Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 178511             December 4, 2008MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS JASON A. ANG, HANNAH

ZORAYDA A. ANG, and VICENTE G. GENATO, petitioners, vs.

EDUARDO G. ANG, respondent.

D E C I S I O N

YNARES-SANTIAGO, J.:This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the March 6, 2007 Decision2 of the Court of Appeals in CA-G.R. SP No. 94708, which nullified and set aside the July 26, 2005 and March 29, 2006 Resolutions3 of the Secretary of Justice in I.S. No. MAL-2004-1167 directing the withdrawal of the information filed against petitioners for violation of Section 74 of the Corporation Code. Also assailed is the June 19, 2007 Resolution4 denying the Motion for Reconsideration.Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc. (Genato) (collectively referred to as "the corporations") are family-owned corporations, where petitioners Ma. Belen Flordeliza C. Ang-Abaya (Flordeliza), Francis Jason A. Ang (Jason), Vincent G. Genato (Vincent), Hanna Zorayda A. Ang (Hanna) and private respondent Eduardo G. Ang (Eduardo) are shareholders, officers and members of the board of directors.Prior to the instant controversy, VMC, Genato, and Oriana Manufacturing Corporation (Oriana) filed Civil Case No. 4257-MC, which is a case for damages with prayer for issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction against herein respondent Eduardo, together with Michael Edward Chi Ang (Michael), and some other persons for allegedly conniving to fraudulently wrest control/management of the corporations.5 Eduardo allegedly borrowed substantial amounts of money from the said corporations without any intention to repay; that he repeatedly demanded for increases in his monthly allowance and for more cash advances contrary to existing corporate policies; that he harassed petitioner Flordeliza to transfer and/or sell certain corporate and personal properties in order to pay off his personal obligations; that he attempted to forcibly evict petitioner Jason from his office and claim it as his own; that he interfered with and disrupted the daily business operations of the corporations; that Michael was placed on preventive suspension due to prolonged absence without leave and commission of acts of disloyalty such as carrying out orders of Eduardo which were detrimental to their business, using privileged information and confidential documents/data obtained in his capacity as Vice President of the corporations, and admitting to have sabotaged their distribution system and operations.During the pendency of Civil Case No. 4257-MC, particularly in July, 2004, Eduardo sought permission to inspect the corporate books of VMC and Genato on account of petitioners’ alleged failure and/or refusal to update him on the financial and business activities of these family corporations.6 Petitioners denied the request claiming that Eduardo would use the information obtained from said inspection for purposes inimical to the corporations’ interests, considering that: "a) he is harassing and/or bullying the Corporation[s] into writing off P165,071,586.55 worth of personal advances which he had unlawfully obtained in the past; b) he is unjustly demanding that he be given the office currently occupied by Mr. Francis Jason Ang, the Vice-President for Finance and Corporate Secretary; c) he is usurping the rights belonging exclusively to the Corporation; and d) he is coercing and/or trying to inveigle the Directors and/or Officers of the Corporation to give in to his baseless demands involving specific corporate assets."7

Because of petitioners’ refusal to grant his request to inspect the corporate books of VMC and Genato, Eduardo filed an Affidavit-Complaint8 against petitioners Flordeliza and Jason, charging them with violation (two counts) of Section 74, in relation to Section 144, of the Corporation Code of the Philippines.9 Ma. Belinda G. Sandejas (Belinda), Vincent,

and Hanna were subsequently impleaded for likewise denying respondent’s request to inspect the corporate books.Petitioners filed a Joint Counter-Affidavit praying for the dismissal of the complaint for lack of factual and legal basis, or for the suspension of the same while Civil Case No. 4257-MC is still pending resolution.10 They denied violating Section 74 of the Corporation Code and reiterated the allegations contained in their complaint in Civil Case No. 4257-MC. Petitioners blamed Eduardo’s lavish lifestyle, which is funded by personal loans and cash advances from the family corporations. They alleged that Eduardo consistently pressured petitioner Flordeliza, his daughter, to improperly transfer ownership of the corporations’ V.A.G. Building to him;11 to disregard the company policy prohibiting advances by shareholders; to unduly increase his corporate monthly allowance; and to sell her Wack-Wack Golf proprietary share and use the proceeds thereof to pay his personal financial obligations. When the proposed transfer of the V.A.G. Building did not materialize, petitioners claim that Eduardo instituted an action to compel the donation of said property to him.12 Furthermore, they claim that Eduardo attempted to forcibly evict petitioner Jason from his office at VMC so he can occupy the same; that Eduardo and his cohorts constantly created trouble by intervening in the daily operations of the corporations without the knowledge or consent of the board of directors.Meanwhile, in Civil Case No. 4257-MC, the trial court rendered a Decision granting the permanent injunction applied for by the corporations.13 However, the Court of Appeals subsequently rendered a Decision14 declaring that Eduardo, his son Michael, and the other persons impleaded in Civil Case No. 4257-MC, were imprudently declared in default by the trial court. The appellate court thus annulled the permanent injunction issued by the trial court and remanded the case for further proceedings. VMC, Genato, and Oriana corporations filed a Petition for Review on Certiorari before this Court, but the same was denied for failure to sufficiently show any reversible error in the Decision of the Court of Appeals.15 The three corporations filed a Motion for Reconsideration, but the same was denied with finality on June 25, 2008.Meanwhile, on February 3, 2005, the City Prosecutor’s Office of Malabon City issued a Resolution16 recommending that petitioners be charged with two counts of violation of Section 74 of the Corporation Code, but dismissed the complaint against Belinda for lack of evidence.17 Petitioners filed a Petition for Review18 before the Department of Justice (DOJ), which reversed the recommendation of the City Prosecutor of Malabon City.19 The dispositive portion of the DOJ Resolution dated July 26, 2005, reads:

Wherefore, premises considered, the assailed resolution is REVERSED and SET ASIDE. The City Prosecutor of Malabon City is hereby directed to cause the withdrawal of the corresponding information filed against respondents [herein petitioners] for violation of Section 74 of the Corporation Code of the Philippines and to report the action taken thereon within ten (10) days from the receipt hereof.

