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34.

THIRD DIVISION

[G.R. No. 142936. April 17, 2002.]

PHILIPPINE NATIONAL BANK & NATIONAL SUGARDEVELOPMENT CORPORATION, petitioners , vs . ANDRADAELECTRIC & ENGINEERING COMPANY , respondent .

Salvador Luy for petitioners.

Renecio Espiritu for private respondent.

SYNOPSIS

Respondent filed an action against petitioners for the unpaid balance onelectrical services it previously rendered to Pampanga Sugar Mill (PASUMIL).Respondent alleged that petitioners became liable to them when the formeracquired the assets of, took over, and operated PASUMIL.

The Court disagreed with respondent. The following precludes thepiercing of the corporate veil in the case at bar: Other than the fact thatpetitioners acquired the assets of PASUMIL, there was no showing that theircontrol over it warrants the disregard of corporate personalities, there was noevidence that their juridical personality was used to commit fraud or to do awrong, or that the separate corporate entity was farcically used as a merealter ego, business conduit or instrumentality of another entity or person;respondent was not defrauded or injured when petitioners acquired the assetsof PASUMIL. Neither is there merger nor consolidation with respect toPASUMIL and PNB.

SYLLABUS

1.REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; PETITION FOR REVIEW;QUESTIONS OF FACT MAY NOT RE RAISED THEREIN; EXCEPTION IS WHENTHERE IS MISAPPRECIATION OF EVIDENCE. — As a general rule, questions offact may not be raised in a petition for review under Rule 45 of the Rules of



Court. To this rule, however, there are some exceptions enumerated in Fuentesv. Court of Appeals . After a careful scrutiny of the records and the pleadingssubmitted by the parties, we find that the lower courts misappreciated theevidence presented. Overlooked by the CA were certain relevant facts that would

justify a conclusion different from that reached in the assailed Decision.

2.COMMERCIAL LAW; PRIVATE CORPORATIONS; WHERE CORPORATIONPURCHASED THE ASSETS OF ANOTHER CORPORATION, THE FORMER WILLNOT BE LIABLE TO THE DEBTS OF THE LATTER; EXCEPTIONS. — As a rule, acorporation that purchases the assets of another will not be liable for the debtsof the selling corporation, provided the former acted in good faith and paidadequate consideration for such assets, except when any of the followingcircumstances is present: (1) where the purchaser expressly or impliedly agreesto assume the debts, (2) where the transaction amounts to a consolidation or

merger of the corporations, (3) where the purchasing corporation is merely acontinuation of the selling corporation, and (4) where the transaction isfraudulently entered into in order to escape liability for those debts. SCHATc

3.ID.; ID.; CORPORATION; ELUCIDATED. — A corporation is an artificial beingcreated by operation of law. It possesses the right of succession and suchpowers, attributes, and properties expressly authorized by law or incident to itsexistence. It has a personality separate and distinct from the persons composingit, as well as from any other legal entity to which it may be related. This is basic.

4.ID.; ID.; DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION; WHENPROPER. — Equally well-settled is the principle that the corporate mask may beremoved or the corporate veil pierced when the corporation is just an alter egoof a person or of another corporation. For reasons of public policy and in theinterest of justice, the corporate veil will justifiably be impaled only when itbecomes a shield for fraud, illegality or inequity committed against third persons.Hence, any application of the doctrine of piercing the corporate veil should bedone with caution. A court should be mindful of the milieu where it is to beapplied. It must be certain that the corporate fiction was misused to such anextent that injustice, fraud, or crime was committed against another, in disregard

of its rights. The wrongdoing must be clearly and convincingly established; itcannot be presumed. Otherwise, an injustice that was never unintended mayresult from an erroneous application. This Court has pierced the corporate veil toward off a judgment credit, to avoid inclusion of corporate assets as part of theestate of the decedent, to escape liability arising from a debt, or to perpetuatefraud and/or confuse legitimate issues either to promote or to shield unfairobjectives or to cover up an otherwise blatant violation of the prohibition against



forum-shopping. Only in these and similar instances may the veil be pierced anddisregarded.

5.ID.; ID.; ID.; ELEMENTS; NOT PRESENT IN CASE AT BAR. — The question ofwhether a corporation is a mere alter ego is one of fact. Piercing the veil of

corporate fiction may be allowed only if the following elements concur: (1)control — not mere stock control, but complete domination — not only offinances, but of policy and business practice in respect to the transactionattacked, must have been such that the corporate entity as to this transactionhad at the time no separate mind, will or existence of its own; (2) such controlmust have been used by the defendant to commit a fraud or a wrong toperpetuate the violation of a statutory or other positive legal duty, or a dishonestand an unjust act in contravention of plaintiff's legal right; and (3) the saidcontrol and breach of duty must have proximately caused the injury or unjust

loss complained of. We believe that the absence of the foregoing elements in thepresent case precludes the piercing of the corporate veil. First , other than thefact that petitioners acquired the assets of PASUMIL, there is no showing thattheir control over it warrants the disregard of corporate personalities. Second ,there is no evidence that their juridical personality was used to commit a fraud orto do a wrong; or that the separate corporate entity was farcically used as amere alter ego, business conduit or instrumentality of another entity orperson. Third , respondent was not defrauded or injured when petitionersacquired the assets of PASUMIL. Being the party that asked for the piercing ofthe corporate veil, respondent had the burden of presenting clear and convincing

evidence to justify the setting aside of the separate corporate personality rule.However, it utterly failed to discharge this burden; it failed to establish bycompetent evidence that petitioner's separate corporate veil had been used toconceal fraud, illegality or inequity. The CA erred in affirming the trial court'slifting of the corporate mask. The CA did not point to any fact evidencing badfaith on the part of PNB and its transferee. The corporate fiction was not used todefeat public convenience, justify a wrong, protect fraud or defend crime. Noneof the foregoing exceptions was shown to exist in the present case. On thecontrary, the lifting of the corporate veil would result in manifest injustice. Thiswe cannot allow.

6.ID.; ID.; CONSOLIDATION OR MERGER OF CORPORATIONS; REQUISITES;NOT PRESENT IN CASE AT BAR. — A consolidation is the union of two or moreexisting entities to form a new entity called the consolidated corporation. Amerger, on the other hand, is a union whereby one or more existing corporationsare absorbed by another corporation that survives and continues the combinedbusiness. The merger, however, does not become effective upon the mere



agreement of the constituent corporations. Since a merger or consolidationinvolves fundamental changes in the corporation, as well as in the rights ofstockholders and creditors, there must be an express provision of law authorizingthem. For a valid merger or consolidation, the approval by the Securities andExchange Commission (SEC) of the articles of merger or consolidation isrequired. These articles must likewise be duly approved by a majority of therespective stockholders of the constituent corporations. In the case at bar, wehold that there is no merger or consolidation with respect to PASUMIL and PNB.The procedure prescribed under Title IX of the Corporation Code was notfollowed. AEIcSa

D E C I S I O N

PANGANIBAN, J p:

Basic is the rule that a corporation has a legal personality distinct and separatefrom the persons and entities owning it. The corporate veil may be lifted only if ithas been used to shield fraud, defend crime, justify a wrong, defeat publicconvenience, insulate bad faith or perpetuate injustice. Thus, the mere fact thatthe Philippine National Bank (PNB) acquired ownership or management of someassets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosedand purchased at the resulting public auction by the Development Bank of the

Philippines (DBP), will not make PNB liable for the PASUMIL's contractual debtsto respondent.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of theCourt of Appeals (CA) in CA-G.R. CV No. 57610. The decretal portion of thechallenged Decision reads as follows:

"WHEREFORE, the judgment appealed from is hereby AFFIRMED." 2

The Facts

The factual antecedents of the case are summarized by the Court of Appeals asfollows:

"In its complaint, the plaintiff [herein respondent] alleged that it is apartnership duly organized, existing, and operating under the laws of the

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Philippines, with office and principal place of business at Nos. 794-812Del Monte [A]venue, Quezon City, while the defendant [hereinpetitioner] Philippine National Bank (herein referred to as PNB), is asemi-government corporation duly organized, existing and operatingunder the laws of the Philippines, with office and principal place of

business at Escolta Street, Sta. Cruz, Manila; whereas, the otherdefendant, the National Sugar Development Corporation (NASUDECO inbrief), is also a semi-government corporation and the sugar arm of thePNB, with office and principal place of business at the 2nd Floor,Sampaguita Building, Cubao, Quezon City; and the defendant PampangaSugar Mills (PASUMIL in short), is a corporation organized, existing andoperating under the 1975 laws of the Philippines, and had its businessoffice before 1975 at Del Carmen, Floridablanca, Pampanga; that theplaintiff is engaged in the business of general construction for therepairs and/or construction of different kinds of machineries andbuildings; that on August 26, 1975, the defendant PNB acquired theassets of the defendant PASUMIL that were earlier foreclosed by theDevelopment Bank of the Philippines (DBP) under LOI No. 311; that thedefendant PNB organized the defendant NASUDECO in September,1975, to take ownership and possession of the assets and ultimately tonationalize and consolidate its interest in other PNB controlled sugarmills; that prior to October 29, 1971, the defendant PASUMIL engagedthe services of plaintiff for electrical rewinding and repair, most of whichwere partially paid by the defendant PASUMIL, leaving several unpaidaccounts with the plaintiff; that finally, on October 29, 1971, the plaintiffand the defendant PASUMIL entered into a contract for the plaintiff to

perform the following, to wit –

'(a)Construction of one (1) power house building;

'(b)Construction of three (3) reinforced concrete foundation for three (3)units 350 KW diesel engine generating set[s];

'(c)Construction of three (3) reinforced concrete foundation for the5,000 KW and 1,250 KW turbo generator sets;

'(d)Complete overhauling and reconditioning tests sum for three (3) 350KW diesel engine generating set[s];

'(e)Installation of turbine and diesel generating sets includingtransformer, switchboard, electrical wirings and pipe providedthose stated units are completely supplied with their accessories;



'(f)Relocating of 2,400 V transmission line, demolition of all existingconcrete foundation and drainage canals, excavation, and earthfillings – all for the total amount of P543,500.00 as evidenced bya contract, [a] xerox copy of which is hereto attached as Annex'A' and made an integral part of this complaint;'

that aside from the work contract mentioned-above, the defendantPASUMIL required the plaintiff to perform extra work, and provideelectrical equipment and spare parts, such as:

'(a)Supply of electrical devices;

'(b)Extra mechanical works;

'(c)Extra fabrication works;

'(d)Supply of materials and consumable items; '(e)Electrical shop repair;

'(f)Supply of parts and related works for turbine generator;

'(g)Supply of electrical equipment for machinery;

'(h)Supply of diesel engine parts and other related works includingfabrication of parts.'

that out of the total obligation of P777,263.80, the defendant PASUMILhad paid only P250,000.00, leaving an unpaid balance, as of June 27,1973, amounting to P527,263.80, as shown in the Certification of thechief accountant of the PNB, a machine copy of which is appended as

Annex 'C' of the complaint; that out of said unpaid balance ofP527,263.80, the defendant PASUMIL made a partial payment to theplaintiff of P14,000.00, in broken amounts, covering the period fromJanuary 5, 1974 up to May 23, 1974, leaving an unpaid balance ofP513,263.80; that the defendant PASUMIL and the defendant PNB, andnow the defendant NASUDECO, failed and refused to pay the plaintiff

their just, valid and demandable obligation; that the President of theNASUDECO is also the Vice-President of the PNB, and this official holdsoffice at the 10th Floor of the PNB, Escolta, Manila, and plaintiffbesought this official to pay the outstanding obligation of the defendantPASUMIL, inasmuch as the defendant PNB and NASUDECO now ownedand possessed the assets of the defendant PASUMIL, and thesedefendants all benefited from the works, and the electrical, as well asthe engineering and repairs, performed by the plaintiff; that because of



the failure and refusal of the defendants to pay their just, valid, anddemandable obligations, plaintiff suffered actual damages in the totalamount of P513,263.80; and that in order to recover these sums, theplaintiff was compelled to engage the professional services of counsel,to whom the plaintiff agreed to pay a sum equivalent to 25% of the

amount of the obligation due by way of attorney's fees. Accordingly, theplaintiff prayed that judgment be rendered against the defendants PNB,NASUDECO, and PASUMIL, jointly and severally to wit:

'(1)Sentencing the defendants to pay the plaintiffs thesum of P513,263.80, with annual interest of 14% from thetime the obligation falls due and demandable;

'(2)Condemning the defendants to pay attorney's feesamounting to 25% of the amount claim;

'(3)Ordering the defendants to pay the costs of thesuit.'

"The defendants PNB and NASUDECO filed a joint motion to dismiss thecomplaint chiefly on the ground that the complaint failed to statesufficient allegations to establish a cause of action against bothdefendants, inasmuch as there is lack or want of privity of contractbetween the plaintiff and the two defendants, the PNB and NASUDECO,said defendants citing Article 1311 of the New Civil Code, and the caselaw ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila

Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214. "The motion to dismiss was by the court a quo denied in its Order ofNovember 27, 1980; in the same order, that court directed thedefendants to file their answer to the complaint within 15 days.

"In their answer, the defendant NASUDECO reiterated the grounds of itsmotion to dismiss, to wit:

'That the complaint does not state a sufficient cause of actionagainst the defendant NASUDECO because: (a) NASUDECO is not

. . . privy to the various electrical construction jobs being suedupon by the plaintiff under the present complaint; (b) the takingover by NASUDECO of the assets of defendant PASUMIL wassolely for the purpose of reconditioning the sugar central ofdefendant PASUMIL pursuant to martial law powers of thePresident under the Constitution; (c) nothing in the LOI No. 189-

A (as well as in LOI No. 311) authorized or commanded the PNB



or its subsidiary corporation, the NASUDECO, to assume thecorporate obligations of PASUMIL as that being involved in thepresent case; and, (d) all that was mentioned by the said letter ofinstruction insofar as the PASUMIL liabilities [were] concerned[was] for the PNB, or its subsidiary corporation the NASUDECO,

to make a study of, and submit [a] recommendation on theproblems concerning the same.'

"By way of counterclaim, the NASUDECO averred that by reason of thefiling by the plaintiff of the present suit, which it [labeled] as unfoundedor baseless, the defendant NASUDECO was constrained to litigate andincur litigation expenses in the amount of P50,000.00, which plaintiffshould be sentenced to pay. Accordingly, NASUDECO prayed that thecomplaint be dismissed and on its counterclaim, that the plaintiff becondemned to pay P50,000.00 in concept of attorney's fees as well asexemplary damages.

"In its answer, the defendant PNB likewise reiterated the grounds of itsmotion to dismiss, namely: (1) the complaint states no cause of actionagainst the defendant PNB; (2) that PNB is not a party to the contractalleged in par. 6 of the complaint and that the alleged services renderedby the plaintiff to the defendant PASUMIL upon which plaintiff's suit iserected, was rendered long before PNB took possession of the assets ofthe defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of the assets of the defendant PASUMIL under LOI 189-A wassolely for the purpose of reconditioning the sugar central so that

PASUMIL may resume its operations in time for the 1974-75 millingseason, and that nothing in the said LOI No. 189-A, as well as in LOI No.311, authorized or directed PNB to assume the corporate obligation/s ofPASUMIL, let alone that for which the present action is brought; (4) thatPNB's management and operation under LOI No. 311 did not refer toany asset of PASUMIL which the PNB had to acquire and thereafter[manage], but only to those which were foreclosed by the DBP and werein turn redeemed by the PNB from the DBP; (5) that conformably to LOINo. 311, on August 15, 1975, the PNB and the Development Bank of thePhilippines (DBP) entered into a 'Redemption Agreement' whereby DBPsold, transferred and conveyed in favor of the PNB, by way of

redemption, all its (DBP) rights and interest in and over the foreclosedreal and/or personal properties of PASUMIL, as shown in Annex 'C' whichis made an integral part of the answer; (6) that again, conformably withLOI No. 311, PNB pursuant to a Deed of Assignment dated October 21,1975, conveyed, transferred, and assigned for valuable consideration, infavor of NASUDECO, a distinct and independent corporation, all its (PNB)rights and interest in and under the above 'Redemption Agreement.' This



is shown in Annex 'D' which is also made an integral part of the answer;[7] that as a consequence of the said Deed of Assignment, PNB onOctober 21, 1975 ceased to manage and operate the above-mentionedassets of PASUMIL, which function was now actually transferred toNASUDECO. In other words, so asserted PNB, the complaint as to PNB,

had become moot and academic because of the execution of the saidDeed of Assignment; [8] that moreover, LOI No. 311 did not authorizeor direct PNB to assume the corporate obligations of PASUMIL, includingthe alleged obligation upon which this present suit was brought; and [9]that, at most, what was granted to PNB in this respect was the authorityto 'make a study of and submit recommendation on the problemsconcerning the claims of PASUMIL creditors,' under sub-par. 5 LOI No.311.

"In its counterclaim, the PNB averred that it was unnecessarilyconstrained to litigate and to incur expenses in this case, hence it isentitled to claim attorney's fees in the amount of at least P50,000.00.

Accordingly, PNB prayed that the complaint be dismissed; and that on itscounterclaim, that the plaintiff be sentenced to pay defendant PNB thesum of P50,000.00 as attorney's fees, aside from exemplary damages insuch amount that the court may seem just and equitable in thepremises.

"Summons by publication was made via the Philippines Daily Express, anewspaper with editorial office at 371 Bonifacio Drive, Port Area, Manila,against the defendant PASUMIL, which was thereafter declared in

default as shown in the August 7, 1981 Order issued by the Trial Court. "After due proceedings, the Trial Court rendered judgment, the decretalportion of which reads:

'WHEREFORE, judgment is hereby rendered in favor of plaintiffand against the defendant Corporation, Philippine National Bank(PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION(NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), orderingthe latter to pay jointly and severally the former the following:

'1.The sum of P513,623.80 plus interest thereon at therate of 14% per annum as claimed fromSeptember 25, 1980 until fully paid;

'2.The sum of P102,724.76 as attorney's fees; and,

'3.Costs.



'SO ORDERED.

'Manila, Philippines, September 4, 1986.

'(SGD) ERNESTO S. TENGCO

'Judge '" 3

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a corporation to take over and operate the business ofanother corporation, while disavowing or repudiating any responsibility,

obligation or liability arising therefrom. 4

Hence, this Petition. 5

Issues

In their Memorandum, petitioners raise the following errors for the Court'sconsideration:

"I

The Court of Appeals gravely erred in law in holding the hereinpetitioners liable for the unpaid corporate debts of PASUMIL, acorporation whose corporate existence has not been legally extinguishedor terminated, simply because of petitioners['] take-over of themanagement and operation of PASUMIL pursuant to the mandates ofLOI No. 189-A, as amended by LOI No. 311.

"II

The Court of Appeals gravely erred in law in not applying [to] the case

at bench the ruling enunciated in Edward J. Nell Co. v. Pacific Farms , 15SCRA 415." 6

Succinctly put, the aforesaid errors boil down to the principal issue of whetherPNB is liable for the unpaid debts of PASUMIL to respondent.

This Court's Ruling

















The Petition is meritorious.

Main Issue: Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for reviewunder Rule 45 of the Rules of Court. 7 To this rule, however, there are someexceptions enumerated in Fuentes v. Court of Appeals . 8 After a careful scrutinyof the records and the pleadings submitted by the parties, we find that the lowercourts misappreciated the evidence presented. 9 Overlooked by the CA werecertain relevant facts that would justify a conclusion different from that reachedin the assailed Decision. 10

Petitioners posit that they should not be held liable for the corporate debts of

PASUMIL, because their takeover of the latter's foreclosed assets did not makethem assignees. On the other hand, respondent asserts that petitioners andPASUMIL should be treated as one entity and, as such, jointly and severally heldliable for PASUMIL's unpaid obligation.

As a rule, a corporation that purchases the assets of another will not be liable forthe debts of the selling corporation, provided the former acted in good faith andpaid adequate consideration for such assets, except when any of the followingcircumstances is present: (1) where the purchaser expressly or impliedly agreesto assume the debts, (2) where the transaction amounts to a consolidation or

merger of the corporations, (3) where the purchasing corporation is merely acontinuation of the selling corporation, and (4) where the transaction isfraudulently entered into in order to escape liability for those debts. 11

Piercing the Corporate

Veil Not Warranted

A corporation is an artificial being created by operation of law. It possesses theright of succession and such powers, attributes, and properties expressly

authorized by law or incident to its existence. 12 It has a personality separate anddistinct from the persons composing it, as well as from any other legal entity towhich it may be related. 13 This is basic.

Equally well-settled is the principle that the corporate mask may be removed orthe corporate veil pierced when the corporation is just an alter ego of a personor of another corporation. 14 For reasons of public policy and in the interest of


































justice, the corporate veil will justifiably be impaled 15 only when it becomes ashield for fraud, illegality or inequity committed against third persons. 16

Hence, any application of the doctrine of piercing the corporate veil should bedone with caution. 17 A court should be mindful of the milieu where it is to be

applied. 18 It must be certain that the corporate fiction was misused to such anextent that injustice, fraud, or crime was committed against another, in disregardof its rights. 19 The wrongdoing must be clearly and convincingly established; itcannot be presumed. 20 Otherwise, an injustice that was never unintended mayresult from an erroneous application. 21

This Court has pierced the corporate veil to ward off a judgment credit, 22 toavoid inclusion of corporate assets as part of the estate of the decedent, 23 toescape liability arising from a debt, 24 or to perpetuate fraud and/or confuselegitimate issues 25either to promote or to shield unfair objectives 26 or to coverup an otherwise blatant violation of the prohibition against forum-shopping. 27 Only in these and similar instances may the veil be pierced anddisregarded. 28

The question of whether a corporation is a mere alter ego is one offact. 29 Piercing the veil of corporate fiction may be allowed only if the followingelements concur: (1) control — not mere stock control, but complete domination

— not only of finances, but of policy and business practice in respect to thetransaction attacked, must have been such 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 a fraud or awrong to perpetuate the violation of a statutory or other positive legal duty, or adishonest and an unjust act in contravention of plaintiff's legal right; and (3) thesaid control and breach of duty must have proximately caused the injury orunjust loss complained of. 30

We believe that the absence of the foregoing elements in the present caseprecludes the piercing of the corporate veil. First , other than the fact thatpetitioners acquired the assets of PASUMIL, there is no showing that their control

over it warrants the disregard of corporate personalities. 31 Second, there is noevidence that their juridical personality was used to commit a fraud or to do awrong; or that the separate corporate entity was farcically used as a mere alterego, business conduit or instrumentality of another entity orperson. 32 Third, respondent was not defrauded or injured when petitionersacquired the assets of PASUMIL. 33












































































Being the party that asked for the piercing of the corporate veil, respondent hadthe burden of presenting clear and convincing evidence to justify the settingaside of the separate corporate personality rule. 34 However, it utterly failed todischarge this burden; 35 it failed to establish by competent evidence thatpetitioner's separate corporate veil had been used to conceal fraud, illegality orinequity. 36

While we agree with respondent's claim that the assets of the National SugarDevelopment Corporation (NASUDECO) can be easily traced to PASUMIL, 37 weare not convinced that the transfer of the latter's assets to petitioners wasfraudulently entered into in order to escape liability for its debt to respondent. 38

A careful review of the records reveals that DBP foreclosed the mortgageexecuted by PASUMIL and acquired the assets as the highest bidder at the publicauction conducted. 39 The bank was justified in foreclosing the mortgage,because the PASUMIL account had incurred arrearages of more than 20 percentof the total outstanding obligation. 40 Thus, DBP had not only a right, but also aduty under the law to foreclose the subject properties. 41

Pursuant to LOI No. 189-A 42 as amended by LOI No. 311, 43 PNB acquiredPASUMIL's assets that DBP had foreclosed and purchased in the normal course.Petitioner bank was likewise tasked to manage temporarily the operation of suchassets either by itself or through a subsidiary corporation. 44

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMILassets pursuant to Section 6 of Act No. 3135. 45These assets were later conveyedto PNB for a consideration, the terms of which were embodied in the Redemption

Agreement46 PNB, as successor-in-interest, stepped into the shoes of DBP asPASUMIL's creditor. 47 By way of a Deed of Assignment,48 PNB then transferredto NASUDECO all its rights under the Redemption Agreement.

In Development Bank of the Philippines v. Court of Appeals , 49 we had theoccasion to resolve a similar issue. We ruled that PNB, DBP and their transfereeswere not liable for Marinduque Mining's unpaid obligations to Remington

Industrial Sales Corporation (Remington) after the two banks had foreclosed theassets of Marinduque Mining. We likewise held that Remington failed todischarge its burden of proving bad faith on the part of Marinduque Mining to

justify the piercing of the corporate veil.

In the instant case, the CA erred in affirming the trial court's lifting of thecorporate mask. 50 The CA did not point to any fact evidencing bad faith on the



































































part of PNB and its transferee. 51 The corporate fiction was not used to defeatpublic convenience, justify a wrong, protect fraud or defend crime. 52 None ofthe foregoing exceptions was shown to exist in the present case. 53On thecontrary, the lifting of the corporate veil would result in manifest injustice. Thiswe cannot allow.

No Merger or

Consolidation

Respondent further claims that petitioners should be held liable for the unpaidobligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expresslyauthorized PASUMIL and PNB to merge or consolidate. On the other hand,petitioners contend that their takeover of the operations of PASUMIL did notinvolve any corporate merger or consolidation, because the latter had never lost

its separate identity as a corporation.

A consolidation is the union of two or more existing entities to form a new entitycalled the consolidated corporation. A merger, on the other hand, is a unionwhereby one or more existing corporations are absorbed by another corporationthat survives and continues the combined business. 54

The merger, however, does not become effective upon the mere agreement ofthe constituent corporations. 55 Since a merger or consolidation involvesfundamental changes in the corporation, as well as in the rights of stockholdersand creditors, there must be an express provision of law authorizing them. 56 Fora valid merger or consolidation, the approval by the Securities and ExchangeCommission (SEC) of the articles of merger or consolidation is required. 57 Thesearticles must likewise be duly approved by a majority of the respectivestockholders of the constituent corporations. 58

In the case at bar, we hold that there is no merger or consolidation with respectto PASUMIL and PNB. The procedure prescribed under Title IX of the CorporationCode 59 was not followed.

In fact, PASUMIL's corporate existence, as correctly found by the CA, had notbeen legally extinguished or terminated. 60Further, prior to PNB's acquisition ofthe foreclosed assets, PASUMIL had previously made partial payments torespondent for the former's obligation in the amount of P777,263.80. As of June








































27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974to May 23, 1974, another P14,000.

Neither did petitioner expressly or impliedly agree to assume the debt ofPASUMIL to respondent. 61 LOI No. 11 explicitly provides that PNB shall study

and submit recommendations on the claims of PASUMIL's creditors. 62 Clearly,the corporate separateness between PASUMIL and PNB remains, despiterespondent's insistence to the contrary. 63

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to costs. DHTCaI

SO ORDERED.

Vitug , Sandoval-Gutierrez and Carpio , JJ ., concur.

Melo , J., Abroad, is on official leave.

Footnotes

35.

EN BANC

[G.R. No. L-21601. December 28, 1968.]

NIELSON & COMPANY , INC., plaintiff- appellant , vs. LEPANTO CONSOLIDATED MININGCOMPANY ,defendant-appellee .

SYLLABUS

1.REMEDIAL LAW; APPEAL; QUESTION OF FACT OR LAW NOT RAISED IN THELOWER COURT MAY NOT BE RAISED ON APPEAL; INSTANT CASE. — In thepleadings filed by defendant Lepanto in the lower court and its memorandumand brief on appeal it never asserted the theory that it has the right to terminatethe management contract because that contract is one of agency which it couldterminate at will. While it is true that in its ninth and tenth special affirmativedefenses, it has the right to terminate the management contract in question, that















plea of its right to terminate was not based upon the ground that the relationbetween defendant and plaintiff was that of principal and agent but upon theground that plaintiff had allegedly not complied with certain terms of themanagement contract. If defendant had thought of considering the managementcontract as one of agency it could have amended its answer by stating exactly itsposition. It could have asserted its theory of agency in its memorandum for thelower and in its brief on appeal. This, defendant did not do. It is the rule, andthe settled doctrine that a party cannot change his theory on appeal, that is, thata party cannot raise in the appellate court any question of law or of fact that wasnot raised in the court below or which was not within the issue made by theparties in their pleadings.

2.CIVIL LAW; SPECIAL CONTRACTS; AGENCY DISTINGUISHED FROM LEASE OFSERVICES. — In both agency and lease of services one of the parties binds

himself to render some service to the other party. Agency, however, isdistinguished from lease of work or services in that the basis of agency isrepresentation, while in the lease of work or services the basis is employment.The lessor of services does not represent his employer while the agentrepresents his principal. Agency is a preparatory contract as agency "does notstop with the agency because the purpose is to enter into other contracts." Themost characteristic feature of an agency relationship is the agent's power tobring about business relations between his principal and third persons. "Theagent is destined to execute juridical acts (creation, modification or extinction ofrelations with third parties). Lease services contemplate only material (non-

juridical) acts." 3.ID.; ID.; CONTRACT IN INSTANT CASE IS FOR LEASE OF SERVICES. — Itappears that the principal and paramount undertaking of plaintiff under themanagement contract was the operation and development of the mine and theoperation of the mill. All the other undertakings mentioned in the contract arenecessary or incidental to the principal undertaking — these other undertakingsbeing dependent upon the work on the development of the mine and theoperation of the mill. In the performance of this principal undertaking plaintiffwas not in any way executing juridical acts for defendant, destined to create,

modify or extinguish business relations between Lepanto and third persons. Inother words, in performing its principal undertaking plaintiff was not acting as anagent of defendant Lepanto, in the sense that the term agent is interpretedunder the law of agency, but as one who was performing material acts for anemployer, for a compensation.



4.ID.; ID.; ID.; DEFENDANT MAY NOT TERMINATE CONTRACT AT WILL. — Inthe instant case, paragraph XI of the contract provides: ". . . Nielson agreesthat Lepanto may cancel this agreement at any time upon ninety days writtennotice, in the event that Nielson for any reason whatsoever, except acts of God,strike and other causes beyond its control, shall cease to prosecute the operationand development of the properties herein described, in good faith and inaccordance with the approved mining practice" defendant could not terminatethe agreement at will. Under the provision, it could terminate or cancel theagreement by giving notice of termination 90 days in advance only in the eventthat plaintiff should prosecute in bad faith and not in accordance with approvedmining practice the operation and development of the mining properties ofdefendant. Defendant could not terminate the agreement if plaintiff should ceaseto prosecute the operation and development of the mining properties by reasonof acts of God, strike and other causes beyond the control of plaintiff. It is,

therefore, by express stipulation of the parties, the management contract inquestion is not revocable at will of defendant. This management contract is not acontract of agency as defined in Article 1700 of the Old Civil Code, but a contractof lease of service as defined in Article 1544 of the same code. This contract cannot be unilaterally revoked by defendant.

5.ID.; ID.; ID.; EXTENSION OF CONTRACT EQUAL TO PERIOD OF SUSPENSION. — The nature of the contract for management and operation of mines justifiesthe interpretation of the force majeure clause, that a period equal to the periodof suspension due to force majeure should be added to the original term of the

contract by way of an extension. We, therefore, reiterate the ruling in ourdecision that since the management contract in the instant case was suspendedfrom February 1942 to June 26, 1948, from the latter the contract had yet fiveyears to go.

6.ID.; ID.; ID.; ID.; PLAINTIFF LIMITED TO MANAGEMENT FEES FOR PERIODOF EXTENSION. — Since the management contract had been extended for 5years, or 60 months, from June 27, 1948 to June 26, 1953, and the cause ofaction of plaintiff to claim for its compensation during that period of extensionhad not prescribed, it follows that plaintiff should be awarded the management

fees during the whole period of extension plus the 10% of the value of thedividends declared during the said period of extension the 10% of the depletionreserve that was set up, and the 10% of any amount expended out of surplusearnings for capital account.

7.ID.; PRESCRIPTION; INAPPLICABILITY THEREOF IN INSTANT CASE. — Theclaim accrued on December 31, 1941, and the right to commence an action



thereon started on January 1, 1942. The action on this claim did not prescribealthough the complaint was filed on February 6, 1958 - or after a lapse of 16years, 1 month and 5 days — because of the operation of moratorium law. Themoratorium period of 8 years, 2 months and 8 days should be deducted from theperiod that had elapsed since the accrual of the cause of action to the date ofthe filing of the complaint, so that there is a period of less than 8 years to bereckoned for the purpose of prescription.

8.ID.; EXECUTIVE ORDER NUMBER 32, MORATORIUM LAW. — Executive OrderNo. 32 covered all debts and monetary obligation on contract before the war (orbefore December 1941) and those contracted subsequent to Dec. 8, 1941 andduring the Japanese occupation. RA No. 342, approved on July 26, 1948, liftedthe moratorium provided for in Executive Order No. 32 on pre-war (or pre-Dec.8, 1941) debts of debtors who had not filed war damage claims with the United

States War Damage Commission. In other words, after the effectivity of RA No.342, the debt moratorium was limited (1) to debts and other monetaryobligations which were contracted after Dec. 8, 1941 and during the Japaneseoccupation, and (2) to those pre-war (or pre-Dec. 8, 1941) debts and othermonetary claims. That was the situation up to May 18, 1953 when this Courtdeclared RA No. 342 unconstitutional. It has been held by this Court, however,that from March 10, 1945 when Executive Order No. 32 was issued, to May 18,1953 when RA No. 342 was declared unconstitutional — or a period of 8 years, 2months and 8 days — the debt moratorium was in force, and had the effect ofsuspending the period of prescription.

9.MERCANTILE LAW; CORPORATIONS; SHARES OF STOCK; ISSUANCETHEREOF. — From Section 16 of the Corporation Law, the consideration forwhich shares of stock may be issued are: (1) cash; (2) property and (3)undistributed profits. Shares of stock are given the special name "stockdividends" only if they are issued in lieu of undistributed profits. If the shares ofstocks are issued in exchange of cash or Property then those shares do not fallunder the category of "stock dividends". A corporation may legally issue sharesof stock in consideration of services rendered to it by a person not a stockholder,or in payment of its indebtedness. A share of stock issued to pay for services

rendered is equivalent to a stock issued in exchange of property becauseservices is equivalent to property. Likewise a share of stock issued in payment ofindebtedness is equivalent to issuing a stock in exchange for cash. But a share ofstock thus issued should be part of the original capital stock of the corporationupon its organization, or part of the stocks issued when the increase of thecapitalization of a corporation is properly authorized.



10.ID.; ID.; STOCK DIVIDEND, DEFINED. — A "stock dividend" is any dividendpayable in shares of stock of the corporation declaring or authorizing suchdividend. It is, what the term itself implies, a distribution of the shares of stockof the corporation among the stockholders as dividends. A stock dividend of acorporation is a dividend paid in shares of stock instead of cash and is properlypayable only out of surplus profits. So, a stock dividend is actually two things:(1) a dividend, and (2) the enforced use of the dividend money to purchaseadditional shares of stock at par. When a corporation issues stock dividends, itshows that the corporations' accumulated profits have been capitalized instead ofdistributed to the stockholders or retained as surplus available for distribution, inmoney or in kind, should opportunity offer. Far from being a realization of profitsfor the stockholder, it tends rather to postpone said realization, in that the fundrepresented by the new stock has been transferred from the surplus to assetsand no longer available for actual distribution.

11.ID.; ID.; DIVIDEND. — The term "dividend" both in the technical sense andits ordinary acceptation, is that part or portion of the profits of the enterprisewhich the corporation, by its governing agents, sets apart for ratable divisionamong the holders of the capital stock. It means the fund actually set aside, anddeclared by the directors of the corporation as a dividend, and duly ordered bythe directory, or by the stockholders at a corporate meeting to be divided ordistributed among the stockholders according to their respective interests.

12.ATTORNEYS; ATTORNEYS FEES; AWARD OF ATTORNEYS FEES IS WITHINTHE SOUND DISCRETION OF THE COURT. — The matter of the award ofattorneys fees is within the sound discretion of this court. In our decision Wehave stated the reason why the award of P50,000.00 for attorney's fees isconsidered by this Court as reasonable.

D E C I S I O N

ZALDIVAR , J p:

Lepanto seeks the reconsideration of the decision rendered on December 17,1966. The motion for reconsideration is based on two sets of grounds — the firstset consisting of four principal grounds, and the second set consisting of fivealternative grounds, as follows:



Principal Grounds :

1.The court erred in overlooking and failing to apply the proper lawapplicable to the agency or management contract in question, namely,

Article 1733 of the Old Civil Code (Article 1920 of the new), by virtue of

which said agency was effectively revoked and terminated in 1945when, as stated in paragraph 20 of the complaint, "defendant voluntarily. . . prevented plaintiff from resuming management and operation ofsaid mining properties."

2.The court erred in holding that paragraph II of the managementcontract (Exhibit C) suspended the period of said contract.

3.The court erred in reversing the ruling of the trial judge, based onwell-settled jurisprudence of this Supreme Court, that the managementagreement was only suspended but not extended on account of the war.

4The court erred in reversing the finding of the trial judgethat Nielson's action had prescribed, but considering only the first claimand ignoring the prescriptibility of the other claims.

Alternative Grounds :

5.The court erred in holding that the period of suspension of thecontract on account of the war lasted from February 1942 to June 26,1948.

6.Assuming arguendo that Nielson is entitled to any relief, the courterred in awarding as damages (a) 10% of the cash dividends declaredand paid in December, 1941; (b) the management fee of P2,500.00 forthe month of January, 1942; and (c) the full contract price for theextended period of sixty months, since these damages were neitherdemanded nor proved and, in any case, not allowable under the generallaw of damages.

7.Assuming arguendo that appellant is entitled to any relief, the courterred in ordering appellee to issue and deliver to appellant shares of

stock together with fruits thereof. 8.The court erred in awarding to appellant an undetermined amount ofshares of stock and/or cash, which award cannot be ascertained andexecuted without further litigation.

9.The court erred in rendering judgment for attorney's fees.



We are going to dwell on these grounds in the order they are presented.

1.In its first principal ground Lepanto claims that its own counsel and this Courthad overlooked the real nature of the management contract entered into by andbetween Lepanto and Nielson, and the law that is applicable on said

contract. Lepantonow asserts for the first time - and this is done in a motion forreconsideration — that the management contract in question is a contract ofagency such that it has the right to revoke and terminate the said contract, as itdid terminate the same, under the law of agency, and particularly pursuant to

Article 1733 of the Old Civil Code (Article 1920 of the New Civil Code)

We have taken note that Lepanto is advancing a new theory. We have carefullyexamined the pleadings filed by Lepanto in the lower court, its memorandum andits brief on appeal, and never did it assert the theory that it has the right toterminate the management contract because that contract is one of agencywhich it could terminate at will. While it is true that in its ninth and tenth specialaffirmative defenses, in its answer in the court below, Lepanto pleaded that ithad the right to terminate the management contract in question, that plea of itsright to terminate was not based upon the ground that the relationbetweenLepanto and Nielson was that of principal and agent but upon theground that Nielson had allegedly not complied with certain terms of themanagement contract. If Lepanto had thought of considering the managementcontract as one of agency it could have amended its answer by stating exactly itsposition. It could have asserted its theory of agency in its memorandum for the

lower court and in its brief on appeal. This, Lepanto did not do. It is the rule, andthe settled doctrine of this Court, that a party cannot change his theory onappeal — that is, that a party cannot raise in the appellate court any question oflaw or of fact that was not raised in the court below or which was not within theissue made by the parties in their pleadings (Section 19, Rule 49 of the old Rulesof Court, and also Section 18 of the new Rules of Court; Hautea vs. Magallon, L-20345, November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884,February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207; Agoncillovs. Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil. 49)

At any rate, even if we allow Lepanto to assert its new theory at this very latestage of the proceedings, this Court cannot sustain the same.

Lepanto contends that the management contract in question (Exhibit C) is one ofagency because: (1) Nielson was to manage and operate the mining propertiesand mill on behalf, and for the account, of Lepanto; and (2) Nielson wasauthorized to represent Lepanto in entering, on Lepanto's behalf, into contracts



for the hiring of laborers, purchase of supplies, and the sale and marketing ofthe ores mined. All these, Lepanto claims, show that Nielson was, by the termsof the contract, destined to execute juridical acts not on its own behalf but onbehalf of Lepanto under the control of the Board of Directors of Lepanto "at alltimes". Hence Lepanto claims that the contract is one of agency. Lepanto thenmaintains that an agency is revocable at the will of the principal (Article 1733 ofthe Old Civil Code) regardless of any term or period stipulated in the contract,and it was in pursuance of that right that Lepanto terminated the contract in1945 when it took over and assumed exclusive management of the workpreviously entrusted to Nielson under the contract. Lepanto finally maintainsthat Nielson as an agent is not entitled to damages since the law gives to theprincipal the right to terminate the agency at will.

Because of Lepanto's new theory We consider it necessary to determine

the nature of the management contract — whether it is a contract of agency or acontract of lease of services. Incidentally, we have noted that the lower court, inthe decision appealed from, considered the management contract as a contractof lease of services.

Article 1709 of the Old Civil Code, defining contract of agency, provides:

"By the contract of agency, one person binds himself to render someservice or do something for the account or at the request of another."

Article 1544, defining contract of lease of service, provides:

"In a lease of work or services, one of the parties binds himself to makeor construct something or to render a service to the other for a pricecertain."

In both agency and lease of services one of the parties binds himself to rendersome service to the other party. Agency, however, is distinguished from lease ofwork or services in that the basis of agency is representation, while in the leaseof work or services the basis is employment. The lessor of services does notrepresent his employer, while the agent represents his principal. Manresa, in his

"Commentarios al Codigo Civil Español" (1931, Tomo IX, pp. 372-373), pointsout that the element of representation distinguishes agency from lease ofservices, as follows:

"Nuestro art. 1.709 como el art 1.984 del Codigo de Napoleon y cuantostextos legales citamos en las concordancias,expresan claramente estaidea de la representación, 'hacer alguna cosa por cuenta o encargo de



otra' dice nuestro Codigo; 'poder de hacer alguna cosa para el mandanteo en su nombre' dice el Codigo de Napoleon, y en tales palabras aparecevivo y luminoso el concepto y la teoria de la representacion, tan fecundaen enseñanzas, que a su sola luz es como se explican las diferencias queseparan el mandato del arrendamiento de servicios, de los contratos

inominados, del consejo y de la gestion de negocios. "En efecto, en el arrendamiento de servicios al obligarse para suejecucion, se trabaja, en verdad, para el dueño que remunera la labor,pero ni se le representa ni se obra en su nombre . . ."

On the basis of the interpretation of Article 1709 of the old Civil Code, Article1868 of the new Civil Code has defined the contract of agency in more explicitterms, as follows:

"By the contract of agency a person binds himself to render someservice or to do something in representation or on behalf of another,with the consent or authority of the latter."

There is another obvious distinction between agency and lease of services. Agency is a preparatory contract, as agency "does not stop with the agencybecause the purpose is to enter into other contracts." The most characteristicfeature of an agency relationship is the agent's power to bring about businessrelations between his principal and third persons. "The agent is destined toexecute juridical acts (creation, modification or extinction of relations with third

parties). Lease of services contemplate only material (non-juridical) acts." (Reyesand Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277)

In the light of the interpretations we have mentioned in the foregoingparagraphs, let us now determine the nature of the management contract inquestion. Under the contract, Nielson had agreed, for a period of five years, withthe right to renew for a like period, to explore, develop and operate the miningclaims of Lepanto, and to mine, or mine and mill, such pay ore as may be found

therein and to market the metallic products recovered therefrom which mayprove to be marketable, as well as to render for Lepanto other services specifiedin the contract. We gather from the contract that the work undertakenby Nielsonwas to take complete charge, subject at all times to the generalcontrol of the Board of Directors of Lepanto, of the exploration and developmentof the mining claims, of the hiring of a sufficient and competent staff and ofsufficient and capable laborers, of the prospecting and development of the mine,



of the erection and operation of the mill, and of the beneficiation and marketingof the minerals found on the mining properties; and in carrying out saidobligation Nielson should proceed diligently and in accordance with the bestmining practice. In connection with its work Nielson was to submit reports,maps, plans and recommendations with respect to the operation anddevelopment of the mining properties, make recommendations and plans on theerection or enlargement of any existing mill, dispatch mining engineers andtechnicians to the mining properties as from time to time may reasonably berequired to investigate and make recommendations without cost or expenseto Lepanto. Nielson was also to "act as purchasing agent of supplies, equipmentand other necessary purchases by Lepanto, provided, however, that no purchaseshall be made without the prior approval of Lepanto; and provided further, thatno commission shall be claimed or retained byNielson on such purchase"; and "tosubmit all requisition for supplies, all contracts and arrangement with engineers,

and staff and all matters requiring the expenditures of money, present or future,for prior approval by Lepanto; and also to make contracts subject to the priorapproval of Lepanto for the sale and marketing of the minerals mined from saidproperties, when said products are in a suitable condition for marketing." 1

It thus appears that the principal and paramount undertaking of Nielson underthe management contract was the operation and development of the mine andthe operation of the mill. All the other undertakings mentioned in the contractare necessary or incidental to the principal undertaking — these otherundertakings being dependent upon the work on the development of the mine

and the operation of the mill. In the performance of this principalundertaking Nielson was not in any way executing juridical acts for Lepanto,destined to create, modify or extinguish business relations between Lepanto andthird persons. In other words, in performing its principal undertaking Nielson wasnot acting as an agent of Lepanto, in the sense that the term agent isinterpreted under the law of agency, but as one who was performing materialacts for an employer, for a compensation.

It is true that the management contract provides that Nielson would also act aspurchasing agent of supplies and enter into contracts regarding the sale of

mineral, but the contract also provides that Nielson could not make anypurchase, or sell the minerals, without the prior approval of Lepanto. It is clear,therefore, that even in these cases Nielson could not execute juridical acts whichwould bind Lepanto without first securing the approval of Lepanto. Nielson, then,was to act only as an intermediary, not as an agent.



Lepanto contends that the management contract in question being one ofagency it had the right to terminate the contract at will pursuant to the provisionof Article 1733 of the old Civil Code. We find, however, a provision in themanagement contract which militates against this stand of Lepanto. ParagraphXI of the contract provides:

"Both parties to this agreement fully recognize that the terms of this Agreement are made possible only because of the faith or confidencethat the Officials of each company have in the other; therefore, in orderto assure that such confidence and faith shall abide andcontinue, NIELSON agrees that LEPANTO may cancel this Agreement atany time upon ninety (90) days written notice, in the eventthat NIELSON for any reason whatsoever, except acts of God, strike andother causes beyond its control, shall cease to prosecute the operationand development of the properties herein described, in good faith and in

accordance with approved mining practice." It is thus seen, from the above-quoted provision of paragraph XI of themanagement contract, that Lepanto could not terminate the agreement atwill. Lepanto could terminate or cancel the agreement by giving notice oftermination ninety days in advance only in the event that Nielson shouldprosecute in bad faith and not in accordance with approved mining practice theoperation and development of the mining properties of Lepanto. Lepanto couldnot terminate the agreement if Nielson should cease to prosecute the operationand development of the mining properties by reason of acts of God, strike and

other causes beyond the control of Nielson. The phrase "Both parties to this agreement fully recognize that the terms of thisagreement are made possible only because of the faith and confidence of theofficials of each company have in the other" in paragraph XI of the managementcontract does not qualify the relation between Lepanto and Nielson as that ofprincipal and agent based on trust and confidence, such that the contractualrelation may be terminated by the principal at any time that the principal losestrust and confidence in the agent. Rather, that phrase simply implies thecircumstance that brought about the execution of the management contract.

Thus, in the annual report for 1936 2 , submitted by Mr. C. A. Dewit, Presidentof Lepanto, to its' stockholders, under date of March 15, 1937, we read thefollowing:

"To the Stockholders:

xxx xxx xxx

http://www.cdasiaonline.com/search/show_article/30720?search=title%3A+%28Nielson%29+AND+title%3A+%28Lepanto+Consolidated%29#footnotes






"The incorporation of our Company was effected as a result ofnegotiations with Messrs. Nielson & Co., Inc., and an offer by thesegentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated August 11,1936, reading as follows:

'Messrs. Cookes and Lednicky,' 'Present.

'Re: Mankayan Copper Mines.

'GENTLEMEN:

'After an examination of your property by our engineers, we havedecided to offer as we hereby offer to underwrite the entire issueof stock of a corporation to be formed for the purpose of taking

over said properties, said corporation to have an authorizedcapital of P1,750,000.00, of which P700,000.00 will be issued inescrow to the claimowners in exchange for their claims, and thebalance of P1,050,000.00 we will sell to the public at par or takeourselves.

'The arrangement will be under the following conditions:

'1.The subscriptions for cash shall be payable 50% at time ofsubscription and the balance subject to the call of the Board of

Directors of the proposed corporation. '2.We shall have an underwriting and brokerage commission of10% of the P1,050,000.00 to be sold for cash to the public, saidcommission to be payable from the first payment of 50% on eachsubscription.

'3.We will bear the cost of preparing and mailing any prospectusthat may be required, but no such prospectus will be sent outuntil the text thereof has been first approved by the Board ofDirectors of the proposed corporation.

'4.That after the organization of the corporation, all operatingcontract be entered into between ourselves and said corporation,under the terms which the property will be developed and minedand a mill erected, under our supervision, our compensation to beP2,000.00 per month until the property is put on a profitablebasis and P2,500.00 per month plus 10% of the net profits for aperiod of five years thereafter.`



'5.That we shall have the option to renew said operating contractfor an additional period of five years, on the same basis as theoriginal contract, upon the expiration thereof.

'It is understood that the development and mining operations on

said property, and the erection of the mill thereon, and theexpenditures therefore, shall be subject to the general control ofthe Board of Directors of the proposed corporation, and, in caseyou accept this proposition, that a detailed operating contract willbe entered into, covering the relationships between the parties.

Yours very truly,(Sgd.) L. R. Nielson'"

"Pursuant to the provisions of paragraph 2 of this offer,Messrs. Nielson & Co., took subscriptions for One Million Fifty Thousand

Pesos (P1,050,000.00) in shares of our Company and their underwritingand brokerage commission has been paid. More than fifty per cent ofthese subscriptions have been paid to the Company in cash. Theclaimowners have transferred their claims to the Corporation, but theP700,000.00 in stock which they are to receive therefor, is as yet held inescrow.

"Immediately upon the formation of the Corporation Messrs. Nielson &Co., assumed the Management of the property under the control of theBoard of Directors. A modification in the Management Contract was

made with the consent of all the then stockholders, in virtue of whichthe compensation of Messrs. Nielson & Co., was increased to P2,500.00per month when mill construction began. The formal ManagementContract was not entered into until January 30, 1937."

xxx xxx xxx

"Manila, March 15, 1937

(Sgd.) "C.A. DeWitt"President"

We can gather from the foregoing statements in the annual report for 1936, andfrom the provision of paragraph XI of the Management contract, that theemployment by Lepanto of Nielson to operate and manage its mines wasprincipally in consideration of the know-how and technical servicesthat Nielson offered Lepanto. The contract thus entered into pursuant to theoffer made by Nielson and accepted by Lepanto was a "detailed operating



contract". It was not a contract of agency. Nowhere in the record is it shownthat Lepanto considered Nielson as its agent and that Lepanto terminated themanagement contract because it had lost its trust and confidence in Nielson.

The contention of Lepanto that it had terminated the management contract in1945, following the liberation of the mines from Japanese control, because therelation between it and Nielson was one of agency and as such it could terminatethe agency at will, is, therefore, untenable. On the other hand, it can be saidthat, in asserting that it had terminated or cancelled the management contract in1945, Lepanto had thereby violated the express terms of the managementcontract. The management contract was renewed to last until January 31, 1947,so that the contract had yet almost two years to go — upon the liberation of themines in 1945. There is no showing that Nielson had ceased to prosecute theoperation and development of the mines in good faith and in accordance withapproved mining practice which would warrant the termination of the contractupon ninety days written notice. In fact there was no such written notice oftermination. It is an admitted fact that Nielson ceased to operate and developthe mines because of the war — a cause beyond the control of Nielson.

Indeed, if the management contract in question was intended to create arelationship of principal and agent between Lepanto andNielson, paragraph XI ofthe contract should not have been inserted because, as provided in Article 1733

of the old Civil Code, agency is essentially revocable at the will of the principal -that means, with or without cause. But precisely said paragraph XI was insertedin the management contract to provide for the cause for its revocation. Theprovision of paragraph XI must be given effect.

In the construction of an instrument where there are several provisions orparticulars, such a construction is, if possible, to be adopted as will give effect toall, 3 and if some stipulation of any contract should admit of several meanings, itshall be understood as bearing that import which is most adequate to render iteffectual. 4

It is Our considered view that by express stipulation of the parties, themanagement contract in question is not revocable at the will of Lepanto. We rulethat this management contract is not a contract of agency as defined in Article1709 of the old Civil Code, but a contract of lease of services as defined in Article1544 of the same Code. This contract can not be unilaterally revokedby Lepanto.







milling. During the period when the adverse effects on the work of mining andmilling exist, neither party in the contract would be held liable for non-compliance of its obligation under the contract. In other words, the operation ofthe contract is suspended for as long as the adverse effects of the happening ofany of those events had impeded or obstructed the work of mining and milling.

An analysis of the phraseology of the above-quoted paragraph II of themanagement contract readily supports the conclusion that it is the agreement, orthe contract, that is suspended. The phrase "the same" can refer to no otherthan the term "Agreement" which immediately precedes it. The "Agreement"may be wholly or partially suspended, and this situation will depend on whetherthe event wholly or partially affected adversely the work of mining and milling. Inthe instant case, the war had adversely affected — and wholly at that — thework of mining and milling. We have clearly stated in Our decision thecircumstances brought about by the war which caused the whole or total

suspension of the agreement or of the management contract. LEPANTO itself admits that the management contract was suspended. We quotefrom the brief of LEPANTO:

"Probably, what Nielson meant was, it was prevented by Lepanto toassume again the management of the mine in 1945, at the precise timewhen defendant was at the feverish phase of rehabilitation and althoughthe contract had already been suspended." (Lepanto's Brief, p. 9)

". . . it was impossible, as a result of the destruction of the mine, for the

plaintiff to manage and operate the same and because, as provided inthe agreement, the contract was suspended by reason of the war."(Lepanto's Brief, pp. 9-10)

"Clause II, by its terms, is clear that the contract is suspended in casefortuitous event or force majeure, such as war, adversely affects thework of mining and milling." (Lepanto's Brief, p. 49)

Lepanto is correct when it said that the obligations under the contract weresuspended upon the happening of any of the events enumerated in paragraph II

of the management contract. Indeed, those obligations were suspended becausethe contract itself was suspended. When we talk of a contract that has beensuspended we certainly mean that the contract temporarily ceased to beoperative, and the contract becomes operative again upon the happening of acondition — or when a situation obtains — which warrants the termination of thesuspension of the contract.



In Our decision We pointed out that the agreement in the management contractwould be suspended when two conditions concur, namely: (1) the happening ofthe event constituting a force majeure that was reasonably beyond the controlof Nielson, and (2) that the event constituting the force majeure adverselyaffected the work of mining and milling. The suspension, therefore, would lastnot only while the event constituting the force majeure continued to occur butalso for as long as the adverse effects of the force majeure on the work ofmining and milling had not been eliminated. Under the management contract thehappening alone of the event constituting the force majeure which did not affectadversely the work of mining and milling would not suspend the period of thecontract. It is only when the two conditions concur that the period of theagreement is suspended.

It is not denied that because of the war, in February 1942, the mine, the original

mill, the original power plant, the supplies and equipment, and all installations atthe Mankayan mines of Lepanto, were destroyed upon order of the United States Army, to prevent their utilization by the enemy. It is not denied that for theduration of the war Nielson could not undertake the work of mining and milling.When the mines were liberated from the enemy in August, 1945, the condition ofthe mines, the mill, the power plant and other installations, was not the same asin February 1942 when they were ordered destroyed by the US army. Certainly,upon the liberation of the mines from the enemy, the work of mining and millingcould not be undertaken by Nielsonunder the same favorable circumstances thatobtained before February 1942. The work of mining and milling, as undertaken

byNielson in January, 1942, could not be resumed by Nielson soon afterliberation because of the adverse effects of the war, and this situation continueduntil June of 1948. Hence, the suspension of the management contract did notend upon the liberation of the mines in August, 1945. The mines and the milland the installations, laid waste by the ravages of war, had to be reconstructedand rehabilitated, and it can be said that it was only on June 26, 1948 that theadverse effects of the war on the work of mining and milling had ended, becauseit was on that date that the operation of the mines and the mill was resumed.The period of suspension should, therefore, be reckoned from February 1942until June 26, 1948, because it was during this period that the war and the

adverse effects of the war on the work of mining and milling had lasted. Themines and the installations had to be rehabilitated because of the adverse effectsof the war. The work of rehabilitation started soon after the liberation of themines in August, 1945 and lasted until June 26, 1948 when, as statedin Lepanto's annual report to its stockholders for the year 1948, "June 28, 1948marked the official return to operation of this company at its properties atMankayan, Mountain province, Philippines" (Exh. F-1).



Lepanto would argue that if the management contract was suspended at all thesuspension should cease in August of 1945, contending that the effects of thewar should cease upon the liberation of the mines from the enemy. This

contention cannot be sustained, because the period of rehabilitation was still aperiod when the physical effects of the war — the destruction of the mines andof all the mining installations — adversely affected, and made impossible, thework of mining and milling. Hence, the period of the reconstruction andrehabilitation of the mines and the installations must be counted as part of theperiod of suspension of the contract.

Lepanto claims that it would not be unfair to end the period of suspension uponthe liberation of the mines because soon after the liberation of themines Nielson insisted to resume the management work, and that Nielson wasunder obligation to reconstruct the mill in the same way that it was underobligation to construct the mill in 1937. This contention is untenable. It is truethat Nielson insisted to resume its management work after liberation, but thiswas only for the purpose of restoring the mines, the mill, and other installationsto their operating and producing condition as of February 1942 when they wereordered destroyed. It is not shown by any evidence in the record,that Nielson had agreed, or would have agreed, that the period of suspension ofthe contract would end upon the liberation of the mines. This is so because, asfound by this Court, the intention of the parties in the management contract, and

as understood by them, the management contract was suspended for as long asthe adverse effects of the force majeure on the work of mining and milling hadnot been removed, and the contract would be extended for as long as it wassuspended. Under the management contract Nielson had the obligation to erectand operate the mill, but not to re-erect or reconstruct the mill in case of itsdestruction by force majeure.

It is the considered view of this Court that it would not be fair to Nielson toconsider the suspension of the contract as terminated upon the liberation of themines because then Nielson would be placed in a situation whereby it would

have to suffer the adverse effects of the war on the work of mining and milling.The evidence shows that as of January 1942 the operation of the mines underthe management of Nielson was already under beneficial conditions, so much sothat dividends were already declared by Lepanto for the years 1939, 1940 and1941. To make the management contract immediately operative after theliberation of the mines from the Japanese, at the time when the mines and all itsinstallations were laid waste as a result of the war, would be to place Nielson in a



situation whereby it would lose all the benefits of what it had accomplished inplacing theLepanto mines in profitable operation before the outbreak of the warin December, 1941. The record shows that Nielson started its managementoperation way back in 1936, even before the management contract was enteredinto. As early as August 1936Nielson negotiated with Messrs. C.I. Cookes and

V.L. Lednicky for the operation of the Mankayan mines and it was the result ofthose negotiations that Lepanto was incorporated; that it was Nielson thathelped to capitalize Lepanto, and that after the formation of the corporation(Lepanto) Nielson immediately assumed the management of the miningproperties of Lepanto. It was not until January 30, 1937 when the managementcontract in question was entered into between Lepanto and Nielson(Exhibit A).

A contract for the management and operation of mines calls for a speculativeand risky venture on the part of the manager-operator. The manager-operator

invests its technical know-how, undertakes back-breaking efforts andtremendous spade-work, so to say, in the first years of its management andoperation of the mines, in the expectation that the investment and the effortsemployed might be rewarded later with success. This expected success maynever come. This had happened in the very case of the Mankayan mines where,as recounted by Mr. Lednicky of Lepanto, various persons and entities ofdifferent nationalities, including Lednicky himself, invested all their money andfailed. The manager-operator may not strike sufficient ore in the first, second,third, or fourth year of the management contract, or he may not strike ore evenuntil the end of the fifth year. Unless the manager-operator strikes sufficient

quantity of ore he cannot expect profits or reward for his investment and efforts.In the case of Nielson, its corps of competent engineers, geologists, andtechnicians begun working on the Mankayan mines ofLepanto since the latterpart of 1936, and continued their work without success and profit through 1937,1938, and the earlier part of 1939. It was only in December of 1939 when theefforts of Nielson started to be rewarded when Lepanto realized profits and thefirst dividends were declared. From that time on Nielson could expect profit tocome to it — as in fact Lepanto declared dividends for 1940 and 1941 — if thedevelopment and operation of the mines and the mill would continueunhampered. The operation, and the expected profits, however, would still be

subject to hazards due to the occurrence of fortuitous events, fires, earthquakes,strikes, war, etc., constituting force majeure , which would result in thedestruction of the mines and the mill. One of these diverse causes, or one afterthe other, may consume the whole period of the contract, and if it shouldhappen that way the manager- operator would reap no profit to compensate forthe first years of spade-work and investment of efforts and know-how. Hence, infairness to the manager-operator, so that he may not be deprived of the benefits



of the work he had accomplished, the force majeure clause is incorporated as astandard clause in contracts for the management and operation of mines.

The nature of the contract for the management and operation of mines justifiesthe interpretation of the force majeure clause, that a period equal to the period

of suspension due to force majeure should be added to the original term of thecontract by way of an extension. We, therefore, reiterate the ruling in Ourdecision that the management contract in the instant case was suspended fromFebruary, 1942 to June 26, 1948, and that from the latter date the contract hadyet five years to go.

3.In the fourth ground of its motion for reconsideration, Lepanto maintains thatthis Court erred in reversing the finding of the trial court that Nielson's action hasprescribed, by considering only the first claim and ignoring the prescriptibility ofthe other claims.

This ground of the motion for reconsideration has no merit.

In Our decision We stated that the claims of Nielson are based on a writtendocument, and, as such, the cause of action prescribes in ten years. 5 Inasmuchas there are different claims which accrued on different dates the prescriptiveperiods for all the claims are not the same. The claims of Nielson that have beenawarded by this Court are itemized in the dispositive part of the decision.

The first item of the awards in Our decision refers to Nielson's compensation inthe sum of P17,500.00, which is equivalent to 10% of the cash dividendsdeclared by Lepanto in December, 1941. As We have stated in Our decision, thisclaim accrued on December 31, 1941, and the right to commence an actionthereon started on January 1, 1942. We declared that the action on this claimdid not prescribe although the complaint was filed on February 6, 1958 — orafter a lapse of 16 years, 1 month and 5 days — because of the operation of themoratorium law. We declared that under the applicable decisions of thisCourt 6 the moratorium period of 8 years, 2 months and 8 days should bededucted from the period that had elapsed since the accrual of the cause of

action to the date of the filing of the complaint, so that there is a period of lessthan 8 years to be reckoned for the purpose of prescription.

