SECTION 2

ARTIFICIAL PERSON
FILIPINAS

BROADCASTING

INC., petitioner,

EDUCATIONAL

vs. AGO

NETWORK,

MEDICAL

CENTER-BICOL

AND

CHRISTIAN

COLLEGE OF MEDICINE, (AMEC-BCCM) and

ANGELITA F. AGO, respondents.

FACTS: Expos is a radio documentary [4] program

hosted (Rima) and (Alegre).[5] Expos is aired every
morning which is owned by Filipinas Broadcasting
Network, Inc. 15 December 1989, Rima and Alegre
exposed various alleged complaints from students,
teachers and parents against Ago Medical and
Educational Center-Bicol Christian College of
Medicine (AMEC) and its administrators. Claiming
that the broadcasts were defamatory, AMEC and
Angelita Ago (Ago), as Dean of AMECs College of
Medicine, filed a complaint for damages [7] against
FBNI, Rima and Alegre
The complaint further alleged that AMEC is a
reputable learning institution. With the supposed
exposs, FBNI, Rima and Alegre transmitted
malicious imputations, and as such, destroyed
plaintiffs (AMEC and Ago) reputation. Rima and
Alegre, through Atty. Rozil Lozares, filed an
Answer[10] alleging that the broadcasts against AMEC
were fair and true. FBNI, Rima and Alegre claimed
that they were plainly impelled by a sense of public
duty to report the goings-on in AMEC, [which is] an
institution imbued with public interest.
The Court of Appeals upheld the trial courts ruling
that the questioned broadcasts are libelous per se and
that FBNI, Rima and Alegre failed to overcome the
legal presumption of malice.
ISSUE: Whether AMEC is entitled to moral damages
HELD: Petition denied
There is no question that the broadcasts were made
public and imputed to AMEC defects or circumstances
tending to cause it dishonor, discredit and
contempt. Every defamatory imputation is presumed
malicious.[25] Rima and Alegre failed to show
adequately their good intention and justifiable motive
in airing the supposed gripes of the students. Hearing
the students alleged complaints a month before the

expos,[27] they had sufficient time to verify their

sources and information. However, Rima and Alegre
hardly made a thorough investigation of the students
alleged gripes.
FBNI contends that AMEC is not entitled to
moral damages because it is a corporation.[39]
A juridical person is generally not entitled to
moral damages because, unlike a natural person, it
cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock.[40] The Court of
Appeals cites Mambulao Lumber Co. v. PNB, et al.
[41]
to justify the award of moral damages. However,
the
Courts
statement
in Mambulao that
a
corporation may have a good reputation which, if
besmirched, may also be a ground for the award of
moral damages is an obiter dictum.
Nevertheless, AMECs claim for moral damages
falls under item 7 of Article 2219 [43] of the Civil Code.
This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any other
form of defamation. Article 2219(7) does not qualify
whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can
validly complain for libel or any other form of
defamation and claim for moral damages. [44]
Moreover, where the broadcast is libelous per se,
the law implies damages.

SEPARATE JURIDICAL PERSONALITY

1. Stockholders of F. Guanzon & Sons, Inc. v.
Register of Deeds
Doctrine: A corporation is a juridical person distinct
from the members composing it. Properties registered
in the name of the corporation are owned by it as an
entity separate and distinct from its members.
Facts:
Five stockholders of the F. Guanzon and Sons Inc.,
executed a certificate of liquidation of the assets,
dissolving the corporation and distributed among
themselves in proportion to their shareholdings, the
assets of said corporation, including the real
properties. The certificate of liquidation, when
presented to the Register of Deeds was denied on 7
grounds of which the ff. were disputed by the
stockholders; 3. no. of parcels of land not certified, 5.
registration fees need be paid 6. documentary stamp
need be attached 7. the judgment of the Court
approving the dissolution and directing the
disposition of the assets need be presented. The
Commissioner of Land Registration overruled the
ground
no.
7
and
sustained
the
others.
Issue: Whether or not the certificate merely involves a
distribution of the corporation's assets or should be
considered
a
transfer
of
conveyance
Appellants' argument: that the certificate of
liquidation is not a conveyance or transfer but merely
a distribution of the assets of the corporation which
has ceased to exist for having been dissolved. Not
being a conveyance, the certificate need not contain
the number of parcel of land involved in the
distribution in the acknowledgment appearing
therein. That they are not required to pay the amount
of registration fees.
Respondent's argument: the Commission of Land
Registration concurred with the view of the RD that
the certificate of liquidation in question, though it
involves a distribution of the assets, in the last
analysis represents a transfer of said assets from the
corporation to the stockholders. Hence, in substance it
is a transfer or conveyance.

Court's ruling:
A corporation is a juridical person distinct from the
members composing it. Properties registered in the
name of the corporation are owned by it as an entity
separate and distinct from its members. while shares
of stock constitute personal property they do not
represent property of the corporation. the corporation
has property of its own which consists chiefly of a real
estate. A share of stock only typifies an aliquot part of
the corporation's property, or the right to share its
proceeds to that extent when distributed according to
law and equity. The stockholder is not a co-owner or
tenant in common of the corporate property.
It is clear that the act of liquidation made by the
stockholders of the Petitioner is not and cannot be
considered a partition of community property, but
rather a transfer or conveyance of the title of its assets
to the individual stockholders.