SO ORDERED.20

The DOJ denied Eduardo’s Motion for Reconsideration21 in a Resolution22 dated March 29, 2006. On appeal, the Court of Appeals rendered the assailed Decision, the dispositive portion of which states:

WHEREFORE, the instant petition is partially GRANTED. The assailed Resolutions of public respondent dated July 26, 2005 and March 29, 2006 are hereby NULLIFIED and SET ASIDE. However, due to the present existence of a prejudicial question, the criminal case docketed I.S. No. MAL-2004-1167 is hereby SUSPENDED until Civil Case No. 4257-MC is decided on the merits with finality. 23

The appellate court ruled that the Secretary of Justice committed grave abuse of discretion amounting to lack or excess of jurisdiction in reversing the Resolutions of the Malabon City Prosecutor and in finding that Eduardo did not act in good faith when he demanded for the examination of VMC and Genato’s corporate books. It further held that Eduardo can demand said examination as a stockholder of both corporations; that Eduardo raised legitimate questions that necessitated inspection of the corporate books

and records; and that petitioners’ refusal to allow inspection created probable cause to believe that they have committed a violation of Section 74 of the Corporation Code.On June 19, 2007, the Court of Appeals denied the Motions for Reconsideration filed by petitioners and the Secretary of Justice.24 Hence, this petition raising the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS WAS CORRECT IN ITS FINDING THAT THE HONORABLE JUSTICE SECRETARY’S REVERSAL OF THE MALABON CITY PROSECUTOR’S RESOLUTION FINDING PROBABLE CAUSE AGAINST HEREIN PETITIONERS WAS DONE CONTRARY TO THE APPLICABLE LAW AND JURISPRUDENCE TANTAMOUNT TO GRAVE ABUSE OF DISCRETION.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN REVERSING THE RESOLUTION OF THE MALABON CITY PROSECUTOR FINDING PROBABLE CAUSE AGAINST PETITIONERS AFTER PRELIMINARY INVESTIGATION FOR VIOLATION OF SECTION 74 OF THE CORPORATION CODE OF THE PHILIPPINES.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN FINDING THAT PETITIONERS ACTED IN GOOD FAITH WHEN THEY DENIED PRIVATE RESPONDENT’S DEMAND FOR INSPECTION OF CORPORATE BOOKS.25

We grant the petition.Probable cause, for purposes of filing a criminal information, has been defined as such facts as are sufficient to engender a well-founded belief that a crime has been committed and that respondent is probably guilty thereof. It is such a state of facts in the mind of the prosecutor as would lead a person of ordinary caution and prudence to believe or entertain an honest or strong suspicion that a thing is so. The term does not mean "actual or positive cause;" nor does it import absolute certainty. It is merely based on opinion and reasonable belief. Thus, a finding of probable cause does not require an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or omission complained of constitutes the offense charged. Precisely, there is a trial for the reception of prosecution’s evidence in support of the charge."26

The determination of the existence of probable cause lies within the discretion of the prosecuting officers after conducting a preliminary investigation upon complaint of an offended party. Their decisions are reviewable by the Secretary of Justice who may direct the filing of the corresponding information or to move for the dismissal of the case.27

In reversing the Resolutions of the Secretary of Justice directing the withdrawal of the information filed against petitioners for lack of probable cause, the Court of Appeals held that it was beyond the Secretary of Justice’s authority to determine the motives of Eduardo in seeking an inspection of the corporations’ books and papers.In order that probable cause to file a criminal case may be arrived at, or in order to engender the well-founded belief that a crime has been committed, the elements of the crime charged should be present.28 This is based on the principle that every crime is defined by its elements, without which there should be – at the most – no criminal offense.In Gokongwei, Jr. v. Securities and Exchange Commission,29 this Court explained the rationale behind a stockholder's right to inspect corporate books, to wit:

The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation.30

In Republic v. Sandiganbayan,31 the Court declared that the right to inspect and/or examine the records of a corporation under Section 74 of the Corporation Code is circumscribed by the express limitation contained in the succeeding proviso, which states that:

[I]t shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. (Emphasis supplied)

Thus, contrary to Eduardo’s insistence, the stockholder’s right to inspect corporate books is not without limitations. While the right of inspection was enlarged under the Corporation Code as opposed to the old Corporation Law (Act No. 1459, as amended),

It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information secured through a prior examination, or that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand.32 (Emphasis supplied)

In order therefore for the penal provision under Section 144 of the Corporation Code to apply in a case of violation of a stockholder or member’s right to inspect the corporate books/records as provided for under Section 74 of the Corporation Code, the following elements must be present:First. A director, trustee, stockholder or member has made a prior demand in writing for a copy of excerpts from the corporation’s records or minutes;Second. Any officer or agent of the concerned corporation shall refuse to allow the said director, trustee, stockholder or member of the corporation to examine and copy said excerpts;Third. If such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal; and,Fourth. Where the officer or agent of the corporation sets up the defense that the person demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand, the contrary must be shown or proved.Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the same. Accordingly, where the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation.33 This being the case, it would be improper for the prosecutor, during preliminary investigation, to refuse or fail to address the defense of improper use or motive, given its express statutory recognition. In the past we have declared that if justifying circumstances are claimed as a defense, they should have at least been raised during preliminary investigation;34

which settles the view that the consideration and determination of justifying circumstances as a defense is a relevant subject of preliminary investigation.A preliminary investigation is in effect a realistic judicial appraisal of the merits of the case; sufficient proof of the guilt of the criminal respondent must be adduced so that when the case is tried, the trial court may not be bound, as a matter of law, to order an acquittal.35 Although a preliminary investigation is not a trial and is not intended to usurp the function of the trial court, it is not a casual affair; the officer conducting the same investigates or inquires into the facts concerning the commission of the crime with the end in view of determining whether or not an information may be prepared against the accused.36 After all, the purpose of preliminary investigation is not only to determine whether there is sufficient ground to engender a well-founded belief that a crime has been committed and the respondent therein is probably guilty thereof and should be

held for trial; it is just as well for the purpose of securing the innocent against hasty, malicious and oppressive prosecution, and to protect him from an open and public accusation of a crime, from the trouble, expense and anxiety of a public trial.37 More importantly, in the appraisal of the case presented to him for resolution, the duty of a prosecutor is more to do justice and less to prosecute.38

If the prosecutor is convinced during preliminary investigation of the validity of the respondent’s claim of a justifying circumstance, then he must dismiss the complaint; if not, then he must file the requisite information. This is his discretion, the exercise of which we grant sufficient latitude.39

In the instant case, the Court finds that the Court of Appeals erred in declaring that the Secretary of Justice exceeded his authority when he conducted an inquiry on the petitioners’ defense of improper use and motive on Eduardo’s part. As a necessary element in the offense of refusal to honor a stockholder/member’s right to inspect the corporate books/records, it was incumbent upon the Secretary of Justice to determine that all the elements which constitute said offense are present, in line with our ruling in Duterte v. Sandiganbayan.A preliminary investigation is the crucial sieve in the criminal justice system which spells for an individual the difference between months if not years of agonizing trial and possibly jail term, on the one hand, and peace of mind and liberty, on the other. Thus, we have characterized the right to a preliminary investigation as not a mere formal or technical right but a substantive one, forming part of due process in criminal justice.40

Due process, in the instant case, requires that an inquiry into the motive behind Eduardo’s attempt at inspection should have been made even during the preliminary investigation stage, just as soon as petitioners set up the defense of improper use and motive.Petitioners argue that Eduardo’s demand for an inspection of the corporations’ books is based on the latter’s attempt in bad faith at having his more than P165 million advances from the corporations written off; that Eduardo is unjustly demanding that he be given the office of Jason, or the Vice Presidency for Finance and Corporate Secretary; that Eduardo is usurping rights belonging exclusively to the corporations; and Eduardo’s attempts at coercing the corporations, their directors and officers into giving in to his baseless demands involving specific corporate assets. Specifically, petitioners accuse Eduardo of the following:

1. He is a spendthrift, using the family corporations’ resources to sustain his extravagant lifestyle. During his incumbency as officer of VMC and Genato (from 1984 to 2000), he was able to obtain massive amounts by way of cash advances from these corporations, amounting to more than P165 million;

2. He is exercising undue pressure upon petitioners in order to acquire ownership, through the forced execution of a deed of donation, over the VAG Building in San Juan, which building belongs to Genato;

3. He is putting pressure on the corporations, through their directors and officers, for the latter to disregard their respective policies which prohibit the grant of cash advances to stockholders.

