G.R. No.

75875 December 15, 1989

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID
P. WHITTINGHAM and CHARLES
CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING
CORPORATOIN, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A.
BONCAN, BALDWIN YOUNG and AVELINO V.
CRUZ, respondents.

that in all subsequent elections for directors of

Sanitary Wares Manufacturing Corporation
(Saniwares), American Standard Inc. (ASI) cannot
nominate more than three (3) directors; that the
Filipino stockholders shall not interfere in ASI's
choice of its three (3) nominees; that, on the
other hand, the Filipino stockholders can
nominate only six (6) candidates and in the event
they cannot agree on the six (6) nominees, they
shall vote only among themselves to determine
who the six (6) nominees will be, with cumulative
voting to be allowed but without interference
from ASI.

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING
CORPORATION, ERNESTO R. LAGDAMEO,
ENRIQUE B. LAGDAMEO, GEORGE FL .EE
RAUL A. BONCAN, BALDWIN YOUNG and
AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG
AURBACH, JOHN GRIFFIN, DAVID P.
WHITTINGHAM, CHARLES CHAMSAY and
LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING
CORPORATION, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A.
BONCAN, BALDWIN YOUNG, AVELINO V.
CRUZ and the COURT OF
APPEALS, respondents.

The antecedent facts can be summarized as

follows:
In 1961, Saniwares, a domestic corporation was
incorporated for the primary purpose of
manufacturing and marketing sanitary wares.
One of the incorporators, Mr. Baldwin Young went
abroad to look for foreign partners, European or
American who could help in its expansion plans.
On August 15, 1962, ASI, a foreign corporation
domiciled in Delaware, United States entered into
an Agreement with Saniwares and some Filipino
investors whereby ASI and the Filipino investors
agreed to participate in the ownership of an
enterprise which would engage primarily in the
business of manufacturing in the Philippines and
selling here and abroad vitreous china and
sanitary wares. The parties agreed that the
business operations in the Philippines shall be
carried on by an incorporated enterprise and that
the name of the corporation shall initially be
"Sanitary Wares Manufacturing Corporation."

Belo, Abiera & Associates for petitioners in

75875.

The Agreement has the following provisions

relevant to the issues in these cases on the
nomination and election of the directors of the
corporation:

Sycip, Salazar, Hernandez & Gatmaitan for

Luciano E. Salazar.

3. Articles of Incorporation

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of
the amended decision of the Court of Appeals in
CA-G.R. SP Nos. 05604 and 05617 which set aside
the earlier decision dated June 5, 1986, of the
then Intermediate Appellate Court and directed

(a) The Articles of Incorporation of

the Corporation shall be
substantially in the form annexed
hereto as Exhibit A and, insofar as
permitted under Philippine law,
shall specifically provide for
(1) Cumulative
voting for directors:

xxx xxx xxx

5. Management
(a) The management of the
Corporation shall be vested in a
Board of Directors, which shall
consist of nine individuals. As long
as American-Standard shall own at
least 30% of the outstanding stock
of the Corporation, three of the
nine directors shall be designated
by American-Standard, and the
other six shall be designated by the
other stockholders of the
Corporation. (pp. 51 & 53, Rollo of
75875)
At the request of ASI, the agreement contained
provisions designed to protect it as a minority
group, including the grant of veto powers over a
number of corporate acts and the right to
designate certain officers, such as a member of
the Executive Committee whose vote was
required for important corporate transactions.
Later, the 30% capital stock of ASI was increased
to 40%. The corporation was also registered with
the Board of Investments for availment of
incentives with the condition that at least 60% of
the capital stock of the corporation shall be
owned by Philippine nationals.
The joint enterprise thus entered into by the
Filipino investors and the American corporation
prospered. Unfortunately, with the business
successes, there came a deterioration of the
initially harmonious relations between the two
groups. According to the Filipino group, a basic
disagreement was due to their desire to expand
the export operations of the company to which
ASI objected as it apparently had other
subsidiaries of joint joint venture groups in the
countries where Philippine exports were
contemplated. On March 8, 1983, the annual
stockholders' meeting was held. The meeting was
presided by Baldwin Young. The minutes were
taken by the Secretary, Avelino Cruz. After
disposing of the preliminary items in the agenda,
the stockholders then proceeded to the election
of the members of the board of directors. The ASI
group nominated three persons namely; Wolfgang
Aurbach, John Griffin and David P. Whittingham.

The Philippine investors nominated six, namely;

Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R.
Lagdameo, Jr., George F. Lee, and Baldwin Young.
Mr. Eduardo R, Ceniza then nominated Mr.
Luciano E. Salazar, who in turn nominated Mr.
Charles Chamsay. The chairman, Baldwin Young
ruled the last two nominations out of order on the
basis of section 5 (a) of the Agreement, the
consistent practice of the parties during the past
annual stockholders' meetings to nominate only
nine persons as nominees for the nine-member
board of directors, and the legal advice of
Saniwares' legal counsel. The following events
then, transpired:
... There were protests against the
action of the Chairman and heated
arguments ensued. An appeal was
made by the ASI representative to
the body of stockholders present
that a vote be taken on the ruling
of the Chairman. The Chairman,
Baldwin Young, declared the appeal
out of order and no vote on the
ruling was taken. The Chairman
then instructed the Corporate
Secretary to cast all the votes
present and represented by proxy
equally for the 6 nominees of the
Philippine Investors and the 3
nominees of ASI, thus effectively
excluding the 2 additional persons
nominated, namely, Luciano E.
Salazar and Charles Chamsay. The
ASI representative, Mr. Jaqua
protested the decision of the
Chairman and announced that all
votes accruing to ASI shares, a
total of 1,329,695 (p. 27, Rollo, ACG.R. SP No. 05617) were being
cumulatively voted for the three
ASI nominees and Charles
Chamsay, and instructed the
Secretary to so vote. Luciano E.
Salazar and other proxy holders
announced that all the votes
owned by and or represented by
them 467,197 shares (p. 27, Rollo,
AC-G.R. SP No. 05617) were being
voted cumulatively in favor of
Luciano E. Salazar. The Chairman,
Baldwin Young, nevertheless
instructed the Secretary to cast all
votes equally in favor of the three

ASI nominees, namely, Wolfgang

Aurbach, John Griffin and David
Whittingham and the six originally
nominated by Rogelio Vinluan,
namely, Ernesto Lagdameo, Sr.,
Raul Boncan, Ernesto Lagdameo,
Jr., Enrique Lagdameo, George F.
Lee, and Baldwin Young. The
Secretary then certified for the
election of the following Wolfgang
Aurbach, John Griffin, David
Whittingham Ernesto Lagdameo,
Sr., Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, Raul A.
Boncan, Baldwin Young. The
representative of ASI then moved
to recess the meeting which was
duly seconded. There was also a
motion to adjourn (p. 28, Rollo, ACG.R. SP No. 05617). This motion to
adjourn was accepted by the
Chairman, Baldwin Young, who
announced that the motion was
carried and declared the meeting
adjourned. Protests against the
adjournment were registered and
having been ignored, Mr. Jaqua the
ASI representative, stated that the
meeting was not adjourned but
only recessed and that the meeting
would be reconvened in the next
room. The Chairman then
threatened to have the
stockholders who did not agree to
the decision of the Chairman on the
casting of votes bodily thrown out.
The ASI Group, Luciano E. Salazar
and other stockholders, allegedly
representing 53 or 54% of the
shares of Saniwares, decided to
continue the meeting at the
elevator lobby of the American
Standard Building. The continued
meeting was presided by Luciano
E. Salazar, while Andres Gatmaitan
acted as Secretary. On the basis of
the cumulative votes cast earlier in
the meeting, the ASI Group
nominated its four nominees;
Wolfgang Aurbach, John Griffin,
David Whittingham and Charles
Chamsay. Luciano E. Salazar voted
for himself, thus the said five
directors were certified as elected

