G.R. No.

131214

July 27, 2000

BA SAVINGS BANK, petitioner,

vs.
ROGER T. SIA, TACIANA U. SIA and JOHN DOE, respondents.
DECISION

In its Memorandum, petitioner submits the following issues for the

consideration of the Court:
"I Whether or not petitioner-corporations lawyers are authorized
to execute and sign the certificate of non-forum shopping. x x x
"II Whether or not the certification of petitioners authorized
lawyers will bind the corporation.

PANGANIBAN, J.:
"III Whether or not the certification by petitioner corporations
lawyers is in compliance with the requirements on non-forum
shopping."6

The certificate of non-forum shopping required by Supreme Court Circular

28-91 may be signed, for and on behalf of a corporation, by a specifically
authorized lawyer who has personal knowledge of the facts required to be
disclosed in such document. Unlike natural persons, corporations may
perform physical actions only through properly delegated individuals;
namely, its officers and/or agents.

Simply stated, the main issue is whether Supreme Court Revised Circular
No. 28-91 allows a corporation to authorize its counsel to execute a
certificate of non-forum shopping for and on its behalf.

The Case

The Courts Ruling

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules

of Court, assailing the August 6, 1997 Resolution1 of the Court of Appeals
(CA) in CA-GR SP No. 43209.2
Also challenged by petitioner is the October 24, 1997 CA Resolution3
denying its Motion for Reconsideration.
The Facts
On August 6, 1997, the Court of Appeals issued a Resolution denying due
course to a Petition for Certiorari filed by BA Savings Bank, on the ground
that "the Certification on anti-forum shopping incorporated in the petition
was signed not by the duly authorized representative of the petitioner, as
required under Supreme Court Circular No. 28-91, but by its counsel, in
contravention of said circular x x x."
A Motion for Reconsideration was subsequently filed by the petitioner,
attached to which was a BA Savings Bank Corporate Secretarys
Certificate,4 dated August 14, 1997. The Certificate showed that the
petitioners Board of Directors approved a Resolution on May 21, 1996,
authorizing the petitioners lawyers to represent it in any action or
proceeding before any court, tribunal or agency; and to sign, execute and
deliver the Certificate of Non-forum Shopping, among others.
On October 24, 1997, the Motion for Reconsideration was denied by the
Court of Appeals on the ground that Supreme Court Revised Circular No.
28-91 "requires that it is the petitioner, not the counsel, who must certify
under oath to all of the facts and undertakings required therein."
Hence, this appeal.5
Issue

The Petition is meritorious.

Main Issue:
Authority of Counsel
A corporation, such as the petitioner, has no powers except those
expressly conferred on it by the Corporation Code and those that are
implied by or are incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly
authorized officers and agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly authorized for
the purpose by corporate bylaws or by a specific act of the board of
directors. "All acts within the powers of a corporation may be performed by
agents of its selection; and, except so far as limitations or restrictions
which may be imposed by special charter, by-law, or statutory provisions,
the same general principles of law which govern the relation of agency for
a natural person govern the officer or agent of a corporation, of whatever
status or rank, in respect to his power to act for the corporation; and
agents once appointed, or members acting in their stead, are subject to
the same rules, liabilities and incapacities as are agents of individuals and
private persons."7
In the present case, the corporations board of directors issued a
Resolution specifically authorizing its lawyers "to act as their agents in any
action or proceeding before the Supreme Court, the Court of Appeals, or
any other tribunal or agency[;] and to sign, execute and deliver in
connection therewith the necessary pleadings, motions, verification,
affidavit of merit, certificate of non-forum shopping and other instruments
necessary for such action and proceeding." The Resolution was sufficient
to vest such persons with the authority to bind the corporation and was
specific enough as to the acts they were empowered to do.

In the case of natural persons, Circular 28-91 requires the parties

themselves to sign the certificate of non-forum shopping. However, such
requirement cannot be imposed on artificial persons, like corporations, for
the simple reason that they cannot personally do the task themselves. As
already stated, corporations act only through their officers and duly
authorized agents. In fact, physical actions, like the signing and the
delivery of documents, may be performed, on behalf of the corporate
entity, only by specifically authorized individuals.
It is noteworthy that the Circular does not require corporate officers to sign
the certificate.1wphi1 More important, there is no prohibition against
authorizing agents to do so.
In fact, not only was BA Savings Bank authorized to name an agent to
sign the certificate; it also exercised its appointing authority reasonably
well. For who else knows of the circumstances required in the Certificate
but its own retained counsel. Its regular officers, like its board chairman
and president, may not even know the details required therein.
Consistent with this rationale, the Court en banc in Robern Development
Corporation v. Judge Jesus Quitain8 has allowed even an acting regional
counsel of the National Power Corporation to sign, among others, the
certificate of non-forum shopping required by Circular 28-91. The Court
held that the counsel was "in the best position to verify the truthfulness
and the correctness of the allegations in the Complaint" and "to know and
to certify if an action x x x had already been filed and pending with the
courts."9
Circular 28-91 was prescribed by the Supreme Court to prohibit and
penalize the evils of forum shopping. We see no circumvention of this
rationale if the certificate was signed by the corporations specifically
authorized counsel, who had personal knowledge of the matters required
in the Circular. In Bernardo v. NLRC,10 we explained that a literal
interpretation of the Circular should be avoided if doing so would subvert
its very rationale. Said the Court:
"x x x. Indeed, while the requirement as to certificate of non-forum
shopping is mandatory, nonetheless the requirements must not be
interpreted too literally and thus defeat the objective of preventing the
undesirable practice of forum-shopping."
Finally, we stress that technical rules of procedure should be used to
promote, not frustrate, justice.11 While the swift unclogging of court
dockets is a laudable objective, the granting of substantial justice is an
even more urgent ideal.
WHEREFORE, the Petition is GRANTED and the appealed Resolution is
REVERSED and SET ASIDE. The case is REMANDED to the Court of
Appeals, which is directed to continue the proceedings in CA-GR SP No.
43209 with all deliberate speed. No costs.
SO ORDERED.
Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.

No. L-49023 June 30, 1987

Footnotes
1

Penned by J. Quirino D. Abad Santos Jr., Division chairman;

with the concurrence of JJ Conchita Carpio Morales and B.A.
Adefuin-dela Cruz, members.
2

MADRIGAL & COMPANY, INC., petitioner,

vs.
HON. MINISTER OF LABOR and MADRIGAL CENTRAL OFFICE
EMPLOYEES UNION, respondents.

Rollo, p. 16. The text of the Resolution reads as follows:

verified and neither was it accompanied by the proper supporting papers.

For this reason, the Department of Labor took no action on the petitioner's
request.
On January 19, 1976, the labor arbiter rendered a decision 18 granting,
among other things, a general wage increase of P200.00 a month
beginning March 1, 1974 plus a monthly living allowance of P100.00
monthly in favor of the petitioner's employees. The arbiter specifically
found that the petitioner "had been making substantial profits in its
operation" 19 since 1972 through 1975. The petitioner appealed.

SARMIENTO, J.:
"It appearing that the Certification on anti-forum
shopping incorporated in the petition was signed not
by the duly authorized representative of the petitioner,
as required under Supreme Court Circular No. 28-91,
but by its counsel, in contravention of said circular, the
instant petition for certiorari and mandamus with
urgent prayer for issuance of a writ of preliminary
injunction and/or temporary restraining order is
hereby DENIED DUE COURSE and ordered
DISMISSED pursuant to paragraph 2 of Supreme
Court Circular No. 28-91."
3

Rollo, pp. 18-19. The text of the Resolution reads as follows:

"For resolution is the Motion for Reconsideration filed
by petitioner to Our Resolution dated August 6,1997,
dismissing petitioners petition for certiorari and
mandamus for failure to comply with Supreme Court
Circular No. 28-91, it appearing that the Certification
on anti-forum shopping incorporated in the petition
was signed not by the duly authorized representative
of the petitioner, but by its counsel, in contravention of
the requirement of said Circular.
"In this motion for reconsideration, petitioner justifies
said failure by claiming that counsel for petitioner was
the duly authorized representative of the petitioner by
virtue of a Resolution issued by the Board of Directors
of the petitioner.
"We deny the

G.R. No. L-48237 June 30, 1987

MADRIGAL & COMPANY, INC., petitioner,
vs.
HON. RONALDO B. ZAMORA, PRESIDENTIAL ASSISTANT FOR
LEGAL AFFAIRS, THE HON. SECRETARY OF LABOR, and
MADRIGAL CENTRAL OFFICE EMPLOYEES UNION, respondents.

These are two petitions for certiorari and prohibition filed by the petitioner,
the Madrigal & Co., Inc. The facts are undisputed.
The petitioner was engaged, among several other corporate objectives, in
the management of Rizal Cement Co., Inc. 1 Admittedly, the petitioner and
Rizal Cement Co., Inc. are sister companies. 2 Both are owned by the
same or practically the same stockholders. 3 On December 28, 1973, the
respondent, the Madrigal Central Office Employees Union, sought for the
renewal of its collective bargaining agreement with the petitioner, which
was due to expire on February 28, 1974. 4 Specifically, it proposed a wage
increase of P200.00 a month, an allowance of P100.00 a month, and other
economic benefits. 5 The petitioner, however, requested for a deferment in
the negotiations.
On July 29, 1974, by an alleged resolution of its stockholders, the
petitioner reduced its capital stock from 765,000 shares to 267,366
shares. 6 This was effected through the distribution of the marketable
securities owned by the petitioner to its stockholders in exchange for their
shares in an equivalent amount in the corporation. 7
On August 22, 1975, by yet another alleged stockholders' action, the
petitioner reduced its authorized capitalization from 267,366 shares to
110,085 shares, again, through the same scheme. 8
After the petitioner's failure to sit down with the respondent union, the
latter, on August 28, 1974, commenced Case No. LR-5415 with the
National Labor Relations Commission on a complaint for unfair labor
practice. 9 In due time, the petitioner filed its position paper, 10 alleging
operational losses. Pending the resolution of Case No. LR-5415, the
petitioner, in a letter dated November 17, 1975, 11 informed the Secretary
of Labor that Rizal Cement Co., Inc., "from which it derives income" 12 "as
the General Manager or Agent" 13 had "ceased operating temporarily." 14
"In addition, "because of the desire of the stockholders to phase out the
operations of the Madrigal & Co., Inc. due to lack of business incentives
and prospects, and in order to prevent further losses," 15 it had to reduce
its capital stock on two occasions "As the situation, therefore, now stands,
the Madrigal & Co., Inc. is without substantial income to speak of,
necessitating a reorganization, by way of retrenchment, of its employees
and operations." 16 The petitioner then requested that it "be allowed to
effect said reorganization gradually considering all the circumstances, by
phasing out in at least three (3) stages, or in a manner the Company
deems just, equitable and convenient to all concerned, about which your
good office will be apprised accordingly." 17 The letter, however, was not

On January 29, 1976, the petitioner applied for clearance to terminate the
services of a number of employees pursuant supposedly to its
retrenchment program. On February 3, 1976, the petitioner applied for
clearance to terminate 18 employees more. 20 On the same date, the
respondent union went to the Regional Office (No. IV) of the Department
of Labor (NLRC Case No. R04-2-1432-76) to complain of illegal lockout
against the petitioner. 21 Acting on this complaint, the Secretary of 22 Labor,
in a decision dated December 14, 1976, 22 found the dismissals "to be
contrary to law" 23 and ordered the petitioner to reinstate some 40
employees, 37 of them with backwages. 24 The petitioner then moved for
reconsideration, which the Acting Labor Secretary, Amado Inciong, denied.
25

Thereafter, the petitioner filed an appeal to the Office of the President. The
respondent, the Presidential Assistant on Legal Affairs, affirmed with
modification the Labor Department's decision, thus:
xxx xxx xxx
1. Eliseo Dizon, Eugenio Evangelista and Benjamin
Victorio are excluded from the order of reinstatement.
2. Rogelio Meneses and Roberto Taladro who appear
to have voluntarily retired and paid their retirement
pay, their cases are left to the judgment of the
Secretary of Labor who is in a better position to
assess appellant's allegation as to their retirement.
3. The rest are hereby reinstated with six (6) months
backwages, except Aleli Contreras, Teresita Eusebio
and Norma Parlade who are to be reinstated without
backwages.
SO ORDERED. 26
xxx xxx xxx
On May 15, 1978, the petitioner came to this court. (G.R. No. 48237.)
Meanwhile, on May 25, 1977, the National Labor Relations Commission
rendered a decision affirming the labor arbiter's judgment in Case No. LR-

5415. 27 The petitioner appealed to the Secretary of Labor. On June 9,

1978, the Secretary of Labor dismissed the appeal. 28 Following these
successive reversals, the petitioner came anew to this court. (G.R. No.
49023.)
By our resolution dated October 9, 1978, we consolidated G.R. No. 48237
with G.R. No. 49023. 29 We likewise issued temporary restraining orders. 30
In G.R. No. 48237, the petitioner argues, that.
xxx xxx xxx
I. SAID RESPONDENTS ERRED IN HOLDING THAT THERE WAS NO
VALID COMPLIANCE WITH THE CLEARANCE REQUIREMENT.
II. SAID RESPONDENTS ERRED IN NOT HOLDING THAT THERE IS
NO LOCKOUT HERE IN LEGAL CONTEMPLATION, MUCH LESS FOR
UNION-BUSTING PURPOSES.
III. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN ORDERING
THE REINSTATEMENT OF THE REST OF AFFECTED MEMBERS OF
RESPONDENT UNION WITH SIX (6) MONTHS BACKWAGES, EXCEPT
ALELI CONTRERAS, TERESITA EUSEBIO AND NORMA PARLADE
WHO ARE TO BE REINSTATED WITHOUT BACKWAGES.
IV. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN LEAVING TO
THE JUDGMENT OF RESPONDENT SECRETARY THE CASES OF
ROGELIO MENESES AND ROBERTO TALADRO WHO HAD
VOLUNTARILY RETIRED AND PAID THEIR RETIREMENT PAY. 31
xxx xxx xxx
while in G.R. No. 49023, it submits that:
xxx xxx xxx
1. RESPONDENT MINISTER ERRED IN AFFIRMING THE DECISION EN
BANC OF THE NATIONAL LABOR RELATIONS COMMISSION DESPITE
CLEAR INDICATIONS IN THE RECORD THAT THE AWARD WAS
PREMATURE IN THE ABSENCE OF A DEADLOCK IN NEGOTIATION
AND THE FAILURE ON THE PART OF THE LABOR ARBITER TO
RESOLVE THE MAIN IF NOT ONLY ISSUE OF REFUSAL TO BARGAIN,
THEREBY DEPRIVING PETITIONER OF ITS RIGHT TO DUE
PROCESS.
2. ASSUMING ARGUENDO THAT THERE WAS A DEADLOCK IN
NEGOTIATION, RESPONDENT MINISTER ERRED NEVERTHELESS IN
NOT FINDING THAT THE ECONOMIC BENEFITS GRANTED IN THE
FORM OF SALARY INCREASES ARE UNFAIR AND VIOLATIVE OF THE
MANDATORY GUIDELINES PRESCRIBED UNDER PRESIDENTIAL
DECREE NO. 525 AND IGNORING THE UNDISPUTED FACT THAT
PETITIONER HAD VIRTUALLY CEASED OPERATIONS AFTER HAVING

TWICE DECREASED ITS CAPITAL STOCKS AND, THEREFORE, NOT

FINANCIALLY CAPABLE TO ABSORB SUCH AWARD OF BENEFITS. 32

the clearance requirement. That being so, it matters

little whether or not complainant union or any of its
members failed to interpose any opposition thereto.

xxx xxx xxx

There is no merit in these two (2) petitions.
As a general rule, the findings of administrative agencies are accorded not
only respect but even finality. 33 This is especially true with respect to the
Department of Labor, which performs not only a statutory function but
carries out a Constitutional mandate as well. 34 Our jurisdiction, as a rule,
is confined to cases of grave abuse of discretion. 35 But for certiorari to lie,
there must be such arbitrary and whimsical exercise of power, or that
discretion was exercised despotically. 36
In no way can the questioned decisions be seen as arbitrary. The
decisions themselves show why.
Anent Case No. R04-2-1432-76 (G.R. No. 48237), we are satisfied with
the correctness of the respondent Presidential Assistant for Legal Affairs'
findings. We quote:
xxx xxx xxx
In urging reversal of the appealed decision, appellant
contends that (1) its letter dated November 17, 1975,
constitute "substantial compliance with the clearance
requirement to terminate;" and (2) individual
appellees' dismissal had no relation to any union
activities, but was the result of an honest-to-goodness
retrenchment policy occasioned by loss of income
due to cessation of operation.
We find the first contention to be without merit. Aside
from the fact that the controversial letter was
unverified, with not even a single document submitted
in support thereof, the same failed to specify the
individual employees to be affected by the intended
retrenchment. Not only this, but the letter is so vague
and indefinite regarding the manner of effecting
appellant's retrenchment plan as to provide the
Secretary of (sic) a reasonable basis on which to
determine whether the request for retrenchment was
valid or otherwise, and whether the mechanics in
giving effect thereto was just or unjust to the
employees concerned. In fact, to be clearly implied
from the letter is that the implementary measures
needed to give effect to the intended retrenchment
are yet to be thought of or concretized in the indefinite
future, measures about which the office of the
Secretary "will be apprised accordingly." All these, and
more, as correctly found by the Acting Secretary,
cannot but show that the letter is insufficient in form
and substance to constitute a valid compliance with

It cannot be over-emphasized that the purpose in

requiring a prior clearance by the Secretary of Labor,
in cases of shutdown or dismissal of employees, is to
afford said official ample opportunity to examine and
determine the reasonableness of the request. This is
made imperative in order to give meaning and
substance to the constitutional mandate that the State
must "afford protection to labor," and guarantee their
"security of tenure." Indeed, the rules require that the
application for clearance be filed ten (10) days before
the intended shutdown or dismissal, serving a copy
thereof to the employees affected in order that the
latter may register their own individual objections
against the grant of the clearance. But how could this
requirement of notice to the employees have been
complied with, when, as observed by the Acting
Secretary in his modificatory decision dated June 30,
1977 "the latter of November 17, 1975 does not even
state definitely the employees involved" upon whom
service could be made.
With respect to appellant's second contention, we
agree with the Acting Secretary's findings that
individual appellee's dismissal was an offshoot of the
union's demand for a renegotiation of the then validly
existing collective bargaining Agreement.
xxx xxx xxx
The pattern of appellant's acts after the decision of
the Labor Arbiter in Case No. LR-5415 has convinced
us that its sole objective was to render moot and
academic the desire of the union to exercise its right
to bargain collectively with management, especially
so when it is considered in the light of the fact that
under the said decision the demand by the union for
wage increase and allowances was granted. What
renders appellant's motive suspect was its haste in
terminating the services of individual appellees,
without waiting the outcome of its appeal in Case No.
LR-5415. The amount involved by its offer to pay
double separation could very well have been used to
pay the salaries of those employees whose services
were sought to be terminated, until the resolution of
its appeal with the NLRC, since anyway, if its planned
retrenchment is found to be justifiable and done in
good faith, its only liability is to answer for the
separation pay provided by law. By and large,
therefore, we agree with the Acting Secretary that,
under the circumstances obtaining in this case,
"respondent's action [was] a systematic and

deliberate attempt to get rid of complainants because

of their union activities.
We now come to the individual cases of Aleli
Contreras, Teresita Eusebio and Norma Parlade. It is
appellant's claim that these three (3) should not be
reinstated inasmuch as they have abandoned their
work by their continued absences, and moreover in
the case of Contreras, she failed to oppose the
application for clearance filed against her on October
24, 1975. However, appellant's payrolls for December
16-31, 1975, January 1-15, 1976 and January 16-31,
1976, show that the three (3) were "on leave without
pay." As correctly appreciated by the Acting Secretary,
these "payrolls prove, first, that "leave" has been
granted to these employees, and, second, that it is a
practice in the company to grant "leaves without pay"
without loss of employment status, to those who have
exhausted their authorized leaves." As regards,
Norma Parlade, the records show that she "truly
incurred illness and actually underwent surgery in
Oct., 1975." As to Aleli Contreras, there is no showing
that the Secretary of Labor or appellant ever acted on
the clearance. If we were to follow the logic of
appellant, Contreras should not have been included in
the application for clearance filed on Feb. 3, 1976.
The fact that she was included shows that up to that
time, she was still considered as a regular employee.
It was for these reasons, coupled with the length of
service that these employees have rendered
appellant, that the Acting Secretary ordered their
reinstatement but without backwages. 37
xxx xxx xxx
With respect Lo Case No. LR-5415 (G.R. No. 49023), we are likewise
content with the findings of the National Labor Relations Commission.
Thus:
xxx xxx xxx
Appellant now points that the only issue certified to
compulsory arbitration is "refusal to bargain" and it is,
therefore, premature to dictate the terms of the CBA
on the assumption that there was already a deadlock
in negotiation. Appellant further contends that,
assuming there was deadlock in negotiation, the
economic benefits granted are unreasonable and
violative of the guideline prescribed by P.D. 525.
On the other hand, it is the union's stance that its
economic demands are justified by, the persistent
increase in the cost of living and the substantial
earnings of the company from 1971 to 1975.

