Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-48237 June 30, 1987

MADRIGAL & COMPANY, INC., petitioner, vs.

HON. RONALDO B. ZAMORA, PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS, THE HON.

SECRETARY OF LABOR, and MADRIGAL CENTRAL OFFICE EMPLOYEES UNION, respondents.

No. L-49023 June 30, 1987

MADRIGAL & COMPANY, INC., petitioner, vs.

HON. MINISTER OF LABOR and MADRIGAL CENTRAL OFFICE EMPLOYEES UNION, respondents.

SARMIENTO, J.:

These are two petitions for certiorari and prohibition filed by the petitioner, the Madrigal & Co., Inc. The facts are undisputed.

The petitioner was engaged, among several other corporate objectives, in the management of Rizal Cement Co., Inc. 1 Admittedly, the petitioner and Rizal Cement Co., Inc. are sister companies. 2 Both are owned by the same or practically the same stockholders. 3 On December 28, 1973, the respondent, the Madrigal Central Office Employees Union, sought for the renewal of its collective bargaining agreement with the petitioner, which was due to expire on February 28, 1974. 4Specifically, it proposed a wage increase of P200.00 a month, an allowance of P100.00 a month, and other economic benefits. 5 The petitioner, however, requested for a deferment in the negotiations.

On July 29, 1974, by an alleged resolution of its stockholders, the petitioner reduced its capital stock from 765,000 shares to 267,366 shares. 6 This was effected through the distribution of the marketable securities owned by the petitioner to its stockholders in exchange for their shares in an equivalent amount in the corporation. 7

On August 22, 1975, by yet another alleged stockholders' action, the petitioner reduced its authorized capitalization from 267,366 shares to 110,085 shares, again, through the same scheme. 8

After the petitioner's failure to sit down with the respondent union, the latter, on August 28, 1974, commenced Case No. LR-5415 with the National Labor Relations Commission on a complaint for unfair labor practice. 9 In due time, the petitioner filed its position paper, 10 alleging operational losses. Pending the resolution of Case No. LR-5415, the petitioner, in a letter dated November 17, 1975, 11 informed the Secretary of Labor that Rizal Cement Co., Inc., "from which it derives income" 12 "as the General Manager or Agent" 13 had "ceased operating temporarily." 14 "In addition, "because of the desire of the stockholders to phase out the operations of the Madrigal & Co., Inc. due to lack of business incentives and prospects, and in order to prevent further losses," 15 it had

to reduce its capital stock on two occasions "As the situation, therefore, now stands, the Madrigal & Co., Inc. is without substantial income to speak of, necessitating a reorganization, by way of retrenchment, of its employees and operations." 16 The petitioner then requested that it "be allowed to effect said reorganization gradually considering all the circumstances, by phasing out in at least three (3) stages, or in a manner the Company deems just, equitable and convenient to all concerned, about which your good office will be apprised accordingly." 17 The letter, however, was not verified and neither was it accompanied by the proper supporting papers. For this reason, the Department of Labor took no action on the petitioner's request.

On January 19, 1976, the labor arbiter rendered a decision 18 granting, among other things, a general wage increase of P200.00 a month beginning March 1, 1974 plus a monthly living allowance of P100.00 monthly in favor of the petitioner's employees. The arbiter specifically found that the petitioner "had been making substantial profits in its operation" 19 since 1972 through 1975. The petitioner appealed.

On January 29, 1976, the petitioner applied for clearance to terminate the services of a number of employees pursuant supposedly to its retrenchment program. On February 3, 1976, the petitioner applied for clearance to terminate 18 employees more. 20 On the same date, the respondent union went to the Regional Office (No. IV) of the Department of Labor (NLRC Case No. R04-2-1432-76) to complain of illegal lockout against the petitioner. 21 Acting on this complaint, the Secretary of 22 Labor, in a decision dated December 14, 1976, 22 found the dismissals "to be contrary to law" 23 and ordered the petitioner to reinstate some 40 employees, 37 of them with backwages. 24 The petitioner then moved for reconsideration, which the Acting Labor Secretary, Amado Inciong, denied. 25

Thereafter, the petitioner filed an appeal to the Office of the President. The respondent, the Presidential Assistant on Legal Affairs, affirmed with modification the Labor Department's decision, thus:

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1. Eliseo Dizon, Eugenio Evangelista and Benjamin Victorio are excluded from the order of reinstatement.

2. Rogelio Meneses and Roberto Taladro who appear to have voluntarily retired and paid their retirement pay, their cases are left to the judgment of the Secretary of Labor who is in a better position to assess appellant's allegation as to their retirement.

3. The rest are hereby reinstated with six (6) months backwages, except Aleli Contreras, Teresita Eusebio and Norma Parlade who are to be reinstated without backwages.