directors by the Acting Secretary,

Andres Gatmaitan, with the
explanation that there was a tie
among the other six (6) nominees
for the four (4) remaining positions
of directors and that the body
decided not to break the tie. (pp.
37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate
petitions by the parties with the Securities and
Exchange Commission (SEC). The first petition
filed was for preliminary injunction by Saniwares,
Emesto V. Lagdameo, Baldwin Young, Raul A.
Bonean Ernesto R. Lagdameo, Jr., Enrique
Lagdameo and George F. Lee against Luciano
Salazar and Charles Chamsay. The case was
denominated as SEC Case No. 2417. The second
petition was for quo warranto and application for
receivership by Wolfgang Aurbach, John Griffin,
David Whittingham, Luciano E. Salazar and
Charles Chamsay against the group of Young and
Lagdameo (petitioners in SEC Case No. 2417) and
Avelino F. Cruz. The case was docketed as SEC
Case No. 2718. Both sets of parties except for
Avelino Cruz claimed to be the legitimate
directors of the corporation.
The two petitions were consolidated and tried
jointly by a hearing officer who rendered a
decision upholding the election of the Lagdameo
Group and dismissing the quo warranto petition of
Salazar and Chamsay. The ASI Group and Salazar
appealed the decision to the SEC en banc which
affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate
appeals with the Intermediate Appellate Court by
Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay (docketed as
AC-G.R. SP No. 05604) and by Luciano E. Salazar
(docketed as AC-G.R. SP No. 05617). The petitions
were consolidated and the appellate court in its
decision ordered the remand of the case to the
Securities and Exchange Commission with the
directive that a new stockholders' meeting of
Saniwares be ordered convoked as soon as
possible, under the supervision of the
Commission.
Upon a motion for reconsideration filed by the
appellees Lagdameo Group) the appellate court
(Court of Appeals) rendered the questioned

amended decision. Petitioners Wolfgang Aurbach,

John Griffin, David P. Whittingham and Charles
Chamsay in G.R. No. 75875 assign the following
errors:
I. THE COURT OF APPEALS, IN
EFFECT, UPHELD THE ALLEGED
ELECTION OF PRIVATE
RESPONDENTS AS MEMBERS OF
THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE
WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS
PROHIBITS THE STOCKHOLDERS
FROM EXERCISING THEIR FULL
VOTING RIGHTS REPRESENTED BY
THE NUMBER OF SHARES IN
SANIWARES, THUS DEPRIVING
PETITIONERS AND THE
CORPORATION THEY REPRESENT
OF THEIR PROPERTY RIGHTS
WITHOUT DUE PROCESS OF LAW.
III. THE COURT OF APPEALS
IMPOSES CONDITIONS AND READS
PROVISIONS INTO THE AGREEMENT
OF THE PARTIES WHICH WERE NOT
THERE, WHICH ACTION IT CANNOT
LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 7597576 assails the amended decision on the following
grounds:
11.1.
ThatAmendedDecisionwouldsanctio
ntheCA'sdisregard of binding
contractual agreements entered
into by stockholders and the
replacement of the conditions of
such agreements with terms never
contemplated by the stockholders
but merely dictated by the CA .
11.2. The Amended decision would
likewise sanction the deprivation of
the property rights of stockholders
without due process of law in order
that a favored group of
stockholders may be illegally
benefitted and guaranteed a
continuing monopoly of the control

of a corporation. (pp. 14-15, Rollo75975-76)

On the other hand, the petitioners in G.R. No.
75951 contend that:
I
THE AMENDED DECISION OF THE
RESPONDENT COURT, WHILE
RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES
ARE DIVIDED INTO TWO BLOCKS,
FAILS TO FULLY ENFORCE THE
BASIC INTENT OF THE AGREEMENT
AND THE LAW.
II
THE AMENDED DECISION DOES
NOT CATEGORICALLY RULE THAT
PRIVATE PETITIONERS HEREIN
WERE THE DULY ELECTED
DIRECTORS DURING THE 8 MARCH
1983 ANNUAL STOCKHOLDERS
MEETING OF SANTWARES. (P. 24,
Rollo-75951)
The issues raised in the petitions are interrelated,
hence, they are discussed jointly.
The main issue hinges on who were the duly
elected directors of Saniwares for the year 1983
during its annual stockholders' meeting held on
March 8, 1983. To answer this question the
following factors should be determined: (1) the
nature of the business established by the parties
whether it was a joint venture or a corporation
and (2) whether or not the ASI Group may vote
their additional 10% equity during elections of
Saniwares' board of directors.
The rule is that whether the parties to a particular
contract have thereby established among
themselves a joint venture or some other relation
depends upon their actual intention which is
determined in accordance with the rules
governing the interpretation and construction of
contracts. (Terminal Shares, Inc. v. Chicago, B.
and Q.R. Co. (DC MO) 65 F Supp 678; Universal
Sales Corp. v. California Press Mfg. Co. 20 Cal.
2nd 751, 128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos.

75975-76) contend that the actual intention of
the parties should be viewed strictly on the
"Agreement" dated August 15,1962 wherein it is
clearly stated that the parties' intention was to
form a corporation and not a joint venture.

Contrary to ASI Group's stand, the Lagdameo and

Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the
Agreement failed to express the true intent of the
parties, to wit:
xxx xxx xxx

They specifically mention number 16

under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall
be construed to constitute any of
the parties hereto partners or joint
venturers in respect of any
transaction hereunder. (At P. 66,
Rollo-GR No. 75875)
They object to the admission of other evidence
which tends to show that the parties' agreement
was to establish a joint venture presented by the
Lagdameo and Young Group on the ground that it
contravenes the parol evidence rule under
section 7, Rule 130 of the Revised Rules of Court.
According to them, the Lagdameo and Young
Group never pleaded in their pleading that the
"Agreement" failed to express the true intent of
the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreementsWhen the terms of an agreement
have been reduced to writing, it is
to be considered as containing all
such terms, and therefore, there
can be, between the parties and
their successors in interest, no
evidence of the terms of the
agreement other than the contents
of the writing, except in the
following cases:
(a) Where a mistake or
imperfection of the writing, or its
failure to express the true intent
and agreement of the parties or the
validity of the agreement is put in
issue by the pleadings.
(b) When there is an intrinsic
ambiguity in the writing.

