Corporation Law Cases Full Text

G.R. No. L-14441 December 17, 1966

PEDRO R. PALTING, petitioner, vs.SAN JOSE PETROLEUM INCORPORATED, respondent.

BARRERA, J.:

This is a petition for review of the order of August 29, 1958, later supplemented and amplified by another dated September 9, 1958, of the Securities and Exchange Commission denying the opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of 5,000,000 shares of the capital stock of the respondent-appellee San Jose Petroleum, Inc. (hereafter referred to as SAN JOSE PETROLEUM), a corporation organized and existing in the Republic of Panama.

On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and Exchange Commission a sworn registration statement, for the registration and licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital stock of a par value of $0.35 a share, at P1.00 per share. It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to finance the operations of San Jose Oil Company, Inc. (a domestic mining corporation hereafter to be referred to as SAN JOSE OIL) which has 14 petroleum exploration concessions covering an area of a little less than 1,000,000 hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and Agusan. It was the express condition of the sale that every purchaser of the securities shall not receive a stock certificate, but a registered or bearer-voting-trust certificate from the voting trustees named therein James L. Buckley and Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and the second in New York City. While this application for registration was pending consideration by the Securities and Exchange Commission, SAN JOSE PETROLEUM filed an amended Statement on June 20, 1958, for registration of the sale in the Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a reduced offering price of from P1.00 to P0.70 per share. At this time the par value of the shares has also been reduced from $.35 to $.01 per share.1

Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed with the Securities and Exchange Commission an opposition to registration and licensing of the securities on the grounds that (1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic corporation, violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the issuer has not been licensed to transact business in the Philippines; (3) the sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4) the issuer as an enterprise, as well as its business, is based upon unsound business principles. Answering the foregoing opposition of Palting, et al., the registrant SAN JOSE PETROLEUM claimed that it was a "business enterprise" enjoying parity rights under the Ordinance appended to the Constitution, which parity right, with respect to mineral resources in the Philippines, may be exercised, pursuant to the Laurel-Langley Agreement, only through the medium of a corporation organized under the laws of the Philippines. Thus, registrant which is allegedly qualified to exercise rights under the Parity Amendment, had to do so through the medium of a domestic corporation, which is the SAN JOSE OIL. It refused the contention that the Corporation Law was being violated, by alleging that Section 13 thereof applies only to foreign corporations doing business in the Philippines, and registrant was not doing business here. The mere fact that it was a holding company of SAN JOSE OIL and that registrant undertook the financing of and giving technical assistance to said corporation did not constitute transaction of business in the Philippines. Registrant also denied that the offering for sale in the Philippines of its shares of capital stock was fraudulent or would work

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or tend to work fraud on the investors. On August 29, 1958, and on September 9, 1958 the Securities and Exchange Commissioner issued the orders object of the present appeal.

The issues raised by the parties in this appeal are as follows:

1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in respondent's securities, has personality to file the present petition for review of the order of the Securities and Exchange Commission;

2. Whether or not the issue raised herein is already moot and academic;

3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining corporation, is violative of the Constitution, the Laurel-Langley Agreement, the Petroleum Act of 1949, and the Corporation Law; and

4. Whether or not the sale of respondent's securities is fraudulent, or would work or tend to work fraud to purchasers of such securities in the Philippines.

1. In answer to the notice and order of the Securities and Exchange Commissioner, published in 2 newspapers of general circulation in the Philippines, for "any person who is opposed" to the petition for registration and licensing of respondent's securities, to file his opposition in 7 days, herein petitioner so filed an opposition. And, the Commissioner, having denied his opposition and instead, directed the registration of the securities to be offered for sale, oppositor Palting instituted the present proceeding for review of said order.

Respondent raises the question of the personality of petitioner to bring this appeal, contending that as a mere "prospective investor", he is not an "Aggrieved" or "interested" person who may properly maintain the suit. Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that the phrase "party aggrieved" used in the Securities Act3 and the Rules of Court4 as having the right to appeal should refer only to issuers, dealers and salesmen of securities.

It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that party "aggrieved by the judgment or decree where it operates on his rights of property or bears directly upon his interest", that the word "aggrieved" refers to "a substantial grievance, a denial of some personal property right or the imposition upon a party of a burden or obligation." But a careful reading of the case would show that the appeal therein was dismissed because the court held that an order of registration was not final and therefore not appealable. The foregoing pronouncement relied upon by herein respondent was made in construing the provision regarding an order of revocation which the court held was the one appealable. And since the law provides that in revoking the registration of any security, only the issuer and every registered dealer of the security are notified, excluding any person or group of persons having no such interest in the securities, said court concluded that the phrase "interested person" refers only to issuers, dealers or salesmen of securities.

We cannot consider the foregoing ruling by the Utah State Court as controlling on the issue in this case. Our Securities Act in Section 7(c) thereof, requires the publication and notice of the registration statement. Pursuant thereto, the Securities and Exchange Commissioner caused the publication of an order in part reading as follows:

. . . Any person who is opposed with this petition must file his written opposition with this Commission within said period (2 weeks). . . .

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In other words, as construed by the administrative office entrusted with the enforcement of the Securities Act, any person (who may not be "aggrieved" or "interested" within the legal acceptation of the word) is allowed or permitted to file an opposition to the registration of securities for sale in the Philippines. And this is in consonance with the generally accepted principle that Blue Sky Laws are enacted to protect investors and prospective purchasers and to prevent fraud and preclude the sale of securities which are in fact worthless or worth substantially less than the asking price. It is for this purpose that herein petitioner duly filed his opposition giving grounds therefor. Respondent SAN JOSE PETROLEUM was required to reply to the opposition. Subsequently both the petition and the opposition were set for hearing during which the petitioner was allowed to actively participate and did so by cross-examining the respondent's witnesses and filing his memorandum in support of his opposition. He therefore to all intents and purposes became a party to the proceedings. And under the New Rules of Court,5 such a party can appeal from a final order, ruling or decision of the Securities and Exchange Commission. This new Rule eliminating the word "aggrieved" appearing in the old Rule, being procedural in nature,6 and in view of the express provision of Rule 144 that the new rules made effective on January 1, 1964 shall govern not only cases brought after they took effect but all further proceedings in cases then pending, except to the extent that in the opinion of the Court their application would not be feasible or would work injustice, in which event the former procedure shall apply, we hold that the present appeal is properly within the appellate jurisdiction of this Court.

The order allowing the registration and sale of respondent's securities is clearly a final order that is appealable. The mere fact that such authority may be later suspended or revoked, depending on future developments, does not give it the character of an interlocutory or provisional ruling. And the fact that seven days after the publication of the order, the securities are deemed registered (Sec. 7, Com. Act 83, as amended), points to the finality of the order. Rights and obligations necessarily arise therefrom if not reviewed on appeal.

Our position on this procedural matter — that the order is appealable and the appeal taken here is proper — is strengthened by the intervention of the Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as the constitutional issues herein presented affect the validity of Section 13 of the Corporation Law, which, according to the respondent, conflicts with the Parity Ordinance and the Laurel-Langley Agreement recognizing, it is claimed, its right to exploit our petroleum resources notwithstanding said provisions of the Corporation Law.

2. Respondent likewise contends that since the order of Registration/Licensing dated September 9, 1958 took effect 30 days from September 3, 1958, and since no stay order has been issued by the Supreme Court, respondent's shares became registered and licensed under the law as of October 3, 1958. Consequently, it is asserted, the present appeal has become academic. Frankly we are unable to follow respondent's argumentation. First it claims that the order of August 29 and that of September 9, 1958 are not final orders and therefor are not appealable. Then when these orders, according to its theory became final and were implemented, it argues that the orders can no longer be appealed as the question of registration and licensing became moot and academic.

But the fact is that because of the authority to sell, the securities are, in all probabilities, still being traded in the open market. Consequently the issue is much alive as to whether respondent's securities should continue to be the subject of sale. The purpose of the inquiry on this matter is not fully served just because the securities had passed out of the hands of the issuer and its dealers. Obviously, so long as the securities are outstanding and are placed in the channels of trade and commerce, members of the investing public are entitled to have the question of the worth or legality of the securities resolved one way or another.

But more fundamental than this consideration, we agree with the late Senator Claro M. Recto, who appeared as amicus curiae in this case, that while apparently the immediate issue in this

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appeal is the right of respondent SAN JOSE PETROLEUM to dispose of and sell its securities to the Filipino public, the real and ultimate controversy here would actually call for the construction of the constitutional provisions governing the disposition, utilization, exploitation and development of our natural resources. And certainly this is neither moot nor academic.

3. We now come to the meat of the controversy — the "tie-up" between SAN JOSE OIL on the one hand, and the respondent SAN JOSE PETROLEUM and its associates, on the other. The relationship of these corporations involved or affected in this case is admitted and established through the papers and documents which are parts of the records: SAN JOSE OIL, is a domestic mining corporation, 90% of the outstanding capital stock of which is owned by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation, the majority interest of which is owned by OIL INVESTMENTS, Inc., another foreign (Panamanian) company. This latter corporation in turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY, C.A., both organized and existing under the laws of Venezuela. As of September 30, 1956, there were 9,976 stockholders of PANCOASTAL PETROLEUM found in 49 American states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of November 30, 1956, PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373 stockholders scattered in 49 American state. In the two lists of stockholders, there is no indication of the citizenship of these stockholders,7 or of the total number of authorized stocks of each corporation, for the purpose of determining the corresponding percentage of these listed stockholders in relation to the respective capital stock of said corporation.

Petitioner, as well as the amicus curiae and the Solicitor General8 contend that the relationship between herein respondent SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the Philippine Constitution, and Section 13 of the Corporation Law, which inhibits a mining corporation from acquiring an interest in another mining corporation. It is respondent's theory, on the other hand, that far from violating the Constitution; such relationship between the two corporations is in accordance with the Laurel-Langley Agreement which implemented the Ordinance Appended to the Constitution, and that Section 13 of the Corporation Law is not applicable because respondent is not licensed to do business, as it is not doing business, in the Philippines.

Article XIII, Section 1 of the Philippine Constitution provides:

SEC. 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other natural resources of the Philippines belong to the State, and their disposition, exploitation, development, or utilization shall be limited to citizens of the Philippines, or to corporations or associations at least sixty per centum of the capital of which is owned by such citizens, subject to any existing right, grant, lease or concession at the time of the inauguration of this Government established under this Constitution. . . . (Emphasis supplied)

In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit our natural resources) was extended to citizens of the United States, thus:

Notwithstanding the provisions of section one, Article Thirteen, and section eight, Article Fourteen, of the foregoing Constitution, during the effectivity of the Executive Agreement entered into by the President of the Philippines with the President of the United States on the fourth of July, nineteen hundred and forty-six, pursuant to the provisions of Commonwealth Act Numbered Seven hundred and thirty-three, but in no case to extend beyond the third of July, nineteen hundred and seventy-four, the disposition, exploitation, development, and utilization of all agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other natural resources of the Philippines, and the operation of public utilities shall, if open to any person,

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be open to citizens of the United States, and to all forms of business enterprises owned or controlled, directly or indirectly, by citizens of the United States in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of the Philippines (Emphasis supplied.)

In the 1954 Revised Trade Agreement concluded between the United States and the Philippines, also known as the Laurel-Langley Agreement, embodied in Republic Act 1355, the following provisions appear:

ARTICLE VI

1. The disposition, exploitation, development and utilization of all agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces and sources of potential energy, and other natural resources of either Party, and the operation of public utilities, shall, if open to any person, be open to citizens of the other Party and to all forms of business enterprise owned or controlled, directly or indirectly, by citizens of such other Party in the same manner as to and under the same conditions imposed upon citizens or corporations or associations owned or controlled by citizens of the Party granting the right.

2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens of the United States, with respect to natural resources in the public domain in the Philippines, only through the medium of a corporation organized under the laws of the Philippines and at least 60% of the capital stock of which is owned or controlled by citizens of the United States. . . .

3. The United States of America reserves the rights of the several States of the United States to limit the extent to which citizens or corporations or associations owned or controlled by citizens of the Philippines may engage in the activities specified in this Article. The Republic of the Philippines reserves the power to deny any of the rights specified in this Article to citizens of the United States who are citizens of States, or to corporations or associations at least 60% of whose capital stock or capital is owned or controlled by citizens of States, which deny like rights to citizens of the Philippines, or to corporations or associations which are owned or controlled by citizens of the Philippines. . . . (Emphasis supplied.)

Re-stated, the privilege to utilize, exploit, and develop the natural resources of this country was granted, by Article XIII of the Constitution, to Filipino citizens or to corporations or associations 60% of the capital of which is owned by such citizens. With the Parity Amendment to the Constitution, the same right was extended to citizens of the United States and business enterprises owned or controlled directly or indirectly, by citizens of the United States.

There could be no serious doubt as to the meaning of the word "citizens" used in the aforementioned provisions of the Constitution. The right was granted to 2 types of persons: natural persons (Filipino or American citizens) and juridical persons (corporations 60% of which capital is owned by Filipinos and business enterprises owned or controlled directly or indirectly, by citizens of the United States). In American law, "citizen" has been defined as "one who, under the constitution and laws of the United States, has a right to vote for representatives in congress and other public officers, and who is qualified to fill offices in the gift of the people. (1 Bouvier's Law Dictionary, p. 490.) A citizen is —

One of the sovereign people. A constituent member of the sovereignty, synonymous with the people." (Scott v. Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)

A member of the civil state entitled to all its privileges. (Cooley, Const. Lim. 77. See U.S. v. Cruikshank 92 U.S. 542, 23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.] 162, 22 L. Ed. 627.)

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These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American business enterprise entitled to parity rights in the Philippines? The answer must be in the negative, for the following reasons:

Firstly — It is not owned or controlled directly by citizens of the United States, because it is owned and controlled by a corporation, the OIL INVESTMENTS, another foreign (Panamanian) corporation.

Secondly — Neither can it be said that it is indirectly owned and controlled by American citizens through the OIL INVESTMENTS, for this latter corporation is in turn owned and controlled, not by citizens of the United States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM.

Thirdly — Although it is claimed that these two last corporations are owned and controlled respectively by 12,373 and 9,979 stockholders residing in the different American states, there is no showing in the certification furnished by respondent that the stockholders of PANCOASTAL or those of them holding the controlling stock, are citizens of the United States.

Fourthly — Granting that these individual stockholders are American citizens, it is yet necessary to establish that the different states of which they are citizens, allow Filipino citizens or corporations or associations owned or controlled by Filipino citizens, to engage in the exploitation, etc. of the natural resources of these states (see paragraph 3, Article VI of the Laurel-Langley Agreement, supra). Respondent has presented no proof to this effect.

Fifthly — But even if the requirements mentioned in the two immediately preceding paragraphs are satisfied, nevertheless to hold that the set-up disclosed in this case, with a long chain of intervening foreign corporations, comes within the purview of the Parity Amendment regarding business enterprises indirectly owned or controlled by citizens of the United States, is to unduly stretch and strain the language and intent of the law. For, to what extent must the word "indirectly" be carried? Must we trace the ownership or control of these various corporations ad infinitum for the purpose of determining whether the American ownership-control-requirement is satisfied? Add to this the admitted fact that the shares of stock of the PANTEPEC and PANCOASTAL which are allegedly owned or controlled directly by citizens of the United States, are traded in the stock exchange in New York, and you have a situation where it becomes a practical impossibility to determine at any given time, the citizenship of the controlling stock required by the law. In the circumstances, we have to hold that the respondent SAN JOSE PETROLEUM, as presently constituted, is not a business enterprise that is authorized to exercise the parity privileges under the Parity Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.

What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock is owned by SAN JOSE PETROLEUM? This is a query which we need not resolve in this case as SAN JOSE OIL is not a party and it is not necessary to do so to dispose of the present controversy. But it is a matter that probably the Solicitor General would want to look into.

There is another issue which has been discussed extensively by the parties. This is whether or not an American mining corporation may lawfully "be in anywise interested in any other corporation (domestic or foreign) organized for the purpose of engaging in agriculture or in mining," in the Philippines or whether an American citizen owning stock in more than one corporation organized for the purpose of engaging in agriculture or in mining, may own more than 15% of the capital stock then outstanding and entitled to vote, of each of such corporations, in view of the express prohibition contained in Section 13 of the Philippine Corporation Law. The petitioner in this case contends that the provisions of the Corporation Law must be applied to American citizens and business enterprise otherwise entitled to exercise the parity privileges, because both the Laurel-Langley Agreement (Art. VI, par. 1) and

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the Petroleum Act of 1948 (Art. 31), specifically provide that the enjoyment by them of the same rights and obligations granted under the provisions of both laws shall be "in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of the Philippines." The petitioner further contends that, as the enjoyment of the privilege of exploiting mineral resources in the Philippines by Filipino citizens or corporations owned or controlled by citizens of the Philippines (which corporation must necessarily be organized under the Corporation Law), is made subject to the limitations provided in Section 13 of the Corporation Law, so necessarily the exercise of the parity rights by citizens of the United States or business enterprise owned or controlled, directly or indirectly, by citizens of the United States, must equally be subject to the same limitations contained in the aforesaid Section 13 of the Corporation Law.

In view of the conclusions we have already arrived at, we deem it not indispensable for us to pass upon this legal question, especially taking into account the statement of the respondent (SAN JOSE PETROLEUM) that it is essentially a holding company, and as found by the Securities and Exchange Commissioner, its principal activity is limited to the financing and giving technical assistance to SAN JOSE OIL.

4. Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for sale in the Philippines, was incorporated under the laws of Panama in April, 1956 with an authorized capital stock of $500,000.00, American currency, divided into 50,000,000 shares at par value of $0.01 per share. By virtue of a 3-party Agreement of June 14, 1956, respondent was supposed to have received from OIL INVESTMENTS 8,000,000 shares of the capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note for $250,000.00 due in 6 months, for which respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its capital stock, at $0.01 per share or with a value of $160,000.00, plus a note for $230,297.97 maturing in 2 years at 6% per annum interest,9 and the assumption of payment of the unpaid price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).

On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from $500,000.00 to $17,500,000.00 by increasing the par value of the same 50,000,000 shares, from $0.01 to $0.35. Without any additional consideration, the 16,000,000 shares of $0.01 previously issued to OIL INVESTMENTS with a total value of $160,000.00 were changed with 16,000,000 shares of the recapitalized stock at $0.35 per share, or valued at $5,600,000.00. And, to make it appear that cash was received for these re-issued 16,000,000 shares, the board of directors of respondent corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE OIL (still having par value of $0.10 per share) which were received from OIL INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per share.

In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly the value of the 8,000,000 shares of SAN JOSE OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged difference between the "value" of the said shares and the subscription price thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00, the subscription price of the SAN JOSE OIL shares, the amount of $319,702.03 was deducted, as allegedly unpaid subscription price, thereby giving a difference of $480,297.97, which was placed as the amount allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL shares. Then, by adding thereto the note receivable from OIL INVESTMENTS, for $250,000.00 (part-consideration for the 16,000,000 SAN JOSE PETROLEUM shares), and the sum of $6,516.21, as deferred expenses, SAN JOSE PETROLEUM appeared to have assets in the sum of $736,814.18.

These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on the 8,000,000 shares of SAN JOSE OIL. There appears no basis for such valuation other than belief by the board of directors of respondent that "should San Jose Oil Company be granted the bulk of the concessions applied for upon reasonable terms, that it would have a reasonable value of

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approximately $10,000,000." 10 Then, of this amount, the subscription price of $800,000.00 was deducted and called it "difference between the (above) valuation and the subscription price for the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted the sum of $480,297.97 and the difference was placed as the unpaid portion of the subscription price. In other words, it was made to appear that they paid in $480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount ($480,297.97) was supposedly that $250,000.00 paid by OIL INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement, and a sum of $230,297.97 the amount expended or advanced by OIL INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among respondent's liabilities, for $230,297.97 appearing as note payable to Oil Investments, maturing in two (2) years at six percent (6%) per annum. 11 As far as it appears from the records, for the 16,000,000 shares at $0.35 per share issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM received from OIL INVESTMENTS only the note for $250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a total of $1,050,000.00 — the only assets of the corporation. In other words, respondent actually lost $4,550,000.00, which was received by OIL INVESTMENTS.

But this is not all. Some of the provisions of the Articles of Incorporation of respondent SAN JOSE PETROLEUM are noteworthy; viz:

(1) the directors of the Company need not be shareholders;

(2) that in the meetings of the board of directors, any director may be represented and may vote through a proxy who also need not be a director or stockholder; and

(3) that no contract or transaction between the corporation and any other association or partnership will be affected, except in case of fraud, by the fact that any of the directors or officers of the corporation is interested in, or is a director or officer of, such other association or partnership, and that no such contract or transaction of the corporation with any other person or persons, firm, association or partnership shall be affected by the fact that any director or officer of the corporation is a party to or has an interest in, such contract or transaction, or has in anyway connected with such other person or persons, firm, association or partnership; and finally, that all and any of the persons who may become director or officer of the corporation shall be relieved from all responsibility for which they may otherwise be liable by reason of any contract entered into with the corporation, whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested.

These provisions are in direct opposition to our corporation law and corporate practices in this country. These provisions alone would outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and unusual provision that no contract or transaction between the company and any other association or corporation shall be affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are directors or officers of such other association or corporation; and that none of such contracts or transactions of this company with any person or persons, firms, associations or corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest in such contract or transaction or has any connection with such person or persons, firms associations or corporations; and that any and all persons who may become directors or officers of this company are hereby relieved of all responsibility which they would otherwise incur by reason of any contract entered into which this company either for their own benefit, or for the benefit of any person, firm, association or corporation in which they may be interested.

The impact of these provisions upon the traditional judiciary relationship between the directors and the stockholders of a corporation is too obvious to escape notice by those who are called upon to protect the interest of investors. The directors and officers of the company

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can do anything, short of actual fraud, with the affairs of the corporation even to benefit themselves directly or other persons or entities in which they are interested, and with immunity because of the advance condonation or relief from responsibility by reason of such acts. This and the other provision which authorizes the election of non-stockholders as directors, completely disassociate the stockholders from the government and management of the business in which they have invested.

To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability of SAN JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of the former corporation and acting "on behalf of all future holders of voting trust certificates," entered into a voting trust agreement12 with James L. Buckley and Austin E. Taylor, whereby said Trustees were given authority to vote the shares represented by the outstanding trust certificates (including those that may henceforth be issued) in the following manner:

(a) At all elections of directors, the Trustees will designate a suitable proxy or proxies to vote for the election of directors designated by the Trustees in their own discretion, having in mind the best interests of the holders of the voting trust certificates, it being understood that any and all of the Trustees shall be eligible for election as directors;

(b) On any proposition for removal of a director, the Trustees shall designate a suitable proxy or proxies to vote for or against such proposition as the Trustees in their own discretion may determine, having in mind the best interest of the holders of the voting trust certificates;

(c) With respect to all other matters arising at any meeting of stockholders, the Trustees will instruct such proxy or proxies attending such meetings to vote the shares of stock held by the Trustees in accordance with the written instructions of each holder of voting trust certificates. (Emphasis supplied.)

It was also therein provided that the said Agreement shall be binding upon the parties thereto, their successors, and upon all holders of voting trust certificates.

And these are the voting trust certificates that are offered to investors as authorized by Security and Exchange Commissioner. It can not be doubted that the sale of respondent's securities would, to say the least, work or tend to work fraud to Philippine investors.

FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this appeal, is denied and the orders of the Securities and Exchange Commissioner, allowing the registration of Respondent's securities and licensing their sale in the Philippines are hereby set aside. The case is remanded to the Securities and Exchange Commission for appropriate action in consonance with this decision. With costs. Let a copy of this decision be furnished the Solicitor General for whatever action he may deem advisable to take in the premises. So ordered.

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LIM v. CA In 1994, Pastor Lim died. His wife, Rufina Lim petitioned with the lower court, acting as a probate court, for the inclusion of 5 corporations into the inventory of the estate of Pastor Lim. The 5 corporations were: Auto Truck Corporation, Alliance Marketing Corporation, Speed Distributing, Inc., Active Distributing, Inc. and Action Company. Rufina alleged that the assets of these corporations were owned wholly by Pastor; that these corporations themselves are owned by Pastor and they are mere dummies of Pastor. The corporations filed a motion for exclusion from the estate. They presented proof (Torrens Titles) showing that the assets of the corporations are in their respective names and titles. The probate court denied their motion. The Court of Appeals reversed the decision of the probate court.

ISSUE: Whether or not the corporations and/or their assets should be included in the inventory of the estate.

HELD: No. As regards the assets, the corporations were able to present their respective Torrens Titles over the disputed assets. It is true that a probate court may pass upon the question ownership albeit in a provisional manner but still, a Torrens Title cannot be attacked collaterally in a probate proceeding, it must be attacked directly in a separate proceeding.

As regards the corporations, to include them in the inventory is tantamount to the piercing of the veil of corporate fiction because the probate court effectively adopted the theory of Rufina. This cannot be done. Firstly, the probate court is sitting in a limited capacity. Secondly, Rufina was not able to present sufficient evidence that indeed the corporations are mere conduits of Pastor. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities. The veil can’t be pierced without any showing that indeed the corporation is being used merely as a dummy. To disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed.

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[G.R. No. 124715. January 24, 2000]

RUFINA LUY LIM petitioner, vs. COURT OF APPEALS, AUTO TRUCK TBA CORPORATION, SPEED DISTRIBUTING, INC., ACTIVE DISTRIBUTORS, ALLIANCE MARKETING CORPORATION, ACTION COMPANY, INC. respondents.

D E C I S I O N

BUENA, J.:

May a corporation, in its universality, be the proper subject of and be included in the inventory of the estate of a deceased person?

Petitioner disputes before us through the instant petition for review on certiorari, the decision[1] of the Court of Appeals promulgated on 18 April 1996, in CA-GR SP No. 38617, which nullified and set aside the orders dated 04 July 1995[2], 12 September 1995[3] and 15 September 1995[4] of the Regional Trial Court of Quezon City, Branch 93, sitting as a probate court.

Petitioner Rufina Luy Lim is the surviving spouse of the late Pastor Y. Lim whose estate is the subject of probate proceedings in Special Proceedings Q-95-23334, entitled, "In Re: Intestate Estate of Pastor Y. Lim Rufina Luy Lim, represented by George Luy, Petitioner".

Private respondents Auto Truck Corporation, Alliance Marketing Corporation, Speed Distributing, Inc., Active Distributing, Inc. and Action Company are corporations formed, organized and existing under Philippine laws and which owned real properties covered under the Torrens system.

On 11 June 1994, Pastor Y. Lim died intestate. Herein petitioner, as surviving spouse and duly represented by her nephew George Luy, filed on 17 March 1995, a joint petition[5]for the administration of the estate of Pastor Y. Lim before the Regional Trial Court of Quezon City.

Private respondent corporations, whose properties were included in the inventory of the estate of Pastor Y. Lim, then filed a motion [6] for the lifting of lis pendens and motion[7]for exclusion of certain properties from the estate of the decedent.

In an order[8] dated 08 June 1995, the Regional Trial Court of Quezon City, Branch 93, sitting as a probate court, granted the private respondents’ twin motions, in this wise:

"Wherefore, the Register of Deeds of Quezon City is hereby ordered to lift, expunge or delete the annotation of lis pendens on Transfer Certificates of Title Nos. 116716, 116717, 116718, 116719 and 5182 and it is hereby further ordered that the properties covered by the same titles as well as those properties by (sic) Transfer Certificate of Title Nos. 613494, 363123, 236236 and 263236 are excluded from these proceedings.

SO ORDERED."

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http://sc.judiciary.gov.ph/jurisprudence/2000/jan2000/124715.html#_ftn8








Subsequently, Rufina Luy Lim filed a verified amended petition[9] which contained the following averments:

"3. The late Pastor Y. Lim personally owned during his lifetime the following business entities, to wit:

Business Entity Address:

X X X X

Alliance Marketing ,Inc. Block 3, Lot 6, Dacca

BF Homes,

Parañaque,

Metro Manila.

X X X X

Speed Distributing Inc. 910 Barrio Niog,

Aguinaldo Highway,

Bacoor, Cavite.

X X X X

Auto Truck TBA Corp. 2251 Roosevelt Avenue,

Quezon City.

X X X X

Active Distributors, Inc. Block 3, Lot 6, Dacca BF

Homes, Parañaque,

Metro Manila.

X X X X

Action Company 100 20th Avenue

Murphy, Quezon City

or

92-D Mc-Arthur Highway

Valenzuela Bulacan.

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"3.1 Although the above business entities dealt and engaged in business with the public as corporations, all their capital, assets and equity were however, personally owned by the late Pastor Y Lim. Hence the alleged stockholders and officers appearing in the respective articles of incorporation of the above business entities were mere dummies of Pastor Y. Lim, and they were listed therein only for purposes of registration with the Securities and Exchange Commission.

"4. Pastor Lim, likewise, had Time, Savings and Current Deposits with the following banks: (a) Metrobank, Grace Park, Caloocan City and Quezon Avenue, Quezon City Branches and (b) First Intestate Bank (formerly Producers Bank), Rizal Commercial Banking Corporation and in other banks whose identities are yet to be determined.

"5. That the following real properties, although registered in the name of the above entities, were actually acquired by Pastor Y. Lim during his marriage with petitioner, to wit:

Corporation Title Lo cation

X X X X

k. Auto Truck TCT No. 617726 Sto. Domingo

TBA Corporation Cainta, Rizal

q. Alliance Marketing TCT No. 27896 Prance,

Metro Manila

Copies of the above-mentioned Transfer Certificate of Title and/or Tax Declarations are hereto attached as Annexes "C" to "W".

X X X X

"7. The aforementioned properties and/or real interests left by the late Pastor Y. Lim, are all conjugal in nature, having been acquired by him during the existence of his marriage with petitioner.

"8. There are other real and personal properties owned by Pastor Y. Lim which petitioner could not as yet identify. Petitioner, however will submit to this Honorable Court the identities thereof and the necessary documents covering the same as soon as possible."

On 04 July 1995, the Regional Trial Court acting on petitioner’s motion issued an order[10], thus:

"Wherefore, the order dated 08 June 1995 is hereby set aside and the Registry of Deeds of Quezon City is hereby directed to reinstate the

13 | c o r p o c a s e s 2 1 - 4 0


annotation of lis pendens in case said annotation had already been deleted and/or cancelled said TCT Nos. 116716, 116717, 116718, 116719 and 51282.

Further more (sic), said properties covered by TCT Nos. 613494, 365123, 236256 and 236237 by virtue of the petitioner are included in the instant petition.

SO ORDERED."

On 04 September 1995, the probate court appointed Rufina Lim as special administrator[11] and Miguel Lim and Lawyer Donald Lee, as co-special administrators of the estate of Pastor Y. Lim, after which letters of administration were accordingly issued.

In an order[12] dated 12 September 1995, the probate court denied anew private respondents’ motion for exclusion, in this wise:

"The issue precisely raised by the petitioner in her petition is whether the corporations are the mere alter egos or instrumentalities of Pastor Lim, Otherwise (sic) stated, the issue involves the piercing of the corporate veil, a matter that is clearly within the jurisdiction of this Honorable Court and not the Securities and Exchange Commission. Thus, in the case of Cease vs. Court of Appeals, 93 SCRA 483, the crucial issue decided by the regular court was whether the corporation involved therein was the mere extension of the decedent. After finding in the affirmative, the Court ruled that the assets of the corporation are also assets of the estate.

A reading of P.D. 902, the law relied upon by oppositors, shows that the SEC’s exclusive (sic) applies only to intra-corporate controversy. It is simply a suit to settle the intestate estate of a deceased person who, during his lifetime, acquired several properties and put up corporations as his instrumentalities.

SO ORDERED."

On 15 September 1995, the probate court acting on an ex parte motion filed by petitioner, issued an order[13] the dispositive portion of which reads:

"Wherefore, the parties and the following banks concerned herein under enumerated are hereby ordered to comply strictly with this order and to produce and submit to the special administrators , through this Honorable Court within (5) five days from receipt of this order their respective records of the savings/current accounts/time deposits and other deposits in the names of Pastor Lim and/or corporations above-mentioned, showing all the transactions made or done concerning savings /current accounts from January 1994 up to their receipt of this court order.

XXX XXX XXX

SO ORDERED."

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Private respondent filed a special civil action for certiorari[14], with an urgent prayer for a restraining order or writ of preliminary injunction, before the Court of Appeals questioning the orders of the Regional Trial Court, sitting as a probate court.

On 18 April 1996, the Court of Appeals, finding in favor of herein private respondents, rendered the assailed decision[15], the decretal portion of which declares:

"Wherefore, premises considered, the instant special civil action for certiorari is hereby granted, The impugned orders issued by respondent court on July 4,1995 and September 12, 1995 are hereby nullified and set aside. The impugned order issued by respondent on September 15, 1995 is nullified insofar as petitioner corporations" bank accounts and records are concerned.