This claim of Nielson is covered by Executive Order No. 32, issued on March 10,1945, which provides as follows:

"Enforcement of payments of all debts and other monetaryobligations payable in the Philippines, except debts and other monetary











obligations entered into in any area after declaration by PresidentialProclamation that such area has been freed from enemy occupation andcontrol, is temporarily suspended pending action by the CommonwealthGovernment." (41 O.G. 56-57; Emphasis supplied)

Executive Order No. 32 covered all debts and monetary obligation contractedbefore the war (or before December 8, 1941) and those contracted subsequentto December 8, 1941 and during the Japanese occupation. Republic Act No. 342,approved on July 26, 1948, lifted the moratorium provided for in Executive OrderNo. 32 on pre-war (or pre-December 8, 1941) debts of debtors who had not filedwar damage claims with the United States War Damage Commission. In otherwords, after the effectivity of Republic Act No. 342, the debt moratorium waslimited: (1) to debts and other monetary obligations which were contracted afterDecember 8, 1941 and during the Japanese occupation, and (2) to those pre-war(or pre-December 8, 1941) debts and other monetary obligations where the

debtors filed war damage claims. That was the situation up to May 18, 1953when this Court declared Republic Act No. 342 unconstitutional. 7 It has beenheld by this Court, however, that from March 10, 1945 when Executive Order No.32 was issued, to May 18, 1953 when Republic Act No. 342 was declaredunconstitutional — or a period of 8 years, 2 months and 8 days — the debtmoratorium was in force, and had the effect of suspending the period ofprescription. 8

Lepanto is wrong when in its motion for reconsideration it claims that themoratorium provided for in Executive Order No. 32 was continued by Republic

Act No. 342 "only with respect to debtors of pre-war obligations or thoseincurred prior to December 8, 1941," and that "the moratoriumwas lifted and terminated with respect to obligations incurred after December 8,1941." 9

This Court has held that Republic Act No. 342 does not apply to debts contractedduring the war and did not lift the moratorium in relation thereto. 10 In the caseof Abraham, et al. vs. Intestate Estate of Juan C. Ysmael, et al., L-16741, Jan.31, 1962, this Court said:

"Respondents, however, contend that Republic Act No. 342, which tookeffect on July 26, 1948, lifted the moratorium on debts contractedduring the Japanese occupation. The court has already held thatRepublic Act No. 342 did not lift the moratorium on debts contractedduring the war (Uy vs. Kalaw Katigbak, G.R. No. L-1830, Dec. 31, 1949)











but modified Executive Order No. 32 as to pre-war debts, making theprotection available only to debtors who had war damage claims (Sisonvs. Mirasol, G.R. No. L-4711, Oct. 3, 1952)"

We therefore reiterate the ruling in Our decision that the claim involved in the

first item awarded to Nielson had not prescribed. What we have stated herein regarding the non-prescription of the cause ofaction of the claim involved in the first item in the award also holds true withrespect to the second item in the award, which refers to Nielson's claim formanagement fee of P2,500.00 for January, 1942. Lepanto admits that thissecond item, like the first, is a monetary obligation. The right of actionofNielson regarding this claim accrued on January 31, 1942.

As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium

law is not applicable. That is the reason why in Our decision We did not discussthe question of prescription regarding these items. The claims of Nielson involvedin these items are based on the management contract, and Nielson's cause ofaction regarding these claims prescribes in ten years. Corollary to Our ruling thatthe management contract was suspended from February, 1942 until June 26,1948, and that the contract was extended for five years from June 26, 1948, theright of action of Nielson to claim for what is due to it during that period ofextension accrued during the period from June 26, 1948 till the end of the five-year extension period — or until June 26, 1953. And so, even if We reckon June26, 1948 as the starting date of the ten-year period in connection with theprescriptibility of the claims involved in items 3, 4, 5, 6 and 7 of the awards inthe decision, it is obvious that when the complaint was filed on February 6, 1958the ten-year prescriptive period had not yet lapsed.

In Our decision We have also ruled that the right of actionof Nielson against Lepanto had not prescribed because of the arbitration clausein the Management contract. We are satisfied that there is evidencethat Nielson had asked for arbitration, and an arbitration committee had beenconstituted. The arbitration committee, however, failed to bring about anysettlement of the differences between Nielson and Lepanto. On June 25, 1957counsel for Lepanto definitely advised Nielson that they were not entertainingany claim of Nielson. The complaint in this case was filed on February 6, 1958.

4.In the sixth ground of its motion for reconsideration, Lepanto maintains thatthis Court "erred in awarding as damages (a) 10% of the cash dividendsdeclared and paid in December, 1941; (b) the management fee of P2,500.00 forthe month of January 1942; and (c) the full contract price for the extended



period of 60 months, since the damages were never demanded nor proved and,in any case, not allowable under the general law on damages."

We have stated in Our decision that the original agreement in the managementcontract regarding the compensation of Nielsonwas modified, such that instead

of receiving a monthly compensation of P2,500.00 plus 10% of the net profitsfrom the operation of the properties for the preceding month, 11 Nielson wouldreceive a compensation of P2,500.00 a month, plus (1)10% of the dividendsdeclared and paid, when and as paid, during the period of the contract, and atthe end of each year, (2)10% of any depletion reserve that may be set up, and(3) 10% of any amount expended during the year out of surplus earnings forcapital account.

It is shown that in December, 1941, cash dividends amounting to P175,000.00was declared by Lepanto. 12 Nielson, therefore, should receive the equivalent of10% of this amount, or the sum of P17,500.00. We have found that this amountwas not paid toNielson.

In its motion for reconsideration, Lepanto inserted a photographic copy of page127 of its cash disbursement book, allegedly for 1941, in an effort to show thatthis amount of P17,500.00 had been paid to Nielson. It appears, however, in thisphotographic copy of page 127 of the cash disbursement book that the sum ofP17,500.00 was entered on October 29 as "surplus a/c Nielson& Co. Inc." Theentry does not make any reference to dividends or participation of Nielson in the

profits. On the other hand, in the photographic copy of page 89 of the 1941 cashdisbursement book, also attached to the motion for reconsideration, there is anentry for P17,500.00 on April 23, 1941 which states "Accts. Pay.Particip. Nielson & Co. Inc." This entry for April 23, 1941 may really be theparticipation of Nielson in the profits based on dividends declared in April 1941as shown in Exhibit L. But in the same Exhibit L it is not stated that any dividendwas declared in October 1941. On the contrary it is stated in Exhibit L thatdividends were declared in December 1941. We cannot entertain this piece ofevidence for several reasons: (1) because this evidence was not presentedduring the trial in the court below; (2) there is no showing that this piece of

evidence is newly discovered and that Lepanto was not in possession of saidevidence when this case was being tried in the court below; and (3) according toExhibit L cash dividends of P175,000.00 were declared in December, 1941, andso the sum of P17,500.00 which appears to have been paid to Nielson in October1941 could not be payment of the equivalent of 10% of the cash dividends thatwere later declared in December, 1941.











As regards the management fee of Nielson corresponding to January, 1942, inthe sum of P2,500.00, We have also found thatNielson is entitled to be paid thisamount, and that this amount was not paid by Lepanto to Nielson.Whereas, Lepanto was able to prove that it had paid the management feesof Nielson for November and December, 1941, 13 it was not able to present anyevidence to show that the management fee of P2,500.00 for January, 1942 hadbeen paid.

It having been declared in Our decision, as well as in this resolution, that themanagement contract had been extended for 5 years, or sixty months, fromJune 27, 1948 to June 26, 1953, and that the cause of action of Nielson to claimfor its compensation during that period of extension had not prescribed, itfollows that Nielson should be awarded the management fees during the wholeperiod of extension, plus the 10% of the value of the dividends declared during

the said period of extension, the 10% of the depletion reserve that was set up,and the 10% of any amount expended out of surplus earnings for capitalaccount.

5.In the seventh ground of its motion for reconsideration, Lepanto maintains thatthis Court erred in ordering Lepanto to issue and deliver to Nielson shares ofstock together with fruits thereof.

In Our decision, We declared that pursuant to the modified agreement regardingthe compensation of Nielson which provides, among others, that Nielson would

receive 10% of any dividends declared and paid, when and aspaid, Nielson should be paid 10% of the stock dividends declaredby Lepanto during the period of extension of the contract.

It is not denied that on November 28, 1949, Lepanto declared stock dividendsworth P1,000,000.00; and on August 22, 1950, it declared stock dividends worthP2,000,000.00. In other words, during the period of extension Lepanto haddeclared stock dividends worth 3,000,000.00. We held in Our decisionthat Nielson is entitled to receive 10% of the stock dividends declared, or sharesof stocks, worth P300,000.00 at the par value of P0.10 per share. We

ordered Lepanto to issue and deliver to Nielsonthose shares of stocks as well asall the fruits or dividends that accrued to said shares.

In its motion for reconsideration, Lepanto contends that the paymentto Nielson of stock dividends as compensation for its services under themanagement contract is a violation of the Corporation Law, and that it was not,and it could not be, the intention of Lepanto and Nielson — as contracting







parties — that the services of Nielson should be paid in shares of stock taken outof stock dividends declared by Lepanto. We have assiduously considered thearguments adduced by Lepanto in support of its contention, as well as theanswer of Nielson in this connection, and We have arrived at the conclusion thatthere is merit in the contention of Lepanto.

Section 16 of the Corporation Law, in part, provides as follows:

"No corporation organized under this Act shall create or issue bills, notesor other evidence of debt, for circulation as money, and no corporationshall issue stock or bonds except in exchange for actual cash paid to thecorporation or for: (1) property actually received by it at a fair valuationequal to the par or issued value of the stock or bonds so issued; and incase of disagreement as to their value, the same shall be presumed tobe the assessed value or the value appearing in invoices or other

commercial documents, as the case may be; and the burden or proofthat the real present value of the property is greater than the assessedvalue or value appearing in invoices or other commercial documents, asthe case may be, shall be upon the corporation, or for (2) profits earnedby it but not distributed among its stockholders or members; Provided,however , That no stock or bond dividend shall be issued without theapproval of stockholders representing not less than two-thirds of allstock then outstanding and entitled to vote at a general meeting of thecorporation or at a special meeting duly called for the purpose.

xxx xxx xxx

"No corporation shall make or declare any dividend except from thesurplus profits arising from its business , or divide or distribute its capitalstock or property other than actual profits among its members orstockholders until after the payment of its debts and the termination ofits existence by limitation or lawful dissolution: Provided , That banking,savings and loan, and trust corporations may receive deposits and issuecertificates of deposit, checks, drafts, and bills of exchange, and the like

in the transaction of the ordinary business of banking, savings and loan,and trust corporations." (As amended by Act No. 2792, and Act No.3518; Emphasis supplied.)

From the above-quoted provision of Section 16 of the Corporation Law, theconsideration for which shares of stock may be issued are: (1) cash; (2)property; and (3) undistributed profits. Shares of stock are given the specialname "stock dividends" only if they are issued in lieu of undistributed profits. If



shares of stocks are issued in exchange of cash or property then those shares donot fall under the category of "stock dividends". A corporation may legally issueshares of stock in consideration of services rendered to it by a person not astockholder, or in payment of its indebtedness. A share of stock issued to pay forservices rendered is equivalent to a stock issued in exchange of property,because services is equivalent to property. 14Likewise a share of stock issued inpayment of indebtedness is equivalent to issuing a stock in exchange for cash.But a share of stock thus issued should be part of the original capital stock of thecorporation upon its organization, or part of the stocks issued when the increaseof the capitalization of a corporation is properly authorized. In other words, it isthe shares of stock that are originally issued by the corporation and forming partof the capital that can be exchanged for cash or services rendered, or property;that is, if the corporation has original shares of stock unsold or unsubscribed,either coming from the original capitalization or from the increased capitalization.

Those shares of stock may be issued to a person who is not a stockholder, or toa person already a stockholder in exchange for services rendered or for cash orproperty. But a share of stock coming from stock dividends declared cannot beissued to one who is not a stockholder of a corporation.

A "stock dividend" is any dividend payable in shares of stock of the corporationdeclaring or authorizing such dividend. It is, what the term itself implies, adistribution of the shares of stock of the corporation among the stockholders asdividends. A stock dividend of a corporation is a dividend paid in shares of stockinstead of cash, and is properly payable only out of surplus profits.15 So, a stock

dividend is actually two things: (1) a dividend, and (2) the enforced use of thedividend money to purchase additional shares of stock at par. 16 When acorporation issues stock dividends, it shows that the corporation's accumulatedprofits have been capitalized instead of distributed to the stockholders orretained as surplus available for distribution, in money or kind, shouldopportunity offer. Far from being a realization of profits for the stockholder, ittends rather to postpone said realization, in that the fund represented by thenew stock has been transferred from surplus to assets and no longer availablefor actual distribution. 17 Thus, it is apparent that stock dividends are issued onlyto stockholders. This is so because only stockholders are entitled to dividends.

They are the only ones who have a right to a proportional share in that part ofthe surplus which is declared as dividends. A stock dividend really adds nothingto the interest of the stockholder; the proportional interest of each stockholderremains the same. 18 If a stockholder is deprived of his stock dividends — andthis happens if the shares of stock forming part of the stock dividends are issuedto a non-stockholder — then the proportion of the stockholder's interest changes






















radically. Stock dividends are civil fruits of the original investment, and to theowners of the shares belong the civil fruits. 19

The term "dividend" both in the technical sense and its ordinary acceptation, isthat part or portion of the profits of the enterprise which the corporation, by its

governing agents, sets apart for ratable division among the holders of the capitalstock. It means the fund actually set aside, and declared by the directors of thecorporation as a dividends, and duly ordered by the director, or by thestockholders at a corporate meeting, to be divided or distributed among thestockholders according to their respective interests. 20

It is Our considered view, therefore, that under Section 16 of the CorporationLaw stock dividends can not be issued to a person who is not a stockholder inpayment of services rendered. And so, in the case at bar Nielson can not be paidin shares of stock which form part of the stock dividends of Lepanto for servicesit rendered under the management contract. We sustain the contentionof Lepanto that the understanding between Lepanto and Nielson was simply tomake the cash value of the stock dividends declared as the basis for determiningthe amount of compensation that should be paid to Nielson, in the proportion of10% of the cash value of the stock dividends declared. And this conclusion ofOurs finds support in the record.

We had adverted to in Our decision that in 1940 there was some disputebetween Lepanto and Nielson regarding the application and interpretation of

certain provisions of the original contract particularly with regard to the 10%participation of Nielson in the net profits, so that some adjustments had to bemade. In the minutes of the meeting of the Board of Directors of Lepanto on

August 21, 1940, We read the following:

"The Chairman stated that he believed that it would be better to tie thecomputation of the 10% participation ofNielson & Company, Inc. to thedividend, because Nielson will then be able to definitely compute its netparticipation by the amount of the dividends declared. In addition to thedividend, we have been setting up a depletion reserve and it does notseem fair to burden the 10% participation of Nielson with the depletion

reserve, as the depletion reserve should not be considered as anoperating expense. After a prolonged discussion, upon motion dulymade and seconded, it was —

"RESOLVED, That the President, be, and he hereby is, authorized toenter into an agreement with Nielson & Company, Inc., modifyingParagraph V of management contract of January 30, 1937, effective



January 1, 1940, in such a way that Nielson & Company, Inc. shallreceive 10% of any dividends declared and paid, when and as paidduring the period of the contract and at the end of each year, 10% ofany depletion reserve that may be set up and 10% of any amountexpended during the year out of surplus earnings for capital account."

(Emphasis supplied.) From the sentence, "The Chairman stated that he believed that it would bebetter to tie the computation of the 10% participation of Nielson & Company,Inc. to the dividend, because Nielson will then be able to definitely compute itsnet participation by the amount of the dividends declared" the idea is conveyedthat the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was tomake the value of the dividends declared — whether the dividends were in cashor in stock — as the basis for determining the amount of compensation thatshould be paid to Nielson, in the proportion of 10% of the cash value of the

dividends so declared. It does not mean, however, that the compensationof Nielson would be taken from the amount actually declared as cash dividend tobe distributed to the stockholder, nor from the shares of stocks to be issued tothe stockholders as stock dividends, but from the other assets or funds of thecorporation which are not burdened by the dividends thus declared. In otherwords, if, for example, cash dividends of P300,000.00 aredeclared. Nielson would be entitled to a compensation of P30,000.00, but thisP30,000.00 should not be taken from the P300,000.00 to be distributed as cashdividends to the stockholders but from some other funds or assets of thecorporation which are not included in the amount to answer for the cashdividends thus declared. This is so because if the P30,000.00 would be taken outfrom the P300,000.00 declared as cash dividends, then the stockholders wouldnot be getting P300,000.00 as dividends but only P270,000.00. There would be adilution of the dividend that corresponds to each share of stock held by thestockholders. Similarly, if there were stock dividends worth one million pesos thatwere declared, which means an issuance of ten million shares at the par value often centavos per share, it does not mean that Nielson would be given 100,000shares. It only means that Nielson should be given the equivalent of 10% of theaggregate cash value of those shares issued as stock dividends. That this was

the understanding of Nielson itself is borne out by the fact that in its appealbrief Nielson urged that it should be paid P300,000.00 being 10% of theP3,000,000.00 stock dividends declared on November 28, 1949 and August 20,1950 . . ." 21

We, therefore, reconsider that part of Our decision which declares that Nielson isentitled to shares of stock worth P300,000.00 based on the stock dividends



declared on November 28, 1949 and on August 20, 1950, together with all thefruits accruing thereto. Instead, We declare that Nielson is entitled to paymentby Lepanto of P300,000.00 in cash, which is equivalent to 10% of the moneyvalue of the stock dividends worth P3,000,000.00 which were declared onNovember 28, 1949 and on August 20, 1950, with interest thereon at the rate of6% from February 6, 1958.

6.In the eighth ground of its motion for reconsideration Lepanto maintains thatthis Court erred in awarding to Nielson an undetermined amount of shares ofstock and/or cash, which award can not be ascertained and executed withoutfurther litigation.

In view of Our ruling in this resolution that Nielson is not entitled to receive

shares of stock as stock dividends in payment of its compensation under themanagement contract, We do not consider it necessary to discuss this ground ofthe motion for reconsideration. The awards in the present case are all reduced tospecific sums of money.

7.In the ninth ground of its motion for reconsideration Lepanto maintains thatthis Court erred in rendering judgment or attorney's fees.

The matter of the award of attorney's fees is within the sound discretion of thisCourt. In Our decision We have stated the reason why the award of P50,000.00for attorney's fees is considered by this Court as reasonable.

Accordingly, We resolve to modify the decision that We rendered on December17, 1966, in the sense that instead of awardingNielson shares of stock worthP300,000.00 at the par value of ten centavos (P0.10) per share based on thestock dividends declared by Lepanto on November 28, 1949 and August 20,1950, together with their fruits, Nielson should be awarded the sum ofP300,000.00 which is an amount equivalent to 10% of the cash value of thestock dividends thus declared, as part of the compensation due Nielson underthe management contract. The dispositive portion of the decision should,therefore, be amended, to read as follows:

IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse thedecision of the court a quo and enter in lieu thereof another, ordering theappellee Lepanto to pay the appellant Nielson the different amounts as specifiedhereinbelow:



(1)Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% ofthe cash dividends of December, 1941, with legal interest thereon from the dateof the filing of the complaint;

(2)Two thousand five hundred pesos (P2,500.00), as management fee for

January, 1942, with legal interest thereon from the date of the filing of thecomplaint;

(3)One hundred fifty thousand pesos (P150,000.00), representing managementfees for the sixty-month period of extension of the management contract, withlegal interest thereon from the date of the filing of the complaint;

(4)One million four hundred thousand pesos (P1,400,000.00), equivalent to 10%of the cash dividends declared during the period of extension of themanagement contract, with legal interest thereon from the date of the filing of

the complaint;

(5)Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cashvalue of the stock dividends declared on November 28, 1949 and August 20,1950, with legal interest thereon from the date of the filing of the complaint;

(6)Fifty three thousand nine hundred twenty eight pesos and eighty eightcentavos (P53,928.88), equivalent to 10% of the depletion reserve set up duringthe period of extension, with legal interest thereon from the date of the filing ofthe complaint;

(7)Six hundred ninety four thousand three hundred sixty four pesos and seventysix centavos (P694,364.76), equivalent to 10% of the expenses for capitalaccount during the period of extension, with legal interest thereon from the dateof the filing of the complaint;

(8)Fifty thousand pesos (P50,000.00) as attorney's fees; and

(9)The costs.

It is so ordered.. Concepcion, C . J . , Reyes, J .B .L . , Dizon, Makalintal, Sanchez and Ruiz Castro,JJ . , concur.

Fernando, Capistrano , Teehankee and Barredo, JJ ., did not take part.



Footnotes

36.

FIRST DIVISION

[G.R. No. 160215. November 10, 2004.]

HYDRO RESOURCES CONTRACTORSCORPORATION, petitioner , vs . NATIONAL IRRIGATION

ADMINISTRATION, respondent .

D E C I S I O N

YNARES-SANTIAGO, J p:

Challenged in this petition for review on certiorari under Rule 45 is the Decision

of the Court of Appeals 1 dated October 29, 2002 and its Resolution dated

September 24, 2003 2 in CA-G.R. SP No. 44527, 3 reversing the judgment of the

Construction Industry Arbitration Commission (CIAC) dated June 10, 1997 4 in

CIAC Case No. 14-98 in favor of petitioner Hydro Resources ContractorsCorporation.

The facts are undisputed and are matters of record.

In a competitive bidding conducted by the National Irrigation Administration(NIA) sometime in August 1978, Hydro Resources Contractors Corporation

(Hydro) was awarded Contract MPI-C-2 5 involving the main civil work of theMagat River Multi-Purpose Project. The contract price for the work was peggedat P1,489,146,473.72 with the peso component thereof amounting to

P1,041,884,766.99 and the US$ component valued at $60,657,992.37 at theexchange rate of P7.3735 to the dollar or P447,361,706.73.

On November 6, 1978, the parties signed Amendment No. 1 6 of the contractwhereby NIA agreed to increase the foreign currency allocation for equipmentfinancing from US$28,000,000.00 for the first and second years of the contractto US$38,000,000.00, to be made available in full during the first year of the



























contract to enable the contractor to purchase the needed equipment and spareparts, as approved by NIA, for the construction of the project. On April 9, 1980,

the parties entered into a Memorandum of Agreement 7 (MOA) whereby theyagreed that Hydro may directly avail of the foreign currency component of thecontract for the sole purpose of purchasing necessary spare parts and equipmentfor the project. This was made in order for the contractor to avoid further delaysin the procurement of the said spare parts and equipment.

A few months after the MOA was signed, NIA and Hydro entered into aSupplemental Memorandum of Agreement (Supplemental MOA) to includeamong the items to be financed out of the foreign currency portion of theContract "construction materials, supplies and services as well as equipment andmaterials for incorporation in the permanent works of the Project." 8

Work on the project progressed steadily until Hydro substantially completed theproject in 1982 and the final acceptance was made by NIA on February 14,1984. 9

During the period of the execution of the contract, the foreign exchange value ofthe peso against the US dollar declined and steadily deteriorated. WheneverHydro's availment of the foreign currency component exceeded the amount ofthe foreign currency payable to Hydro for a particular period, NIA chargedinterest in dollars based on the prevailing exchange rate instead of the fixedexchange rate of P7.3735 to the dollar. Yet when Hydro received payments from

NIA in Philippine Pesos, NIA made deductions from Hydro's foreign currencycomponent at the fixed exchange rate of P7.3735 to US$1.00 instead of theprevailing exchange rate. AEHTIC

Upon completion of the project, a final reconciliation of the total entitlement ofHydro to the foreign currency component of the contract was made. The resultof this final reconciliation showed that the total entitlement of Hydro to theforeign currency component of the contract exceeded the amount of US dollarsrequired by Hydro to repay the advances made by NIA for its account in theimportation of new equipment, spare parts and tools. Hydro then requested a full

and final payment due to the underpayment of the foreign exchange portioncaused by price escalations and extra work orders. In 1983, NIA and Hydroprepared a joint computation denominated as the "MPI-C-2 Dollar RateDifferential on Foreign Component of Escalation." 10Based on said jointcomputation, Hydro was still entitled to a foreign exchange differential ofUS$1,353,771.79 equivalent to P10,898,391.17.


















Hydro then presented its claim for said foreign exchange differential to NIA on

August 12, 1983 11 but the latter refused to honor the same. Hydro made

several 12 demands to recover its claim until the same was turned down withfinality by then NIA Administrator Federico N. Alday, Jr. on January 6, 1987. 13

On December 7, 1994, Hydro filed a request for arbitration with the Construction

Industry Arbitration Commission (CIAC). 14 In the said request, Hydro nominatedsix (6) arbitrators. The case was docketed as CIAC Case No. 18-94.

NIA filed its Answer with Compulsory Counterclaim 15 raising laches, estoppeland lack of jurisdiction by CIAC as its special defenses. NIA also submitted its six(6) nominees to the panel of arbitrators. After appointment of the arbitrators,

both parties agreed on the Terms of Reference 16 as well as the issues submittedfor arbitration.

On March 13, 1995, NIA filed a Motion to Dismiss 17 questioning CIAC's jurisdiction to take cognizance of the case. The latter, however, deferredresolution of the motion and set the case for hearing for the reception of

evidence. 18 NIA moved 19 for reconsideration but the same was denied by CIACin an Order dated April 25, 1995. 20

Dissatisfied, NIA filed a petition for certiorari and prohibition with the Court of

Appeals where the same was docketed as CA-G.R. SP No. 37180, 21 whichdismissed the petition in a Resolution dated June 28, 1996. 22

NIA challenged the resolution of the Court of Appeals before this Court in aspecial civil action for certiorari , docketed as G.R. No. 129169. 23

Meanwhile, on June 10, 1997, the CIAC promulgated a decision in favor of

Hydro. 24 NIA filed a Petition for Review on Appeal before the Court of Appeals,which was docketed as CA-G.R. SP No. 44527. 25

During the pendency of CA-G.R. SP No. 44527 before the Court of Appeals, thisCourt dismissed special civil action for certiorari docketed as G.R. No. 129169 onthe ground that CIAC had jurisdiction over the dispute and directed the Court of

Appeals to proceed with reasonable dispatch in the disposition of CA-G.R. SP No.44527. NIA did not move for reconsideration of the said decision, hence, thesame became final and executory on December 15, 1999. 26

Thereafter, the Court of Appeals rendered the challenged decision in CA-G.R. SPNo. 44527, reversing the judgment of the CIAC on the grounds that: (1) Hydro's






























































claim has prescribed; (2) assuming that Hydro was entitled to its claim, the rateof exchange should be based on a fixed rate; (3) Hydro's claim is contrary to

R.A. No. 529; 27 (4) NIA's Certification of Non-Forum-Shopping was proper evenif the same was signed only by counsel and not by NIA's authorizedrepresentative; and (5) NIA did not engage in forum-shopping.

Hydro's Motion for Reconsideration was denied in Resolution of September 24,2003.

Hence, this petition.

Addressing first the issue of prescription, the Court of Appeals, in ruling thatHydro's claim had prescribed, reasoned thus:

Nevertheless, We find good reason to apply the principle of prescription

against HRCC. It is well to note that Section 25 of the GeneralConditions of the subject contract provides (CIAC Decision, p. 15, Rollo,p. 57 ):

Any controversy or dispute arising out of or relating to thisContract which cannot be resolved by mutual agreement shall bedecided by the Administrator within thirty (30) calendar days fromreceipt of a written notice from Contractor and who shall furnishContractor a written copy of this decision. Such decision shall befinal and conclusive unless within thirty (30) calendar days from

the date of receipt thereof, Contractor shall deliver to NIA awritten notice addressed to the Administrator that he desires thatthe dispute be submitted to arbitration. Pending decision fromarbitration, Contractor shall proceed diligently with theperformance of the Contract and in accordance with the decisionof the Administrator . (Emphasis and Italics Ours)

Both parties admit the existence of this provision in the Contract(Petition, p. 4; Comment, p. 16; Rollo, pp. 12 and 131 ). Apropos , thefollowing matters are clear: (1) any controversy or dispute between theparties arising from the subject contract shall be governed by the

provisions of the contract; (2) upon the failure to arrive at a mutualagreement, the contractor shall submit the dispute to the Administratorof NIA for determination; and (3) the decision of the Administrator shallbecome final and conclusive, unless within thirty (30) calendar daysfrom the date of receipt thereof, the Contractor shall deliver to NIA awritten notice addressed to the Administrator that he desires that thedispute be submitted for arbitration. cHCIDE







Prescinding from the foregoing matters, We find that the CIAC erred ingranting HRCC's claim considering that the latter's right to make suchdemand had clearly prescribed. To begin with, on January 7, 1986,Cesar L. Tech (NIA's Administrator at the time) informed HRCC in writingthat after a review of the additional points raised by the latter, NIA

confirms its original recommendation not to allow the said claim ( Annex"F"; Rollo, p. 81; CIAC Decision, p. 11; Rollo, p. 53 ). This should havepropelled private respondent to notify and signify to NIA of intention tosubmit the dispute to arbitration pursuant to the provision of thecontract. Yet, it did not. Instead it persisted to send several letters toNIA reiterating the reason for its rejected claim (CIAC Decision, p. 11;Rollo, p. 53 ). 28

We disagree for the following reasons:

First , the appellate court clearly overlooked the fact that NIA, through then Administrator Federico N. Alday, Jr., denied "with finality" Hydro's claim only on

January 6, 1987 in a letter bearing the same date 29 which reads:

This refers to your letter dated November 7, 1986 requestingreconsideration on your claim for payment of the Dollar Rate Differentialof Price Escalation in Contract No. MPI-C-2.

We have reviewed the relevant facts and issues as presented and the

additional points raised in the abovementioned letter in the context ofthe Contract Documents and we find no strong and valid reason toreverse the earlier decision of NIA's previous management denying yourclaim . Therefore, we regret that we have to reiterate the earlier officialstand of NIA under its letter dated January 7, 1986, that confirms theoriginal recommendation which had earlier been presented in our 4thIndorsement dated February 5, 1985 to your office.

In view hereof, we regret to say with finality that the claim cannot begiven favorable consideration . (Emphasis and italics supplied)

Hydro received the above-mentioned letter on January 27, 1987. 30 Pursuant toSection 25 of the Contract's General Conditions (GC-25), Hydro had thirty (30)days from receipt of said denial, or until February 26, 1987, within which tonotify NIA of its desire to submit the dispute to arbitration.















On February 18, 1987, Hydro sent a letter 31 to NIA, addressed to then NIA Administrator Federico N. Alday, Jr., manifesting its desire to submit the disputeto arbitration. The letter was received by NIA on February 19, 1987, whichwas within the thirty-day prescriptive period.

Moreover, a circumspect scrutiny of the wording of GC-25 with regard to thethirty-day prescriptive period shows that said proviso is intended to apply todisputes which arose during the actual construction of the project and not forcontroversies which occurred after the project is completed. The rationale forsuch a stipulation was aptly explained thus by the CIAC in its Decision in CIACCase No. 18-94:

In construction contracts, there is invariably a provision for interimsettlement of disputes. The right to settle disputes is given to the owneror his representative, either an architect or engineer, designated as

"owner's representative," only for the purpose of avoiding delay in thecompletion of the project. In this particular contract, that right wasreserved to the NIA Administrator. The types of disputes contemplatedwere those which may have otherwise affected the progress of thework. It is very clear that this is the purpose of the limiting periods inthis clause that the dispute shall be resolved by the Administrator within30 days from receipt of a written notice from the Contractor and thatthe Contractor may submit to arbitration this dispute if it does not agreewith the decision of the Administrator, and "Pending decision fromarbitration, Contractor shall proceed diligently with the performance of

the Contract and in accordance with the decision of the Administrator." In this case, the dispute had arisen after completion of the Project. Thereason for the 30-day limitation no longer applies, and we find no legalbasis for applying it. Moreover, in Exhibit "B," NIA Administrator Cesar L.Tech had, instead of rendering an adverse decision, by signing thedocument with HRCC's Onofre B. Banson, implicitly approved thepayment of the foreign exchange differential, but this payment could notbe made because of the opinion of Auditor Saldua and later of theCommission on Audit. 32

Second , as early as April 1983, Hydro and NIA, through its Administrator Cesar L.Tech, prepared the Joint Computation which shows that Hydro is entitled to theforeign currency differential. 33 As correctly found by the CIAC, this computationconstitutes a written acknowledgment of the debt by the debtor under Article1155 of the Civil Code, which states:














Prescription is deemed to have been tacitly renounced when therenunciation results from acts which imply the abandonment of the rightacquired . (Emphasis and italics supplied)

Certainly, when a party has renounced a right acquired by prescription through

its actions, it can no longer claim prescription as a defense. 36 Fourth , even assuming that NIA did not waive the thirty-day prescriptive period,it clearly waived the effects of such period when it actively participated inarbitration proceedings through the following acts:

a)On January 6, 1995, NIA voluntarily filed its written appearance,readily submitted its Answer and asserted its own Counterclaims;

b)In the Compliance which accompanied the Answer, NIA also submitted

its six nominees to the Arbitral Tribunal to be constituted, among ofwhich one was eventually appointed to the tribunal;

c)NIA also actively participated in the deliberations for and theformulation of the Terms of Reference during the preliminary conferenceset by CIAC; and

d)For the purpose of obviating the introduction of testimonial evidenceon the authenticity and due execution of its documentary evidence, NIAeven had examined, upon prior request to Hydro, all of the documentswhich the latter intended to present as evidentiary exhibits for the said

arbitration case. We now come to the issue of whether or not the provisions of R.A. No. 529,otherwise known as an Act To Assure Uniform Value to Philippine Coin AndCurrency , is applicable to Hydro's claim.

The Contract between NIA and Hydro is an internationally tendered contractconsidering that it was funded by the International Bank for Reconstruction andDevelopment (IBRD). As a contract funded by an international organization,particularly one recognized by the Philippines, 37 the contract is exempt from the

provisions of R.A. No. 529. R.A. No. 4100 amended the provisions of R.A. 529thus:

SECTION 1.Section one of Republic Act Numbered Five hundred andtwenty-nine, entitled "An Act to Assure Uniform Value of Philippine Coinand Currency," is hereby amended to read as follows:











Sec. 1.Every provision contained in, or made with respect to, anydomestic obligation to wit, any obligation contracted in thePhilippines which provisions purports to give the obligee the rightto require payment in gold or in a particular kind of coin orcurrency other than Philippine currency or in an amount of money

of the Philippines measured thereby, be as it is hereby declaredagainst public policy, and null, void, and of no effect, and no suchprovision shall be contained in, or made with respect to, anyobligation hereafter incurred. The above prohibition shall notapply to (a) transactions where the funds involved are theproceeds of loans or investments made directly or indirectly,through bona fide intermediaries or agents, by foreigngovernments, their agencies and instrumentalities, andinternational financial and banking institutions so long as thefunds are identifiable, as having emanated from the sourcesenumerated above ; (b) transactions affecting high-priorityeconomic projects for agricultural, industrial and powerdevelopment as may be determined by the National EconomicCouncil which are financed by or through foreign funds; (c)forward exchange transaction entered into between banks orbetween banks and individuals or juridical persons; (d) import-export and other international banking, financial investment andindustrial transactions. With the exception of the casesenumerated in items (a), (b), (c) and (d) in the foregoingprovisions, in which bases the terms of the parties' agreementshall apply, every other domestic obligation heretofore or

hereafter incurred, whether or not any such provision as topayment is contained therein or made with respect thereto, shallbe discharged upon payment in any coin or currency which at thetime of payment is legal tender for public and privatedebts: Provided , That if the obligation was incurred prior to theenactment of this Act and required payment in a particular kind ofcoin or currency other than Philippine currency, it shall bedischarged in Philippine currency measured at the prevailing ratesof exchange at the time the obligation was incurred, except incase of a loan made in a foreign currency stipulated to be payablein the same currency in which case the rate of exchange

prevailing at the time of the stipulated date of payment shallprevail. All coin and currency, including Central Bank notes,heretofore and hereafter issued and declared by the Governmentof the Philippines shall be legal tender for all debts, public andprivate. ACETSa



SECTION 2.This Act shall take effect upon its approval. (Emphasis anditalics supplied)

Even assuming ex gratia argumenti that R.A. No. 529 is applicable, it is stillerroneous for the Court of Appeals to deny Hydro's claim because Section 1 of

R.A. No. 529 states that only the stipulation requiring payment in foreigncurrency is void, but not theobligation to make payment. This can be gleanedfrom the provision that "every other domestic obligation heretofore or hereafterincurred" shall be "discharged upon payment in any coin and currency which atthe time is legal tender for public and private debts." In Republic Resources and

Development Corporation v. Court of Appeals , 38 it was held:

. . . it is clear from Section 1 of R.A. No. 529 that what is declared nulland void is the "provision contained in, or made with respect to, anydomestic obligation to wit, any obligation contracted in the Philippines

which provision purports to give the obligee the right to require paymentin gold or in a particular kind of coin or currency other than Philippinecurrency or in an amount of money of the Philippines measured thereby"and not the contract or agreement which contains such proscribedprovision . (Emphasis supplied)

More succinctly, we held in San Buenaventura v. Court of Appeals 39 that —

It is to be noted under the foregoing provision that while an agreementto pay an obligation in a currency other than Philippine currency is null

and void as contrary to public policy, what the law specifically prohibitsis payment in currency other than legal tender but does not defeat acreditor's claim for payment . A contrary rule would allow a person toprofit or enrich himself inequitably at another's expense. (Emphasissupplied)

It is thus erroneous for the Court of Appeals to disallow petitioner's claim forforeign currency differential because NIA's obligation should be converted toPhilippine Pesos which was legal tender at the time. 40

The next issue to be resolved is whether or not Hydro's claim should becomputed at the fixed rate of exchange.

When the MOA 41 and the Supplemental MOA 42 were in effect, there wereinstances when the foreign currency availed of by Hydro exceeded the foreigncurrency payable to it for that particular Progress Payment. In instances likethese, NIA actually charged Hydro interest in foreign currency computed atthe prevailing exchange rate and not at the fixed rate. NIA now insists that the






















exchange rate should be computed according to the fixed rate and not theescalating rate it actually charged Hydro.

Suffice it to state that this flip-flopping stance of NIA of adopting and discardingpositions to suit its convenience cannot be countenanced. A person who, by his

deed or conduct has induced another to act in a particular manner, is barredfrom adopting an inconsistent position, attitude or course of conduct that

thereby causes loss or injury to another. 43 Indeed, the application of theprinciple of estoppel is proper and timely in heading off NIA's efforts atrenouncing its previous acts to the prejudice of Hydro which had dealt with ithonestly and in good faith.

. . . A principle of equity and natural justice, this is expressly adoptedunder Article 1431 of the Civil Code, and pronounced as one of theconclusive presumptions under Rule 131, Section 3(a) of the Rules of

Court, as follows: Whenever a party has, by his own declaration, act or omission,intentionally and deliberately led another to believe a particularthing to be true, and to act upon such a belief he cannot, in anylitigation arising out of such declaration, act or omission, bepermitted to falsify it. aTcIAS

Petitioner, having performed affirmative acts upon which therespondents based their subsequent actions, cannot thereafter refute his

acts or renege on the effects of the same, to the prejudice of the latter.To allow him to do so would be tantamount to conferring upon him theliberty to limit his liability at his whim and caprice, which is against thevery principles of equity and natural justice. . . . 44

NIA is, therefore, estopped from invoking the contractual stipulation providing forthe fixed rate to justify a lower computation than that claimed by Hydro. Itcannot be allowed to hide behind the very provision which it itself continuously

violated. 45 An admission or representation is rendered conclusive upon theperson making it and cannot be denied nor disproved as against the person

relying thereon. 46 A party may not go back on his own acts and representationsto the prejudice of the other party who relied upon them. 47

NIA was guilty of forum-shopping. Forum-shopping refers to the act of availingoneself of several judicial remedies in different courts, either simultaneously orsuccessively, substantially founded on the same transaction and identical





















material facts and circumstances, raising basically the like issues either pendingin, or already resolved by, some other court. 48

It has been characterized as an act of malpractice that is prohibited andcondemned as trifling with the courts and abusing their processes. It constitutes

improper conduct which tends to degrade the administration of justice. It hasalso been described as deplorable because it adds to the congestion of the

heavily burdened dockets of the courts. 49 The test in determining the presenceof this pernicious practice is whether in the two or more cases pending, there isidentity of: (a) parties; (b) rights or causes of action; and (c) reliefs sought. 50

Applying the foregoing yardstick to the instant case, it is clear that NIA violatedthe prohibition against forum-shopping. Besides filing CA-G.R. SP No. 44527wherein the Court of Appeals' decision is the subject of appeal in this proceeding,

NIA previously filed CA-G.R. SP No. 37180 and G.R. No. 129169 which is aspecial civil action for certiorari . In all three cases, the parties are invariablyHydro and NIA. In all three petitions, NIA raised practically the same

issues 51 and in all of them, NIA's prayer was the same: to nullify theproceedings commenced at the CIAC.

It must be pointed out in this regard that the first two petitions namely, CA-G.R.SP No. 37180 and G.R. No. 129169 are bothoriginal actions. Since NIA failed tofile a petition for review on certiorari under Rule 45 of the Rules of Courtchallenging the decision of the appellate court in CA-G.R. SP No. 37180

dismissing its petition, it opted to file an original action for certiorari under Rule65 with this Court where the same was docketed as G.R. No. 129169. For itsfailure to appeal the judgments in CA-G.R. SP No. 37180 and G.R. No. 129169,NIA is necessarily bound by the effects of those decisions. The filing of CA-G.R.SP No. 44527, which raises the issues already passed upon in both cases is aclear case of forum-shopping which merits outright dismissal.

The issue of whether or not the Certification of Non-Forum Shopping is validdespite that it was signed by NIA's counsel must be answered in the negative.

Applicable is the ruling in Mariveles Shipyard Corp. v. Court of Appeals, et al .: 52

It is settled that the requirement in the Rules that the certification ofnon-forum shopping should be executed and signed by the plaintiff orthe principal means that counsel cannot sign said certification unlessclothed with special authority to do so . The reason for this is that theplaintiff or principal knows better than anyone else whether a petitionhas previously been filed involving the same case or substantially thesame issues. Hence, a certification signed by counsel alone is defective




















and constitutes a valid cause for dismissal of the petition . In the case ofnatural persons, the Rule requires the parties themselves to sign thecertificate of non-forum shopping. However, in the case of thecorporations, the physical act of signing may be performed, on behalf ofthe corporate entity, only by specifically authorized individuals for the

simple reason that corporations, as artificial persons, cannot personallydo the task themselves. . . . It cannot be gainsaid that obedience to therequirements of procedural rule[s] is needed if we are to expect fairresults therefrom. Utter disregard of the rules cannot justly berationalized by harking on the policy of liberal construction . (Emphasisand italics supplied) HASDcC

In this connection, the lawyer must be "specifically authorized" in order to validlysign the certification. 53

In closing, we restate the rule that the courts will not interfere in matters whichare addressed to the sound discretion of government agencies entrusted with theregulation of activities coming under the special technical knowledge and trainingof such agencies. 54

An action by an administrative agency may be set aside by the judicialdepartment only if there is an error of law, abuse of power, lack of jurisdiction orgrave abuse of discretion clearly conflicting with the letter and spirit of thelaw. 55 In the case at bar, there is no cogent reason to depart from the generalrule because the action of the CIAC conforms rather than conflicts with the

governing statutes and controlling case law on the matter. WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals inCA-G.R. SP No. 44527 dated October 29, 2002 and the Resolution datedSeptember 24, 2003 are REVERSED aid SET ASIDE. The Decision of theConstruction Industry Arbitration Commission dated June 10, 1997 in CIAC CaseNo. 18-94 is REINSTATED.

SO ORDERED.

Davide, Jr., C .J ., Quisumbing, Carpio and Azcuna, JJ ., concur. Footnotes

37.














SECOND DIVISION

[G.R. No. 126006. January 29, 2004.]

LAPULAPU FOUNDATION, INC. and ELIAS Q.TAN, petitioners , vs . COURT OF APPEALS (SeventeenthDivision) and ALLIED BANKING CORP., respondents .

D E C I S I O N

CALLEJO, SR., J p:

Before the Court is the petition for review on certiorari filed by the LapulapuFoundation, Inc. and Elias Q. Tan seeking to reverse and set aside the

Decision 1 dated June 26, 1996 of the Court of Appeals (CA) in CA-G.R. CV No.37162 ordering the petitioners, jointly and solidarily, to pay the respondent AlliedBanking Corporation the amount of P493,566.61 plus interests and othercharges. Likewise, sought to be reversed and set aside is the appellate court'sResolution dated August 19, 1996 denying the petitioners' motion forreconsideration.

The case stemmed from the following facts:

Sometime in 1977, petitioner Elias Q. Tan, then President of the co-petitionerLapulapu Foundation, Inc., obtained four loans from the respondent AlliedBanking Corporation covered by four promissory notes in the amounts ofP100,000 each. The details of the promissory notes are as follows:

P/N No.Date of P/NMaturity DateAmount as of 1/23/79

BD No. 504Nov. 7, 1977Feb. 5, 1978P123,377.76

BD No. 621Nov. 28, 1977Mar. 28, 1978P123,411.10 BD No. 716Dec. 12, 1977Apr. 11, 1978P122,322.21

BD No. 839Jan. 5, 1978May 5, 1978P120,455.54 2

As of January 23, 1979, the entire obligation amounted to P493,566.61 anddespite demands made on them by the respondent Bank, the petitioners failed to

http://www.cdasiaonline.com/search/show_article/8423?search=date%3A%5B2004-01-29+2004-01-29%5D#footnotes









pay the same. The respondent Bank was constrained to file with the RegionalTrial Court of Cebu City, Branch 15, a complaint seeking payment by thepetitioners, jointly and solidarily, of the sum of P493,566.61 representing theirloan obligation, exclusive of interests, penalty charges, attorney's fees and costs.

In its answer to the complaint, the petitioner Foundation denied incurringindebtedness from the respondent Bank alleging that the loans were obtained bypetitioner Tan in his personal capacity, for his own use and benefit and on thestrength of the personal information he furnished the respondent Bank. Thepetitioner Foundation maintained that it never authorized petitioner Tan to co-sign in his capacity as its President any promissory note and that the respondentBank fully knew that the loans contracted were made in petitioner Tan's personalcapacity and for his own use and that the petitioner Foundation never benefited,directly or indirectly therefrom. The petitioner Foundation then interposed a

cross-claim against petitioner Tan alleging that he, having exceeded hisauthority, should be solely liable for said loans, and a counterclaim against therespondent Bank for damages and attorney's fees.

For his part, petitioner Tan admitted that he contracted the loans from therespondent Bank in his personal capacity. The parties, however, agreed that theloans were to be paid from the proceeds of petitioner Tan's shares of commonstocks in the Lapulapu Industries Corporation, a real estate firm. The loans werecovered by promissory notes which were automatically renewable ("rolled-over")every year at an amount including unpaid interests, until such time as petitioner

Tan was able to pay the same from the proceeds of his aforesaid shares. According to petitioner Tan, the respondent Bank's employee required him toaffix two signatures on every promissory note, assuring him that the loandocuments would be filled out in accordance with their agreement. However,after he signed and delivered the loan documents to the respondent Bank, thesewere filled out in a manner not in accord with their agreement, such that thepetitioner Foundation was included as party thereto. Further, prior to its filing ofthe complaint, the respondent Bank made no demand on him.

After due trial, the court a quo rendered judgment the dispositive portion ofwhich reads:

WHEREFORE, in view of the foregoing evidences [sic], arguments andconsiderations, this court hereby finds the preponderance of evidence infavor of the plaintiff and hereby renders judgment as follows:



"1.Requiring the defendants Elias Q. Tan and LapulapuFoundation, Inc. [the petitioners herein] to pay jointly andsolidarily to the plaintiff Allied Banking Corporation [therespondent herein] the amount of P493,566.61 as principalobligation for the four promissory notes, including all other

charges included in the same, with interest at 14% per annum,computed from January 24, 1979, until the same are fully paid,plus 2% service charges and 1% monthly penalty charges.

"2.Requiring the defendants Elias Q. Tan and LapulapuFoundation, Inc., to pay jointly and solidarily, attorney's fees inthe equivalent amount of 25% of the total amount due from thedefendants on the promissory notes, including all charges;

"3.Requiring the defendants Elias Q. Tan and LapulapuFoundation, Inc., to pay jointly and solidarily litigation expensesof P1,000.00 plus costs of the suit." 3

On appeal, the CA affirmed with modification the judgment of the court a quo bydeleting the award of attorney's fees in favor of the respondent Bank for beingwithout basis.

The appellate court disbelieved petitioner Tan's claim that the loans were hispersonal loans as the promissory notes evidencing them showed upon their facesthat these were obligations of the petitioner Foundation, as contracted bypetitioner Tan himself in his "official and personal character." Applying the parolevidence rule, the CA likewise rejected petitioner Tan's assertion that there wasan unwritten agreement between him and the respondent Bank that he wouldpay the loans from the proceeds of his shares of stocks in the LapulapuIndustries Corp.

Further, the CA found that demand had been made by the respondent Bank onthe petitioners prior to the filing of the complainta quo . It noted that the two

letters of demand dated January 3, 1979 4 and January 30, 1979 5 askingsettlement of the obligation were sent by the respondent Bank. These were

received by the petitioners as shown by the registry return cards 6presentedduring trial in the court a quo .

Finally, like the court a quo , the CA applied the doctrine of piercing the veil ofcorporate entity in holding the petitioners jointly and solidarily liable. Theevidence showed that petitioner Tan had represented himself as the President ofthe petitioner Foundation, opened savings and current accounts in its behalf, and

















signed the loan documents for and in behalf of the latter. The CA, likewise,found that the petitioner Foundation had allowed petitioner Tan to act as thoughhe had the authority to contract the loans in its behalf. On the other hand,petitioner Tan could not escape liability as he had used the petitioner Foundationfor his benefit.

Aggrieved, the petitioners now come to the Court alleging that:

I.THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THATTHE LOANS SUBJECT MATTER OF THE INSTANT PETITION

ARE ALREADY DUE AND DEMANDABLE DESPITE ABSENCEOF PRIOR DEMAND.

II.THE COURT OF APPEALS GRAVELY ERRED IN APPLYING THEPAROL EVIDENCE RULE AND THE DOCTRINE OF PIERCING

THE VEIL OF CORPORATE ENTITY AS BASIS FOR ADJUDGING JOINT AND SOLIDARY LIABILITY ON THE PARTOF PETITIONERS ELIAS Q. TAN AND LAPULAPUFOUNDATION, INC. 7

The petitioners assail the appellate court's finding that the loans had become dueand demandable in view of the two demand letters sent to them by therespondent Bank. The petitioners insist that there was no prior demand as theyvigorously deny receiving those letters. According to petitioner Tan, thesignatures on the registry return cards were not his.

The petitioners' denial of receipt of the demand letters was rightfully given scantconsideration by the CA as it held:

Exhibits "R" and "S" are two letters of demand, respectively datedJanuary 3, 1979 and January 30, 1979, asking settlement of theobligations covered by the promissory notes. The first letter was writtenby Ben Tio Peng Seng, Vice-President of the bank, and addressed toLapulapu Foundation, Inc., attention of Mr. Elias Q. Tan, President, whilethe second was a final demand written by the appellee's counsel,

addressed to both defendants-appellants, and giving them five (5) daysfrom receipt within which to settle or judicial action would be institutedagainst them. Both letters were duly received by the defendants, asshown by the registry return cards, marked as Exhibits "R-2" and "S-1,"respectively. The allegation of Tan that he does not know who signedthe said registry return receipts merits scant consideration, for there isno showing that the addresses thereon were wrong. Hence, thedisputable presumption "that a letter duly directed and mailed was






received in the regular course of mail" (per par. V, Section 3, Rule 131of the Revised Rules on Evidence) still holds. 8

There is no dispute that the promissory notes had already matured. However,the petitioners insist that the loans had not become due and demandable as they

deny receipt of the respondent Bank's demand letters. When presented theregistry return cards during the trial, petitioner Tan claimed that he did notrecognize the signatures thereon. The petitioners' allegation and denial are self-serving. They cannot prevail over the registry return cards which constitutedocumentary evidence and which enjoy the presumption that, absent clear andconvincing evidence to the contrary, these were regularly issued by the postalofficials in the performance of their official duty and that they acted in good

faith. 9 Further, as the CA correctly opined, mails are presumed to have beenproperly delivered and received by the addressee "in the regular course of the

mail." 10 As the CA noted, there is no showing that the addresses on the registryreturn cards were wrong. It is the petitioners' burden to overcome thepresumptions by sufficient evidence, and other than their barefaced denial, thepetitioners failed to support their claim that they did not receive the demandletters; therefore, no prior demand was made on them by the respondent Bank.

Having established that the loans had become due and demandable, the Courtshall now resolve the issue of whether the CA correctly held the petitioners

jointly and solidarily liable therefor. In disclaiming any liability for the loans, the petitioner Foundation maintains thatthese were contracted by petitioner Tan in his personal capacity and that it didnot benefit therefrom. On the other hand, while admitting that the loans werehis personal obligation, petitioner Tan avers that he had an unwritten agreementwith the respondent Bank that these loans would be renewed on a year-to-yearbasis and paid from the proceeds of his shares of stock in the LapulapuIndustries Corp.

These contentions are untenable. The Court particularly finds as incredulous petitioner Tan's allegation that he wasmade to sign blank loan documents and that the phrase "IN MYOFFICIAL/PERSONAL CAPACITY" was superimposed by the respondent Bank'semployee despite petitioner Tan's protestation. The Court is hard pressed to














believe that a businessman of petitioner Tan's stature could have been socareless as to sign blank loan documents.

In contrast, as found by the CA, the promissory notes 11 clearly showed upontheir faces that they are the obligation of the petitioner Foundation, as

contracted by petitioner Tan "in his official and personal capacity." 12 Moreover,

the application for credit accommodation, 13 the signature cards of the two

accounts in the name of petitioner Foundation, 14 as well as New Current

Account Record, 15 all accompanying the promissory notes, were signed by

petitioner Tan for and in the name of the petitioner Foundation. 16 Thesedocumentary evidence unequivocally and categorically establish that the loanswere solidarily contracted by the petitioner Foundation and petitioner Tan.

As a corollary, the parol evidence rule likewise constrains this Court to reject

petitioner Tan's claim regarding the purported unwritten agreement between himand the respondent Bank on the payment of the obligation. Section 9, Rule 130of the of the Revised Rules of Court provides that "[w]hen the terms of anagreement have been reduced to writing, it is to be considered as containing allthe terms agreed upon and there can be, between the parties and theirsuccessors-in-interest, no evidence of such terms other than the contents of thewritten agreement." 17

In this case, the promissory notes are the law between the petitioners and therespondent Bank. These promissory notes contained maturity dates as follows:

February 5, 1978, March 28, 1978, April 11, 1978 and May 5, 1978, respectively.That these notes were to be paid on these dates is clear and explicit. Nowherewas it stated therein that they would be renewed on a year-to-year basis or"rolled-over" annually until paid from the proceeds of petitioner Tan's shares inthe Lapulapu Industries Corp. Accordingly, this purported unwritten agreementcould not be made to vary or contradict the terms and conditions in thepromissory notes.

Evidence of a prior or contemporaneous verbal agreement is generally not

admissible to vary, contradict or defeat the operation of a valid contract. 18

While

parol evidence is admissible to explain the meaning of written contracts, itcannot serve the purpose of incorporating into the contract additionalcontemporaneous conditions which are not mentioned at all in writing, unless

there has been fraud or mistake. 19 No such allegation had been made by thepetitioners in this case.





































Finally, the appellate court did not err in holding the petitioners jointly andsolidarily liable as it applied the doctrine of piercing the veil of corporate entity.The petitioner Foundation asserts that it has a personality separate and distinctfrom that of its President, petitioner Tan, and that it cannot be held solidarilyliable for the loans of the latter.

The Court agrees with the CA that the petitioners cannot hide behind thecorporate veil under the following circumstances:

The evidence shows that Tan has been representing himself as thePresident of Lapulapu Foundation, Inc. He opened a savings accountand a current account in the names of the corporation, and signed theapplication form as well as the necessary specimen signature cards(Exhibits "A," "B" and "C") twice, for himself and for the foundation. Hesubmitted a notarized Secretary's Certificate (Exhibit "G") from the

corporation attesting that he has been authorized inter alia to sign forand in behalf of the Lapulapu Foundation any and all checks, drafts orother orders with respect to the bank; to transact business with theBank, negotiate loans, agreements, obligations, promissory notes andother commercial documents: and to initially obtain a loan forP100,000.00 from any bank (Exhibits "G-1" and "G-2"). Under thesecircumstances, the defendant corporation is liable for the transactionsentered into by Tan on its behalf. 20

Per its Secretary's Certificate, the petitioner Foundation had given its President,petitioner Tan, ostensible and apparent authority to inter alia deal with therespondent Bank. Accordingly, the petitioner Foundation is estopped fromquestioning petitioner Tan's authority to obtain the subject loans from therespondent Bank. It is a familiar doctrine that if a corporation knowingly permitsone of its officers, or any other agent, to act within the scope of an apparentauthority, it holds him out to the public as possessing the power to do thoseacts; and thus, the corporation will, as against anyone who has in good faithdealt with it through such agent, be estopped from denying the agent'sauthority. 21

In fine, there is no cogent reason to deviate from the CA's ruling that thepetitioners are jointly and solidarily liable for the loans contracted with therespondent Bank. AEcIaH

WHEREFORE, premises considered, the petition is DENIED and the Decisiondated June 26, 1996 and Resolution dated August 19, 1996 of the Court of

Appeals in CA-G.R. CV No. 37162 are AFFIRMED in toto .









SO ORDERED.

Puno, Quisumbing, Austria-Martinez and Tinga, JJ . , concur.

Footnotes

38.

SECOND DIVISION

[G.R. No. 117188. August 7, 1997.]

LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH)

ASSOCIATION, INC., petitioner , vs . HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTYCORPORATION, EMDEN ENCARNACION and HORATIO

AYCARDO, respondents .

Rene A. Diokno for petitioner.

Reyno De Vera Tiu Domingo and Santos for private respondents.

SYLLABUS

1.STATUTORY CONSTRUCTION; STATUTE; INTERPRETATION; THE WORD"MUST" IS NOT ALWAYS IMPERATIVE. — Ordinarily, the word "must" connotesan imperative act or operates to impose a duty which may be enforced. It issynonymous with "ought" which connotes compulsion or mandatoriness.However, the word "must" in a statute, like, "shall", is not always imperative. Itmay be consistent with an exercise of discretion. In this jurisdiction, thetendency has been to interpret "shall" as the context or a reasonable

construction of the statute in which it is used demands or requires. This isequally true as regards the word "must". Thus, if the language of a statuteconsidered as a whole and with due regard to its nature and object reveals thatthe legislature intended to use the words "shall" and "must" to be directory, theyshould be given that meaning. cdt



2.COMMERCIAL LAW; CORPORATION CODE; SEC. 46 (ADOPTION OF BY-LAWS);BY-LAWS; REQUIREMENT FOR THE ADOPTION THEREOF WITHIN THE PERIODPROVIDED; NOT MANDATORY. — Taken as a whole and under the principle thatthe best interpreter of a statute is the statute itself (optima statuli interpretatixest ipsum statutum ). Section 46 of the Corporation Code reveals the legislativeintent to attach a directory, and not mandatory, meaning for the word "must" inthe first sentence thereof. Note should be taken of the second paragraph of thelaw which allows the filing of the by-laws even prior to incorporation. Thisprovision in the same section of the Code rules out mandatory compliance withthe requirement of filing the by-laws "within one (1) month after receipt ofofficial notice of the issuance of its certificate of incorporation by the Securitiesand Exchange Commission". It necessarily follows that failure to file the by-lawswithin any period does not imply the "demise" of the corporation. By-laws maybe necessary for the "government" of the corporation but these are subordinate

to the articles of incorporation as well as to the Corporation Code and relatedstatutes. There are in fact cases where by-laws are unnecessary to corporateexistence or to the valid exercise of corporate powers, thus: "In the absence ofcharter or statutory provisions to the contrary, by-laws are not necessary eitherto the existence of a corporation or to the valid exercise of the powers conferredupon it, certainly in all cases where the charter sufficiently provides for thegovernment of the body; and even where the governing statute in express termsconfers upon the corporation the power to adopt by-laws, the failure to exercisethe power will be ascribed to mere nonaction which will not render void any actsof the corporation which would otherwise be valid." As the "rules and regulations

or private laws enacted by the corporation to regulate, govern and control itsown actions, affairs and concerns and its stockholders or members and directorsand officers with relation thereto and among themselves in their relation to it,"by-laws are indispensable to corporations in this jurisdiction. These may not beessential to corporate birth but certainly, these are required by law for an orderlygovernance and management of corporations. Nonetheless, failure to file themwithin the period required by law by no means tolls the automatic dissolution ofa corporation.

3.ID.; ID.; ID.; EFFECT OF FAILURE TO FILE. — Although the Corporation Code

requires the filing of by-laws, it does not expressly provide for the consequencesof the non-filing of the same within the period provided for in Section 46.However, such omission has been rectified by Presidential Decree No. 902-A, thepertinent provisions on the jurisdiction of the SEC of which state: "SEC. 6. Inorder to effectively exercise such jurisdiction, the Commission shall possess thefollowing powers: . . . (1) to suspend, or revoke, after proper notice and hearing,the franchise or certificate of registration of corporations, partnerships or



associations, upon any of the grounds provided by law, including the following: .. . Failure to file by-laws within the required period; . . . In the exercise of theforegoing authority and jurisdiction of the Commissions or by a Commissioner orby such there bodies, boards committees and/or any officer as may be createdor designated by the Commission for the purpose. The decision, ruling or orderof any such Commissioner, bodies, boards, committees and/or officer may beappealed to the Commission sitting en banc within thirty (30) days after receiptby the appellant of notice of such decision, ruling or order. The Commission shallpromulgate rules of procedures to govern the proceedings, hearings and appealsof cases falling within its jurisdiction. The aggrieved party may appeal the order,decision or ruling of the Commission sitting en banc to the Supreme Court bypetition for review in accordance with the pertinent provisions of the Rules ofCourt." Even under the foregoing express grant of power and authority, therecan be no automatic corporate dissolution simply because the incorporators

failed to abide by the required filing of by-laws embodied in Section 46 of theCorporation Code. There is no outright "demise" private of corporate existence.Proper notice and hearing are cardinal components of due process in anydemocratic institution, agency or society. In other words, the incorporators mustbe given the chance to explain their neglect or omission and remedy the same.That the failure to file by-laws is not provided for by the Corporation Code but inanother law is of no moment. P.D. No. 902-A, which took effect immediatelyafter its promulgation on March 11, 1976, is very much apposite to the Code.

Accordingly, the provisions above-quoted supply the law governing the situationin the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are

statutes in pari materia. Interpretare et concordare legibus est optimusinterpretandi . Every statute must be so construed and harmonized with otherstatutes as to form a uniform system of jurisprudence. cdasia

D E C I S I O N

ROMERO, J p:

May the failure of a corporation to file its by-laws within one month from thedate of its incorporation, as mandated by Section 46 of the Corporation Code,result in its automatic dissolution?

