the first concept of res judicata known as "bar by prior judgment," whereas,
Section 49(c) is referred to as "conclusiveness of judgment."cralaw virtua1aw library
There is "bar by former judgment" when, between the first case where the judgment was rendered, and
the second case where such judgment is invoked, there is identity of parties, subject matter and cause of
action. When the three identities are present, the judgment on the merits rendered in the first constitutes
an absolute bar to the subsequent action. But where between the first case wherein judgment is rendered
and the second case wherein such judgment is invoked, there is only identity of parties but there is no
identity of cause of action, the judgment is conclusive in the second case, only as to those matters
actually and directly controverted and determined, and not as to matters merely involved therein. This is
what
is
termed
"conclusiveness
of
judgment."
27
Neither of these concepts of res judicata find relevant application in the case at bench. While there may
be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal
parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as
private Respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group was
only made an ancillary party in G.R. No. 107751 as intervenor. 28 It was never originally a principal party
thereto. It must be noted that intervention is not an independent action, but is merely collateral,
accessory, or ancillary to the principal action. It is just an interlocutory proceeding dependent on or
subsidiary to the case between the original parties. 29 Indeed, the IDP-Tamano Group cannot be
considered a principal party in G.R. No. 107751 for purposes of applying the principle of res judicata
since the contrary goes against the true import of the action of intervention as a mere subsidiary
proceeding without an independent life apart from the principal action as well as the intrinsic character of
the intervenor as a mere subordinate party in the main case whose right may be said to be only in aid of
the right of the original party. 30 It is only the present case, actually, where the IDP-Tamano Group
became a principal party, as petitioner, with the Iglesia Ni Cristo, as private Respondent. Clearly, there is
no
identity
of
parties
in
both
cases.chanrobles
lawlibrary
:
rednad
In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751,
was entitled, "Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant," 31 the IDP
can not be considered essentially a formal party thereto for the simple reason that it was not duly
represented by a legitimate Board of Trustees in that case. As a necessary consequence, Civil Case No.
Q-90-6937, a case for Specific Performance with Damages, a mere action in personam, did not become

final and executory insofar as the true IDP is concerned since petitioner corporation, for want of legitimate
representation, was effectively deprived of its day in court in said case. Res inter alios judicatae nullum
aliis praejudicium faciunt. Matters adjudged in cause do not prejudice those who were not parties to it. 32
Elsewise put, no person (natural or juridical) shall be affected by a proceeding to which he is a stranger.
33
Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a "bar by former
judgment" will still not set in on the ground that the cause of action in the two cases are different. The
cause of action in G.R. No. 107751 is the surrender of the owners duplicate copy of the transfer
certificates of title to the rightful possessor thereof, whereon the cause of action in the present case is the
validity
of
the
Carpizo
Group-INC
Deed
of
Absolute
Sale.
Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the reason that any
mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed
incidental to the resolution of the primary issue posed in said case which is: Who between Ligon and INC
has the better right of possession over the owners duplicate copy of the TCTs covering the IDP property?
G.R. No. 107751 cannot be considered determinative and conclusive on the matter of the validity of the
sale for this particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause
grave and irreparable injustice to IDP which never gave its consent to the sale, thru a legitimate Board of
Trustees.
In any case, while it is true that the principle of res judicata is a fundamental component of our judicial
system, it should be disregarded if its rigid application would involve the sacrifice of justice to technicality.
34
The main question though in this petition is: Did the Court of Appeals commit reversible error in setting
aside that portion of the SECs Decision in SEC Case No. 4012 which declared the sale of two (23
parcels of land in Quezon City between the IDP-Carpizo Group and private respondent INC null and
void?
We

rule

in

the

affirmative.

There can be no question as to the authority of the SEC to pass upon the issue as to who among the
different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly
falling within the original and exclusive jurisdiction of the SEC by virtue of Section 3 and 5(c) of
Presidential
Decree
No.
902-A:jgc:chanrobles.com.ph
"Section 3. 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 . . ."cralaw virtua1aw library
x

Section 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear
and decide cases involving:chanrob1es virtual 1aw library
x

c) Controversies in the selection or appointment of directors, trustees, officers, or managers of such

corporations,
partnerships
or
associations.
.
.
."cralaw
virtua1aw
library
If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also declare

who is not the legitimate IDP Board. This is precisely what the SEC did in SEC Case No. 4012 when it
adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null and void. 35 By this
ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo Group is a bogus Board of
Trustees. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind
of
transaction
including
the
sale
or
disposition
of
IDP
property.
It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to
pass upon the status of the Carpizo Group. As far back as October 3, 1986, the SEC, in Case No. 2687,
36 in a suit between the Carpizo Group and the Abbas Group, already declared the election of the
Carpizo Group (as well as the Abbas Group) to the IDP Board as null and void for being violative of the
Articles of Incorporation. 37 Nothing thus becomes more settled than that the IDP-Carpizo Group with
whom
private
respondent
INC
contracted
is
a
fake
Board.
Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora
property, allegedly in the name of the IDP, have to be struck down for having been done without the
consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the
essential
requisites
of
contracts:jgc:chanrobles.com.ph
"There is no contract unless the following requisites concur:chanrob1es virtual 1aw library
(1)
(2)
(3)

Consent
Object
Cause

certain
of

the

of
which
obligation

the
is

the
which

contracting

subject
is

matter

established."cralaw

of

parties;
the
virtua1aw

contract;
library

All these elements must be present to constitute a valid contract. For, where even one is absent, the
contract is void. As succinctly put by Tolentino, consent is essential for the existence of a contract, and
where it is wanting, the contract is non-existent. 38 In this case, the IDP, owner of the subject parcels of
land, never gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale
executed in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent on
the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is void
and
produces
no
effect
whatsoever.
The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Groups
failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or
substantially
all
assets
of
the
corporation:jgc:chanrobles.com.ph
"Sec. 40. Sale or other disposition of assets. Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees,
sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and
assets, including its goodwill, upon terms and conditions and for such consideration, which may be
money, stocks, bonds or other instruments for the payment of money or other property or consideration,
as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-third (2/3) of the outstanding capital stock; or in case of non-stock corporation,
by the vote of at least two-thirds (2/3) of the members, in a stockholders or members meeting duly called
for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided
in
this
Code.chanrobles
virtualawlibrary
chanrobles.com:chanrobles.com.ph
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.

The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence,
its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling
squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of
the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the
corporation should have been obtained. These twin requirements were no met as the Carpizo Group
which voted to sell the Tandang Sora property was a fake Board of Trustees, and those whose names
and signatures were affixed by the Carpizo Group together with the sham Board Resolution authorizing
the negotiation for the sale were, from all indications, not bona fide members of the IDP as they were
made to appear to be. Apparently, there are only fifteen (15) official members of the petitioner corporation
including the eight (8) members of the Board of Trustees. 39
All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent
INC was intrinsically void ab initio.
Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made
outside of its jurisdiction, the same not being an intra-corporate dispute.
The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale
null and void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack
of consent of the IDP, owner of the subject property. No end of substantial justice will be served if we
reverse the SECs conclusion on the matter, and remand the case to the regular courts for further
litigation over an issue which is already determinable based on what we have in the records.
It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board
of Trustees in Civil Case No. Q-90-6937, a case for Specific Performance with Damages between INC
and the Carpizo Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have been
granted ample opportunity before the regional trial court to shed light on the true status of the Carpizo
Board and settled the matter as to the validity of the sale then and there. But INC, wanting to acquire the
property at all costs and threatened by the participation of the legitimate IDP Board in the civil suit, argued
for the denial of the motion averring inter alia, that the issue sought to be litigated by the movant is intracorporate in nature and outside the jurisdiction of the regional trial court. 40 As a result, the motion for
intervention was denied. When the Decision in SEC Case No. 4012 came out nullifying the sale, INC
came forward, this time, quibbling over the issue that it is the regional trial court, and not the SEC, which
has jurisdiction to rule on the validity of the sale. INC is here trifling with the courts. We cannot put a
premium on this clever legal maneuverings of private respondent which, if countenanced, would result in
a failure of justice.
Furthermore, the Court observes that the INC bought the questioned property from the Carpizo Group
without even seeing the owners duplicate copy of the titles covering the property. This is very strange
considering that the subject lot is a large piece of real property in Quezon City worth millions, and that
under the Torrens System of Registration, the minimum requirement for one to be a good faith buyer for
value is that the vendee at least sees the owners duplicate copy of the title and relies upon the same. 41
The private respondent, presumably knowledgeable on the aforesaid workings of the Torrens System, did
not take heed of this and nevertheless went through with the sale with undue haste. The unexplained
eagerness of INC to buy this valuable piece of land in Quezon City without even being presented with the
owners copy of the titles casts very serious doubt on the rightfulness of its position as vendee in the
transaction.
WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated
October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange
Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The Register of Deeds of
Quezon City is hereby ordered to cancel the registration of the Deed of Absolute Sale in the name of
respondent Iglesia Ni Cristo, if one has already been made. If new titles have been issued in the name of

Iglesia Ni Cristo, the Register of Deeds is hereby ordered to cancel the same, and issue new ones in the
name of petitioner Islamic Directorate of the Philippines. Petitioner corporation is ordered to return to
private respondent whatever amount has been initially paid by INC as consideration for the property with
legal interest, if the same was actually received by IDP, Otherwise, INC may run after Engineer Farouk
Carpizo and his group for the amount of money paid.
SO ORDERED.chanroblesvirtualawlibrary
Kapunan, J., concurs.
Vitug, J., concurs in the result.
Bellosillo, J., took no part; I dispel any doubt in my judicial objectivity.
Padilla, J., is on leave.

G.R. No. L-60502 July 16, 1991

PEDRO
LOPEZ
DEE, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, HEARING OFFICER EMMANUEL SISON, NAGA
TELEPHONE CO., INC., COMMUNICATION SERVICES, INC., LUCIANO MAGGAY, AUGUSTO
FEDERIS, NILDA RAMOS, FELIPA JAVALERA, DESIDERIO SAAVEDRA, respondents.
G.R. No. L-63922 July 16, 1991
JUSTINO DE JESUS, SR., PEDRO LOPEZ DEE, JULIO LOPEZ DEE, and VICENTE TORDILLA,
JR., petitioners,
vs.
INTERMEDIATE APPELLATE COURT, LUCIANO MAGGAY, NILDA I. RAMOS, DESIDERIO
SAAVEDRA, AUGUSTO FEDERIS, ERNESTO MIGUEL, COMMUNICATION SERVICES, INC., and
NAGA TELEPHONE COMPANY, INC., respondents.

PARAS, J.:p
These are petitions for certiorari with preliminary injunction and/or restraining order which seek to annul
and set aside in: (1) G.R. No. 60502, the order * of the hearing officer dated May 4, 1982, setting the date
for the election of the directors to be held by the stockholders on May 22, 1982, in SEC Case No. 1748
entitled "Pedro Lopez Dee v. Naga Telephone Co., Inc. et al."; and (2) G.R. No. 63922, the decision ** of
the Intermediate Appellate Court dated April 14, 1983 which annulled the judgment of the trial court on
the contempt charge against the private respondents in G.R. No. SP-14846-R, entitled "Luciano Maggay,
et al. v. Hon. Delfin Vir Sunga, et al."
As gathered from the records, the facts of these cases are as follows:
Naga Telephone Company, Inc. was organized in 1954, the authorized capital was P100,000.00. In 1974
Naga Telephone Co., Inc. (Natelco for short) decided to increase its authorized capital to P3,000,000.00.
As required by the Public Service Act, Natelco filed an application for the approval of the increased
authorized capital with the then Board of Communications under BOC Case No. 74-84. On January 8,
1975, a decision was rendered in said case, approving the said application subject to certain conditions,
among which was:
3. That the issuance of the shares of stocks will be for a period of one year from the date
hereof, "after which no further issues will be made without previous authority from this
Board."
Pursuant to the approval given by the then Board of Communications, Natelco filed its Amended Articles
of Incorporation with the Securities and Exchange Commission (SEC for short). When the amended
articles were filed with the SEC, the original authorized capital of P100,000.00 was already paid. Of the
increased capital of P2,900,000.00 the subscribers subscribed to P580,000.00 of which P145,000 was
fully paid.
The capital stock of Natelco was divided into 213,000 common shares and 87,000 preferred shares, both
at a par value of P10.00 per shares.
On April 12, 1977, Natelco entered into a contract with Communication Services, Inc. (CSI for short) for
the "manufacture, supply, delivery and installation" of telephone equipment. In accordance with this

contract, Natelco issued 24,000 shares of common stocks to CSI on the same date as part of the
downpayment. On May 5, 1979, another 12,000 shares of common stocks were issued to CSI. In both
instances, no prior authorization from the Board of Communications, now the National
Telecommunications Commission, was secured pursuant to the conditions imposed by the decision in
BOC Case NO. 74-84 aforecited (Rollo, Vol. III, Memorandum for private respondent Natelco, pp. 814816).
On May 19, 1979, the stockholders of the Natelco held their annual stockholders' meeting to elect their
seven directors to their Board of Directors, for the year 1979-1980. In this election Pedro Lopez Dee (Dee
for short) was unseated as Chairman of the Board and President of the Corporation, but was elected as
one of the directors, together with his wife, Amelia Lopez Dee (Rollo, Vol. III, Memorandum for private
respondents, p. 985; p. 2).
In the election CSI was able to gain control of Natelco when the latter's legal counsel, Atty. Luciano
Maggay (Maggay for short) won a seat in the Board with the help of CSI. In the reorganization Atty.
Maggay became president (Ibid., Memorandum for Private Respondent Natelco, p. 811).
The following were elected in the May 19, 1979 election: Atty. Luciano Maggay, Mr. Augusto Federis,
Mrs. Nilda Ramos, Ms. Felipa Javalera, Mr. Justino de Jesus, Sr., Mr. Pedro Lopez Dee and Mrs Amelia
C. Lopez Dee. The last three named directors never attended the meetings of the Maggay Board. The
members of the Maggay Board who attended its meetings were Maggay. Federis, Ramos and Javalera.
The last two were and are CSI representatives (Ibid., p. 812).
Petitioner Dee having been unseated in the election, filed a petition in the SEC docketed as SEC Case
No. 1748, questioning the validity of the elections of May 19, 1979 upon the main ground that there was
no valid list of stockholders through which the right to vote could be determined (Rollo, Vol. I, pp. 254262-A). As prayed for in the petition (Ibid., p. 262), a restraining order was issued by the SEC placing
petitioner and the other officers of the 1978-1979 Natelco Board in hold-over capacity (Rollo, Vol. II,
Reply, p. 667).
The SEC restraining order was elevated to the Supreme Court in G.R. No. 50885 where the enforcement
of the SEC restraining order was restrained. Private respondents therefore, replaced the hold-over
officers (Rollo, Vol. 11, p. 897).
During the tenure of the Maggay Board, from June 22, 1979 to March 10, 1980, it did not reform the
contract of April 12, 1977, and entered into another contract with CSI for the supply and installation of
additional equipment but also issued to CSI 113,800 shares of common stock (Ibid., p. 812).
The shares of common stock issued to CSI are as follows:
NO. OF SHARES DATE ISSUED
24,000 shares April 12, 1977
12,000 shares May 5, 1979
28,000 shares October 2, 1979
28,500 shares November 5, 1979
20,000 shares November 14, 1979
20,000 shares January 7, 1980

16,500 shares January 26, 1980

149,000 shares (Ibid., pp. 816-817).
Subsequently, the Supreme Court dismissed the petition in G.R. No. 50885 upon the ground that the
same was premature and the Commission should be allowed to conduct its hearing on the controversy.
The dismissal of the petition resulted in the unseating of the Maggay group from the board of directors of
Natelco in a "hold-over" capacity (Rollo, Vol. II, p. 533).
In the course of the proceedings in SEC Case No. 1748, respondent hearing officer issued an order on
June 23, 1981, declaring: (1) that CSI is a stockholder of Natelco and, therefore, entitled to vote; (2) that
unexplained 16,858 shares of Natelco appear to have been issued in excess to CSI which should not be
allowed to vote; (3) that 82 shareholders with their corresponding number of shares shall be allowed to
vote; and (4) consequently, ordering the holding of special stockholder' meeting to elect the new
members of the Board of Directors for Natelco based on the findings made in the order as to who are
entitled to vote (Rollo, Vol. 1, pp. 288-299).
From the foregoing order dated June 23, 1981, petitioner Dee filed a petition for certiorari/appeal with the
SEC en banc. The petition/appeal was docketed as SEC-AC NO. 036. Thereafter, the Commission en
banc rendered a decision on April 5, 1982, the dispositive part of which leads:
Now therefore, the Commission en banc resolves to sustain the order of the Hearing
Officer; to dismiss the petition/appeal for lack of merit; and order new elections as the
Hearing Officer shall set after consultations with Natelco officers. For the protection of
minority stockholders and in the interest of fair play and justice, the Hearing Officer shall
order the formation of a special committee of three, one from the respondents (other than
Natelco), one from petitioner, and the Hearing Officer as Chairman to supervise the
election.
It remains to state that the Commission en banc cannot pass upon motions belatedly filed
by petitioner and respondent Natelco to introduce newly discovered evidence any
such evidence may be introduced at hearings on the merits of SEC Case No. 1748.
SO ORDERED. (Rollo, Vol. I, p. 24).
On April 21, 1982, petitioner filed a motion for reconsideration (Rollo, Vol. I, pp. 25-30). Likewise, private
respondent Natelco filed its motion for reconsideration dated April 21, 1982 (Ibid., pp. 32-51).
Pending resolution of the motions for reconsideration, on May 4, 1982, respondent healing officer without
waiting for the decision of the commission en banc to become final and executory rendered an order
stating that the election for directors would be held on May 22, 1982 (Ibid., pp. 300-301).
On May 20, 1982, the SEC en banc denied the motions for reconsideration (Rollo, Vol. II, pp. 763-765).
Meanwhile on May 20, 1982 (G.R. No. 63922), petitioner Antonio Villasenor (as plaintiff) filed Civil Case
No. 1507 with the Court of First Instance of Camarines Sur, Naga City, against private respondents and
co-petitioners, de Jesus, Tordilla and the Dee's all defendants therein, which was raffled to Branch I,
presided over by Judge Delfin Vir Sunga (Rollo, G.R. No. 63922; pp. 25-30). Villasenor claimed that he
was an assignee of an option to repurchase 36,000 shares of common stocks of Natelco under a Deed of
Assignment executed in his favor (Rollo, p. 31). The defendants therein (now private respondents),
principally the Maggay group, allegedly refused to allow the repurchase of said stocks when petitioner
Villasenor offered to defendant CSI the repurchase of said stocks by tendering payment of its price (Rollo,
p. 26 and p. 78). The complaint therefore, prayed for the allowance to repurchase the aforesaid stocks

and that the holding of the May 22, 1982 election of directors and officers of Natelco be enjoined (Rollo,
pp. 28-29).
A restraining order dated May 21, 1982 was issued by the lower court commanding desistance from the
scheduled election until further orders (Rollo, p. 32).
Nevertheless, on May 22, 1982, as scheduled, the controlling majority of the stockholders of the Natelco
defied the restraining order, and proceeded with the elections, under the supervision of the SEC
representatives (Rollo, Vol. III, p. 985); p. 10; G.R. No. 60502).
On May 25, 1982, the SEC recognized the fact that elections were duly held, and proclaimed that the
following are the "duly elected directors" of the Natelco for the term 1982-1983:
1. Felipa T. Javalera
2. Nilda I. Ramos
3. Luciano Maggay
4. Augusto Federis
5. Daniel J. Ilano
6. Nelin J. Ilano Sr.
7. Ernesto A. Miguel
And, the following are the recognized officers to wit:
1. President Luciano Maggay
2. Vice-President Nilda I. Ramos
3. Secretary Desiderio Saavedra
4. Treasurer Felipa Javalera
5. Auditor Daniel Ilano
(Rollo, Vol. 1, pp. 302-303)
Despite service of the order of May 25, 1982, the Lopez Dee group headed by Messrs. Justino De Jesus
and Julio Lopez Dee kept insisting no elections were held and refused to vacate their positions (Rollo,
Vol. III, p. 985; p. 11).
On May 28, 1982, the SEC issued another order directing the hold-over directors and officers to turn over
their respective posts to the newly elected directors and officers and directing the Sheriff of Naga City,
with the assistance of PC and INP of Naga City, and other law enforcement agencies of the City or of the
Province of Camarines Sur, to enforce the aforesaid order (Rollo, Vol. 11, pp. 577-578).