SO ORDERED."

Through the expediency of Rule 45 of the Rules of Court, herein petitioner Rufina Luy Lim now comes before us with a lone assignment of error[16]:

"The respondent Court of Appeals erred in reversing the orders of the lower court which merely allowed the preliminary or provisional inclusion of the private respondents as part of the estate of the late deceased (sic) Pastor Y. Lim with the respondent Court of Appeals arrogating unto itself the power to repeal, to disobey or to ignore the clear and explicit provisions of Rules 81,83,84 and 87 of the Rules of Court and thereby preventing the petitioner, from performing her duty as special administrator of the estate as expressly provided in the said Rules."

Petitioner’s contentions tread on perilous grounds.

In the instant petition for review, petitioner prays that we affirm the orders issued by the probate court which were subsequently set aside by the Court of Appeals.

Yet, before we delve into the merits of the case, a review of the rules on jurisdiction over probate proceedings is indeed in order.

The provisions of Republic Act 7691[17], which introduced amendments to Batas Pambansa Blg. 129, are pertinent:

"Section 1. Section 19 of Batas Pambansa Blg. 129, otherwise known as the "Judiciary Reorganization Act of 1980", is hereby amended to read as follows:

Section 19. Jurisdiction in civil cases. Regional Trial Courts shall exercise exclusive jurisdiction:

xxx xxx xxx

(4) In all matters of probate, both testate and intestate, where the gross value of the estate exceeds One Hundred Thousand Pesos (P100,000) or, in probate matters in Metro Manila, where such gross value exceeds Two Hundred Thousand Pesos (P200,000);

15 | c o r p o c a s e s 2 1 - 4 0





xxx xxx xxx

Section 3. Section 33 of the same law is hereby amended to read as follows:

Section 33. Jurisdiction of Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in Civil Cases.-Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts shall exercise:

1. Exclusive original jurisdiction over civil actions and probate proceedings, testate and intestate, including the grant of provisional remedies in proper cases, where the value of the personal property, estate or amount of the demand does not exceed One Hundred Thousand Pesos(P100,000) or, in Metro Manila where such personal property, estate or amount of the demand does not exceed Two Hundred Thousand Pesos (P200,000), exclusive of interest, damages of whatever kind, attorney’s fees, litigation expenses and costs, the amount of which must be specifically alleged, Provided, that interest, damages of whatever kind, attorney’s, litigation expenses and costs shall be included in the determination of the filing fees, Provided further, that where there are several claims or causes of actions between the same or different parties, embodied in the same complaint, the amount of the demand shall be the totality of the claims in all the causes of action, irrespective of whether the causes of action arose out of the same or different transactions;

xxx xxx xxx"

Simply put, the determination of which court exercises jurisdiction over matters of probate depends upon the gross value of the estate of the decedent.

As to the power and authority of the probate court, petitioner relies heavily on the principle that a probate court may pass upon title to certain properties, albeit provisionally, for the purpose of determining whether a certain property should or should not be included in the inventory.

In a litany of cases, We defined the parameters by which the court may extend its probing arms in the determination of the question of title in probate proceedings.

This Court, in PASTOR, JR. vs. COURT OF APPEALS,[18] held:

"X X X As a rule, the question of ownership is an extraneous matter which the probate court cannot resolve with finality. Thus, for the purpose of determining whether a certain property should or should not be included in the inventory of estate properties, the Probate Court may pass upon the title thereto, but such determination is provisional, not conclusive, and is subject to the final decision in a separate action to resolve title."

16 | c o r p o c a s e s 2 1 - 4 0


We reiterated the rule in PEREIRA vs. COURT OF APPEALS[19]:

"X X X The function of resolving whether or not a certain property should be included in the inventory or list of properties to be administered by the administrator is one clearly within the competence of the probate court. However, the court’s determination is only provisional in character, not conclusive, and is subject to the final decision in a separate action which may be instituted by the parties."

Further, in MORALES vs. CFI OF CAVITE[20] citing CUIZON vs. RAMOLETE[21], We made an exposition on the probate court’s limited jurisdiction:

"It is a well-settled rule that a probate court or one in charge of proceedings whether testate or intestate cannot adjudicate or determine title to properties claimed to be a part of the estate and which are equally claimed to belong to outside parties. All that the said court could do as regards said properties is to determine whether they should or should not be included in the inventory or list of properties to be administered by the administrator. If there is no dispute, well and good; but if there is, then the parties, the administrator and the opposing parties have to resort to an ordinary action for a final determination of the conflicting claims of title because the probate court cannot do so."

Again, in VALERA vs. INSERTO[22], We had occasion to elucidate, through Mr. Justice Andres Narvasa[23]:

"Settled is the rule that a Court of First Instance (now Regional Trial Court), acting as a probate court, exercises but limited jurisdiction, and thus has no power to take cognizance of and determine the issue of title to property claimed by a third person adversely to the decedent, unless the claimant and all other parties having legal interest in the property consent, expressly or impliedly, to the submission of the question to the probate court for adjudgment, or the interests of third persons are not thereby prejudiced, the reason for the exception being that the question of whether or not a particular matter should be resolved by the court in the exercise of its general jurisdiction or of its limited jurisdiction as a special court (e.g. probate, land registration, etc.), is in reality not a jurisdictional but in essence of procedural one, involving a mode of practice which may be waived. x x x

x x x. These considerations assume greater cogency where, as here, the Torrens title is not in the decedent’s name but in others, a situation on which this Court has already had occasion to rule x x x."(emphasis Ours)

Petitioner, in the present case, argues that the parcels of land covered under the Torrens system and registered in the name of private respondent corporations should be included in the inventory of the estate of the decedent Pastor Y. Lim, alleging that after all the determination by the probate court of whether these properties should be included or not is merely provisional in nature, thus, not conclusive and subject to a final determination in a separate action brought for the purpose of adjudging once and for all the issue of title.

17 | c o r p o c a s e s 2 1 - 4 0






Yet, under the peculiar circumstances, where the parcels of land are registered in the name of private respondent corporations, the jurisprudence pronounced in BOLISAY vs., ALCID[24] is of great essence and finds applicability, thus:

"It does not matter that respondent-administratrix has evidence purporting to support her claim of ownership, for, on the other hand, petitioners have a Torrens title in their favor, which under the law is endowed with incontestability until after it has been set aside in the manner indicated in the law itself, which, of course, does not include, bringing up the matter as a mere incident in special proceedings for the settlement of the estate of deceased persons. x x x"

"x x x. In regard to such incident of inclusion or exclusion, We hold that if a property covered by Torrens title is involved, the presumptive conclusiveness of such title should be given due weight, and in the absence of strong compelling evidence to the contrary, the holder thereof should be considered as the owner of the property in controversy until his title is nullified or modified in an appropriate ordinary action, particularly, when as in the case at bar, possession of the property itself is in the persons named in the title. x x x"

A perusal of the records would reveal that no strong compelling evidence was ever presented by petitioner to bolster her bare assertions as to the title of the deceased Pastor Y. Lim over the properties. Even so, P.D. 1529, otherwise known as, " The Property Registration Decree", proscribes collateral attack on Torrens Title, hence:

"xxx xxx xxx

Section 48. Certificate not subject to collateral attack.

- A certificate of title shall not be subject to collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in accordance with law."

In CUIZON vs. RAMOLETE, where similarly as in the case at bar, the property subject of the controversy was duly registered under the Torrens system, We categorically stated:

"x x x Having been apprised of the fact that the property in question was in the possession of third parties and more important, covered by a transfer certificate of title issued in the name of such third parties, the respondent court should have denied the motion of the respondent administrator and excluded the property in question from the inventory of the property of the estate. It had no authority to deprive such third persons of their possession and ownership of the property. x x x"

Inasmuch as the real properties included in the inventory of the estate of the late Pastor Y. Lim are in the possession of and are registered in the name of private respondent corporations, which under the law possess a personality separate and distinct from their stockholders, and in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of private respondents should stand undisturbed.

18 | c o r p o c a s e s 2 1 - 4 0


Accordingly, the probate court was remiss in denying private respondents’ motion for exclusion. While it may be true that the Regional Trial Court, acting in a restricted capacity and exercising limited jurisdiction as a probate court, is competent to issue orders involving inclusion or exclusion of certain properties in the inventory of the estate of the decedent, and to adjudge, albeit, provisionally the question of title over properties, it is no less true that such authority conferred upon by law and reinforced by jurisprudence, should be exercised judiciously, with due regard and caution to the peculiar circumstances of each individual case.

Notwithstanding that the real properties were duly registered under the Torrens system in the name of private respondents, and as such were to be afforded the presumptive conclusiveness of title, the probate court obviously opted to shut its eyes to this gleamy fact and still proceeded to issue the impugned orders.

By its denial of the motion for exclusion, the probate court in effect acted in utter disregard of the presumption of conclusiveness of title in favor of private respondents. Certainly, the probate court through such brazen act transgressed the clear provisions of law and infringed settled jurisprudence on this matter.

Moreover, petitioner urges that not only the properties of private respondent corporations are properly part of the decedent’s estate but also the private respondent corporations themselves. To rivet such flimsy contention, petitioner cited that the late Pastor Y. Lim during his lifetime, organized and wholly-owned the five corporations, which are the private respondents in the instant case. [25] Petitioner thus attached as Annexes "F"[26] and "G"[27] of the petition for review affidavits executed by Teresa Lim and Lani Wenceslao which among others, contained averments that the incorporators of Uniwide Distributing, Inc. included on the list had no actual participation in the organization and incorporation of the said corporation. The affiants added that the persons whose names appeared on the articles of incorporation of Uniwide Distributing, Inc., as incorporators thereof, are mere dummies since they have not actually contributed any amount to the capital stock of the corporation and have been merely asked by the late Pastor Y. Lim to affix their respective signatures thereon.

It is settled that a corporation is clothed with personality separate and distinct from that of the persons composing it. It may not generally be held liable for that of the persons composing it. It may not be held liable for the personal indebtedness of its stockholders or those of the entities connected with it.[28]

Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or members. In the same vein, a corporation by legal fiction and convenience is an entity shielded by a protective mantle and imbued by law with a character alien to the persons comprising it.

Nonetheless, the shield is not at all times invincible. Thus, in FIRST PHILIPPINE INTERNATIONAL BANK vs. COURT OF APPEALS[29], We enunciated:

"x x x When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals. x x x"

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Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction.[30]

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another corporation. Where badges of fraud exist, where public convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come to naught.[31]

Further, the test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any of these elements prevent "piercing the corporate veil".[32]

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities.[33]

Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed.[34]

Granting arguendo that the Regional Trial Court in this case was not merely acting in a limited capacity as a probate court, petitioner nonetheless failed to adduce competent evidence that would have justified the court to impale the veil of corporate fiction. Truly, the reliance reposed by petitioner on the affidavits executed by Teresa Lim and Lani Wenceslao is unavailing considering that the aforementioned documents possess no weighty probative value pursuant to the hearsay rule. Besides it is imperative for us to stress that such affidavits are inadmissible in evidence inasmuch as the affiants were not at all presented during the course of the proceedings in the lower court. To put it differently, for this Court to uphold the admissibility of said documents would be to relegate from Our duty to apply such basic rule of evidence in a manner consistent with the law and jurisprudence.

Our pronouncement in PEOPLE BANK AND TRUST COMPANY vs. LEONIDAS[35] finds pertinence:

"Affidavits are classified as hearsay evidence since they are not generally prepared by the affiant but by another who uses his own language in writing the affiant’s statements, which may thus be either omitted or misunderstood by the one writing them. Moreover, the adverse party is deprived of the opportunity to cross-examine the affiants. For this reason, affidavits are generally rejected for being hearsay, unless the affiant themselves are placed on the witness stand to testify thereon."

As to the order[36] of the lower court, dated 15 September 1995, the Court of Appeals correctly observed that the Regional Trial Court, Branch 93 acted without jurisdiction in

20 | c o r p o c a s e s 2 1 - 4 0








issuing said order; The probate court had no authority to demand the production of bank accounts in the name of the private respondent corporations.

WHEREFORE, in view of the foregoing disquisitions, the instant petition is hereby DISMISSED for lack of merit and the decision of the Court of Appeals which nullified and set aside the orders issued by the Regional Trial Court, Branch 93, acting as a probate court, dated 04 July 1995 and 12 September 1995 is AFFIRMED.

SO ORDERED.

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[G.R. No. 141617. August 14, 2001]

ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT CORPORATION, petitioners, vs. RITA C. MEJIA, as Executrix of Testate Estate of ANDREA CORDOVA VDA. DE GUTIERREZ, respondent.

D E C I S I O N

GONZAGA-REYES, J.:

In this petition for review by certiorari, petitioners pray for the setting aside of the Decision of the Court of Appeals promulgated on 13 April 1999 and its 15 December 1999 Resolution in CA-G.R. CV No. 19281.

As culled from the decisions of the lower courts and the pleadings of the parties, the factual background of this case is as set out herein:

Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of land in Camarin, Caloocan City known as Lot 861 of the Tala Estate. The land had an aggregate area of twenty-five (25) hectares and was covered by Transfer Certificate of Title (TCT) No. 5779 of the Registry of Deeds of Caloocan City. The property was later subdivided into five lots with an area of five hectares each and pursuant thereto, TCT No. 5779 was cancelled and five new transfer certificates of title were issued in the name of Gutierrez, namely TCT No. 7123 covering Lot 861-A, TCT No. 7124 covering Lot 861-B, TCT No. 7125 covering Lot 861-C, TCT No. 7126 covering Lot 861-D and TCT No. 7127 covering Lot 861-E.

On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation (Cardale) executed a Deed of Sale with Mortgage relating to the lots covered by TCT Nos. 7124, 7125, 7126 and 7127, for the consideration of P800,000.00. Upon the execution of the deed, Cardale paid Gutierrez P171,000.00. It was agreed that the balance of P629,000.00 would be paid in several installments within five years from the date of the deed, at an interest of nine percent per annum “based on the successive unpaid principal balances.” Thereafter, the titles of Gutierrez were cancelled and in lieu thereof TCT Nos. 7531 to 7534 were issued in favor of Cardale.

To secure payment of the balance of the purchase price, Cardale constituted a mortgage on three of the four parcels of land covered by TCT Nos. 7531, 7532 and 7533, encompassing fifteen hectares of land.[1] The encumbrance was annotated upon the certificates of title and the owner’s duplicate certificates. The owner’s duplicates were retained by Gutierrez.

On 26 August 1968, owing to Cardale’s failure to settle its mortgage obligation, Gutierrez filed a complaint for rescission of the contract with the Quezon City Regional Trial Court (RTC), which was docketed as Civil Case No. Q-12366.[2] On 20 October 1969, during the pendency of the rescission case, Gutierrez died and was substituted by her executrix, respondent Rita C. Mejia (Mejia). In 1971, plaintiff’s presentation of evidence was terminated. However, Cardale, which was represented by petitioner Adalia B. Francisco (Francisco) in her capacity as Vice-President and Treasurer of Cardale, lost interest in proceeding with the presentation of its evidence and the case lapsed into inactive status for a period of about fourteen years.

In the meantime, the mortgaged parcels of land covered by TCT Nos. 7532 and 7533 became delinquent in the payment of real estate taxes in the amount of P102,300.00, while the other mortgaged property covered by TCT No. 7531 became delinquent in the amount of P89,231.37, which culminated in their levy and auction sale on 1 and 12 September 1983, in satisfaction of the tax arrears. The highest bidder for the three parcels of land was petitioner Merryland Development Corporation (Merryland), whose President and majority stockholder

22 | c o r p o c a s e s 2 1 - 4 0

is Francisco. A memorandum based upon the certificate of sale was then made upon the original copies of TCT Nos. 7531 to 7533.

On 13 August 1984, before the expiration of the one year redemption period, Mejia filed a Motion for Decision with the trial court. The hearing of said motion was deferred, however, due to a Motion for Postponement filed by Cardale through Francisco, who signed the motion in her capacity as “officer-in-charge,” claiming that Cardale needed time to hire new counsel. However, Francisco did not mention the tax delinquencies and sale in favor of Merryland. Subsequently, the redemption period expired and Merryland, acting through Francisco, filed petitions for consolidation of title,[3] which culminated in the issuance of certain orders[4] decreeing the cancellation of Cardales’ TCT Nos. 7531 to 7533 and the issuance of new transfer certificates of title “free from any encumbrance or third-party claim whatsoever” in favor of Merryland. Pursuant to such orders, the Register of Deeds of Caloocan City issued new transfer certificates of title in the name of Merryland which did not bear a memorandum of the mortgage liens in favor of Gutierrez.

Thereafter, sometime in June 1985, Francisco filed in Civil Case No. Q-12366 an undated Manifestation to the effect that the properties subject of the mortgage and covered by TCT Nos. 7531 to 7533 had been levied upon by the local government of Caloocan City and sold at a tax delinquency sale. Francisco further claimed that the delinquency sale had rendered the issues in Civil Case No. Q-12366 moot and academic. Agreeing with Francisco, the trial court dismissed the case, explaining that since the properties mortgaged to Cardale had been transferred to Merryland which was not a party to the case for rescission, it would be more appropriate for the parties to resolve their controversy in another action.

On 14 January 1987, Mejia, in her capacity as executrix of the Estate of Gutierrez, filed with the RTC of Quezon City a complaint for damages with prayer for preliminary attachment against Francisco, Merryland and the Register of Deeds of Caloocan City. The case was docketed as Civil Case No. Q-49766. On 15 April 1988, the trial court rendered a decision[5] in favor of the defendants, dismissing the complaint for damages filed by Mejia. It was held that plaintiff Mejia, as executrix of Gutierrez’s estate, failed to establish by clear and convincing evidence her allegations that Francisco controlled Cardale and Merryland and that she had employed fraud by intentionally causing Cardale to default in its payment of real property taxes on the mortgaged properties so that Merryland could purchase the same by means of a tax delinquency sale. Moreover, according to the trial court, the failure to recover the property subject of the Deed of Sale with Mortgage was due to Mejia’s failure to actively pursue the action for rescission (Civil Case No. 12366), allowing the case to drag on for eighteen years. Thus, it ruled that -

xxx xxx xxx

The act of not paying or failing to pay taxes due the government by the defendant Adalia B. Francisco, as treasurer of Cardale Financing and Realty Corporation do not, per se, constitute perpetration of fraud or an illegal act. It do [sic] not also constitute an act of evasion of an existing obligation (to plaintiff) if there is no clear showing that such an act of non-payment of taxes was deliberately made despite its (Cardale’s) solvency and capability to pay. There is no evidence showing that Cardale Financing and Realty Corporation was financially capable of paying said taxes at the time.

“There are times when the corporate fiction will be disregarded: (1) where all the members or stockholders commit illegal act; (2) where the corporation is used as dummy to commit fraud or wrong; (3) where the corporation is an agency for a parent corporation; and (4) where the stock of a corporation is owned by one person.” (I, Fletcher, 58, 59, 61 and 63). None of the foregoing reasons can be applied to the incidents in this case: (1) there appears no illegal act committed by the stockholders of defendant Merryland Development Corporation and

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Cardale Financing and Realty Corporation; (2) the incidents proven by evidence of the plaintiff as well as that of the defendants do not show that either or both corporations were used as dummies by defendant Adalia B. Francisco to commit fraud or wrong. To be used as [a] dummy, there has to be a showing that the dummy corporation is controlled by the person using it. The evidence of plaintiff failed to prove that defendant Adalia B. Francisco has controlling interest in either or both corporations. On the other hand, the evidence of defendants clearly show that defendant Francisco has no control over either of the two corporations; (3) none of the two corporations appears to be an agency for a parent (the other) corporation; and (4) the stock of either of the two corporation [sic] is not owned by one person (defendant Adalia B. Francisco). Except for defendant Adalia B. Francisco, the incorporators and stockholders of one corporation are different from the other.

xxx xxx xxx

The said case (Civil Case No. 12366) remained pending for almost 18 years before the then Court of First Instance, now the Regional Trial Court. Even if the trial of the said case became protracted on account of the retirement and/or promotion of the presiding judge, as well as the transfer of the case from one sala to another, and as claimed by the plaintiff “that the defendant lost interest”, (which allegation is unusual, so to speak), the court believe [sic] that it would not have taken that long to dispose [of] said case had plaintiff not slept on her rights, and her duty and obligation to see to it that the case is always set for hearing so that it may be adjudicated [at] the earliest possible time. This duty pertains to both parties, but plaintiff should have been more assertive, as it was her obligation, similar to the obligation of plaintiff relative to the service of summons in other cases. The fact that Cardale Financing and Realty Corporation did not perform its obligation as provided in the said “Deed of Sale with Mortgage” (Exhibit “A”) is very clear. Likewise, the fact that Andrea Cordova, the contracting party, represented by the plaintiff in this case did not also perform her duties and/or obligation provided in the said contract is also clear. This could have been the reason why the plaintiff in said case (Exhibit “E”) slept on her rights and allowed the same to remain pending for almost 18 years. However, and irrespective of any other reason behind the same, the court believes that plaintiff, indeed, is the one to blame for the failure of the testate estate of the late Andrea Cordova Vda. de Gutierrez to recover the money or property due it on the basis of Exhibit “A”.

xxx xxx xxx

xxx Had the plaintiff not slept on her rights and had it not been for her failure to perform her commensurate duty to pursue vigorously her case against Cardale Financing and Realty Corporation in said Civil Case No. 12366, she could have easily known said non-payment of realty taxes on the said properties by said Cardale Financing and Realty Corporation, or, at least the auction sales that followed, and from which she could have redeemed said properties within the one year period provided by law, or, have availed of remedies at the time to protect the interest of the testate estate of the late Andrea Cordova Vda. de Gutierrez.

xxx xxx xxx

The dispositive portion of the trial court’s decision states -

WHEREFORE, in view of all the foregoing consideration, the court hereby renders judgment in favor of the defendants Register of Deeds of Caloocan City, Merryland Development Corporation and Adalia B. Francisco, and against plaintiff Rita C. Mejia, as Executrix of the Testate Estate of Andrea Cordova Vda. De Gutierrez, and hereby orders:

1. That this case for damages be dismissed, at the same time, plaintiff’s motion for reconsideration dated September 23, 1987 is denied;

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2. Plaintiff pay the defendants Merryland Development Corporation and the Register of Deeds the sum of P20,000.00, and another sum of P20,000.00 to the defendant Adalia B. Francisco, as and for attorney’s fees and litigation expenses, and pay the costs of the proceedings.

SO ORDERED.

The Court of Appeals,[6] in its decision[7] promulgated on 13 April 1999, reversed the trial court, holding that the corporate veil of Cardale and Merryland must be pierced in order to hold Francisco and Merryland solidarily liable since these two corporations were used as dummies by Francisco, who employed fraud in allowing Cardale to default on the realty taxes for the properties mortgaged to Gutierrez so that Merryland could acquire the same free from all liens and encumbrances in the tax delinquency sale and, as a consequence thereof, frustrating Gutierrez’s rights as a mortgagee over the subject properties. Thus, the Court of Appeals premised its findings of fraud on the following circumstances –

xxx xxx xxx

xxx Appellee Francisco knew that Cardale of which she was vice-president and treasurer had an outstanding obligation to Gutierrez for the unpaid balance of the real properties covered by TCT Nos. 7531 to 7533, which Cardale purchased from Gutierrez which account, as of December 1988, already amounted to P4,414,271.43 (Exh. K, pp. 39-44, record); she also knew that Gutierrez had a mortgage lien on the said properties to secure payment of the aforesaid obligation; she likewise knew that the said mortgaged properties were under litigation in Civil Case No. Q-12366 which was an action filed by Gutierrez against Cardale for rescission of the sale and/or recovery of said properties (Exh. E). Despite such knowledge, appellee Francisco did not inform Gutierrez’s Estate or the Executrix (herein appellant) as well as the trial court that the mortgaged properties had incurred tax delinquencies, and that Final Notices dated July 9, 1982 had been sent by the City Treasurer of Caloocan demanding payment of such tax arrears within ten (10) days from receipt thereof (Exhs. J & J-1, pp. 37-38, record). Both notices which were addressed to –

Cardale Financing & Realty Corporation c/o Merryland Development Corporation

and sent to appellee Francisco’s address at 83 Katipunan Road, White Plains, Quezon City, gave warning that if the taxes were not paid within the aforesaid period, the properties would be sold at public auction to satisfy the tax delinquencies.

To reiterate, notwithstanding receipt of the aforesaid notices, appellee Francisco did not inform the Estate of Gutierrez or her executrix about the tax delinquencies and of the impending auction sale of the said properties. Even a modicum of good faith and fair play should have encouraged appellee Francisco to at least advise Gutierrez’s Estate through her executrix (herein appellant) and the trial court which was hearing the complaint for rescission and recovery of said properties of such fact, so that the Estate of Gutierrez, which had a real interest on the properties as mortgagee and as plaintiff in the rescission and recovery suit, could at least take steps to forestall the auction sale and thereby preserve the properties and protect its interests thereon. And not only did appellee Francisco allow the auction sale to take place, but she used her other corporation (Merryland) in participating in the auction sale and in acquiring the very properties which her first corporation (Cardale) had mortgaged to Gutierrez. Again, appellee Francisco did not thereafter inform the Estate of Gutierrez or its executrix (herein appellant) about the auction sale, thus precluding the Estate from exercising its right of redemption. And it was only after the expiration of the redemption period that appellee Francisco filed a Manifestation in Civil Case No. Q-12366 (Exh. I, p. 36, record), in which she disclosed for the first time to the trial court and appellant that the properties subject of the case and on which Gutierrez or her Estate had a mortgage lien, had been sold in

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a tax delinquency sale. And in order to further conceal her deceptive maneuver, appellee Francisco did not divulge in her aforesaid Manifestation that it was her other corporation (Merryland) that acquired the properties in the auction sale.

We are not impressed by appellee’s submission that no evidence was adduced to prove that Cardale had the capacity to pay the tax arrears and therefore she or Cardale may not be faulted for the tax delinquency sale of the properties in question. Appellee Francisco’s bad faith or deception did not necessarily lie in Cardale’s or her failure to settle the tax deliquencies in question, but in not disclosing to Gutierrez’s estate or its executrix (herein appellant) which had a mortgage lien on said properties the tax delinquencies and the impending auction sale of the encumbered properties.

Appellee Francisco’s deception is further shown by her concealment of the tax delinquency sale of the properties from the estate or its executrix, thus preventing the latter from availing of the right of redemption of said properties. That appellee Francisco divulged the auction sale of the properties only after such redemption period had lapsed clearly betrays her intention to keep Gutierrez’s Estate or its Executrix from availing of such right. And as the evidence would further show, appellee Francisco had a hand in securing for Merryland consolidation of its ownership of the properties and in seeing to it that Merryland’s torrens certificates for the properties were free from liens and encumbrances. All these appellee Francisco did even as she was fully aware that Gutierrez or her estate had a valid and subsisting mortgage lien on the said properties.

It is likewise worthy of note that early on appellee Francisco had testified in the action for rescission of sale and recovery of possession and ownership of the properties which Gutierrez filed against Cardale (Civil Case No. Q-12366) in her capacity as defendant Cardale’s vice-president and treasurer. But then, for no plausible reason whatsoever, she lost interest in continuing with the presentation of evidence for defendant Cardale. And then, when appellant Mejia as executrix of Gutierrez’s Estate filed on August 13, 1984 a Motion for Decision in the aforesaid case, appellee Francisco moved to defer consideration of appellant’s Motion on the pretext that defendant Cardale needed time to employ another counsel. Significantly, in her aforesaid Motion for Postponement dated August 16, 1984 which appellee Francisco personally signed as Officer-in-Charge of Cardale, she also did not disclose the fact that the properties subject matter of the case had long been sold at a tax delinquency sale and acquired by her other corporation Merryland.

And as if what she had already accomplished were not enough fraudulence, appellee Francisco, acting in behalf of Merryland, caused the issuance of new transfer certificates of title in the name of Merryland, which did not anymore bear the mortgage lien in favor of Gutierrez. In the meantime, to further avoid payment of the mortgage indebtedness owing to Gutierrez’s estate, Cardale corporation was dissolved. Finally, to put the properties beyond the reach of the mortgagee, Gutierrez’s estate, Merryland caused the subdivision of such properties, which were subsequently sold on installment basis.

In its petition for certiorari, petitioners argue that there is no law requiring the mortgagor to inform the mortgagee of the tax delinquencies, if any, of the mortgaged properties. Moreover, petitioners claim that Cardale’s failure to pay the realty taxes, per se, does not constitute fraud since it was not proven that Cardale was capable of paying the taxes. Petitioners also contend that if Mejia, as executrix of Gutierrez’s estate, was not remiss in her duty to pursue Civil Case No. 12366, she could have easily learned of the non-payment of realty taxes on the subject properties and of the auction sale that followed and thus, have redeemed the properties or availed of some other remedy to conserve the estate of Gutierrez. In addition, Mejia could have annotated a notice of lis pendens on the titles of the mortgaged properties, but she failed to do so. It is the stand of petitioners that respondent has not adduced any proof that Francisco controlled both Cardale and Merryland and that she used

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these two corporations to perpetuate a fraud upon Gutierrez or her estate. Petitioners maintain that the “evidence shows that, apart form the meager share of petitioner Francisco, the stockholdings of both corporations comprise other shareholders, and the stockholders of either of them, aside from petitioner Francisco, are composed of different persons.” As to Civil Case No. 12366, petitioners insist that the decision of the trial court in that case constitutes res judicata to the instant case.[8]

It is dicta in corporation law that a corporation is a juridical person with a separate and distinct personality from that of the stockholders or members who compose it.[9] However, when the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. One of the earliest formulations of this doctrine of piercing the corporate veil was made in the American case of United States v. Milwaukee Refrigerator Transit Co.[10] -

If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.

Since then a good number of cases have firmly implanted this doctrine in Philippine jurisprudence.[11] One such case is Umali v. Court of Appeals[12] wherein the Court declared that –

Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

With specific regard to corporate officers, the general rule is that the officer cannot be held personally liable with the corporation, whether civilly or otherwise, for the consequences of his acts, if he acted for and in behalf of the corporation, within the scope of his authority and in good faith. In such cases, the officer’s acts are properly attributed to the corporation.[13] However, if it is proven that the officer has used the corporate fiction to defraud a third party,[14] or that he has acted negligently, maliciously or in bad faith,[15] then the corporate veil shall be lifted and he shall be held personally liable for the particular corporate obligation involved.

The Court, after an assiduous study of this case, is convinced that the totality of the circumstances appertaining conduce to the inevitable conclusion that petitioner Francisco acted in bad faith. The events leading up to the loss by the Gutierrez estate of its mortgage security attest to this. It has been established that Cardale failed to comply with its obligation to pay the balance of the purchase price for the four parcels of land it bought from Gutierrez covered by TCT Nos. 7531 to 7534, which obligation was secured by a mortgage upon the lands covered by TCT Nos. 7531, 7532 and 7533. This prompted Gutierrez to file an action for rescission of the Deed of Sale with Mortgage (Civil Case No. Q-12366), but the case dragged on for about fourteen years when Cardale, as represented by Francisco, who was Vice-President and Treasurer of the same,[16] lost interest in completing its presentation of evidence.

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Even before 1984 when Mejia, in her capacity as executrix of Gutierrez’s estate, filed a Motion for Decision with the trial court, there is no question that Francisco knew that the properties subject of the mortgage had become tax delinquent. In fact, as treasurer of Cardale, Francisco herself was the officer charged with the responsibility of paying the realty taxes on the corporation’s properties. This was admitted by the trial court in its decision.[17] In addition, notices dated 9 July 1982 from the City Treasurer of Caloocan demanding payment of the tax arrears on the subject properties and giving warning that if the realty taxes were not paid within the given period then such properties would be sold at public auction to satisfy the tax delinquencies were sent directly to Francisco’s address in White Plains, Quezon City.[18] Thus, as early as 1982, Francisco could have informed the Gutierrez estate or the trial court in Civil Case No. Q-12366 of the tax arrears and of the notice from the City Treasurer so that the estate could have taken the necessary steps to prevent the auction sale and to protect its interests in the mortgaged properties, but she did no such thing. Finally, in 1983, the properties were levied upon and sold at public auction wherein Merryland - a corporation where Francisco is a stockholder[19] and concurrently acts as President and director[20] - was the highest bidder.