2. LAPERAL DEVELOPMENT CORPORATION

and

SUNBEAMS

CONVENIENCE

FOOD

CORPORATION, VS. CA
FACTS:
On May 19, 1987, Banzon filed a complaint against
Oliverio Laperal. Laperal Development Corporation.
Imperial
Development
Corporation,
Sunbeams
Convenience Foods, Inc. and Vicente Acsay for: 1) the
annulment of the portion of the Compromise
Agreement; 2) the collection of attorney's fees for his
services in the cases of: a) Imperial Development
Corporation vs. Aover, b) Republic vs. Sunbeams
Convenience Foods, Inc., et al.,
The Regional Trial Court of Quezon City, dismissed
on the ground that the trial court had no jurisdiction
to annul the Compromise Agreement as approved by
an equal and coordinate court. It was held that the
issue was cognizable by the Court of Appeals
On appeal, the decision was affirmed on the issue of
jurisdiction. The Court of Appeals held, however, that
attorney's fees were due the private respondent in the
cases of Laperal Development Corporation v. Ascario
Tuazon and Ascario Tuazon v. Judge Maglalang and
Republic v. Sunbeams Convenience Foods. Inc
The petitioners are now challenging the decision
insofar as it orders them to pay Banzon attorney's fees
for his legal services in the aforementioned cases.

ISSUE:
Whether or not the Petitioners are liable to pay
Banzon his attorneys fees as his legal compensation

HELD:
Banzon's claim for attorney's fees in the said case was
also among those enumerated in his complaint in Civil
Case No. Q-34907 against Oliverio Laperal, Laperal
Development Corporation, and Imperial Development
Corporation. Notably, Sunbeams Convenience Foods,
Inc. (Sunbeams, for brevity), referred to in the
complaint as "Mr. Laperal's Corporation," was not
joined by name as a party-defendant. Apparently, the
private respondent believed that Oliverio Laperal,
being the president of the said company, was directly

obligated to him for the attorney's fees due him for his
handling of the case for Sunbeams.
It is settled that a corporation is clothed with a
personality separate and distinct from that of the
persons composing it. It may not generally be held
liable for the personal indebtedness of its stockholders
or those of the entities connected with it. Conversely, a
stockholder cannot be made to answer for any of its
financial obligations even if he should be its president.
There is no evidence that Sunbeams and Laperal are
one and the same person. While it is true that Laperal
is a stockholder, director and officer of Sunbeams, that
status alone does not make him answerable for the
liabilities of the said corporation. Such liabilities
include Banzon's attorney's fees for representing it in
the case of Republic v. Sunbeams Convenience Foods,
Inc.

The Compromise Agreement upon which the decision

of the court was based was between plaintiff Atty.
Banzon and the defendants represented by Oliverio
Laperal. To repeat, Sunbeams was not a party to this
agreement and so could not be affected by it.
(compromise agreement is about the waiving of
attorneys fees)

The private respondent's claim for attorney's fees in

the Sunbeam case was waived by him not by virtue of
the Compromise Agreement to which Sunbeams, not
being a defendant in Civil Case No. Q-34907, could
not have been a party. What militates against his
claim is his own judicial admission that he had
waived his attorney's fees for the cases he had handled
from 1974 to 1981 for Oliverio Laperal and his
corporations, including those not impleaded in his
complaint in Civil Case No. Q-34907.

PIERCING CORPORATE VEIL

1. PNB

vs.

Hyrdo

Resources

Contractors

Corporation
Facts:
Petitioners DBP and PNB foreclosed on mortgages
made on the properties of MMIC. As a result of the
foreclosure, DBP and PNB acquired substantially all
the assets of MMIC and resumed the business
operations of the defunct MMIC by organizing NMIC.
DPB and PNB owned 57% and 43% of the shares of
NMIC, respectively, except for five qualifying shares.
The members of the Board of Directors of NMIC were
either from DBP or PNB.
NMIC engaged the services of Hercon, Inc. for NMICs
Mine Striping and Road Construction Program for a
contract price of P35m. after computing the payments
already made by NMIC under the program and
crediting the NMICs recievables from Hercon, the
latter found that the former still has an unpaid
balance of P8M. Hercon made several demands on
NMIC including a letter of final demand and when
these were not heeded, a complaint for sum of money
was filed in the RTC seeking to hold NMIC, DBP and
PNB solidarily liable for the amount owing to Hercon.
Subsequent to the filing of the complaint, Hercon, was
acquired by HRCC in a merger. The complaint was
then amended by substituting HRCC for Hercon.
Proclamation No. 50 was issued creating the APT for
the expeditious disposition and privatization nof
certain government corporations and/or the assets
thereof.
Pursuant to the said proclamation, DBP and PNB
executed their respective deeds of transfer in favor of
the National Government transferring and conveying
certain assets and liabilities in NMIC. The National
Government transferred the said assets and liabilities
to the APT as trustee under a Trust Agreement. The
complaint was then amended for the second time to
implead the APT as a defendant
RTC, ruled in favor of HRCC. It pierced the corporate
veil of NMIC and held DBP and PNB solidarily liable
with NMIC