On May 29, 1982, the Sheriff of Naga City, assisted by law enforcement agencies, installed the newly
elected directors and officers of the Natelco, and the hold-over officers peacefully vacated their respective
offices and turned-over their functions to the new officers (Rollo, Vol. III, p. 985; pp. 12-13).
On June 2, 1982, a charge for contempt was filed by petitioner Villasenor alleging that private
respondents have been claiming in press conferences and over the radio airlanes that they actually held
and conducted elections on May 22, 1982 in the City of Naga and that they have a new set of officers,
and that such acts of herein private respondents constitute contempt of court (G.R. 63922; Rollo, pp. 3537).
On September 7, 1982, the lower court rendered judgment on the contempt charge, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered:
1. Declaring respondents, CSI Nilda Ramos, Luciano Maggay, Desiderio Saavedra,
Augusto Federis and Ernesto Miguel, guilty of contempt of court, and accordingly
punished with imprisonment of six (6) months and to pay fine of P1,000.00 each; and
2. Ordering respondents, CSI Nilda Ramos, Luciano Maggay, Desiderio Saavedra,
Augusto Federis and Ernesto Miguel, and those now occupying the positions of directors
and officers of NATELCO to vacate their respective positions therein, and ordering them
to reinstate the hold-over directors and officers of NATELCO, such as Pedro Lopez Dee
as President, Justino de Jesus, Sr., as Vice President, Julio Lopez Dee as Treasurer and
Vicente Tordilla, Jr. as Secretary, and others referred to as hold-over directors and
officers of NATELCO in the order dated May 28, 1982 of SEC Hearing Officer Emmanuel
Sison, in SEC Case No. 1748 (Exh. 6), by way of RESTITUTION, and consequently,
ordering said respondents to turn over all records, property and assets of NATELCO to
said hold-over directors and officers. (Ibid., Rollo, p. 49).
The trial judge issued an order dated September 10, 1982 directing the respondents in the contempt
charge to "comply strictly, under pain of being subjected to imprisonment until they do so" (Ibid., p. 50).
The order also commanded the Deputy Provincial Sheriff, with the aid of the PC Provincial Commander of
Camarines Sur and the INP Station Commander of Naga City to "physically remove or oust from the
offices or positions of directors and officers of NATELCO, the aforesaid respondents (herein private
respondents) . . . and to reinstate and maintain, the hold-over directors and officers of NATELCO referred
to in the order dated May 28, 1982 of SEC Hearing Officer Emmanuel Sison." (Ibid.).
Private respondents filed on September 17, 1982, a petition for certiorari and prohibition with preliminary
injunction or restraining order against the CFI Judge of Camarines Sur, Naga City and herein petitioners,
with the then Intermediate Appellate Court which issued a resolution ordering herein petitioners to
comment on the petition, which was complied with, and at the same time temporarily refrained from
implementing and/or enforcing the questioned judgment and order of the lower court (Rollo, p. 77),
Decision of CA, p. 2).
On April 14, 1983, the then Intermediate Appellate Court, rendered a decision, the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Annuling the judgment dated September 7, 1982 rendered by respondent judge on the
contempt charge, and his order dated September 10, 1982, implementing said judgment;

2. Ordering the "hold-over" directors and officers of NATELCO to vacate their respective
offices;
3. Directing respondents to restore or re-establish petitioners (private respondents in this
case) who were ejected on May 22, 1982 to their respective offices in the NATELCO, . . .;
4. Prohibiting whoever may be the successor of respondent Judge from interfering with
the proceedings of the Securities and Exchange Commission in SE-CAC No. 036;
xxx xxx xxx
(Rollo, p. 88).
The order of re-implementation was issued, and, finally, the Maggay group has been restored as the
officers of the Natelco (Rollo, G.R. No. 60502, p. 985; p. 37).
Hence, these petitions involve the same parties and practically the same issues. Consequently, in the
resolution of the Court En Banc dated August 23, 1983, G.R. No. 63922 was consolidated with G.R. No.
60502.
In G.R. No. 60502 In a resolution issued by the Court En Banc dated March 22, 1983, the Court gave
due course to the petition and required the parties to submit their respective memoranda (Rollo,
Resolution, p. 638-A; Vol. II).
In G.R. No. 60502
The main issues in this case are:
(1) Whether or not the Securities and Exchange Commission has the power and jurisdiction to declare
null and void shares of stock issued by NATELCO to CSI for violation of Sec. 20 (h) of the Public Service
Act;
(2) Whether or not the issuance of 113,800 shares of Natelco to CSI made during the pendency of SEC
Case No. 1748 in the Securities and Exchange Commission was valid;
(3) Whether or not Natelco stockholders have a right of preemption to the 113,800 shares in question;
and
(4) Whether or not the private respondents were duly elected to the Board of Directors of Natelco at an
election held on May 22, 1982.
In G.R. No. 63922
The crucial issue to be resolved is whether or not the trial judge has jurisdiction to restrain the holding of
an election of officers and directors of a corporation. The petitions are devoid of merit.
In G.R. No. 60502
I
It is the contention of petitioner that the Securities and Exchange Commission En Banc committed grave
abuse of discretion when, in its decision dated April 5, 1982, in SEC-AC No. 036, it refused to declare

void the shares of stock issued by Natelco to CSI allegedly in violation of Sec. 20 (h) of the Public Service
Act. This section requires prior administrative approval of any transfer or sale of shares of stock of any
public service which vest in the transferee more than forty percentum of the subscribed capital of the said
public service.
Section 5 of P.D. No. 902-A, as amended, enumerates the jurisdiction of the Securities and Exchange
Commission:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over Corporations, partnerships and other forms of associations,
registered with it as expressly granted under the existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts, of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholders, partners, members
of associations or organizations registered with the Commission.
(b) Controversies arising out of intra-corporate or partnership relations, between and
among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association
possesses sufficient property to cover all its debts but foresees the impossibility of
meeting them when they respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its liabilities, but is under the
management of a Rehabilitation Receiver or Management Committee created pursuant
to this Decree, (As added by PD 1758)
In other words, in order that the SEC can take cognizance of a case, the controversy must pertain to any
of the following relationships: (a) between corporation, partnership or association and the public; (b)
between the corporation, partnership, or association and its stockholders, partners, members or officers;
(c) between the corporation, partnership or association and the state insofar as its franchise, permit or
license to operate is concerned; and (d) among the stockholders, partners, or associates themselves
(Union Glass & Container Corp. vs. SEC, 126 SCRA 31 [1983]).
The jurisdiction of the SEC is limited to matters intrinsically connected with the regulation of corporations,
partnerships and associations and those dealing with internal affairs of such entities; P.D. 902-A does not
confer jurisdiction to SEC over all matters affecting corporations (Pereyra vs. IAC, 181 SCRA 244 [1990];
Sales vs. SEC, 169 SCRA 121 [1989]).
The jurisdiction of the SEC in SEC Case No. 1748 is limited to deciding the controversy in the election of
the directors and officers of Natelco. Thus, the SEC was correct when it refused to rule on whether the
issuance of the shares of Natelco stocks to CSI violated Sec. 20 (h) of the Public Service Act.
The SEC ruling as to the issue involving the Public Service Act, Section 20 (h), asserts that the
Commission En Banc is not empowered to grant much less cancel franchise for telephone and
communications, and therefore has no authority to rule that the issuance and sale of shares would in

effect constitute a violation of Natelco's secondary franchise. It would be in excess of jurisdiction on our
part to decide that a violation of our public service laws has been committed. The matter is better brought
to the attention of the appropriate body for determination. Neither can the SEC provisionally decide the
issue because it is only vested with the power to grant or revoke the primary corporate franchise. The
SEC is empowered by P.D. 902-A to decide intra-corporate controversies and that is precisely the only
issue in this case.
II
The issuance of 113,800 shares of Natelco stock to CSI made during the pendency of SEC Case No.
1748 in the Securities and Exchange Commission was valid. The findings of the SEC En Banc as to the
issuance of the 113,800 shares of stock was stated as follows:
But the issuance of 113,800 shares were (sic) pursuant to a Board Resolution and
stockholders' approval prior to May 19, 1979 when CSI was not yet in control of the
Board or of the voting shares. There is distinction between an order to issue shares on or
before May 19, 1979 and actual issuanceof the shares after May 19, 1979. The actual
issuance, it is true, came during the period when CSI was in control of voting shares and
the Board (if they were in fact in control but only pursuant to the original Board and
stockholders' orders, not on the initiative to the new Board, elected May 19, 1979, which
petitioners are questioning. The Commission en banc finds it difficult to see how the one
who gave the orders can turn around and impugn the implementation of the orders lie
had previously given. The reformation of the contract is understandable for Natelco
lacked the corporate funds to purchase the CSI equipment.
xxx xxx xxx
Appellant had raise the issue whether the issuance of 113,800 shares of stock during the
incumbency of the Maggay Board which was allegedly CSI controlled, and while the case
was sub judice, amounted to unfair and undue advantage. This does not merit
consideration in the absence of additional evidence to support the proposition.
In effect, therefore, the stockholders of Natelco approved the issuance of stock to CSI
III
While the group of Luciano Maggay was in control of Natelco by virtue of the restraining order issued in
G.R. No. 50885, the Maggay Board issued 113,800 shares of stock to CSI Petitioner said that the
Maggay Board, in issuing said shares without notifying Natelco stockholders, violated their right of preemption to the unissued shares.
This Court in Benito vs. SEC, et al., has ruled that:
Petitioner bewails the fact that in view of the lack of notice to him of such subsequent
issuance, he was not able to exercise his right of pre-emption over the unissued shares.
However, the general rule is that pre-emptive right is recognized only with respect to new
issues of shares, and not with respect to additional issues of originally authorized shares.
This is on the theory that when a corporation at its inception offers its first shares, it is
presumed to have offered all of those which it is authorized to issue. An original
subscriber is deemed to have taken his shares knowing that they form a definite
proportionate part of the whole number of authorized shares. When the shares left
unsubscribed are later re-offered, he cannot therefore (sic) claim a dilution of interest
(Benito vs. SEC, et al., 123 SCRA 722).

The questioned issuance of the 113,800 stocks is not invalid even assuming that it was made without
notice to the stockholders as claimed by the petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders meeting is required to consider it
because additional issuance of shares of stocks does not need approval of the stockholders.
Consequently, no pre-emptive right of Natelco stockholders was violated by the issuance of the 113,800
shares to CSI.
IV
Petitioner insists that no meeting and election were held in Naga City on May 22, 1982 as directed by
respondent Hearing Officer. This fact is shown by the Sheriffs return of a restraining order issued by the
Court of First Instance of Camarines Sur in Case No. 1505 entitled "Antonio Villasenor v.
Communications Service Inc, et al." (Rollo, Vol. 1, p. 309).
There is evidence of the fact that the Natelco special stockholders' meeting and election of members of
the Board of Directors of the corporation were held at its office in Naga City on May 22, 1982 as shown
when the Hearing Officer issued an order on May 25, 1982, declaring the stockholders named therein as
corporate officers duly elected for the term 1982-1983.
More than that, private respondents were in fact charged with contempt of court and found guilty for
holding the election on May 22, 1982, in defiance of the restraining order issued by Judge Sunga (Rollo,
Vol. II, p. 750).
It is, therefore, very clear from the records that an election was held on May 22, 1982 at the Natelco
Offices in Naga City and its officers were duly elected, thereby rendering the issue of election moot and
academic, not to mention the fact that the election of the Board of Directors/Officers has been held
annually, while this case was dragging for almost a decade.
The contempt charge against herein private respondents was predicated on their failure to comply with
the restraining order issued by the lower court on May 21, 1982, enjoining them from holding the election
of officers and directors of Natelco scheduled on May 22, 1982. The SEC en banc, in its decision of April
5, 1982, directed the holding of a new election which, through a conference attended by the hold-over
directors of Natelco accompanied by their lawyers and presided by a SEC hearing officer, was scheduled
on May 22, 1982 (Rollo, p. 59). Contrary to the claim of petitioners that the case is within the jurisdiction
of the lower court as it does not involve an intra-corporate matter but merely a claim of a private party of
the right to repurchase common shares of stock of Natelco and that the restraining order was not meant
to stop the election duly called for by the SEC, it is undisputed that the main objective of the lower court's
order of May 21, 1982 was precisely to restrain or stop the holding of said election of officers and
directors of Natelco, a matter purely within the exclusive jurisdiction of the SEC (P.D. No. 902-A, Section
5). The said restraining order reads in part:
. . . A temporary restraining order is hereby issued, directing defendants (herein
respondents), their agents, attorneys as well as any and all persons, whether public
officers or private individuals to desist from conducting and holding, in any manner
whatsoever, an election of the directors and officers of the Naga Telephone Co.
(Natelco). . . . (Rollo, P. 32).
Indubitably, the aforesaid restraining order, aimed not only to prevent the stockholders of Natelco from
conducting the election of its directors and officers, but it also amounted to an injunctive relief against the
SEC, since it is clear that even "public officers" (such as the Hearing Officer of the SEC) are commanded
to desist from conducting or holding the election "under pain of punishment of contempt of court" (Ibid.)
The fact that the SEC or any of its officers has not been cited for contempt, along with the stockholders of
Natelco, who chose to heed the lawful order of the SEC to go on with the election as scheduled by the
latter, is of no moment, since it was precisely the acts of herein private respondents done pursuant to an

order lawfully issued by an administrative body that have been considered as contemptuous by the lower
court prompting the latter to cite and punish them for contempt (Rollo, p. 48).
Noteworthy is the pertinent portion of the judgment of the lower court which states:
Certainly, this Court will not tolerate, or much less countenance, a mere Hearing Officer
of the Securities and Exchange Commission, to render a restraining order issued by it
(said Court) within its jurisdiction, nugatory and ineffectual and abet disobedience and
even defiance by individuals and entities of the same. . . . (Rollo, p. 48).
Finally, in the case of Philippine Pacific Fishing Co., Inc. vs. Luna, 12 SCRA 604, 613 [1983], this Tribunal
stated clearly the following rule:
Nowhere does the law (P.D. No. 902-A) empower any Court of First Instance to interfere
with the orders of the Commission (SEC). Not even on grounds of due process or
jurisdiction. The Commission is, conceding arguendo a possible claim of respondents, at
the very least, a co-equal body with the Courts of First Instance. Even as such co-equal,
one would have no power to control the other. But the truth of the matter is that only the
Supreme Court can enjoin and correct any actuation of the Commission.
Accordingly, it is clear that since the trial judge in the lower court (CFI of Camarines Sur) did not have
jurisdiction in issuing the questioned restraining order, disobedience thereto did not constitute contempt,
as it is necessary that the order be a valid and legal one. It is an established rule that the court has no
authority to punish for disobedience of an order issued without authority (Chanco v. Madrilejos, 9 Phil.
356; Angel Jose Realty Corp. v. Galao, et al., 76 Phil. 201).
Finally, it is well-settled that the power to punish for contempt of court should be exercised on the
preservative and not on the vindictive principle. Only occasionally should the court invoke its inherent
power in order to retain that respect without which the administration of justice must falter or fail (Rivera v.
Florendo, 144 SCRA 643, 662-663 [1986]; Lipata v. Tutaan, 124 SCRA 880 [1983]).
PREMISES CONSIDERED, both petitioners are hereby DISMISSED for lack of merit.
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Grio-Aquino, Medialdea, Regalado and Davide, Jr., JJ., concur.

SECOND
[G.R.

DIVISION
No.

182331

April

18,

2012]

MA. CORINA C. JIAO, RODEN B. LOPEZ, FRANCISCO L. DIMAYUGA, NORMA G. DEL VALLE,
MACARIO G. MARASIGAN, LANIE MARIA B. PASANA, NILO M. DE CASTRO, ANGELITO M.
BALITAAN, CESAR L. RICO, CRISPIN S. CONSTANTINO, GLENDA S. CORPUZ, LEONILA C.
TUAZON, ALFREDO S. DAZA, LORNA R. CRUZ, MARIA M. AMBOJIA, NOEMI M. JAPOR,
ANGELITO V. DANAN, GLORIA M. SALAZAR, JOHN V. VIGILIA, ROEL D. ROBINO, WILLIAM L.
ENDAYA, TERESITA M. ROMAN, ARTURO M. SABALLE, AUGUSTO N. RIGOR, ALLAN O. OLANO,
RODOLFO T. CABATU, NICANOR R. BRAVO, EDUARDO M. ALCANTARA, FELIPE F. OCAMPO,
ELPIDIO C. ADALIA, RENATO M. CRUZ, JOSE C. PEREZ, JR., FERNANDO V. MAPILE, ROMEO R.
PATRICIO, FERNANDO N. RONGAVILLA, FERMIN A. COBRADOR, ANTONIO O. BOSTRE, RALPH
M. MICHAELSON, CRISTINA G. MANIO, EDIGARDO M. BAUTISTA, CYNTHIA C. SANIEL,
PRISCILLA F. DAVID, MACARIO V. ARNEDO, NORLITO V. HERNANDEZ, ALFREDO G.
BUENAVENTURA, JOSE R. CASTRONUEVO, OLDERICO M. AGORILLA, CESAR M. PEREZ,
RONALD M. GENER, EMMANUEL G. QUILAO, BENJAMIN C. CUBA, EDGARDO S. MEDRANO,
GODOFREDO D. PATENA, VIRGILIO G. ILAGAN, MYRNA C. LEGASPI, ELIZABETH P. REYES,
ANTONIO A. TALON, ROMEO P. CRUZ, ELEANOR T. TAN, FERDINAND G. PINAUIN, MA.
OLIVETTE A. NAKPIL, GILBERT NOVIEM A. COLUMNA, ARTHUR L. ABELLA, BENJAMIN L.
ENRIQUEZ, ANTONINO P. QUEVEDO, ADFEL GEORGE MONTEMAYOR, RAMON S. VELASCO,
WILFREDO M. HALILI, ANTONIO M. LUMANGLAS, ANDREW M. MAGNO, SONNY S. ESTANISLAO,
RODOLFO S. ALABASTRO, MICAH B. MARALIT, LINA M. QUEBRAL, REBECCA R. NARCISO,
RONILO T. TOLENTINO, RUPERTO B. LETAN, JR., MEDARDO A. VASQUEZ, VALENTINA A.
SANTIAGO, RODELO S. DIAZ, JOHN O. CORDIAL, EDWIN J. ANDAYA, RODRIGO M. MOJADO,
GERMAN L. ESTRADA, BENJAMIN B. DADUYA, MARLYN A. MUNOZ, MARIVIC M. DIONISIO,
CESAR M. FLORES, JACINTO T. GUINTO, JR., BELEN C. SALAVERRIA, EVELYN M. ANZURES,
GLORIA D. ABELLA, LILIAN V. BUNUAN, MA. CONCEPCION G. UBIADAS, ROLANDO I.
CAMPOSANO, MONICO R. GOREMBALEM, ELADIO M. VICENCIO, AMORSOLO B. BELTRAN,
LEOPOLDO B. JUAREZ, NEPHTALI V. SALAZAR, SANGGUNI P. ROQUE, ROY O. SAPANGHILA,
MELVIN A. DEVEZA, CARMENCITA D. ABELLA, PRIMITIVO S. AGUAS, JOSE MA. ANTONIO I.
BUGAY, HILARIO P. DE GUZMAN, WILLIAM C. VENTIGAN, NOEL L. AMA, ROMEO G. USON,
RAOUL E. VELASCO, FLORENCIO B. PAGSALIGAN, RUBEN C. CRUZ, ANGELA D. CUSTODIO,
NOEL C. CABEROY, GUILLERMO V. GAVINO, JR., GAUDENCIO P. BESA, AIDA M. PADILLA,
ROWENA M. BAUYON, HENRY C. EPISCOPE, ALVIN T. PATRIARCA, EUSTAQUIO C. AQUINO, JR.,
VALENTINO T. ARELLANO, REYNALDO J. AUSTRIA, BAYANI A. CUNANAN, EFREN T. JOSE,
EDUARDO P. LORIA, REYNALDO M. PORTILLO, ARMANDO B. DUPAYA, SESINANDO S. GOMEZ,
BRICCIO B. GAFFUD III, DANILO N. PALO, MARIO F. SOLANO, MARIANITO B. GOOT AND ELSA S.
TANGO, ZENAIDA N. GARIN, RUBY L. TEJADA, JOEL B. GARCIA, MA. RUBY L. JIMENEA,
ARLENE L. MADLANGBAYAN, ROCELY P. MARASIGAN, MA. ROSARIO H. RIVERA, OSCAR G.
BARACHINA, EDITA M. REMO, ROBERTO P. ENDAYA, ALELI B. ALANO, FRANCISCO T. MENEZ,
CAMILO N. CARILLO, ROSEMARIE A. DOMINGO, LYNDON D. ENOROBA, MERLY H. JAVELLANA,
HERNES M. MANDABON, LUZ G. ONG, GILBERTO B. PICO, CRISPIN A. TAMAYO, RICARDO C.
VERNAIZ, RENATO V. SACRAMENTO, CLODUALDO O. GOMEZ, MARINEL O. ALPINO, ELY P.
RAMOS, NICANOR E. REYES, JR., PETITIONERS, VS. NATIONAL LABOR RELATIONS
COMMISSION, GLOBAL BUSINESS BANK, INC., CORPORATE OFFICERS OF GLOBAL BANK:
ROBIN KING, HENRY M. SUN, BENJAMIN G. CHUA, JR., JOVENCIO F. CINCO, EDWARD S. GO,
MARY VY TY, TAKANORI NAKANO, JOHN K.C. NG, FLORENCIO T. MALLARE, EDMUND/EDDIE
GAISANO, FRANCISCO SEBASTIAN, SAMUEL S. YAP, ALFRED VY TY, GEN TOMII, CHARLES
WAI-BUN CHEUNG AND METROPOLITAN BANK AND TRUST COMPANY, RESPONDENTS.
DECISION
REYES, J.:
Nature of the Case

