CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19 CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y.
CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19
Grace Christian High School vs. CA (Long)
Facts: Petitioner Grace Christian High School is an
educational institution offering preparatory,
kindergarten and secondary courses at the Grace
Village in Quezon City. Private respondent Grace
Village Association, Inc., on the other hand, is an
organization of lot and/or building owners, lessees
and residents at Grace Village.
As adopted in 1968, the by-laws of the association
provided in Article IV, as follows:
The annual meeting of the members of the
Association shall be held on the first Sunday of
January in each calendar year at the principal
office of the Association at 2:00 P.M. where they
shall elect by plurality vote and by secret balloting,
the Board of Directors, composed of eleven (11)
members to serve for one (1) year until their
successors are duly elected and have qualified. 2
It appears, that on December 20, 1975, a committee
of the board of directors prepared a draft of an
amendment to the by-laws, reading as follows: 3
VI. ANNUAL MEETING
The Charter and Associate Members shall elect
the Directors of the Association. The candidates
receiving the first fourteen (14) highest number of
votes shall be declared and proclaimed elected
until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL
representative is a permanent Director of the
ASSOCIATION.
This draft was never presented to the general
membership for approval. Nevertheless, from 1975,
after it was presumably submitted to the board, up to
1990, petitioner was given a permanent seat in the
board of directors of the association.
On February 13, 1990, the association's committee on
election in a letter informed James Tan, principal of
the school, that "it was the sentiment that all directors
should be elected by members of the
association". Notices were sent to the members of the
4 repeal any by-law or adopt new by-laws. The
association that the provision on election of directors
of the 1968 by-laws of the association would be
observed.
The school brought suit for mandamus in the Home
Insurance and Guaranty Corporation (HIGC) to
compel the board of directors of the association to
recognize its right to a permanent seat in the board.
SEC Opinion
The SEC rendered an opinion to the effect that the
practice of allowing unelected members in the board
was contrary to the existing by-laws of the association
and to §92 of the Corporation Code (B.P. Blg. 68).
§92. Election and term of trustees. — Unless
otherwise provided in the articles of incorporation
or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15)
in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of
office of one-third (1/3) of the number shall expire
every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall
have a term of three (3) years. Trustees thereafter
elected to fill vacancies occurring before the
expiration of a particular term shall hold office
only for the unexpired period.
HIGC’s, and CA’s Decisions
The hearing officer of HIGC held that the amended
by-laws, upon which petitioner based its claim, "was
merely a proposed by-laws which, although
implemented in the past, had not yet been ratified by
the members of the association nor approved by
competent authority"
The hearing officer rejected petitioner's contention
that it had acquired a vested right to a permanent seat
in the board of directors. He held that past practice in
election of directors could not give rise to a vested
right and that departure from such practice was
justified because it deprived members of association
of their right to elect or to be voted in office, not to
say that "allowing the automatic inclusion of a
member representative of petitioner as permanent
director [was] contrary to law and the registered by-
laws of respondent association."
This was all affirmed by the CA.
Issues:
1) WON there was a valid amendment of the by-laws,
pursuant to their own by-laws, and the Corporation
Code.
2) WON there was ratification of the proposal to the
amended by-laws because the members implemented
the provision for fifteen years.
3) WON petitioner was validly instituted as the
Director of the Association; and acquired a vested
right therein for its continued practice of 15 years.
4) WON the SEC had no authority to issue the opinion
since jurisdiction rests with the HIGC
Ruling:
1) No.
There was no valid amendment of the association's
by-laws because of failure to comply with the
requirement of its existing by-laws, prescribing the
affirmative vote of the majority of the members of the
association at a regular or special meeting called for
the adoption of amendment to the by-laws. Article
XIX of the by-laws provides: 10
The members of the Association by an affirmative
vote of the majority at any regular or special
meeting called for the purpose, may alter, amend,
change or adopt any new by-laws.