4. While certain provisions of the

Agreement would make it appear
that the parties thereto disclaim
being partners or joint venturers
such disclaimer is directed at third
parties and is not inconsistent with,
and does not preclude, the
existence of two distinct groups of
stockholders in Saniwares one of
which (the Philippine Investors)
shall constitute the majority, and
the other ASI shall constitute the
minority stockholder. In any event,
the evident intention of the
Philippine Investors and ASI in
entering into the Agreement is to
enter into ajoint venture enterprise,
and if some words in the
Agreement appear to be contrary
to the evident intention of the
parties, the latter shall prevail over
the former (Art. 1370, New Civil
Code). The various stipulations of a
contract shall be interpreted
together attributing to the doubtful
ones that sense which may result
from all of them taken jointly (Art.
1374, New Civil Code). Moreover, in
order to judge the intention of the
contracting parties, their
contemporaneous and subsequent
acts shall be principally considered.
(Art. 1371, New Civil Code). (Part I,
Original Records, SEC Case No.
2417)
It has been ruled:
In an action at law, where there is
evidence tending to prove that the
parties joined their efforts in
furtherance of an enterprise for
their joint profit, the question
whether they intended by their
agreement to create a joint

adventure, or to assume some

other relation is a question of fact
for the jury. (Binder v. Kessler v 200
App. Div. 40,192 N Y S 653; Pyroa
v. Brownfield (Tex. Civ. A.) 238 SW
725; Hoge v. George, 27 Wyo, 423,
200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important
provisions of the Agreement as well as the
testimonial evidence presented by the Lagdameo
and Young Group shows that the parties agreed to
establish a joint venture and not a corporation.
The history of the organization of Saniwares and
the unusual arrangements which govern its policy
making body are all consistent with a joint
venture and not with an ordinary corporation. As
stated by the SEC:
According to the unrebutted
testimony of Mr. Baldwin Young, he
negotiated the Agreement with ASI
in behalf of the Philippine nationals.
He testified that ASI agreed to
accept the role of minority vis-a-vis
the Philippine National group of
investors, on the condition that the
Agreement should contain
provisions to protect ASI as the
minority.
An examination of the Agreement
shows that certain provisions were
included to protect the interests of
ASI as the minority. For example,
the vote of 7 out of 9 directors is
required in certain enumerated
corporate acts [Sec. 3 (b) (ii) (a) of
the Agreement]. ASI is
contractually entitled to designate
a member of the Executive
Committee and the vote of this
member is required for certain
transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75%
super-majority vote for the
amendment of the articles and bylaws of Saniwares [Sec. 3 (a) (iv)
and (b) (iii)]. ASI is also given the
right to designate the president
and plant manager [Sec. 5 (6)]. The
Agreement further provides that

the sales policy of Saniwares shall

be that which is normally followed
by ASI [Sec. 13 (a)] and that
Saniwares should not export
"Standard" products otherwise than
through ASI's Export Marketing
Services [Sec. 13 (6)]. Under the
Agreement, ASI agreed to provide
technology and know-how to
Saniwares and the latter paid
royalties for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the
provisions of the Agreement
requiring a 7 out of 9 votes of the
board of directors for certain
actions, in effect gave ASI (which
designates 3 directors under the
Agreement) an effective veto
power. Furthermore, the grant to
ASI of the right to designate certain
officers of the corporation; the
super-majority voting requirements
for amendments of the articles and
by-laws; and most significantly to
the issues of tms case, the
provision that ASI shall designate 3
out of the 9 directors and the other
stockholders shall designate the
other 6, clearly indicate that there
are two distinct groups in
Saniwares, namely ASI, which owns
40% of the capital stock and the
Philippine National stockholders
who own the balance of 60%, and
that 2) ASI is given certain
protections as the minority
stockholder.
Premises considered, we believe
that under the Agreement there are
two groups of stockholders who
established a corporation with
provisions for a special contractual
relationship between the parties,
i.e., ASI and the other stockholders.
(pp. 4-5)
Section 5 (a) of the agreement uses the word
"designated" and not "nominated" or "elected" in
the selection of the nine directors on a six to

three ratio. Each group is assured of a fixed

number of directors in the board.
Moreover, ASI in its communications referred to
the enterprise as joint venture. Baldwin Young
also testified that Section 16(c) of the Agreement
that "Nothing herein contained shall be construed
to constitute any of the parties hereto partners or
joint venturers in respect of any transaction
hereunder" was merely to obviate the possibility
of the enterprise being treated as partnership for
tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire
to develop the industrial and manufacturing
capacities of a local firm are constrained to seek
the technology and marketing assistance of huge
multinational corporations of the developed
world. Arrangements are formalized where a
foreign group becomes a minority owner of a firm
in exchange for its manufacturing expertise, use
of its brand names, and other such assistance.
However, there is always a danger from such
arrangements. The foreign group may, from the
start, intend to establish its own sole or
monopolistic operations and merely uses the joint
venture arrangement to gain a foothold or test
the Philippine waters, so to speak. Or the
covetousness may come later. As the Philippine
firm enlarges its operations and becomes
profitable, the foreign group undermines the local
majority ownership and actively tries to
completely or predominantly take over the entire
company. This undermining of joint ventures is
not consistent with fair dealing to say the least.
To the extent that such subversive actions can be
lawfully prevented, the courts should extend
protection especially in industries where
constitutional and legal requirements reserve
controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees'
brief in the Court of Appeal
In fact, the Philippine Corporation
Code itself recognizes the right of
stockholders to enter into
agreements regarding the exercise
of their voting rights.
Sec. 100. Agreements by
stockholders.-

xxx xxx xxx

2. An agreement between two or
more stockholders, if in writing and
signed by the parties thereto, may
provide that in exercising any
voting rights, the shares held by
them shall be voted as therein
provided, or as they may agree, or
as determined in accordance with a
procedure agreed upon by them.
Appellants contend that the above
provision is included in the
Corporation Code's chapter on
close corporations and Saniwares
cannot be a close corporation
because it has 95 stockholders.
Firstly, although Saniwares had 95
stockholders at the time of the
disputed stockholders meeting,
these 95 stockholders are not
separate from each other but are
divisible into groups representing a
single Identifiable interest. For
example, ASI, its nominees and
lawyers count for 13 of the 95
stockholders. The YoungYutivo
family count for another 13
stockholders, the Chamsay family
for 8 stockholders, the Santos
family for 9 stockholders, the Dy
family for 7 stockholders, etc. If the
members of one family and/or
business or interest group are
considered as one (which, it is
respectfully submitted, they should
be for purposes of determining how
closely held Saniwares is there
were as of 8 March 1983,
practically only 17 stockholders of
Saniwares. (Please refer to
discussion in pp. 5 to 6 of
appellees' Rejoinder Memorandum
dated 11 December 1984 and
Annex "A" thereof).
Secondly, even assuming that
Saniwares is technically not a close
corporation because it has more
than 20 stockholders, the
undeniable fact is that it is a closeheld corporation. Surely, appellants

cannot honestly claim that

Saniwares is a public issue or a
widely held corporation.
In the United States, many courts
have taken a realistic approach to
joint venture corporations and have
not rigidly applied principles of
corporation law designed primarily
for public issue corporations. These
courts have indicated that express
arrangements between corporate
joint ventures should be construed
with less emphasis on the ordinary
rules of law usually applied to
corporate entities and with more
consideration given to the nature of
the agreement between the joint
venturers (Please see Wabash Ry v.
American Refrigerator Transit Co., 7
F 2d 335; Chicago, M & St. P. Ry v.
Des Moines Union Ry; 254 Ass'n.
247 US. 490'; Seaboard Airline Ry v.
Atlantic Coast Line Ry; 240 N.C.
495,.82 S.E. 2d 771; Deboy v.
Harris, 207 Md., 212,113 A 2d 903;
Hathway v. Porter Royalty Pool,
Inc., 296 Mich. 90, 90, 295 N.W.
571; Beardsley v. Beardsley, 138
U.S. 262; "The Legal Status of Joint
Venture Corporations", 11 Vand
Law Rev. p. 680,1958). These
American cases dealt with legal
questions as to the extent to which
the requirements arising from the
corporate form of joint venture
corporations should control, and
the courts ruled that substantial
justice lay with those litigants who
relied on the joint venture
agreement rather than the litigants
who relied on the orthodox
principles of corporation law.
As correctly held by the SEC
Hearing Officer:
It is said that participants in a joint
venture, in organizing the joint
venture deviate from the traditional
pattern of corporation
management. A noted authority
has pointed out that just as in close