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court wherein the
[1]
[2]
petitioners assail the Resolutions dated November 7, 2007 and March 26, 2008, respectively, of the
Court of Appeals (CA) in CA-G.R. SP No. 101065.cralaw
Antecedent Facts
The petitioners were regular employees of the Philippine Banking Corporation (Philbank), each with at
[3]
least ten years of service in the company. Pursuant to its Memorandum dated August 28, 1970,
Philbank established a Gratuity Pay Plan (Old Plan) for its employees. The Old Plan provided:
1. Any employee who has reached the compulsory retirement age of 60 years, or who wishes to retire or
resign prior to the attainment of such age or who is separated from service by reason of death, sickness
or other causes beyond his/her control shall for himself or thru his/her heirs file with the personnel office
[4]
an application for the payment of benefits under the plan[.]
Section 1 laid down the benefits to which the employee would be entitled, to wit:
Section

Benefits
1.1 The gratuity pay of an employee shall be an amount equivalent to one-month salary for every year of
credited
service,
computed
on
the
basis
of
last
salary
received.
1.2 An employee with credited service of 10 years or more, shall be entitled to and paid the full amount of
the gratuity pay, but in no case shall the gratuity pay exceed the equivalent of 24 months, or two years,
[5]
salary.
On March 8, 1991, Philbank implemented a new Gratuity Pay Plan (New Gratuity Plan).
the New Gratuity Plan stated thus:

[6]

In particular,

x x x An Employee who is involuntarily separated from the service by reason of death, sickness or
physical disability, or for any authorized cause under the law such as redundancy, or other causes not
due to his own fault, misconduct or voluntary resignation, shall be entitled to either one hundred percent
[7]
(100%) of his accrued gratuity benefit or the actual benefit due him under the Plan, whichever is greater.
In February 2000, Philbank merged with Global Business Bank, Inc. (Globalbank), with the former as the
surviving corporation and the latter as the absorbed corporation, but the bank operated under the name
Global Business Bank, Inc. As a result of the merger, complainants respective positions became
redundant. A Special Separation Program (SSP) was implemented and the petitioners were granted a
separation package equivalent to one and a half months pay (or 150% of one months salary) for every
year of service based on their current salary. Before the petitioners could avail of this program, they were
required to sign two documents, namely, an Acceptance Letter and a Release, Waiver, Quitclaim
[8]
(quitclaim).
As their positions were included in the redundancy declaration, the petitioners availed of the SSP, signed
[9]
acceptance letters and executed quitclaims in Globalbanks favor in consideration of their receipt of
separation pay equivalent to 150% of their monthly salaries for every year of service.
In August 2002, respondent Metropolitan Bank and Trust Company (Metrobank) acquired the assets and
[10]
liabilities of Globalbank through a Deed of Assignment of Assets and Assumption of Liabilities.
Subsequently, the petitioners filed separate complaints for non-payment of separation pay with prayer for
[11]
damages and attorneys fees before the National Labor Relations Commission (NLRC).

The petitioners asserted that, under the Old Plan, they were entitled to an additional 50% of their gratuity
pay on top of 150% of one months salary for every year of service they had already received. They
insisted that 100% of the 150% rightfully belongs to them as their separation pay. Thus, the remaining
50% was only half of the gratuity pay that they are entitled to under the Old Plan. They argued that even if
the New Gratuity Plan were to be followed, the computation would be the same, since Section 10.1 of the
New Gratuity Plan provided that:
10.1 Employees who have attained a regular status as of March 8, 1991 who are covered by the Old
Gratuity Plan and are now covered by this Plan shall be entitled to which is the higher benefit between the
[12]
two Plans. Double recovery from both plans is not allowed.
The petitioners further argued that the quitclaims they signed should not bar them from claiming their full
entitlement under the law. They also claimed that they were defrauded into signing the same without full
[13]
knowledge
of
its
legal
implications.
On the other hand, Globalbank asserted that the SSP should prevail and the petitioners were no longer
entitled to the additional 50% gratuity pay which was already paid, the same having been included in the
computation of their separation pay. It maintained further that the waivers executed by the petitioners
should be held binding, since these were executed in good faith and with the latters full knowledge and
[14]
understanding.
Meanwhile, Metrobank denied any liability, citing the absence of an employment relationship with the
petitioners. It argued that its acquisition of the assets and liabilities of Globalbank did not include the
latters obligation to its employees. Moreover, Metrobank pointed out that the petitioners employment
[15]
with Globalbank had already been severed before it took over the latters banking operations.
The Labor Arbiters Decision
[16]

[17]

On August 30, 2004, the Labor Arbiter (LA) promulgated a decision dismissing the complaint. The LA
ruled that the petitioners were not entitled to the additional 50% in gratuity pay that they were asking
[18]
for.
The LA held that the 150% rate used by Globalbank could legally cover both the separation pay and the
gratuity pay of complainants. The LA upheld the right of the employer to enact a new gratuity plan after
finding that its enactment was not attended by bad faith or any design to defraud complainants. Thus, the
[19]
New Gratuity Plan must be deemed to have superseded the Old Plan. The LA also ruled that the
minimum amount due to the petitioners under the New Gratuity Plan, in relation to Article 283 of the Labor
Code was one months pay for every year of service. Thus, anything over that amount was discretionary.
As to the validity of the quitclaim, the LA held that the issue has been rendered moot. Nonetheless, the
LA upheld the petitioners undertaking under their respective quitclaims, considering the amount involved
is not unconscionable, and that their supposed lack of complete understanding did not mean that they
[20]
were
coerced
or
deceived
into
executing
the
same.
The LA also absolved Metrobank from liability. The LA found that the petitioners had already been
separated from Globalbank when Metrobank took over the formers banking operations. Moreover, the
liabilities that Metrobank assumed were limited to those arising from banking operations and excluded
[21]
those pertaining to Globalbanks employees or to claims of previous employees.
The NLRCs Decision
Aggrieved, the petitioners appealed to the NLRC. In a decision
dismissed the appeal and affirmed the LAs decision.

[22]

dated August 15, 2007, the NLRC

The NLRC held that the petitioners did not acquire a vested right to Philbanks gratuity plans since, at the
outset, it was made clear that these plans would not perpetuate into eternity. It also noted that, under the

SSP, the employee to be separated due to redundancy would be receiving more than the rate in the old
plan and higher than the legal rate for the separated employees.
The petitioners elevated the case to the CA via a Petition for Certiorari under Rule 65.
The CAs Decision
In the first of the assailed CA resolutions, the CA ruled that the petition was dismissible outright for failure
of the petitioners to file a motion for reconsideration of the decision under review before resorting
to certiorari. Further, the CA held that the case did not fall under any of the recognized exceptions to the
[23]
rule on motions for reconsideration.
The petitioners then moved for the reconsideration, which was denied in the second assailed Resolution,
noting the absence of an explanation for their failure to file a motion for reconsideration of the assailed
[24]
NLRC decision in their petition for certiorari.
The Issues
The petitioners are now before this Court raising the following errors supposedly committed by the CA:
1. In dismissing the petition for failure to file a motion for reconsideration before filing a petition under
Rule 65 as it blatantly ignored the application of the recent jurisprudence on labor law.
2. In dismissing the petition without taking into consideration the meritorious grounds laid down by [the]
petitioners by categorically outlining the grave abuse of discretion amounting to lack or excess of
jurisdiction committed by [the] NLRC in affirming the decision of the Labor Arbiter, to wit:
2.a. In holding that [the] petitioners did not acquire a vested right under the PHILBANK gratuity plan.
2.b. In holding that the bank had abandoned the old plan (referring to the old Gratuity Pay Plan) and
replaced it with a Special Separation Program under which [the] petitioners would be receiving more than
the rate in the old plan and higher than the legal rate for redundant employees.
2.c. In holding that the benefits under the Special Separation Program legally replaced not only the
gratuity pay plan to which [the] petitioners were entitled under the old and new Gratuity Pay Plans but
also all other benefits including separation pay under the law.
2.d. In not holding that when [the] petitioners were separated due to redundancy they were entitled per
provision of Article 283 of the Labor Code to separation pay equivalent to one month pay for every year of
service.
2.e. In holding that [the] petitioners are bound under the Acceptance x x x and Release, Waiver and
Quitclaim x x x that they had executed and [cannot] question the same, hence they [cannot] claim
benefits in addition to those they had received from the bank.
2.f. In not holding that respondent METROBANK is the parent corporation of GLOBALBANK and the
latter is the subsidiary, hence METROBANK is liable for the payment of the employment benefits of [the]
petitioners as it had acquired all the assets of GLOBALBANK.
2.g. In not holding that the Assignment of Assets and Liabilities x x x executed by GLOBALBANK and
METROBANK is a scheme to defraud [the] petitioners of the employment benefits due them upon
separation from service.
2.h. In not holding that [the] respondents are liable to [the] petitioners for moral, exemplary and temperate
damages because [the] respondents are guilty of deceit and fraud in not paying [the] petitioners the full
[25]
amount of their employment benefits.

The Courts Decision

The Petition has no merit, hence, must be denied.
The petitioners unexplained failure to move for
the reconsideration of the NLRCs resolution
before applying for a writ ofcertiorari in the CA is
reason enough to deny such application.

We shall first discuss the procedural issue raised by the petitioners: whether the CA erred in dismissing
their petition due to their failure to file a motion for reconsideration of the NLRCs adverse resolution.
The petitioners claim that it was error for the CA to have dismissed their petition on the sole basis thereof.
According to the petitioners, they had opted not to file a motion for reconsideration as the issues that will
be raised therein are those that the NLRC had already passed upon. The petitioners likewise invoke the
liberal
application
of
procedural
rules.
To begin with, the petitioners do not have the discretion or prerogative to determine the propriety of
complying with procedural rules. This Court had repeatedly emphasized in various cases involving the
tedious attempts of litigants to relieve themselves of the consequences of their neglect to follow a simple
procedural requirement for perfecting a petition for certiorari that he who seeks a writ ofcertiorari must
apply for it only in the manner and strictly in accordance with the provisions of the law and the Rules. The
petitioners may not arrogate to themselves the determination of whether a motion for reconsideration is
necessary or not. To dispense with the requirement of filing a motion for reconsideration, the petitioners
[26]
must
show
a
concrete,
compelling,
and
valid
reason
for
doing
so.
As the CA correctly noted, the petitioners did not bother to explain their omission and only did so in their
motion for reconsideration of the dismissal of their petition. Aside from the fact that such belated effort will
not resurrect their application for a writ of certiorari, the reason proffered by the petitioners does not fall
under any of the recognized instances when the filing of a motion for reconsideration may be dispensed
with. Whimsical and arbitrary deviations from the rules cannot be condoned in the guise of a plea for a
liberal interpretation thereof. We cannot respond with alacrity to every claim of injustice and bend the
[27]
rules to placate vociferous protestors crying and claiming to be victims of a wrong.
We now rule on the substantive issues.
The petitioners receipt of separation pay
equivalent to their one and a half months salary
for every year of service as provided in the SSP
and the New Gratuity Plan more than sufficiently
complies with the Labor Code, which only
requires the payment of separation pay at the
rate of one month salary for every year of
service.

The petitioners do not question the legality of their separation from the service or the basis for holding
their positions redundant. What they raise is their entitlement to gratuity pay, as provided in the Old Plan,
in addition to what they received under the SSP. According to the petitioners, they are entitled to
separation pay at a rate of one month salary for every year of service under the Labor Code and gratuity
pay at a rate of one month salary for every year of service whether under the Old Plan or the New
Gratuity Plan. Since what they received as separation pay was equivalent to only 150% or one and onehalf of their monthly salaries for every year of service, the respondents are still liable to pay them the
deficiency equivalent to one-half of their monthly salary for every year of service.

We

disagree.

The
repealed

New

Gratuity

Plan

the

has
Plan.

Old

It is clear from the provisions of Section 8 of the New Gratuity Plan that the Old Plan has been revoked or
superseded. Thus:
SECTION
INTEGRATION
CONTRACTS, ETC.

OF

8
LEGISLATION,

SOCIAL

8.1 This Plan is not intended to duplicate or cause the double payment of similar or analogous benefits
provided for under existing labor and social security laws. Accordingly, benefits under this Plan shall be
deemed integrated with and in lieu of (i) statutory benefits under the New Labor Code and Social Security
Laws, as now or hereafter amended[;] and (ii) analogous benefits granted under present or future
collective bargaining agreements, and other employee benefit plans providing analogous benefits which
may be imposed by future legislations. In the event the benefits due under the Plan are less than those
due and demandable under the provisions of the New Labor Code and/or present or future Collective
Bargaining Agreements and/or future plans of similar nature imposed by law, the Fund shall respond for
[28]
the difference.
Globalbanks right to replace the Old Plan and the New Gratuity Plan is within legal bounds as the terms
thereof are in accordance with the provisions of the Labor Code and complies with the minimum
requirements thereof. Contrary to the petitioners claim, they had no vested right over the benefits
under the Old Plan considering that none of the events contemplated thereunder occurred prior to
the repeal thereof by the adoption of the New Gratuity Plan. Such right accrues only upon their
separation from service for causes contemplated under the Old Plan and the petitioners can only avail the
benefits under the plan that is effective at the time of their dismissal. In this case, when the merger and
the redundancy program were implemented, what was in effect were the New Gratuity Plan and the SSP;
the petitioners cannot, thus, insist on the provisions of the Old Plan which is no longer existent.
The

SSP

did

not

revoke

or

supersede

the

New

Gratuity

Plan.

On the other hand, the issuance of the SSP did not result to the repeal of the New Gratuity Plan. As the
following provision of the SSP shows, the terms of the New Gratuity Plan had been expressly
incorporated in the SSP and should, thus, be implemented alongside the SSP:
II.
Affected

Separation
employees

are

Pay
entitled

to

the

Package
following

tax

free:

a. Gratuity Benefits which they are entitled to under the respective retirement plans.The bank shall give a
premium by rounding up the benefit to an equivalent of 1.5 months salary per every year of service based
[29]
on their salary as of separation date. (emphasis supplied)
The SSP was not intended to supersede the New Gratuity Plan. On the contrary, the SSP was issued to
make the benefits under the New Gratuity Plan available to employees whose positions had become
redundant because of the merger between Philbank and Globalbank, subject to compliance with certain
requirements such as age and length of service, and to improve such benefits by increasing or rounding it
up to an amount equivalent to the affected employees one and a half monthly salary for every year of
service. In other words, the benefits to which the redundated employees are entitled to, including the
petitioners, are the benefits under the New Gratuity Plan, albeit increased by the SSP.
Considering that the New Gratuity Plan still stands and has not been revoked by the SSP, does this mean

that the petitioners can claim the benefits thereunder in addition to or on top of what is required under the
Article 283 of the Labor Code?
For as long as the minimum requirements of the
Labor Code are met, it is within the management
prerogatives of employers to come up with
separation packages that will be given in lieu of
what is provided under the Labor Code.

A direct reference to the New Gratuity Plan reveals the contrary. The above-quoted Section 8 of the New
Gratuity Plan expressly states that the benefits under this Plan shall be deemed integrated with and in
lieu of (i) statutory benefits under the New Labor Code and Social Security Laws, as now or hereafter
amended and that [t]his Plan is not intended to duplicate or cause the double payment of similar or
analogous
benefits
provided
for
under
existing
labor
and
security
laws.
[30]

Article 283 of the Labor Code provides only the required minimum amount of separation pay, which
employees dismissed for any of the authorized causes are entitled to receive. Employers, therefore, have
the right to create plans, providing for separation pay in an amount over and above what is imposed by
Article 283. There is nothing therein that prohibits employers and employees from contracting on the
terms of employment, or from entering into agreements on employee benefits, so long as they do not
violate the Labor Code or any other law, and are not contrary to morals, good customs, public order, or
[31]
public policy. As this Court held in a case:
[E]ntitlement to benefits consequent thereto are not limited to those provided by said provision of law.
Otherwise, the provisions of collective bargaining agreements, individual employment contracts, and
voluntary retirement plans of companies would be rendered inutile if we were to limit the award of
[32]
monetary benefits to an employee only to those provided by statute. x x x.
Previously, the Court adopted the CAs ruling, upholding the validity of a similar provision in a companys
retirement plan:
[T]here is no further doubt that the payment of separation pay is a requirement of the law, i.e.[,] the Labor
Code, which is a social legislation. The clear intent of Article XI, section 6 [of the Retirement Plan] is to
input the effects of social legislation in the circulation of Retirement benefits due to retiring employees x x
x. The Retirement Plan itself clearly sets forth the intention of the parties to entitle employees only
to whatever is greater between the Retirement Benefits then due and that which the law requires
to be given by way of separation pay. To give way to complainants demands would be to totally ignore
the contractual obligations of the parties in the Retirement Plan, and to distort the clear intent of the
[33]
parties as expressed in the terms and conditions contained in such plan. x x x. (emphasis supplied)
Consequently, if the petitioners were allowed to receive separation pay from both the Labor Code, on the
one hand, and the New Gratuity Plan and the SSP, on the other, they would receive double
compensation for the same cause (i.e., separation from the service due to redundancy) even if such is
contrary to the provisions of the New Gratuity Plan. The petitioners claim of being shortchanged is
certainly unfounded. They have recognized the validity of the SSP and the New Gratuity Plan as
evidenced by the acceptance letters and quitclaims they executed; and the benefits they received under
the SSP and the New Gratuity Plan are more than what is required by the Labor Code.
In the absence of proof that any of the vices of
consent are present, the petitioners acceptance
letters and quitclaims are valid; thus, barring
them from claiming additional separation pay.
The Court now comes to the issue on the validity of the acceptance letters and quitclaims that the
petitioners executed, which they claim do not preclude them from asking for the benefits rightfully due

them

under

the

law.