It bears to stress that although the union's petition

was precipitated by the company's refusal to bargain,
there are glaring circumstances pointing out that the
parties also submitted "deadlock" to arbitration. The
petition itself is couched in general terms, praying for
arbitration of the union's "dispute" with the respondent
concerning proposed changes in the collective
bargaining agreement." It is supported with a copy of
the proposed changes which just goes to show that
the union, aside from the issue concerning
respondent's refusal to bargain, sought determination
of the merit of its proposals. On the part of the
appellant company, it pleaded financial incapacity to
absorb the proposed economic benefits during the
initial stage of the proceedings below. Even the
evidence and arguments proferred below by both
parties are relevant to deadlock issue. In the face of
these factual environment, it is our view that the Labor
Arbiter below did not commit a reversible error in
rendering judgment on the proposed CBA changes. At
any rate, the minimum requirements of due process
was satisfied because as heretofore stated, the
appellant was given Opportunity, and had in fact,
presented evidence and argument in avoidance of the
proposed CBA changes.
We do not also subscribe to appellant's argument that
by reducing its capital, it is made evident that it is
phasing out its operations. On the contrary, whatever
may be the reason behind such reductions, it is
indicative of an intention to keep the company a going
concern. So much so that until now almost four (4)
years later, it is still very much in existence and
operational as before.
We now come to the question concerning the
equitableness of the economic benefits granted
below. It requires no evidence to show that the
employees concerned deserve some degree of
upliftment due to the unabated increase in the cost of
living especially in Metro Manila. Of course the
company would like us to believe that it is losing and
is therefore not financially capable of improving the
present CBA to favor its employees. In support of
such assertion, the company points that the profits
reflected in its yearly Statement of Income and
Expenses are dividends from security holdings. We,
however, reject as puerile its suggestion to dissociate
the dividends it received from security holdings on the
pretext that they belong exclusively to its
stockholders. The dividends received by the company
are corporate earnings arising from corporate
investment which no doubt are attended to by the
employees involved in this proceedings. Otherwise. it
would not have been reflected as part of profits in the
company's yearly financial statements. In determining
the reasonableness of the economic grants below, we

have, therefore, scrutinized the company's Statement

of Income and Expenses from 1972 to 1975 and after
equating the welfare of the employees with the
substantial earnings of the company, we find the
award to be predicated on valid justifications.
The salary increase we herein sanction is also in
keeping with the rational that made imperative the
enactment of the Termination Pay Law since in case
the respondent company really closes down, the
employees will receive higher separation pay or
retirement benefits to tide them over while seeking
another employment. 38
What clearly emerges from the recorded facts is that the petitioner, awash
with profits from its business operations but confronted with the demand of
the union for wage increases, decided to evade its responsibility towards
the employees by a devised capital reduction. While the reduction in
capital stock created an apparent need for retrenchment, it was, by all
indications, just a mask for the purge of union members, who, by then,
had agitated for wage increases. In the face of the petitioner company's
piling profits, the unionists had the right to demand for such salary
adjustments.
That the petitioner made quite handsome profits is clear from the records.
The labor arbiter stated in his decision in the collective agreement case
(Case No. LR-5415):
xxx xxx xxx
A clear scrutiny of the financial reports of the
respondent [herein petitioner] reveals that it had been
making substantial profits in the operation.
In 1972, when it still had 765,000 common shares, of
which 305,000 were unissued and 459,000
outstanding capitalized at P16,830,000.00, the
respondent made a net profit of P2,403,211.58. Its
total assets were P70,821,317.81.
In 1973, based on the same capitalization, its profit
increased to P2,724,465.33. Its total assets increased
to P83,240,473.73.
In 1974, although its capitalization was reduced from
P16,830,000.00 to P11,230,459.36, its profits were
further increased to P2,922,349.70. Its assets were
P78,842,175.75.
The reduction in its assets by P4,398,297.98 was due
to the fact that its capital stock was reduced by the
amount of P5,599,540.54.

In 1975, for the period of only six months, the

respondent reported a net profit of P547,414.72,
which when added to the surplus of P5,591.214.19,
makes a total surplus of P6,138,628.91 as of June 30,
1975. 39
xxx xxx xxx
The petitioner would, however, have us believe that it in fact sustained
losses. Whatever profits it earned, so it claims were in the nature of
dividends "declared on its shareholdings in other companies in the earning
of which the employees had no participation whatsoever." 40 "Cash
dividends," according to it, "are the absolute property of the stockholders
and cannot be made available for disposition if only to meet the
employees' economic demands." 41
There is no merit in this contention. We agree with the National Labor
Relations Commission that "[t]he dividends received by the company are
corporate earnings arising from corporate investment." 42 Indeed, as found
by the Commission, the petitioner had entered such earnings in its
financial statements as profits, which it would not have done if they were
not in fact profits. 43
Moreover, it is incorrect to say that such profits in the form of dividends
are beyond the reach of the petitioner's creditors since the petitioner
had received them as compensation for its management services in favor
of the companies it managed as a shareholder thereof. As such
shareholder, the dividends paid to it were its own money, which may then
be available for wage increments. It is not a case of a corporation
distributing dividends in favor of its stockholders, in which case, such
dividends would be the absolute property of the stockholders and hence,
out of reach by creditors of the corporation. Here, the petitioner was acting
as stockholder itself, and in that case, the right to a share in such
dividends, by way of salary increases, may not be denied its employees.
Accordingly, this court is convinced that the petitioner's capital reduction
efforts were, to begin with, a subterfuge, a deception as it were, to
camouflage the fact that it had been making profits, and consequently, to
justify the mass layoff in its employee ranks, especially of union members.
They were nothing but a premature and plain distribution of corporate
assets to obviate a just sharing to labor of the vast profits obtained by its
joint efforts with capital through the years. Surely, we can neither
countenance nor condone this. It is an unfair labor practice.
As we observed in People's Bank and Trust Company v. People's Bank
and Trust Co. Employees Union: 44
xxx xxx xxx
As has been held by this Court in Insular Lumber
Company vs. CA, et al., L-23875, August 29, 1969, 29
SCRA 371, retrenchment can only be availed of if the
company is losing or meeting financial reverses in its
operation, which certainly is not the case at bar.

Undisputed is the fact, that the Bank "at no time

incurred losses. " As a matter of fact, "the net
earnings of the Bank would be in the average of
P2,000,000.00 a year from 1960 to 1969 and, during
this period of nine (9) years, the Bank continuously
declared dividends to its stockholders." Thus the
mass lay-off or dismissal of the 65 employees under
the guise of retrenchment policy of the Bank is a lame
excuse and a veritable smoke-screen of its scheme to
bust the Union and thus unduly disturb the
employment tenure of the employees concerned,
which act is certainly an unfair labor practice. 45
Yet, at the same tune, the petitioner would claim that "the phasing out of
its operations which brought about the retrenchment of the affected
employees was mainly dictated be the necessity of its stockholders in their
capacity as heirs of the late Don Vicente Madrigal to partition the estate
left by him." 46 It must be noted, however, that the labor cases were tried
on the theory of losses the petitioner was supposed to have incurred to
justify retrenchment. The petitioner cannot change its theory in the
Supreme Court. Moreover, there is nothing in the records that will
substantiate this claim. But what is more important is the fact that it is not
impossible to partition the Madrigal estate assuming that the estate is
up for partition without the petitioner's business closing shop and
inevitably, without the petitioner laying off its employees.
As regards the question whether or not the petitioner's letter dated
November 17, 1975 47 was in substantial compliance with legal clearance
requirements, suffice it to state that apart from the Secretary of Labor's
valid observation that the same "did not constitute a sufficient clearance
as contemplated by law, " 48 the factual circumstances show that the letter
in question was itself a part of the "systematic and deliberate attempt to
get rid of [the union members] because of their union activities." 49 Hence,
whether or not the said letter complied with the legal formalities is beside
the point since under the circumstances, retrenchment was, in all events,
unjustified. Parenthetically, the clearance required under Presidential
Decree No. 850 has been done away with by Batas Blg. 130, approved on
August 21, 1981.
During the pendency of these petitions, the petitioner submitted
manifestations to the effect that certain employees have accepted
retirement benefits pursuant to its retrenchment scheme. 50 This is a
matter of defense that should be raised before the National Labor
Relations Commission.
To do away with the protracted process of determining the earnings
acquired by the employees as a result of ad interim employment, and to
erase any doubt as to the amount of backwages due them, this court, in
line with the precedent set in Mercury Drug Co., Inc. v. Court of Industrial
Relations, 51 affirmed in a long line of decisions that came later, 52 hereby
fixes the amount of backwages at three (3) years pay reckoned at the
increased rates decreed by the labor arbiter in Case No. LR-5415 without
deduction or qualification.
WHEREFORE, the petitions are hereby DISMISSED. Subject to the
modification as to the amount of backwages hereby awarded, the

challenged decisions are AFFIRMED. The temporary restraining orders

are LIFTED. With costs against the petitioner.
This decision is IMMEDIATELY EXECUTORY.
SO ORDERED.
G.R. No. 91478

February 7, 1991

ROSITA PEA petitioner,

vs.
THE COURT OF APPEALS, SPOUSES RISING T. YAP and CATALINA
YAP, PAMPANGA BUS CO., INC., JESUS DOMINGO, JOAQUIN
BRIONES, SALVADOR BERNARDEZ, MARCELINO ENRIQUEZ and
EDGARDO A. ZABAT, respondents.
Cesar L. Villanueva for petitioner.
Martin N. Roque for private respondents.

GANCAYCO, J.:p
The validity of the redemption of a foreclosed real property is the center of
this controversy.
The facts as found by the respondent court are not disputed.
A reading of the records shows that [Pampanga Bus Co.] PAMBUSCO,
original owners of the lots in question under TCT Nos. 4314, 4315 and
4316, mortgaged the same to the Development Bank of the Philippines
(DBP) on January 3, 1962 in consideration of the amount of P935,000.00.
This mortgage was foreclosed. In the foreclosure sale under Act No. 3135
held on October 25, 1974, the said properties were awarded to Rosita
Pea as highest bidder. A certificate of sale was issued in her favor by the
Senior Deputy Sheriff of Pampanga, Edgardo A. Zabat, upon payment of
the sum of P128,000.00 to the Office of the Provincial Sheriff (Exh. 23).
The certificate of sale was registered on October 29, 1974 (Exh. G).
On November 19, 1974, the board of directors of PAMBUSCO, through
three (3) out of its five (5) directors, resolved to assign its right of
redemption over the aforesaid lots and authorized one of its members,
Atty. Joaquin Briones "to execute and sign a Deed of Assignment for and
in behalf of PAMBUSCO in favor of any interested party . . ." (Exh. 24).
Consequently, on March 18, 1975, Briones executed a Deed of
Assignment of PAMBUSCO's redemption right over the subject lots in
favor of Marcelino Enriquez (Exh. 25). The latter then redeemed the said
properties and a certificate of redemption dated August 15, 1975 was
issued in his favor by Sheriff Zabat upon payment of the sum of one

hundred forty thousand, four hundred seventy four pesos P140,474.00) to

the Office of the Provincial Sheriff of Pampanga (Exh. 26).
A day after the aforesaid certificate was issued, Enriquez executed a deed
of absolute sale of the subject properties in favor of plaintiffs-appellants,
the spouses Rising T. Yap and Catalina Lugue, for the sum of
P140,000.00 (Exh. F).
On August 18, 1975, a levy on attachment in favor of Capitol Allied Trading
was entered as an additional encumbrance on TCT Nos. 4314, 4315 and
4316 and a Notice of a pending consulta was also annotated on the same
titles concerning the Allied Trading case entitled Dante Gutierrez, et al. vs.
PAMBUSCO (Civil Case No. 4310) in which the registrability of the
aforesaid lots in the name of the spouses Yap was sought to be resolved
(Exh. 20-F). The certificate of sale issued by the Sheriff in favor of
defendant Pea, the resolution of the PAMBUSCO's board of directors
assigning its redemption rights to any interested party, the deed of
assignment PAMBUSCO executed in favor of Marcelino B. Enriquez, the
certificate of redemption issued by the Sheriff in favor of Enriquez as well
as the deed of absolute sale of the subject lots executed by Enriquez in
favor of the plaintiffs-appellants were all annotated on the same
certificates of title likewise on August 18, 1975. Also, on the same date,
the Office of the Provincial Sheriff of San Fernando, Pampanga informed
defendant-appellee by registered mail "that the properties under TCT Nos.
4314, 4315 and 4316 . . . . were all redeemed by Mr. Marcelino B.
Enriquez on August 15,1975 . . . ;" and that she may now get her money at
the Sheriffs Office (Exh. J and J-1).
On September 8, 1975, Pea wrote the Sheriff notifying him that the
redemption was not valid as it was made under a void deed of
assignment. She then requested the recall of the said redemption and a
restraint on any registration or transaction regarding the lots in question
(Exh. 27).
On Sept. 10, 1975, the CFI Branch III, Pampanga in the aforementioned
Civil Case No. 4310, entitled Dante Gutierrez, et al. vs. PAMBUSCO, et
al., ordered the Register of Deeds of Pampanga . . . to desist from
registering or noting in his registry of property . . . any of the following
documents under contract, until further orders:
(a)
Deed of Assignment dated March 18, 1975 executed by the
defendant Pampanga Bus Company in virtue of a resolution of its Board of
Directors in favor of defendant Marcelino Enriquez;
(b)
A Certificate of Redemption issued by defendant Deputy Sheriff
Edgardo Zabat in favor of defendant Marcelino Enriquez dated August 15,
1975;
(c)
Deed of Sale dated August 16, 1975 executed by defendant
Marcelino Enriquez in favor of defendant Rising Yap. (Original Record, p.
244)

On November 17, 1975, the Land Registration Commission opined under

LRC Resolution No. 1029 that "the levy on attachment in favor of Capitol
Allied Trading (represented by Dante Gutierrez) should be carried over on
the new title that would be issued in the name of Rising Yap in the event
that he is able to present the owner's duplicates of the certificates of title
herein involved" (Exh. G).
Meanwhile, defendant Pea, through counsel, wrote the Sheriff asking for
the execution of a deed of final sale in her favor on the ground that "the
one (1) year period of redemption has long elapsed without any valid
redemption having been exercised;" hence she "will now refuse to receive
the redemption money . . . (Exh. 28).
On Dec. 30, 1977, plaintiff Yap wrote defendant Pea asking payment of
back rentals in the amount of P42,750.00 "for the use and occupancy of
the land and house located at Sta. Lucia, San Fernando, Pampanga," and
informing her of an increase in monthly rental to P2,000; otherwise, to
vacate the premises or face an eviction cum collection suit (Exh. D).
In the meantime, the subject lots, formerly under TCT Nos. 4314, 4315
and 4316 were registered on June 16, 1978 in the name of the spouses
Yap under TCT Nos. 148983-R, 148984-R and 148985-R, with an
annotation of a levy on attachment in favor of Capitol Allied Trading. The
LRC Resolution No. 1029 allowing the conditioned registration of the
subject lots in the name of the spouses Yap was also annotated on TCT
No. 4315 on June 16, 1978 and the notice of a pending consulta noted
thereon on August 18, 1975 was cancelled on the same date.
No Trial on the merits was held concerning Civil Case No. 4310. In an
order dated February 17, 1983, the case was dismissed without prejudice.
Despite the foregoing, defendant-appellee Pea remained in possession
of the lots in question hence, the spouses Yap were prompted to file the
instant case. 1
The antecedents of the present petition are as follows:
Plaintiffs-appellants, the spouses Rising T. Yap and Catalina Lugue, are
the registered owners of the lots in question under Transfer Certificate of
Title (TCT) Nos. 148983-R, 148984-R, 148985-R. In the complaint filed on
December 15, 1978, appellants sought to recover possession over the
subject lands from defendants Rosita Pea and Washington Distillery on
the ground that being registered owners, they have to enforce their right to
possession against defendants who have been allegedly in unlawful
possession thereof since October 1974 "when the previous owners
assigned (their) right to collect rentals . . . in favor of plaintiffs" (Record, p.
5). The amount claimed as damages is pegged on the total amount of
unpaid rentals from October 1974 (as taken from the allegations in the
complaint) up to December 1978 at a monthly rate of P1,500.00 'and the
further sum of P2,000.00 a month from January 1979 until the defendants

finally vacate the . . . premises in question with interest at the legal rate
(Record, p. 61).
In their answer, defendants Rosita Pea and Washington Distillery denied
the material allegations of the complaint and by way of an affirmative and
special defense asserted that Pea is now the legitimate owner of the
subject lands for having purchased the same in a foreclosure proceeding
instituted by the DBP . . . against PAMBUSCO . . . and no valid
redemption having been effected within the period provided by law. It was
contended that plaintiffs could not have acquired ownership over the
subject properties under a deed of absolute sale executed in their favor by
one Marcelino B. Enriquez who likewise could not have become [the]
owner of the properties in question by redeeming the same on August 18,
1975 (Exh. 26) under an alleged[ly] void deed of assignment executed in
his favor on March 18, 1975 by the original owners of the land in question,
the PAMBUSCO. The defense was that since the deed of assignment
executed by PAMBUSCO in favor of Enriquez was void ab initio for being
an ultra vires act of its board of directors and, for being without any
valuable consideration, it could not have had any legal effect; hence, all
the acts which flowed from it and all the rights and obligations which
derived from the aforesaid void deed are likewise void and without any
legal effect.
Further, it was alleged in the same Answer that plaintiffs are buyers in bad
faith because they have caused the titles of the subject properties with the
Register of Deeds to be issued in their names despite an order from the
then CFI, Br. III, Pampanga in Civil Case No. 4310, entitled Dante
Gutierrez, et al. vs. Pampanga Bus Company, Inc., et al., to desist from
registering or noting in his registry of property . . . any of the abovementioned documents under contest, until further orders. (Record, p. 11).
For its part, defendant Washington Distillery stated that it has never
occupied the subject lots hence they should not have been impleaded in
the complaint.
The defendants, therefore, prayed that the complaint be dismissed; that
the deed of assignment executed in favor of Marcelino Enriquez, the
certificate of redemption issued by the Provincial Sheriff also in favor of
Marcelino Enriquez, and the deed of sale of these parcels of land
executed by Marcelino Enriquez in favor of the plaintiffs herein be all
declared null and void; and further, that TCT Nos. 148983-R, 148984-R
and 148985-R, covering these parcels issued in the plaintiffs name be
cancelled and, in lieu thereof, corresponding certificates of title over these
same parcels be issued in the name of defendant Rosita Pea.
Thereafter, the defendants with prior leave of court filed a third-party
complaint third-party defendants PAMBUSCO, Jesus Domingo, Joaquin
Briones, Salvador Bernardez (as members of the Board of Directors of
PAMBUSCO), Marcelino Enriquez, and Deputy Sheriff Edgardo Zabat of
Pampanga. All these third-party defendants, how ever, were declared as in

default for failure to file their answer, except Edgardo Zabat who did file
his answer but failed to appear at the pre-trial.

December, 1978 and the amount of P2,000.00 per month thereafter, until
appellee finally vacate (sic) the premises with interest at the legal rate.

After trial, a decision was rendered by the court in favor of the defendantsappellees, to wit:

SO ORDERED. 3

WHEREFORE, and in view of all the foregoing, judgment is hereby

rendered dismissing the complaint filed by the plaintiffs against the
defendants and declaring as null and void the following:
(a)
The resolution of the Board of Directors of PAMBUSCO
approved on November 19, 1974 assigning the PAMBUSCO's right of
redemption concerning the parcels involved herein
(b)
The deed of assignment dated March 18, 1975 executed in
favor of Marcelino Enriquez pursuant to the resolution referred to in the
preceding paragraph;

FURTHER HOLDING THAT IT WAS TOO LATE FOR PETITIONER TO

INTERPOSE THE ISSUE THAT RESPONDENTS YAP WERE
PURCHASERS IN BAD FAITH.
Seventh Assignment of Error

A motion for reconsideration filed by the appellee was denied in a

resolution dated December 27, 1989.

THE RESPONDENT COURT OF APPEALS ERRED IN REVERSING THE

DECISION OF THE TRIAL COURT. 4

Hence, this petition for review on certiorari of said decision and resolution
of the appellate court predicated on the following assigned errors:

The petition is impressed with merit.

First Assignment of Error

First, the preliminary issues.

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT

THE TRIAL COURT HAD NO JURISDICTION TO RULE ON THE
VALIDITY OF THE QUESTIONED RESOLUTION AND TRANSFERS.

The respondent court ruled that the trial court has no jurisdiction to annul
the board resolution as the matter falls within the jurisdiction of the
Securities and Exchange Commission (SEC) and that petitioner did not
have the proper standing to have the same declared null and void.

Second Assignment of Error

(c)
The certificate of redemption dated August 15, 1975 issued by
Deputy Sheriff Edgardo Zabat in favor of Marcelino Enriquez concerning
these parcels;
(d)
The deed of absolute sale dated August 15, 1975 executed by
Marcelino Enriquez in favor of the plaintiffs concerning the same parcels
and

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER HAS NO LEGAL STANDING TO ASSAIL THE VALIDITY OF
THE QUESTIONED RESOLUTION AND THE SERIES OF SUCCEEDING
TRANSACTIONS LEADING TO THE REGISTRATION OF THE SUBJECT
PROPERTIES IN FAVOR OF THE RESPONDENTS YAP.
Third Assignment of Error

(e)
TCT Nos. 148983-R, 148984-R and 148985-R of the Register of
Deeds of Pampanga in the name of the plaintiffs also covering these
parcels.
Third-party defendant Edgardo Zabat, in his capacity as Deputy Sheriff of
Pampanga is directed to execute in favor of defendant Rosita Pea the
corresponding certificate of final sale involving the parcels bought by her
in the auction sale of October 25, 1974 for which a certificate of sale had
been issued to her.
Finally, the third-party defendants herein except Deputy Sheriff Edgardo
Zabat are hereby ordered to pay the defendants/third party plaintiffs,
jointly and severally, the amount of P10,000.00 as attorney's fees plus
costs. 2
Thus, an appeal from said judgment of the trial court was interposed by
private respondents to the Court of Appeals wherein in due course a
decision was rendered on June 20, 1989, the dispositive part of which
reads as follows:
WHEREFORE, premises considered, the judgment of the trial court on
appeal is REVERSED. Defendant-appellee Pea is hereby ordered to
vacate the lands in question and pay the plaintiffs-appellants the accrued
rentals from October, 1974 in the amount of P1,500.00 per month up to

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT

THE RESOLUTION OF RESPONDENT PAMBUSCO, ADOPTED ON 19
NOVEMBER 1974, ASSIGNING ITS RIGHT OF REDEMPTION IS NOT
VOID OR AT THE VERY LEAST LEGALLY DEFECTIVE.

In Philex Mining Corporation vs. Reyes, 5 this Court held that it is the fact
of relationship between the parties that determines the proper and
exclusive jurisdiction of the SEC to hear and decide intra-corporate
disputes; that unless the controversy has arisen between and among
stockholders of the corporation, or between the stockholders and the
officers of the corporation, then the case is not within the jurisdiction of the
SEC. Where the issue involves a party who is neither a stockholder or
officer of the corporation, the same is not within the jurisdiction of the
SEC.
In Union Glass & Container Corporation vs. Securities and Exchange
Commission, 6 this Court defined the relationships which are covered
within "intra-corporate disputes" under Presidential Decree No. 902-A, as
amended, as follows:

Fourth Assignment of Error

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
THE DEED OF ASSIGNMENT, DATED 8 MARCH 1975, IN FAVOR OF
RESPONDENT ENRIQUEZ IS NOT VOID OR AT THE VERY LEAST
VOIDABLE OR RESCISSIBLE.
Fifth Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING
THAT THE QUESTIONED DEED OF ASSIGNMENT, DATED 8 MARCH
1975, WAS VOID AB INITIO FOR FAILING TO COMPLY WITH THE
FORMALITIES MANDATORILY REQUIRED UNDER THE LAW FOR
DONATIONS.

Otherwise stated, in order that the SEC 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.
In this case, neither petitioner nor respondents Yap spouses are
stockholders or officers of PAMBUSCO. Consequently, the issue of the
validity of the series of transactions resulting in the subject properties
being registered in the names of respondents Yap may be resolved only
by the regular courts.

Sixth Assignment of Error

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENTS YAP ARE PURCHASERS IN GOOD FAITH AND IN

Respondent court held that petitioner being a stranger to the questioned

resolution and series of succeeding transactions has no legal standing to
question their validity.