corporations, shareholders'
agreements in joint venture
corporations often contain
provisions which do one or more of
the following: (1) require greater
than majority vote for shareholder
and director action; (2) give certain
shareholders or groups of
shareholders power to select a
specified number of directors; (3)
give to the shareholders control
over the selection and retention of
employees; and (4) set up a
procedure for the settlement of
disputes by arbitration (See I O'
Neal, Close Corporations, 1971 ed.,
Section 1.06a, pp. 15-16) (Decision
of SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of
the Corporation Code does not
necessarily imply that agreements
regarding the exercise of voting
rights are allowed only in close
corporations. As Campos and
Lopez-Campos explain:
Paragraph 2 refers to pooling and
voting agreements in particular.
Does this provision necessarily
imply that these agreements can
be valid only in close corporations
as defined by the Code? Suppose
that a corporation has twenty five
stockholders, and therefore cannot
qualify as a close corporation under
section 96, can some of them enter
into an agreement to vote as a unit
in the election of directors? It is
submitted that there is no reason
for denying stockholders of
corporations other than close ones
the right to enter into not voting or
pooling agreements to protect their
interests, as long as they do not
intend to commit any wrong, or
fraud on the other stockholders not
parties to the agreement. Of
course, voting or pooling
agreements are perhaps more
useful and more often resorted to
in close corporations. But they may
also be found necessary even in

widely held corporations. Moreover,

since the Code limits the legal
meaning of close corporations to
those which comply with the
requisites laid down by section 96,
it is entirely possible that a
corporation which is in fact a close
corporation will not come within
the definition. In such case, its
stockholders should not be
precluded from entering into
contracts like voting agreements if
these are otherwise valid. (Campos
& Lopez-Campos, op cit, p. 405)
In short, even assuming that sec.
5(a) of the Agreement relating to
the designation or nomination of
directors restricts the right of the
Agreement's signatories to vote for
directors, such contractual
provision, as correctly held by the
SEC, is valid and binding upon the
signatories thereto, which include
appellants. (Rollo No. 75951, pp.
90-94)
In regard to the question as to whether or not the
ASI group may vote their additional equity during
elections of Saniwares' board of directors, the
Court of Appeals correctly stated:
As in other joint venture
companies, the extent of ASI's
participation in the management of
the corporation is spelled out in the
Agreement. Section 5(a) hereof
says that three of the nine directors
shall be designated by ASI and the
remaining six by the other
stockholders, i.e., the Filipino
stockholders. This allocation of
board seats is obviously in
consonance with the minority
position of ASI.
Having entered into a well-defined
contractual relationship, it is
imperative that the parties should
honor and adhere to their
respective rights and obligations
thereunder. Appellants seem to
contend that any allocation of

board seats, even in joint venture

corporations, are null and void to
the extent that such may interfere
with the stockholder's rights to
cumulative voting as provided in
Section 24 of the Corporation Code.
This Court should not be prepared
to hold that any agreement which
curtails in any way cumulative
voting should be struck down, even
if such agreement has been freely
entered into by experienced
businessmen and do not prejudice
those who are not parties thereto.
It may well be that it would be
more cogent to hold, as the
Securities and Exchange
Commission has held in the
decision appealed from, that
cumulative voting rights may be
voluntarily waived by stockholders
who enter into special relationships
with each other to pursue and
implement specific purposes, as in
joint venture relationships between
foreign and local stockholders, so
long as such agreements do not
adversely affect third parties.
In any event, it is believed that we
are not here called upon to make a
general rule on this question.
Rather, all that needs to be done is
to give life and effect to the
particular contractual rights and
obligations which the parties have
assumed for themselves.
On the one hand, the clearly
established minority position of ASI
and the contractual allocation of
board seats Cannot be disregarded.
On the other hand, the rights of the
stockholders to cumulative voting
should also be protected.
In our decision sought to be
reconsidered, we opted to uphold
the second over the first. Upon
further reflection, we feel that the
proper and just solution to give due
consideration to both factors
suggests itself quite clearly. This

Court should recognize and uphold

the division of the stockholders into
two groups, and at the same time
uphold the right of the stockholders
within each group to cumulative
voting in the process of
determining who the group's
nominees would be. In practical
terms, as suggested by appellant
Luciano E. Salazar himself, this
means that if the Filipino
stockholders cannot agree who
their six nominees will be, a vote
would have to be taken among the
Filipino stockholders only. During
this voting, each Filipino
stockholder can cumulate his
votes. ASI, however, should not be
allowed to interfere in the voting
within the Filipino group.
Otherwise, ASI would be able to
designate more than the three
directors it is allowed to designate
under the Agreement, and may
even be able to get a majority of
the board seats, a result which is
clearly contrary to the contractual
intent of the parties.
Such a ruling will give effect to
both the allocation of the board
seats and the stockholder's right to
cumulative voting. Moreover, this
ruling will also give due
consideration to the issue raised by
the appellees on possible violation
or circumvention of the AntiDummy Law (Com. Act No. 108, as
amended) and the nationalization
requirements of the Constitution
and the laws if ASI is allowed to
nominate more than three
directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now
reiterate their theory that the ASI Group has the
right to vote their additional equity pursuant to
Section 24 of the Corporation Code which gives
the stockholders of a corporation the right to
cumulate their votes in electing directors.
Petitioner Salazar adds that this right if granted to
the ASI Group would not necessarily mean a
violation of the Anti-Dummy Act (Commonwealth

Act 108, as amended). He cites section 2-a

thereof which provides:
And provided finally that the
election of aliens as members of
the board of directors or governing
body of corporations or
associations engaging in partially
nationalized activities shall be
allowed in proportion to their
allowable participation or share in
the capital of such entities.
(amendments introduced by
Presidential Decree 715, section 1,
promulgated May 28, 1975)
The ASI Group's argument is correct within the
context of Section 24 of the Corporation Code.
The point of query, however, is whether or not
that provision is applicable to a joint venture with
clearly defined agreements:
The legal concept of ajoint venture
is of common law origin. It has no
precise legal definition but it has
been generally understood to mean
an organization formed for some
temporary purpose. (Gates v.
Megargel, 266 Fed. 811 [1920]) It is
in fact hardly distinguishable from
the partnership, since their
elements are similar community of
interest in the business, sharing of
profits and losses, and a mutual
right of control. Blackner v. Mc
Dermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P. 2d.,
1043 [1939]; Buckley v. Chadwick,
45 Cal. 2d. 183, 288 P. 2d. 12 289
P. 2d. 242 [1955]). The main
distinction cited by most opinions
in common law jurisdictions is that
the partnership contemplates a
general business with some degree
of continuity, while the joint
venture is formed for the execution
of a single transaction, and is thus
of a temporary nature. (Tufts v.
Mann 116 Cal. App. 170, 2 P. 2d.
500 [1931]; Harmon v. Martin, 395
111. 595, 71 NE 2d. 74 [1947];
Gates v. Megargel 266 Fed. 811
[1920]). This observation is not