It is true that quitclaims executed by employees are often frowned upon as contrary to public
[34]
policy. Hence, deeds of release or quitclaims cannot bar employees from demanding benefits to which
they are legally entitled or from contesting the legality of their dismissal. The acceptance of those benefits
[35]
would
not
amount
to
estoppel.
However, the Court, in other cases, has upheld quitclaims if found to comply with the following requisites:
(1) the employee executes a deed of quitclaim voluntarily; (2) there is no fraud or deceit on the part of any
of the parties; (3) the consideration of the quitclaim is credible and reasonable; and (4) the contract is not
contrary to law, public order, public policy, morals or good customs or prejudicial to a third person with a
[36]
right
recognized
by
law.
In this case, there is no allegation of fraud or deceit employed by the respondents in making the
petitioners sign the acceptance letters and quitclaims. Neither was there any claim of force or duress
exerted upon the petitioners to compel them to sign the acceptance letters and quitclaims. Likewise, the
consideration is credible and reasonable since the petitioners are getting more than the amount required
under the law. Thus, the acceptance letters and quitclaims executed by the petitioners are valid and
binding.
Considering that the petitioners have already waived their right to file an action for any of their claims in
relation to their employment with Globalbank, the question of whether Metrobank can be held liable for
these claims is now academic. However, in order to put to rest any doubt in the petitioners minds as to
Metrobanks
liabilities,
we
shall
proceed
to
discuss
this
issue.
We

hold

that

Metrobank

cannot

be

held

liable

for

the

petitioners

claims.

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly
agrees to assume the debts; (2) where the transaction amounts to a consolidation or merger of the
corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and
(4) where the selling corporation fraudulently enters into the transaction to escape liability for those
[37]
debts.
[38]

Under the Deed of Assignments of Assets and Assumption of Liabilities between Globalbank and
Metrobank, the latter accepted the formers assets in exchange for assuming its liabilities. The liabilities
that Metrobank assumed, which were clearly set out in Annex A of the instrument, are: deposit liabilities;
interbank loans payable; bills payable; managers checks and demand drafts outstanding; accrued taxes,
[39]
interest
and
other
expenses;
and
deferred
credits
and
other
liabilities.
Based on this enumeration, the liabilities that Metrobank assumed can be characterized as those
pertaining to Globalbanks banking operations. They do not include Globalbanks liabilities to pay
separation pay to its former employees. This must be so because it is understood that the same liabilities
ended when the petitioners were paid the amounts embodied in their respective acceptance letters and
quitclaims. Hence, this obligation could not have been passed on to Metrobank.
The petitioners insist that Metrobank is liable because it is the parent company of Globalbank and that
majority of the latters board of directors are also members of the formers board of directors.
While the petitioners allegations are true, one fact cannot be ignored that Globalbank has a separate
and distinct juridical personality. The petitioners own evidence Global Business Holdings, Inc.s
[40]
General Information Sheet filed with the Securities and Exchange Commission bears this out.
Even then, the petitioners would want this Court to pierce the veil of corporate identity in order to hold
Metrobank
liable
for
their
claims.

What the petitioners desire, the Court cannot do. This fiction of corporate entity can only be disregarded
in cases when it is used to defeat public convenience, justify wrong, protect fraud, or defend crime.
Moreover, to justify the disregard of the separate juridical personality of a corporation, the wrongdoing
[41]
must
be
clearly
and
convincingly
established.
In the instant case, none of these circumstances is present such as to warrant piercing the veil of
corporate
fiction
and
treating
Globalbank
and
Metrobank
as
one.
Lastly, the petitioners prayer for the award of damages must be denied for lack of legal basis.
In sum, the New Gratuity Plan and SSP are valid and must be given effect, inasmuch as their provisions
are not contrary to law; and, indeed, grant benefits that meet the minimum amount required by the Labor
Code. The petitioners have voluntarily sought such benefits and upon their receipt thereof, executed
quitclaims in Globalbanks favor. The petitioners cannot, upon a mere change of mind, seek to invalidate
such quitclaims and renege on their undertaking thereunder, which, to begin with, is supported by a
substantial consideration and which they had knowingly assumed and imposed upon themselves.cralaw
WHEREFORE, the foregoing premises considered, the petition is DENIED. The assailed Resolutions
dated November 7, 2007 and March 26, 2008, respectively, of the Court of Appeals in CA-G.R. SP No.
101065
are AFFIRMED.
SO
Carpio, (Chairperson), Brion, Perez, and Sereno, JJ., concur.

ORDERED.

SECOND DIVISION
[G.R. No. 117188. August 7, 1997.]
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., Petitioner, v. HON.
COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN
ENCARNACION and HORATIO AYCARDO, Respondents.
Rene A. Diokno for Petitioner.
Reyno De Vera Tiu Domingo and Santos for Private Respondents.

SYLLABUS

1. STATUTORY CONSTRUCTION; STATUTE; INTERPRETATION; THE WORD "MUST" IS NOT

ALWAYS IMPERATIVE. Ordinarily, the word "must" connotes an imperative act or operates to impose
a duty which may be enforced. It is synonymous with "ought" which connotes compulsion or
mandatoriness. However, the word "must" in a statute, like, t "shall", is not always imperative. It may be
consistent with an exercise of discretion. In this jurisdiction, the tendency has been to interpret "shall" as
the context or a reasonable construction of the statute in which it is used demands or requires. This is
equally true as regards the word "must." Thus, if the language of a statute considered as a whole and with
due regard to its nature and object reveals that the legislature intended to use the words "shall" and
"must" to be directory, they should be given that meaning.chanroblesvirtuallawlibrary
2. COMMERCIAL LAW; CORPORATION CODE; SEC. 46 (ADOPTION OF BY-LAWS); BY-LAWS;
REQUIREMENT FOR THE ADOPTION THEREOF WITHIN THE PERIOD PROVIDED; NOT
MANDATORY. Taken as a whole and under the principle that the best interpreter of a statute is the
statute itself (optima statuli interpretatix est ipsum statutum). Section 46 of the Corporation Code reveals
the legislative intent to attach a directory, and not mandatory, meaning for the word "must" in the first
sentence thereof. Note should be taken of the second paragraph of the law which allows the filing of the
by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory
compliance with the requirement of filing the by-laws "within one (1) month after receipt of official notice of
the issuance of its certificate of incorporation by the Securities and Exchange Commission." It necessarily
follows that failure to file the by-laws within any period does not imply the "demise" of the corporation. Bylaws may be necessary for the "government" of the corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes. There are in fact cases where bylaws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus: "In the
absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the
existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases
where the charter sufficiently provides for the government of the body; and even where the governing
statute in express terms confers upon the corporation the power to adopt by-laws, the failure to exercise
the power will be ascribed to mere nonaction which will not render void any acts of the corporation which
would otherwise be valid." As the "rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in their relation to it," by-laws are
indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but
certainly, these are required by law for an orderly governance and management of corporations.
Nonetheless, failure to file them within the period required by law by no means tolls the automatic
dissolution
of
a
corporation.
3. ID.; ID.; ID.; EFFECT OF FAILURE TO FILE. Although the Corporation Code requires the filing of
by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period
provided for in Section 46. However, such omission has been rectified by Presidential Decree No. 902-A,
the pertinent provisions on the jurisdiction of the SEC of which state: "SEC. 6. In order to effectively

exercise such jurisdiction, the Commission shall possess the following powers: . . . (1) to suspend, or
revoke, after proper notice and hearing, the franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds provided by law, including the following: . . . Failure
to file by-laws within the required period; . . . In the exercise of the foregoing authority and jurisdiction of
the Commissions or by a Commissioner or by such there bodies, boards committees and/or any officer as
may be created or designated by the Commission for the purpose. The decision, ruling or order of any
such Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission
sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision, ruling or
order. The Commission shall promulgate rules of procedures to govern the proceedings, hearings and
appeals of cases falling within its jurisdiction. The aggrieved party may appeal the order, decision or
ruling of the Commission sitting en banc to the Supreme Court by petition for review in accordance with
the pertinent provisions of the Rules of Court." Even under the foregoing express grant of power and
authority, there can be no automatic corporate dissolution simply because the incorporators failed to
abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. There is no
outright "demise" private of corporate existence. Proper notice and hearing are cardinal components of
due process in any democratic institution, agency or society. In other words, the incorporators must be
given the chance to explain their neglect or omission and remedy the same. That the failure to file by-laws
is not provided for by the Corporation Code but in another law is of no moment. P.D. No. 902-A, which
took effect immediately after its promulgation on March 11, 1976, is very much apposite to the Code.
Accordingly, the provisions above-quoted supply the law governing the situation in the case at bar,
inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari materia. Interpretare et
concordare legibus est optimus interpretandi. Every statute must be so construed and harmonized with
other statutes as to form a uniform system of jurisprudence.chanroblesvirtuallawlibrary

DECISION

ROMERO, J.:

May the failure of a corporation to file its by-laws within one month from the date of its incorporation, as
mandated by Section 46 of the Corporation Code, result in its automatic dissolution?
This is the issue raised in this petition for review on certiorari of the Decision 1 of the Court of Appeals
affirming the decision of the Home Insurance and Guaranty Corporation (HIGC). This quasi-judicial body
recognized Loyola Grand Villas Homeowners Association (LGVHA) as the sole homeowners association
in Loyola Grand Villas, a duly registered subdivision in Quezon City and Marikina City that was owned
and developed by Solid Homes, Inc. It revoked the certificates of registration issued to Loyola Grand
Villas Homeowners (North) Association Incorporated (the North Association for brevity) and Loyola Grand
Villas Homeowners (South) Association Incorporated (the South Association).chanrobles.com : virtual
lawlibrary
LGVHAI was organized on February 8, 1983 as the association of homeowners and residents of the
Loyola Grand Villas. It was registered with the Home Financing Corporation, the predecessor of herein
respondent HIGC, as the sole homeowners organization in the said subdivision under Certificate of
Registration No. 04-197. It was organized by the developer of the subdivision and its first president was
Victorio V. Soliven, himself the owner of the developer. For unknown reasons, however, LGVHAI did not
file
its
corporate
by-laws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so. 2 To the
officers consternation, they discovered that there were two other organizations within the subdivision
the North Association and the South Association. According to private respondents, a non-resident and
Soliven himself, respectively headed these associations. They also discovered that these associations
had five (5) registered homeowners each who were also the incorporators, directors and officers thereof.
None of the members of the LGVHAI was listed as member of the North Association while three (3)

members of LGVHAI were listed as members of the South Association. 3 The North Association was
registered with the HIGC on February 13, 1989 under Certificate of Registration No. 04-1160 covering
Phases West II, East III, West III and East IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of
the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved for two
reasons. First, it did not submit its by-laws within the period required by the Corporation Code and,
second, there was non-user of corporate charter because HIGC had not received any report on the
associations activities. Apparently, this information resulted in the registration of the South Association
with the HIGC on July 27, 1989 covering Phases West I, East I and East II. It filed its by-laws on July 26,
1989.
These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They
questioned the revocation of LGVHAIs certificate of registration without due notice and hearing and
concomitantly prayed for the cancellation of the certificates of registration of the North and South
Associations by reason of the earlier issuance of a certificate of registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private respondents obtained a favorable ruling from
HIGC Hearing Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as
follows:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered recognizing the Loyola Grand Villas Homeowners
Association, Inc., under Certificate of Registration No. 04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners, and declaring the Certificates of
Registration of Loyola Grand Villas Homeowners (North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to render an accounting and turn-over to Loyola Grand
Villas Homeowners Association, Inc., all assets and records of the Association now under his custody and
possession."cralaw
virtua1aw
library
The South Association appealed to the Appeals Board of the HIGC. In its Resolution of September 8,
1993,
the
Board
4
dismissed
the
appeal
for
lack
of
merit.
Rebuffed, the South Association in turn appealed to the Court of Appeals, raising two issues. First,
whether or not LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the
Corporation Code resulted in the automatic dissolution of LGVHAI. Second, whether or not two
homeowners associations may be authorized by the HIGC in one "sprawling subdivision." However, in
the Decision of August 23, 1994 being assailed here, the Court of Appeals affirmed the Resolution of the
HIGC
Appeals
Board.
In resolving the first issue, the Court of Appeals held that under the Corporation Code, a private
corporation commences to have corporate existence and juridical personality from the date the Securities
and Exchange Commission (SEC) issues a certificate of incorporation under its official seal. The
requirement for the filing of by-laws under Section 46 of the Corporation Code within one month from
official notice of the issuance of the certificate of incorporation presupposes that it is already incorporated,
although it may file its by-laws with its articles of incorporation. Elucidating on the effect of a delayed filing
of
by-laws,
the
Court
of
Appeals
said:jgc:chanrobles.com.ph
"We also find nothing in the provisions cited by the petitioner, i.e., Sections 46 and 22, Corporation Code,
or in any other provision of the Code and other laws which provide or at least imply that failure to file the
by-laws results in an automatic dissolution of the corporation. While Section 46, in prescribing that bylaws must be adopted within the period prescribed therein, may be interpreted as a mandatory provision,
particularly because of the use of the word must, its meaning cannot be stretched to support the
argument
that
automatic
dissolution
results
from
non-compliance.
We realize that Section 46 or other provisions of the Corporation Code are silent on the result of the

failure to adopt and file the by-laws within the required period. Thus, Section 46 and other related
provisions of the Corporation Code are to be construed with Section 6 (1) of P.D. 902-A. This section
empowers the SEC to suspend or revoke certificates of registration on the grounds listed therein. Among
the grounds stated is the failure to file by-laws (see also II Campos: The Corporation Code, 1990 ed., pp.
124-125). Such suspension or revocation, the same section provides, should be made upon proper notice
and hearing. Although P.D. 902-A refers to the SEC, the same principles and procedures apply to the
public respondent HIGC as it exercises its power to revoke or suspend the certificates of registration or
homeowners associations. (Section 2 [a], E.O. 535, series 1979, transferred the powers and authorities of
the
SEC
over
homeowners
associations
to
the
HIGC.)
We also do not agree with the petitioners interpretation that Section 46, Corporation Code prevails over
Section 6, P.D. 902-A and that the latter is invalid because it contravenes the former. There is no basis
for such interpretation considering that these two provisions are not inconsistent with each other. They
are, in fact, complementary to each other so that one cannot be considered as invalidating the
other."cralaw
virtua1aw
library
The Court of Appeals added that, as there was no showing that the registration of LGVHAI had been
validly revoked, it continued to be the duly registered homeowners association in the Loyola Grand Villas.
More importantly, the South Association did not dispute the fact that LGVHAI had been organized and
that,
thereafter,
it
transacted
business
within
the
period
prescribed
by
law.
On the second issue, the Court of Appeals reiterated its previous ruling 5 that the HIGC has the authority
to order the holding of a referendum to determine which of two contending associations should represent
the
entire
community,
village
or
subdivision.
Undaunted, the South Association filed the instant petition for review on certiorari. It elevates as sole
issue for resolution the first issue it had raised before the Court of Appeals, i.e., whether or not the
LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code had
the
effect
of
automatically
dissolving
the
said
corporation.
Petitioner contends that, since Section 46 uses the word "must" with respect to the filing of by-laws,
noncompliance therewith would result in "self-extinction" either due to non-occurrence of a suspensive
condition or the occurrence of a resolutory condition under the hypothesis that (by) the issuance of the
certificate of registration alone the corporate personality is deemed already formed." It asserts that the
Corporation Code provides for a "gradation of violations of requirements." Hence, Section 22 mandates
that the corporation must be formally organized and should commence transactions within two years from
date of incorporation. Otherwise, the corporation would be deemed dissolved. On the other hand, if the
corporation commences operations but becomes continuously inoperative for five years, then it may be
suspended
or
its
corporate
franchise
revoked.
Petitioner concedes that Section 46 and the other provisions of the Corporation Code do not provide for
sanctions for non-filing of the by-laws. However, it insists that no sanction need be provided "because the
mandatory nature of the provision is so clear that there can be no doubt about its being an essential
attribute of corporate birth." To petitioner, its submission is buttressed by the facts that the period for
compliance is "spelled out distinctly," that the certification of the SEC/HIGC must show that the by-laws
are not inconsistent with the Code, and that a copy of the by-laws "has to be attached to the articles of
incorporation." Moreover, no sanction is provided for because "in the first place, no corporate identity has
been completed." Petitioner asserts that "non-provision for remedy or sanction is itself the tacit
proclamation that non-compliance is fatal and no corporate existence had yet evolved," and therefore,
there was "no need to proclaim its demise." 6 In a bid to convince the Court of its arguments, petitioner
stresses
that:jgc:chanrobles.com.ph
". . . the word MUST is used in Sec. 46 in its universal literal meaning and corollary human implication
its compulsion is integrated in its very essence MUST is always enforceable by the inevitable
consequence that is, OR ELSE. The use of the word MUST in Sec. 46 is no exception it means file
the by-laws within one month after notice of issuance of certificate of registration OR ELSE. The OR

ELSE, though not specified, is inextricably a part of MUST. Do this or if you do not you are Kaput. The
importance of the by-laws to corporate existence compels such meaning for as decreed the by-laws is
the government of the corporation. Indeed, how can the corporation do any lawful act as such without
by-laws.
Surely,
no
law
is
intended
to
create
chaos."
7
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation Code
which itself does not provide sanctions for non-filing of by-laws. For the petitioner, it is "not proper to
assess the true meaning of Sec. 46 . . . on an unauthorized provision on such matter contained in the
said
decree."cralaw
virtua1aw
library
In their comment on the petition, private respondents counter that the requirement of adoption of by-laws
is not mandatory. They point to P.D. No. 902-A as having resolved the issue of whether said requirement
is mandatory or merely directory. Citing Chung Ka Bio v. Intermediate Appellate Court, 8 private
respondents contend that Section 6(I) of that decree provides that non-filing of by-laws is only a ground
for suspension or revocation of the certificate of registration of corporations and, therefore, it may not
result in automatic dissolution of the corporation. Moreover, the adoption and filing of by-laws is a
condition subsequent which does not affect the corporate personality of a corporation like the LGVHAI.
This is so because Section 9 of the Corporation Code provides that the corporate existence and juridical
personality of a corporation begins from the date the SEC issues a certificate of incorporation under its
official seal. Consequently, even if the by-laws have not yet been filed, a corporation may be considered a
de facto corporation. To emphasize the fact the LGVHAI was registered as the sole homeowners
association in the Loyola Grand Villas, private respondents point out that membership in the LGVHAI was
an "unconditional restriction in the deeds of sale signed by lot buyers." chanroblesvirtual|awlibrary
In its reply to private respondents comment on the petition, petitioner reiterates its argument that the
word "must" in Section 46 of the Corporation Code is mandatory. It adds that, before the ruling in Chung
Ka Bio v. Intermediate Appellate Court could be applied to this case, this Court must first resolve the
issue of whether or not the provisions of P.D. No. 902-A prescribing the rules and regulations to
implement the Corporation Code can "rise above and change" the substantive provisions of the Code.
The pertinent provision of the Corporation Code that is the focal point of controversy in this case
states:jgc:chanrobles.com.ph
"Sec. 46. Adoption of by-laws. Every corporation formed under this Code, must within one (1) month
after receipt of official notice of the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For
the adoption of by-laws by the corporation, the affirmative vote of the stockholders representing at least a
majority of the outstanding capital stock, or of at least a majority of the members, in the case of non-stock
corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for
them and shall be kept in the principal office of the corporation, subject to inspection of the stockholders
or members during office hours; and a copy thereof, shall be filed with the Securities and Exchange
Commission
which
shall
be
attached
to
the
original
articles
of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special corporations governed by special laws,
unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws
or
amendments
are
in
accordance
with
law."cralaw
virtua1aw
library

As correctly postulated by the petitioner, interpretation of this provision of law begins with the
determination of the meaning and import of the word "must" in this section. Ordinarily, the word "must"
connotes an imperative act or operates to impose a duty which may be enforced. 9 It is synonymous with
"ought" which connotes compulsion or mandatoriness. 10 However, the word "must" in a statute, like
"shall," is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the
tendency has been to interpret "shall" as the context or a reasonable construction of the statute in which it
is used demands or requires. 11 This is equally true as regards the word "must." Thus, if the language of
a statute considered as a whole and with due regard to its nature and object reveals that the legislature
intended to use the words "shall" and "must" to be directory, they should be given that meaning. 12
In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68 are
illuminating:jgc:chanrobles.com.ph
"MR.