This provision of the by-laws actually implements
§22 of the Corporation Law (Act No. 1459) which
provides:
§22. The owners of a majority of the subscribed
capital stock, or a majority of the members if there
be no capital stock, may, at a regular or special
meeting duly called for the purpose, amend or
owners of two-thirds of the subscribed capital
stock, or two-thirds of the members if there be no
capital stock, may delegate to the board of
directors the power to amend or repeal any by-law
or to adopt new by-laws: Provided, however, That
any power delegated to the board of directors to
amend or repeal any by-law or adopt new by-laws
shall be considered as revoked whenever a
majority of the stockholders or of the members of
the corporation shall so vote at a regular or special
meeting. And provided, further, That the Director
of the Bureau of Commerce and Industry shall not
hereafter file an amendment to the by-laws of any
bank, banking institution or building and loan
association, unless accompanied by certificate of
the Bank Commissioner to the effect that such
amendments are in accordance with law.
The proposed amendment to the by-laws was never
approved by the majority of the members of the
association as required by these provisions of the law
and by-laws
2) No. The Court ruled: “It is probable that, in
allowing petitioner's representative to sit on the
board, the members of the association were not aware
that this was contrary to law. It should be noted that
they did not actually implement the provision in
question except perhaps insofar as it increased the
number of directors from 11 to 15, but certainly not
the allowance of petitioner's representative as an
unelected member of the board of directors. It is more
accurate to say that the members merely tolerated
petitioner's representative and tolerance cannot be
considered ratification.”
3) No. The law provides that the position must be
elected. Petitioner has not acquired a vested right
despite its long and continued “practice” since
“practice, no matter how long continued, cannot give
rise to any vested right if it is contrary to law.”
§§28 and 29 of the Corporation Law provide:
§28. Unless otherwise provided in this Act, the
corporate powers of all corporations formed under
this Act shall be exercised, all business conducted
and all property of such corporations controlled
CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19
and held by a board of not less than five nor more
than eleven directors to be elected from among the
holders of stock or, where there is no stock, from
the members of the corporation: Provided,
however, That in corporations, other than banks,
in which the United States has or may have a
vested interest, pursuant to the powers granted or
delegated by the Trading with the Enemy Act, as
amended, and similar Acts of Congress of the
United States relating to the same subject, or by
Executive Order No. 9095 of the President of the
United States, as heretofore or hereafter amended,
or both, the directors need not be elected from
among the holders of the stock, or, where there is
no stock from the members of the corporation.
§29. At the meeting for the adoption of the original
by-laws, or at such subsequent meeting as may be
then determined, directors shall be elected to hold
their offices for one year and until their successors
are elected and qualified. Thereafter the directors
of the corporation shall be elected annually by the
stockholders if it be a stock corporation or by the
members if it be a nonstock corporation, and if no
provision is made in the by-laws for the time of
election the same shall be held on the first Tuesday
after the first Monday in January. Unless
otherwise provided in the by-laws, two weeks'
notice of the election of directors must be given by
publication in some newspaper of general
circulation devoted to the publication of general
news at the place where the principal office of the
corporation is established or located, and by
written notice deposited in the post-office, postage
pre-paid, addressed to each stockholder, or, if
there be no stockholders, then to each member, at
his last known place of residence. If there be no
newspaper published at the place where the
principal office of the corporation is established or
located, a notice of the election of directors shall
be posted for a period of three weeks immediately
preceding the election in at least three public
places, in the place where the principal office of
the corporation is established or located
The present Corporation Code (B.P. Blg. 68), which
took effect on May 1, 1980, similarly provides:
12
§23. The Board of Directors or Trustees. — Unless
otherwise provided in this Code, the corporate
powers of all corporations formed under this Code
shall be exercised, all business conducted and all
property of such corporations controlled and held
by the board of directors or trustees to be elected
from among the holders of stocks, or where there
is no stock, from among the members of the
corporation, who shall hold office for one (1) year
and until their successors are elected and
qualified.
