1Articles of Incorporation

Corporate Name

EN BANC

[G.R. No. 41570. September 6, 1934.]

RED LINE TRANSPORTATION CO., Petitioner-Appellant, v. RURAL TRANSIT CO., LTD. ,Respondent-Appellee. 

SYLLABUS

1. PUBLIC SERVICE; AUTHORITY OF PUBLIC SERVICE COMMISSION TO AUTHORIZE A CORPORATION TO ASSUME THE NAME OF ANOTHER. — There is no law that empowers the Public Service Commission or any court in this jurisdiction to authorize one corporation to assume the name of another corporation as a trade name. Both the Rural Transit Company, Ltd., and the Bachrach Motor Co., Inc., are Philippine corporations and the very law of their creation and continued existence requires each to adopt and certify a distinctive name. 

2. ID.; ID.; CHANGE OF CORPORATION’S NAME. — The incorporators "constitute a body politic and corporate under the name stated in the certificate." (Section 11, Act No. 1459, as amended.) A corporation has the power "of succession by its corporate name." (Section 13, ibid.) The name of a corporation is therefore essential to its existence. It cannot change its name except in the manner provided by the statute. By that name alone is it authorized to transact business. 

3. ID.; ID.; ID. — The law gives a corporation no express or implied authority to assume another name that is unappropriated; still less that of another corporation, which is expressly set apart for it and protected by the law. If any corporation could assume at pleasure as an unregistered trade name the name of another corporation, this practice would result in confusion and open the door to frauds and evasions and difficulties of administration and supervision. 

4. ID.; ID.; ID.; POLICY OF THE LAW. — The policy of the law as expressed in our corporation statute and the Code of Commerce is clearly against such a practice. (Cf. Scarsdale Pub. Co. -Colonial Press v. Carter, 116 New York Supplement, 731; Svenska Nat. F. i. C. v. Swedish Nat. Assn., 205 Illinois [Appellate Courts], 428, 434.)

D E C I S I O N

This case is before us on a petition for review of an order of the Public Service Commission entered December 21, 1932, granting to the Rural Transit Company, Ltd., a certificate of public convenience to operate a transportation service between Ilagan in the Province of Isabela and Tuguegarao in the Province of Cagayan, and additional trips in its existing express service between Manila and Tuguegarao. 

On June 4, 1932, the Rural Transit Company, Ltd., a Philippine corporation, filed with the Public Service Commission an application in which it is stated in substance that it is the holder of a certificate of public convenience to operate a passenger bus service between Manila and Tuguegarao; that it is the only operator of direct service between said points and the present authorized schedule of only one trip daily is not sufficient; that it will be also to the public convenience to grant the applicant a certificate for a new service between Tuguegarao and Ilagan. 

On July 22, 1932, the appellant, Red Line Transportation Company, filed an opposition to the said application alleging in substance that as to the service between Tuguegarao and Ilagan, the oppositor already holds a certificate of public convenience and is rendering adequate and satisfactory service; that the granting of the application of the Rural Transit Company, Ltd., would not serve public convenience but would constitute a ruinous competition for the oppositor over said route. 

After testimony was taken, the commission, on December 21, 1932, approved the application of the Rural Transit Company Ltd., and ordered that the certificate of public convenience applied for be "issued to the applicant Rural Transit Company, Ltd.," with the conditions of the various certificates of public

convenience of the herein applicant and herein incorporated are made a part hereof."

On January 14, 1933, the oppositor Red Line Transportation Company filed a motion for rehearing and reconsideration in which it called the commission’s attention to the fact that there was pending in the Court of First Instance of Manila case No. 42343, an application for the voluntary dissolution of the corporation, Rural Transit Company, Ltd. Said motion for reconsideration was set down for hearing on March 24, 1933. On March 23, 1933, the Rural Transit Company, Ltd., the applicant, filed a motion for postponement. This motion was verified by M. Olsen who swears "that he was the secretary of the Rural Transit Company, Ltd., in the above entitled case." Upon the hearing of the motion for reconsideration, the commission admitted without objection the following documents filed in said case No. 42343 in the Court of First Instance of Manila for the dissolution dated July 6, 1932, the decision of the said Court of First Instance of Manila, dated February 28, 1933, decreeing the dissolution of the Rural Transit Company, Ltd. 

At the trial of this case before the Public Service Commission an issue was raised as to who was the real party in interest making the application, whether the Rural Transit Company, Ltd., as appeared on the face of the application, or the Bachrach Motor Company, Ltd., as a trade name. The evidence given by the applicant’s secretary, Olsen, is certainly very dubious and confusing, as may be seen from the following:

"Q. Will you please answer the question whether it is the Bachrach Motor Company operating under the trade name of the Rural Transit Company, Limited, or whether it is the Rural Transit Company, Limited in its own name this application was filed? 

"A. The Bachrach Motor Company is the principal stockholder. 

"Q. Please answer the question. 

"ESPELETA. Objecion porque la pregunta ya ha sido contestada. 

"JUEZ. Puede contestar. 

"A. I do not know what the legal construction or relationship existing between the two. 

"JUDGE. I do not know what is in your mind by not telling the real applicant in this case?

"A. It is the Rural Transit Company, Ltd. 

"JUDGE. As an entity by itself and not by the Bachrach Motor Company?

"A. I do not know. I have not given that phase of the matter much thought, as in previous occasion had not necessitated. 

"JUDGE. In filing this application, you filed it for the operator on that line? Is it not?

"A. Yes, sir. 

"JUDGE. Who is that operator?

"A. The Rural Transit Company, Ltd. 

"JUDGE. By itself, or as a commercial name of the Bachrach Motor Company?

"A. I cannot say. 

"ESPELETA. The Rural Transit Company, Ltd., is a corporation duly established in accordance with the laws of the Philippine Islands. 

"JUDGE. According to the records of this commission the Bachrach Motor Company is the owner of the certificates and the Rural Transit Company, Ltd., is operating without any certificate. 

"JUDGE. If you filed this application for the Rural Transit Company, Ltd., and afterwards it is found out that the Rural Transit Company, Ltd., is not an operator, everything will be turned down. 

"JUDGE. My question was, when you filed this application you evidently made it for the operator?

2

"A. Yes, sir. 

"JUDGE. Who was that operator you had in mind?

"A. According to the status of the ownership of the certificates of the former Rural Transit Company, the operator was the operator authorized in case No. 23217 to whom all of the assets of the former Rural Transit Company were sold. 

"JUDGE. The Bachrach Motor Company?

"A. All actions have been prosecuted in the name of the Rural Transit Company, Ltd. 

"JUDGE. You mean the Bachrach Motor Company, Inc., doing business under the name of the Rural Transit Company, Ltd.?

"A. Yes, sir. 

"LOCKWOOD. I move that this case be dismissed, your Honor, on the ground that this application was made in the name of one party but the real owner is another party. 

"ESPELETA. We object to that petition. 

"JUDGE. I will have that in mind when I decide the case. If I agree with you everything would be finished."

The Bachrach Motor Company, Inc., entered no appearance and ostensibly took no part in the hearing of the application of the Rural Transit Company, Ltd. It may be a matter of some surprise that the commission did not on its own motion order the amendment of the application by substituting the Bachrach Motor Company, Inc., as the applicant. However, the hearing proceeded on the application as filed and the decision of December 21, 1932, was rendered in favor of the Rural Transit Company, Ltd., and the certificate ordered to be issued in its name, in the face of the evidence that the said corporation was not the real party in interest. In its said decision, the commission undertook to meet the objection by referring to its resolution of November 26, 1932, entered in another case. This resolution in case No. 23217 concludes as follows:

"Premises considered we hereby authorize the Bachrach Motor Co., Inc., to continue using the name of ’Rural Transit Co., Ltd.,’ as its trade name in all the applications, motions or other petitions to be filed in this commission in connection with said business and that this authority is given retroactive effect as of the date of filing of the application in this case, to wit, April 28, 1930."

We know of no law that empowers the Public Service Commission or any court in this jurisdiction to authorize one corporation to assume the name of another corporation as a trade name. Both the Rural Transit Company, Ltd., and the Bachrach Motor Co., Inc., are Philippine corporations and the very law of their creation and continued existence requires each to adopt and certify a distinctive name. The incorporators "constitute a body politic and corporate under the name stated in the certificate." (Section 11, Act No. 1459, as amended.) A corporation has the power "of succession by its corporate name." (Section 13, ibid.) The name of a corporation is therefore essential to its existence. It cannot change its name except in the manner provided by the statute. By that name alone is it authorized to transact business. The law gives a corporation no express or implied authority to assume another name that is unappropriated; still less that of another corporation, which is expressly set apart for it and protected by the law. If any corporation could assume at pleasure as an unregistered trade name the name of another corporation, this practice would result in confusion and open the door to frauds and evasions and difficulties of administration and supervision. The policy of the law as expressed in our corporation statute and the Code of Commerce is clearly against such a practice. (Cf. Scarsdale Pub. Co. -Colonial Press v. Carter, 116 New York Supplement, 731; Svenska Nat. F. i. C. v. Swedish Nat. Assn., 205 Illinois [Appellate Courts], 428, 434.) 

The order of the commission of November 26, 1932, authorizing the Bachrach Motor Co., Incorporated, to assume the name of the Rural Transit Co., Ltd., likewise incorporated, as its trade name being void, and accepting the order of December 21, 1932, at its face as granting a certificate of public convenience to the applicant Rural Transit Co., Ltd., the said order last mentioned is set aside and vacated on the ground that the Rural Transit Company, Ltd., is not the real party in interest and its application was fictitious. 

In view of the dissolution of the Rural Transit Company, Ltd. by judicial decree of February 28, 1933, we do not see how we can assess costs against said respondent, Rural Transit Company, Ltd. 

THIRD DIVISION[G.R. No. 117890. September 18, 1997]

PISON-ARCEO AGRICULTURAL and DEVELOPMENT CORPORATION, petitioner, vs. NATIONAL

LABOR RELATIONS COMMISSION and NATIONAL FEDERATION OF SUGAR WORKERS-FOOD and GENERAL TRADE (NFSW-FGT)/ JESUS PASCO,

MARTIN BONARES, EVANGELINE PASCO, TERESITA NAVA, FELIXBERTO NAVA, JOHNNY

GARRIDO, EDUARDO NUEZ and DELMA NUEZ,respondents.

D E C I S I O N

In the proceedings before the labor arbiter, only the unregistered trade name of the employer-corporation and its administrator/manager were impleaded and subsequently held liable for illegal dismissal, backwages and separation pay. On appeal, however, the National Labor Relations Commission motu proprio included the corporate name of the employer as jointly and severally liable for the workers claims. Because of such inclusion, the corporation now raises issues of due process and jurisdiction before this Court.The Case

Assailed in this petition for certiorari under Rule 65 of the Rules of Court is the Decision[1] of Public Respondent National Labor Relations Commission[2] in NLRC Case No. V-0334-92[3] promulgated on September 27, 1993 and its Resolution[4] promulgated on September 12, 1994 denying reconsideration. Affirming the decision[5] dated September 2, 1992 of Executive Labor Arbiter Oscar S. Uy, the impugned NLRC Decision disposed thus:[6]

WHEREFORE, judgment is hereby rendered affirming the decision of Executive Labor Arbiter Oscar S. Uy, dated September 2, 1992, subject to the amendments and modification stated above and ordering the respondent-appellant, Jose Edmundo Pison and the respondent Pison-Arceo Agricultural and Development Corporation to pay jointly and severally the claims for backwages and separation pay of the complainant-appellees in the above-entitled case, except the claims of Danny Felix and Helen Felix, in the amount specified below:

Name Backwages Separation Pay Total

1. Jesus Pasco P14,729.00 P12,818.06 P27,547.06

2. Evangeline Pasco 14,729.00 12,874.81 27,603.81

3. Martin Bonares 14,729.00 9,035.06 23,764.06

4. Mariolita Bonares 14,729.00 8,455.00 23,184.00

5. Felixberto Nava 14,729.00 13,505.31 28,234.31

6. Teresita NAva 14,729.00 3,417.31 18,146.31

7. Johnny Garrido 8,489.00 4,463.94 12,952.94

8. Eduardo Nuez 8,489.00 11,399.44 19,888.44

9. Delma Nuez 8,489.00 9,507.94 17,996.94

In addition, the respondent-appellant and the respondent corporation are ordered to pay attorneys fees equivalent to ten (10%) percent of the total award.

The dispositive portion of the assailed Resolution, on the other hand, reads:[7]

WHEREFORE, the decision in question is hereby modified in the sense that the monetary award of Mariolita Bonares be [sic] deleted. Except for such modification, the rest of the decision stands.

3Arguing that the National Labor Relations Commission

did not have jurisdiction over it because it was not a party before the labor arbiter, petitioner elevated this matter before this Court via a petition for certiorari under Rule 65.

Acting on petitioners prayer[8], this Court (First Division) issued on January 18, 1995 a temporary restraining order enjoining the respondents from executing the assailed Decision and Resolution.The Facts

As gathered from the complaint[9] and other submissions of the parties filed with Executive Labor Arbiter Oscar S. Uy, the facts of the case are as follows:

Together with Complainants Danny and Helen Felix, private respondents -- Jesus Pasco, Evangeline Pasco, Martin Bonares, Teresita Nava, Felixberto Nava, Johnny Garrido, Eduardo Nuez and Delma Nuez, all represented by Private Respondent National Federation of Sugar Workers-Food and General Trade (NSFW-FGT) -- filed on June 13, 1988 a complaint for illegal dismissal, reinstatement, payment of backwages and attorneys fees against Hacienda Lanutan/Jose Edmundo Pison. Complainants alleged that they were previously employed as regular sugar farm workers of Hacienda Lanutan in Talisay, Negros Occidental. On the other hand, Jose Edmundo Pison claimed that he was merely the administrator of Hacienda Lanutan which was owned by Pison-Arceo Agricultural and Development Corporation.

As earlier stated, the executive labor arbiter rendered on September 2, 1992 a decision in favor of the workers-complainants, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered ordering respondent Jose Edmundo Pison/Hda. Lanutan, Talisay, Negros Occidental, to PAY the following complainants their backwages (one year) plus separation pay in the following amounts, to wit:

BACKWAGES SEPARATION PAY   TOTAL

1. J. Pasco -P14,729.00 P12,818.06 P27,547.06

2. E. Pasco - 14,729.00 12,784.81 27,603,81

3. Bonares - 14,729.00 8,404.56 23,133.56

4. F. Nava - 14,729.00 13,505.31 28,234.31

5. T. Nava - 14,729.00 3,427.31 18,146.31

6. J. Garido - 8,489.00 4,463.94 12,952.94

7. E. Nuez - 8,489.00 11,399.44 19,888.44

8. D. Nuez - 8,489.00 9,507.94 17,996.94

plus ten percent (10%) of the total award as attorneys fees in the amount of P17,550.34 or in the total amount of ONE HUNDRED NINETY THREE THOUSAND FIFTY THREE AND 71/100 (P193,053.71), all these amounts to be deposited with this Office within ten (10) days from receipt of this decision. The claim of complainants Danny and Helen Felix are hereby DENIED for lack of merit.

In affirming the decision of the executive labor arbiter, public respondent ordered respondent-appellant, Jose Edmundo Pison and the respondent Pison-Arceo Agricultural and Development Corporation to pay jointly and severally the claims for backwages and separation pay of private respondents. The motion for reconsideration dated October 14, 1993 was apparently filed by Jose Edmundo Pison for and on his own behalf only. However, Pison did not elevate his case before this Court. The sole petitioner now before us is Pison-Arceo Agricultural and Development Corporation, the owner of Hacienda Lanutan.The Issue

Petitioner submits only one issue for our resolution:[10]

Public Respondent NLRC acted without or in excess of jurisdiction or with grave abuse of discretion when it

included motu proprio petitioner corporation as a party respondent and ordered said corporation liable to pay jointly and severally, with Jose Edmundo Pison the claims of private respondents.

In essence, petitioner alleges deprivation of due process.The Courts Ruling

The petition lacks merit.Petitioner contends that it was never served any

summons; hence, public respondent did not acquire jurisdiction over it. It argues that from the time the complaint was filed before the Regional Arbitration Branch No. VI up to the time the said case was appealed by Jose Edmundo Pison to the NLRC, Cebu, petitioner Corporation was never impleaded as one of the parties x x x. It was only in the public respondents assailed Decision of September 27, 1993 that petitioner Corporation was wrongly included as party respondent without its knowledge. Copies of the assailed Decision and Resolution were not sent to petitioner but only to Jose Edmundo Pison, on the theory that the two were one and the same. Petitioner avers that Jose Edmundo Pison is only a minority stockholder of Hacienda Lanutan, which in turn is one of the businesses of petitioner.[11] Petitioner further argues that it did not voluntarily appear before said tribunal and that it was not given (any) opportunity to be heard;[12] thus, the assailed Decision and Resolution in this case are void for having been issued without jurisdiction.[13]

In its memorandum, petitioner adds that Eden vs. Ministry of Labor and Employment,[14] cited by public respondent, does not apply to this case. In Eden, petitioners were duly served with notices of hearings, while in the instant case, the petitioner was never summoned nor was served with notice of hearings as a respondent in the case.[15]

At the outset, we must stress that in quasi-judicial proceedings, procedural rules governing service of summons are not strictly construed. Substantial compliance thereof is sufficient.[16] Also, in labor cases, punctilious adherence to stringent technical rules may be relaxed in the interest of the working man; it should not defeat the complete and equitable resolution of the rights and obligations of the parties. This Court is ever mindful of the underlying spirit and intention of the Labor Code to ascertain the facts of each case speedily and objectively without regard to technical rules of law and procedure, all in the interest of due process.[17] Furthermore, the Labor Code itself, as amended by RA 6715,[18] provides for the specific power of the Commission to correct, amend, or waive any error, defect or irregularity whether in the substance or in the form of the proceedings before it[19] under Article 218 (c) as follows:

(c) To conduct investigation for the determination of a question, matter or controversy within its jurisdiction, proceed to hear and determine the disputes in the absence of any party thereto who has been summoned or served with notice to appear, conduct its proceedings or any part thereof in public or in private, adjourn its hearings to any time and place, refer technical matters or accounts to an expert and to accept his report as evidence after hearing of the parties upon due notice, direct parties to be joined in or excluded from the proceedings, correct, amend, or waive any error, defect or irregularity whether in substance or in form, give all such directions as it may deem necessary or expedient in the determination of the dispute before it, and dismiss any matter or refrain from further hearing or from determining the dispute or part thereof, where it is trivial or where further proceedings by the Commission are not necessary or desirable; xxx (Underscoring supplied.)

In this case, there are legal and factual reasons to hold petitioner jointly and severally liable with Jose Edmundo Pison.Jurisdiction Acquired over Petitioner

Consistent with the foregoing principles applicable to labor cases, we find that jurisdiction was acquired over the petitioner. There is no dispute that Hacienda Lanutan, which was owned SOLELY by petitioner, was impleaded and was heard. If at all, the non-inclusion of the corporate name of petitioner in the case before the executive labor arbiter was a mere procedural error which did not at all affect the jurisdiction of the labor tribunals.[20] Petitioner was adequately represented in the proceedings conducted at the regional arbitration branch by no less than Hacienda Lanutans administrator, Jose Edmundo Pison, who verified and signed his/Hacienda Lanutans position paper and other pleadings submitted before the labor arbiter. It can thus be said that petitioner, acting through its corporate officer Jose Edmundo

4Pison, traversed private respondents complaint and controverted their claims. Further unrebutted by petitioner are the following findings of public respondent:[21]

It should further be noted that two responsible employees of the said corporation, namely, Teresita Dangcasil, the secretary of the administrator/manager, and Fernando Gallego, the hacienda overseer, had submitted their affidavits, both dated July 20, 1988, as part of the evidence for the respondent, and that, as shown by the records, the lawyer who appeared as the legal counsel of the respondent-appellant, specifically, Atty. Jose Ma. Torres, of the Torres and Valencia Law Office in Bacolod City, (Rollo, p. 17) was also the legal counsel of the said corporation. (Rollo, p. 23)

Also, it is undisputed that summons and all notices of hearing were duly served upon Jose Edmundo Pison. Since Pison is the administrator and representative of petitioner in its property (Hacienda Lanutan) and recognized as such by the workers therein, we deem the service of summons upon him as sufficient and substantial compliance with the requirements for service of summons and other notices in respect of petitioner corporation. Insofar as the complainants are concerned, Jose Edmundo Pison was their employer and/or their employers representative. In view of the peculiar circumstances of this case, we rule that Jose Pisons knowledge of the labor case and effort to resist it can be deemed knowledge and action of the corporation. Indeed, to apply the normal precepts on corporate fiction and the technical rules on service of summons would be to overturn the bias of the Constitution and the laws in favor of labor.

Hence, it is fair to state that petitioner, through its administrator and manager, Jose Edmundo Pison, was duly notified of the labor case against it and was actually afforded an opportunity to be heard. That it refused to take advantage of such opportunity and opted to hide behind its corporate veil will not shield it from the encompassing application of labor laws. As we held in Bautista vs. Secretary of Labor and Employment:[22]

Moreover, since the proceeding was not judicial but merely administrative, the rigid requirements of procedural laws were not strictly enforceable. It is settled that --

While the administrative tribunals exercising quasi-judicial powers are free from the rigidity of certain procedural requirements they are bound by law and practice to observe the fundamental and essential requirements of due process in justiciable cases presented before them. However, the standard of due process that must be met in administrative tribunals allows a certain latitude as long as the element of fairness is not ignored. (fn: Adamson & Adamson, Inc. vs. Amores, 152 SCRA 237).

x x x

It is of course also sound and settled rule that administrative agencies performing quasi-judicial functions are unfettered by the rigid technicalities of procedure observed in the courts of law, and this is so that disputes brought before such bodies may be resolved in the most expeditious and inexpensive manner possible. (fn: Rizal Workers Union vs. Ferrer-Calleja, 186 SCRA 431).

Given all these circumstances, we feel that the lack of summons upon the petitioners is not sufficient justification for annulling the acts of the public respondents.

Contrary to petitioners contention, the principles laid down in Eden are relevant to this case. In that case, a religious organization, SCAFI,[23] denied responsibility for the monetary claims of several employees, as these were filed against SCAPS[24] and its officer in charge -- the employees believed that SCAPS was their employer. In rejecting such defense, this Court ruled:[25]

With regard to the contention that SCAPS and SCAFI are two different entities, this lacks merit. The change from SCAPS to SCAFI was a mere modification, if not rectification of the caption as to respondent in the MOLE case, when it was pointed out in the complainants position paper that SCAPS belongs to or is integral with SCAFI as gleaned from the brochure, Annex A of said position paper, which is already part of the records of the case and incorporated in the Comment by way of reference. The brochure stated that SCAPS is the implementing and service arm of SCAFI, with

Bishop Gaviola as National Director of SCAPS and Board Chairman of SCAFI, both their address: 2655 F.B. Harrison, St., Pasay City. Thus, the real party in interest is SCAFI, more so because it has the juridical personality that can sue and be sued. The change in caption from SCAPS to SCAFI however does not absolve SCAPS from liability, for SCAFI includes SCAPS, SCAPS -- the arm, SCAFI, -- the organism to which the arm is an integral part of the rise and fall of SCAPS, and vice-versa. Thus, SCAFI has never been a stranger to the case. Jurisprudence is to the effect that:

An action may be entertained, notwithstanding the failure to include an indispensable party where it appears that the naming of the party would be a formality. (Baguio vs. Rodriguez, L-11078, May 27, 1959)

Comparable to Eden, Hacienda Lanutan is an arm of petitioner, the organism of which it is an integral part. Ineluctably, the real party in interest in this case is petitioner, not Hacienda Lanutan which is merely its non-juridical arm. In dealing with private respondents, petitioner represented itself to be Hacienda Lanutan. Hacienda Lanutan is roughly equivalent to its trade name or even nickname or alias. The names may have been different, but the IDENTITY of the petitioner is not in dispute. Thus, it may be sued under the name by which it made itself known to the workers.Liability of Jose Edmundo Pison

Jose Edmundo Pison did not appeal from the Decision of public respondent. It thus follows that he is bound by the said judgment. A party who has not appealed an adverse decision cannot obtain from the appellate court any affirmative relief other than those granted, if there is any, in the decision of the lower court or administrative body.[26]

WHEREFORE, premises considered, the petition is hereby DISMISSED, for its failure to show grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the National Labor Relations Commission. The assailed Decision and Resolution are AFFIRMED. The temporary restraining order issued on January 19, 1995 is hereby LIFTED. Costs against petitioner.

SO ORDERED.

SECOND DIVISION

G.R. No. 96161 February 21, 1992

PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT,

INC., Petitioners, vs. COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS

CORPORATION, Respondents.

Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp. No. 20067, upholding the Order of the Securities and Exchange Commission, dated 2 January 1990, in SEC-AC No. 202, dismissing petitioners' prayer for the cancellation or removal of the word "PHILIPS" from private respondent's corporate name.

Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the Netherlands, although not engaged in business here, is the registered owner of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration Nos. R-1641 and R-1674, respectively issued by the Philippine Patents Office (presently known as the Bureau of Patents, Trademarks and Technology Transfer). Petitioners Philips Electrical Lamps, Inc. (Philips Electrical, for brevity) and Philips Industrial Developments, Inc. (Philips Industrial, for short), authorized users of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated on 29 August 1956 and 25 May 1956, respectively. All petitioner corporations belong to the PHILIPS Group of Companies.

Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a Certificate of Registration by respondent Commission on 19 May 1982.

On 24 September 1984, Petitioners filed a letter complaint with the Securities & Exchange Commission (SEC) asking for the cancellation of the word "PHILIPS" from Private

5Respondent's corporate name in view of the prior registration with the Bureau of Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner, PEBV, and the previous registration of Petitioners Philips Electrical and Philips Industrial with the SEC.

As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners filed with the SEC, on 6 February 1985, a Petition (SEC Case No. 2743) praying for the issuance of a Writ of Preliminary Injunction, alleging, among others, that Private Respondent's use of the word PHILIPS amounts to an infringement and clear violation of Petitioners' exclusive right to use the same considering that both parties engage in the same business.

In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no legal capacity to sue; that its use of its corporate name is not at all similar to Petitioners' trademark PHILIPS when considered in its entirety; and that its products consisting of chain rollers, belts, bearings and cutting saw are grossly different from Petitioners' electrical products.

After conducting hearings with respect to the prayer for Injunction; the SEC Hearing Officer, on 27 September 1985, ruled against the issuance of such Writ.

On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so ruling, the latter declared that inasmuch as the SEC found no sufficient ground for the granting of injunctive relief on the basis of the testimonial and documentary evidence presented, it cannot order the removal or cancellation of the word "PHILIPS" from Private Respondent's corporate name on the basis of the same evidence adopted in totoduring trial on the merits. Besides, Section 18 of the Corporation Code (infra) is applicable only when the corporate names in question are identical. Here, there is no confusing similarity between Petitioners' and Private Respondent's corporate names as those of the Petitioners contain at least two words different from that of the Respondent. Petitioners' Motion for Reconsideration was likewise denied on 17 June 1987.

On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of Petitioners and Private Respondent hardly breed confusion inasmuch as each contains at least two different words and, therefore, rules out any possibility of confusing one for the other.

On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review on Certiorari before this Court, which Petition was later referred to the Court of Appeals in a Resolution dated 12 February 1990.

In deciding to dismiss the petition on 31 July 1990, the Court of Appeals 1swept aside Petitioners' claim that following the ruling in Converse Rubber Corporation v. Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906, January 8, 1987, 147 SCRA 154), the word PHILIPS cannot be used as part of Private Respondent's corporate name as the same constitutes a dominant part of Petitioners' corporate names. In so holding, the Appellate Court observed that the Converse case is not four-square with the present case inasmuch as the contending parties in Converseare engaged in a similar business, that is, the manufacture of rubber shoes. Upholding the SEC, the Appellate Court concluded that "private respondents' products consisting of chain rollers, belts, bearings and cutting saw are unrelated and non-competing with petitioners' products i.e. electrical lamps such that consumers would not in any probability mistake one as the source or origin of the product of the other."

The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990, hence, this Petition which was given due course on 22 April 1991, after which the parties were required to submit their memoranda, the latest of which was received on 2 July 1991. In December 1991, the SEC was also required to elevate its records for the perusal of this Court, the same not having been apparently before respondent Court of Appeals.

We find basis for petitioners' plea.

As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared that a corporation's right to use its corporate and trade name is a property right, a

right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field (Red Line Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).

A name is peculiarly important as necessary to the very existence of a corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its attributes, an element of its existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each corporation must have a name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the name of an individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its corporate name is as much a part of the corporate franchise as any other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association, 18 RI 165, 26 A 36).

A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individual's name is thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A corporation can no more use a corporate name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308).

Our own Corporation Code, in its Section 18, expressly provides that:

No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing law.Where a change in a corporate name is approved, the commission shall issue an amended certificate of incorporation under the amended name. (Emphasis supplied)

The statutory prohibition cannot be any clearer. To come within its scope, two requisites must be proven, namely:

(1) that the complainant corporation acquired a prior right over the use of such corporate name; and

(2) the proposed name is either:

(a) identical; or

(b) deceptively or confusingly similar

to that of any existing corporation or to any other name already protected by law; or

(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this regard, there is no doubt with respect to Petitioners' prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners Philips Electrical and Philips Industrial were incorporated on 29 August 1956 and 25 May 1956, respectively, while Respondent Standard Philips was issued a Certificate of Registration on 12 April 1982, twenty-six (26) years later (Rollo, p. 16). Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of all types and their accessories since 30 September 1922, as evidenced by Certificate of Registration No. 1651.

The second requisite no less exists in this case. In determining the existence of confusing similarity in corporate names, the

6test is whether the similarity is such as to mislead a person, using ordinary care and discrimination. In so doing, the Court must look to the record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the corporate names of Petitioners and Private Respondent are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or associated with the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of Companies.

Respondents maintain, however, that Petitioners did not present an iota of proof of actual confusion or deception of the public much less a single purchaser of their product who has been deceived or confused or showed any likelihood of confusion. It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).

It may be that Private Respondent's products also consist of chain rollers, belts, bearing and the like, while petitioners deal principally with electrical products. It is significant to note, however, that even the Director of Patents had denied Private Respondent's application for registration of the trademarks "Standard Philips & Device" for chain, rollers, belts, bearings and cutting saw. That office held that PEBV, "had shipped to its subsidiaries in the Philippines equipment, machines and their parts which fall under international class where "chains, rollers, belts, bearings and cutting saw," the goods in connection with which Respondent is seeking to register 'STANDARD PHILIPS' . . . also belong" ( Inter Partes Case No. 2010, June 17, 1988, SEC Rollo).

Furthermore, the records show that among Private Respondent's primary purposes in its Articles of Incorporation (Annex D, Petition p. 37, Rollo) are the following:

To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire, dispose of, and deal in and deal with any kind of goods, wares, and merchandise such as but not limited to plastics, carbon products, office stationery and supplies, hardware parts, electrical wiring devices, electrical component parts, and/or complement of industrial, agricultural or commercial machineries, constructive supplies, electrical supplies and other merchandise which are or may become articles of commerce except food, drugs and cosmetics and to carry on such business as manufacturer, distributor, dealer, indentor, factor, manufacturer's representative capacity for domestic or foreign companies. (emphasis ours)

For its part, Philips Electrical also includes, among its primary purposes, the following:

To develop manufacture and deal in electrical products, including electronic, mechanical and other similar products . . . (p. 30, Record of SEC Case No. 2743)

Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it from dealing in the same line of business of electrical devices, products or supplies which fall under its primary purposes. Besides, there is showing that Private Respondent not only manufactured and sold ballasts for fluorescent lamps with their corporate name printed thereon but also advertised the same as, among others, Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's intention to ride on the popularity and established goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The subsequent appropriator of the name or one confusingly similar thereto usually seeks an unfair advantage, a free ride of another's goodwill (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).

In allowing Private Respondent the continued use of its corporate name, the SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least two words different from that of the corporate name of respondent

STANDARD PHILIPS CORPORATION, which words will readily identify Private Respondent from Petitioners and vice-versa.

True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC, the proposed name "should not be similar to one already used by another corporation or partnership. If the proposed name contains a word already used as part of the firm name or style of a registered company; the proposed name must contain two other words different from the company already registered" (Emphasis ours). It is then pointed out that Petitioners Philips Electrical and Philips Industrial have two words different from that of Private Respondent's name.

What is lost sight of, however, is that PHILIPS is a trademark or trade name which was registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use which must be free from any infringement by similarity. A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps carried on its business thereunder, that another should attempt to use the same name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation to the name (6 Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F 510). Notably, too, Private Respondent's name actually contains only a single word, that is, "STANDARD", different from that of Petitioners inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the Purpose of distinguishing the corporation from partnerships and other business organizations.

The fact that there are other companies engaged in other lines of business using the word "PHILIPS" as part of their corporate names is no defense and does not warrant the use by Private Respondent of such word which constitutes an essential feature of Petitioners' corporate name previously adopted and registered and-having acquired the status of a well-known mark in the Philippines and internationally as well (Bureau of Patents Decision No. 88-35 [TM], June 17, 1988, SEC Records).

In support of its application for the registration of its Articles of Incorporation with the SEC, Private Respondent had submitted an undertaking "manifesting its willingness to change its corporate name in the event another person, firm or entity has acquired a prior right to the use of the said firm name or one deceptively or confusingly similar to it." Private respondent must now be held to its undertaking.

As a general rule, parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonbusiness or non-profit organization if misleading and likely to injure it in the exercise in its corporate functions, regardless of intent, may be prevented by the corporation having the prior right, by a suit for injunction against the new corporation to prevent the use of the name (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27 ALR 2d 948).

WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution dated 20 November 1990, are SET ASIDE and a new one entered ENJOINING private respondent from using "PHILIPS" as a feature of its corporate name, and ORDERING the Securities and Exchange Commission to amend private respondent's Articles of Incorporation by deleting the word PHILIPS from the corporate name of private respondent.

No costs.

SO ORDERED.

THIRD DIVISION

G.R. No. 101897 March 5, 1993

7LYCEUM OF THE PHILIPPINES, INC. Petitioner, vs. COURT

OF APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM,

CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN

MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC., Respondents.

Petitioner is an educational institution duly registered with the Securities and Exchange Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the corporate name Lyceum of the Philippines, Inc. and has used that name ever since.

On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private respondents, which are also educational institutions, to delete the word "Lyceum" from their corporate names and permanently to enjoin them from using "Lyceum" as part of their respective names.

Some of the private respondents actively participated in the proceedings before the SEC. These are the following, the dates of their original SEC registration being set out below opposite their respective names:

Western Pangasinan Lyceum - 27 October 1950Lyceum of Cabagan - 31 October 1962Lyceum of Lallo, Inc. - 26 March 1972Lyceum of Aparri - 28 March 1972Lyceum of Tuao, Inc. - 28 March 1972Lyceum of Camalaniugan - 28 March 1972

The following private respondents were declared in default for failure to file an answer despite service of summons:

Buhi Lyceum;Central Lyceum of Catanduanes;Lyceum of Eastern Mindanao, Inc.; andLyceum of Southern Philippines

Petitioner's original complaint before the SEC had included three (3) other entities:

1. The Lyceum of Malacanay;2. The Lyceum of Marbel; and3. The Lyceum of Araullo.

The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against the Lyceum of Araullo was dismissed when that school motu proprio change its corporate name to "Pamantasan ng Araullo."chanrobles virtual law library

The background of the case at bar needs some recounting. Petitioner had sometime before commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to require it to change its corporate name and to adopt another name not "similar [to] or identical" with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner Julio Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc. were substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the name of the geographical location of the campus being the only word which distinguished one from the other corporate name. The SEC also noted that petitioner had registered as a corporation ahead of the Lyceum of Baguio, Inc. in point of time,  1 and ordered the latter to change its name to another name "not similar or identical [with]" the names of previously registered entities.

The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21 October 1977. 2

Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the educational institutions it could find using the word "Lyceum" as part of their corporate name, and advised them to discontinue such use of "Lyceum." When, with the passage of time, it became clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No.

2579 to enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and held that the word "Lyceum" was capable of appropriation and that petitioner had acquired an enforceable exclusive right to the use of that word.

On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have become so identified with petitioner as to render use thereof by other institutions as productive of confusion about the identity of the schools concerned in the mind of the general public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently to distinguish the schools from one another, especially in view of the fact that the campuses of petitioner and those of the private respondents were physically quite remote from each other. 3

Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991, however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc.4 Petitioner filed a motion for reconsideration, without success.

Before this Court, petitioner asserts that the Court of Appeals committed the following errors:

1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-46595 did not constitute stare decisis as to apply to this case and in not holding that said Resolution bound subsequent determinations on the right to exclusive use of the word Lyceum.

2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was incorporated earlier than petitioner.

3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary meaning in favor of petitioner.

4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated by the petitioner to the exclusion of others. 5

We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by noting that the Resolution of the Court in G.R. No.L-46595 does not, of course, constitute res adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare decisis pertinent, if only because the SEC En Banc itself has re-examined Associate Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.

The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned:

Sec. 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing orcontrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (Emphasis supplied)

The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. 7

8We do not consider that the corporate names of private respondent institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names of private respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by the philosopher Aristotle and his followers for teaching." 8 In time, the word "Lyceum" became associated with schools and other institutions providing public lectures and concerts and public discussions. Thus today, the word "Lyceum" generally refers to a school or an institution of learning. While the Latin word "lyceum" has been incorporated into the English language, the word is also found in Spanish (liceo ) and in French (lycee ). As the Court of Appeals noted in its Decision, Roman Catholic schools frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university." In the name of the petitioner, "Lyceum" appears to be a substitute for "university;" in other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary school or a college. It may be (though this is a question of fact which we need not resolve) that the use of the word "Lyceum" may not yet be as widespread as the use of "university," but it is clear that a not inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to designate an entity which is organized and operating as an educational institution.

It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner with the result that that word, although originally a generic, has become appropriable by petitioner to the exclusion of other institutions like private respondents herein.

The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names since the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary meaning was elaborated in the following terms:

. . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. 12

The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate name has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general public (or at least that portion of the general public which has to do with schools). The Court of Appeals recognized this issue and answered it in the negative:

Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period of time. Consequently, the same doctrine or principle cannot be made to apply where the evidence did not prove that the business (of the plaintiff) has continued for so long a

time that it has become of consequence and acquired a good will of considerable value such that its articles and produce have acquired a well-known reputation, and confusion will result by the use of the disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92 Phil. 448).

With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned requisites. No evidence was ever presented in the hearing before the Commission which sufficiently proved that the word "Lyceum" has indeed acquired secondary meaning in favor of the appellant. If there was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of time. Nevertheless, its (appellant) exclusive use of the word (Lyceum) was never established or proven as in fact the evidence tend to convey that the cross-claimant was already using the word "Lyceum" seventeen (17) years prior to the date the appellant started using the same word in its corporate name. Furthermore, educational institutions of the Roman Catholic Church had been using the same or similar word like "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay" long before appellant started using the word "Lyceum". The appellant also failed to prove that the word "Lyceum" has become so identified with its educational institution that confusion will surely arise in the minds of the public if the same word were to be used by other educational institutions.

In other words, while the appellant may have proved that it had been using the word "Lyceum" for a long period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be used by other educational institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily fail. 13 (Emphasis partly in the original and partly supplied)

We agree with the Court of Appeals. The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name with the SEC and began using the word "Lyceum." It follows that if any institution had acquired an exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution.

In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which records had been destroyed during World War II, Western Pangasinan Lyceum should be deemed to have lost all rights it may have acquired by virtue of its past registration. It might be noted that the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner had filed its own registration on 21 September 1950. Whether or not Western Pangasinan Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration, appears to us to be quite secondary in importance; we refer to this earlier registration simply to underscore the fact that petitioner's use of the word "Lyceum" was neither the first use of that term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other private respondent institutions which registered with the SEC using "Lyceum" as part of their corporation names. There may well be other schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not adopted the corporate form of organization.

We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their own corporate names. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private

9respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.

WHEREFORE, the petitioner having failed to show any reversible error on the part of the public respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Purpose Clause

EN BANC

G.R. No. 9321           September 24, 1914

NORBERTO ASUNCION, ET AL., petitioners-appellants, vs. MANUEL DE YRIARTE,Respondent-Appellee.

This is an action to obtain a writ of mandamus to compel the chief of the division of achieves of the Executive Bureau to file a certain articles of incorporation.

The chief of the division of archives, the respondent, refused to file the articles of incorporation, hereinafter referred to, upon the ground that the object of the corporation, as stated in the articles, was not lawful and that, in pursuance of section 6 of Act No. 1459, they were not registerable.

The proposed incorporators began an action in the Court of First Instance of the city of Manila to compel the chief of the division of archives to receive and register said articles of incorporation and to do any and all acts necessary for the complete incorporation of the persons named in the articles. The court below found in favor of the defendant and refused to order the registration of the articles mentioned, maintaining ad holding that the defendant, under the Corporation Law, had authority to determine both the sufficiency of the form of the articles and the legality of the object of the proposed corporation. This appeal is taken from that judgment.

The first question that arises is whether or not the chief of the division of archives has authority, under the Corporation for registration, to decide not only as to the sufficiency of the form of the articles, but also as to the lawfulness of the purpose of the proposed corporation.

It is strongly urged on the part of the appellants that the duties of the defendant are purely ministerial and that he has no authority to pass upon the lawfulness of the object for which the incorporators propose to organize. No authorities are cited to support this proposition and we are of the opinion that it is not sound.

Section 6 of the Corporation Law reads in part as follows:

Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippine Islands, may form a private corporation for any lawful purpose by filing with the division of archives, patents, copyrights, and trademarks if the Executive Bureau articles of incorporation duly executed and acknowledged before a notary public, . . . .

Simply because the duties of an official happens to be ministerial, it does not necessarily follow that he may not, in the administration of his office, determine questions of law. We are of the opinion that it is the duty of the division of archives, when articles of incorporation are presented for registration, to determine whether the objects of the corporation as expressed in the articles are lawful. We do not believe that, simply because articles of incorporation presented foe registration are perfect in form, the division of archives must accept and register them and issue the corresponding certificate of incorporation no matter what the purpose of the corporation may be as expressed in the articles. We do not believe it was intended that the division of archives should issue a certificate of incorporation to, and thereby put the seal of approval of the Government upon, a

corporation which was organized for base of immoral purposes. That such corporation might later, if it sought to carry out such purposes, be dissolved, or its officials imprisoned or itself heavily fined furnished no reason why it should have been created in the first instance. It seems to us to be not only the right but the duty of the divisions of archives to determine the lawfulness of the objects and purposes of the corporation before it issues a certificate of incorporation.

It having determined that the division of archives, through its officials, has authority to determine not only the sufficiency as to form of the articles of incorporation offered for registration, but also the lawfulness of the purposes of leads us to the determination of the question whether or not the chief of the division of archives, who is the representative thereof and clothed by it with authority to deal subject to mandamus in the performance of his duties.

We are of the opinion that he may be mandamused if he act in violation of law or if he refuses, unduly, to comply with the law. While we have held that defendant has power to pass upon the lawfulness of the purposes of the proposed corporation and that he may, in the fulfillment of his duties, determine the question of law whether or not those purposes are lawful and embraced within that class concerning which the law permits corporations to be formed, that does not necessarily mean, as we have already intimated, that his duties are not ministerial. On the contrary, there is no incompatibility in holding, as we do hold, that his duties are ministerial and that he has no authority to exercise discretion in receiving and registering articles of incorporation. He may exercise judgment - that is, the judicial function - in the determination of the question of law referred to, but he may not use discretion. The question whether or not the objects of a proposed corporation are lawful is one that can be decided one way only. If he err in the determination of that question and refuse to file articles which should be filed under the law, the decision is subject to review and correction and, upon proper showing, he will be ordered to file the articles. This is the same kind of determination which a court makes when it decides a case upon the merits, the court makes when it decides a case upon the merits. When a case is presented to a court upon the merits, the court can decide only one way and be right. As a matter of law, there is only one way and be right. As a matter of law, there is only one course to pursue. In a case where the court or other official has discretion in the resolution of a question, then, within certain limitations, he may decide the question either way and still be right. Discretion, it may be said generally, is a faculty conferred upon a court or other official by which he may decide a question either way and still be right. The power conferred upon the division of archives with respect to the registration of articles of incorporation is not of that character. It is of the same character as the determination of a lawsuit by a court upon the merits. It can be decided only one way correctly.

If, therefore, the defendant erred in determining the question presented when the articles were offered for registration, then that error will be corrected by this court in this action and he will be compelled to register the articles as offered. If, however, he did not commit an error, but decided that question correctly, then, of course, his action will be affirmed to the extent that we will deny the relief prayed for.

The next question leads us to the determination of whether or not the purposes of the corporation as stated in the articles of incorporation are lawful within the meaning of the Corporation Law.

The purpose of the incorporation as stated in the articles is: "That the object of the corporation is ( a) to organize and regulate the management, disposition, administration and control which the barrio of Pulo or San Miguel or its inhabitants or residents have over the common property of said residents or inhabitants or property belonging to the whole barrio as such; and ( b) to use the natural products of the said property for institutions, foundations, and charitable works of common utility and advantage to the barrio or its inhabitants."

The municipality of Pasig as recognized by law contains within its limits several barrios or small settlements, like Pulo or San Miguel, which have no local government of their own but are governed by the municipality of Pasig through its municipal president and council. The president and members of the municipal council are elected by a general vote of the

10municipality, the qualified electors of all the barrios having the right to participate.

The municipality of Pasig is a municipal corporation organized by law. It has the control of all property of the municipality. The various barrios of the municipality have no right to own or hold property, they not being recognized as legal entities by any law. The residents of the barrios participate in the advantages which accrue to the municipality from public property and receive all the benefits incident to residence in a municipality organized by law. If there is any public property situated in the barrio of Pulo or San Miguel not belonging to the general government or the province, it belongs to the municipality of Pasig and the sole authority to manage and administer the same resides in that municipality. Until the present laws upon the subject are charged no other entity can be the owner of such property or control or administer it.

The object of the proposed corporation, as appears from the articles offered for registration, is to make of the barrio of Pulo or San Miguel a corporation which will become the owner of and have the right to control and administer any property belonging to the municipality of Pasig found within the limits of that barrio. This clearly cannot be permitted. Otherwise municipalities as now established by law could be deprived of the property which they now own and administer. Each barrio of the municipality would become under the scheme proposed, a separate corporation, would take over the ownership, administration, and control of that portion of the municipal territory within its limits. This would disrupt, in a sense, the municipalities of the Islands by dividing them into a series of smaller municipalities entirely independent of the original municipality.

What the law does not permit cannot be obtained by indirection. The object of the proposed corporation is clearly repugnant to the provisions of the Municipal Code and the governments of municipalities as they have been organized thereunder. (Act No. 82, Philippine Commission.)

The judgment appealed from is affirmed, with costs against appellants.

FIRST DIVISION[G.R. No. 156819. December 11, 2003]

ALICIA E. GALA, GUIA G. DOMINGO and RITA G. BENSON, petitioners, vs. ELLICE AGRO-

INDUSTRIAL CORPORATION, MARGO MANAGEMENT AND DEVELOPMENT

CORPORATION, RAUL E. GALA, VITALIANO N. AGUIRRE II, ADNAN V. ALONTO, ELIAS N.

CRESENCIO, MOISES S. MANIEGO, RODOLFO B. REYNO, RENATO S. GONZALES, VICENTE C.

NOLAN, NESTOR N. BATICULON ,respondents.

D E C I S I O N

This is a petition for review under Rule 45 of the Rules of Court, seeking the reversal of the decision dated November 8, 2002[1] and the resolution dated December 27, 2002[2] of the Court of Appeals in CA-G.R. SP No. 71979.

On March 28, 1979, the spouses Manuel and Alicia Gala, their children Guia Domingo, Ofelia Gala, Raul Gala, and Rita Benson, and their encargados Virgilio Galeonand Julian Jader formed and organized the Ellice Agro-Industrial Corporation.[3] The total subscribed capital stock of the corporation was apportioned as follows:

Name   Number of Shares   Amount Manuel R. Gala 11, 700 1,170,000.00Alicia E. Gala 23,200 2,320,000.00Guia G. Domingo 16 1,600.00Ofelia E. Gala 40 4,000.00Raul E. Gala 40 4,000.00Rita G. Benson 2 200.00Virgilio Galeon 1 100.00Julian   Jader   1   100.00

TOTAL 35,000 P3,500,000.00[4]

As payment for their subscriptions, the Gala spouses transferred several parcels of land located in the provinces of Quezon and Laguna to Ellice. [5]

In 1982, Manuel Gala, Alicia Gala and Ofelia Gala subscribed to an additional 3,299 shares, 10,652.5 shares and 286.5 shares, respectively. [6]

On June 28, 1982, Manuel Gala and Alicia Gala acquired an additional 550 shares and 281 shares, respectively. [7]

Subsequently, on September 16, 1982, Guia Domingo, Ofelia Gala, Raul Gala, Virgilio Galeon and Julian Jader incorporated the Margo Management and Development Corporation (Margo). [8] The total subscribed capital stock of Margo was apportioned as follows:

Name Number of Shares

Amount

Raul E. Gala 6,640 66,400.00Ofelia E. Gala 6,640 66,400.00Guia G. Domingo 6,640 66,400.00Virgilio Galeon 40 40.00Julian Jader 40 40.00TOTAL 20,000 P200,000.00[9]

On November 10, 1982, Manuel Gala sold 13,314 of his shares in Ellice to Margo. [10]

Alicia Gala transferred 1,000 of her shares in Ellice to a certain Victor de Villa on March 2, 1983. That same day, de Villa transferred said shares to Margo. [11] A few months later, on August 28, 1983, Alicia Gala transferred 854.3 of her shares to Ofelia Gala, 500 to Guia Domingo and 500 to Raul Gala. [12]

Years later, on February 8, 1988, Manuel Gala transferred all of his remaining holdings in Ellice, amounting to 2,164 shares, to Raul Gala. [13]

On July 20, 1988, Alicia Gala transferred 10,000 of her shares to Margo. [14]

Thus, as of the date on which this case was commenced, the stockholdings in Ellice were allocated as follows:

Name Number of Shares

Amount

Margo 24,312.5 2,431,250.00Alicia Gala 21,480.2 2,148,020.00Raul Gala 2,704.5 270,450.00Ofelia Gala 980.8 98,080.00Gina Domingo 516 51,600.00Rita Benson 2 200.00Virgilio Galeon 1 100.00Julian Jader 1 100.00Adnan Alonto 1 100.00Elias Cresencio 1 100.00TOTAL 50,000 P5,000,000.00

On June 23, 1990, a special stockholders meeting of Margo was held, where a new board of directors was elected. [15] That same day, the newly-elected board elected a new set of officers. Raul Gala was elected as chairman, president and general manager. During the meeting, the board approved several actions, including the commencement of proceedings to annul certain dispositions of Margos property made by Alicia Gala. The board also resolved to change the name of the corporation to MRG Management and Development Corporation. [16]

Similarly, a special stockholders meeting of Ellice was held on August 24, 1990 to elect a new board of directors. In the ensuing organizational meeting later that day, a new set of corporate officers was elected. Likewise, Raul Gala was elected as chairman, president and general manager.

On March 27, 1990, respondents filed against petitioners with the Securities and Exchange Commission (SEC) a petition for the appointment of a management committee or receiver, accounting and restitution by the directors and officers, and the dissolution of Ellice Agro-Industrial Corporation for alleged mismanagement, diversion of funds, financial losses and the dissipation of assets, docketed as SEC Case No. 3747.  [17] The petition was amended to delete the prayer for the appointment of a management committee or receiver and for the dissolution of Ellice. Additionally, respondents prayed that they be allowed to inspect the corporate books and documents of Ellice. [18]

In turn, petitioners initiated a complaint against the respondents on June 26, 1991, docketed as SEC Case No. 4027, praying for, among others, the nullification of the elections of directors and officers of both Margo Management and Development Corporation and Ellice Industrial Corporation; the nullification of all board resolutions issued by Margo from June 23, 1990 up to the present and all board resolutions issued by Ellice from August 24, 1990 up to the

11present; and the return of all titles to real property in the name of Margo and Ellice, as well as all corporate papers and records of both Margo and Ellice which are in the possession and control of the respondents.[19]

The two cases were consolidated in an Order dated November 23, 1993. [20]

Meanwhile, during the pendency of the SEC cases, the shares of stock of Alicia and Ofelia Gala in Ellice were levied and sold at public auction to satisfy a judgment rendered against them by he Regional Trial Court of Makati, Branch 66, in Civil Case No. 42560, entitled Regines Condominium v. Ofelia (Gala) Panes and Alicia Gala. [21]

On November 3, 1998, the SEC rendered a Joint Decision in SEC Cases Nos. 3747 and 4027, the dispositive portion of which states:

WHEREFORE, premises considered, judgment is hereby rendered, as follows:

1. Dismissing the petition in SEC Case No. 3747,

2. Issuing the following orders in SEC Case No. 4027;

(a) Enjoining herein respondents to perform corporate acts of both Ellice and Margo, as directors and officers thereof.

(b) Nullifying the election of the new sets of Board of Directors and Officers of Ellice and Margo from June 23, 1990 to the present, and that of Ellice from August 24, 1990to the present.

(c) Ordering the respondent Raul Gala to return all the titles of real properties in the names of Ellice and Margo which were unlawfully taken and held by him.

(d) Directing the respondents to return to herein petitioners all corporate papers, records of both Ellice and Margo which are in their possession and control.

SO ORDERED. [22]

Respondents appealed to the SEC En Banc, which, on July 4, 2002, rendered its Decision, the decretal portion of which reads:

WHEREFORE, the Decision of the Hearing Officer dated November 3, 1998 is hereby REVERSED and SET ASIDE and a new one hereby rendered granting the appeal, upholding the Amended Petition in SEC Case No. 3747, and dismissing the Petition with Prayer for Issuance of Preliminary Restraining Order and granting the Compulsory Counterclaim in SEC Case No. 4027.

Accordingly, appellees Alicia Gala and Guia G. Domingo are ordered as follows:

(1) jointly and solidarily pay ELLICE and/or MARGO the amount of P700,000.00 representing the consideration for the unauthorized sale of a parcel of land to Lucky Homes and Development Corporation (Exhs. N and CCC);

(2) jointly and severally pay ELLICE and MARGO the proceeds of sales of agricultural products averaging P120,000.00 per month from February 17, 1988;

(3) jointly and severally indemnify the appellants P90,000.00 as attorneys fees;

(4) jointly and solidarily pay the costs of suit;

(5) turn over to the individual appellants the corporate records of ELLICE and MARGO in their possession; and

(6) desist and refrain from interfering with the management of ELLICE and MARGO.

SO ORDERED. [23]

Petitioners filed a petition for review with the Court of Appeals which dismissed the petition for review and affirmed the decision of the SEC En Banc. [24]

Hence, this petition, raising the following issues:I

WHETHER OR NOT THE LOWER COURT ERRED IN NOT DECLARING AS ILLEGAL AND CONTRARY TO PUBLIC POLICY THE PURPOSES AND MANNER IN WHICH RESPONDENT CORPORATIONS WERE ORGANIZED WHICH WERE, E.G. TO (1) PREVENT THE GALA ESTATE FROM BEING BROUGHT UNDER THE COVERAGE(SIC) OF THE COMPREHENSIVE AGRARIAN REFORM PROGRAM (CARP) AND (2) PURPORTEDLY FOR ESTATE PLANNING.

II

WHETHER OR NOT THE LOWER COURT ERRED (1) IN SUSPICIOUSLY RESOLVING THE CASE WITHIN TWO (2) DAYS FROM RECEIPT OF RESPONDENTS COMMENT; AND (2) IN NOT MAKING A DETERMINATION OF THE ISSUES OF FACTS AND INSTEAD RITUALLY CITING THE FACTUAL FINDINGS OF THE COMMISSION A QUO WITHOUT DISCUSSION AND ANALYSIS;

III

WHETHER OR NOT THE LOWER COURT ERRED IN RULING THAT THE ORGANIZATION OF RESPONDENT CORPORATIONS WAS NOT ILLEGAL FOR DEPRIVING PETITIONER RITA G. BENSON OF HER LEGITIME.

IV

WHETHER OR NOT THE LOWER COURT ERRED IN NOT PIERCING THE VEILS OF CORPORATE FICTION OF RESPONDENTS CORPORATIONS ELLICE AND MARGO. [25]

In essence, petitioners want this Court to disregard the separate juridical personalities of Ellice and Margo for the purpose of treating all property purportedly owned by said corporations as property solely owned by the Gala spouses.

The petitioners first contention in support of this theory is that the purposes for which Ellice and Margo were organized should be declared as illegal and contrary to public policy. They claim that the respondents never pursued exemption from land reform coverage in good faith and instead merely used the corporations as tools to circumvent land reform laws and to avoid estate taxes. Specifically, they point out that respondents have not shown that the transfers of the land in favor of Ellice were executed in compliance with the requirements of Section 13 of R.A. 3844.[26] Furthermore, they alleged that respondent corporations were run without any of the conventional corporate formalities. [27]

At the outset, the Court holds that petitioners contentions impugning the legality of the purposes for which Ellice and Margo were organized, amount to collateral attacks which are prohibited in this jurisdiction. [28]

The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. [29]

12In the case at bar, a perusal of the Articles of

Incorporation of Ellice and Margo shows no sign of the allegedly illegal purposes that petitioners are complaining of. It is well to note that, if a corporations purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation. [30]

Assuming there was even a grain of truth to the petitioners claims regarding the legality of what are alleged to be the corporations true purposes, we are still precluded from granting them relief. We cannot address here their concerns regarding circumvention of land reform laws, for the doctrine of primary jurisdiction precludes a court from arrogating unto itself the authority to resolve a controversy the jurisdiction over which is initially lodged with an administrative body of special competence.[31] Since primary jurisdiction over any violation of Section 13 of Republic Act No. 3844 that may have been committed is vested in the Department of Agrarian Reform Adjudication Board (DARAB),[32] then it is with said administrative agency that the petitioners must first plead their case. With regard to their claim that Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. [33]

The petitioners allegation that Ellice and Margo were run without any of the typical corporate formalities, even if true, would not merit the grant of any of the relief set forth in their prayer. We cannot disregard the corporate entities of Ellice and Margo on this ground. At most, such allegations, if proven to be true, should be addressed in an administrative case before the SEC. [34]

Thus, even if Ellice and Margo were organized for the purpose of exempting the properties of the Gala spouses from the coverage of land reform legislation and avoiding estate taxes, we cannot disregard their separate juridical personalities.

Next, petitioners make much of the fact that the Court of Appeals promulgated its assailed Decision a mere two days from the time the respondents filed their Comment. They alleged that the appellate court could not have made a deliberate study of the factual questions in the case, considering the sheer volume of evidence available. [35] In support of this allegation, they point out that the Court of Appeals merely adopted the factual findings of the SEC En Banc verbatim, without deliberation and analysis. [36]

In People v. Mercado, [37] we ruled that the speed with which a lower court disposes of a case cannot thus be attributed to the injudicious performance of its function.Indeed, magistrates are not supposed to study a case only after all the pertinent pleadings have been filed. It is a mark of diligence and devotion to duty that jurists study a case long before the deadline set for the promulgation of their decision has arrived. The two-day period between the filing of petitioners Comment and the promulgation of the decision was sufficient time to consider their arguments and to incorporate these in the decision. As long as the lower court does not sacrifice the orderly administration of justice in favor of a speedy but reckless disposition of a case, it cannot be taken to task for rendering its decision with due dispatch. The Court of Appeals in this intra-corporate controversy committed no reversible error and, consequently, its decision should be affirmed. [38] Verily, if such swift disposition of a case is considered a non-issue in cases where the life or liberty of a person is at stake, then we see no reason why the same principle cannot apply when only private rights are involved.

Furthermore, well-settled is the rule that the factual findings of the Court of Appeals are conclusive on the parties and are not reviewable by the Supreme Court. They carry even more weight when the Court of Appeals affirms the factual findings of a lower fact-finding body.[39] Likewise, the findings of fact of administrative bodies, such as the SEC, will not be interfered with by the courts in the absence of grave abuse of discretion on the part of said agencies, or unless the aforementioned findings are not supported by substantial evidence. [40]

However, in the interest of equity, this Court has reviewed the factual findings of the SEC En Banc, which were affirmed in toto by the Court of Appeals, and has found no cogent reason to disturb the same. Indeed, we are convinced that the arguments raised by the petitioners are nothing but unwarranted conclusions of law. Specifically, they insist that the Gala spouses never meant to part with the ownership of the shares which are in the names of their children

and encargados, and that all transfers of property to these individuals are supposedly void for being absolutely simulated for lack of consideration.[41] However, as correctly held by the SEC En Banc, the transfers were only relatively simulated, inasmuch as the evident intention of the Gala spouses was to donate portions of their property to their children and encargados. [42]

In an attempt to bolster their theory that the organization of the respondent corporations was illegal, the petitioners aver that the legitime pertaining to petitioners Rita G. Benson and Guia G. Domingo from the estate of their father had been subject to unwarranted reductions as a result thereof. In sum, they claim that stockholdings inEllice which the late Manuel Gala had assigned to them were insufficient to cover their legitimes, since Benson was only given two shares while Domingo received only sixteen shares out of a total number of 35,000 issued shares. [43]

Moreover, the reliefs sought by petitioners should have been raised in a proceeding for settlement of estate, rather than in the present intra-corporate controversy. If they are genuinely interested in securing that part of their late fathers property which has been reserved for them in their capacity as compulsory heirs, then they should simply exercise their actio ad supplendam legitimam, or their right of completion of legitime.[44] Such relief must be sought during the distribution and partition stage of a case for the settlement of the estate of Manuel Gala, filed before a court which has taken jurisdiction over the settlement of said estate. [45]

Finally, the petitioners pray that the veil of corporate fiction that shroud both Ellice and Margo be pierced, consistent with their earlier allegation that both corporations were formed for purposes contrary to law and public policy. In sum, they submit that the respondent corporations are mere business conduits of the deceased Manuel Gala and thus may be disregarded to prevent injustice, the distortion or hiding of the truth or the letting in of a just defense. [46]

However, to warrant resort to the extraordinary remedy of piercing the veil of corporate fiction, there must be proof that the corporation is being used as a cloak or cover for fraud or illegality, or to work injustice, [47] and the petitioners have failed to prove that Ellice and Margo were being used thus. They have not presented any evidence to show how the separate juridical entities of Ellice and Margo were used by the respondents to commit fraudulent, illegal or unjust acts. Hence, this contention, too, must fail.

On June 5, 2003, the petitioners filed a Reply, where, aside from reiterating the contentions raised in their Petition, they averred that there is no proof that either capital gains taxes or documentary stamp taxes were paid in the series of transfers of Ellice and Margo shares. Thus, they invoke Sections 176 and 201 of the National Internal Revenue Code, which would bar the presentation or admission into evidence of any document that purports to transfer any benefit derived from certificates of stock if the requisite documentary stamps have not been affixed thereto and cancelled.

Curiously, the petitioners never raised this issue before the SEC Hearing Officer, the SEC En Banc or the Court of Appeals. Thus, we are precluded from passing upon the same for, as a rule, no question will be entertained on appeal unless it has been raised in the court below, for points of law, theories, issues and arguments not brought to the attention of the lower court need not be, and ordinarily will not be, considered by a reviewing court, as they cannot be raised for the first time at that late stage. Basic considerations of due process impel this rule.[48] Furthermore, even if these allegations were proven to be true, such facts would not render the underlying transactions void, for these instruments would not be the sole means, much less the best means, by which the existence of these transactions could be proved. For this purpose, the books and records of a corporation, which include the stock and transfer book, are generally admissible in evidence in favor of or against the corporation and its members.They can be used to prove corporate acts, a corporations financial status and other matters, including ones status as a stockholder. Most importantly, these books and records are, ordinarily, the best evidence of corporate acts and proceedings.[49] Thus, reference to these should have been made before the SEC Hearing Officer, for this Court will not entertain this belated questioning of the evidence now.

It is always sad to see families torn apart by money matters and property disputes. The concept of a close corporation organized for the purpose of running a family business or managing family property has formed the backbone of Philippine commerce and industry. Through this

13device, Filipino families have been able to turn their humble, hard-earned life savings into going concerns capable of providing them and their families with a modicum of material comfort and financial security as a reward for years of hard work. A family corporation should serve as a rallying point for family unity and prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of mutual aid and security that are the original driving forces behind the formation of family corporations and use these tenets in order to facilitate more civil, if not more amicable, settlements of family corporate disputes.

WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated November 8, 2002 and the Resolution dated December 27, 2002, both of the Court of Appeals, are AFFIRMED. Costs against petitioners.

SO ORDERED.

Principal Place of Business

THIRD DIVISION G.R. No. 161026

HYATT ELEVATORS AND ESCALATORS CORPORATION, Petitioner, versus GOLDSTAR ELEVATORS,

PHILS., INC., Respondent.

Promulgated: October 24, 2005

DECISION

 Well established in our jurisprudence is the rule that the residence of a corporation is the place where its principal office is located, as stated in its Articles of Incorporation.

The Case 

Before us is a Petition for Review[1] on Certiorari, under Rule 45 of the Rules of Court, assailing the June 26, 2003 Decision[2] and the November 27, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 74319. The decretal portion of the Decision reads as follows:

 WHEREFORE, in view of the

foregoing, the assailed Orders dated May 27, 2002 and October 1, 2002 of the RTC, Branch 213, Mandaluyong City in Civil Case No. 99-600, are hereby SET ASIDE. The said case is hereby ordered DISMISSED on the ground of improper venue.[4]

  The assailed Resolution denied petitioners Motion for Reconsideration. 

The Facts 

The relevant facts of the case are summarized by the CA in this wise:

 Petitioner [herein Respondent]

Goldstar Elevator Philippines, Inc. (GOLDSTAR for brevity) is a domestic corporation primarily engaged in the business of marketing, distributing, selling, importing, installing, and maintaining elevators and escalators, with address at 6th Floor, Jacinta II Building, 64 EDSA, Guadalupe, Makati City.

 On the other hand, private

respondent [herein petitioner] Hyatt Elevators and Escalators Company (HYATT for brevity) is a domestic corporation similarly engaged in the business of selling, installing and maintaining/servicing elevators, escalators and parking equipment, with address at the 6th Floor, Dao I Condominium, Salcedo St., Legaspi Village, Makati, as stated in its Articles of Incorporation.

 On February 23, 1999, HYATT filed

a Complaint for unfair trade practices and damages under Articles 19, 20 and 21 of the Civil Code of the Philippines against LG Industrial Systems Co. Ltd. (LGISC) and LG

International Corporation (LGIC), alleging among others, that: in 1988, it was appointed by LGIC and LGISC as the exclusive distributor of LG elevators and escalators in the Philippines under a Distributorship Agreement; x x x LGISC, in the latter part of 1996, made a proposal to change the exclusive distributorship agency to that of a joint venture partnership; while it looked forward to a healthy and fruitful negotiation for a joint venture, however, the various meetings it had with LGISC and LGIC, through the latters representatives, were conducted in utmost bad faith and with malevolent intentions; in the middle of the negotiations, in order to put pressures upon it, LGISC and LGIC terminated the Exclusive Distributorship Agreement; x x x [A]s a consequence, [HYATT] sufferedP120,000,000.00 as actual damages, representing loss of earnings and business opportunities, P20,000,000.00 as damages for its reputation and goodwill, P1,000,000.00 as and by way of exemplary damages, and P500,000.00 as and by way of attorneys fees.

 On March 17, 1999, LGISC and

LGIC filed a Motion to Dismiss raising the following grounds: (1) lack of jurisdiction over the persons of defendants, summons not having been served on its resident agent; (2) improper venue; and (3) failure to state a cause of action. The [trial] court denied the said motion in an Order dated January 7, 2000.

 On March 6, 2000, LGISC and LGIC

filed an Answer with Compulsory Counterclaim ex abundante cautela. Thereafter, they filed a Motion for Reconsideration and to Expunge Complaint which was denied.

 On December 4, 2000, HYATT filed

a motion for leave of court to amend the complaint, alleging that subsequent to the filing of the complaint, it learned that LGISC transferred all its organization, assets and goodwill, as a consequence of a joint venture agreement with Otis Elevator Company of the USA, to LG Otis Elevator Company (LG OTIS, for brevity). Thus, LGISC was to be substituted or changed to LG OTIS, its successor-in-interest. Likewise, the motion averred that x x x GOLDSTAR was being utilized by LG OTIS and LGIC in perpetrating their unlawful and unjustified acts against HYATT. Consequently, in order to afford complete relief, GOLDSTAR was to be additionally impleaded as a party-defendant. Hence, in the Amended Complaint, HYATT impleaded x x x GOLDSTAR as a party-defendant, and all references to LGISC were correspondingly replaced with LG OTIS.

 On December 18, 2000, LG OTIS

(LGISC) and LGIC filed their opposition to HYATTs motion to amend the complaint. It argued that: (1) the inclusion of GOLDSTAR as party-defendant would lead to a change in the theory of the case since the latter took no part in the negotiations which led to the alleged unfair trade practices subject of the case; and (b) HYATTs move to amend the complaint at that time was dilatory, considering that HYATT was aware of the existence of GOLDSTAR for almost two years before it sought its inclusion as party-defendant.

 On January 8, 2001, the [trial] court

admitted the Amended Complaint. LG OTIS (LGISC) and LGIC filed a motion for reconsideration thereto but was similarly rebuffed on October 4, 2001.

 On April 12, 2002, x x x GOLDSTAR

filed a Motion to Dismiss the amended complaint, raising the following grounds: (1)

14the venue was improperly laid, as neither HYATT nor defendants reside in Mandaluyong City, where the original case was filed; and (2) failure to state a cause of action against [respondent], since the amended complaint fails to allege with certainty what specific ultimate acts x x x Goldstar performed in violation of x x x Hyatts rights. In the Order dated May 27, 2002, which is the main subject of the present petition, the [trial] court denied the motion to dismiss, ratiocinating as follows:

 Upon perusal of the factual and legal arguments raised by the movants-defendants, the court finds that these are substantially the same issues posed by the then defendant LG Industrial System Co. particularly the matter dealing [with] the issues of improper venue, failure to state cause of action as well as this courts lack of jurisdiction. Under the circumstances obtaining, the court resolves to rule that the complaint sufficiently states a cause of action and that the venue is properly laid. It is significant to note that in the amended complaint, the same allegations are adopted as in the original complaint with respect to the Goldstar Philippines to enable this court to adjudicate a complete determination or settlement of the claim subject of the action it appearing preliminarily as sufficiently alleged in the plaintiffs pleading that said Goldstar Elevator Philippines Inc., is being managed and operated by the same Korean officers of defendants LG-OTIS Elevator Company and LG International Corporation. On June 11, 2002, [Respondent]

GOLDSTAR filed a motion for reconsideration thereto. On June 18, 2002, without waiving the grounds it raised in its motion to dismiss, [it] also filed an Answer Ad Cautelam. On October 1, 2002, [its] motion for reconsideration was denied.

 From the aforesaid Order denying x

x x Goldstars motion for reconsideration, it filed the x x x petition for certiorari [before the CA] alleging grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the [trial] court in issuing the assailed Orders dated May 27, 2002 and October 1, 2002.[5]

 Ruling of the Court of Appeals

 The CA ruled that the trial court had committed

palpable error amounting to grave abuse of discretion when the latter denied respondents Motion to Dismiss. The appellate court held that the venue was clearly improper, because none of the litigants resided in Mandaluyong City, where the case was filed.

 According to the appellate court, since Makati was

the principal place of business of both respondent and petitioner, as stated in the latters Articles of Incorporation, that place was controlling for purposes of determining the proper venue. The fact that petitioner had abandoned its principal office in Makati years prior to the filing of the original case did not affect the venue where personal actions could be commenced and tried.

 

Hence, this Petition.[6]

  The Issue  In its Memorandum, petitioner submits this sole issue for our consideration:

 Whether or not the Court of

Appeals, in reversing the ruling of the Regional Trial Court, erred as a matter of law and jurisprudence, as well as committed grave abuse of discretion, in holding that in the light of the peculiar facts of this case, venue was improper[.][7]

  This Courts Ruling

 The Petition has no merit.  Sole Issue: Venue

 The resolution of this case rests upon a proper

understanding of Section 2 of Rule 4 of the 1997 Revised Rules of Court:

 Sec. 2. Venue of personal

actions. All other actions may be commenced and tried where the plaintiff or any of the principal plaintiff resides, or where the defendant or any of the principal defendant resides, or in the case of a non-resident defendant where he may be found, at the election of the plaintiff.

  Since both parties to this case are corporations,

there is a need to clarify the meaning of residence. The law recognizes two types of persons: (1) natural and (2) juridical. Corporations come under the latter in accordance with Article 44(3) of the Civil Code.[8]

Residence is the permanent home -- the place to which, whenever absent for business or pleasure, one intends to return.[9] Residence is vital when dealing with venue.[10] A corporation, however, has no residence in the same sense in which this term is applied to a natural person. This is precisely the reason why the Court in Young Auto Supply Company v. Court of Appeals[11] ruled that for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation.[12] Even before this ruling, it has already been established that the residence of a corporation is the place where its principal office is established.[13]

 This Court has also definitively ruled that for

purposes of venue, the term residence is synonymous with domicile.[14] Correspondingly, the Civil Code provides:

 Art. 51. When the law creating or

recognizing them, or any other provision does not fix the domicile of juridical persons, the same shall be understood to be the place where their legal representation is established or where they exercise their principal functions.[15]

  It now becomes apparent that the residence or

domicile of a juridical person is fixed by the law creating or recognizing it. Under Section 14(3) of the Corporation Code, the place where the principal office of the corporation is to be located is one of the required contents of the articles of incorporation, which shall be filed with the Securities and Exchange Commission (SEC).

 In the present case, there is no question as to the

residence of respondent. What needs to be examined is that of petitioner. Admittedly,[16]the latters principal place of business is Makati, as indicated in its Articles of Incorporation. Since the principal place of business of a corporation determines its residence or domicile, then the place indicated in petitioners articles of incorporation becomes controlling in determining the venue for this case.

 Petitioner argues that the Rules of Court do not

provide that when the plaintiff is a corporation, the complaint should be filed in the location of its principal office as indicated in its articles of incorporation.[17] Jurisprudence has, however, settled that the place where the principal office of a corporation is located, as stated in the articles, indeed establishes its residence.[18] This ruling is important in

15determining the venue of an action by or against a corporation,[19] as in the present case.

 Without merit is the argument of petitioner that the

locality stated in its Articles of Incorporation does not conclusively indicate that its principal office is still in the same place. We agree with the appellate court in its observation that the requirement to state in the articles the place where the principal office of the corporation is to be located is not a meaningless requirement. That proviso would be rendered nugatory if corporations were to be allowed to simply disregard what is expressly stated in their Articles of Incorporation.[20]

 Inconclusive are the bare allegations of petitioner

that it had closed its Makati office and relocated to Mandaluyong City, and that respondent was well aware of those circumstances. Assuming arguendo that they transacted business with each other in the Mandaluyong office of petitioner, the fact remains that, in law, the latters residence was still the place indicated in its Articles of Incorporation. Further unacceptable is its faulty reasoning that the ground for the CAs dismissal of its Complaint was its failure to amend its Articles of Incorporation so as to reflect its actual and present principal office. The appellate court was clear enough in its ruling that the Complaint was dismissed because the venue had been improperly laid, not because of the failure of petitioner to amend the latters Articles of Incorporation.

 Indeed, it is a legal truism that the rules on the

venue of personal actions are fixed for the convenience of the plaintiffs and their witnesses. Equally settled, however, is the principle that choosing the venue of an action is not left to a plaintiffs caprice; the matter is regulated by the Rules of Court.[21] Allowing petitioners arguments may lead precisely to what this Court was trying to avoid in Young Auto Supply Company v. CA:[22] the creation of confusion and untold inconveniences to party litigants. Thus enunciated the CA:

 x x x. To insist that the proper

venue is the actual principal office and not that stated in its Articles of Incorporation would indeed create confusion and work untold inconvenience. Enterprising litigants may, out of some ulterior motives, easily circumvent the rules on venue by the simple expedient of closing old offices and opening new ones in another place that they may find well to suit their needs.[23]

  We find it necessary to remind party litigants,

especially corporations, as follows: The rules on venue, like the other

procedural rules, are designed to insure a just and orderly administration of justice or the impartial and evenhanded determination of every action and proceeding. Obviously, this objective will not be attained if the plaintiff is given unrestricted freedom to choose the court where he may file his complaint or petition.

 The choice of venue should not be

left to the plaintiffs whim or caprice. He may be impelled by some ulterior motivation in choosing to file a case in a particular court even if not allowed by the rules on venue.[24]

  WHEREFORE, the Petition is hereby DENIED, and the

assailed Decision and Resolution AFFIRMED. Costs against petitioner.

SO ORDERED.

SECOND DIVISION

G.R. No. L-56763 December 15, 1982

JOHN SY and UNIVERSAL PARTS SUPPLY CORPORATION, Petitioners, vs. TYSON ENTERPRISES,

INC., JUDGE GREGORIO G. PINEDA of the Court of First Instance of Rizal, Pasig Branch XXI and COURT OF

APPEALS, Respondents.

This is a case about the venue of a collection suit. On August 29, 1979, Tyson Enterprises, Inc. filed against John Sy and

Universal Parts Supply Corporation in the Court of First Instance of Rizal, Pasig Branch XXI, a complaint for the collection of P288,534.58 plus interest, attorney's fees and litigation expenses (Civil Case No. 34302).chanrobles virtual law library

It is alleged in the complaint that John Sy, doing business under the trade name, Universal Parts Supply, is a resident of Fuentebella Subdivision, Bacolod City and that his co-defendant, Universal Parts Supply Corporation, allegedly controlled by Sy, is doing business in Bacolod City.

Curiously enough, there is no allegation in the complaint as to the office or place of business of plaintiff Tyson Enterprises, Inc., a firm actually doing business at 1024 Magdalena, now G. Masangkay Street, Binondo, Manila (p. 59, Rollo).

What is alleged is the postal address or residence of Dominador Ti, the president and general manager of plaintiff firm, which is at 26 Xavier Street, Greenhills Subdivision, San Juan, Rizal. The evident purpose of alleging that address and not mentioning the place of business of plaintiff firm was to justify the filing of the suit in Pasig, Rizal instead of in Manila.

Defendant Sy and Universal Parts Supply Corporation first filed a motion for extension of time to file their answer and later a motion for a bill of particulars. The latter motion was denied. Then, they filed a motion to dismiss on the ground of improper venue.

They invoked the provision of section 2(b), Rule 4 of the Rules of Court that personal actions "may be commenced and tried where the defendant or any of the defendants resides or may be found, or where the plaintiffs or any of the plaintiffs resides, at the election of the plaintiff."

To strengthen that ground, they also cited the stipulation in the sales invoice that "the parties expressly submit to the jurisdiction of the Courts of the City of Manila for any legal action arising out of" the transaction which stipulation is quoted in paragraph 4 of plaintiff's complaint.

The plaintiff opposed the motion to dismiss on the ground that the defendants had waived the objection based on improper venue because they had previously filed a motion for a bill of particulars which was not granted. The trial court denied the motion to dismiss on the ground that by filing a motion for a bill of particulars the defendants waived their objection to the venue. That denial order was assailed in a petition for certiorari and prohibition in the Court of Appeals which issued on July 29, 1980 a restraining order, enjoining respondent judge from acting on the case. He disregarded the restraining order (p. 133, Rollo).

The Appellate Court in its decision of October 6, 1980 dismissed the petition. It ruled that the parties did not intend Manila as the exclusive venue of the actions arising under their transactions and that since the action was filed in Pasig, which is near Manila, no useful purpose would be served by dismissing the same and ordering that it be filed in Manila (Sy vs. Pineda, CA-G.R. No. SP-10775). That decision was appealed to this Court.

There is no question that the venue was improperly laid in this case. The place of business of plaintiff Tyson Enterprises, Inc., which for purposes of venue is considered as its residence (18 C.J.S 583; Clavecilla Radio system vs. Antillon, L-22238, February 18, 1967, 19 SCRA 379), because a corporation has a personality separate and distinct from that of its officers and stockholders.

Consequently, the collection suit should have been filed in Manila, the residence of plaintiff corporation and the place designated in its sales invoice, or it could have been filed also in Bacolod City, the residence of defendant Sy.

We hold that the trial court and the Court of Appeals erred in ruling that the defendants, now the petitioners, waived their objection to the improper venue. As the trial court proceeded in defiance of the Rules of Court in not dismissing the case, prohibition lies to restrain it from acting in the case (Enriquez vs. Macadaeg, 84 Phil. 674).

Section 4, Rule 4 of the Rules of Court provides that, "when improper venue is not objected to in a motion to dismiss it is

16deemed waived" and it can no longer be pleaded as an affirmative defense in the answer (Sec. 5, Rule 16).

In this case, the petitioners, before filing their answer, filed a motion to dismiss based on improper venue. That motion was seasonably filed (Republic vs. Court of First Instance of Manila, L-30839, November 28, 1975, 68 SCRA 231, 239). The fact that they filed a motion for a bill of particulars before they filed their motion to dismiss did not constitute a waiver of their objection to the venue.

It should be noted that the provision of Section 377 of the Code of Civil Procedure that "the failure of a defendant to object to the venue of the action at the time of entering his appearance in the action shall be deemed a waiver on his part of all objection to the place or tribunal in which the action is brought" is not found in the Rules of Court.

And the provision of section 4, Rule 5 of the 1940 Rules of Court that "when improper venue is not objected to prior to the trial, it is deemed waived" is not reproduced in the present Rules of Court.

To repeat, what section 4 of Rule 4 of the present Rules of court provides is that the objection to improper venue should be raised in a motion to dismiss seasonably filed and, if not so raised, then the said objection is waived. Section 4 does not provide that the objection based on improper venue should be interposed by means of a special appearance or before any pleading is filed.

The rules on venue, like the other procedural rules, are designed to insure a just and orderly administration of justice or the impartial and evenhanded determination of every action and proceeding. Obviously, this objective will not be attained if the plaintiff is given unrestricted freedom to choose the court where he may file his complaint or petition.

The choice of venue should not be left to the plaintiff's whim or caprice. He may be impelled by some ulterior motivation in choosing to file a case in a particular court even if not allowed by the rules on venue.

As perspicaciously observed by Justice Moreland, the purpose of procedure is not to restrict the court's jurisdiction over the subject matter but to give it effective facility "in righteous action", "to facilitate and promote the administration of justice" or to insure "just judgments" by means of a fair hearing. If that objective is not achieved, then "the administration of justice becomes incomplete and unsatisfactory and lays itself open to grave criticism." (Manila Railroad Co. vs. Attorney General, 20 Phil. 523, 530.)

The case of Marquez Lim Cay vs. Del Rosario, 55 Phil. 962, does not sustain the trial court's order of denial because in that case the defendants, before filing a motion to dismiss on the ground of improper venue, interposed a demurrer on the ground that the complaint does not state a cause of action. Then, they filed a motion for the dissolution of an attachment, posted a bond for its dissolution and later filed a motion for the assessment of the damages caused by the attachment. All those acts constituted a submission to the trial court's jurisdiction and a waiver of the objection based on improper venue under section 377 of the Code of Civil Procedure.

The instant case is similar to Evangelista vs. Santos, 86 Phil. 387, where the plaintiffs sued the defendant in the Court of First Instance of Rizal on the assumption that he was a resident of Pasay City because he had a house there. Upon receipt of the summons, the defendant filed a motion to dismiss based on improper venue. He alleged under oath that he was a resident of Iloilo City.