In Teves vs. People's Homesite and Housing Corporation, 7 this Court

held:
We note however, in reading the complaint that the plaintiff is seeking the
declaration of the nullity of the deed of sale, not as a party in the deed, or
because she is obliged principally or subsidiarily under the deed, but
because she has an interest that is affected by the deed. This Court has
held that a person who is not a party obliged principally or subsidiarily in a
contract may exercise an action for nullity of the contract if he is
prejudiced in his rights with respect to one of the contracting parties, and
can show the detriment which would positively result to him from the
contract in which he had no intervention, Indeed, in the case now before
Us, the complaint alleges facts which show that plaintiff suffered detriment
as a result of the deed of sale entered into by and between defendant
PHHC and defendant Melisenda L. Santos. We believe that the plaintiff
should be given a chance to present evidence to establish that she
suffered detriment and that she is entitled to relief. (Emphasis supplied.)
There can be no question in this case that the questioned resolution and
series of transactions resulting in the registration of the properties in the
name of respondent Yap spouses adversely affected the rights of
petitioner to the said properties. Consequently, petitioner has the legal
standing to question the validity of said resolution and transactions.
As to the question of validity of the board resolution of respondent
PAMBUSCO adopted on November 19, 1974, Section 4, Article III of the
amended by-laws of respondent PAMBUSCO, provides as follows:
Sec. 4. Notices of regular and special meetings of the Board of
Directors shall be mailed to each Director not less than five days before
any such meeting, and notices of special meeting shall state the purpose
or purposes thereof Notices of regular meetings shall be sent by the
Secretary and notices of special meetings by the President or Directors
issuing the call. No failure or irregularity of notice of meeting shall
invalidate any regular meeting or proceeding thereat; Provided a quorum
of the Board is present, nor of any special meeting; Provided at least four
Directors are present. (Emphasis supplied.) 8
The trial court in finding the resolution void held as follows:
On the other hand, this Court finds merit in the position taken by the
defendants that the questioned resolution should be declared invalid it
having been approved in a meeting attended by only 3 of the 5 members
of the Board of Directors of PAMBUSCO which attendance is short of the
number required by the by-laws of the corporation.
xxx

xxx

xxx

In the meeting of November 19, 1974 when the questioned resolution was
approved, the three members of the Board of Directors of PAMBUSCO

who were present were Jesus Domingo, Joaquin Briones, and Salvador
Bernardez The remaining 2 others, namely: Judge Pio Marcos and Alfredo
Mamuyac were both absent therefrom.
As it becomes clear that the resolution approved on November 19, 1974 is
null and void it having been approved by only 3 of the members of the
Board of Directors who were the only ones present at the said meeting,
the deed of assignment subsequently executed in favor of Marcelino
Enriquez pursuant to this resolution also becomes null and void. . . . 9
However, the respondent court overturning said legal conclusions of the
trial court made the following disquisition:
It should be noted that the provision in Section 4, Article III of
PAMBUSCO's amended by-laws would apply only in case of a failure to
notify the members of the board of directors on the holding of a special
meeting, . . . .
In the instant case, however, there was no proof whatsoever, either by
way of documentary or testimonial evidence, that there was such a failure
or irregularity of notice as to make the aforecited provision apply. There
was not even such an allegation in the Answer that should have
necessitated a proof thereof. The fact alone that only three (3) out of five
(5) members of the board of directors attended the subject special
meeting, was not enough to declare the aforesaid proceeding void ab
initio, much less the board resolution borne out of it, when there was no
proof of irregularity nor failure of notice and when the defense made in the
Answer did not touch upon the said failure of attendance. Therefore, the
judgment declaring the nullity of the subject board resolution must be set
aside for lack of proof.
Moreover, there is no categorical declaration in the by-laws that a failure to
comply with the attendance requirement in a special meeting should make
all the acts of the board therein null and void ab initio. A cursory reading of
the subject provision, as aforequoted, would show that its framers only
intended to make voidable a board meeting held without the necessary
compliance with the attendance requirement in the by-laws. Just the use
of the word "invalidate" already denotes a legal imputation of validity to the
questioned board meeting absent its invalidation in the proceedings
prescribed by the corporation's by-laws and/or the general incorporation
law. More significantly, it should be noted that even if the subject special
meeting is itself declared void, it does not follow that the acts of the board
therein are ipso facto void and without any legal effect. Without the
declaration of nullity of the subject board proceedings, its validity should
be maintained and the acts borne out of it should be presumed valid.
Considering that the subject special board meeting has not been declared
void in a proper proceeding, nor even in the trial by the court below, there
is no reason why the acts of the board in the said special meeting should
be treated as void AB. initio. . . . 10
The Court disagrees.

The by-laws of a corporation are its own private laws which substantially
have the same effect as the laws of the corporation. They are in effect,
written, into the charter. In this sense they become part of the fundamental
law of the corporation with which the corporation and its directors and
officers must comply. 11
Apparently, only three (3) out of five (5) members of the board of directors
of respondent PAMBUSCO convened on November 19, 1974 by virtue of
a prior notice of a special meeting. There was no quorum to validly
transact business since, under Section 4 of the amended by-laws
hereinabove reproduced, at least four (4) members must be present to
constitute a quorum in a special meeting of the board of directors of
respondent PAMBUSCO.
Under Section 25 of the Corporation Code of the Philippines, the articles
of incorporation or by-laws of the corporation may fix a greater number
than the majority of the number of board members to constitute the
quorum necessary for the valid transaction of business. Any number less
than the number provided in the articles or by-laws therein cannot
constitute a quorum and any act therein would not bind the corporation; all
that the attending directors could do is to adjourn. 12
Moreover, the records show that respondent PAMBUSCO ceased to
operate as of November 15, 1949 as evidenced by a letter of the SEC to
said corporation dated April 17, 1980. 13 Being a dormant corporation for
several years, it was highly irregular, if not anomalous, for a group of three
(3) individuals representing themselves to be the directors of respondent
PAMBUSCO to pass a resolution disposing of the only remaining asset of
the corporation in favor of a former corporate officer.
As a matter of fact, the three (3) alleged directors who attended the
special meeting on November 19, 1974 were not listed as directors of
respondent PAMBUSCO in the latest general information sheet of
respondent PAMBUSCO filed with the SEC dated 18 March 1951. 14
Similarly, the latest list of stockholders of respondent PAMBUSCO on file
with the SEC does not show that the said alleged directors were among
the stockholders of respondent PAMBUSCO. 15
Under Section 30 of the then applicable Corporation Law, only persons
who own at least one (1) share in their own right may qualify to be
directors of a corporation. Further, under Section 28 1/2 of the said law,
the sale or disposition of an and/or substantially all properties of the
corporation requires, in addition to a proper board resolution, the
affirmative votes of the stockholders holding at least two-thirds (2/3) of the
voting power in the corporation in a meeting duly called for that purpose.
No doubt, the questioned resolution was not confirmed at a subsequent
stockholders meeting duly called for the purpose by the affirmative votes
of the stockholders holding at least two-thirds (2/3) of the voting power in
the corporation. The same requirement is found in Section 40 of the
present Corporation Code.

It is also undisputed that at the time of the passage of the questioned

resolution, respondent PAMBUSCO was insolvent and its only remaining
asset was its right of redemption over the subject properties. Since the
disposition of said redemption right of respondent PAMBUSCO by virtue of
the questioned resolution was not approved by the required number of
stockholders under the law, the said resolution, as well as the subsequent
assignment executed on March 8, 1975 assigning to respondent Enriquez
the said right of redemption, should be struck down as null and void.
Respondent court, in upholding the questioned deed of assignment, which
appears to be without any consideration at all, held that the consideration
thereof is the liberality of the respondent PAMBUSCO in favor of its former
corporate officer, respondent Enriquez, for services rendered. Assuming
this to be so, then as correctly argued by petitioner, it is not just an
ordinary deed of assignment, but is in fact a donation. Under Article 725 of
the Civil Code, in order to be valid, such a donation must be made in a
public document and the acceptance must be made in the same or in a
separate instrument. In the latter case, the donor shall be notified of the
acceptance in an authentic form and such step must be noted in both
instruments. 16
Non-compliance with this requirement renders the donation null and
void. 17 Since undeniably the deed of assignment dated March 8, 1975 in
question, 18 shows that there was no acceptance of the donation in the
same and in a separate document, the said deed of assignment is thus
void ab initio and of no force and effect.
WHEREFORE, the petition is GRANTED. The questioned decision of the
respondent Court of Appeals dated June 20, 1989 and its resolution dated
December 27, 1989 are hereby REVERSED AND SET ASIDE and
another judgment is hereby rendered AFFIRMING in toto the decision of
the trial court.
SO ORDERED.

G.R. No. 117897 May 14, 1997

ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA
and SECURITIES & EXCHANGE COMMISSION, petitioners,
vs.
COURT OF APPEALS and IGLESIA NI CRISTO, respondents.

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).
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, was 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:
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.

HERMOSISIMA, JR., J.:

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:
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 bylaws 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 bylaws 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 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 Trustee 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-906937, 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 owner's
duplicate copy of TCT Nos. RT-26521 and RT-26520 covering the
aforementioned two parcels of land, so that the sale in INC's 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:
xxx xxx xxx
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,
Intervenor's legal interest in the instant
case. A copy of the said case is hereto
attached as Annex "A";
4. That, furthermore, Intervenor herein is
the duly constituted body which can lawfully
and legally represent the Islamic
Directorate of the Philippines;
xxx xxx xxx 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 petitioner's 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

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;

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

3. Declaring the election of the Board of

Directors, 23 of the corporation from 1986 to
1991 as null and void;

Thereupon, Judge Reyes in another Order, dated March 2, 1992,

pertaining also to Civil Case No. Q-90-6937, treated INC as the rightful
owner of the real properties and disposed as follows:
WHEREFORE, Leticia P. Ligon is hereby
ordered to produce and/or surrender to
plaintiff 17 the owner's copy of RT-26521
(170567) and RT-26520 (176616) in open
court for the registration of the Deed of
Absolute Sale in the latter's 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 owner's 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. SP-27973, 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:
1. Declaring the by-laws submitted by the
respondents 21 as unauthorized, and hence,
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. 25
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 INC's 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:
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 owner's 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 INC's 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 Appeals," promulgated on June 1, 1995, in no wise constitutes
res judicata such that the petition under consideration would be barred if it
were the ease. Quite the contrary, the requisites or 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:
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:
xxx xxx xxx
(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.
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 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 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 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
allis praejudicium faciunt. Matters adjudged in a 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 owner's 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 GroupINC 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 owner's
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 SEC's Decision
in SEC Case No. 4012 which declared the sale of two (2) 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 Sections 3
and 5(c) of Presidential Decree No. 902-A:
Sec. 3. The Commission shall have
absolute jurisdiction, supervision and
control over all corporations, partnership or
associations, who are the grantees of
primary franchises and/or a license or
permit issued by the government to operate
in the Philippines . . . .
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:
xxx xxx xxx
c) Controversies in the selection or
appointment of directors, trustees, officers,
or managers of such corporations,
partnerships or associations. . . . .
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 ID 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:
There is no contract unless the following
requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject
matter of the contract;
(3) Cause of the obligation which is
established.
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 Group's failure to comply with Section 40 of the
Corporation Code pertaining to the disposition of all or substantially all
assets of the corporation:
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-thirds (2/3) of the outstanding
capital stock; or in case of non-stock
corporation, by the vote of at least twothirds (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.
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.
xxx xxx xxx
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 not 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 SEC's 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-906937, 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
intra-corporate 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 owner's
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 owner's 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 owner's 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.

In their answer, respondents denied the material allegations of the petition

and, by way of special defense, claimed that petitioner has no cause of
action and that the stock certificates covering the shares alleged to have
been sold to petitioner were only given to him as collateral for the loan of
Domocao Alonto and Moki-in Alonto.

G.R. No. L-56655 July 25, 1983

DATU TAGORANAO BENITO, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION and JAMIATUL
PHILIPPINE-AL ISLAMIA, INC., respondents.
The Solicitor General for respondent.
Tacod D. Macaraya for private respondent.

RELOVA, J.:
On February 6, 1959, the Articles of Incorporation of respondent Jamiatul
Philippine-Al Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed
with the Securities and Exchange Commission (SEC) and were approved
on December 14, 1962. The corporation had an authorized capital stock of
P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of
the authorized capital stock, 8,058 shares worth P80,580.00 were
subscribed and fully paid for. Herein petitioner Datu Tagoranao Benito
subscribed to 460 shares worth P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate of
increase of its capital stock from P200,000.00 to P1,000,000.00. It was
shown in said certificate that P191,560.00 worth of shares were
represented in the stockholders' meeting held on November 25, 1975 at
which time the increase was approved. Thus, P110,980.00 worth of shares
were subsequently issued by the corporation from the unissued portion of
the authorized capital stock of P200,000.00. Of the increased capital stock
of P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs.
Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto.
On November 18, 1976, petitioner Datu Tagoranao filed with respondent
Securities and Exchange Commission a petition alleging that the
additional issue (worth P110,980.00) of previously subscribed shares of
the corporation was made in violation of his pre-emptive right to said
additional issue and that the increase in the authorized capital stock of the
corporation from P200,000.00 to P1,000,000.00 was illegal considering
that the stockholders of record were not notified of the meeting wherein
the proposed increase was in the agenda. Petitioner prayed that the
additional issue of shares of previously authorized capital stock as well as
the shares issued from the increase in capital stock of respondent
corporation be cancelled; that the secretary of respondent corporation be
ordered to register the 2,540 shares acquired by him (petitioner) from
Domocao Alonto and Moki-in Alonto; and that the corporation be ordered
to render an accounting of funds to the stockholders.

On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities

and Exchange Commission, after due proceedings, rendered a decision
which was affirmed by the Commission En Banc during its executive
session held on March 9, 1981, as follows:
RESOLVED, That the decision of the
hearing Officer in SEC Case No. 1392,
dated July 11, 1980, the dispositive portion
of which reads as follows:
WHEREFORE, in view
of the foregoing
considerations, this
Commission hereby
rules: (a) That the
issuance by the
corporation of its
unissued shares was
validly made and was
not subject to the preemptive rights of
stockholders, including
the petitioner, herein;
(b) That there is no
sufficient legal basis to
set aside the certificate
issued by this
Commission
authorizing the
increase in capital
stock of respondent
corporation from
P200,000.00 to
Pl,000,000.00.
Considering, however,
that petitioner has not
waived his pre-emptive
right to subscribe to the
increased
capitalization,
respondent corporation
is hereby directed to
allow petitioner to
subscribe thereto, at
par value,
proportionate to his
present shareholdings,
adding thereto the
2,540 shares
transferred to him by
Mr. Domocao Alonto

and Mrs. Moki-in

Alonto; (c) To direct as
it hereby directs, the
respondent corporation
to immediately cancel
Certificates of Stock
Nos. 216, 223, 302, all
in the name of
Domocao Alonto, and
Certificate of Stock No.
217, in the name of
Moki-in Alonto, upon
their presentation by
the petitioner and to
issue new certificates
corresponding thereto
in the name of
petitioner herein; (d) To
direct, as it hereby
directs, respondent
corporation to
religiously comply with
the requirement of filing
annual financial
statements under pain
of a more drastic
action; (e) To declare,
as it hereby declares,
as irregular, the
election of the nine (9)
members of the Board
of Trustees of
respondent corporation
on October 30, 1976,
for which reason,
respondent corporation
is hereby ordered to
call a stockholders'
meeting to elect a new
set of five (5) members
of the Board of
Trustees, unless in the
meantime the said
number is accordingly
increased and the
requirement of law to
make such increase
effective have been
complied with. It is
understood that the
said stockholders'
meeting be called
within thirty (30) days
from the time petitioner
shall have subscribed
to the increased
capitalization.'

be, as the same is hereby AFFIRMED, the

same being in accordance with law and the
facts of the case. (pp. 28-29, Reno)
Hence, this petition for review by way of appeal from the aforementioned
decision of the Securities and Exchange Commission, petitioner
contending that (1) the issuance of the 11,098 shares without the consent
of the stockholders or of the Board of Directors, and in the absence of
consideration, is null and void; (2) the increase in the authorized capital
stock from P200,000.00 to P1,000,000.00 without the consent or express
waiver of the stockholders, is null and void; (3) he is entitled to attorneys'
fees, damages and expenses of litigation in filing this suit against the
directors of respondent corporation.
We are not persuaded. As aptly stated by the Securities and Exchange
Commission in its decision:
xxx xxx xxx
... the questioned issuance of the
unsubscribed portion of the capital stock
worth P110,980.00 is ' not invalid even if
assuming that it was made without notice to
the stockholders as claimed by petitioner.
The power to issue shares of stocks in a
corporation is lodged in the board of
directors and no stockholders' meeting is
necessary to consider it because additional
issuance of shares of stocks does not need
approval of the stockholders. The by-laws
of the corporation itself states that 'the
Board of Trustees shall, in accordance with
law, provide for the issue and transfer of
shares of stock of the Institute and shall
prescribe the form of the certificate of stock
of the Institute. (Art. V, Sec. 1).
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 issue 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 reoffered, he cannot therefore claim a dilution
of interest. (Campos and Lopez-Campos

Selected Notes and Cases on Corporation

Law, p. 855, citing Yasik V. Wachtel 25 Del.
Ch. 247,17A. 2d 308 (1941). (pp. 33-34,
Rollo)
With respect to the claim that the increase in the authorized capital stock
was without the consent, expressed or implied, of the stockholders, it was
the finding of the Securities and Exchange Commission that a
stockholders' meeting was held on November 25,1975, presided over by
Mr. Ahmad Domocao Alonto, Chairman of the Board of Trustees and,
among the many items taken up then were the change of name of the
corporation from Kamilol Islam Institute Inc. to Jamiatul Philippine-Al
Islamia, Inc., the increase of its capital stock from P200,000.00 to
P1,000,000.00, and the increase of the number of its Board of Trustees
from five to nine. "Despite the insistence of petitioner, this Commission is
inclined to believe that there was a stockholders' meeting on November
25, 1975 which approved the increase. The petitioner had not sufficiently
overcome the evidence of respondents that such meeting was in fact held.
What petitioner successfully proved, however, was the fact that he was not
notified of said meeting and that he never attended the same as he was
out of the country at the time. The documentary evidence of petitioner
conclusively proved that he was attending the Mecca pilgrimage when the
meeting was held on November 25, 1975. (Exhs. 'Q', 'Q-14', 'R', 'S' and 'Sl'). While petitioner doubts the authenticity of the alleged minutes of the
proceedings (Exh. '4'), the Commission notes with significance that said
minutes contain numerous details of various items taken up therein that
would negate any claim that it was not authentic. Another thing that
petitioner was able to disprove was the allegation in the certificate of
increase (Exh. 'E-l') that all stockholders who did not subscribe to the
increase of capital stock have waived their pre-emptive right to do so. As
far as the petitioner is concerned, he had not waived his pre-emptive right
to subscribe as he could not have done so for the reason that he was not
present at the meeting and had not executed a waiver, thereof. Not having
waived such right and for reasons of equity, he may still be allowed to
subscribe to the increased capital stock proportionate to his present
shareholdings." (pp. 36-37, Rollo)
Well-settled is the rule that the findings of facts of administrative bodies
will not be interfered with by the courts in the absence of grave abuse of
discretion on the part of said agencies, or unless the aforementioned
findings are not supported by substantial evidence. (Gokongwei, Jr. vs.
SEC, 97 SCRA 78). In a long string of cases, the Supreme Court has
consistently adhered to the rule that decisions of administrative officers
are not to be disturbed by the courts except when the former have acted
without or in excess of their jurisdiction or with grave abuse of discretion
(Sichangco vs. Board of Commissioners of Immigration, 94 SCRA 61).
Thus, in the case of Deluao vs. Casteel ( L-21906, Dec. 24, 1968, 26
SCRA 475, 496, citing Pajo vs. Ago, et al., L-15414, June 30, 1960) and
Genitano vs. Secretary of Agriculture and Natural Resources, et al. (L2ll67, March 31, 1966), the Supreme Court held that:
... Findings of fact by an administrative
board or official, following a hearing, are
binding upon the courts and win not be
disturbed except where the board or official
has gone beyond his statutory authority,
exercised unconstitutional powers or clearly

acted arbitrarily and without regard to his

duty or with grave abuse of discretion. ...
ACCORDINGLY, this petition is hereby dismissed for lack of merit.
SO ORDERED.

G.R. No. L-19761

January 29, 1923

PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La

Cooperativa Naval Filipina," plaintiff-appellee,
vs.
MARCIANO RIVERA, defendant-appellant.
Araneta and Zaragoza for appellant.
Ross and Lawrence for appellee.
STREET, J.:
This action was instituted on November 21, 1921, in the Court of First
Instance of Manila, by the Philippine Trust Company, as assignee in
insolvency of La Cooperativa Naval Filipina, against Marciano Rivera, for
the purpose of recovering a balance of P22,500, alleged to be due upon
defendant's subscription to the capital stock of said insolvent corporation.
The trial judge having given judgment in favor of the plaintiff for the
amount sued for, the defendant appealed.
It appears in evidence that in 1918 the Cooperativa Naval Filipina was
duly incorporated under the laws of the Philippine Islands, with a capital of
P100,000, divided into one thousand shares of a par value of P100 each.
Among the incorporators of this company was numbered the defendant
Mariano Rivera, who subscribed for 450 shares representing a value of
P45,000, the remainder of the stock being taken by other persons. The
articles of incorporation were duly registered in the Bureau of Commerce
and Industry on October 30 of the same year.
In the course of time the company became insolvent and went into the
hands of the Philippine Trust Company, as assignee in bankruptcy; and by
it this action was instituted to recover one-half of the stock subscription of
the defendant, which admittedly has never been paid.
The reason given for the failure of the defendant to pay the entire
subscription is, that not long after the Cooperativa Naval Filipina had been
incorporated, a meeting of its stockholders occurred, at which a resolution
was adopted to the effect that the capital should be reduced by 50 per
centum and the subscribers released from the obligation to pay any
unpaid balance of their subscription in excess of 50 per centum of the
same. As a result of this resolution it seems to have been supposed that
the subscription of the various shareholders had been cancelled to the
extent stated; and fully paid certificate were issued to each shareholders

for one-half of his subscription. It does not appear that the formalities
prescribed in section 17 of the Corporation Law (Act No. 1459), as
amended, relative to the reduction of capital stock in corporations were
observed, and in particular it does not appear that any certificate was at
any time filed in the Bureau of Commerce and Industry, showing such
reduction.
His Honor, the trial judge, therefore held that the resolution relied upon the
defendant was without effect and that the defendant was still liable for the
unpaid balance of his subscription. In this we think his Honor was clearly
right.
It is established doctrine that subscription to the capital of a corporation
constitute a find to which creditors have a right to look for satisfaction of
their claims and that the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to realize assets for the
payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has
no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for
such release; and as against creditors a reduction of the capital stock can
take place only in the manner an under the conditions prescribed by the
statute or the charter or the articles of incorporation. Moreover, strict
compliance with the statutory regulations is necessary (14 C. J., 498,
620).
In the case before us the resolution releasing the shareholders from their
obligation to pay 50 per centum of their respective subscriptions was an
attempted withdrawal of so much capital from the fund upon which the
company's creditors were entitled ultimately to rely and, having been
effected without compliance with the statutory requirements, was wholly
ineffectual.
The judgment will be affirmed with cost, and it is so ordered.