These provisions of the former and present
corporation law leave no room for doubt as to their
meaning: the board of directors of corporations must
be elected from among the stockholders or members.
There may be corporations in which there are
unelected members in the board but it is clear that in
the examples cited by petitioner the unelected
members sit as ex officio members, i.e., by virtue of
and for as long as they hold a particular office. But in
the case of petitioner, there is no reason at all for its
representative to be given a seat in the board. Nor
does petitioner claim a right to such seat by virtue of
an office held. In fact, it was not given such seat in
the beginning. It was only in 1975 that a proposed
amendment to the by-laws sought to give it one.
Note: nag present og jurisprudence ang
petitioners ng ani allow ang uban Corporations
to sit an officer without election. Pero gi
clarify ra sa court nga “ex officio members” to
sila.
Nor can petitioner claim a vested right to sit in the
board on the basis of "practice." Practice, no matter
how long continued, cannot give rise to any vested
right if it is contrary to law. Even less tenable is
petitioner's claim that its right is "coterminus with the
existence of the association." 14
4) The Court ruled: “Finally, petitioner questions the
authority of the SEC to render an opinion on the
validity of the provision in question. It contends that
jurisdiction over this case is exclusively vested in the
HIGC.
CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19
But this case was not decided by the SEC but by the
HIGC. The HIGC merely cited as authority for its
ruling the opinion of the SEC chairman. The HIGC
could have cited any other authority for the view that
under the law members of the board of directors of a
corporation must be elected and it would be none the
worse for doing so.”
LOYOLA GRAND VILLAS HOMEOWNERS
vs. HON. COURT OF APPEALS,
HOME INSURANCE AND GUARANTY
CORPORATION, EMDEN ENCARNACION
and HORATIO AYCARDO
Facts: LGVHAI was organized on February 8, 1983
as the association of homeowners and residents of the
Loyola Grand Villas. It was registered with the Home
Financing Corporation, the predecessor of herein
respondent HIGC, as the sole homeowners
organization in the said subdivision under Certificate
of Registration No. 04-197. It was organized by the
developer of the subdivision and its first president
was Victorio V. Soliven, himself the owner of the
developer. For unknown reasons, however, LGVHAI
did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI
tried to register its by-laws. They failed to do so. To
[2]
the officers consternation, they discovered that there
were two other organizations within the subdivision
the North Association and the South Association.
According to private respondents, a non-resident and
Soliven himself, respectively headed these
associations. They also discovered that these
associations had five (5) registered homeowners each
who were also the incorporators, directors and
officers thereof. None of the members of the
LGVHAI was listed as member of the North
Association while three (3) members of LGVHAI
were listed as members of the South
Association. The North Association was registered
[3]
with the HIGC on February 13, 1989 under
Certificate of Registration No. 04-1160 covering
Phases West II, East III, West III and East IV. It
submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the
status of LGVHAI, Atty. Joaquin A. Bautista, the
head of the legal department of the HIGC, informed
him that LGVHAI had been automatically dissolved
for two reasons. First, it did not submit its by-laws
within the period required by the Corporation Code
and, second, there was non-user of corporate charter
because HIGC had not received any report on the
associations activities. Apparently, this information
resulted in the registration of the South Association
with the HIGC on July 27, 1989 covering Phases
West I, East I and East 11. It filed its by-laws on July
26, 1989.
These developments prompted the officers of the
LGVHAI to lodge a complaint with the HIGC.
HIGC ruled in favor of LGVHA and HIGC
appellate board affirmed it.
In resolving the first issue, the Court of Appeals
held that under the Corporation Code,
We also find nothing in the provisions cited by the
petitioner, i.e., Sections 46 and 22, Corporation Code,
or in any other provision of the Code and other laws
which provide or at least imply that failure to file the
by-laws results in an automatic dissolution of the
corporation. While Section 46, in prescribing that by-
laws must be adopted within the period prescribed
therein, may be interpreted as a mandatory provision,
particularly because of the use of the word must, its
meaning cannot be stretched to support the argument
that automatic dissolution results from non-
compliance.