On appeal, the Court of Appeals, affirmed the RTCs

ruling.
Issue: WON that NMIC is a corporate entity with a
juridical personality separate and distinct from both
PNB and DBP.
Held:
A corporation is an artificial entity created by
operation of law. It possesses the right of succession
and such powers, attributes, and properties expressly
authorized by law or incident to its existence. It has a
personality separate and distinct from that of its
stockholders and from that of other corporations to
which it may be connected.
As a consequence, a corporation incurs its own
liabilities and is legally responsible for payment of its
obligations. Hence, the corporate debt or credit is not
the debt or credit of the stockholder. This protection
from liability for shareholders is the principle of
limited liability.
The corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego
of a person or of another Corporation. For reasons of
public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity
committed against third persons.
The SC further held that any application of the
doctrine of piercing the corporate veil should be done
with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that
injustice, fraud, or crime was committed against
another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it cannot
be presumed.
There are three tests that must be applied in order to
determine the application of the alter ego theory: first
is the instrumentality or control test, second is the
fraud test, and third is the harm test
The absence of any of these elements prevents
piercing the corporate veil. Here, the SC finds that
none of the tests has been satisfactorily met in this
case. The Court further held that the existence of
interlocking directors, corporate officers and
shareholders is not enough justification to pierce the

veil of corporate fiction in the absence of fraud or

other public policy considerations.

2. APEX MINING v. SOUTHEAST MINDANAO

GOLD MINING CORP.
FACTS: Diwalwal Gold Rush Area is a rich tract of
land located in Davao. It has been stormed by conflicts
brought about by numerous mining claims over the
same. On March 10, 1986, Marcopper Mining
Corporation (MMC) was granted an Exploration
Permit No. 133 (EP 133) by the Bureau of Mines and
Geo-Sciences (BMG). A long battle ensued between
Apex and MMC with the latter seeking the
cancellation of the mining claims of Apex on the
ground that suchmining claims were within a forest
reservation (Agusan-Davao-Surigao Forest Reserve)
and thus the acquisition on mining rights should have
been through an application for a permit to prospect
with the Bureau of Forest and Development (BFD)
and not through registration of a Declaration of
Location with the BMG. When it reached the SC in
1991, the Court ruled against Apex holding that the
area is a forest reserve and thus it should have
applied for a permit to prospect with the BFD. On
February 16 1994,
MMC assigned all its rights to EP 133 to Southeast
Mindanao Gold Mining Corporation (SEM), a
domestic corporation which is alleged to be a 100%owned subsidiary of MMC. Subsequently, BMG
registered SEMs Mineral Production Sharing
Agreement (MPSA) application and the Deed of
Assignment. Several oppositions were filed.
When the case reached the CA, the appellate court
held that the transfer of EP 133 was valid on the
premise that SEM is the agent of MMC, stressing that
SEM is just a business conduit of MMC, hence, the
distinct legal personality of the two entities should not
be recognized.
ISSUE: WON the subsequent transfer of Examination
Permit 133 from MMC to SEM is valid applying the
doctrine of piercing the corporate veil.
HELD: No.
The Court of Appeals pathetically invokes the doctrine
of piercing the corporate veil to legitimize the
prohibited transfer or assignment of EP 133.
Only in cases where the corporate fiction was used as
a shield for fraud, illegality or inequity may the veil be
pierced and removed. The doctrine of piercing the

corporate veil cannot therefore be used as a vehicle to

commit prohibited acts. The assignment of the permit
in favor of SEM is utilized to circumvent the condition
of non-transferability of the exploration permit. To
allow SEM to avail itself of this doctrine and to
approve the validity of the assignment is tantamount
to sanctioning an illegal act which is what the
doctrine precisely seeks to forestall.

President

of

the

corporation,

jointly

and

severally, to refund immediately to Nazario Dumpit

the amount of P13,722.50 with 12% interest from the

filing of the complaint. Thus, the present petition.
Issues: Whether the petitioners may be held liable for
refund.
Whether the doctrine of piercing the veil of corporate
fiction has application to the case at bar.
Held: YES.

We hold that resolution by petitioners

of the contract was ineffective and inoperative against

private respondent for lack of notice of resolution.
As

stressed

in

University

of

the

Philippines vs. Walfrido de los Angeles, the act of

3. PALAY INC. vs. CLAVE

Petitioner Palay, Inc., through its President,
Albert Onstott executed in favor of private
respondent, Nazario Dumpit, a Contract to Sell a
parcel of Land of the Crestview Heights Subdivision
in Antipolo, Rizal and owned by said corporation. The
sale price was P23,300.00. Paragraph 6 of the contract
provided for automatic extrajudicial rescission upon
default in payment of any monthly installment after
the lapse of 90 days from the expiration of the grace
period of one month, without need of notice and with
forfeiture of all installments paid.
Respondent Dumpit paid the downpayment
and several installments amounting to P13,722.50.
Almost six (6) years later, private respondent wrote
petitioner offering to update all his overdue accounts
with interest. Petitioner then informed respondent
that his Contract to Sell had long been rescinded
pursuant to paragraph 6 of the contract, and that the
lot had already been resold.
Questioning the validity of the rescission of
the contract, respondent filed a letter complaint with
the National Housing Authority (NHA) for
reconveyance with an altenative prayer for refund.
The NHA, finding the rescission void in the absence