When Mejia filed the Motion for Decision in Civil Case No. Q-12366,[21] the period for redeeming the properties subject of the tax sale had not yet expired.[22] Under the Realty Property Tax Code,[23] pursuant to which the tax levy and sale were prosecuted,[24] both the delinquent taxpayer and in his absence, any person holding a lien or claim over the property shall have the right to redeem the property within one year from the date of registration of the sale.[25] However, if these persons fail to redeem the property within the time provided, then the purchaser acquires the property “free from any encumbrance or third party claim whatsoever.”[26] Cardale made no attempts to redeem the mortgaged property during this time. Moreover, instead of informing Mejia or the trial court in Q-12366 about the tax sale, the records show that Francisco filed a Motion for Postponement[27] in behalf of Cardale - even signing the motion in her capacity as “officer-in-charge” - which worked to defer the hearing of Mejia’s Motion for Decision. No mention was made by Francisco of the tax sale in the motion for postponement. Only after the redemption period had expired did Francisco decide to reveal what had transpired by filing a Manifestation stating that the properties subject of the mortgage in favor of Gutierrez had been sold at a tax delinquency sale; however, Francisco failed to mention that it was Merryland that acquired the properties since she was probably afraid that if she did so the court would see behind her fraudulent scheme. In this regard, it is also significant to note that it was Francisco herself who filed the petitions for consolidation of title and who helped secure for Merryland titles over the subject properties “free from any encumbrance or third-party claim whatsoever.”

It is exceedingly apparent to the Court that the totality of Franciso’s actions clearly betray an intention to conceal the tax delinquencies, levy and public auction of the subject properties from the estate of Gutierrez and the trial court in Civil Case No. Q-12366 until after the expiration of the redemption period when the remotest possibility for the recovery of the properties would be extinguished.[28] Consequently, Francisco had effectively deprived the estate of Gutierrez of its rights as mortgagee over the three parcels of land which were sold to Cardale. If Francisco was acting in good faith, then she should have disclosed the status of the mortgaged properties to the trial court in Civil Case No. Q-12366 - especially after Mejia had filed a Motion for Decision, in response to which she filed a motion for postponement wherein she could easily have mentioned the tax sale - since this action directly affected such properties which were the subject of both the sale and mortgage.

That Merryland acquired the property at the public auction only serves to shed more light upon Francisco’s fraudulent purposes. Based on the findings of the Court of Appeals, Francisco is the controlling stockholder and President of Merryland.[29] Thus, aside from the instrumental role she played as an officer of Cardale, in evading that corporation’s legitimate

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obligations to Gutierrez, it appears that Francisco’s actions were also oriented towards securing advantages for another corporation in which she had a substantial interest. We cannot agree, however, with the Court of Appeals’ decision to hold Merryland solidarily liable with Francisco. The only act imputable to Merryland in relation to the mortgaged properties is that it purchased the same and this by itself is not a fraudulent or wrongful act. No evidence has been adduced to establish that Merryland was a mere alter ego or business conduit of Francisco. Time and again it has been reiterated that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.[30] Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of Cardale.[31] Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is not justification for disregarding their separate personalities, absent any showing that Merryland was purposely used as a shield to defraud creditors and third persons of their rights.[32] Thus, Merryland’s separate juridical personality must be upheld.

Based on a statement of account submitted by Mejia, the Court of Appeals awarded P4,314,271.43 in favor of the estate of Gutierrez which represents the unpaid balance of the purchase price in the amount of P629,000.00 with an interest rate of nine percent (9%) per annum, in accordance with the agreement of the parties under the Deed of Sale with Mortgage,[33] as of December 1988.[34] Therefore, in addition to the amount awarded by the appellate court, Francisco should pay the estate of Gutierrez interest on the unpaid balance of the purchase price (in the amount of P629,000.00) at the rate of nine percent (9%) per annum computed from January, 1989 until fully satisfied.

Finally, contrary to petitioner’s assertions, we agree with the Court of Appeals that the decision of the trial court in Civil Case No. Q-12366 does not constitute res judicata insofar as the present case is concerned because the decision in the first case was not a judgment on the merits. Rather, it was merely based upon the premise that since Cardale had been dissolved and the property acquired by another corporation, the action for rescission would not prosper. As a matter of fact, it was even expressly stated by the trial court that the parties should ventilate their issues in another action.

WHEREFORE, the 13 April 1999 Decision of the Court of Appeals is hereby accordingly MODIFIED so as to hold ADALIA FRANCISCO solely liable to the estate of Gutierrez for the amount of P4,314,271.43 and for interest on the unpaid balance of the purchase price (in the amount of P629,000.00) at the rate of nine percent (9%) per annum computed from January, 1989 until fully satisfied. MERRYLAND is hereby absolved from all liability.

SO ORDERED.

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[G.R. No. 126554. May 31, 2000]

ARB CONSTRUCTION CO., INC., and MARK MOLINA, petitioners, vs. COURT OF APPEALS, TBS SECURITY AND INVESTIGATION AGENCY represented by CECILIA R. BACLAY, respondents.

D E C I S I O N

BELLOSILLO, J.:

ARB CONSTRUCTION CO., INC. (ARBC) and MARK MOLINA, Vice President for Operations of ARBC, in this consolidated petition, assail the Decision of the Court of Appeals in CA-G.R. SP Nos. 36330 and 36489 as well as the orders of the trial court dated 9 September 1994 and 9 December 1994 granting private respondent TBS Security and Investigation Agency’s Motion for Leave to File Amended and Supplemental Complaint and denying petitioner Mark Molina's Motion to Dismiss, respectively.

On 15 August 1993 TBS Security and Investigation Agency (TBSS) entered into two (2) Service Contracts with ARBC wherein TBSS agreed to provide and post security guards in the five (5) establishments being maintained by ARBC. Clause 10 of the Service Contracts provides -

10. This contract shall be effective for a period of one (1) year commencing from 15th August 1993 and shall be considered automatically renewed for the same period unless otherwise a written notice of termination shall have been given by one party to the other party thirty (30) days in advance.

In a letter dated 23 February 1994 ARBC informed TBSS of its desire to terminate the Service Contracts effective thirty (30) days after receipt of the letter. Also, in a letter dated 22 March 1994, ARBC through its Vice President for Operations, Mark Molina, informed TBSS that it was replacing its security guards with those of Global Security Investigation Agency (GSIA).

In response to both letters, TBSS informed ARBC that the latter could not preterminate the Service Contracts nor could it post security guards from GSIA as it would run counter to the provisions of their Service Contracts.

On 23 March 1994 Molina wrote TBSS conceding that indeed the "security contract dated 15 August 1993 stipulates that the duration of the service shall be for a period of one year, ending on 15 August 1994 x x x and could not be preterminated until then."[1] Nevertheless, Molina decreased the security guards to only one (1) allegedly pursuant to Clause 2 of the Service Contracts which provides -

2. The AGENCY shall adopt a guarding system and post guards in accordance thereof, in the premises of the client throughout the whole 24 hours daily, using variable shifts of the guards at such hours as may be designated by the CLIENT or AGENCY. As required by the CLIENT, the security guards to be assigned by the AGENCY shall consist initially of the following x x x subject to be increased or decreased by the CLIENT at its sole discretion depending on the security situation or the exigency of the service, by giving the AGENCY at least SEVEN (7) days prior notice.[2]

Thus on 28 March 1994 TBSS filed a Complaint for Preliminary Injunction against ARBC and GSIA praying -

A. Forthwith and Ex-parte, that a Temporary Restraining Order be issued declaring the status quo and directing the Defendants or any person(s) acting in their behalf from performing acts of replacing the Plaintiff’s security guards from other agencies;

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B. After due hearing that a Writ of Preliminary Injunction, in like tenor, be issued upon posting of such bond as the Honorable Court may require;

C. After due hearing, that judgment be rendered -

1. Declaring the two (2) contracts for Security Services between Plaintiff and ARBC to be subsisting until August 15, 1994;

2. Ordering Defendant GLOBAL to refrain from taking over the security services of ARBC and to withdraw its guards from the premises of ARBC, if they have been posted earlier;

3. Ordering ARBC to pay Plaintiff attorney’s fees in the amount of P50,000.00 x x x [3]

In Answer, ARBC claimed that it decreased the number of security guards being posted at its establishments to only one (1) as the security guards assigned by TBSS were found to be grossly negligent and inefficient, citing the following incidents -

8. On February 6, 1994, a Mitsubishi roadgrader of herein defendant was stripped of parts amounting to P58,642.00;

9. On February 25, 1994, a concrete vibrator and mercury light assembly were stolen from the construction site of the Multipurpose Hall beside the swimming pool of herein defendant which is worth P2,800.00 x x x x[4]

In conclusion, it prayed that the complaint against it be dismissed for lack of merit.

On 16 May 1994 TBSS filed a Motion for Leave to File Attached Amended and Supplemental Complaint. TBSS submitted that it now desired to pursue a case for Sum of Money and Damages instead of the one previously filed for Preliminary Injunction. It maintained that the Amended and Supplemental Complaint would not substantially alter its cause of action as both the original and amended complaint were based on the same set of facts.[5]

In addition to the allegations in its original complaint, TBSS alleged in its Amended and Supplemental Complaint that ARBC illegally deducted from the payroll the amounts of P15,500.00 and P2,800.00 representing the value of one (1) unit concrete vibrator and cassette recorder, respectively. It further argued that ARBC withheld additional amounts from its payroll as payment for the parts of the grader that were stolen.[6] TBSS maintained that ARBC had an outstanding obligation of P472,080.46. Corollarily, TBSS prayed for moral damages of P500,000.00, exemplary damages of P200.000.00 and attorney's fees of P50,000.00.

On 2 May 1994 the trial court issued a temporary restraining order but due to the exigency of the situation TBSS decided to withdraw its security contingent from ARBC's premises on 13 May 1994.

ARBC opposed the Motion for Leave to File Amended and Supplemental Complaint [7] contending that the cause of action had been substantially altered.

On 9 September 1994 the RTC of Makati, Br. 59, granted the motion of TBSS to file the Amended and Supplemental Complaint rationalizing thus -

Should the court find the allegations in the pleadings to be inadequate, the Court should allow the party to file proper amendments in accordance with the mandate of the Rules of Court that amendments to pleadings are favored and should be liberally allowed, particularly in the early stages of the law suit, so that the actual merit of the controversy may be speedily

31 | c o r p o c a s e s 2 1 - 4 0

determined without regard to technicalities and in the most expeditious and inexpensive manner x x x x [8]

ARBC filed a Motion for Reconsideration but on 3 November 1994 the motion was denied.

Meanwhile, Mark Molina filed a Motion to Dismiss [9] the Amended and Supplemental Complaint on the ground that it did not state a cause of action insofar as he was concerned. But on 9 December 1994 the trial court denied the motion to dismiss and directed Molina instead to file his answer within ten (10) days from receipt of the order.

On 30 January 1995 ARBC filed a Petition [10] with the Court of Appeals alleging that the trial court committed grave abuse of discretion in issuing the Orders of 9 September 1994 and 3 November 1994. On 15 February 1995 Molina likewise filed a Petition before the Court of Appeals similarly attributing grave abuse of discretion to the trial court in issuing the order of 9 December 1994.

Parenthetically, upon motion of TBSS, the petition of Mark Molina in CA-G.R. SP No. 36484 was consolidated with the petition of ARBC in CA-G.R. SP No. 36330.

On 16 August 1996 the Court of Appeals rendered a Decision [11] denying both petitions of ARBC and Molina. On 3 October 1996 petitioners’ Motion for Reconsideration [12] was denied. Hence, this petition.

In their consolidated Petition before this Court, petitioners first submit that THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT HAD THE RIGHT TO CHANGE ITS CAUSE OF ACTION IN VIEW OF A CHANGE IN THE SITUATION OF THE PARTIES AFTER THE FILING OF THE ORIGINAL COMPLAINT.[13] In support of this assigned error petitioners insist that -

x x x (T)here was not only a substantial change in private respondent’s cause of action but there was even an alteration in the theory of the case x x x (W)hile in the original complaint the only thing alleged and is being prayed for is for petitioner ARB (ARBC) to be enjoined from replacing the security guards of private respondent x x x and for the two contracts x x x to be enforced until August 15, 1994 and for petitioner ARB (ARBC) to be ordered to pay x x x attorney’s fees, what is alleged and is being prayed for in the amended and supplemental complaint is for both petitioners to be ordered to pay P171,853.80 (for unpaid services) x x x and P300,226.66 (for lost income) x x x plus moral and exemplary damages and attorney’s fees.

Obviously, petitioner ARB (ARBC) is being required to answer for a liability or legal obligation under the amended and supplemental complaint wholly different from that stated in the original complaint such as but not limited to the amount of P171,852.80 which was never mentioned in the original contract. Under these circumstances, a different cause of action was introduced by the amendment.

Also, there was a change in the theory of the case. Whereas in the original contract what is sought for by private respondent is the enforcement of the two (2) contracts which is what is known in legal parlance as specific performance, in the amended and supplemental complaint what is sought for is x x x a rescission of the contracts with damages x x x x [14]

We cannot subscribe to the contention of petitioners that the Amended and Supplemental Complaint substantially changed TBSS' cause of action nor was there any alteration in the theory of the case. As correctly observed by the Court of Appeals, "the amendatory allegations are mere amplifications of the cause of action for damages x x x x An amendment will not be considered as stating a new cause of action if the facts alleged in the amended complaint show

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substantially the same wrong with respect to the same transaction, or if what are alleged refer to the same matter but are more fully and differently stated, or where averments which were implied are made in expressed terms, and the subject of the controversy or the liability sought to be enforced remains the same."[15]

The original as well as amended and supplemental complaints readily disclose that the averments contained therein are almost identical. In the original complaint, TBSS prays, among others, that the two (2) Service Contracts be declared as subsisting until 15 August 1994 and that petitioners be made to pay P50,000.00 as attorney’s fees.[16] Significantly, in its penultimate paragraph, TBSS prays "for such other reliefs that are considered just and equitable under the premises."[17] This is a "catch-all" phrase which definitely covers the amplifications and additional averments contained in the Amended and Supplemental Complaint. Due to events supervening after the filing of the original complaint, it became incumbent upon TBSS to amend its original complaint. One of the supervening events was the withholding by petitioner ARBC of some amounts intended for the payroll of TBSS due to pilferage or losses which allegedly occurred due to the negligence and inefficiency of TBSS' security guards. Plainly, this withholding of the payroll was only an offshoot of the pretermination of the two (2) Service Contracts on the part of ARBC.

Significantly, the pretermination of the Service Contracts was already alleged in the original complaint. In fact it was one, if not the most basic, issue discussed therein. Since the withholding of the payroll was only an offshoot of the issue on the pretermination of the contract, we can safely conclude that the allegation on the withholding of the payroll in the Amended and Supplemental Complaint was only an amplification of an issue that was already included and discussed in the original complaint. It was therefore error on the part of petitioners to conclude that private respondent changed its cause of action in the Amended and Supplemental Complaint. Neither could they say that they were being made to answer for a liability or legal obligation that was wholly different from that stated in the original complaint.

Grave abuse of discretion therefore could not be imputed to the trial court for admitting the Amended and Supplemental Complaint of private respondent TBSS. It also follows that the appellate court could not be faulted for putting its stamp of approval on the order of the trial court admitting the same.

Petitioners also argue, as their second assigned error, that THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGATIONS IN THE AMENDED AND SUPPLEMENTAL COMPLAINT WERE SUFFICIENT TO HOLD PETITIONER MOLINA LIABLE TO PRIVATE RESPONDENT IN HIS PERSONAL CAPACITY. In support of their contention petitioners submit -

x x x (W)hen x x x Molina allegedly applied P171,853.80 payable to private respondent to the losses suffered by petitioner ARB (ARBC) due to the negligence and indifference of the private respondent’s security guards and when petitioner Molina replaced the said security guards x x x Molina was not acting in his personal capacity but x x x as officer of petitioner ARB (ARBC).

Since petitioner Molina did not so act in his personal capacity but only in his official capacity as officer of petitioner ARB (ARBC) then petitioner Molina cannot be held personally liable for the alleged liability of petitioner ARB (ARBC) x x x x [18]

In affirming the order of the trial court denying petitioner Molina’s Motion to Dismiss, the appellate court ruled -

Similarly, We find no error committed by respondent Judge in denying the motion to dismiss.

In paragraphs 5, 17, 18 of the amended and supplemental complaint, it is alleged:

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5. But fate would have it that defendant ARBC would subsequently breach the aforesaid contracts by surreptitiously preterminating the same and as precursor thereto, defendant ARBC, through defendant Mark Molina, would impute against plaintiff pretended and fabricated violations and baselessly blame plaintiff for alleged losses of company properties by just deducting the values thereof from plaintiff’s billings without even complying with the procedure agreed upon in the contracts x x x x

It may be pertinent to state that all these accusations and imputations, albeit false and concocted, were made by defendant Mark P. Molina x x x x

17. Such unsalutary breach of contract by defendant ARBC through defendant Mark Molina has resulted to plaintiff’s damage and prejudice by way of lost income consisting of the unexpired portion of the contract, i.e., up to August 15, 1994, entailing a total amount of P300, 266.66 x x x x

The above allegations, particularly the subparagraph, "It may be pertinent to state that all these accusations and imputations, albeit false and concocted, were made by defendant Mark P. Molina," are sufficient statement of a cause of action against petitioner Mark Molina in his personal capacity.[19]

In this regard, we agree with petitioners. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.[20]

Prescinding from the foregoing, the general rule is that officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority.[21] Article 31 of the Corporation Code is in point -

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons x x x x

On the basis hereof, petitioner Molina could not be held jointly and severally liable for any obligation which petitioner ARBC may be held accountable for, absent any proof of bad faith or malice on his part. Corollarily, it is also incorrect on the part of the Court of Appeals to conclude that there was a sufficient cause of action against Molina as to make him personally liable for his actuations as Vice President for Operations of ARBC. A cursory reading of the records of the instant case would reveal that Molina did not summarily withhold certain amounts from the payroll of TBSS. Instead, he enumerated instances [22] which in his view were enough bases to do so.

Finally, petitioners contend that THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL COURT DID NOT GRAVELY ABUSE ITS DISCRETION IN GRANTING PRIVATE RESPONDENT’S MOTION FOR LEAVE TO FILE AMENDED AND SUPPLEMENTAL COMPLAINT AND IN DENYING PETITIONER MOLINA’S MOTION TO DISMISS. In support hereof, petitioners submit that -

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x x x (T)he trial court admitted the amended and supplemental complaint which substantially changed the cause of action and theory of the case of the private respondent. Therefore, there is (sic) abuse of discretion on the part of the trial court contrary to the ruling of the Court of Appeals that there is none.[23]

As already discussed, the Amended and Supplemental Complaint did not substantially alter the cause of action and theory of the case. Consequently, the trial court and the appellate court could not be charged with grave abuse of discretion in admitting the same.

WHEREFORE, the PETITION is PARTIALLY GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 36489 affirming the 9 December 1994 Order of the Regional Trial Court-Br. 59, Makati City, which denied the Motion to Dismiss of petitioner Mark Molina is REVERSED and SET ASIDE.

However, the assailed Decision of the appellate court in CA-G.R. SP No. 36330 affirming the 9 September 1994 Order of the Regional Trial Court-Br. 59, Makati City, granting TBS Security and Investigation Agency's Motion for Leave to File Amended and Supplemental Complaint is likewise AFFIRMED. The case is remanded to the trial court for further proceedings. No costs.

SO ORDERED.

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G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner, vs.COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK of the PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated January 29, 1990, 1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891, 2 with a face value of P500,000.00, from the Philippine Underwriters Finance Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement 3 dated February 4, 1981, and a Detached Assignment 4 dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was originally filed as a Petition for Mandamus 5 under Rule 65 of the Rules of Court, to compel the Central Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a "Detached Assignment" . . ., whereby Filriters, as registered owner, sold, transferred, assigned and delivered unto Philippine Underwriters Finance Corporation (Philfinance) all its rights and title to Central Bank Certificates of Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed by the transferor intended to complete the assignment through the registration of the transfer in the name of PhilFinance, which authorization is specifically phrased as follows: '(Filriters) hereby irrevocably authorized the said issuer (Central Bank) to transfer the said bond/certificates on the books of its fiscal agent;

5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance from Filriters as averred in paragraph 3 of the Petition;

6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when the checks it issued in favor of petitioner were dishonored for insufficient funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to enable the latter to have its title completed and registered in the books of the respondent. And by means of said Detachment, Philfinance transferred and assigned all, its

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rights and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize the said issuer (respondent herein) to transfer the said bond/certificate on the books of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned Detached Assignments (Annexes "B" and "D"), to the Securities Servicing Department of the respondent, and requested the latter to effect the transfer of the CBCI on its books and to issue a new certificate in the name of petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and continues to do so notwithstanding petitioner's valid and just title over the same and despite repeated demands in writing, the latest of which is hereto attached as Annex "E" and made an integral part hereof;

11. The express provisions governing the transfer of the CBCI were substantially complied with the petitioner's request for registration, to wit:

"No transfer thereof shall be valid unless made at said office (where the Certificate has been registered) by the registered owner hereof, in person or by his attorney duly authorized in writing, and similarly noted hereon, and upon payment of a nominal transfer fee which may be required, a new Certificate shall be issued to the transferee of the registered holder thereof."

and, without a doubt, the Detached Assignments presented to respondent were sufficient authorizations in writing executed by the registered owner, Filriters, and its transferee, PhilFinance, as required by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a transfer of ownership over the CBCI and issuing a new certificate to the transferee devolves upon the respondent;

Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its name.

On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank of the Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader 6 thereby calling to fore the respondent Filriters Guaranty Assurance Corporation (Filriters), the registered owner of the subject CBCI as respondent.

For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities required of respondent as an insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust fund doctrine and to the prejudice of policyholders and to all who have present or future claim against policies issued by Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of Filriters, without any board resolution, knowledge or consent of the board of directors of Filriters, and without any clearance or authorization from the Insurance Commissioner, executed a detached assignment purportedly assigning CBCI No. 891 to Philfinance;

xxx xxx xxx

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14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the same positions in Philfinance), without any consideration or benefit redounding to Filriters and to the grave prejudice of Filriters, its policy holders and all who have present or future claims against its policies, executed similar detached assignment forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the assignment is without the knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board, as requiring by Article V, Section 3 of CB Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not the corporate act of Filriters and such null and void;

a) The assignment was executed without consideration and for that reason, the assignment is void from the beginning (Article 1409, Civil Code);

b) The assignment was executed without any knowledge and consent of the board of directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement under the Insurance Code for its existence as an insurance company and the pursuit of its business operations. The assignment of the CBCI is illegal act in the sense of malum in se or malum prohibitum, for anyone to make, either as corporate or personal act;

d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by law, is immoral and against public policy;

e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiency of Filriters (and has in fact helped in placing Filriters under conservatorship), an inevitable result known to the officer who executed assignment.

17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the assignment.

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not payable to bearer but is a registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered owner as the absolute owner and that the value of the registered certificates shall be payable only to the registered owner; a sufficient notice to plaintiff that the assignments do not give them the registered owner's right as absolute owner of the CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the registered certificates are payable only to the registered owner (Article II, Section 1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not a regular transaction made in the usual of ordinary course of business;

a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the Insurance Code and its assignment or transfer is expressly prohibited by law. There was no attempt to get any clearance or authorization from the Insurance Commissioner;

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b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course of its business;

c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all or substantially all" of the assets of Filriters, which requires the affirmative action of the stockholders (Section 40, Corporation [sic] Code. 7

In its Decision 8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same CBCI by Philfinance in favor of Traders Royal Bank null and void and of no force and effect. The dispositive portion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void and of no force and effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and to pay the value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance Corporation;

(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance Corp. The sum of P10,000 as attorney's fees; and

(d) to pay the costs.

SO ORDERED. 9

The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals likewise failed. The findings of the fact of the said court are hereby reproduced:

The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine Underwriters Finance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was still registered in the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made under a repurchase agreement dated February 4, 1981, granting Philfinance the right to repurchase the instrument on or before April 27, 1981. When Philfinance failed to buy back the note on maturity date, it executed a deed of assignment, dated April 27, 1981, conveying to appellant TRB all its right and the title to CBCI No. D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891 in its name before the Security and Servicing Department of the Central Bank (CB). Central Bank, however, refused to effect the transfer and registration in view of an adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in the Regional Trial Court of Manila. The suit, however, was subsequently treated by the lower court as a case of interpleader when CB prayed in its amended answer that Filriters be impleaded as a respondent and the court adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get a favorable judgment. TRB now comes to this Court on appeal. 11

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In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having acquired the said certificate from Philfinance as a holder in due course, its possession of the same is thus free fro any defect of title of prior parties and from any defense available to prior parties among themselves, and it may thus, enforce payment of the instrument for the full amount thereof against all parties liable thereon. 12

In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the instrument clearly stated that it was payable to Filriters, the registered owner, whose name was inscribed thereon, and that the certificate lacked the words of negotiability which serve as an expression of consent that the instrument may be transferred by negotiation.

Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made without consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", which provided that any "assignment of registered certificates shall not be valid unless made . . . by the registered owner thereof in person or by his representative duly authorized in writing."

Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was inexistent, having acquired the certificate through simulation. What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the latter. For lack of such authority, the assignment did not therefore bind Filriters and violated as the same time Central Bank Circular No. 769 which has the force and effect of a law, resulting in the nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to Traders Royal Bank and which the latter can register with the Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equity and the two corporations have identical corporate officers, thus demanding the application of the doctrine or piercing the veil of corporate fiction, as to give validity to the transfer of the CBCI from registered owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as actual payment to Filriters. Thus, there is no merit to the lower court's ruling that the transfer of the CBCI from Filriters to Philfinance was null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability within the meaning of the negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

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The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS.

xxx xxx xxx

Properly understood, a certificate of indebtedness pertains to certificates for the creation and maintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202). Being equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a fixed sum of money. It is usually used for the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:

As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation, the registered owner hereof." Very clearly, the instrument is payable only to Filriters, the registered owner, whose name is inscribed thereon. It lacks the words of negotiability which should have served as an expression of consent that the instrument may be transferred by negotiation. 15

A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCE CORPORATION, and to no one else, thus, discounting the petitioner's submission that the same is a negotiable instrument, and that it is a holder in due course of the certificate.

The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchtone relating to the protection of holders in due course, and the freedom of negotiability is the foundation for the protection which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is totally absent in a certificate indebtedness as it merely to pay a sum of money to a specified person or entity for a period of time.

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. While the writing may be read in the light of surrounding circumstance in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by the negotiable instruments law. The pertinent question then is, was the transfer of the CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on the matter:

Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since it acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer was for "value received", there was really no consideration involved.

41 | c o r p o c a s e s 2 1 - 4 0

What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation. Thus, for lack of any consideration, the assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central Bank Circular No. 769, series of 1980, otherwise known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", under which the note was issued. Published in the Official Gazette on November 19, 1980, Section 3 thereof provides that any assignment of registered certificates shall not be valid unless made . . . by the registered owner thereof in person or by his representative duly authorized in writing.

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the latter. For lack of such authority, the assignment did not therefore bind Filriters and violated at the same time Central Bank Circular No. 769 which has the force and effect of a law, resulting in the nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to Traders Royal Bank and which the latter can register with the Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent Filriters and Philfinance, though separate corporate entities on paper, have used their corporate fiction to defraud TRB into purchasing the subject CBCI, which purchase now is refused registration by the Central Bank.

Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies have the same corporate officers, if the principle of piercing the veil of corporate entity were to be applied in this case, then TRB's payment to Philfinance for the CBCI purchased by it could just as well be considered a payment to Filriters, the registered owner of the CBCI as to bar the latter from claiming, as it has, that it never received any payment for that CBCI sold and that said CBCI was sold without its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that the CBCI was merely borrowed by Philfinance from Filriters, a sister corporation, to guarantee its (Philfinance's) financing operations, if it were to be consistent therewith, on the issued raised by TRB that there was a piercing a veil of corporate entity, the Court of Appeals should have ruled that such veil of corporate entity was, in fact, pierced, and the payment by TRB to Philfinance should be construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person. 18

Peiercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished one corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do this, the court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or crime was committed upon another,

42 | c o r p o c a s e s 2 1 - 4 0

disregarding, thus, his, her, or its rights. It is the protection of the interests of innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine.

The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence on the contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and the identity of one shall be maintained as to the other, there is nothing else which could lead the court under circumstance to disregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical personality separate from its stockholders and from other corporations may be disregarded, 19 in the absence of such grounds, the general rule must upheld. The fact that Filfinance owns majority shares in Filriters is not by itself a ground to disregard the independent corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired the subject certificate of indebtedness from Philfinance.

On its face the subject certificates states that it is registered in the name of Filriters. This should have put the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over the same or its authority to assign the certificate. As it is, there is no showing to the effect that petitioner had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of the certificate.

The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name at any office of the Bank or any agency duly authorized by the Bank, and such registration is noted hereon. After such registration no transfer thereof shall be valid unless made at said office (where the Certificates has been registered) by the registered owner hereof, in person, or by his attorney, duly authorized in writing and similarly noted hereon and upon payment of a nominal transfer fee which may be required, a new Certificate shall be issued to the transferee of the registered owner thereof. The bank or any agency duly authorized by the Bank may deem and treat the bearer of this Certificate, or if this Certificate is registered as herein authorized, the person in whose name the same is registered as the absolute owner of this Certificate, for the purpose of receiving payment hereof, or on account hereof, and for all other purpose whether or not this Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require Philfinance to submit such an authorization from Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-owner was disposing of the registered CBCI owned by another entity was a good reason for petitioner to verify of inquire as to the title Philfinance to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules and Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which provides that:

Sec. 3. Assignment of Registered Certificates. — Assignment of registered certificates shall not be valid unless made at the office where the same have been issued and registered or at the Securities Servicing Department, Central Bank of the Philippines, and by the registered

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owner thereof, in person or by his representative, duly authorized in writing. For this purpose, the transferee may be designated as the representative of the registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its requirements. An entity which deals with corporate agents within circumstances showing that the agents are acting in excess of corporate authority, may not hold the corporation liable. 22 This is only fair, as everyone must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for all intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who had signed the deed of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the latter. As it is, the sale from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there was no consideration for the same. This is fatal to the petitioner's cause, for then, Philfinance had no title over the subject certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure potest — no man can do anything except what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves, which are required by law 24 to be maintained at a mandated level. This was pointed out by Elias Garcia, Manager-in-Charge of respondent Filriters, in his testimony given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the face value of P5000,000.00 subject of this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the Insurance Commission sometime in early 1981 and this CBCI No. 891 was among the CBCI's that were found to be missing.

Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up legal reserves under Section 213 of the Insurance Code equivalent to 40 percent of the premiums receipt and further, the Insurance Commission requires this reserve to be invested preferably in government securities or government binds. This is how this CBCI came to be purchased by the company.

It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus, the anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the said corporation, not without the approval of its Board of Directors, and the maintenance of the required reserve fund.

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Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over the claimed interest of Traders Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is hereby AFFIRMED.

SO ORDERED.

[G.R. No. 100812. June 25, 1999]

FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA MANUEL, respondents.

D E C I S I O N

QUISUMBING, J.:

This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the decision[1] of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural antecedents of this petition are as follows:

On January 23, 1985, petitioner filed a complaint[2] against private respondents to recover three thousand four hundred twelve and six centavos (P3,412.06), representing the balance of the jeep body purchased by the Manuels from petitioner; an additional sum of twenty thousand four hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on the cost of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of suit and attorney’s fees.[3] To the original balance on the price of jeep body were added the costs of repair.[4] In their answer, private respondents interposed a counterclaim for unpaid legal services by Gregorio Manuel in the amount of fifty thousand pesos (P50,000) which was not paid by the incorporators, directors and officers of the petitioner. The trial court decided the case on June 26, 1985, in favor of petitioner in regard to the petitioner’s claim for money, but also allowed the counter-claim of private respondents. Both parties appealed. On April 15, 1991, the Court of Appeals sustained the trial court’s decision.[5] Hence, the present petition.

For our review in particular is the propriety of the permissive counterclaim which private respondents filed together with their answer to petitioner’s complaint for a sum of money. Private respondent Gregorio Manuel alleged as an affirmative defense that, while he was petitioner’s Assistant Legal Officer, he represented members of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, even after the termination of the proceedings, his services were not paid. Said family members, he said, were also incorporators, directors and officers of petitioner. Hence to counter petitioner’s collection suit, he filed a permissive counterclaim for the unpaid attorney’s fees.[6]

For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default on this score, and evidence ex-parte was presented on the counterclaim. The trial court ruled in favor of private respondents and found that Gregorio Manuel indeed rendered legal services to the Francisco family in Special Proceedings Number 7803- “In the Matter of Intestate Estate of Benita Trinidad”. Said court also found that his legal services were not compensated despite repeated demands, and thus ordered petitioner to pay him the amount of fifty thousand (P50,000.00) pesos.[7]

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Dissatisfied with the trial court’s order, petitioner elevated the matter to the Court of Appeals, posing the following issues:

“I.

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE PERSON OF THE DEFENDANT.

II.

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES.

III.

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM.”[8]

Petitioner contended that the trial court did not acquire jurisdiction over it because no summons was validly served on it together with the copy of the answer containing the permissive counterclaim. Further, petitioner questions the propriety of its being made party to the case because it was not the real party in interest but the individual members of the Francisco family concerned with the intestate case.