4. At one time, he coerced Flordeliza for the latter to sell her Wack-Wack Golf Proprietary Share;

5. In May 2003, without the requisite authority, he called a "stockholders’ meeting" to demand an increase in his P140,000.00 monthly allowance from the corporation to P250,000.00; demand a cash advance of US$10,000; and to demand that the corporations shoulder the medical and educational expenses of his family as well as those of the other stockholders;

6. In November 2003, he demanded that he be given an office within the corporations’ premises. In December 2003, he stormed the corporations’ common office, ordered the employees to vacate the premises, summoned the directors to a meeting, and there he berated them for not acting on his requests. In January 2004, he returned to the office, demanding the transfer of the Accounting

Department and for Jason to vacate his office by the end of the month. He likewise left a letter which contained his demands. At the end of January 2004, he returned, ordered the employees to leave the premises and demanded that Jason surrender his office and vacate his desk. He did this no less than four (4) times. As a result, the respective boards of directors of the corporations resolved to ban him from the corporate premises;

7. He has been interfering in the everyday operations of VMC and Genato, usurping the duties, rights and authority of the directors and officers thereof. He attempted to lease out a warehouse within the VMC premises without the knowledge and consent of its directors and officers; during the wake of the former President of VMC and Genato, he issued instructions for the employees to close down operations for the whole duration of the wake, against the corporate officers’ instructions to attend the wake by batch, so as not to hamper business operations; he has caused chaos and confusion in VMC and Genato as a result;41

8. He is out to sabotage the family corporations.42

These serious allegations are supported by official and other documents, such as board resolutions, treasurer’s affidavits and written communication from the respondent Eduardo himself, who appears to have withheld his objections to these charges. His silence virtually amounts to an acquiescence.43 Taken together, all these serve to justify petitioners’ allegation that Eduardo was not acting in good faith and for a legitimate purpose in making his demand for inspection of the corporate books. Otherwise stated, there is lack of probable cause to support the allegation that petitioners violated Section 74 of the Corporation Code in refusing respondent’s request for examination of the corporation books.WHEREFORE, the Petition for Review on Certiorari is GRANTED. The March 6, 2007 Decision and June 19, 2007 Resolution of the Court of Appeals in CA-G.R. SP No. 94708 are REVERSED and SET ASIDE. The July 26, 2005 and March 29, 2006 Resolutions of the Secretary of Justice directing the withdrawal of the information filed against petitioners for violation of Section 74 of the Corporation Code are accordingly REINSTATED and AFFIRMED.SO ORDERED. 

 

 

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 88809 July 10, 1991REPUBLIC OF THE PHILIPPINES, (PRESIDENTIAL COMMISSION ON GOOD

GOVERNMENT), petitioner, vs.

THE HONORABLE SANDIGANBAYAN (FIRST DIVISION) AND EDUARDO COJUANGCO, JR., respondents.G.R. No. 88858 July 10, 1991

REPUBLIC OF THE PHILIPPINES, (PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT), petitioner,

vs.THE HONORABLE SANDIGANBAYAN (FIRST DIVISION) AND EDUARDO

COJUANGCO, JR., respondents.Estelito P. Mendoza for private respondent.

R E S O L U T I O N

 BIDIN, J.:pThese petitions for certiorari assail the resolution of respondent Sandiganbayan dated May 9, 1989, allowing respondent Eduardo Cojuangco, Jr., to inspect the corporate records of United Coconut Planters Bank, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, the respondent UCPB and its corporate secretary shall respond to petitioner Eduardo Cojuangco's request for examination and copying of corporate records in a manner consistent with its duties to all its other registered stockholders as described in the Corporation Code and under specific laws governing banking institutions such as said respondent UCPB. (Rollo, pp. 3640, G.R. No. 88858)

and its resolution dated May 18, 1989, likewise allowing respondent Cojuangco to examine the corporate records of San Miguel Corporation. It reads:

IN VIEW OF THE FOREGOING, the petition filed by Petitioner Eduardo Cojuangco, Jr., to examine the records of the San Miguel Corporation is granted within the confines of Sec. 74 of the Corporation Code. (Rollo, pp. 36-40; G.R. No. 88809)

The facts that gave rise to the instant petitions are as follows:

In G.R. No. 88809:On December 26, 1988, private respondent-stockholder requested the San Miguel Corporation (SMC) and its corporate secretary the production, inspection, examination/verification and/or photocopying of the SMC corporate records to inform him of the decisions, policies, acts and performance of the management of the SMC under the PCGG-Board.Since the shares of private respondent in the SMC have been sequestered by the PCGG, the former (SMC) sought advice from the latter on the effect of such sequestration. Subsequently, private respondent was informed by the SMC that all requests for the examination, inspection and photocopying of its corporate records should be coursed through the PCGG.In G.R. No. 88858:The facts set forth in G.R. No. 88809 are substantially similar in G.R. No. 88858 except that in the latter case, private respondent as stockholder of record seeks authority to inspect and examine the corporate records of United Coconut Planters Bank.The request of private respondent for the inspection/examination of SMC's corporate records was denied by the PCGG (Rollo, p. 44, G.R. No. 88809). As regards the corporate records of URPB, private respondent was likewise advised to course his request through the PCGG (Rollo, pp. 45-46, GR No. 88858).Thereafter, private respondent filed two separate petitions for prohibition and mandamus before the Sandiganbayan seeking to enforce his stockholder's right to inspect the corporate records of SMC and the UCPB. Subsequently, respondent Sandiganbayan rendered the assailed resolutions aforequoted.Hence, the instant petitions for certiorari with prayer for the issuance of temporary restraining orders. On June 13, 1989 and July 20, 1989, the Court issued a temporary restraining order in G.R. Nos. 88809 and 88858, respectively.Petitioner argues, among others, that:1) respondent Sandiganbayan has no jurisdiction over the petition filed by respondent Eduardo Cojuangco, Jr.;2) the PCGG may validly refuse private respondent's right to inspection; and3) the petition filed by private respondent before the Sandiganbayan is barred by the doctrine of state immunity from suit.We find the petition devoid of merit.Nothing is more settled than this Court's pronouncement in PCGG v. Peña (159 SCRA 556 [1988]), where We held that:

. . . Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all cases of the Commission regarding "the Funds, Moneys, Assets, and Properties Illegally Acquired or Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their Close Relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees," civil or criminal, are lodged within the "exclusive and original jurisdiction of the Sandiganbayan" and all incidents arising from, incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court.