This is the issue raised in this petition for review on certiorari of the Decision 1 ofthe Court of Appeals affirming the decision of the Home Insurance and GuarantyCorporation (HIGC). This quasi-judicial body recognized Loyola Grand Villas







Homeowners Association (LGVHA) as the sole homeowners' association in LoyolaGrand Villas, a duly registered subdivision in Quezon City and Marikina City thatwas owned and developed by Solid Homes, Inc. It revoked the certificates ofregistration issued to Loyola Grand Villas Homeowners (North) AssociationIncorporated (the North Association for brevity) and Loyola Grand VillasHomeowners (South) Association Incorporated (the South Association). aisadc

LGVHAI was organized on February 8, 1983 as the association of homeownersand residents of the Loyola Grand Villas. It was registered with the HomeFinancing Corporation, the predecessor of herein respondent HIGC, as the solehomeowners' organization in the said subdivision under Certificate of RegistrationNo. 04-197. It was organized by the developer of the subdivision and its firstpresident was Victorio V. Soliven, himself the owner of the developer. Forunknown reasons, however, LGVHAI did not file its corporate by-laws.

Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. Theyfailed to do so. 2 'To the officers' consternation, they discovered that there weretwo other organizations within the subdivision — the North Association and theSouth Association. According to private respondents, a non-resident and Solivenhimself, respectively headed these associations. They also discovered that theseassociations had five (5) registered homeowners each who were also theincorporators, directors and officers thereof. None of the members of theLGVHAI was listed as member of the North Association while three (3) membersof LGVHAI were listed as members of the South Association. 3 The North

Association was registered with the HIGC on February 13, 1989 under Certificateof Registration No. 04-1160 covering Phases West II, East III, West III and EastIV. It submitted its by-laws on December 20, 1988.

In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of the legal department of the HIGC, informed him thatLGVHAI had been automatically dissolved for two reasons. First, it did not submitits by-laws within the period required by the Corporation Code and, second,there was non-user of corporate charter because HIGC had not received anyreport on the association's activities. Apparently, this information resulted in the

registration of the South Association with the HIGC on July 27, 1989 coveringPhases West I, East I and East II. It filed its by-laws on July 26, 1989.

These developments prompted the officers of the LGVHAI to lodge a complaintwith the HIGC. They questioned the revocation of LGVHAI's certificate ofregistration without due notice and hearing and concomitantly prayed for thecancellation of the certificates of registration of the North and South Associations











by reason of the earlier issuance of a certificate of registration in favor ofLGVHAI.

On January 26, 1993, after due notice and hearing, private respondents obtaineda favorable ruling from HIGC Hearing Officer Danilo C. Javier who disposed of

HIGC Case No. RRM-5-89 as follows:

"WHEREFORE, judgment is hereby rendered recognizing the LoyolaGrand Villas Homeowners Association, Inc., under Certificate ofRegistration No. 04-197 as the duly registered and existing homeownersassociation for Loyola Grand Villas homeowners, and declaring theCertificates of Registration of Loyola Grand Villas Homeowners (North)

Association, Inc. and Loyola Grand Villas Homeowners (South)

Association, Inc. as hereby revoked or cancelled; that the receivershipbe terminated and the Receiver is hereby ordered to render anaccounting and turn-over to Loyola Grand Villas Homeowners

Association, Inc., all assets and records of the Association now under hiscustody and possession."

The South Association appealed to the Appeals Board of the HIGC. In itsResolution of September 8, 1993, the Board 4dismissed the appeal for lack ofmerit.

Rebuffed, the South Association in turn appealed to the Court of Appeals, raisingtwo issues. First , whether or not LGVHAI's failure to file its by-laws within theperiod prescribed by Section 46 of the Corporation Code resulted in theautomatic dissolution of LGVHAI. Second , whether or not two homeowners'associations may be authorized by the HIGC in one "sprawling subdivision."However, in the Decision of August 23, 1994 being assailed here, the Court of

Appeals affirmed the Resolution of the HIGC Appeals Board.

In resolving the first issue, the Court of Appeals held that under the CorporationCode, a private corporation commences to have corporate existence and juridical

personality from the date the Securities and Exchange Commission (SEC) issuesa certificate of incorporation under its official seal. The requirement for the filingof by-laws under Section 46 of the Corporation Code within one month fromofficial notice of the issuance of the certificate of incorporation presupposes thatit is already incorporated, although it may file its by-laws with its articles ofincorporation. Elucidating on the effect of a delayed filing of by-laws, the Courtof Appeals said:






"We also find nothing in the provisions cited by the petitioner, i.e.,Sections 46 and 22, Corporation Code, or in any other provision of theCode and other laws which provide or at least imply that failure to filethe by-laws results in an automatic dissolution of the corporation. WhileSection 46, in prescribing that by-laws must be adopted within the

period prescribed therein, may be interpreted as a mandatory provision,particularly because of the use of the word 'must,' its meaning cannotbe stretched to support the argument that automatic dissolution resultsfrom non-compliance.

We realize that Section 46 or other provisions of the Corporation Codeare silent on the result of the failure to adopt and file the by-laws withinthe required period. Thus, Section 46 and other related provisions of theCorporation Code are to be construed with Section 6 (1) of P.D. 902-A.This section empowers the SEC to suspend or revoke certificates ofregistration on the grounds listed therein. Among the grounds stated isthe failure to file by-laws (see also II Campos: The Corporation Code,1990 ed., pp. 124-125). Such suspension or revocation, the samesection provides, should be made upon proper notice and hearing.

Although P.D. 902-A refers to the SEC, the same principles andprocedures apply to the public respondent HIGC as it exercises its powerto revoke or suspend the certificates of registration or homeownersassociations. (Section 2 [a], E.O. 535, series 1979, transferred thepowers and authorities of the SEC over homeowners associations to theHIGC.)

We also do not agree with the petitioner's interpretation that Section 46,Corporation Code prevails over Section 6, P.D. 902-A and that the latteris invalid because it contravenes the former. There is no basis for suchinterpretation considering that these two provisions are not inconsistentwith each other. They are, in fact, complementary to each other so thatone cannot be considered as invalidating the other."

The Court of Appeals added that, as there was no showing that the registrationof LGVHAI had been validly revoked, it continued to be the duly registeredhomeowners' association in the Loyola Grand Villas. More importantly, the South

Association did not dispute the fact that LGVHAI had been organized and that,thereafter, it transacted business within the period prescribed by law.

On the second issue, the Court of Appeals reiterated its previous ruling 5 that theHIGC has the authority to order the holding of a referendum to determine whichof two contending associations should represent the entire community, village orsubdivision.







existence compels such meaning for as decreed the by-laws is 'thegovernment' of the corporation. Indeed, how can the corporation do anylawful act as such without by-laws. Surely, no law is intended to createchaos." 7

Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of theCorporation Code which itself does not provide sanctions for non-filing of by-laws. For the petitioner, it is "not proper to assess the true meaning of Sec. 46 . .. on an unauthorized provision on such matter contained in the said decree."

In their comment on the petition, private respondents counter that therequirement of adoption of by-laws is not mandatory. They point to P.D. No.902-A as having resolved the issue of whether said requirement is mandatory ormerely directory. Citing Chung Ka Bio v . Intermediate Appellate Court , 8 privaterespondents contend that Section 6(I) of that decree provides that non-filing of

by-laws is only a ground for suspension or revocation of the certificate ofregistration of corporations and, therefore, it may not result in automaticdissolution of the corporation. Moreover, the adoption and filing of by-laws is acondition subsequent which does not affect the corporate personality of acorporation like the LGVHAI. This is so because Section 9 of the CorporationCode provides that the corporate existence and juridical personality of acorporation begins from the date the SEC issues a certificate of incorporationunder its official seal. Consequently, even if the by-laws have not yet been filed,a corporation may be considered a de facto corporation. To emphasize the factthe LGVHAI was registered as the sole homeowners' association in the LoyolaGrand Villas, private respondents point out that membership in the LGVHAI wasan "unconditional restriction in the deeds of sale signed by lot buyers." cdtai

In its reply to private respondents' comment on the petition, petitioner reiteratesits argument that the word "must" in Section 46 of the Corporation Code ismandatory. It adds that, before the ruling in Chung Ka Bio v. Intermediate

Appellate Court could be applied to this case, this Court must first resolve theissue of whether or not the provisions of P.D. No. 902-A prescribing the rulesand regulations to implement the Corporation Code can "rise above and change"the substantive provisions of the Code.

The pertinent provision of the Corporation Code that is the focal point ofcontroversy in this case states:










"Sec. 46. Adoption of by-laws . — Every corporation formed under thisCode, must within one (1) month after receipt of official notice of theissuance of its certificate of incorporation by the Securities andExchange Commission, adopt a code of by-laws for its government notinconsistent with this Code. For the adoption of by-laws by the

corporation, the affirmative vote of the stockholders representing atleast a majority of the outstanding capital stock, or of at least a majorityof the members, in the case of non-stock corporations, shall benecessary. The by-laws shall be signed by the stockholders or membersvoting for them and shall be kept in the principal office of thecorporation, subject to inspection of the stockholders or members duringoffice hours; and a copy thereof, shall be filed with the Securities andExchange Commission which shall be attached to the original articles ofincorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws maybe adopted and filed prior to incorporation; in such case, such by-lawsshall be approved and signed by all the incorporators and submitted tothe Securities and Exchange Commission, together with the articles ofincorporation.

In all cases, by-laws shall be effective only upon the issuance by theSecurities and Exchange Commission of a certification that the by-lawsare not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the

by-laws or any amendment thereto of any bank, banking institution,building and loan association, trust company, insurance company, publicutility, educational institution or other special corporations governed byspecial laws, unless accompanied by a certificate of the appropriategovernment agency to the effect that such by-laws or amendments arein accordance with law."

As correctly postulated by the petitioner, interpretation of this provision of lawbegins with the determination of the meaning and import of the word "must " inthis section. Ordinarily, the word "must" connotes an imperative act or operatesto impose a duty which may be enforced. 9 It is synonymous with "ought" whichconnotes compulsion or mandatoriness. 10 However, the word "must" in astatute, like "shall," is not always imperative. It may be consistent with anexercise of discretion. In this jurisdiction, the tendency has been to interpret"shall" as the context or a reasonable construction of the statute in which it isused demands or requires. 11 This is equally true as regards the word "must."Thus, if the language of a statute considered as a whole and with due regard to















its nature and object reveals that the legislature intended to use the words"shall" and "must" to be directory, they should be given that meaning. 12

In this respect, the following portions of the deliberations of the BatasangPambansa No. 68 are illuminating:

"MR. FUENTEBELLA. Thank you, Mr. Speaker.

On page 34, referring to the adoption of by-laws, are we made tounderstand here, Mr. Speaker, that by-laws must immediately be filedwithin one month after the issuance? In other words, would this bemandatory or directory in character?

MR. MENDOZA. This is mandatory.

MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be theeffect of the failure of the corporation to file these by- laws within onemonth?

MR. MENDOZA. There is a provision in the latter part of the Code whichidentifies and describes the consequences of violations of any provisionof this Code. One such consequence is the dissolution of the corporationfor its inability, or perhaps, incurring certain penalties.

MR. FUENTEBELLA. But it will not automatically amount to a dissolutionof the corporation by merely failing to file the by-laws within one month.

Supposing the corporation was late, say, five days, what would be themandatory penalty?

MR. MENDOZA. I do not think it will necessarily result in the automaticor ipso facto dissolution of the corporation. Perhaps, as in the case, asyou suggested, in the case of El Hogar Filipino where a quowarranto action is brought, one takes to account the gravity of theviolation committed. If the by-laws were late — the filing of the by-lawswere late by, perhaps, a day or two, I would suppose that might be atolerable delay, but if they are delayed over a period of months — as ishappening now — because of the absence of a clear requirement thatby-laws must be completed within a specified period of time, thecorporation must suffer certain consequences." 13

This exchange of views demonstrates clearly that automatic corporate dissolutionfor failure to file the by-laws on time was never the intention of the legislature.Moreover, even without resorting to the records of deliberations of the Batasang










Pambansa, the law itself provides the answer to the issue propounded bypetitioner.

Taken as a whole and under the principle that the best interpreter of a statute isthe statute itself (optima statuli interpretatix est ipsum statutum ), 14 Section 46

aforequoted reveals the legislative intent to attach a directory, and notmandatory, meaning for the word ''must" in the first sentence thereof. Noteshould be taken of the second paragraph of the law which allows the filing of theby-laws even prior to incorporation. This provision in the same section of theCode rules out mandatory compliance with the requirement of filing the by-laws"within one (1) month after receipt of official notice of the issuance of itscertificate of incorporation by the Securities and Exchange Commission." Itnecessarily follows that failure to file the by-laws within that period does notimply the "demise" of the corporation. By-laws may be necessary for the

"government" of the corporation but these are subordinate to the articles ofincorporation as well as to the Corporation Code and related statutes. 15 Thereare in fact cases where by-laws are unnecessary to corporate existence or to thevalid exercise of corporate powers, thus:

"In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the existence of a corporation or to thevalid exercise of the powers conferred upon it, certainly in all caseswhere the charter sufficiently provides for the government of the body;and even where the governing statute in express terms confers upon thecorporation the power to adopt by-laws, the failure to exercise the

power will be ascribed to mere nonaction which will not render void anyacts of the corporation which would otherwise be valid ." 16 (Emphasissupplied.)

As Fletcher aptly puts it:

"It has been said that the by-laws of a corporation are the rule of its life,and that until by-laws have been adopted the corporation may not beable to act for the purposes of its creation, and that the first and mostimportant duty of the members is to adopt them. This would seem to

follow as a matter of principle from the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, ifnot one of legal, necessity. Moreover, the peculiar circumstancesattending the formation of a corporation may impose the obligation toadopt certain by-laws, as in the case of a close corporation organized forspecific purposes. And the statute or general laws from which thecorporation derives its corporate existence may expressly require it tomake and adopt by-laws and specify to some extent what they shall















contain and the manner of their adoption. The mere fact, however, ofthe existence of power in the corporation to adopt by-laws does notordinarily and of necessity make the exercise of such power essential toits corporate life, or to the validity of any of its acts ." 17

Although the Corporation Code requires the filing of by-laws, it does notexpressly provide for the consequences of the non-filing of the same within theperiod provided for in Section 46. However, such omission has been rectified byPresidential Decree No. 902-A, the pertinent provisions on the jurisdiction of theSEC of which state:

"SEC. 6.In order to effectively exercise such jurisdiction, the Commissionshall possess the following powers:

xxx xxx xxx

(l)To suspend, or revoke, after proper notice and hearing, the franchiseor certificate of registration of corporations , partnerships or associations,upon any of the grounds provided by law, including the following:

xxx xxx xxx

5.Failure to file by-laws within the required period;

xxx xxx xxx

In the exercise of the foregoing authority and jurisdiction of theCommission, hearings shall be conducted by the Commission or by aCommissioner or by such other bodies, boards, committees and/or anyofficer as may be created or designated by the Commission for thepurpose. The decision, ruling or order of any such Commissioner,bodies, boards, committees and/or officer may be appealed to theCommission sitting en banc within thirty (30) days after receipt by theappellant of notice of such decision, ruling or order. The Commissionshall promulgate rules of procedures to govern the proceedings,hearings and appeals of cases falling within its jurisdiction. cdpr

The aggrieved party may appeal the order, decision or ruling of theCommission sitting en banc to the Supreme Court by petition for reviewin accordance with the pertinent provisions of the Rules of Court."

Even under the foregoing express grant of power and authority, there can beno automatic corporate dissolution simply because the incorporators failed toabide by the required filing of by-laws embodied in Section 46 of the Corporation






Code. There is no outright "demise" of corporate existence. Proper notice andhearing are cardinal components of due process in any democratic institution,agency or society. In other words, the incorporators must be given the chance toexplain their neglect or omission and remedy the same.

That the failure to file by-laws is not provided for by the Corporation Code but inanother law is of no moment. P.D. No. 902-A, which took effect immediatelyafter its promulgation on March 11, 1976, is very much apposite to the Code.

Accordingly, the provisions abovequoted supply the law governing the situationin the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A arestatutes in pari materia . Interpretare et concordare legibus est optimusinterpretandi . Every statute must be so construed and harmonized with otherstatutes as to form a uniform system of jurisprudence. 18

As the "rules and regulations or private laws enacted by the corporation toregulate, govern and control its own actions, affairs and concerns and itsstockholders or members and directors and officers with relation thereto andamong themselves in their relation to it," 19 by-laws are indispensable tocorporations in this jurisdiction. These may not be essential to corporate birthbut certainly, these are required by law for an orderly governance andmanagement of corporations. Nonetheless, failure to file them within the periodrequired by law by no means tolls the automatic dissolution of a corporation.

In this regard, private respondents are correct in relying on the pronouncementsof this Court in Chung Ka Bio v . Intermediate Appellate Court , 20 as follows:

". . . Moreover, failure to file the by-laws does not automatically operateto dissolve a corporation but is now considered only a ground for suchdissolution.

Section 19 of the Corporation Law, part of which is now Section 22 ofthe Corporation Code, provided that the powers of the corporationwould cease if it did not formally organize and commence the

transaction of its business or the continuation of its works within twoyears from date of its incorporation. Section 20, which has beenreproduced with some modifications in Section 46 of the CorporationCode, expressly declared that 'every corporation formed under this Act,must within one month after the filing of the articles of incorporationwith the Securities and Exchange Commission, adopt a code of by-laws.'Whether this provision should be given mandatory or only directoryeffect remained a controversial question until it became academic with














the adoption of PD 902-A. Under this decree, it is now clear that thefailure to file by-laws within the required period is only a ground forsuspension or revocation of the certificate of registration of corporations.

Non-filing of the by-laws will not result in automatic dissolution of the

corporation. Under Section 6(l) of PD 902-A, the SEC is empowered to'suspend or revoke, after proper notice and hearing, the franchise orcertificate of registration of a corporation' on the ground inter alia of'failure to file by-laws within the required period.' It is clear from thisprovision that there must first of all be a hearing to determine theexistence of the ground, and secondly, assuming such finding, thepenalty is not necessarily revocation but may be only suspension of thecharter. In fact, under the rules and regulations of the SEC, failure to filethe by-laws on time may be penalized merely with the imposition of anadministrative fine without affecting the corporate existence of theerring firm.

It should be stressed in this connection that substantial compliance withconditions subsequent will suffice to perfect corporate personality.Organization and commencement of transaction of corporate businessare but conditions subsequent and not prerequisites for acquisition ofcorporate personality. The adoption and filing of by-laws is also acondition subsequent. Under Section 19 of the Corporation Code, acorporation commences its corporate existence and juridical personalityand is deemed incorporated from the date the Securities and ExchangeCommission issues certificate of incorporation under its official seal. This

may be done even before the filing of the by-laws, which under Section46 of the Corporation Code, must be adopted 'within one month afterreceipt of official notice of the issuance of its certificate ofincorporation.'" 21

That the corporation involved herein is under the supervision of the HIGC doesnot alter the result of this case. The HIGC has taken over the specializedfunctions of the former Home Financing Corporation by virtue of Executive OrderNo. 90 dated December 17, 1986. 22 With respect to homeowners associations,the HIGC shall "exercise all the powers, authorities and responsibilities that are

vested on the Securities and Exchange Commission . . ., the provision of Act1459, as amended by P.D. 902-A, to the contrary notwithstanding." 23

WHEREFORE, the instant petition for review on certiorari is hereby DENIED andthe questioned Decision of the Court of Appeals AFFIRMED. This Decision isimmediately executory. Costs against petitioner. cda













SO ORDERED.

Regalado, Puno and Mendoza, JJ . , concur.

Torres, Jr . , J . , is on leave.

Footnotes

39.

FIRST DIVISION

[G.R. No. 117604. March 26, 1997.]

CHINA BANKING CORPORATION, petitioner , vs . COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB,INC., respondents .

Lim Vigilia Cinco & Orencia for petitioner.

Jose F . Manacop for private respondent.

SYLLABUS

1.COMMERCIAL LAW; P.D. 902-A; JURISDICTION OF THE SECURITIES ANDEXCHANGE COMMISSION; CASE AT BAR; INTRA-CORPORATE CONTROVERSYBETWEEN A CORPORATION AND ITS STOCKHOLDER. — There is no questionthat the purchase of the subject share or membership certificate at publicauction by petitioner (and the issuance to it of the corresponding Certificate ofSale) transferred ownership of the same to the latter and thus entitled petitionerto have the said share registered in its name as a member of VGCCI. It is readily

observed that VGCCI did not assail the transfer directly and has in fact, in itsletter of 27 September 1974, expressly recognized the pledge agreementexecuted by the original owner, Calapatia, in favor of petitioner and has evennoted said agreement in its corporate books. In addition, Calapatia, the originalowner of the subject share, has not contested the said transfer. By virtue of theafore-mentioned sale, petitioner became abona fide stockholder of VGCCI and,therefore, the conflict that arose between petitioner and VGCCI aptly exemplies



an intra-corporate controversy between a corporation and its stockholder underSec. 5(b) of P.D. 902-A.

2.ID.; ID.; ID.; THE SECURITIES AND EXCHANGE COMMISSION TOOK PROPERCOGNIZANCE OF THE INSTANT CASE. — An important consideration, moreover,

is the nature of the controversy between petitioner and private respondentcorporation. VGCCI claims a prior right over the subject share anchored mainlyon Sec. 3, Art VIII of its by-laws which provides that "after a member shall havebeen posted as delinquent, the Board may order his/her/its share sold to satisfythe claims of the Club . . ." It is pursuant to this provision that VGCCI also soldthe subject share at public auction, of which it was the highest bidder. VGCCIcaps its argument by asserting that its corporate by-laws should prevail. Thebone of contention, thus, is the proper interpretation and application of VGCCI'saforequoted by-laws, a subject which irrefutably calls for the special competence

of the SEC. We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz: 6. In the fifties, the Court taking cognizance of the move tovest jurisdiction in administrative commissions and boards the power to resolvespecialized disputes in the field of labor (as in corporations, public transportationand public utilities) ruled that Congress in requiring the Industrial Court'sintervention in the resolution of labor-management Controversies likely to causestrikes or lockouts meant such jurisdiction to be exclusive, although it did not soexpressly state in the law. The Court held that under the "sense-making andexpeditious doctrine of primary jurisdiction. . . the courts cannot or will notdetermine a controversy involving a question which is within the jurisdiction of

an administrative tribunal, where the question demands the exercise of soundadministrative discretion requiring the special knowledge, experience, andservices of the administrative tribunal to determine technical and intricatematters of fact, and a uniformity of ruling is essential to comply with thepurposes of the regulatory statute administered ." In this era of clogged courtdockets, the need for specialized administrative boards or commissions with thespecial knowledge, experience and capability to hear and determine promptlydisputes on technical matters or essentially factual matters, subject to judicialreview in case of grave abuse of discretion, has become well nigh indispensable.Thus, in 1984, the Court noted that "between the power lodged in an

administrative body and a court, the unmistakable trend has been to refer it tothe former. 'Increasingly, this Court has been committed to the view that unlessthe law speaks clearly and unequivocably, the choice should fall on [anadministrative agency.]"' The Court in the earlier case of Ebon v. De Guzman,noted that the lawmaking authority, in restoring to the labor arbiters and theNLRC their jurisdiction to award all kinds of damages in labor cases, as againstthe previous P.D. amendment splitting their jurisdiction with the regular courts,



"evidently, . . . had second thoughts about depriving the Labor Arbiters and theNLRC of the jurisdiction to award damages in labor cases because that setupwould mean duplicity of suits, splitting the cause of action and possibleconflicting findings and conclusions by two tribunals on one and the same claim."In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does the meticulous analysis and correctinterpretation of a corporation's by-laws as well as the applicable provisions ofthe Corporation Code in order to determine the validity of VGCCI's claims. TheSEC, therefore, took proper cognizance of the instant case.

3.ID.; ID.; ID.; THE FILING OF A COMPLAINT WITH ONE COURT WHICH HASNO JURISDICTION OVER IT DOES NOT PREVENT THE PLAINTIFF FROM FILINGTHE SAME COMPLAINT LATER WITH THE COMPETENT COURT. — VGCCI furthercontends that petitioner is estopped from denying its earlier position, in the first

complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is nointra-corporate relations between itself and VGCCI. VGCCI's contention lacksmerit. In Zamora v. Court of Appeals, this Court, through Mr. Justice Isagani A.Cruz, declared that: "It follows that as a rule the filing of a complaint with onecourt which has no jurisdiction over it does not prevent the plaintiff from filingthe same complaint later with the competent court. The plaintiff is not estoppedfrom doing so simply because it made a mistake before in the choice of theproper forum . . ." We remind VGCCI that in the same proceedings before theRTC of Makati, it categorically, stated (in its motion to dismiss) that the casebetween itself and petitioner is intra-corporate and insisted that it is the SEC and

not the regular courts which has jurisdiction. This is precisely the reason why thesaid court dismissed petitioner's complaint and led to petitioner's recourse to theSEC.

4.ID.; CORPORATION CODE; BY-LAWS; THIRD PERSONS ARE NOT BOUND BYTHE BY-LAWS OF A CORPORATION SINCE THEY ARE NOT PRIVY THERETO. — In order to be bound, the third party must have acquired knowledge of thepertinent by-laws at the time the transaction or agreement between said thirdparty and the shareholder was entered into, in this case, at the time the pledgeagreement was executed. VGCCI could have easily informed petitioner of its by-

laws when it sent notice formally recognizing petitioner as pledgee of one of itsshares registered in Calapatia's name. Petitioner's belated notice of said by-lawsat the time of foreclosure will not suffice.

5.ID.; ID.; SECTION 63 THEREOF; THE TERM "UNPAID CLAIM" REFERS TO ANYUNPAID CLAIM ARISING FROM UNPAID SUBSCRIPTION, AND NOT TO ANYINDEBTEDNESS WHICH A SUBSCRIBER OR STOCKHOLDER MAY OWE THE



CORPORATION FROM ANY OTHER TRANSACTION. — Sec. 63 of the CorporationCode which provides that "no shares of stock against which the corporation holdsany unpaid claim shall be transferable in the books of the corporation" cannot beutilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arisingfrom unpaid subscription, and not to any indebtedness which a subscriber orstockholder may owe the corporation arising from any other transaction." In thecase at bar, the subscription for the share in question has been fully paid asevidenced by the issuance of Membership Certificate No. 1219. What Calapatiaowed the corporation were merely the monthly dues. Hence, the aforequotedprovision does not apply.

6.CIVIL LAW; SPECIAL CONTRACTS; PLEDGE; RULE THAT THE CREDITOR MUSTTAKE CARE OF THE THING PLEDGED WITH THE DILIGENCE OF A GOODFATHER OF A FAMILY; DOES NOT APPLY TO A PLEDGEE OF A SHARE OF

STOCK. — VGCCI's contention that petitioner is duty-bound to know its by-lawsbecause of Art. 2099 of the Civil Code which stipulates that the creditor musttake care of the thing pledged with the diligence of a good father of a family,fails to convince. The case of Cruz & Serrano v . Chua A. H . Lee , is clearly notapplicable: "In applying this provision to the situation before us it must be bornein mind that the ordinary pawn ticket is a document by virtue of which theproperty in the thing pledged passes from hand to hand by mere delivery of theticket; and the contract of the pledge is, therefore, absolvable to bearer. Itresults that one who takes a pawn ticket in pledge acquires domination over thepledge; and it is the holder who must renew the pledge, if it is to be kept alive.

It is quite obvious from the aforequoted case that a membership share is quitedifferent in character from a pawn ticket and to reiterate, petitioner was neverinformed of Calapatia' s unpaid accounts and the restrictive provisions in VGCCI'sby-laws.

D E C I S I O N

KAPUNAN, J p:

Through a petition for review on certiorari under Rule 45 of the Revised Rules ofCourt, petitioner China Banking Corporation seeks the reversal of the decision ofthe Court of Appeals dated 15 August 1994 nullifying the Securities andExchange Commission's order and resolution dated 4 June 1993 and 7 December1993, respectively, for lack of jurisdiction. Similarly impugned is the Court of



a demand letter dated 12 December 1985 for the same amount 9 and anothernotice dated 22 November 1986 for P23,483.24. 10

On 4 December 1986, VGCCI caused to be published in the newspaper DailyExpress a notice of auction sale of a number of its stock certificates, to be held

on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's own shareof stock (Stock Certificate No. 1219).

Through a letter dated 15 December 1986, VGCCI informed Calapatia of thetermination of his membership due to the sale of his share of stock in the 10December 1986 auction. 11

On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia'sStock Certificate No. 1219 by virtue of being the highest bidder in the 17September 1985 auction and requested that a new certificate of stock be issued

in its name. 12

On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia'sstock was sold at the public auction held on 10 December 1986 forP25,000.00. 13

On 9 March 1990, petitioner protested the sale by VGCCI of the subject share ofstock and thereafter filed a case with the Regional Trial Court of Makati for thenullification of the 10 December 1986 auction and for the issuance of a newstock certificate in its name. 14

On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint forlack of jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990 denied petitioner's motion forreconsideration.

On 20 September 1990, petitioner filed a complaint with the Securities andExchange Commission (SEC) for the nullification of the sale of Calapatia's stockby VGCCI; the cancellation of any new stock certificate issued pursuant thereto;for the issuance of a new certificate in petitioner's name; and for damages,attorney's fees and costs of litigation.

On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision infavor of VGCCI, stating in the main that "(c)onsidering that the said share isdelinquent, (VGCCI) had valid reason not to transfer the share in the name ofthe petitioner in the books of (VGCCI) until liquidation ofdelinquency." 15 Consequently, the case was dismissed. 16
































On 14 April 1992, Hearing Officer Perea denied petitioner's motion forreconsideration. 17

Petitioner appealed to the SEC en banc and on 4 June 1993, the Commissionissued an order reversing the decision of its hearing officer. It declared thus:

The Commission en banc believes that appellant-petitioner has a priorright over the pledged share and because of pledgor's failure to pay theprincipal debt upon maturity, appellant-petitioner can proceed with theforeclosure of the pledged share.

WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are hereby SET ASIDE. The auction sale conducted byappellee-respondent Club on December 10, 1986 is declared NULL and

VOID. Finally, appellee-respondent Club is ordered to issue another

membership certificate in the name of appellant-petitioner bank. SO ORDERED. 18

VGCCI sought reconsideration of the abovecited order. However, the SEC deniedthe same in its resolution dated 7 December 1993. 19

The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the Court of Appeals rendered its decision nullifyingand setting aside the orders of the SEC and its hearing officer on ground of lackof jurisdiction over the subject matter and, consequently, dismissed petitioner'soriginal complaint. The Court of Appeals declared that the controversy betweenCBC and VGCCI is not intra-corporate. It ruled as follows:

In order that the respondent Commission can take cognizance of a case,the controversy must pertain to any of the following relationships: (a)between the corporation, partnership or association and the public; (b)between the corporation, partnership or association and its stockholders,partners, members, or officers; (c) between the corporation, partnershipor association and the state in so far as its franchise, permit or license tooperate is concerned, and (d) among the stockholders, partners or

associates themselves (Union Glass and Container Corporation vs. SEC,November 28, 1983, 126 SCRA 31). The establishment of any of therelationship mentioned will not necessarily always confer jurisdictionover the dispute on the Securities and Exchange Commission to theexclusion of the regular courts. The statement made in Philex MiningCorp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions ordistinctions is not that absolute. The better policy in determining which













body has jurisdiction over a case would be to consider not only thestatus or relationship of the parties but also the nature of the questionthat is the subject of their controversy (Viray vs. Court of Appeals,November 9, 1990, 191 SCRA 308, 322-323).

Indeed, the controversy between petitioner and respondent bank whichinvolves ownership of the stock that used to belong to Calapatia, Jr. isnot within the competence of respondent Commission to decide. It is notany of those mentioned in the aforecited case.

WHEREFORE, the decision dated June 4, 1993, and order datedDecember 7, 1993 of respondent Securities and Exchange Commission(Annexes Y and BB, petition) and of its hearing officer dated January 3,1992 and April 14, 1992 (Annexes S and W, petition) are all nullified andset aside for lack of jurisdiction over the subject matter of the case.

Accordingly, the complaint of respondent China Banking Corporation(Annex Q, petition) is DISMISSED. No pronouncement as to costs in thisinstance.

SO ORDERED. 20

Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October 1994. 21

Hence, this petition wherein the following issues were raised:

II ISSUES

WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former EighthDivision) GRAVELY ERRED WHEN:

1.IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC, AND WHEN ITDISMISSED THE COMPLAINT OF PETITIONER AGAINST

RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTIONOVER THE SUBJECT MATTER OF THE CASE;

2.IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES ANDEXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993DESPITE PREPONDERANT EVIDENCE SHOWING THATPETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP










CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.

The petition is granted.

The basic issue we must first hurdle is which body has jurisdiction over thecontroversy, the regular courts or the SEC.

P.D. No. 902-A conferred upon the SEC the following pertinent powers:

SEC. 3. The Commission shall have absolute jurisdiction, supervision andcontrol over all corporations, partnerships or associations, who are thegrantees of primary franchises and/or a license or permit issued by thegovernment to operate in the Philippines, and in the exercise of itsauthority, it shall have the power to enlist the aid and support of and to

deputize any and all enforcement agencies of the government, civil ormilitary as well as any private institution, corporation, firm, associationor person.

xxx xxx xxx

SEC. 5. In addition to the regulatory and adjudicative functions of theSecurities and Exchange Commission over corporations, partnershipsand other forms of associations registered with it as expressly grantedunder existing laws and decrees, it shall have original and exclusive

jurisdiction to hear and decide cases involving:

a)Devices or schemes employed by or any acts of the board ofdirectors, business associates, its officers or partners, amountingto fraud and misrepresentation which may be detrimental to theinterest of the public and/or of the stockholders, partners,members of associations or organizations registered with theCommission.

b)Controversies arising out of intra-corporate or partnershiprelations, between and among stockholders, members, orassociates; between any or all of them and the corporation,partnership or association of which they are stockholders,members or associates, respectively; and between suchcorporation, partnership or association and the State insofar as itconcerns their individual franchise or right to exist as such entity;



c)Controversies in the election or appointment of directors,trustees, officers, or managers of such corporations, partnershipsor associations.

d)Petitions of corporations, partnerships or associations to bedeclared in the state of suspension of payments in cases wherethe corporation, partnership or association possesses property tocover all of its debts but foresees the impossibility of meetingthem when they respectively fall due or in cases where thecorporation, partnership or association has no sufficient assets tocover its liabilities, but is under the Management Committeecreated pursuant to this Decree.

The aforecited law was expounded upon in Viray v . CA 22 and in the recent casesof Mainland Construction Co . , Inc . v . Movilla 23 and Bernardo v . CA, 24 thus:

. . . The better policy in determining which body has jurisdiction over acase would be to consider not only the status or relationship of theparties but also the nature of the question that is the subject of theircontroversy.

Applying the foregoing principles in the case at bar, to ascertain which tribunalhas jurisdiction we have to determine therefore whether or not petitioner is astockholder of VGCCI and whether or not the nature of the controversy between

petitioner and private respondent corporation is intra-corporate. As to the first query, there is no question that the purchase of the subject shareor membership certificate at public auction by petitioner (and the issuance to itof the corresponding Certificate of Sale) transferred ownership of the same tothe latter and thus entitled petitioner to have the said share registered in itsname as a member of VGCCI. It is readily observed that VGCCI did not assail thetransfer directly and has in fact, in its letter of 27 September 1974, expresslyrecognized the pledge agreement executed by the original owner, Calapatia, infavor of petitioner and has even noted said agreement in its corporate

books. 25 In addition, Calapatia, the original owner of the subject share, has notcontested the said transfer.

By virtue of the afore-mentioned sale, petitioner became a bona fide stockholderof VGCCI and, therefore, the conflict that arose between petitioner and VGCCIaptly exemplifies an intra-corporate controversy between a corporation and itsstockholder under Sec. 5(b) of P.D. 902-A.


















An important consideration, moreover, is the nature of the controversy betweenpetitioner and private respondent corporation. VGCCI claims a prior right overthe subject share anchored mainly on Sec. 3, Art VIII of its by-laws whichprovides that "after a member shall have been posted as delinquent, the Boardmay order his/her/its share sold to satisfy the claims of the Club . . ."26 It ispursuant to this provision that VGCCI also sold the subject share at publicauction, of which it was the highest bidder. VGCCI caps its argument byasserting that its corporate by-laws should prevail. The bone of contention, thus,is the proper interpretation and application of VGCCI's aforequoted by-laws, asubject which irrefutably calls for the special competence of the SEC. cdphil

We reiterate herein the sound policy enunciated by the Court in Abejo v . De laCruz 27 :

6.In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and boards the power toresolve specialized disputes in the field of labor (as in corporations,public transportation and public utilities) ruled that Congress in requiringthe Industrial Court's intervention in the resolution of labor-managementcontroversies likely to cause strikes or lockouts meant such jurisdictionto be exclusive, although it did not so expressly state in the law. TheCourt held that under the "sense-making and expeditious doctrine ofprimary jurisdiction . . . the courts cannot or will not determine acontroversy involving a question which is within the jurisdiction of anadministrative tribunal, where the question demands the exercise of

sound administrative discretion requiring the special knowledge,experience, and services of the administrative tribunal to determinetechnical and intricate matters of fact, and a uniformity of ruling isessential to comply with the purposes of the regulatory statuteadministered ."

In this era of clogged court dockets, the need for specializedadministrative boards or commissions with the special knowledge,experience and capability to hear and determine promptly disputes ontechnical matters or essentially factual matters, subject to judicial reviewin case of grave abuse of discretion, has become well nigh

indispensable. Thus, in 1984, the Court noted that "between the powerlodged in an administrative body and a court, the unmistakable trendhas been to refer it to the former. 'Increasingly, this Court has beencommitted to the view that unless the law speaks clearly andunequivocably, the choice should fall on [an administrative agency.]'"The Court in the earlier case of Ebon v . De Guzman , noted that thelawmaking authority, in restoring to the labor arbiters and the NLRC










their jurisdiction to award all kinds of damages in labor cases, as againstthe previous P.D. amendment splitting their jurisdiction with the regularcourts, "evidently,. . . had second thoughts about depriving the Labor

Arbiters and the NLRC of the jurisdiction to award damages in laborcases because that setup would mean duplicity of suits, splitting the

cause of action and possible conflicting findings and conclusions by twotribunals on one and the same claim."

In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does the meticulous analysis and correctinterpretation of a corporation's by-laws as well as the applicable provisions ofthe Corporation Code in order to determine the validity of VGCCI's claims. TheSEC, therefore, took proper cognizance of the instant case.

VGCCI further contends that petitioner is estopped from denying its earlier

position, in the first complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between itself and VGCCI.

VGCCI's contention lacks merit.

In Zamora v . Court of Appeals , 28 this Court, through Mr. Justice Isagani A. Cruz,declared that:

It follows that as a rule the filing of a complaint with one court whichhas no jurisdiction over it does not prevent the plaintiff from filing the

same complaint later with the competent court. The plaintiff is notestopped from doing so simply because it made a mistake before in thechoice of the proper forum . . .

We remind VGCCI that in the same proceedings before the RTC of Makati, itcategorically stated (in its motion to dismiss) that the case between itself andpetitioner is intra-corporate and insisted that it is the SEC and not the regularcourts which has jurisdiction. This is precisely the reason why the said courtdismissed petitioner's complaint and led to petitioner's recourse to the SEC.

Having resolved the issue on jurisdiction, instead of remanding the whole case tothe Court of Appeals, this Court likewise deems it procedurally sound to proceedand rule on its merits in the same proceedings.

It must be underscored that petitioner did not confine the instant petition forreview on certiorari on the issue of jurisdiction. In its assignment of errors,petitioner specifically raised questions on the merits of the case. In turn, in its







responsive pleadings, private respondent duly answered and countered all theissues raised by petitioner.

Applicable to this case is the principle succinctly enunciated in the case of Heirsof Crisanta Gabriel-Almoradie v . Court of Appeals , 29 citing Escudero

v . Dulay 30 and The Roman Catholic Archbishop of Manila v . Court of Appeals : 31 In the interest of the public and for the expeditious administration of

justice the issue on infringement shall be resolved by the courtconsidering that this case has dragged on for years and has gone fromone forum to another.

It is a rule of procedure for the Supreme Court to strive to settle theentire controversy in a single proceeding leaving no root or branch tobear the seeds of future litigation. No useful purpose will be served if a

case or the determination of an issue in a case is remanded to the trialcourt only to have its decision raised again to the Court of Appeals andfrom there to the Supreme Court.

We have laid down the rule that the remand of the case or of an issueto the lower court for further reception of evidence is not necessarywhere the Court is in position to resolve the dispute based on therecords before it and particularly where the ends of justice would not besubserved by the remand thereof. Moreover, the Supreme Court isclothed with ample authority to review matters, even those not raised onappeal if it finds that their consideration is necessary in arriving at a just

disposition of the case. In the recent case of China Banking Corp . , et al . v . Court of Appeals, etal ., 32 this Court, through Mr. Justice Ricardo J. Francisco, ruled in this wise:

At the outset, the Court's attention is drawn to the fact that that sincethe filing of this suit before the trial court, none of the substantial issueshave been resolved. To avoid and gloss over the issues raised by theparties, as what the trial court and respondent Court of Appeals did,would unduly prolong this litigation involving a rather simple case of

foreclosure of mortgage. Undoubtedly, this will run counter to theavowed purpose of the rules, i.e., to assist the parties in obtaining just,speedy and inexpensive determination of every action or proceeding.The Court, therefore, feels that the central issues of the case, albeitunresolved by the courts below, should now be settled specially as theyinvolved pure questions of law. Furthermore, the pleadings of therespective parties on file have amply ventilated their various positionsand arguments on the matter necessitating prompt adjudication.



















In the case at bar, since we already have the records of the case (from theproceedings before the SEC) sufficient to enable us to render a sound judgmentand since only questions of law were raised (the proper jurisdiction for SupremeCourt review), we can, therefore, unerringly take cognizance of and rule on themerits of the case.

The procedural niceties settled, we proceed to the merits.

VGCCI assails the validity of the pledge agreement executed by Calapatia inpetitioner's favor. It contends that the same was null and void for lack ofconsideration because the pledge agreement was entered into on 21 August1974 33 but the loan or promissory note which it secured was obtained byCalapatia much later or only on 3 August 1983. 34

VGCCI's contention is unmeritorious.

A careful perusal of the pledge agreement will readily reveal that the contractingparties explicitly stipulated therein that the said pledge will also stand as securityfor any future advancements (or renewals thereof) that Calapatia (the pledgor)may procure from petitioner:

xxx xxx xxx

This pledge is given as security for the prompt payment when due of allloans, overdrafts, promissory notes, drafts, bills or exchange, discounts,and all other obligations of every kind which have heretofore beencontracted, or which may hereafter be contracted , by the PLEDGOR(S)and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE,including discounts of Chinese drafts, bills of exchange, promissorynotes, etc., without any further endorsement by the PLEDGOR(S) and/orDebtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS,together with the accrued interest thereon, as hereinafter provided, plusthe costs, losses, damages and expenses (including attorney's fees)which PLEDGEE may incur in connection with the collectionthereof. 35 (Emphasis ours.)

The validity of the pledge agreement between petitioner and Calapatia cannotthus be held suspect by VGCCI. As candidly explained by petitioner, thepromissory note of 3 August 1983 in the amount of P20,000.00 was but arenewal of the first promissory note covered by the same pledge agreement.














VGCCI likewise insists that due to Calapatia's failure to settle his delinquentaccounts, it had the right to sell the share in question in accordance with theexpress provision found in its by-laws.

Private respondent's insistence comes to naught. It is significant to note that

VGCCI began sending notices of delinquency to Calapatia after it was informedby petitioner (through its letter dated 14 May 1985) of the foreclosureproceedings initiated against Calapatia's pledged share, although Calapatia hasbeen delinquent in paying his monthly dues to the club since 1975. Stranger still,petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia'sshare, was neither informed nor furnished copies of these letters of overdueaccounts until VGCCI itself sold the pledged share at another public auction. Bydoing so, VGCCI completely disregarded petitioner's rights as pledgee. It evenfailed to give petitioner notice of said auction sale. Such actuations of VGCCI

thus belie its claim of good faith. In defending its actions, VGCCI likewise maintains that petitioner is bound by itsby-laws. It argues in this wise:

The general rule really is that third persons are not bound by the by-laws of a corporation since they are not privy thereto (Fleischer v. BoticaNolasco, 47 Phil. 584). The exception to this is when third persons haveactual or constructive knowledge of the same. In the case at bar,petitioner had actual knowledge of the by-laws of private respondentwhen petitioner foreclosed the pledge made by Calapatia and when

petitioner purchased the share foreclosed on September 17, 1985. Thisis proven by the fact that prior thereto, i.e., on May 14, 1985 petitionereven quoted a portion of private respondent's by-laws which is materialto the issue herein in a letter it wrote to private respondent. Because ofthis actual knowledge of such by-laws then the same bound thepetitioner as of the time when petitioner purchased the share. Since theby-laws was already binding upon petitioner when the latter purchasedthe share of Calapatia on September 17, 1985 then the petitionerpurchased the said share subject to the right of the private respondentto sell the said share for reasons of delinquency and the right of privaterespondent to have a first lien on said shares as these rights areprovided for in the by-laws very very clearly. 36

VGCCI misunderstood the import of our ruling in Fleischer v . Botica NolascoCo .: 37

" And moreover, the by-law now in question cannot have any effect onthe appellee . He had no knowledge of such by-law when the shares










were assigned to him . He obtained them in good faith and for a valuableconsideration. He was not a privy to the contract created by said by-lawbetween the shareholder Manuel Gonzales and the Botica Nolasco, Inc.Said by-law cannot operate to defeat his rights as a purchaser.

"An unauthorized by-law forbidding a shareholder to sell his shareswithout first offering them to the corporation for a period of thirty daysis not binding upon an assignee of the stock as a personal contract,although his assignor knew of the by-law and took part in its adoption."(10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

"When no restriction is placed by public law on the transfer of corporatestock, a purchaser is not affected by any contractual restriction of whichhe had no notice." (Brinkerhoff-Farris Trust & Savings Co. vs. HomeLumber Co., 118 Mo., 447.)

"The assignment of shares of stock in a corporation by one who hasassented to an unauthorized by-law has only the effect of a contract by,and enforceable against, the assignor; the assignee is not bound bysuch by-law by virtue of the assignment alone." (Ireland vs. GlobeMilling Co., 21 R.I., 9.)

"A by-law of a corporation which provides that transfers of stock shallnot be valid unless approved by the board of directors, while it may beenforced as a reasonable regulation for the protection of the corporationagainst worthless stockholders, cannot be made available to defeat the

rights of third persons." (Farmers' and Merchants' Bank of Lineville vs.Wasson, 48 Iowa, 336.) (Emphasis ours.)

In order to be bound, the third party must have acquired knowledge of thepertinent by-laws at the time the transaction or agreement between said thirdparty and the shareholder was entered into, in this case, at the time the pledgeagreement was executed. VGCCI could have easily informed petitioner of its by-laws when it sent notice formally recognizing petitioner as pledgee of one of itsshares registered in Calapatia's name. Petitioner's belated notice of said by-lawsat the time of foreclosure will not suffice. The ruling of the SEC en banc is

particularly instructive: By-laws signifies the rules and regulations or private laws enacted by thecorporation to regulate, govern and control its own actions, affairs andconcerns and its stockholders or members and directors and officerswith relation thereto and among themselves in their relation to it. Inother words, by-laws are the relatively permanent and continuing rulesof action adopted by the corporation for its own government and that of



the individuals composing it and having the direction, management andcontrol of its affairs, in whole or in part, in the management and controlof its affairs and activities. (9 Fletcher 4166. 1982 Ed.)

The purpose of a by-law is to regulate the conduct and define the duties

of the members towards the corporation and among themselves. Theyare self-imposed and, although adopted pursuant to statutory authority,have no status as public law. (Ibid.)

Therefore, it is the generally accepted rule that third persons are notbound by by-laws, except when they have knowledge of the provisionseither actually or constructively. In the case of Fleisher v. BoticaNolasco, 47 Phil. 584, the Supreme Court held that the by-law restrictingthe transfer of shares cannot have any effect on the the transferee ofthe shares in question as he "had no knowledge of such by-law whenthe shares were assigned to him. He obtained them in good faith and fora valuable consideration. He was not a privy to the contract created bythe by-law between the shareholder . . . and the Botica Nolasco, Inc .Said by-law cannot operate to defeat his right as a purchaser."(Emphasis supplied.)

By analogy of the above-cited case, the Commission en banc is of theopinion that said case is applicable to the present controversy.

Appellant-petitioner bank as a third party can not be bound by appellee-respondent's by-laws. It must be recalled that when appellee-respondent communicated to appellant-petitioner bank that the pledge

agreement was duly noted in the club's books there was no mention ofthe shareholder-pledgor's unpaid accounts. The transcript ofstenographic notes of the June 25, 1991 Hearing reveals that thepledgor became delinquent only in 1975. Thus, appellant-petitioner wasin good faith when the pledge agreement was contracted.

The Commission en banc also believes that for the exception to thegeneral accepted rule that third persons are not bound by by-laws to beapplicable and binding upon the pledgee, knowledge of the provisions ofthe VGCCI By-laws must be acquired at the time the pledge agreementwas contracted. Knowledge of said provisions, either actual or

constructive, at the time of foreclosure will not affect pledgee's rightover the pledged share. Art. 2087 of the Civil Code provides that it isalso of the essence of these contracts that when the principal obligationbecomes due, the things in which the pledge or mortgage consistsmaybe alienated for the payment to the creditor.



In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., theCommission issued an opinion to the effect that:

According to the weight of authority, the pledgee's right isentitled to full protection without surrender of the certificate, their

cancellation, and the issuance to him of new ones, and whendone, the pledgee will be fully protected against a subsequentpurchaser who would be charged with constructive notice that thecertificate is covered by the pledge. (12-A Fletcher 502)

The pledgee is entitled to retain possession of the stock until thepledgor pays or tenders to him the amount due on the debtsecured. In other words, the pledgee has the right to resort to itscollateral for the payment of the debts. (Ibid, 502)

To cancel the pledged certificate outright and the issuance of newcertificate to a third person who purchased the same certificatecovered by the pledge, will certainly defeat the right of thepledgee to resort to its collateral for the payment of the debt. Thepledgor or his representative or registered stockholders has noright to require a return of the pledged stock until the debt forwhich it was given as security is paid and satisfied, regardless ofthe length of time which have elapsed since debt was created.(12-A Fletcher 409)

A bona fide pledgee takes free from any latent or secret equities or liensin favor either of the corporation or of third persons, if he has no noticethereof, but not otherwise. He also takes it free of liens or claims thatmay subsequently arise in favor of the corporation if it has notice of thepledge, although no demand for a transfer of the stock to the pledgeeon the corporate books has been made. (12-A Fletcher 5634, 1982 ed.,citing Snyder v. Eagle Fruit Co., 75 F2d739) 38

Similarly, VGCCI's contention that petitioner is duty-bound to know its by-lawsbecause of Art. 2099 of the Civil Code which stipulates that the creditor must

take care of the thing pledged with the diligence of a good father of a family,fails to convince. The case of Cruz & Serrano v . Chua A. H . Lee , 39 is clearly notapplicable:

In applying this provision to the situation before us it must be borne inmind that the ordinary pawn ticket is a document by virtue of which theproperty in the thing pledged passes from hand to hand by mere










al., 1 EDUARDO M. COJUANGCO JR. and theSANDIGANBAYAN (First Division) respondents .

The Solicitor General for petitioners.

Mario E. Ongkiko for petitioners-intervenors.

Abello Concepcion Regala & Cruz for COCOFED, et al. & Ballares, et al.

Estelito P. Mendoza for E.M. Cojuangco, Jr.

Catapang Guzman Tiongco & Torres for UCPB & 14 CIIF Holding Co.

Sycip Salazar Hernandez & Gatmaitan for UCPB.

SYNOPSIS

The first Division of the Sandiganbayan in Civil Case Nos. 0033-A, 0033-B and0033-P allowed respondents COCOFED, et al ., and Ballares, et al ., as well asEduardo Cojuangco, et al ., acknowledged registered stockholders of the UnitedCoconut Planters Bank (UCPB) and all other registered stockholders of the bank,to exercise their right to vote their shares of stock and themselves to be votedupon in the UCPB at the scheduled Stockholders' Meeting on March 6, 2001 oron any subsequent continuation or resetting thereof, and to perform such acts aswill normally follow in the exercise of these rights as registered stockholders. Inits petition, the Republic of the Philippines, represented by the PresidentialCommission on Good Government (PCGG), contended that respondentSandiganbayan committed grave abuse of discretion in enjoining them fromvoting the sequestered shares of stock in UCPB despite the fact that thesequestration share were purchased with coconut levy funds (which weredeclared public in character) and the continuing effectivity of Resolution datedFebruary 16, 1993 in G.R. No. 96073 which allows the PCGG to vote saidsequestered shares.

The Supreme Court uphold the contention of the PCGG ands set aside theassailed order of the Sandiganbayan. The Court held that the government shouldbe allowed to continue voting those shares inasmuch as they were purchasedwith coconut levy funds — funds that are prima facie public in character or, atthe very least, are "clearly affected withy public interest," and because theybelong to it as the prima facie beneficial and true owner thereof. Voting is an act

http://www.cdasiaonline.com/search/show_article/3117?search=gr%3A+%28147062-64%2A%29#footnotes






of dominion that should be exercised by the share owner. One of the recognizedrights of an owner is the right to vote at meetings of the corporation. The rightto vote is classified as the right to control. Voting rights may be for the purposeof, among others, electing or removing directors, amending a charter or makingor amending by laws. Because the subject UCPB shares were acquired withgovernment funds, the government becomes their prima facie beneficial and trueowner. Ownership includes the right to enjoy, dispose of, exclude and recover athing without limitations other than those established by law or by the owner.Ownership has been aptly described as the most comprehensive of all real rightsand the right to vote shares is a mere incident of ownership. In the present case,the government has been shown to be the prima facie owner of the funds usedto purchase the shares. Hence, it should be allowed the rights and privilegesflowing from such fact. HCSEcI

SYLLABUS

1. MERCANTILE LAW; CORPORATION CODE; SHARES OF STOCK; GENERALRULE; SEQUESTERED SHARES OF STOCK ARE VOTED BY THE REGISTEREDHOLDER. — It is necessary to restate the general rule that the registered ownerof the shares of a corporation exercises the right and the privilege of voting. Thisprinciple applies even to shares that are sequestered by the government, overwhich the PCGG as a mere conservator cannot, as a general rule, exercise acts ofdominion. On the other hand, it is authorized to vote these sequestered sharesregistered in the names of private persons and acquired with allegedly ill-gottenwealth, if it is able to satisfy the two-tiered test devised by the Courtin Cojuangco v. Calpo and PCGG v. Cojuangco Jr ., as follows: (1) Is there primafacie evidence showing that the said shares are ill-gotten and thus belong to theState? (2) Is there an imminent danger of dissipation, thus necessitating theircontinued sequestration and voting by the PCGG, while the main issue is pendingwith the Sandiganbayan?

2. ID.; ID.; ID.; EXCEPTION TO THE RULE; SEQUESTERED SHARES ACQUIREDWITH PUBLIC FUNDS. — The Court inBaseco v. PCGG (hereinafter "Baseco ")

and Cojuangco Jr. v. Roxas ("Cojuangco-Roxas" ) has provided two clear "publiccharacter" exceptions under which the government is granted the authority tovote the shares: (1) Where government shares are taken over by private personsor entities who/which registered them in their own names, and (2) Where thecapitalization or shares that were acquired with public funds somehow landed inprivate hands. The exceptions are based on the common-sense principle thatlegal fiction must yield to truth; that public property registered in the names of



non-owners is affected with trust relations; and that the prima facie beneficialowner should be given the privilege of enjoying the rights flowing from the primafacie fact of ownership.

3. ID:, ID.; ID.; COCONUT LEVY FUNDS ARE AFFECTED WITH PUBLIC

INTEREST. — Having conclusively shown that the sequestered UCPB shares werepurchased with coconut levies, we hold that these funds and shares are, at thevery least, "affected with public interest." The Resolution issued by the Court onFebruary 16, 1993 in Republic v. Sandiganbayan stated that coconut levy fundswere "clearly affected with public interest"; thus, herein private respondents — even if they are the registered shareholders — cannot be accorded the right tovote them.

4. ID.; ID.; COCONUT LEVY FUNDS ARE PRIMA FACIE PUBLIC FUNDS; SAIDFUND SATISFY THE GENERAL DEFINITION OF PUBLIC FUNDS. — To avoidmisunderstanding and confusion, this Court will even be more categorical andpositive than its earlier pronouncements: the coconut levy funds are not onlyaffected with public interest; they are, in fact, prima facie public funds . Publicfunds are those moneys belonging to the State or to any political subdivision ofthe State; more specifically, taxes, customs duties and moneys raised byoperation of law for the support of the government or for the discharge of itsobligations. Undeniably, coconut levy funds satisfy this general definition ofpublic funds . CcEHaI

5. ID.; ID.; ID.; COCONUT LEVY FUND RAISED THROUGH STATE'S POLICE ANDTAXING POWER. — Indeed, coconut levy funds partake of the nature of taxeswhich, in general, are enforced proportional contributions from persons andproperties, exacted by the State by virtue of its sovereignty for the support ofgovernment and for all public needs. Based on this definition, a tax has threeelements, namely: a) it is an enforced proportional contribution from personsand properties; b) it is imposed by the State by virtue of its sovereignty; and c) itis levied for the support of the government. The coconut levy funds fall squarelyinto these elements.

6. ID.; ID.; ID.; HAVING BEEN ACQUIRED WITH PUBLIC FUNDS, THE SUBJECTSHARES BELONG, PRIMA FACIE , TO THE GOVERNMENT. — Having shown thatthe coconut levy funds are not only affected with public interest, but are infact prima facie public funds, this Court believes that the government should beallowed to vote the questioned shares, because they belong to it as the primafacie beneficial and true owner. As stated at the beginning, voting is an act ofdominion that should be exercised by the share owner. One of the recognized



rights of an owner is the right to vote at meetings of the corporation. The rightto vote is classified as the right to control. Voting rights may be for the purposeof, among others, electing or removing directors, amending a charter, or makingor amending bylaws. Because the subject UCPB shares were acquired withgovernment funds, the government becomes their prima facie beneficial and trueowner. Ownership includes the right to enjoy, dispose of, exclude and recover athing without limitations other than those established by law or by the owner.Ownership has been aptly described as the most comprehensive of all real rights.

And the right to vote shares is a mere incident of ownership. In the present case,the government has been shown to be the prima facie owner of the funds usedto purchase the shares. Hence, it should be allowed the rights and privilegesflowing from such fact.

7. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; CERTIORARI ; GRAVE ABUSE OF

DISCRETION MAY ARISE WHEN A LOWER COURT OR TRIBUNAL VIOLATES ORCONTRAVENES THE CONSTITUTION, THE LAW OR EXISTING JURISPRUDENCE. — We hold that the Sandiganbayan gravely abused its discretion when itcontravened the rulings of this Court in Baseco andCojuangco -Roxas — therebyunlawfully, capriciously and arbitrarily depriving the government of its right tovote sequestered shares purchased with coconut levy funds which are primafacie public funds. Indeed, grave abuse of discretion may arise when a lowercourt or tribunal violates or contravenes the Constitution, the law or existing

jurisprudence. In one case, this Court ruled that the lower court's resolution was"tantamount to overruling a judicial pronouncement of the highest Court . . . and

unmistakably a very grave abuse of discretion."TSIDEa

8. ID.; ID.; ID.; PUBLIC CHARACTER OF SHARES IS A VALID ISSUE. — The mainissue of who may vote the shares cannot be determined without passing uponthe question of the public/private character of the shares and the funds used toacquire them. The latter issue, although not specifically raised in the Court aquo , should still be resolved in order to fully adjudicate the main issue. Indeed,this Court has "the authority to waive the lack of proper assignment of errors ifthe unassigned errors closely relate to errors properly pinpointed out or if theunassigned errors refer to matters upon which the determination of the

questions raised by the errors properly assigned depend." Therefore, "where theissues already raised also rest on other issues not specifically presented as longas the latter issues bear relevance and close relation to the former and as longas they arise from matters on record, the Court has the authority to include themin its discussion of the controversy as well as to pass upon them."



9. ID.; ID.; ID.; NO POSITIVE RELIEF FOR INTERVENORS; THEIR RIGHT ISDEPENDENT UPON THE SANDIGANBAYAN'S RESOLUTION ON THE ACTION FORTHE RECOVERY OF THE SEQUESTERED SHARES. — We cannot rule onintervenors' alleged right to vote at this time and in this case. That right isdependent upon the Sandiganbayan's resolution of their action for the recoveryof said sequestered shares. Given the patent fact that intervenors are notregistered stockholders of UCPB as of the moment, their asserted rights cannotbe ruled upon in the present proceedings. Hence, no positive relief can be giventhem now, except insofar as they join petitioner in barring private respondentsfrom voting the subject shares.

VITUG, J., separate opinion:

1. MERCANTILE LAW, CORPORATION CODE; SHARES OF STOCK; PURCHASE BYTHE COCONUT INDUSTRY INVESTMENT FUND COMPANIES OF THE COCONUTFARMER'S SHARE IN UNITED COCONUT PLANTERS BANK DID NOT CHANGETHE PUBLIC CHARACTER OF THE SHARES. — To account for their equityholdings in the bank, COCOFED, et al ., in their Memorandum, would advancethat, in 1975, COCOFED, a private national association of coconut producers,was designated by the Philippine Coconut Authority ("PCA") as being theimplementing agency for the free distribution of the shares of stock of the UCPBto the coconut farmers. By 02 May 1981, 232,805,852.16 of said shares weredistributed to the farmers. Still there remained 15,619,419.84 shares registeredin the name of COCOFED which, according to it, were ultimately given to the

farmers. Prior to June 1986, a substantial number of the coconut farmers soldtheir shares in the bank at prices below par value. By way of a financialassistance to the selling coconut farmers, the UCPB Board of Directors authorizedthe CIIF companies to purchase their holdings in the bank at par value. Thesetransactions, nevertheless, did not change the character of the UCPB shares,these having been bought with coconut levy funds which the Court distinctlycharacterized to be "clearly affected with public interest" and "raised such asthey were by the State's police and taxing powers." The fundamental rule is thattax proceeds may only be used for a public purpose, which may either be ageneral public purpose to support the existence of the state or a special public

purpose to pursue certain legitimate objects of government in the exercise ofpolice power, and none other. As a measure to ensure the proper utilization ofmoney collected for a specified public purpose, the 1987 Constitution, restatinganother general principle, treats the proceeds as a special fund to be paid out forsuch purpose. If, however, that purpose has been fulfilled or is no longerforthcoming, the balance, if any, shall then be transferred to the general funds ofthe government, which may thereafter be appropriated by Congress and



expended for any legitimate purpose within the scope of the general fund. Anentity, whether public or private, which holds the tax money has no authority todisburse it or to pay any of it to anyone, the power to dispose of such moneybeing vested in the legislature. Thus, the 1987 Constitution, like its counterpartsin the 1935 and the 1973 Constitution, mandates that no money shall be paidout of the national treasury except in pursuance of an appropriation made bylaw . SECHIA

2. ID.; ID.; ID.; PENDING A CONCLUSIVE DETERMINATION ON THE LEGALITYOF THE 10% EQUITY RETENTION STANDING IN THE NAME OF RESPONDENTEDUARDO COJUANGCO, JR., IT WOULD BE NEITHER RIGHT NOR JUST TODEPRIVE HIM FROM MEANWHILE EXERCISING HIS RIGHT TO AT LEAST VOTETHE SAME. — Respondent Eduardo Cojuangco, Jr., upon the other hand, inclaiming ownership over a portion of the sequestered UCPB shares, advanced

two documents — an agreement in May 1975, where he appeared to haveexercised his option to acquire the UCPB shares of stock owned by the family ofthe late Don Jose Cojuangco, Sr., amounting to 72.2% equity holding in thebank, at two hundred pesos (Php200.00) per share, and the "Agreement for the

Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers of thePhilippines," dated 25 May 1975, whereby the PCA purchased with funds fromthe CCSF the aforesaid UCPB shares from Eduardo Cojuangco, Jr., also at twohundred pesos (Php200.00) per share. In the latter agreement, it was stipulatedthat as compensation for exercising his personal and exclusive option to acquirethe UCPB shares and for transferring such shares to the PCA, Eduardo

Cojuangco, Jr., would receive one (1) share for every nine (9) shares acquired bythe PCA and additional equity in the bank. In sum, correlating the twoagreements, Eduardo Cojuangco, Jr., would contend, in effect, that he retainedtitle over roughly 10% equity holding in the bank and established his primafacie right over the corresponding shares independently sourced from thecoconut levy funds. Even if it were to be conceded that the said 10% holding inUCPB of Eduardo Cojuangco, Jr., could be assailed, pending a conclusivedetermination on the legality of such a retention, however, it would neither beright nor just to deprive him from meanwhile exercising his right to at least votethe same. For the foregoing reasons, I vote to grant the petition in part and

to deny it insofar as the shares of stock pertaining to the 10% of the 72% equityretention standing in the name of Eduardo Cojuangco, Jr., are concerned. Inpassing, I should like to state my understanding of the ruling of the Court. Imust first clarify, however, that sequestration does not mean the vesting of titlein the hands of the sequestering authority; rather, the term implies thepreservation of assets. Neither ownership nor rights thereover are acquired or



lost by virtue alone of sequestration — a mere ancillary remedy to secure adisputed asset.