of either judicial or notarial demand, ordered

Palay, Inc. and Alberto Onstott in his capacity as

a party in treating a contract as cancelled should be

made known to the other. The party who deems the
contract violated may consider it resolved or
rescinded, and act accordingly, without previous court
action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will
conclusively and finally settle whether the action
taken was or was not correct in law.
NO.
It is basic that a corporation is
invested by law with a personality separate and
distinct from those of the persons composing it as well
as from that of any other legal entity to which it may
be related. As a general rule, a corporation may not be
made to answer for acts or liabilities of its
stockholders or those of the legal entities to which it
may be connected and vice versa. However, the veil of
corporate fiction may be pierced when it is used as a
shield to further an end subversive of justice; or for
purposes that could not have been intended by the law
that created it; or to defeat public convenience, justify
wrong, protect fraud, or defend crime; or to perpetuate
fraud or confuse legitimate issues 15 ; or to
circumvent the law or perpetuate deception ; or as an
alter ego, adjunct or business conduit for the sole
benefit of the stockholders.
We find no badges of fraud on petitioners'
part. They had literally relied, albeit mistakenly, on
paragraph 6 of its contract with private respondent
when it rescinded the contract to sell extrajudicially
and had sold it to a third person.
In this case, petitioner Onstott was made
liable because he was then the President of the

corporation and the controlling stockholder. No

sufficient proof exists on record that said petitioner
used the corporation to defraud private respondent.
He cannot, therefore, be made personally liable just
because he "appears to be the controlling stockholder".
Mere ownership by a single stockholder or by
another corporation is not of itself sufficient

ground for disregarding the separate corporate

personality.

4. Liddell & Co., Inc., v. Collector of Internal

Revenue
Facts: Liddell & Co. Inc. is a domestic corporation
establish in the Philippines on February 1, 1946, with
an authorized capital of P100,000 divided into 1000
share at P100 each. Of this authorized capital, 196
shares valued at P19,600 were subscribed and paid by
Frank Liddell while the other four shares were in the
name of Charles Kurz, E.J. Darras, Angel Manzano
and Julian Serrano at one shares each. Its purpose
was to engage in the business of importing and
retailing Oldsmobile and Chevrolet passenger cars
and GMC and Chevrolet trucks.
On December 20, 1948, the Liddell Motors, Inc. was
organized and registered with the Securities and
Exchange Commission with an authorized capital
stock of P100,000 of which P20,000 was subscribed
and paid for as follows: Irene Liddell wife of Frank
Liddell 19,996 shares and Messrs. Marcial P.
Lichauco, E. K. Bromwell, V. E. del Rosario and
Esmenia Silva, 1 share each.
At about the end of the year 1948, Messrs. Manzano,
Kurz and Kernot resigned from their respective
positions in the Retail Dept. of Liddell & Co. and they
were taken in and employed by Liddell Motors, Inc.
Beginning January, 1949, Liddell & Co. stopped
retailing cars and trucks; it conveyed them instead to
Liddell Motors, Inc. which in turn sold the vehicles to
the public with a steep mark-up. Since then, Liddell &
Co. paid sales taxes on the basis of its sales to Liddell
Motors Inc. considering said sales as its original sales.
Upon review of the transactions between Liddell & Co.
and Liddell Motors, Inc. the Collector of Internal
Revenue determined that the latter was but an alter
ego of Liddell & Co. The Court of Tax Appeals upheld
the position taken by the Collector of Internal
Revenue.
Issue: Whether or not Liddell & Co. Inc., and the
Liddell Motors, Inc. are identical corporations, the
latter being merely the alter ego of the former
Held: YES. As of the time of its organization, 98% of
the capital stock belonged to Frank Liddell. The 20%
paid-up subscription with which the company began
its business was paid by him. The subsequent

subscriptions to the capital stock were made by him

and paid with his own money.
As to Liddell Motors, Inc. the court is fully persuaded
that Frank Liddell also owned it. He supplied the
original capital funds. It is not proven that his wife
Irene, ostensibly the sole incorporator of Liddell
Motors, Inc. had money of her own to pay for her
P20,000 initial subscription. Her income in the United
States in the years 1943 and 1944 and the savings
therefrom could not be enough to cover the amount of
subscription, much less to operate an expensive trade
like the retail of motor vehicles. The alleged sale of
her property in Oregon might have been true, but the
money received therefrom was never shown to have
been saved or deposited so as to be still available at
the time of the organization of the Liddell Motors, Inc.
The Court noticed that the bulk of the business of
Liddell & Co. was channeled through Liddell Motors,
Inc. On the other hand, Liddell Motors, Inc. pursued
no activities except to secure cars, trucks, and spare
parts from Liddell & Co. Inc. and then sell them to
the general public. These sales of vehicles by Liddell
& Co. to Liddell Motors, Inc. for the most part were
shown to have taken place on the same day that
Liddell Motors, Inc. sold such vehicles to the public.
We may even say that the cars and trucks merely
touched the hands of Liddell Motors, Inc. as a matter
of formality.
Accordingly, the mere fact that Liddell & Co. and
Liddell Motors, Inc. are corporations owned and
controlled by Frank Liddell directly or indirectly is not
by itself sufficient to justify the disregard of the
separate corporate identity of one from the other.
There is, however, in this instant case, a peculiar
consequence of the organization and activities of
Liddell Motors, Inc.
Under the law in force at the time of its incorporation
the sales tax on original sales of cars, was progressive,
i.e. 10% of the selling price of the car if it did not
exceed P5000, and 15% of the price if more than
P5000 but not more than P7000, etc. This progressive
rate of the sales tax naturally would tempt the
taxpayer to employ a way of reducing the price of the
first sale. And Liddell Motors, Inc. was the medium
created by Liddell & Co. to reduce the price and the
tax liability.