xxx xxx xxx

. . . Executive Order No. 14, which defines the jurisdiction over cases involving the ill-gotten wealth of former President Marcos, his wife, Imelda, members of their immediate family, close relatives, subordinates, close and/or business associates, dummies, agents and nominees, specifically provides in section 2 that "the Presidential Commission on Good Government shall file all such cases, whether civil or criminal, with the Sandiganbayan which shall have exclusive and original jurisdiction thereof. "Necessarily, those who wish to question or challenge the Commission's acts or orders in such cases must seek recourse in the same court, the Sandiganbayan, which is vested with exclusive and original jurisdiction. . . . (Emphasis supplied)

The above ruling was reiterated in Soriano v. Yuson (164 SCRA 226 [1988]) and accompanying cases.All matters of sequestration being within the exclusive and original jurisdiction of the Sandiganbayan, it follows that the propriety of petitioner's action in denying Cojuangco's right of inspection, ostensibly based on the order of sequestration, may be challenged before the respondent court.Neither may the doctrine of state immunity be properly invoked by petitioner in the case at bar. For one thing, the petition filed by respondent Cojuangco, Jr., before the Sandiganbayan demanded no affirmative performance by the State in its political capacity which would otherwise call for the application of immunity from suit. (See Republic v. Sandiganbayan, 184 SCRA 382 [1990] and cases cited therein).As regards the might of inspection, it is the submission of petitioner that the request of respondent Cojuangco, Jr., for the examination of the corporate records of SMC and UCPB may be validly refused pending judicial determination of respondent's sequestered shares, i.e., whether the same are ill-gotten or not (Rollo, p. 14, GR No. 88809; citing EO Nos. 1 & 2). It is further argued that respondent's purpose in examining the corporate records of SMC and the UCPB is merely to satisfy his curiosity regarding the performance of said corporations (Rollo, p. 16, GR No. 88809; Rollo, p. 17, GR No. 88858).Does sequestration automatically deprive a stockholder of his right of inspection?We rule in the negative.The right of a stockholder to inspect and/or examine the records of a corporation is explicitly provided in Section 74 of the Corporation Code, the pertinent portion of which reads:

Sec. 74. Books to be kept; stock transfer agent.

xxx xxx xxx

The records of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

Petitioners argue, however, that the Corporation Code has to give way to, as having been amended by, Executive Orders Nos. 1, 2, 14 and related issuances as well as the pronouncement laid down by this Court in Bataan Shipyard and Engineering Corporation v. Presidential Commission on Good Government (150 SCRA 181 [1987]) on the effects of sequestration (Rollo, p. 12, GR No. 88809; Rollo, p. 13, GR No. 88858). There is mischief in this argument. We have examined the extent of Executive Orders Nos. 1, 2 and 14 on sequestration as well as the BASECO case relied upon by petitioner. Nevertheless, the Court finds nothing therein to indicate that the Corporation Code has been deemed amended, much less an implied modification of a stockholder's right to inspection as guaranteed by Sec. 74 thereof. Moreover, what is clear in the case of BASECO, supra, is the following:

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion over property sequestered, frozen or provisionally taken over. As already earlier stressed with no little insistence, the act of sequestration; freezing or provisional takeover of property does not import or bring about a divestment of title over said property; does not make the PCGG the owner thereof. In relation to the property sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an owner. . . .

The PCGG does not become, ipso facto, the owner of the shares just because the same have been sequestered; nor does it become the stockholder of record by virtue of such sequestration.Just recently, We ruled that the PCGG cannot vote the sequestered shares of respondent Cojuangco, Jr., in San Miguel Corporation (Cojuangco, Jr., et al., v. Roxas, et al., GR No. 91925, April 16, 1991; Cojuangco, Jr., et al., v. Azcuna, et al., GR No. 93005, April 16, 1991). If the PCGG cannot vote the sequestered shares of private respondent, with much

more reason it cannot restrain or prevent private respondent, as stockholder from inspecting the corporate records of the SMC and the UCPB at reasonable hours on business days. The law grants respondent/stockholder such authority.Petitioner, in seeking to bar private respondent from exercising his statutory right of inspection, lays emphasis on the argument that respondent's express purpose is to "supervise" PCGG's management, if not to gratify his curiosity regarding the performance of the SMC and the UCPB.Again, the argument is devoid of merit. Records indicate that private respondent is the ostensible owner of a substantial number of shares and is a stockholder of record in SMC and UCPB. * Being a stockholder beyond doubt, there is therefore no reason why private respondent may not exercise his statutory right of inspection in accordance with Sec. 74 of the Corporation Code, the only express limitation being that the right of inspection should be exercised at reasonable hours on business days; 2) the person demanding to examine and copy excerpts from the corporation's records and minutes has not improperly used any information secured through any previous examination of the records of such corporation; and 3) the demand is made in good faith or for a legitimate purpose. The latter two limitations, however, must be set up as a defense by the corporation if it is to merit judicial cognizance. As such, and in the absence of evidence, the PCGG cannot unilaterally deny a stockholder from exercising his statutory right of inspection based on an unsupported and naked assertion that private respondent's motive is improper or merely for curiosity or on the ground that the stockholder is not in friendly terms with the corporation's officers.Explaining the rationale behind a stockholder's right to inspection, this Court in the case of Gokongwei, Jr., v. Securities and Exchange Commission (89 SCRA 336 [1979]) held that:

The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. (citing Fletcher Cyc, Private Corporations, Vol. 5, 1976 Rev. Ed., Secs. 2213, 2218 & 2222)

While it may be true that the right of inspection granted by Sec. 74 of the Corporation Code is not absolute, as when the stockholder is not acting in good faith and for a legitimate purpose (Gonzales v. PNB, 122 SCRA 489 [1983]); or when the demand is purely speculative or merely to satisfy curiosity (Grey v. Insular Lumber Co., 40 O.G., No. 31st Supp. 1 [1939]; See also State ex rel. Thiele v. Cities Service Co. (115 A. 773 [1922]), the same may not be said in the case of private respondent. This is because:

. . . the "impropriety of purpose such as will defeat enforcement must be set up (by) the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the stockholder the burden of showing impropriety of purpose or motive. (Gokongwei, Jr., v. Securities and Exhange Commission, supra; citing State v. Monida & Yellowstone Stage Co., 110 Minn. 193, 124 NW 791; State v. Cities Service Co., 114 A 463.)

In the case at bar, petitioner failed to discharge the burden of proof to show that private respondent's action in seeking examination of the corporate records was moved by unlawful or ill-motivated designs which could appropriately call for a judicial protection against the exercise of such right. Save for its unsubstantiated allegations, petitioner could offer no proof, nay, not even a scintilla of evidence that respondent Cojuangco, Jr., was motivated by bad faith; that the demand was for an illegitimate purpose or that the

demand was impelled by speculation or idle curiosity. Surely, respondent's substantial shareholdings in the SMC and UCPB cannot be an object of mere curiosity.IN VIEW OF THE FOREGOING, the Court Resolved to DISMISS the instant petition for lack of merit. The temporary restraining orders issued are hereby LIFTED and SET ASIDE. This Resolution is immediately executory.SO ORDERED. 