MELO, J., dissenting opinion:

1. MERCANTILE LAW; CORPORATION LAW; SHARES OF STOCK; THE VALIDITYOF THE ACQUISITION OF THE UNITED COCONUT PLANTERS BANK SHARES ISTHE VERY LIS MOTA OF THE ACTION FOR RECONVEYANCE, ACCOUNTING,REVERSION AND RESTITUTION FILED BY THE PCGG WITH THESANDIGANBAYAN; TO RULE ON THE MATTER WOULD BE TO PREEMPT SAIDCOURT. — The view expressed by the majority that the UCPB shares, havingbeen acquired with the use of coconut levy funds, and, therefore belong to thegovernment, may very well turn out to be correct. However, since these issuesare still pending litigation at the Sandiganbayan , it would be premature, I submit,to rule on this point at this time. Verily, the validity of the acquisition byCojuangco Jr., et al . of their UCPB shares is the very lis mota of the action forreconveyance, accounting, reversion, and restitution filed by the PCGG withthe Sandiganbayan . To rule on this matter would be to preempt said court. Too,the argument that the coconut levy funds used to purchase the sequesteredUCPB shares of stock are public funds does not appear to have been raisedbefore the Sandiganbayan ; consequently, the Sandiganbayan did not rule on thenature of the fund. It would be absurd to hold that the Sandiganbayan gravelyabused its discretion in not holding that the sequestered shares belong primafacie to the government, the issue of whether or not coconut levy funds are

public funds not having been raised before it.DAaIHT

2. ID.; ID.; ID.; THE DETERMINATION OF WHETHER THE COCONUT LEVYFUNDS ARE PUBLIC FUNDS INVOLVES THE ASCERTAINMENT OF THECONSTITUTIONALITY OF SECTION 5 OF ARTICLE III OF PRESIDENTIAL DECREENO. 1468. — Moreover, and as mentioned earlier, the nature of the funds used isa matter which should be decided first-hand by theSandiganbayan when itresolves the merits of Civil Case No. 0033-A. Note should also be taken of thefact that the determination of whether the coconut levy funds are public fundsinvolves the ascertainment of the constitutionality of Section 5, Article III of

Presidential Decree No. 961 and Section 5, Article III of Presidential Decree No.1468. Presidential Decrees No. 961 and 1468 have not been repealed, revoked,or declared unconstitutional, hence they are presumed valid and binding.Without a previous declaration of unconstitutionality, the coconut levy funds maynot thus be characterized as prima facie belonging to the government. That issuemust first be resolved by the Sandiganbayan . In fact, when the Solicitor General,in G.R. No. 96073, filed a motion to declare the coconut levies collected pursuant



to the various issuances as public funds and to declare Section 5, Article III ofPresidential Decree No. 1468 as unconstitutional, the Court denied the same in aResolution dated March 26, 1996.

3. ID.; ID.; ID.; THE QUESTION OF WHETHER THE COCONUT LEVY FUNDS ARE

PUBLIC FUNDS IS NOT IN ISSUE IN THE PRESENT CASE. — And if it is to berecalled, the issue involved herein is whether or notthe Sandiganbayan committed grave abuse of discretion when it issued thedisputed order allowing respondents to vote the UCPB shares of stock registeredin their names. The question of whether the coconut levy funds are public fundsis not in issue here. In fact, the constitutionality of Presidential Decrees No. 961and 1468 have not been raised by the PCGG during the proceedings beforethe Sandiganbayan . Moreover, it should be pointed out that the avowed purposeof sequestration is to preserve the assets sequestered to assure that if, and

when, judgment is rendered in favor of the petitioner, the judgment may beimplemented. "Preservation," not "deprivation" before judgment, is its essence.In the instant case, however, the actuations of PCGG with regard to thesequestered shares partake more of deprivation rather than preservation. Aspointed out by respondents, since 1986, only one (1) stockholders' meeting ofUCPB has been held. At this meeting, PCGG voted all of the shares, as a result ofwhich all members of the Board of UCPB, since 1986 to the present, have beenPCGG nominees. When vacancies in the Board occur because of resignation,replacements are installed by the remaining members of the Board — onnomination of the PCGG. The stockholders' meeting scheduled on March 6, 2001

would have been the first stockholders' meeting since 1986 at which registeredstockholders would exercise their right to vote and by their vote elect themembers of the Board of Directors. Also, the shares of stock in UCPB weresequestered in 1986. The civil action "Republic of the Philippines v. Eduardo M.Cojuangco, Jr ., Civil Case No. 033 ," was instituted before the Sandiganbayan onJuly 30, 1987. This action included, among other things, the UCPB shares ofstock and was filed to maintain the effectivity of the writs of sequestrationpursuant to Section 26, Article XVIII of the Constitution. Notwithstanding thelapse of more than 14 years, the proceedings have barely gone beyond the pre-trial stage. PCGG's exercise of the right to vote the sequestered shares of stock

for a period of 14 years constitutes effectively a deprivation of a property rightbelonging to the registered stockholders (18 Am. Jur. 2d, Corporations 2dSection 1065, p. 859, citing cases), a state of affairs not within thecontemplation of "sequestration" as a means of preservation of assets. DHATcE



4. ID.; ID.; INCIDENTS CONCERNING THE VOTING OF THE SEQUESTEREDSHARES BEING MATTERS INCIDENTAL TO THE SEQUESTRATION SHOULD BE

ADDRESSED TO THE SANDIGANBAYAN. — I regret to say that I findunacceptable the contention that the "law of the case " herein should be theResolution dated February 16, 1993, in Republic of the Philippines vs.Sandiganbayan, et al . For one, the UCPB shares of stock of respondentsCOCOFED, et al . and Ballares, et al . are not the subject of the case relied upon.Hence, the Resolution therein could not have referred to or covered said shares.For another, and more importantly, what is invoked by petitioner is, in effect,merely a restraining order which was not re-affirmed by the Court when werendered the main decision in the said consolidated sequestration cases. Rather,what I believe is truly applicable herein is the Court's decision in COCOFED vs.PCGG (178 SCRA 236 [1989]) wherein it was held that "the incidents concerningthe voting of the sequestered shares, the COCOFED elections, and the

replacement of directors, being matters incidental to the sequestration, shouldbe addressed to the Sandiganbayan ." Thus, the Sandiganbayan has been givenby the Court full discretion to evaluate and to allow or disallow the dulyregistered stockholders of the UCPB shares to exercise the right to vote the saidshares in the UCPB elections and/or appointment/replacement of its directors. If,as in the case at hand, the Sandiganbayan , in the exercise of its sound discretionand for justifiable reasons cited in its assailed Order of February 28, 2001,allowed herein private respondents to vote the sequestered shares in question,one would simply be at a loss to understand how such action could be said to betainted with grave abuse of discretion. SHIETa

D E C I S I O N

PANGANIBAN, J P:

The right to vote sequestered shares of stock registered in the names of privateindividuals or entities and alleged to have been acquired with ill-gotten wealthshall, as a rule, be exercised by the registered owner. The PCGG may, however,

be granted such voting right provided it can (1) show prima facie evidence thatthe wealth and/or the shares are indeed ill-gotten; and (2) demonstrateimminent danger of dissipation of the assets, thus necessitating their continuedsequestration and voting by the government until a decision, ruling with finalityon their ownership, is promulgated by the proper court. cdasia



the Writ of Sequestration issued by the Commission was automatically lifted forPCGG‘s failure to commence the corresponding judicial action within the six-month period ending on August 2, 1987 provided under Section 26, Article XVIIIof the 1987 Constitution. The anti-graft court noted that though these entitieswere listed in an annex appended to the Complaint, they had not been named asparties-respondents.

This Sandiganbayan Resolution was challenged by the PCGG in a Petitionfor Certiorari docketed as G.R. No. 96073 in this Court. Meanwhile, upon motionof Cojuangco, the anti-graft court ordered the holding of elections for the Boardof Directors of UCPB. However, the PCGG applied for and was granted by thisCourt a Restraining Order enjoining the holding of the election. Subsequently,the Court lifted the Restraining Order and ordered the UCPB to proceed with theelection of its board of directors. Furthermore, it allowed the sequestered shares

to be voted by their registered owners. The victory of the registered shareholders was fleeting because the Court, actingon the solicitor general‘s Motion for Clarification/Manifestation, issued aResolution on February 16, 1993, declaring that ―the right of petitioners [hereinprivate respondents] to vote stock in their names at the meetings of the UCPBcannot be conceded at this time. That right still has to be established by thembefore the Sandiganbayan. Until that is done, they cannot be deemed legitimateowners of UCPB stock and cannot be accorded the right to vote them.‖ 13 Thedispositive portion of the said Resolution reads as follows:

―IN VIEW OF THE FOREGOING, the Court recalls and sets aside theResolution dated March 3, 1992 and, pending resolution on the merits ofthe action at bar, and until further orders, suspends the effectivity of thelifting of the sequestration decreed by the Sandiganbayan on November15, 1990, and directs the restoration of the status quo ante , so as toallow the PCGG to continue voting the shares of stock undersequestration at the meetings of the United Coconut Planters Bank.‖ 14

On January 23, 1995, the Court rendered its final Decision in G.R. No. 96073,nullifying and setting aside the November 15, 1990 Resolution of the

Sandiganbayan which, as earlier stated, lifted the sequestration of the subjectUCPB shares. The express impleading of herein Respondents COCOFED et al .was deemed unnecessary because ―the judgment may simply be directed againstthe shares of stock shown to have been issued in consideration of ill-gotten

wealth.‖ 15 Furthermore, the companies ―are simply the res in the actions for therecovery of illegally acquired wealth, and there is, in principle, no cause of actionagainst them and no ground to implead them as defendants in said case.‖ 16

















A month thereafter, the PCGG — pursuant to an Order of the Sandiganbayan — subdivided Case No. 0033 into eight Complaints and docketed them as Case Nos.0033-A to 0033-H. CaDEAT

Six years later, on February 13, 2001, the Board of Directors of UCPB receivedfrom the ACCRA Law Office a letter written on behalf of the COCOFED and thealleged nameless one million coconut farmers, demanding the holding of astockholders‘ meeting for the purpose of, among others, electing the board ofdirectors. In response, the board approved a Resolution calling for astockholders‘ meeting on March 6, 2001 at three o‘clock in the afternoon.

On February 23, 2001, ―COCOFED, et al . and Ballares, et al .‖ filed the ―Class

Action Omnibus Motion‖ 17 referred to earlier in Sandiganbayan Civil Case Nos.0033-A, 0033-B and 0033-F, asking the court a quo:

―1. To enjoin the PCGG from voting the UCPB shares of stock registeredin the respective names of the more than one million coconutfarmers; and

―2. To enjoin the PCGG from voting the SMC shares registered in thenames of the 14 CIIF holding companies including thoseregistered in the name of the PCGG.‖ 18

On February 28, 2001, respondent court, after hearing the parties on oralargument, issued the assailed Order.

Hence, this Petition by the Republic of the Philippines represented by thePCGG. 19

The case had initially been raffled to this Court‘s Third Division which, by a voteof 3-2, 20 issued a Resolution 21 requiring the parties to maintain thestatus quo existing before the issuance of the questioned Sandiganbayan Orderdated February 28, 2001. On March 7, 2001, Respondent COCOFED et al. moved

that the instant Petition be heard by the Court en banc. 22 The Motion wasunanimously granted by the Third Division.

On March 13, 2001, the Court en banc resolved to accept the Third Division‘s

referral. 23 It heard the case on Oral Argument in Baguio City on April 17, 2001.During the hearing, it admitted the intervention of a group of coconut farmersand farm worker organizations, the Pambansang Koalisyon ng mga Samahang






























Magsasaka at Manggagawa ng Niyugan (PKSMMN). The coalition claims that itsmembers have been excluded from the benefits of the coconut levy fund. Interalia , it joined petitioner in praying for the exclusion of private respondents invoting the sequestered shares.

Issues

Petitioner submits the following issues for our consideration: 24

―A.

Despite the fact that the subject sequestered shares were purchasedwith coconut levy funds (which were declared public in character) andthe continuing effectivity of Resolution dated February 16, 1993 in G.R.No. 96073 which allows the PCGG to vote said sequestered shares,

Respondent Sandiganbayan, with grave abuse of discretion, issued itsOrder dated February 28, 2001 enjoining PCGG from voting thesequestered shares of stock in UCPB.

―B.

The Respondent Sandiganbayan violated petitioner‘s right to dueprocess by taking cognizance of the Class Action Omnibus Motion dated23 February 2001 despite gross lack of sufficient notice and by issuingthe writ of preliminary injunction despite the obvious fact that there wasno actual pressing necessity or urgency to do so.‖

In its Resolution dated April 17, 2001, the Court defined the issue to be resolvedin the instant case simply as follows:

―Did the Sandiganbayan commit grave abuse of discretion when it issuedthe disputed Order allowing respondents to vote UCPB shares of stockregistered in the name of respondents?‖

This Court‘s Ruling

The Petition is impressed with merit. Main Issue:

Who May Vote the Sequestered Shares of Stock?






Simply stated, the gut substantive issue to be resolved in the present Petition is: ―Who may vote the sequestered UCPB shares while the main case for theirreversion to the State is pending in the Sandiganbayan?‖

This Court holds that the government should be allowed to continue voting those

shares inasmuch as they were purchased with coconut levy funds — funds thatare prima facie public in character or, at the very least, are ―clearly affected withpublic interest.‖

General Rule: Sequestered Shares

Are Voted by the Registered Holder

At the outset, it is necessary to restate the general rule that the registered ownerof the shares of a corporation exercises the right and the privilege of

voting. 25 This principle applies even to shares that are sequestered by thegovernment, over which the PCGG as a mere conservator cannot, as a general

rule, exercise acts of dominion. 26 On the other hand, it is authorized to votethese sequestered shares registered in the names of private persons andacquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered test

devised by the Court in Cojuangco v. Calpo 27 and PCGG v. Cojuangco Jr ., 28 asfollows:

(1) Is there prima facie evidence showing that the said shares are ill-gotten and

thus belong to the State? (2) Is there an imminent danger of dissipation, thus necessitating their continuedsequestration and voting by the PCGG, while the main issue is pending with theSandiganbayan?

Sequestered Shares Acquired with

Public Funds Are an Exception

From the foregoing general principle, the Court in Baseco v. PCGG 29 (hereinafter ―Baseco ‖) and Cojuangco Jr. v. Roxas 30( ―Cojuangco-Roxas ‖) has provided twoclear ―public character‖ exceptions under which the government is granted theauthority to vote the shares:

(1) Where government shares are taken over by private persons or entitieswho/which registered them in their own names, and


























(2) Where the capitalization or shares that were acquired with public fundssomehow landed in private hands.

The exceptions are based on the common-sense principle that legal fiction mustyield to truth; that public property registered in the names of non-owners is

affected with trust relations; and that the prima facie beneficial owner should begiven the privilege of enjoying the rights flowing from the prima facie fact ofownership.

In Baseco , a private corporation known as the Bataan Shipyard and EngineeringCo. was placed under sequestration by the PCGG. Explained the Court:

―The facts show that the corporation known as BASECO was owned andcontrolled by President Marcos ‗during his administration, throughnominees, by taking undue advantage of his public office and/or using

his powers, authority, or influence,‘ and that it was by and through thesame means, that BASECO had taken over the business and/or assets ofthe National Shipyard and Engineering Co., Inc., and other government-owned or controlled entities.‖ 31

Given this factual background, the Court discussed PCGG‘s right over BASECO inthe following manner:

―Now, in the special instance of a business enterprise shown by evidenceto have been ‗taken over by the government of the Marcos

Administration or by entities or persons close to former PresidentMarcos,‘ the PCGG is given power and authority, as already adverted to,to ‗provisionally take (it) over in the public interest or to prevent . . .(its) disposal or dissipation;‘ and since the term is obviously employed inreference to going concerns, or business enterprises in operation,something more than mere physical custody is connoted; the PCGG mayin this case exercise some measure of control in the operation, running,or management of the business itself .‖ 32

Citing an earlier Resolution, it ruled further:

― ‗Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a stockholders'meeting for the election of directors as authorized by the Memorandumof the President . . . (to the PCGG) dated June 26, 1986, particularly,where as in this case, the government can, through its designateddirectors, properly exercise control and management over what appearto be properties and assets owned and belonging to the government










itself and over which the persons who appear in this case on behalf ofBASECO have failed to show any right or even any shareholding in said

corporation.‖ 33 (Italics supplied)

The Court granted PCGG the right to vote the sequestered shares because they

appeared to be ―assets belonging to the government itself.‖ The ConcurringOpinion of Justice Ameurfina A. Melencio-Herrera, in which she was joined byJustice Florentino P. Feliciano, explained this principle as follows:

―I have no objection to according the right to vote sequestered stock incase of a take-over of business actually belonging to the governmentor whose capitalization comes from public funds but which, somehow,landed in the hands of private persons, as in the case of BASECO. To mymind, however, caution and prudence should be exercised in the case ofsequestered shares of an on-going private business enterprise, specially

the sensitive ones, since the true and real ownership of said shares isyet to be determined and proven more conclusively by the

Courts.‖ 34 (Italics supplied)

The exception was cited again by the Court in Cojuangco-Roxas 35 in this wise:

―The rule in this jurisdiction is, therefore, clear. The PCGG cannotperform acts of strict ownership of sequestered property. It is a mereconservator. It may not vote the shares in a corporation and elect themembers of the board of directors. The only conceivable exception is ina case of a takeover of a business belonging to the government or

whose capitalization comes from public funds, but which landed inprivate hands as in BASECO .‖ 36 (Italics supplied)

The ―public character‖ test was reiterated in many subsequent cases; mostrecently, in Antiporda v. Sandiganbayan . 37Expressly citing Cojuangco-

Roxas , 38 this Court said that in determining the issue of whether the PCGGshould be allowed to vote sequestered shares, it was crucial to find out firstwhether these were purchased with public funds , as follows:

―It is thus important to determine first if the sequestered corporateshares came from public funds that landed in private hands.‖ 39

In short, when sequestered shares registered in the names of private individualsor entities are alleged to have been acquired with ill-gotten wealth, then the two-tiered test is applied. However, when the sequestered shares in the name of





























private individuals or entities are shown, prima facie , to have been (1) originallygovernment shares, or (2) purchased with public funds or those affected withpublic interest, then the two-tiered test does not apply. Rather, the publiccharacter exceptions in Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; thatis, the government shall vote the shares.

UCPB Shares Were Acquired

With Coconut Levy Funds

In the present case before the Court, it is not disputed that the money used topurchase the sequestered UCPB shares came from the Coconut ConsumerStabilization Fund (CCSF), otherwise known as the coconut levy funds.

This fact was plainly admitted by private respondent‘s counsel, Atty. Teresita J.

Herbosa, during the Oral Arguments held on April 17, 2001 in Baguio City, asfollows:

―Justice Panganiban:

―In regard to the theory of the Solicitor General that the funds usedto purchase [both] the original 28 million and the subsequent 80 millioncame from the CCSF, Coconut Consumers Stabilization Fund, do youagree with that?

―Atty. Herbosa: ―Yes, Your Honor.

xxx xxx xxx

―Justice Panganiban:

―So it seems that the parties [have] agreed up to that point thatthe funds used to purchase 72% of the former First United Bank camefrom the Coconut Consumers Stabilization Fund?

―Atty. Herbosa:

―Yes, Your Honor.‖ 40







Indeed in Cocofed v. PCGG , 41 this Court categorically declared that the UCPBwas acquired ―with the use of the Coconut Consumers Stabilization Fund in virtueof Presidential Decree No. 755, promulgated on July 29, 1975.‖

Coconut Levy Funds Are

Affected With Public Interest

Having conclusively shown that the sequestered UCPB shares were purchasedwith coconut levies, we hold that these funds and shares are, at the very least,

―affected with public interest.‖

The Resolution issued by the Court on February 16, 1993 in Republic v.Sandiganbayan 42 stated that coconut levy funds were ―clearly affected withpublic interest‖; thus, herein private respondents — even if they are the

registered shareholders — cannot be accorded the right to vote them. We quotethe said Resolution in part, as follows:

―The coconut levy funds being ‗clearly affected with public interest, it

follows that the corporations formed and organized from those funds,and all assets acquired therefrom should also be regarded as ‗clearlyaffected with public interest.‘ ‖ 43

xxx xxx xxx

―Assuming, however, for purposes of argument merely, the lifting ofsequestration to be correct, may it also be assumed that the lifting ofsequestration removed the character of the coconut levy companies ofbeing affected with public interest, so that they and their stock andassets may now be considered to be of private ownership? May it beassumed that the lifting of sequestration operated to relieve the holdersof stock in the coconut levy companies — affected with public interest — of the obligation of proving how that stock had been legitimatelytransferred to private ownership, or that those stockholders who hadhad some part in the collection, administration, or disposition of thecoconut levy funds are now deemed qualified to acquire said stock, and

freed from any doubt or suspicion that they had taken advantage oftheir special or fiduciary relation with the agencies in charge of thecoconut levies and the funds thereby accumulated? The obvious answerto each of the questions is a negative one. It seems plain that the liftingof sequestration has no relevance to the nature of the coconut levycompanies or their stock or property, or to the legality of the acquisitionby private persons of their interest therein, or to the latter‘s capacity or















disqualification to acquire stock in the companies or any propertyacquired from coconut levy funds.

―This being so, the right of the [petitioners] to vote stock in their namesat the meetings of the UCPB cannot be conceded at this time. That right

still has to be established by them before the Sandiganbayan. Until thatis done, they cannot be deemed legitimate owners of UCPB stock and

cannot be accorded the right to vote them.‖ 44 (Italics supplied)

It is however contended by respondents that this Resolution was in the nature ofa temporary restraining order. As such, it was supposedly interlocutory incharacter and became functus oficio when this Court decided G.R. No. 96073 onJanuary 23, 1995.LexLib

This argument is aptly answered by petitioner in its Memorandum, which we

quote: ―The ruling made in the Resolution dated 16 February 1993 confirmingthe public nature of the coconut levy funds and denying claimants theirpurported right to vote is an affirmation of doctrines laid down in thecases of COCOFED v. PCGG supra, Baseco v. PCGG, supra ,and Cojuangco v. Roxas, supra . Therefore it is of no moment that theResolution dated 16 February 1993 has not been ratified. Its

jurisprudential bases remain .‖ 45 (Italics supplied)

Granting arguendo that the Resolution is interlocutory, the truth remains: thecoconut levy funds are still ―clearly affected with public interest.‖ That was thetruth in 1989 as quoted by this Court in its February 16, 1993 Resolution, and soit is today. Said the Court in 1989:

―The utilization and proper management of the coconut levy funds,raised as they were by the State‘s police and taxing powers, arecertainly the concern of the Government. It cannot be denied that it wasthe welfare of the entire nation that provided the prime moving factorfor the imposition of the levy. It cannot be denied that the coconutindustry is one of the major industries supporting the national economy.

It is, therefore, the State‘s concern to make it a strong and securesource not only of the livelihood of a significant segment of thepopulation but also of export earnings the sustained growth of which isone of the imperatives of economic stability. The coconut levy funds areclearly affected with public interest. Until it is demonstrated satisfactorilythat they have legitimately become private funds, they must prima facieand by reason of the circumstances in which they were raised and











accumulated be accounted subject to the measures prescribed in E.O.Nos. 1, 2, and 14 to prevent their concealment, dissipation, etc., whichmeasures include the sequestration and other orders of the PCGG

complained of.‖ 46 (Italics supplied)

To repeat, the foregoing juridical situation has not changed. It is still the truthtoday: ―the coconut levy funds are clearly affected with public interest.‖ Privaterespondents have not ―demonstrated satisfactorily that they have legitimatelybecome private funds.‖

If private respondents really and sincerely believed that the final Decision of theCourt in Republic v. Sandiganbayan (G.R. No. 96073, promulgated on January23, 1995) granted them the right to vote, why did they wait for the lapse of sixlong years before definitively asserting it (1) through their letter dated February13, 2001, addressed to the UCPB Board of Directors, demanding the holding of a

shareholders‘ meeting on March 6, 2001; and (2) through their Omnibus Motiondated February 23, 2001 filed in the court a quo , seeking to enjoin PCGG fromvoting the subject sequestered shares during the said stockholders‘ meeting?Certainly, if they even half believed their submission now — that they alreadyhad such right in 1995 — why are they suddenly and imperiously claimingit only now?

It should be stressed at this point that the assailed Sandiganbayan Order datedFebruary 28, 2001 — allowing private respondents to vote the sequesteredshares — is not based on any finding that the coconut levies and the shares have

―legitimately become private funds.‖ Neither is it based on the alleged lifting of the TRO issued by this Court on February 16, 1993. Rather, it is anchored on thegrossly mistaken application of the two-tiered test mentioned earlier in thisDecision.

To stress, the two-tiered test is applied only when the sequestered asset in thehands of a private person is alleged to have been acquired with ill-gotten wealth.

Hence, in PCGG v. Cojuangco , 47 we allowed Eduardo Cojuangco Jr. to vote thesequestered shares of the San Miguel Corporation (SMC) registered in his name

but alleged to have been acquired with ill-gotten wealth. We did so on hisrepresentation that he had acquired them with borrowed funds and upon failureof the PCGG to satisfy the ―two-tiered‖ test. This test was, however, not appliedto sequestered SMC shares that were purchased with coco levy funds. DHcESI

In the present case, the sequestered UCPB shares are confirmed to have beenacquired with coco levies, not with alleged ill-gotten wealth. Hence, by parity of











1. Coconut Levy Funds Are Raised Through

the State‘s Police an d Taxing Powers.

Indeed, coconut levy funds partake of the nature of taxes which, in general, are

enforced proportional contributions from persons and properties, exacted by theState by virtue of its sovereignty for the support of government and for all publicneeds. 49

Based on this definition, a tax has three elements, namely: a) it is an enforcedproportional contribution from persons and properties; b) it is imposed by theState by virtue of its sovereignty; and c) it is levied for the support of thegovernment. The coconut levy funds fall squarely into these elements for thefollowing reasons:

(a) They were generated by virtue of statutory enactments imposed on thecoconut farmers requiring the payment of prescribed amounts. Thus, P.D. No.276, which created the Coconut Consumers Stabilization Fund (CCSF), mandatedthe following:

―a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or itsequivalent in other coconut products, shall be imposed on every firstsale, in accordance with the mechanics established under R.A. 6260,effective at the start of business hours on August 10, 1973.

―The proceeds from the levy shall be deposited with the PhilippineNational Bank or any other government bank to the account of theCoconut Consumers Stabilization Fund, as a separate trust fund whichshall not form part of the general fund of the government.‖ 50

The coco levies were further clarified in amendatory laws, specifically P.D. No.961 51 and P.D. No. 1468 52 — in this wise:

―The Authority (Philippine Coconut Authority) is hereby empowered toimpose and collect a levy, to be known as the Coconut ConsumersStabilization Fund Levy, on every one hundred kilos of copra resecada ,or its equivalent in other coconut products delivered to, and/orpurchased by, copra exporters, oil millers, desiccators and other end-users of copra or its equivalent in other coconut products. The levy shallbe paid by such copra exporters, oil millers, desiccators and other end-users of copra or its equivalent in other coconut products under suchrules and regulations as the Authority may prescribe. Until otherwise

















prescribed by the Authority, the current levy being collected shall becontinued.‖ 53

Like other tax measures, they were not voluntary payments or donations by thepeople. They were enforced contributions exacted on pain of penal sanctions, as

provided under P.D. No. 276: ―3. Any person or firm who violates any provision of this Decree or therules and regulations promulgated thereunder, shall, in addition topenalties already prescribed under existing administrative and speciallaw, pay a fine of not less than P2,500 or more than P10,000, or suffercancellation of licenses to operate, or both, at the discretion of theCourt.‖ 54

Such penalties were later amended thus:

―Whenever any person or entity willfully and deliberately violates any ofthe provisions of this Act, or any rule or regulation legally promulgatedhereunder by the Authority, the person or persons responsible for suchviolation shall be punished by a fine of not more than P20,000.00 and byimprisonment of not more than five years. If the offender be acorporation, partnership or a juridical person, the penalty shall beimposed on the officer or officers authorizing, permitting or toleratingthe violation. Aliens found guilty of any offenses shall, after havingserved his sentence, be immediately deported and, in the case of anaturalized citizen, his certificate of naturalization shall be cancelled.‖ 55

(b) The coconut levies were imposed pursuant to the laws enacted by the properlegislative authorities of the State. Indeed, the CCSF was collected under P.D.No. 276, issued by former President Ferdinand E. Marcos who was thenexercising legislative powers. 56

(c) They were clearly imposed for a public purpose. There is absolutely noquestion that they were collected to advance the government‘s avowed policy ofprotecting the coconut industry. This Court takes judicial notice of the fact thatthe coconut industry is one of the great economic pillars of our nation, and

coconuts and their by products occupy a leading position among the country‘sexport products; that it gives employment to thousands of Filipinos; that it is agreat source of the State‘s wealth; and that it is one of the important sources offoreign exchange needed by our country and, thus, pivotal in the plans of agovernment committed to a policy of currency stability.
















Taxation is done not merely to raise revenues to support the government, butalso to provide means for the rehabilitation and the stabilization of a threatenedindustry, which is so affected with public interest as to be within the policepower of the State, as held in Caltex Philippines v. COA 57 and Osmeña v.Orbos . 58

Even if the money is allocated for a special purpose and raised by special means,it is still public in character. In the case before us, the funds were even used toorganize and finance State offices. In Cocofed v. PCGG , 59 the Court observedthat certain agencies or enterprises ―were organized and financed with revenuesderived from coconut levies imposed under a succession of laws of the latedictatorship . . . with deposed Ferdinand Marcos and his cronies as the suspectedauthors and chief beneficiaries of the resulting coconut industrymonopoly.‖ 60 The Court continued: ―. . . . It cannot be denied that the coconut

industry is one of the major industries supporting the national economy. It is,therefore, the State‘s concern to make it a strong and secure source not only ofthe livelihood of a significant segment of the population, but also of exportearnings the sustained growth of which is one of the imperatives of economicstability. . . ..‖ 61

2. Coconut Funds Are Levied for the Benefit

of the Coconut Industry and Its Farmers.

Just like the sugar levy funds, the coconut levy funds constitute state funds eventhough they may be held for a special public purpose.

In fact, Executive Order No. 481 dated May 1, 1998 specifically likens thecoconut levy funds to the sugar levy funds, both being special public fundsacquired through the taxing and police powers of the State. The sugar levyfunds, which are strikingly similar to the coconut levies in their imposition andpurpose, were declared public funds by this Court in Gaston v. Republic PlantersBank , 62 from which we quote:

―The stabilization fees collected are in the nature of a tax which is withinthe power of the State to impose for the promotion of the sugar industry(Lutz vs. Araneta , 98 Phil. 148). They constitute sugar liens (Sec. 7[b],P.D. No. 388). The collections made accrue to a ‗Special Fund,‘ a

‗Development and Stabilization Fund,‘ almost identical to the ‗Sugar Adjustment and Stabilization Fund‘ created under Section 6 of

Commonwealth Act 567. The tax collected is not in a pure exercise ofthe taxing power. It is levied with a regulatory purpose, to provide

























means for the stabilization of the sugar industry. The levy is primarily inthe exercise of the police power of the State. (Lutz vs. Araneta,supra .)‖ 63

The Court further explained: 64

―The stabilization fees in question are levied by the State upon sugarmillers, planters and producers for a special purpose — that of ‗financingthe growth and development of the sugar industry and all itscomponents, stabilization of the domestic market including the foreignmarket.‘ The fact that the State has taken possession of moneyspursuant to law is sufficient to constitute them as state funds, eventhough they are held for a special purpose (Lawrence v. AmericanSurety Co., 263 Mich 586, 294 ALR 535, cited in 42 Am. Jur., Sec. 2., p.718). Having been levied for a special purpose, the revenues collectedare to be treated as a special fund, to be, in the language of the statute,‗administered in trust‘ for the purpose intended. Once the purpose hasbeen fulfilled or abandoned, the balance, if any, is to be transferred tothe general funds of the Government. That is the essence of the trustintended (see 1987 Constitution, Art. VI, Sec. 29[3], lifted from the 1935Constitution, Article VI, Sec. 23[1] . (Italics supplied)

―The character of the Stabilization Fund as a special fund is emphasized

by the fact that the funds are deposited in the Philippine National Bankand not in the Philippine Treasury, moneys from which may be paid outonly in pursuance of an appropriation made by law (1987 Constitution,

Article VI, Sec. 29[1], 1973 Constitution, Article VIII, Sec. 18[1]). ―That the fees were collected from sugar producers, planters andmillers, and that the funds were channeled to the purchase of shares ofstock in respondent Bank do not convert the funds into a trust fund fortheir benefit nor make them the beneficial owners of the shares sopurchased. It is but rational that the fees be collected from them since itis also they who are to be benefited from the expenditure of the fundsderived from it. The investment in shares of respondent Bank is notalien to the purpose intended because of the Bank‘s character as acommodity bank for sugar conceived for the industry‘s growth and

development. Furthermore, of note is the fact that one-half (1/2) orP0.50 per picul, of the amount levied under P.D. No. 388 is to be utilizedfor the ‗payment of salaries and wages of personnel, fringe benefits andallowances of officers and employees of PHILSUCOM‘ therebyimmediately negating the claim that the entire amount levied is in trustfor sugar, producers, planters and millers.










―To rule in petitioners‘ favor would contravene the general principle thatrevenues derived from taxes cannot be used for purely private purposesor for the exclusive benefit of private persons. The Stabilization Fund is

to be utilized for the benefit of the entire sugar industry, ‗and all itscomponents, stabilization of the domestic market including the foreignmarket,‘ the industry being of vital importance to the country‘s economyand to national interest.‖

In the same manner, this Court has also ruled that the oil stabilization fundswere public in character and subject to audit by COA. It ruled in this wise:

―Hence, it seems clear that while the funds collected may be referred toas taxes, they are exacted in the exercise of the police power of theState. Moreover, that the OPSF is a special fund is plain from the specialtreatment given it byE.O. 137. It is segregated from the general fund;and while it is placed in what the law refers to as a ‗trust liabilityaccount,‘ the fund nonetheless remains subject to the scrutiny andreview of the COA. The Court is satisfied that these measures complywith the constitutional description of a ‗special fund.‘ Indeed, thepractice is not without precedent.‖ 65

In his Concurring Opinion in Kilosbayan v. Guingona , 66 Justice Florentino P.Feliciano explained that the funds raised by the On-line Lottery System were alsopublic in nature. In his words:

―. . .. In the case presently before the Court, the funds involved are

clearly public in nature. The funds to be generated by the proposedlottery are to be raised from the population at large. Should theproposed operation be as successful as its proponents project, thosefunds will come from well-nigh every town and barrio of Luzon. Thefunds here involved are public in another very real sense: they willbelong to the PCSO, a government owned or controlled corporation andan instrumentality of the government and are destined for utilization insocial development projects which, at least in principle, are designed to

benefit the general public. . . .. The interest of a private citizen in seeingto it that public funds, from whatever source they may have beenderived, go only to the uses directed and permitted by law is as real andpersonal and substantial as the interest of a private taxpayer in seeingto it that tax monies are not intercepted on their way to the publictreasury or otherwise diverted from uses prescribed or allowed by law. Itis also pertinent to note that the more successful the government is inraising revenues by non-traditional methods such as PAGCOR operations










4. The COA Audit Shows the

Public Nature of the Funds.

Under COA Office Order No. 86-9470 dated April 15, 1986, 70 the COA reviewed

the expenditure and use of the coconut levies allocated for the acquisition of theUCPB. The audit was aimed at ascertaining whether these were utilized for thepurpose for which they had been intended. 71 Under the 1987 Constitution, thepowers of the COA are as follows:

―The Commission on Audit shall have the power, authority, and duty toexamine, audit, and settle all accounts pertaining to the revenue andreceipts of, and expenditures or uses of funds and property, owned orheld in trust by, or pertaining to, the Government, or any of itssubdivisions, agencies, or instrumentalities . . . .‖ 72

Because these funds have been subjected to COA audit, there can be no otherconclusion than that they are prima facie public in character.

5. The BIR Has Pronounced That the

Coconut Levy Funds Are Taxes.

In response to a query posed by the administrator of the Philippine Coconut Authority regarding the character of the coconut levy funds, the Bureau of

Internal Revenue has affirmed that these funds are public in character. It held asfollows: ―[T]he coconut levy is not a public trust fund for the benefit of thecoconut farmers, but is in the nature of a tax and, therefore, . . . public fundsthat are subject to government administration and disposition.‖ 73

Furthermore, the executive branch treats the coconut levies as public funds.Thus, Executive Order No. 277, issued on September 24, 1995, directed themode of treatment, utilization, administration and management of the coconutlevy funds. It provided as follows:

‗(a) The coconut levy funds, which include all income, interests,proceeds or profits derived therefrom, as well as all assets, propertiesand shares of stocks procured or obtained with the use of suchfunds, shall be treated, utilized, administered and managed as publicfunds consistent with the uses and purposes under the laws whichconstituted them and the development priorities of the government,including the government‘s coconut productivity, rehabilitation, researchextension, farmers organizations, and market promotions programs,

















which are designed to advance the development of the coconut industry

and the welfare of the coconut farmers.‖ 74 (Italics supplied)

Doctrinally, acts of the executive branch are prima facie valid and binding, unlessdeclared unconstitutional or contrary to law.

6. Laws Governing Coconut Levies

Recognize Their Public Nature.

Finally and tellingly, the very laws governing the coconut levies recognize theirpublic character. Thus, the third Whereas clause of P.D. No. 276 treats them asspecial funds for a specific public purpose. Furthermore, P.D. No. 711 transferredto the general funds of the State all existing special and fiduciary funds includingthe CCSF. On the other hand, P.D. No. 1234 specifically declared the CCSF as a

special fund for a special purpose, which should be treated as a special accountin the National Treasury. TcEaDS

Moreover, even President Marcos himself, as the sole legislative/executiveauthority during the martial law years, struck off the phrase which is a privatefund of the coconut farmers from the original copy of Executive Order No. 504dated May 31, 1978, and we quote:

―WHEREAS, by means of the Coconut Consumers Stabilization Fund(‗CCSF‘), which is the private fund of the coconut farmers (deleted),

essential coconut-based products are made available to householdconsumers at socialized prices.‖ (Italics supplied)

The phrase in bold face — which is the private fund of the coconut farmers — was crossed out and duly initialed by its author, former President Marcos. This

deletion, clearly visible in ―Attachment C‖ of petitioner‘s Memorandum, 75 was acategorical legislative intent to regard the CCSF as public, not private, funds.

Having Been Acquired With Public

Funds, UCPB Shares Belong, Prima Facie, to the Government

Having shown that the coconut levy funds are not only affected with publicinterest, but are in fact prima facie public funds, this Court believes that the











For Intervenors

Intervenors anchor their interest in this case on an alleged right that they aretrying to enforce in another Sandiganbayan case docketed as SB Case No.0187. 85 In that case, they seek the recovery of the subject UCPB shares from

herein private respondents and the corporations controlled by them. Therefore,the rights sought to be protected and the reliefs prayed for by intervenors arestill being litigated in the said case. The purported rights they are invoking aremere expectancies wholly dependent on the outcome of that case in theSandiganbayan.

Clearly, we cannot rule on intervenors‘ alleged right to vote at this time and inthis case. That right is dependent upon the Sandiganbayan‘s resolution of theiraction for the recovery of said sequestered shares. Given the patent fact thatintervenors are not registered stockholders of UCPB as of the moment, theirasserted rights cannot be ruled upon in the present proceedings. Hence, nopositive relief can be given them now, except insofar as they join petitioner inbarring private respondents from voting the subject shares.

Epilogue

In sum, we hold that the Sandiganbayan committed grave abuse of discretion ingrossly contradicting and effectively reversing existing jurisprudence, and indepriving the government of its right to vote the sequestered UCPB shares whichare prima facie public in character.

In making this ruling, we are in no way preempting the proceedings theSandiganbayan may conduct or the final judgment it may promulgate in CivilCase Nos. 0033-A, 0033-B and 0033-F. Our determination here is merely primafacie , and should not bar the anti-graft court from making a final ruling, afterproper trial and hearing, on the issues and prayers in the said civil cases,particularly in reference to the ownership of the subject shares. cTSHaE

We also lay down the caveat that, in declaring the coco levy funds to be primafacie public in character, we are not ruling in any final manner on theirclassification — whether they are general or trust or special funds — since suchclassification is not at issue here. Suffice it to say that the public nature of thecoco levy funds is decreed by the Court only for the purpose of determining theright to vote the shares, pending the final outcome of the said civil cases.

Neither are we resolving in the present case the question of whether the sharesheld by Respondent Cojuangco are, as he claims, the result of private enterprise.







This factual matter should also be taken up in the final decision in the cited casesthat are pending in the court a quo . Again suffice it to say that the only issuesettled here is the right of PCGG to vote the sequestered shares, pending thefinal outcome of said cases.

This matter involving the coconut levy funds and the sequestered UCPB shareshas been straddling the courts for about 15 years. What we are discussing in thepresent Petition, we stress, is just an incident of the main cases which arepending in the anti-graft court — the cases for the reconveyance, reversion andrestitution to the State of these UCPB shares.

The resolution of the main cases has indeed been long overdue. Every effort,both by the parties and the Sandiganbayan , should be exerted to finally settlethis controversy.

WHEREFORE, the Petition is hereby GRANTED and the assailed Order SET ASIDE. The PCGG shall continue voting the sequestered shares untilSandiganbayan Civil Case Nos. 0033-A, 0033-B and 0033-F are finally andcompletely resolved. Furthermore, the Sandiganbayan is ORDERED to decidewith finality the aforesaid civil cases within a period of six (6) months fromnotice. It shall report to this Court on the progress of the said cases every three(3) months, on pain of contempt. The Petition in Intervention is DISMISSEDinasmuch as the reliefs prayed for are not covered by the main issues in thiscase. No costs. IAEcCT

SO ORDERED.

Davide, Jr., C.J., Bellosillo, Mendoza, Quisumbing, Buena, De Leon,Jr., and Carpio, JJ., concur.

Melo, J., see dissenting opinion.

Puno, J., joins the separate opinion of J. Vitug.

Vitug, J., see separate opinion.

Kapunan, Ynares-Santiago, Sandoval-Gutierrez, JJ., concur with thedissenting opinion of J. Melo.

Pardo, J., Join in the result of the dissents



Separate Opinions

VITUG, J., separate opinion :

The Presidential Commission on Good Government ("PCGG"), representing theRepublic of the Philippines, assails in the instant special actionfor certiorari under Rule 65 of the Rules of Court, the order, dated 28 February2001, of public respondent Sandiganbayan (First Division) in Civil Cases No.0033-A, 0033-B, and 0033-F, entitled "Republic of the Philippines vs . EduardoCojuangco, Jr . , et al .," on the ground of grave abuse of discretion amounting tolack of jurisdiction. In the order, the Sandiganbayan enjoined the PCGG fromvoting the sequestered shares of stock of the United Coconut Planters' Bank("UCPB") and authorized private respondents Philippines Coconut ProducersFederation, Inc. ("COCOFED"), et al., Ballares, et al., and Eduardo Cojuangco,

Jr., et al., to vote the UCPB shares registered in their names and themselves bevoted upon at the stockholders' meeting of the bank.

The institution of sequestration proceedings by the PCGG against the shares ofstock of the UCPB claimed to be owned by one million coconut farmers and the"Coconut Industry Investment Fund" ("CIIF") companies, was among themeasures undertaken by the Aquino Government shortly after the February 1986Revolution for the recovery of "ill-gotten wealth" said to have been amassed byformer President and Mrs. Ferdinand E. Marcos, their relatives, friends andbusiness associates. Among the initial cases filed with the Sandiganbayan was

Case No. 003 against private respondent Eduardo Cojuangco, Jr., and sixtyothers, for reconveyance, reversion, accounting, restitution and damages.Sequestration orders were later issued by the Sandiganbayan. CaTcSA

Subsequently, however, Sandiganbayan issued a resolution lifting thesequestration of the UCPB shares of stock registered in the name of the coconutfarmers and the CIIF companies on the thesis that these entities were not soimpleaded by the PCGG as party-defendants, having merely been listed in anannex appended to the complaint in Case No. 003. The PCGG questioned, via apetition for certiorari , docketed G.R. No. 96073, that resolution before this Court.In the interim, the Sandiganbayan authorized the holding of a stockholders'meeting for the election of the members of the Board of Directors of the UCPB.Ruling in favor of a petition filed by Eduardo Cojuangco, Jr., this Court lifted thetemporary restraining order it issued against the holding of said meeting andallowed private respondents to vote the sequestered shares of stock. On 16February 1993, the Court recalled this order by issuing another resolution,directing the restoration of the status quo ante in G.R. No. 96073. The resolution



be established by them before the Sandiganbayan. Until that is done, theycannot be deemed legitimate owners of UCPB stock and cannot be accorded meright to vote them ." ATcEDS

On 23 January 1995, the Court, in a consolidated decision which, among other

cases, included G.R. No. 96073, nullified and set aside the disputedSandiganbayan resolution and upheld the sequestration of the UCPB shares ofstock on the ground that the impleading of the subject firms would beunnecessary since, if warranted by the evidence, judgments could be handeddown against the defendants divesting them of their ownership of said sharesand imposing upon them the obligation of surrendering the shares of stock to theGovernment. The decision, while not expressly ratifying the 16th February 1993resolution, was a mandate, nevertheless, for the maintenance of the status quoante that embraced the exercise by the PCGG of its voting rights on the

sequestered shares of stock of the UCPB. Since 1986, the PCGG had been able to effectively install its nominees to theBoard of Directors of the UCPB. Such was the state of affairs when theSandiganbayan so issued the challenged resolution on 28 February 2001,authorizing COCOFED, et al., Ballares, et al., and Eduardo Cojuangco, Jr., etal., along with all other registered stockholders of UCPB, to vote the shares ofstock and themselves be voted upon at stockholders' meetings of the UCPB. Insupport of this order, preempting the final disposition of the main case in CaseNo. 003, Sandiganbayan applied the two-tiered test enunciated in Eduardo

Cojuangco, Jr .,vs . Calpo 3 and PCGG vs . Eduardo Cojuangco, Jr . 4 As so aptlyargued by petitioner, however, the test would find no application to a case of the"takeover of a business belonging to the government or whose capitalization

comes from public funds, but which landed in private hands." 5 The Courtacknowledged to be a fact that the money used to purchase and capitalize the

UCPB had come from the CCSF, 6 a fund raised from the exercise by the State ofits inherent police and taxing powers.

To account for their equity holdings in the bank, COCOFED, et al., in theirMemorandum, 7 would advance that, in 1975, COCOFED, a private national

association of coconut producers, was designated 'by the Philippine Coconut Authority ("PCA") as being the implementing agency for the free distribution ofthe shares of stock of the UCPB to the coconut farmers. By 02 May 1981,232,805,852.16 of said shares were distributed to the farmers. Still thereremained 15,619,419.84 shares registered in the name of COCOFED which,according to it, were ultimately given to the farmers. Prior to June 1986, asubstantial number of the coconut farmers sold their shares in the bank at prices























below par value. By way of a financial assistance to the selling coconut farmers,the UCPB Board of Directors authorized the CIIF companies to purchase theirholdings in the bank at par value. These transactions, nevertheless, did notchange the character of the UCPB shares, these having been bought withcoconut levy funds which the Court distinctly characterized to be "clearly affectedwith public interest" and "raised such as they were by the State's police andtaxing powers." 8

The fundamental rule is that tax proceeds may only be used for a publicpurpose, which may either be a general public purpose to support the existenceof the state or a special public purpose to pursue certain legitimate objects ofgovernment in the exercise of police power, and none other. As a measure toensure the proper utilization of money collected for a specified public purpose,the 1987 Constitution, restating another general principle, treats the proceeds as

a special fund to be paid out for such purpose. If, however, that purpose hasbeen fulfilled or is no longer forthcoming, the balance, if any, shall then be

transferred to the general funds of the government, 9 which may thereafter beappropriated by Congress and expended for any legitimate purpose within thescope of the general fund. An entity, whether public or private, which holds thetax money has no authority to disburse it or to pay any of it to anyone, the

power to dispose of such money being vested in the legislature. 10 Thus, the1987 Constitution, like its counterparts in the 1935 and the 1973 Constitution,mandates that no money shall be paid out of the national treasury except inpursuance of an appropriation made by law. 11

Respondent Eduardo Cojuangco, Jr., upon the other hand, in claiming ownershipover a portion of the sequestered UCPB shares, advanced two documents — anagreement in May 1975, where he appeared to have exercised his option toacquire the UCPB shares of stock owned by the family of the late Don JoseCojuangco, Sr., amounting to 72.2% equity holding in the bank, at two hundredpesos (Php 200.00) per share, and the "Agreement for the Acquisition of aCommercial Bank for the Benefit of the Coconut Farmers of the Philippines",dated 25 May 1975, whereby the PCA purchased with funds from the CCSF theaforesaid UCPB shares from Eduardo Cojuangco, Jr., also at two hundred pesos

(Php 200.00) per share. 12 In the latter agreement, it was stipulated that ascompensation for exercising his personal and exclusive option to acquire theUCPB shares and for transferring such shares to the PCA, Eduardo Cojuangco,Jr., would receive one (1) share for every nine (9) shares acquired by the PCAand additional equity in the bank. In sum, correlating the two agreements,Eduardo Cojuangco, Jr., would contend, in effect, that he retained title overroughly 10% equity holding in the bank and established his prima facie right





















over the corresponding shares independently sourced from the coconut levyfunds. Even if it were to be conceded that the said 10% holding in UCPB ofEduardo Cojuangco, Jr., could be assailed, pending a conclusive determinationon the legality of such a retention, however, it would neither be right nor just todeprive him from meanwhile exercising his right to at least vote the same.

For the foregoing reasons, I vote to grant the petition in part and to deny itinsofar as the shares of stock pertaining to the 10% of the 72% equity retentionstanding in the name of Eduardo Cojuangco, Jr., are concerned. aTcESI

In passing, I should like to state my understanding of the ruling of the Court. Imust first clarify, however, that sequestration does not mean the vesting of titlein the hands of the sequestering authority; rather, the term implies thepreservation of assets. Neither ownership nor rights thereover are acquired orlost by virtue alone of sequestration — a mere ancillary remedy to secure adisputed asset.

(a) By a vote of ten justices, namely, Chief Justice Davide and Justices Bellosillo,Puno, Vitug, Mendoza, Panganiban, Quisumbing, Buena, de Leon and Carpio, thecoconut levy funds have been declared prima facie to be "public funds."

Justices Melo, Kapunan, Pardo, Ynares-Santiago and Sandoval-Gutierrez havedissented from the view of the majority.

(b) The Sandiganbayan must now determine conclusively and with deliberatedispatch the status of sequestered shares of stock, as well as whether or not theshares have been acquired utilizing the coconut levy funds, and, ultimately, theownership thereof.

(c) Meanwhile, the right to vote the disputed shares belongs to whoever orwhichever can show prima facie ownership or a better right thereover. ChiefJustice Davide and Justices Bellosillo, Mendoza, Panganiban, Quisumbing, Buena,de Leon and Carpio hold that such prima facie showing exists in favor of thegovernment on all the disputed shares. Justices Puno and Vitug concur exceptfor the 10% of the 72% disputed shares in the name of respondent Cojuangcoover which the PCGG will yet have to establish a prima facie right ofownership. SEIcAD

Justices Melo, Kapunan, Pardo, Ynares-Santiago and Sandoval-Gutierrez maintainthe view that, the coconut levy funds not being public funds and the government



not having been able to satisfactorily establish to date its title over thesequestered shares, the PCGG has no right to vote any of the disputed shares.

MELO, J . , dissenting opinion:

I respectfully dissent from the majority opinion, penned by Mr. JusticePanganiban, upholding the right of the PCGG to vote the sequestered UCPBshares of stock.

The petition sprung from the following factual antecedents:

In 1986 and 1987, numerous business enterprises, entities, and pieces ofproperty, real and personal, were sequestered or taken over by the PCGG on theground that these were ill-gotten property of former President Marcos, his family,and close associates. Among these sequestered property were shares of stock in

the United Coconut Planters Bank (UCPB) registered in the name of 1,405,366coconut farmers and of the so-called Coconut Industry Investment Fund (CIIF)companies. IaHDcT

In connection with the sequestration and take-over of said UCPB shares of stock,the PCGG, on July 31, 1987, instituted an action for reconveyance, reversion,accounting, restitution, and damages against Eduardo Cojuangco, Jr. and sixtyothers with the Sandiganbayan , docketed therein as Case No. 0033.

On November 19, 1990, and during the pendency of the case,

the Sandiganbayan issued a resolution lifting the sequestration of the UCPBshares of stock registered in the name of "1 million coconut farmers" and theCIIF companies, on the ground that these entities were not impleaded by thePCGG as party-defendants within the 6-month period — ending on August 2,1987 — fixed by the Constitution, having merely been listed in an annexappended to the complaint in Case No. 0033.

This Resolution was challenged by the PCGG in a petition for certiorari filed withthe Court, docketed herein as G.R. No. 96073. Pending resolution of the case,the Sandiganbayan , on March 4, 1991, ordered the holding of elections formembers of the Board of Directors of UCPB. Opposing the holding of elections,PCGG applied for, and was granted by the Court a restraining order enjoining theholding of a stockholders' meeting for the election of the Board of Directors ofUCPB.

However, on March 3, 1992, acting on a petition filed by Eduardo Cojuangco, Jr.,the Court lifted the restraining order it had issued and ordered instead that UCPB



elect its Board of Directors. Furthermore, the Court allowed the sequesteredshares of UCPB to be voted by the registered owners thereof. The shareholders'victory would, however, be fleeting. On February 17, 1993, acting on theSolicitor General's Clarification/Manifestation with Motion , the Court issued asubsequent Resolution declaring that "the right of the petitioners to vote stock intheir names at the meetings of the UCPB cannot be conceded at this time. Thatright still has to be established by them before the Sandiganbayan . Until that isdone, they cannot be deemed legitimate owners of UCPB stock and cannot beaccorded the right to vote them." Accordingly, the dispositive portion of saidResolution provided:

IN VIEW OF THE FOREGOING, the Court recalls and sets aside theResolution dated March 3, 1992 and; pending resolution on the merits ofthe action at bar, and until further orders, suspends the effectivity of thelifting of the sequestration decreed by the Sandiganbayan on November

15, 1990, and directs the restoration of the status quo ante , so as toallow the PCGG to continue voting the shares of stock undersequestration at the meetings of the United Coconut Planters Bank.

IT IS SO ORDERED.

(Rollo , p. 73.)

Two years thereafter, on January 23, 1995, the Court rendered a decision in G.R.No. 96073 (240 SCRA 376) nullifying and setting aside the November 19, 1990

Resolution of the Sandiganbayan lifting the sequestration of the shares of stockof UCPB registered in the name of "1 million coconut farmers" and of the CIIFcompanies on the ground that "as regards actions in which the complaints seekrecovery of defendants' shares of stock in existing corporations (e.g. San MiguelCorporation, Benguet Corporation, Meralco, etc.) because allegedly purchasedwith misappropriated public funds, in breach of fiduciary duty, or otherwiseunder illicit or anomalous conditions, the impleading of said firms would clearlyappear to be unnecessary" since, if warranted by the evidence, judgments couldbe handed down against the defendants divesting them of their ownership ofsaid stock and imposing upon them the obligation of surrendering said stock to

the Government. It may be noted that in said decision, the Court did not reaffirmand maintain its Resolution dated February 17, 1993.

A month thereafter, the PCGG, pursuant to the order of the Sandiganbayan ,subdivided Case No. 0033 into eight complaints, docketed as Cases No. 0033-Ato 0033-H.



Six years thereafter, on February 13, 2001, the Board of Directors of UCPB,received a letter from the ACCRA Law Office. Written on behalf of the PhilippineCoconut Producers' Federation (COCOFED), et al. and the more than one millioncoconut farmers who are registered stockholders of UCPB, the letter demandedof UCPB, which had not held any stockholders' meeting since 1986, to call such ameeting on March 6, 2001, at 3 o'clock in the afternoon, for the purpose of,among other things, electing the Board of Directors. In the same letter,COCOFED also requested information as to whether UCPB had investigated andreported to the Bangko Sentral ng Pilipinas the large scale estafa allegedlycommitted by the previous members of the board and other responsible officialsof UCPB.

On February 26, 2001, the UCPB Board of Directors, by way of response to theaforementioned letter, passed and approved a resolution calling for a

stockholders' meeting of the bank on March 6, 2001 at 3 o'clock in the afternoon,the date fixed in the bank's By-Laws.

In anticipation of the announced stockholders' meeting, COCOFED, et al . andBallares, et al., filed, in the following Sandiganbayan cases:

Civil Case No. 0033-A;

Civil Case No. 0033-B; and

Civil Case No. 0033-F,

a class action omnibus motion dated February 23, 2001, seeking to enjoin thePCGG from voting in the announced stockholders' meeting of March 6, 2001(a) the UCPB shares of stock registered in the names of the more than onemillion coconut farmers; (b) the San Miguel Corporation (SMC) sharesregistered in the names of the 14 CIIF Holding Companies and beneficiallyowned by COCOFED; and (c) the shares of stock registered in the name ofPCGG itself.

Because of the motion's extreme urgency, and as prayed for by the movants

themselves, the Sandiganbayan (1st Division) heard the motion on February 28,2001. Lorenzo V. Tan, President of UCPB, was present during this hearing and ina manifestation, he asked to be heard therein.

The Sandiganbayan noted the manifestation of Mr. Lorenzo V. Tan, as follows:



At a certain state of the argument on this matter, the UCPB sought to beheard in "executive session" upon the alleged significant matters of factto be conveyed by the UCPB to this Court. Duly warned by the engagedcounsel for the UCPB, Atty. Roberto San Juan, the Court excluded allprivate individuals and all counsel not related to these cases so that

whatever matters of a restricted or confidential character of significanceto banks in the business community, and of the UCPB in particular, couldbe heard in confidence.

The bank's President in the person of Mr. Lorenzo V. Tan was heard.

While the matters he put forth might be relevant to the bank, the entirethrust of the clarification made by the president was the need to disposeof this case expeditiously so that question of ownership of the sharesand therefore of the bank, would be resolved with finality; thisapparently is a desirable element in the business world and in themarket in which banks operate, as much for drawing investments as foracceptability of other transactions and "products" of banks in themarket. It must be stated that the matter, while important in itself, is ofminor relevance to the issue at bar.

(p. 3, Order dated February 28, 2001.)

Following the conclusion of the hearing, the Sandiganbayan issued in open courton the same date — February 28, 2001 — the Order authorizing COCOFED, etal ., Ballares, et al . and Eduardo Cojuangco, Jr., et al . and all other registered

stockholders of UCPB to vote their shares of stock and themselves to be votedupon at the UCPB announced stockholders' meeting of March 6, 2001 or in anysubsequent continuation or resetting thereof, and to perform such acts as willnormally follow in the exercise of their rights as registered stockholders. Morespecifically, the pertinent portion of the Order declared:

In view hereof, the movants COCOFED, et al. and Ballares, et al . as wellas Eduardo Cojuangco, et al . who were acknowledged to be registeredstockholders of the UCPB are authorized, as are all other registeredstockholders of the United Coconut Planters Bank, until further orders

from this Court, to exercise their rights to vote their shares of stock andthemselves to be voted upon in the United Coconut Planters Bank(UCPB) at the scheduled Stockholders' Meeting on May 6, 2001 or onany subsequent continuation or resetting thereof, and to perform suchacts as will normally follow in the exercise of these rights as registeredstockholders.



On March 1, 2001, the Sandiganbayan issued a writ of preliminary injunctionenjoining PCGG or any person acting in its behalf from voting the sequesteredshares of UCPB at its scheduled stockholders' meeting of March 6, 2001, or atanytime at which the meeting may be continued or reset until otherwise orderedby the same court. In the same writ, the Sandiganbayan also directed thechairman and the secretary of the stockholders' meeting of UCPB on the abovescheduled date and other dates to which the meeting may be reset, toacknowledge the right of Eduardo M. Cojuangco, Jr., et al. to vote the shares ofstock registered in their names on all matters that may be properly consideredbefore said stockholders' meeting. DaAIHC

Such was the state of things when, on March 5, 2001, herein petitioner Republicof the Philippines, represented by the PCGG, filed the instant petition premised

on the fact that at all times prior to the questioned order, PCGG had been votingthe sequestered UCPB shares registered in the names of private respondentsunder the authority of the Court's pronouncement in G.R. No. 96073 and104850. PCGG claimed that the right granted to it to vote the sequestered shareswas the status quo and for this status quo to be disturbed, there must be a clearshowing that this Court has reversed or, at the very least, modified its priorpronouncements on the matter. Since there was none, petitioner contended thatrespondent Sandiganbayan gravely abused its discretion, tantamount to lack orexcess of jurisdiction, when it granted the right to vote said sequestered sharesto private respondents COCOFED, Ballares, and Cojuangco, Jr. et al . PCGG

likewise insisted that the subject sequestered shares were purchased withcoconut levy funds, funds declared public in character, and that the Resolutionissued by this Court dated February 13,1993 in G.R. No. 96073 remains effective.

In its Resolution of April 17, 2001, the Court defined the issue to be resolved inthe instant case in this fashion:

Did the Sandiganbayan commit grave abuse of discretion when it issuedthe disputed order allowing respondents to vote UCPB shares of stockregistered in the name of respondents?

While the majority declares that, indeed, the Sandiganbayan acted with graveabuse of discretion in allowing respondents to vote their UCPB shares of stockregistered in their names, I respectfully submit that it did not.