As opined in the case of Gregory v. Helvering, "the

legal right of a taxpayer to decrease the amount of
what otherwise would be his taxes, or altogether avoid
them by means which the law permits, cannot be
doubted." But, as held in another case, "where a
corporation is a dummy, is unreal or a sham and
serves no business purpose and is intended only as a
blind, the corporate form may be ignored for the law
cannot countenance a form that is bald and a
mischievous fiction."

5. GREGORIO

PALACIO

v.

FELY

TRANSPORTATION COMPANY
Fely Transportation Company hired Alfredo
Carillo as driver of a jeep owned and operated by the
corporation. One time, while Carillo was driving the
vehicle, he run over the child of Gregorio Palacio who
suffered injuries and was hospitalized.
Palacio then filed a criminal complaint for
reckless imprudence and damages against Carillo and
Fely Transportation Company. When Carillo was
convicted in the criminal case, Dr. Calingasan, the
owner of the said corporation sold the jeep to the
corporation.
When Carillo was not able to pay damages
because of insolvency. Hence, Palacio sought to collect
from the corporation and Isabelo Calingasan, its
president. The corporation then filed a Motion to
Dismiss on the ground that there is no cause of action
against the defendant company.
Palacio contends that the corporation should
be made subsidiarily liable for damages in the
criminal case because the sale to it of the jeep in
question, after the conviction of Alfred Carillo in
Criminal Case was merely an attempt on the part of
Calingasan to evade his subsidiary civil liability.
ISSUE: Whether or not Isabelo Calingasan, the
president of the corporation should be held
subsidiarily liable with the corporation
HELD: YES.
Isabelo Calingasan and defendant Fely
Transportation may be regarded as one and the same
person. It is evident that Isabelo Calingasan's main
purpose in forming the corporation was to evade his
subsidiary civil liability resulting from the conviction
of his driver, Alfredo Carillo. This conclusion is borne
out by the fact that the incorporators of the Fely
Transportation are Isabelo Calingasan, his wife, his
son, Dr. Calingasan, and his two daughters. The
Court believes that this is one case where the
defendant corporation should not be heard to say that
it has a personality separate and distinct from its
members when to allow it to do so would be to
sanction the use of the fiction of corporate entity as a
shield to further an end subversive of justice.
Furthermore, the failure of the corporation to prove

that it has other property than the jeep strengthens

the conviction that its formation was for the purpose
above indicated.
And while it is true that Isabelo Calingasan is
not a party in this case, yet, is held that this Court
can substitute him in place of the defendant
corporation as to the real party in interest. This is so
in order to avoid multiplicity of suits and thereby save
the parties unnecessary expenses and delay.
Accordingly, defendants Fely Transportation
and Isabelo Calingasan should be held subsidiarily
liable for P500.00 which Alfredo Carillo was ordered
to pay in the criminal case and which amount he could
not pay on account of insolvency.

6. MARVEL BUILDING CORPORATION, ET

AL., plaintiffs-appellees,
vs.

ISSUE: WON Maria B. Castro the owner of all the

shares of stocks of Marvel Building Corporation and
the other stockholders mere dummies of hers?

SATURNINO DAVID, in his capacity as

HELD:

Collector,

Important evidence presented by the collector of

internal revenue to prove his claim that Maria Castro
is the sole owner is supposed endorsement in blank of
the shares of stock issued in the name of the other
incorporators, and the possession thereof by Maria B.
Castro; It is to be remembered also, that it is a
common practice among unscrupulous merchants to
carry two sets of books, one set for themselves and
another to be shown to tax collectors. This practice
could not have been unknown to Maria B. Castro, who
apparently had been able to evade the payment of her
war profits taxes. ;the fact that two sets of certificates
were issued; the principal stockholder had made
enormous profits; the fact that other subscribers had
no income of sufficient magnitude to justify their big
subscription; the fact that she advanced big sums of
money without accounting; and the fact that the books
of accounts were kept as if they belong only to her.

Bureau

of

Internal

Revenue, defendant-appellant.
Circumstantial evidence showing one-man corporation
FACTS: This action was brought by plaintiffs as
stockholders of the Marvel Building Corporation to
enjoin the defendant Collector of Internal Revenue
from selling at public auction various properties
described in the complaint, including three parcels of
land, Said properties were seized and distrained by
defendant to collect war profits taxes assessed against
plaintiff Maria B. Castro (Exhibit B). Plaintiffs allege
that the said three properties (lands and buildings)
belong to Marvel Building Corporation and not to
Maria B. Castro, while the defendant claims that
Maria B. Castro is the true and sole owner of all the
subscribed stock of the Marvel Building Corporation,
including those appearing to have been subscribed
and paid for by the other members, and consequently
said Maria B. Castro is also the true and exclusive
owner of the properties seized.
the Court of First Instance of Manila rendered
judgment ordering the release of the properties
mentioned, and enjoined the Collector of Internal
Revenue from selling the same. The Articles of
Incorporation of the Marvel Building Corporation is
dated February 12, 1947 and according to it the
capital stock is P2,000,000, of which P1,025,000 was
(at the time of incorporation) subscribed and paid for
by the following incorporators: (most of the
incorporators are half brothers and sisters neither did
they file any war profits.)
It does not appear that the stockholders or the board
of directors of the Marvel Building Corporation have
ever held a business meeting, for no books thereof or
minutes meeting were ever mentioned by the officers
thereof or presented by them at the trial. The by-laws
of the corporation, if any had ever been approved, has
not been presented. Neither does it appear that any
report of the affairs of the corporation has been made,
either of its transactions or accounts.