 

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 97237 August 16, 1991FILIPINAS PORT SERVICES, INC., petitioner,

vs.NATIONAL LABOR RELATIONS COMMISSION, PATERNO LIBOON, SEGUNDO AQUINO, JOVITO BULAY,

DOMINGO NAVOA, DELFIN BERMEJO, CELEDONIO MANCUBAT, ALBERTO MAHINAY, SR., TEODULO SILAYA, SANTOS ARGUIDO, JUANITO LABANON, FLORENCIO MIRANTES, LUCIO BARRERA, VICENTE GILDORE, LEON

FUENTES, CASIMIRO MAGSAYO, FERNANDO MORIENTE, MATIAS ORBITA, SR., FRANCISCO PARDILLO, ILDEFONSO JUMILLA AND JOSE CANTONJOS, respondents.

Yap, Ocampo & Associates for petitioner.Porfirio S. Daclan for private respondents.

 

PARAS, J.:pThis is a petition for clarification with prayer for preliminary injunction filed by Filipinas Port Services, Inc. (hereinafter referred to as Filport) seeking to clarify two conflicting decisions rendered by this Court in cases involving identical or similar parties, facts and issues. The antecedent facts of the case are as follows: In view of the government policy which ordained that cargo handling operations should be limited to only one cargo handling operator-contractor for every port (under Customs Memorandum Order 28075, later on superseded by General Ports Regulations of the Philippine Ports Authority) the different stevedoring and arrastre corporations operating in the Port of Davao were integrated into a single dockhandlers corporation, known as the Davao Dockhandlers, Inc., which was registered with the Securities and Exchange Commission on July 13, 1976. Due to the late receipt of its permit to operate at the Port of Davao from the Bureau of Customs, Davao Dockhandlers, Inc., which was subsequently renamed Filport, actually started its operation on February 16, 1977. As a result of the merger, Section 118, Article X of the General Guidelines on The Integration of Stevedoring/Arrastre Services (PPA Administrative Order No. 13-77) mandated Filport to draw its personnel complements from the merging operators, as follows:

Sec. 118. Absorption of labor.—Subject to the provisions of the immediate preceding section, and consistent with the actual operational requirements of the new management, all labor force together with its necessary personnel complement, of the merging operators shall be absorbed by the

merged or integrated organization to constitute its labor force. (Emphasis supplied)

Thus, Filport's labor force was mostly taken from the integrating corporations, among them the private respondents. On February 4,1987, private respondent Paterno Liboon and 18 others filed a complaint with the Department of Labor and Employment Regional Office in Davao City, alleging that they were employees of Filport since 1955 through 1958 up to December 31, 1986 when they retired; that they were paid retirement benefits computed from February 16,1977 up to December 31, 1986 only; and that taking into consideration their continuous length of service, they are entitled to be paid retirement benefits differentials from the time they started working with the predecessors of Filport up to the time they were absorbed by the latter in 1977 (p. 15, Rollo). Finding Filport a mere alter ego of the different integrating corporations, the Labor Arbiter held Filport liable for retirement benefits due private respondents for services rendered prior to February 16, 1977. Said decision was affirmed by the NLRC on appeal. Filport filed a petition for certiorari with the Supreme Court docketed as G.R. No. 85704, claiming that it is an entirely new corporation with a separate juridical personality from the integrating corporations; and that Filport is not a successor-employer, liable for the obligations of private respondents' previous employers, as shown clearly in the memorandum dated November 21,1978 of PPA Assistant General Manager Maximo S. Dumlao, Jr., to wit:

November 1978

MEMORANDUM

TO: The Officer-in-Charge

PMU Davao

FROM: The AGM for Operations

SUBJECT: Clarification of Sec. 116 of PPA Administrative

Order No. 13-77 of New Organization's Liability.

In reply to your telegram dated November 16, 1978, Sec. 116 of PPA Administrative Order #13-77 is hereby quoted for clarification:

New Organization's Liability—The integrated cargo-handling organization shall be absolutely free from any liability or obligation of the merging operators who shall continue to be individually liable for their respective liabilities or obligations, if any. (emphasis supplied) ...

xxx xxx xxx

The new organization's liability shall be the payment of salaries, benefits and all other money due the employee as a result of his employment, starting on the date of his service in the newly integrated organization.

In answer to your query, therefore, the absorption of an employee into a newly integrated organization does not include the carry over of his length of service.

s/t MAXIMO S. DUMLAO, JR.Asst. General ManagerWhile G.R. No. 85704 was still pending decision by this Court, Josefino Silva, another employee of Filport, instituted a suit against Filport and Damasticor (one of the defunct

stevedoring firms) claiming for retirement benefits for services rendered prior to February 19, 1977. The labor arbiter found for Josefino Silva and said decision was affirmed by the NLRC. Filport filed a petition for certiorari with the Supreme Court docketed as G.R. No. 86026. On August 31, 1989, this Court, through the First Division, rendered a decision, holding that: Petitioner (Filport) cannot be held liable for the payment of the retirement pay of private respondent (Josefino Silva) while in the employ of DAMASTICOR ... who is held responsible for the same as the labor contract is in personam and cannot be passed on to the petitioner." (Rollo, p. 7) In so ruling, the First Division relied heavily on the case of Fernando v. Angat Labor Union (5 SCRA 248) where it was held that unless expressly assumed, labor contracts are not enforceable against a transferee of an enterprise labor contracts being in personam. Per entry of judgment, the aforesaid decision became final and executory on November 24, 1989 (p. 87, Rollo). On September 3, 1990, however, this Court, through the Second Division, dismissed the petition in G.R. No. 85704 "for failure to sufficiently show that the questioned judgment is tainted with grave abuse of discretion." Per entry of judgment, said resolution became final and executory on December 4, 1 990 (p. 108, Rollo). Hence, the instant petition for clarification with prayer for preliminary injunction to enjoin the respondents from enforcing the decision in G.R. No. 85704 until further orders of this Court. We see no reason to disturb the findings of fact of the public respondent, supported as they are by substantial evidence in the light of the well established principle that findings of administrative agencies which have acquired expertise because their jurisdiction is confined to specific matters are generally accorded not only respect but at times even finality, and that judicial review by this Court on labor cases does not go so far as to evaluate the sufficiency of the evidence upon which the Labor Arbiter and the NLRC based their determinations but are limited to issues of jurisdiction or grave abuse of discretion. (National Federation of Labor Union v. Ople, 143 SCRA 129). In the case filed by private respondent Paterno Liboon et al against Filport, the findings of the NLRC in its November 27, 1987 decision are categorical: In resolving the issues, the Labor Arbiter concludes as follows:

The eventual incorporation of the arrastre/stevedoring firms and their subsequent registration with the Securities and Exchange Commission on July 13, 1975 brought to the fore the interlocking ownership of the new corporation.

xxx xxx xxx

Subsequent amendment of its Articles of Incorporation highlighted by the renaming of the Davao Dockhandlers, Inc. to Filipinas Port Services, Inc. did not diminish the fact that the ownership and constituency of the new corporation are basically Identical with the previous owners.