SO ORDERED. 26

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On May 15, 1978, the petitioner came to this court. (G.R. No. 48237.)

Meanwhile, on May 25, 1977, the National Labor Relations Commission rendered a decision affirming the labor arbiter's judgment in Case No. LR-5415. 27 The petitioner appealed to the Secretary of Labor. On June 9, 1978, the Secretary of Labor dismissed the appeal. 28 Following these successive reversals, the petitioner came anew to this court. (G.R. No. 49023.)

By our resolution dated October 9, 1978, we consolidated G.R. No. 48237 with G.R. No. 49023. 29 We likewise issued temporary restraining orders. 30

In G.R. No. 48237, the petitioner argues, that.

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I. SAID RESPONDENTS ERRED IN HOLDING THAT THERE WAS NO VALID COMPLIANCE WITH THE CLEARANCE REQUIREMENT.

II. SAID RESPONDENTS ERRED IN NOT HOLDING THAT THERE IS NO LOCKOUT HERE IN LEGAL CONTEMPLATION, MUCH LESS FOR UNION-BUSTING PURPOSES.

III. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN ORDERING THE REINSTATEMENT OF THE REST OF AFFECTED MEMBERS OF RESPONDENT UNION WITH SIX (6) MONTHS BACKWAGES, EXCEPT ALELI CONTRERAS, TERESITA EUSEBIO AND NORMA PARLADE WHO ARE TO BE REINSTATED WITHOUT BACKWAGES.

IV. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN LEAVING TO THE JUDGMENT OF RESPONDENT SECRETARY THE CASES OF ROGELIO MENESES AND ROBERTO TALADRO WHO HAD VOLUNTARILY RETIRED AND PAID THEIR RETIREMENT PAY. 31

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while in G.R. No. 49023, it submits that:

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1. RESPONDENT MINISTER ERRED IN AFFIRMING THE DECISION EN BANC OF THE NATIONAL LABOR RELATIONS COMMISSION DESPITE CLEAR INDICATIONS IN THE RECORD THAT THE AWARD WAS PREMATURE IN THE ABSENCE OF A DEADLOCK IN NEGOTIATION AND THE FAILURE ON THE PART OF THE LABOR ARBITER TO RESOLVE THE MAIN IF NOT ONLY ISSUE OF REFUSAL TO BARGAIN, THEREBY DEPRIVING PETITIONER OF ITS RIGHT TO DUE PROCESS.

2. ASSUMING ARGUENDO THAT THERE WAS A DEADLOCK IN NEGOTIATION, RESPONDENT MINISTER ERRED NEVERTHELESS IN NOT FINDING THAT THE ECONOMIC BENEFITS GRANTED IN THE FORM OF SALARY INCREASES ARE UNFAIR AND VIOLATIVE OF THE MANDATORY GUIDELINES PRESCRIBED UNDER PRESIDENTIAL DECREE NO. 525 AND IGNORING THE UNDISPUTED FACT THAT PETITIONER HAD VIRTUALLY CEASED OPERATIONS AFTER HAVING TWICE DECREASED ITS CAPITAL STOCKS AND, THEREFORE, NOT FINANCIALLY CAPABLE TO ABSORB SUCH AWARD OF BENEFITS. 32

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There is no merit in these two (2) petitions.

As a general rule, the findings of administrative agencies are accorded not only respect but even finality. 33 This is especially true with respect to the Department of Labor, which performs not only a statutory function but carries out a Constitutional mandate as well. 34 Our jurisdiction, as a rule, is confined to cases of grave abuse of discretion. 35 But for certiorari to lie, there must be such arbitrary and whimsical exercise of power, or that discretion was exercised despotically.36

In no way can the questioned decisions be seen as arbitrary. The decisions themselves show why.

Anent Case No. R04-2-1432-76 (G.R. No. 48237), we are satisfied with the correctness of the respondent Presidential Assistant for Legal Affairs' findings. We quote:

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In urging reversal of the appealed decision, appellant contends that (1) its letter dated November 17, 1975, constitute "substantial compliance with the clearance requirement to terminate;" and (2) individual appellees' dismissal had no relation to any union activities, but was the result of an honest-to-goodness retrenchment policy occasioned by loss of income due to cessation of operation.