This Court sustained the dismissal of the complaint on the ground of improper venue, because the defendant was really a resident of Iloilo City. His Pasay City residence was used by his children who were studying in Manila. Same holding in Casilan vs. Tomassi,90 Phil. 765; Corre vs. Corre, 100 Phil. 321; Calo vs. Bislig Industries, Inc., L-19703, January 30, 1967, 19 SCRA 173; Adamos vs. J. M. Tuason, Co., Inc.,. L-21957, October 14, 1968, 25 SCRA 529.

Where one Cesar Ramirez, a resident of Quezon City, sued in the Court of First Instance of Manila Manuel F. Portillo, a resident of Caloocan City, for the recovery of a sum of money, the trial court erred in not granting Portillo's motion to dismiss

the complaint on the ground of improper venue This Court issued the writ of prohibition to restrain the trial court from proceeding in the case (Portillo vs. Judge Reyes and Ramirez, 113 Phil. 288).

WHEREFORE, the decision of the Court of Appeals and the order of respondent judge denying the motion to dismiss are reversed and set aside. The writ of prohibition is granted. Civil Case No. 34302 should be considered dismissed without prejudice to refiling - it in the Court of First Instance of Manila or Bacolod City at the election of plaintiff which should be allowed to withdraw the documentary evidence submitted in that case. All the proceedings in said case, including the decision, are also set aside. Costs against Tyson Enterprises, Inc.

SOORDERED.

Separate Opinions

ESCOLIN, J., dissenting:

It is my view that petitioners, by filing a motion for a bill of particulars, had submitted themselves to the jurisdiction of the respondent court, and has thus waived their objection to the venue of action.

DE CASTRO, J., concurring:

I concur, because as stated in the main opinion, the residence of the plaintiff is not alleged in the complaint. The fact of improper venue is, therefore, not manifest on the face of the complaint. Were it so manifest, I would say, along with Justice Escolin, that, in filing a motion for a bill of particulars, petitioners as defendants in Civil Case No. 34302 of the Court of First Instance of Rizal, waived objection to improper venue.

FIRST DIVISION

G.R. No. 104175 June 25, 1993

YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA, Petitioners, vs. THE HONORABLE COURT OF

APPEALS (THIRTEENTH DIVISION) AND GEORGE CHIONG ROXAS,Respondents.

Petitioners seek to set aside the decision of respondent Court of Appeals in CA-G.R. SP No. 25237, which reversed the Order dated February 8, 1991 issued by the Regional Trial Court, Branch 11, Cebu City in Civil Case No. CEB 6967. The order of the trial court denied the motion to dismiss filed by respondent George C. Roxas of the complaint for collection filed by petitioners.

It appears that sometime on October 28, 1987, Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia, its president, Nelson Garcia and Vicente Sy, sold all of their shares of stock in Consolidated Marketing & Development Corporation (CMDC) to Roxas. The purchase price was P8,000,000.00 payable as follows: a downpayment of P4,000,000.00 and the balance of P4,000,000.00 in four post dated checks of P1,000,000.00 each.

Immediately after the execution of the agreement, Roxas took full control of the four markets of CMDC. However, the vendors held on to the stock certificates of CMDC as security pending full payment of the balance of the purchase price.

The first check of P4,000,000.00, representing the down-payment, was honored by the drawee bank but the four other checks representing the balance of P4,000,000.00 were dishonored. In the meantime, Roxas sold one of the markets to a third party. Out of the proceeds of the sale, YASCO received P600,000.00, leaving a balance of P3,400,000.00 (Rollo, p. 176).

Subsequently, Nelson Garcia and Vicente Sy assigned all their rights and title to the proceeds of the sale of the CMDC shares to Nemesio Garcia.

17On June 10, 1988, petitioners filed a complaint against Roxas in the Regional Trial Court, Branch 11, Cebu City, praying that Roxas be ordered to pay petitioners the sum of P3,400,00.00 or that full control of the three markets be turned over to YASCO and Garcia. The complaint also prayed for the forfeiture of the partial payment of P4,600,000.00 and the payment of attorney's fees and costs (Rollo, p. 290).

Roxas filed two motions for extension of time to submit his answer. But despite said motion, he failed to do so causing petitioners to file a motion to have him declared in default. Roxas then filed, through a new counsel, a third motion for extension of time to submit a responsive pleading.

On August 19, 1988, the trial court declared Roxas in default. The order of default was, however, lifted upon motion of Roxas.

On August 22, 1988, Roxas filed a motion to dismiss on the grounds that:

1. The complaint did not state a cause of action due to non-joinder of indispensable parties;

2. The claim or demand set forth in the complaint had been waived, abandoned or otherwise extinguished; and

3. The venue was improperly laid (Rollo, p. 299).

After a hearing, wherein testimonial and documentary evidence were presented by both parties, the trial court in an Order dated February 8, 1991 denied Roxas' motion to dismiss. After receiving said order, Roxas filed another motion for extension of time to submit his answer. He also filed a motion for reconsideration, which the trial court denied in its Order dated April 10, 1991 for being pro-forma (Rollo, p. 17). Roxas was again declared in default, on the ground that his motion for reconsideration did not toll the running of the period to file his answer.

On May 3, 1991, Roxas filed an unverified Motion to Lift the Order of Default which was not accompanied with the required affidavit or merit. But without waiting for the resolution of the motion, he filed a petition for certiorari with the Court of Appeals.

The Court of Appeals sustained the findings of the trial court with regard to the first two grounds raised in the motion to dismiss but ordered the dismissal of the complaint on the ground of improper venue (Rollo, p. 49).

A subsequent motion for reconsideration by petitioner was to no avail.

Petitioners now come before us, alleging that the Court of Appeals erred in:

1. holding the venue should be in Pasay City, and not in Cebu City (where both petitioners/plaintiffs are residents;

2. not finding that Roxas is estopped from questioning the choice of venue (Rollo, p. 19).

The petition is meritorious.

In holding that the venue was improperly laid in Cebu City, the Court of Appeals relied on the address of YASCO, as appearing in the Deed of Sale dated October 28, 1987, which is "No. 1708 Dominga Street, Pasay City." This was the same address written in YASCO's letters and several commercial documents in the possession of Roxas (Decision, p. 12;Rollo, p. 48).

In the case of Garcia, the Court of Appeals said that he gave Pasay City as his address in three letters which he sent to Roxas' brothers and sisters (Decision, p. 12; Rollo, p. 47). The appellate court held that Roxas was led by petitioners to believe that their residence is in Pasay City and that he had relied upon those representations (Decision, p. 12, Rollo, p. 47).

The Court of Appeals erred in holding that the venue was improperly laid in Cebu City.

In the Regional Trial Courts, all personal actions are commenced and tried in the province or city where the defendant or any of the defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff [Sec. 2(b) Rule 4, Revised Rules of Court].

There are two plaintiffs in the case at bench: a natural person and a domestic corporation. Both plaintiffs aver in their complaint that they are residents of Cebu City, thus:

1.1. Plaintiff Young Auto Supply Co., Inc., ("YASCO") is a domestic corporation duly organized and existing under Philippine laws with principal place of business at M. J. Cuenco Avenue, Cebu City. It also has a branch office at 1708 Dominga Street, Pasay City, Metro Manila.

Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and with business address at Young Auto Supply Co., Inc., M. J. Cuenco Avenue, Cebu City. . . . (Complaint, p. 1; Rollo, p. 81).

The Article of Incorporation of YASCO (SEC Reg. No. 22083) states:

THIRD That the place where the principal office of the corporation is to be established or located is at Cebu City, Philippines (as amended on December 20, 1980 and further amended on December 20, 1984) (Rollo, p. 273).

A corporation has no residence in the same sense in which this term is applied to a natural person. But for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation (Cohen v. Benguet Commercial Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio System v. Antillon, 19 SCRA 379 [1967]). The Corporation Code precisely requires each corporation to specify in its articles of incorporation the "place where the principal office of the corporation is to be located which must be within the Philippines" (Sec. 14 [3]). The purpose of this requirement is to fix the residence of a corporation in a definite place, instead of allowing it to be ambulatory.

In Clavencilla Radio System v. Antillon, 19 SCRA 379 ([1967]), this Court explained why actions cannot be filed against a corporation in any place where the corporation maintains its branch offices. The Court ruled that to allow an action to be instituted in any place where the corporation has branch offices, would create confusion and work untold inconvenience to said entity. By the same token, a corporation cannot be allowed to file personal actions in a place other than its principal place of business unless such a place is also the residence of a co-plaintiff or a defendant.

If it was Roxas who sued YASCO in Pasay City and the latter questioned the venue on the ground that its principal place of business was in Cebu City, Roxas could argue that YASCO was in estoppel because it misled Roxas to believe that Pasay City was its principal place of business. But this is not the case before us.

With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its principal place of business is located, it becomes unnecessary to decide whether Garcia is also a resident of Cebu City and whether Roxas was in estoppel from questioning the choice of Cebu City as the venue.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals appealed from is SET ASIDE and the Order dated February 8, 1991 of the Regional Trial Court is REINSTATED.

SO ORDERED.

Corporate Term

SECOND DIVISION[G.R. No. L-7231.  March 28, 1956.]

18BENGUET CONSOLIDATED MINING CO., Petitioner, vs. MARIANO PINEDA, in his capacity as Securities and

Exchange Commissioner, Respondent. CONSOLIDATED MINES, INC., Intervenor.

 D E C I S I O N

Appeal under Rule 43 from a decision of the Securities and Exchange Commissioner, denying the right of a sociedad anonima to extend its corporate existence by amendment of its original articles of association, or alternatively, to reform and continue existing under the Corporation Law (Act 1459) beyond the original period.The Petitioner, the Benguet Consolidated Mining Co. (hereafter termed “Benguet” for short), was organized on June 24,1903, as a sociedad anonima regulated by Articles 151 et seq., of the Spanish Code of Commerce of 1886, then in force in the Philippines. The articles of association expressly provided that it was organized for a term of fifty (50) years. In 1906, the governing Philippine Commission enacted Act 1459, commonly known as the Corporation Law, establishing in the islands the American type of juridical entities known as corporation, to take effect on April 1, 1906. Of its enactment, this Court said in its decision in Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141, at pp. 145-146, and 147:“When the Philippine Islands passed to the sovereignty of the United States, the attention of the Philippine Commission was early drawn to the fact there is no entity in Spanish law exactly corresponding to the motion of the corporation in English and American law; And in the Philippine Bill, approved July 1, 1906, the Congress of the United States inserted certain provisions, under the head of Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. These provisions are found in sections 74 and 75 of the Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of August 29, 1916, but in section 75 there is a provision referring to mining corporations, which still remains the law, as amended. This provision, in its original form, reads as follows:It shall be unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining.Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commission entered upon the enactment of a general law authorizing the creation of corporations in the Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our Corporation Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission was to introduce the American corporation into the Philippine Islands as the standard commercial entity and to hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of codification of American corporate law.”“As it was the intention of our lawmakers to stimulate the introduction of the American corporation into the Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustment resulting from the continued co-existence, for a time, of the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad anonima subject to the provisions of the Corporation Law ‘so far as such provisions may be applicable’ and giving to the sociedades anonimas previously created in the Islands the option to continue business as such or to reform and organize under the provisions of the Corporation Law. Again, in section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The purpose of the commission in repealing this part of the Code of Commerce was to compel commercial entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other of the partnership. To this provision was added another to the effect that existing sociedades anonimas, which elected to continue their business as such, instead of reforming and reorganizing under the Corporation Law, should continue to be governed by the laws that were in force prior to the passage of this Act ‘in relation to their organization and method of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.’“

Specifically, the two sections of Act No. 1459 referring to sociedades anonimas then already existing, provide as follows:“SEC. 75.  Any corporation or a sociedad anonima formed, organized, and existing under the laws of the Philippines on the date of the passage of this Act, shall be subject to the provisions hereof so far as such provisions may be applicable and shall be entitled at its option either to continue business as such corporation or to reform and organize under and by virtue of the provisions of this Act, transferring all corporate interests to the new corporation which, if a stock corporation, is authorized to issue its shares of stock at par to the stockholders or members of the old corporation according to their interests.”“SEC. 191.  The Code of Commerce, in so far as it relates to corporation or sociedades anonimas, and all other Acts or parts of Acts in conflict or inconsistent with this Act, are hereby repealed with the exception of Act Numbered fifty-two, entitled ‘An Act providing for examinations of banking institutions in the Philippines, and for reports by their officers,’ as amended, and Act Numbered Six hundred sixty-seven, entitled ‘An Act prescribing the method of applying to governments of municipalities, except the city of Manila and of provinces for franchises to contract and operate street railway, electric light and power and telephone lines, the conditions upon which the same may be granted, certain powers of the grantee of said franchises, and of grantees of similar franchises under special Act of the Commission, and for other purposes.’ Provided, however, That nothing in this Act contained shall be deemed to repeal the existing law relating to those classes of associations which are termed sociedades colectivas, and sociedades de cuentas en participacion, as to which association the existing law shall be deemed to be still in force;And provided, further, That existing corporations or sociedades anonimas, lawfully organized as such, which elect to continue their business as such sociedades anonimas instead of reforming and reorganizing under and by virtue of the provisions of this Act, shall continue to be governed by the laws that were in force prior to the passage of this Act in relation to their organization and method of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.”As the expiration of its original 50 year term of existence approached, the Board of Directors of Benguet adopted in 1946 a resolution to extend its life for another 50 years from July 3, 1946 and submitted it for registration to the Respondent Securities and Exchange Commissioner. Upon advice of the Secretary of Justice (Op. No. 45, Ser. 1917) that such extension was contrary to law, the registration was denied. The matter was dropped, allegedly because the stockholders of Benguet did not approve of the Directors’ action.Some six years later in 1953, the shareholders of Benguet adopted a resolution empowering the Director to “effectuate the extension of the Company’s business life for not less than 20 and not more than 50 years, and this by either (1) an amendment to the Articles of Association or Charter of this Company or (2) by reforming and reorganizing the Company as a Philippine Corporation, or (3) by both or (4) by any other means.” Accordingly, the Board of Directors on May 27, 1953, adopted a resolution to the following effect —“Be ItResolved, that the Company be reformed, reorganized and organized under the provisions of section 75 and other provisions of the Philippine Corporation Law as a Philippine corporation with a corporate life and corporate powers as set forth in the Articles of Incorporation attached hereto as Schedule ‘I’ and made a part hereof by this reference; Be It‘FURTHER RESOLVED, that any five or more of the following shareholders of the Company be and they hereby are authorized as instructed to act for and in behalf of the share holders of the Company and of the Company as Incorporators in the reformation, reorganization and organization of the Company under and in accordance with the provisions aforesaid of said Philippine Corporation Law, and in such capacity, they are hereby authorized and instructed to execute the aforesaid Articles of Incorporation attached to these Minutes as Schedule ‘I’ hereof, with such amendments, deletion and additions thereto as any five or more of those so acting shall deem necessary, proper, advisable or convenient to effect prompt registration of said Articles under Philippine Law; 

19And five or more of said Incorporators are hereby further authorized and directed to do all things necessary, proper, advisable or convenient to effect such registration.”In pursuance of such resolution, Benguet submitted in June, 1953, to the Securities and Exchange Commissioner, for alternative registration, two documents:(1) Certification as to the Modification of (the articles of association of) the Benguet Consolidated Mining Company, extending the term of its existence to another fifty years from June 15, 1953; and,(2) articles of incorporation, covering its reformation or reorganization as a corporation in accordance with section 75 of the Philippine Corporation Law.Relying mainly upon the adverse opinion of the Secretary of Justice (Op. No. 180, s. 1953), the Securities and Exchange Commissioner denied the registration and ruled:(1)  That the Benguet, as sociedad anonima, had no right to extend the original term of corporate existence stated in its Articles of Association, by subsequent amendment thereof adopted after enactment of the Corporation Law (Act No. 1459); and,(2)  That Benguet, by its conduct, had chosen to continue as sociedad anonima, under section 75 of Act No. 1459, and could no longer exercise the option to reform into a corporation, specially since it would indirectly produce the effect of extending its life.This ruling is the subject of the present appeal.Petitioner Benguet contends:(1)  That the proviso of section 18 of the Corporation Law to the effect —“that the life of said corporation shall not be extended by amendment beyond the time fixed in the original articles.”does not apply to sociedades anonimas already in existence at the passage of the law, like Petitioner herein;(2)  That to apply the said restriction imposed by section 18 of the Corporation Law to sociedades anonimas already functioning when the said law was enacted would be in violation of constitutional inhibitions;(3)  That even assuming that said restriction was applicable to it, Benguet could still exercise the option of reforming and reorganizing under section 75 of the Corporation Law, thereby prolonging its corporate existence, since the law is silent as to the time when such option may be exercised or availed of.The first issue arises because the Code of Commerce of 1886 under which Benguet was organized, contains no prohibition (to extend the period of corporate existence), equivalent to that set forth in section 18 of the Corporation Law. Neither does it expressly authorize the extension. But the text of Article 223, reading:“ART. 223.  After the termination of the period for which commercial associations are constituted, it shall not be understood as extended by the implied or presumed will of the members; and if the members desire to continue in association, they shall draw up new articles, subject to all the formalities prescribed for their creation as provided in Article 119.” (Code of Commerce.)would seem to imply that the period of existence of the sociedad anonimas (or of any other commercial association for that matter) may be extended if the partners or members so agree before the expiration of the original period.While the Code of Commerce, in so far as sociedades anonimas are concerned, was repealed by Act No 1459, Benguet claims that article 223 is still operative in its favor under the last proviso of section 191 of the Corporation law (ante, p. 4 to the effect that existing sociedades anonimas would continue to be governed by the law in force before Act 1459,“in relation to their organization and method of transacting business and to the rights of members among themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.”Benguet contends that the period of corporate life relates to its organization and the rights of its members inter se, and not to its relations to the public or public officials.We find this contention untenable.

The term of existence of association (partnership or sociedad anonima) is coterminous with their possession of an independent legal personality, distinct from that of their component members. When the period expires, the sociedad anonima loses the power to deal and enter into further legal relations with other persons; It is no longer possible for it to acquire new rights or incur new obligations, have only as may be required by the process of liquidating and winding up its affairs. By the same token, its officers and agents can no longer represent it after the expiration of the life term prescribed, save for settling its business. Necessarily, therefore, third persons or strangers have an interest in knowing the duration of the juridical personality of the sociedad anonima, since the latter cannot be dealt with after that period; Wherefore its prolongation or cessation is a matter directly involving the company’s relations to the public at large.On the importance of the term of existence set in the articles of association of commercial companies under the Spanish Code of Commerce, D. Lorenzo Benito y Endar, professor of mercantile law in the Universidad Central de Madrid, has this to say:“La duracion de la Sociedad. — La necesidad de consignar este requisito en el contrato social tiene un valor analogo al que dijimos tenia el mismo al tratar de las compañias colectivas, aun cuando respecto de las anonimas no haya de tenerse en cuenta para nada lo que dijimos entonces acerca de la trascendencia que ello tiene para los socios; Porque no existiendo en las anonimas la serie de responsibilidades de caracter personal que afectan a los socios colectivos, es claro que la duracion de la sociedad importa conocerla a los socios y los terceros, porque ella marca al limite natural del desenvolvimiento de la empresa constituida y el comienzo de la liquidacion de la sociedad.” (3 Benito, Derecho Mercantil, 292-293.)“Interesa, pues, la fijacion de la vida de la compañia, desenvolviendose con normalidad y regularidad, tanto a los asociados como a los terceros. A aquellos, porque su libertad economica, en cierto modo limitada por la existencia del contrato de compañia, se recobra despues de realizada, mas o menos cumplidamente, la finalidad comun perseguida; y a los terceros, porque les advierte el momento en que, extinguida la compañia, no cabe y a la creacion con ella de nuevas relaciones juridicas, de que nazcan reciprocamente derechos y obligaciones, sino solo la liquidacion de los negocios hasta entonces convenidos, sin otra excepcion que la que luego mas adelante habremos de señalar”. (3 Benito, Derecho Mercantil, p. 245.)The State and its officers also have an obvious interest in the term of life of associations, since the conferment of juridical capacity upon them during such period is a privilege that is derived from statute. It is obvious that no agreement between associates can result in giving rise to a new and distinct personality, possessing independent rights and obligations, unless the law itself shall decree such result. And the State is naturally interested that this privilege be enjoyed only under the conditions and not beyond the period that it sees fit to grant; And, particularly, that it be not abused in fraud and to the detriment of other parties;And for this reason it has been ruled that “the limitation (of corporate existence) to a definite period is an exercise of control in the interest of the public” (Smith vs. Eastwood Wire Manufacturing Co., 43 Atl. 568).We cannot assent to the thesis of Benguet that its period of corporate existence has relation to its “organization”. The latter term is defined in Webster’s International Dictionary as:“The executive structure of a business; The personnel of management, with its several duties and places in administration; The various persons who conduct a business, considered as a unit.”The legal definitions of the term “organization” are concordant with that given above:“Organize or ‘organization,’ as used in reference to corporations, has a well-understood meaning, which is the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created. Waltson vs. Oliver, 30 P. 172, 173, 49 Kan.

20107, 33 Am. St. Rep. 355;  Topeka Bridge Co. vs. Cummings, 3 Kan. 55, 77;  Hunt vs. Kansas & M. Bridge Co., 11 Kan. 412, 439;  Aspen Water & Light Co., vs. City of Aspen, 37 P. 728, 730, 6 Colo. App. 12;  Nemaha Coal & Mining Co., vs. Settle 38 P. 483, 484, 54 Kan. 424.Under a statute providing that, until articles of incorporation should be recorded, the corporation should transact no business except its own organization, it is held that the term “organization” means simply the process of forming and arranging into suitable disposition the parties who are to act together in, and defining the objects of, the compound body, and that this process, even when complete in all its parts, does not confer a franchise either valid or defective, but, on the contrary, it is only the act of the individuals, and something else must be done to secure the corporate franchise. Abbott vs. Omaha Smelting & Refining Co. 4 Neb. 416, 421.” (30 Words and Phrases, p. 282.)It is apparent from the foregoing definitions that the term “organization” relates merely to the systematization and orderly arrangement of the internal and managerial affairs and organs of the Petitioner Benguet, and has nothing to do with the prorogation of its corporate life.From the double fact that the duration of its corporate life (and juridical personality) has evident connection with the Petitioner’s relations to the public, and that it bears none to the Petitioner’s organization and method of transacting business, we derive the conclusion that the prohibition contained in section 18 of the Corporation Law (Act No. 1459) against extension of corporate life by amendment of the original articles was designed and intended to apply to “compañias anonimas” that, like Petitioner Benguet, were already existing at the passage of said law. This conclusion is reinforced by the avowed policy of the law to hasten the day when compañias anonimas would be extinct, and replace them with the American type of corporation (Harden vs. Benguet Consolidated Mining Co., supra), for the indefinite prorogation of the corporation life of sociedades anonimas would maintain the unnecessary duality of organizational types instead of reducing them to a single one; And what is more, it would confer upon these sociedades anonimas, whose obsolescence was sought, the advantageous privilege of perpetual existence that the new corporation could not possess.Of course, the retroactive application of the limitations on the terms of corporate existence could not be made in violation of constitutional inhibitions specially those securing equal protection of the laws and prohibiting impairment of the obligation of contracts. It needs no argument to show that if Act No. 1459 allowed existing compañias anonimas to be governed by the old law in respect to their organization, methods of transacting business and the rights of the members among themselves, it was precisely in deference to the vested rights already acquired by the entity and its members at the time the Corporation Law was enacted. But we do not agree with Petitioner Benguet (and here lies the second issue in this appeal) that the possibility to extend its corporate life under the Code of Commerce constituted a right already vested when Act No. 1459 was adopted. At that time, Benguet’s existence was well within the 50 years period set in its articles of association;  and its members had not entered into any agreement that such period should be extended. It is safe to say that none of the members of Benguet anticipated in 1906 any need to reach an agreement to increase the term of its corporate life, barely three years after it had started. The prorogation was purely speculative;  a mere possibility that could not be taken for granted. It was as yet conditional, depending upon the ultimate decision of the members and directors. They might agree to extend Benguet’s existence beyond the original 50 years;  or again they might not. It must be remembered that in 1906, the success of Benguet in its mining ventures was by no means so certain as to warrant continuation of its operations beyond the 50 years set in its articles. The records of this Court show that Benguet ran into financial difficulties in the early part of its existence, to the extent that, as late as 1913, ten years after it was found, 301,100 shares of its capital stock (with a par value of $1 per share) were being offered for sale at 25 centavos per share in order to raise the sum of P75,000 that was needed to rehabilitate the company (Hanlon vs. Hausermann and Beam, 40 Phil., 796). Certainly the prolongation of the corporate existence of Benguet in 1906 was merely a possibility in futuro, a contingency that did not fulfill the requirements of a vested right entitled to constitutional protection, defined by this Court in Balboa vs. Farrales, 51 Phil., 498, 502, as follows:“Vested right is ‘some right or interest in the property which has become fixed and established, and is no longer open to doubt or controversy,”

“A ‘vested’ right is defined to be an immediate fixed right of present or future enjoyment, and rights are ‘vested’ in contradistinction to being expectant or contingent” (Pearsall vs. Great Northern R. Co., 161 U. S. 646, 40 L. Ed. 838).In Corpus Juris Secundum we find:“Rights are vested when the right to enjoyment, present or prospective, has become the property of some particular person or persons as a present interest. The right must be absolute, complete, and unconditional, independent of a contingency, and a mere expectancy of future benefit, or a contingent interest in property founded on anticipated continuance of existing laws, does not constitute a vested right. So, inchoate rights which have not been acted on are not vested.” (16C.J. S. 214-215.)Since there was no agreement as yet to extend the period of Benguet’s corporate existence (beyond the original 50 years) when the Corporation Law was adopted in 1906, neither Benguet nor its members had any actual or vested right to such extension at that time. Therefore, when the Corporation Law, by section 18, forbade extensions of corporate life, neither Benguet nor its members were deprived of any actual or fixed right constitutionally protected.To hold, as Petitioner Benguet asks, that the legislative power could not deprive Benguet or its members of the possibility to enter at some indefinite future time into an agreement to extend Benguet’s corporate life, solely because such agreements were authorized by the Code of Commerce, would be tantamount to saying that the said Code was irrepealable on that point. It is a well settled rule that no person has a vested interest in any rule of law entitling him to insist that it shall remain unchanged for his benefit. (New York C. R. Co. vs. White, 61 L. Ed (U.S.) 667;  Mondou vs. New York N. H. & H. R. Co., 56 L. Ed. 327;  Rainey vs. U. S., 58 L. Ed. 617;  Lilly Co. vs. Saunders, 125 ALR. 1308;  Shea vs. Olson, 111 ALR. 998).“There can be no vested right in the continued existence of a statute or rule of the common law which precludes its change or repeal, nor in any omission to legislate on a particular matter or subject. Any right conferred by statute may be taken away by statute before it has become vested, but after a right has vested, repeal of the statute or ordinance which created the right does not and cannot affect much right.” (16 C.J. S. 222-223.)It is a general rule of constitutional law that a person has no vested right in statutory privileges and exemptions” (Brearly School vs. Ward, 201 NY. 358, 40 LRA NS. 1215;  also, Cooley, Constitutional Limitations, 7th ed., p. 546).It is not amiss to recall here that after Act No. 1459 the Legislature found it advisable to impress further restrictions upon the power of corporations to deal in public lands, or to hold real estate beyond a maximum area;  and to prohibit any corporation from endeavouring to control or hold more than 15 per cent of the voting stock of an agricultural or mining corporation (Act No. 3518). These prohibitions are so closely integrated with our public policy that Commonwealth Act No. 219 sought to extend such restrictions to associations of all kinds. It would be subversive of that policy to enable Benguet to prolong its peculiar status of sociedad anonimas, and enable it to cast doubt and uncertainty on whether it is, or not, subject to those restrictions on corporate power, as it once endeavoured to do in the previous case of Harden vs. Benguet Mining Corp. 58 Phil., 149.Stress has been laid upon the fact that the Compañia Maritima (like Benguet, a sociedad anonima established before the enactment of the Corporation Law) has been twice permitted to extend its corporate existence by amendment of its articles of association, without objection from the officers of the defunct Bureau of Commerce and Industry, then in charge of the enforcement of the Corporation Laws, although the exact question was never raised then. Be that as it may, it is a well established rule in this jurisdiction that the government is never estopped by mistake or error on the part of its agents” (Pineda vs. Court of First Instance of Tayabas, 52 Phil., 803, 807), and that estopped cannot give validity to an act that is prohibited by law or is against public policy (Eugenio vs. Perdido, (97 Phil., 41, May 19, 1955;  19 Am. Jur. 802);  so that the Respondent, Securities and Exchange Commissioner, was not bound by the rulings of his predecessor if they be inconsistent with law. Much less could erroneous decisions of executive officers bind this Court and induce it to sanction an unwarranted interpretation or application of legal principles.We now turn to the third and last issue of this appeal, concerning the exercise of the option granted by section 75 of the Corporation Law to every sociedad anonima “formed, organized and existing under the laws of the Philippines on

21the date of the passage of this Act” to either continue business as such sociedad anonima or to reform and organize under the provisions of the Corporation Law. Petitioner-Appellant Benguet contends that as the law does not determine the period within which such option may be exercised, Benguet may exercise it at any time during its corporate existence;  and that in fact on June 22, 1953, it chose to reform itself into a corporation for a period of 50 years from that date, filing the corresponding papers and by-laws with the Respondent Commissioner of Securities and Exchange registration;  but the latter refused to accept them as belatedly made.The Petitioner’s argument proceeds from the unexpressed assumption that Benguet, as sociedad anonima, had not exercised the option given by section 75 of the Corporation Law until 1953. This we find to be incorrect. Under that section, by continuing to do business as sociedad anonima, Benguet in fact rejected the alternative to reform as a corporation under Act No. 1459. It will be noted from the text of section 75 (quoted earlier in this opinion) that no special act or manifestation is required by the law from the existing sociedades anonimas that prefer to remain and continue as such. It is when they choose to reform and organize under the Corporation Law that they must, in the words of the section, “transfer all corporate interests to the new corporation”. Hence if they do not so transfer, the sociedades anonimas affected are to be understood to have elected the alternative “to continue business as such corporation” (sociedad anonima) 2The election of Benguet to remain a sociedad anonima after the enactment of the Corporation Law is evidence, not only by its failure, from 1906 to 1953, to adopt the alternative to transfer its corporate interests to a new corporation, as required by section 75;  it also appears from positive acts. Thus around 1933, Benguet claimed and defended in court its acquisition of shares of the capital stock of the Balatoc Mining Company, on the ground that as a sociedad anonima it (Benguet) was not a corporation within the purview of the laws prohibiting a mining corporation from becoming interested in another mining corporation (Harden vs. Benguet Mining Corp., 58 Phil., p. 149). Even in the present proceedings, Benguet has urged its right to amend its original articles of association as “sociedad anonima” and extend its life as such under the provisions of the Spanish Code of Commerce. Such appeals to privileges as “sociedad anonima” under the Code of 1886 necessarily imply that Benguet has rejected the alternative of reforming under the Corporation Law. As Respondent Commissioner’s order, now under appeal, has stated —“A sociedad anonima could not claim the benefit of both, but must have to choose one and discard the other. If it elected to become a corporation it could not continue as a sociedad anonima;  and if it choose to remain as a sociedad anonima, it could not become a corporation.”Having thus made its choice, Benguet may not now go back and seek to change its position and adopt the reformation that it had formerly repudiated. The election of one of several alternatives is irrevocable once made (as now expressly recognized in article 940 of the new Civil Code of the Philippines):Such rule is inherent in the nature of the choice, its purpose being to clarify and render definite the rights of the one exercising the option, so that other persons may act in consequence. While successive choices may be provided there is nothing in section 75 of the Corporation Law to show or hint that a sociedad anonima may make more than one choice thereunder, since only one option is provided for.While no express period of time is fixed by the law within which sociedades anonimas may elect under section 75 of Act No. 1459 either to reform or to retain their status quo, there are powerful reasons to conclude that the legislature intended such choice to be made within a reasonable time from the effectivity of the Act. To enable a sociedad anonima to choose reformation when its stipulated period of existence is nearly ended, would be to allow it to enjoy a term of existence far longer than that granted to corporations organized under the Corporation Law;  in Benguet’s case, 50 years as sociedad anonima, and another 50 years as an American type of corporation under Act 1459;  a result incompatible with the avowed purpose of the Act to hasten the disappearance of the sociedades anonimas. Moreover, such belated election, if permitted, would enable sociedades anonimas to reap the full advantage of both types of organization. Finally, it would permit sociedades anonimas to prolong their corporate existence indirectly by belated reformation into corporations under Act No. 1459, when they could not do so directly by amending their articles of association.

Much stress is laid upon allegedly improper motives on the part of the intervenor, Consolidated Mines, Inc., in supporting the orders appealed from, on the ground that intervenor seeks to terminate Benguet’s operating contract and appropriate the profits that are the result of Benguet’s efforts in developing the mines of the intervenor. Suffice it to say that whatever such motives should be, they are wholly irrelevant to the issues in this appeal, that exclusively concern the legal soundness of the order of the Respondent Securities and Exchange Commissioner rejecting the claims of the Benguet Consolidated Mining Company to extend its corporate life.Neither are we impressed by the prophesies of economic chaos that would allegedly ensure with the cessation of Benguet’s activities. If its mining properties are really susceptible of profitable operation, inexorable economic laws will ensure their exploitation;  if, on the other hand, they can no longer be worked at a profit, then catastrophe becomes inevitable, whether or not Petitioner Benguet retains corporate existence.Sustaining the opinions of the Respondent Securities and Exchange Commissioner and of the Secretary of Justice, we rule that:(1)  The prohibition contained in section 18 of Act No. 1459, against extending the period of corporate existence by amendment of the original articles, was intended to apply, and does apply, to sociedades anonimas already formed, organized and existing at the time of the effectivity of the Corporation Law (Act No. 1459) in 1906;(2)  The statutory prohibition is valid and impairs no vested rights or constitutional inhibition where no agreement to extend the original period of corporate life was perfected before the enactment of the Corporation Law;(3)  A sociedad anonima, existing before the Corporation Law, that continues to do business as such for a reasonable time after its enactments, is deemed to have made its election and may not subsequently claim to reform into a corporation under section 75 of Act No. 1459.In view of the foregoing, the order appealed from is affirmed. Costs against Petitioner-Appellant Benguet Consolidated Mining Company.

Separate OpinionsPARAS, C.J., dissenting:

The Petitioner, Benguet Consolidated Mining Company, was organized as a sociedad anonima on June 24, 1903, under the provisions of the Code of Commerce, and its term as fixed in the articles of association was fifty years. It has been a leading enterprise, long and widely reputed to have pioneered in and boosted the mining industry, distributed profits among its shareholders, and given employment to thousands. To be more approximately exact, the Petitioner has kept on its payrolls over four thousand Filipino employees who have about twenty thousand dependents. The taxes and other dues paid by it to the Government have been in enormous amounts. It has always been subject to such supervision and control of Government officials as are prescribed by law.When, therefore, the Petitioner on June 3, 1953, presented all necessary documents to theRespondent, the Securities and Exchange Commissioner, with a view to the extension of its term as a sociedad anonima for a period of fifty years from June 15, 1953;  when on June 22, 1953, it filed with said Respondent the necessary articles of incorporation and other documents, with a view to reforming itself as a corporation under the Corporation Law for a period of fifty years from June 22, 1953, followed by the filing on July 22, 1953, of the corresponding by-laws;  and when on October 27, 1953, the Respondent issued an order denying the registration of the instruments as well for extension as for reformation, Petitioner’s corporate life was being snapped out with such lightning abruptness as undoubtedly to spell damage and prejudice not so much to its shareholders as to its beneficiaries — thousands of employees and their dependents — and even to the Government which stands to lose a good source of revenue.The Petitioner contends (1) that the Respondent had the ministerial duty of registering the documents presented either for extension of Petitioner’s term as a sociedad anonima or for its reformation under the Corporation Law, in the absence (as in this case) of any pretense that said documents are formally defective or that Petitioner’s purposes are unlawful;  and (2) that as thePetitioner had organized as a sociedad anonima under the Code of Commerce, it has acquired a vested right which cannot subsequently be affected or taken away by the

22Corporation Law enacted on April 1, 1906. I would not dwell upon these contentions, because I hold that, even under the provisions of the Corporation Law, the Petitioner may either extend its life as a sociedad anonima or reform as a corporation.Section 75 of the Corporation Law provides:“Any corporation or sociedad anonima formed, organized and existing under the laws of the Philippine Islands and lawfully transacting business in the Philippine Islands on the date of the passage of this Act, shall be subject to the provisions hereof so far as such provisions may be applicable and shall be entitled at its option either to continue business as such corporation or to reform and organize under, and by virtue of the provisions of this Act, transferring all corporate interests to the new corporation which, if a stock corporation, is authorized to issue its shares of stock at par to the stockholders or members of the old corporation according to their interests.”Upon the other hand, section 191 reads as follows:“The Code of Commerce, in so far as it relates to corporations or sociedades anonimas, and all other or parts of Acts in conflict or inconsistent with this Act, are hereby repealed  And provided, further, That existing corporations or sociedades anonimas lawfully organized as such, which elect to continue their business as such sociedades anonimas instead of reforming and reorganizing under and by virtue of the provisions of this Act, shall continue to be governed by the laws that were in force prior to the passage of this Act in relation to their organization and method of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.”It is noteworthy that section 75 has not limited the optional continuance of a sociedad anonima to its unexpired term, and section 191 expressly allows a sociedad anonima which has elected to continue its business as such to be governed by the laws in force prior to the enactment of the Corporation Law in relation to its organization and method of transacting business and to the rights of members as between themselves. It is admitted that the Code of Commerce, while containing no express provision allowing it, does not prohibit a sociedad anonima from extending its term; chan roblesvirtualawlibraryand commentators Gay de Montella (Tratado Practico de Sociedad Marcantiles — Compañias Anonimas, Tomo II, p. 285) and Cesar Vivante (Tratado de Derecho Mercantil, pp. 254, 258) have observed that a sociedad anonima may prolong its corporate duration by amendment of its articles of association before the expiration of the term.When a business or commercial association is organized, the members are naturally interested in knowing not only their rights and obligations but also the duration of their legal relations. While “organization” in a strict sense may refer to formalities like election of officers, adoption of by-laws, and subscription and payment of capital stock, it cannot be spoken of or conceived in a wider sense without necessarily involving the specification of the term of the entity formed. Extension of corporation life is thus essentially an incident of “organization” and, in any event, a matter directly affecting or in relation to the rights of the shareholders as between themselves, within the contemplation of section 191, and should accordingly be governed by the Code of Commerce. As pointed out by the Supreme Court of Wyoming in the case of Drew vs. Beckwith, (114 P. 2d. 98), extension “merely involves an additional privilege to carry out the business of enterprise undertaken by the corporation,” and is “but an enlargement of the enterprise undertaken by the corporation.” It is true that the duration of a sociedad anonima is of some concern to the public and public officials who ought to know the time when it will cease to exist and its business will be wound up. Notice to the world is however served by the registration of Petitioner’s articles of association as a sociedad anonima or articles of incorporation as a reformed corporation with the Securities and Exchange Commission.When section 191 mentions “relations to the public and public officials” as being governed by the provisions of the Corporation Law, the idea is obviously more to enable the Government to enforce its powers of supervision, inspection and investigation, than to restrict the freedom of the corporate entity as to organizational or substantive rights of members as between themselves. In one of the public hearings conducted by the Philippine Commission before the enactment of the Corporation Law, Commissioner Ide pertinently expressed, “Of course, whether they (sociedades) come under the new law or not they would be subject to

inspection, regulations, and examination for the purpose of protecting the community.” The Attorney General in turn held that sociedades anonimas, although governed by the Code of Commerce, are subject to the examination provided in section 54 of the Corporation Law (5 Op. Atty. Gen. 442). In this connection, the Petitioner has admittedly subjected itself to the provisions of the Corporation Law.In Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141, it was remarked: “The purpose of the commission in repealing this part of the Code of Commerce was to compel commercial entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other of the partnership.” This Court already indicated that the commercial entities compelled to incorporate under the Corporation Law were those organized after its enactment.Section 6, subsection 4, of the Corporation Law provides that the term for which corporations shall exist shall not exceed fifty years; Section 18 provides that the life of a corporation shall not be extended by amendment beyond the time fixed in the original articles;  and section 11 provides that upon the issuance by the Securities and Exchange Commissioner of the certificate of incorporation, the persons organizing the corporation shall constitute a body politic and corporate for the term specified in the articles of incorporation, not exceeding fifty years. The corporations contemplated are those defined in section 22 — corporations organized under the Corporation Law. They cannot be sociedades anonimas formed under the Code of Commerce and licensed to continue as such in virtue of sections 75 and 191. Otherwise the words “or sociedad anonima” would have been added to the term “corporation” in section 18, as was done in sections 75 and 191. A similar observation was made in Harden vs. Benguet Consolidated Mining Co., supra:“But when the word corporation is used in the sense of sociedad anonima and close discrimination is necessary, it should be associated with the Spanish expression sociedad anonima either in parenthesis or connected by the word ‘or’. This latter device was adopted in sections 75 and 191 of the Corporation Law.”The citation from 3 Benito, Derecho Mercantil, p. 245, invoked in the majority decision, to the effect that the duration of a sociedad anonima is of interest both to its members and to third persons, is clearly an authority for our conclusions that the extension of Petitioner’s term is in relation “to the rights of members thereof as between themselves.” Section 191 does not say that a sociedad anonima shall be governed by the provisions of the Corporation Law when the matter involved affects not only “the rights of members thereof as between themselves” but also “the public and public officials.”We are also of the opinion that alternatively, under section 75, the Petitioner may elect to reform and organize under the Corporation Law, transferring all its corporate interests to the new corporation. Contrary to the ruling of the Respondent, we are convinced that, as no period was fixed within which it should exercise the option either of continuing as a sociedad anonima or reforming and organizing under the Corporation Law, the Petitioner was entitled to have its articles of incorporation and by-laws presented respectively on June 22 and July 22, 1953, registered by the Respondent. Section 75 did not take away Petitioner’s right to exhaust its term as a sociedad anonima, already vested before the enactment of the Corporation Law, but merely granted it the choice to organize as a regular corporation, instead of extending its life as a sociedad anonima. The only limitation imposed is that prescribed in section 191, namely, that if a sociedad anonima elects to continue its business as such, it shall be governed by the prior law in relation to its organization and method of transacting business and to the rights of its members as between themselves, and by the provisions of the Corporation Law as to its relations to the public and public officials. If the intention were to fix a period for reformation, the law would have expressly so provided, in the same way that section 19 fixes two years during which a corporation should formally organize and commence the transaction of its business, otherwise its corporate powers would cease; Section 77 fixes three years from the dissolution of a corporation within which it may clear and settle its affairs;  And section 78 fixes the same period of three years within which a corporation may convey its properties to a trustee for the benefit of its stockholders and other interested persons.It is not correct to argue that the Petitioner is not entitled to elect to continue as a sociedad anonima and at the same time

23reform and organize as a regular corporation, because when it continued as a sociedad anonima after the passage of the Corporation Law and during its full term of fifty years, it merely exercised a right it theretofore had;  and the Petitioner can be said properly to have availed itself of the other option only when in June 1953 it filed the necessary papers of incorporation under the Corporation Law. It is likewise not accurate to contend that, as the Respondent ruled, the Petitioner could reform as and be a regular corporation at most only for the remainder of its term as a sociedad anonima. Section 75, in allowing a sociedad anonima to reform and organize under the Corporation Law, also authorizes the transfer of its corporate interests to the new corporation. This “new” corporation should have the advantage of the prescribed maximum duration, regardless of the original term of the old or substituted entity. There is no basis for the criticism that, if the Petitioner were allowed to exhaust its full term as a sociedad anonima, and afterwards to reform as a regular corporation for another fifty years, it would have a span of life twice as long as that granted to corporations organized under the Corporation Law. The simple reason is that the Petitioner was already a corporate entity before the enactment of the Corporation Law, with a fixed duration under its original articles of association. It was clearly not in parity with any corporation organized under and coming into existence after the effectivity of the Corporation Law which has no choice on the matter and can therefore have only the prerogative granted by said law, — no more no less.The Respondent has suggested that the Petitioner, if desirous of continuing its business, may organize a new corporation — a suggestion which need not be made because no one would probably think of denying it that right. But we cannot see any cogent reason or practical purpose for the suggestion. In the first place, the filing of Petitioner’s articles of incorporation and by-laws in July, 1953, in effect amounted to the formation of a new corporation. To require more is to give greater importance to form than to substance. In the second place, the public and public officials may not as a matter of fact be adversely affected by allowing the Petitioner to reform, instead of requiring it technically to form a new corporation. It will acquire no greater rights or obligations by simple reformation than by newly organizing another corporation. Conversely, the public and public officials will acquire no greater benefit or control by requiring the Petitioner to form a new corporation, than by allowing it to reform. And as already stated, whatever interest the public and public officials may have in determining the duration of a sociedad anonima or any corporation for that matter, is amply protected by registration in the Securities and Exchange Commission.The Respondent and the intervenor, Consolidated Mines, Inc., have tried to show that the Petitioner holds or owns interests in eight mining companies, in violation of section 13, subsection 5 of the Corporation Law, in that it has operating contracts with the intervenor and seven other mining companies, besides owning the majority shares in Balatoc Mining Co. This matter has not merited any attention or favorable comment in the majority decision, and rightly of course. Even so, we may observe that the alleged violation was not the subject of any finding by the Respondent, nor relied upon in his order of denial;  that the Petitioner has denied the charge;  that the holding by the Petitioner of shares of stock in Balatoc Mining Co., if really illegal, may look into only in a quo warranto proceeding instituted by the Government;  that at any rate the Petitioner has always been ready and willing to dispose of said shares and, in a proper proceeding, it should be given reasonable time to do so, as this Court gave the Philippine Sugar Estates a period of six months after final decision within which to “liquidate, dissolve and separate absolutely in every respect and in all of its relations, complained of in the petition, with the Tayabas Land Company” (Government vs. Philippine Sugar Estates Co., 38 Phil., 15).With special reference to the intervenor, it may be of some moment to know the antecedents and nature of business relations existing between it and the Petitioner, at least to demonstrate the righteousness of the position of one or the other even from a factual point of view. The following excerpts from “Petitioner’s Reply to a portion of Intervenor’s Brief” are in point:“What has happened in our case is that prior to the execution of the Operating Agreement of July 9, 1934, the stockholders, directors, and officers of the intervenor, Consolidated Mines, Inc., did not want to risk one centavo of their own funds for the development of their chrome ore mining claims in Zambales province, and proposed to the Petitioner herein, Benguet Consolidated Mining Company, to explore, develop and operate their mining claims, Benguet to furnish all the funds that might be necessary, and to explore, develop, mine and concentrate and market ‘all the pay are found on or

within paid claims or properties’, the intervenor, Consolidated Mines, Inc., and the Petitioner, Benguet Consolidated Mining Company, after the latter had reimbursed itself for all its advances, to divide half and half the excess of receipts over disbursements. Benguet agreed to it, and advanced approximately three million pesos, one-half thereof before the war, and the other half after the war (the intervenor’s properties having been destroyed during the war). Paragraph XII of the intervenor’s complaint in the civil action instituted by it against Benguet in the Court of First Instance of Manila, No. 18938, and to which counsel for the intervenor refer in page 5 of their brief, makes mention of the large sums of money that Benguet advanced, as follows:‘Initial advances amounting to approximately P1,500,000 made by Defendant during the first phases of said Operating Agreement which had been fully reimbursed to it before the war, end of the amounts likewise advanced by it (Benguet) for rehabilitation amounting to close P1,500,000.00.’“While Benguet risked and poured approximately three million pesos (P3,000,000) into the venture, and while Benguet was looking for, and establishing, a market for intervenor’s chrome ore, the intervenor, Consolidated Mines, Inc., considered the said Operating Agreement of July 9, 1934, as valid. Now that Benguet’s efforts have been crowned with success, and Benguet has established a market for intervenor’s chrome ore, the intervenor claims that its said operating Agreement of July 9, 1934, with the Petitioner, Benguet, is contrary to law because Benguet has become interested in intervenor’s chrome ore mining claims (although the agreement expressly states that Benguet has no interest therein), and objects to the registration of the documents which Benguet filed with the Respondent Securities and Exchange Commissioner, extending its life as a sociedad anonima, and reforming itself s a corporation, in accordance with the provisions of section 75 of the Corporation Law.“Under the foregoing facts, the intervenor, Consolidated Mines, Inc., cannot be heard to complain against Benguet. No court can give now a helping hand to the intervenor, which claims that Benguet no longer lives, and wants to keep for itself all the products of Benguet’s efforts after the latter risked into the venture approximately three million pesos (P3,000,000).”The foregoing considerations may not constitute a legal justification for ruling that the Petitionershould be allowed either to extend its life as a sociedad anonima or to reform and organize under the provisions of the Corporation Law, but they may aid in resolving in Petitioner’s favor and doubt as to the clarity or definiteness of sections 75 and 191 of the Corporation Law regarding its right to exercise either option in the manner claimed by it.The same result may be arrived at if, in addition, we bear in mind the possible economic harm that may be brought about by the affirmance of the order complained of. This aspect is adequately touched in Petitioner’s brief, as follows:“1.  A loss of employment in the Baguio district by about 4,000 Filipino and a loss of direct living from the Benguet operation supplied to 20,000, that is, the 4,000 employed and their dependents.“(a)  This would be calamity to the district of the highest order which could very well produce a snow balling depression which could react all over the Philippine Islands.“2.  Losses of direct and indirect taxes to the Philippine Government in an extremely large yearly amount.“3.  No one would be able to continue the Benguet and Balatoc mines in operation should a liquidation of Benguet take place because the net profits after labor and material costs and taxes in the last two years or more from the gold mining operations have not warranted their continued operation as independent units. The profits in 1953 certainly do not warrant it. It is merely a case of taking gold out of the ground in order to pay for labor, materials and taxes with very little return to the stockholders and on the huge investment made in the reconstruction since 1946.“(a)  The relief provided by the elimination of the 17 per cent Excise Tax, the 7 per cent Compensating Tax and the lowering of the Extraction Tax, when counter-balanced against consistently increasing costs from month to month up to this very month, is now nothing but an offsetting item against constantly increasing costs.”For whatever persuasive effect it may have, we cannot help calling attention to the fact that there are only about nine sociedades anonimas in the country, foremost among them being Compañia Maritima, which have existed for years and along with the Petitioner figured prominently in our economic

24development. Compañia Maritima, in particular, has been twice allowed to extend its life by amendment of its articles of incorporation. It may be argued that if there was an official mistake in acceding to the extension of the term of Compañia Maritima, the same should not warrant the commission of another mistake. But it will go to show that sections 75 and 191 of the Corporation Law are, on the points herein involved, of doubtful construction;  and it is for this reason that we had to advert hereinabove to the somewhat unequitable position of the intervenor and to the possible adverse effect on Philippine economy of the abrupt termination ofPetitioner’s corporate existence.By and large, it is my considered opinion that the Respondent’s order of denial dated October 27, 1953, should be reversed and the Respondent ordered to register at least the documents presented by the Petitioner, reforming and organizing itself as a corporation under the provisions of the Corporation Law. This would be in line with the policy of doing away with sociedad anonimas, at the same time saving “the goose that lays the golden egg.”

Endnotes:

  2.  It must be remembered that sections 75 and 191 of the Corporation law use the phrase “corporation or sociedad anonima” thus employing “corporation” as the equivalent legal designation in English of the Spanish term “sociedad anonima”, in designating the same entity. See Harden vs. Benguet Cons. Mining Co., 58 Phil., p. 146.

EN BANC

G.R. No. L-23606   July 29, 1968

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., Petitioner, vs.SECURITIES & EXCHANGE

COMMISSION, Respondent.

To the question - May a corporation extend its life by amendment of its articles of incorporation effected during the three-year statutory period for liquidation when its original term of existence had already expired? - the answer of the Securities and Exchange Commissioner was in the negative. Offshoot is this appeal.

That problem emerged out of the following controlling facts:chanrobles virtual law library

Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc. (hereinafter referred to simply as Alhambra) was duly incorporated under Philippine laws on January 15, 1912. By its corporate articles it was to exist for fifty (50) years from incorporation. Its term of existence expired on January 15, 1962. On that date, it ceased transacting business, entered into a state of liquidation.

Thereafter, a new corporation. - Alhambra Industries, Inc. - was formed to carry on the business of Alhambra.

On May 1, 1962, Alhambra's stockholders, by resolution named Angel S. Gamboa trustee to take charge of its liquidation.

On June 20, 1963 - within Alhambra's three-year statutory period for liquidation - Republic Act 3531 was enacted into law. It amended Section 18 of the Corporation Law; it empowered domestic private corporations to extend their corporate life beyond the period fixed by the articles of incorporation for a term not to exceed fifty years in any one instance. Previous to Republic Act 3531, the maximum non-extendible term of such corporations was fifty years.

On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to amend paragraph "Fourth" of its articles of incorporation to extend its corporate life for an additional fifty years, or a total of 100 years from its incorporation.

On August 26, 1963, Alhambra's stockholders, representing more than two-thirds of its subscribed capital stock, voted to approve the foregoing resolution. The "Fourth" paragraph of Alhambra's articles of incorporation was thus altered to read:

FOURTH. That the term for which said corporation is to exist is fifty (50) years from and after the date of incorporation, and for an additional period of fifty (50) years thereafter.

On October 28, 1963, Alhambra's articles of incorporation as so amended certified correct by its president and secretary and a majority of its board of directors, were filed with respondent Securities and Exchange Commission (SEC).

On November 18, 1963, SEC, however, returned said amended articles of incorporation to Alhambra's counsel with the ruling that Republic Act 3531 "which took effect only on June 20, 1963, cannot be availed of by the said corporation, for the reason that its term of existence had already expired when the said law took effect in short, said law has no retroactive effect."

On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's ruling aforesaid, refiled the amended articles of incorporation.

On September 8, 1964, SEC, after a conference hearing, issued an order denying the reconsideration sought.

Alhambra now invokes the jurisdiction of this Court to overturn the conclusion below.1chanrobles virtual law library

1. Alhambra relies on Republic Act 3531, which amended Section 18 of the Corporation Law. Well it is to take note of the old and the new statutes as they are framed. Section 18, prior to and after its modification by Republic Act 3531, covers the subject of amendment of the articles of incorporation of private corporations. A provision thereof which remains unaltered is that a corporation may amend its articles of incorporation "by a majority vote of its board of directors or trustees and ... by the vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock ... "

But prior to amendment by Republic Act 3531, an explicit prohibition existed in Section 18, thus:

... Provided, however, That the life of said corporation shall not be extended by said amendment beyond the time fixed in the original articles: ...

This was displaced by Republic Act 3531 which enfranchises all private corporations to extend their corporate existence. Thus incorporated into the structure of Section 18 are the following:

... Provided, however, That should the amendment consist in extending the corporate life, the extension shall not exceed fifty years in any one instance: Provided, further, That the original articles, and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation: ...

As we look in retrospect at the facts, we find these: From July 15 to October 28, 1963, when Alhambra made its attempt to extend its corporate existence, its original term of fifty years had already expired (January 15, 1962); it was in the midst of the three-year grace period statutorily fixed in Section 77 of the Corporation Law, thus: .

SEC. 77. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established.2

Plain from the language of the provision is its meaning: continuance of a "dissolved" corporation as a body corporate for three years has for its purpose the final closure of its affairs, and no other; the corporation is specifically enjoined from "continuing the business for which it was established". The liquidation of the corporation's affairs set forth in Section 77 became necessary precisely because its life had ended. For this reason alone, the corporate existence and juridical

25personality of that corporation to do business may no longer be extended.

Worth bearing in mind, at this juncture, is the basic development of corporation law.

The common law rule, at the beginning, was rigid and inflexible in that upon its dissolution, a corporation became legally dead for all purposes. Statutory authorizations had to be provided for its continuance after dissolution "for limited and specified purposes incident to complete liquidation of its affairs".3 Thus, the moment a corporation's right to exist as an "artificial person" ceases, its corporate powers are terminated "just as the powers of a natural person to take part in mundane affairs cease to exist upon his death".4 There is nothing left but to conduct, as it were, the settlement of the estate of a deceased juridical person.

2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent, it is true, as to when such act of extension may be made. But even with a superficial knowledge of corporate principles, it does not take much effort to reach a correct conclusion. For, implicit in Section 77 heretofore quoted is that the privilege given to prolong corporate life under the amendment must be exercised before the expiry of the term fixed in the articles of incorporation.

Silence of the law on the matter is not hard to understand. Specificity is not really necessary. The authority to prolong corporate life was inserted by Republic Act 3531 into a section of the law that deals with the power of a corporation to amend its articles of incorporation. (For, the manner of prolongation is through an amendment of the articles.) And it should be clearly evident that under Section 77 no corporation in a state of liquidation can act in any way, much less amend its articles, "for the purpose of continuing the business for which it was established".

All these dilute Alhambra's position that it could revivify its corporate life simply because when it attempted to do so, Alhambra was still in the process of liquidation. It is surely impermissible for us to stretch the law - that merely empowers a corporation to act in liquidation - to inject therein the power to extend its corporate existence.

3. Not that we are alone in this view. Fletcher has written: "Since the privilege of extension is purely statutory, all of the statutory conditions precedent must be complied with in order that the extension may be effectuated. And, generally these conditions must be complied with, and the steps necessary to effect the extension must be taken,during the life of the corporation, and before the expiration of the term of existence as original fixed by its charter or the general law, since, as a rule, the corporation is ipso facto dissolved as soon as that time expires. So where the extension is by amendment of the articles of incorporation, the amendment must be adopted before that time. And, similarly, the filing and recording of a certificate of extension after that time cannot relate back to the date of the passage of a resolution by the stockholders in favor of the extension so as to save the life of the corporation. The contrary is true, however, and the doctrine of relation will apply, where the delay is due to the neglect of the officer with whom the certificate is required to be filed, or to a wrongful refusal on his part to receive it. And statutes in some states specifically provide that a renewal may be had within a specified time before or after the time fixed for the termination of the corporate existence".5

The logic of this position is well expressed in a foursquare case decided by the Court of Appeals of Kentucky.6 There, pronouncement was made as follows:

... But section 561 (section 2147) provides that, when any corporation expires by the terms of its articles of incorporation, it may be thereafter continued to act for the purpose of closing up its business, but for no other purpose. The corporate life of the Home Building Association expired on May 3, 1905. After that date, by the mandate of the statute, it could continue to act for the purpose of closing up its business, but for no other purpose. The proposed amendment was not made until January 16, 1908, or nearly three years after the corporation expired by the terms of the articles of incorporation. When the corporate life of the corporation was ended, there was nothing to extend. Here it was proposed nearly three years after the corporate life of the association had expired to revivify the dead body, and to make that relate back some two years and eight months. In other words, the

association for two years and eight months had only existed for the purpose of winding up its business, and, after this length of time, it was proposed to revivify it and make it a live corporation for the two years and eight months daring which it had not been such.

The law gives a certain length of time for the filing of records in this court, and provides that the time may be extended by the court, but under this provision it has uniformly been held that when the time was expired, there is nothing to extend, and that the appeal must be dismissed... So, when the articles of a corporation have expired, it is too late to adopt an amendment extending the life of a corporation; for, the corporation having expired, this is in effect to create a new corporation ..."7

True it is, that the Alabama Supreme Court has stated in one case.8 that a corporation empowered by statute to renew its corporate existence may do so even after the expiration of its corporate life, provided renewal is taken advantage of within the extended statutory period for purposes of liquidation. That ruling, however, is inherently weak as persuasive authority for the situation at bar for at least two reasons: First. That case was a suit for mandamus to compel a former corporate officer to turn over books and records that came into his possession and control by virtue of his office. It was there held that such officer was obliged to surrender his books and records even if the corporation had already expired. The holding on the continued existence of the corporation was a mere dictum. Second. Alabama's law is different. Corporations in that state were authorized not only to extend but also to renew their corporate existence.That very case defined the word "renew" as follows; "To make new again; to restore to freshness; to make new spiritually; to regenerate; to begin again; to recommence; to resume; to restore to existence, to revive; to re-establish; to recreate; to replace; to grant or obtain an extension of Webster's New International Dict.; 34 Cyc. 1330; Carter v. Brooklyn Life Ins. Co., 110 N.Y. 15, 21, 22, 17 N.E. 396; 54 C.J. 379. Sec".9

On this point, we again draw from Fletcher: "There is a broad distinction between the extension of a charter and the grant of a new one. To renew a charter is to revive a charter which has expired, or, in other words, "to give a new existence to one which has been forfeited, or which has lost its vitality by lapse of time". To "extend" a charter is "to increase the time for the existence of one which would otherwise reach its limit at an earlier period".10 Nowhere in our statute - Section 18, Corporation Law, as amended by Republic Act 3531 - do we find the word "renew" in reference to the authority given to corporations to protract their lives. Our law limits itself to extension of corporate existence. And, as so understood, extension may be made only before the term provided in the corporate charter expires.

Alhambra draws attention to another case11 which declares that until the end of the extended period for liquidation, a dissolved corporation "does not become an extinguished entity". But this statement was obviously lifted out of context. That case dissected the question whether or not suits can be commenced by or against a corporation within its liquidation period. Which was answered in the affirmative. For, the corporation still exists for the settlement of its affairs.

People, ex rel. vs. Green,12 also invoked by Alhambra, is as unavailing. There, although the corporation amended its articles to extend its existence at a time when it had no legal authority yet, it adopted the amended articles later on when it had the power to extend its life and during its original term when it could amend its articles.

The foregoing notwithstanding, Alhambra falls back on the contention that its case is arguably within the purview of the law. It says that before cessation of its corporate life, it could not have extended the same, for the simple reason that Republic Act 3531 had not then become law. It must be remembered that Republic Act 3531 took effect on June 20, 1963, while the original term of Alhambra's existence expired before that date - on January 15, 1962. The mischief that flows from this theory is at once apparent. It would certainly open the gates for all defunct corporations - whose charters have expired even long before Republic Act 3531 came into being - to resuscitate their corporate existence.

4. Alhambra brings into argument Republic Act 1932, which amends Section 196 of the Insurance Act, now reading as follows:

26SEC. 196. Any provision of law to the contrary notwithstanding, every domestic life insurance corporation, formed for a limited period under the provisions of its articles of incorporation, may extend its corporate existence for a period not exceeding fifty years in any one instance by amendment to its articles of incorporation on or before the expiration of the term so fixed in said articles ...

To be observed is that the foregoing statute - unlike Republic Act 3531 - expressly authorizes domestic insurance corporations to extend their corporate existence "on or before the expiration of the term" fixed in their articles of incorporation. Republic Act 1932 was approved on June 22, 1957, long before the passage of Republic Act 3531 in 1963. Congress, Alhambra points out, must have been aware of Republic Act 1932 when it passed Republic Act 3531. Since the phrase "on or before", etc., was omitted in Republic Act 3531, which contains no similar limitation, it follows, according to Alhambra, that it is not necessary to extend corporate existence on or before the expiration of its original term.

That Republic Act 3531 stands mute as to when extension of corporate existence may be made, assumes no relevance. We have already said, in the face of a familiar precept, that a defunct corporation is bereft of any legal faculty not otherwise expressly sanctioned by law.

Illuminating here is the explanatory note of H.B. 1774, later Republic Act 3531 - now in dispute. Its first paragraph states that "Republic Act No. 1932 allows the automatic extension of the corporate existence of domestic life insurance corporations upon amendment of their articles of incorporation on or before the expiration of the terms fixed by said articles". The succeeding lines are decisive: "This is a good law, a sane and sound one. There appears to be no valid reason why it should not be made to apply to other private corporations.13

The situation here presented is not one where the law under consideration is ambiguous, where courts have to put in harness extrinsic aids such as a look at another statute to disentangle doubts. It is an elementary rule in legal hermeneutics that where the terms of the law are clear, no statutory construction may be permitted. Upon the basic conceptual scheme under which corporations operate, and with Section 77 of the Corporation Law particularly in mind, we find no vagueness in Section 18, as amended by Republic Act 3531. As we view it, by directing attention to Republic Act 1932, Alhambra would seek to create obscurity in the law; and, with that, ask of us a ruling that such obscurity be explained. This, we dare say, cannot be done.

The pari materia rule of statutory construction, in fact, commands that statutes must be harmonized with each other.14 So harmonizing, the conclusion is clear that Section 18 of the Corporation Law, as amended by Republic Act 3531 in reference to extensions of corporate existence, is to be read in the same light as Republic Act 1932. Which means that domestic corporations in general, as with domestic insurance companies, can extend corporate existence only on or before the expiration of the term fixed in their charters.

5. Alhambra pleads for munificence in interpretation, one which brushes technicalities aside. Bases for this posture are that Republic Act 3531 is a remedial statute, and that extension of corporate life is beneficial to the economy.

Alhambra's stance does not induce assent. Expansive construction is possible only whenthere is something to expand. At the time of the passage of Republic Act 3531, Alhambra's corporate life had already expired. It had overstepped the limits of its limited existence. No life there is to prolong.

Besides, a new corporation - Alhambra Industries, Inc., with but slight change in stockholdings15 - has already been established. Its purpose is to carry on, and it actually does carry on,16 the business of the dissolved entity. The beneficial-effects argument is off the mark.

The way the whole case shapes up then, the only possible drawbacks of Alhambra might be that, instead of the new corporation (Alhambra Industries, Inc.) being written off, the old one (Alhambra Cigar & Cigarette Manufacturing Company, Inc.) has to be wound up; and that the old corporate name cannot be retained fully in its exact form.17 What is important

though is that the word Alhambra, the name that counts [it has goodwill], remains.

FOR THE REASONS GIVEN, the ruling of the Securities and Exchange Commission of November 18, 1963, and its order of September 8, 1964, both here under review, are hereby affirmed.

Costs against petitioner Alhambra Cigar & Cigarette Manufacturing Company, Inc. So ordered.

THIRD DIVISION MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Petitioners, - versus - MIGUEL LIM, in his personal capacity as Stockholder of Ruby Industrial Corporation and representing the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION and the MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION, Respondents. 

G.R. No. 165887 

x- - - - - - - - - - - - - - - - - - - - - - - - - -x

 

 CHINA BANKING CORPORATION, Petitioner, - versus - MIGUEL LIM, in his personal capacity as a stockholder of Ruby Industrial Corporation and representing the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Respondents.

 G.R. No. 165929 Present: CARPIO MORALES, J.,Chairperson,BRION,BERSAMIN,ABAD,* andVILLARAMA, JR., JJ. Promulgated: June 6, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x 

DECISION This case is brought to us on appeal for the fourth time, involving the same parties and interests litigating on issues arising from rehabilitation proceedings initiated by Ruby Industrial Corporation wayback in 1983.

Following is the factual backdrop of the present controversy, as culled from the records and facts set forth in the ponencia of Chief Justice Reynato S. Puno inRuby Industrial Corporation v. Court of Appeals.[1]

The Antecedents

Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass manufacturing. Reeling from severe liquidity problems beginning in 1980, RUBY filed on December 13, 1983 a petition for suspension of payments with the Securities and Exchange Commission (SEC) docketed as SEC Case No. 2556.On December 20, 1983, the SEC issued an order declaring RUBY under suspension of payments and enjoining the disposition of its properties pending hearing of the petition, except insofar as necessary in its ordinary operations, and making payments outside of the necessary or legitimate expenses of its business.

27On August 10, 1984, the SEC Hearing Panel created the management committee (MANCOM) for RUBY, composed of representatives from Allied Leasing and Finance Corporation (ALFC), Philippine Bank of Communications (PBCOM), China Banking Corporation (China Bank), Pilipinas Shell Petroleum Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu Kim Giang. The MANCOM was tasked to perform the following functions: (1) undertake the management of RUBY; (2) take custody and control over all existing assets and liabilities of RUBY; (3) evaluate RUBYs existing assets and liabilities, earnings and operations; (4) determine the best way to salvage and protect the interest of its investors and creditors; and (5) study, review and evaluate the proposed rehabilitation plan for RUBY.

Subsequently, two (2) rehabilitation plans were submitted to the SEC: the BENHAR/RUBY Rehabilitation Plan of the majority stockholders led by Yu Kim Giang, and the Alternative Plan of the minority stockholders represented by Miguel Lim (Lim).

Under the BENHAR/RUBY Plan, Benhar International, Inc. (BENHAR) -- a domestic corporation engaged in the importation and sale of vehicle spare parts which is wholly owned by the Yu family and headed by Henry Yu, who is also a director and majority stockholder of RUBY -- shall lend its P60 million credit line in China Bank to RUBY, payable within ten (10) years. Moreover, BENHAR shall purchase the credits of RUBYs creditors and mortgage RUBYs properties to obtain credit facilities for RUBY. Upon approval of the rehabilitation plan, BENHAR shall control and manage RUBYs operations. For its service, BENHAR shall receive a management fee equivalent to 7.5% of RUBYs net sales.

The BENHAR/RUBY Plan was opposed by 40% of the stockholders, including Lim, a minority shareholder of RUBY. ALFC, the biggest unsecured creditor of RUBY and chairman of the management committee, also objected to the plan as it would transfer RUBYs assets beyond the reach and to the prejudice of its unsecured creditors.

On the other hand, the Alternative Plan of RUBYs minority stockholders proposed to: (1) pay all RUBYs creditors without securing any bank loan; (2) run and operate RUBY without charging management fees; (3) buy-out the majority shares or sell their shares to the majority stockholders; (4) rehabilitate RUBYs two plants; and (5) secure a loan at 25% interest, as against the 28% interest charged in the loan under the BENHAR/RUBY Plan.

Both plans were endorsed by the SEC to the MANCOM for evaluation.

On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan. The minority stockholders thru Lim appealed to the SEC En Bancwhich, in its November 15, 1988 Order, enjoined the implementation of the BENHAR/RUBY Plan. On December 20, 1988 after the expiration of the temporary restraining order (TRO), the SEC En Banc granted the writ of preliminary injunction against the enforcement of the BENHAR/RUBY Plan. BENHAR, Henry Yu, RUBY and Yu Kim Giang questioned the issuance of the writ in their petition filed in the Court of Appeals (CA), docketed as CA-G.R. SP No. 16798. The CA denied their appeal.[2] Upon elevation to this Court (G.R. No. L-88311), we issued a minute resolution dated February 28, 1990 denying the petition and upholding the injunction against the implementation of the BENHAR/RUBY Plan.

Meanwhile, BENHAR paid off Far East Bank & Trust Company (FEBTC), one of RUBYs secured creditors. By May 30, 1988, FEBTC had already executed a deed of assignment of credit and mortgage rights in favor of BENHAR. BENHAR likewise paid the other secured creditors who, in turn, assigned their rights in favor of BENHAR. These acts were done by BENHAR despite the SECs TRO and injunction and even before the SEC Hearing Panel approved the BENHAR/RUBY Plan on October 28, 1988.

ALFC and Miguel Lim moved to nullify the deeds of assignment executed in favor of BENHAR and cite the parties thereto in contempt for willful violation of the December 20, 1983 SEC order enjoining RUBY from disposing its properties and making payments pending the hearing of its petition for

suspension of payments. They also charged that in paying off FEBTCs credits, FEBTC was given undue preference over the other creditors of RUBY. Acting on the motions, the SEC Hearing Panel nullified the deeds of assignment executed by RUBYs creditors in favor of BENHAR and declared the parties thereto guilty of indirect contempt. BENHAR and RUBY appealed to the SEC En Banc which denied their appeal. BENHAR and RUBY joined by Henry Yu and Yu Kim Giang appealed to the CA (CA-G.R. SP No. 18310). By Decision[3] dated August 29, 1990, the CA affirmed the SEC ruling nullifying the deeds of assignment.The CA also declared its decision final and executory as to RUBY and Yu Kim Giang for their failure to file their pleadings within the reglementary period. By Resolution dated August 26, 1991 in G.R. No. 96675,[4] this Court affirmed the CAs decision.

Earlier, on May 29, 1990, after the SEC En Banc enjoined the implementation of BENHAR/RUBY Plan, RUBY filed with the SEC En Banc an ex partepetition to create a new management committee and to approve its revised rehabilitation plan (Revised BENHAR/RUBY Plan). Under the revised plan, BENHAR shall receive P34.068 million of the P60.437 Million credit facility to be extended to RUBY, as reimbursement for BENHARs payment to some of RUBYs creditors. The SEC En Banc directed RUBY to submit its revised rehabilitation plan to its creditors for comment and approval while the petition for the creation of a new management committee was remanded for further proceedings to the SEC Hearing Panel. The Alternative Plan of RUBYs minority stockholders was also forwarded to the hearing panel for evaluation.

On April 26, 1991, over ninety percent (90%) of RUBYs creditors objected to the Revised BENHAR/RUBY Plan and the creation of a new management committee. Instead, they endorsed the minority stockholders Alternative Plan. At the hearing of the petition for the creation of a new management committee, three (3) members of the original management committee (Lim, ALFC and Pilipinas Shell) opposed the Revised BENHAR/RUBY Plan on grounds that: (1) it would legitimize the entry of BENHAR, a total stranger, to RUBY as BENHAR would become the biggest creditor of RUBY; (2) it would put RUBYs assets beyond the reach of the unsecured creditors and the minority stockholders; and (3) it was not approved by RUBYs stockholders in a meeting called for the purpose.

Notwithstanding the objections of 90% of RUBYs creditors and three members of the MANCOM, the SEC Hearing Panel approved on September 18, 1991 the Revised BENHAR/RUBY Plan and dissolved the existing management committee. It also created a new management committee and appointed BENHAR as one of its members. In addition to the powers originally conferred to the management committee under Presidential Decree (P.D.) No. 902-A, the new management committee was tasked to oversee the implementation by the Board of Directors of the revised rehabilitation plan for RUBY.

The original management committee (MANCOM), Lim and ALFC appealed to the SEC En Banc which affirmed the approval of the Revised BENHAR/RUBY Plan and the creation of a new management committee on July 30, 1993. To ensure that the management of RUBY will not be controlled by any group, the SEC appointed SEC lawyers Ruben C. Ladia and Teresita R. Siao as additional members of the new management committee. Further, it declared that BENHARs membership in the new management committee is subject to the condition that BENHAR will extend its credit facilities to RUBY without using the latters assets as security or collateral.

Lim, ALFC and MANCOM moved for reconsideration while RUBY and BENHAR asked the SEC to reconsider the portion of its Order prohibiting BENHAR from utilizing RUBYs assets as collateral. On October 15, 1993, the SEC denied the motion of Lim, ALFC and the original management committee but granted RUBY and BENHARs motion and allowed BENHAR to use RUBYs assets as collateral for loans, subject to the approval of the majority of all the members of the new management committee. Lim, ALFC and MANCOM appealed to the CA (CA-G.R. SP Nos. 32404, 32469 & 32483) which by Decision[5] dated March 31, 1995 set aside the SECs approval of the Revised BENHAR/RUBY Plan and remanded the case to the SEC for further proceedings. The CA ruled that the revised plan circumvented its earlier decision (CA-G.R. SP No. 18310) nullifying the deeds of assignment executed by RUBYs creditors in favor of BENHAR.Since under the revised plan,

28BENHAR was to receive P34.068 Million of the P60.437 Million credit facility to be extended to RUBY, as settlement for its advance payment to RUBYs seven (7) secured creditors, such payments made by BENHAR under the void Deeds of Assignment, in effect were recognized as payable to BENHAR under the revised plan. The motion for reconsideration filed by BENHAR and RUBY was likewise denied by the CA.[6]

Undaunted, RUBY and BENHAR filed a petition for review in this Court (G.R. Nos. 124185-87 entitled Ruby Industrial Corporation v. Court of Appeals) alleging that the CA gravely abused its discretion in substituting its judgment for that of the SEC, and in allowing Lim, ALFC and MANCOM to file separate petitions prepared by lawyers representing themselves as belonging to different firms. By Decision[7] dated January 20, 1998, we sustained the CAs ruling that the Revised BENHAR/RUBY Plan contained provisions which circumvented its final decision in CA-G.R. SP No. 18310, nullifying the deeds of assignment of credits and mortgages executed by RUBYs creditors in favor of BENHAR, as well as this Courts Resolution in G.R. No. 96675, affirming the said CAs decision.We thus held:

Specifically, the Revised BENHAR/RUBY Plan considered as valid the advance payments made by BENHAR in favor of some of RUBYs creditors. The nullity of BENHARs unauthorized dealings with RUBYs creditors is settled. The deeds of assignment between BENHAR and RUBYs creditors had been categorically declared void by the SEC Hearing Panel in two (2) orders issued on January 12, 1989 and March 15, 1989. x x x

x x x x

These orders were upheld by the SEC en banc and the Court of Appeals. In CA-G.R. SP No. 18310, the Court of Appeals ruled as follows:

x x x x x x x x x

1) x x x when the Deed of Assignment was executed on May 30, 1988 by and between Ruby Industrial Corp., Benhar International, Inc., and FEBTC,the Rehabilitation Plan proposed by petitioner Ruby Industrial Corp. for Benhar International, Inc. to assume all petitioners obligation has not been approved by the SEC. The Rehabilitation Plan was not approved until October 28, 1988. There was a willful and blatant violation of the SEC order dated December 20, 1983 on the part of petitioner Ruby Industrial Corp., represented by Yu Kim Giang, by Benhar International, Inc., represented by Henry Yu and by FEBTC.

2) The magnitude and coverage of the transactions involved were such that Yu Kim Giang and the other signatories cannot feign ignorance or pretend lack of knowledge thereto in view of the fact that they were all signatories to the transaction and privy to all the negotiations leading to the questioned transactions. In executing the Deeds of Assignment, the petitioners totally

disregarded the mandate contained in the SEC order not to dispose the properties of Ruby Industrial Corp. in any manner whatsoever pending the approval of the Rehabilitation Plan and rendered illusory the SEC efforts to rehabilitate the petitioner corporation to the best interests of all the creditors.

3) The assignments were made without prior approval of the Management Committee created by the SEC in an Order dated August 10, 1984. Under Sec. 6, par. d, sub. par. (2) of P.D. 902-A as amended by P.D. 1799, the Management Committee, rehabilitation receiver, board or body shall have the power to take custody and control over all existing assets of such entities under management notwithstanding any provision of law, articles of incorporation or by-law to the contrary. The SEC therefore has the power and authority, through a Management Committee composed of petitioners creditors or through itself directly, to declare all assignment of assets of the petitioner Corporation declared under suspension of payments, null and void, and to conserve the same in order to effect a fair, equitable and meaningful rehabilitation of the insolvent corporation.

4) x x x. The acts for which petitioners were held in indirect contempt by the SEC arose from the failure or willful refusal by petitioners to obey the lawful order of the SEC not to dispose of any of its properties in any manner whatsoever without authority or approval of the SEC. The execution of the Deeds of Assignment tend to defeat or obstruct the administration of justice. Such acts are offenses against the SEC because they are calculated to embarrass, hinder and obstruct the tribunal in the administration of justice or lessen its authority.

x x x

Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the Revised BENHAR/RUBY Plan, has acknowledged the invalidity of the subject deeds of assignment. However, to justify its approval of the plan and the appointment of BENHAR to the new management committee, it gave the lame excuse that BENHAR became RUBYs creditor for having paid RUBYs debts. x x x

29x x x x

For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY Plan gave undue preference to BENHAR. The records, indeed, show that BENHARs offer to lend its credit facility in favor of RUBY is conditioned upon the payment of the amount it advanced to RUBYs creditors, x x x

x x x x

In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit facility to be extended to RUBY for the latters rehabilitation.

Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. When a distressed company is placed under rehabilitation, the appointment of a management committee follows to avoid collusion between the previous management and creditors it might favor, to the prejudice of the other creditors. All assets of a corporation under rehabilitation receivership are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another by the expediency of attachment, execution or otherwise.As between the creditors, the key phrase is equality in equity. Once the corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought to stand on equal footing. Not any one of them should be paid ahead of the others. This is precisely the reason for suspending all pending claims against the corporation under receivership.[8] (Additional emphasis supplied.)

Aside from the undue preference that would have been given to BENHAR under the Revised BENHAR/RUBY Plan, we also found RUBYs dealing with BENHAR highly irregular and its proposed financing scheme more costly and ultimately prejudicial to RUBY. Thus:

Parenthetically, BENHAR is a domestic corporation engaged in importing and selling vehicle spare parts with an authorized capital stock of thirty million pesos. Yet, it offered to lend its credit facility in the amount of sixty to eighty million pesos to RUBY. It is to be noted that BENHAR is not a lending or financing corporation and lending its credit facilities, worth more than double its authorized capitalization, is not one of the powers granted to it under its Articles of Incorporation. Significantly, Henry Yu, a director and a majority stockholder of RUBY is, at the same time, a stockholder of BENHAR, a corporation owned and controlled by his family. These circumstances render the deals between BENHAR and RUBY highly irregular.

x x x x

Moreover, when RUBY initiated its petition for suspension of payments with the SEC, BENHAR was not listed as one of RUBYs creditors. BENHAR is a total stranger to RUBY. If at all, BENHAR only served as a conduit of RUBY. As aptly stated in the challenged Court of Appeals decision:

Benhars role in the Revised Benhar/Ruby Plan, as envisioned by the majority stockholders, is to contract the loan for

Ruby and, serving the role of a financier, relend the same to Ruby. Benhar is merely extending its credit line facility with China Bank, under which the bank agrees to advance funds to the company should the need arise. This is unlikely a loan in which the entire amount is made available to the borrower so that it can be used and programmed for the benefit of the companys financial and operational needs. Thus, it is actually China Bank which will be the source of the funds to be relent to Ruby. Benhar will not shell out a single centavo of its own funds. It is the assets of Ruby which will be mortgaged in favor of Benhar. Benhars participation will only make the rehabilitation plan more costly and, because of the mortgage of its (Rubys) assets to a new creditor, will create a situation which is worse than the present. x x x

We need not say more.[9] (Additional emphasis supplied.)

After the finality of the above decision, the SEC set the case for further proceedings.[10] On March 14, 2000, Bank of the Philippine Islands (BPI), one of RUBYs secured creditors, filed a Motion to Vacate Suspension Order[11] on grounds that there is no existing management committee and that no decision has been rendered in the case for more than 16 years already, which is beyond the period mandated by Sec. 3-8 of the Rules of Procedure on Corporate Recovery. RUBY filed its opposition,[12] asserting that the MANCOM never relinquished its status as the duly appointed management committee as it resisted the orders of the second and third management committees subsequently created, which have been nullified by the CA and later this Court. As to the applicability of the cited rule under the Rules on Corporate Recovery, RUBY pointed out that this case was filed long before the effectivity of said rules. It also pointed out that the undue delay in the approval of the rehabilitation plan being due to the numerous appeals taken by the minority stockholders and MANCOM to the CA and this Court, from the SEC approval of the BENHAR/RUBY Plan. Since there have already been steps taken to finally settle RUBYs obligations with its creditors, it was contended that the application of the mandatory period under the cited provision would cause prejudice and injustice to RUBY.

It appears that even earlier during the pendency of the appeals in the CA, BENHAR and RUBY have performed other acts in pursuance of the BENHAR/RUBY Plan approved by the SEC.

On September 1, 1996, Lim received a Notice of Stockholders Meeting scheduled on September 3, 1996 signed by a certain Mr. Edgardo M. Magtalas, the Designated Secretary of RUBY and stating the matters to be taken up in said meeting, which include the extension of RUBYs corporate term for another twenty-five (25) years and election of Directors.[13] At the scheduled stockholders meeting of September 3, 1996, Lim together with other minority stockholders, appeared in order to put on record their objections on the validity of holding thereof and the matters to be taken therein. Specifically, they questioned the percentage of stockholders present in the meeting which the majority claimed stood at 74.75% of the outstanding capital stock of RUBY.