It is, therefore, the considered view of this Office that respondent Filport being a mere alter ego of the different merging companies has at the very least, the obligation not only to absorb into its employ workers of the dissolved companies, but also to absorb the length of service earned by the absorbed employees from their former employers.

xxx xxx xxx

We are in full accord with, and hereby sustain, the findings and conclusions of the Labor Arbiter. Under the circumstances, respondent-appellant is a successor-employer. As a successor entity, it is answerable to the lawful obligations of the predecessor employers, herein integrees. This Commission has so held under the principle of 'substitution' that the successor firm is liable to (sic) the obligations of the predecessor employer, notwithstanding

the change in management or even personality, of the new contracting employer." (Lakas Ng Manggagawang Filipino (LAKAS] v. Tarlac Electrical Cooperative, Inc. et al., NLRC Case No. RB III-1 57-75, January 28,1978, En Banc). ... The Supreme Court earlier upheld the "Substitutionary" doctrine in the case of Benguet Consolidated, Inc. vs. BOI Employees & Workers Union, (G.R. L-24711, April 30, 1968, 23 SCRA 465). (pp. 35 & 37, Rollo)

Said findings were reiterated in the case filed by Josefino Silva against Filport where the NLRC, in its decision dated January 19, 1988, further ruled that:

... As We have ruled in the similar case involving herein appellant, the latter is deemed a survivor entity because it continued in an essentially unchanged manner the business operators of the predecessor arrastre and port service operators, hiring substantially the same workers, including herein appellee, of the integree predecessors, using substantially the same facilities, with similar working conditions and line of business, and employing the same corporate control, although under a new management and corporate personality. (G.R. No. 86026, p. 35, Rollo)

Thus, granting that Filport had no contract whatsoever with the private respondents regarding the services rendered by them prior to February 16, 1977, by the fact of the merger, a succession of employment rights and obligations had occurred between Filport and the private respondents. The law enforced at the time of the merger was Section 3 of Act No. 2772 which took effect on March 6, 1918. Said law provides:

Sec. 3. Upon the perfecting, as aforesaid, of a consolidation made in the manner herein provided, the several corporations parties thereto shall be deemed and taken as one corporation, upon the terms and conditions set forth in said agreement; or, upon the perfecting of a merger, the corporation merged shall be deemed and taken as absorbed by the other corporation and incorporated in it; and all and singular rights, privileges, and franchises of each of said corporations, and all property, real and personal, and all debts due on whatever account, belonging to each of such corporations, shall be taken and deemed as transferred to and vested in the new corporation formed by the consolidation, or in the surviving corporation in case of merger, without further act or deed; and the title to real estate, either by deed or otherwise, under the laws of the Philippine Islands vested in either corporation, shall not be deemed in any way impaired by reason of this Act: Provided, however, That the rights of creditors and all liens upon the property of either of said corporations shall be preserved unimpaired; and all debts liabilities, and duties of said corporations shall thenceforth attach to the new corporation in case of a consolidation, or to the surviving corporation in case of a merger, and be enforced against said new corporation or surviving corporation as if said debts, liabilities, and duties had been incurred or contracted by it.

As earlier stated, it was mandated that Filport shall absorb all labor force and necessary personnel complement of the merging operators, thus, clearly indicating the intention to continue the employer-employee relationships of the individual companies with its employees through Filport.The alleged memorandum of the PPA Assistant General Manager exonerating Filport from any liability arising from and as a result of the merger is contrary to public policy and is violative of the workers' right to security of tenure. Said memorandum was issued in response to a query of the PMU Officer-in-Charge and was not even published nor made known to the workers who came to know of its existence only at the hearing before the NLRC. (G.R. No. 86026, pp. 93-94, Rollo) The principle involved in the case cited by the First Division (Fernando v. Angat Labor Union [supra]) applies only when the transferee is an entirely new corporation with a distinct personality from the integrating firms and NOT where the transferee was found to be merely an alter ego of the different merging firms, as in this case. Thus, Filport has the obligation not only to absorb the workers of the dissolved companies but also to

include the length of service earned by the absorbed employees with their former employees as well. To rule otherwise would be manifestly less than fair, certainly, less than just and equitable. Finally, to deny the private respondents the fruits of their labor corresponding to the time they worked with their previous employers would render at naught the constitutional provisions on labor protection. In interpreting the protection to labor and social justice provisions of the Constitution and the labor laws, and rules and regulations implementing the constitutional mandate, the Supreme Court has always adopted the liberal approach which favors the exercise of labor rights. (EuroLinea Phils., Inc. v. NLRC, 156 SCRA 83). WHEREFORE, the Resolution of the Second Division of this Court in G.R. No. 85704 dated September 3, 1990 is hereby REITERATED. SO ORDERED 

 

 

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 123793 June 29, 1998ASSOCIATED BANK, petitioner,

vs.COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.

 PANGANIBAN, J.:In a merger, does the surviving corporation have a right to enforce a contract entered into by the absorbed company subsequent to the date of the merger agreement, but prior to the issuance of a certificate of merger by the Securities and Exchange Commission?

The Case

This is a petition for review under Rule 45 of the Rules of Court, seeking to set aside the Decision 1 of the Court of Appeals 2 in CA-GR CV No. 26465 promulgated on January 30, 1996, which answered the above question in the negative. The challenged Decision reversed and set aside the October 17, 1986 Decision 3 in Civil Case No. 85-32243, promulgated by the Regional Trial Court of Manila, Branch 48, which disposed of the controversy in favor of herein petitioner as follows: 4

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Associated Bank. The defendant Lorenzo Sarmiento, Jr. is ordered to pay plaintiff:

1. The amount of P4,689,413.63 with interest thereon at 14% per annum until fully paid;

2. The amount of P200,000.00 as and for attorney's fees; and

3. The costs of suit.

On the other hand, the Court of Appeals resolved the case in this wise: 5

WHEREFORE, premises considered, the decision appealed from, dated October 17, 1986 is REVERSED and SET ASIDE and another judgment rendered DISMISSING plaintiff-appellee's complaint, docketed as Civil Case No. 85-32243. There is no pronouncement as to costs.

The Facts

The undisputed factual antecedents, as narrated by the trial court and adopted by public respondent, are as follows: 6

. . . [O]n or about September 16, 1975 Associated Banking Corporation and Citizens Bank and Trust Company merged to form just one banking corporation known as Associated Citizens Bank, the surviving bank. On or about March 10, 1981, the Associated Citizens Bank changed its corporate name to Associated Bank by virtue of the Amended Articles of Incorporation. On September 7, 1977, the defendant executed in favor of Associated Bank a promissory note whereby the former undertook to pay the latter the sum of P2,500,000.00 payable on or before March 6, 1978. As per said promissory note, the defendant agreed to pay interest at 14% per annum, 3% per annum in the form of liquidated damages, compounded interests, and attorney's fees, in case of litigation equivalent to 10% of the amount due. The defendant, to date, still owes plaintiff bank the amount of P2,250,000.00 exclusive of interest and other charges. Despite repeated demands the defendant failed to pay the amount due.

xxx xxx xxx

. . . [T]he defendant denied all the pertinent allegations in the complaint and alleged as affirmative and[/]or special defenses that the complaint states no valid cause of action; that the plaintiff is not the proper party in interest because the promissory note was executed in favor of Citizens Bank and Trust Company; that the promissory note does not accurately reflect the true intention and agreement of the parties; that terms and conditions of the promissory note are onerous and must be construed against the creditor-payee bank; that several partial payments made in the promissory note are not properly applied; that the present action is premature; that as compulsory counterclaim the defendant prays for attorney's fees, moral damages and expenses of litigation.