FUENTEBELLA.

Thank

you,

Mr.

Speaker.

On page 34, referring to the adoption of by-laws, are we made to understand here, Mr. Speaker, that bylaws must immediately be filed within one month after the issuance? In other words, would this be
mandatory
or
directory
in
character?
MR.

MENDOZA.

This

is

mandatory.

MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the effect of the failure of the
corporation
to
file
these
bylaws
within
one
month?
MR. MENDOZA. There is a provision in the latter part of the Code which identifies and describes the
consequences of violations of any provision of this Code. One such consequence is the dissolution of the
corporation
for
its
inability,
or
perhaps,
incurring
certain
penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation by merely
failing to file the by-laws within one month. Supposing the corporation was late, say, five days, what
would
be
the
mandatory
penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto dissolution of the
corporation. Perhaps, as in the case, as you suggested, in the case of El Hogar Filipino where a quo
warranto action is brought, one takes to account the gravity of the violation committed. If the by-laws were
late the filing of the by-laws were late by, perhaps, a day or two, I would suppose that might be a
tolerable delay, but if they are delayed over a period of months as is happening now because of the
absence of a clear requirement that by-laws must be completed within a specified period of time, the
corporation
must
suffer
certain
consequences."
13
This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the bylaws on time was never the intention of the legislature. Moreover, even without resorting to the records of
deliberations of the Batasang Pambansa, the law itself provides the answer to the issue propounded by
petitioner.
Taken as a whole and under the principle that the best interpreter of a statute is the statute itself (optima
statuli interpretatix est ipsum statutum), 14 Section 46 aforequoted reveals the legislative intent to attach
a directory, and not mandatory, meaning for the word must" in the first sentence thereof. Note should be
taken of the second paragraph of the law which allows the filing of the by-laws even prior to incorporation.
This provision in the same section of the Code rules out mandatory compliance with the requirement of
filing the by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file the
by-laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for
the "government" of the corporation but these are subordinate to the articles of incorporation as well as to
the Corporation Code and related statutes. 15 There are in fact cases where by-laws are unnecessary to
corporate existence or to the valid exercise of corporate powers, thus:jgc:chanrobles.com.ph

"In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the
existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases
where the charter sufficiently provides for the government of the body; and even where the governing
statute in express terms confers upon the corporation the power to adopt by-laws, the failure to exercise
the power will be ascribed to mere nonaction which will not render void any acts of the corporation which
would
otherwise
be
valid."
16
(Emphasis
supplied.)
As

Fletcher

aptly

puts

it:jgc:chanrobles.com.ph

"It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have been
adopted the corporation may not be able to act for the purposes of its creation, and that the first and most
important duty of the members is to adopt them. This would seem to follow as a matter of principle from
the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, if
not one of legal, necessity. Moreover, the peculiar circumstances attending the formation of a corporation
may impose the obligation to adopt certain by-laws, as in the case of a close corporation organized for
specific purposes. And the statute or general laws from which the corporation derives its corporate
existence may expressly require it to make and adopt by-laws and specify to some extent what they shall
contain and the manner of their adoption. The mere fact, however, of the existence of power in the
corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such power
essential to
its
corporate
life,
or
to
the
validity of
any of
its
acts." 17
Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the
consequences of the non-filing of the same within the period provided for in Section 46. However, such
omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction
of
the
SEC
of
which
state:jgc:chanrobles.com.ph
"SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:chanrob1es virtual 1aw library
x

(l) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law, including the
following:chanrob1es virtual 1aw library
x

5. Failure to file by-laws within the required period;

x

In the exercise of the foregoing authority and jurisdiction of the Commission, hearings shall be conducted
by the Commission or by a Commissioner or by such other bodies, boards, committees and/or any officer
as may be created or designated by the Commission for the purpose. The decision, ruling or order of any
such Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission
sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision, ruling or
order. The Commission shall promulgate rules of procedures to govern the proceedings, hearings and
appeals
of
cases
falling
within
its
jurisdiction.chanrobles
virtuallawlibrary
The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to the
Supreme Court by petition for review in accordance with the pertinent provisions of the Rules of
Court."cralaw
virtua1aw
library

Even under the foregoing express grant of power and authority, there can be no automatic corporate
dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in
Section 46 of the Corporation Code. There is no outright "demise" of corporate existence. Proper notice
and hearing are cardinal components of due process in any democratic institution, agency or society. In
other words, the incorporators must be given the chance to explain their neglect or omission and remedy
the
same.
That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no
moment. P.D. No. 902-A, which took effect immediately after its promulgation on March 11, 1976, is very
much apposite to the Code. Accordingly, the provisions abovequoted supply the law governing the
situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari
materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be so construed
and harmonized with other statutes as to form a uniform system of jurisprudence. 18
As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or members and directors and officers with relation
thereto and among themselves in their relation to it," 19 by-laws are indispensable to corporations in this
jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an
orderly governance and management of corporations. Nonetheless, failure to file them within the period
required by law by no means tolls the automatic dissolution of a corporation.
In this regard, private respondents are correct in relying on the pronouncements of this Court in Chung Ka
Bio
v.
Intermediate
Appellate
Court,
20
as
follows:jgc:chanrobles.com.ph
". . . Moreover, failure to file the by-laws does not automatically operate to dissolve a corporation but is
now
considered
only
a
ground
for
such
dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code, provided that
the powers of the corporation would cease if it did not formally organize and commence the transaction of
its business or the continuation of its works within two years from date of its incorporation. Section 20,
which has been reproduced with some modifications in Section 46 of the Corporation Code, expressly
declared that every corporation formed under this Act, must within one month after the filing of the
articles of incorporation with the Securities and Exchange Commission, adopt a code of by-laws.
Whether this provision should be given mandatory or only directory effect remained a controversial
question until it became academic with the adoption of PD 902-A. Under this decree, it is now clear that
the failure to file by-laws within the required period is only a ground for suspension or revocation of the
certificate
of
registration
of
corporations.
Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(l) of
PD 902-A, the SEC is empowered to suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of a corporation on the ground inter alia of failure to file by-laws within the
required period. It is clear from this provision that there must first of all be a hearing to determine the
existence of the ground, and secondly, assuming such finding, the penalty is not necessarily revocation
but may be only suspension of the charter. In fact, under the rules and regulations of the SEC, failure to
file the by-laws on time may be penalized merely with the imposition of an administrative fine without
affecting
the
corporate
existence
of
the
erring
firm.
It should be stressed in this connection that substantial compliance with conditions subsequent will suffice
to perfect corporate personality. Organization and commencement of transaction of corporate business
are but conditions subsequent and not prerequisites for acquisition of corporate personality. The adoption
and filing of by-laws is also a condition subsequent. Under Section 19 of the Corporation Code, a
corporation commences its corporate existence and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues certificate of incorporation under its official
seal. This may be done even before the filing of the by-laws, which under Section 46 of the Corporation
Code, must be adopted within one month after receipt of official notice of the issuance of its certificate of

incorporation."

21

That the corporation involved herein is under the supervision of the HIGC does not alter the result of this
case. The HIGC has taken over the specialized functions of the former Home Financing Corporation by
virtue of Executive Order No. 90 dated December 17, 1986. 22 With respect to homeowners associations,
the HIGC shall "exercise all the powers, authorities and responsibilities that are vested on the Securities
and Exchange Commission . . ., the provision of Act 1459, as amended by P.D. 902-A, to the contrary
notwithstanding."
23
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned Decision
of the Court of Appeals AFFIRMED. This Decision is immediately executory. Costs against
petitioner.chanroblesvirtuallawlibrary:red
SO
Regalado, Puno and Mendoza, JJ., concur.

ORDERED.

G.R. No. 117604 March 26, 1997

CHINA BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.

KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner China
Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August 1994
nullifying the Securities and Exchange Commission's order and resolution dated 4 June 1993 and 7
December 1993, respectively, for lack of jurisdiction. Similarly impugned is the Court of Appeals'
resolution dated 4 September 1994 which denied petitioner's motion for reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private respondent
Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner
1
China Banking Corporation (CBC, for brevity).
On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge agreement be
2
recorded in its books.
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in
3
petitioner's favor was duly noted in its corporate books.
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was
4
secured by the aforestated pledge agreement still existing between Calapatia and petitioner.
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for extrajudicial
foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public
5
auction sale of the pledged stock.
On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings and
requested that the pledged stock be transferred to its (petitioner's) name and the same be recorded in the
corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to accede to
6
petitioner's request in view of Calapatia's unsettled accounts with the club.
Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and petitioner
emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, petitioner was issued
7
the corresponding certificate of sale.
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in
8
the amount of P18,783.24. Said notice was followed by a demand letter dated 12 December 1985 for
9
10
the same amount and another notice dated 22 November 1986 for P23,483.24.
On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction
sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein
was Calapatia's own share of stock (Stock Certificate No. 1219).

Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his
11
membership due to the sale of his share of stock in the 10 December 1986 auction.
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate No.
1219 by virtue of being the highest bidder in the 17 September 1985 auction and requested that a new
12
certificate of stock be issued in its name.
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public
13
auction held on 10 December 1986 for P25,000.00.
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed
a case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and
14
for the issuance of a new stock certificate in its name.
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over
the subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990 denied
petitioner's motion for reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission (SEC)
for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate
issued pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages,
attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating
in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer
the share in the name of the petitioner in the books of (VGCCI) until liquidation of
15
16
delinquency." Consequently, the case was dismissed.
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration.

17

Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing
the decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right over the
pledged share and because of pledgor's failure to pay the principal debt upon maturity,
appellant-petitioner can proceed with the foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992
are hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on
December 10, 1986 is declared NULL and VOID. Finally, appellee-respondent Club is
ordered to issue another membership certificate in the name of appellant-petitioner bank.
SO ORDERED.

18

VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its
19
resolution dated 7 December 1993.
The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994,
the Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its
hearing officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed
petitioner's original complaint. The Court of Appeals declared that the controversy between CBC and
VGCCI is not intra-corporate. It ruled as follows:

In order that the respondent Commission can take cognizance of a case, the controversy
must pertain to any of the following relationships: (a) between the corporation,
partnership or association and the public; (b) between the corporation, partnership or
association and its stockholders, partners, members, or officers; (c) between the
corporation, partnership or association and the state in so far as its franchise, permit or
license to operate is concerned, and (d) among the stockholders, partners or associates
themselves (Union Glass and Container Corporation vs. SEC, November 28, 1983, 126
SCRA 31). The establishment of any of the relationship mentioned will not necessarily
always confer jurisdiction over the dispute on the Securities and Exchange Commission
to the exclusion of the regular courts. The statement made in Philex Mining
Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions or distinctions is
not that absolute. The better policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the parties but also the nature
of the question that is the subject of their controversy (Viray vs. Court of Appeals,
November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank which involves
ownership of the stock that used to belong to Calapatia, Jr. is not within the competence
of respondent Commission to decide. It is not any of those mentioned in the aforecited
case.
WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of
respondent Securities and Exchange Commission (Annexes Y and BB, petition) and of its
hearing officer dated January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are
all nullified and set aside for lack of jurisdiction over the subject matter of the case.
Accordingly, the complaint of respondent China Banking Corporation (Annex Q, petition)
is DISMISSED. No pronouncement as to costs in this instance.
SO ORDERED.

20

Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution
21
dated 5 October 1994.
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division)
GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND
ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE
COMMISSION EN BANC, AND WHEN IT DISMISSED THE COMPLAINT OF
PETITIONER AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OF
JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE
COMMISSIONEN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT
EVIDENCE SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF
MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.

The petition is granted.

The basic issue we must first hurdle is which body has jurisdiction over the controversy, the regular courts
or the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent powers:
Sec. 3. 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, and in
the exercise of its authority, it shall have the power to enlist the aid and support of and to
deputize any and all enforcement agencies of the government, civil or military as well as
any private institution, corporation, firm, association or person.
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest of
the public and/or of the stockholders, partners, members of associations
or organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between any
or all of them and the corporation, partnership or association of which
they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the State
insofar as it concerns their individual franchise or right to exist as such
entity;
c) Controversies in the election or appointment of directors, trustees,
officers, or managers of such corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared
in the state of suspension of payments in cases where the corporation,
partnership or association possesses property to cover all of its debts but
foresees the impossibility of meeting them when they respectively fall
due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities, but is under the Management
Committee created pursuant to this Decree.
The aforecited law was expounded upon in Viray v. CA
23
24
Construction Co., Inc.v. Movilla and Bernardo v. CA, thus:

22

and in the recent cases of Mainland

. . . .The better policy in determining which body has jurisdiction over a case would be to
consider not only the status or relationship of the parties but also the nature of the
question that is the subject of their controversy.

Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we have to
determine therefore whether or not petitioner is a stockholder of VGCCI and whether or not the nature of
the controversy between petitioner and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share or membership certificate
at public auction by petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred
ownership of the same to the latter and thus entitled petitioner to have the said share registered in its
name as a member of VGCCI. It is readily observed that VGCCI did not assail the transfer directly and
has in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement executed by
the original owner, Calapatia, in favor of petitioner and has even noted said agreement in its corporate
25
books. In addition, Calapatia, the original owner of the subject share, has not contested the said
transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and,
therefore, the conflict that arose between petitioner and VGCCI aptly exemplies an intra-corporate
controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between petitioner and private
respondent corporation. VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art
VIII of its by-laws which provides that "after a member shall have been posted as delinquent, the Board
26
may order his/her/its share sold to satisfy the claims of the Club. . ." It is pursuant to this provision that
VGCCI also sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its
argument by asserting that its corporate by-laws should prevail. The bone of contention, thus, is the
proper interpretation and application of VGCCI's aforequoted by-laws, a subject which irrefutably calls for
the special competence of the SEC.
27

We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz :
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in
administrative commissions and boards the power to resolve specialized disputes in the
field of labor (as in corporations, public transportation and public utilities) ruled that
Congress in requiring the Industrial Court's intervention in the resolution of labormanagement controversies likely to cause strikes or lockouts meant such jurisdiction to
be exclusive, although it did not so expressly state in the law. The Court held that under
the "sense-making and expeditious doctrine of primary jurisdiction . . . the courts cannot
or will not determine a controversy involving a question which is within the jurisdiction of
an administrative tribunal, where the question demands the exercise of sound
administrative discretion requiring the special knowledge, experience, and services of the
administrative tribunal to determine technical and intricate matters of fact, and a
uniformity of ruling is essential to comply with the purposes of the regulatory statute
administered.
In this era of clogged court dockets, the need for specialized administrative boards or
commissions with the special knowledge, experience and capability to hear and
determine promptly disputes on technical matters or essentially factual matters, subject to
judicial review in case of grave abuse of discretion, has become well nigh indispensable.
Thus, in 1984, the Court noted that "between the power lodged in an administrative body
and a court, the unmistakable trend has been to refer it to the former. 'Increasingly, this
Court has been committed to the view that unless the law speaks clearly and
unequivocably, the choice should fall on [an administrative agency.]'" The Court in the
earlier case of Ebon v. De Guzman, noted that the lawmaking authority, in restoring to
the labor arbiters and the NLRC their jurisdiction to award all kinds of damages in labor
cases, as against the previous P.D. amendment splitting their jurisdiction with the regular
courts, "evidently, . . . had second thoughts about depriving the Labor Arbiters and the
NLRC of the jurisdiction to award damages in labor cases because that setup would

mean duplicity of suits, splitting the cause of action and possible conflicting findings and
conclusions by two tribunals on one and the same claim."
In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does
the meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable
provisions of the Corporation Code in order to determine the validity of VGCCI's claims. The SEC,
therefore, took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint it
filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between
itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals,

28

this Court, through Mr. Justice Isagani A. Cruz, declared that:

It follows that as a rule the filing of a complaint with one court which has no jurisdiction
over it does not prevent the plaintiff from filing the same complaint later with the
competent court. The plaintiff is not estopped from doing so simply because it made a
mistake before in the choice of the proper forum. . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in its
motion to dismiss) that the case between itself and petitioner is intra-corporate and insisted that it is the
SEC and not the regular courts which has jurisdiction. This is precisely the reason why the said court
dismissed petitioner's complaint and led to petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of Appeals,
this Court likewise deems it procedurally sound to proceed and rule on its merits in the same
proceedings.
It must be underscored that petitioner did not confine the instant petition for review on certiorari on the
issue of jurisdiction. In its assignment of errors, petitioner specifically raised questions on the merits of the
case. In turn, in its responsive pleadings, private respondent duly answered and countered all the issues
raised by petitioner.
Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Y. Gabriel29
30
Almoradie v. Court of Appeals, citing Escudero v. Dulay and The Roman Catholic Archbishop of
31
Manila v. Court of Appeals.
In the interest of the public and for the expeditious administration of justice the issue on
infringement shall be resolved by the court considering that this case has dragged on for
years and has gone from one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in
a single proceeding leaving no root or branch to bear the seeds of future litigation. No
useful purpose will be served if a case or the determination of an issue in a case is
remanded to the trial court only to have its decision raised again to the Court of Appeals
and from there to the Supreme Court.
We have laid down the rule that the remand of the case or of an issue to the lower court
for further reception of evidence is not necessary where the Court is in position to resolve
the dispute based on the records before it and particularly where the ends of justice
would not be subserved by the remand thereof. Moreover, the Supreme Court is clothed

with ample authority to review matters, even those not raised on appeal if it finds that
their consideration is necessary in arriving at a just disposition of the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et al.,
Justice Ricardo J. Francisco, ruled in this wise:

32

this Court, through Mr.