We find the first contention to be without merit. Aside from the fact that the controversial letter was unverified, with not even a single document submitted in support thereof, the same failed to specify the individual employees to be affected by the intended retrenchment. Not only this, but the letter is so vague and indefinite regarding the manner of effecting appellant's retrenchment plan as to provide the Secretary of (sic) a reasonable basis on which to determine whether the request for retrenchment was valid or otherwise, and whether the mechanics in giving effect thereto was just or unjust to the employees concerned. In fact, to be clearly implied from the letter is that the implementary measures needed to give effect to the intended retrenchment are yet to be thought of or concretized in the indefinite future, measures about which the office of the Secretary "will be apprised accordingly." All these, and more, as correctly found by the Acting Secretary, cannot but show that the letter is insufficient in form and substance to constitute a valid compliance with the clearance requirement. That being so, it matters little whether or not complainant union or any of its members failed to interpose any opposition thereto.

It cannot be over-emphasized that the purpose in requiring a prior clearance by the Secretary of Labor, in cases of shutdown or dismissal of employees, is to afford said official ample opportunity to examine and determine the reasonableness of the request. This is made imperative in order to give meaning and substance to the constitutional mandate that the State must "afford protection to labor," and guarantee their

"security of tenure." Indeed, the rules require that the application for clearance be filed ten (10) days before the intended shutdown or dismissal, serving a copy thereof to the employees affected in order that the latter may register their own individual objections against the grant of the clearance. But how could this requirement of notice to the employees have been complied with, when, as observed by the Acting Secretary in his modificatory decision dated June 30, 1977 "the latter of November 17, 1975 does not even state definitely the employees involved" upon whom service could be made.

With respect to appellant's second contention, we agree with the Acting Secretary's findings that individual appellee's dismissal was an offshoot of the union's demand for a renegotiation of the then validly existing collective bargaining Agreement.

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The pattern of appellant's acts after the decision of the Labor Arbiter in Case No. LR-5415 has convinced us that its sole objective was to render moot and academic the desire of the union to exercise its right to bargain collectively with management, especially so when it is considered in the light of the fact that under the said decision the demand by the union for wage increase and allowances was granted. What renders appellant's motive suspect was its haste in terminating the services of individual appellees, without waiting the outcome of its appeal in Case No. LR-5415. The amount involved by its offer to pay double separation could very well have been used to pay the salaries of those employees whose services were sought to be terminated, until the resolution of its appeal with the NLRC, since anyway, if its planned retrenchment is found to be justifiable and done in good faith, its only liability is to answer for the separation pay provided by law. By and large, therefore, we agree with the Acting Secretary that, under the circumstances obtaining in this case, "respondent's action [was] a systematic and deliberate attempt to get rid of complainants because of their union activities.

We now come to the individual cases of Aleli Contreras, Teresita Eusebio and Norma Parlade. It is appellant's claim that these three (3) should not be reinstated inasmuch as they have abandoned their work by their continued absences, and moreover in the case of Contreras, she failed to oppose the application for clearance filed against her on October 24, 1975. However, appellant's payrolls for December 16-31, 1975, January 1-15, 1976 and January 16-31, 1976, show that the three (3) were "on leave without pay." As correctly appreciated by the Acting Secretary, these "payrolls prove, first, that "leave" has been granted to these employees, and, second, that it is a practice in the company to grant "leaves without pay" without loss of employment status, to those who have exhausted their authorized leaves." As regards, Norma Parlade, the records show that she "truly incurred illness and actually underwent

surgery in Oct., 1975." As to Aleli Contreras, there is no showing that the Secretary of Labor or appellant ever acted on the clearance. If we were to follow the logic of appellant, Contreras should not have been included in the application for clearance filed on Feb. 3, 1976. The fact that she was included shows that up to that time, she was still considered as a regular employee. It was for these reasons, coupled with the length of service that these employees have rendered appellant, that the Acting Secretary ordered their reinstatement but without backwages. 37

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With respect Lo Case No. LR-5415 (G.R. No. 49023), we are likewise content with the findings of the National Labor Relations Commission. Thus:

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Appellant now points that the only issue certified to compulsory arbitration is "refusal to bargain" and it is, therefore, premature to dictate the terms of the CBA on the assumption that there was already a deadlock in negotiation. Appellant further contends that, assuming there was deadlock in negotiation, the economic benefits granted are unreasonable and violative of the guideline prescribed by P.D. 525.

On the other hand, it is the union's stance that its economic demands are justified by, the persistent increase in the cost of living and the substantial earnings of the company from 1971 to 1975.

It bears to stress that although the union's petition was precipitated by the company's refusal to bargain, there are glaring circumstances pointing out that the parties also submitted "deadlock" to arbitration. The petition itself is couched in general terms, praying for arbitration of the union's "dispute" with the respondent concerning proposed changes in the collective bargaining agreement." It is supported with a copy of the proposed changes which just goes to show that the union, aside from the issue concerning respondent's refusal to bargain, sought determination of the merit of its proposals. On the part of the appellant company, it pleaded financial incapacity to absorb the proposed economic benefits during the initial stage of the proceedings below. Even the evidence and arguments proferred below by both parties are relevant to deadlock issue. In the face of these factual environment, it is our view that the Labor Arbiter below did not commit a reversible error in rendering judgment on the proposed CBA changes. At any rate, the minimum requirements of due process was satisfied because as heretofore stated, the appellant was given Opportunity, and had in fact, presented evidence and argument in avoidance of the proposed CBA changes.

