BA SAVINGS BANK, petitioner, vs. ROGER T. SIA, TACIANA U.

SIA and JOHN DOE,

respondents.
DECISION
PANGANIBAN, J.:
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.
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
assailing the August 6, 1997 Resolution[1] of the Court of Appeals (CA) in CA-GR SP No.
43209.[2]
Also challenged by petitioner is the October 24, 1997 CA Resolution[3] 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
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.
III Whether or not the certification by petitioner corporations lawyers is in compliance with
the requirements on non-forum shopping.[6]

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 Courts Ruling
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.
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 Quitain[8] 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.

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.
No. L-49023 June 30, 1987
MADRIGAL & COMPANY, INC., petitioner,
vs.
HON. MINISTER OF LABOR and MADRIGAL CENTRAL OFFICE EMPLOYEES
UNION, respondents.
SARMIENTO, J.:
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. 4Specifically, 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 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.
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.

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
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

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.

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

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.

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 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.
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 layoff 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.
ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES
& EXCHANGE COMMISSION, petitioners, vs. COURT OF APPEALS and
IGLESIA NI CRISTO, respondents.
DECISION
HERMOSISIMA, JR., J.:
The subject of this petition for review is the Decision of the public respondent Court
of Appeals,[1] dated October 28, 1994, setting aside the portion of the Decision of the
Securities and Exchange Commission (SEC, for short) in SEC Case No. 4012 which
declared null and void the sale of two (2) parcels of land in Quezon City covered by the
Deed of Absolute Sale entered into by and between private respondent Iglesia Ni Cristo
(INC, for short) and the Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP, for
short).
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.
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 by-laws to govern the internal government of the association
including the conduct of election. And since the election of both petitioners and
respondents have been declared null and void, a vacuum is created as to who should
adopt the by-laws and certify its adoption. To remedy this unfortunate situation that the
association has found itself in, the members of the petitioning corporation are hereby
authorized to prepare and adopt their by-laws for submission to the Commission. Once
approved, an election of the members of the Board of Trustees shall immediately be called
pursuant to the approved by-laws.
SO ORDERED.[9]
Neither group, however, took the necessary steps prescribed by the SEC in its
October 3, 1986 Decision, and, thus, no valid election of the members of the Board of
Trustees of IDP was ever called. Although the Carpizo Group[10] attempted to submit a set
of by-laws, the SEC found that, aside from Engineer Farouk Carpizo and Atty. Musib Buat,
those who prepared and adopted the by-laws were not bona fide members of the IDP, thus
rendering the adoption of the by-laws likewise null and void.
On April 20, 1989, without having been properly elected as new members of the
Board of Trustees of IDP, the Carpizo Group caused to be signed an alleged Board
Resolution[11] of the IDP, authorizing the sale of the subject two parcels of land to the
private respondent INC for a consideration of P22,343,400.00, which sale was evidenced
by a Deed of Absolute Sale[12]dated April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former
Senator Mamintal Tamano, or the Tamano Group, filed a petition before the SEC, docketed

as SEC Case No. 4012, seeking to declare null and void the Deed of Absolute Sale signed
by the Carpizo Group and the INC since the group of Engineer Carpizo was not the
legitimate Board of Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed
in its favor, filed an action for Specific Performance with Damages against the vendor,
Carpizo Group, before Branch 81 of the Regional Trial Court of Quezon City, docketed as
Civil Case No. Q-90-6937, to compel said group to clear the property of squatters and
deliver complete and full physical possession thereof to INC. Likewise, INC filed a motion
in the same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the
Register of Deeds of Quezon City the owners duplicate copy of TCT Nos. RT-26521 and RT26520 covering the aforementioned two parcels of land, so that the sale in INCs favor may
be registered and new titles issued in the name of INC. Mrs. Ligon was alleged to be the
mortgagee of the two parcels of land executed in her favor by certain Abdulrahman R.T.
Linzag and Rowaida Busran-Sampaco claimed to be in behalf of the Carpizo Group.
The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-906937 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, Intervenors 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
petitioners motion to intervene on the ground of lack of juridical personality of the IDPTamano Group and that the issues being raised by way of intervention are intra-corporate
in nature, jurisdiction thereto properly pertaining to the SEC. [15]
Apprised of the pendency of SEC Case No. 4012 involving the controverted status of
the IDP-Carpizo Group but without waiting for the outcome of said case, Judge Reyes, on
September 12, 1991, rendered Partial Judgment in Civil Case No. Q-90-6937 ordering the
IDP-Carpizo Group to comply with its obligation under the Deed of Sale of clearing the
subject lots of squatters and of delivering the actual possession thereof to INC. [16]

Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to
Civil Case No. Q-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 owners copy of RT-26521 (170567) and RT-26520 (176616) in open court for
the registration of the Deed of Absolute Sale in the latters name and the annotation of the
mortgage executed in her favor by herein defendant Islamic Directorate of the Philippines
on the new transfer certificate of title to be issued to plaintiff.