G.R. No. 77860 November 22, 1988

BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION,
petitioners,
vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN, respondents.
Lim, Duran & Associates for petitioner.
Renato J. Dilag for private respondent.

The only issue in this case is whether or not a suit brought by a

withdrawing stockholder against the corporation to enforce payment of the
balance due on the consideration (evidenced by a corporate promissory
note) for the surrender of his shares of stock and interests in the
corporation, involves an intra-corporate dispute. The resolution of that
issue will determine whether the Securities and Exchange Commission
(SEC) or a regular court has jurisdiction over the action.
On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as
President and Member of the Board of Directors of petitioner, Boman
Environmental Development Corporation (BEDECO), and to sell to the
company all his shares, rights, and interests therein for P 300,000 plus the
transfer to him of the company's Isuzu pick-up truck which he had been
using. The letter-offer (Exh. A-1) reads as follows:
07 May 1984
THE BOARD OF DIRECTORS,
BOMAN ENVIRONMENTAL
DEVELOPMENT
CORPORATION
2nd Floor, AGS Building,
466 EDSA, Makati,
Metro Manila
Gentlemen:
With deepest regrets, I am tendering my
resignation as member of the Board of
Directors and President of the Company
effective as soon as my shares and
interests thereto are sold and fully paid.
It is really painful to leave the Company
which we painstakingly labored and
nortured for years to attain its success
today, however, family interests and other
considerations dictate me otherwise.
Thank you for your interest of buying my
shares and other interests on the Company.
It is really my intention to divest myself of
these investments and sell them all for
PESOS: THREE HUNDRED THOUSAND
(P 300,000) payable in cash in addition to
the Isuzu pick up I am presently using for
and in behalf of the Company.

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

Fajilan's resignation as president was accepted and new officers were
elected. Fajilan's offer to sell his shares back to the corporation was
approved, the Board promising to pay for them on a staggered basis from
July 15, 1984 to December 15, 1984 (Annex B).<re||an1w> The
resolution of the Board was communicated to Fajilan in the following letteragreement dated June 25, 1984 to which he affixed his conformity (Annex
C):

June 25, 1
Mr. Nilcar Y. Fajilan
No. 159 Aramismis Street
Project 7, Quezon City
Dear Mr. Fajilan:
Please be informed that after due
deliberation the Board of Directors has
accepted your offer to sell your share and
interest in the company at the price of
P300,000.00, inclusive of your unpaid
salary from February 1984 to May 31, 1984,
loan principal, interest on loan, profit
sharing and share on book value of the
corporation as at May 31, 1984. Payment of
the P300,000.00 shall be as follows:
July 15, 1984

P
100,000.00

September 15, 1984

P
75,000.00

October 15, 1984

P
62,500.00

December 15, 1984

P
62,500.00
P
300,000.00.

To assure you of payment of the above

amount on respective due dates, the
company will execute the necessary
promissory note.

Thank you.
GRIO-AQUINO, J.:

NILCAR Y. FAJILAN
Director/President (p. 239, Rollo.)

In addition to the above, the Ford Courier

Pick-up will belong to you subject to your
assumption of the outstanding obligation
thereof with Fil-Invest. It is understood that
upon your full payment of the pick-up,

arrangement will be made and negotiated

with Fil-Invest regarding the transfer of the
ownership of the vehicle to your name.

SS
OR
Y
NO
TE

If the above meets your requirements, kindly signify your

conformity/approval by signing below.

Makati, Metro Manila

July 3, 1984

Very truly yours,

(SGD) JAMES C. PERALTA
Corporate Secretary

(SGD) NILCAR Y. FAJILAN

Noted:
(SGD) ALFREDO S. PANGILINAN (SGD)
MAXIMO R. REBALDO (SGD)
BENEDICTO M. EMPAYNADO
P100,
000.0
0

Ju
ly
15
,
19
84

75,00
0.00

Se
pt.
15
,
19
84

(SGD) ERNESTO B. DURAN

NOTARY PUBLIC
62,50
Until December 31, 1984
0.00
PTR No. 8582861 Issued
on January 24, 1984 at
Makati, Metro Manila
Doc. No. 392
Page No. 80
Book No. X
Series of 1984. (p. 245, Rollo.)

62,50
0.00

A promissory note dated July 3, 1984, was signed by BEDECO'S new

president, Alfredo Pangilinan, in the presence of two directors, committing
BEDECO to pay him P300,000 over a six-month period from July 15, 1984
to December 15, 1984. The promissory note (Exh. D) provided as follows:
PR
O
MI

Signed in the presence of:

(SGD) MAXIMO R. REBALDO

FOR VALUE RECEIVED, BOMAN

ENVIRONMENTAL DEVELOPMENT
CORPORATION, a domestic corporation
duly registered with the Securities and
Exchange Commission, with office at Rm.
608, Metro Bank Bldg., Ayala Blvd., Makati,
Metro Manila, promise to pay NILCAR Y.
FAJILAN of 17 Aramismis St., Project 7,
Quezon City, the sum of PESOS: THREE
HUNDRED THOUSAND (P300,000.00),
Philippine Currency payable as follows:

CONFORME:

SUBSCRIBED AND SWORN TO before

me, this 3rd day of July, 1984, Alfredo S.
Pangilinan exhibiting to me his Residence
Certificate No. 1696224 issued at Makati,
Metro Manila on January 24, 1984, in his
capacity as President of Boman
Environmental Development Corporation
with Corporate Residence Certificate No.
207911 issued at Makati, Metro Manila on
March 26, 1984.

BOMAN EN
DEVELOP
By:
(SGD) ALF
President

P300,000.00

O
ct
ob
er
15
,
19
84
D
ec
.
15
,
19
84

(SGD) BENEDICTO M. EMPAYNADO

(Annex D, p. 247, Rollo.)
However, BEDECO paid only P50,000 on July 15, 1984 and another
P50,000 on August 31, 1984 and defaulted in paying the balance of
P200,000.
On April 30, 1985, Fajilan filed a complaint in the Regional Trial Court of
Makati for collection of that balance from BEDECO.
In an order dated September 9, 1985, the trial court, through Judge
Ansberto Paredes, dismissed the complaint for lack of jurisdiction. It ruled
that the controversy arose out of intracorporate relations, hence, the
Securities and Exchange Commission has original and exclusive
jurisdiction to hear and decide it.
His motion for reconsideration of that order having been denied, Fajilan
filed a "Petition for Certiorari, and mandamus with Preliminary Attachment"
in the Intermediate Appellate Court.
In a decision dated March 2, 1987, the Court of Appeals set aside Judge
Paredes' order of dismissal and directed him to take cognizance of the
case. BEDECO's motion for reconsideration was denied in a resolution
dated March 24, 1987 of the Court of Appeals.
In its decision, the Appellate Court characterized the case as a suit for
collection of a sum of money as Fajilan "was merely suing on the balance
of the promissory note" (p. 4, Decision; p. 196, Rollo) which BEDECO
failed and refused to pay in full. More particularly, the Court of Appeals
held:
While it is true that the circumstances which
led to the execution of the promissory note
by the Board of Directors of respondent
corporation was an intra- corporate matter,
there arose no controversy as to the sale of
petitioner's interests and rights as well as
his shares as Member of the Board of
Directors and President of respondent
corporation. The intra-corporate matter of
the resignation of petitioner as Member of
the Board of Directors and President of

respondent corporation has long been

settled without issue.
The Board of Directors of respondent
corporation has likewise long settled the
sale by petitioner of all his shares, rights
and interests in favor of the corporation. No
controversy arose out of this transaction.
The jurisdiction of the Securities and
Exchange Commission therefore need not
be invoked on this matter. (p. 196, Rollo.)
The petition is impressed with merit.
Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and
exclusive jurisdiction to hear and decide cases involving
b) Controversies arising out of intracorporate or partnership relations, between
and among stockholders members, or
associates; between any or all of them and
the corporation, partnership or association
of which they are stockholders, members or
associates, respectively; ... (Emphasis
supplied.)
This case involves an intra-corporate controversy because the parties are
a stockholder and the corporation. As correctly observed by the trial court,
the perfection of the agreement to sell Fajilan's participation and interests
in BEDECO and the execution of the promissory note for payment of the
price of the sale did not remove the dispute from the coverage of Section
5(b) of P.D. No. 902, as amended, for both the said agreement (Annex C)
and the promissory note (Annex D) arose from intra-corporate relations.
Indeed, all the signatories of both documents were stockholders of the
corporation at the time of signing the same. It was an intra-corporate
transaction, hence, this suit is an intra-corporate controversy.
Fajilan's offer to resign as president and director "effective as soon as my
shares and interests thereto (sic) are sold and fully paid" (Annex A-1, p.
239, Rollo) implied that he would remain a stockholder until his shares and
interests were fully paid for, for one cannot be a director or president of a
corporation unless he is also a stockholder thereof. The fact that he was
replaced as president of the corporation did not necessaryily mean that he
ceased to be a stockholder considering how the corporation failed to
complete payment of the consideration for the purchase of his shares of
stock and interests in the goodwill of the business. There has been no
actual transfer of his shares to the corporation. In the books of the
corporation he is still a stockholder.
Fajilan's suit against the corporation to enforce the latter's promissory note
or compel the corporation to pay for his shareholdings is cognizable by the
SEC alone which shall determine whether such payment will not constitute
a distribution of corporate assets to a stockholder in preference over
creditors of the corporation. The SEC has exclusive supervision, control
and regulatory jurisdiction to investigate whether the corporation has

unrestricted retained earnings to cover the payment for the shares, and
whether the purchase is for a legitimate corporate purpose as provided in
Sections 41 and 122 of the Corporation Code, which reads as follows:
SEC. 41. Power to acquire own shares.A
stock corporation shall have the power to
purchase or acquire its own shares for a
legitimate corporate purpose or purposes,
including but not limited to the following
cases: Provided, That the corporation has
unrestricted retained earnings in its books
to cover the shares to be purchased or
acquired;

are outstanding debts and liabilities, the board of directors will not use the
assets of the corporation to purchase its own stock ..."(Steinberg vs.
Velasco, 52 Phil. 953.)
WHEREFORE, the petition for certiorari is granted. The decision of the
Court of Appeals is reversed and set aside. The order of the trial court
dismissing the complaint for lack of jurisdiction is hereby reinstated. No
costs.
SO ORDERED.

1. To eliminate fractional shares arising out

of stock dividends;
2. To collect or compromise an
indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code,

G.R. No. L-17504 & L-17506

February 28, 1969

RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA

SALAS, PAZ SALAS and PATRIA SALAS, heirs of Magdalena Salas,
as stockholders on their own behalf and for the benefit of the Ma-ao
Sugar Central Co., Inc., and other stockholders thereof who may
wish to join in this action, plaintiffs-appellants,
vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS.
RAMON S. ARANETA, ROMUALDO M. ARANETA, and RAMON A.
YULO, defendants-appellants.

Sec. 12. Corporate liquidation. ...

xxx xxx xxx
Except by decrease of capital stock and as
otherwise allowed by this Code, no
corporation shall distribute any of its assets
or property except upon lawful dissolution
and after payment of all its debts and
liabilities, (77a, 89a, 16a).
These provisions of the Corporation Code should be deemed written into
the agreement between the corporation and the stockholders even if there
is no express reference to them in the promissory note. The principle is
well settled that an existing law enters into and forms part of a valid
contract without need for the parties' expressly making reference to it
(Lakas ng Manggagawang Makabayan vs. Abiera, 36 SCRA 437).
The requirement of unrestricted retained earnings to cover the shares is
based on the trust fund doctrine which means that the capital stock,
property and other assets of a corporation are regarded as equity in trust
for the payment of corporate creditors. The reason is that creditors of a
corporation are preferred over the stockholders in the distribution of
corporate assets. There can be no distribution of assets among the
stockholders without first paying corporate creditors. Hence, any
disposition of corporate funds to the prejudice of creditors is null and void.
"Creditors of a corporation have the right to assume that so long as there

San Juan, Africa and Benedicto for plaintiffs-appellants.

Vicente Hilado and Gianzon, Sison, Yulo and Associates for defendantsappellants.
CAPISTRANO, J.:
This was a representative or derivative suit commenced on October 20,
1953, in the Court of First Instance of Manila by four minority stockholders
against the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and
three other directors of the corporation.
The complaint comprising the period November, 1946 to October, 1952,
stated five causes of action, to wit: (1) for alleged illegal and ultra-vires
acts consisting of self-dealing irregular loans, and unauthorized
investments; (2) for alleged gross mismanagement; (3) for alleged
forfeiture of corporate rights warranting dissolution; (4) for alleged
damages and attorney's fees; and (5) for receivership.
Plaintiffs prayed, in substance, as follows:
Under the FIRST CAUSE OF ACTION, that the defendant J. Amado
Araneta and his individual co-defendants be ordered to render an
accounting of all transactions made and carried out by them for defendant
corporation, and "to collect, produce and/or pay to the defendant

corporation the outstanding balance of the amounts so diverted and still

unpaid to defendant corporation";
Under the SECOND CAUSE OF ACTION, that the individual defendants
be held liable and be ordered to pay to the defendant corporation
"whatever amounts may be recovered by the plaintiffs in Civil Case No.
20122, entitled 'Francisco Rodriguez vs. Ma-ao Sugar Central Co.'"; to
return to the defendant corporation all amounts withdrawn by way of
discretionary funds or backpay, and to account for the difference between
the corporation's crop loan accounts payable and its crop loan accounts
receivable;
Under the THIRD CAUSE OF ACTION, that the corporation be dissolved
and its net assets be distributed to the stockholders; and
Under the FOURTH CAUSE OF ACTION, that the defendants be ordered
"to pay the sum of P300,000.00 by way of compensatory, moral and
exemplary damages and for expenses of litigation, including attorney's
fees and costs of the suit."
THE FIFTH CAUSE OF ACTION was an application for the provisional
remedy of receivership.
In their answer originally filed on December 1, 1953, and amended on
February 1, 1955, defendants denied "the allegations regarding the
supposed gross mismanagement, fraudulent use and diversion of
corporate funds, disregard of corporate requirements, abuse of trust and
violation of fiduciary relationship, etc., supposed to have been discovered
by plaintiffs, all of which are nothing but gratuitous, unwarranted,
exaggerated and distorted conclusions not supported by plain and specific
facts and transactions alleged in the complaint."
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other
things: (1) that the complaint "is premature, improper and unjustified"; (2)
that plaintiffs did not make an "earnest, not simulated effort" to exhaust
first their remedies within the corporation before filing their complaint; (3)
that no actual loss had been suffered by the defendant corporation on
account of the transactions questioned by plaintiffs; (4) that the payments
by the debtors of all amounts due to the defendant corporation constituted
a full, sufficient and adequate remedy for the grievances alleged in the
complaint and (5) that the dissolution and/or receivership of the defendant
corporation would violate and impair the obligation of existing contracts of
said corporation.
BY WAY OF COUNTERCLAIM, the defendants in substance further
alleged, among others, that the complaint was premature, improper and
malicious, and that the language used was "unnecessarily vituperative
abusive and insulting, particularly against defendant J. Amado Araneta
who appears to be the main target of their hatred." Wherefore, the
defendant sought to recover "compensation for damages, actual, moral,
exemplary and corrective, including reasonable attorney's fees."

After trial, the Lower Court rendered its Decision (later supplemented by
an Order resolving defendants' Motion for Reconsideration), the
dispositive portion of which reads:
IN VIEW WHEREOF, the Court dismisses the petition
for dissolution but condemns J. Amado Araneta to pay
unto Ma-ao Sugar Central Co., Inc. the amount of
P46,270.00 with 8% interest from the date of the filing
of this complaint, plus the costs; the Court reiterates
the preliminary injunction restraining the Ma-ao Sugar
Central Co., Inc. management to give any loans or
advances to its officers and orders that this injunction
be as it is hereby made, permanent; and orders it to
refrain from making investments in Acoje Mining,
Mabuhay Printing, and any other company whose
purpose is not connected with the Sugar Central
business; costs of plaintiffs to be borne by the
Corporation and J. Amado Araneta.
From this judgment both parties appealed directly to the Supreme Court.
Before taking up the errors respectively, assigned by the parties, we
should state that the following findings of the Lower Court on the
commission of corporate irregularities by the defendants have not been
questioned by the defendants:
1. Failure to hold stockholders' meetings regularly. No
stockholders' meetings were held in 1947, 1950 and
1951;
2. Irregularities in the keeping of the books. Untrue
entries were made in the books which could not
simply be considered as innocent errors;
3. Illegal investments in the Mabuhay Printing,
P2,280,00, and the Acoje Mining, P7,000.00. The
investments were made not in pursuance of the
corporate purpose and without the requisite authority
of two-thirds of the stockholders;
4. Unauthorized loans to J. Amado Araneta totalling
P132,082.00 (which, according to the defendants, had
been fully paid), in violation of the by-laws of the
corporation which prohibits any director from
borrowing money from the corporation;
5. Diversion of corporate funds of the Ma-ao Sugar
Central Co., Inc. to:
J. Amado Araneta & Co.
Luzon Industrial Corp.

Associated Sugar

463,860.36

General Securities

86,743.65

Bacolod Murcia

501,030.61

Central Azucarera del Danao

Talisay-Silay

4,365.90

The Court found that sums were taken out of the funds of the Ma-ao
Sugar Central Co., Inc. and delivered to these affiliated companies, and
vice versa, without the approval of the Ma-ao Board of Directors, in
violation of Sec. III, Art. 6-A of the by-laws.
The errors assigned in the appeal of the plaintiffs, as appellants, are as
follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT
THE INVESTMENT OF CORPORATE FUNDS OF
THE MA-AO SUGAR CENTRAL CO., INC., IN THE
PHILIPPINE FIBER PROCESSING CO., INC. WAS
NOT A VIOLATION OF SEC. 17- OF THE
CORPORATION LAW.
II.
THE LOWER COURT ERRED IN NOT FINDING
THAT THE MA-AO SUGAR CENTRAL CO., INC.
WAS INSOLVENT.
III.
THE LOWER COURT ERRED IN HOLDING THAT
THE DISCRIMINATORY ACTS COMMITTED
AGAINST PLANTERS DID NOT CONSTITUTE
MISMANAGEMENT.
IV.
THE LOWER COURT ERRED IN HOLDING THAT
ITS CULPABLE ACTS WERE INSUFFICIENT FOR
THE DISSOLUTION OF THE CORPORATION.
The portions of the Decision of the Lower Court assailed by the plaintiffs
as appellants are as follows:

P243,415.62
585,918.17

97,884.42

(1) ".... Finally, as to the Philippine Fiber, the Court

takes it that defendants admit having invested
P655,000.00 in shares of stock of this company but

that this was ratified by the Board of Directors in

Resolutions 60 and 80, Exhibits "R" and "R-2"; more
than that, defendants contend that since said
company was engaged in the manufacture of sugar
bags it was perfectly legitimate for Ma-ao Sugar either
to manufacture sugar bags or invest in another
corporation engaged in said manufacture, and they
quote authorities for the purpose, pp. 28-31,
memorandum; the Court is persuaded to believe that
the defendants on this point are correct, because
while Sec. 17-1/2 of the Corporation Law provides
that:
No corporation organized under this act
shall invest its funds in any other
corporation or business or for any purpose
other than the main purpose for which it
was organized unless its board of directors
has been so authorized in a resolution by
the affirmative vote of stockholders holding
shares in the corporation entitling them to
exercise at least two-thirds of the voting
power on such proposal at the stockholders'
meeting called for the purpose.
the Court is convinced that that law should be
understood to mean as the authorities state, that it is
prohibited to the Corporation to invest in shares of
another corporation unless such an investment is
authorized by two-thirds of the voting power of the
stockholders, if the purpose of the corporation in
which investment is made is foreign to the purpose of
the investing corporation because surely there is
more logic in the stand that if the investment is made
in a corporation whose business is important to the
investing corporation and would aid it in its purpose,
to require authority of the stockholders would be to
unduly curtail the Power of the Board of Directors; the
only trouble here is that the investment was made
without any previous authority of the Board of
Directors but was only ratified afterwards; this of
course would have the effect of legalizing the
unauthorized act but it is an indication of the manner
in which corporate business is transacted by the Maao Sugar administration, the fact that off and on, there
would be passed by the Board of Directors,
resolutions ratifying all acts previously done by the
management, e.g. resolutions passed on February
25, 1947, and February 25, 1952, by the Board of
Directors as set forth in the affidavit of Isidro T. Dunca
p. 127, etc. Vol. 1. (Decision, pp. 239-241 of Record
on Appeal.)
xxx

xxx

xxx

(2) "On the other hand, the Court has noted against
plaintiffs that their contention that Ma-ao Sugar is on
the verge of bankruptcy has not been clearly shown;
against this are Exh. C to Exh. C-3 perhaps the best
proof that insolvency is still far is that this action was
filed in 1953 and almost seven years have passed
since then without the company apparently getting
worse than it was before; ..." (Decision, pp. 243-244,
supra.)
xxx

xxx

xxx

(3) "As to the crop loan anomalies in that instead of

giving unto the planters the entire amount alloted for
that, the Central withheld a certain portion for their
own use, as can be seen in Appendix A of Exh. C-1,
while the theory of plaintiffs is that since between the
amount of P3,791,551.78 the crop loan account
payable, and the amount of P1,708,488.22, the crop
loan receivable, there is a difference of
P2,083,063.56, this would indicate that this latter sum
had been used by the Central itself for its own
purposes; on the other hand, defendants contend that
the first amount did not represent the totality of the
crop loans obtained from the Bank for the purpose of
relending to the planters, but that it included the
Central's own credit line on its 40% share in the
standing crop; and that this irregularity amounts to a
grievance by plaintiffs as planters and not as
stockholders, the Court must find that as to this count,
there is really reason to find that said anomaly is not a
clear basis for the derivative suit, first, because
plaintiffs' evidence is not very sufficient to prove
clearly the alleged diversion in the face of defendants'
defense; there should have been a showing that the
Central had no authority to make the diversion; and
secondly, if the anomaly existed, there is ground to
hold with defendants that it was an anomaly
pernicious not to the Central but to the planters; it was
not even pernicious to the stockholders.
Going to the discriminatory acts of J. Amado Araneta,
namely, manipulation of cane allotments, withholding
of molasses and alcohol shares, withholding of
trucking allowance, formation of rival planters
associations, refusal to deal with legitimate planters
group, Exh. S; the Court notices that as to the failure
to provide hauling transportation, this in a way is
corroborated by Exh. 7, that part containing the
decision of the Court of First Instance of Manila, civil
20122, Francisco Rodriguez v. Ma-ao Sugar; for the
reason, however, that even if these were true, those
grievances were grievances of plaintiffs as planters
and not as stockholders just as the grievance as to
the crop loans already adverted to, this Court will
find insufficient merit on this count. (Decision, pp. 230231, supra.)