The Court of Appeals added that, as there was no
showing that the registration of LGVHAI had been
validly revoked, it continued to be the duly registered
homeowners association in the Loyola Grand
Villas. More importantly, the South Association did
not dispute the fact that LGVHAI had been organized
and that, thereafter, it transacted business within the
period prescribed by law.
On the second issue, the Court of Appeals
reiterated its previous ruling that the HIGC has the
[5]
authority to order the holding of a referendum to
determine which of two contending associations
should represent the entire community, village or
subdivision.
Petitioner contends that, since Section 46 uses
the word must with respect to the filing of by-laws,
noncompliance therewith would result in self-
extinction either due to non-occurrence of a
CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19
suspensive condition or the occurrence of a resolutory
condition under the hypothesis that (by) the issuance
of the certificate of registration alone the corporate
personality is deemed already formed. It asserts that
the Corporation Code provides for a gradation of
violations of requirements. Hence, Section 22
mandates that the corporation must be formally
organized and should commence transactions within
two years from date of incorporation. Otherwise, the
corporation would be deemed dissolved. On the other
hand, if the corporation commences operations but
becomes continuously inoperative for five years, then
it may be suspended or its corporate franchise
revoked.
Petitioner concedes that Section 46 and the other
provisions of the Corporation Code do not provide for
sanctions for non-filing of the by-laws. However, it
insists that no sanction need be provided because the
mandatory nature of the provision is so clear that
there can be no doubt about its being an essential
attribute of corporate birth. To petitioner, its
submission is buttressed by the facts that the period
for compliance is spelled out distinctly; that the
certification of the SEC/HIGC must show that the by-
laws are not inconsistent with the Code, and that a
copy of the by-laws has to be attached to the articles
of incorporation. Moreover, no sanction is provided
for because in the first place, no corporate identity has
been completed. Petitioner asserts that non-provision
for remedy or sanction is itself the tacit proclamation
that non-compliance is fatal and no corporate
existence had yet evolved, and therefore, there was no
need to proclaim its demise. In a bid to convince the
[6]
Court of its arguments, petitioner stresses that:
x x x the word MUST is used in Sec. 46 in its
universal literal meaning and corollary human
implication its compulsion is integrated in its very
essence MUST is always enforceable by the
inevitable consequence that is, OR ELSE. The use of
the word MUST in Sec. 46 is no exception it means
file the by-laws within one month after notice of
issuance of certificate of registration ORELSE.
The OR ELSE, though not specified, is inextricably a
part of MUST. Do this or if you do not you are
Kaput. The importance of the by-laws to corporate
existence compels such meaning for as decreed the
by-laws is `the government of the corporation.
Indeed, how can the corporation do any lawful act as
such without by-laws. Surely, no law is intended to
create chaos.[7]
The pertinent provision of the Corporation Code that
is the focal point of controversy in this case states:
Sec. 46. Adoption of by-laws. Every corporation
formed under this Code, must within one (1) month
after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code. For
the adoption of by-laws by the corporation, the
affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of
at least a majority of the members, in the case of non-
stock corporations, shall be necessary. The by-laws
shall be signed by the stockholders or members
voting for them and shall be kept in the principal
office of the corporation, subject to the stockholders
or members voting for them and shall be kept in the
principal office of the corporation, subject to
inspection of the stockholders or members during
office hours; and a copy thereof, shall be filed with
the Securities and Exchange Commission which shall
be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and
submitted to the Securities and Exchange
Commission, together with the articles of
incorporation.
In all cases, by-laws shall be effective only upon the
issuance by the Securities and Exchange Commission
of a certification that the by-laws are not inconsistent
with this Code.
The Securities and Exchange Commission shall not
accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building and
loan association, trust company, insurance company,
public utility, educational institution or other special
corporations governed by special laws, unless
accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or
amendments are in accordance with law.
CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19
Issue: WON, the failure to file LGVHAI’s by-laws the issuance of its certificate of incorporation by the
within the period prescribed by Sec. 46 of the Securities and Exchange Commission. It necessarily
Corporation Code had the effect of automatically follows that failure to file the by-laws within that
dissolving the said corporation. period does not imply the demise of the
corporation. By-laws may be necessary for the
Ruling: NO. the word must connotes an imperative government of the corporation but these are
act or operates to impose a duty which may be subordinate to the articles of incorporation as well as
enforced. It is synonymous with ought which
[9]
to the Corporation Code and related statutes. There
[15]
connotes compulsion or mandatoriness. However,
[10]
are in fact cases where by-laws are unnecessary to
the word must in a statute, like shall, is not always
corporate existence or to the valid exercise of
imperative. It may be consistent with an exercise corporate powers, thus:
of discretion. In this jurisdiction, the tendency has
been to interpret shall as the context or a reasonable
In the absence of charter or statutory provisions to the
construction of the statute in which it is used demands
contrary, by-laws are not necessary either to the
or requires. This is equally true as regards the word
[11]
existence of a corporation or to the valid exercise of
must. Thus, if the language of a statute considered
the powers conferred upon it, certainly in all cases
as a whole and with due regard to its nature and
where the charter sufficiently provides for the
object reveals that the legislature intended to use
government of the body; and even where the
the words shall and must to be directory, they
governing statute in express terms confers upon the
should be given that meaning. [12]
corporation the power to adopt by-laws, the failure to
In this respect, the following portions of the exercise the power will be ascribed to mere nonaction
deliberations of the Batasang Pambansa No. 68 are which will not render void any acts of the corporation
illuminating: which would otherwise be valid. (Italics supplied.)
[16]
MR. FUENTEBELLA. But it will
Although the Corporation Code requires the
not automatically amount to a
filing of by-laws, it does not expressly provide for the
dissolution of the corporation by
consequences of the non-filing of the same within the
merely failing to file the by-laws
period provided for in Section 46. However, such
within one month. Supposing the
omission has been rectified by Presidential Decree
corporation was late, say, five days,
No. 902-A, the pertinent provisions on the
what would be the mandatory penalty?
jurisdiction of the SEC of which state:
MR. MENDOZA. I DO NOT
THINK IT WILL NECESSARILY SEC. 6. In order to effectively exercise such
RESULT IN THE AUTOMATIC jurisdiction, the Commission shall possess the
OR IPSO FACTO DISSOLUTION following powers:
OF THE CORPORATION.
This exchange of views demonstrates clearly xxx xxx xxx xxx
that automatic corporate dissolution for failure to
file the by-laws on time was never the intention of (l) To suspend, or revoke, after proper notice and
the legislature. hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any
Section 46 aforequoted reveals the legislative of the grounds provided by law, including the
intent to attach a directory, and not mandatory, following:
meaning for the word must in the first sentence
thereof. Note should be taken of the second xxx xxx xxx xxx
paragraph of the law which allows the filing of the by-
laws even prior to incorporation. This provision in 5. Failure to file by-laws within the required period;
the same section of the Code rules out mandatory
compliance with the requirement of filing the by-laws xxx xxx xxx xxx
within one (1) month after receipt of official notice of
CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19
Even under the foregoing express grant of power
and authority, THERE CAN BE
NO AUTOMATIC CORPORATE
DISSOLUTION SIMPLY BECAUSE THE
INCORPORATORS FAILED TO ABIDE BY
THE REQUIRED FILING OF BY-LAWS
EMBODIED IN SECTION 46 OF THE
CORPORATION CODE. THERE IS NO
OUTRIGHT DEMISE OF CORPORATE
EXISTENCE. PROPER NOTICE AND
HEARING ARE CARDINAL COMPONENTS
OF DUE PROCESS IN ANY DEMOCRATIC
INSTITUTION, AGENCY OR SOCIETY. In
other words, the incorporators must be given the
chance to explain their neglect or omission and
remedy the same.