In its assailed decision now before us for review, respondent Court of Appeals held that a counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere does it state in the Rules that a party still needed to be summoned anew if a counterclaim was set up against him. Failure to serve summons, said respondent court, did not effectively negate trial court’s jurisdiction over petitioner in the matter of the counterclaim. It likewise pointed out that there was no reason for petitioner to be excused from answering the counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the copy of the answer with counterclaim two (2) days prior to his withdrawal as counsel for petitioner. Moreover when petitioner’s new counsel, Jose N. Aquino, entered his appearance, three (3) days still remained within the period to file an answer to the counterclaim. Having failed to answer, petitioner was correctly considered in default by the trial court.[9] Even assuming that the trial court acquired no jurisdiction over petitioner, respondent court also said, but having filed a motion for reconsideration seeking relief from the said order of default, petitioner was estopped from further questioning the trial court’s jurisdiction.[10]

On the question of its liability for attorney’s fees owing to private respondent Gregorio Manuel, petitioner argued that being a corporation, it should not be held liable therefor because these fees were owed by the incorporators, directors and officers of the corporation in their personal capacity as heirs of Benita Trinidad. Petitioner stressed that the personality of the corporation, vis-à-vis the individual persons who hired the services of private respondent, is separate and distinct,[11] hence, the liability of said individuals did not become an obligation chargeable against petitioner.

Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

“However, this distinct and separate personality is merely a fiction created by law for convenience and to promote justice. Accordingly, this separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for found (sic) illegality, or to work an injustice, or where necessary to achieve equity

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or when necessary for the protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity. (Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408)

“In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is composed of the heirs of the late Benita Trinidad as directors and incorporators for whom defendant Gregorio Manuel rendered legal services in the intestate estate case of their deceased mother. Considering the aforestated principles and circumstances established in this case, equity and justice demands plaintiff-appellant’s veil of corporate identity should be pierced and the defendant be compensated for legal services rendered to the heirs, who are directors of the plaintiff-appellant corporation.”[12]

Now before us, petitioner assigns the following errors:

“I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY.

II.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION OVER PETITIONER WITH RESPECT TO THE COUNTERCLAIM.”[13]

Petitioner submits that respondent court should not have resorted to piercing the veil of corporate fiction because the transaction concerned only respondent Gregorio Manuel and the heirs of the late Benita Trinidad. According to petitioner, there was no cause of action by said respondent against petitioner; personal concerns of the heirs should be distinguished from those involving corporate affairs. Petitioner further contends that the present case does not fall among the instances wherein the courts may look beyond the distinct personality of a corporation. According to petitioner, the services for which respondent Gregorio Manuel seeks to collect fees from petitioner are personal in nature. Hence, it avers the heirs should have been sued in their personal capacity, and not involve the corporation.[14]

With regard to the permissive counterclaim, petitioner also insists that there was no proper service of the answer containing the permissive counterclaim. It claims that the counterclaim is a separate case which can only be properly served upon the opposing party through summons. Further petitioner states that by nature, a permissive counterclaim is one which does not arise out of nor is necessarily connected with the subject of the opposing party’s claim. Petitioner avers that since there was no service of summons upon it with regard to the counterclaim, then the court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an action independent from the answer, according to petitioner, then in effect there should be two simultaneous actions between the same parties: each party is at the same time both plaintiff and defendant with respect to the other,[15] requiring in each case separate summonses.

In their Comment, private respondents focus on the two questions raised by petitioner. They defend the propriety of piercing the veil of corporate fiction, but deny the necessity of serving separate summonses on petitioner in regard to their permissive counterclaim contained in the answer.

Private respondents maintain both trial and appellate courts found that respondent Gregorio Manuel was employed as assistant legal officer of petitioner corporation, and that his services were solicited by the incorporators, directors and members to handle and represent them in

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Special Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They assert that the members of petitioner corporation took advantage of their positions by not compensating respondent Gregorio Manuel after the termination of the estate proceedings despite his repeated demands for payment of his services. They cite findings of the appellate court that support piercing the veil of corporate identity in this particular case. They assert that the corporate veil may be disregarded when it is used to defeat public convenience, justify wrong, protect fraud, and defend crime. It may also be pierced, according to them, where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. In these instances, they aver, the corporation should be treated merely as an association of individual persons.[16]

Private respondents dispute petitioner’s claim that its right to due process was violated when respondents’ counterclaim was granted due course, although no summons was served upon it. They claim that no provision in the Rules of Court requires service of summons upon a defendant in a counterclaim. Private respondents argue that when the petitioner filed its complaint before the trial court it voluntarily submitted itself to the jurisdiction of the court. As a consequence, the issuance of summons on it was no longer necessary. Private respondents say they served a copy of their answer with affirmative defenses and counterclaim on petitioner’s former counsel, Nicanor G. Alvarez. While petitioner would have the Court believe that respondents served said copy upon Alvarez after he had withdrawn his appearance as counsel for the petitioner, private respondents assert that this contention is utterly baseless. Records disclose that the answer was received two (2) days before the former counsel for petitioner withdrew his appearance, according to private respondents. They maintain that the present petition is but a form of dilatory appeal, to set off petitioner’s obligations to the respondents by running up more interest it could recover from them. Private respondents therefore claim damages against petitioner.[17]

To resolve the issues in this case, we must first determine the propriety of piercing the veil of corporate fiction.

Basic in corporation law is the principle that a corporation has a separate personality distinct from its stockholders and from other corporations to which it may be connected.[18] However, under the doctrine of piercing the veil of corporate entity, the corporation’s separate juridical personality may be disregarded, for example, when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Also, where the corporation is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation, then its distinct personality may be ignored.[19] In these circumstances, the courts will treat the corporation as a mere aggrupation of persons and the liability will directly attach to them. The legal fiction of a separate corporate personality in those cited instances, for reasons of public policy and in the interest of justice, will be justifiably set aside.

In our view, however, given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no relevant application here. Respondent court erred in permitting the trial court’s resort to this doctrine. The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation. Note that according to private respondent Gregorio Manuel his services were solicited as counsel for members of the Francisco family to represent them in the

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intestate proceedings over Benita Trinidad’s estate. These estate proceedings did not involve any business of petitioner.

Note also that he sought to collect legal fees not just from certain Francisco family members but also from petitioner corporation on the claims that its management had requested his services and he acceded thereto as an employee of petitioner from whom it could be deduced he was also receiving a salary. His move to recover unpaid legal fees through a counterclaim against Francisco Motors Corporation, to offset the unpaid balance of the purchase and repair of a jeep body could only result from an obvious misapprehension that petitioner’s corporate assets could be used to answer for the liabilities of its individual directors, officers, and incorporators. Such result if permitted could easily prejudice the corporation, its own creditors, and even other stockholders; hence, clearly inequitous to petitioner.

Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators, directors and officers of the corporation had incurred, it was incurred in their personal capacity. When directors and officers of a corporation are unable to compensate a party for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or promoting injustice, and be thereby held liable therefor by piercing its corporate veil. While there are no hard and fast rules on disregarding separate corporate identity, we must always be mindful of its function and purpose. A court should be careful in assessing the milieu where the doctrine of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous application.

The personality of the corporation and those of its incorporators, directors and officers in their personal capacities ought to be kept separate in this case. The claim for legal fees against the concerned individual incorporators, officers and directors could not be properly directed against the corporation without violating basic principles governing corporations. Moreover, every action —including a counterclaim — must be prosecuted or defended in the name of the real party in interest.[20] It is plainly an error to lay the claim for legal fees of private respondent Gregorio Manuel at the door of petitioner (FMC) rather than individual members of the Francisco family.

However, with regard to the procedural issue raised by petitioner’s allegation, that it needed to be summoned anew in order for the court to acquire jurisdiction over it, we agree with respondent court’s view to the contrary. Section 4, Rule 11 of the Rules of Court provides that a counterclaim or cross-claim must be answered within ten (10) days from service. Nothing in the Rules of Court says that summons should first be served on the defendant before an answer to counterclaim must be made. The purpose of a summons is to enable the court to acquire jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely distinct and independent action, the defendant in the counterclaim, being the plaintiff in the original complaint, has already submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules of Civil Procedure,[21] if a defendant (herein petitioner) fails to answer the counterclaim, then upon motion of plaintiff, the defendant may be declared in default. This is what happened to petitioner in this case, and this Court finds no procedural error in the disposition of the appellate court on this particular issue. Moreover, as noted by the respondent court, when petitioner filed its motion seeking to set aside the order of default, in effect it submitted itself to the jurisdiction of the court. As well said by respondent court:

“Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon its request, plaintiff-appellant was granted time to file a motion for reconsideration of the disputed decision. Plaintiff-appellant did file its motion for reconsideration to set aside the order of default and the judgment rendered on the counterclaim.

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“Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it vigorously insists, plaintiff-appellant is considered to have submitted to the court’s jurisdiction when it filed the motion for reconsideration seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped from assailing the jurisdiction of a court after voluntarily submitting himself to its jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37).”[22]

WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby REVERSED insofar only as it held Francisco Motors Corporation liable for the legal obligation owing to private respondent Gregorio Manuel; but this decision is without prejudice to his filing the proper suit against the concerned members of the Francisco family in their personal capacity. No pronouncement as to costs.

SO ORDERED.

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[G.R. No. 125986. January 28, 1999]

LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners, vs. HONORABLE COURT OF APPEALS, JAMES BUILDER CONSTRUCTION and/or JAIME T. BRAVO, respondents.

D E C I S I O N

MARTINEZ, J.:

This petition for review assails the decision of the respondent Court of Appeals dated March 15, 1996,[1] which affirmed with modification the judgment of default rendered by the Regional Trial Court of Muntinlupa, Branch 276, in Civil Case No. 92-2592 granting all the reliefs prayed for in the complaint of private respondent James Builder Construction and/or Jaime T. Bravo.

As culled from the record, the facts are as follows:

Petitioner Aida M. Posadas and her two (2) minor children co-owned a 1.6 hectare property in Sucat, Muntinlupa, which was occupied by squatters. Petitioner Posadas entered into negotiations with private respondent Jaime T. Bravo regarding the development of the said property into a residential subdivision. On May 3, 1989, she authorized private respondent to negotiate with the squatters to leave the said property. With a written authorization, respondent Bravo buckled down to work and started negotiations with the squatters.

Meanwhile, some seven (7) months later, on December 11, 1989, petitioner Posadas and her two (2) children, through a Deed of Assignment, assigned the said property to petitioner Luxuria Homes, Inc., purportedly for organizational and tax avoidance purposes. Respondent Bravo signed as one of the witnesses to the execution of the Deed of Assignment and the Articles of Incorporation of petitioner Luxuria Homes, Inc.

Then sometime in 1992, the harmonious and congenial relationship of petitioner Posadas and respondent Bravo turned sour when the former supposedly could not accept the management contracts to develop the 1.6 hectare property into a residential subdivision, the latter was proposing. In retaliation, respondent Bravo demanded payment for services rendered in connection with the development of the land. In his statement of account dated 21 August 1991[2] respondent demanded the payment of P1,708,489.00 for various services rendered, i.e., relocation of squatters, preparation of the architectural design and site development plan, survey and fencing.

Petitioner Posadas refused to pay the amount demanded. Thus, in September 1992, private respondents James Builder Construction and Jaime T. Bravo instituted a complaint for specific performance before the trial court against petitioners Posadas and Luxuria Homes, Inc. Private respondents alleged therein that petitioner Posadas asked them to clear the subject parcel of land of squatters for a fee of P1,100,000.00 for which they were partially paid the amount of P461,511.50, leaving a balance of P638,488.50. They were also supposedly asked to prepare a site development plan and an architectural design for a contract price of P450,000.00 for which they were partially paid the amount of P25,000.00, leaving a balance of P425,000.00. And in anticipation of the signing of the land development contract, they had to construct a bunkhouse and warehouse on the property which amounted to P300,000.00, and a hollow blocks factory for P60,000.00. Private respondents also claimed that petitioner Posadas agreed that private respondents will develop the land into a first class subdivision thru a management contract and that petitioner Posadas is unjustly refusing to comply with her obligation to finalize the said management contract.

The prayer in the complaint of the private respondents before the trial court reads as follows:

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“WHEREFORE, premises considered, it is respectfully prayed of this Honorable Court that after hearing/trial judgment be rendered ordering defendant to:

a) Comply with its obligation to deliver/finalize Management Contract of its land in Sucat, Muntinlupa, Metro Manila and to pay plaintiff its balance in the amount of P1,708,489.00;

b) Pay plaintiff moral and exemplary damages in the amount of P500,000.00;

c) Pay plaintiff actual damages in the amount of P500,000.00 (Bunkhouse/warehouse – P300,000.00, Hollow-block factory – P60,000.00, lumber, cement, etc., P120,000.00, guard – P20,000.00);

d) Pay plaintiff attorney’s fee of P50,000 plus P700 per appearance in court and 5% of that which may be awarded by the court to plaintiff re its monetary claims;

e) Pay cost of this suit.”[3]

On September 27, 1993, the trial court declared petitioner Posadas in default and allowed the private respondents to present their evidence ex-parte. On March 8, 1994, it ordered petitioner Posadas, jointly and in solidum with petitioner Luxuria Homes, Inc., to pay private respondents as follows:

“1. x x x the balance of the payment for the various services performed by Plaintiff with respect to the land covered by TCT NO. 167895 previously No. 158290 in the total amount of P1,708,489.00.

2. x x x actual damages incurred for the construction of the warehouses/bunks, and for the materials used in the total sum of P1,500,000.00.

3. Moral and exemplary damages of P500,000.00.

4. Attorney’s fee of P50,000.00.

5. And cost of this proceedings.

Defendant Aida Posadas as the Representative of the Corporation Luxuria Homes, Incorporated, is further directed to execute the management contract she committed to do, also in consideration of the various undertakings that Plaintiff rendered for her.”[4]

Aggrieved by the aforecited decision, petitioners appealed to respondent Court of Appeals, which, as aforestated, affirmed with modification the decision of the trial court. The appellate court deleted the award of moral damages on the ground that respondent James Builder Construction is a corporation and hence could not experience physical suffering and mental anguish. It also reduced the award of exemplary damages. The dispositive portion of the decision reads:

“WHEREFORE, the decision appealed from is hereby AFFIRMED with the modification that the award of moral damages is ordered deleted and the award of exemplary damages to the plaintiffs-appellee should only be in the amount of FIFTY THOUSAND (P50,000.00) PESOS.”[5]

Petitioners’ motion for reconsideration was denied, prompting the filing of this petition for review before this Court.

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On January 15, 1997, the Third Division of this Court denied due course to this petition for failing to show convincingly any reversible error on the part of the Court of Appeals. This Court however deleted the grant of exemplary damages and attorney’s fees. The Court also reduced the trial court’s award of actual damages from P1,500,000.00 to P500,000.00 reasoning that the grant should not exceed the amount prayed for in the complaint. In the prayer in the complaint respondents asked for actual damages in the amount of P500,000.00 only.

Still feeling aggrieved with the resolution of this Court, petitioners filed a motion for reconsideration. On March 17, 1997, this Court found merit in the petitioners’ motion for reconsideration and reinstated this petition for review.

From their petition for review and motion for reconsideration before this Court, we now synthesize the issues as follows:

1. Were private respondents able to present ex-parte sufficient evidence to substantiate the allegations in their complaint and entitle them to their prayers?

2. Can petitioner Luxuria Homes, Inc., be held liable to private respondents for the transactions supposedly entered into between petitioner Posadas and private respondents?

3. Can petitioners be compelled to enter into a management contract with private respondents?

Petitioners who were declared in default assert that the private respondents who presented their evidence ex-parte nonetheless utterly failed to substantiate the allegations in their complaint and as such cannot be entitled to the reliefs prayed for.

A perusal of the record shows that petitioner Posadas contracted respondents Bravo to render various services for the initial development of the property as shown by vouchers evidencing payments made by petitioner Posadas to respondents Bravo for squatter relocation, architectural design, survey and fencing.

Respondents prepared the architectural design, site development plan and survey in connection with petitioner Posadas’ application with the Housing and Land Regulatory Board (HLRUB) for the issuance of the Development Permit, Preliminary Approval and Locational Clearance.[6] Petitioner benefited from said services as the Development Permit and the Locational Clearance were eventually issued by the HLURB in her favor. Petitioner Posadas is therefore liable to pay for these services rendered by respondents. The contract price for the survey of the land is P140,000.00. Petitioner made partial payments totaling P130,000.00 leaving a payable balance of P10,000.00.

In his testimony,[7] he alleged that the agreed price for the preparation of the site development plan is P500,000.00 and that the preparation of the architectural designs is for P450,000, or a total of P950,000.00 for the two contracts. In his complaint however, respondent Bravo alleged that he was asked “to prepare the site development plan and the architectural designs x x x for a contract price of P450,000.00 x x x.”[8] The discrepancy or inconsistency was never reconciled and clarified.

We reiterate that we cannot award an amount higher than what was claimed in the complaint. Consequently for the preparation of both the architectural design and site development plan, respondent is entitled to the amount of P450,000.00 less partial payments made in the amount of P25,000.00. In Policarpio v. RTC of Quezon City,[9] it was held that a court is bereft of jurisdiction to award, in a judgment by default, a relief other than that specifically prayed for in the complaint.

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As regards the contracts for the ejectment of squatters and fencing, we believe however that respondents failed to show proof that they actually fulfilled their commitments therein. Aside from the bare testimony of respondent Bravo, no other evidence was presented to show that all the squatter were ejected from the property. Respondent Bravo failed to show how many shanties or structures were actually occupying the property before he entered the same, to serve as basis for concluding whether the task was finished or not. His testimony alone that he successfully negotiated for the ejectment of all the squatters from the property will not suffice.

Likewise, in the case of fencing, there is no proof that it was accomplished as alleged. Respondent Bravo claims that he finished sixty percent (60%) of the fencing project but he failed to present evidence showing the area sought to be fenced and the actual area fenced by him. We therefore have no basis to determining the veracity respondent’s allegations. We cannot assume that the said services rendered for it will be unfair to require petitioner to pay the full amount claimed in case the respondents obligations were not completely fulfilled.

For respondents’ failure to show proof of accomplishment of the aforesaid services, their claims cannot be granted. In P.T. Cerna Corp. v. Court of Appeals,[10] we ruled that in civil cases, the burden of proof rests upon the party who, as determined by the pleadings or the nature of the case, asserts the affirmative of an issue. In this case the burden lies on the complainant, who is duty bound to prove the allegations in the complaint. As this Court has held, he who alleges a fact has the burden of proving it and A MERE ALLEGATION IS NOT EVIDENCE.

And the rules do not change even if the defendant is declared in default. In the leading case of Lopez v. Mendezona,[11] this Court ruled that after entry of judgment in default against a defendant who has neither appeared nor answered, and before final judgment in favor of the plaintiff, the latter must establish by competent evidence all the material allegations of his complaint upon which he bases his prayer for relief. In De los Santos v. De la Cruz¸[12] this Court declared that a judgment by default against a defendant does not imply a waiver of rights except that of being heard and of presenting evidence in his favor. It does not imply admission by the defendant of the facts and causes of action of the plaintiff, because the codal section requires the latter to adduce his evidence in support of his allegations as an indispensable condition before final judgment could be given in his favor. Nor could it be interpreted as an admission by the defendant that the plaintiff’s causes of action finds support in the law or that the latter is entitled to the relief prayed for.

We explained the rule in judgments by default in Pascua v. Florendo,[13] where we said that nowhere is it stated that the complainants are automatically entitled to the relief prayed for, once the defendants are declared in default. Favorable relief can be granted only after the court has ascertained that the evidence offered and the facts proven by the presenting party warrant the grant of the same. Otherwise it would be meaningless to require presentation of evidence if everytime the other party is declared in default, a decision would automatically be rendered in favor of the non-defaulting party and exactly according to the tenor of his prayer. In Lim Tanhu v. Ramolete[14] we elaborated and said that a defaulted defendant is not actually thrown out of court. The rules see to it that any judgment against him must be in accordance with law. The evidence to support the plaintiff’s cause is, of course, presented in his absence, but the court is not supposed to admit that which is basically incompetent. Although the defendant would not be in a position to object, elementary justice requires that only legal evidence should be considered against him. If the evidence presented should not be sufficient to justify a judgment for the plaintiff, the complaint must be dismissed. And if an unfavorable judgment should be justifiable, it cannot exceed the amount or be different in kind from what is prayed for in the complaint.

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The prayer for actual damages in the amount of P500,000.00, supposedly for the bunkhouse/warehouse, hollow-block factory, lumber, cement, guard, etc., which the trial court granted and even increased to P1,500,000.00, and which this Court would have rightly reduced to the amount prayed for in the complaint, was not established, as shown upon further review of the record. No receipts or vouchers were presented by private respondents to show that they actually spent the amount. In Salas v. Court of Appeals,[15] we said that the burden of proof of the damages suffered is on the party claiming the same. It his duty to present evidence to support his claim for actual damages. If he failed to do so, he has only himself to blame if no award for actual damages is handed down.

In fine, as we declared in PNOC Shipping & Transport Corp. v. Court of Appeals,[16] basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence obtainable of the actual amount thereof.

We go to the second issue of whether Luxuria Homes, Inc., was a party to the transactions entered into by petitioner Posadas and private respondents and thus could be held jointly and severally with petitioner Posadas. Private respondents contend that petitioner Posadas surreptitiously formed Luxuria Homes, Inc., and transferred the subject parcel of land to it to evade payment and defraud creditors, including private respondents. This allegation does not find support in the evidence on record.

On the contrary we hold that respondents Court of Appeals committed a reversible error when it upheld the factual finding of the trial court that petitioners’ liability was aggravated by the fact that Luxuria Homes, Inc., was formed by petitioner Posadas after demand for payment had been made, evidently for her to evade payment of her obligation, thereby showing that the transfer of her property to Luxuria Homes, Inc., was in fraud of creditors.

We easily glean from the record that private respondents sent demand letters on 21 August 1991 and 14 September 1991, or more than a year and a half after the execution of the Deed of Assignment on 11 December 1989, and the issuance of the Articles of Incorporation of petitioner Luxuria Homes on 26 January 1990. And, the transfer was made at the time the relationship between petitioner Posadas and private respondents was supposedly very pleasant. In fact the Deed of Assignment dated 11 December 1989 and the Articles of Incorporation of Luxuria Homes, Inc., issued 26 January 1990 were both signed by respondent Bravo himself as witness. It cannot be said then that the incorporation of petitioner Luxuria Homes and the eventual transfer of the subject property to it were in fraud of private respondent as such were done with the full knowledge of respondent Bravo himself.

Besides petitioner Posadas is not the majority stockholder of petitioner Luxuria Homes, Inc., as erroneously stated by the lower court. The Articles of Incorporation of petitioner Luxuria Homes, Inc., clearly show that petitioner Posadas owns approximately 33% only of the capital stock. Hence petitioner Posadas cannot be considered as an alter ego of petitioner Luxuria Homes, Inc.

To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. This is elementary. Thus in Bayer-Roxas v. Court of Appeals,[17] we said that the separate personality of the corporation may be disregarded only when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary for the protection of the creditors. Accordingly in Del Rosario v. NLRC,[18] where the Philsa International Placement and Services Corp. was organized and registered with the POEA in 1981, several years before the complainant was filed a case in 1985, we held that this cannot imply fraud.

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Obviously in the instant case, private respondents failed to show proof that petitioner Posadas acted in bad faith. Consequently since private respondents failed to show that petitioner Luxuria Homes, Inc., was a party to any of the supposed transactions, not even to the agreement to negotiate with and relocate the squatters, it cannot be held liable, nay jointly and in solidum, to pay private respondents. In this case since it was petitioner Aida M. Posadas who contracted respondent Bravo to render the subject services, only she is liable to pay the amounts adjudged herein.

We now resolved the third and final issue. Private respondents urge the court to compel petitioners to execute a management contract with them on the basis of the authorization letter dated May 3, 1989. The full text of Exh “D” reads:

“I hereby certify that we have duly authorized the bearer, Engineer Bravo to negotiate, in our behalf, the ejectment of squatters from our property of 1.6 hectares, more or less, in Sucat, Muntinlupa. This authority is extended to him as the representatives of the Managers, under our agreement for them to undertake the development of said area and the construction of housing units intended to convert the land into a first class subdivision.”

The aforecited document is nothing more than a “to-whom-it-may-concern” authorization letter to negotiate with the squatters. Although it appears that there was an agreement for the development of the area, there is no showing that same was never perfected and finalized. Private respondents presented in evidence only drafts of a proposed management contract with petitioner’s handwritten marginal notes but the management contract was not put in its final form. The reason why there was no final uncorrected draft was because the parties could not agree on the stipulations of said contract, which even the private respondents admitted as found by the trial court.[19] As a consequence the management drafts submitted by the private respondents should at best be considered as mere unaccepted offers. We find no cogent reason, considering that the parties no longer are in a harmonious relationship, for the execution of a contract to develop a subdivision.

It is fundamental that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. To compel petitioner Posadas, whether as representatives of petitioners Luxuria Homes or in her personal capacity, to execute a management contract under the terms and conditions of private respondents would be to violate the principle of consensuality of contracts. In Philippine National bank v. Court of Appeals,[20] we held that if the assent is wanting on the part of one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. In ordering petitioner Posadas to execute a management contract with private respondents, the trial court in effect is putting her under duress.

The parties are bound to fulfill the stipulations in a contract only upon its perfection. At anytime prior to the perfection of a contract, unaccepted offers and proposals remain as such and cannot be considered as binding commitments; hence not demandable.

WHEREFORE, the petition is PARTIALLY GRANTED. The assailed decision dated March 15, 1996, of respondent Honorable Court of Appeals and its Resolution dated August 12, 1996, are MODIFIED ordering PETITIONER AIDA M. POSADAS to pay PRIVATE RESPONDENTS the amount of P435,000.00 as balance for the preparation of the architectural design, site development plan and survey. All other claims of respondents are hereby DENIED for lack of merit.

SO ORDERED

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Adm. Matter No. R-181-P July 31, 1987

ADELIO C. CRUZ, complainant, vs.QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila, respondents.

R E S O L U T I O N

FERNAN, J.:

In a sworn complaint dated July 23, 1984, Adelio C. Cruz charged Quiterio L. Dalisay, Senior Deputy Sheriff of Manila, with "malfeasance in office, corrupt practices and serious irregularities" allegedly committed as follows:

1. Respondent sheriff attached and/or levied the money belonging to complainant Cruz when he was not himself the judgment debtor in the final judgment of NLRC NCR Case No. 8-12389-91 sought to be enforced but rather the company known as "Qualitrans Limousine Service, Inc.," a duly registered corporation; and,

2. Respondent likewise caused the service of the alias writ of execution upon complainant who is a resident of Pasay City, despite knowledge that his territorial jurisdiction covers Manila only and does not extend to Pasay City.

In his Comments, respondent Dalisay explained that when he garnished complainant's cash deposit at the Philtrust bank, he was merely performing a ministerial duty. While it is true that said writ was addressed to Qualitrans Limousine Service, Inc., yet it is also a fact that complainant had executed an affidavit before the Pasay City assistant fiscal stating that he is the owner/president of said corporation and, because of that declaration, the counsel for the plaintiff in the labor case advised him to serve notice of garnishment on the Philtrust bank.

On November 12, 1984, this case was referred to the Executive Judge of the Regional Trial Court of Manila for investigation, report and recommendation.

Prior to the termination of the proceedings, however, complainant executed an affidavit of desistance stating that he is no longer interested in prosecuting the case against respondent Dalisay and that it was just a "misunderstanding" between them. Upon respondent's motion, the Executive Judge issued an order dated May 29, 1986 recommending the dismissal of the case.

It has been held that the desistance of complainant does not preclude the taking of disciplinary action against respondent. Neither does it dissuade the Court from imposing the appropriate corrective sanction. One who holds a public position, especially an office directly connected with the administration of justice and the execution of judgments, must at all times be free from the appearance of impropriety.1

We hold that respondent's actuation in enforcing a judgment against complainant who is not the judgment debtor in the case calls for disciplinary action. Considering the ministerial nature of his duty in enforcing writs of execution, what is incumbent upon him is to ensure that only that portion of a decision ordained or decreed in the dispositive part should be the subject of execution.2 No more, no less. That the title of the case specifically names complainant as one of the respondents is of no moment as execution must conform to that directed in the dispositive portion and not in the title of the case.

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The tenor of the NLRC judgment and the implementing writ is clear enough. It directed Qualitrans Limousine Service, Inc. to reinstate the discharged employees and pay them full backwages. Respondent, however, chose to "pierce the veil of corporate entity" usurping a power belonging to the court and assumed improvidently that since the complainant is the owner/president of Qualitrans Limousine Service, Inc., they are one and the same. It is a well-settled doctrine both in law and in equity that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members. The mere fact that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate entities.3

Anent the charge that respondent exceeded his territorial jurisdiction, suffice it to say that the writ of execution sought to be implemented was dated July 9, 1984, or prior to the issuance of Administrative Circular No. 12 which restrains a sheriff from enforcing a court writ outside his territorial jurisdiction without first notifying in writing and seeking the assistance of the sheriff of the place where execution shall take place.

ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L. Dalisay NEGLIGENT in the enforcement of the writ of execution in NLRC Case-No. 8-12389-91, and a fine equivalent to three [3] months salary is hereby imposed with a stern warning that the commission of the same or similar offense in the future will merit a heavier penalty. Let a copy of this Resolution be filed in the personal record of the respondent.

SO ORDERED.

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EN BANC

[G.R. No. L-20886. April 27, 1967.]

NATIONAL MARKETING CORPORATION (NAMARCO), Plaintiff-Appellant, v. ASSOCIATED FINANCE COMPANY, INC. and FRANCISCO SYCIP, defendant, FRANCISCO SYClP, Defendant-Appellee.

Tomas P. Matic, Jr. for plaintiff and Appellant.

Francisco Sycip on his behalf as defendant and appellee.

SYLLABUS

1. CORPORATION; STOCKHOLDERS; LIABILITY FOR CORPORATE OBLIGATIONS. — A stockholder is guilty of fraud where, through false representations, he succeeded in inducing another corporation to enter into an exchange agreement with the corporation he represented and over whose business he had absolute control knowing that the letter was in no position to comply with the obligation it had assumed. Consequently, said stockholder cannot now seek refuge behind the general principle that a corporation has a personality distinct and separate from that of its stockholders and that the latter are not personally liable for the corporate obligations. Upon the facts proven, the court is justified in "piercing the veil of corporate fiction" and in holding said stockholder personally liable, jointly and severally with the corporation, for the sums of money adjudged in favor of the aggrieved party.

2. ID.; WHEN MAY CORPORATE FICTION BE DISREGARDED. — It is settled law in this and other jurisdictions that when the corporation is the mere alter ego of a person, the corporate fiction may be disregarded; the same being true when the corporation is controlled, and its affairs are so conducted as to make it merely an instrumentality, agency or conduit of another (Koppel Phils. etc. v. Yatco etc., 43 Off. Gaz., No. 11, November, 1947; Yutivo Sons etc. v. Court of Tax Appeals etc., 110 Phil., 751; promulgated on January 28, 1961.)

D E C I S I O N

DIZON, J.:

Appeal taken by the National Marketing Corporation — hereinafter referred to as NAMARCO, from the decision of the Court of First Instance of Manila in Civil Case No. 45770 ordering the Associated Finance Company, Inc. — hereinafter referred to as the ASSOCIATED — to pay the NAMARCO the sum of P403,514.28, with legal interest thereon from the date of filing of the action until fully paid, P80,702.26 as liquidated damages, P5,000.00 as attorney’s fees, plus costs, but dismissing the complaint insofar as defendant Francisco Sycip was concerned, as well as the latter’s counterclaim. The appear is only from that portion of the decision dismissing the case as against Francisco Sycip.

On March 25, 1958, ASSOCIATED, a domestic corporation, through its President, appellee Francisco Sycip, entered into an agreement to exchange sugar with NAMARCO, represented by its then General Manager, Benjamin Estrella, whereby the former would deliver to the latter 22,516 bags (each weighing 100 pounds) of "Victorias" and/or "National" refined sugar in exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" raw sugar belonging

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to NAMARCO, both agreeing to pay liquidated damages equivalent to 20% of the contractual value of the sugar should either party fail to comply with the terms and conditions stipulated (Exhibit A). Pursuant thereto, on May 19, 1958, NAMARCO delivered to ASSOCIATED 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" domestic raw sugar. As ASSOCIATED failed to deliver to NAMARCO the 22,516 bags of "Victorias" and/or "National" refined sugar agreed upon, latter, an January 12, 1959, demanded in writing from the ASSOCIATED either (a) immediate delivery thereof before January 20, or (b) payment of its equivalent cash value amounting to P372,639.80.