xxx

xxx

xxx

(4) "...; for the Court must admit its limitations and
confess that it cannot pretend to know better than the
Board in matters where the Board has not
transgressed any positive statute or by-law especially
where as here, there is the circumstance that
presumably, an impartial representative in the Board
of Directors, the one from the Philippine National
Bank, against whom apparently plaintiffs have no
quarrel, does not appear to have made any protest
against the same; the net result will be to hold that the
culpable acts proved are not enough to secure a
dissolution; the Court will only order the correction of
abuses, proved as already mentioned; nor will the
Court grant any more damages one way or the other.
(Decision, p. 244, supra.)
On the other hand, the errors assigned in the appeal of the defendants as
appellants are as follows:
I.
THE LOWER COURT ERRED IN ADJUDGING J.
AMADO ARANETA TO PAY TO MA-AO SUGAR
CENTRAL CO., INC., THE AMOUNT OF P46,270.00,
WITH 8% INTEREST FROM THE DATE OF FILING
OF THE COMPLAINT.
II.
THE LOWER COURT ERRED IN NOT ORDERING
THE PLAINTIFFS TO PAY THE DEFENDANTS,
PARTICULARLY J. AMADO ARANETA, THE
DAMAGES PRAYED FOR IN THE COUNTERCLAIM
OF SAID DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the
defendants as appellants are as follows:
(1) "As to the alleged juggling of books in that the
personal account of J. Amado Araneta of P46,270.00
was closed on October 31, 1947 by charges
transferred to loans receivable nor was interest paid
on this amount, the Court finds that this is related to
charge No. 1, namely, the granting of personal loans
to J. Amado Araneta; it is really true that according to
the books, and as admitted by defendants, J. Amado
Araneta secured personal loans; in 1947, the cash
advance to him was P132,082.00 (Exh. A); the Court
has no doubt that this was against the By-Laws which
provided that:

The Directors shall not in any case borrow

money from the Company. (Sec. III, Art. 7);
the Court therefore finds this count to be duly proved;
worse, the Court also finds that as plaintiffs contend,
while the books of the Corporation would show that
the last balance of P46,270.00 was written off as paid,
as testified to by Auditor Mr. Sanchez, the payment
appeared to be nothing more than a transfer of his
loan receivable account, stated otherwise, the item
was only transferred from the personal account to the
loan receivable account, so that again the Court
considers established the juggling of the books; and
then again, it is also true that the loans were secured
without any interest and while it is true that in the
Directors' meeting of 21 October, 1953, it was
resolved to collect 8%, the Court does not see how
such a unilateral action of the Board could bind the
borrowers. Be it stated that defendants have
presented in evidence Exh. 5 photostatic copy of the
page in loan receivable and it is sought to be proved
that J. Amado Araneta's debt was totally paid on 31
October, 1953; to the Court, in the absence of definite
primary proof of actual payment having found out that
there had already been a juggling of books, it cannot
just believe that the amount had been paid as noted
in the books. (Decision, pp. 233-235 of Record on
Appeal.)
(2) "With respect to the second point in the motion for
reconsideration to the effect that the Court did not
make any findings of fact on the counterclaim of
defendants, although the Court did not say that in so
many words, the Court takes it that its findings of fact
on pages 17 to 21 of its decision were enough to
justify a dismissal of the counterclaim, because the
counterclaims were based on the fact that the
complaint was premature, improper, malicious and
that the language is unnecessarily vituperative
abusive and insulting; but the Court has not found that
the complaint is premature; nor has the Court found
that the complaint was malicious; these findings can
be gleaned from the decision with respect to the
allegation that the complaint was abusive and
insulting, the Court does not concur; for it has not
seen anything in the evidence that would justify a
finding that plaintiffs and been actuated by bad faith,
nor is there anything in the complaint essentially
libelous; especially as the rule is that allegations in
pleading where relevant, are privileged even though
they may not clearly proved afterwards; so that the
Court has not seen any merit in the counterclaims;
and the Court had believed that the decision already
carried with it the implication of the dismissal of the
counterclaims, but if that is not enough, the Court
makes its position clear on this matter in this order,
and clarifies that it has dismissed the counterclaims of

defendant; ..." (Order of September 3, 1960, pp. 248249, supra.)

Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of
the plaintiffs as appellants, it appears to us that the Lower Court was
correct in its appreciation (1) that the evidence presented did not show
that the defendant Ma-ao Sugar Company was insolvent (2) that the
alleged discriminatory acts committed by the defendant Central against
the planters were not a proper subject of derivative suit, but, at most,
constituted a cause of action of the individual planters; and (3) that the
acts of mismanagement complained of and proved do not justify a
dissolution of the corporation.
Whether insolvency exists is usually a question of
fact, to be determined from an inventory of the assets
and their value, as well as a consideration of the
liabilities.... But the mere impairment of capital stock
alone does not establish insolvency there being other
evidence as to the corporation being a going concern
with sufficient assets. Also, the excess of liabilities
over assets does not establish insolvency, when other
assets are available. (Fletcher Cyc. of the Law of
Private Corporations, Vol. 15A, 1938 Ed pp. 34-37;
Emphasis supplied).
But relief by dissolution will be awarded in such cases
only where no other adequate remedy is available,
and is not available where the rights of the
stockholders can be, or are, protected in some other
way. (16 Fletcher Cyc. Corporations, 1942 Ed., pp.
812-813, citing "Thwing v. McDonald", 134 Minn. 148,
156 N.W. 780, 158 N.W. 820, 159 N.W. 564, Ann.
Cas. 1918 E 420; Mitchell v. Bank of St. Paul, 7 Minn.
252).
The First Assignment of Error in the brief of the plaintiffs as appellants,
contending that the investment of corporate funds by the Ma-ao Sugar
Co., Inc., in another corporation (the Philippine Fiber Processing Co., Inc.)
constitutes a violation of Sec. 17- of the Corporation Law, deserves
consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co.,
Inc., through its President, J. Amado Araneta,, subscribed for P300,000.00
worth of capital stock of the Philippine Fiber Processing Co. Inc., that
payments on the subscription were made on September 20, 1950, for
P150,000.00, on April 30, 1951, for P50,000.00, and on March 6, 1952, for
P100,000.00; that at the time the first two payments were made there was
no board resolution authorizing the investment; and that it was only on
November 26, 1951, that the President of Ma-ao Sugar Central Co., Inc.,
was so authorized by the Board of Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber
Processing Co., Inc., owned by Luzon Industrial, corporation were
transferred on May 31, 1952, to the defendant Ma-ao Sugar Central Co.,
Inc., with a valuation of P355,000.00 on the basis of P1.00 par value per

share. Again the "investment" was made without prior board resolution,
the authorizing resolution having been subsequentIy approved only on
June 4, 1952.
Plaintiffs-appellants also contend that even assuming, arguendo, that the
said Board Resolutions are valid, the transaction, is still wanting in legality,
no resolution having been approved by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least twothirds of the voting power, as required in Sec. 17- of the Corporation
Law.
The legal provision invoked by the plaintiffs, as appellants, Sec. 17- of
the Corporation Law, provides:
No corporation organized under this act shall invest
its funds in any other corporation or business, or for
any purpose other than the main purpose for which it
was organized, unless its board of directors has been
so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the
voting power on such proposal at a stockholders'
meeting called for the purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10
of the Corporation Law, which provides:
SEC. 13. Every corporation has the power:
xxx

xxx

xxx

(9) To enter into any obligation or contract essential to

the proper administration of its corporate affairs or
necessary for the proper transaction of the business
or accomplishment of the purpose for which the
corporation was organized;
(10) Except as in this section otherwise provided, and
in order to accomplish its purpose as stated in the
articles of incorporation, to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities and
other evidences of indebtedness of any domestic or
foreign corporation.
A reading of the two afore-quoted provisions shows that there is need for
interpretation of the apparent conflict.
In his work entitled "The Philippine Corporation Law," now in its 5th
edition, Professor Sulpicio S. Guevara of the University of the Philippines,
College of Law, a well-known authority in commercial law, reconciled
these two apparently conflicting legal provisions, as follows:

j. Power to acquire or dispose of shares or securities.

A private corporation, in order to accomplish its
purpose as stated in its articles of incorporation, and
subject to the limitations imposed by the Corporation
Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and
other evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance
of the corporate purpose, does not need the approval
of the stockholders; but when the purchase of shares
of another corporation is done solely for investment
and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders
is necessary. In any case, the purchase of such
shares or securities must be subject to the limitations
established by the Corporation Law; namely, (a) that
no agricultural or mining corporation shall in anywise
be interested in any other agricultural or mining
corporation; or (b) that a non-agricultural or nonmining corporation shall be restricted to own not more
than 15% of the voting stock of any agricultural or
mining corporation; and (c) that such holdings shall be
solely for investment and not for the purpose of
bringing about a monopoly in any line of commerce or
combination in restraint of trade. (The Philippine
Corporation Law by Sulpicio S. Guevara, 1967 Ed., p.
89.) (Emphasis ours.)lawphi1.nt
40. Power to invest corporate funds. A private
corporation has the power to invest its corporate
funds in any other corporation or business, or for any
purpose other than the main purpose for which it was
organized, provided that 'its board of directors has
been so authorized in a resolution by the affirmative
vote of stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the
voting power on such a proposal at a stockholders'
meeting called for that purpose,' and provided further,
that no agricultural or mining corporation shall in
anywise be interested in any other agricultural or
mining corporation. When the investment is
necessary to accomplish its purpose or purposes as
stated in it articles of incorporation, the approval of
the stockholders is not necessary. (Id., p. 108.)
(Emphasis ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the investment
in question does not fall under the purview of Sec. 17- of the
Corporation Law.
With respect to the defendants' assignment of errors, the second (referring
to the counterclaim) is clearly without merit. As the Lower Court aptly ruled
in its Order of September 3, 1960 (resolving the defendants' Motion for
Reconsideration) the findings of fact were enough to justify a dismissal of

the counterclaim, "because the counterclaims were based on the fact that
the complaint was premature, improper, malicious and that the language is
unnecessarily vituperative abusive and insulting; but the Court has not
found that the complaint is premature; nor has the Court found that the
complaint was malicious; these findings can be gleaned from the decision;
with respect to the allegation that the complaint was abusive and insulting,
the Court does not concur; for it has not seen anything in the evidence
that would justify a finding that plaintiffs had been actuated by bad faith,
nor is there anything in the complaint essentially libelous especially as the
rule is that allegations in pleadings where relevant, are privileged even
though they may not be clearly proved afterwards; ..."
As regards defendants' first assignment of error, referring to the status of
the account of J. Amado Araneta in the amount of P46,270.00, this Court
likewise agrees with the finding of the Lower Court that Exhibit 5,
photostatic copy of the page on loans receivable does not constitute
definite primary proof of actual payment, particularly in this case where
there is evidence that the account in question was transferred from one
account to another. There is no better substitute for an official receipt and
a cancelled check as evidence of payment.
In the judgment, the lower court ordered the management of the Ma-ao
Sugar Central Co., Inc. "to refrain from making investments in Acoje
Mining, Mabuhay Printing and any other company whose purpose is not
connected with the sugar central business." This portion of the decision
should be reversed because, Sec. 17- of the Corporation Law allows a
corporation to "invest its fund in any other corporation or business, or for
any purpose other than the main purpose for which it was organized,"
provided that its board of directors has been so authorized by the
affirmative vote of stockholders holding shares entitling them to exercise
at least two-thirds of the voting power.
IN VIEW OF ALL THE FOREGOING, that part of the judgment which
orders the Ma-ao Sugar Central Co., Inc. "to refrain from making
investments in Acoje Mining, Mabuhay Printing, and any other: company
whose purpose is not connected with the sugar central business," is
reversed. The other parts of the judgment are, affirmed. No special
pronouncement as to costs.

G.R. No. 76801 August 11, 1995

LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES,
petitioners,
vs.
FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR
RELATIONS COMMISSION, respondents.

The controversy at bench arose from a complaint filed by private

respondents, 1 namely, Florentina Fontecha, Mila Refuerzo, Marcial
Mamaril, Perfecto Bautista, Edward Mamaril, Marissa Pascual and Allan
Pimentel, against their employer Lopez Realty Incorporated (petitioner)
and its majority stockholder, Asuncion Lopez Gonzales, for alleged nonpayment of their gratuity pay and other benefits. 2 The case was docketed
as NLRC-NCR Case No. 2-2176-82.
Lopez Realty, Inc., is a corporation engaged in real estate business, while
petitioner Asuncion Lopez Gonzales is one of its majority shareholders.
Her interest in the company vis-a-vis the other shareholders is as follows:
1

Asuncion Lopez Gonzales

2 Teresita Lopez Marquez

3 Arturo F. Lopez

7831

shares

7830

shares

7830

shares

4 Rosendo de Leon

shares

5 Benjamin Bernardino

share

6 Leo Rivera

share

Except for Arturo F. Lopez, the rest of the

shareholders also sit as members of the Board of
Directors.
As found by the Labor arbiter. 3 sometime in 1978,
Arturo Lopez submitted a proposal relative to the
distribution of certain assets of petitioner corporation
among its three (3) main shareholders. The proposal
had three (3) aspects, viz: (1) the sale of assets of the
company to pay for its obligations; (2) the transfer of
certain assets of the company to its three (3) main
shareholders, while some other assets shall remain
with the company; and (3) the reduction of employees
with provision for their gratuity pay. The proposal was
deliberated upon and approved in a special meeting
of the board of directors held on April 17, 1978.
It appears that petitioner corporation approved two (2)
resolutions providing for the gratuity pay of its
employees, viz: (a) Resolution No. 6, Series of 1980,
passed by the stockholders in a special meeting held
on September 8, 1980, resolving to set aside, twice a
year, a certain sum of money for the gratuity pay of its
retiring employees and to create a Gratuity Fund for
the said contingency; and (b) Resolution No. 10,
Series of 1980, setting aside the amount of
P157,750.00 as Gratuity Fund covering the period
from 1950 up to 1980.
Meanwhile, on July 28, 1981, board member and
majority stockholder Teresita Lopez Marquez died.

PUNO, J.:
On August 17, 1981, except for Asuncion Lopez
Gonzales who was then abroad, the remaining

members of the Board of Directors, namely: Rosendo

de Leon, Benjamin Bernardino, and Leo Rivera,
convened a special meeting and passed a resolution
which reads:
Resolved, as it is hereby resolved that the
gratuity (pay) of the employees be given as
follows:
(a) Those who will be laid off be given the
full amount of gratuity;
(b) Those who will be retained will receive
25% of their gratuity (pay) due on
September 1, 1981, and another 25% on
January 1, 1982, and 50% to be retained
by the office in the meantime. (emphasis
supplied)
Private respondents were the retained employees of
petitioner corporation. In a letter, dated August 31,
1981, private respondents requested for the full
payment of their gratuity pay. Their request was
granted in a special meeting held on September 1,
1981. The relevant, portion of the minutes of the said
board meeting reads:
In view of the request of the employees
contained in the letter dated August 31,
1981, it was also decided that, all those
remaining employees will receive another
25% (of their gratuity) on or before October
15, 1981 and another 25% on or before the
end of November, 1981 of their respective
gratuity.
At that, time, however, petitioner Asuncion Lopez
Gonzales was still abroad. Allegedly, while she was
still out of the country, she sent a cablegram to the
corporation, objecting to certain matters taken up by
the board in her absence, such as the sale of some of
the assets of the corporation. Upon her return, she
flied a derivative suit with the Securities and
Exchange Commission (SEC) against majority
shareholder Arturo F. Lopez.
Notwithstanding the "corporate squabble" between
petitioner Asuncion Lopez Gonzales and Arturo
Lopez, the first two (2) installments of the gratuity pay
of private respondents Florentina Fontecha, Mila
Refuerzo, Marcial Mamaril and Perfecto Bautista were
paid by petitioner corporation.

Also, petitioner corporation had prepared the cash

vouchers and checks for the third installments of
gratuity pay of said private respondents (Florentina
Fontecha, Mila Refuerzo, Marcial Mamaril and
Perfecto Bautista). For some reason, said vouchers
were cancelled by petitioner Asuncion Lopez
Gonzales.
Likewise, the first, second and third installments of
gratuity pay of the rest of private respondents,
particularly, Edward Mamaril, Marissa Pascual and
Allan Pimentel, were prepared but cancelled by
petitioner Asuncion Lopez Gonzales. Despite private
respondents' repeated demands for their gratuity pay,
corporation refused to pay the same. 4
On July 23, 1984, Labor Arbiter Raymundo R.
Valenzuela rendered judgment in favor of private
respondents. 5
Petitioners appealed the adverse ruling of the Labor
arbiter to public respondent National Labor Relations
Commission. The appeal focused on the alleged nonratification and non-approval of the assailed August
17, 1981 and September 1, 1981 Board Resolutions
during the Annual Stockholders' Meeting held on
March 1, 1982. Petitioners further insisted that the
payment of the gratuity to some of the private
respondents was a mere "mistake" on the part of
petitioner corporation since, pursuant to Resolution
No. 6, dated September 8, 1980, and Resolution No.
10, dated October 6, 1980, said gratuity pay should
be given only upon the employees' retirement.
On November 20, 1985, public respondent, through
its Second Division, dismissed the appeal for lack of
merit, the pertinent portion of which states: 6
We cannot agree with the contention of
respondents (petitioners') that the Labor
Arbiter a quo committed abuse of discretion
in his decision.
Respondents' (petitioners') contention that,
the two (2) resolutions dated 17 August
1981 and 1 September 1981 . . . which
were not approved in the annual
stockholders meeting had no force and
effect, deserves scant consideration. The
records show that the stockholders did not
revoke nor nullify these resolutions granting
gratuities to complainants.
On record, it appears that the said
resolutions arose from the legitimate

creation of the Board of Directors who

steered the corporate affairs of the
corporation. . . .
Respondents' (petitioners') allegation that
the three (3) complainants, Mila E.
Refuerzo, Marissa S. Pascual and Edward
Mamaril, who had resigned after filing the
complaint on February 8, 1982, were
precluded to (sic) receive gratuity because
the said resolutions referred to only retiring
employee could not be given credence. A
reading of Resolutions dated 17 August
1981 and 1 September 1981 disclosed that
there were periods mentioned for the
payment of complainants' gratuities. This
disproves respondents' argument allowing
gratuities upon retirement of employees.
Additionally, the proposed distribution of
assets (Exh. C-1) filed by Mr. Arturo F.
Lopez also made mention of gratuity pay, " .
. . (wherein) an employee who desires to
resign from the LRI will be given the
gratuity pay he or she earned." (Emphasis
supplied) Let us be reminded, too, that the
complainants' resignation was not voluntary
but it was pressurized (sic) due to "power
struggle" which was evident between Arturo
Lopez and Asuncion Gonzales.
The respondents' (petitioners') contention of
a mistake to have been committed in
granting the first two (2) installments of
gratuities to complainants Perfecto
Bautista, Florentina Fontecha, Marcial
Mamaril and Mila Refuerzo, (has) no legal
leg to stand on. The record is bereft of any
evidence that the Board of Directors had
passed a resolution nor is there any
minutes of whatever nature proving
mistakes in the award of damages (sic).
With regard to the award of service
incentive leave and others, the Commission
finds no cogent reason to disturb the
appealed decision.
We affirm.
WHEREFORE, let the appealed decision
be, as it is hereby, AFFIRMED and let the
instant appeal (be) dismissed for lack of
merit.
SO ORDERED.

Petitioners reconsidered. 7 In their motion for

reconsideration, petitioners assailed the validity of the
board resolutions passed on August 17, 1981 and
September 1, 1981, respectively, and claimed, for the
first time, that petitioner Asuncion Lopez Gonzales
was not notified of the special board meetings held on
said dates. The motion for reconsideration was
denied by the Second Division on July 24, 1986.
On September 4, 1986, petitioners filed another
motion for reconsideration. Again, the motion was
denied by public respondent in a Minute Resolution
dated November 19, 1986. 8
Hence, the petition. As prayed for, we issued a
Temporary Restraining Order, 9 enjoining public
respondent from enforcing or executing the
Resolution, dated November 20, 1986 (sic), in NLRCNCR-2-2176-82. 10
The sole issue is whether or not public respondent
acted with grave abuse of discretion in holding that
private respondents are entitled to receive their
gratuity pay under the assailed board resolutions
dated August 17, 1951 and September 1, 1981.
Petitioners contend that the board resolutions passed
on August 17, 1981 and September 1, 1981, granting
gratuity pay to their retained employees, are ultra
vires on the ground that petitioner Asuncion Lopez
Gonzales was not duly notified of the said special
meetings. They aver, further, that said board
resolutions were not ratified by the stockholders of the
corporation pursuant to Section 28 1/2 of the
Corporation Law (Section 40 of the Corporation
Code). They also insist that the gratuity pay must be
given only to the retiring employees, to the exclusion
of the retained employees or those who voluntarily
resigned from their posts.
At the outset, we note that petitioners allegation on
lack of notice to petitioner Asuncion Lopez Gonzales
was raised for the first time in the in their motion for
reconsideration filed before public respondent
National Labor Relations Commission, or after said
public respondent had affirmed the decision of the
labor arbiter. To stress, in their appeal before the
NLRC, petitioners never raised the issue of lack of
notice to Asuncion Lopez Gonzales. The appeal dealt
with (a) the failure of the stockholders to ratify the
assailed resolutions and (b) the alleged "mistake"
committed by petitioner corporation in giving the
gratuity pay to some of its employees who are yet to
retire from employment.

In their comment, 11 private respondents maintain that

the new ground of lack of notice was not raised before
the labor arbiter, hence, petitioners are barred from
raising the same on appeal. Private respondents
claim, further, that such failure on the part of
petitioners, had deprived them the opportunity to
present evidence that, in a subsequent special board
meeting held on September 29, 1981, the subject
resolution dated September 1, 1981, was
unanimously approved by the board of directors of
petitioner corporation, including petitioner Asuncion
Lopez Gonzales. 12
Indeed, it would be offensive to the basic rules of fair
play and justice to allow petitioners to raise questions
which have not been passed upon by the labor arbiter
and the public respondent NLRC. It is well settled that
questions not raised in the lower courts cannot, be
raised for the first time on appeal. 13 Hence, petitioners
may not invoke any other ground, other than those it
specified at the labor arbiter level, to impugn the
validity of the subject resolutions.
We now come to petitioners' argument that the
resolutions passed by the board of directors during
the special meetings on August 1, 1981, and
September 1, 1981, were ultra vires for lack of notice.
The general rule is that a corporation, through its
board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter
or by the general law. 14 Thus, directors must act as a
body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken
therein may be questioned by any objecting director
or shareholder. 15
Be that as it may, jurisprudence 16 tells us that an
action of the board of directors during a meeting,
which was illegal for lack of notice, may be ratified
either expressly, by the action of the directors in
subsequent legal meeting, or impliedly, by the
corporation's subsequent course of conduct. Thus, in
one case, 17 it was held:
. . . In 2 Fletcher, Cyclopedia of the Law of
Private Corporations (Perm. Ed.) sec. 429,
at page 290, it is stated:
Thus, acts of directors
at a meeting which was
illegal because of want
of notice may be
ratified by the directors
at a subsequent legal

meeting, or by the
corporations course of
conduct
...
Fletcher, supra, further states in sec. 762,
at page 1073-1074:
Ratification by directors
may be by an express
resolution or vote to
that effect, or it may be
implied from adoption
of the act, acceptance
or acquiescence.
Ratification may be
effected by a resolution
or vote of the board of
directors expressly
ratifying previous acts
either of corporate
officers or agents; but it
is not necessary,
ordinarily, to show a
meeting and formal
action by the board of
directors in order to
establish a ratification.
In American Casualty Co., v. Dakota
Tractor and Equipment Co., 234 F. Supp.
606, 611 (D.N.D. 1964), the court stated:
Moreover, the
unauthorized acts of an
officer of a corporation
may be ratified by the
corporation by conduct
implying approval and
adoption of the act in
question. Such
ratification may be
express or may be
inferred from silence
and inaction.
In the case at bench, it was established that petitioner
corporation did not issue any resolution revoking nor
nullifying the board resolutions granting gratuity pay to
private respondents. Instead, they paid the gratuity
pay, particularly, the first two (2) installments thereof,
of private respondents Florentina Fontecha, Mila
Refuerzo, Marcial Mamaril and Perfecto Bautista.