That the corporation involved herein is under the
supervision of the HIGC does not alter the result of
this case. The HIGC has taken over the specialized
functions of the former Home Financing Corporation
by virtue of Executive Order No. 90 dated December
17, 1986. With respect to homeowners associations,
the HIGC shall exercise all the powers, authorities
and responsibilities that are vested on the Securities
and Exchange Commission x x x, the provision of Act
1459, as amended by P.D. 902-A, to the contrary
notwithstanding.
China Bank Corp v. CA
Super-digest:
Calapatia pledged his stocks to Chinabank. CBC
informed VGCCI and asked the latter to record it in
its books to which the latter acceded. Calapatia
obtained a loan from CBC secured by the pledge
agreement. He failed to pay thus CBC extrajudicial
foreclosed the mortgage and CBC is the highest
bidder. VGCCI refused to transfer the stock to the
name of CBC due to Calapatia’s unsettled accounts.
Instead, VGCII sent demand letter to Calapatia and
later on informed the latter of the termination of his
membership to the sale of his stocks which was also
conducted by VGCCI. CBC protested to such sale.
Facts
Galicano Calapatia, Jr. a stockholder of
Valley Golf & Country Club, Inc. (VGCCI) pledged
his Stock Certificate No. 1219 to China Banking
Corporation (CBC). CBC wrote VGCCI
aforementioned pledge agreement be recorded in its
books. VGCCI replied that the deed of pledge
executed by Calapatia in CBC's favor was duly noted
in its corporate books. Calapatia obtained a loan of
P20,000.00 from CBC, payment of which was
secured by the aforestated pledge agreement still
existing between Calapatia and petitioner. Due to
Calapatia's failure to pay his obligation, CBC filed a
petition for extrajudicial foreclosure before Notary
Public Antonio T. de Vera of Manila. CBC informed
VGCCI of the above-mentioned foreclosure
proceedings and requested that the pledged stock be
transferred to its name and the same be recorded in
the corporate books. However, VGCCI wrote CBC
expressing its inability to accede to it's request in view
of Calapatia's unsettled accounts with the club.
Despite the foregoing, Notary Public de Vera held a
public auction and CBC emerged as the highest
bidder at P20,000.00 for the pledged stock.
Consequently, CBC was issued the corresponding
certificate of sale.
On 21 November 1985, VGCCI sent
Calapatia a notice demanding full payment of his
overdue account in the amount of P18,783.24 then
followed by a demand letter for the same amount and
another notice. Through a letter, VGCCI informed
Calapatia of the termination of his membership due to
the sale of his share of stock.
CBC advised VGCCI that it is the new owner
of Calapatia's Stock Certificate No. 1219 be issued in
its name. VGCCI replied that "for reason of
delinquency" Calapatia's stock was sold at the public
auction. CBC protested the sale by VGCCI of the
subject share of stock and thereafter filed a case with
the RTC of Makati for the nullification of the auction
and for the issuance of a new stock certificate in its
name.
On 18 June 1990, the Regional Trial Court of
Makati dismissed the complaint for lack of
jurisdiction over the subject matter on the theory that
it involves an intra-corporate dispute and on 27
CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19
August 1990 denied petitioner's motion for
reconsideration.
CBC filed a complaint with SEC for the
nullification of the sale of Calapatia's stock by
VGCCI; the cancellation of any new stock certificate
issued pursuant thereto; for the issuance of a new
certificate in petitioner's name; and for damages,
attorney's fees and costs of litigation.
SEC rendered a decision in favor of VGCCI.
SEC en banc reversed the decision of its hearing
officer. CA nullified and set aside the orders of the
SEC on the ground of lack of jurisdiction over the
subject matter.
Issue: Which body has jurisdiction over the
controversy, the regular courts or the SEC.
Ruling: SC Ruled in favor of China bank. SEC has
jurisdiction.