The aforesaid stockholders meeting was the subject of the Motion to Cite For Contempt[14] and Supplement to Motion to Cite For Contempt[15] filed by Lim before the CA where their

30petitions for review (CA-G.R. Nos. 32404, 32469 and 32483) were then pending. Lim argued that the majority stockholders claimed to have increased their shares to 74.75% by subscribing to the unissued shares of the authorized capital stock (ACS). Lim pointed out that such move of the majority was in implementation of the BENHAR/RUBY Plan which calls for capital infusion of P11.814 Million representing the unissued and unsubscribed portion of the present ACS of P23.7 Million, and the Revised BENHAR/RUBY Plan which proposed an additional subscription of P30 Million. Since the implementation of both majority plans have been enjoined by the SEC and CA, the calling of the special stockholders meeting by the majority stockholders clearly violated the said injunction orders. This circumstance certainly affects the determination of quorum, the voting requirements for corporate term extension, as well as the election of Directors pursuant to the July 30, 1993 Order and October 15, 1993 Resolution of the SEC enjoining not only the implementation of the revised plan but also the doing of any act that may render the appeal from the approval of the said plan moot and academic.

The aforementioned capital infusion was taken up by RUBYs board of directors in a special meeting[16] held on October 2, 1991 following the issuance by the SEC of its Order dated September 18, 1991[17] approving the Revised BENHAR/RUBY Plan and creating a new management committee to oversee its implementation. During the said meeting, the board asserted its authority and resolved to take over the management of RUBYs funds, properties and records and to demand an accounting from the MANCOM which was ordered dissolved by the SEC. The board thus resolved that:

The corporation be authorized to issue out of the unissued portion of the authorized capital stocks of the corporation in the form of common stocks 11.8134.00 [Million] after comparing this with the audited financial statement prepared by SGV as of December 31, 1982, to be subscribed and paid in full by the present stockholders in proportion to their present stockholding in the corporation on staggered basis starting October 28, December 27 then February 28 and April 28 as the last installment date at 25% for each period. It was also moved and seconded that should any of the stockholders fail to exercise their rights to buy the number of shares they are qualified to buy by making the first installment payment of 25% on or before October 13, 1991, then the other stockholders may buy the same and that only when none of the present stockholders are interested in the shares may there be a resort to selling them by public auction.[18]

As reflected in the Minutes of the special board meeting, a representative of the absent directors (Tan Chai, Tomas Lim, Miguel Lim and Yok Lim) came to submit their letter addressed to the Chairman suggesting that said meeting be deferred until the September 18, 1991 SEC Order becomes final and executory. The directors present nevertheless proceeded with the meeting upon their belief that neither appeal nor motion for reconsideration can stay the SEC order.[19]

The resolution to extend RUBYs corporate term, which was to expire on January 2, 1997, was approved during the September 3, 1996 stockholders meeting, as recommended by the board of directors composed of Henry Yu (Chairman), James Yu, David Yukimteng, Harry L. Yu, Yu Kim Giang, Mary L. Yu and Vivian L. Yu. The board certified that said resolution was approved by stockholders representing two-thirds (2/3) of RUBYs outstanding capital stock.[20] Per Certification[21] dated August 31, 1995 issued by Yu Kim Giang as Executive Vice-President of RUBY, the majority stockholders own 74.75% of RUBYs outstanding capital stock as of October 27, 1991. The Amended Articles of Incorporation was filed with the SEC on September 24, 1996.[22]

On March 17, 2000, Lim filed a Motion[23] informing the SEC of acts being performed by BENHAR and RUBY through directors who were illegally elected, despite the pendency of the appeal before this Court questioning the SEC approval of the BENHAR/RUBY Plan and creation of a new management committee, and after this Court had denied their motion for

reconsideration of the January 20, 1998 decision in G.R. Nos. 124185-87. Lim reiterated that before the matter of extension of corporate life can be passed upon by the stockholders, it is necessary to determine the percentage ownership of the outstanding shares of the corporation. The majority stockholders claimed that they have increased their shareholdings from 59.828% to 74.75% as a result of the illegal and invalid stockholders meeting on September 3, 1996. The additional subscription of shares cannot be done as it implements the BENHAR/RUBY Plan against which an existing injunction is still effective based on the SEC Order dated January 6, 1989, and which was struck down under the final decision of this Court in G.R. Nos. 124185-87. Hence, the implementation of the new percentage stockholdings of the majority stockholders and the calling of stockholders meeting and the subsequent resolution approving the extension of corporate life of RUBY for another twenty-five (25) years, were all done in violation of the decisions of the CA and this Court, and without compliance with the legal requirements under the Corporation Code. There being no valid extension of corporate term, RUBYs corporate life had legally ceased. Consequently, Lim moved that the SEC: (1) declare as null and void the infusion of additional capital made by the majority stockholders and restore the capital structure of RUBY to its original structure prior to the time injunction was issued; and (2) declare as null and void the resolution of the majority stockholders extending the corporate life of RUBY for another twenty-five (25) years.

The MANCOM concurred with Lim and made a similar manifestation/comment[24] regarding the irregular and invalid capital infusion and extension of RUBYs corporate term approved by stockholders representing only 60% of RUBYs outstanding capital stock. It further stated that the foregoing acts were perpetrated by the majority stockholders without even consulting the MANCOM, which technically stepped into the shoes of RUBYs board of directors. Since RUBY was still under a state of suspension of payment at the time the special stockholders meeting was called, all corporate acts should have been made in consultation and close coordination with the MANCOM.

Lim likewise filed an Opposition[25] to BPIs Motion to Vacate Suspension Order, asserting that the management committee originally created by the SEC continues to control the corporate affairs and properties of RUBY. He also contended that the SEC Rules of Procedure on Corporate Recovery cannot apply in this case which was filed long before the effectivity of said rules.

On the other hand, RUBY filed its Opposition[26] to the Motion filed by Lim denying the allegation of Lim that RUBYs corporate existence had ceased. RUBY claimed that due notice were given to all stockholders of the October 2, 1991 special meeting in which the infusion of additional capital was discussed. It further contended that the CA decision setting aside the SEC orders approving the Revised BENHAR/RUBY Plan, which was subsequently affirmed by this Court onJanuary 20, 1998, did not nullify the resolution of RUBYs board of directors to issue the previously unissued shares. The amendment of its articles of incorporation on the extension of RUBYs corporate term was duly submitted with and approved by the SEC as per the Certification dated September 24, 1996.

The MANCOM also filed its Opposition[27] to BPIs Motion to Vacate Suspension Order, stating that it has continuously performed its primary function of preserving the assets of RUBY and undertaken the management of RUBYs day-to-day affairs. It expressed belief that between chaotic foreclosure proceedings and collection suits that would be triggered by the vacation of the suspension order and an orderly settlement of creditors claims before the SEC, the latter path is the more prudent and logical course of action. On April 28, 2000, it submitted to the court copies of the minutes of meetings held from January 18, 1999 toDecember 1, 1999 in pursuance of its mandate to preserve the assets and administer the business affairs of RUBY.[28]

On August 23, 2000, China Bank filed a Manifestation[29] echoing the contentions of BPI that as there is no existing management committee and no rehabilitation plan approved even after the 240-day period, warrants the application of Sec. 4-9 of the SEC Rules of Procedure on Corporate Recovery such that the petition is deemed ipso facto denied and dismissed. China Bank lamented that the

31length of time that has lapsed, as well as the parties actuations, completely betrays a genuine attempt to rehabilitate RUBYs moribund operations all to the dismay, damage and prejudice of RUBYs creditors. It stressed that the proceedings cannot be prolonged nor used as a ploy to defer indefinitely the payment of long overdue obligations of RUBY to its creditors. With the case having been ipso facto dismissed, there is no need of further action from the parties or an order from the SEC. Consequently, RUBYs creditors may now take whatever legal action they may deem appropriate to protect their rights including, but not limited to extrajudicial foreclosure.

On September 11, 2000, the SEC granted Lims request for the issuance of subpoena duces tecum/ad testificandum to Ms. Jocelyn Sta. Ana of BPI for the latter to testify and bring all documents and records pertaining to RUBY.[30] Earlier, Lim moved for a hearing to verify the information that China Bank and BPI had separately executed deeds of assignment in favor of Greener Investment Corporation, a company owned by Yu Kim Giang, one of RUBYs majority stockholders.[31] Said hearing, however, did not push through in view of RUBYs proposal for a compromise agreement.[32] Lim submitted his comments on the Proposed Compromise Agreement, but there was no response from RUBY and the majority stockholders.[33] The minority stockholders likewise served a copy of the revised Compromise Agreement to the majority stockholders.[34] Lim moved that the case be assigned to a new Panel of Hearing Officers and the majority stockholders be made to declare in a hearing whether they accept the counterproposals of the minority in their draft Amicable Settlement in order that the case can proceed immediately to liquidation.[35]

On January 25, 2001, the MANCOM filed with the SEC its Resolution unanimously adopted on January 19, 2001 affirming that: (1) MANCOM was never informed nor advised of the supposed capital infusion by the majority stockholders in October 1991 and it never actually received any such additional subscription nor signed any document attesting to or authorizing the said increase of RUBYs capital stock or the extension of its corporate life; (2) MANCOM continuously recognizes the 60%-40% ratio of shareholding profile between the majority and minority stockholders, with the majority having 59.828% while the minority holds 40.172% shareholding; (3) as there was no valid increase in the shareholding of the majority and consequently no valid extension of corporate term, the liquidation of RUBY is thus in order; (4) to date, the majority stockholders or Yu Kim Giang have not complied with the December 22, 1989 SEC order for them to turn over the cash including bank deposits, all other financial records and documents of RUBY including transfer certificates of title over its real properties, and render an accounting of all the money received by RUBY; and (5) pursuant to this Courts ruling in G.R. No. 96675 dated August 26, 1991, the previous deeds of assignment made in favor of BENHAR by Florence Damon, Philippine Bank of Communications, Philippine Commercial International Bank, Philippine Trust Company, PCI Leasing and Finance, Inc. and FEBTC, having been earlier declared void by the SEC Hearing Panel, and the CA decision in CA-G.R. SP No. 18310 affirmed by this Court have no legal effect and are deemed void.[36]

On the other hand, Lim filed a Supplement (to Manifestation and Motion dated January 18, 2001)[37] reiterating his pending motion filed on March 15, 2000 for the SEC to implement this Courts January 20, 1998 Decision in G.R. Nos. 124185-87 which states in part that [t]he SEC therefore has the power and authority, directly to declare all assignment of assets of the petitioner Corporation declared under suspension of payments, null and void, and to conserve the same in order to effect a fair, equitable and meaningful rehabilitation of the insolvent corporation. Lim contended that the SEC retains jurisdiction over pending suspension of payment/rehabilitation cases filed as of June 30, 2000 until these are finally disposed, pursuant to Sec. 5.2 of the Securities Regulation Code (Republic Act [R.A.] No. 8799). Considering that the Management Committee is intact, the majority stockholders cannot act in an illegal manner with regard to RUBYs assets. He thus concluded that the continued disobedience of the majority stockholders to the orders and decisions of the SEC and CA, as affirmed by this Court, have certainly rendered any additional assignments, such as the Deeds of Assignment executed by BPI and China Bank with BENHAR, Henry Yu or conduits of the majority stockholders, null and void.

The MANCOM manifested that it is adopting in toto the Manifestation and Motion dated January 18, 2001 filed by Lim. It also moved for the SEC to conduct further proceedings as directed by this Court. Considering that there is no chance at all for the proposed rehabilitation of RUBY in light of strict implementation by government authorities of environmental laws particularly on pollution control, and MANCOMs assent to effect a liquidation, the MANCOM asserted that a hearing should focus on the eventual liquidation of RUBY. It added that a dismissal under the circumstances would be tantamount to a perceived shirking by the SEC of its mandate to afford all creditors ample opportunity to recover on their respective financial exposure with RUBY.[38]

On May 15, 2001, the MANCOM submitted copies of minutes of meetings held from April 13, 2000 to December 29, 2000.[39]

On September 20, 2001, the SEC issued an Order directing the Management Committee to submit a detailed report not mere minutes of meetings -- on the status of the rehabilitation process and financial condition of RUBY, which should contain a statement on the feasibility of the rehabilitation plan.[40] The MANCOM complied with the said order on February 15, 2002.[41] The majority stockholders and RUBY moved to dismiss the petition and strike from the records the Compliance/Report. MANCOM filed its omnibus opposition to the said motions. There was further exchange of pleadings by the parties on the matter of whether the SEC should already dismiss the petition of RUBY as prayed for by the majority stockholders and RUBY, or proceed with supervised liquidation of RUBY as proposed by the MANCOM and minority stockholders.

The SECs Ruling

On September 18, 2002, the SEC issued its Order[42] denying the petition for suspension of payments, as follows:

WHEREFORE, in view of the foregoing, the Commission hereby resolves to terminate the proceedings and DENY the instant petition.

Accordingly, pursuant to Sec. 5-5 of the SECs Rules of Procedure on Corporate Recovery, which provides:

Discharge of the Management Committee -- The Management Committee shall be discharged and dissolved under the following circumstances:

a. Whenever the Commission, on motion or motu prop[r]io, has determined that the necessity for the Management Committee no longer exists;

b. Upon the appointment of a liquidator under these Rules;

c. By agreement of the parties;

d. Upon termination of the proceedings.

Upon its discharge and dissolution, the Management Committee shall submit its final report and render an accounting of its management within such reasonable time as the Commission may allow.

32the Management Committee is

hereby DISSOLVED. It is likewise ordered to:

(1) Make an inventory of the assets, funds and properties of the petitioner;

(2) Turn-over the aforementioned assets, funds and properties to the proper party(ies);

(3) Render an accounting of its management; and

(4) Submit its Final Report to the Commission.

The MANCOM is ordered to comply with the foregoing within a non-extendible period of thirty (30) days from receipt of this Order. Relative to any compensation owing to the MANCOM, it is left to the determination of the parties concerned.

No pronouncement as to costs.

SO ORDERED.[43]

The SEC declared that since its order declaring RUBY under a state of suspension of payments was issued on December 20, 1983, the 180-day period provided in Sec. 4-9 of the Rules of Procedure on Corporate Recovery had long lapsed. Being a remedial rule, said provision can be applied retroactively in this case. The SEC also overruled the objections raised by the minority stockholders regarding the questionable issuance of shares of stock by the majority stockholders and extension of RUBYs corporate term, citing the presumption of regularity in the act of a government entity which obtains upon the SECs approval of RUBYs amendment of articles of incorporation. It pointed out that Lim raised the issue only in the year 2000. Moreover, the SEC found that notwithstanding his allegations of fraud, Lim never proved the illegality of the additional infusion of the capitalization by RUBY so as to warrant a finding that there was indeed an unlawful act.[44]

Lim, in his personal capacity and in representation of the minority stockholders of RUBY, filed a petition for review with prayer for a temporary restraining order and/or writ of preliminary injunction before the CA (CA-G.R. SP No. 73195) assailing the SEC order dismissing the petition and dissolving the MANCOM.Ruling of the CA

On May 26, 2004, the CA rendered its Decision,[45] the dispositive portion of which states:

WHEREFORE, the Questioned Order dated 18 September 2002 issued by the Securities and Exchange Commission in SEC Case No. 2556 entitled In the Matter of the Petition for Suspension of Payments, Ruby Industrial Corporation, Petitioner, is hereby SET ASIDE, and consequently:

(1) the infusion of additional capital made by the majority stockholders be declared null and void and restoring the capital structure of Ruby to its original structure prior to the time the injunction was issued, that is, majority stockholders 59.828% and the minority stockholders 40.172% of the authorized capital stock of Ruby Industrial Corporation.

(2) the resolution of the majority stockholders, who represents only 59.828% of the outstanding capital stock of Ruby, extending the corporate life of Ruby for another twenty-five (25) years which was made during the supposed stockholders meeting held on 03 September 1996 be declared null and void;

(3) implementing the invalidation of any and all illegal assignments of credit/purchase of credits and the cancellation of mortgages connected therewith made by the creditors of Ruby

Industrial Corporation during the effectivity of the suspension of payments order including that of China Bank and BPI and to deliver to MANCOM or the Liquidator all the original of the Deeds of Assignments and the registered titles thereto and any other documents related thereto; and order their unwinding and requiring the majority stockholders to account for all illegal assignments (amounts, dates, interests, etc. and present the original documents supporting the same); and

(4) ordering the Securities and Exchange Commission to supervise the liquidation of Ruby Industrial Corporation after the foregoing steps shall have been undertaken.

SO ORDERED.[46]

According to the CA, the SEC erred in not finding that the October 2, 1991 meeting held by RUBYs board of directors was illegal because the MANCOM was neither involved nor consulted in the resolution approving the issuance of additional shares of RUBY.

The CA further noted that the October 2, 1991 board meeting was conducted on the basis of the September 18, 1991 order of the SEC Hearing Panel approving the Revised BENHAR/RUBY Plan, which plan was set aside under this Courts January 20, 1998 Decision in G.R. Nos. 124185-87. The CA pointed out that records confirmed the proposed infusion of additional capital for RUBYs rehabilitation, approved during said meeting, as implementing the Revised BENHAR/RUBY Plan. Necessarily then, such capital infusion is covered by the final injunction against the implementation of the revised plan. It must be recalled that this Court affirmed the CAs ruling that the revised plan not only recognized the void deeds of assignments entered into with some of RUBYs creditors in violation of the CAs decision in CA-G.R. SP No. 18310, but also maintained a financing scheme which will just make the rehabilitation plan more costly and create a worse situation for RUBY.

On the supposed delay of the minority stockholders in raising the issue of the validity of the infusion of additional capital effected by the board of directors, the CA held that laches is inapplicable in this case. It noted that Lim sought relief while the case is still pending before the SEC. If ever there was delay, the same is not fatal to the cause of the minority stockholders.

The CA likewise faulted the SEC in relying on the presumption of regularity on the matter of the extension of RUBYs corporate term through the filing of amended articles of incorporation. In doing so, the CA totally disregarded the evidence which rebutted said presumption, as demonstrated by Lim: (1) it was the board of directors and not the stockholders which conducted the meeting without the approval of the MANCOM; (2) there was no written waivers of the minority stockholders pre-emptive rights and thus it was irregular to merely notify them of the board of directors meeting and ask them to exercise their option; (3) there was an existing permanent injunction against any additional capital infusion on the BENHAR/RUBY Plan, while the CA and this Court both rejected the Revised BENHAR/RUBY Plan; (4) there was no General Information Sheet reports made to the SEC on the alleged capital infusion, as per certification by the SEC; (5) the Certification stating the present percentage of majority shareholding, dated December 21, 1993 and signed by Yu Kim Giang -- which was not sworn to before a Notary Public -- was supposedly filed in 1996 with the SEC but it does not bear a stamped date of receipt, and was only attached in a 2000 motion long after the October 1991 board meeting; (6) said Certification was contradicted by the SEC list of all stockholders of RUBY, in which the majority remained at 59.828% and the minority shareholding at 40.172% as of October 27, 1991; (7) certain receipts for the amount of P1.7 million was presented by the majority stockholders only in the year 2000, long after Lim questioned the inclusion of extension of corporate term in the Notice of Meeting when Lim filed before the CA a motion to cite for contempt (CA-G.R. Nos. 32404, 32469 and 32483); and (8) this Courts decisions in the cases elevated to it had recognized the 40% stockholding of the minority. Upon the foregoing grounds, the CA said that the SEC should have invalidated the resolution

33extending the corporate term of RUBY for another twenty-five (25) years.

With the expiration of the RUBYs corporate term, the CA ruled that it was error for the SEC in not commencing liquidation proceedings. As to the dismissal of RUBYs petition for suspension of payments, the CA held that the SEC erred when it retroactively applied Sec. 4-9 of the Rules of Procedure on Corporate Recovery. Such retroactive application of procedural rules admits of exceptions, as when it would impair vested rights or cause injustice. In this case, the CA emphasized that the two decisions of this Court still have to be implemented by the SEC, but to date the SEC has failed to unwound the illegal assignments and order the assignees to surrender the Deeds of Assignment to the MANCOM.

On the issue of violation of the rule against forum shopping, the CA held that this is not applicable because the parties in CA-G.R. SP No. 73169 (filed by MANCOM) and CA-G.R. SP No. 73195 (filed by Lim) are not the same and they do not have the same interest. This issue was in fact already resolved in G.R. Nos. 124185-87 wherein this Court, citing Ramos, Sr. v. Court of Appeals[47] declared that private respondents Lim, the unsecured creditors (ALFC) and MANCOM cannot be considered to have engaged in forum shopping in filing separate petitions with the CA as each have distinct rights to protect.

The CA also found that the belated submission of the special power of attorney executed by the other minority stockholders representing 40.172% of RUBYs ownership has no bearing to the continuation of the petition filed with the appellate court. Moreover, since the petition is in the nature of a derivative suit, Lim clearly can file the same not only in representation of the minority stockholders but also in behalf of the corporation itself which is the real party in interest. Thus, notwithstanding that Lims ownership in RUBY comprises only 1.4% of the outstanding capital stock, as claimed by the majority stockholders, his petition may not be dismissed on this ground.

The Consolidated Petitions

From the Decision of the CA, China Bank and the Majority Stockholder joined by RUBY, filed separate petitions before this Court.

In G.R. No. 165887, petitioners Majority Stockholders and RUBY raised the following grounds for the reversal of the assailed decision and the reinstatement of the SECs September 18, 2002 Order:

First Reason

THE COURT OF APPEALS ERRED AND WHEN IT DID, IT ACTED CONTRARY TO LAW AND PRECEDENTS WHEN IT GAVE DUE COURSE TO, AND, THEREAFTER, SUSTAINED, A FORMALLY AND SUBSTANTIALLY DEFECTIVE PETITION FOR REVIEW.

Second Reason

THE COURT OF APPEALS ERRED AND WHEN IT DID, IT ACTED IN A MANNER AT WAR WITH ORDERLY PROCEDURE AND APPLICABLE JURISPRUDENCE WHEN IT REVERSED THE ORDER OF DISMISSAL OF THE SECURITIES AND EXCHANGE COMMISSION AND SUBSTITUTED ITS JUDGMENT FOR THAT OF THE LATTER IN THE DETERMINATION OF ISSUES WELL WITHIN THE EXPERTISE OF THE COMMISSION.

Third Reason

THE COURT OF APPEALS ERRED AND WHEN IT DID, IT ACTED IN GRAVE ABUSE OF ITS DISCRETION AND, IN FACT, IN EXCESS OR LACK OF JURISDICTION -- WHEN IT SUSTAINED COLLATERAL ATTACKS OF FINAL ADJUDICATIONS OF THE SECURITIES AND EXCHANGE COMMISSION.[48]

On the other hand, petitioner China Bank in G.R. No. 165929 puts forth the argument that the principle of stare decisis cannot be given effect in this case considering the prevailing factual circumstances, as to do so would result in manifest injustice. It contends that the reason for the declaration of nullity of the Deed of Assignment pronounced more than a decade ago, has become legally inefficacious by its obsolescence. The creditors of RUBY have the right to recover their credit. But when the CA ordered the nullification of China Banks Deed of Assignment in favor of Greener Investment Corporation, it practically dashed its last hope for ever recovering its credit.

China Bank is of the view that the CA overstretched the import of this Courts January 20, 1998 decision in G.R. Nos. 124185-87 when the SEC was ordered to conduct further proceedings, as to include the unwinding of the alleged illegal assignment of credits. The rehabilitation of RUBY, if it still may be capable of, is not made dependent on the unwinding by the SEC of the illegal assignments, as the same concerns only the issue of who shall now become the creditors of RUBY, and does not alter the fact that RUBY has hefty loan obligations and it has not enough cash flow to pay for the same.

Deploring the principal parties penchant for prolonged litigation resulting considerably in irreversible losses to RUBY, China Bank maintains that from the report submitted by the MANCOM to the SEC, it can be clearly seen that no attempt at rehabilitation whatsoever had been pursued. Given the current situation, China Bank prays that the CA Decision be reversed and its Deed of Assignment in favor of Greener Investment Corporation be recognized and given full legal effect.

In fine, main issues to be resolved are: (1) whether private respondents MANCOM and Lim engaged in forum shopping when they filed separate petitions before the CA assailing the September 18, 2002 SEC Order; (2) whether the defects in the certification of non-forum shopping submitted by Lim warrant the dismissal of his petition before the CA; (3) whether the CA was correct in reversing the SECs order dismissing the petition for suspension of payment.

Our Ruling

The petitions have no merit.

On the charge of forum shopping, we have already ruled on the matter in G.R. Nos. 124185-87. Thus:

We hold that private respondents are not guilty of forum-shopping. In Ramos, Sr. v. Court of Appeals, we ruled:

The private respondents can be considered to have engaged in forum shopping if all of them, acting as one group, filed identical special civil actions in the Court of Appeals and in this Court. There must be identity of parties or interests represented, rights asserted and relief sought in different tribunals. In the case at bar, two groups of private respondents appear to have acted independently of each other when they sought relief from the appellate court. Both groups sought relief from the same tribunal.

It would not matter even if there are several divisions in the Court of Appeals. The adverse party can always ask for the consolidation of the two cases. x x x

34In the case at bar, private

respondents represent different groups with different interests the minority stockholders group, represented by private respondent Lim; the unsecured creditors group, Allied Leasing & Finance Corporation; and the old management group. Each group has distinct rights to protect. In line with our ruling in Ramos,the cases filed by private respondents should be consolidated. In fact, BENHAR and RUBY did just that in their urgent motions filed on December 1, 1993 and December 6, 1993, respectively, they prayed for the consolidation of the cases before the Court of Appeals.[49]

In the present case, no consolidation of CA-G.R. SP Nos. 73169 (filed by MANCOM) which was earlier assigned to the Thirteenth Division and CA-G.R. SP No. 73195 (filed by Lim) decided by the Second Division, took place. In their Comment filed before CA-G.R. SP No. 73169, the Majority Stockholders and RUBY (private respondents therein) prayed for the dismissal of said case arguing that MANCOM, of which Lim is a member, circumvented the proscription against forum shopping. The CAs Thirteenth Division, however, disagreed with private respondents and granted the motion to withdraw petition filed by MANCOM which manifested that the Second Division in CA-G.R. SP No. 73195 by Decision dated May 26, 2004 had granted the reliefs similar to those prayed for in their petition, said decision being binding on MANCOM which was also impleaded in said case (CA-G.R. SP No. 73195). The Thirteenth Division also cited our pronouncement in G.R. Nos. 124185-87 to the effect that there was no violation on the rule on forum shopping because MANCOM and Lim or the minority shareholders of RUBY represent different interests.[50]

As to the alleged defects in the certificate of non-forum shopping submitted by Lim, we find no error committed by the CA in holding that the belated submission of a special power of attorney executed in Lims favor by the minority stockholders has no bearing to the continuation of the case as supported by ample jurisprudence. To appreciate the liberal stance adopted by the CA, one must take into account the previous history of the petitions for review before the CA involving the SEC September 18, 2002 Order. It was actually the third time that Lim and/or MANCOM have challenged certain acts perpetrated by the majority stockholders which are prejudicial to RUBY, such as the execution of deeds of assignment during the effectivity of the suspension order in pursuit of two rehabilitation plans submitted by them together with BENHAR. The assignment of RUBYs credits to BENHAR gave the secured creditors undue advantage over RUBYs prime properties and put these assets beyond the reach of the unsecured creditors. Each time they go to court, Lim and MANCOM essentially advance the interest of the corporation itself. They have consistently taken the position that RUBYs assets should be preserved for the equal benefit of all its creditors, and vigorously resisted any attempt of the controlling stockholders to favor any or some of its creditors by entering into questionable deals or financing schemes under two BENHAR/RUBY Plans. Viewed in this light, the CA was therefore correct in recognizing Lims right to institute a stockholders action in which the real party in interest is the corporation itself.

A derivative action is a suit by a shareholder to enforce a corporate cause of action.[51] It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority.[52] For this purpose, it is enough that a member or a minority of stockholders file a derivative suit for and in behalf of a corporation.[53] An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation as the party in interest.[54]

Now, on the third and substantive issue concerning the SECs dismissal of RUBYs petition for suspension of payment.

The SEC based its action on Sec. 4-9 of the Rules of Procedure on Corporate Recovery,[55] which provides:

SEC. 4-9. Period of Suspension Order. The suspension order shall be effective for a period of sixty (60) days from the date of its issuance. The order shall be automatically vacated upon the lapse of the sixty-day period unless extended by the Commission. Upon motion, the Commission may grant an extension thereof for a period of not more than sixty (60) days in each application if the Commission is satisfied that the debtor and its officers have been acting in good faith and with due diligence, and that the debtor would likely be able to make a viable rehabilitation plan. After the lapse of one hundred and eighty (180) days from the issuance of the suspension order, no extension of the said order shall be granted by the Commission if opposed in writing by a majority of any class of creditors. The Commission may grant an extension beyond one hundred eighty (180) days only if it appears by convincing evidence that there is a good chance for the successful rehabilitation of the debtor and the opposition thereto by the creditor appears manifestly unreasonable.

In any event, the petition is deemed ipso facto denied and dismissed if no Rehabilitation Plan was approved by the Commission upon the lapse of the order or the last extension thereof. In such case, the debtor shall come under the dissolution and liquidation proceedings of Rule V of these Rules. (Emphasis supplied.)

According to the SEC, even if the 180 days maximum period of suspension order is counted from the finality of this Courts decision in G.R. Nos. 124185-87 in December 1998, still this case had gone beyond the period mandated in the Rules for a corporation under suspension of payment to have a rehabilitation plan approved by the Commission.

While it is true that the Rules of Procedure on Corporate Recovery authorizes the dismissal of a petition for suspension of payment where there is no rehabilitation plan approved within the maximum period of the suspension order, it must be recalled that there was in fact not one, but two rehabilitation plans(BENHAR/RUBY Plan and Revised BENHAR/RUBY Plan) submitted by the majority stockholders which were approved by the SEC. The implementation of the first plan was enjoined when it was seriously challenged in the courts by the minority stockholders through Lim. The second revised plan superseded the first plan, but eventually nullified by the CA and the CA decision declaring it void was affirmed by this Court in G.R. Nos. 124185-87. Given this factual milieu, the automatic application of the lifting of the suspension order as interpreted by the SEC in its September 18, 2002 Order would be unfair and highly prejudicial to the financially distressed corporation.

Moreover, records reveal that the delay in the proceedings after the case was set for hearing following this Courts final judgment in G.R. Nos. 124185-87, was not due to any fault or neglect on the part of MANCOM or the minority stockholders. The idea propounded by the petitioners majority stockholders that this case is about a minority in a corporation holding hostage the majority indefinitely by simple assertion that the formers rights have been transgressed by the latter is, downright misleading.

First, the SEC did not even mention in its September 18, 2002 Order that when this Court remanded to it the case for further proceedings, there remained only the Alternative Plan of RUBYs minority stockholders which had earlier been forwarded to the SEC Hearing Panel. With the CA Decision setting aside the SEC approval of the Revised BENHAR/RUBY Plan, as affirmed by this Court, it behooves on the SEC to recognize the fact that the Alternative Plan was endorsed by 90% of the RUBYs creditors who had objected to the Revised BENHAR/RUBY Plan. Yet, not a single step was taken by the SEC to address those findings and conclusions made by the CA and this Court on the highly disadvantageous and onerous provisions of the Revised BENHAR/RUBY Plan.

35Moreover, the SEC failed to act on motions filed by Lim and MANCOM to implement this Courts January 20, 1998 Decision in G.R. Nos. 124185-87, by declaring all deeds of assignment with BENHAR and/or the conduits of Henry Yu of no force and legal effect, which of course necessitates the surrender by the concerned creditors of those void deeds of assignment. Petitioner China Bank dismisses it as unnecessary and immaterial to the continued inability of RUBY to settle its long overdue debts. However, the CA said that the foregoing acts should have been done by the SEC for proper documentation and orderly settlement after proper accounting of the assignment transactions. The appellate court then concluded that dismissal of the petition under Sec. 4-9 of the Rules of Procedure on Corporate Recovery would impair the vested rights of the minority stockholders under this Courts decision invalidating the aforesaid deeds of assignment, thus:

We agree with the observations of the petition that if the illegal assignments not having been unwound and the mortgages not canceled, the majority, their alter ego, and/or cohorts will claim to be secured creditors and freely collect extra-judicially the obligations covered by the illegal assignments. Ruby has very little money compared to the P200 Million probable liability to the illegal assignees as unilaterally stated by Ruby without audit (previously merely totaled to P34 Million in 1998 as stated in the revised rehabilitation plan). Foreclosure of the mortgages by the illegal assignees will follow; Ruby will lose all its prime properties; there will be no assets left for unsecured creditors; and there will be no residual P600 Million assets to divide.[56]

Evidently, the minority stockholders and MANCOM had already foreseen the impossibility of implementing a viable rehabilitation plan if the illegal assignments made by its creditors with BENHAR and the majority stockholders, and subsequently, with conduits of RUBY or Henry Yu, are not properly unwound and those directors responsible for the void transactions not required to make a full accounting. Contrary to petitioner China Banks insinuation that the minority stockholders merely want to prolong the litigation to the great prejudice and damage to RUBYs creditors, MANCOM and Lim had determined and moved for SEC-supervised liquidation proceedings as the more prudent course of action for an orderly and equitable settlement of RUBYs liabilities.

Records likewise revealed that the SEC chose to keep silent and failed to assist the MANCOM and minority stockholders in their efforts to demand compliance from the majority stockholders or Yu Kim Giang (who headed the first MANCOM) with the December 22, 1989 Order directing them to turn over the cash, financial records and documents of RUBY, including certificates of title over RUBYs real properties, and render an accounting of all moneys received and payments made by RUBY. On January 18, 2002, the MANCOM even filed a Motion[57] to require Yu Kim Giang to render report/accounting of RUBY from 1983 to the 1st quarter of 1990, stating that despite a commitment from Mr. Giang, he has seemingly delayed his compliance, hence frustrating the desire of MANCOM to submit a comprehensive and complete report for the whole period of 1983 up to the present. To underscore the importance of making the said records available for scrutiny of the SEC and MANCOM, Lim manifested before the SEC that--

Indeed, the majority is actually unwilling (and not merely unable) to submit such records because these will show, among others:

(1) The majority to minority ratio in the corporate ownership is 59.828% :40.172%;

(2) The actual amounts of the bank loans paid off by Benhar International[,] Inc. and/or Henry Yu would be very low;

(3) The illegal payment of the bank loans and illegal assignments of the mortgages to

Benhar/Henry Yu are contrary to the Honorable Commissions Order of 20 December 1983 for suspension of payments;

(4) The earnings of the corporation from 1983 to 1989 amounted to millions and cannot be accounted for by the majority and the first Mancom;

(5) The money may have been spent to pay off some of the loans to the bank but Benhar and Henry Yu fraudulently claim credit therefor.[58]

It must be noted that MANCOM had rejected the two rehabilitation plans proposed by BENHAR and the majority stockholders. In shifting the blame to the MANCOM and minority stockholders for the delay in the approval of a viable rehabilitation plan, the SEC apparently overlooked that from the time the SEC approved the Revised BENHAR/RUBY Plan and dissolved the MANCOM, the majority stockholders has denied MANCOM access to corporate papers, documents evidencing the amounts actually paid to creditor banks/assignors, financial statements and titles over RUBYs real properties.

Although the SEC granted MANCOM and Lims request for a hearing and direct a representative from BPI to bring all documents relative to the assignment of RUBYs credit, said hearing did not materialize after the majority stockholders proposed a compromise agreement with the minority stockholders. But as it turned out, this development only caused further delay because the majority stockholders were unwilling to turn over documents, funds and properties in their possession, and would neither make a full accounting or disclosure of RUBYs transactions, especially the actual amounts paid and rates of interest on the loan assignments. In this state of things, the MANCOM and minority stockholders resolved that the more reasonable and practical option is to move for a SEC-supervised liquidation proceedings.

The other ground invoked by Lim and MANCOM for the propriety of liquidation is the expiration of RUBYs corporate term. The SEC, however, held that the filing of the amendment of articles of incorporation by RUBY in 1996 complied with all the legal requisites and hence the presumption of regularity stands.Records show that the validity of the infusion of additional capital which resulted in the alleged increase in the shareholdings of petitioners majority stockholders in October 1991 was questioned by MANCOM and Lim even before the majority stockholders filed their motion to dismiss in the year 2000.

A stock corporation is expressly granted the power to issue or sell stocks.[59] The power to issue shares of stock in a corporation is lodged in the board of directors and no stockholders meeting is required to consider it because additional issuances of shares of stock does not need approval of the stockholders.[60]What is only required is the board resolution approving the additional issuance of shares. The corporation shall also file the necessary application with the SEC to exempt these from the registration requirements under the Revised Securities Act (now the Securities Regulation Code).

The new management committee created pursuant to SEC Order dated September 18, 1991 apparently had no participation in the October 2, 1991 board resolution approving the issuance of additional shares. The move was part of the boards assertion of control over the management in RUBY following the approval of the Revised BENHAR/RUBY Plan. The minority stockholders registered their objection during the said meeting by asking the board to defer action as the SEC September 18, 1991 Order was still on appeal with the SEC En Banc. When the SEC En Banc denied their appeal and motion for reconsideration under its July 30, 1993 and October 15, 1993 orders, Lim, MANCOM and ALFC filed petitions for review with the CA which set aside the said orders. As already mentioned, this Court affirmed the CA ruling in G.R. Nos. 124185-87.

36Contrary to the assertion of petitioners majority stockholders, our decision in G.R. Nos. 124185-87 nullified the deeds of assignment not solely on the ground of violation of the injunction orders issued by the SEC and CA. As earlier mentioned, we affirmed the CAs finding that the re-lending scheme under the Revised BENHAR/RUBY Plan will not only make rehabilitation more costly for RUBY, but also worsen its financial condition because of the mortgage of its assets to a new creditor. To better illumine this point, we quote from the CA decision in CA-G.R. SP Nos. 32404, 32469 and 32483 comparing the provisions of the rehabilitation proposals submitted by the majority stockholders (Revised BENHAR/RUBY Plan) and the minority stockholders (Alternative Plan):

there is no need for Benhar to act as financier, as Ruby itself can very well secure such credit accommodation using its assets as collateral. Verily, Benhars pretext at magnanimity is deception of the highest order considering that: (1) as embodied in the heading Sources and Uses of Funds in the Revised Benhar/Ruby Plan, the P80-Million loan/credit facility to be extended by Benhar will be used to pay P60.437-Million loans of Ruby. Of the P60.437-Million, P34.068-Million will be paid to Benhar as payment for the amounts it paid in consideration of the nullified assignments; (2) The Deed of Assignment of Credit Facility will be executed by Benhar in favor of Ruby only upon payment of Ruby of such amount already advanced by Benhar, i.e. the P34.068-Million credit assigned to Benhar by the seven (7) secured creditors.

The Revised Benhar/Ruby Plan, in fact, gives Benhar undue preference on the matter of repayment. Under the said plan, the creditors of Ruby will be paid in accordance with the following schedules:

Secured CreditorsChina Banking Corp.BPIPhilippine Orient

P17.022M To be paid in cash with 12% interest p.a.

Unsecured Creditors Allied LeasingFilcor Finance

P 9.347M To be paid in cash interest-f[r]ee

BenharFor having paidRuby obligationsto 7 creditors

 P34.068M

 To be paid in cashwith interest charge

Trade/OtherCreditors

P2.871M(p.a. for 3 years)

Totalling P8.614M to be paid in 3- year installment, interest-free

(Rollo, CA-G.R. SP No. 32404, p. 727)

Needless to state, the foregoing payment schedules as embodied in the said plan which gives Benhar undue advantage over the other creditors goes against the very essence of rehabilitation, which requires that no creditor should be preferred over the other. Indeed, a comparison of the salient features of the Revised Benhar/Ruby Plan and the Alternative Plan will readily show just how stacked in favor of Benhar are the provisions of the former plan:

Benhar/Ruby Plan Alternative Plan

1. Benhar plays a major role. It will be paid P34.068M out ofP60.437 M total amount due to creditors but not explained as to how arrived at.

1. The original creditors are the ones recognized. The amount payable is lower because interests are

not capitalized.

2. Benhar will not assign the credit facility of P80M unless theP34.068M above stated is paid.

2. Direct credit of P80M loan and will be borrowed from the bank(s) like Allied, UCPB, Metrobank or Equitable Bank or even China Bank.

3. The main assets are to bemortgaged to the creditor-assignor of Benhar and if the illegal assignments are recognized, then Benhar shall have to be recognized as mortgagee even when it is a disqualified creditor and/or mortgagee.

3. Mortgaged to bank(s)directly.

4. Start up cost P16,880 and based on 1988 figures and projections.

4. Plant B = P25,640

Year IV estimated P40. M

Plant A = 22.40

Year V estimated P30. M

5. Rehabilitation only of Plant B.

5. Rehabilitation of both plants.

6. Recognition of Benhar re-lender/financier.

6. None

7. Because of the SEC Order he got an MC seat and and the Pilipinas Shell representative of trade creditors was retained.

7. Pilipinas Shell representative be retained.

8. Credit facility is being assigned or re-lent by Benhar.

8. Credit facility directly to Ruby.

9. Authorized Benhar to mortgage assets of Ruby itself. Only remaining unencumbered asset is one (1) real property. Two (2) prime properties already encumbered to Assignor of Benhar.

9. None going to the minority but to actual lenders.

10. Capacity of only one (1) plant stated at 72% (overrated)

10. Capacity of two (2) plants progressive to 75% or 80% with purchase of new machines.

37

11. Projection figures based on May, 1990 forex exchange rate. Cost of importation and other local supplier currently cannot be met.

11. Minority RP can be updated at current foreign exchange rate.

12. Market and economic slow down not taken into consideration.

12. Taken into consideration so will upgrade to meet competition.

13. Discriminatory to creditors Benhar-capitalized with undisclosed rates of interest.

13. Not discriminatory.

 

14. Original Figures of illegally assigned loans from FEBTC, PCIB, PTC which totaled toP11,419,036.87 but now entered as P21,378,002.71.The interest is undisclosed and may have been capitalized.Figures for the other four (4) secured lenders not available individually. Total of seven (7) secured lenders given asP34.068 M.

14. Original figures will be used original figures plans 12% interest only.

15. Interest is 28% with Benhar as conduit.

15. Interest is 25% payable to the bank. This is still subject to current market rates to be negotiated by the minority.

16. Call on unissued shares forP11.814 M and if minority will take up their pre-emptive rights and dilute minority shareholdings.

15. Additional subscription of P16M within 6 months by the minority stockholders.

x x x x[61]

Prior to the September 18, 1991 Order approving the Revised BENHAR/RUBY Plan and dissolving the MANCOM, majority of RUBYs creditors (90%) have already withdrawn their support to the revised plan and manifested that they were only lately informed about another plan submitted by the minority stockholders. Hence, these creditors wrote individual letters to the SEC Hearing Panel expressing their agreement with and endorsement of the Alternative Plan of the minority stockholders.[62]

The Revised BENHAR/RUBY Plan had proposed the calling for subscription of unissued shares through a Board Resolution from the P11.814 million of the P23.7 million ACS in order to allow the long overdue program of the REHAB Program. RUBY will offer for subscription 118,140 shares of stocks at par value of P100 each to all stockholders on record, payable within 15 days, or within a reasonable period from SEC approval of the revised plan.[63] This was implemented by

the October 2, 1991 meeting of the Board of Directors led by Yu Kim Giang. The minority directors claimed they were not notified of said board meeting. At any rate, the CA decision nullifying the Revised BENHAR/RUBY Plan was affirmed by this Court on January 20, 1998. Hence, the legitimate concerns of the minority stockholders and MANCOM who objected to the capital infusion which resulted in the dilution of their shareholdings, the expiration of RUBYs corporate term and the pending incidents on the void deeds of assignment of credit all these should have been duly considered and acted upon by the SEC when the case was remanded to it for further proceedings. With the final rejection of the courts of the Revised BENHAR/RUBY Plan, it was grave error for the SEC not to act decisively on the motions filed by the minority stockholders who have maintained that the issuance of additional shares did not help improve the situation of RUBY except to stifle the opposition coming from the MANCOM and minority stockholders by diluting the latters shareholdings. Worse, the SEC ignored the evidence adduced by the minority stockholders indicating that the correct amount of subscription of additional shares was not paid by the majority stockholders and that SEC official records still reflect the 60%-40% percentage of ownership of RUBY.

The SEC remained indifferent to the reliefs sought by the minority stockholders, saying that the issue of the validity of the additional capital infusion was belatedly raised. Even assuming the October 2, 1991 board meeting indeed took place, the SEC did nothing to ascertain whether indeed, as the minority claimed: (1) the minority stockholders were not given notice as required and reasonable time to exercise their pre-emptive rights; and (2) the capital infusion was not for the purpose of rehabilitation but a mere ploy to divest the minority stockholders of their 40.172% shareholding and reduce it to a mere 25.25%.

The foregoing matters, along with the persistent refusal of the majority stockholders, led by Yu Kim Giang, to give a full accounting of their transactions involving RUBYs credits and properties, were extensively argued by the minority stockholders in their opposition to the motions to dismiss/vacate suspension order filed by the majority stockholders and BPI, as follows:

Their receipts only show supposed payment by the majority of a total of P1,759,150.00 out of the correct amount of P7,068,079.92.00 (sic) (59.828% of P11.814 million required capital infusion under the MRP and RRP) which should have been the amount paid by them under the RRP which requires full payment. Thus, they sought to attain a 74.75% equity from a 59.828% original equity by playing more tricks and stating that, under the general rule, they are supposedly allowed to pay-up only 25% of their subscription. Unfortunately for them, in a rehabilitation supervised by the SEC and with an existing Mancom, the general rule does not apply. What is stated in the rehabilitation plan must be strictly followed provided the rehabilitation plan has been finally approved.

It must be remembered that in October 2 to 17, 1991, the amounts owed by Ruby to the banks who illegally assigned their loans/credit was stated at P34 Million.Operations needed another P20 Million plus. A capital infusion of P1,759,150.00 was so miniscule and clearly not for rehabilitation but was intended to deprive the minority of its blocking position and property rights since distribution after liquidation is based on the percentage of stockholdings. It is not only unfair, inequitable and not meaningful it is clearly dishonest.

x x x x

Assuming arguendo that the Board of Directors could act independently and this did not violate any injunction, if the capital infusion was actually made, the Board of Directors had the duty to report this to the Mancom because they would then fall under existing assets and would be

38part of the evaluation of the proposed RRP, necessary for management and in the overall plan of rehabilitation. Nothing of this kind happened and the belated proof cannot correct this situation.

x x x x

It is not true that there is benevolence on the part of the majority when they maneuvered the illegal assignments and paid the banks. The loan obligations remain as accounts payable of Ruby and have even been bloated to gigantic proportions and yet the SEC does not even ask them to account how much these obligations are now and the majority should have reported these to the Mancom, but the majority has not. These anomalous situations have been made to continue long enough and, we pray, should be addressed by the Honorable Commission.

x x x x

The SEC must understand that, being head of the first Mancom, YU KIM GIANG had the same obligation to render a report to the SEC as the present Mancom now.To single out the present Mancom to do this when a complete report cannot be made without these starting records is discriminatory, unfair and violates the rules of accountancy. For example, where is the report on the illegal assignments and mortgages complete with details? Where did the rentals for the period from 1983 to 1989 go?This amounted to millions. There are no reports on these. By not requiring the first Mancom to Report, the SEC is preventing the complete picture on the liabilities and finances of Ruby from being seen and is sheltering Ruby and the majority.[64] (Additional emphasis supplied.)

Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. The right may be restricted or denied under the articles of incorporation, and subject to certain exceptions and limitations. The stockholder must be given a reasonable time within which to exercise their preemptive rights. Upon the expiration of said period, any stockholder who has not exercised such right will be deemed to have waived it.[65]

The validity of issuance of additional shares may be questioned if done in breach of trust by the controlling stockholders. Thus, even if the pre-emptive right does not exist, either because the issue comes within the exceptions in Section 39 or because it is denied or limited in the articles of incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to freeze out the minority interest.[66] In this case, the following relevant observations should have signaled greater circumspection on the part of the SEC -- upon the third and last remand to it pursuant to our January 20, 1998 decision -- to demand transparency and accountability from the majority stockholders, in view of the illegal assignments and objectionable features of the Revised BENHAR/RUBY Plan, as found by the CA and as affirmed by this Court:

There can be no gainsaying the well-established rule in corporate practice and procedure that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws not proscribed by law. It is, however, equally true that other stockholders are afforded the right to intervene especially during critical periods in the life of a corporation like reorganization, or in this case, suspension of payments, more so, when the majority seek to impose their will and through fraudulent means, attempt to siphon

off Rubys valuable assets to the great prejudice of Ruby itself, as well as the minority stockholders and the unsecured creditors.

Certainly, the minority stockholders and the unsecured creditors are given some measure of protection by the law from the abuses and impositions of the majority, more so in this case, considering the give-away signs of private respondents perfidy strewn all over the factual landscape. Indeed, equity cannot deprive the minority of a remedy against the abuses of the majority, and the present action has been instituted precisely for the purpose of protecting the true and legitimate interests of Ruby against the Majority Stockholders. On this score, the Supreme Court, has ruled that:

Generally speaking, the voice of the majority of the stockholders is the law of the corporation, but there are exceptions to this rule. There must necessarily be a limit upon the power of the majority.   Without such a limit the will of the majority will be absolute and irresistible and might easily degenerate into absolute tyranny. x x x[67] (Additional emphasis supplied.)

Lamentably, the SEC refused to heed the plea of the minority stockholders and MANCOM for the SEC to order RUBY to commence liquidation proceedings, which is allowed under Sec. 4-9 of the Rules on Corporate Recovery. Under the circumstances, liquidation was the only hope of the minority stockholders for effecting an orderly and equitable settlement of RUBYs obligations, and compelling the majority stockholders to account for all funds, properties and documents in their possession, and make full disclosure on the nullified credit assignments. Oblivious to these pending incidents so crucial to the protection of the interest of the majority of creditors and minority shareholders, the SEC simply stated that in the interim, RUBYs corporate term was validly extended, as if such extension would provide the solution to RUBYs myriad problems.

Extension of corporate term requires the vote of 2/3 of the outstanding capital stock in a stockholders meeting called for the purpose.[68] The actual percentage of shareholdings in RUBY as of September 3, 1996 -- when the majority stockholders allegedly ratified the board resolution approving the extension of RUBYs corporate life to another 25 years was seriously disputed by the minority stockholders, and we find the evidence of compliance with the notice and quorum requirements submitted by the majority stockholders insufficient and doubtful. Consequently, the SEC had no basis for its ruling denying the motion of the minority stockholders to declare as without force and effect the extension of RUBYs corporate existence.

Liquidation, or the settlement of the affairs of the corporation, consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.[69] It involves the winding up of the affairs of the corporation, which means the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if any, among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests.[70]

Section 122 of the Corporation Code, which is applicable to the present case, provides:

SEC. 122. Corporate liquidation. -- Every corporation whose charter expires by its own limitation or is

39annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interests which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest.

Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

Since the corporate life of RUBY as stated in its articles of incorporation expired, without a valid extension having been effected, it was deemed dissolved by such expiration without need of further action on the part of the corporation or the State.[71] With greater reason then should liquidation ensue considering that the last paragraph of Sec. 4-9 of the Rules of Procedure on Corporate Recovery mandates the SEC to order the dissolution and liquidation proceedings under Rule VI. Sec. 6-1, Rule VI likewise authorizes the SEC on motion or motu proprio, or upon recommendation of the management committee, to order dissolution of the debtor corporation and the liquidation of its remaining assets, appointing a Liquidator for the purpose, if the continuance in business of the debtor is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors, or the general public.

It cannot be denied that with the current divisiveness, distrust and antagonism between the majority and minority stockholders, the long agony and extreme prejudice caused by numerous litigations to the creditors, and the bleak prospects for business recovery in the light of problems with the local government which are implementing more restrictions and anti-pollution measures that practically banned the operation of RUBYs glass plant liquidation becomes the only viable course for RUBY to stave off any further losses and dissipation of its assets. Liquidation would also ensure an orderly and equitable settlement of all creditors of RUBY, both secured and unsecured.

The SECs utter disregard of the rights of the minority in applying the provisions of the Rules of Procedure on Corporate Recovery is inconsistent with the policy of liberal construction of the said rules to assist the parties in obtaining a just, expeditious and inexpensive settlement of cases.[72] Petitioners majority stockholders, however, assert that the findings and conclusions of the SEC on the matter of the dismissal of RUBYs petition are binding and conclusive upon the CA and this Court. They contend that reviewing courts are not supposed to substitute their judgment for those made by administrative bodies specifically clothed with authority to pass upon matters over which they have acquired expertise.[73] Given our foregoing findings clearly showing that the SEC acted arbitrarily and committed patent errors and grave

abuse of discretion, this case falls under the exception to the general rule.

As we held in Ruby Industrial Corporation v. Court of Appeals:

The settled doctrine is that factual findings of an administrative agency are accorded respect and, at times, finality for they have acquired the expertise inasmuch as their jurisdiction is confined to specific matters. Nonetheless, these doctrines do not apply when the board or official has gone beyond his statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to his duty or with grave abuse of discretion. In Leongson vs. Court of Appeals, we held: once the actuation of the administrative official or administrative board or agency is tainted by a failure to abide by the command of the law, then it is incumbent on the courts of justice to set matters right, with this Tribunal having the last say on the matter.[74]

Petitioners majority stockholders further insist that the minority stockholders were mistaken when they contended that the rehabilitation of RUBY is dependent on the unwinding by the SEC of the illegal assignments and mortgages. They assert that aside from the fact that the SEC had nothing to unwind because the alleged illegal assignments and mortgages were already declared null and void, the said assignments and mortgages will not affect the rehabilitation of Ruby; the same affecting only the issue of how, as to who will be its creditors.

Such contention is untenable and contrary to our previous ruling in G.R. Nos. 124185-87. With the nullification of the deeds of assignments of credit executed by some of Rubys secured creditors in favor of BENHAR, it logically follows that the assignors or the original bank creditors remain as the creditors on record of RUBY. We have noted that BENHAR, which is controlled by the family of Henry Yu who is also a director and stockholder of RUBY, was not listed as one of RUBYs creditors at the time RUBY filed the petition for suspension of payment. Petitioners majority stockholders insinuation that RUBYs credits may have been assigned to third parties, if not referring to BENHAR or its conduits, implies two things: either the assignments declared void by this Courts January 20, 1998 decision continues to be recognized by the majority stockholders, in violation of the said decision, or other third parties in connivance with BENHAR and/or the controlling stockholders had subsequently entered the picture, without approval of the SEC and while the SEC December 20, 1983 Order enjoining the disposition of RUBYs properties was in force.

The majority stockholders eagerness to have the suspension order lifted or vacated by the SEC without any order for its liquidation evinces a total disregard of the mandate of Sec. 4-9 of the Rules of Procedure on Corporate Recovery, and their obvious lack of any intent to render an accounting of all funds, properties and details of the unlawful assignment transactions to the prejudice of RUBY, minority stockholders and the majority of RUBYs creditors. The majority stockholders and BENHARs conduits must not be allowed to evade the duty to make such full disclosure and account any money due to RUBY to enable the latter to effect a fair, orderly and equitable settlement of all its obligations, as well as distribution of any remaining assets after paying all its debtors.

In fine, no error was committed by the CA when it set aside the September 18, 2002 Order of the SEC and declared the nullity of the acts of majority stockholders in implementing capital infusion through issuance of additional shares in October 1991, the board resolution approving the extension of RUBYs corporate term for another 25 years, and any illegal assignment of credit executed by RUBYs creditors in favor of third parties and/or conduits of the controlling stockholders. The CA likewise correctly ordered the delivery of all documents relative to the said assignment of credits to the MANCOM or the Liquidator, the unwinding of these void deeds of assignment, and their full accounting by the majority stockholders.

40The petitioners majority stockholders and China Bank cannot be permitted to raise any issue again regarding the validity of any assignment of credit made during the effectivity of the suspension order and before the finality of the September 18, 2002 Order lifting the same. While China Bank is not precluded from questioning the validity of the December 20, 1983 suspension order on the basis of res judicata, it is, however, barred from doing so by the principle of law of the case. We have held that when the validity of an interlocutory order has already been passed upon on appeal, the Decision of the Court on appeal becomes the law of the case between the same parties. Law of the case has been defined as the opinion delivered on a former appeal. More specifically, it means that whatever is once irrevocably established as the controlling legal rule of decision between the same parties in the same case continues to be the law of the case, whether correct on general principles or not, so long as the facts on which such decision was predicated continue to be the facts of the case before the court.[75]

The unwinding process of all such illegal assignment of RUBYs credits is critical and necessary, in keeping with good faith and as a matter of fairness and justice to all parties affected, particularly the unsecured creditors who stands to suffer most if left with nothing of the assets of RUBY, and the minority stockholders who waged legal battles to defend the interest of RUBY and protect the rights of the minority from the abuses of the controlling stockholders. As correctly stated by the CA:

Liquidation is imperative because the unsecured creditor must negotiate the amount of the imputable interest rate on its long unpaid credit, the decision on which assets are to be sold to liquidate the illegally assigned credits must be made, the other secured credits and the trade credits must be determined, and most importantly, the restoration of the 40.172% minority percentage of ownership must be done.[76]

However, we do not agree that it is the SEC which has the authority to supervise RUBYs liquidation.

In the case of Union Bank of the Philippines v. Concepcion,[77] the Court is presented with the issue of whether the SEC had jurisdiction to proceed with insolvency proceedings after it was shown that the debtor corporation can no longer be rehabilitated. We held that although jurisdiction over a petition to declare a corporation in a state of insolvency strictly lies with regular courts, the SEC possessed ample power under P.D. No. 902-A, as amended, to declare a corporation insolvent as an incident of and in continuation of its already acquired jurisdiction over the petition to be declared in a state of suspension of payments in the two instances provided in Sec. 5 (d)[78] thereof.

Subsequently, in Consuelo Metal Corporation v. Planters Development Bank[79] the Court was again confronted with the same issue. The original petition filed by the debtor corporation was for suspension of payment, rehabilitation and appointment of a rehabilitation receiver or management committee. Finding the petition sufficient in form and substance, the SEC issued an order suspending immediately all actions for claims against the petitioner pending before any court, tribunal or body until further orders from the court. It also created a management committee to undertake petitioners rehabilitation. Four years later, upon the management committees recommendation, the SEC issued an omnibus order directing the dissolution and liquidation of the petitioner, and that the proceedings on and implementation of the order of liquidation be commenced at the Regional Trial Court to which the case was transferred. However, the trial court refused to act on the motion filed by the petitioner who requested for the issuance of a TRO against the extrajudicial foreclosure initiated by one of its creditors. The trial court ruled that since the SEC had already terminated and decided on the merits the petition for suspension of payment, the trial court no longer had legal basis to act on petitioners motion. It likewise denied the motion for reconsideration stating that petition for suspension of payment could not be converted into a petition for dissolution and liquidation because they covered different subject matters and were governed by different rules. Petitioners remedy thus was to file a new petition for dissolution and liquidation either with the SEC or the trial court.

When the case was elevated to the CA, the petition was dismissed affirming that under Sec. 121 of the Corporation Code, the SEC had jurisdiction to hear the petition for dissolution and liquidation. On motion for reconsideration, the CA remanded the case to the SEC for proceedings under Sec. 121 of the Corporation Code. The CA denied the motion for reconsideration filed by the respondent creditor, who then filed a petition for review with this Court.

We ruled that the SEC observed the correct procedure under the present law, in cases where it merely retained jurisdiction over pending cases for suspension of payments/rehabilitation, thus:

Republic Act No. 8799 (RA 8799) transferred to the appropriate regional trial courts the SECs jurisdiction defined under Section 5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799 provides:

The Commissions jurisdiction over all cases enumerated under Sec. 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. (Emphasis supplied)

The SEC assumed jurisdiction over CMCs petition for suspension of payment and issued a suspension order on 2 April 1996 after it found CMCs petition to be sufficient in form and substance. While CMCs petition was still pending with the SEC as of 30 June 2000, it was finally disposed of on 29 November 2000 when the SEC issued its Omnibus Order directing the dissolution of CMC and the transfer of the liquidation proceedings before the appropriate trial court. The SEC finally disposed of CMCs petition for suspension of payment when it determined that CMC could no longer be successfully rehabilitated.

However, the SECs jurisdiction does not extend to the liquidation of a corporation. While the SEC has jurisdiction to order the dissolution of a corporation, jurisdiction over the liquidation of the corporation now pertains to the appropriate regional trial courts. This is the reason why the SEC, in its 29 November 2000Omnibus Order, directed that the proceedings on and implementation of the order of liquidation be commenced at the Regional Trial Court to which this case shall be transferred. This is the correct procedure because the liquidation of a corporation requires the settlement of claims for and against the corporation, which clearly falls under the jurisdiction of the regular courts. The trial court is in the best position to convene all the creditors of the corporation, ascertain

41their claims, and determine their preferences.[80] (Additional emphasis supplied.)

In view of the foregoing, the SEC should now be directed to transfer this case to the proper RTC which shall supervise the liquidation proceedings under Sec. 122 of the Corporation Code. Under Sec. 6 (d) of P.D. 902-A, the SEC is empowered, on the basis of the findings and recommendations of the management committee or rehabilitation receiver, or on its own findings, to determine that the continuance in business of a debtor corporation under suspension of payment or rehabilitation would not be feasible or profitable nor work to the best interest of the stockholders, parties-litigants, creditors, or the general public, order the dissolution of such corporation and its remaining assets liquidated accordingly. As mentioned earlier, the procedure is governed by Rule VI of the SEC Rules of Procedure on Corporate Recovery.

However, R.A. No. 10142[81] otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, now provides for court proceedings in the rehabilitation or liquidation of debtors, both juridical and natural persons, in a manner that will ensure or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. Considering that this case was still pending when the new law took effect last year, the RTC to which this case will be transferred shall be guided by Sec. 146 of said law, which states:

SEC. 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases. This Act shall govern all petitions filed after it has taken effect. All further proceedings in insolvency, suspension of payments and rehabilitation cases then pending, except to the extent that in opinion of the court their application would not be feasible or would work injustice, in which event the procedures set forth in prior laws and regulations shall apply.

WHEREFORE, the petitions for review on certiorari are DENIED. The Decision dated May 26, 2004 and Resolution dated November 4, 2004 of the Court of Appeals in CA-G.R. SP No. 73195 are hereby AFFIRMED with MODIFICATION in that the Securities and Exchange Commission is hereby ordered toTRANSFER SEC Case No. 2556 to the appropriate Regional Trial Court which is hereby DIRECTED to supervise the liquidation of Ruby Industrial Corporation under the provisions of R.A. No. 10142.

With costs against the petitioners.

SO ORDERED.

Commencement of Corporate Existence

SECOND DIVISION MARC II MARKETING, INC. and LUCILA V. JOSON,Petitioners,  versus  ALFREDO M. JOSON,Respondent.

  G.R. No. 171993

Promulgated:

 

December 12, 2011

     

 D E C I S I O N

 

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners Marc II Marketing, Inc. and Lucila V. Joson assailed the Decision[1] dated 20 June 2005 of the Court of Appeals in CA-G.R. SP No. 76624 for reversing and setting aside the Resolution[2] of the National Labor Relations Commission (NLRC) dated 15 October 2002, thereby affirming the Labor Arbiters Decision[3] dated 1 October 2001 finding herein respondent Alfredo M. Josons dismissal from employment as illegal. In the questioned Decision, the Court of Appeals upheld the Labor Arbiters jurisdiction over the case

on the basis that respondent was not an officer but a mere employee of petitioner Marc II Marketing, Inc., thus, totally disregarding the latters allegation of intra-corporate controversy. Nonetheless, the Court of Appeals remanded the case to the NLRC for further proceedings to determine the proper amount of monetary awards that should be given to respondent.

 Assailed as well is the Court of Appeals Resolution[4] dated 7 March 2006 denying their Motion for Reconsideration.

 Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and existing under and by virtue of the laws of the Philippines. It is primarily engaged in buying, marketing, selling and distributing in retail or wholesale for export or import household appliances and products and other items.[5]It took over the business operations of Marc Marketing, Inc. which was made non-operational following its incorporation and registration with the Securities and Exchange Commission (SEC). Petitioner Lucila V. Joson (Lucila) is the President and majority stockholder of petitioner corporation. She was also the former President and majority stockholder of the defunct Marc Marketing, Inc. 

Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager, incorporator, director and stockholder of petitioner corporation. 

The controversy of this case arose from the following factual milieu:

Before petitioner corporation was officially incorporated,[6] respondent has already been engaged by petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to work as the General Manager of petitioner corporation. It was formalized through the execution of a Management Contract[7] dated 16 January 1994 under the letterhead of Marc Marketing, Inc.[8] as petitioner corporation is yet to be incorporated at the time of its execution. It was explicitly provided therein that respondent shall be entitled to 30% of its net income for his work as General Manager. Respondent will also be granted 30% of its net profit to compensate for the possible loss of opportunity to work overseas.[9] 

Pending incorporation of petitioner corporation, respondent was designated as the General Manager of Marc Marketing, Inc., which was then in the process of winding up its business. For occupying the said position, respondent was among its corporate officers by the express provision of Section 1, Article IV[10] of its by-laws.[11] 

On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC. Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to discharge his duties as General Manager but this time under petitioner corporation.

 Pursuant to Section 1, Article IV[12] of petitioner corporations by-laws,[13] its corporate officers are as follows: Chairman, President, one or more Vice-President(s), Treasurer and Secretary. Its Board of Directors, however, may, from time to time, appoint such other officers as it may determine to be necessary or proper. 

Per an undated Secretarys Certificate,[14] petitioner corporations Board of Directors conducted a meeting on 29 August 1994 where respondent was appointed as one of its corporate officers with the designation or title of General Manager to function as a managing director with other duties and responsibilities that the Board of Directors may provide and authorized.[15] 

Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations, as evidenced by an Affidavit of Non-Operation[16] dated 31 August 1998, due to poor sales collection aggravated by the inefficient management of its affairs. On the same date, it formally informed respondent of the cessation of its business operation. Concomitantly, respondent was apprised of the termination of his services as General Manager since his services as such would no longer be necessary for the winding up of its affairs.[17] 

Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against petitioners before the Labor Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-99. 

In his complaint, respondent averred that petitioner Lucila dismissed him from his employment with petitioner

42corporation due to the feeling of hatred she harbored towards his family. The same was rooted in the filing by petitioner Lucilas estranged husband, who happened to be respondents brother, of a Petition for Declaration of Nullity of their Marriage.[18] 

For the parties failure to settle the case amicably, the Labor Arbiter required them to submit their respective position papers. Respondent complied but petitioners opted to file a Motion to Dismiss grounded on the Labor Arbiters lack of jurisdiction as the case involved an intra-corporate controversy, which jurisdiction belongs to the SEC [now with the Regional Trial Court (RTC)].[19] Petitioners similarly raised therein the ground of prescription of respondents monetary claim. 

On 5 September 2000, the Labor Arbiter issued an Order[20] deferring the resolution of petitioners Motion to Dismiss until the final determination of the case. The Labor Arbiter also reiterated his directive for petitioners to submit position paper. Still, petitioners did not comply. Insisting that the Labor Arbiter has no jurisdiction over the case, they instead filed an Urgent Motion to Resolve the Motion to Dismiss and the Motion to Suspend Filing of Position Paper. 

In an Order[21] dated 15 February 2001, the Labor Arbiter denied both motions and declared final the Order dated 5 September 2000. The Labor Arbiter then gave petitioners a period of five days from receipt thereof within which to file position paper, otherwise, their Motion to Dismiss will be treated as their position paper and the case will be considered submitted for decision. 

Petitioners, through counsel, moved for extension of time to submit position paper. Despite the requested extension, petitioners still failed to submit the same. Accordingly, the case was submitted for resolution. 

On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal portion reads as follows: 

WHEREFORE, premises considered, judgment is hereby rendered declaring [respondents] dismissal from employment illegal. Accordingly, [petitioners] are hereby ordered: 

1.      To reinstate [respondent] to his former or equivalent position without loss of seniority rights, benefits, and privileges;

2.      Jointly and severally liable to pay [respondents] unpaid wages in the amount of P450,000.00 per month from [26 March 1996] up to time of dismissal in the total amount of P6,300,000.00;

3.      Jointly and severally liable to pay [respondents] full backwages in the amount of P450,000.00 per month from date of dismissal until actual reinstatement which at the time of promulgation amounted to P21,600,000.00;

4.      Jointly and severally liable to pay moral damages in the amount of P100,000.00 and attorneys fees in the amount of 5% of the total monetary award.[22][Emphasis supplied.]

In the aforesaid Decision, the Labor Arbiter initially resolved petitioners Motion to Dismiss by finding the ground of lack of jurisdiction to be without merit. The Labor Arbiter elucidated that petitioners failed to adduce evidence to prove that the present case involved an intra-corporate controversy. Also, respondents money claim did not arise from his being a director or stockholder of petitioner corporation but from his position as being its General Manager. The Labor Arbiter likewise held that respondent was not a corporate officer under petitioner corporations by-laws. As such, respondents complaint clearly arose from an employer-employee relationship, thus, subject to the Labor Arbiters jurisdiction. 

The Labor Arbiter then declared respondents dismissal from employment as illegal. Respondent, being a regular employee of petitioner corporation, may only be dismissed for a valid cause and upon proper compliance with the requirements of due process. The records, though, revealed that petitioners failed to present any evidence to justify respondents dismissal. 

Aggrieved, petitioners appealed the aforesaid Labor Arbiters Decision to the NLRC. 

In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving credence to the Secretarys Certificate, which evidenced petitioner corporations Board of Directors meeting in which a resolution was approved appointing respondent as its corporate officer with designation as General Manager. Therefrom, the NLRC reversed and set aside the Labor Arbiters Decision dated 1 October 2001 and dismissed respondents Complaint for want of jurisdiction.[23] 

The NLRC enunciated that the validity of respondents appointment and termination from the position of General Manager was made subject to the approval of petitioner corporations Board of Directors. Had respondent been an ordinary employee, such board action would not have been required. As such, it is clear that respondent was a corporate officer whose dismissal involved a purely intra-corporate controversy. The NLRC went further by stating that respondents claim for 30% of the net profit of the corporation can only emanate from his right of ownership therein as stockholder, director and/or corporate officer. Dividends or profits are paid only to stockholders or directors of a corporation and not to any ordinary employee in the absence of any profit sharing scheme. In addition, the question of remuneration of a person who is not a mere employee but a stockholder and officer of a corporation is not a simple labor problem. Such matter comes within the ambit of corporate affairs and management and is an intra-corporate controversy in contemplation of the Corporation Code.[24] 

When respondents Motion for Reconsideration was denied in another Resolution[25] dated 23 January 2003, he filed a Petition for Certiorari with the Court of Appeals ascribing grave abuse of discretion on the part of the NLRC. 

On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the Labor Arbiter has jurisdiction over the present controversy. It upheld the finding of the Labor Arbiter that respondent was a mere employee of petitioner corporation, who has been illegally dismissed from employment without valid cause and without due process. Nevertheless, it ordered the records of the case remanded to the NLRC for the determination of the appropriate amount of monetary awards to be given to respondent. The Court of Appeals, thus, decreed: 

WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED to have jurisdiction over the controversy. The records are REMANDED to the NLRC for further proceedings to determine the appropriate amount of monetary awards to be adjudged in favor of [respondent]. Costs against the [petitioners] in solidum.[26] 

Petitioners moved for its reconsideration but to no avail.[27] 

Petitioners are now before this Court with the following assignment of errors: 

I.  THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN DECIDING THAT THE NLRC HAS THE JURISDICTION IN RESOLVING A PURELY INTRA-CORPORATE MATTER WHICH IS COGNIZABLE BY THE SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL COURT.  

II.   ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE, STILL THE COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO M. JOSON AND MARC II MARKETING, INC. [PETITIONER CORPORATION]. 

43III.  ASSUMING GRATIS ARGUENDO THAT THE

NLRC HAS JURISDICTION OVER THE CASE, THE COURT OF APPEALS ERRED IN NOT RULING THAT THELABOR ARBITER COMMITTED GRAVE ABUSE OF DISCRETION IN AWARDING MULTI-MILLION PESOS IN COMPENSATION AND BACKWAGES BASED ON THE PURPORTED GROSS INCOME OF [PETITIONER CORPORATION].  

IV.  THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN NOT MAKING ANY FINDINGS AND RULING THAT [PETITIONER LUCILA] SHOULD NOT BE HELD SOLIDARILY LIABLE IN THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH ON HER PART.[28]

 

Petitioners fault the Court of Appeals for having sustained the Labor Arbiters finding that respondent was not a corporate officer under petitioner corporations by-laws. They insist that there is no need to amend the corporate by-laws to specify who its corporate officers are. The resolution issued by petitioner corporations Board of Directors appointing respondent as General Manager, coupled with his assumption of the said position, positively made him its corporate officer. More so, respondents position, being a creation of petitioner corporations Board of Directors pursuant to its by-laws, is a corporate office sanctioned by the Corporation Code and the doctrines previously laid down by this Court. Thus, respondents removal as petitioner corporations General Manager involved a purely intra-corporate controversy over which the RTC has jurisdiction. 

Petitioners further contend that respondents claim for 30% of the net profit of petitioner corporation was anchored on the purported Management Contract dated 16 January 1994. It should be noted, however, that said Management Contract was executed at the time petitioner corporation was still nonexistent and had no juridical personality yet. Such being the case, respondent cannot invoke any legal right therefrom as it has no legal and binding effect on petitioner corporation. Moreover, it is clear from the Articles of Incorporation of petitioner corporation that respondent was its director and stockholder. Indubitably, respondents claim for his share in the profit of petitioner corporation was based on his capacity as such and not by virtue of any employer-employee relationship. 

Petitioners further avow that even if the present case does not pose an intra-corporate controversy, still, the Labor Arbiters multi-million peso awards in favor of respondent were erroneous. The same was merely based on the latters self-serving computations without any supporting documents. 

Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner corporation. There was neither allegation nor iota of evidence presented to show that she acted with malice and bad faith in her dealings with respondent. Moreover, the Labor Arbiter, in his Decision, simply concluded that petitioner Lucila was jointly and severally liable with petitioner corporation without making any findings thereon. It was, therefore, an error for the Court of Appeals to hold petitioner Lucila solidarily liable with petitioner corporation. 

From the foregoing arguments, the initial question is which between the Labor Arbiter or the RTC, has jurisdiction over respondents dismissal as General Manager of petitioner corporation. Its resolution necessarily entails the determination of whether respondent as General Manager of petitioner corporation is a corporate officer or a mere employee of the latter. 

While Article 217(a)2[29] of the Labor Code, as amended, provides that it is the Labor Arbiter who has the original and exclusive jurisdiction over cases involving termination or dismissal of workers when the person dismissed or terminated is a corporate officer, the case automatically falls within the province of the RTC. The dismissal of a corporate officer is always regarded as a corporate act and/or an intra-corporate controversy.[30]

Under Section 5[31] of Presidential Decree No. 902-A, intra-corporate controversies are those 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. It also includes controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations.[32]

 Accordingly, in determining whether the SEC (now

the RTC) has jurisdiction over the controversy, the status or relationship of the parties and the nature of the question that is the subject of their controversy must be taken into consideration.[33]

 In Easycall Communications Phils., Inc. v. King, this

Court held that in the context of Presidential Decree No. 902-A, corporate officers are those officers of a corporation who are given that character either by the Corporation Code or by the corporations by-laws. Section 25[34] of the Corporation Code specifically enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such other officers as may be provided for in the by-laws.[35]   

The aforesaid Section 25 of the Corporation Code, particularly the phrase such other officers as may be provided for in the by-laws, has been clarified and elaborated in this Courts recent pronouncement in Matling Industrial and Commercial Corporation v. Coros, where it held, thus:

 Conformably with Section 25, a

position must be expressly mentioned in the [b]y-[l]aws in order to be considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling provision is not enough to make a position a corporate office. [In] Guerrea v. Lezama [citation omitted] the first ruling on the matter, held that the only officers of a corporation were those given that character either by the Corporation Code or by the [b]y-[l]aws; the rest of the corporate officers could be considered only as employees or subordinate officials. Thus, it was held in Easycall Communications Phils., Inc. v. King [citation omitted]:

 An "office" is created

by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. 

x x x x 

This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states that the corporate officers are the President, Secretary, Treasurer and such other officers as may be provided for in the [b]y-[l]aws. Accordingly, the corporate officers in the context of PD No. 902-A are exclusively those who are given that character either by the Corporation Code or by the corporations [b]y[l]aws.

 A different interpretation can

easily leave the way open for the Board of Directors to circumvent the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the [b]y-[l]aws of an enabling clause on the creation of just any corporate officer position.

 It is relevant to state in this

connection that the SEC, the primary agency administering the Corporation Code, adopted a similar interpretation of Section 25 of the Corporation Code

44in its Opinion dated November 25, 1993 [citation omitted], to wit:

 Thus, pursuant to the

above provision (Section 25 of the Corporation Code), whoever are the corporate officers enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no power to create other Offices without amending first the corporate [b]y-laws. However, the Board may create appointive positions other than the positions of corporate Officers, but the persons occupying such positions are not considered as corporate officers within the meaning of Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate Officers, except those functions lawfully delegated to them. Their functions and duties are to be determined by the Board of Directors/Trustees.[36] [Emphasis supplied.]

 A careful perusal of petitioner corporations by-laws,

particularly paragraph 1, Section 1, Article IV,[37] would explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2) President; (3) one or more Vice-President; (4) Treasurer; and (5) Secretary.[38] The position of General Manager was not among those enumerated.

 Paragraph 2, Section 1, Article IV of petitioner

corporations by-laws, empowered its Board of Directors to appoint such other officers as it may determine necessary or proper.[39] It is by virtue of this enabling provision that petitioner corporations Board of Directors allegedly approved a resolution to make the position of General Manager a corporate office, and, thereafter, appointed respondent thereto making him one of its corporate officers. All of these acts were done without first amending its by-laws so as to include the General Manager in its roster of corporate officers.

 With the given circumstances and in conformity

with Matling Industrial and Commercial Corporation v. Coros, this Court rules that respondent was not a corporate officer of petitioner corporation because his position as General Manager was not specifically mentioned in the roster of corporate officers in its corporate by-laws. The enabling clause in petitioner corporations by-laws empowering its Board of Directors to create additional officers, i.e., General Manager, and the alleged subsequent passage of a board resolution to that effect cannot make such position a corporate office. Matling clearly enunciated that the board of directors has no power to create other corporate offices without first amending the corporate by-laws so as to include therein the newly created corporate office.Though the board of directors may create appointive positions other than the positions of corporate officers, the persons occupying such positions cannot be viewed as corporate officers under Section 25 of the Corporation Code.[40] In view thereof, this Court holds that unless and until petitioner corporations by-laws is amended for the inclusion of General Manager in the list of its corporate officers, such position cannot be considered as a corporate office within the realm of Section 25 of the Corporation Code.

 This Court considers that the interpretation of

Section 25 of the Corporation Code laid down in Matling safeguards the constitutionally enshrined right of every employee to security of tenure. To allow the creation of a corporate officer position by a simple inclusion in the corporate by-laws of an enabling clause empowering the board of directors to do so can result in the circumvention of that constitutionally well-protected right.[41]

 It is also of no moment that respondent, being

petitioner corporations General Manager, was given the functions of a managing director by its Board of Directors. As held in Matling, the only officers of a corporation are those given that character either by the Corporation Code or by the corporate by-laws. It follows then that the corporate officers enumerated in the by-laws are the exclusive officers of the corporation while the rest could only be regarded as mere employees or subordinate officials.[42] Respondent, in this case, though occupying a high ranking and vital position in

petitioner corporation but which position was not specifically enumerated or mentioned in the latters by-laws, can only be regarded as its employee or subordinate official. Noticeably, respondents compensation as petitioner corporations General Manager was set, fixed and determined not by the latters Board of Directors but simply by its President, petitioner Lucila. The same was not subject to the approval of petitioner corporations Board of Directors. This is an indication that respondent was an employee and not a corporate officer. 

To prove that respondent was petitioner corporations corporate officer, petitioners presented before the NLRC an undated Secretarys Certificate showing that corporations Board of Directors approved a resolution making respondents position of General Manager a corporate office. The submission, however, of the said undated Secretarys Certificate will not change the fact that respondent was an employee. The certification does not amount to an amendment of the by-laws which is needed to make the position of General Manager a corporate office. 

Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned in that undated Secretarys Certificate and the latter itself were obvious fabrications, a mere afterthought. Here we quote with conformity the Court of Appeals findings on this matter stated in this wise: 

The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29 August 1994], why did not [herein petitioners] attach it to their [M]otion to [D]ismiss filed on [26 August 1999], when it could have been the best evidence that [herein respondent] was a corporate officer? Secondly, why did they report the [respondent] instead as [herein petitioner corporations] employee to the Social Security System [(SSS)] on [11 October 1994] or a later date than their [29 August 1994] board resolution? Thirdly, why is there no indication that the [respondent], the person concerned himself, and the [SEC] were furnished with copies of said board resolution?And, lastly, why is the corporate [S]ecretarys [C]ertificate not notarized in keeping with the customary procedure? That is why we called it manipulative evidence as it was a shameless sham meant to be thrown in as a wild card to muddle up the [D]ecision of the Labor Arbiter to the end that it be overturned as the latter had firmly pointed out that [respondent] is not a corporate officer under [petitioner corporations by-laws]. Regrettably, the [NLRC] swallowed the bait hook-line-and sinker. It failed to see through its nature as a belatedly manufactured evidence. And even on the assumption that it were an authentic board resolution, it did not make [respondent] a corporate officer as the board did not first and properly create the position of a [G]eneral [M]anager by amending its by-laws. 

(2) The scope of the term officer in the phrase and such other officers as may be provided for in the by-laws[] (Sec. 25, par. 1), would naturally depend much on the provisions of the by-laws of the corporation. (SEC Opinion, [4 December 1991.]) If the by-laws enumerate the officers to be elected by the board, the provision is conclusive, and the board is without power to create new offices without amending the by-laws. (SEC Opinion, [19 October 1971.]) 

(3) If, for example, the general manager of a corporation is not listed as an officer, he is to be classified as an employee although he has always been considered as one of the principal officers of a corporation [citing De Leon, H. S., The Corporation Code of the Philippines Annotated, 1993

45Ed., p. 215.][43][Emphasis supplied.]  

That respondent was also a director and a stockholder of petitioner corporation will not automatically make the case fall within the ambit of intra-corporate controversy and be subjected to RTCs jurisdiction. To reiterate, not all conflicts between the stockholders and the corporation are classified as intra-corporate. Other factors such as the status or relationship of the parties and the nature of the question that is the subject of the controversy[44] must be considered in determining whether the dispute involves corporate matters so as to regard them as intra-corporate controversies.[45] As previously discussed, respondent was not a corporate officer of petitioner corporation but a mere employee thereof so there was no intra-corporate relationship between them. With regard to the subject of the controversy or issue involved herein, i.e., respondents dismissal as petitioner corporations General Manager, the same did not present or relate to an intra-corporate dispute. To note, there was no evidence submitted to show that respondents removal as petitioner corporations General Manager carried with it his removal as its director and stockholder. Also, petitioners allegation that respondents claim of 30% share of petitioner corporations net profit was by reason of his being its director and stockholder was without basis, thus, self-serving. Such an allegation was tantamount to a mere speculation for petitioners failure to substantiate the same. 

In addition, it was not shown by petitioners that the position of General Manager was offered to respondent on account of his being petitioner corporations director and stockholder. Also, in contrast to NLRCs findings, neither petitioner corporations by-laws nor the Management Contract stated that respondents appointment and termination from the position of General Manager was subject to the approval of petitioner corporations Board of Directors. If, indeed, respondent was a corporate officer whose termination was subject to the approval of its Board of Directors, why is it that his termination was effected only by petitioner Lucila, President of petitioner corporation? The records are bereft of any evidence to show that respondents dismissal was done with the conformity of petitioner corporations Board of Directors or that the latter had a hand on respondents dismissal. No board resolution whatsoever was ever presented to that effect. 