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

SO ORDERED.[18]

3) Not applying the principles of estoppel and laches. [26]

On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon to
deliver the owners duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520
(176616) to theRegister of Deeds of Quezon City for the purposes stated in the Order of
March 2, 1992.[19]

While the above petition was pending, however, the Supreme Court rendered
judgment in G.R. No. 107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision,
dated June 1, 1995, denied the Ligon petition and affirmed the October 28, 1992 Decision
of the Court of Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge Reyes
compelling mortgagee Ligon to surrender the owners duplicate copies of TCT Nos. RT26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City so that
the Deed of Absolute Sale in INCs favor may be properly registered.

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.
2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of
Absolute Sale entered into by Iglesia ni Kristo and the Islamic Directorate of the
Philippines, Inc.[22] null and void.
3. Declaring the election of the Board of Directors [23] of the corporation from 1986 to 1991
as null and void;
4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat,
as members of the IDP null and void.
No pronouncement as to cost.
SO ORDERED.[24]
Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in
SEC Case No. 4012, but the same was denied on account of the fact that the decision of
the case had become final and executory, no appeal having been taken therefrom. [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 INCs

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 case. Quite the contrary, the requisites of res judicata do
not obtain in the case at bench.
Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res
judicata in actions in personam, to wit:
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 aliis 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 owners duplicate copy of the transfer certificates of title to the rightful
possessor thereof, whereas the cause of action in the present case is the validity of the
Carpizo Group-INC Deed of Absolute Sale.
Res Judicata in the form of conclusiveness of judgment cannot likewise apply for the
reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC
sale may only be deemed incidental to the resolution of the primary issue posed in said
case which is: Who between Ligon and INC has the better right of possession over the
owners duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be
considered determinative and conclusive on the matter of the validity of the sale for this
particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause
grave and irreparable injustice to IDP which never gave its consent to the sale, thru a
legitimate Board of Trustees.

In any case, while it is true that the principle of res judicata is a fundamental
component of our judicial system, it should be disregarded if its rigid application would
involve the sacrifice of justice to technicality. [34]
The main question though in this petition is: Did the Court of Appeals commit
reversible error in setting aside that portion of the SECs Decision in SEC Case No. 4012
which declared the sale of two (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:
Section 3. The Commission shall have absolute jurisdiction, supervision and control over
all corporations, partnerships or associations, who are the grantees of primary franchises
and/or a license or permit issued by the government to operate in the Philippines xxx xxx.
xxxxxxxxx
Section 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
xxxxxxxxx
c) Controversies in the selection or appointment of directors, trustees, officers, or
managers of such corporations, partnerships or associations. x x x.
If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can
also declare who is not the legitimate IDP Board. This is precisely what the SEC did in SEC
Case No. 4012 when it adjudged the election of the Carpizo Group to the IDP Board of
Trustees to be null and void.[35] By this ruling, the SEC in effect made the unequivocal
finding that the IDP-Carpizo Group is a bogus Board of Trustees. Consequently, the Carpizo
Group is bereft of any authority whatsoever to bind IDP in any kind of transaction
including the sale or disposition of IDP property.
It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had
the opportunity to pass upon the status of the Carpizo Group. As far back as October 3,
1986, the SEC, in Case No. 2687,[36] in a suit between the Carpizo Group and the Abbas
Group, already declared the election of the Carpizo Group (as well as the Abbas Group) to
the IDP Board as null and void for being violative of the Articles of Incorporation.
[37]
Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private
respondent INC contracted is a fake Board.
Premises considered, all acts carried out by the Carpizo Board, particularly the sale
of the Tandang Sora property, allegedly in the name of the IDP, have to be struck down for
having been done without the consent of the IDP thru a legitimate Board of
Trustees. Article 1318 of the New Civil Code lays down the essential requisites of
contracts:

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 Groups 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 two-thirds (2/3) of the members, in a
stockholders or members meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.
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.
x x x x x x x x x.
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 SECs conclusion on
the matter, and remand the case to the regular courts for further litigation over an issue
which is already determinable based on what we have in the records.
It is unfortunate that private respondent INC opposed the motion for intervention
filed by the 1971 Board of Trustees in Civil Case No. Q-90-6937, a case for Specific
Performance with Damages between INC and the Carpizo Group on the subject Deed of
Absolute Sale. The legitimate IDP Board could have been granted ample opportunity
before the regional trial court to shed light on the true status of the Carpizo Board and
settled the matter as to the validity of the sale then and there. But INC, wanting to acquire
the property at all costs and threatened by the participation of the legitimate IDP Board in
the civil suit, argued for the denial of the motion averring, inter alia, that the issue sought
to be litigated by the movant is 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 observed that the INC bought the questioned property from
the Carpizo Group without even seeing the owners duplicate copy of the titles covering
the property.This is very strange considering that the subject lot is a large piece of real
property in Quezon City worth millions, and that under the Torrens System of Registration,
the minimum requirement for one to be a good faith buyer for value is that the vendee at
least sees the owners duplicate copy of the title and relies upon the same. [41] The private
respondent presumably knowledgeable on the aforesaid working of the Torrens System,
did not take heed of this and nevertheless went through with the sale with undue
haste. The unexplained eagerness of INC to buy this valuable piece of land in Quezon City
without even being presented with the owners copy of the titles casts very serious doubt
on the rightfulness of its position as vendee in the transaction.
WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court
of Appeals dated October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of
the Securities and Exchange Commission dated July 5, 1993 in SEC Case No. 4012 is
REINSTATED. The Register of Deeds of Quezon City is hereby ordered to cancel the
registration of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo, if
one has already been made. If new titles have been issued in the name of Iglesia Ni
Cristo, the register of Deeds is hereby ordered to cancel the same, and issue new ones in
the name of petitioner Islamic Directorate of the Philippines. Petitioner corporation is
ordered to return to private respondent whatever amount has been initially paid by INC as
consideration for the property with legal interest, if the same was actually received by

IDP. Otherwise, INC may run after Engineer Farouk Carpizo and his group for the amount of
money paid.
SO ORDERED.

DATU V. SEC 123 SCRA 722

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.
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.
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 pre-emptive 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 re-offered, 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 'S-l'). 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. (L-2ll67, 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.

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 theCooperativa 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.
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.

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.

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

G.R. No. 77860 November 22, 1988

BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, petitioners,
vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN, respondents.
GRIO-AQUINO, J.:
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

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 letter-agreement
dated June 25, 1984 to which he affixed his conformity (Annex C):
June 25, 1984
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

Doc. No. 392

Page No. 80
Book No. X
Series of 1984. (p. 245, Rollo.)

P 62,500.00

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:

December 15, 1984

PROMISSORY NOTE

P 62,500.00

Makati, Metro Manila

July 3, 1984

October 15, 1984

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.
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.
If the above meets your requirements, kindly signify your conformity/approval by signing
below.

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:
P100,000.00

July 15, 1984

75,000.00

Very truly yours,

(SGD) JAMES C. PERALTA
Corporate Secretary

CONFORME:

62,500.00

(SGD) NILCAR Y. FAJILAN

Noted:

October 15, 1984

(SGD) ALFREDO S. PANGILINAN (SGD) MAXIMO R. REBALDO (SGD) BENEDICTO M.

EMPAYNADO

62,500.00

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.
(SGD) ERNESTO B. DURAN
NOTARY PUBLIC
Until December 31, 1984
PTR No. 8582861 Issued
on January 24, 1984 at
Makati, Metro Manila

Sept. 15, 1984

Dec. 15, 1984

P300,000.00
BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION
By:
(SGD) ALFREDO S. PANGILINAN
President
Signed in the presence of:
(SGD) MAXIMO R. REBALDO

(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 intracorporate 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 intra-corporate or partnership relations, between and
among stockholders members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; ... (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;
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,
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 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.)

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, defendantsappellants.

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.

San Juan, Africa and Benedicto for plaintiffs-appellants.

Vicente Hilado and Gianzon, Sison, Yulo and Associates for defendants-appellants.

SO ORDERED.

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.

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

February 28, 1969

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.

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.

P243,415.62

Luzon Industrial Corp.

585,918.17

Associated Sugar

463,860.36

General Securities

86,743.65

Bacolod Murcia

501,030.61

Central Azucarera del Danao

97,884.42

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.

From this judgment both parties appealed directly to the Supreme Court.
II.
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;

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:
(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 "R2"; 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 Ma-ao 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 two-thirds 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

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 non-mining 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.

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

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.

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.
PUNO, J.:
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:

Asuncion Lopez Gonzales

2 Teresita Lopez Marquez

7831

7830

shares

shares

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.
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;

7830

shares

(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)

4 Rosendo de Leon

shares

5 Benjamin Bernardino

share

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:

3 Arturo F. Lopez

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

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 NLRC-NCR-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.

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:

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:

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
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.
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.

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.
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.
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-NCR-2176-82 is AFFIRMED. This decision is immediately executory. Costs
against petitioners.
SO ORDERED.

Petitioners try to convince us that the subject resolutions had no force and effect
in view of the non-approval thereof during the Annual Stockholders' 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.