We do not also subscribe to appellant's argument that by reducing its capital, it is made evident that it is phasing out its operations. On the contrary, whatever may be the reason behind such reductions, it is indicative of an intention to keep the company a

going concern. So much so that until now almost four (4) years later, it is still very much in existence and operational as before.

We now come to the question concerning the equitableness of the economic benefits granted below. It requires no evidence to show that the employees concerned deserve some degree of upliftment due to the unabated increase in the cost of living especially in Metro Manila. Of course the company would like us to believe that it is losing and is therefore not financially capable of improving the present CBA to favor its employees. In support of such assertion, the company points that the profits reflected in its yearly Statement of Income and Expenses are dividends from security holdings. We, however, reject as puerile its suggestion to dissociate the dividends it received from security holdings on the pretext that they belong exclusively to its stockholders. The dividends received by the company are corporate earnings arising from corporate investment which no doubt are attended to by the employees involved in this proceedings. Otherwise. it would not have been reflected as part of profits in the company's yearly financial statements. In determining the reasonableness of the economic grants below, we have, therefore, scrutinized the company's Statement of Income and Expenses from 1972 to 1975 and after equating the welfare of the employees with the substantial earnings of the company, we find the award to be predicated on valid justifications.

The salary increase we herein sanction is also in keeping with the rational that made imperative the enactment of the Termination Pay Law since in case the respondent company really closes down, the employees will receive higher separation pay or retirement benefits to tide them over while seeking another employment. 38

What clearly emerges from the recorded facts is that the petitioner, awash with profits from its business operations but confronted with the demand of the union for wage increases, decided to evade its responsibility towards the employees by a devised capital reduction. While the reduction in capital stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union members, who, by then, had agitated for wage increases. In the face of the petitioner company's piling profits, the unionists had the right to demand for such salary adjustments.

That the petitioner made quite handsome profits is clear from the records. The labor arbiter stated in his decision in the collective agreement case (Case No. LR-5415):

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A clear scrutiny of the financial reports of the respondent [herein petitioner] reveals that it had been making substantial profits in the operation.

In 1972, when it still had 765,000 common shares, of which 305,000 were unissued and 459,000 outstanding capitalized at P16,830,000.00, the

respondent made a net profit of P2,403,211.58. Its total assets were P70,821,317.81.

In 1973, based on the same capitalization, its profit increased to P2,724,465.33. Its total assets increased to P83,240,473.73.

In 1974, although its capitalization was reduced from P16,830,000.00 to P11,230,459.36, its profits were further increased to P2,922,349.70. Its assets were P78,842,175.75.

The reduction in its assets by P4,398,297.98 was due to the fact that its capital stock was reduced by the amount of P5,599,540.54.

In 1975, for the period of only six months, the respondent reported a net profit of P547,414.72, which when added to the surplus of P5,591.214.19, makes a total surplus of P6,138,628.91 as of June 30, 1975. 39

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The petitioner would, however, have us believe that it in fact sustained losses. Whatever profits it earned, so it claims were in the nature of dividends "declared on its shareholdings in other companies in the earning of which the employees had no participation whatsoever." 40 "Cash dividends," according to it, "are the absolute property of the stockholders and cannot be made available for disposition if only to meet the employees' economic demands." 41

There is no merit in this contention. We agree with the National Labor Relations Commission that "[t]he dividends received by the company are corporate earnings arising from corporate investment." 42 Indeed, as found by the Commission, the petitioner had entered such earnings in its financial statements as profits, which it would not have done if they were not in fact profits. 43

Moreover, it is incorrect to say that such profits — in the form of dividends — are beyond the reach of the petitioner's creditors since the petitioner had received them as compensation for its management services in favor of the companies it managed as a shareholder thereof. As such shareholder, the dividends paid to it were its own money, which may then be available for wage increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in which case, such dividends would be the absolute property of the stockholders and hence, out of reach by creditors of the corporation. Here, the petitioner was acting as stockholder itself, and in that case, the right to a share in such dividends, by way of salary increases, may not be denied its employees.

Accordingly, this court is convinced that the petitioner's capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in its employee ranks, especially of union members. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither countenance nor condone this. It is an unfair labor practice.