Despite the alleged lack of notice to petitioner

Asuncion Lopez Gonzales at that time the assailed
resolutions were passed, we can glean from the
records that she was aware of the corporation's
obligation under the said resolutions. More
importantly, she acquiesced thereto. As pointed out by
private respondents, petitioner Asuncion Lopez
Gonzales affixed her signature on Cash Voucher Nos.
81-10-510 and 81-10-506, both dated October 15,
1981, evidencing the 2nd installment of the gratuity
pay of private respondents Mila Refuerzo and
Florentina Fontecha. 18

Meeting held on March 1, 1982. To strengthen their

position, petitioners cite section 28 1/2 of the
Corporation Law (Section 40 of the Corporation
Code). We are not persuaded.
The cited provision is not applicable to the case at
bench as it refers to the sale, lease, exchange or
disposition of all or substantially all of the
corporation's assets, including its goodwill. In such a
case, the action taken by the board of directors
requires the authorization of the stockholders on
record.

We hold, therefore, that the conduct of petitioners

after the passage of resolutions dated August, 17,
1951 and September 1, 1981, had estopped them
from assailing the validity of said board resolutions.

It will be observed that, except far Arturo Lopez, the

stockholders of petitioner corporation also sit as
members of the board of directors. Under the
circumstances in field, it will be illogical and
superfluous to require the stockholders' approval of
the subject resolutions. Thus, even without the
stockholders' approval of the subject resolutions,
petitioners are still liable to pay private respondents'
gratuity pay.

Assuming, arguendo, that there was no notice given

to Asuncion Lopez Gonzalez during the special
meetings held on August 17, 1981 and September 1,
1981, it is erroneous to state that the resolutions
passed by the board during the said meetings were
ultra vires. In legal parlance, "ultra vires" act refers to
one which is not within the corporate powers
conferred by the Corporation Code or articles of
incorporation or not necessary or incidental in the
exercise of the powers so conferred. 19
The assailed resolutions before us cover a subject
which concerns the benefit and welfare of the
company's employees. To stress, providing gratuity
pay for its employees is one of the express powers of
the corporation under the Corporation Code, hence,
petitioners cannot invoke the doctrine of ultra vires to
avoid any liability arising from the issuance the
subject resolutions. 20
We reject petitioners' allegation that private
respondents, namely, Mila Refuerzo, Marissa Pascual
and Edward Mamaril who resigned from petitioner
corporation after the filing of the case, are precluded
from receiving their gratuity pay. Pursuant to board
resolutions dated August 17, 1981 and September 1,
1981, respectively, petitioner corporation obliged itself
to give the gratuity pay of its retained employees in
four (4) installments: on September 1, 1981; October
15, 1981; November, 1981; and January 1, 1982.
Hence, at the time the aforenamed private
respondents tendered their resignation, the
aforementioned private respondents were already
entitled to receive their gratuity pay.
Petitioners try to convince us that the subject
resolutions had no force and effect in view of the nonapproval thereof during the Annual Stockholders'

IN VIEW WHEREOF, the instant petition is

DISMISSED for lack of merit and the temporary
restraining order we issued on February 9, 1987 is
LIFTED. Accordingly, the assailed resolution of the
National Labor Relations Commission in NLRC-NCR2176-82 is AFFIRMED. This decision is immediately
executory. Costs against petitioners.

Plaintiff's complaint was amended three times with respect to the extent
and description of the land sought to be recovered. The original complaint
described the land as a portion of a lot registered in plaintiff's name under
Transfer Certificate of Title No. 37686 of the land record of Rizal Province
and as containing an area of 13 hectares more or less. But the complaint
was amended by reducing the area of 6 hectares, more or less, after the
defendant had indicated the plaintiff's surveyors the portion of land
claimed and occupied by him. The second amendment became necessary
and was allowed following the testimony of plaintiff's surveyors that a
portion of the area was embraced in another certificate of title, which was
plaintiff's Transfer Certificate of Title No. 37677. And still later, in the
course of trial, after defendant's surveyor and witness, Quirino Feria, had
testified that the area occupied and claimed by defendant was about 13
hectares, as shown in his Exhibit 1, plaintiff again, with the leave of court,
amended its complaint to make its allegations conform to the evidence.
Defendant, in his answer, sets up prescription and title in himself thru
"open, continuous, exclusive and public and notorious possession (of land
in dispute) under claim of ownership, adverse to the entire world by
defendant and his predecessor in interest" from "time in-memorial". The
answer further alleges that registration of the land in dispute was obtained
by plaintiff or its predecessors in interest thru "fraud or error and without
knowledge (of) or interest either personal or thru publication to defendant
and/or predecessors in interest." The answer therefore prays that the
complaint be dismissed with costs and plaintiff required to reconvey the
land to defendant or pay its value.
After trial, the lower court rendered judgment for plaintiff, declaring
defendant to be without any right to the land in question and ordering him
to restore possession thereof to plaintiff and to pay the latter a monthly
rent of P132.62 from January, 1940, until he vacates the land, and also to
pay the costs.

SO ORDERED.
Appealing directly to this court because of the value of the property
involved, defendant makes the following assignment or errors:
G.R. No. L-4935

May 28, 1954

J. M. TUASON & CO., INC., represented by it Managing PARTNER,

GREGORIA ARANETA, INC., plaintiff-appellee,
vs.
QUIRINO BOLAOS, defendant-appellant.

I. The trial court erred in not dismissing the case on

the ground that the case was not brought by the real
property in interest.
II. The trial court erred in admitting the third amended
complaint.

Araneta and Araneta for appellee.

Jose A. Buendia for appellant.

III. The trial court erred in denying defendant's motion

to strike.

REYES, J.:

IV. The trial court erred in including in its decision land

not involved in the litigation.

This is an action originally brought in the Court of First Instance of Rizal,

Quezon City Branch, to recover possesion of registered land situated in
barrio Tatalon, Quezon City.

V. The trial court erred in holding that the land in

dispute is covered by transfer certificates of Title Nos.
37686 and 37677.

Vl. The trial court erred in not finding that the

defendant is the true and lawful owner of the land.
VII. The trial court erred in finding that the defendant
is liable to pay the plaintiff the amount of P132.62
monthly from January, 1940, until he vacates the
premises.
VIII. The trial court erred in not ordering the plaintiff to
reconvey the land in litigation to the defendant.
As to the first assigned error, there is nothing to the contention that the
present action is not brought by the real party in interest, that is, by J. M.
Tuason and Co., Inc. What the Rules of Court require is that an action be
brought in the name of, but not necessarily by, the real party in interest.
(Section 2, Rule 2.) In fact the practice is for an attorney-at-law to bring
the action, that is to file the complaint, in the name of the plaintiff. That
practice appears to have been followed in this case, since the complaint is
signed by the law firm of Araneta and Araneta, "counsel for plaintiff" and
commences with the statement "comes now plaintiff, through its
undersigned counsel." It is true that the complaint also states that the
plaintiff is "represented herein by its Managing Partner Gregorio Araneta,
Inc.", another corporation, but there is nothing against one corporation
being represented by another person, natural or juridical, in a suit in court.
The contention that Gregorio Araneta, Inc. can not act as managing
partner for plaintiff on the theory that it is illegal for two corporations to
enter into a partnership is without merit, for the true rule is that "though a
corporation has no power to enter into a partnership, it may nevertheless
enter into a joint venture with another where the nature of that venture is in
line with the business authorized by its charter." (Wyoming-Indiana Oil
Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp.,
1082.) There is nothing in the record to indicate that the venture in which
plaintiff is represented by Gregorio Araneta, Inc. as "its managing partner"
is not in line with the corporate business of either of them.
Errors II, III, and IV, referring to the admission of the third amended
complaint, may be answered by mere reference to section 4 of Rule 17,
Rules of Court, which sanctions such amendment. It reads:
Sec. 4. Amendment to conform to evidence. When
issues not raised by the pleadings are tried by
express or implied consent of the parties, they shall
be treated in all respects, as if they had been raised in
the pleadings. Such amendment of the pleadings as
may be necessary to cause them to conform to the
evidence and to raise these issues may be made
upon motion of any party at my time, even of the trial
of these issues. If evidence is objected to at the trial
on the ground that it is not within the issues made by
the pleadings, the court may allow the pleadings to be
amended and shall be so freely when the
presentation of the merits of the action will be
subserved thereby and the objecting party fails to
satisfy the court that the admission of such evidence
would prejudice him in maintaining his action or
defense upon the merits. The court may grant a

continuance to enable the objecting party to meet

such evidence.
Under this provision amendment is not even necessary for the purpose of
rendering judgment on issues proved though not alleged. Thus,
commenting on the provision, Chief Justice Moran says in this Rules of
Court:
Under this section, American courts have, under the
New Federal Rules of Civil Procedure, ruled that
where the facts shown entitled plaintiff to relief other
than that asked for, no amendment to the complaint is
necessary, especially where defendant has himself
raised the point on which recovery is based, and that
the appellate court treat the pleadings as amended to
conform to the evidence, although the pleadings were
not actually amended. (I Moran, Rules of Court, 1952
ed., 389-390.)
Our conclusion therefore is that specification of error II, III, and IV are
without merit..
Let us now pass on the errors V and VI. Admitting, though his attorney, at
the early stage of the trial, that the land in dispute "is that described or
represented in Exhibit A and in Exhibit B enclosed in red pencil with the
name Quirino Bolaos," defendant later changed his lawyer and also his
theory and tried to prove that the land in dispute was not covered by
plaintiff's certificate of title. The evidence, however, is against defendant,
for it clearly establishes that plaintiff is the registered owner of lot No. 4-B3-C, situate in barrio Tatalon, Quezon City, with an area of 5,297,429.3
square meters, more or less, covered by transfer certificate of title No.
37686 of the land records of Rizal province, and of lot No. 4-B-4, situated
in the same barrio, having an area of 74,789 square meters, more or less,
covered by transfer certificate of title No. 37677 of the land records of the
same province, both lots having been originally registered on July 8, 1914
under original certificate of title No. 735. The identity of the lots was
established by the testimony of Antonio Manahan and Magno Faustino,
witnesses for plaintiff, and the identity of the portion thereof claimed by
defendant was established by the testimony of his own witness, Quirico
Feria. The combined testimony of these three witnesses clearly shows
that the portion claimed by defendant is made up of a part of lot 4-B-3-C
and major on portion of lot 4-B-4, and is well within the area covered by
the two transfer certificates of title already mentioned. This fact also
appears admitted in defendant's answer to the third amended complaint.
As the land in dispute is covered by plaintiff's Torrens certificate of title and
was registered in 1914, the decree of registration can no longer be
impugned on the ground of fraud, error or lack of notice to defendant, as
more than one year has already elapsed from the issuance and entry of
the decree. Neither court the decree be collaterally attacked by any
person claiming title to, or interest in, the land prior to the registration
proceedings. (Sorogon vs. Makalintal,1 45 Off. Gaz., 3819.) Nor could
title to that land in derogation of that of plaintiff, the registered owner, be
acquired by prescription or adverse possession. (Section 46, Act No. 496.)
Adverse, notorious and continuous possession under claim of ownership
for the period fixed by law is ineffective against a Torrens title. (Valiente vs.

Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is

likewise settled that the right to secure possession under a decree of
registration does not prescribed. (Francisco vs. Cruz, 43 Off. Gaz., 5105,
5109-5110.) A recent decision of this Court on this point is that rendered in
the case of Jose Alcantara et al., vs. Mariano et al., 92 Phil., 796. This
disposes of the alleged errors V and VI.
As to error VII, it is claimed that `there was no evidence to sustain the
finding that defendant should be sentenced to pay plaintiff P132.62
monthly from January, 1940, until he vacates the premises.' But it appears
from the record that that reasonable compensation for the use and
occupation of the premises, as stipulated at the hearing was P10 a month
for each hectare and that the area occupied by defendant was 13.2619
hectares. The total rent to be paid for the area occupied should therefore
be P132.62 a month. It is appears from the testimony of J. A. Araneta and
witness Emigdio Tanjuatco that as early as 1939 an action of ejectment
had already been filed against defendant. And it cannot be supposed that
defendant has been paying rents, for he has been asserting all along that
the premises in question 'have always been since time immemorial in
open, continuous, exclusive and public and notorious possession and
under claim of ownership adverse to the entire world by defendant and his
predecessors in interest.' This assignment of error is thus clearly without
merit.
Error No. VIII is but a consequence of the other errors alleged and needs
for further consideration.
During the pendency of this case in this Court appellant, thru other
counsel, has filed a motion to dismiss alleging that there is pending before
the Court of First Instance of Rizal another action between the same
parties and for the same cause and seeking to sustain that allegation with
a copy of the complaint filed in said action. But an examination of that
complaint reveals that appellant's allegation is not correct, for the
pretended identity of parties and cause of action in the two suits does not
appear. That other case is one for recovery of ownership, while the
present one is for recovery of possession. And while appellant claims that
he is also involved in that order action because it is a class suit, the
complaint does not show that such is really the case. On the contrary, it
appears that the action seeks relief for each individual plaintiff and not
relief for and on behalf of others. The motion for dismissal is clearly
without merit.
Wherefore, the judgment appealed from is affirmed, with costs against the
plaintiff.

G.R. No. L-15092

May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.

Taada, Teehankee and Carreon for plaintiffs-appellants.

Hilado and Hilado for defendant-appellee.

el presente contrato, entonces esas

mejores condiciones se concederan y por
el presente se entenderan concedidas a los
platadores que hayan otorgado este
Contrato de Molienda Enmendado.

REYES, J.B.L., J.:

Appeal on points of law from a judgment of the Court of First Instance of
Occidental Negros, in its Civil Case No. 2603, dismissing plaintiff's
complaint that sought to compel the defendant Milling Company to
increase plaintiff's share in the sugar produced from their cane, from 60%
to 62.33%, starting from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro
Montelibano, and the Limited co-partnership Gonzaga and Company, had
been and are sugar planters adhered to the defendant-appellee's sugar
central mill under identical milling contracts. Originally executed in 1919,
said contracts were stipulated to be in force for 30 years starting with the
1920-21 crop, and provided that the resulting product should be divided in
the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it
was proposed to execute amended milling contracts, increasing the
planters' share to 60% of the manufactured sugar and resulting molasses,
besides other concessions, but extending the operation of the milling
contract from the original 30 years to 45 years. To this effect, a printed
Amended Milling Contract form was drawn up. On August 20, 1936, the
Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc.,
adopted a resolution (Acts No. 11, Acuerdo No. 1) granting further
concessions to the planters over and above those contained in the printed
Amended Milling Contract. The bone of contention is paragraph 9 of this
resolution, that reads as follows:

xxx

xxx

Acuerdo No. 1. Previa mocion

debidamente secundada, la Junta en
consideracion a una peticion de los
plantadores hecha por un comite nombrado
por los mismos, acuerda enmendar el
contrato de molienda enmendado
medientelas siguentes:
xxx

xxx

Las enmiendas arriba transcritas forman parte del

contrato de molienda enmendado, otorgado por y
la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three
Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos),
with a total annual production exceeding one-third of the production of all
the sugar central mills in the province, had already granted increased
participation (of 62.5%) to their planters, and that under paragraph 9 of the
resolution of August 20, 1936, heretofore quoted, the appellee had
become obligated to grant similar concessions to the plaintiffs (appellants
herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim,
and defended by urging that the stipulations contained in the resolution
were made without consideration; that the resolution in question was,
therefore, null and void ab initio, being in effect a donation that was ultra
vires and beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the
defendant Milling company, and dismissed the complaint. Thereupon,
plaintiffs duly appealed to this Court.

ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx

Appellants signed and executed the printed Amended Milling Contract on

September 10, 1936, but a copy of the resolution of August 10, 1936,
signed by the Central's General Manager, was not attached to the printed
contract until April 17, 1937; with the notation

xxx

9.a Que si durante la vigencia de este

contrato de Molienda Enmendado,
lascentrales azucareras, de Negros
Occidental, cuya produccion anual de
azucar centrifugado sea mas de una
tercera parte de la produccion total de
todas lascentrales azucareras de Negros
Occidental, concedieren a sus plantadores
mejores condiciones que la estipuladas en

We agree with appellants that the appealed decisions can not stand. It
must be remembered that the controverted resolution was adopted by
appellee corporation as a supplement to, or further amendment of, the
proposed milling contract, and that it was approved on August 20, 1936,
twenty-one days prior to the signing by appellants on September 10, of the
Amended Milling Contract itself; so that when the Milling Contract was
executed, the concessions granted by the disputed resolution had been
already incorporated into its terms. No reason appears of record why, in
the face of such concessions, the appellants should reject them or
consider them as separate and apart from the main amended milling
contract, specially taking into account that appellant Alfredo Montelibano
was, at the time, the President of the Planters Association (Exhibit 4, p.
11) that had agitated for the concessions embodied in the resolution of
August 20, 1936. That the resolution formed an integral part of the
amended milling contract, signed on September 10, and not a separate
bargain, is further shown by the fact that a copy of the resolution was
simply attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of
August 20, 1936 were supported by the same causa or consideration
underlying the main amended milling contract; i.e., the promises and
obligations undertaken thereunder by the planters, and, particularly, the

extension of its operative period for an additional 15 years over and

beyond the 30 years stipulated in the original contract. Hence, the
conclusion of the court below that the resolution constituted gratuitous
concessions not supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors
of the respondent sugar milling company to make a gift to the planters
would be relevant if the resolution in question had embodied a separate
agreement after the appellants had already bound themselves to the
terms of the printed milling contract. But this was not the case. When the
resolution was adopted and the additional concessions were made by the
company, the appellants were not yet obligated by the terms of the printed
contract, since they admittedly did not sign it until twenty-one days later,
on September 10, 1936. Before that date, the printed form was no more
than a proposal that either party could modify at its pleasure, and the
appellee actually modified it by adopting the resolution in question. So that
by September 10, 1936 defendant corporation already understood that the
printed terms were not controlling, save as modified by its resolution of
August 20, 1936; and we are satisfied that such was also the
understanding of appellants herein, and that the minds of the parties met
upon that basis. Otherwise there would have been no consent or "meeting
of the minds", and no binding contract at all. But the conduct of the parties
indicates that they assumed, and they do not now deny, that the signing of
the contract on September 10, 1936, did give rise to a binding agreement.
That agreement had to exist on the basis of the printed terms as modified
by the resolution of August 20, 1936, or not at all. Since there is no
rational explanation for the company's assenting to the further
concessions asked by the planters before the contracts were signed,
except as further inducement for the planters to agree to the extension of
the contract period, to allow the company now to retract such concessions
would be to sanction a fraud upon the planters who relied on such
additional stipulations.
The same considerations apply to the "void innovation" theory of
appellees. There can be no novation unless two distinct and successive
binding contracts take place, with the later designed to replace the
preceding convention. Modifications introduced before a bargain becomes
obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20,
1936 was not attached to the printed contract until April 17, 1937. But,
except in the case of statutory forms or solemn agreements (and it is not
claimed that this is one), it is the assent and concurrence (the "meeting of
the minds") of the parties, and not the setting down of its terms, that
constitutes a binding contract. And the fact that the addendum is only
signed by the General Manager of the milling company emphasizes that
the addition was made solely in order that the memorial of the terms of the
agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board
of Directors of the appellee company in November 19, 1936 (Exhibit 4)
only made mention of 90%, the planters having agreed to the 60-40
sharing of the sugar set forth in the printed "amended milling contracts",
and did not make any reference at all to the terms of the resolution of
August 20, 1936. But a reading of this report shows that it was not
intended to inventory all the details of the amended contract; numerous

provisions of the printed terms are alao glossed over. The Directors of the
appellee Milling Company had no reason at the time to call attention to the
provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major change was
paragraph 9 heretofore quoted; but when the report was made, that
paragraph was not yet in effect, since it was conditioned on other centrals
granting better concessions to their planters, and that did not happen until
after 1950. There was no reason in 1936 to emphasize a concession that
was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had
authority to modify the proposed terms of the Amended Milling Contract for
the purpose of making its terms more acceptable to the other contracting
parties. The rule is that
It is a question, therefore, in each case of the logical
relation of the act to the corporate purpose expressed
in the charter. If that act is one which is lawful in itself,
and not otherwise prohibited, is done for the purpose
of serving corporate ends, and is reasonably tributary
to the promotion of those ends, in a substantial, and
not in a remote and fanciful sense, it may fairly be
considered within charter powers. The test to be
applied is whether the act in question is in direct and
immediate furtherance of the corporation's business,
fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has
the power to do it; otherwise, not. (Fletcher Cyc.
Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)

have granted progressively increasing participations to their adhered

planter at an average rate of
62.333%

for the 1951-52 crop year;

64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its
Resolution of August 20, 1936, duty bound to grant similar increases to
plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and
judgment is decreed sentencing the defendant-appellee to pay plaintiffsappellants the differential or increase of participation in the milled sugar in
accordance with paragraph 9 of the appellee Resolution of August 20,
1936, over and in addition to the 60% expressed in the printed Amended
Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952
crop year, said appellants having received an
additional 2% corresponding to said year in October,
1953;

As the resolution in question was passed in good faith by the board of

directors, it is valid and binding, and whether or not it will cause losses or
decrease the profits of the central, the court has no authority to review
them.
They hold such office charged with the duty to act for
the corporation according to their best judgment, and
in so doing they cannot be controlled in the
reasonable exercise and performance of such duty.
Whether the business of a corporation should be
operated at a loss during depression, or close down
at a smaller loss, is a purely business and economic
problem to be determined by the directors of the
corporation and not by the court. It is a well-known
rule of law that questions of policy or of management
are left solely to the honest decision of officers and
directors of a corporation, and the court is without
authority to substitute its judgment of the board of
directors; the board is the business manager of the
corporation, and so long as it acts in good faith its
orders are not reviewable by the courts. (Fletcher on
Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La
Carlota, Hawaiian Philippines, San Carlos and Binalbagan (which produce
over one-third of the entire annual sugar production in Occidental Negros)

2.333% to appellant Gonzaga & Co., for the 19511952 crop year; and to all appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the
time they were withheld; and the right is reserved to plaintiffs-appellants to
sue for such additional increases as they may be entitled to for the crop
years subsequent to those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.
G.R. No. 6817

July 31, 1958

ESTEFANIA R. VDA. DE PIROVANO, plaintiff-appellant,

vs.
DE LA RAMA STEAMSHIP CO., INC., defendant-appellee.
Angel S. Gamboa for appellant.
Del Rosario and Garcia for appellee.