In determining whether there has been "grave abuse of discretion", under Rule65, the "unyielding yardstick" is whether the abuse of discretion is "so patent



and gross as to amount to an evasion of positive duty or a virtual refusal toperform a duty enjoined by law, or to act at all in contemplation of law, as wherethe power is exercised in an arbitrary and despotic manner by reason of passionor hostility (Sinon vs. Civil Service Commission , 215 SCRA 410 [1992]; PlantersProducts, Inc. vs. Court of Appeals , 193 SCRA 563 [1991]; Litton Mills, Inc. vs.Galleon Trader, Inc ., 163 SCRA 489 [1988]; Esguerra vs. Court of Appeals , 267SCRA 380 [1997]; Republic vs. Villarama , 278 SCRA 736 [1997]).

To discharge its burden of showing that the Sandiganbayan acted with graveabuse of discretion, the PCGG relies principally on the Court's February 16, 1993Resolution in Republic vs. Sandiganbayan , et al ., G.R. No. 96073 where weordered the restoration of the status quo ante so as to allow PCGG to continuevoting the shares of stock under sequestration at the meetings of the UCPB.

As correctly pointed out by respondents, the February 16, 1993 Resolution, is inthe nature of a temporary restraining order, having been issued to recall theMarch 3, 1992 Resolution lifting of the temporary restraining order previouslyissued by the Court on March 5, 1991. In other words, the subject resolutionmerely reinstated the temporary restraining order which the Court had earlierissued enjoining private respondents from voting the sequestered sharesregistered in their names. Being in the nature of a restraining order, the same isinterlocutory in character and it became functus oficio when this Court decidedthe PCGG Sequestration Cases, including G.R. No. 96073, on January 23, 1995. Arestraining order is but a provisional remedy to which parties may resort "for the

preservation or protection of their rights or interests, and for no otherpurpose, during the pendency of the principal action (Commissioner of Customsvs . Cloribel , 19 SCRA 234 [1967]).

Moreover, the Resolution of February 16, 1993 explicitly provided that it shall beeffective only "pending resolution on the merits of the action at bar." G.R. No.96073, the "action at bar" referred to, was decided on the merits on January 23,1995. The dispositive portion of the decision in the aforementioned PCGGSequestration Cases, including G.R. No. 96073, provided:

WHEREFORE, judgment is hereby rendered: A. NULLIFYING AND SETTING ASIDE:

xxx xxx xxx

B. CONFIRMING AND MAINTAINING the temporary restrainingorders issued in G.R. Nos. 104883, 105170, 105206,



105808, 105809, 107233, and 107908, which shallcontinue in force and effect during the continuation of theproceedings in the corresponding civil actions inthe Sandiganbayan , subject to the latter's power to modifyor terminate the same in the exercise of its sound

discretion in light of such evidence as may be subsequentlyadduced; and

C. DISMISSING the petitions in G.R. Nos. 107908 and 109592, forlack of merit

(Republic v . Sandiganbayan [First Division , 240 SCRA 376[1995], at pp. 474-476.)

Even a casual study of the above dispositive portion would show that the Court'sResolution dated February 16, 1993 is not among the temporary restrainingorders "confirmed and maintained" in the January 23, 1995 decision.

In fact, in Calpo vs . Sandiganbayan (Third Division ) (265 SCRA 380 [1996]), theCourt clarified that the "PCGG Sequestration Cases," including G.R. No. 96073,did not involve the issue of PCGG's right to vote sequestered corporate shares.The Court held thus:

The crucial question in "The PCGG Sequestration Cases," capsulized bythe Court in its resolution of 23 January 1995, is this:

"DOES INCLUSION IN THE COMPLAINTS FILED BY THE PCGGBEFORE THE SANDIGANBAYAN OF SPECIFIC ALLEGATIONS OFCORPORATIONS BEING "DUMMIES" OR UNDER THE CONTROLOF ONE OR ANOTHER OF THE DEFENDANTS NAMED THEREIN

AND USED AS INSTRUMENTS FOR ACQUISITION, OR AS BEINGDEPOSITARIES OR PRODUCTS, OF ILL-GOTTEN WEALTH; ORTHE ANNEXING TO SAID COMPLAINTS OF A LIST OF SAIDFIRMS, BUT WITHOUT ACTUALLY IMPLEADING THEM ASDEFENDANTS, SATISFY THE CONSTITUTIONAL REQUIREMENTTHAT IN ORDER TO MAINTAIN A SEIZURE EFFECTED IN

ACCORDANCE WITH EXECUTIVE ORDER NO. 1, s. 1986, THECORRESPONDING "JUDICIAL ACTION OR PROCEEDING" SHOULDBE FILED WITHIN THE SIX-MONTH PERIOD PRESCRIBED INSECTION 26, ARTICLE XVIII, OF THE (1987) CONSTITUTION?

xxx xxx xxx



Neither the qualifications of the PCGG nominees to sit in the SMC Boardof Directors nor the right of the PCGG to vote the sequestered corporateshares have been mentioned , even in passing, by the Court. In fact, thepromulgation of the Court's resolution in the PCGG sequestration casesshould now pave the way for the cognizance by theSandiganbayan of

the quo warranto proceedings. (p. 386-387; italics supplied.)

The issue being limited to the propriety of impleading the firms and corporationssubject of sequestration, the Court's failure to "confirm and maintain" theFebruary 16, 1993 Resolution only means that it became functus oficio uponresolution of the main action on January 23, 1995. The PCGG cannot, therefore,claim the continuing effectivity of said Resolution so as to authorize it to continuevoting the sequestered UCPB shares. AHSEaD

The majority opinion, however, claims that PCGG's right to vote said sharesremains on the ground that the jurisprudential bases for the Court's Resolutiondated February 16, 1993 still remain. In Buayan Cattle Co . vs . Quintillan (128SCRA 276 [1984]), the Court categorically declared that a complaint forinjunctive relief must be construed strictly against the pleader. Even if the

jurisprudential bases for the Resolution are still extant, the fact that saidResolution was not "confirmed and maintained" by the Court after it decided themain action militates against its continuing effectivity, otherwise a temporaryrestraining order would no longer be "temporary."

With the February 16, 1993 Resolution having lost effectivity, the question as towho could then vote the sequestered shares should then revert tothe Sandiganbayan , in accordance with our ruling in Philippine CoconutProducers Federation, Inc .(COCOFED) vs . Presidential Commission on GoodGovernment (178 SCRA 236[1989]), where we directed:

3. The incidents concerning the voting of the sequestered shares, theCOCOFED elections, and the replacement of directors, being mattersincidental to the sequestration, should be addressed to

the Sandiganbayan in accordance with the doctrine laid down in PCGGvs. Pena , 159 SCRA 556, reiterated in G.R. No. 74910, Andres SorianoIII vs. Hon. Manuel Yuzon; G.R. No. 75075, Eduardo Cojuangco, Jr. vs.Securities and Exchange Commission ; G.R. No. 75094,Clifton Ganay vs.Presidential Commission on Good Government ; G.R. No. 76397, Board ofDirectors of San Miguel Corporation vs. Securities and ExchangeCommission; G.R. No. 79459, Eduardo Cojuangco, Jr. vs. Hon. Pedro N.



Laggui; G.R. No. 79520, Neptunia Corporation, Ltd. vs. PresidentialCommission on Good Government, August 10, 1988.

(p. 253.)

Significantly, even the Resolution in dispute recognizes that it isthe Sandiganbayan which should determine who has the right to vote saidshares, the same stating that "the right of the petitioners to vote stock in theirnames at the meetings of the UCPB cannot be conceded at this time. That rightstill has to be established by them before the Sandiganbayan ."

It must also be pointed out that even the temporary restraining orders"confirmed and maintained" by the Court in the Sequestration Cases were madesubject to the Sandiganbayan's "powers to modify or terminate the same in theexercise of its sound discretion," thereby reinforcing the conclusion that the

February 16, 1993 Resolution relied upon by PCGG (which was not "confirmedand maintained" by the Court) was, in any event, subject to modification ortermination by the Sandiganbayan .

And in the exercise of its power to determine who should vote the sequesteredshares, the Sandiganbayan must be guided by the principles first enunciatedin BASECO vs . PCGG (150 SCRA 181 [1987]), and further elucidated by the Courtin Cojuangco, Jr . vs . Roxas (195 SCRA 797 [1991]), where we stated that:

Nothing is more settled than the ruling of this Court in BASECOvs . PCGG , that the PCGG cannot exercise acts of dominion over propertysequestered. It may not vote sequestered shares of stock or elect themembers of the board of directors of the corporation concerned —

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGGcannot exercise acts of dominion over property sequestered, frozen orprovisionally taken over. As already stressed with no little insistence , theact of sequestration,freezing or provisional takeover of property doesnot import or bring about a divestment of title over said property ;doesnot make the PCGG the owner thereof. In relation to the propertysequestered, frozen or provisionally taken over, the PCGG is aconservator, not an owner. Therefore, it can not perform acts of strictownership ; and this is specially true in the situations contemplated bythe sequestration rules where, unlike cases of receivership, for example,



no court exercises effective supervision or can upon due application andhearing, grant authority for the performance of acts of dominion.

Equally evident is that the resort to the provisional remedies inquestion shall entail the least possible interference with business

operations or activities so that , in the event that the accusation of thebusiness enterprise being 'ill-gotten' be not proven, it may be returnedto its rightful owner as far as possible in the same condition as it was atthe time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over theproperty or business sequestered provisionally taken over , much like acourt-appointed receiver, such as to bring and defend actions in its ownname; receive rents; collect debts due; pay outstanding debts; and

generally do such other acts and things as may be necessary to fulfill itsmission as conservator and administrator. In this context, it may inaddition enjoin or restrain any actual or threatened commission of actsby any person or entity that may render moot and academic, or frustrateor otherwise make ineffectual its efforts to carry out its task; punish fordirect or indirect contempt in accordance with the Rules of Court; andseek and secure the assistance of any office, agency or instrumentalityof the government. In the case of sequestered businesses generally,(i.e., going concerns, businesses in current operation), as in the case ofsequestered objects, its essential role, as already discussed, is that of

conservator, 'watchdog' or overseer, it is not that of manager, orinnovator, much less an owner .

xxx xxx xxx

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions andcircumstances that the PCGG may properly exercise the prerogative tovote sequestered stock of corporations, granted to it by the President ofthe Philippines through a memorandum dated June 26, 1986. That

memorandum authorizes the PCGG, 'pending the outcome ofproceedings to determine the ownership of . . . (sequestered) shares ofstock,' 'to vote such shares of stock as it may have sequestered incorporations at all stockholders' meetings called for the election ofdirectors, declaration of dividends, amendment of the Articles ofIncorporation, etc.' The Memorandum should be construed in such amanner as to be consistent with, and not contradictory of the Executive



Orders earlier promulgated on the same matter. There should be noexercise of the right to vote simply because the right exists, or becausethe stocks sequestered constitute the controlling or a substantial part ofthe corporate voting power. The stock is not to be voted to replacedirectors, or revise the articles or by-laws, or otherwise bring about

substantial changes in policy, program or practice of the corporationexcept for demonstrably weighty and defensible grounds, and always inthe context of the stated purposes of sequestration or provisionaltakeover, i.e., to prevent the dispersion or undue disposal of thecorporate assets.Directors are not to be voted out simply because thepower to do so exists. Substitution of directors is not to be done withoutreason or rhyme, should indeed be shunned if at all possible, andundertaken only when essential to prevent disappearance or wastage ofcorporate property , and always under such circumstances as to assurethat the replacements are truly possessed of competence, experienceand probity.

In the case at bar, there was adequate justification to vote theincumbent directors out of office and elect others in their stead becausethe evidence showed prima facie that the former were just tools ofPresident Marcos and were no longer owners of any stock in the firm, ifthey ever were at all. This is why, in its Resolution of October 28, 1986;this Court declared that —

'Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a stockholders'

meeting for the election of directors as authorized by the Memorandumof the President . . . (to the PCGG) dated June 26, 1986, particularly,where as in this case, the government can, through its designateddirectors, properly exercise control and management over what appearto be properties and assets owned and belonging to the governmentitself and over which the persons who appear in this case on behalf ofBASECO have failed to show any right or even any shareholding in saidcorporation.'

It must however be emphasized that the conduct of the PCGG nomineesin the BASECO Board in the management of the company's affairs

should be henceforth be guided and governed by the norms herein laiddown. They should never for a moment allow themselves to forget thatthey are conservators, not owners of the business; they are fiduciaries,trustees, of whom the highest degree of diligence and rectitude is, in thepremises, required.

xxx xxx xxx



The rule in this jurisdiction is, therefore, clear. The PCGG cannotperform acts of strict ownership of sequestered property. It is a mereconservator. It may not vote the shares in a corporation and elect themembers of the board of directors . The only conceivable exception is ina case of a takeover of a business belonging to the government or

whose capitalization comes from public funds, but which landed inprivate hands as in BASECO.

The constitutional right against deprivation of life, liberty and propertywithout due process of law is so well-known and too precious so that thehand of the PCGG must be stayed in its indiscriminate takeover of andvoting of shares allegedly ill-gotten in these cases. It is only afterappropriate judicial proceedings when a clear determination is made thatsaid shares are truly ill-gotten when such a takeover and exercise of actsof strict ownership by the PCGG are justified.

(pp. 808-813.)

These principles were subsequently refined in the cases of Eduardo Cojuangco,Jr . vs . Calpo (G.R. No. 115352, June 10, 1997) and PCGG vs . EduardoCojuangco, Jr . (G.R. No. 133197, January 27, 1999) where we held that:

The issue of whether PCGG may vote the sequestered shares in SMCnecessitates a determination of at least two factual matters: EDcICT

1. whether there is prima facie evidence showing that the said shares

are ill-gotten and thus belong to the State; and 2. whether there is an imminent danger of dissipation thus necessitatingtheir continued sequestration and voting by the PCGG while the mainissue pends with the Sandiganbayan .

The foregoing two points require presentation of evidence which canonly be done before the Sandiganbayan , it being settled that theSupreme Court is not a trier of facts.

(p. 2, Resolution, June 10, 1997.)

However, the majority opinion holds that the two-tiered test above-enunciatedfinds no application to the case of a take-over of a business belonging togovernment or whose capitalization comes from public funds, but which landedin private hands, citingCojuangco vs . Roxas and BASECO as authority therefor.The majority opinion asserts that the government is granted authority to votesequestered shares:



1. Where government shares are taken over by private persons orentities who/which registered them in their own names; and

2. Where the capitalization or shares that were acquired with publicfunds somehow landed in private hands.

In fine, the majority points out that since the instant case involves shares thatwere acquired with public funds which somehow landed in private hands, there isno more need to apply the two-tiered test, the right to vote said sharesautomatically vesting in the government, acting through the PCGG.

As stated earlier, the Court, in Cojuangco vs . Roxas , unequivocally declared that"[t]he rule in this jurisdiction is, therefore, clear. The PCGG cannot perform actsof strict ownership of sequestered property. It is a mere conservator. It may notvote the shares in a corporation and elect the members of the board of

directors. The only conceivable exception is in a case of a takeover of a businessbelonging to the government or whose capitalization comes from public funds,but which landed in private hands as in BASECO."

Thus, it is well-settled that the only instance when PCGG can vote the shares in asequestered corporation is in case of a takeover of a business belonging to thegovernment or whose capitalization comes from public funds, but which landedin private hands. The foregoing principle, as stated in the majority opinion, hasbeen reiterated in many subsequent cases, most recently in Antipordavs . Sandiganbayan (G.R. No. 116941, May 31, 2001).

On the other hand, the two-tiered test, first enunciated in Cojuangcovs . Calpo and subsequently in PCGG vs . Cojuangco Jr ., provides the guidelines orrequisites to be fulfilled in determining whether or not PCGG can vote shares in asequestered corporation. Since PCGG can vote the shares in a sequesteredcorporation only in case of a takeover of a business belonging to the governmentor whose capitalization comes from public funds, but which landed in privatehands, plainly the two-tiered test is applicable only in this instance. In otherwords, the two-tiered test is designed precisely to verify whether or not thesequestered corporation is a business belonging to the government or whosecapitalization comes from public funds, but which landed in private hands! Thus,I submit that the Sandiganbayan did not err when it applied the two-tiered testin disallowing the PCGG to vote the sequestered shares.



In authorizing COCOFED, Ballares, and Eduardo Cojuangco, Jr. to exercise theirright to vote their shares of stock, theSandiganbayan stated:

Jurisprudence, from as far back as the leading case of Baseco (150SCRA 181), has clearly defined the functions and authority of the PCGG

in relation to sequestered property. Be it noted by way of footnote thatgovernment agencies as well as government officials, do not have rightsin the exercise of the functions of the office. They have only duties toperform and authority by means of which they may comply with thoseduties under the law.

In this instance, the issue is whether or not the authority of the PCGGexists to remain in control of the voting rights of sequestered shares ofstock in general, and whether or not the sequestered shares of stock inthe UCPB in particular may be voted by it as part of its functions assequestor of these shares of stock; corollarily, may the movingstockholders exercise of their proprietary rights over the shares of stock,save for the limitations of free disposal, until judgment shall have beenrendered against them thereon.

It may be stated that jurisprudence has evolved from certain categoricalpositions originally enunciated to more refinements as time and eventsdemonstrated to be appropriate. Let it also be noted that jurisprudencehas not reversed itself; rather, jurisprudence has re-stated the rules asthe circumstances and the facts presented before the courts hadrequired in order to put in proper perspective the earlier assertions of

jurisprudence. In this light, the Court is faced now with the question: Who may votesequestered shares of stock in general, and who may vote them in theparticular instance of the UCPB shares of stock at its scheduledStockholders' Meeting on March 5, 2001? CacTIE

xxx xxx xxx

In the light of all of the above, the Court submits itself to jurisprudenceand with the statements of the Supreme Court in G.R. No. 115352

entitled Enrique Cojuangco, Jr ., et al . vs . Jaime Calpo , et al . dated June10, 1997, as well as the resolution of the Supreme Court promulgatedon January 27, 1999 in the case of PCGG vs . Eduardo Cojuangco, Jr ., etal ., G.R. No. 13319 which included the Sandiganbayan as one of therespondents. In these two cases, the Supreme Court ruled that thevoting of sequestered shares of stock is governed by two considerations,namely,



1. whether there is prima facie evidence showing that the saidshares are ill-gotten and thus belong to the State; and

2. whether there is an imminent danger of dissipation thusnecessitating their continued sequestration and voting by

the PCGG while the main issue pends withthe Sandiganbayan .

(p. 5, Presidential Commission on Good Government vs.Eduardo M. Cojuangco, Jr., et al., supra )

This ruling does not state where, what or who the cause of thedissipation might be to justify the vote by the PCGG of the shares undersequestration. If the registered stockholders, however, have notparticipated in the management of the corporation, and the dissipationhas not been demonstrated to have been caused either by the

stockholders' action in the past, nor by action independent of themanagement during sequestration, then whatever "imminent danger ofdissipation necessitating their continued sequestration and voting by thePCGG. . ." could not be raised against the voting rights of the assertingstockholders.

The Court has sought to obtain by all means any form of reinforcementfrom the PCGG on this matter, not only this morning but over themonths that go as far back as July of the year 2000. Much to theimpatience of this Court, the matter has not been responded to in any

satisfactory manner. (pp. 2-5, Order dated February 28, 2001.)

A perusal of the above order would show that the Sandiganbayan , in allowingprivate respondents to vote their shares, merely followed judicial precedents laiddown by the Court. These decisions have not been challenged by the PCGG.Their review, much less reversal, has not been sought. They continue to expressgood law. I find no "patent or gross" arbitrariness or despotism by reason ofpassion or personal hostility in the Sandiganbayan's adherence to these

precedents. I thus submit that one can hardly characterizethe Sandiganbayan's order authorizing private respondents to vote theirsequestered shares of stock as having been issued with grave abuse ofdiscretion. CSAcTa

Additionally, Cojuangco, Jr . vs . Roxas is cited by the other side as authority forthe proposition that PCGG should be the one to vote the sequestered shares, the



Court having declared in Roxas that: "[t]he only conceivable exception (to therule that PCGG may not vote the shares in a corporation and elect the membersof the board of directors) is in a case of a takeover of a business belonging tothe government or whose capitalization comes from public funds, but whichlanded in private hands as in BASECO." PCGG thus, likens the facts of the instantpetition to the BASECO case.

The BASECO case does not support petitioner's position. It was proven in theBASECO case that 95.82% of the outstanding stock of BASECO, endorsed inblank by the owners thereof, were inexplicably in the possession of thenPresident Marcos. More, deeds of assignment of practically all the stock of thecorporations owning the aforementioned 95.82% were also inexplicably in thepossession of President Marcos. Thus, in the case of BASECO, the directorsthereof were merely Marcos nominees or dummies, it having been proven that

President Marcos not only exercised control over BASECO but also that heactually owned almost 100% of BASECO's outstanding stock. Then too, it wasproven that BASECO had been able to take-over and acquire the business andassets of the National Shipyard and Steel Corporation and other government-owned or controlled entities through the undue exercise by then PresidentMarcos of his powers, authority, and influence. Upon these premises, the Courtheld that the government could properly exercise control and management overwhat appeared to be properties and assets owned and belonging to thegovernment itself. Hereunder are the pertinent observations of the Court in saidcase:

The facts show that the corporation known as BASECO was owned orcontrolled by President Marcos "during his administration, throughnominees, by taking undue advantage of his public office and/or usinghis powers, authority, or influence," and that it was by and through thesame means, that BASECO had taken over the business and/or assets ofthe National Shipyard and Engineering Co., Inc., and other government-owned or controlled entities.

xxx xxx xxx

In the case at bar, there was adequate justification to vote theincumbent directors out of office and elect others in their stead becausethe evidence showed prima facie that the former were just tools ofPresident Marcos and were no longer owners of any stock in the firm, ifthey ever were at all . This is why, in its Resolution of October 28, 1986;this Court declared that —



Petitioner has failed to make out a case of grave abuse or excessof jurisdiction in respondents' calling and holding of astockholders' meeting for the election of directors as authorizedby the memorandum of the President (to the PCGG) dated June26, 1986, particularly, where as in this case, the government can,

though its designated directors, properly exercise control andmanagement over what appear to be properties and assetsowned and belonging to the government itself and over which thepersons who appear in this case on behalf of BASECO have failedto show any right or even any shareholding in said corporation ."

In contrast, respondents in the instant case are the registered stockholders. Noevidence was presented before theSandiganbayan showing that respondents aremere "tools of President Marcos and were no longer owners of any stock in thefirm if they ever were at all."

Nor has it been shown that the sequestered UCPB shares of stock wereinexplicably acquired by respondents. Respondent Cojuangco Jr. obtained hisshares by virtue of an agreement with the Philippine Coconut Authority (PCA)whereby, as compensation for exercising his personal and exclusive option toacquire UCPB shares, Cojuangco Jr. would receive 1 share for every 9 acquiredby PCA. The UCPB shares of stock in the name of the 1,405,366 coconut-farmers, on the other hand, were distributed to them by virtue of PresidentialDecree No. 755, which authorized the distribution of UCPB's shares of stock,free, to coconut farmers. Other UCPB shares were acquired by the CIIF

companies. It is precisely the validity of these acquisitions which is underlitigation in the main case pending with the Sandiganbayan .

The view expressed by the majority that the UCPB shares, having been acquiredwith the use of coconut levy funds, and, therefore belong to the government,may very well turn out to be correct. However, since these issues are stillpending litigation at the Sandiganbayan , it would be premature, I submit, to ruleon this point at this time. Verily, the validity of the acquisition by CojuangcoJr., et al. of their UCPB shares is the very lis mota of the action forreconveyance, accounting, reversion, and restitution filed by the PCGG with

the Sandiganbayan. To rule on this matter would be to preempt said court. Too, the argument that the coconut levy funds used to purchase the sequesteredUCPB shares of stock are public funds does not appear to have been raisedbefore the Sandiganbayan ; consequently, the Sandiganbayan did not rule on thenature of the fund. It would be absurd to hold that the Sandiganbayan gravelyabused its discretion in not holding that the sequestered shares belong prima



facie to the government, the issue of whether or not coconut levy funds arepublic funds not having been raised before it.

Moreover, and as mentioned earlier, the nature of the funds used is a matterwhich should be decided first-hand by theSandiganbayan when-it resolves the

merits of Civil Case No. 0033-A. Note should also be taken of the fact that thedetermination of whether the coconut levy funds are public funds involves theascertainment of the constitutionality of Section 5, Article III of PresidentialDecree No. 961 and Section 5, Article III of Presidential Decree No. 1468, bothof which contain the following identical provisions:

Section 5. Exemptions . — The Coconut Consumers Stabilization Fundand the Coconut Industry Development Fund as well as all

disbursements of said Funds for the benefit of the coconut farmers asherein authorized shall not be construed or interpreted, under any lawor regulation, as special or fiduciary funds, or as part of the generalfunds of the national government within the contemplation of P.D. 771;nor as a subsidy, donation, levy, government funded investment orgovernment share within the contemplation of P.D. 898, the intentionbeing that said Fund and the disbursements thereof as herein authorizedfor the benefit of the coconut farmers shall be owned by them in theirown private capacities.

Presidential Decrees No. 961 and 1468 have not been repealed, revoked, ordeclared unconstitutional, hence they are presumed valid and binding. Without aprevious declaration of unconstitutionality, the coconut levy funds may not thusbe characterized asprima facie belonging to the government. That issue mustfirst be resolved by the Sandiganbayan . In fact, when the Solicitor General, inG.R. No. 96073, filed a motion to declare the coconut levies collected pursuant tothe various issuances as public funds and to declare Section 5, Article III ofPresidential Decree No. 1468 as unconstitutional, the Court denied the same in aResolution dated March 26, 1996.

Parenthetically, in Philippine Coconut Producers Federation, Inc . vs . PCGG(supra) , the Court ruled that the fund is "affected with public interest," implyingthat the fund is private in character. If the coconut levy funds were public funds,then the Court would have so held and there would be no reason to describe thesame as funds "affected with public interest." It may not, thus, be immediatelysaid that the coconut levy funds are public funds, the resolution of the issuebeing left, at the first instance, with theSandiganbayan . HDTSIE



And if it is to be recalled, the issue involved herein is whether or notthe Sandiganbayan committed grave abuse of discretion when it issued thedisputed order allowing respondents to vote the UCPB shares of stock registeredin their names. The question of whether the coconut levy funds are public fundsis not in issue here. In fact, the constitutionality of Presidential Decrees No. 961and 1468 have not been raised by the PCGG during the proceedings beforethe Sandiganbayan .

Moreover, it should be pointed out that the avowed purpose of sequestration isto preserve the assets sequestered to assure that if, and when, judgment isrendered in favor of the petitioner, the judgment may be implemented."Preservation", not "deprivation" before judgment, is its essence. That is why inBASECO, we emphasized:

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional,contingent character of the remedies just described. Indeed the lawplainly qualifies the remedy of takeover by the adjective, "provisional."These remedies may be resorted to only for a particular exigency: toprevent in the public interest the disappearance or dissipation ofproperty or business, and conserve it pending adjudgment inappropriate proceedings of the primary issue of whether or not theacquisition of title or other right thereto by the apparent owner wasattended by some vitiating anomaly. None of the remedies is meant to

deprive the owner or possessor of his title or any right to the propertysequestered, frozen or taken over and vest it in the sequesteringagency, the Government or other person. This can be done only for thecauses and by the processes laid down by law.

That this is the sense in which the power to sequester, freeze orprovisionally take over is to be understood and exercised, the languageof the executive orders in question leaves no doubt. Executive Order No.1 declares that the sequestration of property the acquisition of which issuspect shall last "until the transactions leading to such acquisition . . .can be disposed of by the appropriate authorities ." Executive Order No.

2 declares that the assets or properties therein mentioned shall remainfrozen "pending the outcome of appropriate proceedings in thePhilippines to determine whether any such assets or properties wereacquired " by illegal means . Executive Order No. 14 makes clear that

judicial proceedings are essential for the resolution of the basic issue ofwhether or not particular assets are "ill-gotten," and resultant recoverythereof by the Government is warranted.



(pp. 211-212.)

In the instant case, however, the actuations of PCGG with regard to thesequestered shares partake more of deprivation rather than preservation. Aspointed out by respondents, since 1986, only one (1) stockholders' meeting of

UCPB has been held. At this meeting, PCGG voted all of the shares, as a result ofwhich all members of the Board of UCPB, since 1986 to the present, have beenPCGG nominees. When vacancies in the Board occur because of resignation,replacements are installed by the remaining members of the Board-onnomination of the PCGG. The stockholders' meeting scheduled on March 6, 2001would have been the first stockholders' meeting since 1986 at which registeredstockholders would exercise their right to vote and by their vote elect themembers of the Board of Directors.

Also, the shares of stock in UCPB were sequestered in 1986. The civil action"Republic of the Philippines v . Eduardo M. Cojuangco, Jr ., Civil Case No . 033 ,"was instituted before the Sandiganbayan on July 30, 1987. This action included,among other things, the UCPB shares of stock and was filed to maintain theeffectivity of the writs of sequestration pursuant to Section 26, Article XVIII ofthe Constitution. Notwithstanding the lapse of more than 14 years, theproceedings have barely gone beyond the pre-trial stage. PCGG's exercise of theright to vote the sequestered shares of stock for a period of 14 years constituteseffectively a deprivation of a property right belonging to the registeredstockholders (18 Am . Jur . 2d, Corporations 2d Section 1065, p. 859, citing

cases), a state of affairs not within the contemplation of "sequestration" as ameans of preservation of assets.

To recapitulate, evaluated in accordance with applicable jurisprudence, I holdthat the issuance by respondent Sandiganbayan of its impugned Order datedFebruary 28, 2001, is clearly not an act committed in grave abuse of discretion.Simply put, petitioner PCGG failed to persuade the Sandiganbayan — on thebasis of the "two-tiered test" enunciated by this Court in the SanMiguel case, supra — that it is entitled to vote the UCPB sequestered shares.

Verily, the Sandiganbayan was duty-bound to comply with the jurisprudence laid

down by the Court on the matter. This is certainly not a case of abuse, muchmore grave abuse of discretion, on the part of respondent Sandiganbayan .

I regret to say that I find unacceptable the contention that the " law of the case "herein should be the Resolution dated February 16, 1993 in Republic ofthe Philippines vs . Sandiganbayan , et al . For one, the UCPB shares of stock ofrespondents COCOFED,et al. and Ballares, et al . are not the subject of the case



relied upon. Hence, the Resolution therein could not have referred to or coveredsaid shares. For another, and more importantly, what is invoked by petitioner is,in effect, merely a restraining order which was not re-affirmed by the Courtwhen we rendered the main decision in the said consolidated sequestrationcases.

Rather, what I believe is truly applicable herein is the Court's decisionin COCOFED vs . PCGG (178 SCRA 236 [1989]) wherein it was held that "theincidents concerning the voting of the sequestered shares, the COCOFEDelections, and the replacement of directors, being matters incidental to thesequestration, should be addressed to the Sandiganbayan ." Thus,the Sandiganbayan has been given by the Court full discretion to evaluate and toallow or disallow the duly registered stockholders of the UCPB shares to exercisethe right to vote the said shares in the UCPB elections and/or

appointment/replacement of its directors. If, as in the case at hand,the Sandiganbayan , in the exercise of its sound discretion and for justifiablereasons cited in its assailed Order of February 28, 2001, allowed herein privaterespondents to vote the sequestered shares in question, one would simply be ata loss to understand how such action could be said to be tainted with graveabuse of discretion. AcHEaS

FOR THE FOREGOING REASONS, I vote to DISMISS the instant petition for lackof merit.

Footnotes

41.

FIRST DIVISION

[G.R. No. L-1721. May 19, 1950.]

JUAN D. EVANGELISTA ET AL., plaintiffs-appellants , vs .RAFAEL SANTOS, defendant-appellee .

Antonio Gonzales for appellants.

Benjamin H. Tirol for appellee.



SYLLABUS

1.PLEADING AND PRACTICE; VENUE; MERE SOJOURNING IN A PLACEDOES NOT MAKE THE LATTER A RESIDENT FOR PURPOSES OF VENUE. — The facts in this case show that the objection to the venue is well-founded.The fact that defendant was sojourning in Pasay at the time he was servedwith summons does not make him a resident of that place for purposes ofvenue.

2.PARTIES; CORPORATION; MISMANAGEMENT BY ITS OFFICER;RIGHT OF STOCKHOLDERS TO BEING SUIT. — The plaintiff stockholdershave brought the action not for the benefit of the corporation but for theirown benefit, since they ask that the defendant make good the lossesoccasioned by his mismanagement and pay to them the value of theirrespective participation in the corporate assets on the basis of their respective

holdings.

D E C I S I O N

REYES, J p:

This is an action by the minority stockholders of a corporation againstits principal officer for damages resulting from his mismanagement of its

affairs and misuse of its assets. The complaint alleges that plaintiff's are minority stockholders of the

Vitali Lumber Company, Inc., a Philippine corporation organized for theexploitation of a lumber concession in Zamboanga, Philippines; thatdefendant holds more than 50 per cent of the stocks of said corporation andalso is and always has been the president, manager, and treasurer thereof;and that defendant, in such triple capacity, through fault, neglect, andabandonment allowed its lumber concession to lapse and its properties andassets, among them machineries, buildings, warehouses, trucks, etc., to

disappear, thus causing the complete ruin of the corporation and totaldepreciation of its stocks. The complaint therefore prays for judgmentrequiring defendant: (1) to render an account of his administration of thecorporate affairs and assets: (2) to pay plaintiffs the value of their respectiveparticipation in said assets on the basis of the value of the stocks held byeach of them; and (3) to pay the costs of suit. Plaintiffs also ask for suchother remedy as may be just and equitable.



The complaint does not give plaintiffs' residence, but, for purposes ofvenue, alleges that defendant resides at 2112 Dewey Boulevard, cornerLibertad Street, Pasay, province of Rizal. Having been served with summonsat that place, defendant filed a motion for the dismissal of the complaint onthe ground of improper venue and also on the ground that the complaint didnot state a cause of action in favor of plaintiffs.

In support of the objection to the venue, the motion, which is underoath, states that defendant is a resident of Iloilo City and not of Pasay, and atthe hearing of the motion defendant also presented further affidavit to theeffect that while he has a house in Pasay, where members of his family whoare studying in Manila live and where he himself is sojourning for the purposeof attending to his interests in Manila, yet he has his permanent residence inthe City of Iloilo where he is registered as a voter for election purposes andhas been paying his residence certificate. Plaintiffs opposed the motion for

dismissal but presented no counter proof and merely called attention to theSheriff's return showing service of summons on defendant personally at hisalleged residence at No. 2112 Dewey Boulevard, Pasay.

After hearing, the lower court rendered its order, granting the motionfor dismissal upon the two grounds alleged by defendant, and reconsiderationof this order having been denied, plaintiffs have appealed to this Court.

The appeal presents two questions. The first refers to venue and thesecond, to the right of the plaintiffs to bring this action for their benefit.

As to the first question, it is important to remember that the laying of

the venue of an action is not left to plaintiff's caprice. The matter is regulatedby the Rules of Court. And in actions like the present, which is one inpersonam, the regulation applicable is that contained in section 1 of Rule 5,which provides:.

"Civil action in Courts of First Instance may be commenced and triedwhere the defendant or any of the defendant resides or may be found, orwhere the plaintiff or any of the plaintiffs resides, at the election of theplaintiff.".

Objection to improper venue may be interposed at any time prior to the

trial. (Moran's Comments on the Rules of Court, Vol. I, 2nd ed., p. 108.). Believing that defendant resided in the province of Rizal, herein

plaintiffs brought their action in the Court of First Instance of that province.But that belief proved erroneous, for the lower court found after hearing thatdefendant had his residence in Iloilo. The finding is based on defendant'ssworn statement not rebutted by any proof to the contrary.



There is nothing to the contention that defendant's motion to dismissnecessarily presupposes a hypothetical admission of the allegations of thecomplaint, among them the averment that defendant is a resident of Rizalprovince, for the motion precisely denies that averment and alleges that hisreal residence is in Iloilo City. This, defendant had the right to do in objectingto the court's jurisdiction on the ground of improper venue.

Section 1 of Rule 5 may seem, at first blush, to authorize the laying ofthe venue in the province where the defendant "may be found." But thisphrase has already been held to have a limited application. It is the samephrase used in section 377 of Act 190 from which section 1 of Rule 5 wastaken, and as construed by this Court it applies only to cases wheredefendant has no residence in the Philippine Islands. This was theconstruction adopted in the case of Cohen vs. Benguet Commercial Co., Ltd.,34 Phil. 526, which was an action brought in Manila by a nonresident against

a corporation which had its residence for legal purposes in Baguio but whosePresident was found in Manila and there served with summons. This Courtthere said: "Section 377 provides that actions of this character 'may bebrought in any province where the defendant or any necessary partydefendant may reside or be found, or in any province where the plaintiff orone of the plaintiffs resides, at the election of the plaintiff.' The plaintiff in thisaction has no residence in the Philippine Islands. Only one of the parties tothe action resides here. There can be, therefore, no election by plaintiff as tothe place of trial. It must be in the province where the defendant resides. Thedefendant resides, in the eye of the law, in Baguio. Was it 'found' in the city

of Manila under section 377, its president being in that city where the serviceof summons was made? We think not. The word 'found' as used in section377 has a different meaning that belongs to it as used in section 394, whichrefers exclusively to the place where the summons may be served. As wehave said a summons may be legally served on a defendant wherever he maybe 'found,' i. e., wherever he may be, provided he be in the PhilippineIslands; but the venue cannot be laid wherever the defendant may be 'found.'There is an element entering in section 377 which is not present in section394, that is a residence. Residence of the plaintiff or defendant does notaffect the place where a summons may be served; but residence is the vitalthing when we deal with venue. The venue must be laid in the provincewhere one of the parties resides. If the plaintiff is a nonresident the venuemust be laid in the province of the defendant's residence. The venue can belaid in the province where defendant is 'found' only when defendant has noresidence in the Philippine Islands. A defendant can not have a residence inone province and be 'found' in another. As long as he has a residence in the



Philippine Islands he can be 'found,' for the purposes of section 377, only inthe province of his residence. In such case the words 'residence' and 'found'are synonymous. If he is a nonresident then the venue may be laid in theprovince where he is 'found' at the time the action is commenced or in theprovince of plaintiff's residence. This applies also to a domestic corporation.

"While the service of the summons was good in either Baguio or Manilawe are of the opinion that the objection of the defendant to the place of trialwas proper in both cases and that the trial court should have held that thevenue was improperly laid.".

And elaborating on the point when the case came up forreconsideration, the Court further said:.

"The moving party contends that the venue was properly laid undersection 377 in that it was laid in the province where the defendant was found

at the time summons was served on its president, he having been found andserved with process in the city of Manila. For the purposes of the discussionwe assumed in the main case, as the plaintiff claimed, that the defendant wasin fact and in law found in the city of Manila; and proceeded to decide thecause upon the theory that, even if the defendant were found in the city ofManila, that did not justify, under the facts of the case, the laying of thevenue in the city of Manila.

"We do not believe that the moving party's objection that ourconstruction deprives the word 'found' of all significance and results, in effect,in eliminating it from the statute, is sound. We do not deprive it of all

significance and effect and do not eliminate it from the statute. We give it theonly effect which can be given it and still accord with the other provisions ofthe section which give defendant the right to have the venue laid in theprovince of his residence, the effect which it was intended by the legislaturethey should have. We held that the word 'found' was applicable in certaincases, and in such cases gave it full significance and effect. We declared thatit was applicable and effective in cases where the defendant is a nonresident.In such cases the venue may be laid wherever he may be found in thePhilippine Islands at the time of the service of the process, but we also heldthat where he is a resident of the Philippine Islands the word 'found' has noapplication and the venue must be laid in the province where he resides.

"The construction which the moving party asks us to place on thatprovision of section 377 above quoted would result in the destruction of theprivilege conferred by the section upon a resident defendant which requiresthe venue to be laid in the province where he resides. This is clear; for, if the



venue may be laid in any province where the defendant, although a residentof some other province, may be found at the time process is served on him,then the provision that it shall be laid in the province where he resides is ofno value to him. If a defendant residing in the province of Rizal is helplesswhen the venue is laid in the province of Mindoro in an action in which theplaintiff is a nonresident or resides in Manila, what is the value of a residencein Rizal? If a defendant residing in Jolo is without remedy when a nonresidentplaintiff or a plaintiff residing in Jolo lays the venue in Bontoc because thedefendant happens to be found there, of what significance is a residence inJolo? The phrases 'where the defendant *** may reside' and 'or be found'must be construed together and in such manner that both may be giveneffect. The construction asked for by the moving party would deprive thephrase 'where the defendant *** may reside' of all significance, as theplaintiff could always elect to lay the venue in the province where the

defendant was 'found' and not where he resided; whereas the constructionwhich we place upon these phrases permits both to have effect. We declarethat, when the defendant is a resident of the Philippine Islands, the venuemust be laid either in the province where the plaintiff resides or in theprovince where the defendant resides, and in no other province. Where,however, the defendant is a nonresident the venue may be laid whereverdefendant may be found in the Philippine Islands. This construction givesboth phrases their proper and legitimate effect without doing violence to thespirit which informs all laws relating to venue and which insists always thatthe action shall be tried in the place where the greatest convenience of the

parties will be served. Ordinarily a defendant's witnesses are found where thedefendant resides; and plaintiffs witnesses are generally found where heresides or where the defendant resides. It is, therefore, generally desirable tohave the action tried where one of the parties resides. Where the plaintiff is anonresident and the contract upon which suit is brought was made in thePhilippine Islands it may safely be asserted that the convenience of thedefendant would be best served by a trial in the province where he resides.The fact that defendant was sojourning in Pasay at the time he was servedwith summons does not make him a resident of that place for purposes ofvenue. Residence is "the permanent home, the place to which, whenever

absent for business or pleasure, one intends to return, ***" (67 C. J., pp.123-124.) A man can have but one domicile at a time (Alcantara vs. Secretaryof Interior, 61 Phil., 459), and residence is synonymous with domicile undersection 1 of Rule 5 (Moran's Comments, supra, p. 104).

In view of the foregoing, we hold that the objection to the venue wascorrectly sustained by the lower court.



As to the second question, the complaint shows that the action is fordamages resulting from mismanagement of the affairs and assets of thecorporation by its principal officer, it being alleged that defendant'smaladministration has brought about the ruin of the corporation and theconsequent loss of value of its stocks. The injury complained of is thusprimarily to the corporation, so that the suit for the damages claimed shouldbe by the corporation rather than by the stockholders (3 Fletcher, Cyclopediaof Corporation pp. 977-980). The stockholders may not directly claim thosedamages for themselves for that would result in the appropriation by, and thedistribution among them of part of the corporate assets before the dissolutionof the corporation and the liquidation of its debts and liabilities, somethingwhich cannot be legally done in view of section 16 of the Corporation Law,which provides:.

"No corporation shall make or declare any stock or bond dividend or

any dividend whatsoever except from the surplus profits arising from itsbusiness, or divide or distribute its capital stock or property other than actualprofits among its members or stockholders until after the payment of its debtsand the termination of its existence by limitation or lawful dissolution.".

But while it is to the corporation that the action should pertain in casesof this nature, however, if the officers of the corporation, who are the onescalled upon to protect their rights, refuse to sue, or where a demand uponthem to file the necessary suit would be futile because they are the very onesto be sued or because they hold the controlling interest in the corporation,

then in that case any one of the stockholders is allowed to bring suit (3Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is thecorporation itself and not the plaintiff stockholder that is the real party ininterest, so that such damages as may be recovered shall pertain to thecorporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it isa derivative suit brought by a stockholder as the nominal party plaintiff for thebenefit of the corporation, which is the real party in interest (13 Fletcher,Cyclopedia of Corporations, p. 295).

In the present case, the plaintiff stockholders have brought the actionnot for the benefit of the corporation but for their own benefit, since they ask

that the defendant make good the losses occasioned by his mismanagementand pay to them the value of their respective participation in the corporateassets on the basis of their respective holdings. Clearly, this cannot be doneuntil all corporate debts, if there be any, are paid and the existence of thecorporation terminated by the limitation of its charter or by lawful dissolutionin view of the provisions of section 16 of the Corporation Law.It results that



plaintiffs' complaint shows no cause of action in their favor so that the lowercourt did not err in dismissing the complaint on that ground.

While plaintiffs ask for a remedy to which they are not entitled unlessthe requirement of section 16 of the Corporation Law be first complied with,

we note that the action stated in their complaint is susceptible of beingconverted into a derivative suit for the benefit of the corporation by a merechange in the prayer. Such amendment, however, is not possible now, sincethe complaint has been filed in the wrong court, so that the same has to bedismissed.

The order appealed from is therefore affirmed, but without prejudice tothe filing of the proper action in which the venue shall be laid in the properprovince. Appellants shall pay costs. So ordered.

Moran, C. J., Ozaeta, Pablo, Bengzon, Tuason, and Montemayor, JJ., concur.

Order affirmed.

42.

FIRST DIVISION

[G.R. No. 150793. November 19, 2004.]

FRANCIS CHUA, petitioner , vs . HON. COURT OF APPEALSand LYDIA C. HAO, respondents .

D E C I S I O N

QUISUMBING, J p:

Petitioner assails the Decision , 1 dated June 14, 2001, of the Court of Appeals inCA-G.R. SP No. 57070, affirming the Order , dated October 5, 1999, of theRegional Trial Court (RTC) of Manila, Branch 19. The RTC reversed the Order ,dated April 26, 1999, of the Metropolitan Trial Court (MeTC) of Manila, Branch22. Also challenged by herein petitioner is the CA Resolution , 2dated November20, 2001, denying his Motion for Reconsideration.










The facts, as culled from the records, are as follows:

On February 28, 1996, private respondent Lydia Hao, treasurer of Siena RealtyCorporation, filed a complaint-affidavit with the City Prosecutor of Manilacharging Francis Chua and his wife, Elsa Chua, of four counts of falsification of

public documents pursuant to Article 172 3 in relation to Article 171 4 of theRevised Penal Code. The charge reads:

That on or about May 13, 1994, in the City of Manila, Philippines, thesaid accused, being then a private individual, did then and there willfully,unlawfully and feloniously commit acts of falsification upon a publicdocument, to wit: the said accused prepared, certified, and falsified theMinutes of the Annual Stockholders meeting of the Board of Directors ofthe Siena Realty Corporation, duly notarized before a Notary Public,

Atty. Juanito G. Garcia and entered in his Notarial Registry as Doc No.

109, Page 22, Book No. IV and Series of 1994, and therefore, a publicdocument, by making or causing it to appear in said Minutes of the

Annual Stockholders Meeting that one LYDIA HAO CHUA was presentand has participated in said proceedings, when in truth and in fact, asthe said accused fully well knew that said Lydia C. Hao was neverpresent during the Annual Stockholders Meeting held on April 30, 1994and neither has participated in the proceedings thereof to the prejudiceof public interest and in violation of public faith and destruction of truthas therein proclaimed.

CONTRARY TO LAW. 5

Thereafter, the City Prosecutor filed the Information docketed as Criminal Case

No. 285721 6 for falsification of public document, before the Metropolitan TrialCourt (MeTC) of Manila, Branch 22, against Francis Chua but dismissed theaccusation against Elsa Chua.

Herein petitioner, Francis Chua, was arraigned and trial ensued thereafter.

During the trial in the MeTC, private prosecutors Atty. Evelyn Sua-Kho and Atty. Ariel Bruno Rivera appeared as private prosecutors and presented Hao as theirfirst witness.

After Hao's testimony, Chua moved to exclude complainant's counsels as privateprosecutors in the case on the ground that Hao failed to allege and prove anycivil liability in the case.



















In an Order , dated April 26, 1999, the MeTC granted Chua's motion and orderedthe complainant's counsels to be excluded from actively prosecuting CriminalCase No. 285721. Hao moved for reconsideration but it was denied.

Hence, Hao filed a petition for certiorari docketed as SCA No. 99-

94846, 7 entitled Lydia C. Hao, in her own behalf and for the benefit of SienaRealty Corporation v. Francis Chua, and the Honorable Hipolito dela Vega,Presiding Judge, Branch 22, Metropolitan Trial Court of Manila , before theRegional Trial Court (RTC) of Manila, Branch 19. TcDaSI

The RTC gave due course to the petition and on October 5, 1999, the RTC in anorder reversed the MeTC Order. The dispositive portion reads:

WHEREFORE, the petition is GRANTED. The respondent Court is orderedto allow the intervention of the private prosecutors in behalf of petitioner

Lydia C. Hao in the prosecution of the civil aspect of Crim. Case No.285721, before Br. 22 [MeTC], Manila, allowing Attys. Evelyn Sua-Khoand Ariel Bruno Rivera to actively participate in the proceedings.

SO ORDERED. 8

Chua moved for reconsideration which was denied.

Dissatisfied, Chua filed before the Court of Appeals a petition for certiorari . Thepetition alleged that the lower court acted with grave abuse of discretion in: (1)

refusing to consider material facts; (2) allowing Siena Realty Corporation to beimpleaded as co-petitioner in SCA No. 99-94846 although it was not a party tothe criminal complaint in Criminal Case No. 285721; and (3) effectively amendingthe information against the accused in violation of his constitutional rights.

On June 14, 2001, the appellate court promulgated its assailed Decision denyingthe petition, thus:

WHEREFORE, premises considered, the petition is hereby DENIED DUECOURSE and DISMISSED. The Order, dated October 5, 1999 as well as

the Order, dated December 3, 1999, are hereby AFFIRMED in toto . SO ORDERED. 9

Petitioner had argued before the Court of Appeals that respondent had noauthority whatsoever to bring a suit in behalf of the Corporation since there wasno Board Resolution authorizing her to file the suit.













For her part, respondent Hao claimed that the suit was brought under theconcept of a derivative suit. Respondent maintained that when the directors ortrustees refused to file a suit even when there was a demand from stockholders,a derivative suit was allowed.

The Court of Appeals held that the action was indeed a derivative suit, for italleged that petitioner falsified documents pertaining to projects of thecorporation and made it appear that the petitioner was a stockholder and adirector of the corporation. According to the appellate court, the corporation wasa necessary party to the petition filed with the RTC and even if privaterespondent filed the criminal case, her act should not divest the Corporation ofits right to be a party and present its own claim for damages.

Petitioner moved for reconsideration but it was denied in a Resolution datedNovember 20, 2001.

Hence, this petition alleging that the Court of Appeals committed reversibleerrors:

I.. . . IN RULING THAT LYDIA HAO'S FILING OF CRIMINAL CASE NO.285721 WAS IN THE NATURE OF A DERIVATIVE SUIT

II.. . . IN UPHOLDING THE RULING OF JUDGE DAGUNA THAT SIENAREALTY WAS A PROPER PETITIONER IN SCA NO. [99-94846]

III.. . . IN UPHOLDING JUDGE DAGUNA'S DECISION ALLOWING LYDIAHAO'S COUNSEL TO CONTINUE AS PRIVATE PROSECUTORS INCRIMINAL CASE NO. 285721

IV.. . . IN [OMITTING] TO CONSIDER AND RULE UPON THE ISSUETHAT JUDGE DAGUNA ACTED IN GRAVE ABUSE OF DISCRETIONIN NOT DISMISSING THE PETITION IN SCA NO. [99-94846] FORBEING A SHAM PLEADING. 10

The pertinent issues in this petition are the following: (1) Is the criminalcomplaint in the nature of a derivative suit? (2) Is Siena Realty Corporation aproper petitioner in SCA No. 99-94846? and (3) Should private prosecutors beallowed to actively participate in the trial of Criminal Case No. 285721.

On the first issue, petitioner claims that the Court of Appeals erred when (1) itsustained the lower court in giving due course to respondent's petition in SCANo. 99-94846 despite the fact that the Corporation was not the private







complainant in Criminal Case No. 285721, and (2) when it ruled that CriminalCase No. 285721 was in the nature of a derivative suit.

Petitioner avers that a derivative suit is by nature peculiar only to intra-corporateproceedings and cannot be made part of a criminal action. He cites the case

of Western Institute of Technology, Inc. v. Salas , 11 where the court said that anappeal on the civil aspect of a criminal case cannot be treated as a derivativesuit. Petitioner asserts that in this case, the civil aspect of a criminal case cannotbe treated as a derivative suit, considering that Siena Realty Corporation was notthe private complainant.

Petitioner misapprehends our ruling in Western Institute . In that case, we said:

Here, however, the case is not a derivative suit but is merely an appealon the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the

RTC of Iloilo for estafa and falsification of public document. Among thebasic requirements for a derivative suit to prosper is that the minorityshareholder who is suing for and on behalf of the corporation mustallege in his complaint before the proper forum that he is suing on aderivative cause of action on behalf of the corporation and all othershareholders similarly situated who wish to join. . . . This was notcomplied with by the petitioners either in their complaint before thecourt a quo nor in the instant petition which, in part, merely states that"this is a petition for review on certiorari on pure questions of law to setaside a portion of the RTC decision in Criminal Cases Nos. 37097 and

37098" since the trial court's judgment of acquittal failed to impose civilliability against the private respondents. By no amount of equityconsiderations, if at all deserved, can a mere appeal on the civil aspectof a criminal case be treated as a derivative suit. 12

Moreover, in Western Institute , we said that a mere appeal in the civil aspectcannot be treated as a derivative suit because the appeal lacked the basicrequirement that it must be alleged in the complaint that the shareholder is suingon a derivative cause of action for and in behalf of the corporation and othershareholders who wish to join. CDESIA

Under Section 36 13 of the Corporation Code, read in relation to Section23, 14 where a corporation is an injured party, its power to sue is lodged with itsboard of directors or trustees. 15 An individual stockholder is permitted toinstitute a derivative suit on behalf of the corporation wherein he holds stocks inorder to protect or vindicate corporate rights, whenever the officials of thecorporation refuse to sue, or are the ones to be sued, or hold the control of the























corporation. In such actions, the suing stockholder is regarded as a nominalparty, with the corporation as the real party in interest. 16

A derivative action is a suit by a shareholder to enforce a corporate cause ofaction. The corporation is a necessary party to the suit. And the relief which isgranted is a judgment against a third person in favor of the corporation.Similarly, if a corporation has a defense to an action against it and is notasserting it, a stockholder may intervene and defend on behalf of thecorporation. 17

Under the Revised Penal Code, every person criminally liable for a felony is also

civilly liable. 18 When a criminal action is instituted, the civil action for therecovery of civil liability arising from the offense charged shall be deemedinstituted with the criminal action, unless the offended party waives the civilaction, reserves the right to institute it separately or institutes the civil actionprior to the criminal action. 19

In Criminal Case No. 285721, the complaint was instituted by respondent againstpetitioner for falsifying corporate documents whose subject concerns corporateprojects of Siena Realty Corporation. Clearly, Siena Realty Corporation is anoffended party. Hence, Siena Realty Corporation has a cause of action. And thecivil case for the corporate cause of action is deemed instituted in the criminal

action. However, the board of directors of the corporation in this case did not institutethe action against petitioner. Private respondent was the one who instituted theaction. Private respondent asserts that she filed a derivative suit in behalf of thecorporation. This assertion is inaccurate. Not every suit filed in behalf of thecorporation is a derivative suit. For a derivative suit to prosper, it is required thatthe minority stockholder suing for and on behalf of the corporation must allege inhis complaint that he is suing on a derivative cause of action on behalf of thecorporation and all other stockholders similarly situated who may wish to join

him in the suit. 20 It is a condition sine qua non that the corporation beimpleaded as a party because not only is the corporation an indispensable party,but it is also the present rule that it must be served with process. The judgmentmust be made binding upon the corporation in order that the corporation mayget the benefit of the suit and may not bring subsequent suit against the samedefendants for the same cause of action. In other words, the corporation must





















be joined as party because it is its cause of action that is being litigated andbecause judgment must be a res adjudicata against it. 21

In the criminal complaint filed by herein respondent, nowhere is it stated thatshe is filing the same in behalf and for the benefit of the corporation. Thus, the

criminal complaint including the civil aspect thereof could not be deemed in thenature of a derivative suit.

We turn now to the second issue, is the corporation a proper party in the petitionfor certiorari under Rule 65 before the RTC? Note that the case was titled "LydiaC. Hao, in her own behalf and for the benefit of Siena Realty Corporation v.Francis Chua, and the Honorable Hipolito dela Vega, Presiding Judge, Branch 22,Metropolitan Trial Court of Manila ." Petitioner before us now claims that thecorporation is not a private complainant in Criminal Case No. 285721, and thuscannot be included as appellant in SCA No. 99-94846.

Petitioner invokes the case of Ciudad Real & Dev‘t. Corporation v. Court of

Appeals . 22 In Ciudad Real , it was ruled that the Court of Appeals committedgrave abuse of discretion when it upheld the standing of Magdiwang RealtyCorporation as a party to the petition for certiorari , even though it was not aparty-in-interest in the civil case before the lower court.

In the present case, respondent claims that the complaint was filed by her notonly in her personal capacity, but likewise for the benefit of the corporation.

Additionally, she avers that she has exhausted all remedies available to herbefore she instituted the case, not only to claim damages for herself but also torecover the damages caused to the company.

Under Rule 65 of the Rules of Civil Procedure, 23 when a trial court commits agrave abuse of discretion amounting to lack or excess of jurisdiction, the personaggrieved can file a special civil action for certiorari . The aggrieved parties insuch a case are the State and the private offended party or complainant. 24

In a string of cases, we consistently ruled that only a party-in-interest or those

aggrieved may file certiorari cases. It is settled that the offended parties incriminal cases have sufficient interest and personality as "person(s) aggrieved" tofile special civil action of prohibition and certiorari . 25

In Ciudad Real , cited by petitioner, we held that the appellate court committedgrave abuse of discretion when it sanctioned the standing of a corporation to joinsaid petition for certiorari , despite the finality of the trial court's denial of its




















Motion for Intervention and the subsequent Motion to Substitute and/or Join asParty/Plaintiff.

Note, however, that in Pastor, Jr. v. Court of Appeals 26 we held that ifaggrieved, even a non-party may institute a petition forcertiorari . In that case,petitioner was the holder in her own right of three mining claims and could file apetition for certiorari , the fastest and most feasible remedy since she could notintervene in the probate of her father-in-law‘s estate. 27

In the instant case, we find that the recourse of the complainant to therespondent Court of Appeals was proper. The petition was brought in her ownname and in behalf of the Corporation. Although, the corporation was not acomplainant in the criminal action, the subject of the falsification was thecorporation's project and the falsified documents were corporate documents.

Therefore, the corporation is a proper party in the petition for certiorari becausethe proceedings in the criminal case directly and adversely affected thecorporation.

We turn now to the third issue. Did the Court of Appeals and the lower court errin allowing private prosecutors to actively participate in the trial of Criminal CaseNo. 285721?

Petitioner cites the case of Tan, Jr. v. Gallardo , 28 holding that where from thenature of the offense or where the law defining and punishing the offense

charged does not provide for an indemnity, the offended party may not intervenein the prosecution of the offense.

Petitioner's contention lacks merit. Generally, the basis of civil liability arisingfrom crime is the fundamental postulate that every man criminally liable is alsocivilly liable. When a person commits a crime he offends two entities namely (1)the society in which he lives in or the political entity called the State whose lawhe has violated; and (2) the individual member of the society whose person,right, honor, chastity or property has been actually or directly injured ordamaged by the same punishable act or omission. An act or omission is felonious

because it is punishable by law, it gives rise to civil liability not so much becauseit is a crime but because it caused damage to another. Additionally, what givesrise to the civil liability is really the obligation and the moral duty of everyone torepair or make whole the damage caused to another by reason of his own act oromission, whether done intentionally or negligently. The indemnity which aperson is sentenced to pay forms an integral part of the penalty imposed by law

for the commission of the crime. 29 The civil action involves the civil liability



















arising from the offense charged which includes restitution, reparation of thedamage caused, and indemnification for consequential damages. 30

Under the Rules, where the civil action for recovery of civil liability is instituted inthe criminal action pursuant to Rule 111, the offended party may intervene by

counsel in the prosecution of the offense. 31 Rule 111(a) of the Rules of CriminalProcedure provides that, "[w]hen a criminal action is instituted, the civil actionarising from the offense charged shall be deemed instituted with the criminalaction unless the offended party waives the civil action, reserves the right toinstitute it separately, or institutes the civil action prior to the criminal action."

Private respondent did not waive the civil action, nor did she reserve the right toinstitute it separately, nor institute the civil action for damages arising from theoffense charged. Thus, we find that the private prosecutors can intervene in the

trial of the criminal action. Petitioner avers, however, that respondent's testimony in the inferior court didnot establish nor prove any damages personally sustained by her as a result ofpetitioner's alleged acts of falsification. Petitioner adds that since no personaldamages were proven therein, then the participation of her counsel as privateprosecutors, who were supposed to pursue the civil aspect of a criminal case, isnot necessary and is without basis. IHcTDA

When the civil action is instituted with the criminal action, evidence should be

taken of the damages claimed and the court should determine who are thepersons entitled to such indemnity. The civil liability arising from the crime maybe determined in the criminal proceedings if the offended party does not waiveto have it adjudged or does not reserve the right to institute a separate civilaction against the defendant. Accordingly, if there is no waiver or reservation ofcivil liability, evidence should be allowed to establish the extent of injuriessuffered. 32

In the case before us, there was neither a waiver nor a reservation made; nordid the offended party institute a separate civil action. It follows that evidence

should be allowed in the criminal proceedings to establish the civil liability arisingfrom the offense committed, and the private offended party has the right tointervene through the private prosecutors.













WHEREFORE, the instant petition is DENIED. The Decision, dated June 14, 2001,and the Resolution, dated November 20, 2001, of the Court of Appeals in CA-G.R. SP No. 57070, affirming the Order, dated October 5, 1999, of the RegionalTrial Court (RTC) of Manila, Branch 19, are AFFIRMED. Accordingly, the privateprosecutors are hereby allowed to intervene in behalf of private respondent LydiaHao in the prosecution of the civil aspect of Criminal Case No. 285721 beforeBranch 22, of Metropolitan Trial Court (MeTC) of Manila. Costs against petitioner.

SO ORDERED.

Davide, Jr., C .J ., Ynares-Santiago, Carpio and Azcuna, JJ ., concur.

Footnotes

43.

SECOND DIVISION

[G.R. No. 152392. May 26, 2005.]

EXPERTRAVEL & TOURS, INC., petitioner , vs . COURT OF APPEALS and KOREAN AIRLINES,respondents .

D E C I S I O N

CALLEJO, SR ., J p:

Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals (CA) in CA-G.R. SP No. 61000 dismissing the petitionfor certiorari and mandamus filed by Expertravel and Tours, Inc. (ETI).

The Antecedents

Korean Airlines (KAL) is a corporation established and registered in the Republicof South Korea and licensed to do business in the Philippines. Its generalmanager in the Philippines is Suk Kyoo Kim, while its appointed counsel was Atty.Mario Aguinaldo and his law firm.







On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint 2 againstETI with the Regional Trial Court (RTC) of Manila, for the collection of theprincipal amount of P260,150.00, plus attorney's fees and exemplary damages.The verification and certification against forum shopping was signed by Atty.

Aguinaldo, who indicated therein that he was the resident agent and legalcounsel of KAL and had caused the preparation of the complaint.

ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldowas not authorized to execute the verification and certificate of non-forumshopping as required by Section 5, Rule 7 of the Rules of Court. KAL opposed themotion, contending that Atty. Aguinaldo was its resident agent and wasregistered as such with the Securities and Exchange Commission (SEC) asrequired by the Corporation Code of the Philippines. It was further alleged that

Atty. Aguinaldo was also the corporate secretary of KAL. Appended to the said

opposition was the identification card of Atty. Aguinaldo, showing that he wasthe lawyer of KAL.

During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he hadbeen authorized to file the complaint through a resolution of the KAL Board ofDirectors approved during a special meeting held on June 25, 1999. Upon hismotion, KAL was given a period of 10 days within which to submit a copy of thesaid resolution. The trial court granted the motion. Atty. Aguinaldo subsequentlyfiled other similar motions, which the trial court granted.

Finally, KAL submitted on March 6, 2000 an Affidavit 3 of even date, executed byits general manager Suk Kyoo Kim, alleging that the board of directors conducteda special teleconference on June 25, 1999, which he and Atty. Aguinaldoattended. It was also averred that in that same teleconference, the board ofdirectors approved a resolution authorizing Atty. Aguinaldo to execute thecertificate of non-forum shopping and to file the complaint. Suk Kyoo Kim alsoalleged, however, that the corporation had no written copy of the aforesaidresolution.

On April 12, 2000, the trial court issued an Order 4 denying the motion to

dismiss, giving credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim thatthe KAL Board of Directors indeed conducted a teleconference on June 25, 1999,during which it approved a resolution as quoted in the submitted affidavit. CAacTH

ETI filed a motion for the reconsideration of the Order, contending that it wasinappropriate for the court to take judicial notice of the said teleconference















without any prior hearing. The trial court denied the motion in its Order 5 dated August 8, 2000.

ETI then filed a petition for certiorari and mandamus , assailing the orders of theRTC. In its comment on the petition, KAL appended a certificate signed by Atty.

Aguinaldo dated January 10, 2000, worded as follows:

SECRETARY'S/RESIDENT AGENT'S CERTIFICATE

KNOW ALL MEN BY THESE PRESENTS:

I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected andappointed Corporate Secretary and Resident Agent of KOREAN

AIRLINES, a foreign corporation duly organized and existing under andby virtue of the laws of the Republic of Korea and also duly registered

and authorized to do business in the Philippines, with office address atGround Floor, LPL Plaza Building, 124 Alfaro St., Salcedo Village, MakatiCity, HEREBY CERTIFY that during a special meeting of the Board ofDirectors of the Corporation held on June 25, 1999 at which a quorumwas present, the said Board unanimously passed, voted upon andapproved the following resolution which is now in full force and effect, towit:

RESOLVED, that Mario A. Aguinaldo and his law firmM.A. Aguinaldo & Associates or any of its lawyers arehereby appointed and authorized to take with whatever

legal action necessary to effect the collection of the unpaidaccount of Expert Travel & Tours. They are herebyspecifically authorized to prosecute, litigate, defend, signand execute any document or paper necessary to the filingand prosecution of said claim in Court, attend the Pre-TrialProceedings and enter into a compromise agreementrelative to the above-mentioned claim.

IN WITNESS WHEREOF, I have hereunto affixed my signature this 10thday of January, 1999, in the City of Manila, Philippines.

(Sgd.)

MARIO A. AGUINALDO

Resident Agent







SUBSCRIBED AND SWORN to before me this 10th day of January, 1999, Atty. Mario A. Aguinaldo exhibiting to me his Community Tax CertificateNo. 14914545, issued on January 7, 2000 at Manila, Philippines.

(Sgd.)

Doc. No. 119;ATTY. HENRY D. ADASA

Page No. 25;Notary Public

Book No. XXIVUntil December 31, 2000

Series of 2000.PTR #889583/MLA 1/3/2000 6

On December 18, 2001, the CA rendered judgment dismissing the petition, rulingthat the verification and certificate of non-forum shopping executed by Atty.

Aguinaldo was sufficient compliance with the Rules of Court. According to theappellate court, Atty. Aguinaldo had been duly authorized by the boardresolution approved on June 25, 1999, and was the resident agent of KAL. Assuch, the RTC could not be faulted for taking judicial notice of the saidteleconference of the KAL Board of Directors.

ETI filed a motion for reconsideration of the said decision, which the CA denied.Thus, ETI, now the petitioner, comes to the Court by way of petition for reviewon certiorari and raises the following issue:

DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN ITRENDERED ITS QUESTIONED DECISION AND WHEN IT ISSUED ITSQUESTIONED RESOLUTION, ANNEXES A AND B OF THE INSTANTPETITION? 7

The petitioner asserts that compliance with Section 5, Rule 7, of the Rules ofCourt can be determined only from the contents of the complaint and not bydocuments or pleadings outside thereof. Hence, the trial court committed graveabuse of discretion amounting to excess of jurisdiction, and the CA erred in

considering the affidavit of the respondent's general manager, as well as theSecretary's/Resident Agent's Certification and the resolution of the board ofdirectors contained therein, as proof of compliance with the requirements ofSection 5, Rule 7 of the Rules of Court. The petitioner also maintains that theRTC cannot take judicial notice of the said teleconference without prior hearing,nor any motion therefor. The petitioner reiterates its submission that the











teleconference and the resolution adverted to by the respondent was a merefabrication.

The respondent, for its part, avers that the issue of whether modern technologyis used in the field of business is a factual issue; hence, cannot be raised in a

petition for review on certiorari under Rule 45 of the Rules of Court. On themerits of the petition, it insists that Atty. Aguinaldo, as the resident agent andcorporate secretary, is authorized to sign and execute the certificate of non-forum shopping required by Section 5, Rule 7 of the Rules of Court, on top of theboard resolution approved during the teleconference of June 25, 1999. Therespondent insists that "technological advances in this time and age are ascommonplace as daybreak." Hence, the courts may take judicial notice that thePhilippine Long Distance Telephone Company, Inc. had provided a record ofcorporate conferences and meetings through FiberNet using fiber-optic

transmission technology, and that such technology facilitates voice and imagetransmission with ease; this makes constant communication between a foreign-based office and its Philippine-based branches faster and easier, allowing forcost-cutting in terms of travel concerns. It points out that even the E-CommerceLaw has recognized this modern technology. The respondent posits that thecourts are aware of this development in technology; hence, may take judicialnotice thereof without need of hearings. Even if such hearing is required, therequirement is nevertheless satisfied if a party is allowed to file pleadings by wayof comment or opposition thereto. DHSaCA

In its reply, the petitioner pointed out that there are no rulings on the matter ofteleconferencing as a means of conducting meetings of board of directors forpurposes of passing a resolution; until and after teleconferencing is recognizedas a legitimate means of gathering a quorum of board of directors, such cannotbe taken judicial notice of by the court. It asserts that safeguards must first beset up to prevent any mischief on the public or to protect the general public fromany possible fraud. It further proposes possible amendments to the CorporationCode to give recognition to such manner of board meetings to transact businessfor the corporation, or other related corporate matters; until then, the petitionerasserts, teleconferencing cannot be the subject of judicial notice.

The petitioner further avers that the supposed holding of a special meeting onJune 25, 1999 through teleconferencing where Atty. Aguinaldo was supposedlygiven such an authority is a farce, considering that there was no mention ofwhere it was held, whether in this country or elsewhere. It insists that theCorporation Code requires board resolutions of corporations to be submitted to



the certification must be accomplished by the party himself because he hasactual knowledge of whether or not he has initiated similar actions orproceedings in different courts or tribunals. Even his counsel may be unaware ofsuch facts. 9Hence, the requisite certification executed by the plaintiff's counselwill not suffice. 10

In a case where the plaintiff is a private corporation, the certification may besigned, for and on behalf of the said corporation, by a specifically authorizedperson, including its retained counsel, who has personal knowledge of the factsrequired to be established by the documents. The reason was explained by the

Court in National Steel Corporation v. Court of Appeals , 11 as follows:

Unlike natural persons, corporations may perform physical actions onlythrough properly delegated individuals; namely, its officers and/oragents.

xxx xxx xxx

The corporation, such as the petitioner, has no powers except thoseexpressly conferred on it by the Corporation Code and those that areimplied by or are incidental to its existence. In turn, a corporationexercises said powers through its board of directors and/or its duly-authorized officers and agents. Physical acts, like the signing ofdocuments, can be performed only by natural persons duly-authorizedfor the purpose by corporate by-laws or by specific act of the board of

directors. "All acts within the powers of a corporation may be performedby agents of its selection; and except so far as limitations or restrictionswhich may be imposed by special charter, by-law, or statutoryprovisions, the same general principles of law which govern the relationof agency for a natural person govern the officer or agent of acorporation, of whatever status or rank, in respect to his power to actfor the corporation; and agents once appointed, or members acting intheir stead, are subject to the same rules, liabilities and incapacities asare agents of individuals and private persons." ECTSDa

xxx xxx xxx

. . . For who else knows of the circumstances required in the Certificatebut its own retained counsel. Its regular officers, like its board chairmanand president, may not even know the details required therein.

Indeed, the certificate of non-forum shopping may be incorporated in thecomplaint or appended thereto as an integral part of the complaint. The rule is














that compliance with the rule after the filing of the complaint, or the dismissal ofa complaint based on its non-compliance with the rule, is impermissible.However, in exceptional circumstances, the court may allow subsequent

compliance with the rule. 12 If the authority of a party's counsel to execute acertificate of non-forum shopping is disputed by the adverse party, the former isrequired to show proof of such authority or representation.

In this case, the petitioner, as the defendant in the RTC, assailed the authority of Atty. Aguinaldo to execute the requisite verification and certificate of non-forumshopping as the resident agent and counsel of the respondent. It was, thus,incumbent upon the respondent, as the plaintiff, to allege and establish that

Atty. Aguinaldo had such authority to execute the requisite verification andcertification for and in its behalf. The respondent, however, failed to do so.

The verification and certificate of non-forum shopping which was incorporated inthe complaint and signed by Atty. Aguinaldo reads:

I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Manila, afterhaving sworn to in accordance with law hereby deposes and say: THAT

—

1.I am the Resident Agent and Legal Counsel of theplaintiff in the above entitled case and have caused thepreparation of the above complaint;

2.I have read the complaint and that all theallegations contained therein are true and correct based onthe records on files;

3.I hereby further certify that I have notcommenced any other action or proceeding involving thesame issues in the Supreme Court, the Court of Appeals,or different divisions thereof, or any other tribunal oragency. If I subsequently learned that a similar action orproceeding has been filed or is pending before theSupreme Court, the Court of Appeals, or different divisionsthereof, or any tribunal or agency, I will notify the court,tribunal or agency within five (5) days from suchnotice/knowledge.

(Sgd.)







MARIO A. AGUINALDO

Affiant

CITY OF MANILA

SUBSCRIBED AND SWORN TO before me this 30th day of August, 1999,affiant exhibiting to me his Community Tax Certificate No. 00671047issued on January 7, 1999 at Manila, Philippines.

(Sgd.)

Doc. No. 1005;ATTY. HENRY D. ADASA

Page No. 198;Notary Public

Book No. XXIUntil December 31, 2000 Series of 1999.PTR No. 320501 Mla 1/4/99 13

As gleaned from the aforequoted certification, there was no allegation that Atty. Aguinaldo had been authorized to execute the certificate of non-forum shoppingby the respondent's Board of Directors; moreover, no such board resolution wasappended thereto or incorporated therein.

While Atty. Aguinaldo is the resident agent of the respondent in the Philippines,

this does not mean that he is authorized to execute the requisite certificationagainst forum shopping. Under Section 127, in relation to Section 128 of theCorporation Code, the authority of the resident agent of a foreign corporationwith license to do business in the Philippines is to receive, for and in behalf ofthe foreign corporation, services and other legal processes in all actions andother legal proceedings against such corporation, thus:

SEC. 127.Who may be a resident agent . — A resident agent may eitherbe an individual residing in the Philippines or a domestic corporationlawfully transacting business in the Philippines: Provided , That in the

case of an individual, he must be of good moral character and of soundfinancial standing.

SEC. 128.Resident agent; service of process . — The Securities andExchange Commission shall require as a condition precedent to theissuance of the license to transact business in the Philippines by anyforeign corporation that such corporation file with the Securities andExchange Commission a written power of attorney designating some







persons who must be a resident of the Philippines, on whom anysummons and other legal processes may be served in all actions or otherlegal proceedings against such corporation, and consenting that serviceupon such resident agent shall be admitted and held as valid as if servedupon the duly-authorized officers of the foreign corporation as its home

office. 14 Under the law, Atty. Aguinaldo was not specifically authorized to execute acertificate of non-forum shopping as required by Section 5, Rule 7 of the Rules ofCourt. This is because while a resident agent may be aware of actions filedagainst his principal (a foreign corporation doing business in the Philippines),such resident may not be aware of actions initiated by its principal, whether inthe Philippines against a domestic corporation or private individual, or in thecountry where such corporation was organized and registered, against aPhilippine registered corporation or a Filipino citizen. cDSAEI

The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, wasnot specifically authorized to execute the said certification. It attempted to showits compliance with the rule subsequent to the filing of its complaint bysubmitting, on March 6, 2000, a resolution purporting to have been approved byits Board of Directors during a teleconference held on June 25, 1999, allegedlywith Atty. Aguinaldo and Suk Kyoo Kim in attendance. However, such attempt ofthe respondent casts veritable doubt not only on its claim that such ateleconference was held, but also on the approval by the Board of Directors ofthe resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum

shopping.

In its April 12, 2000 Order, the RTC took judicial notice that because of the onsetof modern technology, persons in one location may confer with other persons inother places, and, based on the said premise, concluded that Suk Kyoo Kim and

Atty. Aguinaldo had a teleconference with the respondent's Board of Directors inSouth Korea on June 25, 1999. The CA, likewise, gave credence to therespondent's claim that such a teleconference took place, as contained in the

affidavit of Suk Kyoo Kim, as well as Atty. Aguinaldo's certification.

Generally speaking, matters of judicial notice have three material requisites: (1)the matter must be one of common and general knowledge; (2) it must be welland authoritatively settled and not doubtful or uncertain; and (3) it must beknown to be within the limits of the jurisdiction of the court. The principal guidein determining what facts may be assumed to be judicially known is that of






notoriety. Hence, it can be said that judicial notice is limited to facts evidenced

by public records and facts of general notoriety. 15 Moreover, a judicially noticedfact must be one not subject to a reasonable dispute in that it is either: (1)generally known within the territorial jurisdiction of the trial court; or (2) capableof accurate and ready determination by resorting to sources whose accuracycannot reasonably be questionable. 16

Things of "common knowledge," of which courts take judicial matters coming tothe knowledge of men generally in the course of the ordinary experiences of life,or they may be matters which are generally accepted by mankind as true andare capable of ready and unquestioned demonstration. Thus, facts which areuniversally known, and which may be found in encyclopedias, dictionaries orother publications, are judicially noticed, provided, they are of such universalnotoriety and so generally understood that they may be regarded as forming part

of the common knowledge of every person. As the common knowledge of manranges far and wide, a wide variety of particular facts have been judiciallynoticed as being matters of common knowledge. But a court cannot take judicialnotice of any fact which, in part, is dependent on the existence or non-existenceof a fact of which the court has no constructive knowledge . 17

In this age of modern technology, the courts may take judicial notice thatbusiness transactions may be made by individuals through teleconferencing.Teleconferencing is interactive group communication (three or more people intwo or more locations) through an electronic medium. In general terms,

teleconferencing can bring people together under one roof even though they areseparated by hundreds of miles. 18 This type of group communication may beused in a number of ways, and have three basic types: (1) video conferencing — television-like communication augmented with sound; (2) computer conferencing

— printed communication through keyboard terminals, and (3) audio-conferencing-verbal communication via the telephone with optional capacity fortelewriting or telecopying. 19

A teleconference represents a unique alternative to face-to-face (FTF) meetings.It was first introduced in the 1960's with American Telephone and Telegraph's

Picturephone. At that time, however, no demand existed for the new technology.Travel costs were reasonable and consumers were unwilling to pay the monthlyservice charge for using the picturephone, which was regarded as more of anovelty than as an actual means for everyday communication. 20 In time, peoplefound it advantageous to hold teleconferencing in the course of business andcorporate governance, because of the money saved, among other advantagesinclude:

























1.People (including outside guest speakers) who wouldn't normallyattend a distant FTF meeting can participate.

2.Follow-up to earlier meetings can be done with relative ease and littleexpense.

3.Socializing is minimal compared to an FTF meeting; therefore,meetings are shorter and more oriented to the primary purpose of themeeting.

4.Some routine meetings are more effective since one can audio-conference from any location equipped with a telephone.

5.Communication between the home office and field staffs is maximized.

6.Severe climate and/or unreliable transportation may necessitate

teleconferencing. 7.Participants are generally better prepared than for FTF meetings.

8.It is particularly satisfactory for simple problem-solving, informationexchange, and procedural tasks.

9.Group members participate more equally in well-moderatedteleconferences than an FTF meeting. 21

On the other hand, other private corporations opt not to hold teleconferencesbecause of the following disadvantages:

1.Technical failures with equipment, including connections that aren'tmade.

2.Unsatisfactory for complex interpersonal communication, such asnegotiation or bargaining.

3.Impersonal, less easy to create an atmosphere of group rapport.

4.Lack of participant familiarity with the equipment, the medium itself,and meeting skills.

5.Acoustical problems within the teleconferencing rooms.

6.Difficulty in determining participant speaking order; frequently oneperson monopolizes the meeting.






7.Greater participant preparation time needed. HCDAac

8.Informal, one-to-one, social interaction not possible. 22

Indeed, teleconferencing can only facilitate the linking of people; it does not alter

the complexity of group communication. Although it may be easier tocommunicate via teleconferencing, it may also be easier to miscommunicate.Teleconferencing cannot satisfy the individual needs of every type of meeting. 23

In the Philippines, teleconferencing and videoconferencing of members of boardof directors of private corporations is a reality, in light of Republic Act No.8792. The Securities and Exchange Commission issued SEC MemorandumCircular No. 15, on November 30, 2001, providing the guidelines to be compliedwith related to such conferences. 24 Thus, the Court agrees with the RTC thatpersons in the Philippines may have a teleconference with a group of persons in

South Korea relating to business transactions or corporate governance. Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated ina teleconference along with the respondent's Board of Directors, the Court is notconvinced that one was conducted; even if there had been one, the Court is notinclined to believe that a board resolution was duly passed specificallyauthorizing Atty. Aguinaldo to file the complaint and execute the requiredcertification against forum shopping.

The records show that the petitioner filed a motion to dismiss the complaint on

the ground that the respondent failed to comply with Section 5, Rule 7 of theRules of Court. The respondent opposed the motion on December 1, 1999, on itscontention that Atty. Aguinaldo, its resident agent, was duly authorized to sue inits behalf. The respondent, however, failed to establish its claim that Atty.

Aguinaldo was its resident agent in the Philippines. Even the identification

card 25 of Atty. Aguinaldo which the respondent appended to its pleading merelyshowed that he is the company lawyer of the respondent's Manila RegionalOffice.

The respondent, through Atty. Aguinaldo, announced the holding of theteleconference only during the hearing of January 28, 2000; Atty. Aguinaldo thenprayed for ten days, or until February 8, 2000, within which to submit the boardresolution purportedly authorizing him to file the complaint and execute therequired certification against forum shopping. The court granted the

motion.26 The respondent, however, failed to comply, and instead prayed for 15more days to submit the said resolution, contending that it was with its main






















office in Korea. The court granted the motion per its Order 27 dated February 11,2000. The respondent again prayed for an extension within which to submit the

said resolution, until March 6, 2000. 28 It was on the said date that therespondent submitted an affidavit of its general manager Suk Kyoo Kim,

stating, inter alia , that he and Atty. Aguinaldo attended the said teleconferenceon June 25, 1999, where the Board of Directors supposedly approved thefollowing resolution:

RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of its lawyers are hereby appointed and authorized totake with whatever legal action necessary to effect the collection of theunpaid account of Expert Travel & Tours. They are hereby specificallyauthorized to prosecute, litigate, defend, sign and execute anydocument or paper necessary to the filing and prosecution of said claimin Court, attend the Pre-trial Proceedings and enter into a compromise

agreement relative to the above-mentioned claim. 29 But then, in the same affidavit, Suk Kyoo Kim declared that the respondent"do[es] not keep a written copy of the aforesaid Resolution" because no recordsof board resolutions approved during teleconferences were kept. This belied therespondent's earlier allegation in its February 10, 2000 motion for extension oftime to submit the questioned resolution that it was in the custody of its mainoffice in Korea. The respondent gave the trial court the impression that it neededtime to secure a copy of the resolution kept in Korea, only to allege later (via theaffidavit of Suk Kyoo Kim) that it had no such written copy. Moreover, Suk Kyoo

Kim stated in his affidavit that the resolution was embodied in theSecretary's/Resident Agent's Certificate signed by Atty. Aguinaldo. However, nosuch resolution was appended to the said certificate.

The respondent's allegation that its board of directors conducted ateleconference on June 25, 1999 and approved the said resolution (with Atty.

Aguinaldo in attendance) is incredible, given the additional fact that no suchallegation was made in the complaint. If the resolution had indeed beenapproved on June 25, 1999, long before the complaint was filed, the respondentshould have incorporated it in its complaint, or at least appended a copy thereof.The respondent failed to do so. It was only on January 28, 2000 that therespondent claimed, for the first time, that there was such a meeting of theBoard of Directors held on June 25, 1999; it even represented to the Court that acopy of its resolution was with its main office in Korea, only to allege later thatno written copy existed. It was only on March 6, 2000 that the respondentalleged, for the first time, that the meeting of the Board of Directors where theresolution was approved was held via teleconference.














Worse still, it appears that as early as January 10, 1999 , Atty. Aguinaldo hadsigned a Secretary's/Resident Agent's Certificate alleging that the board ofdirectors held a teleconference on June 25, 1999 . No such certificate was

appended to the complaint, which was filed on September 6, 1999. Moreimportantly, the respondent did not explain why the said certificate was signedby Atty. Aguinaldo as early as January 9, 1999, and yet was notarized one yearlater (on January 10, 2000); it also did not explain its failure to append the saidcertificate to the complaint, as well as to its Compliance dated March 6, 2000. Itwas only on January 26, 2001 when the respondent filed its comment in the CAthat it submitted the Secretary's/Resident Agent's Certificate30 dated January 10,2000.

The Court is, thus, more inclined to believe that the alleged teleconference onJune 25, 1999 never took place, and that the resolution allegedly approved bythe respondent's Board of Directors during the said teleconference was a mereconcoction purposefully foisted on the RTC, the CA and this Court, to avert thedismissal of its complaint against the petitioner.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision ofthe Court of Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. TheRegional Trial Court of Manila is hereby ORDERED to dismiss, without prejudice,the complaint of the respondent. DCAEcS

SO ORDERED.

Puno, Austria-Martinez and Chico-Nazario, JJ., concur.

Tinga, J., is out of the country.

Footnotes

44.

THIRD DIVISION

[G.R. No. 93695. February 4, 1992.]






RAMON C. LEE and ANTONIO DM.LACDAO, petitioners , vs. THE HON. COURT OF APPEALS,SACOBA MANUFACTURING CORP., PABLO GONZALES, JR.and TOMAS GONZALES, respondents .

Cayanga, Zuniga & Angel Law Offices for petitioners.

Timbol & Associates for private respondents.

SYLLABUS

1.COMMERCIAL LAW; CORPORATIONS; VOTING TRUST; DEFINED. — UnderSection 59 of the new Corporation Code which expressly recognizes voting trust

agreements, a more definite meaning may be gathered. The said provision partlyreads: "Section 59. Voting Trusts — One or more stockholders of a stockcorporation may create a voting trust for the purpose of conferring upon atrustee or trustees the right to vote and other rights pertaining to the shares fora period not exceeding five (5) years at any one time: Provided, that in the caseof a voting trust specifically required as a condition in a loan agreement, saidvoting trust may be for a period exceeding (5) years but shall automaticallyexpire upon full payment of the loan. A voting trust agreement must be inwriting and notarized, and shall specify the terms and conditions thereof. Acertified copy of such agreement shall be filed with the corporation and with the

Securities and Exchange Commission; otherwise, said agreement is ineffectiveand unenforceable. The certificate or certificates of stock covered by the votingtrust agreement shall be cancelled and new ones shall be issued in the name ofthe trustee or trustees stating that they are issued pursuant to said agreement.In the books of the corporation, it shall be noted that the transfer in the name ofthe trustee or trustees is made pursuant to said voting trust agreement."

2.ID.; ID.; VOTING TRUST AGREEMENT; DEFINED. — By its very nature, avoting trust agreement results in the separation of the voting rights of astockholder from his other rights such as the right to receive dividends, the right

to inspect the books of the corporation, the right to sell certain interests in theassets of the corporation and other rights to which a stockholder may be entitleduntil the liquidation of the corporation. However, in order to distinguish a votingtrust agreement from proxies and other voting pools and agreements, it mustpass three criteria or tests, namely: (1) that the voting rights of the stock areseparated from the other attributes of ownership; (2) that the voting rightsgranted are intended to be irrevocable for a definite period of time; and (3) that



the principal purpose of the grant of voting rights is to acquire voting control ofthe corporation. (5 Fletcher, Cylopedia of the Law on Private Corporations ,section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F. Supp. 538)

3.ID.; ID.; ID.; EFFECT AS TO VOTING RIGHTS; CRITERIA TO DISTINGUISH IT

FROM OTHER AGREEMENTS. — The law simply provides that a voting trustagreement is an agreement in writing whereby one or more stockholders of acorporation consent to transfer his or their shares to a trustee in order to vest inthe latter voting or other rights pertaining to said shares for a period notexceeding five years upon the fulfillment of statutory conditions and such otherterms and conditions specified in the agreement. The five year-period may beextended in cases where the voting trust is executed pursuant to a loanagreement whereby the period is made contingent upon full payment of theloan.

4.ID.; ID.; ID.; LIMITATIONS THEREON. — Under section 59 of the CorporationCode, supra , a voting trust agreement may confer upon a trustee not only thestockholder's voting rights but also other rights pertaining to his shares as longas the voting trust agreement is not entered "for the purpose of circumventingthe law against monopolies and illegal combinations in restraint of trade or usedfor purposes of fraud." (section 59, 5th paragraph of the Corporation Code).Thus, the traditional concept of a voting trust agreement primarily intended tosingle out a stockholder's right to vote from his other rights as such and madeirrevocable for a limited duration may in practice become a legal device whereby

a transfer of the stockholders shares is effected subject to the specific provisionof the voting trust agreement. The execution of a voting trust agreement,therefore, may create a dichotomy between the equitable or beneficial ownershipof the corporate shares of a stockholder, on the one hand, and the legal titlethereto on the other hand.

5.ID.; ID.; ID.; EFFECT THEREOF ON THE STATUS OF TRANSFERRINGSTOCKHOLDERS. — Both under the old and the new Corporation Codes there isno dispute as to the most immediate effect of a voting trust agreement on thestatus of a stockholder who is a party to its execution — from legal title holder or

owner of the shares subject of the voting trust agreement, he becomes theequitable or beneficial owner. (Salonga , Philippine Law on Private Corporations ,1958 ed., p. 268; Pineda and Carlos, the Law on Private Corporations andCorporate Practice , 1969 ed., p. 175; Campos and Lopez-Campos, TheCorporation Code ; Comments , Notes & Selected Cases , 1981 ed., p. 386;

Agbayani, Commentaries and Jurisprudence on the Commercial Laws of thePhilippines , Vol. 3, 1988 ed., p. 536.



6.ID.; ID.; ID.; RIGHTS GRANTED THEREIN AUTOMATICALLY EXPIRE AT THEEND OF AGREED PERIOD. — The 6th paragraph of section 59 of the newCorporation Code which reads: "Unless expressly renewed, all rights granted in avoting trust agreement shall automatically expire at the end of the agreedperiod, and the voting trust certificates as well as the certificates of stock in thename of the trustee or trustees shall thereby be deemed cancelled and newcertificates of stock shall be reissued in the name of the transferors."

7.ID.; ID.; ID.; ELIGIBILITY OF A DIRECTOR UNDER THE OLD CORPORATIONCODE AND UNDER THE NEW CORPORATION CODE. — Under the oldCorporation Code, the eligibility of a director, strictly speaking, cannot beadversely affected by the simple act of such director being a party to a votingtrust agreement inasmuch as he remains owner (although beneficial or equitableonly) of the shares subject of the voting trust agreement pursuant to which a

transfer of the stockholder's shares in favor of the trustee is required (section 36of the old Corporation Code). No disqualification arises by virtue of the phrase "inhis own right" provided under the old Corporation Code. With the omission of thephrase "in his own right" the election of trustees and other persons who in factare not the beneficial owners of the shares registered in their names on thebooks of the corporation becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296). Hence, this is a clear indication that in order to beeligible as a director, what is material is the legal title to, not beneficialownership of, the stock as appearing on the books of the corporation (2 Fletcher,Cyclopedia of the Law of Private Corporations, section 300, p. 92 [1969] citing

People v . Lihme, 269 Ill. 351, 109 N.E. 1051). 8.ID.; ID.; REPRESENTATIVES THEREOF AUTHORIZED TO RECEIVE COURTPROCESSES ON ITS BEHALF; RATIONALE. — Under section 13, Rule 14 of theRevised Rules of Court, it is provided that: "Section. 13. Service upon privatedomestic corporation or partnership. — If the defendant is a corporationorganized under the laws of the Philippines or a partnership duly registered,service may be made on the president, manager, secretary, cashier, agent orany of its directors. It is a basic principle in Corporation Law that a corporationhas a personality separate and distinct from the officers or members who

compose it. (See Sulo ng Bayan Inc. v . Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v . Department of Labor and Employment, et al., G.R. Nos. 83257-58,December 21, 1990). Thus, the above role on service of processes on acorporation enumerates the representatives of a corporation who can validlyreceive court processes on its behalf. Not every stockholder or officer can bindthe corporation considering the existence of a corporate entity separate fromthose who compose it. The rationale of the aforecited rule is that service must be



made on a representative so integrated with the corporation sued as to make it apriori supposable that he will realize his responsibilities and know what he shoulddo with any legal papers served on him. (Far Corporation v . Francisco, 146 SCRA197 1986] citing Villa Rey Transit, Inc. v . Far East Motor Corp., 81 SCRA 303[1978]).

9.ID.; ID.; BOUND ONLY BY ACTS WITHIN THE SCOPE OF ITS OFFICER'S OR AGENT'S AUTHORITY. — The general principle that a corporation can only bebound by such acts which are within the scope of its officers' or agents'authority. (see Vicente v . Geraldez, 52 SCRA 210 [1973])

D E C I S I O N

GUTIERREZ, JR., J p:

What is the nature of the voting trust agreement executed between two partiesin this case? Who owns the stocks of the corporation under the terms of thevoting trust agreement? How long can a voting trust agreement remain valid andeffective? Did a director of the corporation cease to be such upon the creation ofthe voting trust agreement? These are the questions the answers to which arenecessary in resolving the principal issue in this petition for certiorari — whetheror not there was proper service of summons on Alfa Integrated Textile Mills

(ALFA, for short), through the petitioners as president and vice-president,allegedly, of the subject corporation after the execution of a voting trustagreement between ALFA and the Development Bank of the Philippines (DBP, forshort).

From the records of the instant case, the following antecedent facts appear:

On November 15, 1985, a complaint for a sum of money was filed by theInternational Corporate Bank, Inc. against the private respondents who, in turn,filed a third party complaint against ALFA and the petitioners on March 17, 1986.

On September 17, 1987, the petitioners filed a motion to dismiss the third partycomplaint which the Regional Trial Court of Makati, Branch 58 denied in an Orderdated June 27, 1988.



On July 18, 1988, the petitioners filed their answer to the third party complaint.

Meanwhile, on July 12, 1988, the trial issued an order requiring the issuance ofan alias summons upon ALFA through the DBP as a consequence of thepetitioners' letter informing the court that the summons for ALFA was

erroneously served upon them considering that the management of ALFA hadbeen transferred to the DBP.

In a manifestation dated July 22, 1988, the DBP claimed that it was notauthorized to receive summons on behalf of ALFA since the DBP had not takenover the company which has a separate and distinct corporate personality andexistence.

On August 4, 1988, the trial court issued an order advising the privaterespondents to take the appropriate steps to serve the summons to ALFA.

On August 16, 1988, the private respondents filed a Manifestation and Motion forthe Declaration of Proper Service of Summons which the trial court granted on

August 17, 1988.

On September 12, 1988, the petitioners filed a motion for reconsiderationsubmitting that the Rule 14, section 13 of the Revised Rules of Court is notapplicable since they were no longer officers of ALFA and the privaterespondents should have availed of another mode of service under Rule 14,Section 16 of the said Rules, i.e., through publication to effect proper serviceupon ALFA.

In their Comment to the Motion for Reconsideration dated September 27, 1988,the private respondents argued that the voting trust agreement dated March 11,1981 did not divest the petitioners of their positions as president and executivevice-president of ALFA so that service of summons upon ALFA through thepetitioners as corporate officers was proper.

On January 2, 1989, the trial court upheld the validity of the service of summonson ALFA through the petitioners, thus, denying the latter's motion forreconsideration and requiring ALFA to file its answer through the petitioners asits corporate officers.

On January 19, 1989, a second motion for reconsideration was filed by thepetitioners reiterating their stand that by virtue of the voting trust agreementthey ceased to be officers and directors of ALFA, hence, they could no longerreceive summons or any court processes for or on behalf of ALFA. In support of



In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990 erroneously applying the rule that the period duringwhich a motion for reconsideration has been pending must be deducted from the15-day period to appeal. However, in its Resolution dated January 3, 1991, thepublic respondent set aside the aforestated entry of judgment after furtherconsidering that the rule it relied on applies to appeals from decisions of theRegional Trial Courts to the Court of Appeals, not to appeals from its decision tous pursuant to our ruling in the case of Refractories Corporation of thePhilippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo , pp.249-250)

In their memorandum, the petitioners present the following arguments, to wit:

"(1)that the execution of the voting trust agreement by a stockholderwhereby all his shares to the corporation have been transferred to the

trustee deprives the stockholder of his position as director of thecorporation; to rule otherwise, as the respondent Court of Appeals did,would be violative of section 23 of the Corporation Code (Rollo , pp. 270-273); and

(2)that the petitioners were no longer acting or holding any of thepositions provided under Rule 14, Section 13 of the Rules of Courtauthorized to receive service of summons for and in behalf of the privatedomestic corporation so that the service of summons on ALFA effectedthrough the petitioners is not valid and ineffective; to maintain the

respondent Court of Appeals' position that ALFA was properly served itssummons through the petitioners would be contrary to the generalprinciple that a corporation can only be bound by such acts which arewithin the scope of its officers' or agents' authority (Rollo , pp. 273-275)

In resolving the issue of the propriety of the service of summons in the instantcase, we dwell first on the nature of a voting trust agreement and theconsequent effects upon its creation in the light of the provisions of theCorporation Code.

A voting trust is defined in Ballentine's Law Dictionary as follows:

"(a)trust created by an agreement between a group of the stockholdersof a corporation and the trustee or by a group of identical agreementsbetween individual stockholders and a common trustee, whereby it isprovided that for a term of years, or for a period contingent upon acertain event, or until the agreement is terminated, control over thestock owned by such stockholders, either for certain purposes or for all



purposes, is to be lodged in the trustee, either with or without areservation to the owners, or persons designated by them, of the powerto direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19

Am J 2d Corp. sec. 685)."

Under Section 59 of the new Corporation Code which expressly recognizes votingtrust agreements, a more definite meaning may be gathered. The said provisionpartly reads:

"Section 59.Voting Trusts. — One or more stockholders of a stockcorporation may create a voting trust for the purpose of conferring upona trustee or trustees the right to vote and other rights pertaining to theshares for a period not exceeding five (5) years at any one time:Provided, that in the case of a voting trust specifically required as acondition in a loan agreement, said voting trust may be for a period

exceeding (5) years but shall automatically expire upon full payment ofthe loan. A voting trust agreement must be in writing and notarized, andshall specify the terms and conditions thereof. A certified copy of suchagreement shall be filed with the corporation and with the Securities andExchange Commission; otherwise, said agreement is ineffective andunenforceable. The certificate or certificates of stock covered by thevoting trust agreement shall be cancelled and new ones shall be issuedin the name of the trustee or trustees stating that they are issuedpursuant to said agreement. In the books of the corporation, it shall benoted that the transfer in the name of the trustee or trustees is madepursuant to said voting trust agreement."

By its very nature, a voting trust agreement results in the separation of thevoting rights of a stockholder from his other rights such as the right to receivedividends, the right to inspect the books of the corporation, the right to sellcertain interests in the assets of the corporation and other rights to which astockholder may be entitled until the liquidation of the corporation. However, inorder to distinguish a voting trust agreement from proxies and other voting poolsand agreements, it must pass three criteria or tests, namely: (1) that the votingrights of the stock are separated from the other attributes of ownership; (2) thatthe voting rights granted are intended to be irrevocable for a definite period of

time; and (3) that the principal purpose of the grant of voting rights is to acquirevoting control of the corporation. (5 Fletcher, Cylopedia of the Law on PrivateCorporations , section 2075 [1976] p. 331 citing Tankersly v. Albright , 374 F.Supp. 538)

Under Section 59 of the Corporation Code, supra , a voting trust agreement mayconfer upon a trustee not only the stockholder's voting rights but also other



rights pertaining to his shares as long as the voting trust agreement is notentered "for the purpose of circumventing the law against monopolies and illegalcombinations in restraint of trade or used for purposes of fraud." (section 59, 5thparagraph of the Corporation Code). Thus, the traditional concept of a votingtrust agreement primarily intended to single out a stockholder's right to votefrom his other rights as such and made irrevocable for a limited duration may inpractice become a legal device whereby a transfer of the stockholder's shares iseffected subject to the specific provision of the voting trust agreement.

The execution of a voting trust agreement, therefore, may create a dichotomybetween the equitable or beneficial ownership of the corporate shares of astockholder, on the one hand, and the legal title thereto on the other hand.

The law simply provides that a voting trust agreement is an agreement in writingwhereby one or more stockholders of a corporation consent to transfer his ortheir shares to a trustee in order to vest in the latter voting or other rightspertaining to said shares for a period not exceeding five years upon thefulfillment of statutory conditions and such other terms and conditions specifiedin the agreement. The five year-period may be extended in cases where thevoting trust is executed pursuant to a loan agreement whereby the period ismade contingent upon full payment of the loan.

In the instant case, the point of controversy arises from the effects of thecreation of the voting trust agreement. The petitioners maintain that with theexecution of the voting trust agreement between them and the otherstockholders of ALFA, as one party, and the DBP, as the other party, the formerassigned and transferred all their shares in ALFA to DBP, as trustee. They arguethat by virtue of the voting trust agreement the petitioners can no longer beconsidered directors of ALFA. In support of their contention, the petitionersinvoke section 23 of the Corporation Code which provides, in part, that:

"Every director must own at least one (1) share of the capital stock ofthe corporation of which he is a director which share shall stand in hisname on the books of the corporation. Any director who ceases to bethe owner of at least one (1) share of the capital stock of thecorporation of which he is a director shall thereby cease to be director. xx x." (Rollo , p. 270)

The private respondents, on the contrary, insist that the voting trust agreementbetween ALFA and the DBP had all the more safeguarded the petitioners'



Under the old Corporation Code, the eligibility of a director, strictly speaking,cannot be adversely affected by the simple act of such director being a party to avoting trust agreement inasmuch as he remains owner (although beneficial orequitable only) of the shares subject of the voting trust agreement pursuant towhich a transfer of the stockholder's shares in favor of the trustee is required(section 36 of the old Corporation Code). No disqualification arises by virtue ofthe phrase "in his own right" provided under the old Corporation Code.

With the omission of the phrase "in his own right" the election of trustees andother persons who in fact are not the beneficial owners of the shares registeredin their names on the books of the corporation becomes formally legalized (seeCampos and Lopez-Campos, supra , p. 296). Hence, this is a clear indication thatin order to be eligible as a director, what is material is the legal title to, notbeneficial ownership of, the stock as appearing on the books of the corporation

(2 Fletcher, Cyclopedia of the Law of Private Corporations , section 300, p. 92[1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).

The facts of this case show that the petitioners, by virtue of the voting trustagreement executed in 1981 disposed of all their shares through assignment anddelivery in favor of the DBP, as trustee . Consequently, the petitioners ceased toown at least one share standing in their names on the books of ALFA as requiredunder Section 23 of the new Corporation Code. They also ceased to haveanything to do with the management of the enterprise. The petitioners ceased tobe directors. Hence, the transfer of the petitioners' shares to the DBP created

vacancies in their respective positions as directors of ALFA. The transfer ofshares from the stockholders of ALFA to the DBP is the essence of the subjectvoting trust agreement as evident from the following stipulations:

"1.The TRUSTORS hereby assign and deliver to the TRUSTEE thecertificate of the shares of stocks owned by them respectively and shalldo all things necessary for the transfer of their respective shares to theTRUSTEE on the books of ALFA.

2.The TRUSTEE shall issue to each of the TRUSTORS a trust certificatefor the number of shares transferred, which shall be transferable in the

same manner and with the same effect as certificates of stock subject tothe provisions of this agreement;

3.The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or special, upon any resolution, matter or business thatmay be submitted to any such meeting, and shall possess in that respect



the same powers as owners of the equitable as well as the legal title tothe stock ;

4.The TRUSTEE may cause to be transferred to any person one share ofstock for the purpose of qualifying such person as director of ALFA, and

cause a certificate of stock evidencing the share so transferred to beissued in the name of such person;

xxx xxx xxx

9.Any stockholder not entering into this agreement may transfer hisshares to the same trustee, without the need of revising this agreement,and this agreement shall have the same force and effect upon that saidstockholder." (CARollo , pp. 137-138; Underlining supplied)

Considering that the voting trust agreement between ALFA and the DBPtransferred legal ownership of the stocks covered by the agreement to the DBPas trustee, the latter became the stockholder of record with respect to the saidshares of stocks. In the absence of a showing that the DBP had caused to betransferred in their names one share of stock for the purpose of qualifying asdirectors of ALFA, the petitioners can no longer be deemed to have retained theirstatus as officers of ALFA which was the case before the execution of the subjectvoting trust agreement. There appears to be no dispute from the records thatDBP has taken over full control and management of the firm.

Moreover, in the Certification dated January 24, 1989 issued by the DBP throughone Elsa A. Guevarra, Vice-President of its Special Accounts Department II,Remedial Management Group, the petitioners were no longer included in the listof officers of ALFA "as of April 1982". (CA Rollo , pp. 140-142)

Inasmuch as the private respondents in this case failed to substantiate theirclaim that the subject voting trust agreement did not deprive the petitioners oftheir position as directors of ALFA, the public respondent committed a reversibleerror when it ruled that:

". . . while the individual respondents (petitioners Lee and Lacdao) mayhave ceased to be president and vice-president, respectively, of thecorporation at the time of service of summons on them on August 21,1987, they were at least up to that time, still directors . . .".

The aforequoted statement is quite inaccurate in the light of the express termsof Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFAand the DBP, were aware at the time of the execution of the agreement that by



virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA werestripped of their positions as such.

There can be no reliance on the inference that the five-year period of the votingtrust agreement in question had lapsed in 1986 so that the legal title to the

stocks covered by the said voting trust agreement ipso facto reverted to thepetitioners as beneficial owners pursuant to the 6th paragraph of section 59 ofthe new Corporation Code which reads:

"Unless expressly renewed, all rights granted in a voting trust agreementshall automatically expire at the end of the agreed period, and thevoting trust certificates as well as the certificates of stock in the name ofthe trustee or trustees shall thereby be deemed cancelled and new

certificates of stock shall be reissued in the name of the transferors." On the contrary, it is manifestly clear from the terms of the voting trustagreement between ALFA and the DBP that the duration of the agreement iscontingent upon the fulfillment of certain obligations of ALFA with the DBP. Thisis shown by the following portions of the agreement.

"WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its creditis secured by a first mortgage on the manufacturing plant of saidcompany;

WHEREAS, ALFA is also indebted to other creditors for various financialaccommodations and because of the burden of these obligations isencountering very serious difficulties in continuing with its operations.

WHEREAS, in consideration of additional accommodations from theTRUSTEE, ALFA has offered and the TRUSTEE has accepted participationin the management and control of the company and to assure theaforesaid participation by the TRUSTEE, the TRUSTORS have agreed toexecute a voting trust covering their shareholding in ALFA in favor of theTRUSTEE;

AND WHEREAS, DBP, is willing to accept the trust for the purposeaforementioned.

NOW, THEREFORE, it is hereby agreed as follows:

xxx xxx xxx



6.This Agreement shall last for a period of Five (5) years, and isrenewable for as long as the obligations of ALFA with DBP, or anyportion thereof, remains outstanding;' (CA Rollo , pp. 137-138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP

would not have transferred all its rights, titles and interests in ALFA "effectiveJune 30, 1986" to the national government through the Asset Privatization Trust(APT) as attested to in a Certification dated January 24, 1989 of the VicePresident of the DBP's Special Accounts Department II. In the same certification,it is stated that the DBP, from 1987 until 1989, had handled APT's account whichincluded ALFA's assets pursuant to a management agreement by and betweenthe DBP and APT. (CA Rollo , p. 142) Hence, there is evidence on record that atthe time of the service of summons on ALFA through the petitioners on August21, 1987, the voting trust agreement in question was not yet terminated so thatthe legal title to the stocks of ALFA, then, still belonged to the DBP.

In view of the foregoing, the ultimate issue of whether or not there was properservice of summons on ALFA through the petitioners is readily answered in thenegative.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

"Sec. 13.Service upon private domestic corporation or partnership. — Ifthe defendant is a corporation organized under the laws of thePhilippines or a partnership duly registered, service may be made on the

president, manager, secretary, cashier, agent or any of its directors." It is a basic principle in Corporation Law that a corporation has a personalityseparate and distinct from the officers or members who compose it. (See Sulo ngBayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v. Departmentof Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990).Thus, the above rule on service of processes on a corporation enumerates therepresentatives of a corporation who can validly receive court processes on itsbehalf. Not every stockholder or officer can bind the corporation considering theexistence of a corporate entity separate from those who compose it.

The rationale of the aforecited rule is that service must be made on arepresentative so integrated with the corporation sued as to make it apriori supposable that he will realize his responsibilities and know what he shoulddo with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA197 1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 303[1978]).



The petitioners in this case do not fall under any of the enumerated officers. Theservice of summons upon ALFA, through the petitioners, therefore, is not valid.To rule otherwise, as correctly argued by the petitioners, will contravene thegeneral principle that a corporation can only be bound by such acts which arewithin the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52SCRA 210 [1973].)

WHEREFORE, premises considered, the petition is hereby GRANTED. Theappealed decision dated March 19, 1990 and the Court of Appeals' resolution ofMay 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October17, 1989 issued by the Regional Trial Court of Makati, Branch 58 areREINSTATED.

SO ORDERED.

Feliciano, Bidin, Davide, Jr . and Romero, JJ., concur.

45.

SPECIAL SECOND DIVISION

[G.R. No. 144476. April 8, 2003.]

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L.ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG

ALONZO, petitioners , vs . DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU,LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENTCORP., MASAGANA TELAMART, INC., REGISTER OF DEEDSOF PASAY CITY, and the SECURITIES AND EXCHANGECOMMISSION, respondents .

[G.R. No. 144629. April 8, 2003.]

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU,D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, andINTRALAND RESOURCES DEVELOPMENTCORP., petitioners , vs . ONG YONG, JUANITA TAN ONG,



WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIET. ONG, and JULIA ONG ALONZO, respondents .

Feria Feria Lugtu La O'Noche for petitioners.

Estelito P. Mendoza for petitioners.

Gonzales Batiller Bilog & Asso. for W. Ong.

Tan Acut & Lopez for respondents.

Aquilino L. Pimentel III for Landlink, etc.

Arturo Santos for Masagana.

SYNOPSIS

In these consolidated petitions, the Ongs moved for reconsideration of theFebruary 1, 2002 Decision of the Supreme Court affirming with modification theOctober 5, 1999 Decision of the Court of Appeals, which in turn upheld, likewisewith modification, the decision of the SEC en banc dated September 11, 1998,which confirmed the unilateral rescission by the Tius of the Pre-Subscription

Agreement between them and the Ongs. The Tius, on the other hand, moved forthe issuance of a writ of execution of the February 1, 2002 decision of the Court.

Movants Ong argued that specific performance and not rescission was the properremedy under the premises. According to them, their alleged breach of the Pre-Subscription Agreement was, at most casual, which did not justify the rescissionof the contract. They claimed that it was the Tius who were guilty offundamental violation in failing to remit funds to FLADC and diverting the sameto their MATTERCO account. They alleged that in view of the findings that bothparties were guilty of violating their Agreement, neither of them could resort torescission under the principle of pari delicto . The Ongs further argued that

assuming rescission to be proper, they should be given the proportionate shareof the mall.

In reversing itself, the Court ruled that the Tius could not legally rescind the Pre-Subscription Agreement. According to the Court, although the Tius wereadversely affected by the Ong's unwillingness to let them assume the positionsof Vice-President and Treasurer of the Corporation, rescission due to breach of



contract was definitely a wrong remedy for their personal grievances. TheCorporation Code, SEC rules and even the Rules of Court provide for appropriateadequate intra-corporate remedies, other than rescission, in situations like this.Rescission is certainly not one of them, especially if the party asking for it has nolegal personality to do so and the requirements of the law therefor have notbeen met. A contrary doctrine will tread on extremely dangerous ground becauseit will allow just any stockholder, for just about any real or imagined offense, todemand rescission of his subscription and call for the distribution of some part ofthe corporate assets to him without complying with the requirements of theCorporation Code. Hence, the Court held that the Tius, in their personalcapacities, cannot seek the ultimate and extraordinary remedy of rescission ofthe subject agreement based on a less than substantial breach of thesubscription contract. Moreover, the Court found that Masagana Citimall wouldnot be what it has become today were it not for the timely infusion of P190

million by the Ongs in 1994. Without the Ongs, the Tius would have losteverything they originally invested in said mall. Thus, it would be totally againstall rules of justice, fairness and equity to deprive the Ongs of their interest onpetty and tenuous grounds. Accordingly, the Court declared null and void theunilateral rescission by the Tius of the subject Pre-Subscription Agreement. Itdenied Tius' motion for issuance of a writ of execution for being moot. EHTIcD

SYLLABUS

1.REMEDIAL LAW; MOTIONS; MOTION FOR RECONSIDERATION; NOT PRO-FORMA FOR THE REASON ALONE THAT IT REITERATES THE ARGUMENTSEARLIER PASSED UPON AND REJECTED BY THE APPELLATE COURT. — Theprocedural rule on pro-forma motions pointed out by the Tius should not beblindly applied to meritorious motions for reconsideration. As long as the sameadequately raises a valid ground (i.e., the decision or final order is contrary tolaw), this Court has to evaluate the merits of the arguments to prevent an unjustdecision from attaining finality. In Security Bank and Trust Company vs. Cuenca ,we ruled that a motion for reconsideration is not pro forma for the reason alonethat it reiterates the arguments earlier passed upon and rejected by the

appellate court. We explained there that a movant may raise the samearguments, if only to convince this Court that its ruling was erroneous. Moreover,the rule (that a motion is pro-forma if it only repeats the arguments in theprevious pleadings) will not apply if said arguments were not squarely passedupon and answered in the decision sought to be reconsidered. In the case atbar, no ruling was made on some of the petitioner Ongs' arguments . Forinstance, no clear ruling was made on why an order distributing corporate assets



and property to the stockholders would not violate the statutory preconditionsfor corporate dissolution or decrease of authorized capital stock. Thus, it wouldserve the ends of justice to entertain the subject motion for reconsideration sincesome important issues therein, although mere repetitions, were not consideredor clearly resolved by this Court.

2.COMMERCIAL LAW; CORPORATION LAW; CORPORATIONS; SUBSCRIPTIONCONTRACT; A PARTY WHO HAS NOT TAKEN PART IN THE TRANSACTIONCANNOT SUE OR BE SUED FOR PERFORMANCE OR FOR CANCELLATIONTHEREOF, UNLESS HE SHOWS THAT HE HAS A REAL INTEREST AFFECTEDTHEREBY. — A subscription contract necessarily involves the corporation as oneof the contracting parties since the subject matter of the transaction is propertyowned by the corporation — its shares of stock. Thus, the subscription contract(denominated by the parties as Pre-Subscription Agreement) whereby the Ongs

invested P100 million for 1,000,000 shares of stock was, from the viewpoint ofthe law, one between the Ongs and FLADC, not between the Ongs and the Tius.Otherwise stated, the Tius did not contract in their personal capacities with theOngs since they were not selling any of their own shares to them. It was FLADCthat did. Considering therefore that the real contracting parties to thesubscription agreement were FLADC and the Ongs alone, a civil case forrescission on the ground of breach of contract filed by the Tius m their personalcapacities will not prosper. Assuming it had valid reasons to do so, only FLADC(and certainly not the Tius) had the legal personality to file suit rescinding thesubscription agreement with the Ongs inasmuch as it was the real party in

interest therein. Article 1311 of the Civil Code provides that "contracts take effectonly between the parties, their assigns and heirs. . ." Therefore, a party who hasnot taken part in the transaction cannot sue or be sued for performance or forcancellation thereof, unless he shows that he has a real interest affectedthereby.

3.ID.; ID.; ID.; ID.; RESCISSION BASED ON BREACH OF CONTRACT NOTPROPER REMEDY WHERE PARTY ASKING FOR IT HAS NO LEGAL PERSONALITYTO DO SO AND THE REQUIREMENTS OF THE LAW THEREFOR HAVE NOT BEENMET. — However, although the Tius were adversely affected by the Ongs'

unwillingness to let them assume their positions, rescission due to breach ofcontract is definitely the wrong remedy for their personal grievances. TheCorporation Code, SEC rules and even the Rules of Court provide for appropriateand adequate intra-corporate remedies, other than rescission, in situations likethis . Rescission is certainly not one of them, specially if the party asking for it hasno legal personality to do so and the requirements of the law therefor have notbeen met. A contrary doctrine will tread on extremely dangerous ground because



it will allow just any stockholder, for just about any real or imagined offense, todemand rescission of his subscription and call for the distribution of some part ofthe corporate assets to him without complying with the requirements of theCorporation Code. Hence, the Tius, in their personal capacities, cannot seek theultimate and extraordinary remedy of rescission of the subject agreement basedon a less than substantial breach of subscription contract. Not only are they notparties to the subscription contract between the Ongs and FLADC; they also haveother available and effective remedies under the law.

4.ID.; ID.; ID.; ID.; RESCISSION THEREOF WILL RESULT IN THE PREMATURELIQUIDATION OF THE CORPORATION IN CASE AT BAR. — Contrary to the Tius'allegation, rescission will, in the final analysis, result in the premature liquidationof the corporation without the benefit of prior dissolution in accordance withSections 117, 118, 119 and 120 of the Corporation Code. The Tius maintain that

rescinding the subscription contract is not synonymous to corporate liquidationbecause all rescission will entail would be the simple restoration of the status quoante and a return to the two groups of their cash and property contributions. Wewish it were that simple. Very noticeable is the fact that the Tius do not explainwhy rescission in the instant case will not effectively result in liquidation. TheTius merely refer in cavalier fashion to the end-result of rescission (whichincidentally is 100% favorable to them) but turn a blind eye to its unfair,inequitable and disastrous effect on the corporation, its creditors and theOngs. DAcaIE

5.ID.; ID.; ID.; ID.; RESCISSION THEREOF UNWARRANTED IN CASE AT BAR. — After all is said and done, no one can close his eyes to the fact that theMasagana Citimall would not be what it has become today were it not for thetimely infusion of P190 million by the Ongs in 1994. There are no ifs or butsabout it. Without the Ongs, the Tius would have lost everything they originallyinvested in said mall. If only for this and the fact that this Resolution can trulypave the way for both groups to enjoy the fruits of their investments — assuming good faith and honest intentions — we cannot allow the rescission ofthe subject subscription agreement. The Ongs' shortcomings were far fromserious and certainly less than substantial; they were in fact remediable and

correctable under the law. It would be totally against all rules of justice, fairnessand equity to deprive the Ongs of their interests on petty and tenuous grounds.

6.ID.; ID.; ID.; PIERCING THE VEIL OF CORPORATE FICTION; NOTWARRANTED ABSENT PROOF THAT THE CORPORATION IS BEING USED AS A



from exercising her function as such. The records show that the President,Wilson Ong, supervised the collection and receipt of rentals in the MasaganaCitimall; that he ordered the same to be deposited in the bank; and that he heldon to the cash and properties of the corporation. Section 25 of the CorporationCode prohibits the President from acting concurrently as Treasurer of thecorporation. The rationale behind the provision is to ensure the effectivemonitoring of each officer's separate functions.

9.ID.; ID.; ID.; TRUST FUND DOCTRINE; ELABORATED. — All thisnotwithstanding, granting but not conceding that the Tius possess the legalstanding to sue for to rescission based on breach of contract, said action willnevertheless still not prosper since rescission will violate the Trust Fund Doctrineand the procedures for the valid distribution of assets and property under theCorporation Code. The Trust Fund Doctrine, first enunciated by this Court in the

1923 case of Philippine Trust Co. vs. Rivera , provides that subscriptions to thecapital stock of a corporation constitute a fund to which the creditors have aright to look for the satisfaction of their claims. This doctrine is the underlyingprinciple in the procedure for the distribution of capital assets, embodied in theCorporation Code, which allows the distribution of corporate capital only in threeinstances: (1) amendment of the Articles of Incorporation to reduce theauthorized capital stock, (2) purchase of redeemable shares by the corporation,regardless of the existence of unrestricted retained earnings, and (3) dissolutionand eventual liquidation of the corporation. Furthermore, the doctrine isarticulated in Section 41 on the power of a corporation to acquire its own shares

and in Section 122 on the prohibition against the distribution of corporate assetsand property unless the stringent requirements therefor are complied with.

10.ID.; ID.; ID.; DISTRIBUTION OF CORPORATE ASSETS AND PROPERTYCANNOT BE MADE TO DEPEND ON THE WHIMS AND CAPRICES OF THESTOCKHOLDERS, OFFICERS OR DIRECTORS OR EARNEST DESIRE OF THECOURT A QUO TO PREVENT FURTHER SQUABBLES AND FUTURE LITIGATIONS.

— The distribution of corporate assets and property cannot be made to dependon the whims and caprices of the stockholders, officers or directors of thecorporation, or even, for that matter, on the earnest desire of the court a quo "to

prevent further squabbles and future litigations" unless the indispensableconditions and procedures for the protection of corporate creditors are followed.Otherwise, the "corporate peace" laudably hoped for by the court will remainnothing but a dream because this time, it will be the creditors' turn to engage in"squabbles and litigations" should the court order an unlawful distribution inblatant disregard of the Trust Fund Doctrine. In the instant case, the rescissionof the Pre-Subscription Agreement will effectively result in the unauthorized



distribution of the capital assets and property of the corporation, therebyviolating the Trust Fund Doctrine and the Corporation Code, since rescission of asubscription agreement is not one of the instances when distribution of capitalassets and property of the corporation is allowed.

11.ID.; ID.; ID.; DECREASE OF CAPITAL STOCK; FORMAL REQUIREMENTS; NOTCOMPLIED WITH IN CASE AT BAR. — The Tius' case for rescission cannot validlybe deemed a petition to decrease capital stock because such action nevercomplied with the formal requirements for decrease of capital stock underSection 33 of the Corporation Code. No majority vote of the board of directorswas ever taken. Neither was there any stockholders meeting at which theapproval of stockholders owning at least two-thirds of the outstanding capitalstock was secured. There was no revised treasurer's affidavit and no proof thatsaid decrease will not prejudice the creditors' rights. On the contrary, all their

pleadings contained were alleged acts of violations by the Ongs to justify anorder of rescission. Furthermore, it is an improper judicial intrusion into theinternal affairs of the corporation to compel FLADC to file at the SEC a petitionfor the issuance of a certificate of decrease of stock. Decreasing a corporation'sauthorized capital stock is an amendment of the Articles of Incorporation. It is adecision that only the stockholders and the directors can make, considering thatthey are the contracting parties thereto. In this case, the Tius are actually not

just asking for a review of the legality and fairness of a corporate decision. Theywant this Court to make a corporate decision for FLADC . We decline to interveneand order corporate structural changes not voluntarily agreed upon by its

stockholders and directors.DCSTAH

12.ID.; ID.; ID.; BUSINESS JUDGMENT RULE; EXPLAINED; RATIONALE BEHINDTHE RULE; CASE AT BAR. — Truth to tell, a judicial order to decrease capitalstock without the assent of FLADC's directors and stockholders is a violation ofthe "business judgment rule" which states that: . . . (C)ontracts intravires entered into by the board of directors are binding upon the corporation andcourts will not interfere unless such contracts are so unconscionable andoppressive as to amount to wanton destruction to the rights of the minority, aswhen plaintiffs aver that the defendants (members of the board), have

concluded a transaction among themselves as will result in serious injury to theplaintiffs stockholders. The reason behind the rule is aptly explained by DeanCesar L. Villanueva, an esteemed author in corporate law, thus: Courts and othertribunals are wont to override the business judgment of the board mainlybecause, courts are not in the business of business, and the laissez faire rule orthe free enterprise system prevailing in our social and economic set-up dictatesthat it is better for the State and its organs to leave business to the



businessmen; especially so, when courts are ill-equipped to make businessdecisions. More importantly, the social contract in the corporate family to decidethe course of the corporate business has been vested in the board and not withcourts. Apparently, the Tius do not realize the illegal consequences of seekingrescission and control of the corporation to the exclusion of the Ongs. Such anact infringes on the law on reduction of capital stock. Ordering the return anddistribution of the Ongs' capital contribution without dissolving the corporation ordecreasing its authorized capital stock is not only against the law but is alsoprejudicial to corporate creditors who enjoy absolute priority of payment overand above any individual stockholder thereof.

R E S O L U T I O N

CORONA, J p:

Before us are the (1) motion for reconsideration, dated March 15, 2002, ofpetitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, WilliamOng, Willie Ong and Julia Ong Alonzo (the Ongs); (2) motion for partialreconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking areversal of this Court's Decision, 1 dated February 1, 2002, in G.R.Nos. 144476 and 144629 affirming with modification the decision 2 of the Courtof Appeals, dated October 5, 1999, which in turn upheld, likewise with

modification, the decision of the SEC en banc , dated September 11, 1998; and(3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y.Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu(the Tius) of our February 1, 2002 Decision. DaAETS

A brief recapitulation of the facts shows that:

In 1994, the construction of the Masagana Citimall in Pasay City was threatenedwith stoppage and incompletion when its owner, the First Landlink Asia

Development Corporation (FLADC), which was owned by the Tius, encountereddire financial difficulties. It was heavily indebted to the Philippine National Bank(PNB) for P190 million. To stave off foreclosure of the mortgage on the two lotswhere the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong,Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), toinvest in FLADC. Under the Pre-Subscription Agreement they entered into, theOngs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs











were to subscribe to 1,000,000 shares at a par value of P100.00 each while theTius were to subscribe to an additional 549,800 shares at P100.00 each inaddition to their already existing subscription of 450,200 shares. Furthermore,they agreed that the Tius were entitled to nominate the Vice-President and theTreasurer plus five directors while the Ongs were entitled to nominate thePresident, the Secretary and six directors (including the chairman) to the boardof directors of FLADC. Moreover, the Ongs were given the right to manage andoperate the mall.