On January 19, 1959, ASSOCIATED, through Sycip, offered to pay NAMARCO the value of 22,516 bags of refined sugar at the rate of P15.30 per bag, but the latter rejected the offer. Instead, on January 21 of the same year, it demanded payment of the 7,732.71 bags of "Busilak" raw sugar at P15.30 per bag, amounting to P118,310.40, and of the 17,285.08 piculs of "Pasumil" raw sugar at P16.50 per picul, amounting to P285,203.82, or a total price of P403,514.28 for both kinds of sugar, based on the sugar quotations (Exhibit H) as of March 20, 1958 — the date when the exchange agreement was entered into.

As ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar delivered to it, in spite of repeated demands therefore, NAMARCO instituted the present action in the lower court to recover the sum of P403,514.28 in payment of the raw sugar received by defendants from it; P80,702.86; as liquidated damages; P10,000.00 as attorney’s fees, expenses of litigation and exemplary damages, with legal interest thereon from the filing of the complaint until fully paid.

In their amended answer defendants, by way of affirmative defenses, alleged that the correct value of the sugar delivered by NAMARCO to them was P259,451.09 or P13.30 per bag of 100 lbs. weight (quedan basis) and not P403,514.58 as claimed by NAMARCO. As counterclaim they prayed for the award of P500,000.00 as moral damages, P100,000.00 as exemplary damages and P10,000.00 as attorney’s fees.

After trial the court rendered the appealed judgment. The appeal was taken to the Court of Appeals, but on January 15, 1963 the latter certified the case to Us for final adjudication pursuant to sections 17 and 31 of the Judiciary Act of 1948, as amended, the amount involved being more than P200,000.00, exclusive of interests and costs.

The only issue to be resolved is whether, upon the facts found by the trial court, — which, in our opinion, are fully supported by the evidence — Francisco Sycip may be held liable, jointly and severally with his co-defendant, for the sums of money adjudged in favor of NAMARCO.

The evidence of record shows that, of the capital stock of ASSOCIATED, Sycip owned P60,000.00 worth of shares, while his wife — the second biggest stockholder — owned P20,000.00 worth of shares; that the par value of the subscribed capital stock of ASSOCIATED was only P105,000.00; that negotiations that lead to the execution of the exchange agreement in question were conducted exclusively by Sycip on behalf of ASSOCIATED; that, as a matter of fact, in the course of his testimony, Sycip referred to himself as the one who contracted or transacted the business in his personal capacity, and asserted that the exchange agreement was his personal contract; that it was Sycip who made personal representations and gave assurances that ASSOCIATED was in actual possession of the 22,516 bags of "Victorias" and/or "National" refined sugar which the latter had agreed to deliver to NAMARCO, and that the same was ready for delivery; that, as a matter of fact, ASSOCIATED was at that time already insolvent; that when NAMARCO made written demands upon ASSOCIATED to deliver the 22,516 bags of refined sugar it was under obligation to deliver to the former, ASSOCIATED and Sycip, instead of making delivery of the sugar, offered to pay its value at the rate of P15.30 per bag — a clear indication that they did not have the sugar contracted for.

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The foregoing facts, fully established by the evidence, can lead to no other conclusion than that Sycip was guilty of fraud because through false representations he succeeded in inducing NAMARCO to enter into the aforesaid exchange agreement, with full knowledge, on his part of the fact that ASSOCIATED whom he represented and over whose business and affairs he had absolute control, was in no position to comply with the obligation it had assumed. Consequently, he can not now seek refuge behind the general principle that a corporation has a personality distinct and separate from that of its stockholders and that the latter are not personally liable for the corporate obligations. To the contrary, upon the proven facts, We feel perfectly justified in "piercing the veil of corporate fiction" and in holding Sycip personally liable, jointly and severally with his co-defendant, for the sums of money adjudged in favor of appellant. It is settled law in this and other jurisdictions that when the corporation is the mere alter ego of a person, the corporate fiction may be disregarded; the same being true when the corporation is controlled, and its affairs are so conducted as to make it merely an instrumentality, agency or conduit of another (Koppel Phils. etc. v. Yatco etc., 43 Off. Gaz. No. 11, November, 1947; Yutivo Sons etc. v. Court of Tax Appeals etc., G.R. No. L-13203 promulgated on January 28, 1961.)

Wherefore, the decision appealed from is modified by sentencing defendant-appellee Francisco Sycip to pay, jointly and severally with the Associated Finance Company, Inc., the sums of money which the trial court sentenced the latter to pay to the National Marketing Corporation, as follows: the sum of FOUR HUNDRED THREE THOUSAND FIVE HUNDRED FOURTEEN P E S O S AND TWENTY-EIGHT CENTAVOS (P403,514.28), with interest at the legal rate from the date of the filing of the action until fully paid plus an additional amount of EIGHTY THOUSAND SEVEN HUNDRED TWO PESOS AND EIGHTY-SIX CENTAVOS (80,702.86) as liquidated damages and P5,000.00 as attorney’s fees and further to pay the costs. With costs.

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G.R. No. L-41337 June 30, 1988

TAN BOON BEE & CO., INC., petitioner, vs.THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG COMPANY, respondents.

De Santos, Balgos & Perez Law Office for petitioner.

Araneta Mendoza & Papa Law Office for respondent Phil. American Drug Company.

PARAS, J.:

This is a petition for certiorari, with prayer for preliminary injunction, to annul and set aside the March 26, 1975 Order of the then Court of First Instance of Manila, Branch XXIII, setting aside the sale of "Heidelberg" cylinder press executed by the sheriff in favor of the herein petitioner, as well as the levy on the said property, and ordering the sheriff to return the said machinery to its owner, herein private respondent Philippine American Drug Company.

Petitioner herein, doing business under the name and style of Anchor Supply Co., sold on credit to herein private respondent Graphic Publishing, Inc. (GRAPHIC for short) paper products amounting to P55,214.73. On December 20, 1972, GRAPHIC made partial payment by check to petitioner in the total amount of P24,848.74; and on December 21, 1972, a promissory note was executed to cover the balance of P30,365.99. In the said promissory note, it was stipulated that the amount will be paid on monthly installments and that failure to pay any installment would make the amount immediately demandable with an interest of 12% per annum. On September 6, 1973, for failure of GRAPHIC to pay any installment, petitioner filed with the then Court of First Instance of Manila, Branch XXIII, presided over by herein respondent judge, Civil Case No. 91857 for a Sum of Money (Rollo, pp. 36-38). Respondent judge declared GRAPHIC in default for failure to file its answer within the reglementary period and plaintiff (petitioner herein) was allowed to present its evidence ex parte. In a Decision dated January 18, 1974 (Ibid., pp. 39-40), the trial court ordered GRAPHIC to pay the petitioner the sum of P30,365.99 with 12% interest from March 30, 1973 until fully paid, plus the costs of suit. On motion of petitioner, a writ of execution was issued by respondent judge; but the aforestated writ having expired without the sheriff finding any property of GRAPHIC, an alias writ of execution was issued on July 2, 1974.

Pursuant to the said issued alias writ of execution, the executing sheriff levied upon one (1) unit printing machine Identified as "Original Heidelberg Cylinder Press" Type H 222, NR 78048, found in the premises of GRAPHIC. In a Notice of Sale of Execution of Personal Property dated July 29, 1974, said printing machine was scheduled for auction sale on July 26, 1974 at 10:00 o'clock at 14th St., Cor. Atlanta St., Port Area, Manila (lbid., p. 45); but in a letter dated July 19, 1974, herein private respondent, Philippine American Drug Company (PADCO for short) had informed the sheriff that the printing machine is its property and not that of GRAPHIC, and accordingly, advised the sheriff to cease and desist from carrying out the scheduled auction sale on July 26, 1974. Notwithstanding the said letter, the sheriff proceeded with the scheduled auction sale, sold the property to the petitioner, it being the highest bidder, and issued a Certificate of Sale in favor of petitioner (Rollo, p. 48). More than five (5) hours after the auction sale and the issuance of the certificate of sale, PADCO filed an "Affidavit of Third Party Claim" with the Office of the City Sheriff (Ibid., p. 47). Thereafter, on July 30,1974, PADCO filed with the Court of First Instance of Manila, Branch XXIII, a Motion to Nullify Sale on Execution (With Injunction) (Ibid., pp, 49-55), which was opposed by the petitioner (Ibid., pp.

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5668). Respondent judge, in an Order dated March 26, 1975 (Ibid., pp. 64-69), ruled in favor of PADCO. The decretal portion of the said order, reads:

WHEREFORE, the sale of the 'Heidelberg cylinder press executed by the Sheriff in favor of the plaintiff as well as the levy on the said property is hereby set aside and declared to be without any force and effect. The Sheriff is ordered to return the said machinery to its owner, the Philippine American Drug Co.

Petitioner filed a Motion For Reconsideration (Ibid., pp. 7093) and an Addendum to Motion for Reconsideration (Ibid., pp. 94-08), but in an Order dated August 13, 1975, the same was denied for lack of merit (Ibid., p. 109). Hence, the instant petition.

In a Resolution dated September 12, 1975, the Second Division of this Court resolved to require the respondents to comment, and to issue a temporary restraining order (Rollo, p. 111 ). After submission of the parties' Memoranda, the case was submitted for decision in the Resolution of November 28, 1975 (Ibid., p. 275).

Petitioner, to support its stand, raised two (2) issues, to wit:

I

THE RESPONDENT JUDGE GRAVELY EXCEEDED, IF NOT ACTED WITHOUT JURISDICTION WHEN HE ACTED UPON THE MOTION OF PADCO, NOT ONLY BECAUSE SECTION 17, RULE 39 OF THE RULES OF COURT WAS NOT COMPLIED WITH, BUT ALSO BECAUSE THE CLAIMS OF PADCO WHICH WAS NOT A PARTY TO THE CASE COULD NOT BE VENTILATED IN THE CASE BEFORE HIM BUT IN INDEPENDENT PROCEEDING.

II

THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION WHEN HE REFUSED TO PIERCE THE PADCO'S (IDENTITY) AND DESPITE THE ABUNDANCE OF EVIDENCE CLEARLY SHOWING THAT PADCO WAS CONVENIENTLY SHIELDING UNDER THE THEORY OF CORPORATE PETITION.

Petitioner contends that respondent judge gravely exceeded, if not, acted without jurisdiction, in nullifying the sheriffs sale not only because Section 17, Rule 39 of the Rules of Court was not complied with, but more importantly because PADCO could not have litigated its claim in the same case, but in an independent civil proceeding.

This contention is well-taken.

In the case of Bayer Philippines, Inc. vs. Agana (63 SCRA 355, 366-367 [1975]), this Court categorically ruled as follows:

In other words, constitution, Section 17 of Rule 39 of the Revised Rules of Court, the rights of third-party claimants over certain properties levied upon by the sheriff to satisfy the judgment should not be decided inthe action where the third-party claims have been presented, but in the separate action instituted by the claimants.

... Otherwise stated, the court issuing a writ of execution is supposed to enforce the authority only over properties of the judgment debtor, and should a third party appeal- to claim the property levied upon by the sheriff, the procedure laid down by the Rules is that such claim should be the subject of a separate and independent action.

xxx xxx xxx

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... This rule is dictated by reasons of convenience, as "intervention is more likely to inject confusion into the issues between the parties in the case . . . with which the third-party claimant has nothing to do and thereby retard instead of facilitate the prompt dispatch of the controversy which is the underlying objective of the rules of pleading and practice." Besides, intervention may not be permitted after trial has been concluded and a final judgment rendered in the case.

However, the fact that petitioner questioned the jurisdiction of the court during the initial hearing of the case but nevertheless actively participated in the trial, bars it from questioning now the court's jurisdiction. A party who voluntarily participated in the trial, like the herein petitioner, cannot later on raise the issue of the court's lack of jurisdiction (Philippine National Bank vs. Intermediate Appellate Court, 143 SCRA [1986]).

As to the second issue (the non-piercing of PADCO's corporate Identity) the decision of respondent judge is as follows:

The plaintiff, however, contends that the controlling stockholders of the Philippine American Drug Co. are also the same controlling stockholders of the Graphic Publishing, Inc. and, therefore, the levy upon the said machinery which was found in the premises occupied by the Graphic Publishing, Inc. should be upheld. This contention cannot be sustained because the two corporations were duly incorporated under the Corporation Law and each of them has a juridical personality distinct and separate from the other and the properties of one cannot be levied upon to satisfy the obligation of the other. This legal preposition is elementary and fundamental.

It is true that a corporation, upon coming into being, is invested by law with a personality separate and distinct from that of the persons composing it as well as from any other legal entity to which it may be related (Yutivo & Sons Hardware Company vs. Court of Tax Appeals, 1 SCRA 160 [1961]; and Emilio Cano Enterprises, Inc. vs. CIR, 13 SCRA 290 [1965]). As a matter of fact, the doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law (Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 845 [1968]). However, this separate and distinct personality is merely a fiction created by law for convenience and to promote justice (Laguna Transportation Company vs. SSS, 107 Phil. 833 [1960]). Accordingly, this separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work an injustice, or where necessary to achieve equity or when necessary for the protection of creditors (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347 [1976]). Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity (Chenplex Philippines, Inc., et al. vs. Hon. Pamatian et al., 57 SCRA 408 (19741). Likewise, this is true when the corporation is merely an adjunct, business conduit or alter ego of another corporation. In such case, the fiction of separate and distinct corporation entities should be disregarded (Commissioner of Internal Revenue vs. Norton & Harrison, 11 SCRA 714 [1964]).

In the instant case, petitioner's evidence established that PADCO was never engaged in the printing business; that the board of directors and the officers of GRAPHIC and PADCO were the same; and that PADCO holds 50% share of stock of GRAPHIC. Petitioner likewise stressed that PADCO's own evidence shows that the printing machine in question had been in the premises of GRAPHIC since May, 1965, long before PADCO even acquired its alleged title on July 11, 1966 from Capitol Publishing. That the said machine was allegedly leased by PADCO to GRAPHIC on January 24, 1966, even before PADCO purchased it from Capital Publishing on July 11, 1966, only serves to show that PADCO's claim of ownership over the printing machine is not only farce and sham but also unbelievable.

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Considering the aforestated principles and the circumstances established in this case, respondent judge should have pierced PADCO's veil of corporate Identity.

Respondent PADCO argues that if respondent judge erred in not piercing the veil of its corporate fiction, the error is merely an error of judgment and not an error of jurisdiction correctable by appeal and not by certiorari.

To this argument of respondent, suffice it to say that the same is a mere technicality. In the case of Rubio vs. Mariano (52 SCRA 338, 343 [1973]), this Court ruled:

While We recognize the fact that these movants — the MBTC, the Phillips spouses, the Phillips corporation and the Hacienda Benito, Inc.— did raise in their respective answers the issue as to the propriety of the instant petition for certiorari on the ground that the remedy should have been appeal within the reglementary period, We considered such issue as a mere technicality which would have accomplished nothing substantial except to deny to the petitioner the right to litigate the matters he raised ...

Litigations should, as much as possible, be decided on their merits and not on technicality (De las Alas vs. Court of Appeals, 83 SCRA 200, 216 [1978]). Every party-litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the unacceptable plea of technicalities (Heirs of Ceferino Morales vs. Court of Appeals, 67 SCRA 304, 310 [1975]).

PREMISES CONSIDERED, the March 26,1975 Order of the then Court of First Instance of Manila, is ANNULLED and SET ASIDE, and the Temporary Restraining Order issued is hereby made permanent.

SO ORDERED.

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[G.R. No. 117416. December 8, 2000]

Avelina G. Ramoso, Renato B. Salvatierra, Benefrido M. Cruz, Leticia L. Medina, Pelagio Pascual, Domingo P. Santiago, Amado S. Veloira, Concepcion F. Blaylock, in their own behalf and in behalf of numerous other persons similarly situated, Commercial Credit Corp. of North Manila, Commercial Credit Corp. of Cagayan Valley, Commercial Credit Corp. of Olongapo City, and Commercial Credit Corp. of Quezon City, petitioners, vs. Court of Appeals, General Credit Corp. (Formerly Commercial Credit Corp.), CCC Equity Corp., Resource and Finance Corp., Generoso G. Villanueva and Leonardo B. Alejandrino, and Securities and Exchange Commission, respondents.

D E C I S I O N

QUISUMBING, J.:

This petition for review on certiorari assails the decision[1] of the Court of Appeals dated October 8, 1993, and its resolution[2] dated September 22, 1994 in CA G.R. SP No. 29225, which affirmed the Securities and Exchange Commission’s decision stating thus:

“WHEREFORE, the appealed decision of the hearing officer in SEC Case No. 2581 is hereby MODIFIED as follows:

1. Piercing the veil of corporate fiction among GCC, CCC Equity and the franchise companies - Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit Corporation of Olongapo City, and Commercial Credit Corporation of Quezon City - is not proper for being without merit; and

2. The declaration that petitioning franchise corporations and individual petitioners are not liable for the payment of bad accounts assigned to, and discounted by GCC is SET ASIDE for being in excess of jurisdiction.”[3]

The facts of this case as gleaned from the records are as follows:

On March 11, 1957, Commercial Credit Corporation was registered with SEC as a general financing and investment corporation. CCC made proposals to several investors for the organization of franchise companies in different localities. The proposed trade names and indicated areas were: (a) Commercial Credit Corporation - Cagayan Valley; (b) Commercial Credit Corporation - Olongapo City; and (c) Commercial Credit Corporation - Quezon City.

Petitioners herein invested and bought majority shares of stocks, while CCC retained minority holdings. Management contracts were executed between each franchise company and CCC, under the following terms and conditions: (1) The franchise company shall be managed by CCC’s resident manager. (2) Management fee equivalent to 10% of net profit before taxes shall be paid to CCC. (3) All expenses shall be borne by the franchise company, except the salary of the resident manager and the cost of credit investigation. (4) CCC shall set prime rates for discounting or rediscounting of receivables. Apart from these, each investor was required to sign a continuing guarantee for bad accounts that might be incurred by CCC due to discounting activities.

In 1974, CCC attempted to obtain a quasi-banking license from Central Bank of the Philippines. But there was a hindrance because Section 1326 of CB’s “Manual of Regulations for Banks and Other Financial Intermediaries,” states:

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Sec. 1326. General Policy. Dealings of a bank with any of its directors, officers or stockholders and their related interests should be in the regular course of business and upon terms not less favorable to the bank than those offered to others. (Emphasis supplied)

The above DOSRI regulation and set guidelines are entitled to make sure that lendings by banks or other financial institutions to its own directors, officers, stockholders or related interests are above board. In view of said hindrance, what CCC did was divest itself of its shareholdings in the franchise companies. It incorporated CCC Equity to take over the administration of the franchise companies under new management contracts. In the meantime, CCC continued providing a discounting line for receivables of the franchise companies through CCC Equity. Thereafter, CCC changed its name to General Credit Corporation (GCC).

The companies’ operations were on course until 1981, when adverse media reports unraveled anomalies in the business of GCC. Upon investigation, petitioners allegedly discovered the dissipation of the assets of their respective franchise companies. Among the alleged fraudulent schemes by GCC involved transfer or assignment of its uncollectible notes and accounts; utilization of spurious commercial papers to generate paper revenues; and release of collateral in connivance with unauthorized loans. Furthermore, GCC allegedly divested itself of its assets through a questionable offset of receivables arrangement with one of its creditors, Resource and Finance Corporation.

On February 24, 1984, petitioners filed a suit against GCC, CCC Equity and RFC. Petitioners prayed for (1) receivership, (2) an order directing GCC and CCC Equity solidarily to pay petitioners and depositors for the losses they sustained, and (3) nullification of the agreement between GCC and RFC.

On June 6, 1984, all respondents, except CCC Equity, filed a motion to dismiss asserting that SEC lacked jurisdiction, and that petitioners were not the real parties in interest. Both motions, for receivership and for dismissal, were subsequently denied by the hearing officer.

On February 23, 1990, the hearing officer ordered “piercing the corporate veil” of GCC, CCC Equity, and the franchise companies. He later declared that GCC was not liable to individual petitioners for the losses, since as investors they assumed the risk of their respective investments. The franchise companies and the individual petitioners were held not liable to GCC for the bad accounts incurred by the latter through the discounting process. The decretal portion of his order reads:

“WHEREFORE, judgment is hereby rendered, as follows:

1. Declaring GCC, CCC-Equity and the franchised companies - Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit Corporation of Olongapo City and Commercial Credit Corporation of Quezon City - as one corporation;

2. Declaring that the petitioning franchised companies are not liable for the payment of bad accounts assigned to, and discounted by GCC;

3. Declaring the individual petitioners who executed continuing guaranties to secure the obligation of the franchised companies to GCC arising from the discounting accounts should not be held liable thereon;

4. Declaring that GCC is not liable to individual petitioners for the investments they made in the franchised companies;

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5. Dismissing the petition with respect to respondent Resource Finance Corporation, Generoso Villanueva and Leonardo Alejandrino.”[4]

In an en banc decision, dated October 6, 1992, the SEC reversed the ruling of its hearing officer. Petitioners appealed to the Court of Appeals. On October 8, 1993, the appellate court affirmed respondent SEC’s decision. Petitioners moved for a reconsideration, but it was denied on September 22, 1994.

Hence, the instant petition raising the following issues:

I. WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO RULE THAT GCC’S FRAUD UPON PETITIONERS AND MISMANAGEMENT OF THE FRANCHISE COMPANIES WARRANT THE PIERCING OF ITS VEIL OF CORPORATE FICTION.

II. WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO RULE THAT ONLY THE SEC HAS JURISDICTION OVER THE ISSUE OF WHETHER INDIVIDUAL PETITIONERS MAY BE HELD LIABLE ON THE SURETY AGREEMENTS FOR BAD ACCOUNTS INCURRED BY GCC THROUGH THE DISCOUNTING PROCESS.

III.WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO REVERSE AND SET ASIDE THE 06, OCTOBER 1992 SEC DECISION.

Petitioners pray for the piercing of the corporate fiction of GCC, CCC Equity, RFC and the franchise companies. They allege that (1) GCC was the alter-ego of CCC Equity and the franchise companies; (2) GCC created CCC Equity to circumvent CB’s DOSRI Regulation; and (3) GCC mismanaged the franchise companies. Ultimately, petitioners pray that the SEC en banc reinstate the decision of the hearing officer absolving individual investors of their respective liabilities attached to the continuing guaranty of bad debts. They pray that should the afore-stated companies be considered as one, then petitioners’ liabilities should be nullified.

SEC en banc decided against the petitioners, saying:

“Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded... [T]he control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.

The test may be stated as follows:

In any given case, except express agency, estoppel, or direct tort, three elements must be proved:

1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of the statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and

3. the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents ‘piercing the corporate veil.”[5]

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The SEC stated further that:

“The second element required for the application of the instrumentality rule is not present in this case. Upon close scrutiny of the various testamentary and documentary evidence presented during trial, it may be observed that petitioner’s claim of dissipation of assets and resources belonging to the franchise companies has not been reasonably supported by said evidence at hand with the Commission. In fact, the disputed decision of the hearing officer dealt mainly with the aspect of control exercised by GCC over the franchise companies without a concrete finding of fraud on the part of the former to the prejudice of individual petitioners’ interests. As previously discussed, mere control on the part of GCC through CCC Equity over the operations and business policies of the franchise companies does not necessarily warrant piercing the veil of corporate fiction without proof of fraud. In order to determine whether or not the control exercised by GCC through CCC Equity over the franchise companies was used to commit fraud or wrong, to violate a statutory or other positive legal duty, or dishonest and unjust act in contravention of petitioners’ legal rights, the circumstances that caused the bankruptcy of the franchise companies must be taken into consideration.”[6]

As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.[7] Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud, and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established.[8] It cannot be presumed.[9]

We agree with the findings of the SEC concurred in by the appellate court that there was no fraud nor mismanagement in the control exercised by GCC and by CCC Equity, over the franchise companies. Whether the existence of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The presumption is that the stockholders or officers and the corporation are distinct entities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of the corporate entity.[10] In this, petitioner failed.

Petitioners contend that the issue of whether the investors may be held liable on the surety agreements for bad accounts incurred by GCC through the discounting process cannot be isolated from the fundamental issue of validly piercing GCC’s corporate veil. They argue that since these surety agreements are intra-corporate matters, only the SEC has the specialized knowledge to evaluate whether fraud was perpetrated.

We note, however, that petitioners signed the continuing guaranty of the franchise companies’ bad debts in their own personal capacities. Consequently, they are responsible for their individual acts. The liabilities of petitioners as investors arose out of the regular financing venture of the franchise companies. There is no evidence that these bad debts were fraudulently incurred. Any taint of bad faith on the part of GCC in enticing investors may be resolved in ordinary courts, inasmuch as this is in the nature of a contractual relationship. Changing petitioners’ subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity.

Private respondents claim they had actually filed collection cases against most, if not all, of the petitioners to enforce the suretyship liability on accounts discounted with then CCC (now GCC).[11] In such cases, the trial court may determine the validity of the promissory notes and

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the corresponding guarantee contracts. The existence of the corporate entities need not be disregarded.

On the matter of jurisdiction, we agree with the Court of Appeals when it held that:

“. . . [T]he ruling of the hearing officer in relation to the liabilities of the franchise companies and individual petitioners for the bad accounts incurred by GCC through the discounting process would necessary entail a prior interpretation of the discounting agreements entered into between GCC and the various franchise companies as well as the continuing guaranties executed to secure the same. A judgment on the aforementioned liabilities incurred through the discounting process must likewise involve a determination of the validity of the said discounting agreements and continuing guaranties in order to properly pass upon the enforcement or implementation of the same. It is crystal clear from the aforecited authorities and jurisprudence[12] that there is no need to apply the specialized knowledge and skill of the SEC to interpret the said discounting agreements and continuing guaranties executed to secure the same because the regular courts possess the utmost competence to do so by merely applying the general principles laid down under civil law on contracts.

x x x

The matter of whether the petitioners must be held liable on their separate suretyship is one that belongs to the regular courts. As the respondent SEC notes in its comment, ‘the franchised companies accounts discounted by GCC would arise even if there is no intra-corporate relationship between the parties. In other words, the controversy did not arise out of the parties’ relationships as stockholders. The Court agrees. This matter is better left to the regular courts in which the private respondents have filed suits to enforce the suretyship agreements allegedly executed by the petitioners.”[13]

Not every conflict between a corporation and its stockholders involves corporate matters that only the SEC can resolve. In Viray vs. Court of Appeals, 191 SCRA 308, 323 (1990), we stressed that a contrary interpretation would dissipate the powers of the regular courts and distort the meaning and intent of PD No. 902-A.

“It is true that the trend is toward vesting administrative bodies like the SEC with the power to adjudicate matters coming under their particular specialization, to insure a more knowledgeable solution of the problems submitted to them. This would also relieve the regular courts of a substantial number of cases that would otherwise swell their already clogged dockets. But as expedient as this policy may be, it should not deprive the courts of justice of their power to decide ordinary cases in accordance with the general laws that do not require any particular expertise or training to interpret and apply. Otherwise, the creeping take-over by the administrative agencies of the judicial power vested in the courts would render the Judiciary virtually impotent in the discharge of the duties assigned to it by the Constitution.”

Finally, we note that petitioners were given ample opportunity to present evidence in support of their claims. But mere allegations do not constitute convincing evidence. We find no sufficient reason to overturn the decisions of both the SEC and the appellate court.

WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision and resolution of the Court of Appeals dated October 8, 1993 and September 22, 1994, respectively, are AFFIRMED. Costs against petitioners.

SO ORDERED.

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G.R. No. L-20502 February 26, 1965

EMILIO CANO ENTERPRISES, INC., petitioner, vs.COURT OF INDUSTRIAL RELATIONS, ET AL., respondents.

D. T. Reyes and Associates for petitioner.Mariano B. Tuason for respondent Court of Industrial Relations.C. E. Santiago for respondent Honorata Cruz.

BAUTISTA ANGELO, J.:

In a complaint for unfair labor practice filed before the Court of Industrial Relations on June 6, 1956 by a prosecutor of the latter court, Emilio, Ariston and Rodolfo, all surnamed Cano, were made respondents in their capacity as president and proprietor, field supervisor and manager, respectively, of Emilio Cano Enterprises, Inc.

After trial, Presiding Judge Jose S. Bautista rendered decision finding Emilio Cano and Rodolfo Cano guilty of the unfair labor practice charge, but absolved Ariston for insufficiency of evidence. As a consequence, the two were ordered, jointly and severally, to reinstate Honorata Cruz, to her former position with payment of backwages from the time of her dismissal up to her reinstatement, together with all other rights and privileges thereunto appertaining.

Meanwhile, Emilio Cano died on November 14, 1958, and the attempt to have the case dismissed against him having failed, the case was appealed to the court en banc, which in due course affirmed the decision of Judge Bautista. An order of execution was issued on August 23, 1961 the dispositive part of which reads: (1) to reinstate Honorata Cruz to her former position as ordered in the decision; and (2) to deposit with the court the amount of P7,222.58 within ten days from receipt of the order, failing which the court will order either a levy on respondents' properties or the filing of an action for contempt of court.

The order of execution having been directed against the properties of Emilio Cano Enterprises, Inc. instead of those of the respondents named in the decision, said corporation filed an ex parte motion to quash the writ on the ground that the judgment sought to be enforced was not rendered against it which is a juridical entity separate and distinct from its officials. This motion was denied. And having failed to have it reconsidered, the corporation interposed the present petition for certiorari.1äwphï1.ñët

The issue posed before us is: Can the judgment rendered against Emilio and Rodolfo Cano in their capacity as officials of the corporation Emilio Cano Enterprises, Inc. be made effective against the property of the latter which was not a party to the case?

The answer must be in the affirmative. While it is an undisputed rule that a corporation has a personality separate and distinct from its members or stockholders because of a fiction of the law, here we should not lose sight of the fact that the Emilio Cano Enterprises, Inc. is a closed family corporation where the incorporators and directors belong to one single family. Thus, the following are its incorporators: Emilio Cano, his wife Juliana, his sons Rodolfo and Carlos, and his daughter-in-law Ana D. Cano. Here is an instance where the corporation and its members can be considered as one. And to hold such entity liable for the acts of its members is not to ignore the legal fiction but merely to give meaning to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end subversive of justice. 1 And so it has been held that while a corporation is a legal entity existing separate and apart from the persons composing it, that concept cannot be extended to a point beyond its reason

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and policy, and when invoked in support of an end subversive of this policy it should be disregarded by the courts (12 Am. Jur. 160-161).

A factor that should not be overlooked is that Emilio and Rodolfo Cano are here indicted, not in their private capacity, but as president and manager, respectively, of Emilio Cano Enterprises, Inc. Having been sued officially their connection with the case must be deemed to be impressed with the representation of the corporation. In fact, the court's order is for them to reinstate Honorata Cruz to her former position in the corporation and incidentally pay her the wages she had been deprived of during her separation. Verily, the order against them is in effect against the corporation. No benefit can be attained if this case were to be remanded to the court a quo merely in response to a technical substitution of parties for such would only cause an unwarranted delay that would work to Honorata's prejudice. This is contrary to the spirit of the law which enjoins a speedy adjudication of labor cases disregarding as much as possible the technicalities of procedure. We, therefore, find unmeritorious the relief herein prayed for.

WHEREFORE, petition is dismissed, with costs.

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[G.R. No. 129049. August 6, 1999]

BALTAZAR G. CAMPOREDONDO, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION (NLRC), Fifth Division, Cagayan de Oro City, THE PHILIPPINE NATIONAL RED CROSS (PNRC), represented by GOVERNOR ROMEO C. ESPINO and DR. CELSO SAMSON, respondents.

D E C I S I O N

PARDO, J.:

At issue in this case is whether the Philippine National Red Cross (PNRC for short) is a government owned and controlled corporation or it has been “impliedly converted to a private organization” subject to the jurisdiction of labor tribunals in a complaint filed by petitioner, a former PNRC chapter administrator in Surigao del Norte, for illegal dismissal and damages, as he was forced to "retire" after he was required to restitute shortages and unremitted collections in the total sum of P135,927.78.

Having obviously no merit, we dismiss the petition.

All suitors must come to court with clean hands. This is especially true of paid staff of the Philippine National Red Cross. Like its unpaid volunteers, they must be men of unquestioned honesty and integrity serving in selfless manner to aid the sick and wounded of armed forces in time of war, acting in voluntary relief in time of peace and war, maintaining a system of national and international relief in meeting emergency relief needs caused by typhoons, floods, fires, earthquakes, and other natural disasters, and promoting such service in time of peace and war to improve the health, safety and welfare of the Filipino people.[1] Paid staff of the PNRC are government employees who are members of the Government Service Insurance System and covered by the Civil Service Law. Unlike government service in other agencies, Red Cross service demands of its paid staff uberrima fides, the utmost good faith and dedication to work.