entirely accurate in this jurisdiction,

since under the Civil Code, a
partnership may be particular or
universal, and a particular
partnership may have for its object
a specific undertaking. (Art. 1783,
Civil Code). It would seem therefore
that under Philippine law, a joint
venture is a form of partnership
and should thus be governed by
the law of partnerships. The
Supreme Court has however
recognized a distinction between
these two business forms, and has
held that although a corporation
cannot enter into a partnership
contract, it may however engage in
a joint venture with others. (At p.
12, Tuazon v. Bolanos, 95 Phil. 906
[1954]) (Campos and LopezCampos Comments, Notes and
Selected Cases, Corporation Code
1981)
Moreover, the usual rules as regards the
construction and operations of contracts
generally apply to a contract of joint venture. (O'
Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view
would be that the resolution of the question of
whether or not the ASI Group may vote their
additional equity lies in the agreement of the
parties.
Necessarily, the appellate court was correct in
upholding the agreement of the parties as
regards the allocation of director seats under
Section 5 (a) of the "Agreement," and the right of
each group of stockholders to cumulative voting
in the process of determining who the group's
nominees would be under Section 3 (a) (1) of the
"Agreement." As pointed out by SEC, Section 5 (a)
of the Agreement relates to the manner of
nominating the members of the board of directors
while Section 3 (a) (1) relates to the manner of
voting for these nominees.
This is the proper interpretation of the Agreement
of the parties as regards the election of members
of the board of directors.

To allow the ASI Group to vote their additional

equity to help elect even a Filipino director who
would be beholden to them would obliterate their
minority status as agreed upon by the parties. As
aptly stated by the appellate court:
... ASI, however, should not be
allowed to interfere in the voting
within the Filipino group.
Otherwise, ASI would be able to
designate more than the three
directors it is allowed to designate
under the Agreement, and may
even be able to get a majority of
the board seats, a result which is
clearly contrary to the contractual
intent of the parties.
Such a ruling will give effect to
both the allocation of the board
seats and the stockholder's right to
cumulative voting. Moreover, this
ruling will also give due
consideration to the issue raised by
the appellees on possible violation
or circumvention of the AntiDummy Law (Com. Act No. 108, as
amended) and the nationalization
requirements of the Constitution
and the laws if ASI is allowed to
nominate more than three
directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the
contractual intent of the parties is the
consideration as regards the possible domination
by the foreign investors of the enterprise in
violation of the nationalization requirements
enshrined in the Constitution and circumvention
of the Anti-Dummy Act. In this regard, petitioner
Salazar's position is that the Anti-Dummy Act
allows the ASI group to elect board directors in
proportion to their share in the capital of the
entity. It is to be noted, however, that the same
law also limits the election of aliens as members
of the board of directors in proportion to their
allowance participation of said entity. In the
instant case, the foreign Group ASI was limited to
designate three directors. This is the allowable
participation of the ASI Group. Hence, in future
dealings, this limitation of six to three board seats
should always be maintained as long as the joint
venture agreement exists considering that in

limiting 3 board seats in the 9-man board of

directors there are provisions already agreed
upon and embodied in the parties' Agreement to
protect the interests arising from the minority
status of the foreign investors.
With these findings, we the decisions of the SEC
Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs.
Wolfgang Aurbach, John Griffin, David P
Whittingham, Emesto V. Lagdameo, Baldwin
young, Raul A. Boncan, Emesto V. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly
elected directors of Saniwares at the March
8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young
Group (petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the
board of directors of the enterprise as ruled by
the appellate court and submits that the six (6)
directors allotted the Filipino stockholders should
be selected by consensus pursuant to section 5
(a) of the Agreement which uses the word
"designate" meaning "nominate, delegate or
appoint."
They also stress the possibility that the ASI Group
might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees
separately and not as a common slot determined
by the majority of their group.

management of Saniwares. The joint venture

character of the enterprise must always be taken
into account, so long as the company exists
under its original agreement. Cumulative voting
may not be used as a device to enable ASI to
achieve stealthily or indirectly what they cannot
accomplish openly. There are substantial
safeguards in the Agreement which are intended
to preserve the majority status of the Filipino
investors as well as to maintain the minority
status of the foreign investors group as earlier
discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76
and G.R. No. 75875 are DISMISSED and the
petition in G.R. No. 75951 is partly GRANTED. The
amended decision of the Court of Appeals is
MODIFIED in that Messrs. Wolfgang Aurbach John
Griffin, David Whittingham Emesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R.
Lagdameo, Jr., Enrique Lagdameo, and George F.
Lee are declared as the duly elected directors of
Saniwares at the March 8,1983 annual
stockholders' meeting. In all other respects, the
questioned decision is AFFIRMED. Costs against
the petitioners in G.R. Nos. 75975-76 and G.R. No.
75875.
SO ORDERED.

Section 5 (a) of the Agreement which uses the

word designates in the allocation of board
directors should not be interpreted in isolation.
This should be construed in relation to section 3
(a) (1) of the Agreement. As we stated earlier,
section 3(a) (1) relates to the manner of
voting for these nominees which is cumulative
voting while section 5(a) relates to the manner
of nominating the members of the board of
directors. The petitioners in G.R. No. 75951
agreed to this procedure, hence, they cannot now
impugn its legality.

IRMA

The insinuation that the ASI Group may be able to

control the enterprise under the cumulative
voting procedure cannot, however, be ignored.
The validity of the cumulative voting procedure is
dependent on the directors thus elected being
genuine members of the Filipino group, not voters
whose interest is to increase the ASI share in the

Before this Court is the petition for review of

the
Decision
of
respondent
Court
of
[1]
Appeals dismissing petitioners appeal in CA-G.R.
CR No. 11960; and affirming her conviction as
well as the sentence imposed on her by the
Regional Trial Court of Malolos, Bulacan, in
Criminal Case No. 1395-M-88[2] as follows:

[G.R. No. 110782. September 25, 1998]

IDOS, petitioner, vs.
COURT
APPEALS
and
PEOPLE
OF
PHILIPPINES, respondents.

OF
THE

DECISION
QUISUMBING, J.:

WHEREFORE . . . the [c]ourt finds the

accused Irma Idos guilty beyond
reasonable doubt and is hereby
sentenced to suffer the penalty of
imprisonment of six (6) months and to
pay a fine of P135,000.00 and to pay
private complainant Eddie Alarilla the
amount of the check in question
of P135,000.00 at 12% interest from the
time of the filing of the [i]nformation
(August 10, 1988) until said amount has
been fully paid.
Elevated from the Third Division[3] of this
Court, the case was accepted for resolution en
banc on the initial impression that here, a
constitutional question might be involved.[4] It was
opined that petitioners sentence, particularly six
months imprisonment, might be in violation of
the
constitutional
guarantee
against
[5]
imprisonment for non-payment of a debt.
A careful consideration of the issues
presented in the petition as well as the comments
thereon and the findings of fact by the courts
below in the light of applicable laws and
precedents convinces us, however, that the
constitutional dimension need not be reached in
order to resolve those issues adequately. For, as
herein discussed, the merits of the petition could
be determined without delving into aspects of the
cited constitutional guarantee vis--vis provisions
of the Bouncing Checks Law (Batas Pambansa
Blg. 22). There being no necessity therefor, we
lay aside discussions of the constitutional
challenge to said law in deciding this petition.
The petitioner herein, Irma L. Idos, is a
businesswoman engaged in leather tanning. Her
accuser for violation of B.P. 22 is her erstwhile
supplier and business partner, the complainant
below, Eddie Alarilla.
As narrated by the Court of Appeals, the
background of this case is as follows:
The complainant Eddie Alarilla supplied
chemicals and rawhide to the accusedappellant Irma L. Idos for use in the
latters business of manufacturing
leather. In 1985, he joined the accusedappellants business and formed with her
a partnership under the style Tagumpay