At the outset, the Court's attention is drawn to the fact that since the filing of this suit
before the trial court, none of the substantial issues have been resolved. To avoid and
gloss over the issues raised by the parties, as what the trial court and respondent Court
of Appeals did, would unduly prolong this litigation involving a rather simple case of
foreclosure of mortgage. Undoubtedly, this will run counter to the avowed purpose of the
rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of
every action or proceeding. The Court, therefore, feels that the central issues of the case,
albeit unresolved by the courts below, should now be settled specially as they involved
pure questions of law. Furthermore, the pleadings of the respective parties on file have
amply ventilated their various positions and arguments on the matter necessitating
prompt adjudication.
In the case at bar, since we already have the records of the case (from the proceedings before the SEC)
sufficient to enable us to render a sound judgment and since only questions of law were raised (the
proper jurisdiction for Supreme Court review), we can, therefore, unerringly take cognizance of and rule
on the merits of the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It
contends that the same was null and void for lack of consideration because the pledge agreement was
entered
into
on
21
August
33
1974 but the loan or promissory note which it secured was obtained by Calapatia much later or only on
34
3 August 1983.
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly
stipulated therein that the said pledge will also stand as security for any future advancements (or
renewals thereof) that Calapatia (the pledgor) may procure from petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment when due of all loans, overdrafts,
promissory notes, drafts, bills or exchange, discounts, and all other obligations of every
kind which have heretofore been contracted, or which may hereafter be contracted, by
the PLEDGOR(S) and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE,
including discounts of Chinese drafts, bills of exchange, promissory notes, etc., without
any further endorsement by the PLEDGOR(S) and/or Debtor(s) up to the sum of
TWENTY THOUSAND (P20,000.00) PESOS, together with the accrued interest thereon,
as hereinafter provided, plus the costs, losses, damages and expenses (including
attorney's fees) which PLEDGEE may incur in connection with the collection
35
thereof. (Emphasis ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by
VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 in the amount of
P20,000.00 was but a renewal of the first promissory note covered by the same pledge agreement.

VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to
sell the share in question in accordance with the express provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to note that VGCCI began sending
notices of delinquency to Calapatia after it was informed by petitioner (through its letter dated 14 May
1985) of the foreclosure proceedings initiated against Calapatia's pledged share, although Calapatia has
been delinquent in paying his monthly dues to the club since 1975. Stranger still, petitioner, whom VGCCI
had officially recognized as the pledgee of Calapatia's share, was neither informed nor furnished copies
of these letters of overdue accounts until VGCCI itself sold the pledged share at another public auction.
By doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give petitioner
notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this
wise:
The general rule really is that third persons are not bound by the by-laws of a corporation
since they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception
to this is when third persons have actual or constructive knowledge of the same. In the
case at bar, petitioner had actual knowledge of the by-laws of private respondent when
petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the
share foreclosed on September 17, 1985. This is proven by the fact that prior thereto, i.e.,
on May 14, 1985 petitioner even quoted a portion of private respondent's by-laws which
is material to the issue herein in a letter it wrote to private respondent. Because of this
actual knowledge of such by-laws then the same bound the petitioner as of the time when
petitioner purchased the share. Since the by-laws was already binding upon petitioner
when the latter purchased the share of Calapatia on September 17, 1985 then the
petitioner purchased the said share subject to the right of the private respondent to sell
the said share for reasons of delinquency and the right of private respondent to have a
36
first lien on said shares as these rights are provided for in the by-laws very very clearly.
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.:

37

And moreover, the by-law now in question cannot have any effect on the appellee. He
had no knowledge of such by-law when the shares were assigned to him. He obtained
them in good faith and for a valuable consideration. He was not a privy to the contract
created by said by-law between the shareholder Manuel Gonzales and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first offering
them to the corporation for a period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of the by-law and took part in its
adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of corporate stock, a
purchaser is not affected by any contractual restriction of which he had no notice.
(Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has assented to an
unauthorized by-law has only the effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation

for the protection of the corporation against worthless stockholders, cannot be made
available to defeat the rights of third persons. (Farmers' and Merchants' Bank of Lineville
vs. Wasson, 48 Iowa, 336.) (Emphasis ours.)
In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time
the transaction or agreement between said third party and the shareholder was entered into, in this case,
at the time the pledge agreement was executed. VGCCI could have easily informed petitioner of its bylaws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered in
Calapatia's name. Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice. The
ruling of the SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their
relation to it. In other words, by-laws are the relatively permanent and continuing rules of
action adopted by the corporation for its own government and that of the individuals
composing it and having the direction, management and control of its affairs, in whole or
in part, in the management and control of its affairs and activities. (9 Fletcher 4166, 1982
Ed.)
The purpose of a by-law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although
adopted pursuant to statutory authority, have no status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are not bound by by-laws,
except when they have knowledge of the provisions either actually or constructively. In
the case of Fleisher v.Botica Nolasco, 47 Phil. 584, the Supreme Court held that the bylaw restricting the transfer of shares cannot have any effect on the transferee of the
shares in question as he "had no knowledge of such by-law when the shares were
assigned to him. He obtained them in good faith and for a valuable consideration. He was
not a privy to the contract created by the by-law between the shareholder . . .and the
Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser.
(Emphasis supplied.)
By analogy of the above-cited case, the Commission en banc is of the opinion that said
case is applicable to the present controversy. Appellant-petitioner bank as a third party
can not be bound by appellee-respondent's by-laws. It must be recalled that when
appellee-respondent communicated to appellant-petitioner bank that the pledge
agreement was duly noted in the club's books there was no mention of the shareholderpledgor's unpaid accounts. The transcript of stenographic notes of the June 25, 1991
Hearing reveals that the pledgor became delinquent only in 1975. Thus, appellantpetitioner was in good faith when the pledge agreement was contracted.
The Commission en banc also believes that for the exception to the general accepted
rule that third persons are not bound by by-laws to be applicable and binding upon the
pledgee, knowledge of the provisions of the VGCI By-laws must be acquired at the time
the pledge agreement was contracted. Knowledge of said provisions, either actual or
constructive, at the time of foreclosure will not affect pledgee's right over the pledged
share. Art. 2087 of the Civil Code provides that it is also of the essence of these contracts
that when the principal obligation becomes due, the things in which the pledge or
mortgage consists maybe alienated for the payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission
issued an opinion to the effect that:

According to the weight of authority, the pledgee's right is entitled to full

protection without surrender of the certificate, their cancellation, and the
issuance to him of new ones, and when done, the pledgee will be fully
protected against a subsequent purchaser who would be charged with
constructive notice that the certificate is covered by the pledge. (12-A
Fletcher 502)
The pledgee is entitled to retain possession of the stock until the pledgor
pays or tenders to him the amount due on the debt secured. In other
words, the pledgee has the right to resort to its collateral for the payment
of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of new
certificate to a third person who purchased the same certificate covered
by the pledge, will certainly defeat the right of the pledgee to resort to its
collateral for the payment of the debt. The pledgor or his representative
or registered stockholders has no right to require a return of the pledged
stock until the debt for which it was given as security is paid and
satisfied, regardless of the length of time which have elapsed since debt
was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens in favor either of
the corporation or of third persons, if he has no notice thereof, but not otherwise. He also
takes it free of liens or claims that may subsequently arise in favor of the corporation if it
has notice of the pledge, although no demand for a transfer of the stock to the pledgee
on the corporate books has been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v.
38
Eagle Fruit Co., 75 F2d739)
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of the
Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a
39
good father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H. Lee, is clearly not
applicable:
In applying this provision to the situation before us it must be borne in mind that the
ordinary pawn ticket is a document by virtue of which the property in the thing pledged
passes from hand to hand by mere delivery of the ticket; and the contract of the pledge
is, therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge
acquires domination over the pledge; and it is the holder who must renew the pledge, if it
is to be kept alive.
It is quite obvious from the aforequoted case that a membership share is quite different in
character from a pawn ticket and to reiterate, petitioner was never informed of Calapatia's unpaid
accounts and the restrictive provisions in VGCCI's by-laws.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the
corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be
utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription,
and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any
40
other transaction." In the case at bar, the subscription for the share in question has been fully paid as
41
evidenced by the issuance of Membership Certificate No. 1219. What Calapatia owed the corporation
were merely the monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and
the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.G.R. No. 123793 June 29, 1998

ASSOCIATED BANK, petitioner,

vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.

PANGANIBAN, J.:
In a merger, does the surviving corporation have a right to enforce a contract entered into by the
absorbed company subsequent to the date of the merger agreement, but prior to the issuance of a
certificate of merger by the Securities and Exchange Commission?
The Case
1

This is a petition for review under Rule 45 of the Rules of Court, seeking to set aside the Decision of the
2
Court of Appeals in CA-GR CV No. 26465 promulgated on January 30, 1996, which answered the
above question in the negative. The challenged Decision reversed and set aside the October 17, 1986
3
Decision in Civil Case No. 85-32243, promulgated by the Regional Trial Court of Manila, Branch 48,
4
which disposed of the controversy in favor of herein petitioner as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff Associated Bank. The
defendant Lorenzo Sarmiento, Jr. is ordered to pay plaintiff:
1. The amount of P4,689,413.63 with interest thereon at 14% per annum until fully paid;
2. The amount of P200,000.00 as and for attorney's fees; and
3. The costs of suit.
On the other hand, the Court of Appeals resolved the case in this wise:

WHEREFORE, premises considered, the decision appealed from, dated October 17,
1986 is REVERSED and SET ASIDE and another judgment rendered DISMISSING
plaintiff-appellee's complaint, docketed as Civil Case No. 85-32243. There is no
pronouncement as to costs.
The Facts
The undisputed factual antecedents, as narrated by the trial court and adopted by public respondent, are
6
as follows:
. . . [O]n or about September 16, 1975 Associated Banking Corporation and Citizens
Bank and Trust Company merged to form just one banking corporation known as
Associated Citizens Bank, the surviving bank. On or about March 10, 1981, the
Associated Citizens Bank changed its corporate name to Associated Bank by virtue of
the Amended Articles of Incorporation. On September 7, 1977, the defendant executed in
favor of Associated Bank a promissory note whereby the former undertook to pay the
latter the sum of P2,500,000.00 payable on or before March 6, 1978. As per said
promissory note, the defendant agreed to pay interest at 14% per annum, 3% per annum
in the form of liquidated damages, compounded interests, and attorney's fees, in case of
litigation equivalent to 10% of the amount due. The defendant, to date, still owes plaintiff
bank the amount of P2,250,000.00 exclusive of interest and other charges. Despite
repeated demands the defendant failed to pay the amount due.

xxx xxx xxx

. . . [T]he defendant denied all the pertinent allegations in the complaint and alleged as
affirmative and[/]or special defenses that the complaint states no valid cause of action;
that the plaintiff is not the proper party in interest because the promissory note was
executed in favor of Citizens Bank and Trust Company; that the promissory note does not
accurately reflect the true intention and agreement of the parties; that terms and
conditions of the promissory note are onerous and must be construed against the
creditor-payee bank; that several partial payments made in the promissory note are not
properly applied; that the present action is premature; that as compulsory counterclaim
the defendant prays for attorney's fees, moral damages and expenses of litigation.
On May 22, 1986, the defendant was declared as if in default for failure to appear at the
Pre-Trial Conference despite due notice.
A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22, 1986
was filed by defendant's counsel which was denied by the Court in [an] order dated
September 16, 1986 and the plaintiff was allowed to present its evidence before the
Court ex-parte on October 16, 1986.
At the hearing before the Court ex-parte, Esteban C. Ocampo testified that . . . he is an
accountant of the Loans and Discount Department of the plaintiff bank; that as such, he
supervises the accounting section of the bank, he counterchecks all the transactions that
transpired during the day and is responsible for all the accounts and records and other
things that may[ ]be assigned to the Loans and Discount Department; that he knows the
[D]efendant Lorenzo Sarmiento, Jr. because he has an outstanding loan with them as per
their records; that Lorenzo Sarmiento, Jr. executed a promissory note No. TL-2649-77
dated September 7, 1977 in the amount of P2,500,000.00 (Exhibit A); that Associated
Banking Corporation and the Citizens Bank and Trust Company merged to form one
banking corporation known as the Associated Citizens Bank and is now known as
Associated Bank by virtue of its Amended Articles of Incorporation; that there were partial
payments made but not full; that the defendant has not paid his obligation as evidenced
by the latest statement of account (Exh. B); that as per statement of account the
outstanding obligation of the defendant is P5,689,413.63 less P1,000,000.00 or
P4,689,413.63 (Exh. B, B-1); that a demand letter dated June 6, 1985 was sent by the
bank thru its counsel (Exh. C) which was received by the defendant on November 12,
1985 (Exh. C, C-1, C-2, C-3); that the defendant paid only P1,000,000.00 which is
reflected in the Exhibit C.
Based on the evidence presented by petitioner, the trial court ordered Respondent Sarmiento to pay the
bank his remaining balance plus interests and attorney's fees. In his appeal, Sarmiento assigned to the
7
trial court several errors, namely:
I The [trial court] erred in denying appellant's motion to dismiss appellee bank's complaint
on the ground of lack of cause of action and for being barred by prescription and laches.
II The same lower court erred in admitting plaintiff-appellee bank's amended complaint
while defendant-appellant's motion to dismiss appelle bank's original complaint and
using/availing [itself of] the new additional allegations as bases in denial of said
appellant's motion and in the interpretation and application of the agreement of merger
and Section 80 of BP Blg. 68, Corporation Code of the Philippines.
III The [trial court] erred and gravely abuse[d] its discretion in rendering the two as if in
default orders dated May 22, 1986 and September 16, 1986 and in not reconsidering the

same upon technical grounds which in effect subvert the best primordial interest of
substantial justice and equity.
IV The court a quo erred in issuing the orders dated May 22, 1986 and September 16,
1986 declaring appellant as if in default due to non-appearance of appellant's attending
counsel who had resigned from the law firm and while the parties [were] negotiating for
settlement of the case and after a one million peso payment had in fact been paid to
appellee bank for appellant's account at the start of such negotiation on February 18,
1986 as act of earnest desire to settle the obligation in good faith by the interested
parties.
V The lower court erred in according credence to appellee bank's Exhibit B statement of
account which had been merely requested by its counsel during the trial and bearing date
of September 30, 1986.
VI The lower court erred in accepting and giving credence to appellee bank's 27-year-old
witness Esteban C. Ocampo as of the date he testified on October 16, 1986, and
therefore, he was merely an eighteen-year-old minor when appellant supposedly incurred
the foisted obligation under the subject PN No. TL-2649-77 dated September 7, 1977,
Exhibit A of appellee bank.
VII The [trial court] erred in adopting appellee bank's Exhibit B dated September 30, 1986
in its decision given in open court on October 17, 1986 which exacted eighteen percent
(18%) per annum on the foisted principal amount of P2.5 million when the subject PN,
Exhibit A, stipulated only fourteen percent (14%) per annum and which was actually
prayed for in appellee bank's original and amended complaints.
VIII The appealed decision of the lower court erred in not considering at all appellant's
affirmative defenses that (1) the subject PN No. TL-2649-77 for P2.5 million dated
September 7, 1977, is merely an accommodation pour autrui of any actual consideration
to appellant himself and (2) the subject PN is a contract of adhesion, hence, [it] needs [to]
be strictly construed against appellee bank assuming for granted that it has the right to
enforce and seek collection thereof.
IX The lower court should have at least allowed appellant the opportunity to present
countervailing evidence considering the huge amounts claimed by appellee bank
(principal sum of P2.5 million which including accrued interests, penalties and cost of
litigation totaled P4,689,413.63) and appellant's affirmative defenses pursuant to
substantial justice and equity.
The appellate court, however, found no need to tackle all the assigned errors and limited itself to the
question of "whether [herein petitioner had] established or proven a cause of action against [herein
private respondent]." Accordingly, Respondent Court held that the Associated Bank had no cause of
action against Lorenzo Sarmiento Jr., since said bank was not privy to the promissory note executed by
Sarmiento in favor of Citizens Bank and Trust Company (CBTC). The court ruled that the earlier merger
between the two banks could not have vested Associated Bank with any interest arising from the
promissory note executed in favor of CBTC after such merger.
Thus, as earlier stated, Respondent Court set aside the decision of the trial court and dismissed the
8
complaint. Petitioner now comes to us for a reversal of this ruling.
Issues
In its petition, petitioner cites the following "reasons":

I The Court of Appeals erred in reversing the decision of the trial court and in declaring
that petitioner has no cause of action against respondent over the promissory note.
II The Court of Appeals also erred in declaring that, since the promissory note was
executed in favor of Citizens Bank and Trust Company two years after the merger
between Associated Banking Corporation and Citizens Bank and Trust Company,
respondent is not liable to petitioner because there is no privity of contract between
respondent and Associated Bank.
III The Court of Appeals erred when it ruled that petitioner, despite the merger between
petitioner and Citizens Bank and Trust Company, is not a real party in interest insofar as
the promissory note executed in favor of the merger.
In a nutshell, the main issue is whether Associated Bank, the surviving corporation, may enforce the
promissory note made by private respondent in favor of CBTC, the absorbed company, after the merger
agreement had been signed.
The Court's Ruling
The petition is impressed with merit.
The
Associated
All Rights of CBTC

Main
Bank

Issue:
Assumed

Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives
and continues the combined business, while the rest are dissolved and all their rights, properties and
10
liabilities are acquired by the surviving corporation. Although there is a dissolution of the absorbed
corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving
11
corporation automatically acquires all their rights, privileges and powers, as well as their liabilities.
The merger, however, does not become effective upon the mere agreement of the constituent
12
corporations. The procedure to be followed is prescribed under the Corporation Code. Section 79 of
said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of
merger which, in turn, must have been duly approved by a majority of the respective stockholders of the
constituent corporations. The same provision further states that the merger shall be effective only upon
the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for
determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges,
properties as well as liabilities pass on to the surviving corporation.
13

Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of Merger, which
Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into,
provided that its effectivity "shall, for all intents and purposes, be the date when the necessary papers to
14
carry out this [m]erger shall have been approved by the Securities and Exchange Commission." As to
the transfer of the properties of CBTC to ABC, the agreement provides:
10. Upon effective date of the Merger, all rights, privileges, powers, immunities,
franchises, assets and property of [CBTC], whether real, personal or mixed, and including
[CBTC's] goodwill and tradename, and all debts due to [CBTC] on whatever act, and all
other things in action belonging to [CBTC] as of the effective date of the [m]erger shall be
vested in [ABC], the SURVIVING BANK, without need of further act or deed, unless by
express requirements of law or of a government agency, any separate or specific deed of
conveyance to legally effect the transfer or assignment of any kind of property [or] asset
is required, in which case such document or deed shall be executed accordingly; and all

property, rights, privileges, powers, immunities, franchises and all appointments,

designations and nominations, and all other rights and interests of [CBTC] as trustee,
executor, administrator, registrar of stocks and bonds, guardian of estates, assignee,
receiver, trustee of estates of persons mentally ill and in every other fiduciary capacity,
and all and every other interest of [CBTC] shall thereafter be effectually the property of
[ABC] as they were of [CBTC], and title to any real estate, whether by deed or otherwise,
vested in [CBTC] shall not revert or be in any way impaired by reason
thereof; provided, however, that all rights of creditors and all liens upon any property of
[CBTC] shall be preserved and unimpaired and all debts, liabilities, obligations, duties
and undertakings of [CBTC], whether contractual or otherwise, expressed or implied,
actual or contingent, shall henceforth attach to [ABC] which shall be responsible therefor
and may be enforced against [ABC] to the same extent as if the same debts liabilities,
obligations, duties and undertakings have been originally incurred or contracted by
[ABC], subject, however, to all rights, privileges, defenses, set-offs and counterclaims
15
which [CBTC] has or might have and which shall pertain to [ABC].
The records do not show when the SEC approved the merger. Private respondent's theory is that it took
effect on the date of the execution of the agreement itself, which was September 16, 1975. Private
respondent contends that, since he issued the promissory note to CBTC on September 7, 1977 two
years after the merger agreement had been executed CBTC could not have conveyed or transferred to
petitioner its interest in the said note, which was not yet in existence at the time of the merger. Therefore,
petitioner, the surviving bank, has no right to enforce the promissory note on private respondent; such
right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that
petitioner no longer has any interest in the promissory note. A closer perusal of the merger agreement
leads to a different conclusion. The provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents,
or other papers of whatever kind or nature and wherever found shall be deemed for all
intents and purposes, references to [ABC], the SURVIVING BANK, as if such references
6
were direct references to [ABC]. . . . (Emphasis supplied)
Thus, the fact that the promissory note was executed after the effectivity date of the merger does not
militate against petitioner. The agreement itself clearly provides that all contracts irrespective of the
date of execution entered into in the name of CBTC shall be understood as pertaining to the surviving
bank, herein petitioner. Since, in contrast to the earlier aforequoted provision, the latter clause no longer
specifically refers only to contracts existing at the time of the merger, no distinction should be made. The
clause must have been deliberately included in the agreement in order to protect the interests of the
combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at
evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the
note shall be construed, under the very provisions of the merger agreement, as a reference to petitioner
bank, "as if such reference [was a] direct reference to" the latter "for all intents and purposes."
No other construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity,
the
provision
must
be
given
its
literal
17
18
meaning and applied without a convoluted interpretation. Verba lelegis non est recedendum.
In light of the foregoing, the Court holds that petitioner has a valid cause of action against private
respondent. Clearly, the failure of private respondent to honor his obligation under the promissory note
constitutes a violation of petitioner's right to collect the proceeds of the loan it extended to the former.