Since 1980, petitioner was employed with the PNRC, and until his early "retirement" on December 15, 1995, he was administrator of the Surigao del Norte Chapter, Philippine National Red Cross.[2]

In July, 1995, a field auditor of the PNRC conducted an audit of the books of account of the Surigao del Norte Chapter headed by petitioner and found him short in the total sum of P109,000.00.[3]

On November 21, 1995, Dr. Celso Samson, Secretary General of the PNRC wrote petitioner requiring him to restitute within seventy two (72) hours from notice, the total sum of P135,927.78 representing cash shortage, technical shortage and unremitted collections.[4]

On December 15, 1995, petitioner applied for early retirement from the service, and later wrote Dr. Samson requesting for a re-audit by an independent auditor of his accounts. However, Dr. Samson denied the request.[5]

On May 28, 1996, petitioner filed with the National Labor Relations Commission, Sub-Regional Arbitration Branch X, Butuan City, a complaint for illegal dismissal, damages and underpayment of wages against the Philippine National Red Cross and its key officials.[6]

On June 14, 1996, respondent Philippine National Red Cross filed with the Surigao del Norte provincial office, Department of Labor and Employment, a motion to dismiss the complaint for lack of jurisdiction over the subject matter of the case because the PNRC is a government

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corporation whose employees are members of the Government Service Insurance System (GSIS), and embraced within the Civil Service Law and regulations.[7]

On July 25, 1996, petitioner filed an opposition to motion to dismiss arguing that there was between the PNRC and its duly appointed paid staff, an employer-employee relationship, governed by the Labor Code of the Philippines.[8]

On October 11, 1996, the Labor Arbiter issued an order dismissing the complaint for lack of jurisdiction, finding that the Philippine National Red Cross is a government corporation with an original charter, having been created by Republic Act No. 95.[9]

On November 12, 1996, the Labor Arbiter denied petitioner's motion for reconsideration filed on October 14, 1996.[10]

On November 20, 1996, petitioner filed a notice of appeal and appeal memorandum with the National Labor Relations Commission.[11]

On March 21, 1997, the National Labor Relations Commission, Fifth Division, issued a resolution dismissing the appeal and confirming the decision of the Labor Arbiter that dismissed petitioner's complaint for lack of jurisdiction.[12]

Hence, this recourse.

On July 7, 1997, we resolved to require respondents to comment on the petition within ten (10) days from notice.[13]

On August 7, 1997, respondent Philippine National Red Cross filed its comment.[14] On November 7, 1997, the Solicitor General filed its comment.[15]

Resolving the issue set out in the opening paragraph of this opinion, we rule that the Philippine National Red Cross (PNRC) is a government owned and controlled corporation, with an original charter under Republic Act No. 95, as amended. The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the Government Service Insurance System. The PNRC was not "impliedly converted to a private corporation" simply because its charter was amended to vest in it the authority to secure loans, be exempted from payment of all duties, taxes, fees and other charges of all kinds on all importations and purchases for its exclusive use, on donations for its disaster relief work and other services and in its benefits and fund raising drives, and be alloted one lottery draw a year by the Philippine Charity Sweepstakes Office for the support of its disaster relief operation in addition to its existing lottery draws for blood program.

Having served in the Philippine National Red Cross for a number of years since his initial employment, he must know that it is a government corporation with its own charter and that he was covered by compulsory membership in the Government Service Insurance System, which is why he could apply, as he did, for "early" retirement from the service under Presidential Decree No. 1146 or Republic Act No. 1616.[16]

WHEREFORE, the Court hereby DISMISSES the petition, and AFFIRMS the ruling of the National Labor Relations Commission.

Double costs taxed against petitioner.

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SO ORDERED.

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G.R. No. 89070 May 18, 1992

BENGUET ELECTRlC COOPERATIVE, INC., petitioner, vs.NATIONAL LABOR RELATIONS COMMISSION, PETER COSALAN and BOARD OF DIRECTORS OF BENGUET ELECTRIC COOPERATIVE, INC., * respondents.

Raymundo W. Celino for respondent Peter Cosalan.

Reenan Orate for respondent Board of Directors of BENECO.

FELICIANO, J.:

Private respondent Peter Cosalan was the General Manager of Petitioner Benguet Electric Cooperative, Inc. ("Beneco"), having been elected as such by the Board of Directors of Beneco, with the approval of the National Electrification Administrator, Mr. Pedro Dumol, effective 16 October 1982.

On 3 November 1982, respondent Cosalan received Audit Memorandum No. 1 issued by the Commission on Audit ("COA"). This Memorandum noted that cash advances received by officers and employees of petitioner Beneco in the amount of P129,618.48 had been virtually written off in the books of Beneco. In the Audit Memorandum, the COA directed petitioner Beneco to secure the approval of the National Electrification Administration ("NEA") before writing off or condoning those cash advances, and recommended the adoption of remedial measures.

On 12 November 1982, COA issued another Memorandum — Audit Memorandum No. 2 –– addressed to respondent Peter Cosalan, inviting attention to the fact that the audit of per diems and allowances received by officials and members of the Board of Directors of Beneco showed substantial inconsistencies with the directives of the NEA. The Audit Memorandum once again directed the taking of immediate action in conformity with existing NEA regulations.

On 19 May 1983, petitioner Beneco received the COA Audit Report on the financial status and operations of Beneco for the eight (8) month period ended 30 September 1982. This Audit Report noted and enumerated irregularities in the utilization of funds amounting to P37 Million released by NEA to Beneco, and recommended that appropriate remedial action be taken.

Having been made aware of the serious financial condition of Beneco and what appeared to be mismanagement, respondent Cosalan initiated implementation of the remedial measures recommended by the COA. The respondent members of the Board of Beneco reacted by adopting a series of resolutions during the period from 23 June to 24 July 1984. These Board Resolutions abolished the housing allowance of respondent Cosalan; reduced his salary and his representation and commutable allowances; directed him to hold in abeyance all pending personnel disciplinary actions; and struck his name out as a principal signatory to transactions of petitioner Beneco.

During the period from 28 July to 25 September 1984, the respondent Beneco Board members adopted another series of resolutions which resulted in the ouster of respondent Cosalan as General Manager of Beneco and his exclusion from performance of his regular duties as such, as well as the withholding of his salary and allowances. These resolutions were as follows:

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1. Resolution No. 91-4 dated 28 July 1984:

. . . that the services of Peter M. Cosalan as General Manager of BENECO is terminated upon approval of the National Electrification Administration;

2. Resolution No. 151-84 dated September 15, 1984;

. . . that Peter M. Cosalan is hereby suspended from his position as General Manager of the Benguet Electric Cooperative, Inc. (BENECO) effective as of the start of the office hours on September 24, 1984, until a final decision has been reached by the NEA on his dismissal;

. . . that GM Cosalan's suspension from office shall remain in full force and effect until such suspension is sooner lifted, revoked or rescinded by the Board of Directors; that all monies due him are withheld until cleared;

3. Resolution No. 176-84 dated September 25, 1984;

. . . that Resolution No. 151-84, dated September 15, 1984 stands as preventive suspension for GM Peter M. Cosalan. 1

Respondent Cosalan nevertheless continued to work as General Manager of Beneco, in the belief that he could be suspended or removed only by duly authorized officials of NEA, in accordance with provisions of P.D. No, 269, as amended by P.D. No. 1645 (the statute creating the NEA, providing for its capitalization, powers and functions and organization), the loan agreement between NEA and petitioner Beneco 2 and the NEA Memorandum of 2 July 1980. 3 Accordingly, on 5 October and 10 November 1984, respondent Cosalan requested petitioner Beneco to release the compensation due him. Beneco, acting through respondent Board members, denied the written request of respondent Cosalan.

Respondent Cosalan then filed a complaint with the National Labor Relations Commission ("NLRC") on 5 December 1984 against respondent members of the Beneco Board, challenging the legality of the Board resolutions which ordered his suspension and termination from the service and demanding payment of his salaries and allowances. On 18 February 1985, Cosalan amended his complaint to implead petitioner Beneco and respondent Board members, the latter in their respective dual capacities as Directors and as private individuals.

In the course of the proceedings before the Labor Arbiter, Cosalan filed a motion for reinstatement which, although opposed by petitioner Beneco, was granted on 23 October 1987 by Labor Arbiter Amado T. Adquilen. Petitioner Beneco complied with the Labor Arbiter's order on 28 October 1987 through Resolution No. 10-90.

On 5 April 1988, the Labor Arbiter rendered a decision (a) confirming Cosalan's reinstatement; (b) ordering payment to Cosalan of his backwages and allowances by petitioner Beneco and respondent Board members, jointly and severally, for a period of three (3) years without deduction or qualification, amounting to P344,000.00; and (3) ordering the individual Board members to pay, jointly and severally, to Cosalan moral damages of P50,000.00 plus attorney's fees of ten percent (10%) of the wages and allowances awarded him.

Respondent Board members appealed to the NLRC, and there filed a Memorandum on Appeal. Petitioner Beneco did not appeal, but moved to dismiss the appeal filed by respondent Board members and for execution of judgment. By this time, petitioner Beneco had a new set of directors.

In a decision dated 21 November 1988, public respondent NLRC modified the award rendered by the Labor Arbiter by declaring that petitioner Beneco alone, and not respondent Board

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members, was liable for respondent Cosalan's backwages and allowances, and by ruling that there was no legal basis for the award of moral damages and attorney's fees made by the Labor Arbiter.

Beneco, through its new set of directors, moved for reconsideration of the NLRC decision, but without success.

In the present Petition for Certiorari, Beneco's principal contentions are two-fold: first, that the NLRC had acted with grave abuse of discretion in accepting and giving due course to respondent Board members' appeal although such appeal had been filed out of time; and second, that the NLRC had acted with grave abuse of discretion amounting to lack of jurisdiction in holding petitioner alone liable for payment of the backwages and allowances due to Cosalan and releasing respondent Board members from liability therefor.

We consider that petitioner's first contention is meritorious. There is no dispute about the fact that the respondent Beneco Board members received the decision of the labor Arbiter on 21 April 1988. Accordingly, and because 1 May 1988 was a legal holiday, they had only up to 2 May 1988 within which to perfect their appeal by filing their memorandum on appeal. It is also not disputed that the respondent Board members' memorandum on appeal was posted by registered mail on 3 May 1988 and received by the NLRC the following day. 4 Clearly, the memorandum on appeal was filed out of time.

Respondent Board members, however, insist that their Memorandum on Appeal was filed on time because it was delivered for mailing on 1 May 1988 to the Garcia Communications Company, a licensed private letter carrier. The Board members in effect contend that the date of delivery to Garcia Communications was the date of filing of their appeal memorandum.

Respondent Board member's contention runs counter to the established rule that transmission through a private carrier or letter-forwarder –– instead of the Philippine Post Office –– is not a recognized mode of filing pleadings. 5 The established rule is that the date of delivery of pleadings to a private letter-forwarding agency is not to be considered as the date of filing thereof in court, and that in such cases, the date of actual receipt by the court, and not the date of delivery to the private carrier, is deemed the date of filing of that pleading. 6

There, was, therefore, no reason grounded upon substantial justice and the prevention of serious miscarriage of justice that might have justified the NLRC in disregarding the ten-day reglementary period for perfection of an appeal by the respondent Board members. Accordingly, the applicable rule was that the ten-day reglementary period to perfect an appeal is mandatory and jurisdictional in nature, that failure to file an appeal within the reglementary period renders the assailed decision final and executory and no longer subject to review. 7 The respondent Board members had thus lost their right to appeal from the decision of the Labor Arbiter and the NLRC should have forthwith dismissed their appeal memorandum.

There is another and more compelling reason why the respondent Board members' appeal should have been dismissed forthwith: that appeal was quite bereft of merit. Both the Labor Arbiter and the NLRC had found that the indefinite suspension and termination of services imposed by the respondent Board members upon petitioner Cosalan was illegal. That illegality flowed, firstly, from the fact that the suspension of Cosalan was continued long after expiration of the period of thirty (30) days, which is the maximum period of preventive suspension that could be lawfully imposed under Section 4, Rule XIV of the Omnibus Rules Implementing the Labor Code. Secondly, Cosalan had been deprived of procedural due process by the respondent Board members. He was never informed of the charges raised against him and was given no opportunity to meet those charges and present his side of whatever dispute existed; he was kept totally in the dark as to the reason or reasons why he had been suspended and effectively dismissed from the service of Beneco Thirdly, respondent Board

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members failed to adduce any cause which could reasonably be regarded as lawful cause for the suspension and dismissal of respondent Cosalan from his position as General Manager of Beneco. Cosalan was, in other words, denied due process both procedural and substantive. Fourthly, respondent Board members failed to obtain the prior approval of the NEA of their suspension now dismissal of Cosalan, which prior approval was required, inter alia, under the subsisting loan agreement between the NEA and Beneco. The requisite NEA approval was subsequently sought by the respondent Board members; no NEA approval was granted.

In reversing the decision of the Labor Arbiter declaring petitioner Beneco and respondent Board members solidarily liable for the salary, allowances, damages and attorney's fees awarded to respondent Cosalan, the NLRC said:

. . . A perusal of the records show that the members of the Board never acted in their individual capacities. They were acting as a Board passing resolutions affecting their general manager. If these resolutions and resultant acts transgressed the law, to then BENECO for which the Board was acting in behalf should bear responsibility. The records do not disclose that the individual Board members were motivated by malice or bad faith, rather, it reveals an intramural power play gone awry and misapprehension of its own rules and regulations. For this reason, the decision holding the individual board members jointly and severally liable with BENECO for Cosalan's backwages is untenable. The same goes for the award of damages which does not have the proverbial leg to stand on.

The Labor Arbiter below should have heeded his own observation in his decision —

Respondent BENECO as an artificial person could not have, by itself, done anything to prevent it. But because the former have acted while in office and in the course of their official functions as directors of BENECO, . . .

Thus, the decision of the Labor Arbiter should be modified conformably with all the foregoing holding BENECO solely liable for backwages and releasing the appellant board members from any individual liabilities. 8 (Emphasis supplied)

The applicable general rule is clear enough. The Board members and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts, Those acts, when they are such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such officers and Board members. 9

The major difficulty with the conclusion reached by the NLRC is that the NLRC clearly overlooked or disregarded the circumstances under which respondent Board members had in fact acted in the instant case. As noted earlier, the respondent Board members responded to the efforts of Cosalan to take seriously and implement the Audit Memoranda issued by the COA explicitly addressed to the petitioner Beneco, first by stripping Cosalan of the privileges and perquisites attached to his position as General Manager, then by suspending indefinitely and finally dismissing Cosalan from such position. As also noted earlier, respondent Board members offered no suggestion at all of any just or lawful cause that could sustain the suspension and dismissal of Cosalan. They obviously wanted to get rid of Cosalan and so acted, in the words of the NLRC itself, "with indecent haste" in removing him from his position and denying him substantive and procedural due process. Thus, the record showed strong indications that respondent Board members had illegally suspended and dismissed Cosalan precisely because he was trying to remedy the financial irregularities and violations of NEA regulations which the COA had brought to the attention of Beneco. The conclusion reached by the NLRC that "the records do not disclose that the individual Board members were motivated by malice or bad faith" flew in the face of the evidence of record. At the very least, a strong

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presumption had arisen, which it was incumbent upon respondent Board members to disprove, that they had acted in reprisal against respondent Cosalan and in an effort to suppress knowledge about and remedial measures against the financial irregularities the COA Audits had unearthed. That burden respondent Board members did not discharge.

The Solicitor General has urged that respondent Board members may be held liable for damages under the foregoing circumstance under Section 31 of the Corporation Code which reads as follows:

Sec. 31. Liability of directors, trustees or officers. — Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be jointly liable and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons . . . (Emphasis supplied)

We agree with the Solicitor General, firstly, that Section 31 of the Corporation Code is applicable in respect of Beneco and other electric cooperatives similarly situated. Section 4 of the Corporation Code renders the provisions of that Code applicable in a supplementary manner to all corporations, including those with special or individual charters so long as those provisions are not inconsistent with such charters. We find no provision in P.D. No. 269, as amended, that would exclude expressly or by necessary implication the applicability of Section 31 of the Corporation Code in respect of members of the boards of directors of electric cooperatives. Indeed, P.D. No. 269 expressly describes these cooperatives as "corporations:"

Sec. 15. Organization and Purpose. — Cooperative non-stock, non-profit membership corporations may be organized, and electric cooperative corporations heretofore formed or registered under the Philippine non-Agricultural Co-operative Act may as hereinafter provided be converted, under this Decree for the purpose of supplying, and of promoting and encouraging-the fullest use of, service on an area coverage basis at the lowest cost consistent with sound economy and the prudent management of the business of such corporations. 10 (Emphasis supplied)

We agree with the Solicitor General, secondly, that respondent Board members were guilty of "gross negligence or bad faith in directing the affairs of the corporation" in enacting the series of resolutions noted earlier indefinitely suspending and dismissing respondent Cosalan from the position of General Manager of Beneco. Respondent Board members, in doing so, acted belong the scope of their authority as such Board members. The dismissal of an officer or employee in bad faith, without lawful cause and without procedural due process, is an act that is contra legem. It cannot be supposed that members of boards of directors derive any authority to violate the express mandates of law or the clear legal rights of their officers and employees by simply purporting to act for the corporation they control.

We believe and so hold, further, that not only are Beneco and respondent Board members properly held solidarily liable for the awards made by the Labor Arbiter, but also that petitioner Beneco which was controlled by and which could act only through respondent Board members, has a right to be reimbursed for any amounts that Beneco may be compelled to pay to respondent Cosalan. Such right of reimbursement is essential if the innocent members of Beneco are not to be penalized for the acts of respondent Board members which were both done in bad faith and ultra vires. The liability-generating acts here are the personal and individual acts of respondent Board members, and are not properly attributed to Beneco itself.

WHEREFORE, the Petition for Certiorari is GIVEN DUE COURSE, the comment filed by respondent Board members is TREATED as their answer, and the decision of the National

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Labor Relations Commission dated 21 November 1988 in NLRC Case No. RAB-1-0313-84 is hereby SET ASIDE and the decision dated 5 April 1988 of Labor Arbiter Amado T. Adquilen hereby REINSTATED in toto. In addition, respondent Board members are hereby ORDERED to reimburse petitioner Beneco any amounts that it may be compelled to pay to respondent Cosalan by virtue of the decision of Labor Arbiter Amado T. Adquilen. No pronouncement as to costs.

SO ORDERED.

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SECOND DIVISION

[G.R. No. L-61145. February 20, 1984.]

REPUBLIC OF THE PHILIPPINES (Director of Lands), Petitioner, v. IGLESIA NI CRISTO and JUDGE DOMINGO M. ANGELES, Branch I, Court of First Instance of Camarines Norte, Respondents.

The Solicitor General for Petitioner.

Joaquin Ortega and Cruz, Esguerra, Tafalla Perel & Associates for Respondents.

SYLLABUS

1. CIVIL LAW; LAND REGISTRATION; PUBLIC LAND LAW; IGLESIA NI CRISTO NOT ENTITLED TO APPLY FOR REGISTRATION OF LAND UNDER SECTION 48(b) THEREOF. — The trial court found, and it is a matter of judicial notice, that the Iglesia "is a duly registered corporation sole." As the application is for confirmation of an imperfect or incomplete title, that application is necessarily subject to the provisions of law only Filipino citizens are entitled to apply for registration of lands of the public domain. The Iglesia is not a Filipino citizen. The lands in question are still public lands until registered.

2. CONSTITUTIONAL LAW; PATRIMONY OF THE NATION; IGLESIA NI CRISTO AS A CORPORATION CANNOT ACQUIRE ALIENABLE PUBLIC LAND. — Under Section 11 of Article XIV of the Constitution, the Iglesia ni Cristo is disqualified as a corporation to hold lands of the public domain except by lease. The Iglesia in its appellee’s brief has not shown that it is not covered by the said constitutional and statutory provisions. Its statement on page 2 of its brief that it "is not a religious corporation" when it filed its application is belied by the facts.

3. MERCANTILE LAW; CORPORATION LAW; IGLESIA NI CRISTO, REGISTERED AS A CORPORATION SOLE, NOT AS A TRUSTEE; NOT QUALIFIED TO REGISTER LAND AS TRUSTEE IN THE CASE AT BAR. — Iglesia ni Cristo contends that it is entitled to register the lands as a trustee. This contention is erroneous. The unarguable fact is that it is a corporation sole governed by section 109 et sequitur of the Corporation Code. It did not apply for registration as a trustee. As stated at the outset, the matter is subject to the governing principle of stare decisis et non quieta movere (follow past precedents and do not disturb what has been settled).

D E C I S I O N

AQUINO, J.:

This case is about the same issue which was resolved against the Iglesia ni Cristo and is, therefore, res judicata: that, as a corporation sole, (1) it is not entitled to register lands under section 48(b) of the Public Land Law, which refers only to Filipino citizens, and (2) that it is disqualified under section 11, Article XIV of the Constitution to hold alienable public lands except by lease. (Republic v. Villanueva, G.R. No. 55289, June 29, 1982, 114 SCRA 875; Republic v. Gonong, G.R. No. 56025, November 25, 1982, 118 SCRA 729; Republic v. Court of Appeals, G.R. No. 59447 and Republic v. Cendaña, G.R. No. 60188, December 27, 1982, 119 SCRA 449 and Republic v. Court of First Instance of Nueva Ecija, L-35273, July 25, 1983, 123 SCRA 516.)chanrobles.com.ph : virtual law library

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The Iglesia on November 6, 1976 filed an application for confirmation and registration of its title over two parcels of land located at Barrio Calabaca and the poblacion of Capalonga, Camarines Norte with areas of 300 and 599 square meters used as sites of its chapels.

The town lot was purchased by the Iglesia on May 30, 1955 from Josefina Diezmo who in turn purchased it from Esteban Arcea who had used the lot for residential purposes since 1920. The realty taxes had been paid up to the time Diezmo possessed the lot.

The Calabaca lot was purchased by the Iglesia on July 18, 1973 from Basilio Parale who inherited it from his father Simeon. It used to be coconut land. Simeon possessed the lot since 1920 and used it for residential purposes. He paid realty taxes on the land.

The Iglesia and its predecessors claimed to have actual, public, peaceful, continuous and uninterrupted possession of the two lots in the concept of an owner for more than thirty years preceding the filing of the application. No realty taxes were paid by the Iglesia because it is an exempt corporation.

The Director of Lands opposed the application. The trial court in its decision of April 30, 1982 granted it, confirmed the title of the applicant and ordered the lands registered "in the name of Iglesia ni Cristo, with its Executive Minister Eraño G. Manalo, as corporation sole, with office and postal address at corner Central and Don Mariano Marcos Avenues, Diliman, Quezon City, Metro Manila."cralaw virtua1aw library

The Republic appealed under Republic Act No. 5440 in relation to Rule 45 of the Rules of Court. The trial court found, and it is a matter of judicial notice, that the Iglesia "is a duly registered corporation sole" (Exhs. E and F). As the application is for confirmation of an imperfect or incomplete title, that application is necessarily subject to the following provisions of the Public Land Law, Commonwealth Act No. 141:jgc:chanrobles.com.ph

"SEC. 48. The following described citizens of the Philippines, occupying lands of the public domain or claiming to own any such lands or an interest therein, but whose titles have not been perfected or completed, may apply to the Court of First Instance of the province where the land is located for confirmation of their claims and the issuance of a certificate of title therefor, unless the Land Registration Act, to wit:chanrob1es virtual 1aw library

(a) . . .

(b) Those who by themselves or through their predecessors in interest have been in open, continuous, exclusive, and notorious possession and occupation of agricultural lands of the public domain, under a bona fide claim of acquisition of ownership, for at least thirty years immediately preceding the filing of the application for confirmation of title except when prevented by war or force majeure. These shall be conclusively presumed to have performed all the conditions essential to a Government grant and shall be entitled to a certificate of title under the provisions of this chapter."cralaw virtua1aw library

(c) . . .

"Sec. 49. No person claiming title to lands of the public domain not in possession of the qualifications specified in the last preceding section may apply for the benefits of this chapter."cralaw virtua1aw library

The Iglesia is not a Filipino citizen, The lands in question are still public lands until registered (Heirs of Pelagio Zara v. Director of Lands, 127 Phil. 8). Moreover, under the aforecited section 11 of Article XIV, it is disqualified as a corporation to hold lands of the public domain except by

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lease. (Manila Electric Company v. Castro Bartolome, L-49623, June 29, 182, 114 SCRA 799; Director of Lands, v. Lood, L-32521, September 2, 1983, 124 SCRA 460).

The Iglesia in its appellee’s brief has not shown that it is not covered by the said constitutional and statutory provisions. Its statement on page 2 of its brief that it "is not a religious corporation" when it filed its application is belied by the facts.

It contends that it is entitled to register the lands as a trustee. This contention is erroneous. The unarguable fact is that it is a corporation sole governed by section 109 et sequitur of the Corporation Code. It did not apply for registration as a trustee.

As stated at the outset, the matter is subject to the governing principle of stare decisis et non quieta movere (follow past precedents and do not disturb what has been settled).

WHEREFORE, the trial court’s decision is reversed and set aside and the Iglesia’s application is dismissed with costs against it.

SO ORDERED.

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[G.R. No. 80767. April 22, 1991.]

BOY SCOUTS OF THE PHILIPPINES, Petitioner, v. NATIONAL LABOR RELATIONS COMMISSION, FORTUNATO ESGUERRA, ROBERTO MALABORBOR, ESTANISLAO MISA, VICENTE EVANGELISTA, and MARCELINO GARCIA, Respondents.

Julio O. Lopez for Petitioner.

SYLLABUS

1. COMMONWEALTH ACT NO. III AS AMENDED BY PRESIDENTIAL DECREE NO. 460; BOY SCOUTS OF THE PHILIPPINES; FUNCTION, WITH PUBLIC ASPECT. — BSP’s functions as set out in its statutory charter do have a public aspect. BSP’s functions do relate to the fostering of the public virtues of citizenship and patriotism and the general improvement of the moral spirit and fiber of our youth. The social value of activities like those to which the BSP dedicates itself by statutory mandate have in fact, been accorded constitutional recognition (Article II of the 1987 Constitution). The public character of BSP’s functions and activities must be conceded, for they pertain to the educational, civic and social development of the youth which constitutes a very substantial and important part of the nation.

2. ID.; ID.; NATIONAL EXECUTIVE BOARD; SUBSTANTIAL GOVERNMENTAL PARTICIPATION IN THE CHOICE OF

MEMBERS. — The second aspect that the Court must take into account relates to the governance of the BSP. The composition of the National Executive Board of the BSP includes, as noted from Section 5 of its charter quoted earlier, includes seven (7) Secretaries of Executive Departments. The seven (7) Secretaries (now six [6] in view of the abolition of the Department of Youth and Sports and merger thereof into the Department of Education, Culture and Sports) by themselves do not constitute a majority of the members of the National Executive Board. We must note at the same time that the appointments of members of the National Executive Board, except only the appointments of the Regional Chairman and Scouts of Senior age from the various Scout Regions, are subject to ratification and confirmation by the Chief Scout, who is the President of the Philippines. Vacancies to the Board are filled by a majority vote of the remaining members thereof, but again subject to ratification and confirmation by the Chief Scout. We must assume that such confirmation or ratification involves the exercise of choice or discretion on the part of ratifying or confirming power. It does appears therefore that there is substantial governmental (i.e., Presidential) participation or intervention in the choice of the majority of the members of the National Executive Board of the BSP.

3. ID.; ID.; CHARACTER OF ASSETS AND FUNDS. — The third aspect relates to the character of the assets and funds of the BSP. The original assets of the BSP were acquired by purchase or gift or other equitable arrangement with the Boy Scouts of America, of which the BSP was part before the establishment of the Commonwealth of the Philippines. The BSP charter, however, does not indicate that such assets were public or statal in character or had originated from the Government or the State. According to petitioner BSP, its operating funds used for carrying out its purposes and programs, are derived principally from membership dues paid by the Boy Scouts themselves and from property rentals. In this respect, the BSP appears similar to private non-stock, non-profit corporations, although its charter expressly envisages donations and contributions to it from the Government and any of its agencies and instrumentalities. We note only that BSP funds have not apparently heretofore been regarded as public funds by the Commission on Audit, considering that such funds have not been audited by the Commission.

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4. ID.; ID.; A GOVERNMENT-CONTROLLED CORPORATION AND INSTRUMENTALITY OF THE GOVERNMENT. — While the BSP may be seen to be a mixed type of entity, combining aspects of both public and private entities, we believe that considering the character of its purposes and its functions, the statutory designation of the BSP as "a public corporation" and the substantial participation of the Government in the selection of members of the National Executive Board of the BSP, the BSP, as presently constituted under its charter, is a government-controlled corporation within the meaning of Article IX (B) (2) (1) of the Constitution. We are fortified in this conclusion when we note that the Administrative Code of 1987 designates the BSP as one of the attached agencies of the Department of Education, Culture and Sports ("DECS"). We believe that the BSP is appropriately regarded as "a government instrumentality" under the 1987 Administrative Code.

5. ADMINISTRATIVE LAW; ADMINISTRATIVE CODE OF 1987; AGENCY OF THE GOVERNMENT, DEFINED. — An "agency of the Government" is defined as referring to any of the various units of the Government including a department, bureau, office, instrumentality, government-owned or-controlled corporation, or local government or distinct unit therein.

6. ID.; ID.; GOVERNMENT INSTRUMENTALITY, DEFINED. — "Government instrumentality" is in turn defined in the 1987 Administrative Code in the following manner: "Instrumentality — refers to any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned or controlled corporations."cralaw virtua1aw library

7. ID.; ID.; CHARTERED INSTITUTION, DEFINED. — The same Code describes a "chartered institution" in the following terms: "Chartered institution — refers to any agency organized or operating under a special charter, and vested by law with functions relating to specific constitutional policies or objectives. This term includes the state universities and colleges, and the monetary authority of the State."cralaw virtua1aw library

8. ID.; ID.; EMPLOYEE, EMBRACED WITHIN THE CIVIL SERVICE. — It thus appears that the BSP may be regarded as both a "government controlled corporation with an original charter" and as an "instrumentality’ of the Government within the meaning of Article IX (B) (2) (1) of the Constitution. It follows that the employees of petitioner BSP are embraced within the Civil Service and are accordingly governed by the Civil Service Law and Regulations.

9. LABOR & SOCIAL LEGISLATION; LABOR CODE; NATIONAL LABOR RELATIONS OFFICE; WITHOUT JURISDICTION OVER ILLEGAL DISMISSAL OF EMPLOYEE OF THE BOY SCOUTS OF THE PHILIPPINES. — In view of the foregoing, we hold that both the Labor Arbiter and public respondent NLRC had no jurisdiction over the complaint filed by private respondents in NLRC Case No. 1637-84; neither labor agency had before it any matter which could validly have been passed upon by it in the exercise of original or appellate jurisdiction. The appealed Decision and Resolution in this case, having been rendered without jurisdiction, vested no rights and imposed no liabilities upon any of the parties here involved.

10. REMEDIAL LAW; SUPREME COURT; MAY MOTU PROPIO TAKE COGNIZANCE OF THE ISSUE OF EXISTENCE OR ABSENCE OF JURISDICTION. — That neither party had expressly raised the issue of jurisdiction in the pleadings poses no obstacle to this ruling of the Court, which may motu proprio take cognizance of the issue of existence or absence of jurisdiction and pass upon the same.

D E C I S I O N

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FELICIANO, J.:

This Petition for Certiorari is directed at (1) the Decision, 1 dated 27 February 1987, and (2) the Resolution 2 dated 16 October 1987, both issued by the National Labor Relations Commission ("NLRC") in Case No. 1637-84.

Private respondents Fortunato C. Esquerra, Roberto O. Malaborbor, Estanislao M. Misa, Vicente N. Evangelista and Marcelino P. Garcia, had all been rank-and-file employees of petitioner Boy Scouts of the Philippines ("BSP"). At the time of termination of their services in February 1985, private respondents were stationed at the BSP Camp in Makiling, Los Baños, Laguna.

The events which led to such termination of services are as follows:chanrob1es virtual 1aw library

On 19 October 1984, the Secretary-General of petitioner BSP issued Special Orders Nos. 80, 81, 83, 84 and 85 addressed separately to the five (5) private respondents, informing them that on 20 November 1984, they were to be transferred from the BSP Camp in Makiling to the BSP Land Grant in Asuncion, Davao del Norte. These Orders were opposed by private respondents who, on 4 November 1984, appealed the matter to the BSP National President.

On 6 November 1984, petitioner BSP conducted a pre-transfer briefing at its National Headquarters in Manila. Private respondents were in attendance during the briefing and they were there assured that their transfer to Davao del Norte would not involve any diminution in salary, and that each of them would receive a relocation allowance equivalent to one (1) month’s basic pay. This assurance, however, failed to persuade private respondents to abandon their opposition to the transfer orders issued by the BSP Secretary-General.