With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying the General Manager position, was not a corporate officer of petitioner corporation rather he was merely its employee occupying a high-ranking position. 

Accordingly, respondents dismissal as petitioner corporations General Manager did not amount to an intra-corporate controversy. Jurisdiction therefor properly belongs with the Labor Arbiter and not with the RTC. 

Having established that respondent was not petitioner corporations corporate officer but merely its employee, and that, consequently, jurisdiction belongs to the Labor Arbiter, this Court will now determine if respondents dismissal from employment is illegal. 

It was not disputed that respondent worked as petitioner corporations General Manager from its incorporation on 15 August 1994 until he was dismissed on 30 June 1997. The cause of his dismissal was petitioner corporations cessation of business operations due to poor sales collection aggravated by the inefficient management of its affairs. 

In termination cases, the burden of proving just and valid cause for dismissing an employee from his employment rests upon the employer. The latter's failure to discharge that burden would necessarily result in a finding that the dismissal is unjustified.[46] 

Under Article 283 of the Labor Code, as amended, one of the authorized causes in terminating the employment of an employee is the closing or cessation of operation of the establishment or undertaking. Article 283 of the Labor Code, as amended, reads, thus: 

ART. 283. Closure of establishment and reduction of personnel. The employer may also terminate the employment of any employee due to the installation of labor saving-devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the

establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Department of Labor and Employment at least one (1) month before the intended date thereof. x x x In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or to at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year. [Emphasis supplied.]

 From the afore-quoted provision, the closure or

cessation of operations of establishment or undertaking may either be due to serious business losses or financial reverses or otherwise. If the closure or cessation was due to serious business losses or financial reverses, it is incumbent upon the employer to sufficiently and convincingly prove the same. If it is otherwise, the employer can lawfully close shop anytime as long as it was bona fide in character and not impelled by a motive to defeat or circumvent the tenurial rights of employees and as long as the terminated employees were paid in the amount corresponding to their length of service.[47]

 Accordingly, under Article 283 of the Labor Code, as

amended, there are three requisites for a valid cessation of business operations: (a) service of awritten notice to the employees and to the Department of Labor and Employment (DOLE) at least one month before the intended date thereof; (b) the cessation of business must be bona fide in character; and (c) payment to the employees of termination pay amounting to one month pay or at least one-half month pay for every year of service, whichever is higher. 

In this case, it is obvious that petitioner corporations cessation of business operations was not due to serious business losses. Mere poor sales collection, coupled with mismanagement of its affairs does not amount to serious business losses. Nonetheless, petitioner corporation can still validly cease or close its business operations because such right is legally allowed, so long as it was not done for the purpose of circumventing the provisions on termination of employment embodied in the Labor Code.[48] As has been stressed by this Court in Industrial Timber Corporation v. Ababon, thus:

Just as no law forces anyone to go into business, no law can compel anybody to continue the same.  It would be stretching the intent and spirit of the law if a court interferes with management's prerogative to close or cease its business operations just because the business is not suffering from any loss or because of the desire to provide the workers continued employment.[49]

 A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and ceased business operations beginning 30 June 1997. This was evidenced by a notarized Affidavit of Non-Operation dated 31 August 1998. There was also no showing that the cessation of its business operations was done in bad faith or to circumvent the Labor Code. Nevertheless, in doing so, petitioner corporation failed to comply with the one-month prior written notice rule. The records disclosed that respondent, being petitioner corporations employee, and the DOLE were not given a written notice at least one month before petitioner corporation ceased its business operations. Moreover, the records clearly show that respondents dismissal was effected on the same date that petitioner corporation decided to stop and cease its operation. Similarly, respondent was not paid separation pay upon termination of his employment. As respondents dismissal was not due to serious business losses, respondent is entitled to payment of separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher. The rationale for this was laid down in Reahs Corporation v. National Labor Relations Commission,[50] thus: 

The grant of separation pay, as an incidence of termination of employment under Article 283, is a

46statutory obligation on the part of the employer and a demandable right on the part of the employee, except only where the closure or cessation of operations was due to serious business losses or financial reverses and there is sufficient proof of this fact or condition. In the absence of such proof of serious business losses or financial reverses, the employer closing his business is obligated to pay his employees and workers their separation pay.

 The rule, therefore, is that in all

cases of business closure or cessation of operation or undertaking of the employer, the affected employee is entitled to separation pay. This is consistent with the state policy of treating labor as a primary social economic force, affording full protection to its rights as well as its welfare. The exception is when the closure of business or cessation of operations is due to serious business losses or financial reverses duly proved, in which case, the right of affected employees to separation pay is lost for obvious reasons.[51] [Emphasis supplied.]

 As previously discussed, respondents dismissal was

due to an authorized cause, however, petitioner corporation failed to observe procedural due process in effecting such dismissal. In Culili v. Eastern Telecommunications Philippines, Inc.,[52] this Court made the following pronouncements, thus: 

x x x there are two aspects which characterize the concept of due process under the Labor Code: one is substantive whether the termination of employment was based on the provision of the Labor Code or in accordance with the prevailing jurisprudence; the other is procedural the manner in which the dismissal was effected. 

Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:

 (d) In all cases of termination of employment, the following standards of due process shall be substantially observed:

 x x x x

 For termination

of employment as defined in Article 283 of the Labor Code, the requirement of due process shall be deemed complied with upon service of a written notice to the employee and the appropriate Regional Office of the Department of Labor and Employment at least thirty days before effectivity of the termination, specifying the ground or grounds for termination.

 In Mayon Hotel & Restaurant v. Adana, [citation

omitted] we observed: 

The requirement of law mandating the giving of notices was intended not only to enable the employees to look for another employment and therefore ease the impact of the loss of their jobs and the corresponding income, but more importantly, to give

the Department of Labor and Employment (DOLE) the opportunity to ascertain the verity of the alleged authorized cause of termination.[53] [Emphasis supplied]. 

 The records of this case disclosed that there was

absolutely no written notice given by petitioner corporation to the respondent and to the DOLE prior to the cessation of its business operations. This is evident from the fact that petitioner corporation effected respondents dismissal on the same date that it decided to stop and cease its business operations. The necessary consequence of such failure to comply with the one-month prior written notice rule, which constitutes a violation of an employees right to statutory due process, is the payment of indemnity in the form of nominal damages.[54] In Culili v. Eastern Telecommunications Philippines, Inc., this Court further held:

In Serrano v. National Labor Relations Commission [citation omitted], we noted that a job is more than the salary that it carries. There is a psychological effect or a stigma in immediately finding ones self laid off from work. This is exactly why our labor laws have provided for mandating procedural due process clauses. Our laws, while recognizing the right of employers to terminate employees it cannot sustain, also recognize the employees right to be properly informed of the impending severance of his ties with the company he is working for. x x x.

 x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon employers who fail to comply with the procedural due process requirements in terminating its employees. In Agabon v. National Labor Relations Commission [citation omitted], this Court reverted back to the doctrine in Wenphil Corporation v. National Labor Relations Commission [citation omitted] and held that where the dismissal is due to a just or authorized cause, but without observance of the due process requirements, the dismissal may be upheld but the employer must pay an indemnity to the employee. The sanctions to be imposed however, must be stiffer than those imposed in Wenphil to achieve a result fair to both the employers and the employees.

 In Jaka Food Processing

Corporation v. Pacot [citation omitted], this Court, taking a cue from Agabon, held that since there is a clear-cut distinction between a dismissal due to a just cause and a dismissal due to an authorized cause, the legal implications for employers who fail to comply with the notice requirements must also be treated differently:

 Accordingly, it is wise to

hold that: (1) if the dismissal is based on a just cause under Article 282 but the employer failed to comply with the notice requirement, the sanction to be imposed upon him should be tempered because the dismissal process was, in effect, initiated by an act imputable to the employee; and (2) if the dismissal is based on an authorized cause under Article 283 but the employer failed to comply with the notice requirement, the sanction should be stiffer because the dismissal process was initiated by the employer's exercise of his management prerogative.[55] [Emphasis supplied.] 

 Thus, in addition to separation pay, respondent is

also entitled to an award of nominal damages. In conformity with this Courts ruling in Culili v. Eastern Telecommunications

47Philippines, Inc. and Shimizu Phils. Contractors, Inc. v. Callanta, both citing Jaka Food Processing Corporation v. Pacot,[56] this Court fixed the amount of nominal damages to P50,000.00. With respect to petitioners contention that the Management Contract executed between respondent and petitioner Lucila has no binding effect on petitioner corporation for having been executed way before its incorporation, this Court finds the same meritorious. Section 19 of the Corporation Code expressly provides: 

Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. [Emphasis supplied.]

  

Logically, there is no corporation to speak of prior to an entitys incorporation. And no contract entered into before incorporation can bind the corporation.

 As can be gleaned from the records, the

Management Contract dated 16 January 1994 was executed between respondent and petitioner Lucila months before petitioner corporations incorporation on 15 August 1994. Similarly, it was done when petitioner Lucila was still the President of Marc Marketing, Inc.Undeniably, it cannot have any binding and legal effect on petitioner corporation. Also, there was no evidence presented to prove that petitioner corporation adopted, ratified or confirmed the Management Contract. It is for the same reason that petitioner corporation cannot be considered estopped from questioning its binding effect now that respondent was invoking the same against it. In no way, then, can it be enforced against petitioner corporation, much less, its provisions fixing respondents compensation as General Manager to 30% of petitioner corporations net profit. Consequently, such percentage cannot be the basis for the computation of respondents separation pay. This finding, however, will not affect the undisputed fact that respondent was, indeed, the General Manager of petitioner corporation from its incorporation up to the time of his dismissal.

Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to conduct further proceedings for the sole purpose of determining the compensation that respondent was actually receiving during the period that he was the General Manager of petitioner corporation, this, for the proper computation of his separation pay.

As regards petitioner Lucilas solidary liability, this Court affirms the same.

 As a rule, corporation has a personality separate and

distinct from its officers, stockholders and members such that corporate officers are not personally liable for their official acts unless it is shown that they have exceeded their authority. However, this corporate veil can be pierced when the notion of the legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and to confuse legitimate issues. Under the Labor Code, for instance, when a corporation violates a provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of the corporation.[57]

 Based on the prevailing circumstances in this case,

petitioner Lucila, being the President of petitioner corporation, acted in bad faith and with malice in effecting respondents dismissal from employment. Although petitioner corporation has a valid cause for dismissing respondent due to cessation of business operations, however, the latters dismissal therefrom was done abruptly by its President, petitioner Lucila. Respondent was not given the required one-month prior written notice that petitioner corporation will already

cease its business operations. As can be gleaned from the records, respondent was dismissed outright by petitioner Lucila on the same day that petitioner corporation decided to stop and cease its business operations. Worse, respondent was not given separation pay considering that petitioner corporations cessation of business was not due to business losses or financial reverses.

WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7 March 2006, respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the MODIFICATION finding respondents dismissal from employment legal but without proper observance of due process. Accordingly, petitioner corporation, jointly and solidarily liable with petitioner Lucila, is hereby ordered to pay respondent the following; (1) separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, to be computed from the commencement of employment until termination; and (2) nominal damages in the amount of P50,000.00. 

This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct further proceedings for the sole purpose of determining the compensation that respondent was actually receiving during the period that he was the General Manager of petitioner corporation for the proper computation of his separation pay. 

Costs against petitioners. 

SO ORDERED.

Incorporators

FIRST DIVISION G.R. No. 164588NAUTICA CANNING  CORPORATION, FIRST DOMINION

PRIME HOLDINGS, INC. and FERNANDO R. ARGUELLES, JR., Petitioners, versus ROBERTO C. YUMUL,

Respondent. Promulgated:

October 19, 2005

 

DECISION 

Petitioners assail the September 26, 2001 Decision[1] of the Court of Appeals in CA-G.R. SP No. 61919, affirming in toto the Decision of the Securities and Exchange Commission (SEC) En Banc in SEC Case No. 10-96-5455, as well as the July 16, 2004 Resolution[2] denying the motion for reconsideration. 

The facts of the case show that Nautica Canning Corporation (Nautica) was organized and incorporated on May 11, 1994 with an authorized capital stock of P40,000,000 divided into 400,000 shares with a par value of P100.00 per share. It had a subscribed capital stock of P10,000,000 with paid-in subscriptions from its incorporators as follows:[3] Name No. of Shares Amount Subscribed Amount Paid 

ALVIN Y. DEE 89,991 P8,999,100 P4,499,100

JONATHAN Y. DEE 2 200 200

JOANNA D. LAUREL 2 200 200

DARLENE EDSA MARIE

GONZALES 2 200 200

JENNIFER Y. DEE 2 200 200

ROBERTO C. YUMUL 1 100 100

JERRY ANGPING 10,000 1,000,000 500,000

-------------- -------------------- -------------------

100,000 P10,000,000 P5,000,000

On December 19, 1994, respondent Roberto C. Yumul was appointed Chief Operating Officer/General Manager of Nautica with a monthly compensation of P85,000 and an additional compensation equal to 5% of the companys

48operating profit for the calendar year.[4] On the same date, First Dominion Prime Holdings, Inc., Nauticas parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase[5] up to 15% of the total stocks it subscribed from Nautica.

On June 22, 1995, a Deed of Trust and Assignment[6] was executed between First Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. The deed stated that the 14,999 shares were acquired and paid for in the name of the ASSIGNOR only for convenience, but actually executed in behalf of and in trust for the ASSIGNEE. 

In March 1996, Nautica declared a P35,000,000 cash dividend, P8,250,000 of which was paid to Yumul representing his 15% share. 

After Yumuls resignation from Nautica on August 5, 1996, he wrote a letter[7] to Dee requesting the latter to formalize his offer to buy Yumuls 15% share in Nautica on or before August 20, 1996; and demanding the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee, through Atty. Fernando R. Arguelles, Jr., Nauticas corporate secretary, denied the request claiming that Yumul was not a stockholder of Nautica. 

On September 6, 1996[8] and September 9, 1996,[9] Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and records. 

Yumuls requests were denied allegedly because he neither exercised the option to purchase the shares nor paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend received by Yumul is held by him only in trust for First Dominion Prime Holdings, Inc. 

Thus, Yumul filed on October 3, 1996, before the SEC a petition for mandamus with damages, with prayer that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and that the certificate of stocks corresponding thereto be issued in his name.[10] 

On October 12, 2000, the SEC En Banc rendered the Decision,[11] the dispositive portion of which reads: 

WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the respondents, as follows:

 

1.                  Declaring petitioner as a stockholder of respondent Nautica;

 

2.                  Declaring petitioner as beneficial owner of 14,999 shares of Nautica under the Deed of Trust and Assignment dated June 22, 1995

 

3.                  Declaring petitioner to be entitled to the right of inspection of the books of the corporation pursuant to the pertinent provisions of the Corporation Code; and

 

4.                  Directing the Corporate Secretary of Nautica to recognize and register the Deed of Trust and Assignment dated June 22, 1995. 

SO ORDERED.[12] 

On appeal, the Court of Appeals affirmed the decision of the SEC En Banc. Petitioners motion for reconsideration was denied in a Resolution dated July 16, 2004. 

Hence, this petition. 

At the outset, we note that petitioners recourse to this Court via a combined petition under Rule 65 and an appeal under Rule 45 of the Rules of Court is irregular. A petition for review under Rule 45 is the proper remedy of a party aggrieved by a decision of the Court of Appeals, which is not identical to a petition for certiorari under Rule 65.  Under Rule 45, decisions, final orders or resolutions of the Court of Appeals is appealed by filing a petition for review, which is a continuation of the appellate process over the original case.[13] On the other hand, the writ of certiorari under Rule 65 is filed when petitioner has no plain, speedy and adequate remedy in the ordinary course of law against its perceived grievance. A remedy is considered plain, speedy and adequate if it will promptly relieve the petitioner from the injurious effects of the judgment and the acts of the lower court or agency.

 In this case, petitioners speedy, available and

adequate remedy is appeal via Rule 45, and not certiorari under Rule 65. Notwithstanding petitioners procedural lapse, we shall treat the petition as one filed under Rule 45. The petition is partly meritorious. Petitioners contend that Yumul was not a stockholder of Nautica; that he was just a nominal owner of one share as the beneficial ownership belonged to Dee who paid for said share when Nautica was incorporated. They presented China Banking Corporation Check No. A2620636 and Citibank Check No. B82642 as proof of payment by Dee; a letter by Dee dated July 15, 1994 requesting the corporate secretary of Nautica to issue a certificate of stock in Yumuls name but in trust for Dee; and Stock Certificate No. 6 with annotation ITF Alvin Y. Dee which means that respondent held said stock In Trust For Alvin Y. Dee. We are not persuaded. 

Indeed, it is possible for a business to be wholly owned by one individual. The validity of its incorporation is not affected when such individual gives nominal ownership of only one share of stock to each of the other four incorporators. This is not necessarily illegal.[14] But, this is valid only between or among the incorporators privy to the agreement. It does bind the corporation which, at the time the agreement is made, was non-existent. Thus, incorporators continue to be stockholders of a corporation unless, subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in interest. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.[15]

 In the case at bar, the SEC and the Court of Appeals correctly found Yumul to be a stockholder of Nautica, of one share of stock recorded in Yumuls name, although allegedly held in trust for Dee. Nauticas Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC indicated that Yumul was an incorporator and subscriber of one share.[16] Even granting that there was an agreement between Yumul and Dee whereby the former is holding the share in trust for Dee, the same is binding only as between them. From the corporations vantage point, Yumul is its stockholder with one share, considering that there is no showing that Yumul transferred his subscription to Dee, the alleged real owner of the share, after Nauticas incorporation. We held in Ponce v. Alsons Cement Corp.[17] that: 

... [A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the

49corporation to recognize such rights as it is mandated by law to recognize arises. 

Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates[.]

 Moreover, the contents of the articles of

incorporation bind the corporation and its stockholders. Its contents cannot be disregarded considering that it was the basic document which legally triggered the creation of the corporation.[18]

The Court of Appeals, in affirming the factual findings of SEC, held that:

 The evidence submitted by petitioners to establish trust is palpably incompetent, consisting mainly of the self-serving allegations by the petitioners and the China Banking Corporation checks issued as payment for the shares of stock of Nautica. Dee did not testify on the supposed trust relationship between him and Yumul. While Atty. Arguelles testified, his testimony is barren of probative value since he had no first-hand knowledge of the relationship in question. The isolated fact that Dee might have paid for the share in the name of Yumul did not by itself make the latter a man of straw. Such act of payment is so nebulous and equivocal that it can not yield the meaning which the petitioners would want to squeeze from it without the clarificatory testimony of Dee.[19]

We see no cogent reason to set aside the factual findings of the SEC, as upheld by the Court of Appeals. Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality by the Supreme Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their consideration,[20] moreso if the same has been upheld by the appellate court, as in this case.

 Besides, other than petitioners self-serving assertion

that the beneficial ownership belongs to Dee, they failed to show that the subscription was transferred to Dee after Nauticas incorporation. The conduct of the parties also constitute sufficient proof of Yumuls status as a stockholder. On April 4, 1995, Yumul was elected during the regular annual stockholders meeting as a Director of Nauticas Board of Directors.[21] Thereafter, he was elected as president of Nautica.[22]Thus, Nautica and its stockholders knowingly held respondent out to the public as an officer and a stockholder of the corporation.

 Section 23 of Batas Pambansa (BP) Blg. 68 or The

Corporation Code of the Philippines requires that every director must own at least one share of the capital stock of the corporation of which he is a director. Before one may be elected president of the corporation, he must be a director.[23] Since Yumul was elected as Nauticas Director and as President thereof, it follows that he must have owned at least one share of the corporations capital stock.

 Thus, from the point of view of the corporation,

Yumul was the owner of one share of stock. As such, the SEC correctly ruled that he has the right to inspect the books and records of Nautica,[24] pursuant to Section 74 of BP Blg. 68 which states that the records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. As to whether or not Yumul is the beneficial owner of the 14,999 shares of stocks of Nautica, petitioners allege that Yumul was given the option to purchase shares of stocks in Nautica under the Option to Purchase dated December 19, 1994. However, he failed to exercise the option, thus there was no cause or consideration for the Deed of Trust and Assignment, which makes it void for being simulated or fictitious.[25]

 Anent this issue, the SEC did not make a categorical

finding on whether Yumul exercised his option and also on the validity of the Deed of Trust and Assignment. Instead, it held that:

 

... Although unsubstantiated, the apparent objective of the respondents allegation was to refute petitioners claim over the shares covered by the Deed of Trust and Assignment. This must therefore be deemed as nothing but a ploy to deprive petitioner of his right over the shares in question, which to us should not be countenanced.[26]

 Neither did the Court of Appeals rule on the issue as

it only held that: Petitioners also contend that the

Deed is a simulated contract. Simulation is the declaration of a

fictitious will, deliberately made by agreement of the parties, in order to produce, for the purposes of deception, the appearances of a judicial act which does not exist or is different with that which was really executed. The characteristic of simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties.

 The requisites for simulation are:

(a) an outward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons. These requisites have not been proven in this case.[27]

 Thus, other than defining and enumerating the

requisites of a simulated contract or deed, the Court of Appeals did not make a determination whether the SEC has the jurisdiction to resolve the issue and whether the questioned deed was fictitious or simulated.

 In Intestate Estate of Alexander T. Ty v. Court of

Appeals,[28] we held that:The question raised in the complaints is whether or not there was indeed a sale in the absence of cause or consideration. The proper forum for such a dispute is a regular trial court. The Court agrees with the ruling of the Court of Appeals that no special corporate skill is necessary in resolving the issue of the validity of the transfer of shares from one stockholder to another of the same corporation. Both actions, although involving different property, sought to declare the nullity of the transfers of said property to the decedent on the ground that they were not supported by any cause or consideration, and thus, are considered void ab initio for being absolutely simulated or fictitious. The determination whether a contract is simulated or not is an issue that could be resolved by applying pertinent provisions of the Civil Code, particularly those relative to obligations and contracts. Disputes concerning the application of the Civil Code are properly cognizable by courts of general jurisdiction. No special skill is necessary that would require the technical expertise of the SEC. (Emphasis supplied)

 

Thus, when the controversy involves matters purely civil in character, it is beyond the ambit of the limited jurisdiction of the SEC. As held in Viray v. Court of Appeals,[29] 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. This, however, is now moot and academic due to the passage of Republic Act No. 8799 or The Securities Regulation Code which took effect on August 8, 2000. The Act transferred from the SEC to the regional trial court jurisdiction over cases involving intra-corporate disputes. Thus, whether or not the issue is intra-corporate, it is now the regional trial court and no longer the SEC that takes cognizance of the controversy.

Considering that the issue of the validity of the Deed of Trust and Assignment is civil in nature, thus, under the competence

50of the regular courts, and the failure of the SEC and the Court of Appeals to make a determinative finding as to its validity, we are constrained to refrain from ruling on whether or not Yumul can compel the corporate secretary to register said deed. It is only after an appropriate case is filed and decision rendered thereon by the proper forum can the issue be resolved. 

WHEREFORE, the petition is PARTIALLY GRANTED. The September 26, 2001 Decision of the Court of Appeals in CA-G.R. SP No. 61919, isAFFIRMED insofar as it declares respondent Roberto C. Yumul as a subscriber and stockholder of one share of stock of Nautica Canning Corporation. The Decision is REVERSED and SET ASIDE insofar as it affirms the validity of the Deed of Trust and Assignment and orders its registration in the Stock and Transfer Book of Nautica Canning Corporation.

 

SO ORDERED.

By-Laws

EN BANC

[G.R. No. L-45911. April 11, 1979.]

JOHN GOKONGWEI, JR., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE

M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUÑAO, WALTHRODE B. CONDE, MIGUEL

ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and

EDUARDO R. VISAYA, Respondents.

SYNOPSIS

Petitioner (a) seeks to declare null and void the amended by-laws of respondent corporation which disqualifies any stockholder engaged in any business that competes with or is antagonistic to that of the corporation from being nominated or elected to the Board of Directors; (b) assails the order of the Securities and Exchange Commission denying his right to inspect the books of a wholly-owned subsidiary of respondent corporation; (c) assails the act of the Securities and Exchange Commission in allowing the stockholders of respondent corporation to ratify the investment of corporate funds in a foreign corporation.

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of the wholly-owned subsidiary of respondent corporation.

For lack of necessary votes the Court denied the petition insofar as it assails the validity of the by-laws and ratification of the foreign investment of respondent corporation.

On the validity of the amended By-laws, six justices (Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, JJ.,) voted to sustain the validity per se of the amended by-laws and to dismiss the petition without prejudice to the question of petitioner’s actual disqualification from running if elected from sitting as director of respondent corporation being decided, after a new and proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission and ultimately to the Supreme Court.

The aforementioned six justices, together with Fernando, J., voted to declare the issue on the validity of the foreign investment of respondent corporation as moot.

Fred Ruiz Castro, C.J., reserved his vote on the validity of the amended by-laws pending hearing by this Court on the applicability of section 13(5) of the Corporation law to petitioner.

Fernando, J., reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result.

Four Justices (Teehankee, Conception Jr., Fernandez and Guerrero, JJ.,) in a separate opinion voted against the validity of the questioned amended by-laws and held that this

question should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur in the result that petitioner may be allowed to run for and sit as director in the scheduled election and subsequent elections until disqualified after proper hearing by the respondent’s Board of Directors and petitioner’s disqualification shall have been sustained by respondent SEC en banc and ultimately by final judgment of this Court.

SYLLABUS

1. APPEAL; SUPREME COURT MAY RESOLVED CASE ON THE MERITS, INSTEAD OF REMANDING IT TO LOWER COURT. — The Supreme Court always strives to settle the entire controversy in a single proceeding, "leaving no root or branch to bear the seeds of future litigation," and to decide a case on the merits instead of remanding it to the trial court for further proceedings (a) where the ends of justice would not be subserved by the remand of the case, or (b) where public interest demands an early disposition of the case; or (c) while the trial court had already received all the evidence presented by both parties and the Supreme Court is in a position, based upon said evidence, to decide the case on its merits.

2. ID.; ID.; QUESTION OF PRIMARY JURISDICTION HAS NO APPLICATION WHERE ONLY QUESTION OF LAW IS INVOLVED. — The doctrine of primary jurisdiction has no application where only a question of law is involved. Because uniformity may be secured through review by a single Supreme Court questions of law may appropriately de determined in the first instance by courts.

3. ID.; VALIDITY OF BY-LAW OF CORPORATION IS A QUESTION OF LAW. — The validity of reasonableness of a by-laws of a corporation, whether the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is purely a question of law. This rule is subject, however, to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority.

4. CORPORATIONS; POWER TO ADOPT BY-LAWS. — Every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of it affairs. In the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its character or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation.

5. ID.; ID.; QUALIFICATIONS OF OFFICERS AND EMPLOYEES. — The term "qualifications" under section 21 of the Corporation Law which expressly empowers a corporation to prescribed in its by-laws the qualifications of directors must necessarily refer to qualifications in addition to that specified by section 30 of the Corporation law, which provides that "every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director."

6. ID.; STOCKHOLDERS MUST ABIDE BY RULE OF THE MAJORITY. — Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law. To this extent the stockholder may be considered to have parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of majority of his fellow incorporators. It cannot, therefore, be justly said that the contract, express or implied, between the corporation and the stockholders is infringed by any act of the former which is authorized by a majority.

7. ID.; ID.; AMENDMENT OF BY-LAWS; RIGHT OF DISSENTING MINORITY STOCKHOLDER. — Where the articles of the incorporation or the by-laws of a corporation has been amended by the required number of votes as provided for in the Corporation Law, and the amendment changes, diminishes or restricts the rights of the existing stockholders,

51the dissenting minority has only one right, viz.; to object thereto in writing and demand payment of his share.

8. ID.; STOCKHOLDER HAS NO VESTED RIGHT TO BE ELECTED DIRECTOR. — A stockholder has no vested right to be elected director, where the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law will be subject to amendment, alteration and modification.

9. ID.; DIRECTOR STANDS IN A FIDUCIARY RELATION TO CORPORATION AND STOCKHOLDER. — Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." The ordinary trust relationship of directors of a corporation and stockholders is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof.

10. ID.; BY-LAWS; QUALIFICATION OF DIRECTORS. — Corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation’s Board of Directors.

11. ID.; ID.; ID.; CONFLICT OF INTERESTS. — An amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid. This is based upon the principle that were the director also employed in the service of a rival company, he cannot serve both, but must betray one or the other. Thus, an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injuries the business of the corporation of which he is an officer or director."

12. ID.; ID.; DOCTRINE OF "CORPORATE OPPORTUNITY." — Corporate officers are not permitted to the use their position of trust and confidence to further their interests. The doctrine of "corporate opportunity" is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally of the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection.

13. ID.; MONOPOLIES. — The Constitution and the law prohibit combinations in restraint of trade and unfair competition. Thus, section 2 of article XIV of the Constitution provides: "The State shall regulate or prohibit private monopolies when the public interest so requires. No combination in restraint of trade or unfair competition shall be allowed." These anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumers’ effectiveness as the final arbiter in free markets. They are designed to preserve free and unfettered competition as the rule of trade, and operate to forestall concentration of economic power.

14. ID.; ID.; NATURE AND DEFINITION OF MONOPOLY. — A "monopoly" embraces any combination, the tendency of which is to prevent competition in the broad and general sense, or to control prices to the detriment of the public. It is the concentration of business in the hands of a few. The material consideration in determining its existence is not that prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when desired. It includes a condition produced by the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of competition by the unification of interest or management, or thru agreement and concert of action. An express agreement is not necessary for the existence of a combination or conspiracy in restraint of trade.

15. ID.; ID.; STOCK OWNERSHIP IN AGRICULTURAL CORPORATIONS, LIMITATIONS. — The election of the president and controlling shareholder of a corporation engaged in agriculture, to the board of another corporation, also engaged

in agriculture, may constitute a violation of the prohibition contained in section 13 (5) of the Corporation Law which provides in part that "any stockholder of more than one corporation organized for the purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or attempting to bring about a combination to exercise control of such corporations."

16. ID.; BY-LAW; QUALIFICATION IF MEMBERS OF THE BOARD; EQUAL PROTECTION. — If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory manner, but not if the by-law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate equally upon all persons of a class. Sound principles of public policy and management support the view that a by-law which disqualifies a competitor from election to the Board of Directors of another corporation is valid and reasonable.

17. ID.; ID.; PROTECTION OF LEGITIMATE CORPORATE INTERESTS. — In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in adopting measures to protect legitimate corporate interests.

18. ID.; COMPETITION DEFINED. — "Competition" implies a struggle for advantage between two or more forces, each possessing, in substantially similar if not identical degree, certain characteristics essential to the business sought. It means an independent endeavor of two or more persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure trade. The test must be whether the business does in fact compete, not whether it is capable of an indirect and highly unsubstantial duplication of an isolated or non characteristic activity.

19. ID.; ID.; EXERCISE OF POWER TO DISQUALIFY A STOCKHOLDER FROM BEING MEMBER OF THE BOARD. — The amended by-laws which grants the Board the power by 3/4 votes to bar a stockholder from his right to be elected as director where such stockholder is found to be engaged in a "competitive or antagonistic business" is valid. However, consonant with the requirement of due process, there must be due hearing at which the stockholder must be given the fullest opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with fairness to the stockholders. Pursuant to this obligation and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the Securities and Exchange Commission en banc and its decision shall be final unless reversed by the Supreme Court on certiorari.

20. ID.; REVIEW OF ACTION OF THE BOARD OF DIRECTORS. — Where the action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or misapplication of the corporate assets, a court of equity has the power to grant appropriate relief.

21. ID.; STOCKHOLDER’S RIGHT; INSPECTION OF BOOKS. — The stockholders’ right of inspection of the corporation’s books and records is based upon their ownership of the assets and property of the corporation. It is an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or quasi-ownership. It is predicated upon the necessity of self-protection.

22. ID.; ID.; RIGHT MUST BE EXERCISED IN GOOD FAITH. — Where a right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to be germane to the petitioner’s interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. It must be exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes.

23. ID.; ID.; COURT MAY INQUIRE INTO MOTIVE OF STOCKHOLDER. — On application for mandamus to enforce the right to examine the books of a corporation, it is proper for the court to inquire into and consider the stockholder’s good faith and his purpose and motives in seeking inspection.

52The right given by the statute is not absolute and may be refused when the information is not sought in good faith or is used to the detriment of the corporation.

24. ID.; ID.; RIGHT TO EXAMINE BOOKS OF A WHOLLY OWNED SUBSIDIARY. — While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing. Where a foreign subsidiary is wholly owned by respondent corporation and, therefore, under its control, it would be in accord with equity, good faith and fair dealing to construe the statutory right of a stockholder to inspect the books and records of the corporation as extending to books and records of such wholly owned subsidiary which are in respondent corporation’s possession and control.

25. ID.; BOARD DIRECTORS; POWER TO INVEST FUNDS. — Section 17-1/2 of the Corporation Law allows a corporation to "invest its fund in any corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary.

26. ID.; ID.; RATIFICATION OF ACT OF BOARD OF DIRECTORS. — Where the Board of Directors had no authority to make an investment, the corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. Mere ultra vires acts or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders.

27. ID.; ID.; INVESTMENT IN AID OF CORPORATE PURPOSE. — The purchase of beer manufacturing facilities by San Miguel Corporation was an investment in the same business as its main purpose in its Articles of Incorporation and is relevant to the corporate purpose.

28. ID.; ID.; SUBMISSION OF ASSAILED INVESTMENT FOR RATIFICATION BY STOCKHOLDERS. — The mere fact that a corporation submits the assailed investment to the stockholders for its ratification at the annual meeting cannot be construed as an admission that the corporation had committed an ultra vires act, considering the common practices of corporations of periodically submitting for ratification of their stockholders the acts of their directors, officers and managers.

BARREDO, J., concurring:

1. JUDGMENTS; DISMISSAL FOR LACK OF NECESSARY VOTES; LAW OF THE CASE. — Where petitioner and respondents placed the issue of the validity of amended by-laws squarely before the Court for resolution and six justices voted in favor, while four justices voted against, its validity, thereby resulting in the dismissal, of the petition "insofar as it assails the validity of the amended by-laws . . . for lack of necessary votes," such dismissal is the law of the case as far as the parties are concerned albeit the majority of six against four justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent for subsequent cases. This means that the petitioner and respondents are bound by the foregoing result, namely that the Court en banc has not found merit in the claim that the amended by-laws in question are invalid. In other words, the issue of the challenged amended by-laws is already a settled matter for the parties as the law of the case, and said amended by-law already enforceable in so far as the parties are concerned. Petitioner may not thereafter act on the assumption that he can revive the issue of validity whether in the Securities and Exchange Commission, the Supreme Court or in any other forum, unless, he proceeds on the basis of a different factual milieu from the setting of the case. Only the actual implementation of the impugned amended by-laws remained to be passed upon by the Securities and Exchange Commission.

2. ID.; ID.; DECISION ON THE MERITS. — It is somewhat of a misreading and misconstruction of Section 11 of Rule 56, contrary to the well-known established norm observed by the Supreme Court, to state that the dismissal of a petition for

lack of necessary votes does not amount to a decision on the merits. The Supreme Court is deemed to find no merit in a petition in two ways, namely, (1) when eight or more members vote expressly in that sense and (2) when the required number of justices needed to sustain the same cannot be had.

DE CASTRO, J., concurring:

1. CORPORATION; STOCKHOLDERS; DISQUALIFICATION TO BE ELECTED DIRECTOR. — If a person became a stockholder of a corporation and gets himself elected as a director, and while he is such a director, he forms his own corporation competitive or antagonistic to the corporation of which he is a director, and becomes Chairman of the Board and President of his own corporation, he may be removed from his position as director, admittedly one of trust and confidence. If this is so, a person controlling, and also the Chairman of the Board and President of, a corporation, may be barred form becoming a member of the Board of Directors of a competitive corporation.

2. ID.; AGRICULTURE, CORPORATION ENGAGED IN. — The scope of the provision of Section 13(5) of the Philippine Corporation Law should be limited to corporations engaged in agriculture, only as the word "agriculture" refers to its more limited meaning as distinguished from its general and broad connotation. The term would then mean "farming" or raising the natural products of the soil, such as by cultivation, in the manner as is required by the Public Land Act in the acquisition of agricultural land, such as by homestead, before the patent may be issued, but does not extend to poultry raising or piggery which may be included in the term "agriculture" in its broad sense.

3. JUDGMENTS; LAW OF THE CASE. — Although only six votes are for upholding the validity of the by-laws, their validity is deemed upheld as constituting the "law of the case." It could not be otherwise, after the petition is dismissed with the relief sought do declare null and void the said by-laws being denied in effect. A vicious circle would be created should petitioner come against to the Court, raising the same question he raised in the present petition, unless the principle of the "law of the case" is applied.

TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ., : Supplement to separate opinion.

1. JUDGMENTS; LAW OF THE CASE. — The doctrine of the law of the case may be invoked only where there has been a final and conclusive determination of an issue in the first case later invoked as the law of the case. It has no application where the judgment in the first case is inconclusive, as where no final and conclusive determination could be reached on account of lack of necessary votes and the case was simply dismissed pursuant to Rule 56, Section 11. It cannot be contended that the Supreme Court in dismissing the petition for lack of necessary votes had directly ruled on the issue presented when it itself could not reach a final conclusive vote thereon.

D E C I S I O N

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange Commission, as follows:

SEC CASE NO. 1375

On October 22, 1976, Petitioner, as stockholder of respondent San Miguel Corporation, filed with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and damages with prayer for a preliminary injunction" against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei, Jr., v. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,043, with a

53total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist.

As a third cause of action, petitioner averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the qualifications to be a director of respondent corporation, being a substantial stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely provided for petitioner’s disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-laws are null and void. 1 

As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with respondent corporation, which was avowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended by-laws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of directors . . . shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled, and that individual respondents be made to pay damages, in specified amounts, to petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of respondent corporation refused to allow him to inspect its records despite request made by petitioner for production of certain documents enumerated in the request, and that respondent corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. Among the documents requested to be copied were (a) minutes of the stockholder’s meeting held on March 13, 1961; (b) copy of the management contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-in-interest.

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging, among others, that the motion has no legal basis; that the demand is not based on good faith; that the motion is premature since the materiality or relevance of the evidence sought cannot be determined until the issues are joined; that it fails to show good cause and constitutes continued harassment; and that some of the information sought are not part of the records of the corporation and, therefore, privileged.

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations therein and stating, by

way of affirmative defenses that "the action taken by the Board of Directors on September 18, 1976 resulting in the . . . amendments is valid and legal because the power to ‘amend, modify, repeal or adopt new By-laws’ delegated to said Board on March 13, 1961 and long prior thereto has never been revoked, withdrawn or otherwise nullified by the stockholders of SMC" ; that contrary to petitioner’s claim, "the vote requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total subscribed capital stock at the time the delegation of said power is made, not when the Board opts to exercise said delegated power" ; that petitioner has not availed of his intra-corporate remedy for the nullification of the amendment, which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII, section 1 of the by-laws and section 22 of the Corporation Law, hence the petition is premature; that petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board, since he failed to object to other amendments made on the basis of the same 1961 authorization; that the power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws adopted should not be inconsistent with any existing law; that respondent corporation should not be precluded from adopting protective measures to minimize or eliminate situations where its directors might be tempted to put their personal interests over that of the corporation; that the questioned amended by-laws is a matter of internal policy and the judgment of the board should not be interfered with; that the by-laws, as amended, are valid and binding and are intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in restraint of trade; and that the petition states no cause of action. It was, therefore, prayed that the petition be dismissed and that petitioner be ordered to pay damages and attorney’s fees to respondents. The application for writ of preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of respondent corporation, began acquiring shares therein, until September 1976 when its total holding amounted to 622,987 shares; that in October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent corporation, until its total holdings amounted to P543,959.00 in September 1976; that on January 12, 1976, Petitioner, who is president and controlling shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the stockholders’ meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business and his securing a seat would have subjected respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting" ; that thereafter the Board of Directors amended the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of obligation and attorney’s fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and they accordingly filed their oppositions-in-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:

"Considering the evidence submitted before the Commission by the petitioner and respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and photographing, by or on behalf of the petitioner-

54movant, John Gokongwei, Jr., of the minutes of the stockholders’ meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in the possession, custody and control of the said corporation, it appearing that the same is material and relevant to the issues involved in the main case. Accordingly, the respondents should allow petition-movant entry in the principal office of the respondent Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o’clock in the morning for purposes of enforcing the rights herein granted; it being understood that the inspection, copying and photographing of the said documents shall be undertaken under the direct and strict supervision of this Commission. Provided, however, that other documents and/or papers not heretofore included are not covered by this Order and any inspection thereof shall require the prior permission of this Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries, allowances, bonuses, compensation and/or remuneration received by respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-in-interest, the Petition to produce and inspect the same is hereby DENIED, as petitioner-movant is not a stockholder of San Miguel International, Inc. and has, therefore, no inherent right to inspect said documents;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing his request to copy and inspect the management contract between San Miguel Corporation and A. Soriano Corporation and the renewal and amendments thereof for the reason that he had already obtained the same, the Commission takes note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter of production and inspection of the authority of the stockholders of San Miguel Corporation to invest the funds of respondent corporation in San Miguel International, Inc., until after the hearing on the merits of the principal issues in the above-entitled case.

This Order is immediately executory upon its approval." 2 

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation issued a notice of special stockholders’ meeting for the purpose of "ratification and confirmation of the amendment to the By-laws", setting such meeting for February 10, 1977. This prompted petitioner to ask respondent Commission for a summary judgment insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders’ meeting for the aforesaid purpose, private respondents admitted the invalidity of the amendments of September 18, 1976. The motion for summary judgment was opposed by private respondents. Pending action on the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of petitioner’s application for the issuance of a preliminary injunction and or petitioner’s motion for summary judgment, a temporary restraining order be issued, restraining respondents from holding the special stockholders’ meeting as scheduled. This motion was duly opposed by respondents.

On February 10, 1977, respondent Cremation issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, respondents conducted the special stockholders’ meeting wherein the amendments to the by-laws were ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt and for nullification of the special stockholders’ meeting.

A motion for reconsideration of the order denying petitioner’s motion for summary judgment was filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of the filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the order granting in part and denying in part petitioner’s motion for production of records had not yet been resolved.

In view of the fact that the annual stockholders’ meeting of respondent corporation had been scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended to run for the position of director of respondent corporation. Thereafter, respondents filed a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors of respondent corporation disqualifying and precluding petitioner from being a candidate for director unless he could submit evidence on May 3, 1977

that he does not come within the disqualifications specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ of injunction, alleging that private respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent Commission, to petitioner’s irreparable damage and prejudice. Allegedly despite a subsequent Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of the stockholders’ meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act, hence petitioner came to this Court.

SEC CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17-1/2 of the Corporation Law, he filed with respondent Commission, on January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated motion to strike and to declare individual respondents in default and an opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4, 1977, the Commission acted thereon only on April 25, 1977, when it denied respondents’ motions to dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April 29 and May 3, 1977.

Respondents issued notices of the annual stockholders’ meeting, including in the Agenda thereof, the following:

"6. Reaffirmation of the authorization to the Board of Directors by the stockholders at the meeting on March 20, 1972 to invest corporate funds in other companies or businesses or for purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments thereafter made pursuant thereto."

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the Agenda at the annual stockholders’ meeting, requesting that the same be set for hearing on May 3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission, however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders’ meeting. For the purpose of urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner’s contention before this Court that respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as stockholder of respondent corporation, and that respondent are acting oppressively against petitioner, in gross derogation of petitioner’s rights to property and due process. He prayed that this Court direct respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from disqualifying or preventing petitioner from running or from being voted as director of respondent corporation and from submitting for ratification or confirmation or from causing the ratification or confirmation of Item 6 of the Agenda of the annual stockholders’ meeting on May 10, 1977, or from making effective the amended by-laws of respondent corporation, until further orders from this Court or until the Securities and Exchange Commission acts on the matters complained of in the instant petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the following orders:

55

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner’s motion for reconsideration, with its supplement, of the order of the Commission denying in part petitioner’s motion for production of documents, petitioner’s motion for reconsideration of the order denying the issuance of a temporary restraining order denying the issuance of a temporary restraining order, and petitioner’s consolidated motion to declare respondents in contempt and to nullify the stockholders’ meeting;

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of respondent corporation but stating that he should not sit as such if elected, until such time that the Commission has decided the validity of the by-laws in dispute, and denying deferment of Item 6 of the Agenda for the annual stockholders’ meeting; and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner’s motion for reconsideration of the order of respondent Commission denying petitioner’s motion for summary judgment;

It is petitioner’s assertions, anent the foregoing orders, (1) that respondent Commission acted with indecent haste and without circumspection in issuing the aforesaid orders to petitioner’s irreparable damage and injury; (2) that it acted without jurisdiction and in violation of petitioner’s right to due process when it decided en banc an issue not raised before it and still pending before one of its Commissioners, and without hearing petitioner thereon despite petitioner’s request to have the same calendared for hearing; and (3) that the respondents acted oppressively against the petitioner in violation of his rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to San Miguel International, Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment, alleging that the petition is without merit for the following reasons:

(1) that the petitioner and the interests he represents are engaged in businesses competitive and antagonistic to that of respondent San Miguel Corporation, it appearing that he owns and controls a greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation, which corporations are engaged in businesses directly and substantially competing with the allied businesses of respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and present danger that competitors or antagonistic parties may be elected directors and thereby have easy and direct access to SMC’s business and trade secrets and plans;

(2) that the amended by-laws were adopted to preserve and protect respondent SMC from the clear and present danger that business competitors, if allowed to become directors, will illegally and unfairly utilize their direct access to its business secrets and plans for their own private gain to the irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership of a competitor in the Board of Directors is a blatant disregard of no less than the Constitution and pertinent laws against combinations in restraint of trade;

(3) that by-laws are valid and binding since a corporation has the inherent right and duty to preserve and protect itself by excluding competitors and antagonistic parties, under the law of self-preservation, and it should be allowed a wide latitude in the selection of means to preserve itself;

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to petitioner’s own acts or omissions, since he failed to have the petition to suspend, pendente lite, the amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was not given a chance to act "with deliberate dispatch" ; and

(5) that even assuming that the petition was meritorious, it has become moot and academic because respondent Commission has acted on the pending incidents complained of. It was, therefore, prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G. Tanjuatco, Sr. filed his comment, alleging that the petition has become moot and academic for the reason, among others, that the acts of private respondents sought to be enjoined have reference to the annual meeting of the stockholders of respondent San Miguel Corporation, which was held on May 10, 1977; that in said meeting, in compliance with the order of respondent Commission, petitioner was allowed to run and be voted for as director; and that in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further, it was averred that the questions and issues raised by petitioner are pending in the Securities and Exchange Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had; hence the elevation of these issues before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions for the determination of this Court because (1) the respondent Commission acted without circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the annual stockholders’ meeting of May 10, 1977 did not render the case moot; that the amendment to the bylaws which specifically bars petitioner from being a director is void since it deprives him of his vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after receiving a copy of the restraining order issued by this Court and noting that the restraining order did not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied deferment of Item 6 of the Agenda of the annual stockholders’ meeting of respondent corporation, took into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given for denial of deferment was that "such action is within the authority of the corporation as well as falling within the sphere of stockholders’ right to know, deliberate upon and/or to express their wishes regarding disposition of corporate funds considering that their investments are the ones directly affected." It was alleged that the main petition has, therefore, become moot and academic.

On September 29, 1977, petitioner filed a second supplemental petition with prayer for preliminary injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due process, and "that all possible questions on the facts now pending before the respondent Commission are now before this Honorable Court which has the authority and the competence to act on them as it may see fit." (Rollo, pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) Whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a competitor from nomination or election to the Board of Directors are valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner’s request for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6 of the Agenda of the Annual Stockholders’ Meeting on May 10, 1977, and the ratification of the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of the Corporation Law.

I

Whether or not amended by-laws are valid is purely a legal question, which public interest requires to be resolved —

56It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the amended by-laws are intrinsically valid . . . is purely a legal question. There is no factual dispute as to what the provisions are and evidence is not necessary to determine whether such amended by-laws are valid as framed and approved . . ." ; second: "it is for the interest and guidance of the public that an immediate and final ruling on the question be made . . ." ; third: "petitioner was denied due process by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner . . .", and "Commissioner Sulit . . . approved the amended by-laws ex-parte and obviously found the same intrinsically valid" ; and finally: "to remand the case to SEC would only entail delay rather than serve the ends of justice."

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a court should always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of future ligiation", citing Gayos v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve on the merits the validity of its amended by-laws and the rights and obligations of the parties thereunder, otherwise "the time spent and effort exerted by the parties concerned and, more importantly, by this Honorable Court, would have been for naught because the main question will come back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing and decision of the issues involved, invoking the latter’s primary jurisdiction to hear and decide cases involving intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire controversy in a single proceeding, leaving no root or branch to bear the seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits instead of remanding it to the trial court for further proceedings since the ends of justice would not be subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, Et Al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits "because public interest demands an early disposition of the case", and in Republic v. Central Surety and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for further proceedings, citing precedents where this Court, in similar situations, resolved to decide the cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or (b) where public interest demands an early disposition of the case; or (c) where the trial court had already received all the evidence presented by both parties and the Supreme Court is now in a position, based upon said evidence, to decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only a question of law is involved. 8 Because uniformity may be secured through review by a single Supreme Court, questions of law may appropriately be determined in the first instance by courts. 8 In the case at bar, there are facts which cannot be denied, viz: that the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and Distillery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders’ annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders.

II

Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or election to the Board of Directors of SMC are valid and reasonable —

The validity or reasonableness of a by-law of a corporation is purely a question of law. 9 Whether the by-law is in conflict

with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority. 11 

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board", at the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation content that exclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable protection from the unrestrained self-interest of those charged with the promotion of the corporate enterprise; that access to confidential information by a competitor may result either in the promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is further argued that there is not vested right of any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that petitioner, as of May 6,1978, has exercised, personally or thru two corporations owned or controlled by him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation — 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of the present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially competing with the allied businesses of San Miguel Corporation, and of corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER’S CORPORATIONS AND SAN MIGUEL CORPORATION 

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total

1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%

Dressed Chicken 35.0% 14.0% 49.0%

Poultry & Hog Feeds 40.0% 12.0% 52.0%

Ice Cream 70.0% 13.0% 83.0%

Instant Coffee 45.0% 40.0% 85.0%

Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina in layer pullets, dressed chicken, poultry and hog

57feeds, ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which, for SMC, represented sales amounting to more than P478 million. In addition, CFC-Robina was directly competing in the sale of coffee with Filipino, a subsidiary of SMC, which product line represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million.

According to private respondents, at the Annual Stockholders’ Meeting of March 18, 1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total outstanding shares of SMC, rejected petitioner’s candidacy for the Board of Directors because they "realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the stockholders," approved the amendment to the by-laws in question. At the meeting of February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders’ Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner’s candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders’ Meeting, 12,480 shareholders, owning more than 30 million shares, or more than 90% of the total outstanding shares, voted against petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED BY LAW

Private respondents contend that the disputed amended by-laws were adopted by the Board of Directors of San Miguel Corporation as a measure of self-defense to protect the corporation from the clear and present danger that the election of a business competitor to the Board may cause upon the corporation and the other stockholders "irreparable prejudice." Submitted for resolution, therefore, is the issue — whether or not respondent San Miguel Corporation could, as a measure of self-protection, disqualify a competitor from nomination and election to its Board of Directors.

It is recognized by all authorities that ‘every corporation has the inherent power to adopt by-laws ‘for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.’" 12 At common law, the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the United States that in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation." 13 

In this jurisdiction under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees . . ." This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director . . ." In Government v. El Hogar, 14 the Court sustained the validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their action, on the ground that section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in conformity with good practice."

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. . . . It can not therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed . . . by any act of the former which is authorized by a majority . . ." 16 

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders, then the dissenting minority has only one right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. 17 

It being settled that the corporation has the power to provide for the qualifications of its directors, the next question that must be considered is whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS

Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof . . ."

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of the directors of corporations, thus:

"A director is a fiduciary. . . . Their powers are powers in trust. . . . He who is in such fiduciary position cannot serve himself first and his cestuis second. . . . He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. . . . He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis."

And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:

". . . A person cannot serve two hostile and adverse masters without detriment to one of them. A judge cannot be impartial if personally interested in the cause. No more can a director.

58Human nature is too weak for this. Take whatever statute provision you please giving power to stockholders to choose directors, and in none will you find any express prohibition against a discretion to select directors having the company’s interest at heart, and it would simply be going far to deny by mere implication the existence of such a salutary power.

". . . If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being a director, the same reasoning would apply to disqualify the wife and immediate member of the family of such stockholder, on account of the supposed interest of the wife in her husband’s affairs, and his supposed influence over her. It is perhaps true that such stockholders ought not to be condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the by-law. The strife over the matter of control in this corporation as in many others is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or not the action of the Board is authorized and sanctioned by law. . . ." 22 

These principles have been applied by this Court in previous cases. 23 

AN AMENDMENT TO THE CORPORATE BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation’s Board of Directors.." . . (A)n amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid." 24 This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to add additional qualifications. 25 This is the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director." 26 

It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." 27 In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm’s products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. 28 

The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. 30 

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding,

availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns.

Thus, in McKee & Co. v. First National Bank of San Diego, supra, the court sustained as valid and reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors, officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:

". . . A bank director has access to a great deal of information concerning the business and plans of a bank which would likely be injurious to the bank if known to another bank, and it was reasonable and prudent to enlarge this minimum disqualification to include any director, officer, employee, agent, nominee, or attorney of any other bank in California. The Ashkins case, supra, specifically recognizes protection against rivals and others who might acquire information which might be used against the interests of the corporation as a legitimate object of by-law protection. With respect to attorneys or persons associated with a firm which is attorney for another bank, in addition to the direct conflict or potential conflict of interest, there is also the danger of inadvertent leakage of confidential information through casual office discussions or accessibility of files. Defendant’s directors determined that its welfare was best protected if this opportunity for conflicting loyalties and potential misuse and leakage of confidential information was foreclosed."

In McKee, the Court further listed qualificational by-laws upheld by the courts, as follows:

"(1) A director shall not be directly or indirectly interested as a stockholder in any other firm, company, or association which competes with the subject corporation.

(2) A director shall not be the immediate member of the family of any stockholder in any other firm, company, or association which competes with the subject corporation.

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company, or association which compete with the subject corporation.

(4) A director shall be of good moral character as an essential qualification to holding office.

(5) No person who is an attorney against the corporation in a law suit is eligible for service on the board." (At p. 7.)

These are not based on theorical abstractions but on human experience — that a person cannot serve two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with petitioner’s primary motive in running for board membership — which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director’s duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management. As explained by Oleck: 31 "The law will not tolerate the passive attitude of directors . . . without active and conscientious participation in the managerial functions of the company. As directors, it is their duty to control and supervise the day to day business activities of the company or to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it

59that these policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to the corporation."

Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive rival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director.

Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utilize such knowledge to his advantage. 32 

There is another important consideration in determining whether or not the amended by-laws are reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or prohibit private monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed."

Article 186 of the Revised Penal Code also provides:

"Art. 186. Monopolies and combinations in restraint of trade. — The penalty of prision correccional in its minimum period or a fine ranging from two hundred to six thousand pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce or to prevent by artificial means free competition in the market.

2. Any person who shall monopolize any merchandise or object of trade or commerce, or shall combine with any other person or persons to monopolize said merchandise or object in order to alter the price thereof by spreading false rumors or making use of any other artifice to restrain free competition in the market.

3. Any person who, being a manufacturer, producer, or processor of any merchandise or object of commerce or an importer of any merchandise or object of commerce from any foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire or agree in any manner with any person likewise engaged in the manufacture, production, processing, assembling or importation of such merchandise or object of commerce or with any other persons not so similarly engaged for the purpose of making transactions prejudicial to lawful commerce, or of increasing the market price in any part of the Philippines, or any such merchandise or object of commerce manufactured, produced, processed, assembled in or imported into the Philippines, or of any article in the manufacture of which such manufactured, produced, processed, or imported merchandise or object of commerce is used."

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of trade. 33 Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumers’ effectiveness as the final arbiter in free markets. These laws are designed to preserve free and unfettered competition as the rule of trade. "It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices and the highest quality . . ." 34 they operate to forestall concentration of economic power. 35 The law against monopolies and combinations in restraint of trade is aimed at contracts and combinations that, by reason of the inherent nature of the contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing the course of trade. 36 

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a well defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of which is to prevent competition in the broad and general sense, or to control prices to the detriment of the public. 37 In short, it is the concentration of business in the hands of a few. The material consideration in determining its existence is not that prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when desired. 38 Further, it must be considered that the idea of monopoly is now understood to include a condition produced by the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of competition by the unification of interest or management, or it may be thru agreement and concert of action. It is, in brief, unified tactics with regard to prices. 39 

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal situation. This is because an express agreement is not necessary for the existence of a combination or conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the defendants conformed to the arrangements, 41 and what is to be considered is what the parties actually did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the same time as a director in any two or more corporations, if such corporations are, by virtue of their business and location of operation, competitors so that the elimination of competition between them would constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of the anti-competitive dangers which may arise when an individual simultaneously acts as a director of two or more competing corporations. A common director of two or more competing corporations would have access to confidential sales, pricing and marketing information and would be in a position to coordinate policies or to aid one corporation at the expense of another, thereby stifling competition. This situation has been aptly explained by Travers, thus:

"The argument for prohibiting competing corporations from sharing even one director is that the interlock permits the coordination of policies between nominally independent firms to an extent that competition between them may be completely eliminated. Indeed, if a director, for example, is to be faithful to both corporations, some accommodation must result. Suppose X is a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that would injure B without violating his duty of loyalty to B; at the same time he could hardly abstain from voting without depriving A of his best judgment. If the firms really do compete — in the sense of vying for economic advantage at the expense of the other — there can hardly be any reason for an interlock between competitors other than the suppression of competition." 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the Clayton Act, it was established that: "By means of the interlocking directorates one man or group of men have been able to dominate and control a great number of corporations . . . to the detriment of the small ones dependent upon them and to the injury of the public." 44 

Shared information on cost accounting may lead to price fixing. Certainly, shared information on production, orders, shipments, capacity and inventories may lead to control of production for the purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest priced goods to the consuming public would be frustrated. The competitor could so manipulate the prices of his products or vary its marketing strategies by region or by brand in order to get the most out of the consumers. Where the two competing firms control a substantial segment of the market this could lead to collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion that the inherent tendency of interlocking directorates between companies that are related to each other as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina of SMC’s costs in various industries and regions in the country will enable the former to practice price discrimination. CFC-Robina can segment the entire consuming

60population by geographical areas or income groups and change varying prices in order to maximize profits from every market segment. CFC-Robina could determine the most profitable volume at which it could produce for every product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than one corporation organized for the purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or attempting to bring about a combination to exercise control of such corporations . . .).”

Neither are We persuaded by the claim that the by-law was intended to prevent the candidacy of petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory manner. However, the by-law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and management, therefore, support the view that a by-law which disqualifies a competition from election to the Board of Directors of another corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in adopting measures to protect legitimate corporate interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have expressed their authority." 45 

Although it is asserted that the amended by-laws confer on the present Board powers to perpetuate themselves in power, such fears appear to be misplaced. This power, by its very nature, is subject to certain well established limitations. One of these is inherent in the very concept and definition of the terms "competition" and "competitor." "Competition" implies a struggle for advantage between two or more forces, each possessing, in substantially similar if not identical degree, certain characteristics essential to the business sought. It means an independent endeavor of two or more persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure trade. 46 The test must be whether the business does in fact compete, not whether it is capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristic activity. 47 It is, therefore, obvious that not every person or entity engaged in business of the same kind is a competitor. Such factors as quantum and place of business, identity of products and area of competition should be taken into consideration. It is, therefore, necessary to show that petitioner’s business covers a substantial portion of the same markets for similar products to the extent of not less than 10% of respondent corporation’s market for competing products. While We here sustain the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with fairness to the stockholders. 48 Pursuant to this obligation and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the Securities and Exchange Commission en banc and its decision shall be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or misapplication of the corporation assets, a court of equity has the power to grant appropriate relief. 50 

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner’s request for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner’s claim that he was denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual stockholders’ meeting of May 18, 1975; (3) a copy of the minutes of the stockholders’ meeting of March 18, 1976; (4) a breakdown of SMC’s P186.6 million investment in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the US$100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1) that SMC’s foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC’s first venture abroad, having started in 1948 with an initial outlay of P500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the personal guaranty of SMC’s former President, the late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to almost P400 million; (3) that the total cash dividends received by SMC from SMI since 1953 has amount to US$9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used in line with a program for the setting up of breweries by SMI.

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the afore-mentioned documents. 51 

Pursuant to the second paragraph of section 51 of the Corporation Law," (t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours."

The stockholder’s right of inspection of the corporation’s books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. 52 This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other words, the inspection has to be germane to the petitioner’s interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes." The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder’s good faith and his purpose and motives in seeking inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused when the information is not sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive." 58 It appears to be the "general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for

61the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." 59 

While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.

Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held that where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded and the books, papers and documents of all the corporations may be required to be produced for examination, 60 and that a writ of mandamus may be granted, as the records of the subsidiary were, to all intents and purposes, the records of the parent even though the subsidiary was not named as a party. 61 Mandamus was likewise held proper to inspect both the subsidiary’s and the parent corporation’s books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto. 62 

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to the control of the parent company, although it owned a vast majority of the stock of the subsidiary. 63 Likewise, inspection of the books of an allied corporation by a stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class of "persons having an interest." 64 

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former stockholders to inspect books and records of the corporation "included the right to inspect corporation’s subsidiaries’ books and records which were in corporation’s possession and control in its office in New York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had identical officers and directors.

In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner contended that respondent corporation "had been attempting to suppress information from the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of some documents which for some reason or another, respondent corporation is very reluctant in revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the corporation." 67 There is no question that stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors. 68 

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and, therefore, under Its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly owned subsidiary which are in respondent corporation’s possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate funds in SMI without prior authority of the stockholders, thus violating section 17-112 of the Corporation Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense, instead of allowing ratification of the investment by the stockholders.

Respondent SEC’s position is that submission of the investment to the stockholders for ratification is a sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary. 69 

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.

Under these circumstances, the ruling in De la Rama v. Ma-ao Sugar Central Co., Inc., supra, appears relevant. In said case, one of the issues was the legality of an investment made by Ma-ao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders’ voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:

"‘j. Power to acquire or dispose of shares or securities. — A private corporation, in order to accomplish is purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase of such shares or securities must be subject to the limitations established by the Corporation law; namely, (a) that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation; or (b) that a non-agricultural or non-mining corporation shall be restricted to own not more than 15% of the voting stock of any agricultural or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce or combination in restraint of trade.’ (The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis ours.)

"‘40. Power to invest corporate funds. — A private corporation has the power to invest its corporate funds "in any other corporation or business, or for any purpose other than the main purpose for which it was organized, provided that ‘its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal at a stockholders’ meeting called for that purpose,’ and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation, the approval of the stockholders is not necessary." " (Id., p. 108.) (Emphasis ours.)" (pp. 258-259.)

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized

62acts of its officers or other agents. 70 This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe in its execution the requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders."

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be construed as an admission that respondent corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the ratification of their stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to sustain the validity per se of the amended by-laws in question and to dismiss the petition without prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc, and ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero filed a separate opinion, wherein they voted against the validity of the questioned amended by-laws and that this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by the respondent’s Board of Directors and petitioner’s disqualification shall have been sustained by respondent SEC en banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications afore-stated, judgment is hereby rendered GRANTING the petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in the petition. The petition, * insofar as it assails the validity of the amended by-laws and the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

Separate Opinions

TEEHANKEE, CONCEPCION JR.,

FERNANDEZ and GUERRERO, JJ., concurring:

I

As correctly stated in the main opinion of Mr. Justice Antonio, the Court is unanimous in its judgment granting the petitioner as stockholder of respondent San Miguel Corporation the right to inspect, examine and secure copies of the records of San Miguel International, Inc. (SMI), a wholly owned foreign subsidiary corporation of respondent San Miguel Corporation. Respondent commission’s en banc Order No. 449, Series of 1977, denying petitioner’s right of inspection for "not being a stockholder of San Miguel International, Inc." has been accordingly set aside. It need be only pointed out that:

a) The commission’s reasoning grossly disregards the fact that the stockholders of San Miguel Corporation are likewise the owners of San Miguel International, Inc. as the corporation’s wholly owned foreign subsidiary and therefore have every right to have access to its books and records otherwise, the directors and management of any Philippine corporation by the simple device of organizing with the corporation’s funds foreign subsidiaries would be granted complete immunity from the stockholders’ scrutiny of its foreign operations and would have a conduit for dissipating, if not misappropriating, the corporate funds and assets by merely channeling them into foreign subsidiaries’ operations; and

b) Petitioner’s right of examination herein recognized refers to all books and records of the foreign subsidiary SMI which are "in respondent corporation’s possession and control" 1 , meaning to say regardless of whether or not such books and records are physically within the Philippines. All such books and records of SMI are legally within respondent corporation’s "possession and control" and if any books or records are kept abroad, (e.g. in the foreign subsidiary’s state of domicile, as is to be expected), then the respondent corporation’s board and management are obliged under the Court’s judgment to bring and make them (or true copies thereof) available within the Philippines for petitioner’s examination and inspection.

II

On the other main issue of the validity of respondent San Miguel Corporation’s amendment of its by-laws 2 whereby respondent corporation’s board of directors under its resolution dated April 29, 1977 declared petitioner ineligible to be nominated or to be voted or to be elected as of the board of directors, the Court, composed of 12 members (since Mme. Justice Ameurfina Melencio Herrera inhibited herself from taking part herein, while Mr. Justice Ramon C. Aquino upon submittal of the main opinion of Mr. Justice Antonio decided not to take part), failed to reach a conclusive vote or the required majority of 8 votes to settle the issue one way or the other.

Six members of the Court, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, considered the issue purely legal and voted to sustain the validity per se of the questioned amended by-laws but nevertheless voted that the prohibition and disqualification therein provided shall not apply to petitioner Gokongwei until and after he shall have been given "a new and proper hearing" by the corporation’s board of directors and the board’s decision of disqualification shall have been sustained on appeal by respondent Securities and Exchange Commission and ultimately by this Court.

The undersigned Justices do not consider the issue as purely legal in the light of respondent commission’s Order No. 451, Series of 1977, denying petitioner’s "Motion for Summary Judgment" on the ground that "the Commission en banc finds that there (are) unresolved and genuine issues of fact" 3 as well as its position in this case thru the Solicitor General that the case at bar is "premature" and that the administrative remedies before the commission should first be availed of and exhausted. 4 

We are of the opinion that the questioned amended by-laws, as they are, (adopted after almost a century of respondent corporation’s existence as a public corporation with its shares freely purchased and traded in the open market without restriction and disqualification) which would bar petitioner from qualification, nomination and election as director and worse, grant the board by 3/4 vote the arbitrary power to bar any stockholder from his right to be elected as director by the simple expedient of declaring him to be engaged in a "competitive or antagonistic business" or declaring him as a

63"nominee" of the "competitive or antagonistic" stockholder are illegal, oppressive, arbitrary and unreasonable.

We consider the questioned amended by-laws as being specifically tailored to discriminate against petitioner and depriving him in violation of substantive due process of his vested substantial rights as stockholder of respondent corporation. We further consider said amended by-laws as violating specific provisions of the Corporation Law which grant and recognize the right of a minority stockholder like petitioner to be elected director by the process of cumulative voting ordained by the Law (secs. 21 and 30) and the right of a minority director once elected not to be removed from office of director except for cause by vote of the stockholders holding 2/3 of the subscribed capital stock (sec. 31). If a minority stockholder could be disqualified by such a by-laws amendment under the guise of providing for "qualifications," these mandates of the Corporation Law would have no meaning or purpose.

These vested and substantial rights granted stockholders under the Corporation Law may not be diluted or defeated by the general authority granted by the Corporation Law itself to corporations to adopt their by-laws (in section 21) which deal principally with the procedures governing their internal business. The by-laws of any corporation must be always within the charter limits. What the Corporation Law has granted stockholders may not be taken away by the corporation’s by-laws. The amendment is further an instrument of oppressiveness and arbitrariness in that the incumbent directors are thereby enabled to perpetuate themselves in office by the simple expedient of disqualifying any unwelcome candidate, no matter how many votes he may have.

However, in view of the inconclusiveness of the vote, we sustain respondent commission’s stand as expressed in its Orders Nos. 450 and 451, Series of 1977 that there are "unresolved and genuine issues of fact" and that it has yet to rule on and finally decide the validity of the disputed by-law provision", subject to appeal by either party to this Court.

In view of prematurity of the proceedings here (as likewise expressed by Mr. Justice Fernando), the case should as a consequence be remanded to the Securities and Exchange Commission as the agency of primary jurisdiction for a full hearing and reception of evidence of all relevant facts (which should property be submitted to the commission instead of the piecemeal documents submitted as annexes to this Court which is not a trier of facts) concerning not only the petitioner but the members of the board of directors of respondent corporation as well, so that it may determine on the basis thereof the issue of the legality of the questioned amended by-laws, and assuming that it holds the same to be valid whether the same are arbitrarily and unreasonably applied to petitioner vis a vis other directors, who, petitioner claims, should in such event be likewise disqualified from sitting in the board of directors by virtue of conflict of interests or their being likewise engaged in "competitive or antagonistic business" with the corporation such as investment and finance, coconut oil mills, cement, milk and hotels. 5 

It should be noted that while the petition may be dismissed in view of the inconclusiveness of the vote and the Court’s failure to attain the required 8-vote majority to resolve the issue, such as dismissal (for lack of necessary votes) is of no doctrinal value and does not in any manner resolve the issue of the validity of the questioned amended by-laws nor foreclose the same. The same should properly be determined in a proper case in the first instance by the Securities and Exchange Commission as the agency of primary jurisdiction, as above indicated.

The Court is unanimous, therefore, in its judgment that petitioner Gokongwei may run for the office of, and if elected, sit as, member of the board of directors of respondent San Miguel Corporation as stated in the dispositive portion of the main opinion of Mr. Justice Antonio, to wit: Until and after petitioner has been given a "new and proper hearing by the board of directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court" and until "disqualified in the manner herein provided, the prohibition in the aforementioned amended by-laws shall not apply to petitioner." In other words, until and after petitioner shall have been given due process and proper hearing by the respondent board of directors as to the question of his qualification or disqualification under the questioned amended by-laws (assuming that the respondent Securities and Exchange Commission ultimately upholds the

validity of said by-laws), and such disqualification shall have been sustained by respondent Securities and Exchange Commission and ultimately by final judgment of this Court, petitioner is deemed eligible for all legal purposes and effects to be nominated and voted and if elected to sit as a member of the board of directors of respondent San Miguel Corporation.

In view of the Court’s unanimous judgment on this point, the portion of respondent commission’s Order No. 450, Series of 1977 which imposed "the condition that he [petitioner] cannot sit as board member if elected until after the Commission shall have finally decided the validity of the disputed by-law provision" has been likewise accordingly set aside.

III

By way of recapitulation, so that the Court’s decision and judgment may be clear and not subject to ambiguity, we state the following:

1. With the votes of the six Justices concurring unqualifiedly in the main opinion added to our four votes, plus the Chief Justice’s vote and that of Mr. Justice Fernando, the Court has by twelve (12) votes unanimously rendered judgment granting petitioner’s right to examine and secure copies of the books and records of San Miguel International, Inc. as a foreign subsidiary of respondent corporation and respondent commission’s Order No. 449, Series of 1977, to the contrary is set aside:

2. With the same twelve (12) votes, the Court has also unanimously rendered judgment declaring that until and after petitioner shall have been given due process and proper hearing by the respondent board of directors as to the question of his disqualification under the questioned amended by-laws (assuming that the respondent Securities and Exchange Commission ultimately upholds the validity of said by-laws), and such disqualification shall have been sustained by respondent Securities and Exchange Commission and ultimately by final judgment of this Court petitioner is deemed eligible for all legal purposes and effect to be nominated and voted and if elected to sit as a member of the board of directors of respondent San Miguel Corporation. Accordingly, respondent commission’s Order No. 450, Series of 1977 to the contrary has likewise been set aside; and

3. The Court’s voting on the validity of respondent corporation’s amendment of the by-laws (sec. 2, Art. III) is inconclusive without the required majority of eight votes to settle the issue one way or the other having been reached. No judgment is rendered by the Court thereon and the statements of the six Justices who have signed the main opinion on the legality thereof have no binding effect, much less doctrinal value.

The dismissal of the petition insofar as the question of the validity of the disputed by-laws amendment is concerned is not by any judgment with the required eight votes but simply by force of Rule 56, section 11 of the Rules of Court, the pertinent portion of which provides that "where the court en banc is equally divided in opinion, or the necessary majority cannot be had, the case shall be reheard, and if on re-hearing no decision is reached, the action shall be dismissed if originally commenced in the court . . ." The end result is that the Court has thereby dismissed the petition which prayed that the Court bypass the commission and directly resolved the issue and therefore the respondent commission may now proceed, as announced in its Order No. 450, Series of 1977, to hear the case before it and receive all relevant evidence bearing on the issue as hereinabove indicated, and resolve the "unresolved and genuine issues of fact" (as per Order No. 451, Series of 1977) and the issues of legality of the disputed by-laws amendment.

TEEHANKEE, CONCEPCION JR.,

FERNANDEZ and GUERRERO, JJ., concurring:

Supplement to separate opinion.

JUDGMENT; LAW OF THE CASE. — The doctrine of the law of the case may be invoked only where there has been a final and conclusive determination of an issue in the first case later invoked as the law of the case. It has no application where the judgment in the first case is inconclusive, as where no final and conclusive determination could be reached on account of lack of necessary votes and the case was simply dismissed pursuant to Rule 56, Section 11. It cannot be contended that

64the Supreme Court is dismissing the petition for lack of necessary votes had directly ruled on the issue presented when it itself could not reach a final and conclusive vote thereon.

This supplemental opinion is issued with reference to the advance separate opinion of Mr. Justice Barredo issued by him as to "certain misimpressions as to the import of the decision in this case" which might be produced by our joint separate opinion of April 11, 1979 and "urgent(ly) to clarify (his) position in respect to the rights of the parties resulting from the dismissal of the petition herein and the outline of the procedure by which the disqualification of petitioner Gokongwei can be made effective."

1. Mr. Justice Barredo’s advances separate opinion "that as between the parties herein, the issue of the validity of the challenged by-laws is already settled" had, of course, no binding effect. The judgment of the Court is found on pages 59-61 of the decision of April 11, 1979, penned by Mr. Justice Antonio, wherein on the question of the validity of the amended by-laws the Court’s inconclusive voting is set forth as follows:

"Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

"Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result.

"Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero filed a separate opinion, wherein they voted against the validity of the questioned amended by-laws and that this question should properly be resolved first by the SEC as the agency of primary jurisdiction . . ." 1 

As stated in said judgment itself, for lack of the necessary votes, the petition, insofar as it assails the validity of the questioned by-laws, was dismissed.

2. Mr. Justice Barredo now contends contrary to the undersigned’s understanding, as stated on pages 8 and 9 of our joint separate opinion of April 11, 1979 that the legal effect of the dismissal of the petition on the question of validity of the amended by-laws for lack of the necessary votes simply means that "the Court has thereby dismissed the petition which prayed that the Court by-pass the commission and directly resolve the issue and therefore the respondent commission may now proceed, as announced in its Order No. 450, Series of 1977, to hear the case before it and receive all relevant evidence bearing on the issue as hereinabove indicated, and resolve the ‘unresolved and genuine issues of fact’ (as per Order No. 451, Series of 1977) and the issue of legality of the disputed by-laws amendment," that such dismissal "has no other legal consequence than that it is the law of the case as far as the parties are concerned, albeit the majority of the opinion of six against four Justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent for subsequent cases."

We hold on our part that the doctrine of the law of the case invoked by Mr. Justice Barredo has no applicability for the following reasons:

a) Our jurisprudence is quite clear that this doctrine may be invoked only where there has been a final and conclusive determination of an issue in the first case later invoked as the law of the case.

Thus, in People v. Olarte 2 , we held that

"‘Law of the case’ has been defined as the opinion delivered on a former appeal. More specifically, it means that whatever is once irrevocably established as the controlling legal rule of decision between the same parties in the same case continues to be the law of the case, whether correct on general principles or not, so long as the facts on which such decision was predicated continue to be the facts of the case before the court. . . .

"It need not be stated that the Supreme Court, being the court of last resort, is the final arbiter of all legal questions properly brought before it and that its decision in any given case constitutes the law of that particular case. Once its judgment becomes final it is binding on all inferior courts, and hence

beyond their power and authority to alter or modify (Kabigting v. Acting Director of Prisons, G. R. No. L-15548, October 30, 1962).

"‘The decision of this Court on that appeal by the government from the order of dismissal, holding that said appeal did not place the appellants, including Absalon Bignay, in double jeopardy, signed and concurred in by six Justices as against three dissenters headed by the Chief Justice, promulgated way back in the year 1952, has long become the law of the case. It may be erroneous, judged by the law on double jeopardy as recently interpreted by this same Tribunal. Even so, it may not be disturbed and modified. Our recent interpretation of the law may be applied to new cases, but certainly not to an old one finally and conclusively determined. As already stated, the majority opinion in that appeal is now the law of the case.’" (People v. Pinuila)

The doctrine of the law of the case, therefore, has no applicability whatsoever herein insofar as the question of the validity or invalidity of the amended by-laws is concerned. The Court’s judgment of April 11, 1979 clearly shows that the voting on this question was inconclusive with six against four Justices and two other Justices (the Chief Justice and Mr. Justice Fernando) expressly reserving their votes thereon, and Mr. Justice Aquino while taking no part in effect likewise expressly reserved his vote thereon. No final and conclusive determination could be reached on the issue and pursuant to the provisions of Rule 56, section 11, since this special civil action originally commenced in this Court, the action was simply dismissed with the result that no law of the case was laid down insofar as the issue of the validity or invalidity of the questioned by-laws is concerned, and the relief sought herein by petitioner that this Court by-pass the SEC which has yet to hear and determine the same issue pending before it below and that this Court itself directly resolve the said issue stands denied.

b) The contention of Mr. Justice Barredo that the result of the dismissal of the case was that "petitioner Gokongwei may not hereafter act on the assumption that he can revive the issue of the validity whether in the Securities and Exchange Commission, in this Court or in any other forum, unless he proceeds on the basis of a factual milieu different from the setting of this case. Not even the Securities and Exchange Commission may pass on such question anymore at the instance of herein petitioner or anyone acting in his stead or on his behalf," appears to us to be untenable.

The Court through the decision of April 11, 1979, by the unanimous votes of the twelve participating Justices headed by the Chief Justice, ruled that petitioner Gokongwei was entitled to a "new and proper hearing" by the SMC board of directors on the matter of his disqualification under the questioned by-laws and that the board’s "decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court (and) unless disqualified in the manner herein provided, the prohibition in the aforementioned amended by-laws shall not apply to petitioner."

The entire Court, therefore, recognized that petitioner had not been given procedural due process by the SMC board on the matter of his disqualification and that he was entitled to a "new and proper hearing." It stands to reason that in such hearing, petitioner could raise not only questions of fact but questions of law, particularly questions of law affecting the investing public and their right to representation on the board as provided by law — not to mention that as borne out by the fact that no restriction whatsoever appears in the Court’s decision, it was never contemplated that petitioner was to be limited to questions of fact and could not raise the fundamental questions of law bearing on the invalidity of the questioned amended by-laws at such hearing before the SMC board. Furthermore, it was expressly provided unanimously in the Court’s decision that the SMC board’s decision on the disqualification of petitioner ("assuming the board of directors of San Miguel Corporation should, after the proper hearing, disqualify him" as qualified in Mr. Justice Barredo’s own separate opinion, at page 2) shall be appealable to respondent Securities and Exchange Commission "deliberating and acting en banc" and "untimately to this Court." Again, the Court’s judgment as set forth in its decision of April 11, 1979 contains nothing that would warrant the opinion now expressed that respondent Securities and Exchange Commission may not pass anymore on the question of the invalidity of the amended by-laws. Certainly, it cannot be contended that the Court in dismissing the petition for lack of necessary votes actually by-passed the Securities and Exchange Commission and directly ruled itself on the

65invalidity of the questioned by-laws when it itself could not reach a final and conclusive vote (a minimum of eight votes) on the issue and three other Justices (the Chief Justice and Messrs. Justices Fernando and Aquino) had expressly reserved their vote until after further hearings (first before the Securities and Exchange Commission and ultimately in this Court).

Such a view espoused by Mr. Justice Barredo could conceivably result in an incongruous situation where supposedly under the law of this case the questioned by-laws would be held valid as against petitioner Gokongwei and yet the same may be stricken off as invalid as to all other SMC shareholders in a proper case.

3. It need only be pointed out that Mr. Justice Barredo’s advance separate opinion can in no way affect or modify the judgment of this Court as set forth in the decision of April 11, 1979 and discussed hereinabove. The same bears the unqualified concurrence of only three Justices out of the six Justices who originally voted for the validity per se of the questioned by-laws, namely, Messrs. Justices Antonio, Santos and De Castro. Messrs. Justices Fernando and Makasiar did not concur therein but they instead concurred with the limited concurrence of the Chief Justice touching on the law of the case which guardedly held that the Court has not found merit in the claim that the amended by-laws in question are invalid but without in any manner foreclosing the issue and as a matter of fact and law, without in any manner changing or modifying the above-quoted vote of the Chief Justice as officially rendered in the decision of April 11, 1979, wherein he precisely "reserved (his) vote on the validity of the amended by-laws."

4. A word on the separate opinion of Mr. Justice Pacifico de Castro attached to the advance separate opinion of Mr. Justice Barredo. Mr. Justice De Castro advances his interpretation as to a restrictive construction of section 13(5) of the Philippine Corporation Law, ignoring or disregarding the fact that during the Court’s deliberations it was brought out that this prohibitory provision was and is not raised in issue in this case whether here or in the Securities and Exchange Commission below (outside of a passing argument by Messrs. Angara, Abello, Concepcion, Regala & Cruz, as counsels for respondent Sorianos in their Memorandum of June 26, 1978 that" (T)he disputed By-Laws does not prohibit petitioner from holding onto, or even increasing his SMC investment; it only restricts any shifting on the part of petitioner from passive investor to a director of the company." 3 

As a consequence, the Court abandoned the idea of calling for another hearing wherein the parties could properly raise and discuss this question as a new issue and instead rendered the decision in question, under which the question of section 13(5) could be raised at a new and proper hearing before the SMC board and in the Securities and Exchange Commission and in due course before this Court (but with the clear understanding that since both corporations, the Robina and SMC are engaged in agriculture as submitted by the Sorianos’ counsel in their said memorandum, the issue could be raised likewise against SMC and its other shareholders, directors, if not against SMC itself. As expressly stated in the Chief Justice’s reservation of his vote, the matter of the question of the applicability of the said section 13(5) to petitioner would be heard by this Court at the appropriate time after the proceedings below (and necessarily the question of the validity of the amended by-laws would be taken up anew and the Court would at that time be able to reach a final and conclusive vote).

Mr. Justice De Castro’s personal interpretation of the decision of April 11, 1979 that petitioner may be allowed to run for election despite adverse decision of both the SMC board and the Securities and Exchange Commission "only if he comes to this Court and obtains an injunction against the enforcement of the decision disqualifying him" is patently contradictory of his vote on the matter as expressly given in the judgment in the Court’s decision of April 11, 1979 (at page 59) that petitioner could run and if elected, sit as director of the respondent SMC and could be disqualified only after a "new and proper hearing by the board of directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court. Unless-disqualified in the manner herein provided, the prohibition in the aforementioned amended by-laws shall not apply to petitioner."