As we observed in People's Bank and Trust Company v. People's Bank and Trust Co. Employees Union: 44

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As has been held by this Court in Insular Lumber Company vs. CA, et al., L-23875, August 29, 1969, 29 SCRA 371, retrenchment can only be availed of if the company is losing or meeting financial reverses in its operation, which certainly is not the case at bar. Undisputed is the fact, that the Bank "at no time incurred losses. " As a matter of fact, "the net earnings of the Bank would be in the average of P2,000,000.00 a year from 1960 to 1969 and, during this period of nine (9) years, the Bank continuously declared dividends to its stockholders." Thus the mass lay-off or dismissal of the 65 employees under the guise of retrenchment policy of the Bank is a lame excuse and a veritable smoke-screen of its scheme to bust the Union and thus unduly disturb the employment tenure of the employees concerned, which act is certainly an unfair labor practice. 45

Yet, at the same tune, the petitioner would claim that "the phasing out of its operations which brought about the retrenchment of the affected employees was mainly dictated be the necessity of its stockholders in their capacity as heirs of the late Don Vicente Madrigal to partition the estate left by him." 46 It must be noted, however, that the labor cases were tried on the theory of losses the petitioner was supposed to have incurred to justify retrenchment. The petitioner cannot change its theory in the Supreme Court. Moreover, there is nothing in the records that will substantiate this claim. But what is more important is the fact that it is not impossible to partition the Madrigal estate — assuming that the estate is up for partition — without the petitioner's business closing shop and inevitably, without the petitioner laying off its employees.

As regards the question whether or not the petitioner's letter dated November 17, 1975 47 was in substantial compliance with legal clearance requirements, suffice it to state that apart from the Secretary of Labor's valid observation that the same "did not constitute a sufficient clearance as contemplated by law, " 48 the factual circumstances show that the letter in question was itself a part of the "systematic and deliberate attempt to get rid of [the union members] because of their union activities." 49 Hence, whether or not the said letter complied with the legal formalities is beside the point since under the circumstances, retrenchment was, in all events, unjustified. Parenthetically, the clearance required under Presidential Decree No. 850 has been done away with by Batas Blg. 130, approved on August 21, 1981.

During the pendency of these petitions, the petitioner submitted manifestations to the effect that certain employees have accepted retirement benefits pursuant to its retrenchment scheme. 50 This is a matter of defense that should be raised before the National Labor Relations Commission.

To do away with the protracted process of determining the earnings acquired by the employees as a result of ad interim employment, and to erase any doubt as to the amount of backwages due them, this court, in line with the precedent set in Mercury Drug Co., Inc. v. Court of Industrial Relations, 51 affirmed in a long line of decisions that came

later, 52 hereby fixes the amount of backwages at three (3) years pay reckoned at the increased rates decreed by the labor arbiter in Case No. LR-5415 without deduction or qualification.

WHEREFORE, the petitions are hereby DISMISSED. Subject to the modification as to the amount of backwages hereby awarded, the challenged decisions are AFFIRMED. The temporary restraining orders are LIFTED. With costs against the petitioner.

This decision is IMMEDIATELY EXECUTORY.

SO ORDERED.

Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Feliciano and Gancayco, JJ., concur.

 

Footnotes

1 Rollo, G.R. No. 48237, 10, 18, 20-21.2 Id., 10.3 Id.. 20.4 Id., 21.5 Id., 29.6 Id., 18, 30.7 Id.8 Id.9 Rollo, G. R. No. 49023, 4.10 Id., 25-29.11 Id., G.R. No. 48237,18-20.12 Id., 18.13 Id.14 Id.15 Id.16 Id.17 Id.18 Id., G.R. No. 49023, 32-37.19 Id., 34.20 Id., G.R. No. 48237, 3, 84.21 Id.22 Id., 20-28.23 Id., 27.24 Id., 28.25 Id., 29-36.26 Id., 60-61.27 Id., G.R. No. 49023, 64-76.28 Id., 78-80.29 Id., 86-Al.30 Id., 85-86; Id., G.R. No. 48237, 77-78.31 Id., G.R. No. 48237, 6.32 Id., G.R. No. 49023, 8.33 Special Events & Central Shipping Office Workers Union San Miguel Corp., Nos. L-51002-06, May 30, 1983, 122 SCRA 557 (1983), citing International Hardwood and Veneer Co. of the Phil. v. Leogardo, No. L-57429, October 28, 1982, 117 SCRA 967 (1982), Genconsu Free Workers Union v. Inciong, No. L- 48687, July 2, 1979, 91 SCRA 311 (1979), and Dy Keh Beng v. International Labor, No. L-32245, May 25, 1979, 90 SCRA 161 (1979).34 Int'l. Hardwood and Veneer Co. of the Phil. v. Leogardo, supra.