On 13 November 1984, a complaint 3 (docketed as NLRC Case No. 1 6-84J) for illegal transfer was filed with the then Ministry of Labor and Employment, Sub-Regional Arbitration Branch IV, San Pablo City, Laguna. Private respondents there sought to enjoin implementation of Special Orders Nos. 80, 81, 83, 84 and 85, alleging, among other things, that said orders were "indubitable and irrefutable action[s] prejudicial not only to [them] but to [their] families and [would] seriously affect [their] economic stability and solvency considering the present cost of living."cralaw virtua1aw library

On 21 November 1984 (or the day immediately following the date of scheduled transfer), the BSP Camp Manager in Makiling issued a Memorandum requiring the five (5) private respondents to explain why they should not be charged administratively for insubordination. The Memorandum was a direct result of the refusal by private respondents, two (2) days earlier, to accept from petitioner BSP their respective boat tickets to Davao del Norte and their relocation allowances.chanrobles law library

Meanwhile, in a letter of the same date, the BSP National President informed private respondents that their refusal to comply with the Special Orders was not sufficiently justified and constituted rank disobedience. Memoranda subsequently issued by the BSP Secretary-General stressed that such refusal as well as the explanations proffered therefor, were unacceptable and could altogether result in termination of employment with petitioner BSP. These warnings notwithstanding, private respondents continued pertinaciously to disobey the disputed transfer orders.

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Petitioner BSP consequently imposed a five-day suspension on the five (5) private respondents, in the latter part of January 1985. Subsequently, by Special Order dated 12 February 1985 issued by the BSP Secretary-General, private respondents’ services were ordered terminated effective 15 February 1985.

On 22 February 1985, private respondents amended their original complaint to include charges of illegal dismissal and unfair labor practice against petitioner BSP. 4 The Labor Arbiter thereafter proceeded to hear the complaint.

In a decision 5 dated 31 July 1985, the Labor Arbiter ordered the dismissal of private respondents’ complaint for lack of merit.

On 27 February 1987, however, the ruling of the Labor Arbiter was reversed by public respondent, NLRC, which held that private respondents had been illegally dismissed by petitioner BSP. The dispositive portion of the NLRC decision read:jgc:chanrobles.com.ph

"WHEREFORE, premises considered, the Decision appealed from is hereby SET ASIDE and a new one entered ordering the respondent-appellee [petitioner BSP] to reinstate the complainants-appellants [private respondents] to their former positions without loss of seniority rights and other benefits appurtenant thereto and with full backwages from the time they were illegally dismissed from the service up to date of their actual reinstatement.

SO ORDERED."cralaw virtua1aw library

The Court notes at the outset that in the Position Paper 6 filed by petitioner BSP with the Labor Arbiter, it was alleged in the second paragraph thereof, that petitioner is a "civic service, non-stock and non-profit organization, relying mostly [on] government and public support, existing under and by virtue of Commonwealth Act. No. 111, as amended, by Presidential Decree No. 460 . . ." A similar allegation was contained in the Brief for Appellee 7 and in the Petition 8 and Memorandum 9 filed by petitioner BSP with public respondent NLRC and this Court, respectively. The same allegation, moreover, appeared in the Comment 10 (also treated as the Memorandum) submitted to this Court by the Solicitor General on behalf of public respondent NLRC; for their part private respondents stated in their Appeal Memorandum 11 with the NLRC that petitioner BSP is "by mandate of law a Public Corporation," a statement reiterated by them in their Memorandum 12 before this Court.chanrobles law library

In a Resolution dated 9 August 1989, this Court required the parties and the Office of the Government Corporate Counsel to file a comment on the question of whether or not petitioner BSP is in fact a government-owned or controlled corporation.

Petitioner, private respondents, the Office of the Solicitor General and the Office of the Government Corporate Counsel filed their respective comments.

The central issue is whether or not the BSP is embraced within the Civil Service as that term is defined in Article IX (B) (2) (1) of the 1987 Constitution which reads as follows:jgc:chanrobles.com.ph

"The Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled corporations with original charters.

x x x"

The answer to the central issue will determine whether or not private respondent NLRC had jurisdiction to render the Decision and Resolution which are here sought to be nullified.

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The responses of the parties, on the one hand, and of the Office of the Solicitor General and the Office of the Government Corporate Counsel, upon the other hand, in compliance with the Resolution of this Court of 9 August 1989, present a noteworthy uniformity. Petitioner BSP and private respondents submit substantially the same view "that the BSP is a purely private organization." In contrast, the Solicitor General and the Government Corporate Counsel take much the same position, that is, that the BSP is a "public corporation or a "quasi-public corporation" and, as well, a "government controlled corporation."cralaw virtua1aw library

Petitioner BSP’s compliance with our Resolution invokes the following provisions of its Constitution and By-laws:jgc:chanrobles.com.ph

"The Boy Scouts of the Philippines declares that it is an independent, voluntary, non-political, non-sectarian and non-governmental organization, with obligations towards nation building and with international orientation."cralaw virtua1aw library

The BSP, petitioner stresses, does not receive any monetary or financial subsidy from the Government whether on the national or local level. 13 Petitioner declares that it is a "purely private organization" directed and controlled by its National Executive Board the members of which are, it is said, all "voluntary scouters, including seven (7) Cabinet Secretaries. 14

Private respondents submitted a supplementary memorandum arguing that while petitioner BSP was created as a public corporation, it had lost that status when Section 2 of Commonwealth Act No. 111 as amended by P.D. No. 460 conferred upon it the powers which ordinary private corporations organized under the Corporation Code have:chanrobles virtual lawlibrary

"Sec. 2. The said corporation shall have perpetual succession with power to sue and be sued; to hold such real and personal estate as shall be necessary for corporate purposes, and to receive real and personal property by gift, devise, or bequest; to adopt a seal, and to alter or destroy the same at pleasure; to have offices and conduct its business and affairs in the City of Manila and in the several provinces; to make and adopt by-laws, rules and regulations not inconsistent with the laws of the Philippines, and generally to do all such acts and things (including the establishment of regulations for the election of associates and successors: as may be necessary to carry into effect the provisions of the Act and promote the purposes of said corporation."cralaw virtua1aw library

Private respondents also point out that the BSP is registered as a private employer with the Social Security System and that all its staff members and employees are covered by the Social Security Act, indicating that the BSP had lost its personality or standing as a public corporation. It is further alleged that the BSP’s assets and liabilities, official transactions and financial statements have never been subjected to audit by the government auditing office, i.e., the Commission on Audit, being audited rather by the private auditing firm of Sycip Gorres Velayo and Co. Private respondents finally state that the appointments of BSP officers and staff were not approved or confirmed by the Civil Service Commission.

The views of the Office of the Solicitor General and the Office of the Government Corporate Counsel on the above issue appeared to be generally similar. The Solicitor General’s Office, although it had appeared for the NLRC and filed a Comment on the latter’s behalf on the merits of the Petition for Certiorari, submitted that the BSP is a government-owned or controlled corporation, having been created by virtue of Commonwealth Act No. 111 entitled "An Act to Create a Public Corporation to be known as the Boy Scouts of the Philippines and to Define its Powers and Purposes." The Solicitor General stressed that the BSP was created in order to "promote, through organization, and cooperation with other agencies the ability of boys to do things for themselves and others, to train them in scout craft, and to teach them patriotism, courage, self-reliance, and kindred virtues, using the methods which are now in

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common use by boy scouts." 15 He further noted that the BSP’s objectives and purposes are "solely of a benevolent character and not for pecuniary profit by its members. 16 The Solicitor General also underscored the extent of government participation in the BSP under its charter as reflected in the composition of its governing body:chanrobles law library

"The governing body of the said corporation shall consist of a National Executive Board composed of (a) the President of the Philippines or his representative; (b) the charter and life members of the Boy Scouts of the Philippines; (c) the Chairman of the Board of Trustees of the Philippine Scouting Foundation; (d) the Regional Chairman of the Scout Regions of the Philippines; (e) the Secretary of Education and Culture, the Secretary of Social Welfare, the Secretary of National Defense, the Secretary of Labor, the Secretary of Finance, the Secretary of Youth and Sports, and the Secretary of Local Government and Community Development; (f) an equal number of individuals from the private sector; (g) the National President of the Girl Scouts of the Philippines; (h) one Scout of Senior age from each Scout Region to represent the boy membership; and (i) three representatives of the cultural minorities. Except for the Regional Chairman who shall be elected by the Regional Scout Councils during their annual meetings, and the Scouts of their respective regions, all members of the National Executive Board shall be either by appointment or cooption, subject to ratification and confirmation by the Chief Scout, who shall be the Head of State. . . ." 17 (Emphasis supplied)

The Government Corporate Counsel, like the Solicitor General, describes the BSP as a "public corporation" but, unlike the Solicitor General, suggests that the BSP is more of a "quasi corporation" than a "public corporation." The BSP, unlike most public corporations which are created for a political purpose, is not vested with political or governmental powers to be exercised for the public good or public welfare in connection with the administration of civil government. The Government Corporate Counsel submits, more specifically, that the BSP falls within the ambit of the term "government-owned or controlled corporation" as defined in Section 2 of P.D. No. 2029 (approved on 4 February 1986) which reads as follows:jgc:chanrobles.com.ph

"A government-owned or controlled corporation is a stock or a non-stock corporation, whether performing governmental or proprietary functions, which is directly chartered by special law or if organized under the general corporation law is owned or controlled by the government directly, or indirectly through a parent corporation or subsidiary corporation, to the extent of at least a majority of its outstanding capital stock or of its outstanding voting capital stock.

x x x"

(Emphasis supplied)

Examining the relevant statutory provisions and the arguments outlined above, the Court considers that the following need to be considered in arriving at the appropriate legal characterization of the BSP for purposes of determining whether its officials and staff members are embraced in the Civil Service. Firstly, BSP’s functions as set out in its statutory charter do have a public aspect. BSP’s functions do relate to the fostering of the public virtues of citizenship and patriotism and the general improvement of the moral spirit and fiber of our youth. The social value of activities like those to which the BSP dedicates itself by statutory mandate have in fact, been accorded constitutional recognition. Article II of the 1987 Constitution includes in the "Declaration of Principles and State Policies," the following:chanrobles.com.ph : virtual law library

"Sec. 13. The State recognizes the vital role of the youth in nation-building and shall promote and protect their physical, moral, spiritual, intellectual, and social well-being. It shall

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inculcate in the youth patriotism and nationalism, and encourage their involvement in public and civic affairs."cralaw virtua1aw library

At the same time, BSP’s functions do not relate to the governance of any part of territory of the Philippines; BSP is not a public corporation in the same sense that municipal corporations or local governments are public corporations. BSP’s functions can not also be described as proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations like the National Development Company or the National Steel Corporation can be described as proprietary or "business-like" in character. Nevertheless, the public character of BSP’s functions and activities must be conceded, for they pertain to the educational, civic and social development of the youth which constitutes a very substantial and important part of the nation.

The second aspect that the Court must take into account relates to the governance of the BSP. The composition of the National Executive Board of the BSP includes, as noted from Section 5 of its charter quoted earlier, includes seven (7) Secretaries of Executive Departments. The seven (7) Secretaries (now six [6] in view of the abolition of the Department of Youth and Sports and merger thereof into the Department of Education, Culture and Sports) by themselves do not constitute a majority of the members of the National Executive Board. We must note at the same time that the appointments of members of the National Executive Board, except only the appointments of the Regional Chairman and Scouts of Senior age from the various Scout Regions, are subject to ratification and confirmation by the Chief Scout, who is the President of the Philippines. Vacancies to the Board are filled by a majority vote of the remaining members thereof, but again subject to ratification and confirmation by the Chief Scout. 18 We must assume that such confirmation or ratification involves the exercise of choice or discretion on the part of ratifying or confirming power. It does appears therefore that there is substantial governmental (i.e., Presidential) participation or intervention in the choice of the majority of the members of the National Executive Board of the BSP.

The third aspect relates to the character of the assets and funds of the BSP. The original assets of the BSP were acquired by purchase or gift or other equitable arrangement with the Boy Scouts of America, of which the BSP was part before the establishment of the Commonwealth of the Philippines. The BSP charter, however, does not indicate that such assets were public or statal in character or had originated from the Government or the State. According to petitioner BSP, its operating funds used for carrying out its purposes and programs, are derived principally from membership dues paid by the Boy Scouts themselves and from property rentals. In this respect, the BSP appears similar to private non-stock, non-profit corporations, although its charter expressly envisages donations and contributions to it from the Government and any of its agencies and instrumentalities. 19 We note only that BSP funds have not apparently heretofore been regarded as public funds by the Commission on Audit, considering that such funds have not been audited by the Commission.

While the BSP may be seen to be a mixed type of entity, combining aspects of both public and private entities, we believe that considering the character of its purposes and its functions, the statutory designation of the BSP as "a public corporation" and the substantial participation of the Government in the selection of members of the National Executive Board of the BSP, the BSP, as presently constituted under its charter, is a government-controlled corporation within the meaning of Article IX (B) (2) (1) of the Constitution.

We are fortified in this conclusion when we note that the Administrative Code of 1987 designates the BSP as one of the attached agencies of the Department of Education, Culture and Sports ("DECS"). 20 An "agency of the Government" is defined as referring to any of the various units of the Government including a department, bureau, office, instrumentality, government-owned or-controlled corporation, or local government or distinct unit therein. 21

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"Government instrumentality" is in turn defined in the 1987 Administrative Code in the following manner:chanrobles virtual lawlibrary

"Instrumentality — refers to any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned or controlled corporations." 22 (Emphasis supplied)

The same Code describes a "chartered institution" in the following terms:jgc:chanrobles.com.ph

"Chartered institution — refers to any agency organized or operating under a special charter, and vested by law with functions relating to specific constitutional policies or objectives. This term includes the state universities and colleges, and the monetary authority of the State." 23 (Emphasis supplied)

We believe that the BSP is appropriately regarded as "a government instrumentality" ‘ under the 1987 Administrative Code.

It thus appears that the BSP may be regarded as both a "government controlled corporation with an original charter" and as an "instrumentality’ of the Government within the meaning of Article IX (B) (2) (1) of the Constitution. It follows that the employees of petitioner BSP are embraced within the Civil Service and are accordingly governed by the Civil Service Law and Regulations.

It remains only to note that even before the effectivity of the 1987 Constitution employees of the BSP already fell within the scope of the Civil Service. In National Housing Corporation v. Juco, 24 decided in 1985, the Court, speaking through Mr. Justice Gutierrez, held:jgc:chanrobles.com.ph

"There should no longer be any question at this time that employees of government-owned or controlled corporations are governed by the civil service law and civil service rules and regulations.

Section 1, Article XII-B of the [1973] Constitution specifically provides:chanrob1es virtual 1aw library

‘The Civil Service embraces every branch, agency, subdivision and instrumentality of the Government, including every government-owned or controlled corporation. . . .’

The 1935 Constitution had a similar provision in its Section 1, Article XII which stated:chanrob1es virtual 1aw library

‘A Civil Service embracing all branches and subdivisions of the Government shall be provided by law.’

The inclusion of ‘government-owned or controlled corporations’ within the embrace of the civil service shows a deliberate effort of the framers to plug an earlier loophole which allowed government-owned or controlled corporations to avoid the full consequences of the all encompassing coverage of the civil service system. The same explicit intent is shown by the addition of ‘agency’ and ‘instrumentality’ to branches and subdivisions of the Government. All offices and firms of the government are covered. The amendments introduced in 1973 are not idle exercises or meaningless gestures. They carry the strong message that civil service

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coverage is broad and all-embracing insofar as employment in the government in any of its governmental or corporate arms is concerned."25cralaw:red

The complaint in NLRC Case No. 1637-84 having been filed on 13 November 1984, when the 1973 Constitution was still in force, our ruling in Juco applies in the case at bar. 26

In view of the foregoing, we hold that both the Labor Arbiter and public respondent NLRC had no jurisdiction over the complaint filed by private respondents in NLRC Case No. 1637-84; neither labor agency had before it any matter which could validly have been passed upon by it in the exercise of original or appellate jurisdiction. The appealed Decision and Resolution in this case, having been rendered without jurisdiction, vested no rights and imposed no liabilities upon any of the parties here involved. That neither party had expressly raised the issue of jurisdiction in the pleadings poses no obstacle to this ruling of the Court, which may motu proprio take cognizance of the issue of existence or absence of jurisdiction and pass upon the same. 27

ACCORDINGLY, the Decision of the Labor Arbiter dated 31 July 1985, and the Decision dated 27 February 1987 and Resolution dated 16 October 1987, issued by public respondent NLRC, in NLRC Case No. 1637-84, are hereby SET ASIDE. All other orders and resolutions rendered in this case by the Labor Arbiter and the NLRC are likewise SET ASIDE. No pronouncement as to costs.

Fernan, C.J., Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.

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G.R. No. L-4043 May 26, 1952

CENON S. CERVANTES, petitioner, vs.THE AUDITOR GENERAL, respondent.

Cenon Cervantes in his own behalf.Office of the Solicitor General Pompeyo Diaz and Solicitor Felix V. Makasiar for respondent.

REYES, J.:

This is a petition to review a decision of the Auditor General denying petitioner's claim for quarters allowance as manager of the National Abaca and Other Fibers Corporation, otherwise known as the NAFCO.

It appears that petitioner was in 1949 the manager of the NAFCO with a salary of P15,000 a year. By a resolution of the Board of Directors of this corporation approved on January 19 of that year, he was granted quarters allowance of not exceeding P400 a month effective the first of that month. Submitted the Control Committee of the Government Enterprises Council for approval, the said resolution was on August 3, 1949, disapproved by the said Committee on strenght of the recommendation of the NAFCO auditor, concurred in by the Auditor General, (1) that quarters allowance constituted additional compensation prohibited by the charter of the NAFCO, which fixes the salary of the general manager thereof at the sum not to exceed P15,000 a year, and (2) that the precarious financial condition of the corporation did not warrant the granting of such allowance.

On March 16, 1949, the petitioner asked the Control Committee to reconsider its action and approve his claim for allowance for January to June 15, 1949, amounting to P1,650. The claim was again referred by the Control Committee to the auditor General for comment. The latter, in turn referred it to the NAFCO auditor, who reaffirmed his previous recommendation and emphasized that the fact that the corporation's finances had not improved. In view of this, the auditor General also reiterated his previous opinion against the granting of the petitioner's claim and so informed both the Control Committee and the petitioner. But as the petitioner insisted on his claim the Auditor General Informed him on June 19, 1950, of his refusal to modify his decision. Hence this petition for review.

The NAFCO was created by the Commonwealth Act No. 332, approved on June 18, 1939, with a capital stock of P20,000,000, 51 per cent of which was to be able to be subscribed by the National Government and the remainder to be offered to provincial, municipal, and the city governments and to the general public. The management the corporation was vested in a board of directors of not more than 5 members appointed by the president of the Philippines with the consent of the Commission on Appointments. But the corporation was made subject to the provisions of the corporation law in so far as they were compatible with the provisions of its charter and the purposes of which it was created and was to enjoy the general powers mentioned in the corporation law in addition to those granted in its charter. The members of the board were to receive each a per diem of not to exceed P30 for each day of meeting actually attended, except the chairman of the board, who was to be at the same time the general manager of the corporation and to receive a salary not to exceed P15,000 per annum.

On October 4, 1946, Republic Act No. 51 was approved authorizing the President of the Philippines, among other things, to effect such reforms and changes in government owned and controlled corporations for the purpose of promoting simplicity, economy and efficiency in their operation Pursuant to this authority, the President on October 4, 1947, promulgated Executive Order No. 93 creating the Government Enterprises Council to be composed of the President of the Philippines as chairman, the Secretary of Commerce and Industry as vice-

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chairman, the chairman of the board of directors and managing heads of all such corporations as ex-officio members, and such additional members as the President might appoint from time to time with the consent of the Commission on Appointments. The council was to advise the President in the excercise of his power of supervision and control over these corporations and to formulate and adopt such policy and measures as might be necessary to coordinate their functions and activities. The Executive Order also provided that the council was to have a Control Committee composed of the Secretary of Commerce and Industry as chairman, a member to be designated by the President from among the members of the council as vice-chairman and the secretary as ex-officio member, and with the power, among others —

(1) To supervise, for and under the direction of the President, all the corporations owned or controlled by the Government for the purpose of insuring efficiency and economy in their operations;

(2) To pass upon the program of activities and the yearly budget of expenditures approved by the respective Boards of Directors of the said corporations; and

(3) To carry out the policies and measures formulated by the Government Enterprises Council with the approval of the President. (Sec. 3, Executive Order No. 93.)

With its controlling stock owned by the Government and the power of appointing its directors vested in the President of the Philippines, there can be no question that the NAFCO is Government controlled corporation subject to the provisions of Republic Act No. 51 and the executive order (No. 93) promulgated in accordance therewith. Consequently, it was also subject to the powers of the Control Committee created in said executive order, among which is the power of supervision for the purpose of insuring efficiency and economy in the operations of the corporation and also the power to pass upon the program of activities and the yearly budget of expenditures approved by the board of directors. It can hardly be questioned that under these powers the Control Committee had the right to pass upon, and consequently to approve or disapprove, the resolution of the NAFCO board of directors granting quarters allowance to the petitioners as such allowance necessarily constitute an item of expenditure in the corporation's budget. That the Control Committee had good grounds for disapproving the resolution is also clear, for, as pointed out by the Auditor General and the NAFCO auditor, the granting of the allowance amounted to an illegal increase of petitioner's salary beyond the limit fixed in the corporate charter and was furthermore not justified by the precarious financial condition of the corporation.

It is argued, however, that Executive Order No. 93 is null and void, not only because it is based on a law that is unconstitutional as an illegal delegation of legislature power to executive, but also because it was promulgated beyond the period of one year limited in said law.

The second ground ignores the rule that in the computation of the time for doing an act, the first day is excluded and the last day included (Section 13 Rev. Ad. Code.) As the act was approved on October 4, 1946, and the President was given a period of one year within which to promulgate his executive order and that the order was in fact promulgated on October 4, 1947, it is obvious that under the above rule the said executive order was promulgated within the period given.

As to the first ground, the rule is that so long as the Legislature "lays down a policy and a standard is established by the statute" there is no undue delegation. (11 Am. Jur. 957). Republic Act No. 51 in authorizing the President of the Philippines, among others, to make reforms and changes in government-controlled corporations, lays down a standard and policy that the purpose shall be to meet the exigencies attendant upon the establishment of the free and independent government of the Philippines and to promote simplicity, economy and efficiency in their operations. The standard was set and the policy fixed. The President had to

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carry the mandate. This he did by promulgating the executive order in question which, tested by the rule above cited, does not constitute an undue delegation of legislative power.

It is also contended that the quarters allowance is not compensation and so the granting of it to the petitioner by the NAFCO board of directors does not contravene the provisions of the NAFCO charter that the salary of the chairman of said board who is also to be general manager shall not exceed P15,000 per anum. But regardless of whether quarters allowance should be considered as compensation or not, the resolution of the board of the directors authorizing payment thereof to the petitioner cannot be given effect since it was disapproved by the Control Committee in the exercise of powers granted to it by Executive Order No. 93. And in any event, petitioner's contention that quarters allowance is not compensation, a proposition on which American authorities appear divided, cannot be insisted on behalf of officers and employees working for the Government of the Philippines and its Instrumentalities, including, naturally, government-controlled corporations. This is so because Executive Order No. 332 of 1941, which prohibits the payment of additional compensation to those working for the Government and its Instrumentalities, including government-controlled corporations, was in 1945 amended by Executive Order No. 77 by expressly exempting from the prohibition the payment of quarters allowance "in favor of local government officials and employees entitled to this under existing law." The amendment is a clear indication that quarters allowance was meant to be included in the term "additional compensation", for otherwise the amendment would not have expressly excepted it from the prohibition. This being so, we hold that, for the purpose of the executive order just mentioned, quarters allowance is considered additional compensation and, therefore, prohibited.

In view of the foregoing, the petition for review is dismissed, with costs.

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G.R. No. 79182 September 11, 1991

PNOC-ENERGY DEVELOPMENT CORPORATION, petitioner, vs.NATIONAL LABOR RELATIONS COMMISSION (Third Division) and DANILO MERCADO, respondents.

Bacorro & Associates for petitioner.

Alberto L. Dalmacion for private respondent.

PARAS, J.:p

This is a petition for certiorari to set aside the Resolution * dated July 3, 1987 of respondent National Labor Relations Commission (NLRC for brevity) which affirmed the decision dated April 30, 1986 of Labor Arbiter Vito J. Minoria of the NLRC, Regional Arbitration Branch No. VII at Cebu City in Case No. RAB-VII-0556-85 entitled "Danilo Mercado, Complainant, vs. Philippine National Oil Company-Energy Development Corporation, Respondent", ordering the reinstatement of complainant Danilo Mercado and the award of various monetary claims.

The factual background of this case is as follows:

Private respondent Danilo Mercado was first employed by herein petitioner Philippine National Oil Company-Energy Development Corporation (PNOC-EDC for brevity) on August 13, 1979. He held various positions ranging from clerk, general clerk to shipping clerk during his employment at its Cebu office until his transfer to its establishment at Palimpinon, Dumaguete, Oriental Negros on September 5, 1984. On June 30, 1985, private respondent Mercado was dismissed. His last salary was P1,585.00 a month basic pay plus P800.00 living allowance (Labor Arbiter's Decision, Annex "E" of Petition, Rollo, p. 52).

The grounds for the dismissal of Mercado are allegedly serious acts of dishonesty committed as follows:

1. On ApriI 12, 1985, Danilo Mercado was ordered to purchase 1,400 pieces of nipa shingles from Mrs. Leonardo Nodado of Banilad, Dumaguete City, for the total purchase price of Pl,680.00. Against company policy, regulations and specific orders, Danilo Mercado withdrew the nipa shingles from the supplier but paid the amount of P1,000.00 only. Danilo Mercado appropriated the balance of P680.00 for his personal use;

2. In the same transaction stated above, the supplier agreed to give the company a discount of P70.00 which Danilo Mercado did not report to the company;

3. On March 28, 1985, Danilo Mercado was instructed to contract the services of Fred R. Melon of Dumaguete City, for the fabrication of rubber stamps, for the total amount of P28.66. Danilo Mercado paid the amount of P20.00 to Fred R. Melon and appropriated for his personal use the balance of P8.66.

In addition, private respondent, Danilo Mercado violated company rules and regulations in the following instances:

1. On June 5, 1985, Danilo Mercado was absent from work without leave, without proper turn-over of his work, causing disruption and delay of company work activities;

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2. On June 15, 1985, Danilo Mercado went on vacation leave without prior leave, against company policy, rules and regulations. (Petitioner's Memorandum, Rollo, p. 195).

On September 23, 1985, private respondent Mercado filed a complaint for illegal dismissal, retirement benefits, separation pay, unpaid wages, etc. against petitioner PNOC-EDC before the NLRC Regional Arbitration Branch No. VII docketed as Case No. RAB-VII-0556-85.

After private respondent Mercado filed his position paper on December 16, 1985 (Annex "B" of the Petition, Rollo, pp. 28-40), petitioner PNOC-EDC filed its Position Paper/Motion to Dismiss on January 15, 1986, praying for the dismissal of the case on the ground that the Labor Arbiter and/or the NLRC had no jurisdiction over the case (Annex "C" of the Petition, Rollo, pp. 41-45), which was assailed by private respondent Mercado in his Opposition to the Position Paper/Motion to Dismiss dated March 12, 1986 (Annex "D" of the Petition, Rollo, pp. 46-50).

The Labor Arbiter ruled in favor of private respondent Mercado. The dispositive onion of said decision reads as follows:

WHEREFORE, in view of the foregoing, respondents are hereby ordered:

1) To reinstate complainant to his former position with full back wages from the date of his dismissal up to the time of his actual reinstatement without loss of seniority rights and other privileges;

2) To pay complainant the amount of P10,000.00 representing his personal share of his savings account with the respondents;

3) To pay complainants the amount of P30,000.00 moral damages; P20,000.00 exemplary damages and P5,000.00 attorney's fees;

4) To pay complainant the amount of P792.50 as his proportionate 13th month pay for 1985.

Respondents are hereby further ordered to deposit the aforementioned amounts with this Office within ten days from receipt of a copy of this decision for further disposition.

SO ORDERED. (Labor Arbiter's Decision, Rollo, p. 56)

The appeal to the NLRC was dismissed for lack of merit on July 3, 1987 and the assailed decision was affirmed.

Hence, this petition.

The issues raised by petitioner in this instant petition are:

1. Whether or not matters of employment affecting the PNOC-EDC, a government-owned and controlled corporation, are within the jurisdiction of the Labor Arbiter and the NLRC.

2. Assuming the affirmative, whether or not the Labor Arbiter and the NLRC are justified in ordering the reinstatement of private respondent, payment of his savings, and proportionate 13th month pay and payment of damages as well as attorney's fee.

Petitioner PNOC-EDC alleges that it is a corporation wholly owned and controlled by the government; that the Energy Development Corporation is a subsidiary of the Philippine National Oil Company which is a government entity created under Presidential Decree No. 334,

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as amended; that being a government-owned and controlled corporation, it is governed by the Civil Service Law as provided for in Section 1, Article XII-B of the 1973 Constitution, Section 56 of Presidential Decree No. 807 (Civil Service Decree) and Article 277 of Presidential Decree No. 442, as amended (Labor Code).

The 1973 Constitution provides:

The Civil Service embraces every branch, agency, subdivision and instrumentality of the government including government-owned or controlled corporations.

Petitioner PNOC-EDC argued that since Labor Arbiter Minoria rendered the decision at the time when the 1973 Constitution was in force, said decision is null and void because under the 1973 Constitution, government-owned and controlled corporations were governed by the Civil Service Law. Even assuming that PNOC-EDC has no original or special charter and Section 2(i), Article IX-B of the 1987 Constitution provides that:

The Civil Service embraces all branches, subdivision, instrumentalities and agencies of the Government, including government-owned or controlled corporations with original charters.

such circumstances cannot give validity to the decision of the Labor Arbiter (Ibid., pp. 192-193).

This issue has already been laid to rest in the case of PNOC-EDC vs. Leogardo, 175 SCRA 26 (July 5, 1989), involving the same petitioner and the same issue, where this Court ruled that the doctrine that employees of government-owned and/or con controlled corporations, whether created by special law or formed as subsidiaries under the General Corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the present Constitution. "Thus, under the present state of the law, the test in determining whether a government-owned or controlled corporation is subject to the Civil Service Law are the manner of its creation, such that government corporations created by special charter are subject to its provisions while those incorporated under the General Corporation Law are not within its coverage."

Specifically, the PNOC-EDC having been incorporated under the General Corporation Law was held to be a government owned or controlled corporation whose employees are subject to the provisions of the Labor Code (Ibid.).

The fact that the case arose at the time when the 1973 Constitution was still in effect, does not deprive the NLRC of jurisdiction on the premise that it is the 1987 Constitution that governs because it is the Constitution in place at the time of the decision (NASECO v. NLRC, G.R. No. 69870, 168 SCRA 122 [1988]).

In the case at bar, the decision of the NLRC was promulgated on July 3, 1987. Accordingly, this case falls squarely under the rulings of the aforementioned cases.

As regards the second issue, the record shows that PNOC-EDC's accusations of dishonesty and violations of company rules are not supported by evidence. Nonetheless, while acknowledging the rule that administrative bodies are not governed by the strict rules of evidence, petitioner PNOC-EDC alleges that the labor arbiter's propensity to decide the case through the position papers submitted by the parties is violative of due process thereby rendering the decision null and void (Ibid., p. 196).

On the other hand, private respondent contends that as can be seen from petitioner's Motion for Reconsideration and/or Appeal dated July 28, 1986 (Annex "F" of the Petition, Rollo, pp. 57- 64), the latter never questioned the findings of facts of the Labor Arbiter but simply limited

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its objection to the lack of legal basis in view of its stand that the NLRC had no jurisdiction over the case (Private Respondent's Memorandum, Rollo, p. 104).

Petitioner PNOC-EDC filed its Position Paper/Motion to Dismiss dated January 15, 1986 (Annex "C" of the Petition Rollo, pp. 41-45) before the Regional Arbitration Branch No. VII of Cebu City and its Motion for Reconsideration and/or Appeal dated July 28, 1986 (Annex "F" of the Petition, Rollo, pp. 57-64) before the NLRC of Cebu City. Indisputably, the requirements of due process are satisfied when the parties are given an opportunity to submit position papers. What the fundamental law abhors is not the absence of previous notice but rather the absolute lack of opportunity to ventilate a party's side. There is no denial of due process where the party submitted its position paper and flied its motion for reconsideration (Odin Security Agency vs. De la Serna, 182 SCRA 472 [February 21, 1990]). Petitioner's subsequent Motion for Reconsideration and/or Appeal has the effect of curing whatever irregularity might have been committed in the proceedings below (T.H. Valderama and Sons, Inc. vs. Drilon, 181 SCRA 308 [January 22, 1990]).