PADILLA, J.:
Plaintiff seeks to recover from the defendant the sum of P221,975.45, the
balance of the amount of dividends at P100 per share, declared by
Resolution No. 50-127 of 29 December 1950, to which she is entitled as
the registered owner of 3,424 shares of stock in the defendant
corporation, after deducting the sum of P120,424.55 she had withdrawn or
received from the defendant for advances made to her after the death of
the late Esteban de la Rama, 20 per cent of the sum sought to be
recovered for attorney's fees and expenses of litigation by way of
damages, and costs.
Answering the complaint, the defendant avers that although the plaintiff is
entitled to the dividends claimed in the complaint, yet she is indebted to
the defendant as of 29 December 1950 in the sum of P444,202.52, and
that by reason of the unnecessary commencement of the suit, the
defendant suffered damages in the sum of P100,000. Upon the foregoing
allegations the defendant asks for the dismissal of the complaint and
prays that judgment rendered condemning the plaintiff to pay the amount
of damages it has suffered and costs.
After hearing, the Court dismissed both the complaint and the
counterclaim without pronouncement as to costs. The plaintiff has
appealed.
Appellant's theory is that the cash advances to her in the United States
during the Pacific War for her personal expenses and for the support and
education of her children were assumed by Esteban de la Rama, as set
forth in his letter dated 5 May 1947 (Exhibit B) to the appellee and the
Hijos de I. de la Rama & Co., Inc., consented to and approved by both
corporations. She claims that the advances made to her by the appellee
were debited against the account of Hijos de I. de la Rama & Co., Inc.,
another corporation practically owned by Esteban de Ia Rama; that the
only sum the appellee corporation may deduct from the amount of
dividends to which she is entitled is P120,424.55 which she received after
the death of her father Esteban de la Rama and was not assumed by him;
and that as a matter of fact in special proceedings No. 401 of the Court of
First Instance of Iloilo for the administration and settlement of the estate of
the late Esteban de la Rama, the Hijos de I. de la Rama & Co., Inc., filed a
claim charging the estate with the aforesaid advances for expenses of the
appellant and of her children which had been assumed by the deceased in
his lifetime, a claim which, although reduced to P26,000 as per Ballentyne
schedule of monetary value, was approved by the Court of First Instance
of Iloilo on 27 September 1950, and the executor of the estate of the late
Esteban de la Rama was directed to pay the claim thus allowed (Exhibit
O).
The appellee resists appellant's claim upon the ground that the
assumption by Esteban de la Rama of the total sum of withdrawals by the
appellant for her expenses and of her children was never consented to by
the appellee and hence not binding upon it; and that the accounting
method by which the withdrawals were charged against the Hijas de I. de
la Rama & Co., Inc. was to circumvent the prohibition imposed upon the
appellee to declare dividends, agreed upon in the deed of trust executed
by the appellee and the National Development Company, a prohibition
which lasted from 26 February 1940 to 23 September 1949 (Exhibit 7).

There is no dispute that the appellant is the registered owner of 3,424

shares of stock in the appellee corporation; that on 29 December 1950 the
appellee by Resolution No. 50-127 declared a dividend of P100 for each
share of stock; that the appellee further resolved that the personal
accounts of the stockholders of the De la Rama Steamship Co., Inc.,
which include that of the appellant in the sum of P444,202.52 set up in the
books of De la Rama Steamship Co., Inc. against the Hijos de I. de la
Rama & Co., Inc., be credited to the account of the last named corporation
and debited to accounts receivable from the stockholders; and that from
the amount of dividends, the personal account of each and every
stockholder be deducted (Exhibit A-1).
The determination of the controversy hinges on whether the assumption
made by the late Esteban de la Rama in his lifetime of all the advances
made by the appellee to the appellant was binding upon it. There is no
doubt that because of the prohibition agreed upon in the deed of trust to
the effect that no dividends could be declared by the appellee during the
period of time already stated, advances to the stockholders would
constitute a violation of section 12 of the deed of trust. For that reason it
was made to appear that such advances were made to the Hijos de I. de
la Rama & Co., Inc. and debited the same against the latter in the books
of the appellee, and in the books of the Hijos de I. de la Rama & Co., Inc.
the said advances were debited against the individual the stockholders,
the stockholders of both corporations being the same. The pivotal point is
whether the assumption by Esteban de la Rama of the advances made to
the appellant by the appellee, as stated in his letter of 5 May 1947, was
consented to by the appellee to constitute a novation. Express sent by the
creditor is necessary to substitute another for the debtor.1 Such consent
does not appear to have been given by the board of directors of the
appellee. Corporate acts of a corporation must appear in its books or
records. No such consent appears in the books or records of the appellee.

Rama & Co., Inc. against the estate of the late Esteban de la Rama
(Exhibit N).
Resolution No. 50-127 of the board of directors of the appellee of 29
December 1950, whereby a cash dividend of P2,000,000 was declared in
favor of stockholders of record as of 1 December 1950, or at the rate of
P100 per share, subject to the conditions already stated, does not suffer
from any legal infirmity. The segregation from the account of Hijos de I. de
la Rama & Co., Inc. and the setting up in the books of the De la Rama
Steamship Co., Inc. of withdrawals made by the stockholders of the
appellee as accounts receivable due from said stockholders was even
suggested by the President of Hijos de I. de la Rama & Co., Inc. in a letter
dated 9 April 1945, addressed to the De la Rama Steamship Co., Inc.
(Exhibit A-1).
There is no room for the application of the in pari delicto principle to the
instant case, because the appellee corporation and the Hijos de I. de la
Rama & Co., Inc. have committed no crime or violation of law, but a
violation of section 12 of the deed of trust by the appellee corporation
which gave rise to a cause of action by the National Development
Company, the injured party, against the appellee corporation. However,
the National Development Company chose not to avail itself of its right.
The appellant must answer for the personal advances made to her by the
appellee corporation and the latter may set off the total sum of such
advances against the amount of dividends to which she is entitled.
For the foregoing considerations, the judgment appealed from is affirmed,
without pronouncement as to costs.

The appellant does not dispute the total sum of her withdrawals which is
P444,202.52 as claimed by the appellee.
G.R. No. L-17716
Aside from the letter of 5 May 1947 of Esteban de la Rama, the appellant
relies upon the financial statements and books of the appellee where the
withdrawals by the appellant were entered in the account of Hijos de I. de
la Rama & Co., Inc. or transferred to the account of Esteban de la Rama.
The entries on the withdrawals by the appellant entered in the account of
Hijos de I. de la Rama & Co., Inc. or transferred to the account of Esteban
de la Rama have already been explained satisfactorily. They were done so
in order to circumvent the prohibition referred to above. As a matter of fact
the withdrawals made by the appellant were made by her and not by the
Hijos de I. de la Rama & Co., Inc. Nor is there any evidence that those
advances were used by the Hijos de I. de la Rama & Co., Inc.
As to the inclusion of the withdrawals made by the appellant in the claim of
the Hijos de I. de la Rama & Co., Inc. filed against the estate of the late
Esteban de la Rama in special proceedings No. 401 of the probate court
of Iloilo and allowed by the court although in a reduced amount, suffice it
to say that such act of the Hijos de I. de la Rama & Co., Inc. cannot and
does not bind the appellee. Its appearance in the probate court was by
order of that court of 19 June 1950 (Exhibit M), and in its pleading the
appellee disclaimed any interest in the claim filed by the Hijos de I. de la

July 31, 1962

LUNETA MOTOR COMPANY, petitioner,

vs.
A.D. SANTOS, INC., ET AL., respondents.
Jose Agbulos for petitioner.
Graciano C. Regala and Angel A. Sison for respondents.
DIZON, J.:
Appeal from the decision of the Public Service Commission in case No.
123401 dismissing petitioner's application for the approval of the sale in its
favor, made by the Sheriff of the City of Manila, of the certificate of public
convenience granted before the war to Nicolas Concepcion (Commission
Cases Nos. 60604 and 60605, reconstituted after the war in Commission
Case No. 1470) to operate a taxicab service of 27 units in the City of
Manila and therefrom to any point in Luzon.

It appears that on December 31, 1941, to secure payment of a loan

evidenced by a promissory note executed by Nicolas Concepcion and
guaranteed by one Placido Esteban in favor of petitioner, Concepcion
executed a chattel mortgage covering the above mentioned certificate in
favor of petitioner.
To secure payment of a subsequent loan obtained by Concepcion from the
Rehabilitation Finance Corporation (now Development Bank of the
Philippines) he constituted a second mortgage on the same certificate.
This second mortgage was approved by the respondent Commission,
subject to the mortgage lien in favor of petitioner.
The certificate was later sold to Francisco Benitez, Jr., who resold it to
Rodi Taxicab Company. Both sales were made with assumption of the
mortgage in favor of the RFC, and were also approved provisionally by the
Commission, subject to petitioner's lien.
On October 10, 1953 petitioner filed an action to foreclose the chattel
mortgage executed in its favor by Concepcion (Civil Case No. 20853 of
the Court of First Instance of Manila) in view of the failure of the latter and
his guarantor, Placido Esteban, to pay their overdue account.
While the above case was pending, the RFC also instituted foreclosure
proceedings on its second chattel mortgage, and as a result of the
decision in its favor therein rendered, the certificate of public convenience
was sold at public auction in favor of Amador D. Santos for P24,010.00 on
August 31, 1956. Santos immediately applied with the Commission for the
approval of the sale, and the same was approved on January 26, 1957,
subject to the mortgage lien in favor of petitioner.
On June 9, 1958 the Court of First Instance of Manila rendered judgment
in Civil Case No. 20853, amended on August 1, 1958, adjudging
Concepcion indebted to petitioner in the sum of P15,197.84, with 12%
interest thereon from December 2, 1941 until full payment, plus other
assessments, and ordered that the certificate of public convenience
subject matter of the chattel mortgage be sold at public auction in
accordance with law. Accordingly, on March 3, 1959 said certificate was
sold at public auction to petitioner, and six days thereafter the Sheriff of
the City of Manila issued in its favor the corresponding certificate of sale.
Thereupon petitioner filed the application mentioned heretofore for the
approval of the sale. In the meantime and before his death, Amador D.
Santos sold and transferred (Commission Case No. 1272231) all his rights
and interests in the certificate of public convenience in question in favor of
the now respondent A.D. Santos, Inc., who opposed petitioner's
application.
The record discloses that in the course of the hearing on said application
and after petitioner had rested its case, the respondent A. D. Santos, Inc.,
with leave of court, filed a motion to dismiss based on the following
grounds:
a) under the petitioner's Articles of Incorporation, it
was not authorized to engage in the taxicab business
or operate as a common carrier;

b) the decision in Civil Case No. 20853 of the Court of

First Instance of Manila did not affect the oppositor
nor its predecessor Amador D. Santos inasmuch as
neither of them had been impleaded into the case;
c) that what was sold to the petitioner were only the
"rights, interests and participation" of Nicolas
Concepcion in the certificate that had been granted to
him which were no longer existing at the time of the
sale.
On October 18, 1960, the respondent Commission, after considering the
memoranda submitted by the parties, rendered the appealed decision
sustaining the first ground relied upon in support thereof, namely, that
under petitioner's articles of incorporation it had no authority to engage in
the taxicab business or operate as a common carrier, and that, is a result,
it could not acquire by purchase the certificate of public convenience
referred to above. Hence, the present appeal interposed by petitioner who
claims that, in accordance with the Corporation Law and its articles of
incorporation, it can acquire by purchase the certificate of public
convenience in question, maintaining inferentially that, after acquiring said
certificate, it could make use of it by operating a taxicab business or
operate is a common carrier by land.
There is no question that a certificate of public convenience granted to the
public operator is liable to execution (Raymundo vs. Luneta Motor Co., 58
Phil. 889) and may be acquired by purchase. The question involved in the
present appeal, however, is not only whether, under the Corporation Law
and petitioner's articles of incorporation, it may acquire by purchase a
certificate of public convenience, such as the one in question, but also
whether, after its acquisition, petitioner may hold the certificate and
thereunder operate as a common carrier by land.
It is not denied that under Section 13 (5) of the Corporation Law, a
corporation created thereunder may purchase, hold, etc., and otherwise
deal in such real and personal property is the purpose for which the
corporation was formed may permit, and the transaction of its lawful
business may reasonably and necessarily require. The issue here is
precisely whether the purpose for which petitioner was organized and the
transaction of its lawful business reasonably and necessarily require the
purchase and holding by it of a certificate of public convenience like the
one in question and thus give it additional authority to operate thereunder
as a common carrier by land.
Petitioner claims in this regard that its corporate purposes are to carry on
a general mercantile and commercial business, etc., and that it is
authorized in its articles of incorporation to operate and otherwise deal in
and concerning automobiles and automobile accessories' business in all
its multifarious ramification (petitioner's brief p. 7) and to operate, etc., and
otherwise dispose of vessels and boats, etc., and to own and operate
steamship and sailing ships and other floating craft and deal in the same
and engage in the Philippine Islands and elsewhere in the transportation
of persons, merchandise and chattels by water; all this incidental to the
transportation of automobiles (id. pp. 7-8 and Exhibit B).

We find nothing in the legal provision and the provisions of petitioner's

articles of incorporation relied upon that could justify petitioner's contention
in this case. To the contrary, they are precisely the best evidence that it
has no authority at all to engage in the business of land transportation and
operate a taxicab service. That it may operate and otherwise deal in
automobiles and automobile accessories; that it may engage in the
transportation of persons by water does not mean that it may engage in
the business of land transportation an entirely different line of business.
If it could not thus engage in the line of business, it follows that it may not
acquire an certificate of public convenience to operate a taxicab service,
such as the one in question, because such acquisition would be without
purpose and would have no necessary connection with petitioner's
legitimate business.
In view of the conclusion we have arrived at on the decisive issue involved
in this appeal, we deem it unnecessary to resolve the other incidental
questions raised by petitioner.
WHEREFORE, the appealed decision is affirmed, with costs.
G.R. No. L-37331

March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own

behalf and in that all other stockholders of the Balatoc Mining
Company, etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING
COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM,
defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellants.
DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
STREET, J.:
This action was originally instituted in the Court of First Instance of the
City of Manila by F. M. Harden, acting in his own behalf and that of all
other stockholders of the Balatoc Mining Co. who might join in the action
and contribute to the expense of the suit. With the plaintiff Harden two
others, J. D. Highsmith and John C. Hart, subsequently associated
themselves. The defendants are the Benguet Consolidated Mining Co.,
the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W.
Beam. The principal purpose of the original action was to annul a
certificate covering 600,000 shares of the stock of the Balatoc Mining Co.,
which have been issued to the Benguet Consolidated Mining Co., and to
secure to the Balatoc Mining Co., the restoration of a large sum of money
alleged to have been unlawfully collected by the Benguet Consolidated
Mining Co., with legal interest, after deduction therefrom of the amount
expended by the latter company under a contract between the two
companies, bearing date of March 9, 1927. The complaint was afterwards
amended so as to include a prayer for the annulment of this contract.
Shortly prior to the institution of this lawsuit, the Benguet Consolidated
Mining Co., transferred to H. E. Renz, as trustee, the certificate for
600,000 shares of the Balatoc Mining Co. which constitute the principal

subject matter of the action. This was done apparently to facilitate the
splitting up to the shares in the course of the sale or distribution. To
prevent this the plaintiffs, upon filing their original complaint, procured a
preliminary injunction restraining the defendants, their agents and
servants, from selling, assigning or transferring the 600,000 shares of the
Balatoc Mining Co., or any part thereof, and from removing said shares
from the Philippine Islands. This explains the connection of Renz with the
case. The other individual defendants are made merely as officials of the
Benguet Consolidated Mining Co. Upon hearing the cause the trial court
dismissed the complaint and dissolved the preliminary injunction, with
costs against the plaintiffs. From this judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial
interests involve are immense. Briefly told these facts are as follows: The
Benguet Consolidated Mining Co. was organized in June, 1903, as a
sociedad anonima in conformity with the provisions of Spanish law; while
the Balatoc Mining Co. was organized in December 1925, as a
corporation, in conformity with the provisions of the Corporation Law (Act
No. 1459). Both entities were organized for the purpose of engaging in the
mining of gold in the Philippine Islands, and their respective properties are
located only a few miles apart in the subprovince of Benguet. The capital
stock of the Balatoc Mining Co. consists of one million shares of the par
value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired
by it were largely undeveloped; and the original stockholders were unable
to supply the means needed for profitable operation. For this reason, the
board of directors of the corporation ordered a suspension of all work,
effective July 31, 1926. In November of the same year a general meeting
of the company's stockholders appointed a committee for the purpose of
interesting outside capital in the mine. Under the authority of this
resolution the committee approached A. W. Beam, then president and
general manager of the Benguet Company, to secure the capital
necessary to the development of the Balatoc property. As a result of the
negotiations thus begun, a contract, formally authorized by the
management of both companies, was executed on March 9, 1927, the
principal features of which were that the Benguet Company was to
proceed with the development and construct a milling plant for the Balatoc
mine, of a capacity of 100 tons of ore per day, and with an extraction of at
least 85 per cent of the gold content. The Benguet Company also agreed
to erect an appropriate power plant, with the aerial tramlines and such
other surface buildings as might be needed to operate the mine. In return
for this it was agreed that the Benguet Company should receive from the
treasurer of the Balatoc Company shares of a par value of P600,000, in
payment for the first P600,000 be thus advanced to it by the Benguet
Company.
The performance of this contract was speedily begun, and by May 31,
1929, the Benguet Company had spent upon the development the sum of
P1,417,952.15. In compensation for this work a certificate for six hundred
thousand shares of the stock of the Balatoc Company has been delivered
to the Benguet Company, and the excess value of the work in the amount
of P817,952.15 has been returned to the Benguet Company in cash.
Meanwhile dividends of the Balatoc Company have been enriching its
stockholders, and at the time of the filing of the complaint the value of its
shares had increased in the market from a nominal valuation to more than
eleven pesos per share. While the Benguet Company was pouring its

million and a half into the Balatoc property, the arrangements made
between the two companies appear to have been viewed by the plaintiff
Harden with complacency, he being the owner of many thousands of the
shares of the Balatoc Company. But as soon as the success of the
development had become apparent, he began this litigation in which he
has been joined by two others of the eighty shareholders of the Balatoc
Company.
Briefly, the legal point upon which the action is planted is that it is unlawful
for the Benguet Company to hold any interest in a mining corporation and
that the contract by which the interest here in question was acquired must
be annulled, with the consequent obliteration of the certificate issued to
the Benguet Company and the corresponding enrichment of the
shareholders of the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United
States, in the attention of the Philippine Commission was early drawn to
the fact that there is no entity in Spanish law exactly corresponding to the
notion of the corporation in English and American law; and in the
Philippine Bill, approved July 1, 1902, the Congress of the United States
inserted certain provisions, under the head of Franchises, which were
intended to control the lawmaking power in the Philippine Islands in the
matter of granting of franchises, privileges and concessions. These
provisions are found in section 74 and 75 of the Act. The provisions of
section 74 have been superseded by section 28 of the Act of Congress of
August 29, 1916, but in section 75 there is a provision referring to mining
corporations, which still remains the law, as amended. This provisions, in
its original form, reads as follows: "... it shall be unlawful for any member
of a corporation engaged in agriculture or mining and for any corporation
organized for any purpose except irrigation to be in any wise interested in
any other corporation engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus enacted by
Congress, the Philippine Commission entered upon the enactment of a
general law authorizing the creation of corporations in the Philippine
Islands. This rather elaborate piece of legislation is embodied in what is
called our Corporation Law (Act No. 1459 of the Philippine Commission).
The evident purpose of the commission was to introduce the American
corporation into the Philippine Islands as the standard commercial entity
and to hasten the day when the sociedad anonima of the Spanish law
would be obsolete. That statute is a sort of codification of American
corporate law.
For the purposes general description only, it may be stated that the
sociedad anonima is something very much like the English joint stock
company, with features resembling those of both the partnership is shown
in the fact that sociedad, the generic component of its name in Spanish, is
the same word that is used in that language to designate other forms of
partnership, and in its organization it is constructed along the same
general lines as the ordinary partnership. It is therefore not surprising that
for purposes of loose translation the expression sociedad anonima has not
infrequently the other hand, the affinity of this entity to the American
corporation has not escaped notice, and the expression sociedad
anonima is now generally translated by the word corporation. But when
the word corporation is used in the sense of sociedad anonima and close
discrimination is necessary, it should be associated with the Spanish

expression sociedad anonima either in a parenthesis or connected by the

word "or". This latter device was adopted in sections 75 and 191 of the
Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily,
in subsection (5) of section 13 of that Act (No. 1459) the words which we
have already quoted from section 75 of the Act of Congress of July 1,
1902 (Philippine Bill); and it is of course obvious that whatever meaning
originally attached to this provision in the Act of Congress, the same
significance should be attached to it in section 13 of our Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the
American Corporation into Philippine law in the place of the sociedad
anonima, it was necessary to make certain adjustments resulting from the
continued co-existence, for a time, of the two forms of commercial entities.
Accordingly, in section 75 of the Corporation Law, a provision is found
making the sociedad anonima subject to the provisions of the Corporation
Law "so far as such provisions may be applicable", and giving to the
sociedades anonimas previously created in the Islands the option to
continue business as such or to reform and organize under the provisions
of the Corporation Law. Again, in section 191 of the Corporation Law, the
Code of Commerce is repealed in so far as it relates to sociedades
anonimas. The purpose of the commission in repealing this part of the
Code of Commerce was to compel commercial entities thereafter
organized to incorporate under the Corporation Law, unless they should
prefer to adopt some form or other of the partnership. To this provision
was added another to the effect that existing sociedades anonimas, which
elected to continue their business as such, instead of reforming and
reorganizing under the Corporation Law, should continue to be governed
by the laws that were in force prior to the passage of this Act "in relation to
their organization and method of transacting business and to the rights of
members thereof as between themselves, but their relations to the public
and public officials shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the
Act Congress of July 1, 1902 (Philippine Bill), generally prohibiting
corporations engaged in mining and members of such from being
interested in any other corporation engaged in mining, was amended by
section 7 of Act No. 3518 of the Philippine Legislature, approved by
Congress March 1, 1929. The change in the law effected by this
amendment was in the direction of liberalization. Thus, the inhibition
contained in the original provision against members of a corporation
engaged in agriculture or mining from being interested in other
corporations engaged in agriculture or in mining was so modified as
merely to prohibit any such member from holding more than fifteen per
centum of the outstanding capital stock of another such corporation.
Moreover, the explicit prohibition against the holding by any corporation
(except for irrigation) of an interest in any other corporation engaged in
agriculture or in mining was so modified as to limit the restriction to
corporations organized for the purpose of engaging in agriculture or in
mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain
any appropriate clause directly penalizing the act of a corporation, a
member of a corporation , in acquiring an interest contrary to paragraph
(5) of section 13 of the Act. The Philippine Legislature undertook to