35 Special Events & Central Shipping Office Workers Union v. San Miguel Corp., supra, citing Consolidated Farms, Inc. v. Noriel, No. L-47752, July 31, 1978, 84 SCRA 469 (1970), Scott v. Inciong, No. L-38868, December 29, 1975, 68 SCRA 473 (1975), and San Miguel Corp. v. Secretary of Labor, No. L- 39195, May 26, 1975, 64 SCRA 56 (1975).36 Busier v. Leogardo, Jr., No. L-63316, July 31, 1984, 131 SCRA 151 (1984), citing Palma and Ignacio v. Q & S, Inc., No. L-20366, May 19, 1966, 17 SCRA 97 (1966) and Philippine Virginia Tobacco Administration v. Lucero, No. L-32550, October 27, 1983, 125 SCRA 337 (1983).37 Id., G.R. No. 48237, 55-57, 58-59.38 Id., G.R. No. 49023, 65-67.39 Id., 34-35.40 Id., 53.41 Id.42 Id., 67.43 Id.44 Nos. L-39598 and 39603, January 13, 1976, 69 SCRA 10 (1976).45 Supra, 25-26.46 Id., G.R. No, 48237,144.47 Id., 18-19.48 Id., 25.49 Id., 26.50 Id., 118-122,141-145.51 No. L-23557, April 30, 1974, 56 SCRA 694 (1974).52 Manila Hotel Corporation v. NLRC, No. L-53453, January 22, 1986, 141 SCRA 169 (1986); Akay Printing Press v. Minister of Labor and Employment, No. L-59651, December 6, 1985, 140 SCRA 381 (1985); Magtoto v. National Labor Relations Commission, No. L-63370, November 18, 1985, 140 SCRA 58 (1985); Panay Railways, Inc. v. National Labor Relations Commission, No. L-69416, July 1 1, 1985, 137 SCRA 480 (1985); Lepanto Consolidated Mining Company v. Encarnacion, Nos, L-67002-03, April 30, 1985, 136 SCRA 256 (1985); Medical Doctors, Inc. (Makati Medical Center) v. NLRC, No. L-56633, April 24, 1985, 136 SCRA 1 (1985); Insular Life Assurance Co., Ltd. v. NLRC, No. L-49071, April 17, 1985, 135 SCRA 697 (1985); Flexo Manufacturing Corp. v. NLRC, No. L-55971, February 28, 1985, 135 SCRA 145 (1985); Philippine Airlines, Inc. v. NLRC, No. L-64809, November 29, 1983, 126 SCRA 223 (1983); Associated Anglo American Tobacco Corporation v. Lazaro, No. L-63779, October 27, 1983, 125 SCRA 463 (1983); Capital Garment Corporation v. Ople, No. L-53627, September 10, 1982, 117 SCRA 473 (1982); Litex Employees Association v. CIR, No. L-39154, September 9, 1982, 116 SCRA 459 (1982); Yucoco v. Inciong, No. L-49061, March 29, 1982, 113 SCRA 245 (1982); People's Industrial and Commercial Employees and Workers Org. (FFLU) v. People's Industrial and Commercial Corp., No. L-37687, March 15, 1982, 112 SCRA 440 (1982); Kapisanan ng Manggagawa sa Camara Shoes v. Camara Shoes, No. L-50985, January 30, 1982, 111 SCRA 477

(1982); Pepito v. Secretary of Labor, No. L-49418, February 29, 1980, 96 SCRA 454 (1980); Citizens' League of Free- Workers v. CIR, No. L-38293, February 21, 1980, 96 SCRA 225 (1980); Liberty Cotton Mills Workers Union v. Liberty Cotton Mills, Inc., No. L-33987, May 31, 1979, 90 SCRA 391 (1979); Dy Keh Beng v. International Labor, supra; Bachrach Motor Co., Inc. v. Court of Industrial Relations, No. L-26136, October 30, 1978, 86 SCRA 27 (1978); L.R. Aguinaldo & Co., Inc. v. Court of Industrial Relations, No. L-31909, April 3, 1978, 82 SCRA 309 (1978); Danao Development Corporation v. NLRC, Nos. L-40706 & 40700, February 16, 1978, 81 SCRA 487 (1978); Monteverde v. Court of Industrial Relations, No. L- 32975, September 30, 1977, 79 SCRA 259 (1977); Insular Life Assurance Co., Ltd. Employees Association-Natu v. Insular Life Assurance Co., Ltd., No. L-25291, March 10, 1977, 76 SCRA 50 (1977); People's Bank and Trust Company v. People's Bank and Trust Co. Employee Union, supra; Luzon Stevedoring v. Court of Industrial Relations, No. L-34300, November 24, 1974, 61 SCRA 154 (1974); Feati University Faculty Club (Paflu) v. Feati University, No. l-31503, August 25, 1974, 58 SCRA 395 (1974).