BARREDO, J., concurring:

1. JUDGMENTS; DISMISSAL FOR LACK OF NECESSARY VOTES; LAW OF THE CASE. — Where petitioner and respondents placed the issue of the validity of amended by-laws squarely before the Court for resolution and six justices vote in favor, while four justices voted against, its validity, thereby resulting in the dismissal of the petition "insofar as it assails the validity of the amended by-laws . . . for lack of necessary votes," such dismissal is the law of the case as far as the parties are concerned, albeit the majority of six against four justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent for subsequent cases. This means that the petitioner and respondents are bound by the forgoing result, namely, that the Court en banc has not found merit in the claims that the amended by-laws in question are invalid. In other words, the issue of the challenged amended by-laws is already a settled matter for the parties as the law of the case, and said amended by-laws already enforceable in so far as the parties are concerned. Petitioner may not thereafter act on the assumption that he can revive the issue of validity whether in the Securities and Exchange Commission, the Supreme Court or in any other forum, unless, he proceeds on the basis of a different factual milieu from the setting of the case. Only the actual implementation of the impugned amended by-laws remained to be passed upon by the Securities and Exchange Commission.

2. ID.; ID.; DECISION ON THE MERITS. — It is somewhat of a misreading and misconstruction of Section 11 of Rule 56, contrary to the well-known established norm observed by the Supreme Court, to estate that the dismissal of a petition for lack of necessary votes does not amount to a decision on the merits. The Supreme Court is deemed to find no merit in a petition in two ways, namely, (1) when eight or more members vote expressly in that sense and (2) when the required number of justices needed to sustain the same cannot be had.

I reserved the filing of a separate opinion in order to state my own reasons for voting in favor of the validity of the amended by-laws in question. Regrettably, I have not yet finished preparing the same. In view, however, of the joint separate opinion of Justices Teehankee, Concepcion Jr., Fernandez and Guerrero, the full text of which has just come to my attention, and which I am afraid might produce certain misimpressions as to the import of the decision in this case, I consider it urgent to clarify my position in respect to the rights of the parties resulting from the dismissal of the petition herein and the outlining of the procedure by which the disqualification of petitioner Gokongwei can be made effective, hence this advance separate opinion.

To start with, inasmuch as petitioner Gokongwei himself placed the issue of the validity of said amended by-laws squarely before the Court for resolution, because he feels, rightly or wrongly, he can no longer have due process or justice from the Securities and Exchange Commission, and the private respondents have joined with him in that respect, the six votes cast by Justices Makasiar, Antonio, Santos, Abad Santos, de Castro and this writer in favor of validity of the amended by-laws in question, with only four members of this Court, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero opining otherwise, and with Chief Justice Castro and Justice Fernando reserving their votes thereon, and Justices Aquino and Melencio Herrera not voting, thereby resulting in the dismissal of the petition "insofar as it assails the validity of the amended by-laws . . . for lack of necessary votes", has no other legal consequence than that it is the law of the case as far as the parties herein are concerned, albeit the majority opinion of six against four Justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent for subsequent cases. This means that petitioner Gokongwei and the respondents, including the Securities and Exchange Commission, are bound by the foregoing result, namely, that the Court en banc has not found merit in the claim that the amended by-laws in question are invalid. Indeed, it is one thing to say that dismissal of the case is not doctrinal and entirely another thing to maintain that such dismissal leaves the issue unsettled. It is somewhat of a misreading and misconstruction of Section 11 of Rule 56, contrary to the well-known established norm observed by this Court, to state that the dismissal of a petition for lack of the necessary votes does not amount to a decision on the merits. Unquestionably, the Court is deemed to find no merit in a petition in two ways, namely, (1) when eight or more members vote expressly in that sense and (2) when the required number of justices needed to sustain the same cannot be had.

I reiterate, therefore, that as between the parties herein, the issue of validity of the challenged by-laws is already settled. From which it follows that the same are already enforceable

66insofar as they are concerned. Petitioner Gokongwei may not hereafter act on the assumption that he can revive the issue of validity whether in the Securities and Exchange Commission, in this Court or in any other forum, unless he proceeds on the basis of a factual milieu different from the setting of this case. Not even the Securities and Exchange Commission may pass on such question anymore at the instance of herein petitioner or anyone acting in his stead or on his behalf. The vote of four justices to remand the case thereto cannot alter the situation.

It is very clear that under the decision herein, the issue of validity is a settled matter for the parties herein as the law of the case, and it is only the actual implementation of the impugned amended by-laws in the particular case of petitioner that remains to be passed upon by the Securities and Exchange Commission, and on appeal therefrom to Us, assuming the board of directors of San Miguel Corporation should, after the proper hearing, disqualify him.

To be sure, the record is replete with substantial indications, nay admissions of petitioner himself, that he is a controlling stockholder of corporations which are competitors of San Miguel Corporation. The very substantial areas of such competition involving hundreds of millions of pesos worth of businesses stand uncontroverted in the records hereof. In fact, petitioner has even offered, if he should be elected, as director, not to take part when the board takes up matters affecting the corresponding areas of competition between his corporation and San Miguel. Nonetheless, perhaps, it is best that such evidence be formally offered at the hearing contemplated in Our decision.

As to whether or not petitioner may sit in the board, if he win, definitely, under the decision in this case, even if petitioner should win, he will have to immediately leave his position or should be ousted, the moment this Court settles the issue of his actual disqualification, either in a full blown decision or by denying the petition for review of corresponding decision of the Securities and Exchange Commission unfavorable to him. And, of course, as a matter of principle, it is to be expected that the matter of his disqualification should be resolved expeditiously and within the shortest possible time, so as to avoid as much juridical injury as possible, considering that the matter of the validity of the prohibition against competitors embodied in the amended by-laws is already unquestionable among the parties herein and to allow him to be in the board for sometime would create an obviously anomalous and legally incongruous situation that should not be tolerated. Thus, all the parties concerned must act promptly and expeditiously.

Additionally, my reservation to explain my vote on the validity of the amended by-laws still stands.

Castro, C.J., concurs in Justice Barredo’s statement that the dismissal (for lack of necessary votes) of the petition to the extent that "it assails the validity of the amended by-laws," is the law of the case at bar, which means in effect that as far and only in so far as the parties and the Securities and Exchange Commission are concerned, the Court has not found merit in the claim that the amended by-laws in question are invalid.

DE CASTRO, J., concurring:

1. CORPORATION; STOCKHOLDERS; DISQUALIFICATION TO BE ELECTED DIRECTOR. — If a person becomes a stockholder of a corporation and gets himself elected as a director, and while he is such a director, he forms his own corporation competitive or antagonistic to the corporation of which he is a director, and becomes Chairman of the Board and President of his own corporation, he may be removed from his position as director, admittedly one of trust and confidence. If this is so, a person controlling, and also the Chairman of the Board and President of, a corporation, may be barred from becoming a member of the Board of Directors of a competitive corporation.

2. ID.; AGRICULTURE, CORPORATION ENGAGED IN. — The scope of the provision of Section 13(5) of the Philippine Corporation Law should be limited to corporations engaged in agriculture, only as the word "agriculture" refers to its more limited meaning as distinguished from its general and broad connotation. The term would then mean "farming" or raising the natural products of the soil, such as by cultivation, in the manner as is required by the Public Land Act in the acquisition of agricultural land, such as by homestead, before the patent may be issued, but does not extend to poultry raising or

piggery which may be included in the term "agriculture" in its broad sense.

3. JUDGMENT; LAW OF THE CASE. — Although only six votes are for upholding the validity of the by-laws, their validity is deemed upheld as constituting the "law of the case." It could not be otherwise, after the petition is dismissed with the relief sought do declare null and void the said by-laws being denied in effect. A vicious circle would be created should petitioner come against to the Court, raising the same question he raised in the present petition, unless the principle of the "law of the case" is applied.

As stated in the decision penned by Justice Antonio, I voted to uphold the validity of the amendment to the by-laws in question. What induced me to this view is the practical consideration easily perceived in the following illustration: If a person becomes a stockholder of a corporation and gets himself elected as a director, and while he is such a director, he forms his own corporation competitive or antagonistic to the corporation of which he is a director, and becomes Chairman of the Board and President of his own corporation, he may be removed from his position as director, admittedly one of trust and confidence. If this is so, as seems undisputably to be the case, a person already controlling, and also the Chairman of the Board and President of, a corporation, may be barred from becoming a member of the board of directors of a competitive corporation. This is my view,. even as I am for a restrictive interpretation of Section 13(5) of the Philippine Corporation Law, under which I would limit the scope of the provision to corporations engaged in agricultural, but only as the word "agriculture" refers to its more limited meaning as distinguished from its general and broad connotation. The term would then mean "farming" or raising the natural products of the soil, such as by cultivation, in the manner as is required by the Public Land Act in the acquisition of agricultural land, such as by homestead, before the patent may be issued. It is my opinion that under the public land statute, the development of a certain portion of the land applied for as specified in the law as a condition precedent before the applicant may obtain a patent, is cultivation, not let us say, poultry raising or piggery, which may be included in the term "agriculture" in its broad sense. For under Section 13(5) of the Philippine Corporation Law, construed not in the strict way as I believe it should, because the provision is in derogation of property rights, the petitioner in this case would be disqualified from becoming an officer of either the San Miguel Corporation or his own supposedly agricultural corporations. It is thus beyond my comprehension why, feeling as though I am the only member of the Court for a restricted interpretation of Section 13(5) of Act 1459, doubt still seems to be in the minds of other members giving the cited provision an unrestricted interpretation, as to the validity of the amended by-laws in question, or even holding them null and void.

I concur with the observation of Justice Barredo that despite that less than six votes are for upholding the validity of the by-laws, their validity is deemed upheld, as constituting the "law of the case." It could not be otherwise, after the present petition is dismissed with the relief sought to declare null and void the said by-laws being denied in effect. A vicious circle would be created if, should petitioner Gokongwei be barred or disqualified from running by the Board of Directors of San Miguel Corporation and the Securities and Exchange Commission sustain the Board, petitioner could come again to Us, raising the same question he has raised in the present petition, unless the principle of the "law of the case" is applied.

Clarifying therefore, my position, I am of the opinion that with the validity of the by-laws in question standing unimpaired, it is now for petitioner to show that he does not come within the disqualification as therein provided, both to the Board and later to the Securities and Exchange Commission, it being a foregone conclusion that, unless petitioner disposes of his stockholdings in the so-called competitive corporations, San Miguel Corporation would apply the by-laws against him. His right, therefore, to run depends on what, on election day, May 8, 1979, the ruling of the Board and or the Securities and Exchange Commission on his qualification to run would be, certainly, not the final ruling of this Court in the event recourse thereto is made by the party feeling aggrieved, as intimated in the "Joint Separate Opinion" of Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero, that only after petitioner’s "disqualification" has ultimately been passed upon by this Court should petitioner not be allowed to run, Petitioner may be allowed to run, despite an adverse decision of both the Board and the Securities and Exchange Commission, only if he comes to this Court and obtain an

67injunction against the enforcement of the decision disqualifying him. Without such injunction being required, all that petitioner has to do is to take his time in coming to this Court, and in so doing, he would in the meantime, be allowed to run, and if he wins, to sit. This would, however, be contrary to the doctrine that gives binding, if not conclusive, effect of findings of facts of administrative bodies exercising quasi-judicial functions upon appellate courts, which should, accordingly, be enforced until reversed by this Tribunal. 

Endnotes:

1. The pertinent amendment reads as follows:RESOLVED, That Section 2, Article III of the By-laws of San Miguel Corporation, which reads as follows:SECTION 2. Any stockholder having at least five thousand shares registered in his name may be elected director, but he shall not be qualified to hold office unless he pledges said five thousand shares to the Corporation to answer for his conduct.’bee, and the same hereby is, amended, to read as follows;

SECTION 2. Any stockholder having at least five thousand shares registered in his name may be elected Director, provided, however, that no person shall qualify or be eligible for nomination or election to the Board of Directors if he is engaged in any business which competes with or is antagonistic to that of the Corporation. Without limiting the generality of the foregoing, a person shall be deemed to be so engaged:chanrob1es virtual 1aw library

a) if he is an officer, manager or controlling person of, or the owner (either of record or beneficially) of 10% or more of any outstanding class of shares of, any corporation (other than one in which the corporation owns at least 30% of the capital stock) engaged in a business which the Board, by at least three fourths vote, determines to be competitive or antagonistic to that of the Corporation; or

b) If he is an officer, manager or controlling person of, or the owner (either of record or beneficially) of 10% or more of any outstanding class of shares of, any other corporation or entity engaged in any time of business of the Corporation, when in the judgment of the Board, by at least three-fourths vote, the laws against combinations in restraint of trade shall be violated by such person’s membership in the Board of Directors.c) If the Board, in the exercise of its judgment in good faith, determines by at least three-fourths vote that he is the nominee of any person set forth in (a) or (b).In determining whether or not a person is a controlling person, beneficial owner, or the nominee of another, the Board may take into account such factors as business and family relationship.For the proper implementation of this provision, all nominations for election of Directors by the stockholders shall be submitted in writing to the Board of Directors at least five working days before the date of the Annual Meeting.’" (Rollo, pp. 462-463.)

29. Schildberg Rock Products Co. v. Brooks, 140 NW 2d 132, 137. Chief Justice Garfield quotes the doctrine as follows:

"(5) The doctrine ‘corporate opportunity’ is not new to the law and is but one phase of the cardinal rule of undivided loyalty on the part of the fiduciaries. 3 Fletcher Cyc. Corporations, Perm. Ed., 1965 Revised Volume, section 861.1, page 227; 19 Am Jur. 2d, Corporations, section 1311, page 717. Our own consideration of the quoted terms as such is mainly in Ontjes v. MacNider, supra, 232 Iowa 562, 579, 5 N.W., 2d 860, 869, which quotes at length with approval from Guth v. Loft, Inc., 23 Del. Ch. 255, 270, 5 A 2d 503, 511, a leading case in this area of the law. The quotation cites several precedents for this: ‘. . . if there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is from its nature, in the line of the corporation’s business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself. And, if, in such circumstances, the interests of the corporation are betrayed, the corporation may elect to claim all of the benefits of the transaction for itself, and the law will impress a trust in favor

of the corporation upon the property, interests and profits so acquired."

32. "The CFC and Robina companies, which are reportedly worth more than P500 Million, are principally owned and controlled by Mr. Gokongwei and are in substantial competition to San Miguel. As against his almost 100% ownership in these basically family companies, Mr. Gokongwei’s holding in San Miguel are approximately 4% of the total shareholdings of your Company. As a consequence, One Peso (P1.00) of profit resulting from a sale by CFC and Robina in the lines competing with San Miguel, is earned almost completely by Mr. Gokongwei, his immediate family and close associates. On the other hand, the loss of that sale to San Miguel, resulting in a One Peso (P1.00) loss of profit to San Miguel, in the lines competing with CFC and Robina, would result in a loss in profit of only Four Centavos (P0.04) to Mr. Gokongwei." (Letter to stockholders of SMC, dated April 3, 1978, Annex "R", Memo for respondent San Miguel Corporation, rollo, p. 1867).

49. Sections 3 and 5 of Presidential Decree No. 902-A provides:"SEC. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations . . . who are grantees of . . . license or permit issued by the government . . .""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 its as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partners amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission.

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; 

c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnership or associations."

SECOND DIVISION[G.R. No. 117188. August 7, 1997]

LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCEAND GUARANTY

CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO, respondents.

D E C I S I O N

May the failure of a corporation to file its by-laws within one month from the date of its incorporation, as mandated by Section 46 of the Corporation Code, result in its automatic dissolution?

This is the issue raised in this petition for review on certiorari of the Decision[1] of the Court of Appeals affirming the decision of the Home Insurance and Guaranty Corporation (HIGC). This quasi-judicial body recognized Loyola Grand Villas Homeowners Association (LGVHA) as the sole homeowners association in Loyola Grand Villas, a duly registered subdivision in Quezon City and Marikina City that was owned and developed by Solid Homes, Inc. It revoked the certificates of registration issued to Loyola Grand Villas Homeowners (North) Association Incorporated (the North Association for brevity) and Loyola Grand Villas Homeowners (South) Association Incorporated (the South Association).

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

68developer 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.[2] To 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.[3] The North Association was registered 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. They questioned the revocation of LGVHAIs certificate of registration without due notice and hearing and concomitantly prayed for the cancellation of the certificates of registration of the North and South Associations by reason of the earlier issuance of a certificate of registration in favor of LGVHAI.

On January 26, 1993, after due notice and hearing, private respondents obtained a favorable ruling from HIGC Hearing Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as follows:

WHEREFORE, judgment is hereby rendered recognizing the Loyola Grand Villas Homeowners Association, Inc., under Certificate of Registration No. 04-197 as the duly registered and existing homeowners association for Loyola Grand Villas homeowners, and declaring the Certificates of Registration of Loyola Grand Villas Homeowners (North) Association, Inc. and Loyola Grand Villas Homeowners (South) Association, Inc. as hereby revoked or cancelled; that the receivership be terminated and the Receiver is hereby ordered to render an accounting and turn-over to Loyola Grand Villas Homeowners Association, Inc., all assets and records of the Association now under his custody and possession.

The South Association appealed to the Appeals Board of the HIGC. In its Resolution of September 8, 1993, the Board[4] dismissed the appeal for lack of merit.

Rebuffed, the South Association in turn appealed to the Court of Appeals, raising two issues. First, whether or not LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code resulted in the automatic dissolution of LGVHAI. Second, whether or not two homeowners associations may be authorized by the HIGC in one sprawling subdivision. However, in the Decision of August 23, 1994 being assailed here, the Court of Appeals affirmed the Resolution of the HIGC Appeals Board.

In resolving the first issue, the Court of Appeals held that under the Corporation Code, a private corporation commences to have corporate existence and juridical personality from the date the Securities and Exchange Commission (SEC) issues a certificate of incorporation under its official seal. The requirement for the filing of by-laws under Section 46 of the Corporation Code within one month from official notice of the issuance of the certificate of incorporation presupposes that it is already incorporated, although it may file its by-laws with its articles of incorporation. Elucidating on the effect of a delayed filing of by-laws, the Court of Appeals said:

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.

We realize that Section 46 or other provisions of the Corporation Code are silent on the result of the failure to adopt and file the by-laws within the required period. Thus, Section 46 and other related provisions of the Corporation Code are to be construed with Section 6 (1) of P.D. 902-A. This section empowers the SEC to suspend or revoke certificates of registration on the grounds listed therein. Among the grounds stated is the failure to file by-laws (see also II Campos: The Corporation Code, 1990 ed., pp. 124-125). Such suspension or revocation, the same section provides, should be made upon proper notice and hearing. Although P.D. 902-A refers to the SEC, the same principles and procedures apply to the public respondent HIGC as it exercises its power to revoke or suspend the certificates of registration or homeowners associations. (Section 2 [a], E.O. 535, series 1979, transferred the powers and authorities of the SEC over homeowners associations to the HIGC.)

We also do not agree with the petitioners interpretation that Section 46, Corporation Code prevails over Section 6, P.D. 902-A and that the latter is invalid because it contravenes the former.There is no basis for such interpretation considering that these two provisions are not inconsistent with each other. They are, in fact, complementary to each other so that one cannot be considered as invalidating the other.

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[5] that the HIGC has the authority to order the holding of a referendum to determine which of two contending associations should represent the entire community, village or subdivision.

Undaunted, the South Association filed the instant petition for review on certiorari. It elevates as sole issue for resolution the first issue it had raised before the Court of Appeals, i.e., whether or not the LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code had the effect of automatically dissolving the said corporation.

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 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.[6] In a bid to convince the Court of its arguments, petitioner stresses that:

69x 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 OR ELSE. 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]

Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation Code which itself does not provide sanctions for non-filing of by-laws.For the petitioner, it is not proper to assess the true meaning of Sec. 46 x x x on an unauthorized provision on such matter contained in the said decree.

In their comment on the petition, private respondents counter that the requirement of adoption of by-laws is not mandatory. They point to P.D. No. 902-A as having resolved the issue of whether said requirement is mandatory or merely directory. Citing Chung Ka Bio v. Intermediate Appellate Court,[8] private respondents contend thatSection 6(I) of that decree provides that non-filing of by-laws is only a ground for suspension or revocation of the certificate of registration of corporations and, therefore, it may not result in automatic dissolution of the corporation. Moreover, the adoption and filing of by-laws is a condition subsequent which does not affect the corporate personality of a corporation like the LGVHAI. This is so because Section 9 of the Corporation Code provides that the corporate existence and juridical personality of a corporation begins from the date the SEC issues a certificate of incorporation under its official seal. Consequently, even if the by-laws have not yet been filed, a corporation may be considered a de facto corporation. To emphasize the fact the LGVHAI was registered as the sole homeowners association in the Loyola Grand Villas, private respondents point out that membership in the LGVHAI was an unconditional restriction in the deeds of sale signed by lot buyers.

In its reply to private respondents comment on the petition, petitioner reiterates its argument that the word must in Section 46 of the Corporation Code is mandatory. It adds that, before the ruling in Chung Ka Bio v. Intermediate Appellate Court could be applied to this case, this Court must first resolve the issue of whether or not the provisions of P.D. No. 902-A prescribing the rules and regulations to implement the Corporation Code can rise above and change the substantive provisions of the Code.

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.

As correctly postulated by the petitioner, interpretation of this provision of law begins with the determination of the meaning and import of the word must in this section.Ordinarily, the word must connotes an imperative act or operates to impose a duty which may be enforced.[9] It is synonymous with ought which connotes compulsion or mandatoriness.[10] However, the word must in a statute, like shall, is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the tendency has been to interpret shall as the context or a reasonable construction of the statute in which it is used demands or requires.[11] This is equally true as regards the word must. Thus, if the language of a statute considered as a whole and with due regard to its nature and object reveals that the legislature intended to use the words shall and must to be directory, they should be given that meaning.[12]

In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68 are illuminating:

MR. FUENTEBELLA. Thank you, Mr. Speaker.

On page 34, referring to the adoption of by-laws, are we made to understand here, Mr. Speaker, that by-laws must immediately be filed within one month after the issuance? In other words, would this be mandatory or directory in character?

MR. MENDOZA. This is mandatory.MR. FUENTEBELLA. It being mandatory,

Mr. Speaker, what would be the effect of the failure of the corporation to file these by-laws within one month?

MR. MENDOZA. There is a provision in the latter part of the Code which identifies and describes the consequences of violations of any provision of this Code. One such consequence is the dissolution of the corporation for its inability, or perhaps, incurring certain penalties.

MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation by merely failing to file the by-laws within one month. Supposing the corporation was late, say, five days, what would be the mandatory penalty?

MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto dissolution of the corporation. Perhaps, as in the case, as you suggested, in the case of El Hogar Filipino where a quo warranto action is brought, one takes into account the gravity of the violation committed. If the by-laws were late the filing of the by-laws were late by, perhaps, a day or two, I would suppose that might be a tolerable delay, but if they are delayed over a period of months as is happening now because of the absence of a clear requirement that by-laws must be completed within a specified period of time, the corporation must suffer certain consequences.[13]

This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the by-laws on time was never the intention of the legislature.Moreover, even without resorting to the records of deliberations of the Batasang Pambansa, the law itself provides the answer to the issue propounded by petitioner.

Taken as a whole and under the principle that the best interpreter of a statute is the statute itself (optima statuli interpretatix est ipsum statutum),[14] Section 46 aforequoted reveals the legislative intent to attach a directory, and not mandatory, meaning for the word must in the first sentence thereof. Note should be taken of the second paragraph of the law which allows the filing of the by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory compliance with the requirement of filing the by-laws within one (1) month after

70receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission. It necessarily follows that failure to file the by-laws within that period does not imply the demise of the corporation. By-laws may be necessary for the government of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes.[15] There are in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus:

In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently provides for the government of the body; and even where the governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure to exercise the power will be ascribed to mere nonaction which will not render void any acts of the corporation which would otherwise be valid.[16] (Italics supplied.)

As Fletcher aptly puts it:

It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have been adopted the corporation may not be able to act for the purposes of its creation, and that the first and most important duty of the members is to adopt them. This would seem to follow as a matter of principle from the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of legal, necessity. Moreover, the peculiar circumstances attending the formation of a corporation may impose the obligation to adopt certain by-laws, as in the case of a close corporation organized for specific purposes. And the statute or general laws from which the corporation derives its corporate existence may expressly require it to make and adopt by-laws and specify to some extent what they shall contain and the manner of their adoption. The mere fact, however, of the existence of power in the corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the validity of any of its acts.[17]

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46. However, such omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which state:

SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers:

xxx xxx xxx xxx

(l) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following:

xxx xxx xxx xxx

5. Failure to file by-laws within the required period;

xxx xxx xxx xxx

In the exercise of the foregoing authority and jurisdiction of the Commissions or by a Commissioner or by such other bodies, boards, committees and/or any officer as may be created or designated by the Commission for the purpose. The decision, ruling or order of any such Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision, ruling or order. The Commission shall promulgate rules of procedures to govern the proceedings, hearings and appeals of cases falling within its jurisdiction.

The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to the Supreme Court by petition for review in accordance with the pertinent provisions of the Rules of Court.

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 failure to file by-laws is not provided for by the Corporation Code but in another law is of no moment. P.D. No. 902-A, which took effect immediately after its promulgation on March 11, 1976, is very much apposite to the Code. Accordingly, the provisions abovequoted supply the law governing the situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be so construed and harmonized with other statutes as to form a uniform system of jurisprudence.[18]

As the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it,[19] by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation.

In this regard, private respondents are correct in relying on the pronouncements of this Court in Chung Ka Bio v. Intermediate Appellate Court,[20] as follows:

x x x. Moreover, failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution.

Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code, provided that the powers of the corporation would cease if it did not formally organize and commence the transaction of its business or the continuation of its works within two years from date of its incorporation. Section 20, which has been reproduced with some modifications in Section 46 of the Corporation Code, expressly declared that every corporation formed under this Act, must within one month after the filing of the articles of incorporation with the Securities and Exchange Commission, adopt a code of by-laws. Whether this provision should be given mandatory or only directory effect remained a controversial question until it became academic with the adoption of PD 902-A. Under this decree, it is now clear that the failure to file by-laws within the required period is only a ground for suspension or revocation of the certificate of registration of corporations.

Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(I) of PD 902-A, the SEC is empowered to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of a corporation on the ground inter alia of failure to file by-laws within the required period. It is clear from this provision that there must first of all be a hearing to determine the existence of the ground, and secondly, assuming such finding, the penalty is not necessarily revocation but may be only suspension of the charter. In fact, under the rules and regulations of the SEC, failure to file the by-laws on time may be penalized merely with the imposition of an administrative fine without affecting the corporate existence of the erring firm.

It should be stressed in this connection that substantial compliance with conditions subsequent will suffice to perfect corporate personality. Organization and commencement of transaction of corporate business are but conditions subsequent and not prerequisites for acquisition of corporate personality. The adoption and filing of by-laws is also a condition subsequent. Under Section 19 of the Corporation Code, a corporation commences its corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues certificate of incorporation under its official seal. This may be done even before the filing of the by-laws, which under Section 46 of the Corporation Code, must be adopted within one month after receipt of official notice of the issuance of its certificate of incorporation.[21]

71That 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.[22] 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.[23]

WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned Decision of the Court of Appeals AFFIRMED. This Decision is immediately executory. Costs against petitioner.

SO ORDERED.

FIRST DIVISION[G.R. No. 117604. March 26, 1997]

CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and VALLEY GOLF and COUNTRY

CLUB, INC., respondents.

D E C I S I O N

Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner China Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August 1994 nullifying the Securities and Exchange Commission's order and resolution dated 4 June 1993 and 7 December 1993, respectively, for lack of jurisdiction. Similarly impugned is the Court of Appeals' resolution dated 4 September 1994 which denied petitioner's motion for reconsideration.

The case unfolds thus:On 21 August 1974, Galicano Calapatia, Jr. (Calapatia,

for brevity) a stockholder of private respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner China Banking Corporation (CBC, for brevity).[1]

On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge agreement be recorded in its books.[2]

In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in petitioner's favor was duly noted in its corporate books.[3]

On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was secured by the aforestated pledge agreement still existing between Calapatia and petitioner.[4]

Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public auction sale of the pledged stock.[5]

On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings and requested that the pledged stock be transferred to its (petitioner's) name and the same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to accede to petitioner's request in view of Calapatia's unsettled accounts with the club.[6]

Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and petitioner emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, petitioner was issued the corresponding certificate of sale.[7]

On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of P18,783.24.[8] Said notice was followed by a demand letter dated 12 December 1985 for the same amount[9] and another notice dated 22 November 1986 for P23,483.24.[10]

On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's own share of stock (Stock Certificate No. 1219).

Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his membership due

to the sale of his share of stock in the 10 December 1986 auction.[11]

On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate No. 1219 by virtue of being the highest bidder in the 17 September 1985 auction and requested that a new certificate of stock be issued in its name.[12]

On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public auction held on 10 December 1986 for P25,000.00.[13]

On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for the issuance of a new stock certificate in its name.[14]

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 August 1990 denied petitioner's motion for reconsideration.

On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission (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.

On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer the share in the name of the petitioner in the books of (VGCCI) until liquidation of delinquency."[15] Consequently, the case was dismissed.[16]

On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration.[17]

Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the decision of its hearing officer. It declared thus:

The Commission en banc believes that appellant-petitioner has a prior right over the pledged share and because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner can proceed with the foreclosure of the pledged share.

WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on December 10, 1986 is declared NULL and VOID. Finally, appellee-respondent Club is ordered to issue another membership certificate in the name of appellant-petitioner bank.

SO ORDERED.[18]

VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its resolution dated 7 December 1993.[19]

The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed petitioner's original complaint. The Court of Appeals declared that the controversy between CBC and VGCCI is not intra-corporate. It ruled as follows:

In order that the respondent Commission can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members, or officers; (c) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned, and (d) among the stockholders, partners or associates themselves (Union Glass and Container Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The establishment of any of the relationship mentioned will not necessarily always confer jurisdiction over the dispute on the Securities and Exchange Commission to the exclusion of the regular courts. The statement made in Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions or distinctions is not that absolute.

72The 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 (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).

Indeed, the controversy between petitioner and respondent bank which involves ownership of the stock that used to belong to Calapatia, Jr. is not within the competence of respondent Commission to decide. It is not any of those mentioned in the aforecited case.

WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of respondent Securities and Exchange Commission (Annexes Y and BB, petition) and of its hearing officer dated January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all nullified and set aside for lack of jurisdiction over the subject matter of the case. Accordingly, the complaint of respondent China Banking Corporation (Annex Q, petition) is DISMISSED. No pronouncement as to costs in this instance.

SO ORDERED.[20]

Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October 1994.[21]

Hence, this petition wherein the following issues were raised:II

ISSUES

WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division) GRAVELY ERRED WHEN:

1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC, AND WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;

2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT EVIDENCE SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.

The petition is granted.The basic issue we must first hurdle is which body has

jurisdiction over the controversy, the regular courts or the SEC.

P.D. No. 902-A conferred upon the SEC the following pertinent powers:

SECTION 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines, and in the exercise of its authority, it shall have the power to enlist the aid and support of and to deputize any and all enforcement agencies of the government, civil or military as well as any private institution, corporation, firm, association or person.

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SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the

stockholders, partners, members of associations or organizations registered with the Commission.

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;

c) Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations, partnerships or associations.

d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses property to cover all of its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the Management Committee created pursuant to this Decree.

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.

As to the first query, there is no question that the purchase of the subject share or membership certificate at public auction by petitioner (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.[25] 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 exemplies an intra-corporate controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.

An important consideration, moreover, is the nature of the controversy between petitioner and private respondent corporation. 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 . . ."[26] 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:[27]

6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and boards the power to resolve specialized disputes in the field of labor (as in corporations, public transportation and public utilities) ruled that Congress in requiring the Industrial Court's intervention in the resolution of labor-management controversies likely to cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in the law. The Court held that under the "sense-making and expeditious

73doctrine 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 era of clogged court dockets, the need for specialized administrative boards or commissions with the special knowledge, experience and capability to hear and determine promptly disputes on technical matters or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been committed to the view that unless the law speaks clearly and unequivocably, the choice should fall on [an administrative agency.]'" The Court in the earlier case of Ebon v. De Guzman, noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D. amendment splitting their jurisdiction with the regular courts, "evidently,. . . had second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award damages in labor cases because that setup would mean duplicity of suits, splitting the cause of action and possible conflicting findings and conclusions by two tribunals on one and the same claim."

In this case, the need for the SEC's technical expertise cannot be over-emphasized 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.

VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between itself and VGCCI.

VGCCI's contention lacks merit.In Zamora v. Court of Appeals,[28] this Court, through Mr.

Justice Isagani A. Cruz, declared that:

It 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 . . .

We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in its motion to dismiss) that the case between itself and petitioner is intra-corporate and insisted that it is the SEC and not the regular courts which has jurisdiction. This is precisely the reason why the said court dismissed petitioner's complaint and led to petitioner's recourse to the SEC.

Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of Appeals, this Court likewise deems it procedurally sound to proceed and rule on its merits in the same proceedings.

It must be underscored that petitioner did not confine the instant petition for review on certiorari on the issue of jurisdiction. In its assignment of errors, petitioner specifically raised questions on the merits of the case. In turn, in its responsive pleadings, private respondent duly answered and countered all the issues raised by petitioner.

Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Gabriel-Almoradie v. Court of Appeals,[29] citing Escudero v. Dulay[30] and The Roman Catholic Archbishop of Manila v. Court of Appeals:[31]

In the interest of the public and for the expeditious administration of justice the issue on infringement shall be resolved by the court considering that this case has dragged on for years and has gone from one forum to another.

It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a single proceeding leaving no

root or branch to bear the seeds of future litigation. No useful purpose will be served if a case or the determination of an issue in a case is remanded to the trial court only to have its decision raised again to the Court of Appeals and from there to the Supreme Court.

We have laid down the rule that the remand of the case or of an issue to the lower court for further reception of evidence is not necessary where the Court is in position to resolve the dispute based on the records before it and particularly where the ends of justice would not be subserved by the remand thereof. Moreover, the Supreme Court is clothed with ample authority to review matters, even those not raised on appeal if it finds that their consideration is necessary in arriving at a just disposition of the case.

In the recent case of China Banking Corp., et al. v. Court of Appeals, et al.,[32] this Court, through Mr. Justice Ricardo J. Francisco, ruled in this wise:

At the outset, the Court's attention is drawn to the fact that that since the filing of this suit before the trial court, none of the substantial issues have been resolved. To avoid and gloss over the issues raised by the parties, as what the trial court and respondent Court of Appeals did, would unduly prolong this litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of every action or proceeding. The Court, therefore, feels that the central issues of the case, albeit unresolved by the courts below, should now be settled specially as they involved pure questions of law. Furthermore, the pleadings of the respective parties on file have amply ventilated their various positions and arguments on the matter necessitating prompt adjudication.

In the case at bar, since we already have the records of the case (from the proceedings before the SEC) sufficient to enable us to render a sound judgment and since only questions of law were raised (the proper jurisdiction for Supreme Court review), we can, therefore, unerringly take cognizance of and rule on the merits of the case.

The procedural niceties settled, we proceed to the merits.

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.[34]

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:

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This pledge is given as security for the prompt payment when due of all loans, overdrafts, promissory notes, drafts, bills or exchange, discounts, and all other obligations of every kind which have heretofore been contracted, or which may hereafter be contracted, by the PLEDGOR(S) and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including discounts of Chinese drafts, bills of exchange, promissory notes, etc., without any further endorsement by the PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS, together with the accrued interest thereon, as hereinafter provided, plus the costs, losses, damages and expenses (including attorney's fees) which PLEDGEE may incur in connection with the collection thereof.[35] (Emphasis ours.)

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.

74Private respondent'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 VGCCI itself sold the pledged share at another public auction. By doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith.

In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this wise:

The general rule really is that third persons are not bound by the by-laws of a corporation since they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this is when third persons have actual or constructive knowledge of the same. In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the share foreclosed on September 17, 1985. This is proven by the fact that prior thereto, i.e., on May 14, 1985 petitioner even quoted a portion of private respondent's by-laws which is material to the issue herein in a letter it wrote to private respondent. Because of this actual knowledge of such by-laws then the same bound the petitioner as of the time when petitioner purchased the share. Since the by-laws was already binding upon petitioner when the latter purchased the share of Calapatia on September 17, 1985 then the petitioner purchased the said share subject to the right of the private respondent to sell the said share for reasons of delinquency and the right of private respondent to have a first lien on said shares as these rights are provided for in the by-laws very very clearly.[36]

VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.:[37]

And moreover, the by-law now in question cannot have any effect on the appellee. He had no knowledge of such by-law 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 said by-law between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.

"An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-law and took part in its adoption." (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

"When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice." (Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

"The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is not bound by such by-law by virtue of the assignment alone." (Ireland vs. Globe Milling Co., 21 R.I., 9.)

"A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by the board of directors, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of third persons." (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.) (Underscoring ours.)

In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party and the shareholder was entered into, in 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. Petitioner'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:

By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities. (9 Fletcher 4166. 1982 Ed.)

The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. (Ibid.)

Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have knowledge of the provisions either actually or constructively. In the case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the transfer of shares cannot have any effect on the the transferee of the shares in question as he "had no knowledge of such by-law 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 by-law between the shareholder x x x and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser." (Underscoring supplied.)

By analogy of the above-cited case, the Commission en banc is of the opinion that said case is applicable to the present controversy. Appellant-petitioner bank as a third party can not be bound by appellee-respondent's by-laws. It must be recalled that when appellee-respondent communicated to appellant-petitioner bank that the pledge agreement was duly noted in the club's books there was no mention of the shareholder-pledgor's unpaid accounts. 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.

The Commission en banc also believes that for the exception to the general accepted rule that third persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was contracted. Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of the Civil Code provides that it is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists maybe alienated for the payment to the creditor.

In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued an opinion to the effect that:

According to the weight of authority, the pledgee's right is entitled to full protection without surrender of the certificate, their cancellation, and the issuance to him of new ones, and when done, the pledgee will be fully protected against a subsequent purchaser who would be charged with constructive notice that the certificate is covered by the pledge. (12-A Fletcher 502)

The pledgee is entitled to retain possession of the stock until the pledgor pays or tenders to him the amount due on the debt secured. In other words, the pledgee has the right to resort to its collateral for the payment of the debts. (Ibid, 502)

To cancel the pledged certificate outright and the issuance of new certificate to a third person who purchased the same certificate covered by the pledge, will certainly defeat the right of the pledgee to resort to its collateral for the payment of the debt. The pledgor or his representative or registered stockholders has no right to require a return of the pledged stock until the debt for which it was given as security is paid and satisfied, regardless of the length of time which have elapsed since debt was created. (12-A Fletcher 409)

75A 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. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739)[38]

Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H . Lee,[39] is clearly not applicable:

In applying this provision to the situation before us it must be borne in mind that the ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must renew the pledge, if it is to be kept alive.

It is quite obvious from the aforequoted case that a membership share is quite different in character from a pawn ticket and to reiterate, petitioner was never informed of Calapatia' s unpaid accounts and the restrictive provisions in VGCCI's by-laws.

Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction."[40] In the case at bar, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership Certificate No. 1219.[41] What Calapatia owed the corporation were merely the monthly dues. Hence, the aforequoted provision does not apply.

WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.

SO ORDERED.

SECOND DIVISION[G.R. No. 108905. October 23, 1997]

GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURT OF APPEALS, GRACE VILLAGE

ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO, respondents.

D E C I S I O N

The question for decision in this case is the right of petitioners representative to sit in the board of directors of respondent Grace Village Association, Inc. as a permanent member thereof. For fifteen years from 1975 until 1989 petitioners representative had been recognized as a permanent director of the association. But on February 13, 1990, petitioner received notice from the associations committee on election that the latter was reexamining (actually, reconsidering) the right of petitioners representative to continue as an unelected member of the board. As the board denied petitioners request to be allowed representation without election, petitioner brought an action for mandamus in the Home Insurance and Guaranty Corporation. Its action was dismissed by the hearing officer whose decision was subsequently affirmed by the appeals board. Petitioner appealed to the Court of Appeals, which in turn upheld the decision of the HIGCs appeals board. Hence this petition for review based on the following contentions:

1. The Petitioner herein has already acquired a vested right to a permanent seat in the Board of Directors of Grace Village Association;

2. The amended By-laws of the Association drafted and promulgated by a Committee on December 20, 1975 is valid and binding; and

3. The Practice of tolerating the automatic inclusion of petitioner as a permanent member of the Board of Directors of the Association without the benefit of election is allowed under the law.[1]

Briefly stated, the facts are as follows: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, while private respondents Alejandro G. Beltran and Ernesto L. Go were its president and chairman of the committee on election, respectively, in 1990, when this suit was brought.

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 Annual Meeting of the members of the Association shall be held on the second Thursday of January of each year. Each Charter or Associate Member of the Association is entitled to vote. He shall be entitled to as many votes as he has acquired thru his monthly membership fees only computed on a ratio of TEN ( P 10.00) PESOS  for one vote.

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 associations 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 because to make a person or entity a permanent Director would deprive the right of voters to vote for fifteen (15) members of the Board, and it is undemocratic for a person or entity to hold office in perpetuity.[4] For this reason, Tan was told that the proposal to make the Grace Christian High School representative as a permanent director of the association, although previously tolerated in the past elections should be reexamined. Following this advice, notices were sent to the members of the association that the provision on election of directors of the 1968 by-laws of the association would be observed.

Petitioner requested the chairman of the election committee to change the notice of election by following the procedure in previous elections, claiming that the notice issued for the 1990 elections ran counter to the practice in previous years and was in violation of the by-laws (of 1975) and unlawfully deprive[d] Grace Christian High School of its vested right [to] a permanent seat in the board.[5]

As the association denied its request, the school brought suit for mandamus in the Home Insurance and Guaranty Corporation to compel the board of directors of the association to recognize its right to a permanent seat in the board. Petitioner based its claim on the following portion of the proposed amendment which, it contended, had become part of the by-laws of the association as Article VI, paragraph 2, thereof:

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

76proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.

It appears that the opinion of the Securities and Exchange Commission on the validity of this provision was sought by the association and that in reply to the query, 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).

Private respondent association cited the SEC opinion in its answer. Additionally, the association contended that the basis of the petition for mandamus was merely a proposed by-laws which has not yet been approved by competent authority nor registered with the SEC or HIGC. It argued that the by-laws which was registered with the SEC on January 16, 1969 should be the prevailing by-laws of the association and not the proposed amended by-laws.[6]

In reply, petitioner maintained that the amended by-laws is valid and binding and that the association was estopped from questioning the by-laws.[7]

A preliminary conference was held on March 29, 1990 but nothing substantial was agreed upon. The parties merely agreed that the board of directors of the association should meet on April 17, 1990 and April 24, 1990 for the purpose of discussing the amendment of the by-laws and a possible amicable settlement of the case.A meeting was held on April 17, 1990, but the parties failed to reach an agreement. Instead, the board adopted a resolution declaring the 1975 provision null and void for lack of approval by members of the association and the 1968 by-laws to be effective.

On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing petitioners action. The hearing officer 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; that, on the contrary, in the meeting held on April 17, 1990, the directors of the association declared the proposed by-law dated December 20, 1975 prepared by the committee on by-laws . . . null and void and the by-laws of December 17, 1968 as the prevailing by-laws under which the association is to operate until such time that the proposed amendments to the by-laws are approved and ratified by a majority of the members of the association and duly filed and approved by the pertinent government agency. The hearing officer rejected petitioners 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.[8]

The appeals board of the HIGC affirmed the decision of the hearing officer in its resolution dated September 13, 1990. It cited the opinion of the SEC based on 92 of the Corporation Code which reads:

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.

The HIGC appeals board denied claims that the school [was] being deprived of its right to be a member of the Board of Directors of respondent association, because the fact was that it may nominate as many representatives to the Associations Board as it may deem appropriate. It said that what is merely being upheld is the act of the incumbent directors of the Board of correcting a long standing practice which is not anchored upon any legal basis.[9]

Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate court on February 9, 1993, affirmed the decision of the HIGC. The Court of Appeals held that there was no valid amendment of the associations 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 repeal any by-law or adopt new by-laws. The 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. But petitioner contends that the members of the committee which prepared the proposed amendment were duly authorized to do so and that because the members of the association thereafter implemented the provision for fifteen years, the proposed amendment for all intents and purposes should be considered to have been ratified by them. Petitioner contends:[11]

Considering, therefore, that the agents or committee were duly authorized to draft the amended by-laws and the acts done by the agents were in accordance with such authority, the acts of the agents from the very beginning were lawful and binding on the homeowners (the principals) per se without need of any ratification or adoption. The more has the amended by-laws become binding on the homeowners when the homeowners followed and implemented the provisions of the amended by-laws. This is not merely tantamount to tacit ratification of the acts done by duly authorized agents but express approval and confirmation of what the agents did pursuant to the authority granted to them.

Corollarily, petitioner claims that it has acquired a vested right to a permanent seat in the board. Says petitioner:

The right of the petitioner to an automatic membership in the board of the Association was granted by the members of the Association themselves and this grant has been implemented by members of the board themselves all through the years. Outside the present membership of the board, not a single member of the Association has registered any desire to remove the right of herein petitioner to an automatic membership in the board. If there is anybody who has the right to take away such right of the petitioner, it would be the individual members of the Association through a referendum and not the present board some of the members of which are motivated by personal interest.

Petitioner disputes the ruling that the provision in question, giving petitioners representative a permanent seat in the board of the association, is contrary to law. Petitioner claims that that is not so because there is really no provision of law prohibiting unelected members of boards of directors of corporations. Referring to 92 of the present Corporation Code, petitioner says:

77It is clear that the above provision of the Corporation Code only provides for the manner of election of the members of the board of trustees of non-stock corporations which may be more than fifteen in number and which manner of election is even subject to what is provided in the articles of incorporation or by-laws of the association thus showing that the above provisions [are] not even mandatory.

Even a careful perusal of the above provision of the Corporation Code would not show that it prohibits a non-stock corporation or association from granting one of its members a permanent seat in its board of directors or trustees. If there is no such legal prohibition then it is allowable provided it is so provided in the Articles of Incorporation or in the by-laws as in the instant case.

. . . .

If fact, the truth is that this is allowed and is being practiced by some corporations duly organized and existing under the laws of the Philippines.

One example is the Pius XII Catholic Center, Inc. Under the by-laws of this corporation, that whoever is the Archbishop of Manila is considered a member of the board of trustees without benefit of election. And not only that. He also automatically sits as the Chairman of the Board of Trustees, again without need of any election.

Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also provided in the by-laws of this corporation that whoever is the Archbishop of Manila is considered a member of the board of trustees year after year without benefit of any election and he also sits automatically as the Chairman of the Board of Trustees.

It is actually 28 and 29 of the Corporation Law not 92 of the present law or 29 of the former one which require members of the boards of directors of corporations to be elected. These provisions read:

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 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. (emphasis added)

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 anonstock 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. (Emphasis added)

The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980,[12] similarly provides:

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. (Emphasis added)

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.

Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity. For that matter the members of the association may have formally adopted the provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law.[13]

It is probable that, in allowing petitioners 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 petitioners representative as an unelected member of the board of directors. It is more accurate to say that the members merely tolerated petitioners representative and tolerance cannot be considered ratification.

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 petitioners claim that its right is coterminus with the existence of the association.[14]

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.

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.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

SECOND DIVISION

[G.R. No. 23241. March 14, 1925. ]

HENRY FLEISCHER, Plaintiff-Appellee, v. BOTICA NOLASCO CO., INC., Defendant-Appellant. 

SYLLABUS

1. CORPORATIONS; CORPORATE STOCK; RIGHT OF CORPORATIONS TO IMPOSE A LIMITATION ON TRANSFERS OF STOCK. — A stock corporation in adopting by-laws governing the transfer of shares of stock should take into consideration the specific provisions of the Corporation Law. The by-laws of corporations should be made to harmonize with the provisions of the Corporation Law. By-laws must not be inconsistent with the provisions of the Corporation Law. By-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporations provided they

78are not contradictory to the general policy of the laws of the land. Under a statute authorizing by-laws for the transfer of stock of a corporation, it can do more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right to sell. The shares of stock of a corporation are personal property and the holder thereof may transfer the same without unreasonable restrictions. 

2. ID.; TRANSFER OF SHARES OF STOCK. — The power to enact by-laws restraining the sale and transfer of stock must be found in the governing statute or charter. Restrictions upon the traffic in stock must have their source in legislative enactments, as the corporation itself cannot create such impediments. By-laws of a corporations are intended merely for the protection of the corporation, and prescribe regulations and not restrictions; they are always subject to the charter of the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the transaction by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. A by-law of a corporation cannot take away or abridge the substantial rights of stockholders. Courts will carefully scrutinize any attempt in the on a part of a corporation to impose restrictions or limitations upon the right of stockholders to sell and assign their stock. Restrictions cannot be imposed upon a stockholder by a by-law without statutory or charter authority. The owner of a corporate stock has the same uncontrollable right to sell or alienate, which attaches to the ownership of any other species of property.

D E C I S I O N

This action was commenced in the Court of First Instance of the Province of Oriental Negros on the 14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., a corporation duly organized and existing under the laws of the Philippine Islands. the plaintiff prayed that said board of directors be ordered to register in the books of the corporation five shares of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for damages sustained by him resulting from the refusal of said body to register the share of stock in question. the defendant filed the demurrer on the ground that the facts alleged in the complaint did not constitute sufficient cause of action, and that the action was not brought against the proper party, which was the Botica Nolasco, Inc. the demurrer was sustained, and the plaintiff was granted five days to amend his complaint. 

On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of five shares of stock of said corporation, by purchase from their original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the defendant refused to register said shares in his name in the books of the corporation in spite of repeated demands to that effect made by him upon said corporation, which refusal caused him damages amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to register in his name in the books of the corporation the five shares of stock recorded in said books in the name of Manuel Gonzales, and to indemnity him in the sum of P500 as damages, and to pay the costs. The defendant again filed a demurrer in the ground that the amended complaint did not state facts sufficient to constitute a cause of action, and that said amended complaint was ambiguous, unintelligence, uncertain, which demurrer was overruled by the court. 

The defendant answered the amended complaint denying generally and specifically each and every one of the material allegations thereof, and, as a special defense, alleged that the defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said shares at the par value of P100 a share, plus P90 as dividends corresponding to the year 1922, and that said offer was refused by the plaintiff. The defendant prayed for a judgment absolving it from all liability under the complaint and directing the plaintiff to deliver to the defendant the five shares of stock in question, and to pay damages in the sum of P500, and the costs. 

Upon the issued presented by the pleadings above stated, the cause was brought in for trial, at the conclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that, in his opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy its shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especially with section 34 thereof; and rendered a judgment ordering the defendant corporation, through its

board of directors, to register in the books of said corporation the said five shares of stock in the name of the plaintiff, Henry Fleischer, as the shareholder or owner thereof instead of the original owner, Manuel Gonzalez, with costs against the defendant. 

The defendant appealed from said judgment, and now makes several assignments of error, all of which, in substance, raise the question whether or not article 12 of the by-laws of the corporation is in conflict with the provisions of the Corporation Law (Act No. 1459). 

There is no controversy as to the facts of the present case. They are simple and may be stated as follows:

That Manuel Gonzalez was the original owner of the five shares of stock in question, No. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement provided in the back thereof, together with other credits, in consideration of a large sum of money owed by Gonzalez to Fleischer (Exhibit A, B, B-1, B-2, B-3, B-4); that on March 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry Fleischer, on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell them to the defendant; that the plaintiff requested Doctor Miciano to register said shares in his name; that Doctor Miciano refused to do so, saying that it would be in contravention of the by-laws of the corporation. 

It also appears from the record that on the 13th day of March, 1923, two days after the assignment of th shares to the plaintiff, Manuel Gonzalez made a written statement to the Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry Fleischer be not transferred to Fleischer’s name. He also acknowledged in said written statement the preferential right of the corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling his written statement On March 14, 1923 (Exhibit C), to which letter the Botica Nolasco , in June 15, 1923, replied, declaring that his written statement was in conformity with the by-laws of the corporation that his letter of June 14th was of no effect, and that the shares in question had been registered in the name of the Botica Nolasco, Inc., (Exhibit X). 

As indicated above, the important question raised in this appeal is whether or not article of the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law (Act No. 1459). Appellant invoked said article as its ground for denying the request of th plaintiff that the shares in question be registered in his(plaintiff’s) name, and for claiming that it (Botica Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez. Appellant now contends that article 12 of the said by-laws is in conformity with the provisions of Act No. 1459. Said article is as follows:

"ART. 12. Las acciones de la Corporacion peden ser transferidas a otra person, pero para que estas transferencias tengan validez legal, deben constar en los registros de la Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la accion o acciones que se tranfieran, o un documento de transferencia. Entendiendose que, ningun accionista transferira accion alguna a otra rero. En igualdad de condiciones, la sociedad tendra el derecho de adquirir par si la accion o acciones que se traten de transferir." (Exhibit 2.) 

The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc., governing the transfer of shares of stock of said corporation. The latter part of said article creates in favor of the Botica Nolasco, a preferential right to buy, under the same conditions, the share or shares of stock of a retiring shareholder. Has said corporation any power, under the Corporation Law (Act No. 1459), to adopt such by-laws?

The particular provisions of the Corporation Law referring to transfer of shares of stock are as follows:

"Sec 13. Every corporation has the power:

x       x       x

"(7) To make by-laws, not inconsistent with any existing law,

79for the fixing or changing of the number of its officers and directors within the limits prescribed by law, of its corporate affairs, etc. 

x       x       x

"Sec 35. The capital stock corporations shall be divided into shares for which certificate signed by the president or the vice-president, countersigned by the secretary or clerk and sealed of the corporation, shall be issued in accordance with the by-laws. Share of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. "No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation.”

Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock. It follows from said provision, that a by-law adopted by a corporation relating to transfer of stock should be in harmony with the law in the subject of transfer of stock. The law on this subject is found in section 35 of Act No. 1459 above quoted. Said section 35 specifically provides that the shares of stock "are personal property and may be transferred by delivery of the certificate indorsed by the owner, etc. Said section 35 defines the nature, character and transferability of shares of stock. Under said section they are personal property and may be transferred as therein provided. Said section contemplates no restriction as to whom they may be transferred or sold. It does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize with said provisions. It should not be inconsistent therewith. 

The by-law now in question was adopted under the power conferred upon the corporation by section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has transcended the limits fixed by law in the same section, and has not taken into consideration the provisions of section 35 of Act No. 1459. 

As general rule, the ly-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land. (Supreme Commandery of the Knights of the Golden Rule v. Ainswoth, 71 Ala., 436; 46 Am. Rep., 332.) 

On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and for a corporate purpose, and always within the charter limits. They must always be strictly subordinate to the constitution and the general laws of the land. They must infringe the policy of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested rights or impair the obligation of a contract, take away or abridge the substantial rights of stockholder or member, affect rights of property or create obligations unknown to the law. (People’s Home Savings Bank v. Superior Court, 104 Cal., Co., 649; 43 Am. St. Rep., 147; Ireland v. Globe Milling Co., 79 Am. St. Rep., 769.) 

The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co. v. Rhodes, 25 Fla., 40.) 

"The power to enact by-laws restraining the sale and transfer of stock must be found in the governing statute or the charter. Restrictions upon the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. By-laws are intended merely for the protection of the corporation, and prescribed regulation and not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the transaction by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. A by-law cannot take away or abridge the substantial rights of stockholder. Under a statute

authorizing by-laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale." (4 Thompson on Corporations, Sec. 4137, p. 674.) 

"The right of unrestrained transfer of shares inheres in the very nature of a corporation, and courts will carefully scrutinize any attempt to impose restrictions or limitations upon the right of stockholders to sell and assign their stock. The right to impose any restraint in this respect must be conferred upon the corporation either by the governing statute or by the articles of the corporation. It cannot be done by a by-law without statutory or charter authority." (4 Thompson on Corporations, sec. 4334, pp. 818, 819.) 

"The jus disponendi, being an incident of the ownership of property, the general rule (subject to exceptions hereafter pointed out and discussed) is that every owner of corporate shares has the same uncontrollable right to alien them which attaches to the ownership of any other species of property. A shareholder is under no obligation to refrain from selling his shares at the sacrifice of his personal interest, in order to secure the welfare of the corporation, or to enable another shareholder to make gains and profits." (10 Cyc., p. 577.) 

"It follows from the foregoing that a corporation has no power to prevent or to restrain transfers of its shares, unless such power is expressly conferred in its charter or governing statute. This conclusion follows from the further consideration that by-laws or other regulations restraining such transfers, unless derived from authority expressly granted by the legislature, would be regarded as impositions in restraint of trade." (10 Cyc., p. 578.) 

The foregoing authorities go farther than the stand we are taking on this question. They hold the power of a corporation to enact by-laws restraining the sale and transfer of shares, should not only be in harmony with the law or charter of the corporation, but such power should be expressly granted in said law or charter. 

The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation, the to show the names of the parties to the transaction, the date of transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meetings of stockholders, and for other purposes. But any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade. 

And moreover, the by-law now in question cannot have any effect on the appellee. He had no knowledge of such by-law 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 said by-law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser. 

"An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-law and took part in its adoption." (10 Cyc., 579; Ireland v. Globe Milling Co., 21 R. I., 9.) 

"When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice." (Brinkerhoff-Farris Trust & Savings Co. v. Home Lumber Co., 118 Mo., 447.) 

"The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law has only the effect of a contract by, and enforceable against, that assignor; the assignee is not bound by such by-law by virtue of the assignment alone." (Ireland v. Globe Milling Co., 21 R.I., 9.) 

"A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by the board of directors, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of

80third persons." (Farmers’ & Merchants’ Bank of Lineville v. Wasson, 48 Iowa, 336.) 

Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right of action against the defendant corporation, but against the president and secretary thereof, inasmuch as the signing and registration of shares is incumbent upon said officers pursuant to section 35 of the Corporation Law. This contention cannot be sustained now. The question should have been raised in the lower court. It is too late to raise it now in this appeal. Besides, as stated above, the corporation was made defendant in this action upon the demurrer of the attorney of the original defendant in the lower court, who contended that the Botica Nolasco, Inc., should be made the party defendant in this action. Accordingly, upon order of the court, the complaint was amended and the said corporation was made the party defendant . 

Whenever the corporation refuses to transfer and register stock in case like the present, mandamus will lie to compel the officers of the corporation to transfer said stock upon the books of the corporation. (26 Cyc., 347; Hager v. Bryan, 19 Phil., 138.) 

In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower court is in accordance with law and should be and is hereby affirmed, with costs. So ordered. 

SECOND DIVISION[G.R. No. 121466. August 15, 1997]

PMI COLLEGES, petitioner, vs. THE NATIONAL LABOR RELATIONS COMMISSION and ALEJANDRO

GALVAN, respondents.

D E C I S I O N

Subject of the instant petition for certiorari under Rule 65 of the Rules of Court is the resolution[1] of public respondent National Labor Relations Commission[2] rendered on August 4, 1995, affirming in toto the December 7, 1994 decision[3] of Labor Arbiter Pablo C. Espiritu declaring petitioner PMI Colleges liable to pay private respondent Alejandro Galvan P405,000.00 in unpaid wages and P40,532.00 as attorneys fees.

A chronicle of the pertinent events on record leading to the filing of the instant petition is as follows:

On July 7, 1991, petitioner, an educational institution offering courses on basic seamans training and other marine-related courses, hired private respondent as contractual instructor with an agreement that the latter shall be paid at an hourly rate of P30.00 to P50.00, depending on the description of load subjects and on the schedule for teaching the same. Pursuant to this engagement, private respondent then organized classes in marine engineering.

Initially, private respondent and other instructors were compensated for services rendered during the first three periods of the abovementioned contract. However, for reasons unknown to private respondent, he stopped receiving payment for the succeeding rendition of services. This claim of non-payment was embodied in a letter dated March 3, 1992, written by petitioners Acting Director, Casimiro A. Aguinaldo, addressed to its President, Atty. Santiago Pastor, calling attention to and appealing for the early approval and release of the salaries of its instructors including that of private respondent. It appeared further in said letter that the salary of private respondent corresponding to the shipyard and plant visits and the ongoing on-the-job training of Class 41 on board MV Sweet Glory of Sweet Lines, Inc. was not yet included. This request of the Acting Director apparently went unheeded. Repeated demands having likewise failed, private respondent was soon constrained to file a complaint[4] before the National Capital Region Arbitration Branch on September 14, 1993 seeking payment for salaries earned from the following: (1) basic seaman course Classes 41 and 42 for the period covering October 1991 to September 1992; (2) shipyard and plant visits and on-the-job training of Classes 41 and 42 for the period covering October 1991 to September 1992 on board M/V Sweet Glory vessel; and (3) as Acting Director of Seaman Training Course for 3-1/2 months.

In support of the abovementioned claims, private respondent submitted documentary evidence which were annexed to his complaint, such as the detailed load and schedule of classes with number of class hours and rate per hour (Annex A); PMI Colleges Basic Seaman Training Course (Annex B); the aforementioned letter-request for payment of

salaries by the Acting Director of PMI Colleges (Annex C); unpaid load of private respondent (Annex D); and vouchers prepared by the accounting department of petitioner but whose amounts indicated therein were actually never paid to private respondent (Exhibit E).

Private respondents claims, as expected, were resisted by petitioner. It alleged that classes in the courses offered which complainant claimed to have remained unpaid were not held or conducted in the school premises of PMI Colleges. Only private respondent, it was argued, knew whether classes were indeed conducted. In the same vein, petitioner maintained that it exercised no appropriate and proper supervision of the said classes which activities allegedly violated certain rules and regulations of the Department of Education, Culture and Sports (DECS). Furthermore, the claims, according to petitioner, were all exaggerated and that, at any rate, private respondent abandoned his work at the time he should have commenced the same.

In reply, private respondent belied petitioners allegations contending, among others, that he conducted lectures within the premises of petitioners rented space located at 5th Floor, Manufacturers Bldg., Sta. Cruz, Manila; that his students duly enrolled with the Registrars Office of petitioner; that shipyard and plant visits were conducted at Fort San Felipe, Cavite Naval Base; that petitioner was fully aware of said shipyard and plant visits because it even wrote a letter for that purpose; and that basic seaman courses 41 and 42 were sanctioned by the DECS as shown by the records of the Registrars Office.

Later in the proceedings below, petitioner manifested that Mr. Tomas G. Cloma, Jr., a member of the petitioners Board of Trustees wrote a letter[5] to the Chairman of the Board on May 23, 1994, clarifying the case of private respondent and stating therein, inter alia, that under petitioners by-laws only the Chairman is authorized to sign any contract and that private respondent, in any event, failed to submit documents on the alleged shipyard and plant visits in Cavite Naval Base.

Attempts at amicable settlement having failed, the parties were required to submit their respective position papers. Thereafter, on June 16, 1994, the Labor Arbiter issued an order declaring the case submitted for decision on the basis of the position papers which the parties filed. Petitioner, however, vigorously opposed this order insisting that there should be a formal trial on the merits in view of the important factual issues raised. In another order dated July 22, 1994, the Labor Arbiter impliedly denied petitioners opposition, reiterating that the case was already submitted for decision. Hence, a decision was subsequently rendered by the Labor Arbiter on December 7, 1994 finding for the private respondent. On appeal, the NLRC affirmed the same in toto in its decision of August 4, 1995.

Aggrieved, petitioner now pleads for the Court to resolve the following issues in its favor, to wit:

I. Whether the money claims of private respondent representing salaries/wages as contractual instructor for class instruction, on-the-job training and shipboard and plant visits have valid legal and factual bases;

II. Whether claims for salaries/wages for services relative to on-the-job training and shipboard and plant visits by instructors, assuming the same were really conducted, have valid bases;

III. Whether the petitioner was denied its right to procedural due process; and

IV. Whether the NLRC findings in its questioned resolution have sound legal and factual support.

We see no compelling reason to grant petitioners plea; the same must, therefore, be dismissed.

At once, a mere perusal of the issues raised by petitioner already invites dismissal for demonstrated ignorance and disregard of settled rules on certiorari. Except perhaps for the third issue, the rest glaringly call for a re-examination, evaluation and appreciation of the weight and sufficiency of factual evidence presented before the Labor Arbiter. This, of course, the Court cannot do in the exercise of its certiorari jurisdiction without transgressing the well-defined limits thereof. The corrective power of the Court in this regard is confined only to jurisdictional issues and a determination of whether there is such grave abuse of

81discretion amounting to lack or excess of jurisdiction on the part of a tribunal or agency. So unyielding and consistent are the decisional rules thereon that it is indeed surprising why petitioners counsel failed to accord them the observance they deserve.

Thus, in San Miguel Foods, Inc. Cebu B-Meg Feed Plant v. Hon. Bienvenido Laguesma,[6] we were emphatic in declaring that:

This Court is definitely not the proper venue to consider this matter for it is not a trier of facts. x x x Certiorari is a remedy narrow in its scope and inflexible in character. It is not a general utility tool in the legal workshop. Factual issues are not a proper subject for certiorari, as the power of the Supreme Court to review labor cases is limited to the issue of jurisdiction and grave abuse of discretion. x x x (Emphasis supplied).

Of the same tenor was our disquisition in Ilocos Sur Electric Cooperative, Inc.   v.   NLRC [7]  where we made plain that:

In certiorari proceedings under Rule 65 of the Rules of Court, judicial review by this Court does not go so far as to evaluate the sufficiency of evidence upon which the Labor Arbiter and the NLRC based their determinations, the inquiry being limited essentially to whether or not said public respondents had acted without or in excess of its jurisdiction or with grave abuse of discretion. (Emphasis supplied).

To be sure, this does not mean that the Court would disregard altogether the evidence presented. We merely declare that the extent of review of evidence we ordinarily provide in other cases is different when it is a special civil action of certiorari. The latter commands us to merely determine whether there is basis established on record to support the findings of a tribunal and such findings meet the required quantum of proof, which in this instance, is substantial evidence. Our deference to the expertise acquired by quasi-judicial agencies and the limited scope granted to us in the exercise of certiorari jurisdiction restrain us from going so far as to probe into the correctness of a tribunals evaluation of evidence, unless there is palpable mistake and complete disregard thereof in which case certiorari would be proper. In plain terms, in certiorari proceedings, we are concerned with mere errors of jurisdiction and not errors of judgment. Thus:

The rule is settled that the original and exclusive jurisdiction of this Court to review a decision of respondent NLRC (or Executive Labor Arbiter as in this case) in a petition for certiorari under Rule 65 does not normally include an inquiry into the correctness of its evaluation of the evidence.   Errors of judgment, as distinguished from errors of jurisdiction, are not within the province of a special civil action for certiorari, which is merely confined to issues of jurisdiction or grave abuse of discretion. It is thus incumbent upon petitioner to satisfactorily establish that respondent Commission or executive labor arbiter acted capriciously and whimsically in total disregard of evidence material to or even decisive of the controversy, in order that the extraordinary writ of certiorari will lie. By grave abuse of discretion is meant such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, and it must be shown that the discretion was exercised arbitrarily or despotically. For certiorari to lie there must be capricious, arbitrary and whimsical exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of both civil law and common law traditions.[8]

The Court entertains no doubt that the foregoing doctrines apply with equal force in the case at bar.

In any event, granting that we may have to delve into the facts and evidence of the parties, we still find no puissant justification for us to adjudge both the Labor Arbiters and NLRCs appreciation of such evidence as indicative of any grave abuse of discretion.

First. Petitioner places so much emphasis on its argument that private respondent did not produce a copy of the contract pursuant to which he rendered services. This argument is, of course, puerile. The absence of such copy does not in any manner negate the existence of a contract of employment since (C)ontracts shall be obligatory, in whatever form they have been entered into, provided all the essential requisites for their validity are present.[9] The only exception to this rule is when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way. However, there is no

requirement under the law that the contract of employment of the kind entered into by petitioner with private respondent should be in any particular form. While it may have been desirable for private respondent to have produced a copy of his contract if one really exists, but the absence thereof, in any case, does not militate against his claims inasmuch as:

No particular form of evidence is required to prove the existence of an employer-employee relationship. Any competent and relevant evidence to prove the relationship may be admitted.For, if only documentary evidence would be required to show that relationship, no scheming employer would ever be brought before the bar of justice, as no employer would wish to come out with any trace of the illegality he has authored considering that it should take much weightier proof to invalidate a written instrument. x x x [10]

At any rate, the vouchers prepared by petitioners own accounting department and the letter-request of its Acting Director asking for payment of private respondents services suffice to support a reasonable conclusion that private respondent was employed with petitioner. How else could one explain the fact that private respondent was supposed to be paid the amounts mentioned in those documents if he were not employed? Petitioners evidence is wanting in this respect while private respondent affirmatively stated that the same arose out of his employment with petitioner. As between the two, the latter is weightier inasmuch as we accord affirmative testimony greater value than a negative one. For the foregoing reasons, we find it difficult to agree with petitioners assertion that the absence of a copy of the alleged contract should nullify private respondents claims.

Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated petitioners by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same.[11] No proof appears on record that private respondent ever knew anything about the provisions of said by-laws. In fact, petitioner itself merely asserts the same without even bothering to attach a copy or excerpt thereof to show that there is such a provision. How can it now expect the Labor Arbiter and the NLRC to believe it? That this allegation has never been denied by private respondent does not necessarily signify admission of its existence because technicalities of law and procedure and the rules obtaining in the courts of law do not strictly apply to proceedings of this nature.

Second. Petitioner bewails the fact that both the Labor Arbiter and the NLRC accorded due weight to the documents prepared by private respondent since they are said to be self-serving. Self-serving evidence is not to be literally taken as evidence that serves ones selfish interest.[12] The fact alone that most of the documents submitted in evidence by private respondent were prepared by him does not make them self-serving since they have been offered in the proceedings before the Labor Arbiter and that ample opportunity was given to petitioner to rebut their veracity and authenticity. Petitioner, however, opted to merely deny them which denial, ironically, is actually what is considered self-serving evidence[13] and, therefore, deserves scant consideration. In any event, any denial made by petitioner cannot stand against the affirmative and fairly detailed manner by which private respondent supported his claims, such as the places where he conducted his classes, on-the-job training and shipyard and plant visits; the rate he applied and the duration of said rendition of services; the fact that he was indeed engaged as a contractual instructor by petitioner; and that part of his services was not yet remunerated. These evidence, to reiterate, have never been effectively refuted by petitioner.

Third. As regards the amounts demanded by private respondent, we can only rely upon the evidence presented which, in this case, consists of the computation of private respondent as well as the findings of both the Labor Arbiter and the NLRC. Petitioner, it must be stressed, presented no satisfactory proof to the contrary. Absent such proof, we are constrained to rely upon private respondents otherwise straightforward explanation of his claims.

Fourth. The absence of a formal hearing or trial before the Labor Arbiter is no cause for petitioner to impute grave abuse of discretion. Whether to conduct one or not depends on the sole discretion of the Labor Arbiter, taking into account the position papers and supporting documents submitted by the parties on every issue presented. If the Labor Arbiter, in his judgment, is confident that he can rely on the documents

82before him, he cannot be faulted for not conducting a formal trial anymore, unless it would appear that, in view of the particular circumstances of a case, the documents, without more, are really insufficient.

As applied to the instant case, we can understand why the Labor Arbiter has opted not to proceed to trial, considering that private respondent, through annexes to his position paper, has adequately established that, first of all, he was an employee of petitioner; second, the nature and character of his services, and finally, the amounts due him in consideration of his services. Petitioner, it should be reiterated, failed to controvert them. Actually, it offered only four documents later in the course of the proceedings. It has only itself to blame if it did not attach its supporting evidence with its position paper. It cannot now insist that there be a trial to give it an opportunity to ventilate what it should have done earlier. Section 3, Rule V of the New Rules of Procedure of the NLRC is very clear on the matter:

Section 3. x x x

These verified position papers x x x shall be accompanied by all supporting documents including the affidavits of their respective witnesses which shall take the place of the latters direct testimony. The parties shall thereafter not be allowed to allege facts, or present evidence to prove facts, not referred to and any cause or causes of action not included in the complaint or position papers, affidavits and other documents. x x x (Emphasis supplied).

Thus, given the mandate of said rule, petitioner should have foreseen that the Labor Arbiter, in view of the non-litigious nature of the proceedings before it, might not proceed at all to trial. Petitioner cannot now be heard to complain of lack of due process. The following is apropos:

The petitioners should not have assumed that after they submitted their position papers, the Labor Arbiter would call for a formal trial or hearing. The holding of a trial is discretionary on the Labor Arbiter, it is not a matter of right of the parties, especially in this case, where the private respondents had already presented their documentary evidence.

x x x

The petitioners did ask in their position paper for a hearing to thresh out some factual matters pertinent to their case. However, they had no right or reason to assume that their request would be granted. The petitioners should have attached to their position paper all the documents that would prove their claim in case it was decided that no hearing should be conducted or was necessary. In fact, the rules require that position papers shall be accompanied by all supporting documents, including affidavits of witnesses in lieu of their direct testimony.[14]

It must be noted that adequate opportunity was given to petitioner in the presentation of its evidence, such as when the Labor Arbiter granted petitioners Manifestation and Motion[15] dated July 22, 1994 allowing it to submit four more documents. This opportunity notwithstanding, petitioner still failed to fully proffer all its evidence which might help the Labor Arbiter in resolving the issues. What it desired instead, as stated in its petition,[16] was to require presentation of witnesses buttressed by relevant documents in support thereof. But this is precisely the opportunity given to petitioner when the Labor Arbiter granted its Motion and Manifestation. It should have presented the documents it was proposing to submit. The affidavits of its witnesses would have sufficed in lieu of their direct testimony[17] to clarify what it perceives to be complex factual issues. We rule that the Labor Arbiter and the NLRC were not remiss in their duty to afford petitioner due process. The essence of due process is merely that a party be afforded a reasonable opportunity to be heard and to submit any evidence he may have in support of his defense.[18]

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED for lack of merit while the resolution of the National Labor Relations Commission dated August 4, 1995 is hereby AFFIRMED.

SO ORDERED.

EN BANC

[G.R. No. 141735. June 8, 2005]SAPPARI K. SAWADJAAN, petitioner, vs. THE

HONORABLE COURT OF APPEALS, THE CIVIL SERVICE COMMISSION and AL-AMANAH

INVESTMENT BANK OF THE PHILIPPINES, respondents.

D E C I S I O N

This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision[1] of the Court of Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission (CSC) dated 11 August 1994 and 11 April 1995, respectively, which in turn affirmed Resolution No. 2309 of the Board of Directors of the Al-Amanah Islamic Investment Bank of the Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and dismissing him from the service, and its Resolution[2] of 15 December 1999 dismissing petitioners Motion for Reconsideration.

The records show that petitioner Sappari K. Sawadjaan was among the first employees of the Philippine Amanah Bank (PAB) when it was created by virtue of Presidential Decree No. 264 on 02 August 1973. He rose through the ranks, working his way up from his initial designation as security guard, to settling clerk, bookkeeper, credit investigator, project analyst, appraiser/ inspector, and eventually, loans analyst.[3]

In February 1988, while still designated as appraiser/investigator, Sawadjaan was assigned to inspect the properties offered as collaterals by Compressed Air Machineries and Equipment Corporation (CAMEC) for a credit line of Five Million Pesos (P5,000,000.00). The properties consisted of two parcels of land covered by Transfer Certificates of Title (TCTs) No. N-130671 and No. C-52576. On the basis of his Inspection and Appraisal Report,[4] the PAB granted the loan application. When the loan matured on 17 May 1989, CAMEC requested an extension of 180 days, but was granted only 120 days to repay the loan.[5]

In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.[6]

In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No. 264 (which created the PAB). All assets, liabilities and capital accounts of the PAB were transferred to the AIIBP,[7] and the existing personnel of the PAB were to continue to discharge their functions unless discharged.[8] In the ensuing reorganization, Sawadjaan was among the personnel retained by the AIIBP.

When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP, discovered that TCT No. N-130671 was spurious, the property described therein non-existent, and that the property covered by TCT No. C-52576 had a prior existing mortgage in favor of one Divina Pablico.

On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee to look into the CAMEC transaction, which had cost the bank Six Million Pesos (P6,000,000.00) in losses.[9] The subsequent events, as found and decided upon by the Court of Appeals,[10] are as follows:

On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP] Chairman Roberto F. De Ocampo charging him with Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and preventively suspending him.

In his memorandum dated 8 September 1993, petitioner informed the Investigating Committee that he could not submit himself to the jurisdiction of the Committee because of its alleged partiality. For his failure to appear before the hearing set on 17 September 1993, after the hearing of 13 September 1993 was postponed due to the Manifestation of even date filed by petitioner, the Investigating Committee declared petitioner in default and the prosecution was allowed to present its evidence ex parte.

On 08 December 1993, the Investigating Committee rendered a decision, the pertinent portions of which reads as follows:

In view of respondent SAWADJAANS abject failure to perform his duties and assigned tasks as appraiser/inspector, which resulted to the prejudice and substantial damage to the Bank, respondent should be held liable therefore. At this juncture, however, the Investigating Committee is of the considered

83opinion that he could not be held liable for the administrative offense of dishonesty considering the fact that no evidence was adduced to show that he profited or benefited from being remiss in the performance of his duties. The record is bereft of any evidence which would show that he received any amount in consideration for his non-performance of his official duties.

This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official duties resulted to the prejudice and substantial damage to the Islamic Bank for which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.

Premises considered, the Investigating Committee recommends that respondent SAPPARI SAWADJAAN be meted the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION from office in accordance with the Civil Service Commissions Memorandum Circular No. 30, Series of 1989.

On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted Resolution No. 2309 finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and imposing the penalty of Dismissal from the Service.

On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the Resolution No. 2332 on 20 February 1994 reducing the penalty imposed on petitioner from dismissal to suspension for a period of six (6) months and one (1) day.

On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection Board (MSPB).

On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal for lack of merit and affirming Resolution No. 2309 dated 13 December 1993 of the Board of Directors of Islamic Bank.

On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners Motion for Reconsideration.

On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the following assignment of errors:

I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has committed a grave abuse of discretion amounting to excess or lack of jurisdiction when it initiated and conducted administrative investigation without a validly promulgated rules of procedure in the adjudication of administrative cases at the Islamic Bank.

II. Public respondent Civil Service Commission has committed a grave abuse of discretion amounting to lack of jurisdiction when it prematurely and falsely assumed jurisdiction of the case not appealed to it, but to the Merit System Protection Board.

III. Both the Islamic Bank and the Civil Service Commission erred in finding petitioner Sawadjaan of having deliberately reporting false information and therefore guilty of Dishonesty and Conduct Prejudicial to the Best Interest of the Service and penalized with dismissal from the service.

On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this Honorable Court pursuant to Revised Administrative Circular No. 1-95, which took effect on 01 June 1995.

We do not find merit [in] the petition.

Anent the first assignment of error, a reading of the records would reveal that petitioner raises for the first time the alleged failure of the Islamic Bank [AIIBP] to promulgate rules of procedure governing the adjudication and disposition of administrative cases involving its personnel. It is a rule that issues not properly brought and ventilated below may not be raised for the first time on appeal, save in exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA 257) none of which, however, obtain in this case. Granting arguendo that the issue is of such exceptional character that the Court may take cognizance of the same,

still, it must fail. Section 26 of Republic Act No. 6848 (1990) provides:

Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to manage the Islamic Bank, x x x The Board shall adopt policy guidelines necessary to carry out effectively the provisions of this Charter as well as internal rules and regulations necessary for the conduct of its Islamic banking business and all matters related to personnel organization, office functions and salary administration. (Italics ours)

On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled Prescribing Procedure and Sanctions to Ensure Speedy Disposition of Administrative Cases directs, all administrative agencies to adopt and include in their respective Rules of Procedure provisions designed to abbreviate administrative proceedings.

The above two (2) provisions relied upon by petitioner does not require the Islamic Bank [AIIBP] to promulgate rules of procedure before administrative discipline may be imposed upon its employees. The internal rules of procedures ordained to be adopted by the Board refers to that necessary for the conduct of its Islamic banking business and all matters related to personnel organization, office functions and salary administration. On the contrary, Section 26 of RA 6848 gives the Board of Directors of the Islamic Bank the broadest powers to manage the Islamic Bank. This grant of broad powers would be an idle ceremony if it would be powerless to discipline its employees.

The second assignment of error must likewise fail. The issue is raised for the first time via this petition for certiorari. Petitioner submitted himself to the jurisdiction of the CSC. Although he could have raised the alleged lack of jurisdiction in his Motion for Reconsideration of Resolution No. 94-4483 of the CSC, he did not do so. By filing the Motion for Reconsideration, he is estopped from denying the CSCs jurisdiction over him, as it is settled rule that a party who asks for an affirmative relief cannot later on impugn the action of the tribunal as without jurisdiction after an adverse result was meted to him. Although jurisdiction over the subject matter of a case may be objected to at any stage of the proceedings even on appeal, this particular rule, however, means that jurisdictional issues in a case can be raised only during the proceedings in said case and during the appeal of said case (Aragon v. Court of Appeals, 270 SCRA 603). The case at bar is a petition [for] certiorari and not an appeal.

But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-2387 dated 29 June 1993, provides:

Decisions in administrative cases involving officials and employees of the civil service appealable to the Commission pursuant to Section 47 of Book V of the Code (i.e., Administrative Code of 1987) including personnel actions such as contested appointments shall now be appealed directly to the Commission and not to the MSPB.

In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held:

. . . The functions of the MSPB relating to the determination of administrative disciplinary cases were, in other words, re-allocated to the Commission itself.

Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain whether a court (in this case, administrative agency) has jurisdiction or not, the provisions of the law should be inquired into. Furthermore, `the jurisdiction of the court must appear clearly from the statute law or it will not be held to exist.(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the provision of law abovecited, the Civil Service Commission clearly has jurisdiction over the Administrative Case against petitioner.

Anent the third assignment of error, we likewise do not find merit in petitioners proposition that he should not be liable, as in the first place, he was not qualified to perform the functions of appraiser/investigator because he lacked the necessary training and expertise, and therefore, should not have been found dishonest by the Board of Directors of Islamic Bank [AIIBP] and the CSC. Petitioner himself admits that the position of appraiser/inspector is one of the most serious [and] sensitive job in the banking operations. He should have

84been aware that accepting such a designation, he is obliged to perform the task at hand by the exercise of more than ordinary prudence. As appraiser/investigator, he is expected, among others, to check the authenticity of the documents presented by the borrower by comparing them with the originals on file with the proper government office. He should have made it sure that the technical descriptions in the location plan on file with the Bureau of Lands of Marikina, jibe with that indicated in the TCT of the collateral offered by CAMEC, and that the mortgage in favor of the Islamic Bank was duly annotated at the back of the copy of the TCT kept by the Register of Deeds of Marikina. This, petitioner failed to do, for which he must be held liable. That he did not profit from his false report is of no moment. Neither the fact that it was not deliberate or willful, detracts from the nature of the act as dishonest. What is apparent is he stated something to be a fact, when he really was not sure that it was so.

WHEREFORE, above premises considered, the instant Petition is DISMISSED, and the assailed Resolutions of the Civil Service Commission are hereby AFFIRMED.

On 24 March 1999, Sawadjaans counsel notified the court a quo of his change of address,[11] but apparently neglected to notify his client of this fact. Thus, on 23 July 1999, Sawadjaan, by himself, filed a Motion for New Trial [12] in the Court of Appeals based on the following grounds: fraud, accident, mistake or excusable negligence and newly discovered evidence. He claimed that he had recently discovered that at the time his employment was terminated, the AIIBP had not yet adopted its corporate by-laws. He attached a Certification[13] by the Securities and Exchange Commission (SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft by-laws to the SEC, and that its registration was being held in abeyance pending certain corrections being made thereon. Sawadjaan argued that since the AIIBP failed to file its by-laws within 60 days from the passage of Rep. Act No. 6848, as required by Sec. 51 of the said law, the bank and its stockholders had already forfeited its franchise or charter, including its license to exist and operate as a corporation,[14] and thus no longer have the legal standing and personality to initiate an administrative case.