P.D. No. 902-A conferred upon the SEC the
following pertinent powers:
SEC. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange
Commission over corporations, partnerships and
other forms of associations registered with it as
expressly granted under existing laws and decrees, it
shall have original and exclusive jurisdiction to hear
and decide cases involving:
b) Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members, or associates; between any or
all of them and the corporation, partnership or
association of which they are stockholders, members
or associates, respectively; and between such
corporation, partnership or association and the State
insofar as it concerns their individual franchise or
right to exist as such entity;
The aforecited law was expounded upon in
Viray v. CA 22 and in the recent cases of Mainland
Construction Co., Inc. v. Movilla 23 and Bernardo v.
CA, 24 thus:
. . .The better policy in determining which
body has jurisdiction over a case would be to consider
not only the status or relationship of the parties but
also the nature of the question that is the subject of
their controversy.
Applying the foregoing principles in the case
at bar, to ascertain which tribunal has jurisdiction we
have to determine therefore whether or not petitioner
is a stockholder of VGCCI and whether or not the
nature of the controversy between petitioner and
private respondent corporation is intra-corporate.
Chinabank is a stockholder of VGCC
There is no question that the purchase of the subject
share or membership certificate at public auction by
CBC (and the issuance to it of the corresponding
Certificate of Sale) transferred ownership of the same
to the latter and thus entitled petitioner to have the
said share registered in its name as a member of
VGCCI. It is readily observed that VGCCI did not
assail the transfer directly and has in fact, in its letter
of 27 September 1974, expressly recognized the
pledge agreement executed by the original owner,
Calapatia, in favor of petitioner and has even noted
said agreement in its corporate books. In addition,
Calapatia, the original owner of the subject share, has
not contested the said transfer.
By virtue of the afore-mentioned sale,
petitioner became a bona fide stockholder of VGCCI
and, therefore, the conflict that arose between
petitioner and VGCCI aptly exemplifies an intra-
corporate controversy between a corporation and its
stockholder under Sec. 5(b) of P.D. 902-A.
The nature of the controversy between CBC and
VGCCI is intra-corporate
VGCCI claims a prior right over the subject
share anchored mainly on Sec. 3, Art VIII of its by-
laws which provides that "after a member shall have
been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the Club
. . ."
CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19
It is pursuant to this provision that VGCCI
also sold the subject share at public auction, of which
it was the highest bidder. VGCCI caps its argument
by asserting that its corporate by-laws should prevail.
The bone of contention, thus, is the proper
interpretation and application of VGCCI's
aforequoted by-laws, a subject which irrefutably calls
for the special competence of the SEC.
We reiterate herein the sound policy
enunciated by the Court in Abejo v. De la Cruz:
The Court held that under the "sense-making and
expeditious doctrine of primary jurisdiction . . . the
courts cannot or will not determine a controversy
involving a question which is within the jurisdiction
of an administrative tribunal, where the question
demands the exercise of sound administrative
discretion requiring the special knowledge,
experience, and services of the administrative tribunal
to determine technical and intricate matters of fact,
and a uniformity of ruling is essential to comply with
the purposes of the regulatory statute administered."
In this case, the need for the SEC's technical
expertise cannot be overemphasized involving as it
does the meticulous analysis and correct
interpretation of a corporation's by-laws as well as the
applicable provisions of the Corporation Code in
order to determine the validity of VGCCI's claims.
The SEC, therefore, took proper cognizance of the
instant case.
Estoppel
VGCCI further contends that petitioner is
estopped from denying its earlier position, in the first
complaint it filed with the RTC of Makati that there
is no intra-corporate relations between itself and
VGCCI. VGCCI's contention lacks merit.
In Zamora v. Court of Appeals, declared that:
this Court, follows that as a rule the filing of a
complaint with one court which has no jurisdiction
over it does not prevent the plaintiff from filing the
same complaint later with the competent court. The
plaintiff is not estopped from doing so simply because
it made a mistake before in the choice of the proper
forum . . .