Secondary
Prescription,
Pour Autrui, Lack of Consideration
No
or Laches

Laches,

Issues:
Contract

Prescription

Private respondent's claim that the action has prescribed, pursuant to Article 1149 of the Civil Code, is
legally untenable. Petitioner's suit for collection of a sum of money was based on a written contract and
19
prescribes after ten years from the time its right of action arose. Sarmiento's obligation under the
promissory note became due and demandable on March 6, 1978. Petitioner's complaint was instituted on
August 22, 1985, before the lapse of the ten-year prescriptive period. Definitely, petitioner still had every
right to commence suit against the payor/obligor, the private respondent herein.
Neither is petitioner's action barred by laches. The principle of laches is a creation of equity, which is
applied not to penalize neglect or failure to assert a right within a reasonable time, but rather to avoid
20
21
recognizing a right when to do so would result in a clearly inequitable situation or in an injustice. To
require private respondent to pay the remaining balance of his loan is certainly not inequitable or unjust.
What would be manifestly unjust and inequitable is his contention that CBTC is the proper party to
proceed against him despite the fact, which he himself asserts, that CBTC's corporate personality has
been dissolved by virtue of its merger with petitioner. To hold that no payee/obligee exists and to let
private respondent enjoy the fruits of his loan without liability is surely most unfair and unconscionable,
amounting to unjust enrichment at the expense of petitioner. Besides, this Court has held that the doctrine
22
of laches is inapplicable where the claim was filed within the prescriptive period set forth under the law.
No
Pour Autrui

Contract

Private respondent, while not denying that he executed the promissory note in the amount of P2,500,000
in favor of CBTC, offers the alternative defense that said note was a contract pour autrui.
A stipulation pour autrui is one in favor of a third person who may demand its fulfillment, provided he
communicated his acceptance to the obligor before its revocation. An incidental benefit or interest, which
another person gains, is not sufficient. The contracting parties must have clearly and deliberately
23
conferred a favor upon a third person.
24

Florentino vs. Encarnacion Sr. enumerates the requisites for such contract: (1) the stipulation in favor of
a third person must be a part of the contract, and not the contract itself; (2) the favorable stipulation
should not be conditioned or compensated by any kind of obligation; and (3) neither of the contracting
parties bears the legal representation or authorization of the third party. The "fairest test" in determining
whether the third person's interest in a contract is a stipulation pour autrui or merely an incidental interest
25
is to examine the intention of the parties as disclosed by their contract.
We carefully and thoroughly perused the promissory note, but found no stipulation at all that would even
resemble a provision in consideration of a third person. The instrument itself does not disclose the
purpose of the loan contract. It merely lays down the terms of payment and the penalties incurred for
failure to pay upon maturity. It is patently devoid of any indication that a benefit or interest was thereby
created in favor of a person other than the contracting parties. In fact, in no part of the instrument is there
any mention of a third party at all. Except for his barefaced statement, no evidence was proffered by
private respondent to support his argument. Accordingly, his contention cannot be sustained. At any rate,
if indeed the loan actually benefited a third person who undertook to repay the bank, private respondent
26
could have availed himself of the legal remedy of a third-party complaint. That he made no effort to
implead such third person proves the hollowness of his arguments.

Consideration
Private respondent also claims that he received no consideration for the promissory note and, in support
thereof, cites petitioner's failure to submit any proof of his loan application and of his actual receipt of the
amount loaned. These arguments deserve no merit. Res ipsa loquitur. The instrument, bearing the
signature of private respondent, speaks for itself. Respondent Sarmiento has not questioned the
genuineness and due execution thereof. No further proof is necessary to show that he undertook to pay
P2,500,000, plus interest, to petitioner bank on or before March 6, 1978. This he failed to do, as testified
to by petitioner's accountant. The latter presented before the trial court private respondent's statement of
27
account as of September 30, 1986, showing an outstanding balance of P4,689,413.63 after deducting
P1,000,000.00 paid seven months earlier. Furthermore, such partial payment is equivalent to an express
acknowledgment of his obligation. Private respondent can no longer backtrack and deny his liability to
28
petitioner bank. "A person cannot accept and reject the same instrument."
WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the Decision of RTCManila, Branch 48, in Civil Case No. 26465 is hereby REINSTATED.
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

FIRST DIVISION
[G.R. No. 99398. January 26, 2001.]
CHESTER BABST, Petitioner, v. COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS,
ELIZALDE STEEL CONSOLIDATED, INC., and PACIFIC MULTI-COMMERCIAL
CORPORATION,Respondents.
[G.R. No. 104625. January 26, 2001.]
ELIZALDE STEEL CONSOLIDATED, INC., Petitioner, v. COURT OF APPEALS, BANK OF THE
PHILIPPINE ISLANDS, PACIFIC MULTI-COMMERCIAL CORPORATION and CHESTER
BABST,Respondents.
DECISION

YNARES-SANTIAGO, J.:

These consolidated petitions seek the review of the Decision dated April 29, 1991 of the Court of Appeals
in CA-G.R. CV No. 17282 1 entitled, "Bank of the Philippine Islands, Plaintiff-Appellee versus Elizalde
Steel Consolidated, Inc., Pacific Multi-Commercial Corporation, and Chester G. Babst, DefendantsAppellants." chanrob1es virtua1 1aw 1ibrary
The complaint was commenced principally to enforce payment of a promissory note and three domestic
letters of credit which Elizalde Steel Consolidated, Inc. (ELISCON) executed and opened with the
Commercial Bank and Trust Company (CBTC).
On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P8,015,900.84, with interest at
the rate of 14% per annum, evidenced by a promissory note. 2 ELISCON defaulted in its payments,
leaving an outstanding indebtedness in the amount of P2,795,240.67 as of October 31, 1982. 3
The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of
Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board
of Directors of MULTI adopted on August 31, 1977 which reads:chanrob1es virtual 1aw library
WHEREAS, at least 90% of the Companys gross sales is generated by the sale of tin-plates
manufactured by Elizalde Steel Consolidated, Inc.;
WHEREAS, it is to the best interests of the Company to continue handling said tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the Company in obtaining
credit facilities to enable it to maintain the present level of its tin-plate manufacturing output and the
Company is willing to extend said requested assistance;
NOW, THEREFORE, for and in consideration of the foregoing premises
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL MANAGER,
ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and authorize ELIZALDE STEEL
CONSOLIDATED, INC. to avail and make use of the Credit Line of PACIFIC MULTI-COMMERCIAL
CORPORATION with the COMMERCIAL BANK & TRUST COMPANY OF THE PHILIPPINES, Makati,
Metro Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it does hereby
guarantee, solidarily, the payment of the corresponding Letters of Credit upon maturity of the same;

RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank & Trust
Company of the Philippines, Makati, Metro Manila, for their information. 4
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a
Continuing Suretyship, 5 whereby they bound themselves jointly and severally liable to pay any existing
indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each.
Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation three (3)
domestic letters of credit in the amounts of P1,946,805.73, 6 P1,702,869.32 7 and P200,307.72, 8
respectively, which ELISCON used to purchase tin black plates from National Steel Corporation.
ELISCON defaulted in its obligation to pay the amounts of the letters of credit, leaving an outstanding
account, as of October 31, 1982, in the total amount of P3,963,372.08. 9
On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger,
wherein BPI, as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC.
10
Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development
Bank of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey to DBP by
way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness in
the amount of P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of
Cession of Property in Payment of Debt. 11
In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets.
In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI.
Thereafter, DBP proposed formulas for the settlement of all of ELISCONs obligations to its creditors, but
BPI expressly rejected the formula submitted to it for not being acceptable. 12
Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional
Trial Court of Makati, Branch 147, a complaint 13 for sum of money against ELISCON, MULTI and Babst,
which was docketed as Civil Case No. 49226.
ELISCON, in its Answer, 14 argued that the complaint was premature since DBP had made serious
efforts to settle its obligations with BPI.chanrob1es virtua1 1aw 1ibrary
Babst also filed his Answer alleging that he signed the Continuing Suretyship on the understanding that it
covers only obligations which MULTI incurred solely for its benefit and not for any third party liability, and
he had no knowledge or information of any transaction between MULTI and ELISCON. 15
MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and averred that the
guaranty under its board resolution did not cover purchases made by ELISCON in the form of trust
receipts. It set up a cross-claim against ELISCON alleging that the latter should be held liable for any
judgment which the court may render against it in favor of BPI. 16
On February 20, 1987, the trial court rendered its Decision, 17 the dispositive portion of which
reads:chanrob1es virtual 1aw library
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor of the plaintiff and
against all the defendants:chanrob1es virtual 1aw library
1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67 due on the promissory
note, Annex "A" of the Complaint as of 31 October 1982 and the amount of P3,963,372.08 due on the
three (3) domestic letters of credit, also as of 31 October 1982;

2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the principal of said
promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982 until
full payment thereof, and on the principal of the three (3) domestic letters of credit of P3,564,349.25
interests and related charges at the rates provided in said letters of credit, from and after 31 October
1982 until full payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and related charges but
unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering defendant ELISCON to pay attorneys fees equivalent to 10% of the total amount due under
the preceding paragraphs;
5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly
and severally with defendant ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic
letters of credit as of 31 October 1982 with interests and related charges on the principal amount of
P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982 until fully paid, but to
the extent of not more than P8,000,000.00 in the case of defendant Chester Babst;
6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly
and severally plaintiff interests at the legal rate on all interests and related charges already accrued but
unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full
payment thereof;chanrob1es virtua1 1aw 1ibrary
7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly
and severally, attorneys fees of not less than 10% of the total amount due under paragraphs 5 and 6
hereof. With costs.
SO ORDERED.
In due time, ELISCON, MULTI and Babst filed their respective notices of appeal. 18
On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:chanrob1es virtual
1aw library
WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the underlining to show the
principal changes from the decision of the lower court) thus:chanrob1es virtual 1aw library
1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2,731,005.60 due on the
promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of P3,963,372.08
due on the three (3) domestic letters of credit, also as of 31 October 1982;
2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the principal of
said promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982
until full payment thereof, and on the principal of the three (3) domestic letters of credit of P3,564,349.25
interests and related charges at the rates provided in said letters of credit, from and after 31 October
1982 until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests and related
charges but unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G. Babst to pay
appellee BPI, jointly and severally with appellant ELISCON, the total sum of P3,963,372.08 due on the
three (3) domestic letters of credit as of 31 October 1982 with interest and related charges on the
principal amount of P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982 until
fully paid, but to the extent of not more than P8,000,000.00 in the case of defendant Chester Babst;

5) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly
and severally, appellee BPI interests at the legal rate on all interests and related charges already accrued
but unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full
payment thereof and the plaintiffs lawyers fees in the nominal amount of P200,000.00;
6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial Corporation and
Chester Babst whatever amount they shall have paid in said Eliscons behalf particularly referring to three
(3) letters of credit as of 31 October 1982 and other related charges.cralaw : red
No costs.
SO ORDERED. 19
ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was, however,
denied in a Resolution dated March 9, 1992. 20 Subsequently, ELISCON filed a petition for review
on certiorari, docketed as G.R. No. 104625, on the following grounds:chanrob1es virtual 1aw library
A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER FROM PETITIONER
ELISCON THE LATTERS OBLIGATION WITH COMMERCIAL BANK AND TRUST COMPANY (CBTC)
B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND BPI THERE
BEING A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE SUBSTITUTION BY DBP AS
DEBTOR IN LIEU OF THE ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING ELISCON FROM
ITS OBLIGATION TO BPI.
C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT LAWFULLY
RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED TO PAY TO BPI AS
SURETIES OF ELISCONS OBLIGATION TO BPI; THEIR CAUSE OF ACTION MUST BE DIRECTED
AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF ELISCON.
D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF GOVERNMENT
WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON FROM FURTHER LIABILITIES TO
RESPONDENT BPI.
E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT BPI THE
AMOUNTS STATED IN THE DISPOSITIVE PORTION OF RESPONDENT COURT OF APPEALS
DECISION. 21
BPI filed its Comment 22 raising the following arguments, to wit:chanrob1es virtual 1aw library
1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst the past due
obligations with CBTC prior to the merger of BPI with CBTC.
2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid novation has been
effected.
3. Express consent of creditor to substitution should be recorded in the books.
4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily liable to BPI for the unpaid
letters of credit of ELISCON.
5. The question of the liability of ELISCON to BPI has been clearly established.
6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by ELISCON, they may
recover from the latter what they may have paid for on account of that guaranty.chanrob1es virtua1 1aw
1ibrary

Chester Babst filed a Comment with Manifestation, 23 wherein he contends that the suretyship
agreement he executed with Antonio Roxas Chua was in favor of MULTI; and that there is nothing therein
which authorizes MULTI, in turn, to guarantee the obligations of ELISCON.
In its Comment, 24 MULTI maintained that inasmuch as BPI had full knowledge of the purpose of the
meeting in June 1981, wherein the takeover by DBP of ELISCON was announced, it was incumbent upon
the said bank to formally communicate its objection to the assumption of ELISCONs liabilities by DBP in
answer to the call for the meeting. Moreover, there was no showing that the availment by ELISCON of
MULTIs credit facilities with CBTC, which was supposedly guaranteed by Antonio Roxas Chua, was
indeed authorized by the latter pursuant to the resolution of the Board of Directors of MULTI.
In compliance with this Courts Resolution dated March 17, 1993, 25 the parties submitted their
respective memoranda.
Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No. 99398, Chester
Babst alleged that the Court of Appeals acted without jurisdiction and/or with grave abuse of discretion
when:chanrob1es virtual 1aw library
1. IT AFFIRMED THE LOWER COURTS HOLDING THAT THERE WAS NO NOVATION INASMUCH AS
RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND
APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE DEVELOPMENT BANK OF THE
PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE STEEL CONSOLIDATED, INC. (OR ELISCON)
IN THE LATTERS OBLIGATION TO BPI.
2. IT CONFIRMED THE LOWER COURTS CONCLUSION THAT THERE WAS NO IMPLIED CONSENT
OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE SUBSTITUTION BY
DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL DEBTOR ELIZALDE STEEL
CONSOLIDATED, INC.
3. IT AFFIRMED THE LOWER COURTS FINDING OF LACK OF MERIT OF THE CONTENTION OF
ELISCON THAT THE FAILURE OF THE OFFICER OF BPI, WHO WAS PRESENT DURING THE
MEETING OF ELISCONS CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION TO THE
ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF ELISCON AND ASSUMPTION OF ITS
LIABILITIES, CONSTITUTED AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF THE
OBLIGATIONS OF ELISCON TO BPI.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE ELISCON WAS
AN ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT EXCULPATING ELISCON
FROM ANY LIABILITY TO BPI.
5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED ELISCON,
MULTI AND BABST OF ANY LIABILITY TO BPI.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH ELISCON WITH
RESPECT TO THE OBLIGATION INVOLVED HERE.chanrob1es virtua1 1aw 1ibrary
7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING THE LATTER
TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE DECISION; AND
ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY AND SEVERALLY WITH
ELISCON. 26
Petitioner Babst alleged that DBP sold all of ELISCONs assets to the National Development Company,
for the latter to take over and continue the operation of its business. On September 11, 1981, the Board
of Governors of the DBP adopted Resolution No. 2817 which states that DBP shall enter into a
contractual arrangement with NDC for the latter to pay ELISCONs creditors, including BPI in the amount

of P4,015,534.54. This was followed by a Memorandum of Agreement executed on May 4, 1983 by and
between DBP and NDC, wherein they stipulated, inter alia, that NDC shall pay to ELISCONs creditors,
through DBP, the amount of P299,524,700.00. Among the creditors mentioned in the agreement was BPI,
with a listed credit of P4,015,534.54.
Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired by the DBP, and
later transferred to the NDC, were placed under the Asset Privatization Trust pursuant to Proclamation
No. 50, issued by then President Corazon C. Aquino on December 8, 1986.
In its Comment, 27 BPI countered that by virtue of its merger with CBTC, it acquired all the latters rights
and interest including all receivables; that in order to effect a valid novation by substitution of debtors, the
consent of the creditor must be express; that in addition, the consent of BPI must appear in its books, it
being a private corporation; that BPI intentionally did not consent to the assumption by DBP of the
obligations of ELISCON because it wanted to preserve intact its causes of action and legal recourse
against Pacific Multi-Commercial Corporation and Babst as sureties of ELISCON and not of DBP; that
MULTI expressly bound itself solidarily for ELISCONs obligations to CBTC in its Resolution wherein it
allowed the latter to use its credit facilities; and that the suretyship agreement executed by Babst does not
exclude liabilities incurred by MULTI on behalf of third parties, such as ELISCON.
ELISCON likewise filed a Comment, 28 wherein it manifested that of the seven errors raised by Babst in
his petition, six are arguments which ELISCON itself raised in its previous pleadings. It is only the sixth
assigned error that the Court of Appeals erred in finding that MULTI and Babst bound themselves
solidarily with ELISCON that ELISCON takes exception to. More particularly, ELISCON pointed out the
contradictory positions taken by Babst in admitting that he bound himself to pay the indebtedness of
MULTI, while at the same time completely disavowing and denying any such obligation. It stressed that
should MULTI or Babst be finally adjudged liable under the suretyship agreement, they cannot lawfully
recover from ELISCON, but from the DBP which had been substituted as the new debtor.
MULTI filed its Comment, 29 admitting the correctness of the petition and adopting the Comment of
ELISCON insofar as it is not inconsistent with the positions of Babst and MULTI.
At the outset, the preliminary issue of BPIs right of action must first be addressed. ELISCON and MULTI
assail BPIs legal capacity to recover their obligation to CBTC. However, there is no question that there
was a valid merger between BPI and CBTC. It is settled that in the merger of two existing corporations,
one of the corporations survives and continues the business, while the other is dissolved and all its rights,
properties and liabilities are acquired by the surviving corporation. 30 Hence, BPI has a right to institute
the case a quo.
We now come to the primordial issue in this case whether or not BPI consented to the assumption by
DBP of the obligations of ELISCON.chanrob1es virtua1 1aw 1ibrary
Article 1293 of the Civil Code provides:chanrob1es virtual 1aw library
Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment
by the new debtor gives him the rights mentioned in articles 1236 and 1237.
BPI contends that in order to have a valid novation, there must be an express consent of the creditor. In
the case of Testate Estate of Mota, Et. Al. v. Serra, 31 this Court held:chanrob1es virtual 1aw library
It should be noted that in order to give novation its legal effect, the law requires that the creditor should
consent to the substitution of a new debtor. This consent must be given expressly for the reason that,
since novation extinguishes the personality of the first debtor who is to be substituted by a new one, it
implies on the part of the creditor a waiver of the right that he had before the novation, which waiver must
be express under the principle of renuntiatio non prsumitur, recognized by the law in declaring that a
waiver of right may not be performed [should read: presumed] unless the will to waive is indisputably