Manufacturing, with offices in Bulacan

and Cebu City.
However, the partnership was short
lived. In January, 1986 the parties agreed
to terminate their partnership. Upon
liquidation of the business the
partnership had as of May 1986
receivables and stocks
worth P1,800,000.00. The complainants
share of the assets was P900,000.00 to
pay for which the accusedappellant issued the following postdated
checks, all drawn against Metrobank
Branch in Mandaue, Cebu:
CHECK NO. DATE AMOUNT
1) 103110295 8-15-86 P135,828.87
2) 103110294 P135,828.87
3) 103115490 9-30-86 P135,828.87
4) 103115491 10-30-86 P126,656.01
The complainant was able to encash the
first, second, and fourth checks, but the
third check (Exh. A) which is the subject
of this case, was dishonored on October
14, 1986 for insufficiency of funds. The
complainant demanded payment from
the accused-appellant but the latter
failed to pay. Accordingly, on December
18, 1986, through counsel, he made a
formal demand for payment. (Exh. B) In a
letter dated January 2, 1987, the
accused-appellant denied liability. She
claimed that the check had been given
upon demand of complainant in May
1986 only as assurance of his share in
the assets of the partnership and that it
was not supposed to be deposited until
the stocks had been sold.
Complainant then filed his complaint in
the Office of the Provincial Fiscal of
Bulacan which on August 22, 1988 filed
an information for violation of BP Blg. 22
against accused-appellant.
Complainant denied that the checks
issued to him by accused-appellant were

subject to the disposition of the stocks

and the collection of receivables of the
business. But the accused-appellant
insisted that the complainant had known
that the checks were to be funded from
the proceeds of the sale of the stocks
and the collection of receivables. She
claimed that the complainant himself
asked for the checks because he did not
want to continue in the tannery business
and had no use for a share of the stocks.
(TSN, p. 7, April 14, 1991; id., pp. 8-9,
Nov. 13, 1989; id., pp. 12, 16, 20, Feb.
14, 1990; id., p. 14, June 4, 1990).
On February 15, 1992, the trial court
rendered judgment finding the accusedappellant guilty of the crime
charged. The accused-appellants motion
for annulment of the decision and for
reconsideration was denied by the trial
court in its order dated April 12, 1991.[6]
Herein respondent court thereafter affirmed
on appeal the decision of the trial court. Petitioner
timely moved for a reconsideration, but this was
subsequently denied by respondent court in its
Resolution[7] dated June 11, 1993. Petitioner has
now appealed to us by way of a petition
for certiorari under Rule 45 of the Rules of Court.
During the pendency of this petition, this
Court by a resolution[8] dated August 30, 1993,
took note of the compromise agreement executed
between the parties, regarding the civil aspect of
the case, as manifested by petitioner in a Motion
to Render Judgment based on Compromise
Agreement[9]filed on August 5, 1993. After
submission of the Comment[10] by the Solicitor
General, and the Reply[11] by petitioner, this case
was deemed submitted for decision.
Contending that the Court of Appeals erred in
its affirmance of the trial courts decision,
petitioner cites the following reasons to justify the
review of her case:
1. The Honorable Court of Appeals has
decided against the innocence of the
accused based on mere probabilities
which, on the contrary, should have
warranted her acquittal on reasonable
doubt. Even then, the conclusion of the

trial court is contrary to the evidence on

record, including private complainants
judicial admission that there was no
consideration for the check.
2. The Honorable Court of Appeals has
confused and merged into one the legal
concepts of dissolution, liquidation and
termination of a partnership and, on the
basis of such misconception of the law,
disregarded the fact of absence of
consideration of the check and convicted
the accused.
3. While this appeal was pending, the parties
submitted for the approval of the
Honorable Court a compromise agreement
on the civil liability. The accused humbly
submits that this supervening event,
which by its terms puts to rest any doubt
the Court of Appeals had entertained
against the defense of lack of
consideration, should have a legal effect
favorable to the accused, considering that
the dishonored check constitutes a private
transaction between partners which does
not involve the public interest, and
considering further that the offense is not
one involving moral turpitude.
4. The Honorable Court of Appeals failed to
appreciate the fact that the accused had
warned private complainant that the
check was not sufficiently funded, which
should have exonerated the accused
pursuant to the ruling in the recent case
of Magno vs. Court of Appeals, 210 SCRA
471, which calls for a more flexible and
less rigid application of the Bouncing
Checks law.[12]
For a thorough consideration of the merits of
petitioners appeal, we find pertinent and decisive
the following issues:
1. Whether respondent court erred in holding that
the subject check was issued by petitioner to
apply on account or for value, that is, as part of
the consideration of a buy-out of said
complainants interest in the partnership, and not
merely as a commitment on petitioners part to
return the investment share of complainant,

along with any profit pertaining to said share, in

the partnership.

thereon, for which reason it is dishonored by the

drawee bank.

2. Whether the respondent court erred in

concluding that petitioner issued the subject
check knowing at the time of issue that she did
not have sufficient funds in or credit with the
drawee bank and without communicating this fact
of insufficiency of funds to the complainant.

Where the check is drawn by a corporation,

company or entity, the person or persons who
actually signed the check in behalf of such drawer
shall be liable under this Act.

Both inquiries boil down into one ultimate

issue: Did the respondent court err in affirming
the trial courts judgment that she violated Batas
Pambansa Blg. 22?
Considering that penal statutes are strictly
construed against the state and liberally in favor
of the accused, it bears stressing that for an act
to be punishable under the B.P. 22, it must come
clearly within both the spirit and the letter of the
statute.[13] Otherwise, the act has to be declared
outside the laws ambit and a plea of innocence
by the accused must be sustained.
The relevant provisions of B.P. 22 state that:
SECTION 1. Checks without sufficient funds. Any
person who makes or draws and issues any check
to apply on account or for value,knowing at the
time of issue that he does not have sufficient
funds in or credit with the drawee bank for the
payment of such check in full upon its
presentment, which check is subsequently
dishonored by the drawee bank for insufficiency
of funds or credit or would have been dishonored
for the same reason had not the drawer, without
any valid reason, ordered the bank to stop
payment, shall be punished by imprisonment of
not less than thirty days but not more than one
(1) year or by a fine of not less than but not more
than double the amount of the check which fine
shall in no case exceed Two hundred thousand
pesos, or both such fine and imprisonment at the
discretion of the court.
The same penalty shall be imposed upon any
person who having sufficient funds in or credit
with the drawee bank when he makes or draws
and issues a check, shall fail to keep sufficient
funds or to maintain a credit or to cover the full
amount of the check if presented within a period
of ninety (90) days from the date appearing