Issue on the merits
(Ni explain ang SC na since naa na man sa ila ang
records sa case, mo rule on the merits nlng sila ky ma-
prolong na daw kaau ang litigation)
VGCCI assails the validity of the pledge
agreement executed by Calapatia in petitioner's favor.
It contends that the same was null and void for lack
of consideration because the pledge agreement was
entered into on 21 August 1974 33 but the loan or
promissory note which it secured was obtained by
Calapatia much later or only on 3 August 1983.
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement
will readily reveal that the contracting parties
explicitly stipulated therein that the said pledge will
also stand as security for any future advancements (or
renewals thereof) that Calapatia (the pledgor) may
procure from petitioner The validity of the pledge
agreement between petitioner and Calapatia cannot
thus be held suspect by VGCCI. As candidly
explained by petitioner, the promissory note of 3
August 1983 in the amount of P20,000.00 was but a
renewal of the first promissory note covered by the
same pledge agreement.
VGCCI likewise insists that due to
Calapatia's failure to settle his delinquent accounts, it
had the right to sell the share in question in
accordance with the express provision found in its by-
laws.
VGCCI's insistence comes to naught.
It is significant to note that VGCCI began
sending notices of delinquency to Calapatia after it
was informed by petitioner (through its letter dated 14
May 1985) of the foreclosure proceedings initiated
against Calapatia's pledged share, although Calapatia
has been delinquent in paying his monthly dues to the
club since 1975. Stranger still, petitioner, whom
VGCCI had officially recognized as the pledgee of
Calapatia's share, was neither informed nor furnished
copies of these letters of overdue accounts until
CORPO LAW I BATCH 3 I ATTY. GAVIOLA I EH 501 S.Y. 18-19
VGCCI itself sold the pledged share at another public Finally, Sec. 63 of the Corporation Code
auction. which provides that "no shares of stock against which
the corporation holds any unpaid claim shall be
By doing so, VGCCI completely disregarded
transferable in the books of the corporation" cannot
petitioner's rights as pledgee. It even failed to give be utilized by VGCCI. The term "unpaid claim" refers
CBC notice of said auction sale. Such actuations of
to "any unpaid claim arising from unpaid
VGCCI thus belie its claim of good faith.
subscription, and not to any indebtedness which a
In defending its actions, VGCCI likewise subscriber or stockholder may owe the corporation
maintains that petitioner is bound by its by-laws. arising from any other transaction." In the case at bar,
the subscription for the share in question has been
In order to be bound, the third party must fully paid as evidenced by the issuance of
have acquired knowledge of the pertinent by-laws at Membership Certifucate No. 1219. What Calapatia
the time the transaction or agreement between said owed the corporation were merely the monthly dues.
third party and the shareholder was entered into, in Hence, the aforequoted provision does not apply.
this case, at the time the pledge agreement was
executed. VGCCI could have easily informed
petitioner of its by-laws when it sent notice formally
recognizing petitioner as pledgee of one of its shares
registered in Calapatia's name. CBC's belated notice
of said by-laws at the time of foreclosure will not
suffice.
The ruling of the SEC en banc is particularly
instructive: the Supreme Court held that the by-law
restricting the transfer of shares cannot have any
effect on the transferee of the shares in question as he
"had no knowledge of such bylaw when the shares
were assigned to him. He obtained them in good faith
and for a valuable consideration. He was not a privy
to the contract created by the bylaw between the
shareholder . . . and the Botica Nolasco, Inc. Said by-
law cannot operate to defeat his right as a purchaser."
The transcript of stenographic notes of the
June 25, 1991 Hearing reveals that the pledgor
became delinquent only in 1975. Thus, appellant-
petitioner was in good faith when the pledge
agreement was contracted. Furthermore, A bona fide
pledgee takes free from any latent or secret equities
or liens in favor either of the corporation or of third
persons, if he has no notice thereof, but not otherwise.
He also takes it free of liens or claims that may
subsequently arise in favor of the corporation if it has
notice of the pledge, although no demand for a
transfer of the stock to the pledgee on the corporate
books has been made.