On May 22, 1986, the defendant was declared as if in default for failure to appear at the Pre-Trial Conference despite due notice.

A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22, 1986 was filed by defendant's counsel which was denied by the Court in [an] order dated September 16, 1986 and the plaintiff was allowed to present its evidence before the Court ex-parte on October 16, 1986.

At the hearing before the Court ex-parte, Esteban C. Ocampo testified that . . . he is an accountant of the Loans and Discount Department of the plaintiff bank; that as such, he supervises the accounting section of the bank, he counterchecks all the transactions that transpired during the day and is responsible for all the accounts and records and other things that may[ ]be assigned to the Loans and Discount Department; that he knows the [D]efendant Lorenzo Sarmiento, Jr. because he has an outstanding loan with them as per their records; that Lorenzo Sarmiento, Jr. executed a promissory

note No. TL-2649-77 dated September 7, 1977 in the amount of P2,500,000.00 (Exhibit A); that Associated Banking Corporation and the Citizens Bank and Trust Company merged to form one banking corporation known as the Associated Citizens Bank and is now known as Associated Bank by virtue of its Amended Articles of Incorporation; that there were partial payments made but not full; that the defendant has not paid his obligation as evidenced by the latest statement of account (Exh. B); that as per statement of account the outstanding obligation of the defendant is P5,689,413.63 less P1,000,000.00 or P4,689,413.63 (Exh. B, B-1); that a demand letter dated June 6, 1985 was sent by the bank thru its counsel (Exh. C) which was received by the defendant on November 12, 1985 (Exh. C, C-1, C-2, C-3); that the defendant paid only P1,000,000.00 which is reflected in the Exhibit C.

Based on the evidence presented by petitioner, the trial court ordered Respondent Sarmiento to pay the bank his remaining balance plus interests and attorney's fees. In his appeal, Sarmiento assigned to the trial court several errors, namely: 7

I The [trial court] erred in denying appellant's motion to dismiss appellee bank's complaint on the ground of lack of cause of action and for being barred by prescription and laches.

II The same lower court erred in admitting plaintiff-appellee bank's amended complaint while defendant-appellant's motion to dismiss appelle bank's original complaint and using/availing [itself of] the new additional allegations as bases in denial of said appellant's motion and in the interpretation and application of the agreement of merger and Section 80 of BP Blg. 68, Corporation Code of the Philippines.

III The [trial court] erred and gravely abuse[d] its discretion in rendering the two as if in default orders dated May 22, 1986 and September 16, 1986 and in not reconsidering the same upon technical grounds which in effect subvert the best primordial interest of substantial justice and equity.

IV The court a quo erred in issuing the orders dated May 22, 1986 and September 16, 1986 declaring appellant as if in default due to non-appearance of appellant's attending counsel who had resigned from the law firm and while the parties [were] negotiating for settlement of the case and after a one million peso payment had in fact been paid to appellee bank for appellant's account at the start of such negotiation on February 18, 1986 as act of earnest desire to settle the obligation in good faith by the interested parties.

V The lower court erred in according credence to appellee bank's Exhibit B statement of account which had been merely requested by its counsel during the trial and bearing date of September 30, 1986.

VI The lower court erred in accepting and giving credence to appellee bank's 27-year-old witness Esteban C. Ocampo as of the date he testified on October 16, 1986, and therefore, he was merely an eighteen-year-old minor when appellant supposedly incurred the foisted obligation under the subject PN No. TL-2649-77 dated September 7, 1977, Exhibit A of appellee bank.

VII The [trial court] erred in adopting appellee bank's Exhibit B dated September 30, 1986 in its decision given in open court on October 17, 1986 which exacted eighteen percent (18%) per annum on the foisted principal amount of P2.5 million when the subject PN, Exhibit A, stipulated only fourteen percent (14%) per annum and which was actually prayed for in appellee bank's original and amended complaints.

VIII The appealed decision of the lower court erred in not considering at all appellant's affirmative defenses that (1) the subject PN No. TL-2649-77 for P2.5 million dated September 7, 1977, is merely an accommodation pour autrui of any actual consideration to appellant himself and (2) the subject PN is a contract of adhesion, hence, [it] needs [to] be strictly construed against appellee bank — assuming for granted that it has the right to enforce and seek collection thereof.

IX The lower court should have at least allowed appellant the opportunity to present countervailing evidence considering the huge amounts claimed by appellee bank (principal sum of P2.5 million which including accrued interests, penalties and cost of litigation totaled P4,689,413.63) and appellant's affirmative defenses — pursuant to substantial justice and equity.

The appellate court, however, found no need to tackle all the assigned errors and limited itself to the question of "whether [herein petitioner had] established or proven a cause of action against [herein private respondent]." Accordingly, Respondent Court held that the Associated Bank had no cause of action against Lorenzo Sarmiento Jr., since said bank was not privy to the promissory note executed by Sarmiento in favor of Citizens Bank and Trust Company (CBTC). The court ruled that the earlier merger between the two banks could not have vested Associated Bank with any interest arising from the promissory note executed in favor of CBTC after such merger.Thus, as earlier stated, Respondent Court set aside the decision of the trial court and dismissed the complaint. Petitioner now comes to us for a reversal of this ruling. 8

Issues

In its petition, petitioner cites the following "reasons": 9

I The Court of Appeals erred in reversing the decision of the trial court and in declaring that petitioner has no cause of action against respondent over the promissory note.

II The Court of Appeals also erred in declaring that, since the promissory note was executed in favor of Citizens Bank and Trust Company two years after the merger between Associated Banking Corporation and Citizens Bank and Trust Company, respondent is not liable to petitioner because there is no privity of contract between respondent and Associated Bank.

III The Court of Appeals erred when it ruled that petitioner, despite the merger between petitioner and Citizens Bank and Trust Company, is not a real party in interest insofar as the promissory note executed in favor of the merger.

In a nutshell, the main issue is whether Associated Bank, the surviving corporation, may enforce the promissory note made by private respondent in favor of CBTC, the absorbed company, after the merger agreement had been signed.

The Court's Ruling

The petition is impressed with merit.