SECTION 2. Evidence of knowledge of insufficient

funds. The making, drawing and issuance of a
check payment of which is refused by the drawee
because of insufficient funds in or credit with such
bank, when presented within ninety (90) days
from the date of the check, shall be prima
facie evidence of knowledge of such insufficiency
of funds or credit unless such maker or drawer
pays the holder thereof the amount due thereon,
or makes arrangements for payment in full by the
drawee of such check within five (5) banking days
after receiving notice that such check has not
been paid by the drawee. (Underscoring supplied)
As decided by this Court, the elements of the
offense penalized under B.P. 22, are as
follows: (1) the making, drawing and issuance of
any check to apply to account or for value; (2) the
knowledge of the maker, drawer or issuer that at
the time of issue he does not have sufficient
funds in or credit with the drawee bank for the
payment of such check in full upon its
presentment; and (3) subsequent dishonor of the
check
by
the
drawee
bank
for insufficiency of funds or credit or dishonor for
the same reason had not the drawer, without any
valid cause, ordered the bank to stop payment.[14]
In the present case, with regard to the first
issue, evidence on record would show that the
subject check was to be funded from receivables
to be collected and goods to be sold by the
partnership, and only when such collection and
sale were realized.[15] Thus, there is sufficient
basis for the assertion that the petitioner issued
the subject check (Metrobank Check No.
103115490 dated October 30, 1986, in the
amount of P135,828.87) to evidence only
complainants share or interest in the partnership,
or at best, to show her commitment that when
receivables are collected and goods are sold, she
would give to private complainant the net amount
due him representing his interest in the
partnership. It did not involve a debt of or any
account due and payable by the petitioner.

Two facts stand out. Firstly, three of four

checks were properly encashed by complainant;
only one (the third) was not. But eventually even
this one was redeemed by petitioner. Secondly,
even private complainant admitted that there
was no consideration whatsoever for the issuance
of the check, whose funding was dependent on
future sales of goods and receipts of payment of
account receivables.
Now, it could not be denied that though the
parties petitioners and complainant had agreed
to dissolve the partnership, such agreement did
not automatically put an end to the partnership,
since they still had to sell the goods on hand and
collect the receivables from debtors. In short,
they were still in the process of winding up the
affairs of the partnership, when the check in
question was issued.
Under the Civil Code, the three final stages of
a partnership are (1) dissolution; (2) winding-up;
and
(3)
termination. These
stages
are
distinguished, to wit:
(1) Dissolution Defined
Dissolution is the change in the
relation of the partners caused
by any partner ceasing to be
associated in the carrying on of
the business (Art. 1828). It is
that point of time the partners
cease to carry on the business
together. [Citation omitted]
(2) Winding Up Defined
Winding up is the process
of settling business affairs after
dissolution.
(NOTE: Examples of winding
up: the paying of previous
obligations; the collecting of
assets previously demandable;
even new business if needed to
wind up, as the contracting
with a demolition company for
the demolition of the garage
used in a used car partnership.)
(3) Termination Defined

Termination is the point in

time after all the partnership
affairs have been wound up.
[16]
[Citation omitted]
(Underscoring supplied.)
These final stages in the life of a partnership
are recognized under the Civil Code that explicitly
declares that upon dissolution, the partnership is
not terminated, to wit:
Art. 1828. The dissolution of a partnership is the
change in the relation of the partners caused by
any partner ceasing to be associated in the
carrying on as distinguished from the winding up
of the business.
Art. 1829. On dissolution the partnership is not
terminated, but continues until the winding up of
partnership affairs is completed.(Underscoring
supplied.)
The best evidence of the existence of the
partnership, which was not yet terminated
(though in the winding up stage), were the unsold
goods and uncollected receivables, which were
presented to the trial court. Since the partnership
has not been terminated, the petitioner and
private complainant remained as co-partners. The
check was thus issued by the petitioner to
complainant, as would a partner to another, and
not as payment from a debtor to a creditor.
The more tenable view, one in favor of the
accused, is that the check was issued merely to
evidence the complainants share in the
partnership property, or to assure the latter that
he would receive in time his due share
therein. The alternative view that the check was
in consideration of a buy out is but a theory,
favorable to the complainant, but lacking support
in the record; and must necessarily be discarded.
For there is nothing on record which even
slightly suggests that petitioner ever became
interested in acquiring, much less keeping, the
shares of the complainant. What is very clear
therefrom is that the petitioner exerted her best
efforts to sell the remaining goods and to collect
the receivables of the partnership, in order to
come up with the amount necessary to satisfy the
value of complainants interest in the partnership
at the dissolution thereof. To go by accepted

custom of the trade, we are more inclined to the

view that the subject check was issued merely to
evidence
complainants
interest
in
the
partnership. Thus, we are persuaded that the
check was not intended to apply on account or for
value; rather it should be deemed as having been
drawn without consideration at the time of issue.
Absent the first element of the offense
penalized under B.P. 22, which is the making,
drawing and issuance of any check to apply on
account or for value, petitioners issuance of the
subject check was not an act contemplated in nor
made punishable by said statute.
As to the second issue, the Solicitor General
contends that under the Bouncing Checks Law,
the elements of deceit and damage are not
essential or required to constitute a violation
thereof. In his view, the only essential element is
the knowledge on the part of the maker or drawer
of the check of the insufficiency of his/her funds
at the time of the issuance of said check.
The Bouncing Checks Law makes the mere
act of issuing a bad or worthless check a special
offense punishable by law. Malice or intent in
issuing the worthless check is immaterial, the
offense being malum prohibitum,[17] so goes the
argument for the public respondents.
But of course this could not be an absolute
proposition without descending to absurdity. For if
a check were issued by a kidnap victim to a
kidnapper for ransom, it would be absurd to hold
the drawer liable under B.P. 22, if the check is
dishonored and unpaid. That would go against
public policy and common sense.
Public respondents further contend that since
petitioner issued the check in favor of
complainant Alarilla and when notified that it was
returned for insufficiency of funds, failed to make
good the check, then petitioner is liable for
violation of B.P. 22.[18] Again, this matter could not
be all that simple. For while the makers
knowledge of the insufficiency of funds is legally
presumed from the dishonor of his checks for
insufficiency of funds,[19] this presumption is
rebuttable.
In the instant case, there is only a prima
facie presumption which did not preclude the

presentation of contrary evidence.[20] In fact, such

contrary evidence on two points could be gleaned
from the record concerning (1) lack of actual
knowledge of insufficiency of funds; and (2) lack
of adequate notice of dishonor.
Noteworthy for the defense, knowledge of
insufficiency of funds or credit in the drawee bank
for the payment of a check upon its presentment
is an essential element of the offense.[21] It must
be
proved,
particularly
where
the prima
facie presumption of the existence of this
element
has
been
rebutted. The prima
facie presumption arising from the fact of
drawing, issuing or making a check, the payment
of
which
was
subsequently
refused
for
insufficiency of funds is, moreover, not sufficient
proof of guilt by the issuer.
In the case of Nieva v. Court of Appeals,[22] it
was held that the subsequent dishonor of the
subject check issued by accused merely
engendered the prima facie presumption that she
knew of the insufficiency of funds, but did not
render the accused automatically guilty under
B.P. 22.[23]
The prosecution has a duty to prove all the
elements of the crime, including the acts that
give rise to the prima facie presumption;
petitioner, on the other hand, has a right to rebut
the prima facie presumption. Therefore, if such
knowledge of insufficiency of funds is proven to
be actually absent or non-existent, the accused
should not be held liable for the offense defined
under the first paragraph of Section 1 of B.P.
22. Although the offense charged is a malum
prohibitum, the prosecution is not thereby
excused from its responsibility of proving beyond
reasonable doubt all the elements of the offense,
one of which is knowledge of the insufficiency of
funds.
Section 1 of B.P. 22 specifically requires that
the person in making, drawing or issuing the
check, be shown that he knows at the time of
issue, that he does not have sufficient funds in or
credit with the drawee bank for the payment of
such check in full upon its presentment.
In the case at bar, as earlier discussed,
petitioner issued the check merely to evidence
the proportionate share of complainant in the