Furthermore, it has been consistently held that findings of administrative agencies which have acquired expertise because their jurisdiction is confined to specific matters are accorded not only respect but even finality (Asian Construction and Development Corporation vs. NLRC, 187 SCRA 784 [July 27, 1990]; Lopez Sugar Corporation vs. Federation of Free Workers, 189 SCRA 179 [August 30, 1990]). Judicial review by this Court does not go so far as to evaluate the sufficiency of the evidence but is limited to issues of jurisdiction or grave abuse of discretion (Filipinas Manufacturers Bank vs. NLRC, 182 SCRA 848 [February 28, 1990]). A careful study of the records shows no substantive reason to depart from these established principles.

While it is true that loss of trust or breach of confidence is a valid ground for dismissing an employee, such loss or breach of trust must have some basis (Gubac v. NLRC, 187 SCRA 412 [July 13, 1990]). As found by the Labor Arbiter, the accusations of petitioner PNOC-EDC against private respondent Mercado have no basis. Mrs. Leonardo Nodado, from whom the nipa shingles were purchased, sufficiently explained in her affidavit (Rollo, p. 36) that the total purchase price of P1,680.00 was paid by respondent Mercado as agreed upon. The alleged discount given by Mrs. Nodado is not supported by evidence as well as the alleged appropriation of P8.66 from the cost of fabrication of rubber stamps. The Labor Arbiter, likewise, found no evidence to support the alleged violation of company rules. On the contrary, he found respondent Mercado's explanation in his affidavit (Rollo, pp. 38-40) as to the alleged violations to be satisfactory. Moreover, these findings were never contradicted by petitioner petitioner PNOC-EDC.

PREMISES CONSIDERED, the petition is DENIED and the resolution of respondent NLRC dated July 3, 1987 is AFFIRMED with the modification that the moral damages are reduced to Ten Thousand (P10,000.00) Pesos, and the exemplary damages reduced to Five Thousand (P5,000.00) Pesos.

SO ORDERED.

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[G.R. No. 120138. September 5, 1997]

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L. JOCSON, JR., MELVIN S. JURISPRUDENCIA, AUGUSTUS CESAR AZURA and EDGARDO D. PABALAN, petitioners, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, TORMIL REALTY & DEVELOPMENT CORPORATION, ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T. MORALES, and DANTE D. MORALES, respondents.

D E C I S I O N

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioners seek to annul the decision of the Court of Appeals in CA-G.R. SP. No. 31748 dated 23 May 1994 and its subsequent resolution dated 10 May 1995 denying petitioners’ motion for reconsideration.

The present case involves two separate but interrelated conflicts. The facts leading to the first controversy are as follows:

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of Tormil Realty & Development Corporation while private respondents who are the children of Judge Torres’ deceased brother Antonio A. Torres, constituted the minority stockholders. In particular, their respective shareholdings and positions in the corporation were as follows:

Name of Stockholder Number of Percentage Position(s) Shares

Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./ChairMilagros P. Torres 33,430 19.10 Dir./TreasurerJosefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.Antonio P. Torres, Jr. 8,290 4.73 DirectorMa. Jacinta P. Torres 8,290 4.73 Director

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Ma. Luisa T. Morales 7,790 4.45 Director

Dante D. Morales 500 .28 Director [1]

In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an “estate planning” scheme under which he assigned to Tormil Realty & Development Corporation (Tormil for brevity) various real properties he owned and his shares of stock in other corporations in exchange for 225,972 Tormil Realty shares. Hence, on various dates in July and August of 1984, ten (10) deeds of assignment were executed by the late Judge Torres:

ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES TO BE ISSUED

1. July 13, 1984 TCT 81834 Quezon City 13,252 TCT 144240 Quezon City 2. July 13, 1984 TCT 77008 Manila TCT 65689 Manila 78,493 TCT 109200 Manila3. July 13, 1984 TCT 374079 Makati 8,3074. July 24, 1984 TCT 41527 Pasay

TCT 41528 Pasay 9,855TCT 41529 Pasay

5. Aug. 06, 1984 El Hogar Filipino Stocks 2,0006, Aug. 06, 1984 Manila Jockey Club Stocks 48,7377. Aug. 07, 1984 San Miguel Corp. Stocks 50,2838. Aug. 07, 1984 China Banking Corp. Stocks 6,3009. Aug. 20, 1984 Ayala Corp. Stocks 7,46810. Aug. 29, 1984 Ayala Fund Stocks 1,322

225,972 [2]

Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil Realty and the revenues generated by the said properties were correspondingly entered in the corporation’s books of account and financial records.

Likewise, all the assigned parcels of land were duly registered with the respective Register of Deeds in the name of Tormil Realty, except for the ones located in Makati and Pasay City.

At the time of the assignments and exchange, however, only 225,000 Tormil Realty shares remained unsubscribed, all of which were duly issued to

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http://sc.judiciary.gov.ph/jurisprudence/1997/sep1997/120138.htm#_edn2


and received by Judge Torres (as evidenced by stock certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25).[3]

Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal of private respondents to approve the needed increase in the corporation’s authorized capital stock (to cover the shortage of 972 shares due to Judge Torres under the “estate planning” scheme), on 11 September 1986, Judge Torres revoked the two (2) deeds of assignment covering the properties in Makati and Pasay City.[4]

Noting the disappearance of the Makati and Pasay City properties from the corporation’s inventory of assets and financial records private respondents, on 31 March 1987, were constrained to file a complaint with the Securities and Exchange Commission (SEC) docketed as SEC Case No. 3153 to compel Judge Torres to deliver to Tormil Corporation the two (2) deeds of assignment covering the aforementioned Makati and Pasay City properties which he had unilaterally revoked and to cause the registration of the corresponding titles in the name of Tormil. Private respondents alleged that following the disappearance of the properties from the corporation’s inventory of assets, they found that on October 24, 1986, Judge Torres, together with Edgardo Pabalan and Graciano Tobias, then General Manager and legal counsel, respectively, of Tormil, formed and organized a corporation named “Torres-Pabalan Realty and Development Corporation” and that as part of Judge Torres’ contribution to the new corporation, he executed in its favor a Deed of Assignment conveying the same Makati and Pasay City properties he had earlier transferred to Tormil.

The second controversy--involving the same parties--concerned the election of the 1987 corporate board of directors.

The 1987 annual stockholders meeting and election of directors of Tormil corporation was scheduled on 25 March 1987 in compliance with the provisions of its by-laws.

Pursuant thereto, Judge Torres assigned from his own shares, one (1) share each to petitioners Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares were in the nature of “qualifying shares,” for the sole purpose of meeting the legal requirement to be able to elect them (Tobias and company) to the Board of Directors as Torres’ nominees.

The assigned shares were covered by corresponding Tormil Stock Certificates Nos. 030, 029, 028, 027, 026 and at the back of each certificate the following inscription is found:

The present certificate and/or the one share it represents, conformably to the purpose and intention of the Deed of Assignment dated March 6, 1987, is not held by me under any claim of ownership and I acknowledge that I hold the same merely as trustee of Judge Manuel A. Torres, Jr. and for the sole purpose of qualifying me as Director;

(Signature of Assignee) [5]

The reason behind the aforestated action was to remedy the “inequitable lopsided set-up obtaining in the corporation, where, notwithstanding his controlling interest in the corporation, the late Judge held only a single seat in the nine-member Board of Directors and was, therefore, at the mercy of the

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minority, a combination of any two (2) of whom would suffice to overrule the majority stockholder in the Board’s decision making functions.” [6]

On 25 March 1987, the annual stockholders meeting was held as scheduled. What transpired therein was ably narrated by Attys. Benito Cataran and Bayani De los Reyes, the official representatives dispatched by the SEC to observe the proceedings (upon request of the late Judge Torres) in their report dated 27 March 1987:

xxx.

The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential bungalow in Urdaneta Village, Makati, Metro Manila. Upon arrival, Josefina Torres introduced us to the stockholders namely: Milagros Torres, Antonio Torres, Jr., Ma. Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta Torres. Antonio Torres, Jr. questioned our authority and personality to appear in the meeting claiming subject corporation is a family and private firm. We explained that our appearance there was merely in response to the request of Manuel Torres, Jr. and that SEC has jurisdiction over all registered corporations. Manuel Torres, Jr., a septuagenarian, argued that as holder of the major and controlling shares, he approved of our attendance in the meeting.

At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano Tobias, Atty. Rodolfo Jocson, Jr., Atty. Melvin Jurisprudencia, and Atty. Augustus Cesar Azura arrived. Atty. Azura told the body that they came as counsels of Manuel Torres, Jr. and as stockholders having assigned qualifying shares by Manuel Torres, Jr.

The stockholders’ meeting started at 2:45 p.m. with Mr. Pabalan presiding after verbally authorized by Manuel Torres, Jr., the President and Chairman of the Board. The secretary when asked about the quorum, said that there was more than a quorum. Mr. Pabalan distributed copies of the president’s report and the financial statements. Antonio Torres, Jr. requested time to study the said reports and brought out the question of auditing the finances of the corporation which he claimed was approved previously by the board. Heated arguments ensued which also touched on family matters. Antonio Torres, Jr. moved for the suspension of the meeting but Manuel Torres, Jr. voted for the continuation of the proceedings.

Mr. Pabalan suggested that the opinion of the SEC representatives be asked on the propriety of suspending the meeting but Antonio Torres, Jr. objected reasoning out that we were just observers.

When the Chairman called for the election of directors, the Secretary refused to write down the names of nominees prompting Atty. Azura to initiate the appointment of Atty. Jocson, Jr. as Acting Secretary.

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Antonio Torres, Jr. nominated the present members of the Board. At this juncture, Milagros Torres cried out and told the group of Manuel Torres, Jr. to leave the house.

Manuel Torres, Jr., together with his lawyers-stockholders went to the residence of Ma. Jacinta Torres in San Miguel Village, Makati, Metro Manila. The undersigned joined them since the group with Manuel Torres, Jr. the one who requested for S.E.C. observers, represented the majority of the outstanding capital stock and still constituted a quorum.

At the resumption of the meeting, the following were nominated and elected as directors for the year 1987-1988:

1. Manuel Torres, Jr.2. Ma. Jacinta Torres3. Edgardo Pabalan4. Graciano Tobias5. Rodolfo Jocson, Jr.6. Melvin Jurisprudencia7. Augustus Cesar Azura8. Josefina Torres

9. Dante Morales

After the election, it was resolved that after the meeting, the new board of directors shall convene for the election of officers.

xxx. [7]

Consequently, on 10 April 1987, private respondents instituted a complaint with the SEC (SEC Case No. 3161) praying in the main, that the election of petitioners to the Board of Directors be annulled.

Private respondents alleged that the petitioners-nominees were not legitimate stockholders of Tormil because the assignment of shares to them violated the minority stockholders’ right of pre-emption as provided in the corporation’s articles and by-laws.

Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint hearing and adjudication.

On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in favor of private respondents. The dispositive portion thereof states, thus:

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

1. Ordering and directing the respondents, particularly respondent Manuel A. Torres, Jr., to turn over and deliver to TORMIL through its Corporate Secretary, Ma. Cristina T. Carlos: (a) the originals of the Deeds of Assignment dated July 13 and 24, 1984 together with the owner’s duplicates of Transfer Certificates of Title Nos. 374079 of the Registry of Deeds for Makati, and 41527, 41528 and 41529 of the Registry of Deeds for Pasay City

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and/or to cause the formal registration and transfer of title in and over such real properties in favor of TORMIL with the proper government agency; (b) all corporate books of account, records and papers as may be necessary for the conduct of a comprehensive audit examination, and to allow the examination and inspection of such accounting books, papers and records by any or all of the corporate directors, officers and stockholders and/or their duly authorized representatives or auditors;

2. Declaring as permanent and final the writ of preliminary injunction issued by the Hearing Panel on February 13, 1989;

3. Declaring as null and void the election and appointment of respondents to the Board of Directors and executive positions of TORMIL held on March 25, 1987, and all their acts and resolutions made for and in behalf of TORMIL by authority of and pursuant to such invalid appointment & election held on March 25, 1987;

4. Ordering the respondents jointly and severally, to pay the complainants the sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) and by way of attorney’s fees. [8]

Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339). Thereafter, on 3 April 1991, during the pendency of said appeal, petitioner Manuel A. Torres, Jr. died. However, notice thereof was brought to the attention of the SEC not by petitioners’ counsel but by private respondents in a Manifestation dated 24 April 1991.[9]

On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no administrator or legal representative of the late Judge Torres’ estate has yet been appointed by the Regional Trial Court of Makati where Sp. Proc. No. M-1768 (“In Matter of the Issuance of the Last Will and Testament of Manuel A. Torres, Jr.”) was pending. Two similar motions for suspension were filed by petitioners on 28 June 1993 and 9 July 1993.

On 19 July 1993, the SEC en banc issued an Order denying petitioners’ aforecited motions on the following ground:

“Before the filing of these motions, the Commission en banc had already completed all proceedings and had likewise ruled on the merits of the appealed cases. Viewed in this light, we thus feel that there is nothing left to be done except to deny these motions to suspend proceedings.” [10]

On the same date, the SEC en banc rendered a decision, the dispositive portion of which reads, thus:

WHEREFORE, premises considered, the appealed decision of the hearing panel is hereby affirmed and all motions pending before us incident to this appealed case are necessarily DISMISSED.

SO ORDERED. [11]

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Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court of Appeals by way of a petition for review (docketed as CA-G.R. SP No. 31748).

On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of which states:

“WHEREFORE, the petition for review is DISMISSED and the appealed decision is accordingly affirmed.

SO ORDERED. [12]

From the said decision, petitioners filed a motion for reconsideration which was denied in a resolution issued by the Court of Appeals dated 10 May 1995.[13]

Insisting on their cause, petitioners filed the present petition for review alleging that the Court of Appeals committed the following errors in its decision:

(1)

WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A FULL LENGTH DECISION, WITHOUT THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. - AC NO. 339 BEING PROPERLY BROUGHT BEFORE IT FOR REVIEW AND RE-EXAMINATION, AN OMISSION RESULTING IN A CLEAR TRANSGRESSION OR CURTAILMENT OF THE RIGHTS OF THE HEREIN PETITIONERS TO PROCEDURAL DUE PROCESS;

(2)

WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE RESPONDENT S.E.C., WHICH IS VOID FOR HAVING BEEN RENDERED WITHOUT THE PROPER SUBSTITUTION OF THE DECEASED PRINCIPAL PARTY-RESPONDENT IN S.E.C.-AC NO. 339 AND CONSEQUENTLY, FOR WANT OF JURISDICTION OVER THE SAID DECEASED’S TESTATE ESTATE, AND MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NON-SUBSTITUTION BY ITS APPLICATION OF THE CIVIL LAW CONCEPT OF NEGOTIORUM GESTIO;

(3)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. -AC NO. 339 NOT HAVING ACTUALLY BEEN RE-EXAMINED, THAT S.E.C. CASE NO. 3153 INVOLVED A SITUATION WHERE PERFORMANCE WAS IMPOSSIBLE (AS CONTEMPLATED UNDER ARTICLE 1191 OF THE CIVIL CODE) AND WAS NOT A MERE CASE OF LESION OR INADEQUACY OF CAUSE (UNDER ARTICLE 1355 OF THE CIVIL CODE) AS SO ERRONEOUSLY CHARACTERIZED BY THE RESPONDENT S.E.C.; and,

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(4)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C.-AC NO. 339 NOT HAVING ACTUALLY BEEN EXAMINED, THAT THE RECORDING BY THE LATE JUDGE MANUEL A. TORRES, JR. OF THE QUESTIONED ASSIGNMENT OF QUALIFYING SHARES TO HIS NOMINEES, WAS AFFIRMED IN THE STOCK AND TRANSFER BOOK BY AN ACTING CORPORATE SECRETARY AND MOREOVER, THAT ACTUAL NOTICE OF SAID ASSIGNMENT WAS TIMELY MADE TO THE OTHER STOCKHOLDERS. [14]

We shall resolve the issues in seriatim.

I

Petitioners insist that the failure to transmit the original records to the Court of Appeals deprived them of procedural due process. Without the evidence and the original records of the proceedings before the SEC, the Court of Appeals, petitioners adamantly state, could not have possibly made a proper appreciation and correct determination of the issues, particularly the factual issues they had raised on appeal. Petitioners also assert that since the Court of Appeals allegedly gave due course to their petition, the original records should have been forwarded to said court.

Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27 February 1991) which provides that:

8. WHEN PETITION GIVEN DUE COURSE.-The Court of Appeals shall give due course to the petition only when it shows prima facie that the court, commission, board, office or agency concerned has committed errors of fact or law that would warrant reversal or modification of the order, ruling or decision sought to be reviewed. The findings of fact of the court commission, board, office or agency concerned when supported by substantial evidence shall be final.

xxx.

11. TRANSMITTAL OF RECORD.-Within fifteen (15) days from notice that the petition has been given due course, the court, commission, board, office or agency concerned shall transmit to the Court of Appeals the original or a certified copy of the entire record of the proceeding under review. The record to be transmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals may require or permit subsequent correction or addition to the record.

Petitioners contend that the Court of Appeals had given due course to their petition as allegedly indicated by the following acts:

a) it granted the restraining order applied for by the herein petitioners, and after hearing, also the writ of preliminary injunction sought by them; under

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the original SC Circular No. 1-91, a petition for review may be given due course at the onset (paragraph 8) upon a mere prima facie finding of errors of fact or law having been committed, and such prima facie finding is but consistent with the grant of the extra-ordinary writ of preliminary injunction;

b) it required the parties to submit “simultaneous memoranda” in its resolution dated October 15, 1993 (this is in addition to the comment required to be filed by the respondents) and furthermore declared in the same resolution that the petition will be decided “on the merits,” instead of outrightly dismissing the same;

c) it rendered a full length decision, wherein: (aa) it expressly declared the respondent S.E.C. as having erred in denying the pertinent motions to suspend proceedings; (bb) it declared the supposed error as having become a non-issue when the respondent C.A. “proceeded to hear (the) appeal”; (cc) it formulated and applied its own theory ofnegotiorum gestio in justifying the non-substitution of the deceased principal party in S.E C. -AC No. 339 and moreover, its theory of di minimis non curat lex (this, without first determining the true extent of and the correct legal characterization of the so-called “shortage” of Tormil shares; and, (dd) it expressly affirmed the assailed decision of respondent S.E.C .[15]

Petitioners’ contention is unmeritorious.

There is nothing on record to show that the Court of Appeals gave due course to the petition. The fact alone that the Court of Appeals issued a restraining order and a writ of preliminary injunction and required the parties to submit their respective memoranda does not indicate that the petition was given due course. The office of an injunction is merely to preserve the status quo pending the disposition of the case. The court can require the submission of memoranda in support of the respective claims and positions of the parties without necessarily giving due course to the petition. The matter of whether or not to give due course to a petition lies in the discretion of the court.

It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised Administrative Circular No. 1-95 (which took effect on 1 June 1995) wherein the procedure for appeals from quasi-judicial agencies to the Court of Appeals was clarified thus:

10. Due course.-- If upon the filing of the comment or such other pleadings or documents as may be required or allowed by the Court of Appeals or upon the expiration of the period for the filing thereof, and on the bases of the petition or the record the Court of Appeals finds prima facie that the court or agency concerned has committed errors of fact or law that would warrant reversal or modification of the award, judgment, final order or resolution sought to be reviewed, it may give due course to the petition; otherwise, it shall dismiss the same. The findings of fact of the court or agency concerned, when supported by substantial evidence, shall be binding on the Court of Appeals.

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11. Transmittal of record.-- Within fifteen (15) days from notice that the petition has been given due course, the Court of Appeals may require the court or agency concerned to transmit the original or a legible certified true copy of the entire record of the proceeding under review. The record to be transmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals may require or permit subsequent correction of or addition to the record. (Underscoring ours.)

The aforecited circular now formalizes the correct practice and clearly states that in resolving appeals from quasi judicial agencies, it is within the discretion of the Court of Appeals to have the original records of the proceedings under review be transmitted to it. In this connection, petitioners’ claim that the Court of Appeals could not have decided the case on the merits without the records being brought before it is patently lame. Indubitably, the Court of Appeals decided the case on the basis of the uncontroverted facts and admissions contained in the pleadings, that is, the petition, comment, reply, rejoinder, memoranda, etc. filed by the parties.

II

Petitioners contend that the decisions of the SEC and the Court of Appeals are null and void for being rendered without the necessary substitution of parties (for the deceased petitioner Manuel A. Torres, Jr.) as mandated by Sec. 17, Rule 3 of the Revised Rules of Court, which provides as follows:

SEC. 17. Death of party.--After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted. If the legal representative fails to appear within said time, the court may order the opposing party to procure the appointment of a legal representative of the deceased within a time to be specified by the court, and the representative shall immediately appear for and on behalf of the interest of the deceased. The court charges involved in procuring such appointment, if defrayed by the opposing party, may be recovered as costs. The heirs of the deceased may be allowed to be substituted for the deceased, without requiring the appointment of an executor or administrator and the court may appoint guardian ad litem for the minor heirs.

Petitioners insist that the SEC en banc should have granted the motions to suspend they filed based as they were on the ground that the Regional Trial Court of Makati, where the probate of the late Judge Torres’ will was pending, had yet to appoint an administrator or legal representative of his estate.

We are not unaware of the principle underlying the aforequoted provision:

It has been held that when a party dies in an action that survives, and no order is issued by the Court for the appearance of the legal representative or of the heirs of the deceased to be substituted for the deceased, and as a matter of fact no such substitution has ever been effected, the trial held by the court without such legal representative or heirs, and the judgment rendered after such trial, are null and void because the court acquired no jurisdiction over the persons

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of the legal representative or of the heirs upon whom the trial and the judgment are not binding. [16]

As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768 before the Regional Trial Court of Makati for the ante-mortem probate of his holographic will which he had executed on 31 October 1986. Testifying in the said proceedings, Judge Torres confirmed his appointment of petitioner Edgardo D. Pabalan as the sole executor of his will and administrator of his estate. The proceedings, however, were opposed by the same parties, herein private respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma. Cristina T. Carlos, [17] who are nephew and nieces of Judge Torres, being the children of his late brother Antonio A. Torres.

It can readily be observed therefore that the parties involved in the present controversy are virtually the same parties fighting over the representation of the late Judge Torres’ estate. It should be recalled that the purpose behind the rule on substitution of parties is the protection of the right of every party to due process. It is to ensure that the deceased party would continue to be properly represented in the suit through the duly appointed legal representative of his estate. In the present case, this purpose has been substantially fulfilled (despite the lack of formal substitution) in view of the peculiar fact that both proceedings involve practically the same parties. Both parties have been fiercely fighting in the probate proceedings of Judge Torres’ holographic will for appointment as legal representative of his estate. Since both parties claim interests over the estate, the rights of the estate were expected to be fully protected in the proceedings before the SEC en banc and the Court of Appeals. In either case, whoever shall be appointed legal representative of Judge Torres’ estate (petitioner Pabalan or private respondents) would no longer be a stranger to the present case, the said parties having voluntarily submitted to the jurisdiction of the SEC and the Court of Appeals and having thoroughly participated in the proceedings.

The foregoing rationale finds support in the recent case of Vda. de Salazar v. CA, [18] wherein the Court expounded thus:

The need for substitution of heirs is based on the right to due process accruing to every party in any proceeding. The rationale underlying this requirement in case a party dies during the pendency of proceedings of a nature not extinguished by such death, is that xxx the exercise of judicial power to hear and determine a cause implicitly presupposes in the trial court, amongst other essentials, jurisdiction over the persons of the parties. That jurisdiction was inevitably impaired upon the death of the protestee pending the proceedings below such that unless and until a legal representative is for him duly named and within the jurisdiction of the trial court, no adjudication in the cause could have been accorded any validity or binding effect upon any party, in representation of the deceased, without trenching upon the fundamental right to a day in court which is the very essence of the constitutionally enshrined guarantee of due process.

We are not unaware of several cases where we have ruled that a party having died in an action that survives, the trial held by the court without appearance of the deceased’s legal representative or substitution of heirs and the judgment

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rendered after such trial, are null and void because the court acquired no jurisdiction over the persons of the legal representatives or of the heirs upon whom the trial and the judgment would be binding. This general rule notwithstanding, in denying petitioner’s motion for reconsideration, the Court of Appeals correctly ruled that formal substitution of heirs is not necessary when the heirs themselves voluntarily appeared, participated in the case and presented evidence in defense of deceased defendant. Attending the case at bench, after all, are these particular circumstances which negate petitioner’s belated and seemingly ostensible claim of violation of her rights to due process. We should not lose sight of the principle underlying the general rule that formal substitution of heirs must be effectuated for them to be bound by a subsequent judgment. Such had been the general rule established not because the rule on substitution of heirs and that on appointment of a legal representative are jurisdictional requirements per se but because non-compliance therewith results in the undeniable violation of the right to due process of those who, though not duly notified of the proceedings, are substantially affected by the decision rendered therein. xxx.

It is appropriate to mention here that when Judge Torres died on April 3, 1991, the SEC en banc had already fully heard the parties and what remained was the evaluation of the evidence and rendition of the judgment.

Further, petitioners filed their motions to suspend proceedings only after more than two (2) years from the death of Judge Torres. Petitioners’ counsel was even remiss in his duty under Sec. 16, Rule 3 of the Revised Rules of Court.[19] Instead, it was private respondents who informed the SEC of Judge Torres’ death through a manifestation dated 24 April 1991.

For the SEC en banc to have suspended the proceedings to await the appointment of the legal representatives by the estate was impractical and would have caused undue delay in the proceedings and a denial of justice. There is no telling when the probate court will decide the issue, which may still be appealed to the higher courts.

In any case, there has been no final disposition of the properties of the late Judge Torres before the SEC. On the contrary, the decision of the SEC enbanc as affirmed by the Court of Appeals served to protect and preserve his estate. Consequently, the rule that when a party dies, he should be substituted by his legal representative to protect the interest of his estate in observance of due process was not violated in this case in view of its peculiar situation where the estate was fully protected by the presence of the parties who claim interest thereto either as directors, stockholders or heirs.

Finally, we agree with petitioners’ contention that the principle of negotiorum gestio [20] does not apply in the present case. Said principle explicitly covers abandoned or neglected property or business.

III

Petitioners find legal basis for Judge Torres’ act of revoking the assignment of his properties in Makati and Pasay City to Tormil corporation by relying on Art. 1191 of the Civil Code which provides that:

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ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

Petitioners’ contentions cannot be sustained. We see no justifiable reason to disturb the findings of SEC, as affirmed by the Court of Appeals:

We sustain the ruling of respondent SEC in the decision appealed from (Rollo, pp. 45-46) that -

x x x the shortage of 972 shares would not be valid ground for respondent Torres to unilaterally revoke the deeds of assignment he had executed on July 13, 1984 and July 24, 1984 wherein he voluntarily assigned to TORMIL real properties covered by TCT No. 374079 (Makati) and TCT No. 41527, 41528 and 41529 (Pasay) respectively.

A comparison of the number of shares that respondent Torres received from TORMIL by virtue of the “deeds of assignment” and the stock certificates issued by the latter to the former readily shows that TORMIL had substantially performed what was expected of it. In fact, the first two issuances were in satisfaction to the properties being revoked by respondent Torres. Hence, the shortage of 972 shares would never be a valid ground for the revocation of the deeds covering Pasay and Quezon City properties.

In Universal Food Corp. vs. CA, the Supreme Court held:

The general rule is that rescission of a contract will not be permitted for a slight or carnal breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement.

The shortage of 972 shares definitely is not substantial and fundamental breach as would defeat the very object of the parties in entering into contract. Art. 1355 of the Civil Code also provides: “Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influences.” There being no fraud, mistake or undue influence exerted on respondent Torres by TORMIL and the latter having already issued to the former of its 225,000 unissued

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shares, the most logical course of action is to declare as null and void the deed of revocation executed by respondent Torres. (Rollo, pp. 45-46.) [21]

The aforequoted Civil Code provision does not apply in this particular situation for the obvious reason that a specific number of shares of stock (as evidenced by stock certificates) had already been issued to the late Judge Torres in exchange for his Makati and Pasay City properties. The records thus disclose:

DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OFASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE

1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd

TCT 144240 Quezon City)2. July 13, 1984 TCT 77008 Manila) TCT 65689 Manila) 78,493 2nd TCT 102200 Manila)3. July 13, 1984 TCT 374079 Makati 8,307 1st4. July 24, 1984 TCT 41527 Pasay) TCT 41528 Pasay) 9,855 4th TCT 41529 Pasay)5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th7. August 7, 1984 San Miguel Corp. Stocks 50,238 8th8. August 7, 1984 China Banking Corp. Stocks 6,300 6th9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th10. August 29, 1984 Ayala Fund Stocks 1,322.1)

TOTAL 225,972.3

* Order of stock certificate issuances by TORMIL to respondent Torres relative to the Deeds of Assignment he executed sometime in July and August, 1984. [22] (Emphasis ours.)

Moreover, we agree with the contention of the Solicitor General that the shortage of shares should not have affected the assignment of the Makati and Pasay City properties which were executed in 13 and 24 July 1984 and the consideration for which have been duly paid or fulfilled but should have been applied logically to the last assignment of property -- Judge Torres’ Ayala Fund shares--which was executed on 29 August 1984.[23]

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IV

Petitioners insist that the assignment of “qualifying shares” to the nominees of the late Judge Torres (herein petitioners) does not partake of the real nature of a transfer or conveyance of shares of stock as would call for the “imposition of stringent requirements (with respect to the) recording of the transfer of said shares.” Anyway, petitioners add, there was substantial compliance with the above-stated requirement since said assignments were entered by the late Judge Torres himself in the corporation’s stock and transfer book on 6 March 1987, prior to the 25 March 1987 annual stockholders meeting and which entries were confirmed on 8 March 1987 by petitioner Azura who was appointed Assistant Corporate Secretary by Judge Torres.

Petitioners further argue that:

10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to penalize the late Judge Torres by invalidating the questioned entries in the stock and transfer book, simply because he initially made those entries (they were later affirmed by an acting corporate secretary) and because the stock and transfer book was in his possession instead of the elected corporate secretary, if the background facts herein-before narrated and the serious animosities that then reigned between the deceased Judge and his relatives are to be taken into account;

xxx.

10.12. Indeed it was a practice in the corporate respondent, a family corporation with only a measly number of stockholders, for the late judge to have personal custody of corporate records; as president, chairman and majority stockholder, he had the prerogative of designating an acting corporate secretary or to himself make the needed entries, in instances where the regular secretary, who is a mere subordinate, is unavailable or intentionally defaults, which was the situation that obtained immediately prior to the 1987 annual stockholders meeting of Tormil, as the late Judge Torres had so indicated in the stock and transfer book in the form of the entries now in question;

10.13. Surely, it would have been futile nay foolish for him to have insisted under those circumstances, for the regular secretary, who was then part of a group ranged against him, to make the entries of the assignments in favor of his nominees; [24]

Petitioners’ contentions lack merit.

It is precisely the brewing family discord between Judge Torres and private respondents--his nephew and nieces that should have placed Judge Torres on his guard. He should have been more careful in ensuring that his actions (particularly the assignment of qualifying shares to his nominees) comply with the requirements of the law. Petitioners cannot use the flimsy excuse that it would have been a vain attempt to force the incumbent corporate secretary to register the aforestated assignments in the stock and transfer book because the latter belonged to the opposite faction. It is the corporate secretary’s duty and obligation to register valid transfers of stocks and if said corporate officer

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refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance.[25] In other words, there are remedies within the law that petitioners could have availed of, instead of taking the law in their own hands, as the cliche goes.

Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of Appeals:

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the Corporation Code, as follows (Rollo, p. 45):

In the absence of (any) provision to the contrary, the corporate secretary is the custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes proper and necessary entries therein.

Contrary to the generally accepted corporate practice, the stock and transfer book of TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by respondent Torres, the President and Chairman of the Board of Directors of TORMIL. In contravention to the above cited provision, the stock and transfer book was not kept at the principal office of the corporation either but at the place of respondent Torres.

These being the obtaining circumstances, any entries made in the stock and transfer book on March 8, 1987 by respondent Torres of an alleged transfer of nominal shares to Pabalan and Co. cannot therefore be given any valid effect. Where the entries made are not valid, Pabalan and Co. cannot therefore be considered stockholders of record of TORMIL. Because they are not stockholders, they cannot therefore be elected as directors of TORMIL. To rule otherwise would not only encourage violation of clear mandate of Sec. 74 of the Corporation Code that stock and transfer book shall be kept in the principal office of the corporation but would likewise open the flood gates of confusion in the corporation as to who has the proper custody of the stock and transfer book and who are the real stockholders of records of a certain corporation as any holder of the stock and transfer book, though not the corporate secretary, at pleasure would make entries therein.

The fact that respondent Torres holds 81.28% of the outstanding capital stock of TORMIL is of no moment and is not a license for him to arrogate unto himself a duty lodged to (sic) the corporate secretary. [26]

All corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family corporation is not an exemption. Such corporations cannot have rules and practices other than those established by law.

WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED.

SO ORDERED.

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