Accordingly, the Ongs paid P100 million in cash for their subscription to1,000,000 shares of stock while the Tius committed to contribute to FLADC afour-storey building and two parcels of land respectively valued at P20 million(for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for49,800 shares) to cover their additional 549,800 stock subscription therein. The

Ongs paid in another P70 million 3

to FLADC and P20 million to the Tius over andabove their P100 million investment, the total sum of which (P190 million) wasused to settle the P190 million mortgage indebtedness of FLADC to PNB.

The business harmony between the Ongs and the Tius in FLADC, however, wasshortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of (1) refusing to credit tothem the FLADC shares covering their real property contributions; (2) preventingDavid S. Tiu and Cely Y. Tiu from assuming the positions of and performing theirduties as Vice-President and Treasurer, respectively, and (3) refusing to give

them the office spaces agreed upon. According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu toassume the positions and perform the duties of Vice-President and Treasurer,respectively, but the Ongs prevented them from doing so. Furthermore, theOngs refused to provide them the space for their executive offices as Vice-President and Treasurer. Finally, and most serious of all, the Ongs refused togive them the shares corresponding to their property contributions of a four-story building, a 1,902.30 square-meter lot and a 151 square-meter lot. Hence,they felt they were justified in setting aside their Pre-Subscription Agreement

with the Ongs who allegedly refused to comply with their undertakings. In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in factassumed the positions of Vice-President and Treasurer of FLADC but that it wasthey who refused to comply with the corporate duties assigned to them. It wasthe contention of the Ongs that they wanted the Tius to sign the checks of thecorporation and undertake their management duties but that the Tius shied away







from helping them manage the corporation. On the issue of office space, theOngs pointed out that the Tius did in fact already have existing executive officesin the mall since they owned it 100% before the Ongs came in. What the Tiusreally wanted were new offices which were anyway subsequently provided tothem. On the most important issue of their alleged failure to credit the Tius withthe FLADC shares commensurate to the Tius' property contributions, the Ongsasserted that, although the Tius executed a deed of assignment for the 1,902.30square-meter lot in favor of FLADC, they (the Tius) refused to pay P570,690 forcapital gains tax and documentary stamp tax. Without the payment thereof, theSEC would not approve the valuation of the Tius' property contribution (asopposed to cash contribution). This, in turn, would make it impossible to securea new Transfer Certificate of Title (TCT) over the property in FLADC's name. Inany event, it was easy for the Tius to simply pay the said transfer taxes and,after the new TCT was issued in FLADC's name, they could then be given the

corresponding shares of stocks. On the 151 square-meter property, the Tiusnever executed a deed of assignment in favor of FLADC. The Tius initiallyclaimed that they could not as yet surrender the TCT because it was "still beingreconstituted" by the Lichaucos from whom the Tius bought it. The Ongs later ondiscovered that FLADC had in reality owned the property all along, even beforetheir Pre-Subscription Agreement was executed in 1994. This meant that the 151square-meter property was at that time already the corporate property of FLADCfor which the Tius were not entitled to the issuance of new shares of stock. TEAICc

The controversy finally came to a head when this case was commenced 4 by the

Tius on February 27, 1996 at the Securities and Exchange Commission (SEC),seeking confirmation of their rescission of the Pre-Subscription Agreement. Afterhearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued adecision on May 19, 1997 confirming the rescission sought by the Tius, asfollows:

WHEREFORE, judgment is hereby rendered confirming the rescission ofthe Pre-Subscription Agreement, and consequently ordering:

(a)The cancellation of the 1,000,000 shares subscription of the

individual defendants in FLADC; (b)FLADC to pay the amount of P170,000,000.00 to the individual

defendants representing the return of their contribution for1,000,000 shares of FLADC;







(c)The plaintiffs to submit with (sic) the Securities and ExchangeCommission amended articles of incorporation of FLADC toconform with this decision;

(d)The defendants to surrender to the plaintiffs TCT Nos. 132493,

132494, 134066 (formerly 15587), 135325 and 134204and any other title or deed in the name of FLADC, failing inwhich said titles are declared void;

(e)The Register of Deeds to issue new certificates of titles in favorof the plaintiffs and to cancel the annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No.134066 (formerly 15587);

(f)The individual defendants, individually and collectively, theiragents and representatives, to desist from exercising or

performing any and all acts pertaining to stockholder,director or officer of FLADC or in any manner intervene inthe management and affairs of FLADC;

(g)The individual defendants, jointly and severally, to return toFLADC interest payment in the amount of P8,866,669.00and all interest payments as well as any payments onprincipal received from the P70,000,000.00 inexistent loan,plus the legal rate of interest thereon from the date oftheir receipt of such payment until fully paid;

(h)The plaintiff David Tiu to pay individual defendants the sum ofP20,000,000.00 representing his loan from said defendantsplus legal interest from the date of receipt of such amount.

SO ORDERED. 5

On motion of both parties, the above decision was partially reconsidered but onlyinsofar as the Ongs' P70 million was declared not as a premium on capital stockbut an advance (loan) by the Ongs to FLADC and that the imposition of intereston it was correct. 6

Both parties appealed 7 to the SEC en banc which rendered a decision onSeptember 11, 1998, affirming the May 19, 1997 decision of the Hearing Officer.The SEC en banc confirmed the rescission of the Pre-Subscription Agreement butreverted to classifying the P70 million paid by the Ongs as premium on capitaland not as a loan or advance to FLADC, hence, not entitled to earn interest. 8

















On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999,thus:

WHEREFORE, the Order dated September 11, 1998 issued by theSecurities and Exchange Commission En Banc in SEC AC CASE NOS. 598

and 601 confirming the rescission of the Pre-Subscription Agreementdated August 15, 1994 is hereby AFFIRMED, subject to the followingMODIFICATIONS:

1.The Ong and Tiu Groups are ordered to liquidate First Landlink AsiaDevelopment Corporation in accordance with the following cashand property contributions of the parties therein.

(a)Ong Group — P100,000,000.00 cash contribution for one (1)million shares in First Landlink Asia DevelopmentCorporation at a par value of P100.00 per share;

(b)Tiu Group:

1)P45,020,000.00 original cash contribution for 450,200shares in First Landlink Asia DevelopmentCorporation at a par value of P100.00 per share;

2)A four-storey building described in Transfer Certificate ofTitle No. 15587 in the name of Intraland Resourcesand Development Corporation valued at

P20,000,000.00 for 200,000 shares in First Landlink Asia Development Corporation at a par value ofP100.00 per share;

3)A 1,902.30 square-meter parcel of land covered byTransfer Certificate of Title No. 15587 in the nameof Masagana Telamart, Inc. valued atP30,000,000.00 for 300,000 shares in First Landlink

Asia Development Corporation at a par value ofP100.00 per share.

2)Whatever remains of the assets of the First Landlink Asia DevelopmentCorporation and the management thereof is (sic) hereby orderedtransferred to the Tiu Group.

3)First Landlink Asia Development Corporation is hereby ordered to paythe amount of P70,000,000.00 that was advanced to it by theOng Group upon the finality of this decision. Should the former



incur in delay in the payment thereof, it shall pay the legalinterest thereon pursuant to Article 2209 of the New Civil Code.

4)The Tius are hereby ordered to pay the amount of P20,000,000.00loaned them by the Ongs upon the finality of this decision. Should

the former incur in delay in the payment thereof, it shall pay thelegal interest thereon pursuant to Article 2209 of the New CivilCode.

SO ORDERED. 9

An interesting sidelight of the CA decision was its description of the rescissionmade by the Tius as the "height of ingratitude" and as "pulling a fast one" on theOngs. The CA moreover found the Tius guilty of withholding FLADC funds fromthe Ongs and diverting corporate income to their own MATTERCOaccount. 10 These were findings later on affirmed in our own February 1, 2002Decision which is the subject of the instant motion for reconsideration. 11

But there was also a strange aspect of the CA decision. The CA concluded thatboth the Ongs and the Tius were in pari delicto (which would not have legallyentitled them to rescission) but, "for practical considerations," that is, theirinability to work together, it was best to separate the two groups by rescindingthe Pre-Subscription Agreement, returning the original investment of the Ongs

and awarding practically everything else to the Tius. Their motions for reconsideration having been denied, both parties filed separatepetitions for review before this Court.

In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongsargued that the Tius may not properly avail of rescission under Article 1191 ofthe Civil Code considering that the Pre-Subscription Agreement did not providefor reciprocity of obligations; that the rights over the subject matter of therescission (capital assets and properties) had been acquired by a third party

(FLADC); that they did not commit a substantial and fundamental breach of theiragreement since they did not prevent the Tius from assuming the positions of Vice-President and Treasurer of FLADC, and that the failure to credit the 300,000shares corresponding to the 1,902.30 square-meter property covered by TCT No.134066 (formerly 15587) was due to the refusal of the Tius to pay the requiredtransfer taxes to secure the approval of the SEC for the property contributionand, thereafter, the issuance of title in FLADC's name. They also argued that the














liquidation of FLADC may not legally be ordered by the appellate court even forso called "practical considerations" or even to prevent "further squabbles andnumerous litigations," since the same are not valid grounds under theCorporation Code. Moreover, the Ongs bewailed the failure of the CA to grantinterest on their P70 million and P20 million advances to FLADC and David S. Tiu,respectively, and to award costs and damages.

In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius,on the other hand, contended that the rescission should have been limited to therestitution of the parties' respective investments and not the liquidation of FLADCbased on the erroneous perception by the court that: the Masagana Citimall wasthreatened with incompletion since FLADC was in financial distress; that the Tiusinvited the Ongs to invest in FLADC to settle its P190 million loan from PNB; thatthey violated the Pre-Subscription Agreement when it was the Lichaucos and not

the Tius who executed the deed of assignment over the 151 square-meterproperty commensurate to 49,800 shares in FLADC thereby failing to pay theprice for the said shares; that they did not turn over to the Ongs the entireamount of FLADC funds; that they were diverting rentals from lease contractsdue to FLADC to their own MATTERCO account; that the P70 million paid by theOngs was an advance and not a premium on capital; and that, by rescinding thePre-Subscription Agreement, they wanted to wrestle away the management ofthe mall and prevent the Ongs from enjoying the profits of their P190 millioninvestment in FLADC.

On February 1, 2002, this Court promulgated its Decision (the subject of theinstant motions), affirming the assailed decision of the Court of Appeals but withthe following modifications:

1.the P20 million loan extended by the Ongs to the Tius shall earninterest at twelve percent (12%) per annum to be computed fromthe time of judicial demand which is from April 23, 1996;

2.the P70 million advanced by the Ongs to the FLADC shall earn interestat ten percent (10%) per annum to be computed from the dateof the FLADC Board Resolution which is June 19, 1996; and

3.the Tius shall be credited with 49,800 shares in FLADC for theirproperty contribution, specifically, the 151 sq. m. parcel of land.

This Court affirmed the fact that both the Ongs and the Tius violated theirrespective obligations under the Pre-Subscription Agreement. The Ongsprevented the Tius from assuming the positions of Vice-President and Treasurer



of the corporation. On the other hand, the Decision established that the Tiusfailed to turn over FLADC funds to the Ongs and that the Tius diverted rentalsdue to FLADC to their MATTERCO account. Consequently, it held that rescissionwas not possible since both parties were in pari delicto . However, this Courtagreed with the Court of Appeals that the remedy of specific performance, asespoused by the Ongs, was not practical and sound either and would only leadto further "squabbles and numerous litigations" between the parties.

On March 15, 2002, the Tius filed before this Court a Motion for Issuance of aWrit of Execution on the grounds that: (a) the SEC order had become executoryas early as September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of theRules of Court; (b) any further delay would be injurious to the rights of the Tiussince the case had been pending for more than six years; and (c) the SEC nolonger had quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code).

The Ongs filed their opposition, contending that the Decision dated February 1,2002 was not yet final and executory; that no good reason existed to issue awarrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SECretained jurisdiction over pending cases involving intra-corporate disputesalready submitted for final resolution upon the effectivity of the said law.

Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution,the Ongs filed their own "Motion for Reconsideration; Alternatively, Motion forModification (of the February 1, 2002 Decision)" on March 15, 2002, raising twomain points: (a) that specific performance and not rescission was the proper

remedy under the premises; and (b) that, assuming rescission to be proper, thesubject decision of this Court should be modified to entitle movants to theirproportionate share in the mall.

On their first point (specific performance and not rescission was the properremedy), movants Ong argue that their alleged breach of the Pre-Subscription

Agreement was, at most, casual which did not justify the rescission of thecontract. They stress that providing appropriate offices for David S. Tiu and Cely

Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on theirobligations under the Pre-Subscription Agreement since the said obligation (to

provide executive offices) pertained to FLADC itself. Such obligation arose fromthe relations between the said officers and the corporation and not any of theindividual parties such as the Ongs. Likewise, the alleged failure of the Ongs tocredit shares of stock in favor of the Tius for their property contributions alsopertained to the corporation and not to the Ongs. Just the same, it could not bedone in view of the Tius' refusal to pay the necessary transfer taxes which in



Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8,2002, pointing out that there was no violation of the Pre-Subscription Agreementon the part of the Ongs; that, after more than seven years since the mall beganits operations, rescission had become not only impractical but would alsoadversely affect the rights of innocent parties; and that it would behighlyinequitable and unfair to simply return the P100 million investment of the Ongsand give the remaining assets now amounting to about P1 billion to the Tius . AISHcD

The Tius, in their opposition to the Ongs' motion for reconsideration, counterthat the arguments therein are a mere re-hash of the contentions in the Ongs'petition for review and previous motion for reconsideration of the Court of

Appeals' decision. The Tius compare the arguments in said pleadings to provethat the Ongs do not raise new issues, and, based on well-settled

jurisprudence, 12 the Ongs' present motion is therefore pro forma and did not

prevent the Decision of this Court from attaining finality. On January 29, 2003, the Special Second Division of this Court held oralarguments on the respective positions of the parties. On February 27, 2003, Dr.Willie Ong and the rest of the movants Ong filed their respective memoranda. OnFebruary 28, 2003, the Tius submitted their memorandum.

We grant the Ongs' motions for reconsideration.

This is not the first time that this Court has reversed itself on a motion for

reconsideration. In Philippine Consumers Foundation, Inc. vs. NationalTelecommunications Commission , 13 this Court, through then Chief Justice Felix V. Makasiar, said that its members may and do change their minds, after a re-study of the facts and the law, illuminated by a mutual exchange of

views.14 After a thorough re-examination of the case, we find that our Decisionof February 1, 2002 overlooked certain aspects which, if not corrected, will causeextreme and irreparable damage and prejudice to the Ongs, FLADC and itscreditors.

The procedural rule on pro forma motions pointed out by the Tius should not be

blindly applied to meritorious motions for reconsideration. As long as the sameadequately raises a valid ground 15 (i.e., the decision or final order is contrary tolaw), this Court has to evaluate the merits of the arguments to prevent an unjustdecision from attaining finality. In Security Bank and Trust Company vs.Cuenca , 16 we ruled that a motion for reconsideration is not pro forma for thereason alone that it reiterates the arguments earlier passed upon and rejected bythe appellate court. We explained there that a movant may raise the same























arguments, if only to convince this Court that its ruling was erroneous. Moreover,the rule (that a motion is pro forma if it only repeats the arguments in theprevious pleadings) will not apply if said arguments were not squarely passedupon and answered in the decision sought to be reconsidered. In the case atbar, no ruling was made on some of the petitioner Ongs' arguments. Forinstance, no clear ruling was made on why an order distributing corporate assetsand property to the stockholders would not violate the statutory preconditionsfor corporate dissolution or decrease of authorized capital stock. Thus, it wouldserve the ends of justice to entertain the subject motion for reconsideration sincesome important issues therein, although mere repetitions, were not consideredor clearly resolved by this Court.

Going now to the merits, we resolve whether the Tius could legally rescind thePre-Subscription Agreement. We rule that they could not.

FLADC was originally incorporated with an authorized capital stock of 500,000shares with the Tius owning 450,200 shares representing the paid-up capital.When the Tius invited the Ongs to invest in FLADC as stockholders, an increaseof the authorized capital stock became necessary to give each group equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement. Theauthorized capital stock was thus increased from 500,000 shares to 2,000,000shares with a par value of P100 each, with the Ongs subscribing to 1,000,000shares and the Tius to 549,800 more shares in addition to their 450,200 sharesto complete 1,000,000 shares. Thus, the subject matter of the contract was the

1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since thesewere unissued shares, the parties' Pre-Subscription Agreement was in fact asubscription contract as defined under Section 60, Title VII of the CorporationCode:

Any contract for the acquisition of unissued stock in an existingcorporation or a corporation still to be formed shall be deemed asubscription within the meaning of this Title, notwithstanding the factthat the parties refer to it as a purchase or some other contract (Italicssupplied).

A subscription contract necessarily involves the corporation as one of thecontracting parties since the subject matter of the transaction is property ownedby the corporation — its shares of stock. Thus, the subscription contract(denominated by the parties as a Pre-Subscription Agreement) whereby theOngs invested P100 million for 1,000,000 shares of stock was, from theviewpoint of the law, one between the Ongs and FLADC, not between the Ongsand the Tius. Otherwise stated, the Tius did not contract in their personal



capacities with the Ongs since they were not selling any of their own shares tothem. It was FLADC that did.

Considering therefore that the real contracting parties to the subscriptionagreement were FLADC and the Ongs alone, a civil case for rescission on the

ground of breach of contract filed by the Tius in their personal capacities will notprosper. Assuming it had valid reasons to do so, only FLADC (and certainly notthe Tius) had the legal personality to file suit rescinding the subscriptionagreement with the Ongs inasmuch as it was the real party in interesttherein. Article 1311 of the Civil Code provides that "contracts take effect onlybetween the parties, their assigns and heirs. . ." Therefore, a party who has nottaken part in the transaction cannot sue or be sued for performance or forcancellation thereof, unless he shows that he has a real interest affectedthereby. 17

In their February 28, 2003 Memorandum, the Tius claim that there are twocontracts embodied in the Pre-Subscription Agreement: a shareholder'sagreement between the Tius and the Ongs defining and governing theirrelationship and a subscription contract between the Tius, the Ongs and FLADCregarding the subscription of the parties to the corporation. They point out thatthese two component parts form one whole agreement and that their terms andconditions are intrinsically related and dependent on each other. Thus, thebreach of the shareholders' agreement, which was allegedly the consideration forthe subscription contract, was also a breach of the latter.

Aside from the fact that this is an entirely new angle never raised in any of theirprevious pleadings until after the oral arguments on January 29, 2003, we findthis argument too strained for comfort. It is obviously intended to remedy andcover up the Tius' lack of legal personality to rescind an agreement in which theywere personally not parties-in-interest. Assuming arguendo that there were two"sub-agreements" embodied in the Pre-Subscription Agreement, this Court failsto see how the shareholders agreement between the Ongs and Tius can, withinthe bounds of reason, be interpreted as the consideration of the subscriptioncontract between FLADC and the Ongs. There was nothing in the Pre-

Subscription Agreement even remotely suggesting such alleged interdependence.Be that as it may, however, the Tius are nevertheless not the proper parties toraise this point because they were not parties to the subscription contractbetween FLADC and the Ongs. Thus, they are not in a position to claim that theshareholders agreement between them and the Ongs was what induced FLADCand the Ongs to enter into the subscription contract. It is the Ongs alone whocan say that. Though FLADC was represented by the Tius in the subscription







contract, FLADC had a separate juridical personality from the Tius. The casebefore us does not warrant piercing the veil of corporate fiction since there is noproof that the corporation is being used "as a cloak or cover for fraud orillegality, or to work injustice."18

The Tius also argue that, since the Ongs represent FLADC as its management,breach by the Ongs is breach by FLADC. This must also fail because such anargument disregards the separate juridical personality of FLADC.

The Tius allege that they were prevented from participating in the managementof the corporation. There is evidence that the Ongs did prevent the rightfullyelected Treasurer, Cely Tiu, from exercising her function as such. The recordsshow that the President, Wilson Ong, supervised the collection and receipt ofrentals in the Masagana Citimall; 19 that he ordered the same to be deposited inthe bank; 20 and that he held on to the cash and properties of thecorporation. 21 Section 25 of the Corporation Code prohibits the President fromacting concurrently as Treasurer of the corporation. The rationale behind theprovision is to ensure the effective monitoring of each officer's separatefunctions.

However, although the Tius were adversely affected by the Ongs' unwillingnessto let them assume their positions, rescission due to breach of contract isdefinitely the wrong remedy for their personal grievances. The Corporation Code,SEC rules and even the Rules of Court provide for appropriate and adequate

intra-corporate remedies, other than rescission, in situations like this. Rescissionis certainly not one of them, specially if the party asking for it has no legalpersonality to do so and the requirements of the law therefor have not beenmet. A contrary doctrine will tread on extremely dangerous ground because itwill allow just any stockholder, for just about any real or imagined offense, todemand rescission of his subscription and call for the distribution of some part ofthe corporate assets to him without complying with the requirements of theCorporation Code.

Hence, the Tius, in their personal capacities, cannot seek the ultimate andextraordinary remedy of rescission of the subject agreement based on a lessthan substantial breach of subscription contract. Not only are they not parties tothe subscription contract between the Ongs and FLADC; they also have otheravailable and effective remedies under the law.


















All this notwithstanding, granting but not conceding that the Tius possess thelegal standing to sue for rescission based on breach of contract, said action willnevertheless still not prosper since rescission will violate the Trust Fund Doctrineand the procedures for the valid distribution of assets and property under theCorporation Code.

The Trust Fund Doctrine, first enunciated by this Court in the 1923 caseof Philippine Trust Co. vs. Rivera , 22 provides that subscriptions to the capitalstock of a corporation constitute a fund to which the creditors have a right tolook for the satisfaction of their claims. 23 This doctrine is the underlyingprinciple in the procedure for the distribution of capital assets, embodied in theCorporation Code, which allows the distribution of corporate capital only in threeinstances: (1) amendment of the Articles of Incorporation to reduce theauthorized capital stock, 24 (2) purchase of redeemable shares by the

corporation, regardless of the existence of unrestricted retained earnings, 25

and(3) dissolution and eventual liquidation of the corporation. Furthermore, thedoctrine is articulated in Section 41 on the power of a corporation to acquire itsown shares 26 and in Section 122 on the prohibition against the distribution ofcorporate assets and property unless the stringent requirements therefor arecomplied with.27

The distribution of corporate assets and property cannot be made to depend onthe whims and caprices of the stockholders, officers or directors of thecorporation, or even, for that matter, on the earnest desire of the court a quo "to

prevent further squabbles and future litigations" unless the indispensableconditions and procedures for the protection of corporate creditors are followed.Otherwise, the "corporate peace" laudably hoped for by the court will remainnothing but a dream because this time, it will be the creditors' turn to engage in"squabbles and litigations" should the court order an unlawful distribution inblatant disregard of the Trust Fund Doctrine.

In the instant case, the rescission of the Pre-Subscription Agreement willeffectively result in the unauthorized distribution of the capital assets andproperty of the corporation, thereby violating the Trust Fund Doctrine and the

Corporation Code, since rescission of a subscription agreement is not one of theinstances when distribution of capital assets and property of the corporation isallowed.

Contrary to the Tius' allegation, rescission will, in the final analysis, result in thepremature liquidation of the corporation without the benefit of prior dissolution inaccordance with Sections 117, 118, 119 and 120 of the Corporation Code. 28 The































Tius maintain that rescinding the subscription contract is not synonymous tocorporate liquidation because all rescission will entail would be the simplerestoration of the status quo ante and a return to the two groups of their cashand property contributions. We wish it were that simple. Very noticeable is thefact that the Tius do not explain why rescission in the instant case will noteffectively result in liquidation. The Tius merely refer in cavalier fashion to theend-result of rescission (which incidentally is 100% favorable to them) but turn ablind eye to its unfair, inequitable and disastrous effect on the corporation, itscreditors and the Ongs.

In their Memorandum dated February 28, 2003, the Tius claim that rescission ofthe agreement will not result in an unauthorized liquidation of the corporationbecause their case is actually a petition to decrease capital stock pursuant toSection 38 of the Corporation Code. Section 122 of the law provides that

"(e)xcept by decrease of capital stock . . ., no corporation shall distribute any ofits assets or property except upon lawful dissolution and after payment of all itsdebts and liabilities." The Tius claim that their case for rescission, being apetition to decrease capital stock, does not violate the liquidation proceduresunder our laws. All that needs to be done, according to them, is for this Court toorder (1) FLADC to file with the SEC a petition to issue a certificate of decreaseof capital stock and (2) the SEC to approve said decrease. This new argumenthas no merit.

The Tius' case for rescission cannot validly be deemed a petition to decrease

capital stock because such action never complied with the formal requirementsfor decrease of capital stock under Section 33 of the Corporation Code. Nomajority vote of the board of directors was ever taken. Neither was there anystockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding capital stock was secured. There was no revisedtreasurer's affidavit and no proof that said decrease will not prejudice thecreditors' rights. On the contrary, all their pleadings contained were alleged actsof violations by the Ongs to justify an order of rescission.

Furthermore, it is an improper judicial intrusion into the internal affairs of the

corporation to compel FLADC to file at the SEC a petition for the issuance of acertificate of decrease of stock. Decreasing a corporation's authorized capitalstock is an amendment of the Articles of Incorporation. It is a decision that onlythe stockholders and the directors can make, considering that they are thecontracting parties thereto. In this case, the Tius are actually not just asking fora review of the legality and fairness of a corporate decision. They want this Courtto make a corporate decision for FLADC. We decline to intervene and order



corporate structural changes not voluntarily agreed upon by its stockholders anddirectors.

Truth to tell, a judicial order to decrease capital stock without the assent ofFLADC's directors and stockholders is a violation of the "business judgment rule"

which states that: . . . (C)ontracts intra vires entered into by the board of directors arebinding upon the corporation and courts will not interfere unless suchcontracts are so unconscionable and oppressive as to amount to wantondestruction to the rights of the minority, as when plaintiffs aver that thedefendants (members of the board), have concluded a transactionamong themselves as will result in serious injury to the plaintiffsstockholders. 29

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, anesteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business judgmentof the board mainly because, courts are not in the business of business,and the laissez faire rule or the free enterprise system prevailing in oursocial and economic set-up dictates that it is better for the State and itsorgans to leave business to the businessmen; especially so, when courtsare ill-equipped to make business decisions. More importantly, the socialcontract in the corporate family to decide the course of the corporatebusiness has been vested in the board and not with courts. 30

Apparently, the Tius do not realize the illegal consequences of seeking rescissionand control of the corporation to the exclusion of the Ongs. Such an act infringeson the law on reduction of capital stock. Ordering the return and distribution ofthe Ongs' capital contribution without dissolving the corporation or decreasing itsauthorized capital stock is not only against the law but is also prejudicial tocorporate creditors who enjoy absolute priority of payment over and above anyindividual stockholder thereof.

Stripped to its barest essentials, the issue of rescission in this case is not difficultto understand. If rescission is denied, will injustice be inflicted on any of theparties? The answer is no because the financial interests of both the Tius and theOngs will remain intact and safe within FLADC. On the other hand, if rescission isgranted, will any of the parties suffer an injustice? Definitely yes because theOngs will find themselves out in the streets with nothing but the money they hadin 1994 while the Tius will not only enjoy a windfall estimated to be anywhere











from P450 million to P900 million 31 but will also take over an extremelyprofitable business without much effort at all.

Another very important point follows. The Court of Appeals and, later on, ourDecision dated February 1, 2002, stated that both groups were in pari delicto ,

meaning, that both the Tius and the Ongs committed breaches of the Pre-Subscription Agreement. This may be true to a certain extent but, judging fromthe comparative gravity of the acts separately committed by each group, we findthat the Ongs' acts were relatively tame vis-à-vis those committed by the Tius innot surrendering FLADC funds to the corporation and diverting corporate incometo their own MATTERCO account. The Ongs were right in not issuing to the Tiusthe shares corresponding to the four-story building and the 1,902.30 square-meter lot because no title for it could be issued in FLADC's name, owing to theTius' refusal to pay the transfer taxes. And as far as the 151 square-meter lot

was concerned, why should FLADC issue additional shares to the Tius forproperty already owned by the corporation and which, in the final analysis, wasalready factored into the shareholdings of the Tius before the Ongs came in?

We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to "pull a fast one" on the Ongs because that was where the problemprecisely started. It is clear that, when the finances of FLADC improvedconsiderably after the equity infusion of the Ongs, the Tius started planning totake over the corporation again and exclude the Ongs from it. It appears that theTius' refusal to pay transfer taxes might not have really been at all unintentional

because, by failing to pay that relatively small amount which they could easilyafford, the Tius should have expected that they were not going to be given thecorresponding shares. It was, from every angle, the perfect excuse forblackballing the Ongs. In other words, the Tius created a problem then used thatsame problem as their pretext for showing their partners the door. In theprocess, they stood to be rewarded with a bonanza of anywhere between P450million to P900 million in assets (from an investment of only P45 million whichwas nearly foreclosed by PNB), to the extreme and irreparable damage of theOngs, FLADC and its creditors.

After all is said and done, no one can close his eyes to the fact that theMasagana Citimall would not be what it has become today were it not for thetimely infusion of P190 million by the Ongs in 1994. There are no ifs or butsabout it. Without the Ongs, the Tius would have lost everything they originallyinvested in said mall. If only for this and the fact that this Resolution can truly







pave the way for both groups to enjoy the fruits of their investments — assuming good faith and honest intentions — we cannot allow the rescission ofthe subject subscription agreement. The Ongs' shortcomings were far fromserious and certainly less than substantial; they were in fact remediable andcorrectable under the law. It would be totally against all rules of justice, fairnessand equity to deprive the Ongs of their interests on petty and tenuous grounds.

WHEREFORE, the motion for reconsideration, dated March 15, 2002, ofpetitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong,Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration, datedMarch 15, 2002, of petitioner Willie Ong are hereby GRANTED. The Petition forConfirmation of the Rescission of the Pre-Subscription Agreement docketed asSEC Case No. 02-96-5269 is hereby DISMISSED for lack of merit. The unilateralrescission by the Tius of the subject Pre-Subscription Agreement, dated August

15, 1994, is hereby declared as null and void. The motion for the issuance of a writ of execution, dated March 15, 2002, ofpetitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y.Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being moot.

Accordingly, the Decision of this Court, dated February 1, 2002, affirming withmodification the decision of the Court of Appeals, dated October 5, 1999, andthe SEC en banc , dated September 11, 1998, is hereby REVERSED.

Costs against the petitioner Tius.

SO ORDERED.

Bellosillo, Quisumbing and Callejo, Sr., JJ., concur.

Footnotes

46.

FIRST DIVISION

[G.R. No. 126891. August 5, 1998.]



LIM TAY , petitioner , vs . COURT OF APPEALS, GO FAY ANDCO. INC., SY GUIOK, and ESTATE OF ALFONSOLIM, respondents .

Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles for petitioner. Manuel M. Gonzales for private respondent.

SYNOPSIS

Private respondent Sy Guiok and Alfonso Sy Lim secured a loan from petitionerLim Tay, securing their loans with contracts of pledge covering their respectiveshares of stock in Go Fay & Company, Inc. Under said contracts of pledge, Guiok

and Sy Lim agreed that in the event of their failure to pay the amount within theperiod agreed upon, the pledgee, Lim Tay, was authorized to foreclose thepledge upon the said shares of stock.

Respondent Guiok and Sy Lim endorsed their respective shares of stock in blankand delivered the same to Lim Tay. Guiok and Lim, however, failed to pay theirrespective loans to Lim Tay.

Lim Tay filed a petition for mandamus with the Securities and ExchangeCommission (SEC) against Go Fay & Company, praying that an order be issued

directing the corporate secretary of the company to register the stock transfersand issue new certificates in his favor. Lim Tay alleged in his petition that thecontroversy between him as stockholder and the company was intra-corporate inview of the obstinate refusal of the corporate secretary of the company to recordthe transfer of the shares of stock of Guiok and Sy Lim in favor of petitioner.

The registration of shares in a stockholder's name, the issuance of stockcertificates, and the right to receive dividends which pertain to the said sharesare all rights that flow from ownership. The determination of whether or not ashareholder is entitled to exercise the preceding rights falls within the jurisdiction

of the SEC. However, if ownership of the shares is not clearly established and isstill unresolved at the time the action for mandamus is filed, then jurisdiction lieswith the regular courts.

Manifestly, petitioner's complaint by itself did not contain any primafacie showing that petitioner was the owner of the shares of stocks. Quite thecontrary, it demonstrated that he was merely a pledgee, not an owner. The



contractual stipulation which was part of the complaint, shows that petitionerwas merely authorized to foreclose the pledge upon maturity of the loans, not toown them. Accordingly, it failed to lay down a sufficient basis for the SEC toexercise jurisdiction over the controversy.

SYLLABUS

1.MERCANTILE LAW; CORPORATION LAW; OWNERSHIP OF SHARES OFSTOCKS; JURISDICTION LIES WITH REGULAR COURTS AND NOT WITH THESEC; REASON. — The registration of shares in a stockholder's name, theissuance of stock certificates, and the right to receive dividends which pertain tothe said shares are all rights that flow from ownership. The determination ofwhether or not a shareholder is entitled to exercise the above-mentioned rightsfalls within the jurisdiction of the SEC. However, if ownership of the shares is not

clearly established and is still unresolved at the time the action for mandamus isfiled, then jurisdiction lies with the regular courts. As a general rule, the

jurisdiction of a court or tribunal over the subject matter is determined by theallegations in the complaint. In the present case, however, petitioner's claim thathe was the owner of the shares of stock in question has no prima facie basis. Inhis Complaint, petitioner alleged that, pursuant to the contracts of pledge, hebecame the owner of the shares when the term for the loans expired. However,the contracts of pledge, which were made integral parts of the Complaint,contain this common proviso: In the event of the failure of the PLEDGOR to paythe amount within a period of six (6) months from the date hereof, the PLEDGEEis hereby authorized to foreclose the pledge upon the said shares of stock . . .."

2.REMEDIAL LAW; CIVIL PROCEDURE; MANDAMUS ; MANDAMUS WILL NOTISSUE TO ESTABLISH A RIGHT. — Petitioner has failed to establish a clear legalright. Petitioner's contention that he is the owner of the said shares is completelywithout merit. Quite the contrary and as already shown, he does not have anyownership rights at all. At the time petitioner instituted his suit at the SEC, hisownership claim had no prima facie leg to stand on. At best, his contention wasdisputable and uncertain. Mandamus will not issue to establish a legal right, but

only to enforce one that is already clearly established. 3.CIVIL LAW; CREDIT TRANSACTIONS; PLEDGE; PETITIONER DID NOT

ACQUIRE OWNERSHIP OF THE SHARES BY VIRTUE OF THE PLEDGE. — There isno showing that petitioner made any attempt to foreclose or sell the sharesthrough public or private auction, as stipulated in the contracts of pledge and asrequired by Article 2112 of the Civil Code. Therefore, ownership of the shares



could not have passed to him. The pledgor remains the owner during thependency of the pledge and prior to foreclosure and sale, as explicitly providedby Article 2103 of the same Code: "Unless the thing pledged is expropriated, thedebtor continues to be the owner thereof. Nevertheless, the creditor may bringthe actions which pertain to the owner of the thing pledged in order to recover itfrom, or defend it against a third person."

4.ID.; PRESCRIPTION; PETITIONER'S POSSESSION OF THE SHARES OF STOCK AS A PLEDGEE CANNOT RIPEN INTO OWNERSHIP BY PRESCRIPTION. — Petitioner's contention that he can be deemed to have acquired ownership overthe certificates of stock through extraordinary prescription, as provided for in

Article 1132 of the Civil Code, is untenable. What is required by Article 1132 ispossession in the concept of an owner. In the present case, petitioner'spossession of the stock certificates came about because they were delivered to

him pursuant to the contracts of pledge. His possession as a pledgee cannotripen into ownership by prescription.

5.ID.; NOVATION; NOVATION OF A CONTRACT MUST NOT BE PRESUMED. — Neither did petitioner acquire the shares by virtue of a novation of the contractof pledge. Novation is defined as "the extinguishment of an obligation by asubsequent one which terminates it, either by changing its object or principalconditions, by substituting a new debtor in place of the old one, or bysubrogating a third person to the rights of the creditor." Novation of a contractmust not be presumed. "In the absence of an express agreement, novation takes

place only when the old and the new obligations are incompatible on everypoint."

D E C I S I O N

PANGANIBAN, J p:

The duty of a corporate secretary to record transfers of stocks is ministerial.

However, he cannot be compelled to do so when the transferee's title to saidshares has no prima facie validity or is uncertain. More specifically, a pledgor,prior to foreclosure and sale, does not acquire ownership rights over the pledgedshares and thus cannot compel the corporate secretary to record his allegedownership of such shares on the basis merely of the contract of pledge. Similarly,the SEC does not acquire jurisdiction over a dispute when a party's claim tobeing a shareholder is, on the face of the complaint, invalid or inadequate or is



otherwise negated by the very allegations of such complaint. Mandamus will notissue to establish a right, but only to enforce one that is already established. LibLex

Statement of the Case

These are the principles used by this Court in resolving this Petition for Reviewon Certiorari before us, assailing the October 24, 1996 Decision 1 of the Court of

Appeals 2 in CA-GR SP No. 40832, the dispositive portion of which reads:

"IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench isDENIED DUE COURSE and is hereby DISMISSED. With costs against the[p]etitioner." 3

By the foregoing disposition, the Court of Appeals effectively affirmed the March

7, 1996 Decision 4 of the Securities and Exchange Commission (SEC) en banc :

"WHEREFORE, in view of all the foregoing, judgment is hereby rendereddismissing the appeal on the ground that mandamus will only issue upona clear showing of ownership over the assailed shares of stock, [t]hedetermination of which, on the basis of the foregoing facts, is within the

jurisdiction of the regular courts and not with the SEC." 5

The SEC en banc upheld the August 16, 1993 Decision 6 of SEC Hearing OfficerRolando C. Malabonga, which dismissed the action for mandamus filed bypetitioner.

The Facts

As found by the Court of Appeals, the facts of the case are as follows:

" . . . On January 8, 1980, Respondent-Appellee Sy Guiok secured a loanfrom the [p]etitioner in the amount of P40,000 payable within six (6)months. To secure the payment of the aforesaid loan and interestthereon, Respondent Guiok executed a Contract of Pledge in favor of the[p]etitioner whereby he pledged his three hundred (300) shares of stock

in the Go Fay & Company Inc., Respondent Corporation, for brevity'ssake. Respondent Guiok obliged himself to pay interest on said loan atthe rate of 10% per annum from the date of said contract of pledge. Onthe same date, Alfonso Sy Lim secured a loan, from the [p]etitioner inthe amount of P40,000 payable in six (6) months. To secure thepayment of his loan, Sy Lim executed a 'Contract of Pledge' covering histhree hundred (300) shares of stock in Respondent Corporation. Under


























said contract, Sy Lim obliged himself to pay interest on his loan at therate of 10% per annum from the date of the execution of said contract.

Under said 'Contracts of Pledge,' Respondent[s] Guiok and Sy Limcovenanted, inter alia, that:

'3.In the event of the failure of the PLEDGOR to pay the amountwithin a period of six (6) months from the date hereof, thePLEDGEE is hereby authorized to foreclose the pledge upon thesaid shares of stock hereby created by selling them same atpublic or private sale with or without notice to the PLEDGOR, atwhich sale the PLEDGEE may be the purchaser at his option; andthe PLEDGEE is hereby authorized and empowered at his optionto transfer the said shares of stock on the books of thecorporation to his own name and to hold the certificate issued inlieu thereof under the terms of this pledge, and to sell the saidshares to issue to him and to apply the proceeds of the sale tothe payment of the said sum and interest, in the mannerhereinabove provided;

4.In the event of the foreclosure of this pledge and the sale ofthe pledged certificate, any surplus remaining in the hands of thePLEDGEE after the payment of the said sum and interest, and theexpenses, if any, connected with the foreclosure sale, shall be

paid by the PLEDGEE to the PLEDGOR; 5.Upon payment of the said amount and interest in full, thePLEDGEE will, on demand of the PLEDGOR, redeliver to him thesaid shares of stock by surrendering the certificate delivered tohim by the PLEDGOR or by retransferring each share to thePLEDGOR, in the event that the PLEDGEE, under the optionhereby granted, shall have caused such shares to be transferredto him upon the books of the issuing company.' (idem, supra )

Respondent Guiok and Sy Lim endorsed their respective shares of stock

in blank and delivered the same to the [p]etitioner." 7 However, Respondent Guiok and Sy Lim failed to pay their respectiveloans and the accrued interests thereon to the [p]etitioner. In October,1990, the [p]etitioner filed a 'Petition for Mandamus' against RespondentCorporation, with the SEC entitled 'Lim Tay versus Go Fay &Company . Inc . , SEC Case No . 03894' , praying that:






'PRAYER

WHEREFORE, premises considered, it is respectfully prayed thatan order be issued directing the corporate secretary of[R]espondent Go Fay & Co, Inc. to register the stock transfers

and issue new certificates in favor of Lim Tay. It is likewiseprayed that [R]espondent Go Fay & Co., Inc[.] be ordered to payall dividends due and unclaimed on the said certificates to[P]laintiff Lim Tay. cdphil

Plaintiff further prays for such other relief just and equitable inthe premises.' (page 34, Rollo)

The [p]etitioner alleged, inter alia , in his Petition that the controversybetween him as stockholder and the Respondent Corporation was intra-corporate in view of the obstinate refusal of the corporate secretary of

Respondent Corporation to record the transfer of the shares of stock ofRespondent Guiok and Sy Lim in favor of and under the name of the[p]etitioner and to issue new certificates of stock to the [p]etitioner.

The Respondent Corporation filed its Answer to the Complaint andalleged, as Affirmative Defense, that:

'AFFIRMATIVE DEFENSE '

7.Respondent repleads and incorporates herein by reference the

foregoing allegations. 8.The Complaint states no cause of action against [r]espondent.

9.Complainant is not a stockholder of [r]espondent. Hence, theHonorable Commission has no jurisdiction to enter the presentcontroversy since their [sic] is no intracorporate relationshipbetween complainant and respondent.

10.Granting arguendo that a pledge was constituted over theshareholdings of Sy Guiok in favor of the complainant and that

the former defaulted in the payment of his obligations to thelatter, the same did not automatically vest [i]n complainantownership of the pledged shares.' (page 37, Rollo )

In the interim, Sy Lim died. Respondents Guiok and the Intestate Estateof Alfonso Sy Lim, represented by Conchita Lim, filed their Answer-In-Intervention with the SEC alleging, inter alia , that:



'xxx xxx xxx

3.Deny specifically the allegation under paragraph 5 of theComplaint that, failure to pay the loan within the contract periodautomatically foreclosed the pledged shares of stocks and that

the share of stocks are automatically purchased by the plaintiff,for being false and distorted, the truth being that pursuant to the[sic] paragraph 3 of the contract of pledges, Annexes 'A' and 'B',it is clear that upon failure to pay the amount within thestipulated period, the pledgee is authorized to foreclose thepledge and thereafter, to sell the same to satisfy the loan.[H]owever, to this point in time, plaintiff has not performed anyoperative act of foreclosing the shares of stocks of [i]ntervenorsin accordance with the Chattel Mortgage law, [n]either was thereany sale of stocks — by way of public or private auction — madeafter foreclosure in favor of the plaintiff to speak about, andtherefore, the respondent company could not be force[d] to [sic]by way of mandamus, to transfer the subject shares of stocksfrom the name of your [i]ntervenors to that of the plaintiff in theabsence of clear and legal basis for such;

4.DENY specifically the allegations under paragraphs 6, 7 and 8 ofthe complaint as to the existence of the alleged intracorporatedispute between plaintiff and company for being without properand legal basis. In the first place, plaintiff is not a stockholder ofthe respondent corporation; there was no foreclosure of shares

executed in accordance with the Chattel Mortgage Lawwhatsoever; there were no sales consummated that wouldtransfer to the plaintiff the subject shares of stocks and therefore,any demand to transfer the shares of stocks to the name of theplaintiff has no legal basis. In the second place, [i]ntervenors hadbeen in the past negotiating possible compromise and at thesame time, had tendered payment of the loan secured by thesubject pledges but plaintiff refused unjustifiably to oblige andaccept payment o[r] even agree on the computation of theprincipal amount of the loan and interest on top of a substantialamount offered just to settle and compromise the indebtedness

of [i]ntervenors; II.SPECIAL AFFIRMATIVE DEFENSES

Intervenors replead by way of reference all the foregoingallegations to form part of the special affirmative defenses;



5.This Honorable Commission has no jurisdiction over the personof the respondent and nature of the action, plaintiff having nopersonality at all to compel respondent by way of mandamus toperform certain corporate function[s]; prLL

6.The complaint states no cause of action; 7.That respondent is not [a] real party in interest;

8.The appropriation of the subject shares of stocks by plaintiff,without compliance with the formality of law, amounted to'[p]actum commis[s]orium' therefore, null and void;

9.Granting for the sake of argument only that there was a validforeclosure and sale of the subject st[o]cks in favor of the plaintiff

— which [i]ntervenors deny — still paragraph 5 of the contract

allows redemption, for which intervenors are willing to redeemthe share of stocks pledged;

10.Even the Chattel Mortgage law allowed redemption of the[c]hattel foreclosed;

11.As a matter of fact, on several occasions, [i]ntervenors hadmade representations with the plaintiff for the compromise andsettlement of all the obligations secured by the subject pledges — even offering to pay compensation over and above the value of

the obligations, interest[s] and dividends accruing to the share ofstocks but, plaintiff unjustly refused to accept the offer ofpayment;' ( pages 39-42 , Rollo )

The [r]espondents-[i]ntervenors prayed the SEC that judgment berendered in their favor, as follows:

'IV. PRAYER

It is respectfully prayed to this Honorable Commission after duehearing, to dismiss the case for lack of merit, ordering plaintiff to

accept payment for the loans secured by the subject shares ofstocks and to pay plaintiff:

1.The sum of P50,000.00, as moral damages;

2.the sum of P50,000.00, as attorneys fees; and,

3.costs of suit.



doubt exists . . .The principal function of the writ of mandamus is tocommand and expedite, and not to inquire and adjudicate and,therefore it is not the purpose of the writ to establish a legal right, but

to enforce one which has already been established." 9 [citationsomitted] prLL

The Court of Appeals debunked petitioner's claim that he had acquiredownership over the shares by virtue of novation, holding that respondents'indorsement and delivery of the shares were pursuant to Articles 2093 and 2095of the Civil Code and that petitioner's receipt of dividends was in compliance with

Article 2102 of the same Code. Petitioner's claim that he had acquired ownershipof the shares by virtue of prescription was likewise dismissed by RespondentCourt in this wise:

"The prescriptive period for the action of Respondent[s] Guiok and SyLim to recover the shares of stock from the [p]etitioner accrued onlyfrom the time they paid their loans and the interests thereon and[made] a demand for their return. 10

Hence, the petitioner brought before us this Petition for Review on Certiorari inaccordance with Rule 45 of the Rules of Court.11

Assignment of Errors

Petitioner submits, for the consideration of this Court, these issues: 12 "(a)Whether the Securities and Exchange Commission had jurisdictionover the complaint filed by the petitioner; and

(b)Whether the petitioner is entitled to the relief of mandamus asagainst the respondent Go Fay & Co., Inc."

In addition, petitioner contends that it has acquired ownership of the shares"through extraordinary prescription," pursuant to Article 1132 of the Civil Code,

and through respondents' subsequent acts, which amounted to a novation of thecontracts of pledge. Petitioner also claims that there was dacion en pago , inwhich the shares of stock were deemed sold to petitioner, the consideration forwhich was the extinguishment of the loans and the interests thereon. Petitionerlikewise claims that laches bars respondents from recovering the subject shares.

The Court's Ruling
















(c)Controversies in the election or appointment of directors, trustees,officers or managers of such corporations, partnerships or associations;

(d)Petitions of corporations, partnerships or associations to be declaredin the state of suspension of payments in cases where the corporation,

partnership or association possesses property to cover all its debts butforesees the impossibility of meeting them when they respectively falldue or in cases where the corporation, partnership or association has nosufficient assets to cover its liabilities, but is under the ManagementCommittee created pursuant to this decree." 15

Thus, a controversy "among stockholders, partners or associates

themselves" 16 is intra-corporate in nature and falls within the jurisdiction of theSEC. cda

As a general rule, the jurisdiction of a court or tribunal over the subject matter isdetermined by the allegations in the complaint.17 in the present case, however,petitioner's claim that he was the owner of the shares of stock in question hasno prima facie basis.

In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, hebecame the owner of the shares when the term for the loans expired. TheComplaint contained the following pertinent averments:

"xxx xxx xxx

3.On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay receivedthree hundred (300) shares of stock of Go Fay & Co., Inc., from SyGuiok as, security for the payment of a loan of [f]orty [t]housand[p]esos (P40,000.00) Philippine currency, the sum of which was payablewithin six (6) months [with interest] at ten percentum (10%) per annumfrom the date of the execution of the contract; a copy of this Contract ofPledge is attached as Annex "A" and made part hereof ;

4.On the same date January 8, 1980, under a similar Contract of Pledge,Lim Tay received three hundred (300) shares of stock of Go Fay & Co.,

Inc. from Alfonso Sy Lim as security for the payment of a loan of [f]orty[t]housand [p]esos (P40,000.00) Philippine currency, the sum of whichwas payable within six (6) months [with interest] at ten percentum(10%) per annum from the date of the execution of the contract; copyof this Contract of Pledge is attached as Annex "B" and made parthereof ;














5.By the express terms of the agreements, upon failure of the borrowersto pay the stated amounts within the contract period, the pledge isforeclosed and the shares of stock are purchased by [p]laintiff, who isexpressly authorized and empowered to transfer the duly endorsedshares of stock on the books of the corporation to his own name; . .

. 18 (emphasis supplied) However, the contracts of pledge, which were made integral parts of theComplaint, contain this common proviso:

"3.In the event of the failure of the PLEDGOR to pay the amount withina period of six (6) months from the date hereof, the PLEDGEE is herebyauthorized to foreclose the pledge upon the said shares of stock herebycreated by selling the same at public or private sale with or withoutnotice to the PLEDGOR, at which sale the PLEDGEE may be the

purchaser at his option; and the PLEDGEE is hereby authorized andempowered at his option, to transfer the said shares of stock on thebooks of the corporation to his own name and to hold the certificateissued in lieu thereof under the terms of this pledge, and to sell the saidshares to issue to him and to apply the proceeds of the sale to thepayment of the said sum and interest, in the manner hereinaboveprovided; "

This contractual stipulation, which was part of the Complaint, shows that plaintiffwas merely authorized to foreclose the pledge upon maturity of the loans, not toown them. Such foreclosure is not automatic, for it must be done in a public or

private sale. Nowhere did the Complaint mention that petitioner had in factforeclosed the pledge and purchased the shares after such foreclosure His statusas a mere pledgee does not, under civil law, entitle him to ownership of thesubject shares. It is also noteworthy that petitioner's Complaint did not aver thatsaid shares were acquired through extraordinary prescription, novation or laches.Moreover, petitioner's claim, subsequent to the filing of the Complaint, that heacquired ownership of the said shares through these three modes is notindubitable and still has to be resolved. In fact, as will be shown, such allegationhas no merit. Manifestly, the Complaint by itself did not contain any primafacie showing that petitioner was the owner of the shares of stocks. Quite thecontrary, it demonstrated that he was merely a pledgee, not an owner.

Accordingly, it failed to lay down a sufficient basis for the SEC to exercise jurisdiction over the controversy. In fact, the very allegations of the Complaintand its annexes negated the jurisdiction of the SEC.

Petitioner's reliance on the doctrines set forth in Abejo v . De la Cruz and RuralBank of Salinas, Inc . v . Court of Appeals is misplaced. In Abejo , the Abejo







spouses sold to Telectronic Systems, Inc. shares of stock in Pocket BellPhilippines, Inc. Subsequent to such contract of sale, the corporate secretary,Norberto Braga, refused to record the transfer of the shares in the corporatebooks and instead asked for the annulment of the sale, claiming that he and hiswife had a preemptive right over some of the shares, and that his wife's shareswere sold without consideration or consent.

At the time the Bragas questioned the validity of the sale, the contract hadalready been perfected, thereby demonstrating that Telectronic Systems, Inc.was already the prima facie owner of the shares and, consequently, astockholder of Pocket Bell Philippines, Inc. Even if the sale were to be annulledlater on, Telectronic Systems, Inc. had, in the meantime, title over the sharesfrom the time the sale was perfected until the time such sale was annulled. Theeffects of an annulment operate prospectively and do not, as a rule, retroact to

the time the sale was made. Therefore, at the time the Bragas questioned thevalidity of the transfers made by the Abejos, Telectronic Systems, Inc. wasalready aprima facie shareholder of the corporation, thus making the disputebetween the Bragas and the Abejos "intra-corporate" in nature. Hence, the Courtheld that "the issue is not on ownership of shares but rather the non-performance by the corporate secretary of the ministerial duty of recordingtransfers of shares of stock of the corporation of which he is secretary " 19

Unlike Abejo , however, petitioner's ownership over the shares in this case wasnot yet perfected when the Complaint was filed. The contract of pledge certainlydoes not make him the owner of the shares pledged. Further, whetherprescription effectively transferred ownership of the shares, whether there was anovation of the contracts of pledge, and whether laches had set in were difficultlegal issues, which were unpleaded and unresolved when herein petitioner askedthe corporate secretary of Go Fay to effect the transfer, in his favor, of theshares pledged to him. cda

In Rural Bank of Salinas , Melenia Guerrero executed deeds of assignment for the

shares in favor of the respondents in that case. When the corporate secretaryrefused to register the transfer, an action for mandamus was instituted.Subsequently, a motion for intervention was filed, seeking the annulment of thedeeds of assignment on the grounds that the same were fictitious andantedated, and that they were in fact donations because the considerationstherefor were below the book value of the shares.






Like the Abejo spouses, the respondents in Rural Bank of Salinas werealready prima facie shareholders when the deeds of assignment werequestioned. If the said deeds were to be annulled later on, respondents wouldstill be considered shareholders of the corporation from the time of theassignment until the annulment of such contracts.

Second Issue : Mandamus Will Not

Issue to Establish a Right

Petitioner prays for the issuance of a writ of mandamus, directing the corporatesecretary of respondent corporation to have the shares transferred to his namein the corporate books, to issue new certificates of stock and to deliver thecorresponding dividends to him. 20

"In order that a writ of mandamus may issue, it is essential that the personpetitioning for the same has a clear legal right to the thing demanded and that itis the imperative duty of the respondent to perform the act required. It neitherconfers powers nor imposes duties and is never issued in doubtful cases. It issimply a command to exercise a power already possessed and to perform a dutyalready imposed." 21

In the present case, petitioner has failed to establish a clear legal right.Petitioner's contention that he is the owner of the said shares is completelywithout merit. Quite the contrary and as already shown, he does not have anyownership rights at all. At the time petitioner instituted his suit at the SEC, hisownership claim had no prima facie leg to stand on. At best, his contention wasdisputable and uncertain. Mandamus will not issue to establish a legal right, butonly to enforce one that is already clearly established.

Without Foreclosure and

Purchase at Auction,

Pledgor Is Not the Owner of Pledged Shares

Petitioner initially argued that ownership of the shares pledged had passed tohim, upon Respondents Sy Guiok and Sy Lim's failure to pay their respectiveloans. But on appeal, petitioner claimed that ownership over the shares hadpassed to him, not via the contracts of pledge, but by virtue of prescription andby respondents' subsequent acts which amounted to a novation of the contractsof pledge. We do not agree.









At the outset, it must be underscored that petitioner did not acquire ownershipof the shares by virtue of the contracts of pledge. Article 2112 of the Civil Codestates:

"The creditor to whom the credit has not been satisfied in due time, may

proceed before a Notary Public to the sale of the thing pledged. Thissale shall be made at a public auction, and with notification to thedebtor and the owner of the thing pledged in a proper case, stating theamount for which the public sale is to be held. If at the first auction thething is not sold, a second one with the same formalities shall be held;and if at the second auction there is no sale either, the creditor mayappropriate the thing pledged. In this case he shall be obliged to give anacquittance for his entire claim."

Furthermore, the contracts of pledge contained a common proviso, which we

quote again for the sake of clarity: "3.In the event of the failure of the PLEDGOR to pay the amount withina period of six (6) months from the date hereof, the PLEDGEE is herebyauthorized to foreclose the pledge upon the said shares of stock herebycreated by selling the same at public or private sale with or withoutnotice to the PLEDGOR, at which sale the PLEDGEE may be thepurchaser at his option; and the PLEDGEE is hereby authorized andempowered at his option to transfer the said shares of stock on thebooks of the corporation to his own name, and to hold the certificateissued in lieu thereof under the terms of this pledge, and to sell the said

shares to issue to him and to apply the proceeds of the sale to thepayment of the said sum and interest, in the manner hereinaboveprovided;" 22

There is no showing that petitioner made any attempt to foreclose or sell theshares through public or private auction, as stipulated in the contracts of pledgeand as required by Article 2112 of the Civil Code. Therefore, ownership of theshares could not have passed to him. The pledgor remains the owner during thependency of the pledge and prior to foreclosure and sale, as explicitly providedby Article 2103 of the same Code: LLphil

"Unless the thing pledged is expropriated, the debtor continues to bethe owner thereof.

Nevertheless, the creditor may bring the actions which pertain to theowner of the thing pledged in order to recover it from, or defend itagainst a third person."







No Ownership

by Prescription

Petitioner did not acquire the shares by prescription either. The period of

prescription of any cause of action is reckoned only from the date the cause ofaction accrued.

"Since a cause of action requires as an essential element not only a legal right ofthe plaintiff and a correlative obligation of the defendant, but also an act oromission of the defendant in violation of said legal right, the cause of action doesnot accrue until the party obligated refuses, expressly or impliedly, to comply

with its duty." 23 Accordingly, a cause of action on a written contract accrueswhen a breach or violation thereof occurs.

Under the contracts of pledge, private respondents would have a right to ask forthe redelivery of their certificates of stock upon payment of their debts topetitioner, consonant with Article 2105 of the Civil Code, which reads:

"The debtor cannot ask for the return of the thing pledged against thewill of the creditor, unless and until he has paid the debt and its interest,with expenses in a proper case." 24

Thus, the right to recover the shares based on the written contract of pledgebetween petitioner and respondents would arise only upon payment of their

respective loans. Therefore, the prescriptive period within which to demand thereturn of the thing pledged should begin to run only after the payment of theloan and a demand for the thing has been made, because it is only then thatrespondents acquire a cause of action for the return of the thing pledged.

Prescription should not begin to run on the action to demand the return of thething pledged while the loan still exists. This is because the right to ask for thereturn of the thing pledged will not arise so long as the loan subsists. In thepresent case, the prescriptive period did not begin to run when the loan becamedue. On the other hand, it is petitioner's right to demand payment that may be in

danger of prescription.

Petitioner contends that he can be deemed to have acquired ownership over thecertificates of stock through extraordinary prescription, as provided for in Article1132 of the Civil Code which states:










"Art. 1132. The ownership of movables prescribes through uninterruptedpossession for four years in good faith.

The ownership of personal property also prescribes throughuninterrupted possession for eight years, without need of any other

condition. . . ." Petitioner's argument is untenable. What is required by Article 1132 is possessionin the concept of an owner. In the present case, petitioner's possession of thestock certificates came about because they were delivered to him pursuant tothe contracts of pledge. His possession as a pledgee cannot ripen into ownershipby prescription. As aptly pointed out by Justice Jose C. Vitug:

"Acquisitive prescription is a mode of acquiring ownership by apossessor through the requisite lapse of time. In order to ripen into

ownership, possession must be in the concept of an owner, public,peaceful and uninterrupted. Thus, possession with a juridical title, suchas by a usufructory, a trustee, a lessee, agent or a pledgee, not being inthe concept of an owner, cannot ripen into ownership by acquisitiveprescription unless the juridical relation is first expressly repudiated andsuch repudiation has been communicated to the other party." 25

Petitioner expressly repudiated the pledge, only when he filed his Complaint andclaimed that he was not a mere pledgee, but that he was already the owner ofthe shares. Based on the foregoing, petitioner has not acquired the certificates ofstock through extraordinary prescription.

No Novation

in Favor of Petitioner

Neither did petitioner acquire the shares by virtue of a novation of the contractof pledge. Novation is defined as "the extinguishment of an obligation by asubsequent one which terminates it, either by changing its object or principalconditions, by substituting a new debtor in place of the old one, or by

subrogating a third person to the rights of the creditor." 26 Novation of acontract must not be presumed. "In the absence of an express agreement,novation takes place only when the old and the new obligations are incompatibleon every point." 27

In the present case, novation cannot be presumed by (a) respondents'indorsement and delivery of the certificates of stock covering the 600 shares, (b)













petitioner's receipt of dividends from 1980 to 1983, and (c) the fact thatrespondents have not instituted any action to recover the shares since 1980.

Respondents' indorsement and delivery of the certificates of stock were pursuantto paragraph 2 of the contract of pledge which reads:

"2.The said certificates had been delivered by the PLEDGOR endorsed inblank to be held by the PLEDGEE under the pledge as security for thepayment of the aforementioned sum and interest thereon accruing." 28

This stipulation did not effect the transfer of ownership to petitioner. It wasmerely in compliance with Article 2093 of the Civil Code, 29 which requires thatthe thing pledged be placed in the possession of the creditor or a third person of

common agreement; and Article 2095, 30 which states that if the thing pledgedare shares of stock, then the "instrument proving the right pledged" must bedelivered to the creditor. cdll

Moreover, the fact that respondents allowed the petitioner to receive dividendspertaining to the shares was not meant to relinquish ownership thereof. Asstated by respondent corporation, the same was done pursuant to an agreementbetween the petitioner and Respondents Sy Guiok and Sy Lim, following Article2102 of the Civil Code which provides:

"If the pledge earns or produces fruits, income, dividends, or interests,the creditor shall compensate what he receives with those which areowing him; but if none are owing him, or insofar as the amount mayexceed that which is due, he shall apply it to the principal. Unless thereis a stipulation to the contrary, the pledge shall extend to the interestand the earnings of the right pledged."

Novation cannot be inferred from the mere fact that petitioner has not, since1980, instituted any action to recover the shares. Such action is in factpremature, as the loan is still outstanding. Besides, as already pointed out,

novation is never presumed inferred. No Dacion en Pago

in Favor of Petitioner

Neither can there be dacion en pago , in which the certificates of stock aredeemed sold to petitioner, the consideration for which is the extinguishment of














the loans and the accrued interests thereon. Dacion en pago is a form ofnovation in which a change takes place in the object involved in the originalcontract. Absent an explicit agreement, petitioner cannot simply presume dacionen pago .

Laches Not

a Bar to Petitioner

Petitioner submits that "the inaction of the individual respondents with respect tothe recovery of the shares of stock serves to bar them from asserting rights oversaid shares on the basis of laches." 31

Laches has been defined as "the failure or neglect, for an unreasonable length oftime, to do that which by exercising due diligence could or should have been

done earlier; it is negligence or omission to assert a right within a reasonabletime, warranting a presumption that the party entitled to assert it either hasabandoned it or declined to assert it." 32

In this case, it is in fact petitioner who may be guilty of laches. Petitioner had allthe time to demand payment of the debt. More important, under the contracts ofpledge, petitioner could have foreclosed the pledges as soon as the loansbecame due. But for still unknown or unexplained reasons, he failed to do so,preferring instead to pursue his baseless claim to ownership.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. Costs against petitioner. LLphil

SO ORDERED.