What are their necessary implications? Maria B.

Castro would not have asked them to endorse their
stock certificates, or be keeping these in her
possession, if they were really the owners. They never
would have consented that Maria B. Castro keep the
funds without receipts or accounting, nor that she
manages the business without their knowledge or
concurrence, were they owners of the stocks in their
own rights. Each and every one of the facts all set
forth above, in the same manner, is inconsistent with
the claim that the stockholders, other than Maria B.
Castro, own their shares in their own right. On the
other hand, each and every one of them, and all of
them, can point to no other conclusion than that
Maria B. Castro was the sole and exclusive owner of
the shares and that they were only her dummies.

7. Arcilla v. CA
Private respondent filed with the Regional Trial
Court (RTC) of Catanduanes a complaint for a sum
of money against petitioner. It is alleged therein
that the defendant, succeeded in securing on
credit from the plaintiff, various items, cash and
checks which the defendant encashed, in the
total amount of P93,358.51 which the plaintiff
willingly extended because of the representations
of the defendant that he was a successful
financial consultant of local and international
businessmen; that the defendant's indebtedness
referred is shown and described in thirty (30)
"vales" signed by him or by persons authorized
by him; that the plaintiff had made numerous
demands for payment but the respondent acted
in gross and evident bad faith in refusing to
satisfy the plaintiff's plainly valid, just and
demandable claim; That the plaintiff is left
without any recourse other than to enforce his
claim in court. In petitioners answer, he did not
deny that he had business transactions with the
private respondent but he alleges that "as
President of CSAR Marine Resources, he "was
looking for a "pro-forma" invoice to support his
loan with the Kilusang Kabuhayan at Kaunlaran
(KKK for short). He explicitly admits that "(H)is
loan was in the same (name) of his family
corporation, CSAR Marine Resources, however,
the "vales",were liquidated in the bank loan
releases. Thus his main defense is payment.
The trial court ordered petitioner to pay the
private respondent. Petitioner appealed the
decision before the Court of Appeals and the
latter affirmed the trial courts decision. Petitioner
filed a motion for reconsideration were the Court
of Appeals promulgated an amended decision
ordering the petitioner to pay the private
respondent in his capacity as President of Csar
marine Resources, Inc. Petitoner then filed a
motion for Clarificatroy Judgment alleging therein
that Petitioner Arcilla never had any personal
business transaction with the private respondent
and that Csar Marine Resources is not a party in
the case. Respondent denied the motion on these
grounds: (a) the veil of corporate fiction should
be pierced in this case; (b) since petitioner did
not raise the issue of separate corporate identity
he cannot raise it for the first time in a Motion for
Clarificatory Judgment;

ISSUE: Whether or not the court of appeals erred

in holding Csar marine Resources, Inc., a
domestic corporation duly organized according to
law, where petitioner the president, liable to the
private respondent in the amount awarded in the
appealed decision.

COURTS RULING:
The pleadings lead the Court to the inescapable
conclusion that the petitioner, who is himself a
lawyer, is merely taking advantage of the use of
the innocuous phrase "in his capacity as
President" making the same a sanctuary for a
defense; had long since abandoned or waived
either deliberately or through his obliviscence.
His sole purpose is to avoid complying with the
liability adjudged against him by the public
respondent.
Moreover, by no stretch of even the most fertile
imagination may one be able to conclude that the
challenged Amended Decision directed Csar
Marine Resources, Inc. to pay the amounts
adjudge. By its clear and unequivocal language, it
is the petitioner who was declared liable therefor
and consequently made to pay. That the latter
was ordered to do so as president of the
corporation would not free him from the
responsibility of paying the due amount simply
because according to him, he had ceased to be
corporate president; such conclusion stems from
the fact that the public respondent, in resolving
his motion for clarificatory judgment, pierced the
veil of corporate fictional and cast aside the
contention that both he and the corporation have
separate and distinct personalities. In short, even
if the Court is to assume arguendo that the
obligation was incurred in the name of the
corporation, the petitioner would still be
personally liable therefor because for all legal
intents and purposes, he and the corporation
are one and the same. Csar Marine
Resources, Inc. is nothing more than his
business conduit and alter ego. The fiction
of a separate juridical personality conferred
upon such corporation by law should be
disregarded.

8. RAMOSO VS CA

The Court of Appeals affirmed the SEC en banc.

FACTS:
On March 11, 1957, Commercial Credit Corporation
was registered with SEC as a general financing and
investment corporation. CCC made proposals to
several investors for the organization of franchise
companies in different localities. Petitioners herein
invested and bought majority shares of stocks, while
CCC retained minority holdings.

In 1974, CCC attempted to obtain a quasi-banking

license from Central Bank of the Philippines. But
there was a hindrance because Section 1326 of CBs
Manual of Regulations for Banks and Other
Financial Intermediaries, where corporations are
prohibited from lending funds to persons with related
interests, among others.
What CCC did was divest itself of its shareholdings in
the franchise companies. It incorporated CCC Equity
to take over the administration of the franchise
companies under new management contracts.

Upon investigation, petitioners allegedly discovered

the dissipation of the assets of their respective
franchise companies. Among the alleged fraudulent
schemes by GCC involved transfer or assignment of its
uncollectible notes and accounts; utilization of
spurious commercial papers to generate paper
revenues; and release of collateral in connivance with
unauthorized loans. Furthermore, GCC allegedly
divested itself of its assets through a questionable
offset of receivables arrangement with one of its
creditors, Resource and Finance Corporation.