remedy this situation in section 3 of Act No. 2792 of the Philippine

Legislature, approved on February 18, 1919, but this provision was
declared invalid by this court in Government of the Philippine Islands vs.
El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the Act.
Subsequently the Legislature reenacted substantially the same penal
provision in section 21 of Act No. 3518, under a title sufficiently broad to
comprehend the subject matter. This part of Act No. 3518 became
effective upon approval by the Governor-General, on December 3, 1928,
and it was therefore in full force when the contract now in question was
made.
This provision was inserted as a new section in the Corporation Law,
forming section 1990 (A) of said Act as it now stands. Omitting the proviso,
which seems not to be pertinent to the present controversy, said provision
reads as follows:
SEC. 190 (A). Penalties. The violation of any of the
provisions of this Act and its amendments not
otherwise penalized therein, shall be punished by a
fine of not more than five thousand pesos and by
imprisonment for not more than five years, in the
discretion of the court. If the violation is committed by
a corporation, the same shall, upon such violation
being proved, be dissolved by quo warranto
proceedings instituted by the Attorney-General or by
any provincial fiscal by order of said Attorney-General:
....
Upon a survey of the facts sketched above it is obvious that there are two
fundamental questions involved in this controversy. The first is whether the
plaintiffs can maintain an action based upon the violation of law
supposedly committed by the Benguet Company in this case. The second
is whether, assuming the first question to be answered in the affirmative,
the Benguet Company, which was organized as a sociedad anonima, is a
corporation within the meaning of the language used by the Congress of
the United States, and later by the Philippine Legislature, prohibiting a
mining corporation from becoming interested in another mining
corporation. It is obvious that, if the first question be answered in the
negative, it will be unnecessary to consider the second question in this
lawsuit.
Upon the first point it is at once obvious that the provision referred to was
adopted by the lawmakers with a sole view to the public policy that should
control in the granting of mining rights. Furthermore, the penalties
imposed in what is now section 190 (A) of the Corporation Law for the
violation of the prohibition in question are of such nature that they can be
enforced only by a criminal prosecution or by an action of quo warranto.
But these proceedings can be maintained only by the Attorney-General in
representation of the Government.
What room then is left for the private action which the plaintiffs seek to
assert in this case? The defendant Benguet Company has committed no
civil wrong against the plaintiffs, and if a public wrong has been
committed, the directors of the Balatoc Company, and the plaintiff Harden
himself, were the active inducers of the commission of that wrong. The
contract, supposing it to have been unlawful in fact, has been performed

on both sides, by the building of the Balatoc plant by the Benguet

Company and the delivery to the latter of the certificate of 600,000 shares
of the Balatoc Company. There is no possibility of really undoing what has
been done. Nobody would suggest the demolition of the mill. The Balatoc
Company is secure in the possession of that improvement, and talk about
putting the parties in status quo ante by restoring the consideration with
interest, while the Balatoc Company remains in possession of what it
obtained by the use of that money, does not quite meet the case. Also, to
mulct the Benguet Company in many millions of dollars in favor of
individuals who have not the slightest equitable right to that money in a
proposition to which no court can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on
the assumption that only one of the contracting parties has been guilty of a
misdemeanor, namely, the Benguet Company, and that the other party, the
Balatoc Company, is wholly innocent to participation in that wrong. The
plaintiffs would then have us apply the second paragraph of article 1305 of
the Civil Code which declares that an innocent party to an illegal contract
may recover anything he may have given, while he is not bound to fulfill
any promise he may have made. But, supposing that the first hurdle can
be safely vaulted, the general remedy supplied in article 1305 of the Civil
Code cannot be invoked where an adequate special remedy is supplied in
a special law. It has been so held by this court in Go Chioco vs. Martinez
(45 Phil., 256, 280), where we refused to apply that article to a case of
nullity arising upon a usurious loan. The reason given for the decision on
this point was that the Usury Act, as amended, contains all the provisions
necessary for the effectuation of its purposes, with the result that the
remedy given in article 1305 of the Civil Code is unnecessary. Much more
is that idea applicable to the situation now before us, where the special
provisions give ample remedies for the enforcement of the law by action in
the name of the Government, and where no civil wrong has been done to
the party here seeking redress.
The view of the case presented above rest upon considerations arising
upon our own statutes; and it would seem to be unnecessary to ransack
the American decisions for analogies pertinent to the case. We may
observe, however, that the situation involved is not unlike that which has
frequently arisen in the United States under provisions of the National
Bank Act prohibiting banks organized under that law from holding real
property. It has been uniformly held that a trust deed or mortgaged
conveying property of this kind to a bank, by way of security, is valid until
the transaction is assailed in a direct proceeding instituted by the
Government against the bank, and the illegality of such tenure supplies no
basis for an action by the former private owner, or his creditor, to annul the
conveyance. (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs.
Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same
direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29
Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes & Wessell Metal Co.,
127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)
Most suggestive perhaps of all the cases in Compaia Azucarera de
Carolina vs. Registrar (19 Porto Rico, 143), for the reason that this case
arose under a provision of the Foraker Act, a law analogous to our
Philippine Bill. It appears that the registrar had refused to register two
deeds in favor of the Compaia Azucarera on the ground that the land
thereby conveyed was in excess of the area permitted by law to the

company. The Porto Rican court reversed the ruling of the registrar and
ordered the registration of the deeds, saying:
Thus it may be seen that a corporation limited by the
law or by its charter has until the State acts every
power and capacity that any other individual capable
of acquiring lands, possesses. The corporation may
exercise every act of ownership over such lands; it
may sue in ejectment or unlawful detainer and it may
demand specific performance. It has an absolute title
against all the world except the State after a proper
proceeding is begun in a court of law. ... The Attorney
General is the exclusive officer in whom is confided
the right to initiate proceedings for escheat or attack
the right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against
the Benguet Company for the infraction of law supposed to have been
committed, we forego cny discussion of the further question whether a
sociedad anonima created under Spanish law, such as the Benguet
Company, is a corporation within the meaning of the prohibitory provision
already so many times mentioned. That important question should, in our
opinion, be left until it is raised in an action brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed,
and it is so ordered, with costs against the appellants.

G.R. No. L-36207

October 26, 1932

IRINEO G. CARLOS, plaintiff-appellant,

vs.
MINDORO SUGAR CO., ET AL., defendants-appellees.
Jose Ayala for appellant.
Ross, Lawrence & Selph for appellees.

IMPERIAL, J.:
The plaintiff brought this action to recover from the defendants the value of
four bonds, Nos. 1219, 1220, 1221, and 1222, with due and unpaid
interest thereon, issued by the Mindoro Sugar Company and placed in
trust with the Philippine Trust Company which, in turn, guaranteed them
for value received. Said plaintiff appealed from the judgment rendered by
the Court of First Instance of Manila absolving the defendants from the
complaint, excepting the Mindoro Sugar Company, which was sentenced
to pay the value of the four bonds with interest at 8 per cent per annum,
plus costs.

The Mindoro Sugar Company is a corporation constituted in accordance

with the laws of the country and registered on July 30, 1917. According to
its articles of incorporation, Exhibit 5, one of its principal purposes was to
acquire and exercise the franchise granted by Act No. 2720 to George H.
Fairchild, to substitute the organized corporation, the Mindoro Company,
and to acquire all the rights and obligations of the latter and of Horace
Havemeyer and Charles J. Welch in the so-called San Jose Estate in the
Province of Mindoro.
The Philippine Trust Company is another domestic corporation, registered
on October 21, 1917. In its articles of incorporation, Exhibit A, some of its
purposes are expressed thus: "To acquire by purchase, subscription, or
otherwise, and to invest in, hold, sell, or otherwise dispose of stocks,
bonds, mortgages, and other securities, or any interest in either, or any
obligations or evidences of indebtedness, of any other corporation or
corporations, domestic or foreign. . . . Without in any particular limiting any
of the powers of the corporation, it is hereby expressly declared that the
corporation shall have power to make any guaranty respecting the
dividends, interest, stock, bonds, mortgages, notes, contracts or other
obligations of any corporation, so far as the same may be permitted by the
laws of the Philippine Islands now or hereafter in force." Its principal
purpose, then, as its name indicates, is to engage in the trust business.
On November 17, 1917, the board of directors of the Philippine Trust
Company, composed of Phil, C. Whitaker, chairman, and James Ross,
Otto Vorster, Charles D. Ayton, and William J. O'Donovan, members,
adopted a resolution authorizing its president, among other things, to
purchase at par and in the name and for the use of the trust corporation all
or such part as he may deem expedient, of the bonds in the value of
P3,000,000 that the Mindoro Sugar Company was about to issue, and to
resell them, with or without the guarantee of said trust corporation, at a
price not less than par, and to guarantee to the Philippine National Bank
the payment of the indebtedness to said bank by the Mindoro Sugar
Company or Charles J. Welch and Horace Havemeyer, up to P2,000,000.
The relevant part of the resolution, Exhibit 3, reads as follows:
Resolved that Mr. Phil. C. Whitaker, president of this
company, be and he hereby is authorized to purchase
at par in the name and for the use of this company all,
or such part as he may deem expedient, of the said
P3,000,000 of 20-year 8 per cent coupon bonds of the
said Mindoro Sugar Company, and to resell or
otherwise dispose of the said bonds, with or without
this company's guaranty, at a price not less than par;
and it was further
Resolved that Mr. Phil. C. Whitaker, president of the
company be and he hereby is authorized in the name
of this company alone or in connection with others, by
joint and several obligations, to guarantee to the
Philippine National Bank the due and punctual
payment of any and all indebtedness owing to the
said Bank by either the Mindoro Sugar Company, the
Mindoro Company, or Charles J. Welch and Horace
Havemeyer, up to P2,000,000; and it was further

Resolved that the said president, Mr. Phil. C.

Whitaker, be and he hereby is authorized to execute
in the name of this company any and all notes,
mortgages, bonds, guaranties, or instruments in
writing whatever necessary for the carrying into effect
of the authority hereby granted.
In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar
Company executed in favor of the Philippine Trust Company the deed of
trust, Exhibit 6, transferring all of its property to it in consideration of the
bonds it had issued to the value of P3,000,000, the value of each bond
being $1,000, which par value, with interest at 8 per cent per annum, the
Philippine Trust Company had guaranteed to the holders, and in
consideration, furthermore, of said trust corporation having guaranteed to
the Philippine National Bank all the obligations contracted by the Mindoro
Sugar Company, Charles J. Welch and Horace Havemeyer up to the
aforesaid amount of P2,000,000. The aforementioned deed was approved
by his Excellency, the Governor-General, upon recommendation of the
Secretary of Agriculture and Natural Resources, and in accordance with
the provisions of Act No. 2720 of the Philippine Legislature. Following are
the clauses of said Exhibit 6 material to this decision:
Whereas, for the purposes aforesaid, and in further
pursuance of said resolutions of its board of directors
and of its stockholders, the company, in order to
secure the payment of said First Mortgage, Twenty
Year, Eight Per Cent, Gold Bonds, has determined to
execute and deliver to said Philippine Trust Company,
as trustee, a deed of trust of its properties hereinafter
described, and the board of directors of the Company
has approved the form of this indenture and directed
that the same be executed and delivered to said
trustee; and
Whereas, all things necessary to make said bonds,
when certified by said trustee as in this indenture
provided, valid, binding, legal and negotiable
obligations of the company and this indenture a valid
deed of trust to secure the payment of said bonds,
have been done and performed, and the creation and
issue of said bonds, and the execution,
acknowledgment and delivery of this deed of trust
have been duly authorized;
Now, therefore, in order to secure the payment of the
principal and interest of all such bonds at any time
issued and outstanding under this indenture,
according to their tenor, purport and effect, and to
secure the performance and observance of all the
covenants and conditions herein contained and to
declare the terms and conditions upon which said
bonds are issued, received and held, and for and in
consideration of the premises, and of the purchase or
acceptance of such bonds by the holders thereof, and
of the sum of one dollar, United States currency, to it
duly paid at or before the ensealing and delivery of

these presents, the receipt whereof is hereby

acknowledged, the Mindoro Sugar Company, party of
the first part, has sold and conveyed, and by these
presents does sell and convey to the Philippine Trust
Company, party of the second part, its successors
and assigns forever;
(Description of the property.)
In consequence of this transaction, the bonds, with their coupons were
placed on the market and sold by the Philippine Trust Company, all
endorsed as follows:
This is to certify that the within bond is one
of the series described in the trust deed
therein mentioned.

SECOND ERROR
The lower court, without a proof to support it or an
averment in defense by the defendant Philippine Trust
Company, erred in finding hypothetically that if the
guarantee made by this company be held valid, the
trust funds and deposits in its hands would probably
be endangered.
THIRD ERROR
The lower court erred in holding that the Philippine
Trust Company has no power to guarantee the
obligation of another juridical personality, for value
received.
FOURTH ERROR

PHILIPPINE TRUST COMPANY

by: (Sgd.) PHIL. C. WHITAKER
President
For values received, the Philippine Trust
Company hereby guarantees the payment
of principal and interest of the within bond.

The lower court erred in not recognizing the validity

and effect of the guarantee subscribed by the
Philippine Trust Company for the payment of the four
bonds claimed in the complaint, endorsed upon them,
and in absolving said institution from the complaint.
FIFTH ERROR

Manila, Jan.2, 1918

PHILIPPINE TRUST COMPANY
by: (Sgd.)
PHIL. C. WHITAKER
President
The Philippine Trust Company sold thirteen bonds, Nos. 1219 to 1231, to
Ramon Diaz for P27,300, at a net profit of P100 per bond. The four bonds
Nos. 1219, 1220, 1221, and 1222, here in litigation, are included in the
thirteen sold to Diaz.
The Philippine Trust Company paid the appellant, upon presentation of the
coupons, the stipulated interest from the date of their maturity until the 1st
of July, 1928, when it stopped payments; and thenceforth it alleged that it
did not deem itself bound to pay such interest or to redeem the obligation
because the guarantee given for the bonds was illegal and void.
The appellant now contends that the judgment appealed from is
untenable, assigning the following errors:
FIRST ERROR
The lower court erred in sustaining the demurrer
against the amended complaint, filed by defendant J.
S. Reis (Reese) and consequently in dismissing the
same with regard to this defendant.

The lower court erred in absolving the ex-directors of

the Philippine Trust Company, Phil. C. Whitaker, O.
Vorster, and Charles D. Ayton, from the complaint.
We shall not follow the order of the appellant's argument, deeming it
unnecessary, but shall decide only the third and fourth assignments of
error upon which the merits of the case depend. For the clear
understanding of this decision and to avoid erroneous interpretations,
however, we wish to state that in this decision we shall decide only the
rights of the parties with regard to the four bonds in question and whatever
we say in no wise affects or applies to the rest of the bonds.
We shall begin by saying that the majority of the justices of this court who
took part in the case are of opinion that the only point of law to be decided
is whether the Philippine Trust Company acquired the four bonds in
question, and whether as such it bound itself legally and acted within its
corporate powers in guaranteeing them. This question was answered in
the affirmative.1awphil.net
In adopting this conclusion we have relied principally upon the following
facts and circumstances: Firstly, that the Philippine Trust Company,
although secondarily engaged in banking, was primarily organized as a
trust corporation with full power to acquire personal property such as the
bonds in question according to both section 13 (par. 5) of the Corporation
Law and its duly registered by-laws and articles of incorporation; secondly,
that being thus authorized to acquire the bonds, it was given implied
power to guarantee them in order to place them upon the market under

better, more advantageous conditions, and thereby secure the profit

derived from their sale:
It is not, however, ultra vires for a corporation to enter
into contracts of guaranty or suretyship where it does
so in the legitimate furtherance of its purposes and
business. And it is well settled that where a
corporation acquires commercial paper or bonds in
the legitimate transaction of its business it may sell
them, and in furtherance of such a sale it may, in
order to make them the more readily marketable,
indorse or guarantee their payment. (7 R. C. L., p.
604 and cases cited.)
"Whenever a corporation has the power to take and dispose of the
securities of another corporation, of whatsoever kind, it may, for the
purpose of giving them a marketable quality, guarantee their payment,
even though the amount involved in the guaranty may subject the
corporation to liabilities in excess of the limit of indebtedness which it is
authorized to incur. A corporation which has power by its charter to issue
its own bonds has power to guarantee the bonds of another corporation,
which has been taken in payment of a debt due to it, and which it sells or
transfers in payment of its own debt, the guaranty being given to enable it
to dispose of the bond to better advantage. And so guaranties of payment
of bonds taken by a loan and trust company in the ordinary course of its
business, made in connection with their sale, are not ultra vires, and are
binding." (14-A C. J., pp. 742-743 and cases cited); thirdly, that although it
does not clearly appear in the deed of trust (Exhibit 6) that the Mindoro
Sugar Company transferred the bonds therein referred to, to the Philippine
Trust Company, nevertheless, in the resolution of the board of directors
(Exhibit 3), the president of the Philippine Trust Company was expressly
authorized to purchase all or some of the bonds and to guarantee them;
whence it may be inferred that subsequent purchasers of the bonds in the
market relied upon the belief that they were acquiring securities of the
Philippine Trust Company, guaranteed by this corporation; fourthly, that as
soon as P3,000,000 worth of bonds was issued, and by the deed of trust
the Mindoro, Sugar Company transferred all its real property to the
Philippine Trust Company, the cause or consideration of the transfer
being, (1) the guarantee given by the purchaser to the bonds, and (2) its
having likewise guaranteed its obligations and those of Welch and
Havemeyer in favor of the Philippine National Bank up to the amount of
P2,000,000; fifthly, that in transferring its real property as aforesaid the
Mindoro Sugar Company was reduced to a real state of bankruptcy, as the
parties specifically agreed during the hearing of the case, to the point of
having become a nominal corporation without any assets whatsoever;
sixthly, that such operation or transaction cannot mean anything other
than that the real intention of the parties was that the Philippine Trust
Company acquired the bonds issued and at the same time guaranteed the
payment of their par value with interest, because otherwise the transaction
would be fraudulent, inasmuch as nobody would be answerable to the
bond-holders for their value and interest; seventhly, that the Philippine
Trust Company had been paying the appellant the interest accrued upon
the four bonds from the date of their issuance until July 1, 1928, such
payment of interest being another proof that said corporation had really
become the owner of the aforesaid bonds; and, eightly, that the Philippine
Trust Company has not adduced any evidence to show any other
conclusions.

There are other considerations leading to the same result even in the
supposition that the Philippine Trust Company did not acquire the bonds in
question, but only guaranteed them. In such a case the guarantee of these
bonds would at any rate, be valid and the said corporation would be bound
to pay the appellant their value with the accrued interest in view of the fact
that they become due on account of the lapse of sixty (60) days, without
the accrued interest due having been paid; and the reason is that it is
estopped from denying the validity of its guarantee.
. . . On the other hand, according to the view taken by
other courts, which it must be acknowledged are in
the majority, a recovery directly upon the contract is
permitted, on the ground that the corporation, having
received money or property by virtue of a contract not
immoral or illegal of itself, is estopped to deny liability;
and that the only remedy is one on behalf of the state
to punish the corporation for violating the law. (7 R. C.
L., pp. 680-681 and cases cited.)
. . . The doctrine of ultra vires has been declared to be
entirely the creation of the courts and is of
comparatively modern origin. The defense is by some
courts regarded as an ungracious and odious one, to
be sustained only where the most persuasive
considerations of public policy are involved, and there
are numerous decisions and dicta to the effect that
the plea should not as a general rule prevail whether
interposed for or against the corporation, where it will
not advance justice but on the contrary will
accomplish a legal wrong. (14-A C. J., pp. 314-315.)
The doctrine of the Supreme Court of the United
States together with the English courts and some of
the state courts is that no performance upon either
side can validate an ultra vires transaction or
authorize an action to be maintained directly upon it.
However, the great weight of authority in the state
courts is to the effect that a transaction which is
merely ultra vires and not malum in se or malum
prohibitum although it may be made by the state a
basis for the forfeiture of the corporate charter or the
dissolution of the corporation, is, if performed by one
party, not void as between the parties to all intents
and purposes, and that an action may be brought
directly upon the transaction and relief had according
to its terms. ( 14-A C. J., pp. 319-320.)
When a contract is not on its face necessarily beyond
the scope of the power of the corporation by which it
was made, it will, in the absence of proof to the
contrary, be presumed to be valid. Corporations are
presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it
would defeat the ends of justice or work a legal

wrong. (Coleman vs. Hotel de France Co., 29 Phil.,

323.)
Guaranties of payment of bonds taken by a loan and
trust company in the ordinary course of its business,
made in connection with their sale, are not ultra vires,
and are binding. (Broadway Nat. Bank vs. Baker, 57
N. E., p. 603.)
It has been intimated according to section 121 of the Corporation Law, the
Philippine Trust Company, as a banking institution, could not guarantee
the bonds to the value of P3,000,000 because this amount far exceeds its
capital of P1,000,000 of which only one-half has been subscribed and
paid. Section 121 reads as follows:
SEC. 212. No such bank shall at any time be indebted
or in any way liable to an amount exceeding the
amount of its capital stock at such time actually paid
in and remaining undiminished by losses or
otherwise, except on account of demands of the
following nature:
(1) Moneys deposited with or collected by
the bank;
(2) Bills of exchange or drafts drawn
against money actually on deposit to the
credit of the bank or due thereto;
(3) Liabilities to the stockholders of the
bank for dividends and reserve profits.
This difficulty is easily obviated by bearing in mind that, as we stated
above, the banking operations are not the primary aim of said corporation,
which is engaged essentially in the trust business, and that the prohibition
of the law is not applicable to the Philippine Trust Company, for the
evidence shows that Mindoro Sugar Company transferred all its real
property, with the improvements, to it, and the value of both, which surely
could not be less than the value of the obligation guaranteed, became a
part of its capital and assets; in other words, with the value of the real
property transferred to it, the Philippine Trust Company had enough
capital and assets to meet the amount of the bonds guaranteed with
interest thereon.
Wherefore, the decision appealed from is reversed and the Philippine
Trust Company is sentenced to pay to the appellant the sum of four
thousand dollars ($4,000) with interest at eight per cent (8%) per annum
from July 1, 1928 until fully paid, and the costs of both instances. So
ordered.