The Main Issue:Associated Bank Assumed

All Rights of CBTC

Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. 10

Although there is a dissolution of the absorbed corporations, there is no winding up of

their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. 11

The merger, however, does not become effective upon the mere agreement of the constituent corporations. The procedure to be followed is prescribed under the Corporation Code. 12 Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation.Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of Merger, 13 which Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into, provided that its effectivity "shall, for all intents and purposes, be the date when the necessary papers to carry out this [m]erger shall have been approved by the Securities and Exchange Commission." 14 As to the transfer of the properties of CBTC to ABC, the agreement provides:

10. Upon effective date of the Merger, all rights, privileges, powers, immunities, franchises, assets and property of [CBTC], whether real, personal or mixed, and including [CBTC's] goodwill and tradename, and all debts due to [CBTC] on whatever act, and all other things in action belonging to [CBTC] as of the effective date of the [m]erger shall be vested in [ABC], the SURVIVING BANK, without need of further act or deed, unless by express requirements of law or of a government agency, any separate or specific deed of conveyance to legally effect the transfer or assignment of any kind of property [or] asset is required, in which case such document or deed shall be executed accordingly; and all property, rights, privileges, powers, immunities, franchises and all appointments, designations and nominations, and all other rights and interests of [CBTC] as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, trustee of estates of persons mentally ill and in every other fiduciary capacity, and all and every other interest of [CBTC] shall thereafter be effectually the property of [ABC] as they were of [CBTC], and title to any real estate, whether by deed or otherwise, vested in [CBTC] shall not revert or be in any way impaired by reason thereof; provided, however, that all rights of creditors and all liens upon any property of [CBTC] shall be preserved and unimpaired and all debts, liabilities, obligations, duties and undertakings of [CBTC], whether contractual or otherwise, expressed or implied, actual or contingent, shall henceforth attach to [ABC] which shall be responsible therefor and may be enforced against [ABC] to the same extent as if the same debts liabilities, obligations, duties and undertakings have been originally incurred or contracted by [ABC], subject, however, to all rights, privileges, defenses, set-offs and counterclaims which [CBTC] has or might have and which shall pertain to [ABC]. 15

The records do not show when the SEC approved the merger. Private respondent's theory is that it took effect on the date of the execution of the agreement itself, which was September 16, 1975. Private respondent contends that, since he issued the promissory note to CBTC on September 7, 1977 — two years after the merger agreement had been executed — CBTC could not have conveyed or transferred to petitioner its interest in the said note, which was not yet in existence at the time of the merger. Therefore, petitioner, the surviving bank, has no right to enforce the promissory note on private respondent; such right properly pertains only to CBTC.Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that petitioner no longer has any interest in the promissory note. A closer perusal of the merger agreement leads to a different conclusion. The provision quoted earlier has this other clause:

Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents, or other papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes, references to [ABC], the SURVIVING BANK, as if such references were direct references to [ABC]. . . . 6

(Emphasis supplied)

Thus, the fact that the promissory note was executed after the effectivity date of the merger does not militate against petitioner. The agreement itself clearly provides that all contracts — irrespective of the date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner. Since, in contrast to the earlier aforequoted provision, the latter clause no longer specifically refers only to contracts existing at the time of the merger, no distinction should be made. The clause must have been deliberately included in the agreement in order to protect the interests of the combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation.Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the note shall be construed, under the very provisions of the merger agreement, as a reference to petitioner bank, "as if such reference [was a] direct reference to" the latter "for all intents and purposes."No other construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity, the provision must be given its literalmeaning 17 and applied without a convoluted interpretation. Verba lelegis non est recedendum. 18

In light of the foregoing, the Court holds that petitioner has a valid cause of action against private respondent. Clearly, the failure of private respondent to honor his obligation under the promissory note constitutes a violation of petitioner's right to collect the proceeds of the loan it extended to the former.

Secondary Issues:Prescription, Laches, Contract

Pour Autrui, Lack of Consideration

No Prescriptionor Laches

Private respondent's claim that the action has prescribed, pursuant to Article 1149 of the Civil Code, is legally untenable. Petitioner's suit for collection of a sum of money was based on a written contract and prescribes after ten years from the time its right of action arose. 19 Sarmiento's obligation under the promissory note became due and demandable on March 6, 1978. Petitioner's complaint was instituted on August 22, 1985, before the lapse of the ten-year prescriptive period. Definitely, petitioner still had every right to commence suit against the payor/obligor, the private respondent herein.Neither is petitioner's action barred by laches. The principle of laches is a creation of equity, which is applied not to penalize neglect or failure to assert a right within a reasonable time, but rather to avoid recognizing a right when to do so would result in a clearly inequitable situation 20 or in an injustice. 21 To require private respondent to pay the remaining balance of his loan is certainly not inequitable or unjust. What would be manifestly unjust and inequitable is his contention that CBTC is the proper party to proceed against him despite the fact, which he himself asserts, that CBTC's corporate personality has been dissolved by virtue of its merger with petitioner. To hold that no payee/obligee exists and to let private respondent enjoy the fruits of his loan without liability is surely most unfair and unconscionable, amounting to unjust enrichment at the expense of petitioner. Besides, this Court has held that the doctrine of laches is inapplicable where the claim was filed within the prescriptive period set forth under the law. 22

No ContractPour Autrui Private respondent, while not denying that he executed the promissory note in the amount of P2,500,000 in favor of CBTC, offers the alternative defense that said note was a contract pour autrui.

A stipulation pour autrui is one in favor of a third person who may demand its fulfillment, provided he communicated his acceptance to the obligor before its revocation. An incidental benefit or interest, which another person gains, is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. 23

Florentino vs. Encarnacion Sr. 24 enumerates the requisites for such contract: (1) the stipulation in favor of a third person must be a part of the contract, and not the contract itself; (2) the favorable stipulation should not be conditioned or compensated by any kind of obligation; and (3) neither of the contracting parties bears the legal representation or authorization of the third party. The "fairest test" in determining whether the third person's interest in a contract is a stipulation pour autrui or merely an incidental interest is to examine the intention of the parties as disclosed by their contract. 25

We carefully and thoroughly perused the promissory note, but found no stipulation at all that would even resemble a provision in consideration of a third person. The instrument itself does not disclose the purpose of the loan contract. It merely lays down the terms of payment and the penalties incurred for failure to pay upon maturity. It is patently devoid of any indication that a benefit or interest was thereby created in favor of a person other than the contracting parties. In fact, in no part of the instrument is there any mention of a third party at all. Except for his barefaced statement, no evidence was proffered by private respondent to support his argument. Accordingly, his contention cannot be sustained. At any rate, if indeed the loan actually benefited a third person who undertook to repay the bank, private respondent could have availed himself of the legal remedy of a third-party complaint. 26 That he made no effort to implead such third person proves the hollowness of his arguments.

Consideration

Private respondent also claims that he received no consideration for the promissory note and, in support thereof, cites petitioner's failure to submit any proof of his loan application and of his actual receipt of the amount loaned. These arguments deserve no merit. Res ipsa loquitur. The instrument, bearing the signature of private respondent, speaks for itself. Respondent Sarmiento has not questioned the genuineness and due execution thereof. No further proof is necessary to show that he undertook to pay P2,500,000, plus interest, to petitioner bank on or before March 6, 1978. This he failed to do, as testified to by petitioner's accountant. The latter presented before the trial court private respondent's statement of account 27 as of September 30, 1986, showing an outstanding balance of P4,689,413.63 after deducting P1,000,000.00 paid seven months earlier. Furthermore, such partial payment is equivalent to an express acknowledgment of his obligation. Private respondent can no longer backtrack and deny his liability to petitioner bank. "A person cannot accept and reject the same instrument." 28

WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the Decision of RTC-Manila, Branch 48, in Civil Case No. 26465 is hereby REINSTATED.SO ORDERED.