Ramoso et al then sued GCC before the Securities and

Exchange Commission. The hearing officer ruled in
favor of Ramoso et al. He pierced the veil of corporate
fiction and he declared that the franchise branches,
GCC, and CCC equity are one and the same
corporation; that as such, the franchise branches, in
whom Ramoso et al invested, are not liable to the
obligations incurred by GCC. The SEC en banc
however reversed the ruling of the hearing officer.

ISSUE:

Whether or not the veil of corporate fiction should be

pierced.
HELD:
No. Ramoso et al did not properly plead their cause.
They merely alleged that CCC Equity is a conduit of
GCC. As found by the SEC en banc, Ramoso et al were
not able to prove that CCC Equity was incorporated in
order to perpetrate fraud against them. Whether the
existence of the corporation should be pierced depends
on questions of facts, appropriately pleaded. Mere
allegation that a corporation is the alter ego of the
individual stockholders is insufficient.
The presumption is that the stockholders or officers
and the corporation are distinct entities. The burden
of
proving
otherwise is on the party seeking to have the court
pierce the veil of the corporate entity. It was not
shown
that
the
debts incurred by GCC were actually incurred in bad
faith. Further, there is a pending case relating to the
liability of Ramoso et al as guarantors that will be
the proper forum to raise their respective liability as
regards said debts.

SECTION 6
LIRAG TEXTILE MILLS vs. SSS
Facts:
SSS (respondent) and Lirag Textile Mills (Petitioner)
entered into a Purchase Agreement which Respondent
agreed to purchase preferred stocks of Petitioner
worth P1 million subject to conditions that Petitioner
should repurchase the shares of stocks at a regular
interval of one year and to pay dividends and failure
to redeem and pay the dividend, the entire obligation
shall become due and demandable and it shall be
liable for an amount equivalent to 12% of the amount
then outstanding as liquidated damages.
Basilio Lirag (Basilio) as President of Lirag Textile
Mills signed the Agreement as a surety to guarantee
the redemption of the stocks, the payment of
dividends and other obligations.
Pursuant to the Agreement, Respondent paid
Petitioner P500,000 on two occasions and the latter
issued 5,000 preferred stocks with a par value of P100
To guarantee the redemption of the stocks purchased
by the respondent, the payment of dividends, as well
as the other obligations of the Lirag Textile Mills, Inc.,
defendants Basilio L. Lirag signed the Purchase
Agreement not only as president of the defendant
corporation, but also as surety so that should the
Lirag Textile Mills, Inc. fail to perform any of its
obligations in the said Purchase Agreement, the
surety shall immediately pay to the vendee the
amounts then outstanding.
Lirag failed to redeem the certificates of stock
After sending Respondent sent demand letters,
Petitioner and Basilio still made no redemption nor
made dividend payments.
Respondent filed an action for specific performance
and damages against Petitioner
The lower court ruled in favor of SSS
Petitioner contends that there is no obligation on their
part to redeem the stock certificates since Respondent
is still a preferred stock holder of the company and
such redemption is dependent upon the financial
ability of the company.

On the part of Basilio, he contends that his liability

only arises only if the company is liable and does not
perform its obligations under the Agreement.

Issue:
Whether or not the Purchase Agreement entered into
by the Parties is a debt instrument

Held:
YES, the Purchase Agreement is a debt instrument.
Its terms and conditions unmistakably show that the
parties intended the repurchase of the preferred
shares on the respective scheduled dates to be an
absolute obligation which does not depend upon the
financial ability of petitioner corporation. This
absolute obligation on the part of petitioner
corporation is made manifest by the fact that a surety
was required to see to it that the obligation is fulfilled
in the event of the principal debtor's inability to do so.
The unconditional undertaking of petitioner
corporation to redeem the preferred shares at the
specified dates constitutes a debt which is defined "as
an obligation to pay money at some fixed future time,
or at a time which becomes definite and fixed by acts
of either party and which they expressly or impliedly,
agree to perform in the contract.
It cannot be said that SSS is a preferred stockholder.
The rights given by the Purchase Agreement to SSS
are not rights enjoyed by ordinary stockholders. Since
there was a condition that failure to repurchase the
stocks on the scheduled dates renders the entire
obligation due and demandable with interest. These
features clearly show that intent of the parties to be
bound therein as debtor and creditor and not as a
corporation and stockholder.
The SC futher held Basilio L. Lirag cannot deny
liability for petitioner corporation's default. As surety,
Basilio L. Lirag is bound immediately to pay
respondent SSS the amount then outstanding.
The award of liquidated damages represented by 12%
of the amount then outstanding is correct, considering
that the petitioners in the given facts admitted having
failed to fulfill their obligations under the Agreement.
The grant of liquidated damages is expressly provided

for the Purchase Agreement in case of contractual

breach.
Since Lirag did not deny its failure to redeem the
preferred shares and the non-payment of dividends
which are overdue, they are bound to earn legal
interest from the time of demand, in this case, judicial
i.e. the time of filing the action.