Sawadjaans counsel subsequently adopted his motion, but requested that it be treated as a motion for reconsideration.[15] This motion was denied by the court a quo in its Resolution of 15 December 1999.[16]

Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the Rules of Court challenging the above Decision and Resolution of the Court of Appeals on the ground that the court a quo erred: i) in ignoring the facts and evidences that the alleged Islamic Bank has no valid by-laws; ii) in ignoring the facts and evidences that the Islamic Bank lost its juridical personality as a corporation on 16 April 1990; iii) in ignoring the facts and evidences that the alleged Islamic Bank and its alleged Board of Directors have no jurisdiction to act in the manner they did in the absence of a valid by-laws; iv) in not correcting the acts of the Civil Service Commission who erroneously rendered the assailed Resolutions No. 94-4483 and No. 95-2754 as a result of fraud, falsification and/or misrepresentations committed by Farouk A. Carpizo and his group, including Roberto F. de Ocampo; v) in affirming an unconscionably harsh and/or excessive penalty; and vi) in failing to consider newly discovered evidence and reverse its decision accordingly.

Subsequently, petitioner Sawadjaan filed an Ex-parte Urgent Motion for Additional Extension of Time to File a Reply (to the Comments of Respondent Al-Amanah Investment Bank of the Philippines),[17] Reply (to Respondents Consolidated Comment,)[18] and Reply (to the Alleged Comments of Respondent Al-Amanah Islamic Bank of the Philippines).[19] On 13 October 2000, he informed this Court that he had terminated his lawyers services, and, by himself, prepared and filed the following: 1) Motion for New Trial; [20] 2) Motion to Declare Respondents in Default and/or Having Waived their Rights to Interpose Objection to Petitioners Motion for New Trial;[21] 3) Ex-ParteUrgent Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court & to Inhibit them from Appearing in this Case Until they Can Present Valid Evidence of Legal Authority;[22] 4) Opposition/Reply (to Respondent AIIBPs Alleged Comment);[23] 5)Ex-Parte Urgent Motion to Punish Atty. Reynaldo A. Pineda for Contempt of Court and the Issuance of a Commitment Order/Warrant for His Arrest;[24] 6) Reply/Opposition (To the Formal Notice of Withdrawal of Undersigned Counsel as Legal Counsel for the Respondent Islamic Bank with Opposition to Petitioners Motion to Punish Undersigned Counsel for Contempt of Court for the Issuance

of a Warrant of Arrest);[25] 7) Memorandum for Petitioner;[26] 8) Opposition to SolGens Motion for Clarification with Motion for Default and/or Waiver of Respondents to File their Memorandum;[27] 9) Motion for Contempt of Court and Inhibition/Disqualification with Opposition to OGCCs Motion for Extension of Time to File Memorandum;[28] 10) Motion for Enforcement (In Defense of the Rule of Law); [29] 11) Motion and Opposition (Motion to Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their Arrest; and Opposition to their Alleged Manifestation and Motion Dated February 5, 2002);[30] 12) Motion for Reconsideration of Item (a) of Resolution dated 5 February 2002 with Supplemental Motion for Contempt of Court;[31] 13) Motion for Reconsideration of Portion of Resolution Dated 12 March 2002;[32] 14) Ex-Parte Urgent Motion for Extension of Time to File Reply Memorandum (To: CSC and AIIBPs Memorandum);[33] 15) Reply Memorandum (To: CSCs Memorandum) With Ex-Parte Urgent Motion for Additional Extension of time to File Reply Memorandum (To: AIIBPs Memorandum);[34] and 16) Reply Memorandum (To: OGCCs Memorandum for Respondent AIIBP).[35]

Petitioners efforts are unavailing, and we deny his petition for its procedural and substantive flaws.

The general rule is that the remedy to obtain reversal or modification of the judgment on the merits is appeal. This is true even if the error, or one of the errors, ascribed to the court rendering the judgment is its lack of jurisdiction over the subject matter, or the exercise of power in excess thereof, or grave abuse of discretion in the findings of fact or of law set out in the decision.[36]

The records show that petitioners counsel received the Resolution of the Court of Appeals denying his motion for reconsideration on 27 December 1999. The fifteen day reglamentary period to appeal under Rule 45 of the Rules of Court therefore lapsed on 11 January 2000. On 23 February 2000, over a month after receipt of the resolution denying his motion for reconsideration, the petitioner filed his petition for certiorari under Rule 65.

It is settled that a special civil action for certiorari will not lie as a substitute for the lost remedy of appeal, [37] and though there are instances[38] where the extraordinary remedy of certiorari may be resorted to despite the availability of an appeal,[39] we find no special reasons for making out an exception in this case.

Even if we were to overlook this fact in the broader interests of justice and treat this as a special civil action for certiorari under Rule 65,[40] the petition would nevertheless be dismissed for failure of the petitioner to show grave abuse of discretion. Petitioners recurrent argument, tenuous at its very best, is premised on the fact that since respondent AIIBP failed to file its by-laws within the designated 60 days from the effectivity of Rep. Act No. 6848, all proceedings initiated by AIIBP and all actions resulting therefrom are a patent nullity. Or, in his words, the AIIBP and its officers and Board of Directors,

. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic Bank, file administrative charges and investigate petitioner in the manner they did and allegedly passed Board Resolution No. 2309 on December 13, 1993 which is null and void for lack of an ( sic)   authorized and valid by-laws. The CIVIL SERVICE COMMISSION was therefore affirming, erroneously, a null and void Resolution No. 2309 dated December 13, 1993 of the Board of Directors of Al-Amanah Islamic Investment Bank of the Philippines in CSC Resolution No. 94-4483 dated August 11, 1994. A motion for reconsideration thereof was denied by the CSC in its Resolution No. 95-2754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous, resulting from fraud, falsifications and misrepresentations of the alleged Chairman and CEO Roberto F. de Ocampo and the alleged Director Farouk A. Carpizo and his group at the alleged Islamic Bank.[41]

Nowhere in petitioners voluminous pleadings is there a showing that the court a quo committed grave abuse of discretion amounting to lack or excess of jurisdiction reversible by a petition for certiorari. Petitioner already raised the question of AIIBPs corporate existence and lack of jurisdiction in his Motion for New Trial/Motion for Reconsideration of 27 May 1997 and was denied by the Court of Appeals. Despite the volume of pleadings he has submitted thus far, he has added nothing substantial to his arguments.

85The AIIBP was created by Rep. Act No. 6848. It has a

main office where it conducts business, has shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact, here represented by the Office of the Government Corporate Counsel, the principal law office of government-owned corporations, one of which is respondent bank.[42] At the very least, by its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation[43] whose right to exercise corporate powers may not be inquired into collaterally in any private suit to which such corporations may be a party.[44]

Moreover, a corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of Registration of Corporations,[45] details the procedures and remedies that may be availed of before an order of revocation can be issued. There is no showing that such a procedure has been initiated in this case.

In any case, petitioners argument is irrelevant because this case is not a corporate controversy, but a labor dispute; and it is an employers basic right to freely select or discharge its employees, if only as a measure of self-protection against acts inimical to its interest.[46] Regardless of whether AIIBP is a corporation, a partnership, a sole proprietorship, or a sari-sari store, it is an undisputed fact that AIIBP is the petitioners employer. AIIBP chose to retain his services during its reorganization, controlled the means and methods by which his work was to be performed, paid his wages, and, eventually, terminated his services.[47]

And though he has had ample opportunity to do so, the petitioner has not alleged that he is anything other than an employee of AIIBP. He has neither claimed, nor shown, that he is a stockholder or an officer of the corporation. Having accepted employment from AIIBP, and rendered his services to the said bank, received his salary, and accepted the promotion given him, it is now too late in the day for petitioner to question its existence and its power to terminate his services. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.[48]

Even if we were to consider the facts behind petitioner Sawadjaans dismissal from service, we would be hard pressed to find error in the decision of the AIIBP.

As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of the properties offered by CAMEC as collaterals and check the copies of the certificates of title against those on file with the Registry of Deeds. Not only did he fail to conduct these routine checks, but he also deliberately misrepresented in his appraisal report that after reviewing the documents and conducting a site inspection, he found the CAMEC loan application to be in order. Despite the number of pleadings he has filed, he has failed to offer an alternative explanation for his actions.

When he was informed of the charges against him and directed to appear and present his side on the matter, the petitioner sent instead a memorandum questioning the fairness and impartiality of the members of the investigating committee and refusing to recognize their jurisdiction over him. Nevertheless, the investigating committee rescheduled the hearing to give the petitioner another chance, but he still refused to appear before it.

Thereafter, witnesses were presented, and a decision was rendered finding him guilty of dishonesty and dismissing him from service. He sought a reconsideration of this decision and the same committee whose impartiality he questioned reduced their recommended penalty to suspension for six months and one day. The board of directors, however, opted to dismiss him from service.

On appeal to the CSC, the Commission found that Sawadjaans failure to perform his official duties greatly prejudiced the AIIBP, for which he should be held accountable. It held that:

. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the performance of his duties as appraiser/inspector. Had respondent performed his duties as appraiser/inspector, he could have easily noticed that the property located at Balintawak, Caloocan City covered by TCT No. C-52576 and which is one of the properties offered as collateral by CAMEC is encumbered to Divina Pablico. Had respondent reflected such fact in his appraisal/inspection report on said property the ISLAMIC BANK would not have approved CAMECs loan of P500,000.00 in 1987 and CAMECs P5 Million loan in 1988, respondent knowing fully well the

Banks policy of not accepting encumbered properties as collateral.

Respondent SAWADJAANs reprehensible act is further aggravated when he failed to check and verify from the Registry of Deeds of Marikina the authenticity of the property located at Mayamot, Antipolo, Rizal covered by TCT No. N-130671 and which is one of the properties offered as collateral by CAMEC for its P5 Million loan in 1988. If he only visited and verified with the Register of Deeds of Marikina the authenticity of TCT No. N-130671 he could have easily discovered that TCT No. N-130671 is fake and the property described therein non-existent.

. . .

This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official duties resulted to the prejudice and substantial damage to the ISLAMIC BANK for which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.[49]

From the foregoing, we find that the CSC and the court a quo committed no grave abuse of discretion when they sustained Sawadjaans dismissal from service. Grave abuse of discretion implies such capricious and whimsical exercise of judgment as equivalent to lack of jurisdiction, or, in other words, where the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law. [50] The records show that the respondents did none of these; they acted in accordance with the law.

WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission, and its Resolution of 15 December 1999 are hereby AFFIRMED. Costs against the petitioner.

SO ORDERED.

For the Barba v. Liceo de Cagayan, see PDF.

Corporate Powers and Authority

[G.R. No. 143377. February 20, 2001]

SHIPSIDE INCORPORATED, petitioner, vs. THE HON. COURT OF APPEALS [Special Former Twelfth Division], HON. REGIONAL TRIAL COURT, BRANCH 26 (San Fernando City, La Union) & The REPUBLIC OF THE PHILIPPINES, respondents.

D E C I S I O N

Before the Court is a petition for certiorari filed by Shipside Incorporated under Rule 65 of the 1997 Rules on Civil Procedure against the resolutions of the Court of Appeals promulgated on November 4, 1999 and May 23, 2000, which respectively, dismissed a petition for certiorari and prohibition and thereafter denied a motion for reconsideration.

The antecedent facts are undisputed:On October 29, 1958, Original Certificate of Title No. 0-

381 was issued in favor of Rafael Galvez, over four parcels of land Lot 1 with 6,571 square meters; Lot 2, with 16,777 square meters; Lot 3 with 1,583 square meters; and Lot 4, with 508 square meters.

On April 11, 1960, Lots No. 1 and 4 were conveyed by Rafael Galvez in favor of Filipina Mamaril, Cleopatra Llana, Regina Bustos, and Erlinda Balatbat in a deed of sale which was inscribed as Entry No. 9115 OCT No. 0-381 on August 10, 1960. Consequently, Transfer Certificate No. T-4304 was issued in favor of the buyers covering Lots No. 1 and 4.

Lot No. 1 is described as:

A parcel of land (Lot 1, Plan PSU-159621, L. R. Case No. N-361; L. R. C. Record No. N-14012, situated in the Barrio of Poro, Municipality of San Fernando, Province of La Union,

86bounded on the NE, by the Foreshore; on the SE, by Public Land and property of the Benguet Consolidated Mining Company; on the SW, by properties of Rafael Galvez (US Military Reservation Camp Wallace) and Policarpio Munar; and on the NW, by an old Barrio Road. Beginning at a point marked 1 on plan, being S. 74 deg. 11W. , 2670. 36 from B. L. L. M. 1, San Fernando, thence

S. 66 deg. 19E., 134.95 m. to point 2; S. 14 deg. 57W., 11.79 m. to point 3;

S. 12 deg. 45W., 27.00 m. to point 4; S. 12 deg. 45W, 6.90 m. to point 5;

N. 69 deg., 32W., 106.00 m. to point 6; N. 52 deg., 21W., 36. 85 m. to point 7;

N. 21 deg. 31E., 42. 01 m. to the point of beginning; containing an area of SIX THOUSAND FIVE HUNDRED AND SEVENTY-ONE (6,571) SQUARE METERS, more or less. All points referred to are indicated on the plan; and marked on the ground; bearings true, date of survey, February 421, 1957.

Lot No. 4 has the following technical description:

A parcel of land (Lot 4, Plan PSU-159621, L. R. Case No.N-361 L. R. C. Record No.N-14012), situated in the Barrio of Poro, Municipality of San Fernando, La Union. Bounded on the SE by the property of the Benguet Consolidated Mining Company; on the S. by property of Pelagia Carino; and on the NW by the property of Rafael Galvez (US Military Reservation, Camp Wallace). Beginning at a point marked 1 on plan, being S. deg. 24W. 2591. 69 m. from B. L. L. M. 1, San Fernando, thence S. 12 deg. 45W., 73. 03 m. to point 2; N. 79 deg. 59W., 13.92 m. to point 3; N. 23 deg. 26E. , 75.00 m. to the point of beginning; containing an area of FIVE HUNDED AND EIGHT (508) SQUARE METERS, more or less. All points referred to are indicated in the plan and marked on the ground; bearings true, date of survey, February 4-21, 1957.

On August 16, 1960, Mamaril, et al. sold Lots No. 1 and 4 to Lepanto Consolidated Mining Company. The deed of sale covering the aforesaid property was inscribed as Entry No. 9173 on TCT No. T-4304. Subsequently, Transfer Certificate No. T-4314 was issued in the name of Lepanto Consolidated Mining Company as owner of Lots No. 1 and 4.

On February 1, 1963, unknown to Lepanto Consolidated Mining Company, the Court of First Instance of La Union, Second Judicial District, issued an Order in Land Registration Case No. N-361 (LRC Record No. N-14012) entitled Rafael Galvez, Applicant, Eliza Bustos, et al., Parties-In-Interest; Republic of the Philippines, Movant declaring OCT No. 0-381 of the Registry of Deeds for the Province of La Union issued in the name of Rafael Galvez, null and void, and ordered the cancellation thereof.

The Order pertinently provided:

Accordingly, with the foregoing, and without prejudice on the rights of incidental parties concerned herein to institute their respective appropriate actions compatible with whatever cause they may have, it is hereby declared and this court so holds that both proceedings in Land Registration Case No. N-361 and Original Certificate No. 0-381 of the Registry of Deeds for the province of La Union issued in virtue thereof and registered in the name of Rafael Galvez, are null and void; the Register of Deeds for the Province of La Union is hereby ordered to cancel the said original certificate and / or such other certificates of title issued subsequent thereto having reference to the same parcels of land; without pronouncement as to costs.

On October 28, 1963, Lepanto Consolidated Mining Company sold to herein petitioner Lots No. 1 and 4, with the deed being entered in TCT NO. 4314 as entry No. 12381. Transfer Certificate of Title No. T-5710 was thus issued in favor of the petitioner which starting since then exercised proprietary rights over Lots No. 1 and 4.

In the meantime, Rafael Galvez filed his motion for reconsideration against the order issued by the trial court declaring OCT No. 0-381 null and void. The motion was denied on January 25, 1965. On appeal, the Court of Appeals ruled in favor of the Republic of the Philippines in a Resolution promulgated on August 14, 1973 in CA-G. R. No. 36061-R.

Thereafter, the Court of Appeals issued an Entry of Judgment, certifying that its decision dated August 14, 1973 became final and executory on October 23, 1973.

On April 22, 1974, the trial court in L. R. C. Case No. N-361 issued a writ of execution of the judgment which was served on the Register of Deeds, San Fernando, La Union on April 29, 1974.

Twenty four long years thereafter, on January 14, 1999, the Office of the Solicitor General received a letter dated January 11, 1999 from Mr. Victor G. Floresca, Vice-President, John Hay Poro Point Development Corporation, stating that the aforementioned orders and decision of the trial court in L. R. C. No. N-361 have not been executed by the Register of Deeds, San Fernando, La Union despite receipt of the writ of execution.

On April 21, 1999, the Office of the Solicitor General filed a complaint for revival of judgment and cancellation of titles before the Regional Trial Court of the First Judicial Region (Branch 26, San Fernando, La Union) docketed therein as Civil Case No. 6346 entitled, Republic of the Philippines, Plaintiff, versus Heirs of Rafael Galvez, represented by Teresita Tan, Reynaldo Mamaril, Elisa Bustos, Erlinda Balatbat, Regina Bustos, Shipside Incorporated and the Register of Deeds of La Union, Defendants.

The evidence shows that the impleaded defendants (except the Register of Deeds of the province of La Union) are the successors-in-interest of Rafael Galvez (not Reynaldo Galvez as alleged by the Solicitor General) over the property covered by OCT No. 0-381, namely: (a) Shipside Inc. which is presently the registered owner in fee simple of Lots No. 1 and 4 covered by TCT No. T-5710, with a total area of 7,079 square meters; (b) Elisa Bustos, Jesusito Galvez, and Teresita Tan who are the registered owners of Lot No. 2 of OCT No. 0-381;and (c) Elisa Bustos, Filipina Mamaril, Regina Bustos and Erlinda Balatbat who are the registered owners of Lot No. 3 of OCT No. 0-381, now covered by TCT No. T-4916, with an area of 1,583 square meters.

In its complaint in Civil Case No. 6346, the Solicitor General argued that since the trial court in LRC Case No. 361 had ruled and declared OCT No. 0-381 to be null and void, which ruling was subsequently affirmed by the Court of Appeals, the defendants-successors-in-interest of Rafael Galvez have no valid title over the property covered by OCT No. 0-381, and the subsequent Torrens titles issued in their names should be consequently cancelled.

On July 22, 1999, petitioner Shipside, Inc. filed its Motion to Dismiss, based on the following grounds: (1) the complaint stated no cause of action because only final and executory judgments may be subject of an action for revival of judgment; (2) the plaintiff is not the real party-in-interest because the real property covered by the Torrens titles sought to be cancelled, allegedly part of Camp Wallace (Wallace Air Station), were under the ownership and administration of the Bases Conversion Development Authority (BCDA) under Republic Act No. 7227; (3) plaintiffs cause of action is barred by prescription; (4) twenty-five years having lapsed since the issuance of the writ of execution, no action for revival of judgment may be instituted because under Paragraph 3 of Article 1144 of the Civil Code, such action may be brought only within ten (10) years from the time the judgment had been rendered.

An opposition to the motion to dismiss was filed by the Solicitor General on August 23, 1999, alleging among others, that: (1) the real party-in-interest is the Republic of the Philippines;and (2) prescription does not run against the State.

On August 31, 1999, the trial court denied petitioners motion to dismiss and on October 14, 1999, its motion for reconsideration was likewise turned down.

On October 21, 1999, petitioner instituted a petition for certiorari and prohibition with the Court of Appeals, docketed therein as CA-G.R. SP No. 55535, on the ground that the orders of the trial court denying its motion to dismiss and its subsequent motion for reconsideration were issued in excess of jurisdiction.

On November 4, 1999, the Court of Appeals dismissed the petition in CA-G.R. SP No. 55535 on the ground that the verification and certification in the petition, under the signature of Lorenzo Balbin, Jr., was made without authority, there being no proof therein that Balbin was authorized to institute the petition for and in behalf and of petitioner.

On May 23, 2000, the Court of Appeals denied petitioners motion for reconsideration on the grounds that: (1)

87a complaint filed on behalf of a corporation can be made only if authorized by its Board of Directors, and in the absence thereof, the petition cannot prosper and be granted due course;and (2) petitioner was unable to show that it had substantially complied with the rule requiring proof of authority to institute an action or proceeding.

Hence, the instant petition.In support of its petition, Shipside, Inc. asseverates that:1. The Honorable Court of Appeals gravely abused

its discretion in dismissing the petition when it made a conclusive legal presumption that Mr. Balbin had no authority to sign the petition despite the clarity of laws, jurisprudence and Secretarys certificate to the contrary;

2. The Honorable Court of Appeals abused its discretion when it dismissed the petition, in effect affirming the grave abuse of discretion committed by the lower court when it refused to dismiss the 1999 Complaint for Revival of a 1973 judgment, in violation of clear laws and jurisprudence.

Petitioner likewise adopted the arguments it raised in the petition and comment/reply it filed with the Court of Appeals, attached to its petition as Exhibit L and N, respectively.

In his Comment, the Solicitor General moved for the dismissal of the instant petition based on the following considerations: (1) Lorenzo Balbin, who signed for and in behalf of petitioner in the verification and certification of non-forum shopping portion of the petition, failed to show proof of his authorization to institute the petition for certiorari and prohibition with the Court of Appeals, thus the latter court acted correctly in dismissing the same; (2) the real party-in-interest in the case at bar being the Republic of the Philippines, its claims are imprescriptible.

In order to preserve the rights of herein parties, the Court issued a temporary restraining order on June 26, 2000 enjoining the trial court from conducting further proceedings in Civil Case No. 6346.

The issues posited in this case are: (1) whether or not an authorization from petitioners Board of Directors is still required in order for its resident manager to institute or commence a legal action for and in behalf of the corporation; and (2) whether or not the Republic of the Philippines can maintain the action for revival of judgment herein.

We find for petitioner.Anent the first issue:The Court of Appeals dismissed the petition

for certiorari on the ground that Lorenzo Balbin, the resident manager for petitioner, who was the signatory in the verification and certification on non-forum shopping, failed to show proof that he was authorized by petitioners board of directors to file such a petition.

A corporation, such as petitioner, has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and / or its duly authorized officers and agents. Thus, it has been observed that the power of a corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers (Premium Marble Resources, Inc. v. CA, 264 SCRA 11 [1996]). In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors.

It is undisputed that on October 21, 1999, the time petitioners Resident Manager Balbin filed the petition, there was no proof attached thereto that Balbin was authorized to sign the verification and non-forum shopping certification therein, as a consequence of which the petition was dismissed by the Court of Appeals. However, subsequent to such dismissal, petitioner filed a motion for reconsideration, attaching to said motion a certificate issued by its board secretary stating that on October 11, 1999, or ten days prior to the filing of the petition, Balbin had been authorized by petitioners board of directors to file said petition.

The Court has consistently held that the requirement regarding verification of a pleading is formal, not jurisdictional (Uy v. LandBank, G.R. No. 136100, July 24, 2000). Such requirement is simply a condition affecting the form of the

pleading, non-compliance with which does not necessarily render the pleading fatally defective. Verification is simply intended to secure an assurance that the allegations in the pleading are true and correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in good faith. The court may order the correction of the pleading if verification is lacking or act on the pleading although it is not verified, if the attending circumstances are such that strict compliance with the rules may be dispensed with in order that the ends of justice may thereby be served.

On the other hand, the lack of certification against forum shopping is generally not curable by the submission thereof after the filing of the petition. Section 5, Rule 45 of the 1997 Rules of Civil Procedure provides that the failure of the petitioner to submit the required documents that should accompany the petition, including the certification against forum shopping, shall be sufficient ground for the dismissal thereof. The same rule applies to certifications against forum shopping signed by a person on behalf of a corporation which are unaccompanied by proof that said signatory is authorized to file a petition on behalf of the corporation.

In certain exceptional circumstances, however, the Court has allowed the belated filing of the certification. In Loyola v. Court of Appeals, et. al. (245 SCRA 477 [1995]), the Court considered the filing of the certification one day after the filing of an election protest as substantial compliance with the requirement. In Roadway Express, Inc. v. Court of Appeals, et. al. (264 SCRA 696 [1996]), the Court allowed the filing of the certification 14 days before the dismissal of the petition. In Uy v. LandBank, supra, the Court had dismissed Uys petition for lack of verification and certification against non-forum shopping.However, it subsequently reinstated the petition after Uy submitted a motion to admit certification and non-forum shopping certification. In all these cases, there were special circumstances or compelling reasons that justified the relaxation of the rule requiring verification and certification on non-forum shopping.

In the instant case, the merits of petitioners case should be considered special circumstances or compelling reasons that justify tempering the requirement in regard to the certificate of non-forum shopping. Moreover, in Loyola, Roadway, and Uy, the Court excused non-compliance with the requirement as to the certificate of non-forum shopping. With more reason should we allow the instant petition since petitioner herein did submit a certification on non-forum shopping, failing only to show proof that the signatory was authorized to do so. That petitioner subsequently submitted a secretarys certificate attesting that Balbin was authorized to file an action on behalf of petitioner likewise mitigates this oversight.

It must also be kept in mind that while the requirement of the certificate of non-forum shopping is mandatory, nonetheless the requirements must not be interpreted too literally and thus defeat the objective of preventing the undesirable practice of forum-shopping (Bernardo v. NLRC, 255 SCRA 108 [1996]). Lastly, technical rules of procedure should be used to promote, not frustrate justice. While the swift unclogging of court dockets is a laudable objective, the granting of substantial justice is an even more urgent ideal.

Now to the second issue:The action instituted by the Solicitor General in the trial

court is one for revival of judgment which is governed by Article 1144(3) of the Civil Code and Section 6, Rule 39 of the 1997 Rules on Civil Procedure. Article 1144(3) provides that an action upon a judgment must be brought within 10 years from the time the right of action accrues." On the other hand, Section 6, Rule 39 provides that a final and executory judgment or order may be executed on motion within five (5) years from the date of its entry, but that after the lapse of such time, and before it is barred by the statute of limitations, a judgment may be enforced by action. Taking these two provisions into consideration, it is plain that an action for revival of judgment must be brought within ten years from the time said judgment becomes final.

From the records of this case, it is clear that the judgment sought to be revived became final on October 23, 1973. On the other hand, the action for revival of judgment was instituted only in 1999, or more than twenty-five (25) years after the judgment had become final. Hence, the action is barred by extinctive prescription considering that such an action can be instituted only within ten (10) years from the time the cause of action accrues.

The Solicitor General, nonetheless, argues that the States cause of action in the cancellation of the land title issued to petitioners predecessor-in-interest is imprescriptible

88because it is included in Camp Wallace, which belongs to the government.

The argument is misleading.While it is true that prescription does not run against the

State, the same may not be invoked by the government in this case since it is no longer interested in the subject matter. While Camp Wallace may have belonged to the government at the time Rafael Galvezs title was ordered cancelled in Land Registration Case No. N-361, the same no longer holds true today.

Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, created the Bases Conversion and Development Authority. Section 4 pertinently provides:

Section 4. Purposes of the Conversion Authority. The Conversion Authority shall have the following purposes:

(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station, ODonnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita Station (Hermosa, Bataan) and those portions of Metro Manila military camps which may be transferred to it by the President;

Section 2 of Proclamation No. 216, issued on July 27, 1993, also provides:

Section 2. Transfer of Wallace Air Station Areas to the Bases Conversion and Development Authority. All areas covered by the Wallace Air Station as embraced and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended, excluding those covered by Presidential Proclamations and some 25-hectare area for the radar and communication station of the Philippine Air Force, are hereby transferred to the Bases Conversion Development Authority

With the transfer of Camp Wallace to the BCDA, the government no longer has a right or interest to protect. Consequently, the Republic is not a real party in interest and it may not institute the instant action. Nor may it raise the defense of imprescriptibility, the same being applicable only in cases where the government is a party in interest. Under Section 2 of Rule 3 of the 1997 Rules of Civil Procedure, every action must be prosecuted or defended in the name of the real party in interest. To qualify a person to be a real party in interest in whose name an action must be prosecuted, he must appear to be the present real owner of the right sought to enforced (Pioneer Insurance v. CA, 175 SCRA 668 [1989]). A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. And by real interest is meant a present substantial interest, as distinguished from a mere expectancy, or a future, contingent, subordinate or consequential interest (Ibonilla v. Province of Cebu, 210 SCRA 526 [1992]). Being the owner of the areas covered by Camp Wallace, it is the Bases Conversion and Development Authority, not the Government, which stands to be benefited if the land covered by TCT No. T-5710 issued in the name of petitioner is cancelled.

Nonetheless, it has been posited that the transfer of military reservations and their extensions to the BCDA is basically for the purpose of accelerating the sound and balanced conversion of these military reservations into alternative productive uses and to enhance the benefits to be derived from such property as a measure of promoting the economic and social development, particularly of Central Luzon and, in general, the countrys goal for enhancement (Section 2, Republic Act No. 7227). It is contended that the transfer of these military reservations to the Conversion Authority does not amount to an abdication on the part of the Republic of its interests, but simply a recognition of the need to create a body corporate which will act as its agent for the realization of its program. It is consequently asserted that the Republic remains to be the real party in interest and the Conversion Authority merely its agent.

We, however, must not lose sight of the fact that the BCDA is an entity invested with a personality separate and distinct from the government. Section 3 of Republic Act No. 7227 reads:

Section 3. Creation of the Bases Conversion and Development Authority. There is hereby created a body corporate to be

known as the Conversion Authority which shall have the attribute of perpetual succession and shall be vested with the powers of a corporation.

It may not be amiss to state at this point that the functions of government have been classified into governmental or constituent and proprietary or ministrant. While public benefit and public welfare, particularly, the promotion of the economic and social development of Central Luzon, may be attributable to the operation of the BCDA, yet it is certain that the functions performed by the BCDA are basically proprietary in nature. The promotion of economic and social development of Central Luzon, in particular, and the countrys goal for enhancement, in general, do not make the BCDA equivalent to the Government. Other corporations have been created by government to act as its agents for the realization of its programs, the SSS, GSIS, NAWASA and the NIA, to count a few, and yet, the Court has ruled that these entities, although performing functions aimed at promoting public interest and public welfare, are not government-function corporations invested with governmental attributes. It may thus be said that the BCDA is not a mere agency of the Government but a corporate body performing proprietary functions.

Moreover, Section 5 of Republic Act No. 7227 provides:

Section 5. Powers of the Conversion Authority. To carry out its objectives under this Act, the Conversion Authority is hereby vested with the following powers:

(a) To succeed in its corporate name, to sue and be sued in such corporate name and to adopt, alter and use a corporate seal which shall be judicially noticed;

Having the capacity to sue or be sued, it should thus be the BCDA which may file an action to cancel petitioners title, not the Republic, the former being the real party in interest. One having no right or interest to protect cannot invoke the jurisdiction of the court as a party plaintiff in an action (Ralla v. Ralla, 199 SCRA 495 [1991]). A suit may be dismissed if the plaintiff or the defendant is not a real party in interest. If the suit is not brought in the name of the real party in interest, a motion to dismiss may be filed, as was done by petitioner in this case, on the ground that the complaint states no cause of action (Tanpingco v. IAC, 207 SCRA 652 [1992]).

However, E. B. Marcha Transport Co. , Inc. v. IAC (147 SCRA 276 [1987]) is cited as authority that the Republic is the proper party to sue for the recovery of possession of property which at the time of the institution of the suit was no longer held by the national government but by the Philippine Ports Authority. In E. B. Marcha, the Court ruled:

It can be said that in suing for the recovery of the rentals, the Republic of the Philippines, acted as principal of the Philippine Ports Authority, directly exercising the commission it had earlier conferred on the latter as its agent. We may presume that, by doing so, the Republic of the Philippines did not intend to retain the said rentals for its own use, considering that by its voluntary act it had transferred the land in question to the Philippine Ports Authority effective July 11, 1974. The Republic of the Philippines had simply sought to assist, not supplant, the Philippine Ports Authority, whose title to the disputed property it continues to recognize. We may expect then that the said rentals, once collected by the Republic of the Philippines, shall be turned over by it to the Philippine Ports Authority conformably to the purposes of P. D. No. 857.

E. B. Marcha is, however, not on all fours with the case at bar. In the former, the Court considered the Republic a proper party to sue since the claims of the Republic and the Philippine Ports Authority against the petitioner therein were the same. To dismiss the complaint in E. B. Marcha would have brought needless delay in the settlement of the matter since the PPA would have to refile the case on the same claim already litigated upon. Such is not the case here since to allow the government to sue herein enables it to raise the issue of imprescriptibility, a claim which is not available to the BCDA. The rule that prescription does not run against the State does not apply to corporations or artificial bodies created by the State for special purposes, it being said that when the title of the Republic has been divested, its grantees, although artificial bodies of its own creation, are in the same category as ordinary persons (Kingston v. LeHigh Valley Coal Co., 241 Pa 469). By raising the claim of imprescriptibility, a claim which cannot be raised by the BCDA, the Government not only assists the BCDA, as it did in E. B. Marcha, it even

89supplants the latter, a course of action proscribed by said case.

Moreover, to recognize the Government as a proper party to sue in this case would set a bad precedent as it would allow the Republic to prosecute, on behalf of government-owned or controlled corporations, causes of action which have already prescribed, on the pretext that the Government is the real party in interest against whom prescription does not run, said corporations having been created merely as agents for the realization of government programs.

Parenthetically, petitioner was not a party to the original suit for cancellation of title commenced by the Republic twenty-seven years for which it is now being made to answer, nay, being made to suffer financial losses.

It should also be noted that petitioner is unquestionably a buyer in good faith and for value, having acquired the property in 1963, or 5 years after the issuance of the original certificate of title, as a third transferee. If only not to do violence and to give some measure of respect to the Torrens System, petitioner must be afforded some measure of protection.

One more point.Since the portion in dispute now forms part of the

property owned and administered by the Bases Conversion and Development Authority, it is alienable and registerable real property.

We find it unnecessary to rule on the other matters raised by the herein parties.

WHEREFORE, the petition is hereby granted and the orders dated August 31, 1999 and October 4, 1999 of the Regional Trial Court of the First National Judicial Region (Branch 26, San Fernando, La Union) in Civil Case No. 6346 entitled Republic of the Philippines, Plaintiff, versus Heirs of Rafael Galvez, et. al., Defendants as well as the resolutions promulgated on November 4, 1999 and May 23, 2000 by the Court of Appeals (Twelfth Division) in CA-G. R. SP No. 55535 entitled Shipside, Inc., Petitioner versus Hon. Alfredo Cajigal, as Judge, RTC, San Fernando, La Union, Branch 26, and the Republic of the Philippines, Respondents are hereby reversed and set aside. The complaint in Civil Case No. 6346, Regional Trial Court, Branch 26, San Fernando City, La Union entitled Republic of the Philippines, Plaintiff, versus Heirs of Rafael Galvez, et al." is ordered dismissed, without prejudice to the filing of an appropriate action by the Bases Development and Conversion Authority.

SO ORDERED.

SEPARATE OPINIONVITUG, J.:

I find no doctrinal difficulty in adhering to the draft ponencia written by our esteemed Chairman. Mr. Justice JARM, insofar as it declares that an action for revival of judgment is barred by extinctive prescription, if not brought within ten (10) years from the time the right of action accrues, pursuant to Article 1144(3) of the New Civil Code. It appears that the judgment in the instant case has become final on 23 October 1973 or well more than two decades prior to the action for its revival instituted only in 1999.

With due respect, however, I still am unable to subscribe to the idea that prescription may not be invoked by the government in this case upon the thesis that the transfer of Camp Wallace to the Bases Conversion Development authority renders the Republic with no right or interest to protect and thus unqualified under the rules of procedure to be the real party-in-interest. While it is true that Republic Act 7227, otherwise known as the Bases Conversion and Development Act of 1992, authorizes the transfer of the military reservations and their extensions to the conversion Authority, the same, however, is basically for the purpose of accelerating the sound and balanced conversion of these military reservations into alternative productive uses and to enhance the benefits to be derived from such property as a measure of promoting the economic and social development, particularly, of Central Luzon and, in general, the countrys goal for enhancement.[1] The transfer of these military reservations to the Conversion Authority does not amount to an abdication on the part of the Republic of its interests but simply a recognition of the need to create a body corporate which will act as its agent for the realization of its program specified in the Act. It ought to follow that the Republic remains to be the real party-in-interest and the Conversion authority being merely its agent.

In E. B. Marcha Transport Co. , Inc. vs. Intermediate Appellate Court,[2] the Court succinctly resolved the issue of whether or not the Republic of the Philippines would be a proper party to sue for the recovery of possession of property which at time of the institution of the suit was no longer being held by the national government but by the Philippine Ports Authority. The Court ruled:

More importantly, as we see it, dismissing the complaint on the ground that the Republic of the Philippines is not the proper party would result in needless delay in the settlement of this matter and also in derogation of the policy against multiplicity of suits. Such a decision would require the Philippine Ports Authority to refile the very same complaint already proved by the Republic of the Philippines and bring back the parties as it were to square one.

It can be said that in suing for the recovery of the rentals, the Republic of the Philippines, acted as principal of the Philippine Ports Authority, directly exercising the commission it had earlier conferred on the latter as its agent. We may presume that, by doing so, the republic of the Philippines did not intend to retain the said rentals for its own use, considering that by its voluntary act it had transferred the land in question to the Philippine Ports authority effective July 11, 1974. The Republic of the Philippines had simply sought to assist, not supplant, the Philippine Ports Authority, whose title to the disputed property it continues to recognize. We may expect then that the said rentals, once collected by the Republic of the Philippines, shall be turned over by it to the Philippine Ports Authority conformably to the purposes of P. D. No. 857."

There would seem to be no cogent reason for ignoring that rationale specially when taken in light of the fact that the original suit for cancellation of title of petitioners predecessor-in-interest was commenced by the Republic itself, and it was only in 1992 that the subject military camp was transferred to the Conversion Authority.

FIRST DIVISION[G.R. No. 152542. July 8, 2004]

MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M. SALVATIERRA,petitioner, vs. ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M. RODRIGUEZ and COURT OF APPEALS, respondents.

[G.R. No. 155472. July 8, 2004]

ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M. RODRIGUEZ, petitioners, vs. HON. COURT OF APPEALS, MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M. SALVATIERRA, and RAMON H. MONFORT, respondents.

D E C I S I O N

Before the Court are consolidated petitions for review of the decisions of the Court of Appeals in the complaints for forcible entry and replevin filed by Monfort Hermanos Agricultural Development Corporation (Corporation) and Ramon H. Monfort against the children, nephews, and nieces of its original incorporators (collectively known as the group of Antonio Monfort III).

The petition in G.R. No. 152542, assails the October 5, 2001 Decision[1] of the Special Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652, which ruled that Ma. Antonia M. Salvatierra has no legal capacity to represent the Corporation in the forcible entry case docketed as Civil Case No. 534-C, before the Municipal TrialCourt of Cadiz City. On the other hand, the petition in G.R. No. 155472, seeks to set aside the June 7, 2002 Decision[2] rendered by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No. 49251, where it refused to address, on jurisdictional considerations, the issue of Ma. Antonia M. Salvatierras capacity to file a complaint for replevin on behalf of the

90Corporation in Civil Case No. 506-C before the Regional Trial Court of Cadiz City, Branch 60.

Monfort Hermanos Agricultural Development Corporation, a domestic private corporation, is the registered owner of a farm, fishpond and sugar cane plantation known as Haciendas San Antonio II, Marapara, Pinanoag and Tinampa-an, all situated in Cadiz City.[3] It also owns one unit of motor vehicle and two units of tractors.[4] The same allowed Ramon H. Monfort, its Executive Vice President, to breed and maintain fighting cocks in his personal capacity at Hacienda San Antonio.[5]

In 1997, the group of Antonio Monfort III, through force and intimidation, allegedly took possession of the 4 Haciendas, the produce thereon and the motor vehicle and tractors, as well as the fighting cocks of Ramon H. Monfort.In G.R. No. 155472:

On April 10, 1997, the Corporation, represented by its President, Ma. Antonia M. Salvatierra, and Ramon H. Monfort, in his personal capacity, filed against the group of Antonio Monfort III, a complaint[6] for delivery of motor vehicle, tractors and 378 fighting cocks, with prayer for injunction and damages, docketed as Civil Case No. 506-C, before the Regional Trial Court of Negros Occidental, Branch 60.

The group of Antonio Monfort III filed a motion to dismiss contending, inter alia, that Ma. Antonia M. Salvatierra has no capacity to sue on behalf of the Corporation because the March 31, 1997 Board Resolution[7] authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation is void as the purported Members of the Board who passed the same were not validly elected officers of the Corporation.

On May 4, 1998, the trial court denied the motion to dismiss.[8] The group of Antonio Monfort III filed a petition for certiorari with the Court of Appeals but the same was dismissed on June 7, 2002.[9] The Special Former Thirteenth Division of the appellate court did not resolve the validity of the March 31, 1997 Board Resolution and the election of the officers who signed it, ratiocinating that the determination of said question is within the competence of the trial court.

The motion for reconsideration filed by the group of Antonio Monfort III was denied.[10] Hence, they instituted a petition for review with this Court, docketed as G.R. No. 155472.In G.R. No. 152542:

On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the Corporation a complaint for forcible entry, preliminary mandatory injunction with temporary restraining order and damages against the group of Antonio Monfort III, before the Municipal Trial Court (MTC) of Cadiz City.[11] It contended that the latter through force and intimidation, unlawfully took possession of the 4 Haciendas and deprived the Corporation of the produce thereon.

In their answer,[12] the group of Antonio Monfort III alleged that they are possessing and controlling the Haciendas and harvesting the produce therein on behalf of the corporation and not for themselves. They likewise raised the affirmative defense of lack of legal capacity of Ma. Antonia M. Salvatierra to sue on behalf of the Corporation.

On February 18, 1998, the MTC of Cadiz City rendered a decision dismissing the complaint.[13] On appeal, the Regional Trial Court of Negros Occidental, Branch 60, reversed the Decision of the MTCC and remanded the case for further proceedings.[14]

Aggrieved, the group of Antonio Monfort III filed a petition for review with the Court of Appeals. On October 5, 2001, the Special Tenth Division set aside the judgment of the RTC and dismissed the complaint for forcible entry for lack of capacity of Ma. Antonia M. Salvatierra to represent the Corporation.[15] The motion for reconsideration filed by the latter was denied by the appellate court.[16]

Unfazed, the Corporation filed a petition for review with this Court, docketed as G.R. No. 152542 which was consolidated with G.R. No. 155472 per Resolution datedJanuary 21, 2004.[17]

The focal issue in these consolidated petitions is whether or not Ma. Antonia M. Salvatierra has the legal capacity to sue on behalf of the Corporation.

The group of Antonio Monfort III claims that the March 31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation is void because the purported Members of the Board who passed the same were not validly elected officers of the Corporation.

A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. Thus, it has been observed that the power of a corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors.[18]

Corollary thereto, corporations are required under Section 26 of the Corporation Code to submit to the SEC within thirty (30) days after the election the names, nationalities and residences of the elected directors, trustees and officers of the Corporation. In order to keep stockholders and the public transacting business with domestic corporations properly informed of their organizational operational status, the SEC issued the following rules:

x x x x x x x x x

2. A General Information Sheet shall be filed with this Commission within thirty (30) days following the date of the annual stockholders meeting. No extension of said period shall be allowed, except for very justifiable reasons stated in writing by the President, Secretary, Treasurer or other officers, upon which the Commission may grant an extension for not more than ten (10) days.

2.A. Should a director, trustee or officer die, resign or in any manner, cease to hold office, the corporation shall report such fact to the Commission with fifteen (15) days after such death, resignation or cessation of office.

3. If for any justifiable reason, the annual meeting has to be postponed, the company should notify the Commission in writing of such postponement.

The General Information Sheet shall state, among others, the names of the elected directors and officers, together with their corresponding position title (Emphasis supplied)

In the instant case, the six signatories to the March 31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation, were: Ma. Antonia M. Salvatierra, President; Ramon H. Monfort, Executive Vice President; Directors Paul M. Monfort, Yvete M. Benedicto and Jaqueline M. Yusay; and Ester S. Monfort, Secretary.[19] However, the names of the last four (4) signatories to the said Board Resolution do not appear in the 1996 General Information Sheet submitted by the Corporation with the SEC. Under said General Information Sheet the composition of the Board is as follows:

1. Ma. Antonia M. Salvatierra (Chairman);2. Ramon H. Monfort (Member);3. Antonio H. Monfort, Jr., (Member);4. Joaquin H. Monfort (Member);5. Francisco H. Monfort (Member) and

6. Jesus Antonio H. Monfort (Member).[20]

There is thus a doubt as to whether Paul M. Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed duly elected Members of the Board legally constituted to bring suit in behalf of the Corporation.[21]

In Premium Marble Resources, Inc. v. Court of Appeals,[22] the Court was confronted with the similar issue of capacity to sue of the officers of the corporation who filed a complaint for damages. In the said case, we sustained the dismissal of the complaint because it was not established that the Members of the Board who authorized the filing of the complaint were the lawfully elected officers of the corporation. Thus

The only issue in this case is whether or not the filing of the case for damages against private respondent was authorized

91by a duly constituted Board of Directors of the petitioner corporation.

Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes of the meeting of its Board of Directors held on April 1, 1982, as proof that the filing of the case against private respondent was authorized by the Board. On the other hand, the second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes, presented a Resolution dated July 30, 1986, to show that Premium did not authorize the filing in its behalf of any suit against the private respondent International Corporate Bank.

Later on, petitioner submitted its Articles of Incorporation dated November 6, 1979 with the following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and Jose Ma. Silva.

However, it appears from the general information sheet and the Certification issued by the SEC on August 19, 1986 that as of March 4, 1981, the officers and members of the board of directors of the Premium Marble Resources, Inc. were:

Alberto C. Nograles President/DirectorFernando D. Hilario Vice President/DirectorAugusto I. Galace TreasurerJose L.R. Reyes Secretary/DirectorPido E. Aguilar Director

Saturnino G. Belen, Jr. Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show proof that this election was reported to the SEC. In fact, the last entry in their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected in March 1981.

We agree with the finding of public respondent Court of Appeals, that in the absence of any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation, the present action must necessarily fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellants subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities & Exchange Commission.

By the express mandate of the Corporation Code (Section 26), all corporations duly organized pursuant thereto are required to submit within the period therein stated (30 days) to the Securities and Exchange Commission the names, nationalities and residences of the directors, trustees and officers elected.

Sec. 26 of the Corporation Code provides, thus:

Sec. 26. Report of election of directors, trustees and officers. Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees and officers elected. xxx

Evidently, the objective sought to be achieved by Section 26 is to give the public information, under sanction of oath of responsible officers, of the nature of business, financial condition and operational status of the company together with information on its key officers or managers so that those dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporations financial resources and business responsibility.

The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are the incumbent officers of Premium has not been fully substantiated. In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation.

In the case at bar, the fact that four of the six Members of the Board listed in the 1996 General Information Sheet[23] are already dead[24] at the time the March 31, 1997 Board Resolution was issued, does not automatically make the four signatories (i.e., Paul M. Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said Board Resolution (whose name do not appear in the 1996 General Information Sheet) as among the incumbent Members of the Board. This is because it was not established that they were duly elected to replace the said deceased Board Members.

To correct the alleged error in the General Information Sheet, the retained accountant of the Corporation informed the SEC in its November 11, 1998 letter that the non-inclusion of the lawfully elected directors in the 1996 General Information Sheet was attributable to its oversight and not the fault of the Corporation.[25] This belated attempt, however, did not erase the doubt as to whether an election was indeed held. As previously stated, a corporation is mandated to inform the SEC of the names and the change in the composition of its officers and board of directors within 30 days after election if one was held, or 15 days after the death, resignation or cessation of office of any of its director, trustee or officer if any of them died, resigned or in any manner, ceased to hold office. This, the Corporation failed to do. The alleged election of the directors and officers who signed the March 31, 1997 Board Resolution was held on October 16, 1996, but the SEC was informed thereof more than two years later, or onNovember 11, 1998. The 4 Directors appearing in the 1996 General Information Sheet died between the years 1984 1987,[26] but the records do not show if such demise was reported to the SEC.

What further militates against the purported election of those who signed the March 31, 1997 Board Resolution was the belated submission of the alleged Minutes of the October 16, 1996 meeting where the questioned officers were elected. The issue of legal capacity of Ma. Antonia M. Salvatierra was raised before the lower court by the group of Antonio Monfort III as early as 1997, but the Minutes of said October 16, 1996 meeting was presented by the Corporation only in its September 29, 1999Comment before the Court of Appeals.[27] Moreover, the Corporation failed to prove that the same October 16, 1996 Minutes was submitted to the SEC. In fact, the 1997General Information Sheet[28] submitted by the Corporation does not reflect the names of the 4 Directors claimed to be elected on October 16, 1996.

Considering the foregoing, we find that Ma. Antonia M. Salvatierra failed to prove that four of those who authorized her to represent the Corporation were the lawfully elected Members of the Board of the Corporation. As such, they cannot confer valid authority for her to sue on behalf of the corporation.

The Court notes that the complaint in Civil Case No. 506-C, for replevin before the Regional Trial Court of Negros Occidental, Branch 60, has 2 causes of action, i.e., unlawful detention of the Corporations motor vehicle and tractors, and the unlawful detention of the of 387 fighting cocks of Ramon H. Monfort. Since Ramon sought redress of the latter cause of action in his personal capacity, the dismissal of the complaint for lack of capacity to sue on behalf of the corporation should be limited only to the corporations cause of action for delivery of motor vehicle and tractors. In view, however, of the demise of Ramon on June 25, 1999,[29] substitution by his heirs is proper.

WHEREFORE, in view of all the foregoing, the petition in G.R. No. 152542 is DENIED. The October 5, 2001 Decision of the Special Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652, which set aside the August 14, 1998 Decision of the Regional Trial Court of Negros Occidental, Branch 60 in Civil Case No. 822, isAFFIRMED.

In G.R. No. 155472, the petition is GRANTED and the June 7, 2002 Decision rendered by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No. 49251, dismissing the petition filed by the group of Antonio Monfort III, is REVERSED and SET ASIDE.

The complaint for forcible entry docketed as Civil Case No. 822 before the Municipal Trial Court of Cadiz City is DISMISSED. In Civil Case No. 506-C with the Regional Trial Court of Negros Occidental, Branch 60, the action for delivery of personal property filed by Monfort Hermanos Agricultural Development Corporation is likewise DISMISSED. With respect to the action filed by Ramon H. Monfort for the delivery of 387 fighting cocks, the Regional Trial Court of Negros Occidental, Branch 60, is ordered to effect the corresponding substitution of parties.

92No costs.SO ORDERED.

**Reyes v RCPI ECUI**

FIRST DIVISION

G.R. No. 166862             December 20, 2006

MANILA METAL CONTAINER CORPORATION, petitioner, REYNALDO C. TOLENTINO, intervenor, vs.PHILIPPINE NATIONAL BANK, respondent,DMCI-PROJECT DEVELOPERS, INC., intervenor

D E C I S I O N

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R. No. 46153 which affirmed the decision2 of the Regional Trial Court (RTC), Branch 71, Pasig City, in Civil Case No. 58551, and its Resolution3 denying the motion for reconsideration filed by petitioner Manila Metal Container Corporation (MMCC).

The Antecedents

Petitioner was the owner of a 8,015 square meter parcel of land located in Mandaluyong (now a City), Metro Manila. The property was covered by Transfer Certificate of Title (TCT) No. 332098 of the Registry of Deeds of Rizal. To secure a P900,000.00 loan it had obtained from respondent Philippine National Bank (PNB), petitioner executed a real estate mortgage over the lot. Respondent PNB later granted petitioner a new credit accommodation of P1,000,000.00; and, on November 16, 1973, petitioner executed an Amendment4 of Real Estate Mortgage over its property. On March 31, 1981, petitioner secured another loan of P653,000.00 from respondent PNB, payable in quarterly installments of P32,650.00, plus interests and other charges.5

On August 5, 1982, respondent PNB filed a petition for extrajudicial foreclosure of the real estate mortgage and sought to have the property sold at public auction for P911,532.21, petitioner's outstanding obligation to respondent PNB as of June 30, 1982,6 plus interests and attorney's fees.

After due notice and publication, the property was sold at public auction on September 28, 1982 where respondent PNB was declared the winning bidder for P1,000,000.00. The Certificate of Sale7 issued in its favor was registered with the Office of the Register of Deeds of Rizal, and was annotated at the dorsal portion of the title on February 17, 1983. Thus, the period to redeem the property was to expire on February 17, 1984.

Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that it be granted an extension of time to redeem/repurchase the property.8 In its reply dated August 30, 1983, respondent PNB informed petitioner that the request had been referred to its Pasay City Branch for appropriate action and recommendation.9

In a letter10 dated February 10, 1984, petitioner reiterated its request for a one year extension from February 17, 1984 within which to redeem/repurchase the property on installment basis. It reiterated its request to repurchase the property on installment.11 Meanwhile, some PNB Pasay City Branch personnel informed petitioner that as a matter of policy, the bank does not accept "partial redemption."12

Since petitioner failed to redeem the property, the Register of Deeds cancelled TCT No. 32098 on June 1, 1984, and issued a new title in favor of respondent PNB.13 Petitioner's offers had not yet been acted upon by respondent PNB.

Meanwhile, the Special Assets Management Department (SAMD) had prepared a statement of account, and as of June 25, 1984 petitioner's obligation amounted to P1,574,560.47. This included the bid price of P1,056,924.50, interest,

advances of insurance premiums, advances on realty taxes, registration expenses, miscellaneous expenses and publication cost.14 When apprised of the statement of account, petitioner remitted P725,000.00 to respondent PNB as "deposit to repurchase," and Official Receipt No. 978191 was issued to it.15

In the meantime, the SAMD recommended to the management of respondent PNB that petitioner be allowed to repurchase the property for P1,574,560.00. In a letter dated November 14, 1984, the PNB management informed petitioner that it was rejecting the offer and the recommendation of the SAMD. It was suggested that petitioner purchase the property for P2,660,000.00, its minimum market value. Respondent PNB gave petitioner until December 15, 1984 to act on the proposal; otherwise, its P725,000.00 deposit would be returned and the property would be sold to other interested buyers.16

Petitioner, however, did not agree to respondent PNB's proposal. Instead, it wrote another letter dated December 12, 1984 requesting for a reconsideration. Respondent PNB replied in a letter dated December 28, 1984, wherein it reiterated its proposal that petitioner purchase the property for P2,660,000.00. PNB again informed petitioner that it would return the deposit should petitioner desire to withdraw its offer to purchase the property.17 On February 25, 1985, petitioner, through counsel, requested that PNB reconsider its letter dated December 28, 1984. Petitioner declared that it had already agreed to the SAMD's offer to purchase the property for P1,574,560.47, and that was why it had paid P725,000.00. Petitioner warned respondent PNB that it would seek judicial recourse should PNB insist on the position.18

On June 4, 1985, respondent PNB informed petitioner that the PNB Board of Directors had accepted petitioner's offer to purchase the property, but for P1,931,389.53 in cash less the P725,000.00 already deposited with it.19 On page two of the letter was a space above the typewritten name of petitioner's President, Pablo Gabriel, where he was to affix his signature. However, Pablo Gabriel did not conform to the letter but merely indicated therein that he had received it.20 Petitioner did not respond, so PNB requested petitioner in a letter dated June 30, 1988 to submit an amended offer to repurchase.

Petitioner rejected respondent's proposal in a letter dated July 14, 1988. It maintained that respondent PNB had agreed to sell the property for P1,574,560.47, and that since its P725,000.00 downpayment had been accepted, respondent PNB was proscribed from increasing the purchase price of the property.21 Petitioner averred that it had a net balance payable in the amount of P643,452.34. Respondent PNB, however, rejected petitioner's offer to pay the balance of P643,452.34 in a letter dated August 1, 1989.22

On August 28, 1989, petitioner filed a complaint against respondent PNB for "Annulment of Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific Performance with Damages." To support its cause of action for specific performance, it alleged the following:

34. As early as June 25, 1984, PNB had accepted the down payment from Manila Metal in the substantial amount of P725,000.00 for the redemption/repurchase price of P1,574,560.47 as approved by its SMAD and considering the reliance made by Manila Metal and the long time that has elapsed, the approval of the higher management of the Bank to confirm the agreement of its SMAD is clearly a potestative condition which cannot legally prejudice Manila Metal which has acted and relied on the approval of SMAD. The Bank cannot take advantage of a condition which is entirely dependent upon its own will after accepting and benefiting from the substantial payment made by Manila Metal.

35. PNB approved the repurchase price of P1,574,560.47 for which it accepted P725,000.00 from Manila Metal. PNB cannot take advantage of its own delay and long inaction in demanding a higher amount based on unilateral computation of interest rate without the consent of Manila Metal.

Petitioner later filed an amended complaint and supported its claim for damages with the following arguments:

9336. That in order to protect itself against the wrongful and malicious acts of the defendant Bank, plaintiff is constrained to engage the services of counsel at an agreed fee of P50,000.00 and to incur litigation expenses of at least P30,000.00, which the defendant PNB should be condemned to pay the plaintiff Manila Metal.

37. That by reason of the wrongful and malicious actuations of defendant PNB, plaintiff Manila Metal suffered besmirched reputation for which defendant PNB is liable for moral damages of at least P50,000.00.

38. That for the wrongful and malicious act of defendant PNB which are highly reprehensible, exemplary damages should be awarded in favor of the plaintiff by way of example or correction for the public good of at least P30,000.00.23

Petitioner prayed that, after due proceedings, judgment be rendered in its favor, thus:

a) Declaring the Amended Real Estate Mortgage (Annex "A") null and void and without any legal force and effect.

b) Declaring defendant's acts of extra-judicially foreclosing the mortgage over plaintiff's property and setting it for auction sale null and void.

c) Ordering the defendant Register of Deeds to cancel the new title issued in the name of PNB (TCT NO. 43792) covering the property described in paragraph 4 of the Complaint, to reinstate TCT No. 37025 in the name of Manila Metal and to cancel the annotation of the mortgage in question at the back of the TCT No.37025 described in paragraph 4 of this Complaint.

d) Ordering the defendant PNB to return and/or deliver physical possession of the TCT No. 37025 described in paragraph 4 of this Complaint to the plaintiff Manila Metal.

e) Ordering the defendant PNB to pay the plaintiff Manila Metal's actual damages, moral and exemplary damages in the aggregate amount of not less than P80,000.00 as may be warranted by the evidence and fixed by this Honorable Court in the exercise of its sound discretion, and attorney's fees of P50,000.00 and litigation expenses of at least P30,000.00 as may be proved during the trial, and costs of suit.

Plaintiff likewise prays for such further reliefs which may be deemed just and equitable in the premises.24

In its Answer to the complaint, respondent PNB averred, as a special and affirmative defense, that it had acquired ownership over the property after the period to redeem had elapsed. It claimed that no contract of sale was perfected between it and petitioner after the period to redeem the property had expired.

During pre-trial, the parties agreed to submit the case for decision, based on their stipulation of facts.25 The parties agreed to limit the issues to the following:

1. Whether or not the June 4, 1985 letter of the defendant approving/accepting plaintiff's offer to purchase the property is still valid and legally enforceable.

2. Whether or not the plaintiff has waived its right to purchase the property when it failed to conform with the conditions set forth by the defendant in its letter dated June 4, 1985.

3. Whether or not there is a perfected contract of sale between the parties.26

While the case was pending, respondent PNB demanded, on September 20, 1989, that petitioner vacate the property within 15 days from notice,27 but petitioners refused to do so.

On March 18, 1993, petitioner offered to repurchase the property for P3,500,000.00.28 The offer was however rejected by respondent PNB, in a letter dated April 13, 1993. According to it, the prevailing market value of the property was approximately P30,000,000.00, and as a matter of policy, it could not sell the property for less than its market value.29 On June 21, 1993, petitioner offered to purchase the property for P4,250,000.00 in cash.30 The offer was again rejected by respondent PNB on September 13, 1993.31

On May 31, 1994, the trial court rendered judgment dismissing the amended complaint and respondent PNB's counterclaim. It ordered respondent PNB to refund the P725,000.00 deposit petitioner had made.32 The trial court ruled that there was no perfected contract of sale between the parties; hence, petitioner had no cause of action for specific performance against respondent. The trial court declared that respondent had rejected petitioner's offer to repurchase the property. Petitioner, in turn, rejected the terms and conditions contained in the June 4, 1985 letter of the SAMD. While petitioner had offered to repurchase the property per its letter of July 14, 1988, the amount ofP643,422.34 was way below the P1,206,389.53 which respondent PNB had demanded. It further declared that theP725,000.00 remitted by petitioner to respondent PNB on June 4, 1985 was a "deposit," and not a downpayment or earnest money.

On appeal to the CA, petitioner made the following allegations:

ITHE LOWER COURT ERRED IN RULING THAT DEFENDANT-APPELLEE'S LETTER DATED 4 JUNE 1985 APPROVING/ACCEPTING PLAINTIFF-APPELLANT'S OFFER TO PURCHASE THE SUBJECT PROPERTY IS NOT VALID AND ENFORCEABLE.

IITHE LOWER COURT ERRED IN RULING THAT THERE WAS NO PERFECTED CONTRACT OF SALE BETWEEN PLAINTIFF-APPELLANT AND DEFENDANT-APPELLEE.

IIITHE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLLANT WAIVED ITS RIGHT TO PURCHASE THE SUBJECT PROPERTY WHEN IT FAILED TO CONFORM WITH CONDITIONS SET FORTH BY DEFENDANT-APPELLEE IN ITS LETTER DATED 4 JUNE 1985.

IVTHE LOWER COURT ERRED IN DISREGARDING THE FACT THAT IT WAS THE DEFENDANT-APPELLEE WHICH RENDERED IT DIFFICULT IF NOT IMPOSSIBLE FOR PLAINTIFF-APPELLANT TO COMPLETE THE BALANCE OF THEIR PURCHASE PRICE.

VTHE LOWER COURT ERRED IN DISREGARDING THE FACT THAT THERE WAS NO VALID RESCISSION OR CANCELLATION OF SUBJECT CONTRACT OF REPURCHASE.

VITHE LOWER COURT ERRED IN DECLARING THAT PLAINTIFF FAILED AND REFUSED TO SUBMIT THE AMENDED REPURCHASE OFFER.

VIITHE LOWER COURT ERRED IN DISMISSING THE AMENDED COMPLAINT OF PLAINTIFF-APPELLANT.

VIIITHE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT ACTUAL, MORAL AND EXEMPLARY DAMAGES, ATTOTRNEY'S FEES AND LITIGATION EXPENSES.33

Meanwhile, on June 17, 1993, petitioner's Board of Directors approved Resolution No. 3-004, where it waived, assigned and transferred its rights over the property covered by TCT No. 33099 and TCT No. 37025 in favor of Bayani Gabriel, one of its Directors.34 Thereafter, Bayani Gabriel executed a Deed of Assignment over 51% of the ownership and management of the property in favor of Reynaldo Tolentino, who later moved for leave to intervene as plaintiff-appellant. On July 14, 1993, the CA issued a resolution granting the motion,35 and likewise granted the motion of Reynaldo Tolentino substituting petitioner MMCC, as plaintiff-appellant, and his motion to withdraw as intervenor.36

94The CA rendered judgment on May 11, 2000 affirming the decision of the RTC.37 It declared that petitioner obviously never agreed to the selling price proposed by respondent PNB (P1,931,389.53) since petitioner had kept on insisting that the selling price should be lowered to P1,574,560.47. Clearly therefore, there was no meeting of the minds between the parties as to the price or consideration of the sale.

The CA ratiocinated that petitioner's original offer to purchase the subject property had not been accepted by respondent PNB. In fact, it made a counter-offer through its June 4, 1985 letter specifically on the selling price; petitioner did not agree to the counter-offer; and the negotiations did not prosper. Moreover, petitioner did not pay the balance of the purchase price within the sixty-day period set in the June 4, 1985 letter of respondent PNB. Consequently, there was no perfected contract of sale, and as such, there was no contract to rescind.

According to the appellate court, the claim for damages and the counterclaim were correctly dismissed by the court a quo for no evidence was presented to support it. Respondent PNB's letter dated June 30, 1988 cannot revive the failed negotiations between the parties. Respondent PNB merely asked petitioner to submit an amended offer to repurchase. While petitioner reiterated its request for a lower selling price and that the balance of the repurchase be reduced, however, respondent rejected the proposal in a letter dated August 1, 1989.

Petitioner filed a motion for reconsideration, which the CA likewise denied.

Thus, petitioner filed the instant petition for review on certiorari, alleging that:

I. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THERE IS NO PERFECTED CONTRACT OF SALE BETWEEN THE PETITIONER AND RESPONDENT.

II. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE AMOUNT OF PHP725,000.00 PAID BY THE PETITIONER IS NOT AN EARNEST MONEY.

III. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE FAILURE OF THE PETITIONER-APPELLANT TO SIGNIFY ITS CONFORMITY TO THE TERMS CONTAINED IN PNB'S JUNE 4, 1985 LETTER MEANS THAT THERE WAS NO VALID AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.

IV. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW THAT NON-PAYMENT OF THE PETITIONER-APPELLANT OF THE BALANCE OF THE OFFERED PRICE IN THE LETTER OF PNB DATED JUNE 4, 1985, WITHIN SIXTY (60) DAYS FROM NOTICE OF APPROVAL CONSTITUTES NO VALID AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.

V. THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE LETTERS OF PETITIONER-APPELLANT DATED MARCH 18, 1993 AND JUNE 21, 1993, OFFERING TO BUY THE SUBJECT PROPERTY AT DIFFERENT AMOUNT WERE PROOF THAT THERE IS NO PERFECTED CONTRACT OF SALE.38

The threshold issue is whether or not petitioner and respondent PNB had entered into a perfected contract for petitioner to repurchase the property from respondent.

Petitioner maintains that it had accepted respondent's offer made through the SAMD, to sell the property forP1,574,560.00. When the acceptance was made in its letter dated June 25, 1984; it then deposited P725,000.00 with the SAMD as partial payment, evidenced by Receipt No. 978194 which respondent had issued. Petitioner avers that the SAMD's acceptance of the deposit amounted to an acceptance of its offer to repurchase. Moreover, as gleaned from the letter of SAMD dated June 4, 1985, the PNB Board of Directors had approved petitioner's offer to purchase the property. It claims that this was the suspensive condition, the fulfillment of which gave rise to the contract. Respondent could no

longer unilaterally withdraw its offer to sell the property for P1,574,560.47, since the acceptance of the offer resulted in a perfected contract of sale; it was obliged to remit to respondent the balance of the original purchase price of P1,574,560.47, while respondent was obliged to transfer ownership and deliver the property to petitioner, conformably with Article 1159 of the New Civil Code.

Petitioner posits that respondent was proscribed from increasing the interest rate after it had accepted respondent's offer to sell the property for P1,574,560.00. Consequently, respondent could no longer validly make a counter-offer of P1,931,789.88 for the purchase of the property. It likewise maintains that, although theP725,000.00 was considered as "deposit for the repurchase of the property" in the receipt issued by the SAMD, the amount constitutes earnest money as contemplated in Article 1482 of the New Civil Code. Petitioner cites the rulings of this Court in Villonco v. Bormaheco39 and Topacio v. Court of Appeals.40

Petitioner avers that its failure to append its conformity to the June 4, 1984 letter of respondent and its failure to pay the balance of the price as fixed by respondent within the 60-day period from notice was to protest respondent's breach of its obligation to petitioner. It did not amount to a rejection of respondent's offer to sell the property since respondent was merely seeking to enforce its right to pay the balance of P1,570,564.47. In any event, respondent had the option either to accept the balance of the offered price or to cause the rescission of the contract.

Petitioner's letters dated March 18, 1993 and June 21, 1993 to respondent during the pendency of the case in the RTC were merely to compromise the pending lawsuit, they did not constitute separate offers to repurchase the property. Such offer to compromise should not be taken against it, in accordance with Section 27, Rule 130 of the Revised Rules of Court.

For its part, respondent contends that the parties never graduated from the "negotiation stage" as they could not agree on the amount of the repurchase price of the property. All that transpired was an exchange of proposals and counter-proposals, nothing more. It insists that a definite agreement on the amount and manner of payment of the price are essential elements in the formation of a binding and enforceable contract of sale. There was no such agreement in this case. Primarily, the concept of "suspensive condition" signifies a future and uncertain event upon the fulfillment of which the obligation becomes effective. It clearly presupposes the existence of a valid and binding agreement, the effectivity of which is subordinated to its fulfillment. Since there is no perfected contract in the first place, there is no basis for the application of the principles governing "suspensive conditions."

According to respondent, the Statement of Account prepared by SAMD as of June 25, 1984 cannot be classified as a counter-offer; it is simply a recital of its total monetary claims against petitioner. Moreover, the amount stated therein could not likewise be considered as the counter-offer since as admitted by petitioner, it was only recommendation which was subject to approval of the PNB Board of Directors.

Neither can the receipt by the SAMD of P725,000.00 be regarded as evidence of a perfected sale contract. As gleaned from the parties' Stipulation of Facts during the proceedings in the court a quo, the amount is merely an acknowledgment of the receipt of P725,000.00 as deposit to repurchase the property. The deposit of P725,000.00 was accepted by respondent on the condition that the purchase price would still be approved by its Board of Directors. Respondent maintains that its acceptance of the amount was qualified by that condition, thus not absolute. Pending such approval, it cannot be legally claimed that respondent is already bound by any contract of sale with petitioner.

According to respondent, petitioner knew that the SAMD has no capacity to bind respondent and that its authority is limited to administering, managing and preserving the properties and other special assets of PNB. The SAMD does not have the power to sell, encumber, dispose of, or otherwise alienate the assets, since the power to do so must emanate from its Board of Directors. The SAMD was not authorized by respondent's Board to enter into contracts of sale with third persons involving corporate assets. There is absolutely nothing on record that respondent authorized the SAMD, or made it

95appear to petitioner that it represented itself as having such authority.

Respondent reiterates that SAMD had informed petitioner that its offer to repurchase had been approved by the Board subject to the condition, among others, "that the selling price shall be the total bank's claim as of documentation date x x x payable in cash (P725,000.00 already deposited)

within 60 days from notice of approval." A new Statement of Account was attached therein indicating the total bank's claim to be P1,931,389.53 less deposit of P725,000.00, or P1,206,389.00. Furthermore, while respondent's Board of Directors accepted petitioner's offer to repurchase the property, the acceptance was qualified, in that it required a higher sale price and subject to specified terms and conditions enumerated therein. This qualified acceptance was in effect a counter-offer, necessitating petitioner's acceptance in return.

The Ruling of the Court

The ruling of the appellate court that there was no perfected contract of sale between the parties on June 4, 1985 is correct.

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.41 Under Article 1318 of the New Civil Code, there is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

Contracts are perfected by mere consent which is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract.42 Once perfected, they bind other contracting parties and the obligations arising therefrom have the form of law between the parties and should be complied with in good faith. The parties are bound not only to the fulfillment of what has been expressly stipulated but also to the consequences which, according to their nature, may be in keeping with good faith, usage and law.43

By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.44 The absence of any of the essential elements will negate the existence of a perfected contract of sale. As the Court ruled in Boston Bank of the Philippines v. Manalo:45

A definite agreement as to the price is an essential element of a binding agreement to sell personal or real property because it seriously affects the rights and obligations of the parties. Price is an essential element in the formation of a binding and enforceable contract of sale. The fixing of the price can never be left to the decision of one of the contracting parties. But a price fixed by one of the contracting parties, if accepted by the other, gives rise to a perfected sale.46

A contract of sale is consensual in nature and is perfected upon mere meeting of the minds. When there is merely an offer by one party without acceptance of the other, there is no contract.47 When the contract of sale is not perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation between the parties.48

In San Miguel Properties Philippines, Inc. v. Huang,49 the Court ruled that the stages of a contract of sale are as follows: (1) negotiation, covering the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is perfected; (2) perfection, which takes place upon the concurrence of the essential elements of the sale which are the meeting of the minds of the parties as to the object of the contract and upon the price; and (3) consummation, which begins when the parties perform

their respective undertakings under the contract of sale, culminating in the extinguishment thereof.

A negotiation is formally initiated by an offer, which, however, must be certain.50 At any time prior to the perfection of the contract, either negotiating party may stop the negotiation. At this stage, the offer may be withdrawn; the withdrawal is effective immediately after its manifestation. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional and without variance of any sort from the proposal. In Adelfa Properties, Inc. v. Court of Appeals,51 the Court ruled that:

x x x The rule is that except where a formal acceptance is so required, although the acceptance must be affirmatively and clearly made and must be evidenced by some acts or conduct communicated to the offeror, it may be shown by acts, conduct, or words of the accepting party that clearly manifest a present intention or determination to accept the offer to buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a party recognizing the existence of the contract of sale.52

A qualified acceptance or one that involves a new proposal constitutes a counter-offer and a rejection of the original offer. A counter-offer is considered in law, a rejection of the original offer and an attempt to end the negotiation between the parties on a different basis.53 Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to guarantee consent because any modification or variation from the terms of the offer annuls the offer.54 The acceptance must be identical in all respects with that of the offer so as to produce consent or meeting of the minds.

In this case, petitioner had until February 17, 1984 within which to redeem the property. However, since it lacked the resources, it requested for more time to redeem/repurchase the property under such terms and conditions agreed upon by the parties.55 The request, which was made through a letter dated August 25, 1983, was referred to the respondent's main branch for appropriate action.56 Before respondent could act on the request, petitioner again wrote respondent as follows:

1. Upon approval of our request, we will pay your goodselves ONE HUNDRED & FIFTY THOUSAND PESOS (P150,000.00);

2. Within six months from date of approval of our request, we will pay another FOUR HUNDRED FIFTY THOUSAND PESOS (P450,000.00); and

3. The remaining balance together with the interest and other expenses that will be incurred will be paid within the last six months of the one year grave period requested for.57

When the petitioner was told that respondent did not allow "partial redemption,"58 it sent a letter to respondent's President reiterating its offer to purchase the property.59 There was no response to petitioner's letters dated February 10 and 15, 1984.

The statement of account prepared by the SAMD stating that the net claim of respondent as of June 25, 1984 wasP1,574,560.47 cannot be considered an unqualified acceptance to petitioner's offer to purchase the property. The statement is but a computation of the amount which petitioner was obliged to pay in case respondent would later agree to sell the property, including interests, advances on insurance premium, advances on realty taxes, publication cost, registration expenses and miscellaneous expenses.

There is no evidence that the SAMD was authorized by respondent's Board of Directors to accept petitioner's offer and sell the property for P1,574,560.47. Any acceptance by the SAMD of petitioner's offer would not bind respondent. As this Court ruled in AF Realty Development, Inc. vs. Diesehuan Freight Services, Inc.:60

Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize

96another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of such director, are held not binding on the corporation.

Thus, a corporation can only execute its powers and transact its business through its Board of Directors and through its officers and agents when authorized by a board resolution or its by-laws.61

It appears that the SAMD had prepared a recommendation for respondent to accept petitioner's offer to repurchase the property even beyond the one-year period; it recommended that petitioner be allowed to redeem the property and pay P1,574,560.00 as the purchase price. Respondent later approved the recommendation that the property be sold to petitioner. But instead of the P1,574,560.47 recommended by the SAMD and to which petitioner had previously conformed, respondent set the purchase price at P2,660,000.00. In fine, respondent's acceptance of petitioner's offer was qualified, hence can be at most considered as a counter-offer. If petitioner had accepted this counter-offer, a perfected contract of sale would have arisen; as it turns out, however, petitioner merely sought to have the counter-offer reconsidered. This request for reconsideration would later be rejected by respondent.

We do not agree with petitioner's contention that the P725,000.00 it had remitted to respondent was "earnest money" which could be considered as proof of the perfection of a contract of sale under Article 1482 of the New Civil Code. The provision reads:

ART. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract.

This contention is likewise negated by the stipulation of facts which the parties entered into in the trial court:

8. On June 8, 1984, the Special Assets Management Department (SAMD) of PNB prepared an updated Statement of Account showing MMCC's total liability to PNB as of June 25, 1984 to be P1,574,560.47 and recommended this amount as the repurchase price of the subject property.

9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase the property. The deposit of P725,000 was accepted by PNB on the condition that the purchase price is still subject to the approval of the PNB Board.62

Thus, the P725,000.00 was merely a deposit to be applied as part of the purchase price of the property, in the event that respondent would approve the recommendation of SAMD for respondent to accept petitioner's offer to purchase the property for P1,574,560.47. Unless and until the respondent accepted the offer on these terms, no perfected contract of sale would arise. Absent proof of the concurrence of all the essential elements of a contract of sale, the giving of earnest money cannot establish the existence of a perfected contract of sale.63

It appears that, per its letter to petitioner dated June 4, 1985, the respondent had decided to accept the offer to purchase the property for P1,931,389.53. However, this amounted to an amendment of respondent's qualified acceptance, or an amended counter-offer, because while the respondent lowered the purchase price, it still declared that its acceptance was subject to the following terms and conditions:

1. That the selling price shall be the total Bank's claim as of documentation date (pls. see attached statement of account as of 5-31-85), payable in cash (P725,000.00 already deposited) within sixty (60) days from notice of approval;

2. The Bank sells only whatever rights, interests and participation it may have in the property and you are charged with full knowledge of the nature and extent of said rights, interests and participation and waive your right to warranty against eviction.

3. All taxes and other government imposts due or to become due on the property, as well as expenses including costs of documents and science stamps, transfer fees, etc., to be incurred in connection with the execution and registration of all covering documents shall be borne by you;

4. That you shall undertake at your own expense and account the ejectment of the occupants of the property subject of the sale, if there are any;

5. That upon your failure to pay the balance of the purchase price within sixty (60) days from receipt of advice accepting your offer, your deposit shall be forfeited and the Bank is thenceforth authorized to sell the property to other interested parties.

6. That the sale shall be subject to such other terms and conditions that the Legal Department may impose to protect the interest of the Bank.64

It appears that although respondent requested petitioner to conform to its amended counter-offer, petitioner refused and instead requested respondent to reconsider its amended counter-offer. Petitioner's request was ultimately rejected and respondent offered to refund its P725,000.00 deposit.

In sum, then, there was no perfected contract of sale between petitioner and respondent over the subject property.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED.

The assailed decision is AFFIRMED. Costs against petitioner Manila Metal Container Corporation.

SO ORDERED.

SECOND DIVISION

[G.R. No. 122452. January 29, 2001.]

TAM WING TAK, Petitioner, v. HON. RAMON P. MAKASIAR (in his Capacity as Presiding Judge of the

Regional Trial Court of Manila, Branch 35) and ZENON DE GUIA (in his capacity as Chief State

Prosecutor), Respondents.

D E C I S I O N

This is a petition for review on certiorari of the decision of the Regional Trial Court of Manila, Branch 35, dated September 14, 1995, which dismissed herein petitioner’s special civil action for mandamus and sustained the Letter-Order of respondent Chief State Prosecutor. The latter dismissed petitioner’s appeal from the resolution of the City Prosecutor of Quezon City, which, in turn, dismissed petitioner’s complaint against Vic Ang Siong for violation of the Bouncing Checks Law or B.P. Blg. 22.

The factual background of this case is as follows:

On November 11, 1992, Petitioner, in his capacity as director of Concord-World Properties, Inc., (Concord for brevity), a domestic corporation, filed an affidavit-complaint with the Quezon City Prosecutor’s Office, charging Vic Ang Siong with violation of B.P. Blg. 22. Docketed by the prosecutor as I.S. No. 93-15886, the complaint alleged that a check for the amount of P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was dishonored when presented for encashment.

Vic Ang Siong sought the dismissal of the case on two grounds: First, that petitioner had no authority to file the case on behalf of Concord, the payee of the dishonored check, since the firm’s board of directors had not empowered him to act on its behalf. Second, he and Concord had already agreed to amicably settle the issue after he made a partial payment of P19,000,000.00 on the dishonored check.

97

On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-15886 on the following grounds: (1) that petitioner lacked the requisite authority to initiate the criminal complaint for and on Concord’s behalf; and (2) that Concord and Vic Ang Siong had already agreed upon the payment of the latter’s balance on the dishonored check.

A copy of the City Prosecutor’s resolution was sent by registered mail to petitioner in the address he indicated in his complaint-affidavit. Notwithstanding that petitioner was represented by counsel, the latter was not furnished a copy of the resolution.

On June 27, 1994, petitioner’s counsel was able to secure a copy of the resolution dismissing I.S. No. 93-15886. Counting his 15-day appeal period from said date, petitioner moved for reconsideration on July 7, 1994.

On October 21, 1994, the City Prosecutor denied petitioner’s motion for reconsideration. Petitioner’s counsel received a copy of the denial order on November 3, 1994.

On November 7, 1994, petitioner’s lawyer filed a motion to extend the period to appeal by an additional 15 days counted from November 3, 1994 with the Chief State Prosecutor. He manifested that it would take time to communicate with petitioner who is a Hong Kong resident and enable the latter to verify the appeal as procedurally required.

On November 8, 1994, petitioner appealed the dismissal of his complaint by the City Prosecutor to the Chief State Prosecutor. The appeal was signed by petitioner’s attorney only and was not verified by petitioner until November 23, 1994.

On December 8, 1994, the Chief State Prosecutor dismissed the appeal for having been filed out of time. Petitioner’s lawyer received a copy of the letter-resolution dismissing the appeal on January 20, 1995.

On January 30, 1995, petitioner moved for reconsideration.

On March 9, 1995, respondent Chief State Prosecutor denied the motion for reconsideration.

Petitioner then filed Civil Case No. 95-74394 for mandamus with the Regional Trial Court of Quezon City to compel the Chief State Prosecutor to file or cause the filing of an information charging Vic Ang Siong with violation of B.P. Blg. 22.

On September 14, 1995, the trial court disposed of the action as follows:

WHEREFORE, for utter lack of merit, the petition for mandamus of petitioner is DENIED and DISMISSED.

SO ORDERED. 1 

Petitioner moved for reconsideration, but the trial court denied this motion in its order dated October 24, 1995.

Hence, the instant petition.

Before this Court, petitioner claims respondent judge committed grave errors of law in sustaining respondent Chief State Prosecutor whose action flagrantly contravenes: (1) the established rule on service of pleadings and orders upon parties represented by counsel; (b) the basic principle that except in private crimes, any competent person may initiate a criminal case; and (3) the B.P. Blg. 22 requirement that arrangement for full payment of a bounced check must be made by the drawer with the drawee within five (5) banking days from notification of the check’s dishonor. 2 

We find pertinent for our resolution the following issues:

(1) Was there valid service of the City Prosecutor’s resolution upon petitioner?

(2) Will mandamus lie to compel the City Prosecutor to file the necessary information in court?

In upholding respondent Chief State Prosecutor, the court a quo held:

It is a generally accepted principle in the service of orders, resolutions, processes and other papers to serve them on the party or his counsel, either in his office, if known, or else in the residence, also if known. As the party or his counsel is not

expected to be present at all times in his office or residence, service is allowed to be made with a person in charge of the office, or with a person of sufficient discretion to receive the same in the residence.