partnership assets upon its dissolution. Payment

of that share in the partnership was conditioned
on the subsequent realization of profits from the
unsold goods and collection of the receivables of
the firm. This condition must be satisfied or
complied with before the complainant can
actually encash the check. The reason for the
condition is that petitioner has no independent
means to satisfy or discharge the complainants
share, other than by the future sale and collection
of the partnership assets. Thus, prior to the
selling of the goods and collecting of the
receivables, the complainant could not, as of yet,
demand
his
proportionate
share
in
the
business. This situation would hold true until after
the winding up, and subsequent termination of
the partnership. For only then, when the goods
were already sold and receivables paid that cash
money could be availed of by the erstwhile
partners.

of insufficiency of funds. There is no proof that

notice of dishonor was actually sent by the
complainant or by the drawee bank to the
petitioner. On this point, the record is bereft of
evidence to the contrary.

Complainant did not present any evidence

that petitioner signed and issued four checks
actually knowing that funds therefor would be
insufficient at the time complainant would
present them to the drawee bank. For it was
uncertain at the time of issuance of the checks
whether the unsold goods would have been sold,
or whether the receivables would have been
collected by the time the checks would be
encashed. As it turned out, three were fully
funded when presented to the bank; the
remaining one was settled only later on.

Because no notice of dishonor was actually sent

to and received by the petitioner, the prima
facie presumption that she knew about the
insufficiency of funds cannot apply. Section 2 of
B.P. 22 clearly provides that this presumption
arises not from the mere fact of drawing, making
and issuing a bum check; there must also be a
showing that, within five banking days from
receipt of the notice of dishonor, such maker or
drawer failed to pay the holder of the check the
amount due thereon or to make arrangement for
its payment in full by the drawee of such check.
[25]
[Underscoring supplied.]

Since petitioner issued these four checks

without actual knowledge of the insufficiency of
funds, she could not be held liable under B.P. 22
when one was not honored right away. For it is
basic doctrine that penal statutes such as B.P. 22
must be construed with such strictness as to
carefully safeguard the rights of the defendant x
x x.[24] The element of knowledge of insufficiency
of funds has to be proved by the prosecution;
absent said proof, petitioner could not be held
criminally liable under that law. Moreover, the
presumption ofprima facie knowledge of such
insufficiency in this case was actually rebutted by
petitioners evidence.
Further, we find that the prosecution also
failed to prove adequate notice of dishonor of the
subject check on petitioners part, thus precluding
any finding of prima facie evidence of knowledge

But in fact, while the subject check initially

bounced, it was later made good by petitioner. In
addition, the terms of the parties compromise
agreement, entered into during the pendency of
this case, effectively invalidates the allegation of
failure to pay or to make arrangement for the
payment of the check in full. Verily, said
compromise
agreement
constitutes
an
arrangement for the payment in full of the subject
check.
The absence of notice of dishonor is crucial in
the present case. As held by this Court in prior
cases:

The absence of a notice of dishonor necessarily

deprives an accused an opportunity to preclude a
criminal prosecution. Accordingly, procedural due
process clearly enjoins that a notice of dishonor
be actually served on petitioner. Petitioner has a
right to demand and the basic postulates of
fairness require that the notice of dishonor be
actually sent to and received by her to afford her
the opportunity to avert prosecution under B.P.
22.[26]
Further, what militates strongly against public
respondents stand is the fact that petitioner
repeatedly notified the complainant of the
insufficiency of funds. Instructive is the following
pronouncement of this Court in Magno v. Court of
Appeals:

Furthermore, the element of knowing at the time

of issue that he does not have sufficient funds in
or credit with the drawee bank for the payment of
such check in full upon its presentment, which
check is subsequently dishonored by the drawee
bank for insufficiency of funds or credit or would
have been dishonored for the same reason x x x
is inversely applied in this case. From the very
beginning, petitioner never hid the fact that he
did not have the funds with which to put up the
warranty deposit and as a matter of fact, he
openly intimated this to the vital conduit of the
transaction, Joey Gomez, to whom petitioner was
introduced by Mrs. Teng. It would have been
different if this predicament was not
communicated to all the parties he dealt with
regarding the lease agreement the financing of
which was covered by L.S. Finance Management.
[27]

In the instant case, petitioner intimated to

private complainant the possibility that funds
might be insufficient to cover the subject check,
due to the fact that the partnerships goods were
yet to be sold and receivables yet to be collected.
As Magno had well observed:
For all intents and purposes, the law was devised
to safeguard the interest of the banking system
and the legitimate public checking account
user. It did not intend to shelter or favor nor
encourage users of the system to enrich
themselves through manipulations and
circumvention of the noble purpose and objective
of the law. Least should it be used also as a
means of jeopardizing honest-to-goodness
transactions with some color of get-rich scheme
to the prejudice of well-meaning businessmen
who are the pillars of society.
xxx
Thus, it behooves upon a court of law that in
applying the punishment imposed upon the
accused, the objective of retribution of a wronged
society, should be directed against the actual and
potential wrongdoers. In the instant case, there is
no doubt that petitioners four (4) checks were
used to collateralize an accommodation, and not
to cover the receipt of an actual account or credit
for value as this was absent, and therefore

petitioner should not be punished for mere

issuance of the checks in question. Following the
aforecited theory, in petitioners stead the
potential wrongdoer, whose operation could be a
menace to society, should not be glorified by
convicting the petitioner.[28]
Under the circumstances obtaining in this
case, we find the petitioner to have issued the
check in good faith, with every intention of
abiding by her commitment to return, as soon as
able, the investments of complainant in the
partnership. Evidently, petitioner issued the
check with benign considerations in mind, and
not for the purpose of committing fraud, deceit,
or violating public policy
To recapitulate, we find the petition
impressed with merit. Petitioner may not be held
liable for violation of B.P. 22 for the following
reasons: (1) the subject check was not made,
drawn and issued by petitioner in exchange for
value received as to qualify it as a check on
account or for value; (2) there is no sufficient
basis to conclude that petitioner, at the time of
issue of the check, had actual knowledge of the
insufficiency of funds; and (3) there was no notice
of dishonor of said check actually served on
petitioner, thereby depriving her of the
opportunity to pay or make arrangements for the
payment of the check, to avoid criminal
prosecution.
Having resolved the foregoing principal
issues, and finding the petition meritorious, we no
longer need to pass upon the validity and legality
or necessity of the purported compromise
agreement on civil liability between the petitioner
and the complainant.
WHEREFORE, the instant petition is hereby
GRANTED AND THE PETITIONER ACQUITTED. The
Decision of the respondent Court of Appeals in
CA-G.R. CR No. 11960 is hereby REVERSED and
the Decision of Regional Trial Court in Criminal
Case No. 1395-M-88 is hereby SET ASIDE.
NO COSTS.
SO ORDERED.