SECTION 8
Republic v. Agana
On 18 September 1961, the Robes-Francisco Realty &
Development Corporation (RFRDC) secured a loan
from the Republic Planters Bank in the amount of
P120,000.00. As part of the proceeds of the loan,
preferred shares of stocks were issued to RFRDC
through its officers then, Adalia F. Robes and one
Carlos F. Robes (the Bank lent such amount partially
in the form of money and partially in the form of stock
certificates).
Said stock certificates were in the name of Adalia
F. Robes and Carlos F. Robes, who subsequently,
however, endorsed his shares in favor of Adalia F.
Robes. Said certificates of stock bear the following
terms and conditions:
"The Preferred Stock shall have the following rights,
preferences, qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of 1%,
cumulative and participating. xxx 2. That such
preferred shares may be redeemed, by the system of
drawing lots, at any time after 2years from the date
of issue at the option of the Corporation."
Later, RFRDC and Robes proceeded against the Bank
and filed a complaint anchored on their alleged rights
to collect dividends under the preferred shares in
question and to have the bank redeem the same under
the terms and conditions of the stock certificates.
The trial court ruled in favor of RFRDC ordering the
bank to pay it and Robes the face value of the stock
certificates as redemption price plus 1%quarterly
interest thereon until full payment.
ISSUE: WON the bank can be compelled to redeem
the preferred shares issued to RFRDC and Robes.
HELD:
Redeemable shares are shares usually preferred,
which by their terms are redeemable at a fixed date or
at the option of either the issuing corporation or the
stockholder or both at a certain redemption price.
While the stock certificate does allow redemption, the
option to do so was clearly vested in the bank.
The redemption therefore is clearly the type known as
"optional". Thus, except as otherwise provided in the

stock certificate, the redemption rests entirely with

the corporation and the stockholder is without right to
either compel or refuse the redemption of its stock.
Furthermore, the terms and conditions set forth
therein use the word "may". It is a settled doctrine
in statutory construction that the word "may" denotes
discretion, and cannot be construed as having a
mandatory effect. The redemption of said shares
cannot be allowed.
The Central Bank made a finding that the Bank has
been suffering from chronic reserve deficiency, and
that such finding resulted in a directive, issued on
31 January 1973 by then Gov. G. S. Licaros of
the Central Bank, to the President and Acting
Chairman of the Board of the bank prohibiting the
latter from redeeming any preferred share, on the
ground that said redemption would reduce the assets
of the Bank to the prejudice of its depositors and
creditors. Redemption of preferred shares was
prohibited for a just and valid reason. The directive
issued by the Central Bank Governor was obviously
meant to preserve the status quo, and to prevent
the financial ruin of a banking institution that would
have resulted in adverse repercussions, not only to its
depositors and creditors, but also to the banking
industry as a whole. The directive, in limiting the
exercise of a right granted by law to a corporate
entity, may thus be considered as an exercise of police
power.

WON Manning, McDonald & Simmons should pay for

deficiency income taxes.

Held:
NO. Treasury shares are stocks issued and

SECTION 9
CIR vs Manning
Reese, the majority stockholder of Mantrasco,
executed a trust agreement between him, Mantrasco,
Ross, Selph, carrascoso & Janda law firm and the
minority stockholders, Manning, McDonald and
Simmons. Said agreement was entered into because of
Reeses desire that Mantrasco and Mantrasocs two
subsidiaries, Mantrasco Guamand Port Motors, to
continue under the management of Manning,
McDonald and Simmons upon his [Reese] death.
When Reese died, Mantrasco paid Reeses estate the
value of his shares. When said purchase price has
been fully paid, the24, 700 shares, which were
declared
as
dividends,
were
proportionately
distributed to Manning, McDonald and Simmons.
Because of this, the BIR issued assessments on
Manning, McDonald and Simmons for deficiency
income tax for 1958. Manning et al, opposed this
assessment but the BIR still found them liable.
Manning et al. appealed to the CTA, which absolved
them from any liability.

Issues: WON the shares are treasury shares.

fully paid for and re-acquired by the corporation either

by purchase, donation, forfeiture or other means. They
are therefore issued shares, but being in the treasury
they do not have the status of outstanding shares.
Consequently, although a treasury share, not having
been retired by the corporation re-acquiring it, may be
re-issued or sold again, such share, as long as it is
held by the corporation as a treasury share,
participates neither in dividends, because dividends
cannot be declared by the corporation to itself, nor in
the meetings of the corporations as voting stock, for
otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors
will be able to perpetuate their control of the
corporation though it still represent a paid for
interest in the property of the corporation.
Where the manifest intention of the parties to
the trust agreement was, in sum and substance, to
treat the shares of a deceased stockholder as
absolutely outstanding shares of said stockholders
estate until they were fully paid, the declaration of
said shares as treasury stock dividend was a complete
nullity and plainly violative of public policy.
A stock dividend, being one payable in capital
stock, cannot be declared out of outstanding corporate
stock, but only from retained earnings.
YES. Where by the use of a trust instrument
as a convenient technical device, respondents
bestowed unto themselves the full worth and value of
a deceased stockholders corporate holding acquired
with the very earnings of the companies, such package
device which obviously is not designed to carry out the
usual stock dividend purpose of corporate expansion
reinvestment, e.g., the acquisition of additional
facilities and other capital budget items, but
exclusively for expanding the capital base of the
surviving stockholders in the company, cannot be
allowed to deflect the latters responsibilities toward
our income tax laws. The conclusion is ineluctable
that whenever the company parted with a portion of

its earnings "to buy" the corporate holdings of the

deceased stockholders, it was in ultimate effect and
result making a distribution of such earnings to the
surviving stockholders. All these amounts are

consequently subject to income tax as being, in truth

and in fact, a flow of cash benefits to the surviving
stockholders.