In the case under consideration, it is not disputed that the controverted Resolution dismissing the complaint of the petitioner against Vic Ang Siong was served on the former by registered mail and was actually delivered by the postmaster on April 9, 1994 at said petitioner’s given address in the record at No. 5 Kayumanggi Street, West Triangle, Quezon City. The registered mail was in fact received by S. Ferraro. The service then was complete and the period for filing a motion for reconsideration or appeal began to toll from that date. It expired on April 24, 1994. Considering that his motion for reconsideration was filed only on July 7, 1994, the same was filed beyond the prescribed period, thereby precluding further appeal to the Office of the Respondent. 3 

Petitioner, before us, submits that there is no such "generally accepted practice" which gives a tribunal the option of serving pleadings, orders, resolutions, and other papers to either the opposing party himself or his counsel. Petitioner insists that the fundamental rule in this jurisdiction is that it a party appears by counsel, then service can only be validly made upon counsel and service upon the party himself becomes invalid and without effect. Petitioner relies upon Rule 13, Section 2 of the Rules of Court 4 and our ruling in J.M. Javier Logging Corp. v. Mardo, 24 SCRA 776 (1968) to support his stand. In the J.M. Javier case, we held:

[W]here a party appears by attorney, notice to the former is not a notice in law, unless service upon the party himself is ordered by the court. . . 5 

The Solicitor General, for respondents, contends that the applicable rule on service in the present case is Section 2 of the Department of Justice (DOJ) Order No. 223, 6 which allows service to be made upon either party or his counsel. Respondents argue that while a preliminary investigation has been considered as partaking of the nature of a judicial proceeding, 7 nonetheless, it is not a court proceeding and hence, falls outside of the ambit of the Rules of Court.

We agree with petitioner that there is no "generally accepted practice" in the service of orders, resolutions, and processes, which allows service upon either the litigant or his lawyer. As a rule, notice or service made upon a party who is represented by counsel is a nullity. 8 However, said rule admits of exceptions, as when the court or tribunal orders service upon the party 9 or when the technical defect is waived. 10 

To resolve the issue on validity of service, we must make a determination as to which is the applicable rule — the rule on service in the Rules of Court, as petitioner insists or the rule on service in DOJ Order No. 223?

The Rules of Court were promulgated by this Court pursuant to Section 13, Article VII of the 1935 Constitution 11 (now Section 5 [5], Article VIII of the Constitution) 12 to govern "pleadings, practice and procedure in all courts of the Philippines." The purpose of the Rules is clear and does not need any interpretation. The Rules were meant to govern court (stress supplied) procedures and pleadings. As correctly pointed out by the Solicitor General, a preliminary investigation, notwithstanding its judicial nature, is not a court proceeding. The holding of a preliminary investigation is a function of the Executive Department and not of the Judiciary. 13 Thus, the rule on service provided for in the Rules of Court cannot be made to apply to the service of resolutions by public prosecutors, especially as the agency concerned, in this case, the Department of Justice, has its own procedural rules governing said service.

A plain reading of Section 2 of DOJ Order No. 223 clearly shows that in preliminary investigation, service can be made upon the party himself or through his counsel. It must be assumed that when the Justice Department crafted the said section, it was done with knowledge of the pertinent rule in the Rules of Court and of jurisprudence interpreting it. The DOJ could have just adopted the rule on service provided for in the Rules of Court, but did not. Instead, it opted to word Section 2 of DOJ Order No. 223 in such a way as to leave no doubt that in preliminary investigations, service of resolutions of public prosecutors could be made upon either the party or his counsel.

Moreover, the Constitution provides that "Rules of procedure of special courts and quasi judicial bodies shall remain effective unless disapproved by the Supreme Court." 14 There

98is naught in the records to show that we have disapproved and nullified Section 2 of DOJ Order No. 223 and since its validity is not an issue in the instant case, we shall refrain from ruling upon its validity.

We hold that there was valid service upon petitioner pursuant to Section 2 of DOJ Order No. 223.

On the issue of whether mandamus will lie. In general, mandamus may be resorted to only where one’s right is founded clearly in law and not when it is doubtful. 15 The exception is to be found in criminal cases where mandamus is available to compel the performance by the public prosecutor of an ostensibly discretionary function, where by reason of grave abuse of discretion on his part, he willfully refuses to perform a duty mandated by law. 16 Thus, mandamus may issue to compel a prosecutor to file an information when he refused to do so in spite of the prima facie evidence of guilt. 17 

Petitioner takes the stance that it was grave abuse for discretion on the part of respondent Chief State Prosecutor to sustain the dismissal of I.S. No. 93-15886 on the grounds that: (1) Vic Ang Siong’s obligation which gave rise to the bounced check had already been extinguished by partial payment and agreement to amicably settle balance, and (2) petitioner had no standing to file the criminal complaint since he was neither the payee nor holder of the bad check. Petitioner opines that neither ground justifies dismissal of his complaint.

Petitioner’s stand is unavailing. Respondent Chief State Prosecutor in refusing to order the filing of an information for violation of B.P. Blg. 22 against Vic Ang Siong did not act without or in excess of jurisdiction or with grave abuse of discretion.

First, with respect to the agreement between Concord and Victor Ang Siong to amicably settle their difference, we find this resort to an alternative dispute settlement mechanism as not contrary to law, public policy, or public order. Efforts of parties to solve their disputes outside of the courts are looked on with favor, in view of the clogged dockets of the judiciary.

Second, it is not disputed in the instant case that Concord, a domestic corporation, was the payee of the bum check, not petitioner. Therefore, it is Concord, as payee of the bounced check, which is the injured party. Since petitioner was neither a payee nor a holder of the bad check, he had neither the personality to sue nor a cause of action against Vic Ang Siong. Under Section 36 of the Corporation Code 18 read in relation to Section 23, 19 it is clear that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. 20 Note that petitioner failed to show any proof that he was authorized or deputized or granted specific powers by Concord’s board of director to sue Victor Ang Siong for and on behalf of the firm. Clearly, petitioner as a minority stockholder and member of the board of directors had no such power or authority to sue on Concord’s behalf. Nor can we uphold his act as a derivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. 21 There is no showing that petitioner has complied with the foregoing requisites. It is obvious that petitioner has not shown any clear legal right which would warrant the overturning of the decision of public respondents to dismiss the complaint against Vic Ang Siong. A public prosecutor, by the nature of his office, is under no compulsion to file a criminal information where no clear legal justification has been shown, and no sufficient evidence of guilt nor prima facie case has been presented by the petitioner. 22 No reversible error may be attributed to the court a quo when it dismissed petitioner’s special civil action for mandamus.

WHEREFORE, the instant petition is DISMISSED for lack of merit. Costs against petitioner.

SO ORDERED.

SECOND DIVISION

[G.R. NO. 150959 : August 4, 2006]

UNITED PARAGON MINING CORPORATION, Petitioner, v. COURT OF APPEALS, former

12th DIVISION, ATTY. MURLY P. MENDEZ and CESARIO1 F. ERMITA, Respondents.

D E C I S I O N

Assailed and sought to be set aside in this Petition for Review under Rule 45 of the Rules of Court is the Decision2 dated July 24, 2001 of the Court of Appeals (CA), as reiterated in its Resolution3 of November 7, 2001, dismissing the petition for certiorari with prayer for a temporary restraining order and preliminary injunction thereat filed by the herein petitioner in CA-G.R. SP No. 44450, entitled United Paragon Mining Corporation, represented by Feliciano M. Daniel v. Atty. Murly P. Mendez, in his capacity as Accredited Voluntary Arbitrator, Region V, and Cesario F. Ermita.

The facts:

Prior to the instant controversy, private respondent Cesario F. Ermita (Cesario, for brevity) was a regular employee working as a foreman of petitioner United Paragon Mining Corporation (UPMC, hereafter).

On January 18, 1996, Cesario received a termination letter bearing date January 16, 1996 and signed by UPMC's Personnel Superintendent, Feliciano M. Daniel, informing Cesario that his employment as foreman is terminated effective thirty days after his receipt of the letter. As stated in the letter, the termination was on account of Cesario's violation of company rules against infliction of bodily injuries on a co-employee, it being alleged therein that Cesario inflicted bodily injuries on a co-employee, a certain Jerry Romero, as well as for unlawfully possessing a deadly weapon, a bolo, again in violation of company rules.

As a result of the termination, the matter was brought to the grievance machinery as mandated under the Collective Bargaining Agreement existing at that time between UPMC and the United Paragon Supervisors Union. Having failed to reach a settlement thereat, the parties agreed to submit the dispute to voluntary arbitration. Accordingly, the complaint for illegal dismissal was referred to Voluntary Arbitrator Atty. Murly P. Mendez of the National Conciliation and Mediation Board, Regional Branch No. V, Legaspi City, whereat the same was docketed as VA Case No.RB5-657-04-002-96.

On February 28, 1997, Voluntary Arbitrator Mendez rendered a decision4 in Cesario's favor, stating that although the procedural requirements in the termination of an employee had been complied with, the termination of Cesario was unjustified because it was arrived at through gross misapprehension of facts. Explains the Voluntary Arbitrator:

An analysis of the tenor of the termination letter would seem to indicate that Ceasario Ermita was separated from service simply because his explanation was not acceptable to the company. Stated more bluntly, Ermita was terminated not because there was a definite finding of fact relative to his supposed culpability, but because his answer did not find favor with management.

x x x

The evidence on record partakes of the uncorroborated statement of Jerry Romero claiming that he was assaulted by [Cesario]. This claim has been disputed and is denied by [Cesario] in the statement executed by him on January 2, 1996 as well as in his written explanation (Annex 6, Respondent's Position Paper).

On this point, it can be argued that since this is a case of one's word against another, the best that could be said of management's evidence is that it has achieved a level at an equi-poise with that of the Constitution. The spirit of prevailing jurisprudence as well as a liberal interpretation of the new Constitutional provision on labor, would mandate that where a doubt exists, the same should be resolved in favor of labor. The position of [Cesario] appears to have been strengthened by the document jointly signed by [him] and Jerry Romero, the supposed victim of the assault charged.

This amicable settlement would serve to negate the charge of physical injury against [Cesario] as a basis for termination, it appearing that even [his] supposed victim, Jerry Romero, who has been made to appear as a complainant in the proceedings which resulted in the termination letter, has admitted in this amicable settlement (Annex A, Complainant's Position Paper) that "hindi naming sinasadya yon at itong ginawa naming sulat na ito ay siya ang magpapatunay na ayos kaming dalawa at walang problema sa isa't isa."

99This admission, that comes no less from the supposed accuser of [Cesario], clearly establishes the fact that whatever may have happened between them on New Year's eve was something that neither of them willfully and voluntarily did. Since it has been established that the supposed scuffle between [Cesario] and Romero was "hindi sinasadya," then it would necessarily follow that there could not have been a willful and voluntary assault by [Cesario] upon Romero. This situation is further rendered more puzzling by the fact that the suspected assailant was himself the bearer of the tell-tale marks of injury.

x x x

It has been established to the satisfaction of this Arbitrator that the bolo seen that night was used to chop wood to be burnt in the bonfire. This statement by people who happened to be unbiased and disinterested remains uncontested and undisputed.

Further, the preponderance of evidence shows that it was not [Cesario] who used said bolo, but his son.

x x x

On these points, it is the finding of this Arbitrator, and it is so ruled, that Ceasario Ermita was unjustifiably terminated.5 (Words in brackets supplied).

On the basis of the above, the Voluntary Arbitrator, in his aforementioned decision of February 28, 1997, ordered Cesario's reinstatement, to wit:

WHEREFORE, judgment is hereby issued ordering respondent United Paragon Mining Corporation to immediately reinstate Ceasario F. Ermita to his former position prior to the termination without loss of seniority nor interruption of service, and to pay said Ceasario F. Ermita his back wages, including such other fringe benefits as he would have been entitled to, from the date of his termination effective February 17, 1996 up to the time of actual reinstatement. Attorney's fees are hereby granted equivalent to 10 per cent of such monetary award as the complainant is entitled to.

For lack of merit, all other claims for damages are hereby dismissed.

SO ORDERED.

In time, UPMC moved for a reconsideration of the decision insofar as it ordered Cesario's reinstatement which UPMC sought to avert by offering separation pay instead. UPMC cites the following against the decreed reinstatement: 1) Cesario's position has already been filled up; and 2) reinstatement is no longer appropriate in view of the supposed strained relations between Cesario and UPMC.

In his Order6 of April 22, 1997, the Voluntary Arbitrator denied the desired reconsideration stressing that UPMC's management misapprehended the facts when it caused Cesario's termination, which cannot support the claim of the existence of strained relations between him and the corporation.

Unsatisfied, UPMC, thru its Personnel Superintendent Feliciano M. Daniel, elevated the case to the CA on a Petition for Certiorari with Prayer for Temporary Restraining Order and Injunction, thereat docketed as CA-G.R. SP No. 44450, asserting that the Voluntary Arbitrator committed grave abuse of discretion, erroneous interpretation of the law and denial of substantial justice.

In the herein assailed Decision7 dated July 24, 2001, the CA, without going into the merits of the petition, dismissed the same on the following grounds:

1) The petition for certiorari was not the proper remedy in order to seek review or nullify decisions or final orders issued by the Labor Arbiter;

2) The verification in the petition is ineffective and insufficient because it was merely signed by the company's Personnel Superintendent without alleging or showing that he is authorized for the said purpose and that the verification was based on knowledge and information;

3) The petitioner's ground of grave abuse of discretion, erroneous interpretation of the law and denial of justice are actually dwelling on the appreciation of facts, which cannot be entertained in a petition for certiorari .

With its motion for reconsideration having been denied by the CA in its Resolution of November 7, 2001,8 petitioner UPMC is now with this Court via the present recourse, submitting for our consideration the following questions:

I

WHETHER OR NOT THE COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE PROPER REMEDY SHOULD HAVE BEEN A PETITION FOR REVIEW ON CERTIORARI AND NOT A PETITION FOR CERTIORARI;

II

WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING

THAT THE VERIFICATION PORTION OF THE PETITION WAS INEFFECTIVE AND INSUFFICIENT IN THE ABSENCE OF

ALLEGATION OR SHOWING THAT FELICIANO DANIEL, AS PERSONNEL SUPERINTENDENT WAS DULY AUTHORIZED TO

FILE THE PETITION;

III

WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE PETITION LACKS MERIT BECAUSE IT DWELLED ON

THE APPRECIATION OF FACTS WHICH IS NOT PROPER IN PETITION FOR CERTIORARI.

The recourse must have to be DENIED, no reversible error having been committed by the CA in its challenged decision.

We start with the basic concept that a corporation, like petitioner UPMC, has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. It has thus been observed that the power of a corporation to sue and be sued in any court is lodged with its board of directors that exercises its corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by the corporate by-laws or by a specific act of the board of directors.9

It is petitioner's posture that there is no necessity for a board resolution authorizing its Personnel Superintendent to file in its behalf the certiorari petition in CA-G.R. SP No. 44450 because said petition arose out of the labor dispute filed against it and its Personnel Superintendent, Feliciano M. Daniel. It is argued that in Cesario's complaint for illegal dismissal, Daniel was made a co-respondent of the corporation. Upon this premise, UPMC argues that Daniel has all the right to answer the complaint and to appeal an unfavorable judgment therein, which he actually did, in his capacity as the corporation's Personnel Superintendent and as its representative. Plodding on, petitioner contends that were the CA to insist that Daniel could not represent the corporation, it follows that the proceedings before the Voluntary Arbitrator could only be binding as against Daniel because the company then could not have been duly represented in said proceedings.

Throughout the proceedings before the Voluntary Arbitrator, that is, from the filing of the position papers up to the filing of the motion for reconsideration, UPMC was duly represented by its counsel, Atty. Archimedes O. Yanto. True it is that Cesario's complaint for illegal dismissal was filed against the corporation and Daniel. It appears obvious to us, however, that Daniel was merely a nominal party in that proceedings, as in fact he was impleaded thereat in his capacity as UPMC's Personnel Superintendent who signed the termination letter. For sure, Cesario's complaint contains no allegation whatsoever for specific claim or charge against Daniel in whatever capacity. As it is, Daniel was not in anyway affected by the outcome of the illegal dismissal case because only the corporation was made liable therein to Cesario. Being not a real party-in-interest, Daniel has no right to file the petition in CA-G.R. SP No. 44450 in behalf of the corporation without any authority from its board of directors. It is basic in law that a corporation has a legal personality entirely separate and

100distinct from that of its officers and the latter cannot act for and on its behalf without being so authorized by its governing board.

In Premium Marble Resources, Inc. v. Court of Appeals,10 we made it clear that in the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the latter:

We agree with the finding of public respondent Court of Appeals, that "in the absence of any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation, the present action must necessary fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellant's subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities and Exchange Commission."

Given the reality that the petition in CA-G.R. SP No. 44450 was filed by Daniel in behalf of and in representation of petitioner UPMC without an enabling resolution of the latter's board of directors, that petition was fatally defective, inclusive of the verification and the certification of non-forum shopping executed by Daniel himself.

True, ample jurisprudence exists to the effect that subsequent and substantial compliance of a petitioner may call for the relaxation of the rules of procedure in the interest of justice.11But to merit the Court's liberal consideration, petitioner must show reasonable cause justifying non-compliance with the rules and must convince the Court that the outright dismissal of the petition would defeat the administration of justice.12 Here, petitioner has not adequately explained its failure to have the certification against forum shopping signed by its duly authorized officer. Instead, it merely persisted in its thesis that it was not necessary to show proof that its Personnel Superintendent was duly authorized to file that petition and to sign the verification thereof and the certification against forumshopping despite the absence of the necessary board authorization, thereby repeating in the process its basic submission that CA-G.R. SP No. 44450 is merely a continuation of the proceedings before the Voluntary Arbitrator and that its Personnel Superintendent was impleaded as one of the respondents in Cesario's complaint for illegal dismissal.

With the view we take of this case, we deem it unnecessary to address petitioner's other grievances.

WHEREFORE, the instant petition is DENIED and the assailed CA decision and resolution are AFFIRMED.

Costs against petitioner.

SO ORDERED.

THIRD DIVISION

[G.R. NO. 177549 : June 18, 2009]

ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners, v. JOSEPH S. YUKAYGUAN, NANCY L.

YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf and on

behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC., Respondents.

D E C I S I O N

Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, which seeks to reverse and set aside the Resolutions dated 18 July 20062 and 19 April 20073 of the Court of Appeals in CA-G.R. SP No. 00185. Upon herein respondents' motion, the Court of Appeals rendered the assailed Resolution dated 18 July 2006, reconsidering its Decision4 dated 15 February 2006; and remanding the case to the Regional Trial Court (RTC) of Cebu City, Branch 11, for necessary proceedings, in effect, reversing the Decision5 dated 10 November 2004 of the RTC which dismissed respondents' Complaint in SRC Case No. 022-CEB. Herein petitioners' Motion for Reconsideration of the

Resolution dated 18 July 2006 was denied by the appellate court in the other assailed Resolution dated 19 April 2007.

Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu (Anthony); the wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).

Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan (Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).

Petitioner Anthony is the older half-brother of respondent Joseph.

Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. (Winchester, Inc.), a domestic corporation engaged in the operation of a general hardware and industrial supply and equipment business.

On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting, Inspection of Corporate Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts6 before the RTC of Cebu. The said Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual background of the Complaint was stated in the attached Affidavit executed by respondent Joseph.

According to respondents,7 Winchester, Inc. was established and incorporated on 12 September 1977, with petitioner Anthony as one of the incorporators, holding 1,000 shares of stock worth P100,000.00.8 Petitioner Anthony paid for the said shares of stock with respondent Joseph's money, thus, making the former a mere trustee of the shares for the latter. On 14 November 1984, petitioner Anthony ceded 800 of his 1,000 shares of stock in Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan,9 Siao So Lan, and John S. Yu.10 Petitioner Anthony remained as trustee for respondent Joseph of the 200 shares of stock in Winchester, Inc., still in petitioner Anthony's name.

Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its incorporators, excluding petitioner Anthony, their accumulated 8,500 shares in the corporation.11Subsequently, on 7 November 1995, Winchester, Inc. sold the same 8,500 shares to other persons, who included respondents Nancy, Jerald, and Jill; and petitioners Rosita and Jason.12

Respondents further averred that although respondent Joseph appeared as the Secretary and Treasurer in the corporate records of Winchester, Inc., petitioners actually controlled and ran the said corporation as if it were their own family business. Petitioner Rosita handled the money market placements of the corporation to the exclusion of respondent Joseph, the designated Treasurer of Winchester, Inc. Petitioners were also misappropriating the funds and properties of Winchester, Inc. by understating the sales, charging their personal and family expenses to the said corporation, and withdrawing stocks for their personal use without paying for the same. Respondents attached to the Complaint various receipts13 to prove the personal and family expenses charged by petitioners to Winchester, Inc.

Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200 shares of stock in petitioner Anthony's name. Respondents also prayed that petitioners be ordered to: (1) deposit the corporate books and records of Winchester, Inc. with the Branch Clerk of Court of the RTC for respondents' inspection; (2) render an accounting of all the funds of Winchester, Inc. which petitioners misappropriated; (3) reimburse the personal and family expenses which petitioners charged to Winchester, Inc., as well as the properties of the corporation which petitioners withheld without payment; and (4) pay respondents' attorney's fees and litigation expenses. In the meantime, respondents sought the appointment of a Management Committee and the freezing of all corporate funds by the trial court.

On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim,14 attached to which was petitioner Anthony's Affidavit.15 Petitioners vehemently denied the allegation that petitioner Anthony was a mere trustee for respondent Joseph of the 1,000 shares of stock in Winchester, Inc. in petitioner Anthony's name. For the incorporation of Winchester, Inc., petitioner Anthony contributed P25,000.00 paid-up capital, representing 25% of the total par value of the

1011,000 shares he subscribed to, the said amount being paid out of petitioner Anthony's personal savings and petitioners Anthony and Rosita's conjugal funds. Winchester, Inc. was being co-managed by petitioners and respondents, and the attached receipts, allegedly evidencing petitioners' use of corporate funds for personal and family expenses, were in fact signed and approved by respondent Joseph.

By way of special and affirmative defenses, petitioners contended in their Answer with Compulsory Counterclaim that respondents had no cause of action against them. Respondents' Complaint was purely intended for harassment. It should be dismissed under Section 1(j), Rule 1616 of the Rules of Court for failure to comply with conditions precedent before its filing. First, there was no allegation in respondents' Complaint that earnest efforts were exerted to settle the dispute between the parties. Second, since respondents' Complaint purportedly constituted a derivative suit, it noticeably failed to allege that respondents exerted effort to exhaust all available remedies in the Articles of Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation Code. And third, given that respondents' Complaint was also for inspection of corporate books, it lacked the allegation that respondents made a previous demand upon petitioners to inspect the corporate books but petitioners refused. Prayed for by petitioners, in addition to the dismissal of respondents' Complaint, was payment of moral and exemplary damages, attorney's fees, litigation expenses, and cost of suit.

On 30 October 2002, the hearing on the application for the appointment of a Management Committee was commenced. Respondent Joseph submitted therein, as his direct testimony, the same Affidavit that he executed, which was attached to the respondents' Complaint. On 4 November 2002, respondent Joseph was cross-examined by the counsel for petitioners. Thereafter, the continuation of the hearing was set for 29 November 2002, in order for petitioners to adduce evidence in support of their opposition to the application for the appointment of a Management Committee.17

During the hearing on 29 November 2002, the parties manifested before the RTC that there was an ongoing mediation between them, and so the hearing on the appointment of a Management Committee was reset to another date.

In amicable settlement of their dispute, the petitioners and respondents agreed to a division of the stocks in trade,18 the real properties, and the other assets of Winchester, Inc. In partial implementation of the afore-mentioned amicable settlement, the stocks in trade and real properties in the name of Winchester, Inc. were equally distributed among petitioners and respondents. As a result, the stockholders and members of the Board of Directors of Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution19 dissolving the corporation as of said date.

On 22 February 2004, respondents filed their pre-trial brief.20

On 25 June 2004, petitioners filed a Manifestation21 informing the RTC of the existence of their amicable settlement with respondents. Respondents, however, made their own manifestation before the RTC that they were repudiating said settlement, in view of the failure of the parties thereto to divide the remaining assets of Winchester, Inc. Consequently, respondents moved to have SRC Case No. 022-CEB set for pre-trial.

On 23 August 2004, petitioners filed their pre-trial brief.22

On 26 August 2004, instead of holding a formal pre-trial conference and resuming the hearing on the application for the appointment of a Management Committee, petitioners and respondents agreed that the RTC may already render a judgment based on the pleadings. In accordance with the agreement of the parties, the RTC issued, on even date, an Order23which stated:

O R D E R

During the pre-trial conference held on August 26, 2004, counsels of the parties manifested, agreed and suggested that a judgment may be rendered by the Court in this case based on the pleadings, affidavits, and other evidences on record, or to be submitted by them, pursuant to the provision of Rule 4, Section 4 of the Rule on Intra-Corporate Controversies. The suggestion of counsels was approved by the Court.

Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from notice hereof. Thereafter, the instant case will be deemed submitted for resolution.

x x x

Cebu City, August 26, 2004.

(signed)SILVESTRE A. MAAMO, JR.Acting Presiding Judge

Petitioners and respondents duly filed their respective Memoranda,24 discussing the arguments already set forth in the pleadings they had previously submitted to the RTC. Respondents, though, attached to their Memorandum a Supplemental Affidavit25 of respondent Joseph, containing assertions that refuted the allegations in petitioner Anthony's Affidavit, which was earlier submitted with petitioners' Answer with Compulsory Counterclaim. Respondents also appended to their Memorandum additional documentary evidence,26 consisting of original and duplicate cash invoices and cash disbursement receipts issued by Winchester, Inc., to further substantiate their claim that petitioners were understating sales and charging their personal expenses to the corporate funds.

The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC Case No. 022-CEB. The dispositive portion of said Decision reads:

WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby renders judgment in this case DISMISSING the complaint filed by the [herein respondents].

The Court also hereby dismisses the [herein petitioners'] counterclaim because it has not been indubitably shown that the filing by the [respondents] of the latter's complaint was done in bad faith and with malice.27

The RTC declared that respondents failed to show that they had complied with the essential requisites for filing a derivative suit as set forth in Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

As to respondents' prayer for the inspection of corporate books and records, the RTC adjudged that they had likewise failed to comply with the requisites entitling them to the same. Section 2, Rule 7 of the Interim Rules of Procedure Governing Intra-Corporate Controversies requires that the complaint for inspection of corporate books or records must state that:

(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records and/or to be furnished with financial statements under Sections 74 and 75 of the Corporation Code of the Philippines;

(2) A demand for inspection and copying of books and records and/or to be furnished with financial statements made by the plaintiff upon defendant;

(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusals, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof.

102The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as such, he was supposed to be the custodian of the corporate books and records; therefore, a court order for respondents' inspection of the same was no longer necessary. The RTC similarly denied respondents' demand for accounting as it was clear that Winchester, Inc. had been engaging the services of an audit firm. Respondent Joseph himself described the audit firm as competent and independent, and believed that the audited financial statements the said audit firm prepared were true, faithful, and correct.

Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC thereby dismissed the same.

Respondents challenged the foregoing RTC Decision before the Court of Appeals via a Petition for Review under Rule 43 of the Rules of Court, docketed as CA-G.R. SP No. 00185.

On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10 December 2004 Decision of the RTC. Said the appellate court:

After a careful and judicious scrutiny of the extant records of the case, together with the applicable laws and jurisprudence, WE see no reason or justification for granting the present appeal.

x x x

x x x [T]his Court sees that the instant petition would still fail taking into consideration all the pleadings and evidence of the parties except the supplemental affidavit of [herein respondent] Joseph and its corresponding annexes appended in [respondents'] memorandum before the Court a quo. The Court a quo have (sic) outrightly dismissed the complaint for its failure to comply with the mandatory provisions of the Interim Rules of Procedure for Intra-Corporate Controversies particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and Rule 7, Section 2 thereof, which reads as follows:

RULE 2COMMENCEMENT OF ACTION AND PLEADINGS

Sec. 4. Complaint. - The complaint shall state or contain:

x x x

(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;

x x x

RULE 8DERIVATIVE SUITS

Sec. 1.Derivative action. - x x x

x x x

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires.

x x x

RULE 7INSPECTION OF CORPORATE BOOKS AND RECORDS

Sec. 2. Complaint - In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state the

following:

(1) The case is set (sic) for the enforcement of plaintiff's right of inspection of corporate orders or records and/or to be furnished with financial statements under Section 74 and 75 of the Corporation Code of the Philippines;

(2) A demand for inspection and copying of books [and/or] to be furnished with financial statements made by the plaintiffs upon defendant;

(3) The refusal of the defendant to grant the demands of the plaintiff and the reasons given for such refusal, if any; andcralawlibrary

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof.

x x x

A perusal of the extant record shows that [herein respondents] have not complied with the above quoted provisions. [Respondents] should be mindful that in filing their complaint which, as admitted by them, is a derivative suit, should have first exhausted all available remedies under its (sic) Articles of Incorporation, or its by-laws, or any laws or rules governing the corporation. The contention of [respondent Joseph] that he had indeed made several talks to (sic) his brother [herein petitioner Anthony] to settle their differences is not tantamount to exhaustion of remedies. What the law requires is to bring the grievance to the Board of Directors or Stockholders for the latter to take the opportunity to settle whatever problem in its regular meeting or special meeting called for that purpose which [respondents] failed to do. x x x The requirements laid down by the Interim Rules of Procedure for Intra-Corporate Controversies are mandatory which cannot be dispensed with by any stockholder of a corporation before filing a derivative suit.28 (Emphasis ours.)

The Court of Appeals likewise sustained the refusal by the RTC to consider respondent Joseph's Supplemental Affidavit and other additional evidence, which respondents belatedly submitted with their Memorandum to the said trial court. The appellate court ratiocinated that:

With regard to the claim of [herein respondents] that the supplemental affidavit of [respondent] Joseph and its annexes appended to their memorandum should have been taken into consideration by the Court a quo to support the reliefs prayed [for] in their complaint. (sic) This Court rules that said supplemental affidavit and its annexes is (sic) inadmissible.

A second hard look of (sic) the extant records show that during the pre-trial conference conducted on August 26, 2004, the parties through their respective counsels had come up with an agreement that the lower court would render judgment based on the pleadings and evidence submitted. This agreement is in accordance with Rule 4, Sec. 4 of the Interim Rules of Procedure for Intra-Corporate Controversies which explicitly states:

SECTION. 4. Judgment before pre-trial. - If, after submission of the pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda.

x x x

Clearly, the supplemental affidavit and its appended documents which were submitted only upon the filing of the memorandum for the [respondents] were not submitted in the pre-trial briefs for the stipulation of the parties during the pre-trial, hence, it cannot be accepted pursuant to Rule 2, Sec. 8 of the same rules which reads as follows:

SEC. 8.Affidavits, documentary and other evidence. - Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading; Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases:

103(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor;

(2) If the failure to submit the evidence is for meritorious and compelling reasons; and

(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence.

There is no showing in the case at bench that the supplemental affidavit and its annexes falls (sic) within one of the exceptions of the above quoted proviso, hence, inadmissible.

It must be noted that in the case at bench, like any other civil cases, "the party making an allegation in a civil case has the burden of proving it by preponderance of evidence." Differently stated, upon the plaintiff in [a] civil case, the burden of proof never parts. That is, appellants must adduce evidence that has greater weight or is more convincing that (sic) which is offered to oppose it. In the case at bar, no one should be blamed for the dismissal of the complaint but the [respondents] themselves for their lackadaisical attitude in setting forth and appending their defences belatedly. To admit them would be a denial of due process for the opposite party which this Court cannot allow.29

Ultimately, the Court of Appeals decreed:

WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the assailed Decision of the Regional Trial Court (RTC), 7th Judicial Region, Branch II, Cebu City, dated November 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in toto. Cost against the [herein respondents].30

Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion for Reconsideration and Motion to Set for Oral Arguments the Motion for Reconsideration,31invoking the following grounds:

(1) The [herein respondents] have sufficiently exhausted all remedies before filing the present action; and

(2) [The] Honorable Court erred in holding that the supplemental affidavit and its annexes is (sic) inadmissible because the rules and the lower court expressly allowed the submission of the same in its order dated August 26, 2004 x x x.32

In a Resolution33 dated 8 March 2006, the Court of Appeals granted respondents' Motion to Set for Oral Arguments the Motion for Reconsideration.

On 4 April 2006, the Court of Appeals issued a Resolution34 setting forth the events that transpired during the oral arguments, which took place on 30 March 2006. Counsels for the parties manifested before the appellate court that they were submitting respondents' Motion for Reconsideration for resolution. Justice Magpale, however, still called on the parties to talk about the possible settlement of the case considering their familial relationship. Independent of the resolution of respondents' Motion for Reconsideration, the parties were agreeable to pursue a settlement for the dissolution of the corporation, which they had actually already started.

In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the parties to submit, within 10 days from notice, their intended amicable settlement, since the same would undeniably affect the resolution of respondents' pending Motion for Reconsideration. If the said period should lapse without the parties submitting an amicable settlement, then they were directed by the appellate court to file within 10 days thereafter their position papers instead.

On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper,36 stating that the parties did not reach an amicable settlement. Respondents informed the appellate court that prior to the filing with the Securities and Exchange Commission (SEC) of a petition for dissolution of Winchester, Inc., the parties already divided the stocks in trade and the real assets of the corporation among themselves. Respondents posited, though, that the afore-mentioned distribution of the assets of Winchester, Inc.

among the parties was null and void, as it violated the last paragraph of Section 122 of the Corporation Code, which provides that, "[e]xcept by a decrease of capital stock and as otherwise allowed by the Corporation Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities." At the same time, however, respondents brought to the attention of the Court of Appeals that the parties did eventually file with the SEC a petition for dissolution of Winchester, Inc., which the SEC approved.37

Respondents no longer discussed in their Position Paper the grounds they previously invoked in their Motion for Reconsideration of the Court of Appeals Decision dated 15 February 2006, affirming in toto the RTC Decision dated 10 November 2004. They instead argued that the RTC Decision in question was null and void as it did not clearly state the facts and the law on which it was based. Respondents sought the remand of the case to the RTC for further proceedings on their derivative suit and completion of the dissolution of Winchester, Inc., including the legalization of the prior partial distribution among the parties of the assets of said corporation.

Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused respondents of attempting to incorporate extraneous matters into the latter's Motion for Reconsideration. Petitioners pointed out that the issue before the Court of Appeals was not the dissolution and division of assets of Winchester, Inc., thus, a remand of the case to the RTC was not necessary.

On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting respondents' Motion for Reconsideration. The Court of Appeals reasoned in this wise:

After a second look and appreciation of the facts of the case, vis - à-vis the issues raised by the [herein respondents'] motion for reconsideration and in view of the formal dissolution of the corporation which leaves unresolved up to the present the settlement of the properties and assets which are now in danger of dissipation due to the unending litigation, this Court finds the need to remand the instant case to the lower court (commercial court) as the proper forum for the adjudication, disposition, conveyance and distribution of said properties and assets between and amongst its stockholders as final settlement pursuant to Sec. 122 of the Corporation Code after payment of all its debts and liabilities as provided for under the same proviso. This is in accord with the pronouncement of the Supreme Court in the case of Clemente et. al. v. Court of Appeals, et. al. where the high court ruled and which WE quote, viz:

"the corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity x x x nor those of its owners and creditors. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustees) xxx may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representation with the Securities and Exchange Commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns."

In the absence of a trustee or board of director in the case at bar for purposes above mentioned, the lower court under Republic Act No. [8799] (otherwise known as the Securities and Exchange Commission) as implemented by A.M. No. 00-8-10-SC (Transfer of Cases from the Securities and Exchange Commission to the Regional Trial Courts) which took effect on October 1, 2001, is the proper forum for working out the final settlement of the corporate concern.39

Hence, the Court of Appeals ruled:

WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The order dated February 15,

1042006 is hereby SET ASIDE and the instant case is REMANDED to the lower court to take the necessary proceedings in resolving with deliberate dispatch any and all corporate concerns towards final settlement.40

Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution, but it was denied by the Court of Appeals in its other assailed Resolution dated 19 April 2007.

In the Petition at bar, petitioners raise the following issues:

I.

WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.]

II.

WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT JURISDICTION[.]

III.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN REMANDING THIS CASE TO THE LOWER COURT FOR THE REASON CITED IN THE ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS FOR THE [RESPONDENTS'] MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE] REASON CITED WAS A NON-ISSUE IN THE CASE.

IV.

WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT VIOLATES THE SUMMARY PROCEDURE FOR INTRA-CORPORATE CASES.42

The crux of petitioners' contention is that the Court of Appeals committed grievous error in reconsidering its Decision dated 15 February 2006 on the basis of extraneous matters, which had not been previously raised in respondents' Complaint before the RTC, or in their Petition for Review and Motion for Reconsideration before the appellate court; i.e., the adjudication, disposition, conveyance, and distribution of the properties and assets of Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of the parties. The fact that the parties were able to agree before the Court of Appeals to submit for resolution respondents' Motion for Reconsideration of the 15 February 2006 Decision of the same court, independently of any intended settlement between the parties as regards the dissolution of the corporation and distribution of its assets, only proves the distinction and independence of these matters from one another. Petitioners also contend that the assailed Resolution dated 18 July 2006 of the Court of Appeals, granting respondents' Motion for Reconsideration, failed to clearly and distinctly state the facts and the law on which it was based. Remanding the case to the RTC, petitioners maintain, will violate the very essence of the summary nature of the Interim Rules of Procedure Governing Intra-Corporate Controversies, as this will just entail delay, protract litigation, and revert the case to square one.

The Court finds the instant Petition meritorious.

To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to compel petitioners to account for and reimburse to the said corporation the corporate assets and funds which the latter allegedly misappropriated for their personal benefit. During the pendency of the proceedings before the court a quo, the parties were able to reach an amicable settlement wherein they agreed to divide the assets of Winchester, Inc. among themselves. This amicable settlement was already partially implemented by the parties, when respondents repudiated the same, for which reason the RTC proceeded with the case on its merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents' Complaint for failure to comply with essential pre-requisites before they could avail themselves of the remedies under the Interim Rules of Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of respondents' allegations in said Complaint after consideration of the pleadings and evidence on record.

In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings of the RTC that respondents did not abide by the requirements for a derivative suit, nor were they able to prove their case by a preponderance of evidence. Respondents filed a Motion for Reconsideration of said judgment of the appellate court, insisting that they were able to meet all the conditions for filing a derivative suit. Pending resolution of respondents' Motion for Reconsideration, the Court of Appeals urged the parties to again strive to reach an amicable settlement of their dispute, but the parties were unable to do so. The parties were not able to submit to the appellate court, within the given period, any amicable settlement; and filed, instead, their Position Papers. This effectively meant that the parties opted to submit respondents' Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, and petitioners' opposition to the same, for resolution by the appellate court on the merits.

It was at this point that the case took an unexpected turn.

In accordance with respondents' allegation in their Position Paper that the parties subsequently filed with the SEC, and the SEC already approved, a petition for dissolution of Winchester, Inc., the Court of Appeals remanded the case to the RTC so that all the corporate concerns between the parties regarding Winchester, Inc. could be resolved towards final settlement.

In one stroke, with the use of sweeping language, which utterly lacked support, the Court of Appeals converted the derivative suit between the parties into liquidation proceedings.

The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation.43 By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.

In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is specifically governed by Section 122 of the Corporation Code, which reads:

SEC. 122.Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest.

Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.

105Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.44 More particularly, it entails the following:

Winding up the affairs of the corporation means the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if any among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests. The manner of liquidation or winding up may be provided for in the corporate by-laws and this would prevail unless it is inconsistent with law.45

It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to whom all corporate assets are conveyed for liquidation; or by a receiver appointed by the SEC upon its decree dissolving the corporation.46 Ï

Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are neither part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc.

While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents themselves repudiated said amicable settlement before the RTC, even after the same had been partially implemented; and moved that their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties before the Court of Appeals were unsuccessful.

Moreover, the decree of the Court of Appeals to remand the case to the RTC for the "final settlement of corporate concerns" was solely grounded on respondents' allegation in its Position Paper that the parties had already filed before the SEC, and the SEC approved, the petition to dissolve Winchester, Inc. The Court notes, however, that there is absolute lack of evidence on record to prove said allegation. Respondents failed to submit copies of such petition for dissolution of Winchester, Inc. and the SEC Certification approving the same. It is a basic rule in evidence that each party must prove his affirmative allegation. Since it was respondents who alleged the voluntary dissolution of Winchester, Inc., respondents must, therefore, prove it.47This respondents failed to do.

Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester, Inc. and the same was approved by the SEC, the Court of Appeals was still without jurisdiction to order the final settlement by the RTC of the remaining corporate concerns. It must be remembered that the Complaint filed by respondents before the RTC essentially prayed for the accounting and reimbursement by petitioners of the corporate funds and assets which they purportedly misappropriated for their personal use; surrender by the petitioners of the corporate books for the inspection of respondents; and payment by petitioners to respondents of damages. There was nothing in respondents' Complaint which sought the dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution of Winchester, Inc. could not have resulted in the conversion of respondents' derivative suit to a proceeding for the liquidation of said corporation, but only in the dismissal of the derivative suit based on either compromise agreement or mootness of the issues.

Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of Appeals already went beyond the issues raised in respondents' Motion for Reconsideration. Instead of focusing on whether it erred in affirming, in its 15 February 2006 Decision, the dismissal by the RTC of respondents' Complaint due to respondents' failure to comply with the requirements for a derivative suit and submit evidence to support their allegations, the Court of Appeals unduly concentrated on respondents' unsubstantiated

allegation that Winchester, Inc. was already dissolved and speciously ordered the remand of the case to the RTC for proceedings so vitally different from that originally instituted by respondents.

Despite the foregoing, the Court still deems it appropriate to already look into the merits of respondents' Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, for the sake of finally putting an end to the case at bar.

In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently exhausted all remedies before filing the derivative suit; and (2) respondent Joseph's Supplemental Affidavit and its annexes should have been taken into consideration, since the submission thereof was allowed by the rules of procedure, as well as by the RTC in its Order dated 26 August 2004.

As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a derivative suit, the Court subscribes to the ruling to the contrary of the Court of Appeals in its Decision dated 16 February 2006.ςηαñrοblεš  Î½Î¹r†υαl  lαω  lιbrαrÿ

The Court has recognized that a stockholder's right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection. The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution.48

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following requirements which a stockholder must comply with in filing a derivative suit:

Sec. 1.Derivative action. - A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

A perusal of respondents' Complaint before the RTC would reveal that the same did not allege with particularity that respondents exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing Winchester, Inc. to obtain the relief they desire.

Respondents assert that their compliance with said requirement was contained in respondent Joseph's Affidavit, which was attached to respondents' Complaint. Respondent Joseph averred in his Affidavit that he tried for a number of times to talk to petitioner Anthony to settle their differences, but the latter would not listen. Respondents additionally claimed that taking further remedies within the corporation would have been idle ceremony, considering that Winchester, Inc. was a family corporation and it was impossible to expect petitioners to take action against themselves who were the ones accused of wrongdoing.

The Court is not persuaded.

106The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do not leave room for statutory construction. The second paragraph thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; and to allege such fact with particularity in the complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.

The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony regarding their dispute hardly constitutes "all reasonable efforts to exhaust all remedies available." Respondents did not refer to or mention at all any other remedy under the articles of incorporation or by-laws of Winchester, Inc., available for dispute resolution among stockholders, which respondents unsuccessfully availed themselves of. And the Court is not prepared to conclude that the articles of incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such remedies.

Neither can this Court accept the reasons proffered by respondents to excuse themselves from complying with the second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies. They are flimsy and insufficient, compared to the seriousness of respondents' accusations of fraud, misappropriation, and falsification of corporate records against the petitioners. The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules supporting the distinction between, and the difference in the requirements for, family corporations vis - à-vis other types of corporations, in the institution by a stockholder of a derivative suit.

The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the respondents' Complaint failed to allege, explicitly or otherwise, the fact that there were no appraisal rights available for the acts of petitioners complained of, as well as a categorical statement that the suit was not a nuisance or a harassment suit.

As to respondents' second ground in their Motion for Reconsideration, the Court agrees with the ruling of the Court of Appeals, in its 15 February 2006 Decision, that respondent Joseph's Supplemental Affidavit and additional evidence were inadmissible since they were only appended by respondents to their Memorandum before the RTC. Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies is crystal clear that:

Sec. 8.Affidavits, documentary and other evidence. - Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading, Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases:

(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor;

(2) If the failure to submit the evidence is for meritorious and compelling reasons; andcralawlibrary

(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence. (Emphasis ours.)

According to the afore-quoted provision, the parties should attach the affidavits of witnesses and other documentary evidence to the appropriate pleading, which generally should mean the complaint for the plaintiff and the answer for the respondent. Affidavits and documentary evidence not so submitted must already be attached to the respective pre-trial briefs of the parties. That the parties should have already identified and submitted to the trial court the affidavits of their witnesses and documentary evidence by the time of pre-trial is strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies require that the following matters should already be set forth in the parties' pre-trial briefs:

Section 1. Pre-trial conference, mandatory nature. - Within five (5) days after the period for availment of, and compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the court shall issue and serve an order immediately setting the case for pre-trial conference, and directing the parties to submit their respective pre-trial briefs. The parties shall file with the court and furnish each other copies of their respective pre-trial brief in such manner as to ensure its receipt by the court and the other party at least five (5) days before the date set for the pre-trial.

The parties shall set forth in their pre-trial briefs, among other matters, the following:

x x x

(4) Documents not specifically denied under oath by either or both parties;

x x x

(7) Names of witnesses to be presented and the summary of their testimony as contained in their affidavits supporting their positions on each of the issues;

(8) All other pieces of evidence, whether documentary or otherwise and their respective purposes.

Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies,49 it is the duty of the court to ensure during the pre-trial conference that the parties consider in detail, among other things, objections to the admissibility of testimonial, documentary, and other evidence, as well as objections to the form or substance of any affidavit, or part thereof.

Obviously, affidavits of witnesses and other documentary evidence are required to be attached to a party's pre-trial brief, at the very last instance, so that the opposite party is given the opportunity to object to the form and substance, or the admissibility thereof. This is, of course, to prevent unfair surprises and/or to avoid the granting of any undue advantage to the other party to the case.

True, the parties in the present case agreed to submit the case for judgment by the RTC, even before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:

Sec. 4.Judgment before pre-trial. - If after submission of the pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda.

Even then, the afore-quoted provision still requires, before the court makes a determination that it can render judgment before pre-trial, that the parties had submitted their pre-trial briefs and the court took into consideration the pleadings, affidavits and other evidence submitted by the parties. Hence, cases wherein the court can render judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that affidavits of witnesses and documentary evidence should be submitted, at the latest, with the parties' pre-trial briefs. Taking further into account that under Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies parties are required to file their memoranda simultaneously, the same would mean that a party would no longer have any opportunity to dispute or rebut any new

107affidavit or evidence attached by the other party to its memorandum. To violate the above-quoted provision would, thus, irrefragably run afoul the former party's constitutional right to due process.

In the instant case, therefore, respondent Joseph's Supplemental Affidavit and the additional documentary evidence, appended by respondents only to their Memorandum submitted to the RTC, were correctly adjudged as inadmissible by the Court of Appeals in its 15 February 2006 Decision for having been belatedly submitted. Respondents neither alleged nor proved that the documents in question fall under any of the three exceptions to the requirement that affidavits and documentary evidence should be attached to the appropriate pleading or pre-trial brief of the party, which is particularly recognized under Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies.

WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is hereby GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April 2007 of the Court of Appeals in CA-G.R. SP No. 00185 are hereby REVERSED AND SET ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is hereby AFFIRMED. No costs.

SO ORDERED.

SECOND DIVISION

[G.R. NO. 143088 - January 24, 2006]

PHILIPPINE AIRLINES, INC., MANOLO AQUINO, JORGE MA. CUI, JR. and PATRICIA CHIONG, Petitioners, v. FLIGHT

ATTENDANTS AND STEWARDS ASSOCIATION OF THE PHILIPPINES (FASAP) and LEONARDO

BHAGWANI, Respondents.

D E C I S I O N

This Petition for Review on Certiorari under Rule 45 of the Rules of Court presents a recurring question regarding the Court's requirement of a certification of non-forum shopping.

Petitioners Philippine Airlines, Inc. (PAL) and Manolo Aquino, Jorge Ma. Cui, Jr. and Patricia Chiong, in their capacity as Executive Vice-President Administration and Services, Manager International Cabin Crew and Assistant Vice-President Cabin Services, respectively, are before the Court seeking the reversal of the resolution of the Court of Appeals in C.A. G.R. No. SP-56850, dated January 31, 2000, dismissing their appeal and the resolution of May 11, 2000, denying the motion for reconsideration.

The facts on the conflict between PAL and respondents Flight Attendants and Stewards Association of the Philippines (FASAP) and Leonardo Bhagwani are not necessary for the Court's resolution of the petition. It is enough to state that on May 14, 1997 FASAP and Leonardo Bhagwani filed a complaint for unfair labor practice, illegal suspension and illegal dismissal against petitioners before the Labor Arbiter of the National Labor Relations Commission (NLRC). The Labor Arbiter rendered a decision holding that PAL committed unfair labor practice and illegal dismissal of Bhagwani and, consequently, ordered the payment of damages. The NLRC later modified the decision by setting aside the finding that PAL was guilty of unfair labor practice, but affirming the rest of the decision.

What is relevant to the case is the subsequent appeal to the Court of Appeals. When petitioners filed a petition for certiorari against the decision with the Court of Appeals, it was accompanied by a Certification of Non-Forum Shopping executed by Cesar R. Lamberte and Susan Del Carmen, Vice-President Human Resources and Assistant Vice-President Cabin Services of PAL, respectively, who are not parties to the case. The certification, however, was without proof that the two affiants had authority to sign in behalf of petitioners. As a result, the Court of Appeals dismissed the case for failure to show the authority of affiants to sign for PAL and for failure of the other petitioners to join in the execution of the certification. A motion for reconsideration was filed with a Secretary's Certificate attached evidencing that affiants Cesar R. Lamberte and Susan Del Carmen have been authorized by Board Resolution No. 00-02-03 to initiate and/or cause to be filed on behalf of PAL petitions and pleadings in all labor-

related cases. As to the other petitioners, it was argued that they are mere nominal parties so that their failure to execute the certification does not justify dismissal of the petition. Despite this submission, the Court of Appeals denied the motion for reconsideration. Hence, the case is now before this Court.

The petition is without merit.

The necessity for a certification of non-forum shopping in filing petitions for certiorari is found in Rule 65, Section 1, in relation to Rule 46, Section 3 of the Rules of Court. These provisions require it to be executed by the corresponding petitioner or petitioners. As no distinction is made as to which party must execute the certificate, this requirement is made to apply to both natural and juridical entities.1 When the petitioner is a corporation, the certification should be executed by a natural person. Furthermore, not just any person can be called upon to execute the certification, although such a person may have personal knowledge of the facts to be attested to.2

This Court has explained that a corporation has no power except those conferred on it by the Corporation Code and those that are implied or incidental to its existence. The exercise of these powers is done through the board of directors and/or duly authorized officers and agents. Given these corporate features, the power of a corporation to sue in any court is generally lodged with the board of directors. The board, in turn, can delegate the physical acts needed to sue, which may be performed only by natural persons, to its attorneys-in-fact by a board resolution, if not already authorized under the corporate by-laws.3

Thus, only individuals vested with authority by a valid board resolution may sign the certificate of non-forum shopping in behalf of a corporation. In addition, the Court has required that proof of said authority must be attached. Failure to provide a certificate of non-forum shopping is sufficient ground to dismiss the petition. Likewise, the petition is subject to dismissal if a certification was submitted unaccompanied by proof of the signatory's authority.4

The petition filed with the Court of Appeals had a certification of non-forum shopping executed by Cesar R. Lamberte and Susan Del Carmen. The certification, however, was without proof of authority to sign. When a motion for reconsideration was filed, a Secretary's Certificate was submitted as proof that the board of directors of PAL had authorized the two to execute the certificate. Nonetheless, the Court finds that this belated submission is an insufficient compliance with the certification requirement.

This Court has allowed the reinstatement of petitions that were dismissed due to lack of proof of authority to sign the certification upon its subsequent submission, saying that this amounted to

substantial compliance. The rationale was that the signatories, at the time of execution of the certification, were in fact authorized to sign, although proof of their authority was lacking.5

This is not what happened in this case. A perusal of the Secretary's Certificate submitted reveals that the authority to cause the filing of the petition was granted on February 15, 2000.6The petition, on the other hand, was filed on January 24, 2000 and was dismissed by the Court of Appeals on January 31, 2000. This means that at the time the certification was signed, Cesar R. Lamberte and Susan Del Carmen were not duly authorized by the Board of Directors of PAL and, consequently, their signing and attestations were not in representation of PAL. This effectively translates to a petition that was filed without a certification at all as none was issued by PAL, the principal party to the case.

The required certification of non-forum shopping must be valid at the time of filing of the petition. An invalid certificate cannot be remedied by the subsequent submission of a Secretary's Certificate that vests authority only after the petition had been filed.

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.

108FIRST DIVISION

[G.R. NO. 156905 : September 5, 2007]

ATHENA COMPUTERS, INC. and JOSELITO R. JIMENEZ, Petitioners, v. WESNU A. REYES, Respondent.

D E C I S I O N

For our resolution is the instant Petition for Review on Certiorari seeking the reversal of the Resolutions dated September 5, 20021 and January 13, 20032 of the Court of Appeals in CA-G.R. SP No. 72284.

On September 1, 1996, Athena Computers, Inc. (Athena), petitioner, hired Wesnu A. Reyes, respondent, as a computer technician. In less than a year, he was promoted as manager of Athena's engineering and technical department. Under his direct supervision were computer technicians. He had full access to all Athena's computer equipment and those entrusted to him by it's clients.

In January 1998, Athena conducted an inventory of its computer equipment. Allegedly, respondent committed certain anomalies and admitted misappropriating payments for several computers and the burning of records to conceal his misappropriation. A computer monitor entrusted to respondent for repair as well as parts of LX 300 printers were missing.

Athena's board of directors terminated respondent's services. However, Joselito R. Jimenez, also a petitioner, convinced the board to defer its decision to give respondent another chance to rectify his inefficiencies. It is at this point that respondent indicated his desire to resign on the ground that the pressures of his work have affected his health and that he intends to seek employment abroad. Thereupon, he and Jimenez agreed to discuss the phase-out and turn-over procedure of respondent's accountabilities on July 28, 1998.

The phase-out and turn-over did not materialize since respondent did not report for work anymore despite numerous pager messages sent to him by Athena. On August 1, 1998, Jimenez issued a memorandum placing respondent under preventive suspension for fifteen (15) days and directing him to submit a written explanation on his absence without leave. On August 16, 1998, Jimenez issued another memorandum terminating respondent's employment.

For his part, respondent claimed that he did an excellent job while he was employed in Athena. In fact, three (3) months after his probationary period of employment, he was given a salary increase. Jimenez commended him for his performance and attitude. On July 24, 1998, he verbally asked permission from Jimenez to go on leave starting July 29, 1998 in order to apply for a job abroad. But on July 31, 1998, Jimenez announced to all Athena's internet subscribers that respondent was placed under preventive suspension due to his absence without leave and warned the public to refrain from making any transaction with him since it will not be honored by Athena.

On August 5, 1998, respondent filed with the Labor Arbiter a complaint for illegal suspension, harassment, non-payment of salaries and damages, backwages, and attorney's fees. Later, he filed an amended complaint3 to include the charge of illegal dismissal.

On September 30, 1999, the Labor Arbiter promulgated a Decision dismissing respondent's complaint, thus:

WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered DISMISSING the case for lack of merit but ordering the respondent to pay the complainant his unpaid salary for the period from July 15 to 27, 1998.

SO ORDERED.4

On appeal, the National Labor Relations Commission (NLRC) promulgated its Decision dated May 10, 2002 reversing the Labor Arbiter's judgment and declaring that the preventive suspension and dismissal from employment of respondent are illegal. The dispositive portion of the NLRC Decision reads:

WHEREFORE, premises considered, complainant's appeal is GRANTED. The Labor Arbiter's Decision is REVERSED. It is hereby declared that complainant's preventive suspension

and dismissal from employment are illegal. Respondents are ordered to jointly and severally pay complainant the amount of P292,500.00 as backwages and separation pay, plus ten percent (10%) thereof as attorney's fees. The Labor Arbiter's Decision ordering Respondents to pay complainant his unpaid salary for the period covering July 15 to 27, 1998 is hereby AFFIRMED.

SO ORDERED.5

Both petitioners seasonably filed with the Court of Appeals a petition for certiorari alleging that in reversing the Decision of the Labor Arbiter, the NLRC committed grave abuse of discretion. In a Resolution6 dated September 5, 2002, the appellate court dismissed the petition, thus:

After a careful examination of the instant petition for certiorari, it reveals that the Verification of the petition and Certification of non-forum shopping were executed and signed by Joselito R. Jimenez without authority to act for and in behalf of his co petitioner (Digital Microwave Corp. v. Court of Appeals, 328 SCRA 287) in violation of Sections 4 and 5, Rule 7 of the 1997 Rules of Civil Procedure. Moreover, the copies of pertinent pleadings are not attached to the petition in violations of Section 1, par. 2, Rule 65 Rules of Civil Procedure.

WHEREFORE, the instant petition for certiorari is herby DENIED DUE COURSE AND DISMISSED for being insufficient in form and substance.

SO ORDERED.

Petitioners filed a motion for reconsideration but it was subsequently denied by the appellate court in its Resolution7 dated January 13, 2003.

Hence, the instant petition.

The issue for our resolution is whether the appellate court erred in dismissing the petition due to defective verification and certification on non-forum shopping and for petitioners' failure to attach to the same petition pertinent pleadings as required by Section 1, Rule 65 of the 1997 Rules of Civil Procedure, as amended.

The petition is without merit.

Certiorari, being an extraordinary remedy, the party who seeks to avail of the same must strictly observe the rules laid down by law.8

Section 1, Rule 65 of the same Rules provides:

SECTION 1. Petition for certiorari. - When any tribunal, board or officer exercising judicial or quasi-judicial functions has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and praying that judgment be rendered annulling or modifying the proceedings of such tribunal, board or officer, and granting such incidental reliefs as law and justice may require.

The petition shall be accompanied by a certified true copy of the judgment, order or resolution subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a sworn certification of non-forum shopping as provided in the third paragraph of Section 3, Rule 46.

Section 3, Rule 46, likewise provides:

SECTION 3. Contents and filing of petition; effect of non-compliance with requirements. - The petition shall contain the full names and actual addresses of all the petitioners and respondents, a concise statement of the matters involved, the factual background of the case, and the grounds relied upon for the relief prayed for.

In actions filed under Rule 65, the petition shall further indicate the material dates showing when notice of the judgment or final order or resolution subject thereof was received, when a motion for new trial or reconsideration, if any, was filed and when notice of the denial thereof was received.

109It shall be filed in seven (7) clearly legible copies together with proof of service thereof on the respondent with the original copy intended for the court indicated as such by the petitioner, and shall be accompanied by a clearly legible duplicate original or certified true copy of the judgment, order, resolution, or ruling subject thereof, such material portions of the record as are referred to therein, and other documents relevant or pertinent thereto. The certification shall be accomplished by the proper clerk of court or his duly authorized representative, or by the proper officer of the court, tribunal, agency or office involved or by his duly authorized representative. The other requisite number of copies of the petition shall be accompanied by clearly legible plain copies of all documents attached to the original.

The petitioner shall also submit together with the petition a sworn certification that he has not theretofore commenced any other action involving the same issues in the Supreme Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he must state the status of the same; and if he should thereafter learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within five (5) days therefrom.

The petitioner shall pay the corresponding docket and other lawful fees to the clerk of court and deposit the amount of P500.00 for costs at the time of the filing of the petition.

The failure of the petitioner to comply with any of the foregoing requirements shall be sufficient ground for the dismissal of the petition.

The acceptance of a Petition for Certiorari as well as the grant of due course thereto is, in general, addressed to the sound discretion of the court. Although the court has absolute discretion to reject and dismiss a petition for certiorari, it does so only (1) when the petition fails to demonstrate grave abuse of discretion by any court, agency, or branch of the government; or (2) when there are procedural errors, like violations of the Rules of Court or Supreme Court Circulars.9 Clearly, petitioners in their petition before the Court of Appeals committed procedural errors.

The verification of the petition and certification on non-forum shopping before the Court of Appeals were signed only by Jimenez. There is no showing that he was authorized to sign the same by Athena, his co-petitioner.

Section 4, Rule 7 of the Rules states that a pleading is verified by an affidavit that the affiant has read the pleading and that the allegations therein are true and correct of his knowledge and belief. Consequently, the verification should have been signed not only by Jimenez but also by Athena's duly authorized representative.

In Docena v. Lapesura,10 we ruled that the certificate of non-forum shopping should be signed by all the petitioners or plaintiffs in a case, and that the signing by only one of them is insufficient. The attestation on non-forum shopping requires personal knowledge by the party executing the same,11 and the lone signing petitioner cannot be presumed to have personal knowledge of the filing or non-filing by his co-petitioners of any action or claim the same as similar to the current petition.

The certification against forum shopping in CA-G.R. SP No. 72284 is fatally defective, not having been duly signed by both petitioners and thus warrants the dismissal of the petition forcertiorari . We have consistently held that the certification against forum shopping must be signed by the principal parties.12 With respect to a corporation, the certification against forum shopping may be signed for and on its behalf, by a specifically authorized lawyer who has personal knowledge of the facts required to be disclosed in such document.13

While the Rules of Court may be relaxed for persuasive and weighty reasons to relieve a litigant from an injustice commensurate with his failure to comply with the prescribed procedures, nevertheless they must be faithfully followed.14 In the instant case, petitioners have not shown any reason which justifies relaxation of the Rules. We have held that procedural rules are not to be belittled or dismissed simply because their non-observance may have prejudiced a party's substantive rights. Like all rules, they are required to be followed except

for the most persuasive of reasons when they may be relaxed.15 Not one of these persuasive reasons is present here.

In fine, we hold that the Court of Appeals did not err in dismissing the Petition for Certiorariin view of the procedural lapses committed by petitioners.

WHEREFORE, we DENY the petition. The assailed twin Resolutions of the Court of Appeals in CA-G.R. SP No. 72284 are AFFIRMED. Costs against petitioners.

SO ORDERED.

SECOND DIVISION

[G.R. NO. 173834 : April 24, 2009]

ISABELITA CUNANAN, CAROLYN CUNANAN and CARMENCITA F. NEMOTO, Petitioners, v. JUMPING JAP TRADING CORPORATION, represented by REUBEN M.

PROTACIO, Respondent.

D E C I S I O N

This is a Petition for Review on Certiorari 1 under Rule 45 of the 7 April 2006 decision of the Court of Appeals2 and the 28 July 2006 resolution3 of the same court denying petitioners' motion for reconsideration.

The pertinent facts as culled from the records follow.

Petitioner Carmencita Fradejas Nemoto (Carmencita) is the registered owner of a 618 square meter-lot, with the house and improvements thereon, located at No. 167 Pili Drive, Ayala Alabang Village, Muntinlupa City and covered by Transfer Certificate of Title (TCT) No. 2132464 . She acquired the property by virtue of a deed of sale executed in her favor by Metropolitan Land Corporation (MLC).

On 22 March 2001, respondent Jumping Jap Trading Corporation (respondent), represented by its President, Rueben Protacio (Protacio), filed Civil Case No. 01-098 with the Regional Trial Court (RTC) of Muntinlupa City seeking the annulment of both the deed of sale and TCT No. 213246, as well as the reconveyance of the property. Respondent anchored the complaint on its alleged superior right over the property by virtue of the execution of a previous deed of conditional sale by MLC in its favor and its having paid P18,300,000.00 by itself using corporate funds and P5,000,000.00 by Protacio, or a total of P23,300,000.00 which was more than the P12,600,000.00 that the spouses Nemoto had paid on the purchase price ofP35,900,000.00. It was allegedly agreed that Nobuyasu Nemoto (Nobuyasu), who is one of respondent's stockholders and also a friend of Protacio, would pay the remaining installment ofP12,600,000.00 and reimburse the amount already paid by respondent and Protacio while the title, to be placed in the name of the minor daughter of spouses Nemoto, Sakura Nemoto, would be in respondent's possession. However, MLC did not deliver the title to the property to respondent despite repeated oral demands. Respondent later discovered that a deed of absolute sale was executed between MLC and Carmencita with a stated consideration of P12,500,000.00 and that TCT No. 213246 was issued in the name of Carmencita.5

Despite several demands and assurances in a span of more than three years, the spouses Nemoto still failed to pay the purchase price advanced by respondent and Protacio amounting toP23,400,000.00.

On 19 April 2001, respondent caused the annotation of a notice of lis pendens involving Civil Case No. 01-098 on TCT No. 213246. Despite the notice of lis pendens, Carmencita executed a deed of real estate mortgage6 dated 20 July 2001 over the property in favor of petitioners Isabelita and Carolyn Cunanan (the Cunanans) as security for the payment of a P10 million loan plus interest, as well as all subsequent loans and obligations. She also executed a promissory note dated 22 July 2001,7 undertaking to pay on or before 22 December 2001 the P10 million loan with interest of 3% per month.

In an Order dated 18 July 2001, the RTC dismissed the case and ordered the cancellation of the notice of lis pendens.8 Subsequently, on 23 July 2001, the RTC issued an

110amended order9specifically ordering the Register of Deeds of Muntinlupa City to immediately cancel the notice of lis pendens on TCT No. 213246.10 Within the

same day, the Register of Deeds cancelled the notice of lis pendens and, immediately thereafter, annotated the deed of real estate mortgage.11

The RTC subsequently granted respondent's motion for reconsideration of the amended order of dismissal in its order dated 24 October 2001.12 Thereafter, the Register of Deeds of Muntinlupa City re-annotated the notice of lis pendens on 12 December 2001.13

Ultimately, the RTC decided Civil Case No. 01-098 in favor of respondent in a Decision14 dated 26 February 2002.

In the meantime, the Cunanans effected the extra-judicial foreclosure of the mortgage on the property on 17 July 2002.15 This prompted respondent to file on 12 August 2002 before the RTC of Muntinlupa City Civil Case No. 02-18916 seeking the nullification of mortgage deed and the extra-judicial foreclosure proceedings, as well as the cancellation of the mortgage deed annotation on TCT No. 213246. In the complaint in that case, from which the present case stemmed, respondent as plaintiff, averred that the mortgage deed was executed fraudulently and deceitfully to deprive respondent of its right over the property and that the Cunanans are mortgagees in bad faith since Civil Case No. 01-098 was still pending when the deed of real estate mortgage was executed in their favor.17

On 16 April 2004, the RTC rendered its decision18 in favor of respondent. It found that the execution of the real estate mortgage was done in bad faith for Civil Case No. 01-098 was still pending as the dismissal thereof was not yet final and executory and the notice of lis pendens was not yet cancelled by the Register of Deeds. In fact, a timely motion for reconsideration of the order dismissing the complaint and canceling the notice of lis pendens was filed and granted.

On appeal, the Court of Appeals affirmed the decision of the trial court per its decision19 of 7 April 2006. It found that the notice of lis pendens was subsisting at the time the contract of real estate mortgage was executed between the Cunanans and Carmencita. And even when the notice of lis pendens was cancelled on 23 July 2001, the Cunanans were aware that the proceedings in Civil Case No. 01-098 was not yet terminated, as in fact, the notice was subsequently re-annotated after the RTC had granted respondent's motion for reconsideration. Moreover, the Court of Appeals held that at the time of the extra-judicial foreclosure sale of the property the notice of lis pendens had been reinstated by the RTC and this tainted the Cunanans' status as purchasers at the foreclosure sale with bad faith.

Now, petitioners are before this Court.

Prefatorily, the Court agrees with the appellate court in affirming the trial court ruling that Protacio is authorized to institute the complaint against the petitioners. The certification issued by the majority of the directors clearly indicates that he is authorized to demand and collect the corporation's claims over the Ayala Alabang property and the institution of actions in court.20 The authority granted to Protacio is broad enough to enable him to take any legal action necessary to protect respondent's interest in the disputed property. This Court has also held that the power to institute actions necessarily includes the power to execute the verification and certification against forum shopping21 required in initiatory pleadings, such as the complaint in Civil Case No. 02-189.

The sole remaining issue is whether or not the Cunanans are bound by the notice of lis pendens which was ordered cancelled by the RTC.

A notice of lis pendens22 is an announcement to the whole world that a particular real property is in litigation, serving as a warning that one who acquires an interest over said property does so at his own risk, or that he gambles on the result of the litigation over the said property.23 The filing of a notice of lis pendens charges all strangers with a notice of the particular litigation referred to therein and, therefore, any right they may thereafter acquire on the property is subject to the eventuality of the suit.24 Such announcement is founded upon public policy and necessity, the purpose of which is to keep the properties in litigation within the power of the court

until the litigation is terminated and to prevent the defeat of the judgment or decree by subsequent alienation.25

Under Section 77 of Presidential Decree (P.D.) No. 1529,26 a notice of lis pendens shall be deemed cancelled only upon the registration of a certificate of the clerk of court in which the action or proceeding was pending stating the manner of disposal thereof if there was a final judgment in favor of the defendant or the action was disposed of terminating finally all rights of the plaintiff over the property in litigation.

Given the antecedent facts in the present case, the Court should deny the petition.

There is no question that the Register of Deeds cancelled the notice of lis pendens annotated on TCT No. 213246 only on 23 July 2001 while the Cunanans and Carmencita executed the deed of real estate mortgage three days before, or on 20 July 2001. The Cunanans are bound by the notice of lis pendens because on the date they executed the mortgage deed with Carmencita the annotation was still subsisting and had not yet been cancelled. The Order dated 18 July 2001 dismissing the complaint and directing the cancellation of the notice of lis pendens did not improve the situations of the Cunanans simply because said Order was not registered at all and therefore did not preclude the notice of lis pendens from continuing in effect.

Neither did the issuance and registration of the amended Order dated 23 July 2001, although it even commanded the Register of Deeds to cancel the notice of lis pendens apart from containing the same directives as those in the 18 July 2001 Order. The simple reason this time is the fact that the last order was issued after the execution of the mortgage deed. As the mortgage had already been executed and therefore deemed valid and effective between the parties as of the date of its execution, the Cunanans had taken a gamble on the result of the litigation referred to in the notice of lis pendens when they accepted the properties as security.

The result in the present case would still be the same even if the parties executed the mortgage deed after the Register of Deeds had cancelled the notice of lis pendens. It is true that one who deals with property registered under the Torrens system need not go beyond the same, but only has to rely on the face of the title. He is charged with notice only of such burdens and claims as are annotated on the title. However, this principle does not apply when the party has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry or when the purchaser or mortgagee has knowledge of a defect or the lack of title in his vendor or mortgagor or of sufficient facts to induce a reasonably prudent man to inquire into the status of the title of the property in litigation. One who falls within the exception can neither be denominated an innocent purchaser or mortgagee for value nor a purchaser or mortgagee in good faith.27 In the present case, the fact that the orders dismissing the case and directing the cancellation of the notice of lis pendens was not yet final and executory should have impelled the Cunanans to be wary of further developments, as in fact plaintiff filed a motion for reconsideration and the RTC granted the same. In short, the Cunanans' knowledge of the existence of a pending litigation involving the disputed property makes them mortgagees in bad faith. Hence, respondent could still recover the property from the Cunanans.

Petitioners mistakenly rely on the Court's holding in Po Lam v. Court of Appeals.28 The case involves a dispute over two parcels of lands with notice of lis pendens annotated on the titles. The trial court declared the predecessor-in-interest of the petitioner spouses Po Lam as owners of the properties and ordered the cancellation of the notice of lis pendens on both titles. The Register of Deeds was only able to cancel the annotation on one of the titles. During the pendency of the appeal to the Court of Appeals, the two properties were sold to the petitioners. It was only after four years that the petitioners had the notice of lis pendens on the title of the other property cancelled. New certificates of titles were issued to petitioners. In declaring that the spouses Po Lam are not purchasers in bad faith, we ruled, thus:

A possessor in good faith has been defined as "one who is unaware that there exists a flaw which invalidates his acquisition of the thing (See Article 526, Civil Code). Good faith consists in the possessor's belief that the person from whom he received the

111thing was the owner of the same and could convey his title (Piño v. CA, 198 SCRA 434 [1991]). In this case, while petitioners bought Lot No. 2581 from LAHCO while a notice of lis pendens was still annotated thereon, there was also existing a court order canceling the same. Hence, petitioners cannot be considered as being "aware of a flaw which invalidates their acquisition of the thing" since the alleged flaw, the notice of lis pendens, was already being ordered cancelled at the time of the purchase. On this ground alone, petitioners can already be considered buyers in good faith. (Emphasis ours.)

More importantly, however, the notice of lis pendens inscribed on TCT No. 2581 was cancelled on May 20, 1974, pursuant to the order of the trial court in Civil Case No. 2953. Felix Lim did not move for the reinstatement of the cancelled notices of lis pendens. What is the effect of this cancellation? To follow the prior ruling of the Court in the instant case, the cancellation of the notice of lis pendens would have no effect. Regardless of the cancellation of the notice of lis pendens, the Po Lam spouses are still considered as having notice of a possible defect in the title of LAHCO, making them purchasers in bad faith.29 (Emphasis ours.)ςηαñrοblεš  Î½Î¹r†υαl  lαω  lιbrαrÿ

In the Po Lam case, the Register of Deeds only cancelled the notice of lis pendens on one of the titles that were in dispute. It was almost a year passed when the trial court's order was annotated on the title of the other property. The spouses Po Lam purchased both properties at the same time several months after the trial court declared their predecessor-in-interest as owner of the properties and ordered the cancellation of the notice of lis pendens. There was no finding that the spouses Po Lam were aware of any pending litigation over the property for no motion for reconsideration or motion for reinstatement of the notice of lis pendens was filed with the trial court. The Court had no choice but to give effect to the trial court's order and considered the petitioners as buyers in good faith.

In the present case, the mortgage deed was executed even before the Register of Deeds had the chance to cancel the annotated

notice of lis pendens on the title of the disputed property. Moreover, the RTC's orders had not even attained finality when the mortgage deed was executed. The respondent in fact filed on 2 August 2001 a motion for reconsideration of the trial court's order and sought the reinstatement of the cancelled notice of lis pendens. On 24 October 2001, the trial court reconsidered its previous ruling and ordered the reinstatement of the notice of lis pendens.

WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals in CA-G.R. CV No. 82588. Cost against petitioners.

SO ORDERED.

FIRST DIVISION

[G.R. No. 127624. November 18, 2003.]

BPI LEASING CORPORATION, Petitioner, v. THE HONORABLE COURT OF APPEALS, COURT OF TAX

APPEAL AND COMMISSIONER OF INTERNAL REVENUE, Respondents.

D E C I S I O N

The present petition for review on certiorari assails the decision 1 of the Court of Appeals in CA-G.R. SP No. 38223 and its subsequent resolution 2 denying the motion for reconsideration. The assailed decision and resolution affirmed the decision of the Court of Tax Appeals (CTA) which denied petitioner BPI Leasing Corporation’s (BLC) claim for tax refund in CTA Case No. 4252.

The facts are not disputed.

BLC is a corporation engaged in the business of leasing properties. 3 For the calendar year 1986, BLC paid the Commissioner of Internal Revenue (CIR) a total of P1,139,041.49 representing 4% "contractor’s percentage tax" then imposed by Section 205 of the National Internal Revenue

Code (NIRC), based on its gross rentals from equipment leasing for the said year amounting to P27,783,725.42. 4 

On November 10, 1986, the CIR issued Revenue Regulation 19-86. Section 6.2 thereof provided that finance and leasing companies registered under Republic Act 5980 shall be subject to gross receipt tax of 5%-3%-1% on actual income earned. This means that companies registered under Republic Act 5980, such as BLC, are not liable for "contractor’s percentage tax" under Section 205 but are, instead, subject to "gross receipts tax" under Section 260 (now Section 122) of the NIRC. Since BLC had earlier paid the aforementioned "contractor’s percentage tax," it re-computed its tax liabilities under the "gross receipts tax" and arrived at the amount of P361,924.44.

On April 11, 1988, BLC filed a claim for a refund with the CIR for the amount of P777,117.05, representing the difference between the P1,139,041.49 it had paid as "contractor’s percentage tax" and P361,924.44 it should have paid for "gross receipts tax." 5 Four days later, to stop the running of the prescriptive period for refunds, petitioner filed a petition for review with the CTA. 6 

In a decision dated May 13, 1994, 7 the CTA dismissed the petition and denied BLC’s claim of refund. The CTA held that Revenue Regulation 19-86, as amended, may only be applied prospectively such that it only covers all leases written on or after January 1, 1987, as stated under Section 7 of said revenue regulation:

Section 7. Effectivity — These regulations shall take effect on January 1, 1987 and shall be applicable to all leases written on or after the said date.

The CTA ruled that, since BLC’s rental income was all received prior to 1986, it follows that this was derived from lease transactions prior to January 1, 1987, and hence, not covered by the revenue regulation.

A motion for reconsideration of the CTA’s decision was filed, but was denied in a resolution dated July 26, 1995. 8 BLC then appealed the case to the Court of Appeals, which issued the aforementioned assailed decision and resolution. 9 Hence, the present petition.

In seeking to reverse the denial of its claim for tax refund, BLC submits that the Court of Appeals and the CTA erred in not ruling that Revenue Regulation 19-86 may be applied retroactively so as to allow BLC’s claim for a refund of P777,117.05.

Respondents, on the other hand, maintain that the provision on the date of effectivity of Revenue Regulation 19-86 is clear and unequivocal, leaving no room for interpretation on its prospective application. In addition, respondents argue that the petition should be dismissed on the ground that the Verification/Certification of Non-Forum Shopping was signed by the counsel of record and not by BLC, through a duly authorized representative, in violation of Supreme Court Circular 28-91.

In a resolution dated March 29, 2000, 10 the petition was given due course and the Court required the parties to file their respective Memoranda. Upon submission of the Memoranda, the issues in this case were delineated, as follows: 11 

WHETHER THE INSTANT PETITION FOR REVIEW ON CERTIORARI SUBSTANTIALLY COMPLIES WITH SUPREME COURT CIRCULAR 28-91.

WHETHER REVENUE REGULATION 19-86, AS AMENDED, IS LEGISLATIVE OR INTERPRETATIVE IN NATURE.

WHETHER REVENUE REGULATION 19-86, AS AMENDED, IS PROSPECTIVE OR RETROACTIVE IN ITS APPLICATION.

WHETHER PETITIONER, AS FOUND BY THE COURT OF APPEALS, FAILED TO MEET THE QUANTUM OF EVIDENCE REQUIRED IN REFUND CASES.

WHETHER PETITIONER, AS FOUND BY THE COURT OF APPEALS, IS ESTOPPED FROM CLAIMING ITS PRESENT REFUND.chanrob1es virtua1 1aw library

As to the first issue, the Court agrees with respondents’ contention that the petition should be dismissed outright for failure to comply with Supreme Court Circular 28-91, now incorporated as Section 2 of Rule 42 of the Rules of Court. The records plainly show, and this has not been denied by BLC,

112that the certification was executed by counsel who has not been shown to have specific authority to sign the same for BLC.

In BA Savings Bank v. Sia, 12 it was held that the certificate of non-forum shopping may be signed, for and on behalf of a corporation, by a specifically authorized lawyer who has personal knowledge of the facts required to be disclosed in such document. This ruling, however, does not mean that any lawyer, acting on behalf of the corporation he is representing, may routinely sign a certification of non-forum shopping. The Court emphasizes that the lawyer must be "specifically authorized" in order validly to sign the certification.

Corporations have no powers except those expressly conferred upon them by the Corporation Code and those that are implied by or are incidental to its existence. These powers are exercised through their board of directors and/or duly authorized officers and agents. Hence, physical acts, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by specific act of the board of directors. 13 

The records are bereft of the authority of BLC’s counsel to institute the present petition and to sign the certification of non-forum shopping. While said counsel may be the counsel of record for BLC, the representation does not vest upon him the authority to execute the certification on behalf of his client. There must be a resolution issued by the board of directors that specifically authorizes him to institute the petition and execute the certification, for it is only then that his actions can be legally binding upon BLC.

BLC however insists that there was substantial compliance with SC Circular No. 28-91 because the verification/certification was issued by a counsel who had full personal knowledge that no other petition or action has been filed or is pending before any other tribunal. According to BLC, said counsel’s law firm has handled this case from the very beginning and could very well attest and/or certify to the absence of an instituted or pending case involving the same or similar issues.

The argument of substantial compliance deserves no merit, given the Court’s ruling in Mendigorin v. Cabantog: 14 

. . . The CA held that there was substantial compliance with the Rules of Court, citing Dimagiba v. Montalvo, Jr. [ 202 S CRA 641 ] to the effect that a lawyer who assumes responsibility for a client’s cause has the duty to know the entire history of the case, especially if any litigation is commenced. This view, however, no longer holds authoritative value in the light of Digital Microwave Corporation v. CA [328 SCRA 286], where it was held that the reason the certification against forum shopping is required to be accomplished by petitioner himself is that only the petitioner himself has actual knowledge of whether or not he has initiated similar actions or proceedings in other courts or tribunals. Even counsel of record may be unaware of such fact. To our mind, this view is more in accord with the intent and purpose of Revised Circular No. 28-91.

Clearly, therefore, the present petition lacks the proper certification as strictly required by jurisprudence and the Rules of Court.

Even if the Court were to ignore the aforesaid procedural infirmity, a perusal of the arguments raised in the petition, indicates that a resolution on the merits would nevertheless yield the same outcome.

BLC attempts to convince the Court that Revenue Regulation 19-86 is legislative rather than interpretative in character and hence, should retroact to the date of effectivity of the law it seeks to interpret.

Administrative issuances may be distinguished according to their nature and substance: legislative and interpretative. A legislative rule is in the matter of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing. 15 

The Court finds the questioned revenue regulation to be legislative in nature. Section 1 of Revenue Regulation 19-86 plainly states that it was promulgated pursuant to Section 277 of the NIRC. Section 277 (now Section 244) is an express grant of authority to the Secretary of Finance to promulgate all needful rules and regulations for the effective enforcement of the provisions of the NIRC. In Paper Industries Corporation

of the Philippines v. Court of Appeals, 16 the Court recognized that the application of Section 277 calls for none other than the exercise of quasi-legislative or rule-making authority. Verily, it cannot be disputed that Revenue Regulation 19-86 was issued pursuant to the rule-making power of the Secretary of Finance, thus making it legislative, and not interpretative as alleged by BLC.

BLC further posits that, assuming the revenue regulation is legislative in nature, it is invalid for want of due process as no prior notice, publication and public hearing attended the issuance thereof. To support its view, BLC cited CIR v. Fortune Tobacco, Et Al., 17 wherein the Court nullified a revenue memorandum circular which reclassified certain cigarettes and subjected them to a higher tax rate, holding it invalid for lack of notice, publication and public hearing.

The doctrine enunciated in Fortune Tobacco, and reiterated in CIR v. Michel J. Lhuillier Pawnshop, Inc., 18 is that when an administrative rule goes beyond merely providing for the means that can facilitate or render less cumbersome the implementation of the law and substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard and, thereafter, to be duly informed, before the issuance is given the force and effect of law. In Lhuillier and Fortune Tobacco, the Court invalidated the revenue memoranda concerned because the same increased the tax liabilities of the affected taxpayers without affording them due process. In this case, Revenue Regulation 19-86 would be beneficial to the taxpayers as they are subjected to lesser taxes. Petitioner, in fact, is invoking Revenue Regulation 19-86 as the very basis of its claim for refund. If it were invalid, then petitioner all the more has no right to a refund.

After upholding the validity of Revenue Regulation 19-86, the Court now resolves whether its application should be prospective or retroactive.