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 117897 May 14, 1997

ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE

COMMISSION, petitioners, vs.

COURT OF APPEALS and IGLESIA NI CRISTO, respondents.

HERMOSISIMA, JR., J.:

The subject of this petition for review is the Decision of the public respondent Court of Appeals, 1 dated October 28, 1994, setting aside the portion of the Decision of the Securities and Exchange Commission (SEC, for short) in SEC Case No. 4012 which declared null and void the sale of two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into by and between private respondent Iglesia Ni Cristo (INC, for short) and the Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP, for short).

The following facts appear of record.

Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic Center in Quezon City for the construction of a "Mosque (prayer place), Madrasah (Arabic School), and other religious infrastructures" so as to facilitate the effective practice of Islamic faith in the area. 2

Towards this end, that is, in the same year, the Libyan government donated money to the IDP to purchase land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land, with an area of 49,652 square meters, was covered by two titles: Transfer Certificate of Title Nos. RT-26520 (176616) 3 and RT-26521 (170567), 4 both registered in the name of IDP.

It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of its Articles of Incorporation:

Senator Mamintal Tamano 5

Congressman Ali DimaporoCongressman Salipada PendatunDean Cesar Adib MajulSultan Harun Al-Rashid LucmanDelegate Ahmad AlontoCommissioner Datu Mama SinsuatMayor Aminkadra Abubakar 6

According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name of IDP, Martial Law was declared by the late President Ferdinand Marcos.

Most of the members of the 1971 Board of Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and Congressman Al-Rashid Lucman flew to the Middle East to escape political persecution.

Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending groups, came out with a Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group and the Abbas Group as IDP board members to be null and void. The dispositive portion of the SEC Decision reads:

WHEREFORE, judgment is hereby rendered declaring the elections of both the petitioners 7 and respondents 8 as null and void for being violative of the Articles of Incorporation of petitioner corporation. With the nullification of the election of the respondents, the approved by-laws which they certified to this Commission as members of the Board of Trustees must necessarily be likewise declared null and void. However, before any election of the members of the Board of Trustees could be conducted, there must be an approved by-laws to govern the internal government of the association including the conduct of election. And since the election of both petitioners and respondents have been declared null and void, a vacuum is created as to who should adopt the by-laws and certify its adoption. To remedy this unfortunate situation that the association has found itself in, the members of the petitioning corporation are hereby authorized to prepare and adopt their by-laws for submission to the Commission. Once approved, an election of the members of the Board of Trustees shall immediately be called pursuant to the approved by-laws.

SO ORDERED. 9

Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision, and, thus, no valid election of the members of the Board of Trustees of IDP was ever called. Although the Carpizo Group 10 attempted to submit a set of by-laws, the SEC found that, aside from Engineer Farouk Carpizo and Atty. Musib Buat, those who prepared and adopted the by-laws were not bona fide members of the IDP, thus rendering the adoption of the by-laws likewise null and void.

On April 20, 1989, without having been properly elected as new members of the Board of Trustee of IDP, the Carpizo Group caused to be signed an alleged Board Resolution 11 of the IDP, authorizing the sale of the subject two parcels of land to the private respondent INC for a consideration of P22,343,400.00, which sale was evidenced by a Deed of Absolute Sale 12 dated April 20, 1989.

On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal Tamano, or the Tamano Group, filed a petition before the SEC, docketed as SEC Case No. 4012, seeking to declare null and void the Deed of Absolute Sale signed by the Carpizo Group and the INC since

the group of Engineer Carpizo was not the legitimate Board of Trustees of the IDP.

Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an action for Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of the Regional Trial Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to clear the property of squatters and deliver complete and full physical possession thereof to INC. Likewise, INC filed a motion in the same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the Register of Deeds of Quezon City the owner's duplicate copy of TCT Nos. RT-26521 and RT-26520 covering the aforementioned two parcels of land, so that the sale in INC's favor may be registered and new titles issued in the name of INC. Mrs. Ligon was alleged to be the mortgagee of the two parcels of land executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco claimed to be in behalf of the Carpizo Group.