Davide, Jr . , Bellosillo, Vitug and Quisumbing, JJ . , concur.

Footnotes

47.

FIRST DIVISION

[G.R. No. 124535. September 28, 2001.]










THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS ANDDIRECTORS, BERNARDO BAUTISTA, JAIME CUSTODIO,OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, andJUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY,INC., petitioners , vs . HONORABLE COURT OF APPEALS,HONORABLE COMMISSION EN BANC, SECURITIES ANDEXCHANGE COMMISSION, HONORABLE ENRIQUE L.FLORES, JR., in his capacity as Hearing Officer, REYNALDO

VILLANUEVA, SR., AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES, AURORA LACERNA,CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGANand ELENA USI, respondents .

Rosales Law Office for petitioners.

Amando D. Ignacio and Jose R. Dimayuga for private respondents.

SYNOPSIS

This is an appeal from the CA decision which upheld the decision of theSEC which granted the preliminary injunction prayed for by privaterespondents who claimed that the newly elected officers of petitioner-bankshould be enjoined from discharging their duties because private

respondents-stockholders of petitioner-bank were not notified of thestockholders' meeting held on January 15, 1994 wherein said new set ofofficers were elected.

The Supreme Court found the appeal meritless, ruling: that whileprivate respondents executed a deed of assignment of their shares in favor ofpetitioners, there was no effective transfer of shares since the requirementsprescribed by the law for a valid transfer of shares of stock have not beencomplied with. Consequently, petitioner, as mere assignees cannot enjoy thestatus of stockholders, insofar as the assigned shares are concerned, andprivate respondents cannot, as yet, be deprived of their rights asstockholders, until the issue of ownership of the shares in question is finallyresolved. IaDcTC

SYLLABUS



1.COMMERCIAL LAW; CORPORATION CODE; TRANSFER OF SHARES OF STOCK;REQUISITES FOR VALIDITY. — We have uniformly held that for a valid transferof stocks, there must be strict compliance with the mode of transfer prescribedby law. The requirements are: (a) There must be delivery of the stock certificate;(b) The certificate must be endorsed by the owner or his attorney-in-fact orother persons legally authorized to make the transfer; and (c) To be valid againstthird parties, the transfer must be recorded in the books of the corporation.

2.ID.; ID.; ID.; ID.; EFFECT OF NON-COMPLIANCE THEREWITH; CASE AT BAR. — While it may be true that there was an assignment of private respondents'shares to the petitioners, said assignment was not sufficient to effect the transferof shares since there was no endorsement of the certificates of stock by theowners, their attorneys-in-fact or any other person legally authorized to makethe transfer. Moreover, petitioners admit that the assignment of shares was not

coupled with delivery, the absence of which is a fatal defect. The rule is that thedelivery of the stock certificate duly endorsed by the owner is the operative actof transfer of shares from the lawful owner to the transferee. Title may bevested in the transferee only by delivery of the duly indorsed certificate of stock.. . . Consequently, the petitioners, as mere assignees, cannot enjoy the status ofa stockholder, cannot vote nor be voted for, and will not be entitled to dividends,insofar as the assigned shares are concerned. Parenthetically, the privaterespondents cannot, as yet, be deprived of their rights as stockholders, until andunless the issue of ownership and transfer of the shares in question is resolvedwith finality.

3.ID.; ID.; SECURITIES AND EXCHANGE COMMISSION; R.A. NO. 8799; SECJURISDICTION OVER CASES FALLING UNDER SEC. 5 OF PD NO. 902-A NOWCOGNIZABLE BY THE RTC; CASE AT BAR. — While this case was pending,Republic Act No. 8799 was enacted, transferring to the courts of general

jurisdiction or the appropriate Regional Trial Court the SEC's jurisdiction over allcases enumerated under Section 5 of Presidential Decree No. 902-A. One ofthose cases enumerated is any controversy "arising out of intra-corporate orpartnership relations, between and among stockholders, members, or associates,between any and/or all of them and the corporation, partnership or association

of which they are stockholders, members or associates, respectively; andbetween such corporation, partnership or association and the state insofar as itconcerns their individual franchise or right to exist as such entity." The instantcontroversy clearly falls under this category of cases which are now cognizableby the Regional Trial Court.



D E C I S I O N

YNARES-SANTIAGO, J p:

Before us is a petition for review on certiorari assailing the Decision of the Courtof Appeals dated February 27, 1996, as well as the Resolution dated March 29,1996, in CA-G.R. SP No. 38861.

The instant controversy arose from a dispute between the Rural Bank of LipaCity, Incorporated (hereinafter referred to as the Bank), represented by itsofficers and members of its Board of Directors, and certain stockholders of thesaid bank. The records reveal the following antecedent facts:

Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank ofLipa City, executed a Deed of Assignment, 1wherein he assigned his shares, aswell as those of eight (8) other shareholders under his control with a total of10,467 shares, in favor of the stockholders of the Bank represented by itsdirectors Bernardo Bautista, Jaime Custodio and Octavio Katigbak. Sometimethereafter, Reynaldo Villanueva, Sr. and his wife, Avelina, executed an

Agreement 2 wherein they acknowledged their indebtedness to the Bank in theamount of Four Million Pesos (P4,000,000.00), and stipulated that said debt willbe paid out of the proceeds of the sale of their real property described in the

Agreement.

At a meeting of the Board of Directors of the Bank on November 15, 1993, the Villanueva spouses assured the Board that their debt would be paid on or beforeDecember 31 of that same year; otherwise, the Bank would be entitled toliquidate their shareholdings, including those under their control. In such anevent, should the proceeds of the sale of said shares fail to satisfy in full theobligation, the unpaid balance shall be secured by other collateral sufficienttherefor.

When the Villanueva spouses failed to settle their obligation to the Bank on the

due date, the Board sent them a letter 3demanding: (1) the surrender of all thestock certificates issued to them; and (2) the delivery of sufficient collateral tosecure the balance of their debt amounting to P3,346,898.54. The Villanuevasignored the bank's demands, whereupon their shares of stock were convertedinto Treasury Stocks. Later, the Villanuevas, through their counsel, questionedthe legality of the conversion of their shares. 4
















On January 15, 1994, the stockholders of the Bank met to elect the newdirectors and set of officers for the year 1994. The Villanuevas were not notifiedof said meeting. In a letter dated January 19, 1994, Atty. Amado Ignacio,counsel for the Villanueva spouses, questioned the legality of the saidstockholders' meeting and the validity of all the proceedings therein. In reply, thenew set of officers of the Bank informed Atty. Ignacio that the Villanuevas wereno longer entitled to notice of the said meeting since they had relinquished theirrights as stockholders in favor of the Bank.

Consequently, the Villanueva spouses filed with the Securities and ExchangeCommission (SEC), a petition for annulment of the stockholders' meeting andelection of directors and officers on January 15, 1994, with damages and prayerfor preliminary injunction 5 , docketed as SEC Case No. 02-94-4683. Joining themas co-petitioners were Catalino Villanueva, Andres Gonzales, Aurora Lacerna,

Celso Laygo, Edgardo Reyes, Alejandro Tonogan, and Elena Usi. Namedrespondents were the newly-elected officers and directors of the Rural Bank,namely: Bernardo Bautista, Jaime Custodio, Octavio Katigbak, Francisco Custodioand Juanita Bautista.

The Villanuevas' main contention was that the stockholders' meeting and electionof officers and directors held on January 15, 1994 were invalid because: (1) theywere conducted in violation of the by-laws of the Rural Bank; (2) they were notgiven due notice of said meeting and election notwithstanding the fact that theyhad not waived their right to notice; (3) they were deprived of their right to vote

despite their being holders of common stock with corresponding voting rights;(4) their names were irregularly excluded from the list of stockholders; and (5)the candidacy of petitioner Avelina Villanueva for directorship was arbitrarilydisregarded by respondent Bernardo Bautista and company during the saidmeeting.

On February 16, 1994, the SEC issued a temporary restraining order enjoiningthe respondents, petitioners herein, from acting as directors and officers of theBank, and from performing their duties and functions as such. 6

In their joint Answer, 7 the respondents therein raised the following defenses: 1)The petitioners have no legal capacity to sue;

2)The petition states no cause of action;

3)The complaint is insufficient;














4)The petitioners' claims had already been paid, waived,abandoned, or otherwise extinguished;

5)The petitioners are estopped from challenging the conversion oftheir shares.

Petitioners, respondents therein, thus moved for the lifting of the temporaryrestraining order and the dismissal of the petition for lack of merit, and for theupholding of the validity of the stockholders' meeting and election of directorsand officers held on January 15, 1994. By way of counterclaim, petitionersprayed for actual, moral and exemplary damages.

On April 6, 1994, the Villanuevas' application for the issuance of a writ ofpreliminary injunction was denied by the SEC Hearing Officer on the ground oflack of sufficient basis for the issuance thereof. However, a motion for

reconsideration 8 was granted on December 16, 1994, upon finding that sincethe Villanuevas' have not disposed of their shares, whether voluntarily orinvoluntarily, they were still stockholders entitled to notice of the annualstockholders' meeting was sustained by the SEC. Accordingly, a writ ofpreliminary injunction was issued enjoining the petitioners from acting asdirectors and officers of the bank .9

Thereafter, petitioners filed an urgent motion to quash the writ of preliminaryinjunction, 10 challenging the propriety of the said writ considering that they hadnot yet received a copy of the order granting the application for the writ ofpreliminary injunction.

With the impending 1995 annual stockholders' meeting only nine (9) days away,the Villanuevas filed an Omnibus Motion 11praying that the said meeting andelection of officers scheduled on January 14, 1995 be suspended or held inabeyance, and that the 1993 Board of Directors be allowed, in the meantime, toact as such. One (1) day before the scheduled stockholders meeting, the SECHearing Officer granted the Omnibus Motion by issuing a temporary restrainingorder preventing petitioners from holding the stockholders meeting and electingthe board of directors and officers of the Bank. 12

A petition for Certiorari and Annulment with Damages was filed by the RuralBank, its directors and officers before the SEC en banc , 13 naming asrespondents therein SEC Hearing Officer Enrique L. Flores, Jr., and the

Villanuevas, erstwhile petitioners in SEC Case No. 02-94-4683. The said petition


























alleged that the orders dated December 16, 1994 and January 13, 1995, whichallowed the issuance of the writ of preliminary injunction and prevented the bankfrom holding its 1995 annual stockholders' meeting, respectively, were issued bythe SEC Hearing Officer with grave abuse of discretion amounting to lack orexcess of jurisdiction. Corollarily, the Bank, its directors and its officersquestioned the SEC Hearing Officer's right to restrain the stockholders' meetingand election of officers and directors considering that the Villanueva spouses andthe other petitioners in SEC Case No. 02-94-4683 were no longer stockholderswith voting rights, having already assigned all their shares to the Bank.

In their Comment/Opposition, the Villanuevas and other private respondentsargued that the filing of the petition for certiorari was premature and there wasno grave abuse of discretion on the part of the SEC Hearing Officer, nor did heact without or in excess of his jurisdiction.

On June 7, 1995, the SEC en banc denied the petition for certiorari in anOrder, 14 which stated:

In the case now before us, petitioners could not show any proof ofdespotic or arbitrary exercise of discretion committed by the hearingofficer in issuing the assailed orders save and except the allegation thatthe private respondents have already transferred their stockholdings infavor of the stockholders of the Bank. This, however, is the very issue ofthe controversy in the case a quo and which, to our mind, shouldrightfully be litigated and proven before the hearing officer. This is so

because of the undisputed fact the (sic ) private respondents are still inpossession of the stock certificates evidencing their stockholdings and asheld by the Supreme Court in Embassy Farms, Inc. v. Court of Appeals,et al., 188 SCRA 492 , citing Nava v. Peers Marketing Corp., the non-delivery of the stock certificate does not make the transfer of the sharesof stock effective. For an effective transfer of stock, the mode of transferas prescribed by law must be followed.

We likewise find that the provision of the Corporation Code cited by theherein petitioner, particularly Section 83 thereof, to support the claimthat the private respondents are no longer stockholders of the Bank ismisplaced. The said law applies to acquisition of shares of stock by thecorporation in the exercise of a stockholder's right of appraisal or whenthe said stockholder opts to dissent on a specific corporate act in thoseinstances provided by law and demands the payment of the fair value ofhis shares. It does not contemplate a "transfer" whereby thestockholder, in the exercise of his right to dispose of his shares ( jusdisponendi ) sells or assigns his stockholdings in favor of another person







where the provisions of Section 63 of the same Code should be compliedwith.

The hearing officer, therefore, had a basis in issuing the questionedorders since the private respondents' rights as stockholders may be

prejudiced should the writ of injunction not be issued. The privaterespondents are presumably stockholders of the Bank in view of the factthat they have in their possession the stock certificates evidencing theirstockholdings. Until proven otherwise, they remain to be such and thehearing officer, being the one directly confronted with the facts andpieces of evidence in the case, may issue such orders and resolutionswhich may be necessary or reasonable relative thereto to protect theirrights and interest in the meantime that the said case is still pendingtrial on the merits.

A subsequent motion for reconsideration 15 was likewise denied by the SEC enbanc in a Resolution 16 dated September 29, 1995.

A petition for review was thus filed before the Court of Appeals, which wasdocketed as CA-G.R. SP No. 38861, assailing the Order dated June 7, 1995 andthe Resolution dated September 29, 1995 of the SEC en banc in SEC EB No. 440.The ultimate issue raised before the Court of Appeals was whether or not theSEC en banc erred in finding:

1.That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did notcommit any grave abuse of discretion that would warrant the filing of a

petition for certiorari ; 2.That the private respondents are still stockholders of the subject bankand further stated that "it does not contemplate a transfer" whereby thestockholders, in the exercise of his right to dispose of his shares (JusDisponendi ) sells or assigns his stockholdings in favor of another personwhere the provisions of Sec. 63 of the same Code should be compliedwith; and

3.That the private respondents are presumably stockholders of the bank

in view of the fact that they have in their possession the stockcertificates evidencing their stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailedDecision 17 dismissing the petition for review for lack of merit. The appellatecourt found that:















The public respondent is correct in holding that the Hearing Officer didnot commit grave abuse of discretion. The officer, in exercising his

judicial functions, did not exercise his judgment in a capricious,whimsical, arbitrary or despotic manner. The questioned Orders issuedby the Hearing Officer were based on pertinent law and the facts of the

case. Section 63 of the Corporation Code states: ". . . Shares of stock soissued are personal property and may be transferred by delivery of thecertificate or certificates indorsed by the owner . . . . No transfer,however, shall be valid, except as between the parties, until the transferis recorded in the books of the corporation so as to show the names ofthe parties to the transaction, the date of the transfer, the number ofthe certificate or certificates and the number of shares transferred."

In the case at bench, when private respondents executed a deed ofassignment of their shares of stocks in favor of the Stockholders of theRural Bank of Lipa City, represented by Bernardo Bautista, JaimeCustodio and Octavio Katigbak, title to such shares will not be effectiveunless the duly indorsed certificate of stock is delivered to them. For aneffective transfer of shares of stock, the mode and manner of transfer asprescribed by law should be followed. Private respondents are stillpresumed to be the owners of the shares and to be stockholders of theRural Bank.

We find no reversible error in the questioned orders.

Petitioners' motion for reconsideration was likewise denied by the Court of Appeals in an Order 18 dated March 29, 1996.

Hence, the instant petition for review seeking to annul the Court of Appeals'decision dated February 27, 1996 and the resolution dated March 29, 1996. Inparticular, the decision is challenged for its ruling that notwithstanding theexecution of the deed of assignment in favor of the petitioners, transfer of title tosuch shares is ineffective until and unless the duly indorsed certificate of stock isdelivered to them. Moreover, petitioners faulted the Court of Appeals for not

taking into consideration the acts of disloyalty committed by the Villanuevaspouses against the Bank.

We find no merit in the instant petition.







The Court of Appeals did not err or abuse its discretion in affirming the order ofthe SEC en banc , which in turn upheld the order of the SEC Hearing Officer, forthe said rulings were in accordance with law and jurisprudence.

The Corporation Code specifically provides:

SECTION 63.Certificate of stock and transfer of shares . — The capitalstock of stock corporations shall be divided into shares for whichcertificates signed by the president or vice president, countersigned bythe secretary or assistant secretary, and sealed with the seal of thecorporation shall be issued in accordance with the by-laws. Shares ofstocks so issued are personal property and may be transferred bydelivery of the certificate or certificates indorsed by the owner or hisattorney-in-fact or other person legally authorized to make the transfer.No transfer, however, shall be valid, except as between the parties, until

the transfer is recorded in the books of the corporation so as to showthe names of the parties to the transaction, the date of the transfer, thenumber of the certificate or certificates and the number of sharestransferred.

No shares of stock against which the corporation holds any unpaid claimshall be transferable in the books of the corporation. (Emphasis ours)

Petitioners argue that by virtue of the Deed of Assignment, 19 privaterespondents had relinquished to them any and all rights they may have had asstockholders of the Bank. While it may be true that there was an assignment ofprivate respondents' shares to the petitioners, said assignment was not sufficientto effect the transfer of shares since there was no endorsement of thecertificates of stock by the owners, their attorneys-in-fact or any other personlegally authorized to make the transfer. Moreover, petitioners admit that theassignment of shares was not coupled with delivery, the absence of which is afatal defect. The rule is that the delivery of the stock certificate duly endorsed bythe owner is the operative act of transfer of shares from the lawful owner to thetransferee. 20 Thus, title may be vested in the transferee only by delivery of theduly indorsed certificate of stock. 21

We have uniformly held that for a valid transfer of stocks, there must be strictcompliance with the mode of transfer prescribed by law. 22 The requirementsare: (a) There must be delivery of the stock certificate; (b) The certificate mustbe endorsed by the owner or his attorney-in-fact or other persons legallyauthorized to make the transfer; and (c) To be valid against third parties, the


















transfer must be recorded in the books of the corporation. As it is, compliancewith any of these requisites has not been clearly and sufficiently shown.

It may be argued that despite non-compliance with the requisite endorsementand delivery, the assignment was valid between the parties, meaning the private

respondents as assignors and the petitioners as assignees. While the assignmentmay be valid and binding on the petitioners and private respondents, it does notnecessarily make the transfer effective. Consequently, the petitioners, as mereassignees, cannot enjoy the status of a stockholder, cannot vote nor be votedfor, and will not be entitled to dividends, insofar as the assigned shares areconcerned. Parenthetically, the private respondents cannot, as yet, be deprivedof their rights as stockholders, until and unless the issue of ownership andtransfer of the shares in question is resolved with finality.

There being no showing that any of the requisites mandated by law 23 wascomplied with, the SEC Hearing Officer did not abuse his discretion in grantingthe issuance of the preliminary injunction prayed for by petitioners in SEC CaseNo. 02-94-4683 (herein private respondents). Accordingly, the order of theSEC en banc affirming the ruling of the SEC Hearing Officer, and the Court of

Appeals decision upholding the SEC en banc order, are valid and in accordancewith law and jurisprudence, thus warranting the denial of the instant petition forreview.

To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect

their directors, the temporary restraining order issued by the SEC Hearing Officeron January 13, 1995 must be lifted. However, private respondents shall benotified of the meeting and be allowed to exercise their rights as stockholdersthereat.

While this case was pending, Republic Act No. 8799 24 was enacted, transferringto the courts of general jurisdiction or the appropriate Regional Trial Court theSEC's jurisdiction over all cases enumerated under Section 5 of PresidentialDecree No. 902-A. 25 One of those cases enumerated is any controversy "arisingout of intra-corporate or partnership relations, between and among stockholders,

members, or associates, between any and/or all of them and the corporation,partnership or association of which they are stockholders, members orassociates, respectively; and between such corporation, partnership orassociation and the state insofar as it concerns their individual franchise or rightto exist as such entity." The instant controversy clearly falls under this categoryof cases which are now cognizable by the Regional Trial Court.















legal increments and for the corporation to pay him damages. Respondentmoved to dismiss the complaint on the ground, among others, that it states nocause of action. After respondents filed their reply, the SEC hearing officergranted the motion to dismiss. According to the hearing officer, insofar as theissuance of stock certificates is concerned, the real party-in-interest was FaustoG. Gaid, or his estate, or his heirs. Gaid was an incorporator and an originalstockholder of the respondent corporation who subscribed and fully paid for239,500 shares of stock. The petitioner tried to step into the shoes of Gaid andthereby become a stockholder of the defendant corporation by demanding theissuance of the stock certificate in his name. The SEC hearing officer decidedthat the petitioner could not do as he prayed because there was no record of anyassignment or transfer in the books of the respondent corporation and there wasneither instruction nor authority from the transferor for such assignment ortransfer. Petitioner appealed the order of dismissal. The Commission en

banc reversed the decision of the hearing officer. The motion for reconsiderationhaving been denied, the respondents appealed to the Court of Appeals. TheCourt of Appeals held that in the absence of any allegations that the transfer ofshares between Fausto Gaid and the petitioner was registered in the stock andtransfer book of respondent corporation, petitioner failed to state a cause ofaction. Thus, the CA dismissed the complaint formandamus for failure to state acause of action. Hence, the instant petition for review on certiorari . At issueherein was whether the Court of Appeals erred in holding that herein petitionerhad no cause of action for a writ of mandamus .

The Supreme Court ruled that petitioner had no cause of action and that hispetition for mandamus was properly dismissed. From the corporation's point ofview, the transfer is not effective until it is recorded. As between the corporation,on one hand, and its stockholders and third persons on the other, thecorporation looks only to its books for the purpose of determining who itsstockholders are. cSCADE

SYLLABUS

1.MERCANTILE LAW; CORPORATION CODE; TRANSFER OF SHARES OF STOCKS;SHOULD BE RECORDED IN THE STOCK AND TRANSFER BOOK OF ACORPORATION; EFFECT OF FAILURE; APPLICATION IN CASE AT BAR. — Pursuant to Sec. 63 of the Corporation Code, a transfer of shares of stock notrecorded in the stock and transfer book of the corporation is non-existent as faras the corporation is concerned. As between the corporation on the one hand,and its shareholders and third persons on the other, the corporation looks only to



its books for the purpose of determining who its shareholders are. It is onlywhen the transfer has been recorded in the stock and transfer book that acorporation may rightfully regard the transferee as one of its stockholders. Fromthis time, the consequent obligation on the part of the corporation to recognizesuch rights as it is mandated by law to recognize arises. Hence, without suchrecording, the transferee may not be regarded by the corporation as one amongits stockholders and the corporation may legally refuse the issuance of stockcertificates in the name of the transferee even when there has been compliancewith the requirements of Section 64 of the Corporation Code. This is the importof Section 63 which states that "No transfer, however, shall be valid, exceptbetween the parties, until the transfer is recorded in the books of the corporationshowing the names of the parties to the transaction, the date of the transfer, thenumber of the certificate or certificates and the number of shares transferred."Unless and until such recording is made the demand for the issuance of stock

certificates to the alleged transferee has no legal basis. 2.ID.; ID.; CERTIFICATE OF STOCK, A TANGIBLE EVIDENCE OF THE STOCKITSELF AND OF THE VARIOUS INTERESTS THEREIN; IMPORTANCE OFCERTIFICATE OF STOCK, CONSTRUED. — In Tan vs . SEC , 206 SCRA 740 (1992),we had occasion to declare that a certificate of stock is not necessary to renderone a stockholder in a corporation. But a certificate of stock is the tangibleevidence of the stock itself and of the various interests therein. The certificate isthe evidence of the holder's interest and status in the corporation, his ownershipof the share represented thereby. The certificate is in law, so to speak, an

equivalent of such ownership. It expresses the contract between the corporationand the stockholder, but it is not essential to the existence of a share in stock orthe creation of the relation of shareholder to the corporation. In fact, it rests onthe will of the stockholder whether he wants to be issued stock certificates, anda stockholder may opt not to be issued a certificate.

3.REMEDIAL LAW; SPECIAL CIVIL ACTIONS; PETITION FOR MANDAMUS; WHENNOT PROPER TO COMPEL THE REGISTRATION OF STOCK TRANSFER;

APPLICATION IN CASE AT BAR. — The deed of undertaking with indorsementpresented by petitioner does not establish, on its face, his right to demand for

the registration of the transfer and the issuance of certificates of stocks.In Hager vs . Bryan , 19 Phil. 138 (1911), this Court held that a petitionfor mandamus fails to state a cause of action where it appears that the petitioneris not the registered stockholder and there is no allegation that he holds anypower of attorney from the registered stockholder, from whom he obtained thestocks, to make the transfer. . . . In Rivera vs .Florendo , 144 SCRA 643, 657(1986), we reiterated that a mere indorsement by the supposed owners of the



stock, in the absence of express instructions from them, cannot be the basis ofan action for mandamus and that the rights of the parties have to be threshedout in an ordinary action. That Hager and Rivera involved petitionsfor mandamus to compel the registration of the transfer, while this case is onefor issuance of stock, is of no moment. It has been made clear, thus far, thatbefore a transferee may ask for the issuance of stock certificates, he must firstcause the registration of the transfer and thereby enjoy the status of astockholder insofar as the corporation is concerned. A corporate secretary maynot be compelled to register transfers of shares on the basis merely of anindorsement of stock certificates. With more reason, in our view, a corporatesecretary may not be compelled to issue stock certificates without suchregistration. . . . Absent an allegation that the transfer of shares is recorded inthe stock and transfer book of respondent ALSONS, there appears no basis for aclear and indisputable duty or clear legal obligation that can be imposed upon

the respondent corporate secretary, so as to justify the issuance of the writof mandamus to compel him to perform the transfer of the shares to petitioner.The test of sufficiency of the facts alleged in a petition is whether or not,admitting the facts alleged, the court could render a valid judgment thereon inaccordance with the prayer of the petition. This test would not be satisfied if, asin this case, not all the elements of a cause of action are alleged in thecomplaint. Where the corporate secretary is under no clear legal duty to issuestock certificates because of the petitioner's failure to record earlier the transferof shares, one of the elements of the cause of action for mandamus is clearlymissing. IaHDcT

D E C I S I O N

QUISUMBING, J p:

This petition for review seeks to annul the decision 1 of the Court of Appeals, in

CA-G.R. SP No. 46692, which set aside the decision 2 of the Securities andExchange Commission (SEC) En Banc in SEC-AC No. 545 and reinstated the

order 3 of the Hearing Officer dismissing herein petitioner's complaint. Also

assailed is the CA's resolution 4 of August 10, 1999, denying petitioner's motionfor reconsideration. DTAaCE

On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed acomplaint 5 with the SEC for mandamus and damages against defendants (now























respondents) Alsons Cement Corporation and its corporate secretary FranciscoM. Giron, Jr. In his complaint, petitioner alleged, among others, that:

xxx xxx xxx

5.The late Fausto G. Gaid was an incorporator of Victory CementCorporation (VCC), having subscribed to and fully paid 239,500 shares ofsaid corporation.

6.On February 8, 1968, plaintiff and Fausto Gaid executed a "Deed ofUndertaking" and "Indorsement" whereby the latter acknowledges thatthe former is the owner of said shares and he was thereforeassigning/endorsing the same to the plaintiff. A copy of the saiddeed/indorsement is attached as Annex "A".

7.On April 10, 1968, VCC was renamed Floro Cement Corporation (FCCfor brevity).

8.On October 22, 1990, FCC was renamed Alsons Cement Corporation(ACC for brevity) as shown by the Amended Articles of Incorporation of

ACC, a copy of which is attached as Annex "B".

9.From the time of incorporation of VCC up to the present, nocertificates of stock corresponding to the 239,500 subscribed and fullypaid shares of Gaid were issued in the name of Fausto G. Gaid and/orthe plaintiff.

10.Despite repeated demands, the defendants refused and continue torefuse without any justifiable reason to issue to plaintiff the certificatesof stocks corresponding to the 239,500 shares of Gaid, in violation ofplaintiff's right to secure the corresponding certificate of stock in hisname. 6

Attached to the complaint was the Deed of Undertaking and Indorsement 7 uponwhich petitioner based his petition formandamus . Said deed and indorsementread as follows:

DEED OF UNDERTAKING

KNOW ALL MEN BY THESE PRESENTS:










I, VICENTE C. PONCE, is the owner of the total subscription of FaustoGaid with Victory Cement Corporation in the total amount of TWOHUNDRED THIRTY-NINE THOUSAND FIVE HUNDRED (P239,500.00)PESOS and that Fausto Gaid does not have any liability whatsoever onthe subscription agreement in favor of Victory Cement Corporation.

(SGD.) VICENTE C. PONCE

February 8, 1968

CONFORME:

(SGD.) FAUSTO GAID

INDORSEMENT

I, FAUSTO GAID is indorsing the total amount of TWO HUNDREDTHIRTY-NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of

Victory Cement Corporation to VICENTE C. PONCE.

(SGD.) FAUSTO GAID

With these allegations, petitioner prayed that judgment be rendered orderingrespondents (a) to issue in his name certificates of stocks covering the 239,500shares of stocks and its legal increments and (b) to pay him damages. 8

Instead of filing an answer, respondents moved to dismiss the complaint on thegrounds that: (a) the complaint states no cause of action; mandamus is improperand not available to petitioner; (b) the petitioner is not the real party in interest;(c) the cause of action is barred by the statute of limitations; and (d) in anycase, the petitioner's cause of action is barred by laches. 9 They argued, interalia , that there being no allegation that the alleged "INDORSEMENT" wasrecorded in the books of the corporation, said indorsement by Gaid to theplaintiff of the shares of stock in question — assuming that the indorsement wasin fact a transfer of stocks — was not valid against third persons such as ALSONSunder Section 63 of the Corporation Code. 10 There was, therefore, no specific

legal duty on the part of the respondents to issue the corresponding certificatesof stock, andmandamus will not lie. 11

Petitioner filed his opposition to the motion to dismiss on February 19, 1996contending that: (1) mandamus is the proper remedy when a corporation and itscorporate secretary wrongfully refuse to record a transfer of shares and issue thecorresponding certificates of stocks; (2) he is the proper party-in-interest since


















he stands to be benefited or injured by a judgment in the case; (3) the statute oflimitations did not begin to run until defendant refused to issue the certificates ofstock in favor of the plaintiff on April 13, 1992.

After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr.

granted the motion to dismiss in an Order dated February 29, 1996, which heldthat:

xxx xxx xxx

Insofar as the issuance of certificates of stock is concerned, the realparty in interest is Fausto G. Gaid, or his estate or his heirs. Gaid was anincorporator and an original stockholder of the defendant corporationwho subscribed and fully paid for 239,500 shares of stock (Annex "B").In accordance with Section 37 of the old Corporation Law (Act No. 1459)

obtaining in 1968 when the defendant corporation was incorporated, aswell as Section 64 of the present Corporation Code (Batas PambansaBlg. 68), a stockholder who has fully paid for his subscription togetherwith interest and expenses in case of delinquent shares, is entitled tothe issuance of a certificate of stock for his shares. According toparagraph 9 of the Complaint, no stock certificate was issued to Gaid.

Comes now the plaintiff who seeks to step into the shoes of Gaid andthereby become a stockholder of the defendant corporation bydemanding issuance of the certificates of stock in his name. This hecannot do, for two reasons: there is no record of any assignment or

transfer in the books of the defendant corporation, and there is noinstruction or authority from the transferor (Gaid) for such assignmentor transfer. Indeed, nothing is alleged in the complaint on these twopoints.

xxx xxx xxx

In the present case, there is not even any indorsement of any stockcertificate to speak of. What the plaintiff possesses is a document bywhich Gaid supposedly transferred the shares to him. Assuming the

document has this effect, nevertheless there is neither any allegationnor any showing that it is recorded in the books of the defendantcorporation, such recording being a prerequisite to the issuance of astock certificate in favor of the transferee. 12

Petitioner appealed the Order of dismissal. On January 6, 1997, theCommission En Banc reversed the appealed Order and directed the HearingOfficer to proceed with the case. In ruling that a transfer or assignment of stocks







need not be registered first before it can take cognizance of the case to enforcethe petitioner's rights as a stockholder, the Commission En Banc cited our rulingin Abejo vs. De la Cruz , 149 SCRA 654 (1987) to the effect that:

. . . As the SEC maintains, "There is no requirement that a

stockholder of a corporation must be a registered one in orderthat the Securities and Exchange Commission may takecognizance of a suit seeking to enforce his rights as suchstockholder". This is because the SEC by express mandate has"absolute jurisdiction, supervision and control over allcorporations" and is called upon to enforce the provisions of theCorporation Code, among which is the stock purchaser's right tosecure the corresponding certificate in his name under theprovisions of Section 63 of the Code. Needless to say, anyproblem encountered in securing the certificates of stock

representing the investment made by the buyer must beexpeditiously dealt with throughadministrative mandamus proceedings with the SEC, rather thanthrough the usual tedious regular court procedure. . . .

Applying this principle in the case on hand, a transfer or assignment ofstocks need not be registered first before the Commission can takecognizance of the case to enforce his rights as a stockholder. Also, theproblem encountered in securing the certificates of stock made by thebuyer must be expeditiously taken up through the so-calledadministrative mandamus proceedings with the SEC than in the regular

courts. 13 The Commission En Banc also found that the Hearing Officer erred in holdingthat petitioner is not the real party in interest.

xxx xxx xxx

As appearing in the allegations of the complaint, plaintiff-appellant is thetransferee of the shares of stock of Gaid and is therefore entitled to availof the suit to obtain the proper remedy to make him the rightful owner

and holder of a stock certificate to be issued in his name. Moreover,defendant-appellees failed to show that the transferor nor his heirs haverefuted the ownership of the transferee. Assuming these allegations tobe true, the corporation has a mere ministerial duty to register in itsstock and transfer book the shares of stock in the name of the plaintiff-appellant subject to the determination of the validity of the deed ofassignment in the proper tribunal. 14









Their motion for reconsideration having been denied, herein respondents

appealed the decision 15 of the SEC En Banc and the resolution 16 denying theirmotion for reconsideration to the Court of Appeals.

In its decision, the Court of Appeals held that in the absence of any allegationthat the transfer of the shares between Fausto Gaid and Vicente C. Ponce wasregistered in the stock and transfer book of ALSONS, Ponce failed to state acause of action. Thus, said the CA, "the complaint for mandamus should bedismissed for failure to state a cause of action." 17 Petitioner's motion forreconsideration was likewise denied in a resolution 18 dated August 10, 1999.

Hence, the instant petition for review on certiorari alleging that:

I.. . . THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THATTHE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK

FILED BY PETITIONER FAILED TO STATE A CAUSE OF ACTIONBECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THESHARES (SUBJECT MATTER OF THE COMPLAINT) WASREGISTERED IN THE STOCK AND TRANSFER BOOK OF THECORPORATION, CITING SECTION 63 OF THE CORPORATIONCODE.

II.. . . THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYINGTHE CASES OF "ABEJO VS. DE LA CRUZ" , 149 SCRA 654

AND "RURAL BANK OF SALINAS, INC., ET AL. VS. COURT OF

APPEALS, ET AL." , G.R. NO. 96674, JUNE 26, 1992. III.. . . THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A

1911 CASE, "HAGER VS. BRYAN" , 19 PHIL. 138, TO DISMISS THECOMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK. 19

At issue is whether the Court of Appeals erred in holding that herein petitionerhas no cause of action for a writ of mandamus .HECaTD

Petitioner first contends that the act of recording the transfer of shares in thestock and transfer book and that of issuing a certificate of stock for thetransferred shares involves only one continuous process. Thus, when a corporatesecretary is presented with a document of transfer of fully paid shares, it is hisduty to record the transfer in the stock and transfer book of the corporation,issue a new stock certificate in the name of the transferee, and cancel the oldone. A transferee who requests for the issuance of a stock certificate need notspell out each and every act that needs to be done by the corporate secretary,as a request for issuance of stock certificates necessarily includes a request for






















the recording of the transfer. Ergo , the failure to record the transfer does notmean that the transferee cannot ask for the issuance of stock certificates.

Secondly, according to petitioner, there is no law, rule or regulation requiring atransferor of shares of stock to first issue express instructions or execute a

power of attorney for the transfer of said shares before a certificate of stock isissued in the name of the transferee and the transfer registered in the books ofthe corporation. He contends that Hager vs. Bryan , 19 Phil. 138 (1911),and Rivera vs. Florendo , 144 SCRA 643 (1986), cited by respondents, do notapply to this case. These cases contemplate a situation where a certificate ofstock has been issued by the company whereas in this case at bar, no stockcertificates have been issued even in the name of the original stockholder,Fausto Gaid.

Finally, petitioner maintains that since he is under no compulsion to register thetransfer or to secure stock certificates in. his name, his cause of action isdeemed not to have accrued until respondent ALSONS denied his request.

Respondents, in their comment, maintain that the transfer of shares of stock notrecorded in the stock and transfer book of the corporation is non-existent in sofar as the corporation is concerned and no certificate of stock can be issued inthe name of the transferee. Until the recording is made, the transfer cannot bethe basis of issuance of a certificate of stock. They add that petitioner is not thereal party-in-interest, the real party-in-interest being Fausto Gaid since it is hisname that appears in the records of the corporation. They conclude thatpetitioner's cause of action is barred by prescription and laches since 24 yearselapsed before he made any demand upon ALSONS.

We find the instant petition without merit. The Court of Appeals did not err inruling that petitioner had no cause of action, and that his petitionfor mandamus was properly dismissed.

There is no question that Fausto Gaid was an original subscriber of respondentcorporation's 239,500 shares. This is clear from the numerous pleadings filed byeither party. It is also clear from the Amended Articles of

Incorporation 20 approved on April 9, 1995 21 that each share had a par value ofP1.00 per share. And, it is undisputed that petitioners had not made a previousrequest upon the corporate secretary of ALSONS, respondent Francisco M. GironJr., to record the alleged transfer of stocks.











The Corporation Code states that:

SEC. 63.Certificate of stock and transfer of shares . — The capital stockof stock corporations shall be divided into shares for which certificatessigned by the president or vice-president, countersigned by the

secretary or assistant secretary, sealed with the seal of the corporationshall be issued in accordance with the by-laws. Shares of stock so issuedare personal property and may be transferred by delivery of thecertificate or certificates indorsed by the owner or his attorney-in-fact orother person legally authorized to make the transfer. No transfer,however, shall be valid, except as between the parties, until the transferis recorded in the books of the corporation so as to show the names ofthe parties to the transaction, the date of the transfer, the number ofthe certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claimshall be transferable in the books of the corporation.

Pursuant to the foregoing provision, a transfer of shares of stock not recorded inthe stock and transfer book of the corporation is non-existent as far as thecorporation is concerned. 22 As between the corporation on the one hand, andits shareholders and third persons on the other, the corporation looks only to itsbooks for the purpose of determining who its shareholders are. 23 It is only whenthe transfer has been recorded in the stock and transfer book that a corporationmay rightfully regard the transferee as one of its stockholders. From this time,the consequent obligation on the part of the corporation to recognize such rightsas it is mandated by law to recognize arises. HcISTE

Hence, without such recording, the transferee may not be regarded by thecorporation as one among its stockholders and the corporation may legallyrefuse the issuance of stock certificates in the name of the transferee even whenthere has been compliance with the requirements of Section 64 24 of theCorporation Code. This is the import of Section 63 which states that "No transfer,however, shall be valid, except between the parties, until the transfer is recordedin the books of the corporation showing the names of the parties to the

transaction, the date of the transfer, the number of the certificate or certificatesand the number of shares transferred." The situation would be different if thepetitioner was himself the registered owner of the stock which he sought totransfer to a third party, for then he would be entitled to the remedyof mandamus . 25


















From the corporation's point of view, the transfer is not effective until it isrecorded. Unless and until such recording is made the demand for the issuanceof stock certificates to the alleged transferee has no legal basis. As between thecorporation on the one hand, and its shareholders and third persons on theother, the corporation looks only to its books for the purpose of determining who

its shareholders are. 26 In other words, the stock and transfer book is the basisfor ascertaining the persons entitled to the rights and subject to the liabilities ofa stockholder. Where a transferee is not yet recognized as a stockholder, thecorporation is under no specific legal duty to issue stock certificates in thetransferee's name.

It follows that, as held by the Court of Appeals:

. . . until registration is accomplished, the transfer, though valid betweenthe parties, cannot be effective as against the corporation. Thus, in theabsence of any allegation that the transfer of the shares between Gaidand the private respondent [herein petitioner] was registered in thestock and transfer book of the petitioner corporation, the privaterespondent has failed to state a cause of action. 27

Petitioner insists that it is precisely the duty of the corporate secretary, whenpresented with the document of fully paid shares, to effect the transfer byrecording the transfer in the stock and transfer book of the corporation and toissue stock certificates in the name of the transferee. On this point, the SEC EnBanc cited Rural Bank of Salinas, Inc. vs. Court of Appeals , 28 where we held

that: For the petitioner Rural Bank of Salinas to refuse registration of thetransferred shares in its stock and transfer book, which duty isministerial on its part, is to render nugatory and ineffectual the spirit andintent of Section 63 of the Corporation Code. Thus, respondent Court of

Appeals did not err in upholding the decision of respondent SECaffirming the Decision of its Hearing Officer directing the registration ofthe 473 shares in the stock and transfer book in the names of privaterespondents. At all events, the registration is without prejudice to the

proceedings in court to determine the validity of the Deeds of Assignment of the shares of stock in question. AcHEaS

In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero hada Special Power of Attorney executed in her favor by Clemente Guerrero, theregistered stockholder. It gave Guerrero full authority to sell or otherwise disposeof the 473 shares of stock registered in Clemente's name and to execute the














proper documents therefor. Pursuant to the authority so given, Melania assignedthe 473 shares of stock owned by Guerrero and presented to the Rural Bank ofSalinas the deeds of assignment covering the assigned shares. Melania Guerreroprayed for the transfer of the stocks in the stock and transfer book and theissuance of stock certificates in the name of the new owners thereof. Based onthose circumstances, there was a clear duty on the part of the corporatesecretary to register the 473 shares in favor of the new owners, since the personwho sought the transfer of shares had express instructions from and specificauthority given by the registered stockholder to cause the disposition of stocksregistered in his name.

That cannot be said of this case. The deed of undertaking with indorsementpresented by petitioner does not establish, on its face, his right to demand forthe registration of the transfer and the issuance of certificates of stocks.

In Hager vs. Bryan , 19 Phil. 138 (1911), this Court held that a petitionfor mandamus fails to state a cause of action where it appears that the petitioneris not the registered stockholder and there is no allegation that he holds anypower of attorney from the registered stockholder, from whom he obtained thestocks, to make the transfer, thus:

It appears, however, from the original as well as the amended petition,that this petitioner is not the registered owner of the stock which heseeks to have transferred, and except in so far as he alleges that he isthe owner of the stock and that it was "indorsed" to him on February 5by the Bryan-Landon Company, in whose name it is registered on the

books of the Visayan Electric Company, there is no allegation that thepetitioner holds any power of attorney from the Bryan-Landon Companyauthorizing him to make demand on the secretary of the Visayan ElectricCompany to make the transfer, which petitioner seeks to have madethrough the medium of the mandamus of this court.

Without discussing or deciding the respective rights of the parties whichmight be properly asserted in an ordinary action or an action in thenature of an equitable suit, we are all agreed that in a case such as thatat bar, a mandamus should not issue to compel the secretary of a

corporation to make a transfer of the stock on the books of thecompany, unless it affirmatively appears that he has failed or refused soto do, upon the demand either of the person in whose name the stock isregistered, or of some person holding a power of attorney for thatpurpose from the registered owner of the stock. There is no allegation inthe petition that the petitioner or anyone else holds a power of attorneyfrom the Bryan-Landon Company authorizing a demand for the transferof the stock, or that the Bryan-Landon Company has ever itself made



such demand upon the Visayan Electric Company, and in the absence ofsuch allegation we are not able to say that there was such a clearindisputable duty, such a clear legal obligation upon the respondent, asto justify the issuance of the writ to compel him to perform it.

Under the provisions of our statute touching the transfer of stock (Secs.

35 and 36 of Act No. 1459), 29 the mere indorsement of stockcertificates does not in itself give to the indorsee such a right to have atransfer of the shares of stock on the books of the company as will

entitle him to the writ of mandamus to compel the company and itsofficers to make such transfer at his demand, because, under suchcircumstances the duty, the legal obligation, is not so clear andindisputable as to justify the issuance of the writ. As a general rule andespecially under the above-cited statute, as between the corporation on

the one hand, and its shareholders and third persons on the other, thecorporation looks only to its books for the purpose of determining whoits shareholders are, so that a mere indorsee of a stock certificate,claiming to be the owner, will not necessarily be recognized as such bythe corporation and its officers, in the absence of express instructions ofthe registered owner to make such transfer to the indorsee, or a powerof attorney authorizing such transfer. 30

In Rivera vs. Florendo , 144 SCRA 643, 657 (1986), we reiterated that a mereindorsement by the supposed owners of the stock, in the absence of expressinstructions from them, cannot be the basis of an action for mandamus and thatthe rights of the parties have to be threshed out in an ordinary action.That Hager and Rivera involved petitions for mandamus to compel theregistration of the transfer, while this case is one for issuance of stock, is of nomoment. It has been made clear, thus far, that before a transferee may ask forthe issuance of stock certificates, he must first cause the registration of thetransfer and thereby enjoy the status of a stockholder insofar as the corporationis concerned. A corporate secretary may not be compelled to register transfers ofshares on the basis merely of an indorsement of stock certificates. With morereason, in our view, a corporate secretary may not be compelled to issue stock

certificates without such registration. 31 Petitioner's reliance on our ruling in Abejo vs. De la Cruz , 149 SCRA 654 (1987),that notice given to the corporation of the sale of the shares and presentation ofthe certificates for transfer is equivalent to registration is misplaced. In this casethere is no allegation in the complaint that petitioner ever gave notice torespondents of the alleged transfer in his favor. Moreover, that case arose













between and among the principal stockholders of the corporation, Pocket Bell,due to the refusal of the corporate secretary to record the transfers in favor ofTelectronics of the corporation's controlling 56% shares of stock which werecovered by duly endorsed stock certificates. As aforesaid, the request for therecording of a transfer is different from the request for the issuance of stockcertificates in the transferee's name. Finally, in Abejo we did not say that transferof shares need not be recorded in the books of the corporation before thetransferee may ask for the issuance of stock certificates. The Court's statement,that "there is no requirement that a stockholder of a corporation must be aregistered one in order that the Securities and Exchange Commission may takecognizance of a suit seeking to enforce his rights as such stockholder amongwhich is the stock purchaser's right to secure the corresponding certificate in his

name," 32 was addressed to the issue of jurisdiction, which is not pertinent tothe issue at hand.

Absent an allegation that the transfer of shares is recorded in the stock andtransfer book of respondent ALSONS, there appears no basis for a clear andindisputable duty or clear legal obligation that can be imposed upon therespondent corporate secretary, so as to justify the issuance of the writof mandamus to compel him to perform the transfer of the shares to petitioner.The test of sufficiency of the facts alleged in a petition is whether or not,admitting the facts alleged, the court could render a valid judgment thereon inaccordance with the prayer of the petition. 33 This test would not be satisfied if,as in this case, not all the elements of a cause of action are alleged in the

complaint. 34 Where the corporate secretary is under no clear legal duty to issuestock certificates because of the petitioner's failure to record earlier the transferof shares, one of the elements of the cause of action for mandamus is clearlymissing. AaSCTD

That petitioner was under no obligation to request for the registration of thetransfer is not in issue. It has no pertinence in this controversy. One may ownshares of corporate stock without possessing a stock certificate. In Tan vs. SEC ,206 SCRA 740 (1992), we had occasion to declare that a certificate of stock isnot necessary to render one a stockholder in a corporation. But a certificate of

stock is the tangible evidence of the stock itself and of the various intereststherein. The certificate is the evidence of the holder's interest and status in thecorporation, his ownership of the share represented thereby. The certificate is inlaw, so to speak, an equivalent of such ownership. It expresses the contractbetween the corporation and the stockholder, but it is not essential to theexistence of a share in stock or the creation of the relation of shareholder to thecorporation. 35 In fact, it rests on the will of the stockholder whether he wants to



















be issued stock certificates, and a stockholder may opt not to be issued acertificate. In Won vs. Wack Wack Golf and Country Club, Inc ., 104 Phil. 466(1958), we held that considering that the law does not prescribe a period withinwhich the registration should be effected, the action to enforce the right doesnot accrue until there has been a demand and a refusal concerning the transfer.In the present case, petitioner's complaint formandamus must fail, not becauseof laches or estoppel, but because he had alleged no cause of action sufficientfor the issuance of the writ.

WHEREFORE, the petition is DENIED for lack of merit. The decision of the Courtof Appeals, in CA-G.R. SP No. 46692, which set aside that of the Securities andExchange Commission En Banc in SEC-AC No. 545 and reinstated the order ofthe Hearing Officer, is hereby AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Bellosillo, Mendoza, Austria-Martinez and Callejo, Sr., JJ., concur.

Footnotes

49.

FIRST DIVISION

[G.R. No. L-33320. May 30, 1983.]

RAMON A. GONZALES, petitioner , vs. THE PHILIPPINENATIONAL BANK, respondent .

Ramon A. Gonzales in his own behalf.

Juan Diaz for respondent.

SYLLABUS

1.COMMERCIAL LAW; CORPORATION CODE; LIMITATIONS OF RIGHT OFINSPECTION UNDER THE NEW CODE (B.P. BLG. 68). — As may be noted,



among the changes introduced in the new Code with respect to the right ofinspection granted to a stockholder are the following: the records must be keptat the principal office of the corporation; the inspection must be made onbusiness days; the stockholder may demand a copy of the excerpts of therecords or minutes; and the refusal to allow such inspection shall subject theerring officer or agent of the corporation to civil and criminal liabilities. However,while seemingly enlarging the right of inspection, the new Code has prescribedlimitations to the same. It is now expressly required as a condition for suchexamination that the one requesting it must not have been guilty of usingimproperly any information secured through a prior examination, and that theperson asking for such examinations must be "acting in good faith and for alegitimate purpose in making his demand."

2.ID.; ID.; ID.; UNQUALIFIED PROVISION UNDER THE PREVIOUS LAW, NOW

DISSIPATED BY THE CLEAR PROVISION OF SECTION 74 OF B.P. BLG. 68. — Theunqualified provision on the right of inspection previously contained in Section51, Act No. 1459, as amended, no longer holds true under the provisions of thepresent law. The argument of the petitioner that the right granted to him underSection 51 of the former Corporation law should not be dependent on thepropriety of his motive or purpose in asking for the inspection of the books of therespondent bank loses whatever validity it might have had before theamendment of the law. If there is any doubt in the correctness of the ruling ofthe trial court that the right of inspection granted under Section 51 of the oldCorporation Law must be dependent on a showing of proper motive on the part

of the stockholder demanding the same, it now dissipated by the clear languageof the pertinent provision contained in Section 74 of Batas Pambansa Blg. 68.

3.ID.; ID.; ID.; MODE OF ACQUISITION OF ONE SHARE OF STOCK, ASEVIDENCE OF BAD FAITH AND ULTERIOR MOTIVE. — Although the petitionerhas claimed that he has justifiable motives in seeking the inspection of the booksof the respondent bank, he has not set forth the reasons and the purposes forwhich be desires such inspection, except to satisfy himself as to the truth ofpublished reports regarding certain transactions entered into by the respondentbank and to inquire into their validity. The circumstances under which he

acquired one share of stock in the respondent bank purposely to exercise theright of inspection do not argue in favor of his good faith and proper motivation.

Admittedly he sought to be a stockholder in order to pry into transactionsentered into by the respondent bank even before he became a stockholder. Hisobvious purpose was to arm himself with materials which he can use against therespondent bank for acts done by the latter when the petitioner was a totalstranger to the same. He could have been impelled by a laudable sense of civil



consciousness, but it could not be said that his purpose is germane to hisinterest as a stockholder.

4.ID.; ID.; PROVIDES THAT CORPORATIONS CREATED BY CHARTERS SHALL BEGOVERNED PRIMARILY BY SAID CHARTERS; RESPONDENT BANK WITH A

CHARTER OF ITS OWN IS NOT GOVERNED BY THE CORPORATION CODE. — The Philippine National Bank is not an ordinary corporation. Having a charter ofits own, it is not governed, as a rule, by the Corporation Code of the Philippines.Section 4 of the said Code provides: "SEC. 4. — Corporations created by speciallaws or charters. — Corporations created by special laws or charters shall begoverned primarily by the provisions of the special law or charter creating themor applicable to them, supplemented by the provisions of this Code, insofar asthey are applicable." The provision of Section 74 of Batas Pambansa Blg. 68 ofthe new Corporation Code with respect to the right of a stockholder to demand

an inspection or examination of the books of the corporation may not bereconciled with the above-quoted provisions of the charter of the bank. It is notcorrect to claim, therefore, that the right of inspection under Section 74 of thenew Corporation Code may apply in a supplementary capacity to the charter ofthe respondent bank.

D E C I S I O N

VASQUEZ, Jp

:

Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance ofManila a special civil action for mandamus against the herein respondent prayingthat the latter be ordered to allow him to look into the books and records of therespondent bank in order to satisfy himself as to the truth of the publishedreports that the respondent has guaranteed the obligation of Southern NegrosDevelopment Corporation in the purchase of a US$23 million sugar-mill to befinanced by Japanese suppliers and financiers; that the respondent is financingthe construction of the P21 million Cebu-Mactan Bridge to be constructed by V.C.

Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the HonironPhilippines, Inc., as well as to inquire into the validity of said transactions. Thepetitioner has alleged had his written request for such examination was deniedby the respondent. The trial court having dismissed the petition for mandamus,the instant appeal to review the said dismissal was filed. LLjur



The facts that gave rise to the subject controversy have been set forth by thetrial court in the decision herein sought to be reviewed, as follows:

"'Briefly stated, the following facts gathered from the stipulation of theparties served as the backdrop of this proceeding.

'Previous to the present action, the petitioner instituted several cases inthis Court questioning different transactions entered into by the Bankwith other parties. First among them is Civil Case No. 69345 filed on

April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio Raquizaof Public Works and Communications, the Commissioner of PublicHighways, the Bank, Continental Ore Phil., Inc., Continental Ore, HuberCorporation, Allis Chalmers and General Motors Corporation. In thecourse of the hearing of said case on August 3, 1967, the personality ofherein petitioner to sue the bank and question the letters of credit it hasextended for the importation by the Republic of the Philippines of publicworks equipment intended for the massive development program of thePresident was raised. In view thereof, he expressed and made knownhis intention to acquire one share of stock from Congressman JustinianoMontano which, on the following day, August 30, 1967, was transferredin his name in the books of the Bank.

'Subsequent to his aforementioned acquisition of one share of stock ofthe Bank, petitioner, in his dual capacity as a taxpayer and stockholder,filed the following cases involving the bank or the members of its Boardof Directors to wit:

'1.On October 18, 1967, Civil Case No. 71044 versus theBoard of Directors of the Bank; the National Investment andDevelopment Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev.Co. or Saravia;

'2.On May 11, 1968, Civil Case No. 72936 versus RobertoBenedicto and other Directors of the Bank, Passi (Iloilo) SugarCentral, Inc., Calinog-Lambunao Sugar Mill Integrated Farming,Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., andBatangas Sugar Central Inc.;

'3.On May 8, 1969, Civil Case No. 76427 versus AlfredoMontelibano and the Directors of both the PNB and DBP;

'On January 11, 1969, however, petitioner addressed a letter to thePresident of the Bank (Annex A, Pet.), requesting submission to look intothe records of its transactions covering the purchase of a sugar central



by the Southern Negros Development Corp. to be financed by Japanesesuppliers and financiers; its financing of the Cebu-Mactan Bridge to beconstructed by V.C. Ponce, Inc. and the construction of the Passi SugarMills in Iloilo. On January 23, 1969, the Asst. Vice President and LegalCounsel of the Bank answered petitioner's letter denying his request for

being not germane to his interest as a one share stockholder and for thecloud of doubt as to his real intention and purpose in acquiring saidshare. (Annex B, Pet.) In view of the Bank's refusal, the petitionerinstituted this action.'" (Rollo, pp. 16-18.)

The petitioner has adopted the above finding of facts made by the trial court inits brief which he characterized as having been "correctly stated." (Petitioner-

Appellant's Brief, pp. 5-7.) LLjur

The court a quo denied the prayer of the petitioner that he be allowed to

examine and inspect the books and records of the respondent bank regardingthe transactions mentioned on the grounds that the right of a stockholder toinspect the record of the business transactions of a corporation granted underSection 51 of the former Corporation Law (Act No. 1459, as amended) is notabsolute, but is limited to purposes reasonably related to the interest of thestockholder, must be asked for in good faith for a specific and honest purposeand not gratify curiosity or for speculative or vicious purposes; that suchexamination would violate the confidentiality of the records of the respondentbank as provided in Section 16 of its charter, Republic Act No. 1300, asamended; and that the petitioner has not exhausted his administrative remedies.

Assailing the conclusions of the lower court, the petitioner has assigned thesingle error to the lower court of having ruled that his alleged improper motive inasking for an examination of the books and records of the respondent bankdisqualifies him to exercise the right of a stockholder to such inspection underSection 51 of Act No. 1459, as amended. Said provision reads in part as follows:

"Sec. 51.. . . The record of all business transactions of the corporation

and the minutes of any meeting shall be open to the inspection of anydirector, member or stockholder of the corporation at reasonable hours."

Petitioner maintains that the above-quoted provision does not justify thequalification made by the lower court that the inspection of corporate recordsmay be denied on the ground that it is intended for an improper motive orpurpose, the law having granted such right to a stockholder in clear and



unconditional terms. He further argues that, assuming that a proper motive orpurpose for the desired examination is necessary for its exercise, there is nothingimproper in his purpose for asking for the examination and inspection hereininvolved.

Petitioner may no longer insist on his interpretation of Section 51 of Act No.1459, as amended, regarding the right of a stockholder to inspect and examinethe books and records of a corporation. The former Corporation Law (Act No.1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwiseknown as the "Corporation Code of the Philippines." The right of inspectiongranted to a stockholder under Section 51 of Act No. 1459 has been retained,but with some modifications. The second and third paragraphs of Section 74 ofBatas Pambansa Blg. 68 provide the following:

"The records of all business transactions of the corporation and theminutes of any meeting shall be open to inspection by any director,trustee, stockholder or member of the corporation at reasonable hourson business days and he may demand, in writing, for a copy of excerptsfrom said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow anydirector, trustee, stockholder or member of the corporation to examineand copy excerpts from its records or minutes, in accordance with theprovisions of this Code, shall be liable to such director, trustee,stockholder or member for damages, and in addition, shall be guilty of

an offense which shall be punishable under Section 144 of this Code:Provided, That if such refusal is made pursuant to a resolution or orderof the board of directors or trustees, the liability under this section forsuch action shall be imposed upon the directors or trustees who votedfor such refusal: and Provided, further, That it shall be a defense to anyaction under this section that the person demanding to examine andcopy excerpts from the corporation's records and minutes hasimproperly used any information secured through any prior examinationof the records or minutes of such corporation or of any othercorporation, or was not acting in good faith or for a legitimate purposein making his demand."

As may be noted from the above-quoted provisions, among the changesintroduced in the new Code with respect to the right of inspection granted to astockholder are the following the records must be kept at the principal office ofthe corporation; the inspection must be made on business days; the stockholdermay demand a copy of the excerpts of the records or minutes; and the refusal toallow such inspection shall subject the erring officer or agent of the corporation



to civil and criminal liabilities. However, while seemingly enlarging the right ofinspection, the new Code has prescribed limitations to the same. It is nowexpressly required as a condition for such examination that the one requesting itmust not have been guilty of using improperly any information secured through aprior examination, and that the person asking for such examination must be"acting in good faith and for a legitimate purpose in making his demand."

The unqualified provision on the right of inspection previously contained inSection 51, Act No. 1459, as amended, no longer holds true under the provisionsof the present law. The argument of the petitioner that the right granted to himunder Section 51 of the former Corporation Law should not be dependent on thepropriety of his motive or purpose in asking for the inspection of the books of therespondent bank loses whatever validity it might have had before theamendment of the law. If there is any doubt in the correctness of the ruling of

the trial court that the right of inspection granted under Section 51 of the oldCorporation Law must be dependent on a showing of proper motive on the partof the stockholder demanding the same, it is now dissipated by the clearlanguage of the pertinent provision contained in Section 74 of Batas PambansaBlg 68.

Although the petitioner has claimed that he has justifiable motives in seeking theinspection of the books of the respondent bank, he has not set forth the reasonsand the purposes for which he desires such inspection, except to satisfy himselfas to the truth of published reports regarding certain transactions entered into by

the respondent bank and to inquire into their validity. The circumstances underwhich he acquired one share of stock in the respondent bank purposely toexercise the right of inspection do not argue in favor of his good faith and propermotivation. Admittedly he sought to be a stockholder in order to pry intotransactions entered into by the respondent bank even before he became astockholder. His obvious purpose was to arm himself with materials which he canuse against the respondent bank for acts done by the latter when the petitionerwas a total stranger to the same. He could have been impelled by a laudablesense of civic consciousness, but it could not be said that his purpose is germaneto his interest as a stockholder.

We also find merit in the contention of the respondent bank that the inspectionsought to be exercised by the petitioner would be violative of the provisions of itscharter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the saidcharter provide respectively as follows:



"'Sec. 15.Inspection by Department of Supervision and Examination ofthe Central Bank. — The National Bank shall be subject to inspection bythe Department of Supervision and Examination of the Central Bank.'

'Sec. 16.Confidential information. — The Superintendent of Banks and

the Auditor General, or other officers designated by law to inspect orinvestigate the condition of the National Bank, shall not reveal to anyperson other than the President of the Philippines, the Secretary ofFinance, and the Board of Directors the details of the inspection orinvestigation, nor shall they give any information relative to the funds inits custody, its current accounts or deposits belonging to privateindividuals, corporations, or any other entity, except by order of a Courtof competent jurisdiction.'

'Sec. 30.Penalties for violation of the provisions of this Act. — Anydirector, officer, employee, or agent of the Bank, who violates or permitsthe violation of any of the provisions of this Act, or any person aiding orabetting the violations of any of the provisions of this Act, shall bepunished by a fine not to exceed ten thousand pesos or byimprisonment of not more than five years, or both such fine andimprisonment.'"

The Philippine National Bank is not an ordinary corporation. Having a charter ofits own, it is not governed, as a rule, by the Corporation Code of the Philippines.Section 4 of the said Code provides:

"SEC. 4.Corporations created by special laws or charters. — Corporationscreated by special laws or charters shall be governed primarily by theprovisions of the special law or charter creating them or applicable tothem, supplemented by the provisions of this Code, insofar as they areapplicable."

The provision of Section 74 of Batas Pambansa Blg. 68 of the new CorporationCode with respect to the right of a stockholder to demand an inspection orexamination of the books of the corporation may not be reconciled with theabove quoted provisions of the charter of the respondent bank. It is not correct

to claim, therefore, that the right of inspection under Section 74 of the newCorporation Code may apply in a supplementary capacity to the charter of therespondent bank. cdrep

WHEREFORE, the petition is hereby DISMISSED, without costs.

Melencio-Herrera , Plana and Gutierrez , Jr ., JJ ., concur.



Teehankee, concurs in the result.