shown by him who holds the right. 32

The import of the foregoing ruling, however, was explained and clarified by this Court in the later case of
Asia Banking Corporation v. Elser 33 in this wise:chanrob1es virtual 1aw library
The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditors consent to the
substitution of the new debtor for the old be express, or given at the time of the substitution, and the
Supreme Court of Spain, in its judgment of June 16, 1908, construing said article, laid down the doctrine
that "article 1205 of the Civil Code does not mean or require that the creditors consent to the change of
debtors must be given simultaneously with the debtors consent to the substitution, its evident purpose
being to preserve the creditors full right, it is sufficient that the latters consent be given at any time and in
any form whatever, while the agreement of the debtors subsists." The same rule is stated in the
Enciclopedia Juridica Espaola, volume 23, page 503, which reads: "The rule that this kind of novation,
like all others, must be express, is not absolute; for the existence of the consent may well be inferred from
the acts of the creditor, since volition may as well be expressed by deeds as by words." The
understanding between Henry W. Elser and the principal director of Yangco, Rosenstock & Co., Inc., with
respect to Luis R. Yangcos stock in said corporation, and the acts of the board of directors after Henry
W. Elser had acquired said shares, in substituting the latter for Luis R. Yangco, are a clear and
unmistakable expression of its consent. When this court said in the case of Estate of Mota v. Serra (47
Phil., 464), that the creditors express consent is necessary in order that there may be a novation of a
contract by the substitution of debtors, it did not wish to convey the impression that the word "express"
was to be given an unqualified meaning, as indicated in the authorities or cases, both Spanish and
American, cited in said decision. 34
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v. Albo & Sevilla, Inc., Et Al., 35 this
Court reiterated the rule that there can be implied consent of the creditor to the substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register its
objection to the take-over by DBP of ELISCONs assets, at the creditors meeting held in June 1981 and
thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor.chanrob1es
virtua1 1aw 1ibrary
We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the assumption
by DBP of the obligations of ELISCON. In fact, BPI admits that
"the Development Bank of the Philippines (DBP), for a time, had proposed a formula for the settlement of
Eliscons past obligations to its creditors, including the plaintiff [BPI], but the formula was expressly
rejected by the plaintiff as not acceptable (long before the filing of the complaint at bar)." 36
The Court of Appeals held that even if the account officer who attended the June 1981 creditors meeting
had expressed consent to the assumption by DBP of ELISCONs debts, such consent would not bind BPI
for lack of a specific authority therefor. In its petition, ELISCON counters that the mere presence of the
account officer at the meeting necessarily meant that he was authorized to represent BPI in that creditors
meeting. Moreover, BPI did not object to the substitution of debtors, although it objected to the payment
formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the creditors meeting was an authority
to represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf
of and for the bank. Even granting arguendo that the said account officer was not so empowered, BPI
could have subsequently registered its objection to the substitution, especially after it had already learned
that DBP had taken over the assets and assumed the liabilities of ELISCON. Its failure to do so can only
mean an acquiescence in the assumption by DBP of ELISCONs obligations. As repeatedly pointed out
by ELISCON and MULTI, BPIs objection was to the proposed payment formula, not to the substitution
itself.
BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve

its causes of action and legal recourse against the sureties of ELISCON. It must be remembered,
however, that while a surety is solidarily liable with the principal debtor, his obligation to pay only arises
upon the principal debtors failure or refusal to pay. A contract of surety is an accessory promise by which
a person binds himself for another already bound, and agrees with the creditor to satisfy the obligation if
the debtor does not. 37 A surety is an insurer of the debt; he promises to pay the principals debt if the
principal will not pay. 38
In the case at bar, there was no indication that the principal debtor will default in payment. In fact, DBP,
which had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was
increased by the government. 39 More importantly, the National Development Company took over the
business of ELISCON and undertook to pay ELISCONs creditors, and earmarked for that purpose the
amount of P4,015,534.54 for payment to BPI. 40
Notwithstanding the fact that a reliable institution backed by government funds was offering to pay
ELISCONs debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to
itself, insisted in going after the sureties. The course of action chosen taxes the credulity of this Court. At
the very least, suffice it to state that BPIs actuation in this regard runs counter to the good faith covenant
in contractual relations, provided for by the Civil Code, to wit:chanrob1es virtual 1aw library
ARTICLE 19. Every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith.chanrob1es virtua1 1aw 1ibrary
ARTICLE 1159. Obligations arising from contract have the force of law between the contracting parties
and should be complied with in good faith.
BPIs conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as
debtor. Hence, there was a valid novation which resulted in the release of ELISCON from its obligation to
BPI, whose cause of action should be directed against DBP as the new debtor.
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely
modificatory when the old obligation subsists to the extent it remains compatible with the amendatory
agreement. An extinctive novation results either by changing the object or principal conditions (objective
or real), or by substituting the person of the debtor or subrogating a third person in the rights of the
creditor (subjective or personal). Under this mode, novation would have dual functions one to
extinguish an existing obligation, the other to substitute a new one in its place requiring a conflux of
four essential requisites, (1) a previous valid obligation; (2) an agreement of all parties concerned to a
new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. 41
The original obligation having been extinguished, the contracts of suretyship executed separately by
Babst and MULTI, being accessory obligations, are likewise extinguished. 42
Hence, BPI should enforce its cause of action against DBP. It should be stressed that notwithstanding the
lapse of time within which these cases have remained pending, the prescriptive period for BPI to file its
action was interrupted when it filed Civil Case No. 49226. 43
WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the Court of
Appeals, which held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the promissory
note and letters of credit, is REVERSED and SET ASIDE. BPIs complaint against ELISCON, MULTI and
Babst is DISMISSED.
SO ORDERED.
Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ., concur.

G.R. No. 178618 : October 11, 2010

MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by its Liquidator, THE
PHILIPPINE DEPOSIT INSURANCE CORPORATION, Petitioner, v. EDWARD WILLKOM; GILDA GO;
REMEDIOS UY; MALAYO BANTUAS, in his capacity as the Deputy Sheriff of Regional Trial Court,
Branch 3, Iligan City; and the REGISTER OF DEEDS of Cagayan de Oro City,Respondent.cralaw
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao Savings
and Loan Association, Inc. (MSLAI), represented by its liquidator, Philippine Deposit Insurance
Corporation (PDIC), against respondents Edward R. Willkom (Willkom); Gilda Go (Go); Remedios Uy
(Uy); Malayo Bantuas (sheriff Bantuas), in his capacity as sheriff of the Regional Trial Court (RTC),
Branch 3 of Iligan City; and the Register of Deeds of Cagayan de Oro City. MSLAI seeks the reversal and
1
2
setting aside of the Court of Appeals cra1aw (CA) Decision cra1aw dated March 21, 2007 and
3
Resolution cra1aw dated June 1, 2007 in CA-G.R. CV No. 58337.
The controversy stemmed from the following facts:chanroblesvirtualawlibrary
The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with the Securities and Exchange Commission
(SEC) under Registry Nos. 34869 and 32388, respectively, primarily engaged in the business of granting
4
loans and receiving deposits from the general public, and treated as banks. chanroblesvirtuallawlibrary
Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving
5
corporation. cra1aw The articles of merger were not registered with the SEC due to incomplete
6
documentation. cra1aw On August 12, 1985, DSLAI changed its corporate name to MSLAI by way of an
amendment to Article 1 of its Articles of Incorporation, but the amendment was approved by the SEC only
7
on April 3, 1987. chanroblesvirtuallawlibrary
Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved Board Resolution
No. 86-002, assigning its assets in favor of DSLAI which in turn assumed the formers
8
liabilities. chanroblesvirtuallawlibrary
The business of MSLAI, however, failed. Hence, the Monetary Board of the Central Bank of the
Philippines ordered its closure and placed it under receivership per Monetary Board Resolution No. 922
dated August 31, 1990. The Monetary Board found that MSLAIs financial condition was one of
insolvency, and for it to continue in business would involve probable loss to its depositors and creditors.
On May 24, 1991, the Monetary Board ordered the liquidation of MSLAI, with PDIC as its
9
liquidator. chanroblesvirtuallawlibrary
It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan City, an action for
collection of sum of money against FISLAI, docketed as Civil Case No. 111-697. On October 19, 1989,
the RTC issued a summary decision in favor of Uy, directing defendants therein (which included FISLAI)
to pay the former the sum of P136,801.70, plus interest until full payment, 25% as attorneys fees, and the
costs of suit. The decision was modified by the CA by further ordering the third-party defendant therein to
reimburse the payments that would be made by the defendants. The decision became final and executory
10
on February 21, 1992. A writ of execution was thereafter issued. chanroblesvirtuallawlibrary
On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in Cagayan
de Oro City, and the notice of sale was subsequently published. During the public auction on May 17,

1993, Willkom was the highest bidder. A certificate of sale was issued and eventually registered with the
Register of Deeds of Cagayan de Oro City. Upon the expiration of the redemption period, sheriff Bantuas
issued the sheriffs definite deed of sale. New certificates of title covering the subject properties were
issued in favor of Willkom. On September 20, 1994, Willkom sold one of the subject parcels of land to
11
Go. chanroblesvirtuallawlibrary
On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of Cagayan de Oro
City, a complaint for Annulment of Sheriffs Sale, Cancellation of Title and Reconveyance of Properties
12
against respondents. cra1aw MSLAI alleged that the sale on execution of the subject properties was
conducted without notice to it and PDIC; that PDIC only came to know about the sale for the first time in
February 1995 while discharging its mandate of liquidating MSLAIs assets; that the execution of the RTC
decision in Civil Case No. 111-697 was illegal and contrary to law and jurisprudence, not only because
PDIC was not notified of the execution sale, but also because the assets of an institution placed under
receivership or liquidation such as MSLAI should be deemed in custodia legis and should be exempt from
13
any order of garnishment, levy, attachment, or execution. chanroblesvirtuallawlibrary
In answer, respondents averred that MSLAI had no cause of action against them or the right to recover
the subject properties because MSLAI is a separate and distinct entity from FISLAI. They further
contended that the "unofficial merger" between FISLAI and DSLAI (now MSLAI) did not take effect
considering that the merging companies did not comply with the formalities and procedure for merger or
consolidation as prescribed by the Corporation Code of the Philippines. Finally, they claimed that FISLAI
is still a SEC registered corporation and could not have been absorbed by
14
petitioner. chanroblesvirtuallawlibrary
On March 13, 1997, the RTC issued a resolution dismissing the case for lack of jurisdiction. The RTC
declared that it could not annul the decision in Civil Case No. 111-697, having been rendered by a court
15
of coordinate jurisdiction. chanroblesvirtuallawlibrary
On appeal, MSLAI failed to obtain a favorable decision when the CA affirmed the RTC resolution. The
dispositive portion of the assailed CA Decision reads:chanroblesvirtualawlibrary
WHEREFORE, premises considered, the instant appeal is DENIED. The decision assailed is AFFIRMED.
We REFER Sheriff Malayo B. Bantuas violation of the Supreme Court Administrative Circular No. 12 to
the Office of the Court Administrator for appropriate action. The Division Clerk of Court is hereby
DIRECTED to furnish the Office of the Court Administrator a copy of this decision.
16

SO ORDERED. chanroblesvirtuallawlibrary
The appellate court sustained the dismissal of petitioners complaint not because it had no jurisdiction
17
over the case, as held by the RTC, but on a different ground. Citing Associated Bank v. CA, cra1aw the
CA ruled that there was no merger between FISLAI and MSLAI (formerly DSLAI) for their failure to follow
the procedure laid down by the Corporation Code for a valid merger or consolidation. The CA then
concluded that the two corporations retained their separate personalities; consequently, the claim against
FISLAI is warranted, and the subsequent sale of the levied properties at public auction is valid. The CA
went on to say that even if there had been a de facto merger between FISLAI and MSLAI (formerly
DSLAI), Willkom, having relied on the clean certificates of title, was an innocent purchaser for value,
whose right is superior to that of MSLAI. Furthermore, the alleged assignment of assets and liabilities
executed by FISLAI in favor of MSLAI was not binding on third parties because it was not registered.
Finally, the CA said that the validity of the auction sale could not be invalidated by the fact that the sheriff
18
had no authority to conduct the execution sale. chanroblesvirtuallawlibrary
Petitioners motion for reconsideration was denied in a Resolution dated June 1, 2007. Hence, the instant
petition anchored on the following grounds:chanroblesvirtualawlibrary

THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO COMMITTED GRAVE AND

REVERSIBLE ERROR WHEN:chanroblesvirtualawlibrary
(1)
IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE SURVIVING
ENTITY IN THE MERGER BETWEEN DSLAI AND FISLAI AS A DEFENSE IN AN ACTION OTHER
THAN IN A QUO WARRANTO PROCEEDING UPON THE INSTITUTION OF THE SOLICITOR
GENERAL AS MANDATED UNDER SECTION 20 OF BATAS PAMBANSA BLG. 68.
(2)
IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH DSLAI AS THE
SURVIVING CORPORATION.
(3)
IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN CUSTODIA LEGIS AND
THEREFORE,
EXEMPT
FROM
GARNISHMENT,
LEVY,
ATTACHMENT
OR
19
EXECUTION. chanroblesvirtuallawlibrary
To resolve this petition, we must address two basic questions: (1) Was the merger between FISLAI and
DSLAI (now MSLAI) valid and effective; and (2) Was there novation of the obligation by substituting the
person of the debtor?
We answer both questions in the negative.
Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and
continues the combined business, while the rest are dissolved and all their rights, properties, and
20
liabilities are acquired by the surviving corporation. cra1aw Although there is a dissolution of the
absorbed or merged corporations, there is no winding up of their affairs or liquidation of their assets
because the surviving corporation automatically acquires all their rights, privileges, and powers, as well
21
as their liabilities. chanroblesvirtuallawlibrary
The merger, however, does not become effective upon the mere agreement of the constituent
22
corporations. cra1aw Since a merger or consolidation involves fundamental changes in the corporation,
as well as in the rights of stockholders and creditors, there must be an express provision of law
23
authorizing them. chanroblesvirtuallawlibrary
The steps necessary to accomplish a merger or consolidation, as provided for in Sections
24
25
26
27
76, cra1aw77, cra1aw 78, cra1aw and
79 cra1aw of
the
Corporation
Code,
are:chanroblesvirtualawlibrary
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include
any amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of
consolidation, all the statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be
called and at least two (2) weeks notice must be sent to all stockholders or members, personally or by
registered mail. A summary of the plan must be attached to the notice. Vote of two-thirds of the members
or of stockholders representing two-thirds of the outstanding capital stock will be needed. Appraisal rights,
when proper, must be respected.

(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the
corporate officers of each constituent corporation. These take the place of the articles of incorporation of
the consolidated corporation, or amend the articles of incorporation of the surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks
before.
28

(6) Issuance of certificate of merger or consolidation. chanroblesvirtuallawlibrary

Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the SEC,
subject to its prior determination that the merger is not inconsistent with the Corporation Code or existing
29
laws. cra1aw Where a party to the merger is a special corporation governed by its own charter, the Code
particularly mandates that a favorable recommendation of the appropriate government agency should first
30
be obtained. chanroblesvirtuallawlibrary
In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered
with the SEC due to incomplete documentation. Consequently, the SEC did not issue the required
certificate of merger. Even if it is true that the Monetary Board of the Central Bank of the Philippines
recognized such merger, the fact remains that no certificate was issued by the SEC. Such merger is still
incomplete without the certification.
The issuance of the certificate of merger is crucial because not only does it bear out SECs approval but it
also marks the moment when the consequences of a merger take place. By operation of law, upon the
effectivity of the merger, the absorbed corporation ceases to exist but its rights and properties, as well as
liabilities, shall be taken and deemed transferred to and vested in the surviving
31
corporation. chanroblesvirtuallawlibrary
The same rule applies to consolidation which becomes effective not upon mere agreement of the
32
members but only upon issuance of the certificate of consolidation by the SEC. cra1aw When the SEC,
upon processing and examining the articles of consolidation, is satisfied that the consolidation of the
corporations is not inconsistent with the provisions of the Corporation Code and existing laws, it issues a
33
certificate of consolidation which makes the reorganization official. cra1aw The new consolidated
corporation comes into existence and the constituent corporations are dissolved and cease to
34
exist. chanroblesvirtuallawlibrary
There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as respondents,
the two corporations shall not be considered as one but two separate corporations. A corporation is an
artificial being created by operation of law. It possesses the right of succession and such powers,
35
attributes, and properties expressly authorized by law or incident to its existence. cra1aw It has a
personality separate and distinct from the persons composing it, as well as from any other legal entity to
36
which it may be related. cra1aw Being separate entities, the property of one cannot be considered the
property of the other.
Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as its assets
and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the Deed of Assignment
wherein FISLAI assigned its assets and properties to DSLAI, and the latter assumed all the liabilities of
the former. As provided in Article 1625 of the Civil Code, "an assignment of credit, right or action shall
produce no effect as against third persons, unless it appears in a public instrument, or the instrument is
recorded in the Registry of Property in case the assignment involves real property." The certificates of title
of the subject properties were clean and contained no annotation of the fact of assignment. Respondents
cannot, therefore, be faulted for enforcing their claim against FISLAI on the properties registered under its
name. Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the

execution sale over the properties of FISLAI. With more reason can it not cause the cancellation of the
title to the subject properties of Willkom and Go.
Petitioner cannot also anchor its right to annul the execution sale on the principle of novation. While it is
true that DSLAI (now MSLAI) assumed all the liabilities of FISLAI, such assumption did not result in
novation as would release the latter from liability, thereby exempting its properties from execution.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, by substituting another in place of the debtor, or by subrogating a third person in the rights of
37
the creditor. chanroblesvirtuallawlibrary
It is a rule that novation by substitution of debtor must always be made with the consent of the
38
creditor. cra1aw Article 1293 of the Civil Code is explicit, thus:chanroblesvirtualawlibrary
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.
In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that DSLAI
(now MSLAI) would assume the liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the
assets that FISLAI transferred to DSLAI remained subject to execution to satisfy the judgment claim of Uy
against FISLAI. The subsequent sale of the properties by Uy to Willkom, and of one of the properties by
Willkom to Go, cannot, therefore, be questioned by MSLAI.
The consent of the creditor to a novation by change of debtor is as indispensable as the creditors consent
39
in conventional subrogation in order that a novation shall legally take place. cra1aw Since novation
implies a waiver of the right which the creditor had before the novation, such waiver must be
40
express. chanroblesvirtuallawlibrary
WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated March
21, 2007 and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337 are AFFIRMED.
SO ORDERED.