The principle is well entrenched that statutes, including administrative rules and regulations, operate prospectively only, unless the legislative intent to the contrary is manifest by express terms or by necessary implication. 19 In the present case, there is no indication that the revenue regulation may operate retroactively. Furthermore, there is an express provision stating that it "shall take effect on January 1, 1987," and that it "shall be applicable to all leases written on or after the said date." Being clear on its prospective application, it must be given its literal meaning and applied without further interpretation. 20 Thus, BLC is not in a position to invoke the provisions of Revenue Regulation 19-86 for lease rentals it received prior to January 1, 1987.

It is also apt to add that tax refunds are in the nature of tax exemptions. As such, these are regarded as in derogation of sovereign authority and are to be strictly construed against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption and he must be able to justify his claim by the clearest grant under Constitutional or statutory law, and he cannot be permitted to rely upon vague implications. 21 Nothing that BLC has raised justifies a tax refund.

It is not necessary to rule on the remaining issues,

WHEREFORE, the petition for review is hereby DENIED, and the assailed decision and resolution of the Court of Appeals are AFFIRMED. No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION

[G.R. NO. 162525 : September 23, 2008]

ASEAN PACIFIC PLANNERS, APP CONSTRUCTION AND DEVELOPMENT CORPORATION* AND CESAR

GOCO, Petitioners, v. CITY OF URDANETA, CEFERINO J. CAPALAD, WALDO C. DEL CASTILLO, NORBERTO M. DEL

PRADO, JESUS A. ORDONO AND AQUILINO MAGUISA,**, Respondents.

D E C I S I O N

The instant petition seeks to set aside the Resolutions1 dated April 15, 2003 and February 4, 2004 of the Court of Appeals in CA-G.R. SP No. 76170.

113This case stemmed from a Complaint2 for annulment of contracts with prayer for preliminary prohibitory injunction and temporary restraining order filed by respondent Waldo C. Del Castillo, in his capacity as taxpayer, against respondents City of Urdaneta and Ceferino J. Capalad doing business under the name JJEFWA Builders, and petitioners Asean Pacific Planners (APP) represented by Ronilo G. Goco and Asean Pacific Planners Construction and Development Corporation (APPCDC) represented by Cesar D. Goco.

Del Castillo alleged that then Urdaneta City Mayor Rodolfo E. Parayno entered into five contracts for the preliminary design, construction and management of a four-storey twin cinema commercial center and hotel involving a massive expenditure of public funds amounting to P250 million, funded by a loan from the Philippine National Bank (PNB). For minimal work, the contractor was allegedly paid P95 million. Del Castillo also claimed that all the contracts are void because the object is outside the commerce of men. The object is a piece of land belonging to the public domain and which remains devoted to a public purpose as a public elementary school. Additionally, he claimed that the contracts, from the feasibility study to management and lease of the future building, are also void because they were all awarded solely to the Goco family.

In their Answer,3 APP and APPCDC claimed that the contracts are valid. Urdaneta City Mayor Amadeo R. Perez, Jr., who filed the city's Answer,4 joined in the defense and asserted that the contracts were properly executed by then Mayor Parayno with prior authority from the Sangguniang Panlungsod. Mayor Perez also stated that Del Castillo has no legal capacity to sue and that the complaint states no cause of action. For respondent Ceferino J. Capalad, Atty. Oscar C. Sahagun filed an Answer5 with compulsory counterclaim and motion to dismiss on the ground that Del Castillo has no legal standing to sue.

Respondents Norberto M. Del Prado, Jesus A. Ordono and Aquilino Maguisa became parties to the case when they jointly filed, also in their capacity as taxpayers, a Complaint-in-Intervention6 adopting the allegations of Del Castillo.

After pre-trial, the Lazaro Law Firm entered its appearance as counsel for Urdaneta City and filed an Omnibus Motion7 with prayer to (1) withdraw Urdaneta City's Answer; (2) drop Urdaneta City as defendant and be joined as plaintiff; (3) admit Urdaneta City's complaint; and (4) conduct a new pre-trial. Urdaneta City allegedly wanted to rectify its position and claimed that inadequate legal representation caused its inability to file the necessary pleadings in representation of its interests.

In its Order8 dated September 11, 2002, the Regional Trial Court (RTC) of Urdaneta City, Pangasinan, Branch 45, admitted the entry of appearance of the Lazaro Law Firm and granted the withdrawal of appearance of the City Prosecutor. It also granted the prayer to drop the city as defendant and admitted its complaint for consolidation with Del Castillo's complaint, and directed the defendants to answer the city's complaint.

In its February 14, 2003 Order,9 the RTC denied reconsideration of the September 11, 2002 Order. It also granted Capalad's motion to expunge all pleadings filed by Atty. Sahagun in his behalf. Capalad was dropped as defendant, and his complaint filed by Atty. Jorito C. Peralta was admitted and consolidated with the complaints of Del Castillo and Urdaneta City. The RTC also directed APP and APPCDC to answer Capalad's complaint.

Aggrieved, APP and APPCDC filed a petition for certiorari before the Court of Appeals. In its April 15, 2003 Resolution, the Court of Appeals dismissed the petition on the following grounds: (1) defective verification and certification of non-forum shopping, (2) failure of the petitioners to submit certified true copies of the RTC's assailed orders as mere photocopies were submitted, and (3) lack of written explanation why service of the petition to adverse parties was not personal.10 The Court of Appeals also denied APP and APPCDC's motion for reconsideration in its February 4, 2004 Resolution.11

Hence, this petition, which we treat as one for review on certiorari under Rule 45, the proper remedy to assail the resolutions of the Court of Appeals.12

Petitioners argue that:

I.

THE APPELLATE COURT PALPABLY ERRED AND GRAVELY ABUSED ITS JUDICIAL PREROGATIVES BY SUMMARILY DISMISSING THE PETITION ON THE BASIS OF PROCEDURAL TECHNICALITIES DESPITE SUBSTANTIAL COMPLIANCE [THEREWITH]'

II.

THE TRIAL COURT PALPABLY ERRED AND GRAVELY ABUSED ITS JUDICIAL PREROGATIVES BY CAPRICIOUSLY

(a.) Entertaining the taxpayers' suits of private respondents del Castillo, del Prado, Ordono and Maguisa despite their clear lack of legal standing to file the same.

(b.) Allowing the entry of appearance of a private law firm to represent the City of Urdaneta despite the clear statutory and jurisprudential prohibitions thereto.

(c.) Allowing Ceferino J. Capalad and the City of Urdaneta to switch sides, by permitting the withdrawal of their respective answers and admitting their complaints as well as allowing the appearance of Atty. Jorito C. Peralta to represent Capalad although Atty. Oscar C. Sahagun, his counsel of record, had not withdrawn from the case, in gross violation of well settled rules and case law on the matter.13

We first resolve whether the Court of Appeals erred in denying reconsideration of its April 15, 2003 Resolution despite APP and APPCDC's subsequent compliance.

Petitioners argue that the Court of Appeals should not have dismissed the petition on mere technicalities since they have attached the proper documents in their motion for reconsideration and substantially complied with the rules.

Respondent Urdaneta City maintains that the Court of Appeals correctly dismissed the petition because Cesar Goco had no proof he was authorized to sign the certification of non-forum shopping in behalf of APPCDC.

Indeed, Cesar Goco had no proof of his authority to sign the verification and certification of non-forum shopping of the petition for certiorari filed with the Court of Appeals.14 Thus, the Court of Appeals is allowed by the rules the discretion to dismiss the petition since only individuals vested with authority by a valid board resolution may sign the certificate of non-forum shopping in behalf of a corporation. Proof of said authority must be attached; otherwise, the petition is subject to dismissal.15

However, it must be pointed out that in several cases,16 this Court had considered as substantial compliance with the procedural requirements the submission in the motion for reconsideration of the authority to sign the verification and certification, as in this case. The Court notes that the attachments in the motion for reconsideration show that on March 5, 2003, the Board of Directors of APPCDC authorized Cesar Goco to institute the petition before the Court of Appeals.17 On March 22, 2003, Ronilo Goco doing business under the name APP, also appointed his father, Cesar Goco, as his attorney-in-fact to file the petition.18 When the petition was filed on March 26, 2003 19  before the Court of Appeals, Cesar Goco was duly authorized to sign the verification and certification except that the proof of his authority was not submitted together with the petition.

Similarly, petitioners submitted in the motion for reconsideration certified true copies of the assailed RTC orders and we may also consider the same as substantial compliance.20Petitioners also included in the motion for reconsideration their explanation21 that copies of the petition were personally served on the Lazaro Law Firm and mailed to the RTC and Atty. Peralta because of distance. The affidavit of service22 supported the explanation. Considering the substantial issues involved, it was thus error for the appellate court to deny reinstatement of the petition.

Having discussed the procedural issues, we shall now proceed to address the substantive issues raised by petitioners, rather than remand this case to the Court of Appeals. In our view, the issue, simply put, is: Did the RTC err and commit grave abuse of discretion in (a) entertaining the taxpayers' suits; (b) allowing a private law firm to represent Urdaneta City; (c) allowing respondents Capalad and Urdaneta City to switch from being defendants to becoming complainants; and (d) allowing Capalad's change of attorneys?cralawred

114On the first point at issue, petitioners argue that a taxpayer may only sue where the act complained of directly involves illegal disbursement of public funds derived from taxation. The allegation of respondents Del Castillo, Del Prado, Ordono and Maguisa that the construction of the project is funded by the PNB loan contradicts the claim regarding illegal disbursement since the funds are not directly derived from taxation.

Respondents Del Castillo, Del Prado, Ordono and Maguisa counter that their personality to sue was not raised by petitioners APP and APPCDC in their Answer and that this issue was not even discussed in the RTC's assailed orders.

Petitioners' contentions lack merit. The RTC properly allowed the taxpayers' suits. In Public Interest Center, Inc. v. Roxas,23 we held:

In the case of taxpayers' suits, the party suing as a taxpayer must prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation. Thus, taxpayers have been allowed to sue where there is a claim that public funds are illegally disbursed or that public money is being deflected to any improper purpose, or that public funds are wasted through the enforcement of an invalid or unconstitutional law.

x x x

Petitioners' allegations in their Amended Complaint that the loan contracts entered into by the Republic and NPC are serviced or paid through a disbursement of public funds are not disputed by respondents, hence, they are invested with personality to institute the same.24

Here, the allegation of taxpayers Del Castillo, Del Prado, Ordono and Maguisa that P95 million of the P250 million PNB loan had already been paid for minimal work is sufficient allegation of overpayment, of illegal disbursement, that invests them with personality to sue. Petitioners do not dispute the allegation as they merely insist, albeit erroneously, that public funds are not involved. Under Article 195325 of the Civil Code, the city acquired ownership of the money loaned from PNB, making the money public fund. The city will have to pay the loan by revenues raised from local taxation or by its internal revenue allotment.

In addition, APP and APPCDC's lack of objection in their Answer on the personality to sue of the four complainants constitutes waiver to raise the objection under Section 1, Rule 9 of the Rules of Court.26

On the second point, petitioners contend that only the City Prosecutor can represent Urdaneta City and that law and jurisprudence prohibit the appearance of the Lazaro Law Firm as the city's counsel.

The Lazaro Law Firm, as the city's counsel, counters that the city was inutile defending its cause before the RTC for lack of needed legal advice. The city has no legal officer and both City Prosecutor and Provincial Legal Officer are busy. Practical considerations also dictate that the city and Mayor Perez must have the same counsel since he faces related criminal cases. Citing Mancenido v. Court of Appeals,27 the law firm states that hiring private counsel is proper where rigid adherence to the law on representation would deprive a party of his right to redress a valid grievance.28

We cannot agree with the Lazaro Law Firm. Its appearance as Urdaneta City's counsel is against the law as it provides expressly who should represent it. The City Prosecutor should continue to represent the city.

Section 481(a)29 of the Local Government Code (LGC) of 199130 mandates the appointment of a city legal officer. Under Section 481(b)(3)(i)31 of the LGC, the city legal officer is supposed to represent the city in all civil actions, as in this case, and special proceedings wherein the city or any of its officials is a party. In Ramos v. Court of Appeals,32 we cited that under Section 1933 of Republic Act No. 5185,34 city governments may already create the position of city legal officer to whom the function of the city fiscal (now prosecutor) as legal adviser and officer for civil cases of the city shall be transferred.35 In the case of Urdaneta City, however, the position of city legal officer is still vacant, although its charter36 was enacted way back in 1998.

Because of such vacancy, the City Prosecutor's appearance as counsel of Urdaneta City is proper. The City Prosecutor remains as the city's legal adviser and officer for civil cases, a function that could not yet be transferred to the city legal officer. Under the circumstances, the RTC should not have allowed the entry of appearance of the Lazaro Law Firm vice the City Prosecutor. Notably, the city's Answer was sworn to before the City Prosecutor by Mayor Perez. The City Prosecutor prepared the city's pre-trial brief and represented the city in the pre-trial conference. No question was raised against the City Prosecutor's actions until the Lazaro Law Firm entered its appearance and claimed that the city lacked adequate legal representation.

Moreover, the appearance of the Lazaro Law Firm as counsel for Urdaneta City is against the law. Section 481(b)(3)(i) of the LGC provides when a special legal officer may be employed, that is, in actions or proceedings where a component city or municipality is a party adverse to the provincial government. But this case is not between Urdaneta City and the Province of Pangasinan. And we have consistently held that a local government unit cannot be represented by private counsel37 as only public officers may act for and in behalf of public entities and public funds should not be spent to hire private lawyers.38 Pro bono representation in collaboration with the municipal attorney and prosecutor has not even been allowed.39

Neither is the law firm's appearance justified under the instances listed in Mancenido when local government officials can be represented by private counsel, such as when a claim for damages could result in personal liability. No such claim against said officials was made in this case. Note that before it joined the complainants, the city was the one sued, not its officials. That the firm represents Mayor Perez in criminal cases, suits in his personal capacity,40 is of no moment.

On the third point, petitioners claim that Urdaneta City is estopped to reverse admissions in its Answer that the contracts are valid and, in its pre-trial brief, that the execution of the contracts was in good faith.

We disagree. The court may allow amendment of pleadings.

Section 5,41 Rule 10 of the Rules of Court pertinently provides that if evidence is objected to at the trial on the ground that it is not within the issues raised by the pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the presentation of the merits of the action and the ends of substantial justice will be subserved thereby. Objections need not even arise in this case since the Pre-trial Order42 dated April 1, 2002 already defined as an issue whether the contracts are valid. Thus, what is needed is presentation of the parties' evidence on the issue. Any evidence of the city for or against the validity of the contracts will be relevant and admissible. Note also that under Section 5, Rule 10, necessary amendments to pleadings may be made to cause them to conform to the evidence.

In addition, despite Urdaneta City's judicial admissions, the trial court is still given leeway to consider other evidence to be presented for said admissions may not necessarily prevail over documentary evidence,43 e.g., the contracts assailed. A party's testimony in open court may also override admissions in the Answer.44

As regards the RTC's order admitting Capalad's complaint and dropping him as defendant, we find the same in order. Capalad insists that Atty. Sahagun has no authority to represent him. Atty. Sahagun claims otherwise. We note, however, that Atty. Sahagun represents petitioners who claim that the contracts are valid. On the other hand, Capalad filed a complaint for annulment of the contracts. Certainly, Atty. Sahagun cannot represent totally conflicting interests. Thus, we should expunge all pleadings filed by Atty. Sahagun in behalf of Capalad.

Relatedly, we affirm the order of the RTC in allowing Capalad's change of attorneys, if we can properly call it as such, considering Capalad's claim that Atty. Sahagun was never his attorney.

Before we close, notice is taken of the offensive language used by Attys. Oscar C. Sahagun and Antonio B. Escalante in their pleadings before us and the Court of Appeals. They unfairly called the Court of Appeals a "court of technicalities"45 for validly dismissing their defectively prepared petition. They also accused the Court of Appeals of protecting, in their view, "an incompetent judge."46 In

115explaining the "concededly strong language," Atty. Sahagun further indicted himself. He said that the Court of Appeals' dismissal of the case shows its "impatience and readiness to punish petitioners for a perceived slight on its dignity" and such dismissal "smacks of retaliation and does not augur for the cold neutrality and impartiality demanded of the appellate court."47

Accordingly, we impose upon Attys. Oscar C. Sahagun and Antonio B. Escalante a fine of P2,00048 each payable to this Court within ten days from notice and we remind them that they should observe and maintain the respect due to the Court of Appeals and judicial officers;49 abstain from offensive language before the courts;50 and not attribute to a Judge motives not supported by the record.51 Similar acts in the future will be dealt with more severely.

WHEREFORE, we (1) GRANT the petition; (2) SET ASIDE the Resolutions dated April 15, 2003 and February 4, 2004 of the Court of Appeals in CA-G.R. SP No. 76170; (3) DENY the entry of appearance of the Lazaro Law Firm in Civil Case No. U-7388 and EXPUNGE all pleadings it filed as counsel of Urdaneta City; (4) ORDER the City Prosecutor to represent Urdaneta City in Civil Case No. U-7388; (5) AFFIRM the RTC in admitting the complaint of Capalad; and (6) PROHIBIT Atty. Oscar C. Sahagun from representing Capalad and EXPUNGE all pleadings that he filed in behalf of Capalad.

Let the records of Civil Case No. U-7388 be remanded to the trial court for further proceedings.

Finally, we IMPOSE a fine of P2,000 each on Attys. Oscar C. Sahagun and Antonio B. Escalante for their use of offensive language, payable to this Court within ten (10) days from receipt of this Decision.

SO ORDERED.

THIRD DIVISION

[G.R. NO. 147217 : October 7, 2004]

DEVELOPMENT BANK OF THE PHILIPPINES and NILO C. GALORPORT, Petitioners, v. THE COURT OF APPEALS

(Former First Division), HON. ACHILLES L. MELICOR (as Presiding Judge, Regional Trial Court, Branch 4,

Tagbilaran City), BIBIANA GUREA VDA. DE AZARCON, HEIRS OF INOCENTES AZARCON, namely, PERLA ROÑO, INOCENTES AZARCON, JR., LORENZITA CALAMBA, ELSA ANGALOT, MANUELA B. TUASON, DARIETTA AZARCON

and DONALITA A. ALONSO (For Herself and as Attorney-In-Fact of her Co-heirs), Respondents.

D E C I S I O N

Assailed in this Petition for Review on Certiorari is the Resolution of the Court of Appeals dated September 26, 2000 in CA-G.R. SP No. 60838 dismissing the petition for certiorari filed by the Development Bank of the Philippines (DBP) and Atty. Nilo Galorport (DBP deputized special sheriff1), herein petitioners. The ground for the dismissal is that the certification against forum shopping was signed only by Atty. Demosthenes Demecillo, DBP Branch Manager at Tagbilaran City, the bank's representative. Atty. Galorport, DBP's co-petitioner did not sign the same.

Also assailed in the instant petition is the subsequent Resolution of the Court of Appeals dated January 29, 2001 denying petitioners' motion for reconsideration of the previous Resolution as there is no proof that DBP Branch Manager Atty. Demosthenes Demecillo, who alone signed the certification against forum shopping, is the duly authorized representative of the bank.

Records show that on February 11, 2000, the above-named private respondents filed with the Regional Trial Court (RTC) of Tagbilaran City Civil Case No. 6464 for annulment of contract and Transfer Certificates of Title (TCT) Nos. 42996 and 42997 with prayer for the issuance of a temporary restraining order (TRO) and preliminary injunction. Impleaded as defendants are the DBP, represented by Atty. Demosthenes Demecillo, DBP Branch Manager at Tagbilaran City, and Atty. Nilo Galorport, DBP deputized special sheriff.

During the hearing of the application for a preliminary injunction, it was established that the lots covered by TCT Nos. 42996 and 42997 were owned by Bibiana Guerra de Azarcon (one of the herein private respondents) and her late husband Inocentes Azarcon. They obtained a loan from the Philippine National Bank (PNB). As collateral, they mortgaged these two (2) lots with the bank. But they could not pay their loan. Asuncion Calceta, a close friend of private respondent Donalita Alonzo, told Bibiana that she is willing to pay their loan if she (Bibiana) would mortgage the lots to her. Private respondents agreed.

Asuncion Calceta then made an initial payment of P273,000.00 to the PNB. In turn, the bank extended the redemption period to allow Asuncion to apply with the DBP a loan ofP3,500,000.00 to be paid to the PNB.

Upon Asuncion's persistence, private respondents executed a simulated deed of sale of their lots in her favor to enable her to mortgage the same with the DBP. Thus, TCT Nos. 42996 and 42997 were issued in her name by the Register of Deeds of Tagbilaran City.

Asuncion then mortgaged the two (2) lots with the DBP. When the proceeds of the loan were released, she paid the PNB P900,000.00 representing the unpaid balance of respondents' loan.

However, Asuncion failed to pay her loan with the DBP, prompting the bank to foreclose the mortgage covering the two (2) lots.

After hearing private respondents' application for preliminary injunction, the RTC, on June 9, 2000, issued an Order enjoining the DBP and Atty. Nilo Galorport, the bank's deputized special sheriff, from proceeding with the auction sale of the lots pending the final determination of Civil Case No. 6464.

The DBP and Atty. Galorport filed a motion for reconsideration but was denied by the RTC. Hence, they filed with the Court of Appeals a petition for certiorari alleging that in granting the injunctive relief in favor of private respondents, the RTC acted with grave abuse of discretion. As stated in the outset, the Appellate Court issued a Resolution on September 26, 2000 dismissing the petition for certiorari for failure of one of the petitioners, Atty. Nilo Galorport (DBP's deputized special sheriff), to sign the certification against forum shopping. Subsequently, acting on petitioners' motion for reconsideration, the Appellate Court likewise denied the same in a Resolution dated January 29, 2001, holding that Atty. Demosthenes Demecillo, Branch Manager of the DBP at Tagbilaran City, failed to show that he is the bank's authorized representative to file the petition for certiorari .

The issue for our resolution is:

Whether the Court of Appeals acted with grave abuse of discretion in issuing the assailed twin Resolutions dismissing petitioners' petition for certiorari .

It bears reiterating that the petitioners before the Court of Appeals were the DBP, represented by Atty. Demosthenes Demecillo, the bank's Branch Manager at Tagbilaran City, and Atty. Nilo Galorport, DBP's deputized special sheriff. The certification against forum shopping was signed by Atty. Demosthenes Demecillo only. According to private respondents, Atty. Demecillo was not authorized by the DBP to represent it in filing with the Court of Appeals the petition for certiorari . Hence, Atty. Demecillo's signature appearing on the certification against forum shopping has no legal significance at all. It cannot bind DBP.

Petitioners explained in their motion for reconsideration that in the verification of the petition for certiorari in CA-G.R. SP No. 60838, Atty. Demecillo stated under oath that he is the DBP's incumbent Branch Head and its duly authorized officer. They submitted a copy of Resolution No. 0192 dated April 5, 2000 passed by the DBP Board of Governors. This Resolution authorizes Branch Heads of the DBP to sign the verification and certification against forum shopping of all initiatory pleadings of the bank.

What petitioners failed to explain, however, is their failure to attach a certified true copy of Resolution No. 0912 to their petition for certiorari in CA-G.R. SP No. 60838. Their omission is fatal to their case. Courts are not, after all, expected to take judicial notice of corporate board resolutions or a corporate

116officer's authority to represent a corporation. To be sure, petitioners' failure to submit proof that Atty. Demecillo has been authorized by the DBP to file the petition is a "sufficient ground for the dismissal thereof."2

On the part of Atty. Galorport, he admits that he did not sign the certification against forum shopping in CA-G.R. SP No. 60838, contending that the signature of Atty. Demecillo, representing the DBP, is sufficient since he (Atty. Galorport) and the DBP are being sued jointly, they having a common interest in the lots under litigation. His contention lacks merit. DBP is being sued as a mortgagee, while he is impleaded as the bank's deputized special sheriff who conducted the extra-judicial foreclosure of the mortgage. Surely, their interests are not the same. He should have signed the certification. In Docena v. Lapesura,3 we ruled that the certification against forum shopping should be signed by all the petitioners in a case, and that the signing by only one of them is insufficient.

In sum, we find that the certification against forum shopping in CA-G.R. SP No. 60838 is fatally defective, not having been duly signed by both petitioners. This procedural flaw warrants the dismissal of the petition for certiorari . We have consistently held that the certification against forum shopping must be signed by the principal parties.4 With respect to a corporation, the certification against forum shopping may be signed for and on its behalf, by a specifically authorized lawyer who has personal knowledge of the facts required to be disclosed in such document.5

We, therefore, hold that in rendering the assailed twin Resolutions in CA-G.R. SP No. 60838, respondent Court of Appeals did not gravely abuse its discretion.

WHEREFORE, the instant petition is DENIED. Costs against petitioners.

SO ORDERED.

FIRST DIVISION

[G.R. No. 146608. October 23, 2003.]

SPOUSES CONSTANTE FIRME AND AZUCENA E. FIRME, Petitioners, v. BUKAL ENTERPRISES AND

DEVELOPMENT CORPORATION, Respondent.

D E C I S I O N

The CaseThis is a petition for review on certiorari of the Decision 1 dated 3 January 2001 of the Court of Appeals in CA-G.R. CV No. 60747. The Court of Appeals reversed the Decision 2 of the Regional Trial Court, Branch 223, Quezon City ("trial court"), which held that there was no perfected contract of sale since there was no consent on the part of the seller.

The FactsPetitioner Spouses Constante and Azucena Firme ("Spouses Firme") are the registered owners of a parcel of land 3 ("Property") located on Dahlia Avenue, Fairview Park, Quezon City. Renato de Castro ("De Castro"), the vice president of Bukal Enterprises and Development Corporation ("Bukal Enterprises") authorized his friend, Teodoro Aviles ("Aviles"), a broker, to negotiate with the Spouses Firme for the purchase of the Property.

On 28 March 1995, Bukal Enterprises filed a complaint for specific performance and damages with the trial court, alleging that the Spouses Firme reneged on their agreement to sell the Property. The complaint asked the trial court to order the Spouses Firme to execute the deed of sale and to deliver the title to the Property to Bukal Enterprises upon payment of the agreed purchase price.

During trial, Bukal Enterprises presented five witnesses, namely, Aviles, De Castro, Antonio Moreno, Jocelyn Napa and Antonio Ancheta.

Aviles testified that De Castro authorized him to negotiate on behalf of Bukal Enterprises for the purchase of the Property. According to Aviles, he met with the Spouses Firme on 23 January 1995 and he presented them with a draft deed of sale 4 ("First Draft") dated February 1995. The First Draft of the deed of sale provides:

DEED OF ABSOLUTE SALE

KNOW ALL MEN BY THESE PRESENTS:

This DEED OF ABSOLUTE SALE made and executed by and between the Spouses CONSTANTE FIRME and AZUCENA E. FIRME, both of legal age, Filipino citizens and with postal address at No. 1450 Union, Paco, City of Manila, hereinafter called the VENDOR, and

BUKAL ENTERPRISES and DEVELOPMENT CORPORATION, a corporation duly organized and registered in accordance with Philippine Laws, with business address at Dahlia Avenue, Fairview Park, Quezon City, herein represented by its PRESIDENT, MRS. ZENAIDA A. DE CASTRO, hereinafter called the VENDEE.

WITNESSETH:

That the VENDOR is the absolute and registered owner of a certain parcel of land located at Fairview Park, Quezon City, and more particularly described as follows:

A parcel of land (Lot 4, Block 33 of the consolidation-subdivision plan (LRC) Pcs-8124, Sheet No. I, being a portion of the consolidation of Lots 41-B-2-A and 41-B-2-C, Psd-1136 and Lot (LRC) Pcs-2665, (LRC) GLRO) Record No. 1037), situated in Quezon City, Island of Luzon.Bounded on the NE., points 2 to 5 by Road Lot 24, of the consolidation-subdivision plan. Beginning at a point marked "1" on plan, being S. 67 deg. 23’W., 9288.80 m. from BLLM I, Mp of Montalban, Rizal; thence N. 85 deg. 35’E., 17.39 m. to point 2; thence S. 54 deg. 22’E., 4.00 m. to point 3; thence S. 14 deg. 21’E., 17.87 m. to point 4; thence 3 deg. 56’E., 17.92 m. to point 5; thence N. 85 deg. 12’ W., 23.38 m. to point 6; thence N. 4 deg. 55’W., 34.35 m. to the point of beginning; containing an area of EIGHT HUNDRED AND SIX (806) SQUARE METERS, more or less.

VENDOR’S title thereto being evidenced by Transfer Certificate of Title No. 264243 issued by the Register of Deeds of Quezon City;

That the VENDOR, for and in consideration of the sum of THREE MILLION TWO HUNDRED TWENTY FOUR THOUSAND PESOS (P3,224,000.00) Philippine Currency, to them in hand paid and receipt whereof is hereby acknowledged, do hereby SELL, TRANSFER and CONVEY unto the said VENDEE, its assigns, transferees and successors in interest the above described property, free from all liens and encumbrances whatsoever;

It is hereby mutually agreed that the VENDEE shall bear all the expenses for the capital gains tax, documentary stamps, documentation, notarization, removal and relocation of the squatters, registration, transfer tax and other fees as may be required by law;

That the VENDOR shall pay the real estate tax for the current year and back real estate taxes, charges and penalties if there are any.

IN WITNESS WHEREOF, we have hereunto affixed our signatures this _____ day of February, 1995, at Quezon City, Philippines.

CONSTANTE FIRME BUKAL ENTERPRISES AND

DEVELOPMENT CORP.

BY:

AZUCENA E. FIRME ZENAIDA A. DE CASTRO

VENDOR President

x       x       x

The Spouses Firme rejected this First Draft because of several objectionable conditions, including the payment of capital gains and other government taxes by the seller and the relocation of the squatters at the seller’s expense. During their second meeting, Aviles presented to the Spouses Firme another draft deed of sale 5 ("Second Draft") dated March 1995. The Spouses Firme allegedly accepted the Second Draft in view of the deletion of the objectionable conditions contained in the First Draft. According to Aviles, the Spouses Firme were willing to sell the Property at P4,000 per square meter. They then agreed that payment would be made at the Far East Bank and Trust Company ("FEBTC"), Padre Faura Branch, Manila. However, the scheduled payment had to be postponed due to problems in the transfer of funds. The Spouses Firme later informed Aviles that they were no longer

117interested in selling the Property. 6 

De Castro testified that he authorized Aviles to negotiate for Bukal Enterprises the purchase of the Property owned by the Spouses Firme. The Property was located beside the Dahlia Commercial Complex owned by Bukal Enterprises. Aviles informed him that the Spouses Firme agreed to sell the Property at P4,000 per square meter, payable in cash for a lump sum of P3,224,000. Furthermore, Bukal Enterprises agreed to pay the taxes due and to undertake the relocation of the squatters on the Property. For this purpose, Bukal Enterprises applied for a loan of P4,500,000 which FEBTC granted. Bukal Enterprises then relocated the four families squatting on the Property at a cost of P60,000 per family. After the squatters vacated the Property, Bukal Enterprises fenced the area, covered it with filling materials, and constructed posts and riprap. Bukal Enterprises spent approximately P300,000 for these improvements. In a letter 7 dated 7 March 1995, Bukal Enterprises offered to pay the purchase price of P3,224,000 to the Spouses Firme upon execution of the transfer documents and delivery of the owner’s duplicate copy of TCT No. 264243. The Spouses Firme did not accept this offer but instead sent Bukal Enterprises a letter demanding that its workers vacate the Property. Bukal Enterprises then filed a complaint for specific performance and damages. 8 

Antonio Moreno, one of the alleged squatters on the Property, testified that he constructed his house on the Property sometime in 1982. On 26 February 1995, he was summoned together with the other squatters to a meeting with Aviles regarding their relocation. They agreed to relocate provided they would be given financial assistance of P60,000 per family. Thus, on 6 March 1995, the squatter families were each paid P60,000 in the presence of De Castro and Aviles. Thereafter, they voluntarily demolished their houses and vacated the Property. 9 

Jocelyn Mapa, the manager of FEBTC, Padre Faura Branch, testified that Bukal Enterprises has been their client since 1994. According to her, Bukal Enterprises applied for a loan of P4,500,000 on the third week of February 1995 allegedly to buy a lot in Fairview. FEBTC approved the loan on the last week of February and released the proceeds on the first week of March. 10 

Antonio Ancheta ("Ancheta"), barangay captain of Barangay Fairview, testified that he was present when one of the officers of Bukal Enterprises, a certain Renato, paid each of the four squatter families around P60,000 to P100,000. Ancheta informed Dr. Constante Firme that he told the squatters to leave considering that they already received payment for their relocation. According to Ancheta, Dr. Constante Firme must have misunderstood him and thought that the squatters left through Ancheta’s own efforts. 11 

On the other hand, Dr. Constante Firme ("Dr. Firme") was the sole witness for the defendant spouses.

Dr. Firme testified that on 30 January 1995, he and his wife met with Aviles at the Aristocrat Restaurant in Quezon City. Aviles arranged the meeting with the Spouses Firme involving their Property in Fairview. Aviles offered to buy the Property at P2,500 per square meter. The Spouses Firme did not accept the offer because they were reserving the Property for their children. On 6 February 1995, the Spouses Firme met again with Aviles upon the latter’s insistence. Aviles showed the Spouses Firme a copy of a draft deed of sale 12 ("Third Draft") which Aviles prepared. The Third Draft of the deed of sale provides:

CONTRACT OF SALE

KNOW ALL MEN BY THESE PRESENTS:

This AGREEMENT, executed this ___ day of February, 1995, by and between the Spouses CONSTANTE FIRME and AZUCENA E. FIRME, both of legal age, Filipino citizen and with postal address at __________, Quezon City, hereinafter referred to as the VENDORS, and BUKAL ENTERPRISES and DEVELOPMENT CORPORATION, a corporation duly organized and registered in accordance with Philippine Laws, with postal address at Fairview Park, Quezon City, herein represented by its President and Chief Executive Officer, hereinafter referred to as the VENDEE.

WITNESSETH:

That for and in consideration of the sum of THREE MILLION TWO HUNDRED TWENTY FOUR THOUSAND PESOS (P3,224,000.00), Philippine Currency, payable in the form

hereinafter expressed, agreed to sell to the VENDEE and the VENDEE has agreed to buy from the VENDORS, a parcel of land situated at Dahlia Avenue corner Rolex Street, Fairview Park, Quezon City, containing an area of 806 Square Meters more or less, of which the VENDORS are the absolute registered owners in accordance with the Land Registration Act, as evidenced by Transfer Certificate of Title No. 264243 issued by the Register of Deeds of Quezon City, more particularly described and bounded as follows:

(DESCRIPTION AND BOUNDARIES OF PROPERTY)

THE FURTHER TERMS AND CONDITIONS OF THE CONTRACT ARE AS FOLLOWS:

1. The VENDEE agrees to pay the VENDORS upon execution of this Contract the sum of ONE MILLION PESOS (P1,000,000.00), Philippine Currency, as downpayment and agrees to pay the balance of TWO MILLION TWO HUNDRED TWENTY FOUR THOUSAND PESOS (P2,224,000.00) at the post office address of the VENDORS in Quezon City, or such other place or Office as the VENDORS may designate within a period of sixty (60) days counted from the date of this Contract;

2. The VENDORS have hereunto authorized the VENDEE to mortgage the property and submit this Contract, together with a certified true copy of the TCT, Tax Declaration, Tax Clearance and Vicinity/Lot Plan, with their Lending Bank. The proceeds of the VENDEE’S Loan shall directly be paid and remitted by the Bank to the VENDORS;

3. The said parcel of land shall remain in the name of the VENDORS until the Lending Bank of the VENDEE shall have issued a Letter Guaranty Payment in favor of the VENDORS, at which time the VENDORS agree to execute a Deed of Absolute Sale in favor of the VENDEE and cause the issuance of the Certificate of Title in the name of the latter. The Capital Gains Tax and Documentary Stamps shall be charged from the VENDORS in accordance with law;

4. The payment of the balance of P2,224,000.00 by the VENDEE to the VENDORS shall be within a period of sixty (60) days effective from the date of this Contract. After the lapse of 60 days and the loan has not yet been released due to fortuitous events the VENDEE shall pay an interest of the balance a monthly interest based on existing bank rate until said fortuitous event is no longer present;

5. The VENDEE shall remove and relocate the Squatters, however, such actual, reasonable and necessary expenses shall be charged to the VENDORS upon presentation of receipts and documents to support the act;

6. The VENDEE shall be allowed for all legal purposes to take possession of the parcel of land after the execution of this Contract and payment of the downpayment;

7. The VENDEE shall shoulder all expenses like the documentation, registration, transfer tax and relocation of the property.

IN WITNESS WHEREOF, we have hereunto affixed our signatures this ____ day of February, 1995, at Quezon City, Philippines.

CONSTANTE E. FIRME BUKAL ENTERPRISES DEV. CORP.

VENDOR VENDEE

AZUCENA E. FIRME BY:

VENDOR ——————————————

President & Chief Executive Officer

x       x       x

The Spouses Firme did not accept the Third Draft because they found its provisions one-sided. The Spouses Firme particularly opposed the provision on the delivery of the Property’s title to Bukal Enterprises for the latter to obtain a loan from the bank and use the proceeds to pay for the Property. The Spouses Firme repeatedly told Aviles that the Property was not for sale when Aviles called on 2 and 4 March 1995 regarding the Property. On 6 March 1995, the Spouses Firme visited their Property and discovered that there was a hollow block fence on one side, concrete posts on another side and bunkers occupied by workers of a certain Florante de Castro. On 11 March 1995, Spouses Firme visited the Property again with a surveyor. Dr. Firme talked with Ancheta who told him that the squatters had voluntarily demolished their

118shanties. The Spouses Firme sent a letter 13 dated 20 March 1995 to Bukal Enterprises demanding removal of the bunkers and vacation by the occupants of the Property. On 22 March 1995, the Spouses Firme received a letter 14 dated 7 March 1995 from Bukal Enterprises demanding that they sell the Property. 15 

On 7 August 1998, the trial court rendered judgment against Bukal Enterprises as follows:

WHEREFORE, in the light of the foregoing premises, the above-entitled case [is] hereby DISMISSED and plaintiff BUKAL ENTERPRISES DEVELOPMENT CORPORATION is hereby ordered to pay the defendants Spouses Constante and Azucena Firme:

1. the sum of Three Hundred Thirty Five Thousand Nine Hundred Sixty Four and 90/100 (P335,964.90) as and by way of actual and compensatory damages;

2. the sum of Five Hundred Thousand Pesos (P500,000.00) as and by way of moral damages;

3. the sum of One Hundred Thousand Pesos (P100,000.00) as and by way of attorney’s fees; and

4. the costs of the suit.

SO ORDERED. 16 

Bukal Enterprises appealed to the Court of Appeals, which reversed and set aside the decision of the trial court. The dispositive portion of the decision reads:

WHEREFORE, premises considered, the Decision, dated August 7, 1998, is hereby REVERSED and SET ASIDE. The complaint is granted and the appellees are directed to henceforth execute the Deed of Absolute Sale transferring the ownership of the subject property to the appellant immediately upon receipt of the purchase price of P3,224,000.00 and to perform all such acts necessary and proper to effect the transfer of the property covered by TCT No. 264243 to appellant. Appellant is directed to deliver the payment of the purchase price of the property within sixty days from the finality of this judgment. Costs against appellees.

SO ORDERED.17 

Hence, the instant petition.

The Ruling of the Trial Court

The trial court held there was no perfected contract of sale. Bukal Enterprises failed to establish that the Spouses Firme gave their consent to the sale of the Property. The parties did not go beyond the negotiation stage and there was no evidence of meeting of the minds between the parties. Furthermore, Aviles had no valid authority to bind Bukal Enterprises in the sale transaction. Under Sections 23 and 36 (No. 7) of the Corporation Code, the corporate power to purchase a specific property is exercised by the Board of Directors of the corporation. Without an authorization from the Board of Directors, Aviles could not validly finalize the purchase of the Property on behalf of Bukal Enterprises. There is no basis to apply the Statute of Frauds since there was no perfected contract of sale.

The Ruling of the Court of Appeals

The Court of Appeals held that the lack of a board resolution authorizing Aviles to act on behalf of Bukal Enterprises in the purchase of the Property was cured by ratification. Bukal Enterprises ratified the purchase when it filed the complaint for the enforcement of the sale.

The Court of Appeals also held there was a perfected contract of sale. The appellate court ruled that the Spouses Firme revealed their intent to sell the Property when they met with Aviles twice. The Spouses Firme rejected the First Draft because they considered the terms unacceptable. When Aviles presented the Second Draft without the objectionable provisions, the Spouses Firme no longer had any cause for refusing to sell the Property. On the other hand, the acts of Bukal Enterprises in fencing the Property, constructing posts, relocating the squatters and obtaining a loan to purchase the Property are circumstances supporting their claim that there was a perfected contract of sale.

The Spouses Firme allowed Bukal Enterprises to exercise acts of ownership over the Property when the latter introduced

improvements on the Property and evicted the squatters. These acts constitute partial performance of the contract of sale that takes the oral contract out of the scope of the Statute of Frauds.

The Issues

The Spouses Firme raise the following issues:

1. WHETHER THE COURT OF APPEALS ERRED IN FINDING THAT THERE WAS A PERFECTED CONTRACT OF SALE BETWEEN PETITIONERS AND RESPONDENT DESPITE THE ADDUCED EVIDENCE PATENTLY TO THE CONTRARY;

2. WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ALLEGED CONTRACT OF SALE IS ENFORCEABLE DESPITE THE FACT THAT THE SAME IS COVERED BY THE STATUTE OF FRAUDS;

3. WHETHER THE COURT OF APPEALS ERRED IN DISREGARDING THE FACT THAT IT WAS NOT LEGALLY AND FACTUALLY POSSIBLE FOR RESPONDENT TO PERFECT A CONTRACT OF SALE; AND

4. THE COURT OF APPEALS ERRED IN RULING THAT THE AWARD BY THE TRIAL COURT OF MORAL AND COMPENSATORY DAMAGES TO PETITIONERS IS IMPROPER. 18 

The Ruling of the Court

The petition is meritorious.

The fundamental question for resolution is whether there was a perfected contract of sale between the Spouses Firme and Bukal Enterprises. This requires a review of the factual and legal issues of this case. As a rule, only questions of law are appealable to this Court under Rule 45 19 of the Rules of Civil Procedure. The findings of fact by the Court of Appeals are generally conclusive and binding on the parties and are not reviewable by this Court. 20 However, when the factual findings of the Court of Appeals are contrary to those of the trial court or when the inference made is manifestly mistaken, this Court has the authority to review the findings of fact. 21 Likewise, this Court may review findings of fact when the judgment of the Court of Appeals is premised on a misapprehension of facts. 22 This is the situation in this case.

Whether there was a perfected contract of sale

We agree with the finding of the trial court that there was no perfected contract of sale. Clearly, the Court of Appeals misapprehended the facts of the case in ruling otherwise.

First, the records indubitably show that there was no consent on the part of the Spouses Firme. Aviles did not present any draft deed of sale during his first meeting with the Spouses Firme on 30 January 1995. 23 Dr. Firme was consistent in his testimony that he and his wife rejected the provisions of the Third Draft presented by Aviles during their second meeting on 6 February 1995. The Spouses Firme found the terms and conditions unacceptable and told Aviles that they would not sell the property. 24 Aviles showed them only one draft deed of sale (Third Draft) during their second and last meeting on 6 February 1995. 25 When shown a copy of the First Draft, Dr. Firme testified that it was not the deed of sale shown to them by Aviles during their second meeting 26 and that the Third Draft was completely different from the First Draft. 27 

On the other hand, Aviles gave conflicting testimony as to what transpired during the two meetings with the Spouses Firme. In his direct examination, Aviles testified that during his first meeting with the Spouses Firme on 23 January 1995, he showed them the First Draft which the Spouses Firme rejected. 28 On their second meeting, Aviles showed the Spouses Firme the Second Draft, which the Spouses Firme allegedly approved because the objectionable conditions contained in the First Draft were already deleted. However, a perusal of the First Draft and the Second Draft would show that both deeds of sale contain exactly the same provisions. The only difference is that the date of the First Draft is February 1995 while that of the Second Draft is March 1995.

When Aviles testified again as rebuttal witness, his testimony became more confusing. Aviles testified that during his first meeting with the Spouses Firme on 30 January 1995, he showed them the Third Draft, which was not acceptable to the latter. 29 However, upon further questioning by his counsel, Aviles concurred with Dr. Firme’s testimony that he presented the Third Draft (Exh. "5" ; Exh. "L") to the Spouses Firme only during their second meeting. He also stated that he prepared

119and presented to the Spouses Firme the First Draft (Exh. "C") and the Second Draft (Exh. "C-1") during their first or second meeting. He testified:

ATTY. MARQUEDA:

Q: On page 11 of the tsn dated August 5, 1997 a question was posed "How did you find this draft the Contract of Sale which was presented to you by Mr. Aviles on the second meeting?" The answer is "On the first meeting(sic), we find it totally unacceptable, sir." 30 What can you say on this? Before that, Mr. Witness, what is this Contract of Sale that you presented to Mr. Aviles on the second meeting? Is this different from the Contract of Sale that was marked as Exhibit "5-L" ?

Q: May I see the document Exhibit 5-L? 31 

INTERPRETER:

Witness going over the record.

ATTY. MARQUEDA:

Q: Is that the same document that was presented by you to Mr. Firme on the second meeting or there is a different contract?

A: This is the same document — draft of the document that I submitted to them during our second meeting. That was February. This was the draft.

Q: What about Exhibit C and C-1 [which] were identified by you. When was this presented to Dr. Firme?

A: This is the same.

Q: Exhibit C and C-1?

A: Yes because I prepared two documents during our meeting. One already with notarial, the one without notarial page and the other one with notarial page already, so I prepared two documents but with the same contents both were dated February of 1995. 32 

Q: So, you are referring now to Exhibit C and C-1 for the plaintiff?

A: C-1 is already in the final form because we agreed already as to the date of the payment, so I prepared already another document which is dated March 1995. 33 (Emphasis supplied)

In his cross-examination, Aviles again changed his testimony. According to him, he presented the Third Draft to the Spouses Firme during their first meeting. 34 However, when he went over the records, he again changed his answer and stated that he presented the Third Draft during their second meeting. 35 

In his re-direct examination, Aviles gave another version of what he presented to the Spouses Firme during the two meetings. According to him, he presented the Third Draft during the first meeting. On their second meeting, he presented the First and the Second Drafts to the Spouses Firme. 36 

Furthermore, Aviles admitted that the first proposal of Bukal Enterprises was at P2,500 per square meter for the Property. 37 But the First, Second and Third Drafts of the deed of sale prepared by Aviles all indicated a purchase price of P4,000 per square meter or a lump sum of P3,224,000 (P4,000 per sq.m. x 806 sq.m. = P3,224,000) for the Property. Hence, Aviles could not have presented any of these draft deeds of sale to the Spouses Firme during their first meeting.

Considering the glaring inconsistencies in Aviles’ testimony, it was proper for the trial court to give more credence to the testimony of Dr. Firme.

Even after the two meetings with Aviles, the Spouses Firme were firm in their decision not to sell the Property. Aviles called the Spouses Firme twice after their last meeting. The Spouses Firme informed Aviles that they were not selling the Property. 38 Aviles himself admitted this during his testimony, thus:

Q. Now, the next question which states: "But did you not have any occasion to talk to him after that second meeting?" and the answer of Dr. Firme is "He called up a month after, that’s March 2, 1995." What can you say on this?

A. I called him to inform him that the loan was already

transferred from Makati to Padre Faura Branch of the Far East Bank, so I scheduled already the payment of their property.

Q. When?

A. On March 4, 1995.

Q. And then the next question which also states: "What did you talked (sic) about over the telephone?" The answer of Dr. Firme was "When I found out that he was calling, I told him that the property is not for sale." What can you say on this?

A. He mentioned that they are no longer interested to sell their property, perhaps they would like a higher price of the property. They did not mention to me. I do not know what was their reason.

Q. The next question "So, what happened next?" The answer is "He called up two days later, March 4 and my wife answered the telephone and told him that the property is not for sale, sir." What can you say on this?

A. That is true. That is what Mrs. Firme told me during our conversation on the telephone that they are no longer interested to sell the property for obvious reason.

Q. When was that?

A. March 4, 1995, your honor. 39 (Emphasis supplied)

Significantly, De Castro also admitted that he was aware of the Spouses Firme’s refusal to sell the Property. 40 

The confusing testimony of Aviles taken together with De Castro’s admission that he was aware of the Spouses Firme’s refusal to sell the Property reinforces Dr. Firme’s testimony that he and his wife never consented to sell the Property.

Consent is one of the essential elements of a valid contract. The Civil Code provides:

Art. 1318. There is no contract unless the following requisites concur:

1. Consent of the contracting parties;

2. Object certain which is the subject matter of the contract;

3. Cause of the obligation which is established.

The absence of any of these essential elements will negate the existence of a perfected contract of sale. 41 Thus, where there is want of consent, the contract is non-existent. 42 As held in Salonga, Et. Al. v. Farrales, Et. Al.: 43 

It is elementary that consent is an essential element for the existence of a contract, and where it is wanting, the contract is non-existent. The essence of consent is the conformity of the parties on the terms of the contract, the acceptance by one of the offer made by the other. The contract to sell is a bilateral contract. Where there is merely an offer by one party, without the acceptance of the other, there is no consent. (Emphasis supplied)

In this case, the Spouses Firme flatly rejected the offer of Aviles to buy the Property on behalf of Bukal Enterprises. There was therefore no concurrence of the offer and the acceptance on the subject matter, consideration and terms of payment as would result in a perfected contract of sale. 44 Under Article 1475 of the Civil Code, the contract of sale is perfected at the moment there is a meeting of minds on the thing which is the object of the contract and on the price.

Another piece of evidence which supports the contention of the Spouses Firme that they did not consent to the contract of sale is the fact they never signed any deed of sale. If the Spouses Firme were already agreeable to the offer of Bukal Enterprises as embodied in the Second Draft, then the Spouses Firme could have simply affixed their signatures on the deed of sale, but they did not.

Even the existence of a signed document purporting to be a contract of sale does not preclude a finding that the contract is invalid when the evidence shows that there was no meeting of the minds between the seller and buyer. 45 In this case, what were offered in evidence were mere unsigned deeds of sale which have no probative value. 46 Bukal Enterprises failed to show the existence of a perfected contract of sale by competent proof.

Second, there was no approval from the Board of Directors of

120Bukal Enterprises as would finalize any transaction with the Spouses Firme. Aviles did not have the proper authority to negotiate for Bukal Enterprises. Aviles testified that his friend, De Castro, had asked him to negotiate with the Spouses Firme to buy the Property. 47 De Castro, as Bukal Enterprises’ vice president, testified that he authorized Aviles to buy the Property. 48 However, there is no Board Resolution authorizing Aviles to negotiate and purchase the Property on behalf of Bukal Enterprises. 49 

It is the board of directors or trustees which exercises almost all the corporate powers in a corporation. Thus, the Corporation Code provides:

SEC. 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 stock, 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. . . .

SEC. 36.Corporate powers and capacity. — Every corporation incorporated under this Code has the power and capacity:

x       x       x

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of a lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by the law and the Constitution.

x       x       x

Under these provisions, the power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. 50 A corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or its by-laws. 51 As held in AF Realty & Development, Inc. v. Dieselman Freight Services, Co.: 52 

Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director, are held not binding on the corporation. (Emphasis supplied)

In this case, Aviles, who negotiated the purchase of the Property, is neither an officer of Bukal Enterprises nor a member of the Board of Directors of Bukal Enterprises. There is no Board Resolution authorizing Aviles to negotiate and purchase the Property for Bukal Enterprises. There is also no evidence to prove that Bukal Enterprises approved whatever transaction Aviles made with the Spouses Firme. In fact, the president of Bukal Enterprises did not sign any of the deeds of sale presented to the Spouses Firme. Even De Castro admitted that he had never met the Spouses Firme. 53 Considering all these circumstances, it is highly improbable for Aviles to finalize any contract of sale with the Spouses Firme.

Furthermore, the Court notes that in the Complaint filed by Bukal Enterprises with the trial court, Aviles signed 54 the verification and certification of non-forum shopping. 55 The verification and certification of non-forum shopping was not accompanied by proof that Bukal Enterprises authorized Aviles to file the complaint on behalf of Bukal Enterprises.

The power of a corporation to sue and be sued is exercised by the board of directors. "The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors." 56 

The purpose of verification is to secure an assurance that the allegations in the pleading are true and correct and that it is filed in good faith. 57 True, this requirement is procedural and not jurisdictional. However, the trial court should have ordered the correction of the complaint since Aviles was neither an officer of Bukal Enterprises nor authorized by its Board of Directors to act on behalf of Bukal Enterprises.

Whether the Statute of Frauds is applicable

The Court of Appeals held that partial performance of the contract of sale takes the oral contract out of the scope of the Statute of Frauds. This conclusion arose from the appellate court’s erroneous finding that there was a perfected contract of sale. The records show that there was no perfected contract of sale. There is therefore no basis for the application of the Statute of Frauds. The application of the Statute of Frauds presupposes the existence of a perfected contract. 58 Article 1403 of the Civil Code provides:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing and subscribed by the party charged or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

x       x       x

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

x       x       x

Whether Bukal Enterprises is a builder in good faith

Bukal Enterprises is not a builder in good faith. The Spouses Firme did not accept Aviles’ offer to purchase the Property. Aviles testified that when he called the Spouses Firme on 2 March 1995, Dr. Firme informed him that they were no longer interested in selling the Property. On 4 March 1995, Aviles called again and this time Mrs. Firme told him that they were not selling the Property. Aviles informed De Castro of the refusal of the Spouses Firme to sell the Property. However, Bukal Enterprises still proceeded in relocating the squatters and constructing improvements on the Property. De Castro testified:

ATTY. EJERCITO:

Q: The truth of the matter, Mr. Witness, is that the post was constructed sometime late 1994. Is that not correct?

A: No, sir. It is not true.

Q: When was it constructed?

A: That March.

Q: When in March?

A: 1995.

Q: When in March 1995?

A: From the period of March 2, 1995 or two (2) weeks after the removal of the squatters.

Q: When were the squatters removed?

WITNESS:

A: March 6 and 7 because there were four (4) squatters.

ATTY. EJERCITO:

Q: When did you find out that the Spouses Firme did not want to sell the same?

A: First week of March 1995.

Q: In your Complaint you said you find out on March 3, 1995. Is that not correct?

121

A: I cannot exactly remember, sir.

ATTY. MARQUEDA:

In the Complaint it does not state March 3. Maybe counsel was thinking of this Paragraph 6 which states, "When the property was rid of the squatters on March 2, 1995 for the documentation and payment of the sale, . . ." .

ATTY. EJERCITO:

Q: So, you found out on March 2, 1995 that the defendants were no longer interested in selling to you the property. Is that correct?

A: Yes, sir, because Mr. Aviles relayed it to me.

Q: Mr. Aviles relayed to you that the Spouses Firme were no longer interested in selling to you the property in March 2, 1995. Is that correct?

A: Yes, sir. Mr. Aviles told me.

Q: In so many words, Mr. Witness, you learned that the Spouses Firme were no longer interested in selling the property before you spent allegedly all the sum of money for the relocation of squatters for all this construction that you are telling this Court now?

WITNESS:

A: The refusal to sell is not yet formal and the lawyer sent a letter tendering full payment of the purchase price.

ATTY. EJERCITO:

Q: You mean to say that you did not believe Mr. Aviles when he told you that the Spouses Firme were no longer selling the property?

A: No, sir.

Q: Was there anything formal when you say the Spouses Firme agreed to sell the property?

A: None, sir.

Q: And yet that time you believe Mr. Aviles when he verbally told you that the Sps. Firme agreed to sell the property? At what point of the transaction with the Spouses Firme were you advised by your lawyer?

WITNESS:

A: At the time when they refused to sell the lot.

ATTY. EJERCITO:

Q: Was that before the squatters were relocated allegedly by Bukal Enterprises?

A: Yes, sir.

Q: In fact, it was the lawyer who advised you to relocate the squatters. Is it not true?

A: No, sir. 59 (Emphasis supplied)

Bukal Enterprises is obviously a builder in bad faith. No deed of sale has been executed in this case. Despite the refusal of the Spouses Firme to sell the Property, Bukal Enterprises still proceeded to introduce improvements on the Property. Bukal Enterprises introduced improvements on the Property without the knowledge and consent of the Spouses Firme. When the Spouses Firme learned about the unauthorized constructions made by Bukal Enterprises on the Property, they advised the latter to desist from further acts of trespass on their Property. 60 

The Civil Code provides:

Art. 449. He who builds, plants or sows in bad faith on the land of another, loses what is built, planted or sown without right of indemnity.

Art. 450. The owner of the land on which anything has been built, planted or sown in bad faith may demand the demolition of the work, or that the planting or sowing be removed, in order to replace things in their former condition at the expense of the person who built, planted or sowed; or he may

compel the builder or planter to pay the price of the land, and the owner the proper rent.

Under these provisions the Spouses Firme have the following options: (1) to appropriate what Bukal Enterprises has built without any obligation to pay indemnity; (2) to ask Bukal Enterprises to remove what it has built; or (3) to compel Bukal Enterprises to pay the value of the land. 61 Since the Spouses Firme are undoubtedly not selling the Property to Bukal Enterprises, they may exercise any of the first two options. They may appropriate what has been built without paying indemnity or they may ask Bukal Enterprises to remove what it has built at Bukal Enterprises’ own expense.

Bukal Enterprises is not entitled to reimbursement for the expenses incurred in relocating the squatters. Bukal Enterprises spent for the relocation of the squatters even after learning that the Spouses Firme were no longer interested in selling the Property. De Castro testified that even though the Spouses Firme did not require them to remove the squatters, they chose to spend for the relocation of the squatters since they were interested in purchasing the Property. 62 

Whether the Spouses Firme are entitled to compensatory and moral damages

The Court agrees with the Court of Appeals to delete the award for compensatory and moral damages. In awarding actual damages, the trial court took into account the traveling expenses incurred by the Spouses Firme who are already residing in the United States. However, the trial court failed to consider the testimony of Dr. Firme that they normally travel to the Philippines more than once a year to visit their children. 63 Thus, the expenses for the roundtrip tickets dated 1996-1997 could not be attributed solely for the attendance of hearings in the case.

Nevertheless, an award of nominal damages of P30,000 is warranted since Bukal Enterprises violated the property rights of the Spouses Firme. 64 The Civil Code provides:

Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.

Art. 2222. The court may award nominal damages in every obligation arising from any source enumerated in article 1157, or in every case where any property right has been invaded.

The award of damages is also in accordance with Article 451 of the Civil Code which states that the landowner is entitled to damages from the builder in bad faith. 65 

WHEREFORE, we SET ASIDE the Decision of the Court of Appeals and RENDER a new one:

1. Declaring that there was no perfected contract of sale;

2. Ordering Bukal Enterprises to pay the Spouses Firme P30,000 as nominal damages.

SO ORDERED.

EN BANC

[G.R. No. L-15092. May 18, 1962. ]

ALFREDO MONTELIBANO, ET AL., Plaintiffs-Appellants, v. BACOLOD-MURCIA MILLING CO., INC., Defendant-

Appellee. 

SYLLABUS

1. SUGAR CENTRALS; MILLING CONTRACTS; CONCESSIONS GIVEN BY CENTRAL TO PLANTERS, IF RETRACTED, WILL CONSTITUTE FRAUD; CASE AT BAR. — Since there is no rational explanation for the company’s asserting to the further concessions asked by the planters before the contracts were signed, except as further inducement for the planters to agree to the extension of the contract period, to allow the company now to retract such concessions would be to sanction a fraud upon he planters who relied on such additional stipulation. 

2. CONTRACTS; NOVATION; MODIFICATION BEFORE A BARGAIN NOT NOVATION IN LAW. — There can be no novation unless two distinct and successive binding contracts take

122place, with the later one designed to replace the preceding convention. Modifications introduced before a bargain becomes obligatory can in no sense constitute novation in law. 

3. ID.; ASSENT AND CONCURRENCE OF PARTIES NECESSARY TO PERFECT A CONTRACT; SETTING DOWN OF TERMS NOT IMPORTANT EXCEPT IN CERTAIN CASES. — Except in the case of statutory forms or solemn agreements, it is the assent and concurrence of the parties, and not the setting down of its terms, that constitute a binding contract. 

4. CORPORATIONS; EXERCISE OF CHARTER POWERS; TESTS TO BE APPLIED. — "It is a question, therefore, in each case, of the logical relation of the act as to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not." (Fletcher Cyc. corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)

5. ID.; ID.; QUESTION ON PROBABLE LOSSES OR DECREASE IN PROFITS NOT REVIEWABLE BY COURTS. — Whether or not a valid and binding resolution passed by the board of directors, will cause losses or decrease the profits of the corporation, may not be reviewed by the courts.

D E C I S I O N

Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros, in its Civil Case No. 2603, dismissing plaintiff’s complaint that sought to compel the defendant Milling Company to increase plaintiff’s share in the sugar produced from their cane, from 60% to 62.33 %, starting from the 1951-1952 crop year. 

It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the limited co-partnership Gonzaga and Company, had been and are sugar planters adhered to the defendant- appellee’s sugar central mill under identical milling contracts. Originally executed in 1919, said contracts were stipulated to be in force for 30 years starting with the 1920-21 crop, and provided that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was proposed to execute amended milling contracts, increasing the planters’ share to 60% of the manufactured sugar and resulting molasses, besides other concessions, but extending the operation of the milling contract from the original 30 years to 45 years. To this effect, a printed Amended Milling Contract form was drawn up. On August 20, 1936, the Board of Directors of the appellee Bacolod Murcia Milling Co., Inc., adopted a resolution (Acta No. 11, Acuerdo No. 1) granting further concessions to the planters over and above those contained in the printed Amended Milling Contract. The bone of contention is paragraph 9 of this resolution, that reads as follows:

"ACTA NO. 11

SESION DE LA JUNTA DIRECTIVA

AGOSTO 20, 1936

x       x       x

Acuerdo No. 1 — Previa mocion debidamente secundada, la Junta en consideración a una peticion de los plantadores hecha por un comité nombrado por los mismos, acuerda enmendar el contrato de molienda enmendado mediante las siguientes:" 

x       x       x

"9.a Que si durante la vigencia de este contrato de Molienda Enmendado, las centrales azucareras, de Negros Occidental, cuya producción anual de azucar centrifugado sea mas de una tercera parte de la producción total anual de todas las centrales azucareras de Negros Occidental, concedieren a sus plantadores mejores condiciones que las estipuladas en el presente contrato, entonces esas mejores condiciones se concederan y por el presente se entenderan concedidas a los plantadores que hayan otorgado este Contrato de Molienda Enmendado."

Appellants signed and executed the printed Amended Milling Contract on September 10, 1936; but a copy of the resolution of August 20, 1936, signed by the Central’s General Manager, was not attached to the printed contract until April 17, 1937; with the notation —

"Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado, otorgado por — y la Bacolod Murcia Milling Co., Inc."

In 1953, the appellants initiated the present action, contending that three Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production exceeding one-third of the production of all the sugar central mills in the province, had already granted increased participation (of 62.5%) to their planters, and that under paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had become obligated to grant similar concessions to the plaintiffs (appellants herein). The appellee Bacolod Murcia Milling Co., Inc., resisted the claim, and defended by urging that the stipulations contained in the resolution were made without consideration; that the resolution in question was, therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt. 

After trial, the court below rendered judgment upholding the stand of the defendant milling company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court. 

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

It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 were supported by the same causa or consideration underlying the main amended milling contract; i.e., the promises and obligations undertaken thereunder by the planters, and, particularly, the extension of its operative period for an additional 15 years over and beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court below that the resolution constituted gratuitous concessions not supported by any consideration is legally untenable. 

All disquisition concerning donations and the lack of power of the directors of the respondent sugar milling company to make a gift to the planters would be relevant if the resolution in question had embodied a separate agreement after the appellants had already bound themselves to the terms of the printed milling contract. But this was not the case. When the resolution was adopted and the additional concessions were made by the company, the appellants were not yet obligated by the terms of the printed contract, since they admittedly did not sign it until twenty-one days later, on September 10, 1936. Before that date, the printed form was no more than a proposal that either party could modify at its pleasure, and the appellee actually modified it by adopting the resolution in question. So that by September 10, 1936, defendant corporation already understood that the printed terms were not controlling, save as modified by its resolution of August 20, 1936; and we are satisfied that such was also the understanding of appellants herein, and that the minds of the parties met upon that basis. Otherwise there would have been no consent or" meeting of the minds", and no binding contract at all. But the conduct of the parties indicates that they assumed, and they do not now deny, that the signing of the contract on September 10, 1962 did give rise to a binding agreement. That agreement had to exist on the basis of the printed terms as modified by the resolution of August 20, 1936, or not at all. Since there is no rational explanation for

123the Company’s assenting to the further concessions asked by the planters before the contracts were signed, except as further inducement for the planters to agree to the extension of the contract period, to allow the company now to retract such concessions would be to sanction a fraud upon the planters who relied on such additional stipulations. 

The same considerations apply to the "void novation" theory of appellees. There can be no novation unless two distinct and successive binding contracts take place, with the later one designed to replace the preceding convention. Modifications introduced before a bargain become obligatory and can in no sense constitute novation in law. 

Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached to the printed contract until April 17, 1937. But, except in the case of statutory forms or solemn agreements (and it is not claimed that this is one), it is the assent and concurrence (the "meeting of the minds") of the parties, and not the setting down of its terms, that constitute a binding contract. And the fact that the addendum is only signed by the General Manager of the milling company emphasizes that the addition was made solely in order that the memorial of the terms of the agreement should be full and complete. 

Much is made of the circumstance that the report submitted by the Board of Directors of the appellee company in November 19, 1936 (Exhibit 4) only made mention of the 90 per cent, the planters having agreed to the 60-40 sharing of the sugar set forth in the printed "amended milling contract", and did not make any reference at all to the terms of the resolution of August 20, 1936. But a reading of this report shows that it was not intended to inventory all the details of the amended contract; numerous provisions of the printed terms are also glossed over. The Directors of the appellee Milling Company had no reason at the time to call attention to the provisions of the resolution in question, since it contained mostly modifications in detail of the printed terms, and the only major change was paragraph 9 heretofore quoted; but when the report was made, that paragraph was not yet in effect, since it was conditioned on other centrals granting better concessions to their planters, and that did not happen until after 1950. There was no reason in 1936 to emphasize a concession that was not yet, and might never be, in effective operation. 

There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties. The rule is that — 

"It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not."(Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)

As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. 

"They hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of a corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation and not by the court. It is a well-known rule of law that questions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390)

And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual sugar

production in Occidental Negros) have granted progressively increasing participations to their adhered planters, at an average rate of

62.333% for the 1951-52 crop year;

64.2% for the 1952-53;

64.3% for the 1953-54;

64.5% for the 1954-55; and

63.5% for the 1955-1956,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein. 

WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed sentencing defendant-appellee to pay plaintiffs-appellants the differential or increase of participation in the milled sugar in accordance with paragraph 9 of the appellee’s Resolution of August 20, 1936, over and in addition to the 60% expressed in the printed Amended Milling Contract, or the value thereof when due, as follows:

0.333% to appellants Montelibano for the 1951-1952 crop year, said appellants having received an additional 2% corresponding to said year in October, 1953;

2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants thereafter —

4.2% for the 1952-1953 crop year;

4.3% for the 1953-1954 crop year;

4.5% for the 1954-1955 crop year;

3.5% for the 1955-1956 crop year;

with interest at the legal rate on the value of such differential during the time they were withheld; and the right is reserved to plaintiffs-appellants to sue for such additional increases as they may be entitled to for the crop years subsequent to those herein adjudged. 

Costs against appellee, Bacolod-Murcia Milling Co. 

THIRD DIVISION

[G.R. NO. 150711 : August 10, 2006]

CALTEX (PHILIPPINES), INC., Petitioner, v. PNOC SHIPPING AND TRANSPORT CORPORATION, Respondent.

D E C I S I O N

The Case

Before the Court is a Petition for Review 1 assailing the 31 May 2001 Decision2 and 9 November 2001 Resolution3 of the Court of Appeals in CA-G.R. CV No. 46097. The Court of Appeals reversed the 1 June 1994 Decision4 of the Regional Trial Court of Manila, Branch 51 ("trial court"), and dismissed the complaint filed by Caltex (Philippines), Inc. ("Caltex") against PNOC Shipping and Transport Corporation (PSTC).

The Antecedent Facts

On 6 July 1979, PSTC and Luzon Stevedoring Corporation ("LUSTEVECO") entered into an Agreement of Assumption of Obligations ("Agreement"). The Agreement provides that PSTC shall assume all the obligations of LUSTEVECO with respect to the claims enumerated in Annexes "A" and "B" ("Annexes") of the Agreement. The Agreement also provides that PSTC shall control the conduct of any litigation pending or which may be filed with respect to the claims in the Annexes. The Agreement further provides that LUSTEVECO shall deliver to PSTC all papers and records of the claims in the Annexes. Finally, the Agreement provides that LUSTEVECO appoints and constitutes PSTC as its attorney-in-fact to demand and receive any claim out of the countersuits and counterclaims arising from the claims in the Annexes.

124Among the actions enumerated in the Annexes is Caltex (Phils.), Inc. v. Luzon Stevedoring Corporation docketed as AC-G.R. CV No. 62613 which at that time was pending before the then Intermediate Appellate Court (IAC). The case was an appeal from the Decision by the then Court of First Instance of Manila (CFI) directing LUSTEVECO to pay Caltex P103,659.44 with legal interest from the filing of the action until full payment. In its 12 November 1985 Decision,5 the IAC affirmed with modification the Decision of the CFI. The dispositive portion of the Decision reads:

WHEREFORE, the decision appealed from is hereby MODIFIED and judgment is rendered ordering the defendant [LUSTEVECO] to pay plaintiff [Caltex]:

(a) P126,771.22 under the first cause of action, with legal interest until fully paid;

(b) P103,659.44 under the second cause of action with legal interest until fully paid;

(c) 10% of the sums due as and for attorney's fees;

(d) costs of the suit.

SO ORDERED.6

The Decision of the IAC became final and executory.

The Regional Trial Court of Manila, Branch 12, issued a writ of execution in favor of Caltex. However, the judgment was not satisfied because of the prior foreclosure of LUSTEVECO's properties. The Manila Bank Intramuros Branch and the Traders Royal Bank Aduana Branch did not respond to the notices of garnishment.

Caltex subsequently learned of the Agreement between PSTC and LUSTEVECO. Caltex sent successive demands to PSTC asking for the satisfaction of the judgment rendered by the CFI. PSTC requested for the copy of the records of AC-G.R. CV No. 62613. Later, PSTC informed Caltex that it was not a party to AC-G.R. CV No. 62613 and thus, PSTC would not pay LUSTEVECO's judgment debt. PSTC advised Caltex to demand satisfaction of the judgment directly from LUSTEVECO.

Caltex continued to send several demand letters to PSTC. On 5 February 1992, Caltex filed a complaint for sum of money against PSTC. The case was docketed as Civil Case No. 91-59512.

On 1 June 1994, the trial court rendered its Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff, ordering defendant to pay plaintiff the sums due the latter in the decision rendered by the Court of Appeals in CA-G.R. No. 62613, CALTEX v. LUSTEVECO, or to pay plaintiff (Exhibit "C"):

(a) P126,771.22 under the first cause of action, with legal interest from the date of the promulgation of the decision on November 12, 1985 until fully paid;

(b) P103,659.44 under the second cause of action with legal interest from the date of the promulgation of the decision on November 12, 1985 until fully paid;

(c) 10% of the sums due as and for attorney's fees; and

(d) Costs of suit.

SO ORDERED.7

PSTC appealed the trial court's Decision.

The Ruling of the Court of Appeals

In its 31 May 2001 Decision, the Court of Appeals found the appeal meritorious. The Court of Appeals ruled that Caltex has no personality to sue PSTC. The Court of Appeals held that non-compliance with the Agreement could only be questioned by the signatories to the contract, namely, LUSTEVECO and PSTC. The Court of Appeals stated that LUSTEVECO and PSTC are the only parties who can file an action to enforce the Agreement. The Court of Appeals considered fatal the omission of LUSTEVECO, the real party in interest, as a party

defendant in the case. The Court of Appeals further ruled that Caltex is not a beneficiary of a stipulation pour autrui because there is no stipulation in the Agreement which clearly and deliberately favors Caltex.

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the appealed Decision dated June 1, 1994, rendered by the Regional Trial Court of Manila, Branch 51, is hereby REVERSED and SET ASIDE and a new one entered DISMISSING the complaint filed by appellee [Caltex], against appellant [PSTC], for want of cause of action.

SO ORDERED.8

Caltex filed a motion for reconsideration of the 31 May 2001 Decision. In a Resolution promulgated on 9 November 2001, the Court of Appeals denied the motion for lack of merit.

Hence, this petition before this Court.

The Issues

The issues in this case are:

1. Whether PSTC is bound by the Agreement when it assumed all the obligations of LUSTEVECO; and

2. Whether Caltex is a real party in interest to file an action to recover from PSTC the judgment debt against LUSTEVECO.

The Ruling of this Court

The petition is meritorious.

Caltex May Recover from PSTC Under the Terms of the Agreement

Caltex may recover the judgment debt from PSTC not because of a stipulation in Caltex's favor but because the Agreement provides that PSTC shall assume all the obligations of LUSTEVECO.

In this case, LUSTEVECO transferred, conveyed and assigned to PSTC all of LUSTEVECO's business, properties and assets pertaining to its tanker and bulk business "together with all the obligations relating to the said business, properties and assets." The Agreement, reproduced here in full, provides:

AGREEMENT OF ASSUMPTION

OF OBLIGATIONS

KNOW ALL MEN BY THESE PRESENTS:

This Agreement of Assumption of Obligations made and executed this 6th day of July 1979, in the City of Manila, by and between:

LUZON STEVEDORING CORPORATION, a corporation duly organized and existing under and by virtue of Philippine Laws, with offices at Tacoma and Second Streets, Port Area, Manila, represented by GERONIMO Z. VELASCO, in his capacity as Chairman of the Board, hereinafter referred to as ASSIGNOR,

- and -

PNOC SHIPPING AND TRANSPORT CORPORATION, a corporation duly organized and existing under and by virtue of Philippine Laws, with offices at Makati Avenue, Makati, Metro Manila, represented by MARIO V. TIAOQUI, in his capacity as Vice-President, hereinafter referred to as ASSIGNEE,

WITNESSETH : T h a t -

WHEREAS, on April 1, 1979, ASSIGNOR, for valuable consideration, executed an Agreement of Transfer with ASSIGNEE whereby ASSIGNOR transferred, conveyed and assigned unto ASSIGNEE all of ASSIGNOR's business, properties and assets appertaining to its tanker and bulk all (sic) departments, together with all the obligations relating to said business, properties and assets;

125WHEREAS, relative to the conduct, operation and management of the business, properties and assets transferred, conveyed and assigned by ASSIGNOR to ASSIGNEE certain actions and claims particularly described in Annex "A" consisting of four (4) pages and Annex "B", consisting of one (1) page, attached hereto and made integral parts hereof, have been filed, either with ASSIGNOR or with appropriate courts and administrative tribunals.

WHEREAS, under the terms and conditions hereinafter mentioned, ASSIGNEE agree[s] to assume the obligations incident and relative to the actions and claims enumerated and described in Annexes "A" and "B" hereof.

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereto have agreed as follows:

1. ASSIGNEE shall assume, as it hereby assumes all the obligations of ASSIGNOR in respect to the actions and claims and described in Annexes "A" and "B";

2. ASSIGNEE shall have complete control in the conduct of any and all litigations now pending or may be filed with respect to the actions and claims enumerated and described in Annexes "A" and "B";

3. ASSIGNOR shall deliver and convey unto ASSIGNEE all papers, documents, files and any other records appertaining to the actions and claims enumerated and described in Annexes "A" and "B";

4. ASSIGNOR hereby constitutes and appoints ASSIGNEE, its successors and assigns, the true and lawful attorney of ASSIGNOR, with full power of substitution, for it and in its name, place and stead or otherwise, but on behalf and for the benefit of ASSIGNEE, its successors and assigns, to demand and receive any and all claim[s] out of countersuits or counterclaims arising from the actions and claims enumerated and described in Annexes "A" and "B".9 (Emphasis supplied)cralawlibrary

When PSTC assumed all the properties, business and assets of LUSTEVECO pertaining to LUSTEVECO's tanker and bulk business, PSTC also assumed all of LUSTEVECO's obligations pertaining to such business. The assumption of obligations was stipulated not only in the Agreement of Assumption of Obligations but also in the Agreement of Transfer. The Agreement specifically mentions the case between LUSTEVECO and Caltex, docketed as AC-G.R. CV No. 62613, then pending before the IAC. The Agreement provides that PSTC may demand and receive any claim out of counter-suits or counterclaims arising from the actions enumerated in the Annexes.

PSTC is bound by the Agreement. PSTC cannot accept the benefits without assuming the obligations under the same Agreement. PSTC cannot repudiate its commitment to assume the obligations after taking over the assets for that will amount to defrauding the creditors of LUSTEVECO. It will also result in failure of consideration since the assumption of obligations is part of the consideration for the transfer of the assets from LUSTEVECO to PSTC. Failure of consideration will revert the assets to LUSTEVECO for the benefit of the creditors of LUSTEVECO. Thus, PSTC cannot escape from its undertaking to assume the obligations of LUSTEVECO as stated in the Agreement.

Disposition of Assets should not Prejudice Creditors

Even without the Agreement, PSTC is still liable to Caltex.

The disposition of all or substantially all of the assets of a corporation is allowed under Section 40 of Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the Philippines ("Corporation Code"). Section 40 provides:

SEC. 40. Sale or other disposition of assets. ─ Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors, or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of non-

stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets, if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purposes for which it was incorporated.

x x x

While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignor's liabilities,10 unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud.11 To allow an assignor to transfer all its business, properties and assets without the consent of its creditors and without requiring the assignee to assume the assignor's obligations will defraud the creditors. The assignment will place the assignor's assets beyond the reach of its creditors.

Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of execution could not be satisfied because LUSTEVECO's remaining properties had been foreclosed by lienholders. In addition, all of LUSTEVECO's business, properties and assets pertaining to its tanker and bulk business had been assigned to PSTC without the knowledge of its creditors. Caltex now has no other means of enforcing the judgment debt except against PSTC.

If PSTC refuses to honor its written commitment to assume the obligations of LUSTEVECO, there will be fraud on the creditors of LUSTEVECO. PSTC agreed to take over, and in fact took over, all the assets of LUSTEVECO upon its express written commitment to pay all obligations of LUSTEVECO pertaining to those assets, including specifically the claim of Caltex. LUSTEVECO no longer informed its creditors of the transfer of all of its assets presumably because PSTC committed to pay all such creditors. Such transfer, leaving the claims of creditors unenforceable against the debtor, is fraudulent and rescissible.12 To allow PSTC now to welsh on its commitment is to sanction a fraud on LUSTEVECO's creditors.13

In Oria v. McMicking, the Court enumerated the badges of fraud as follows:

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has been begun and while it is pending against him.

3. A sale upon credit by an insolvent debtor.

4. Evidence of large indebtedness or complete insolvency.

5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially.

6. The fact that the transfer is made between father and son, when there are present other of the above circumstances.

7. The failure of the vendee to take exclusive possession of all the property.14 (Emphasis supplied)cralawlibrary

In Pepsi-Cola Bottling Co. v. NLRC,15 which involved the illegal dismissal of the employees of Pepsi-Cola Distributors of the Philippines (PCD), the Court has ruled that Pepsi-Cola Products Philippines, Inc. (PCPPI) which acquired the franchise of PCD is liable for the reinstatement of PCD's employees. The Court rejected PCPPI's argument that it is a company separate

126and distinct from PCD. The Court ruled that the complaint was filed when PCD was still in existence. Further, there was no evidence that PCPPI, as the new entity or purchasing company, was free from any liabilities incurred by PCD.

In this case, PSTC was aware of the pendency of the case between Caltex and LUSTEVECO. PSTC assumed LUSTEVECO's obligations, including specifically any obligation that might arise from Caltex's suit against LUSTEVECO. The Agreement transferred the unencumbered assets of LUSTEVECO to PSTC, making any money judgment in favor of Caltex unenforceable against LUSTEVECO. To allow PSTC to renege on its obligation under the Agreement will allow PSTC to defraud Caltex. This militates against the statutory policy of protecting creditors from fraudulent contracts.

Article 1313 of the Civil Code provides that "[c]reditors are protected in cases of contracts intended to defraud them." Further, Article 1381 of the Civil Code provides that contracts entered into in fraud of creditors may be rescinded when the creditors cannot in any manner collect the claims due them.16 Article 1381 applies to contracts where the creditors are not parties, for such contracts are usually made without their knowledge. Thus, a creditor who is not a party to a contract can sue to rescind the contract to prevent fraud upon him. Or, the same creditor can instead choose to enforce the contract if a specific provision in the contract allows him to collect his claim, and thus protect him from fraud.

If PSTC does not assume the obligations of LUSTEVECO as PSTC had committed under the Agreement, the creditors of LUSTEVECO could no longer collect the debts of LUSTEVECO. The assignment becomes a fraud on the part of PSTC, because PSTC would then have inveigled LUSTEVECO to transfer the assets on the promise to pay LUSTEVECO's creditors. However, after taking over the assets, PSTC would now turn around and renege on its promise.

The Agreement, under Article 1291 of the Civil Code,17 is also a novation of LUSTEVECO's obligations by substituting the person of the debtor. Under Article 1293 of the Civil Code, a novation which consists in substituting a new debtor in place of the original debtor cannot be made without the consent of the creditor.18 Here, since the Agreement novated the debt without the knowledge and consent of Caltex, the Agreement cannot prejudice Caltex. Thus, the assets that LUSTEVECO transferred to PSTC in consideration, among others, of the novation, or the value of such assets, remain even in the hands of PSTC subject to execution to satisfy the judgment claim of Caltex.

Caltex is a Real Party in Interest

Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides:

SEC. 2. Parties in interest. â”€ A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law or these Rules, every action must be prosecuted or defended in the name of the real party in interest.

Ordinarily, one who is not a privy to a contract may not bring an action to enforce it. However, this case falls under the exception. In Oco v. Limbaring, we ruled:

The parties to a contract are the real parties in interest in an action upon it, as consistently held by the Court. Only the contracting parties are bound by the stipulation in the contract; they are the ones who would benefit from and could violate it. Thus, one who is not a party to a contract, and for whose benefit it was not expressly made, cannot maintain an action on it. One cannot do so, even if the contract performed by the contracting parties would incidentally inure to one's benefit.

As an exception, parties who have not taken part in a contract may show that they have a real interest affected by its performance or annulment. In other words, those who are not principally or subsidiarily obligated in a contract, in which they had no intervention, may show their detriment that could result from it. x x x19 (Emphasis supplied)cralawlibrary

Caltex may enforce its cause of action against PSTC because PSTC expressly assumed all the obligations of LUSVETECO

pertaining to its tanker and bulk business and specifically, those relating to AC-G.R. CV No. 62613. While Caltex is not a party to the Agreement, it has a real interest in the performance of PSTC's obligations under the Agreement because the non-performance of PSTC's obligations will defraud Caltex.

Even if PSTC did not expressly assume to pay the creditors of LUSTEVECO, PSTC would still be liable to Caltex up to the value of the assets transferred. The transfer of all or substantially all of the unencumbered assets of LUSTEVECO to PSTC cannot work to defraud the creditors of LUSTEVECO. A creditor has a real interest to go after any person to whom the debtor fraudulently transferred its assets.

WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001 Decision and 9 November 2001 Resolution of the Court of Appeals in CA-G.R. CV No. 46097. We AFFIRM the 1 June 1994 Decision of the Regional Trial Court of Manila, Branch 51, in Civil Case No. 91-59512. Costs against respondent.

SO ORDERED.