The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring, inter alia:

xxx xxx xxx

2. That the Intervenor has filed a case before the Securities and Exchange Commission (SEC) against Mr. Farouk Carpizo, et. al., who, through false schemes and machinations, succeeded in executing the Deed of Sale between the IDP and the Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of Sale is the subject of the case at bar;

3. That the said case before the SEC is docketed as Case No. 04012, the main issue of which is whether or not the aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void, hence, Intervenor's legal interest in the instant case. A copy of the said case is hereto attached as Annex "A";

4. That, furthermore, Intervenor herein is the duly constituted body which can lawfully and legally represent the Islamic Directorate of the Philippines;

xxx xxx xxx 13

Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by way of intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC. 14

Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioner's motion to intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues being raised by way of intervention are intra-corporate in nature, jurisdiction thereto properly pertaining to the SEC. 15

Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo Group but without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered Partial Judgment in Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its obligation under the Deed of Sale of clearing the subject lots of squatters and of delivering the actual possession thereof to INC. 16

Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-90-6937, treated INC as the rightful owner of the real properties and disposed as follows:

WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to plaintiff 17 the owner's copy of RT-26521 (170567) and RT-26520 (176616) in open court for the registration of the Deed of Absolute Sale in the latter's name and the annotation of the mortgage executed in her favor by herein defendant Islamic Directorate of the Philippines on the new transfer certificate of title to be issued to plaintiff.

SO ORDERED. 18

On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon "to deliver the owner's duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City for the purposes stated in the Order of March 2, 1992." 19

Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R No. SP-27973, assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on October 28, 1992.20

Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No. 107751.

In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this wise:

1. Declaring the by-laws submitted by the respondents 21 as unauthorized, and hence, null and void.

2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into by Iglesia ni Kristo and the Islamic Directorate of the Philippines, Inc. 22 null and void;

3. Declaring the election of the Board of Directors, 23 of the corporation from 1986 to 1991 as null and void;

4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat, as members of the IDP null and void.

No pronouncement as to cost.

SO ORDERED. 24

Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012, but the same was denied on account of the fact that the decision of the case had become final and executory, no appeal having been taken therefrom. 25

INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil action forcertiorari, docketed as CA-G.R SP No. 33295. On October 28, 1994, the court a quo promulgated a Decision in CA-G.R. SP No. 33295 granting INC's petition. The portion of the SEC Decision in SEC Case No. 4012 which declared the sale of the two (2) lots in question to INC as void was ordered set aside by the Court of Appeals.

Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994, submitting that the Court of Appeals gravely erred in:

1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;

2) Encouraging multiplicity of suits; and

3) Not applying the principles of estoppel and laches. 26

While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No. 107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon petition and affirmed the October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owner's duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City so that the Deed of Absolute Sale in INC's favor may be properly registered.

Before we rule upon the main issue posited in this petition, we would like to point out that our disposition in G.R. No. 107751 entitled, "Ligon v. Court of Appeals," promulgated on June 1, 1995, in no wise constitutes res judicatasuch that the petition under consideration would be barred if it were the ease. Quite the contrary, the requisites orres judicata do not obtain in the case at bench.

Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in personam, to wit:

Effect of judgment. — The effect of a judgment or final order rendered by a court or judge of the Philippines, having jurisdiction to pronounce the judgment or order, may be as follows:

xxx xxx xxx

(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to any other matter that could have been raised in relation thereto, conclusive between the parties and their successors in interest by title subsequent to the commencement of the action or special proceeding, litigating for the same thing and under the same title and in the same capacity;

(c) In any other litigation between the same parties or their successors in interest, that only is deemed to have been adjudged in a former judgment which appears upon its face to have been so adjudged, or which was actually and necessarily included therein or necessary thereto.

Section 49(b) enunciates the first concept of res judicata known as "bar by prior judgment," whereas, Section 49(c) is referred to as "conclusiveness of judgment."

There is "bar by former judgment" when, between the first case where the judgment was rendered, and the second case where such judgment is invoked, there is identity of parties, subject matter and cause of action. When the three identities are present, the judgment on the merits rendered in the first constitutes an absolute bar to the subsequent action. But where between the first case wherein judgment is rendered and the second case wherein such judgment is invoked, there is only

identity of parties but there is no identity of cause of action, the judgment is conclusive in the second case, only as to those matters actually and directly controverted and determined, and not as to matters merely involved therein. This is what is termed "conclusiveness of judgment."27

Neither of these concepts of res judicata find relevant application in the case at bench. While there may be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group, was only made an ancillary party in G.R. No. 107751 as intervenor. 28 It was never originally a principal party thereto. It must be noted that intervention is not an independent action, but is merely collateral, accessory, or ancillary to the principal action. It is just an interlocutory proceeding dependent on or subsidiary to the case between the originalparties. 29 Indeed, the IDP-Tamano Group cannot be considered a principal party in G.R. No. 107751 for purposes of applying the principle of res judicata since the contrary goes against the true import of the action of intervention as a mere subsidiary proceeding without an independent life apart from the principal action as well as the intrinsic character of the intervenor as a mere subordinate party in the main case whose right may be said to be only in aid of the right of the original party. 30 It is only in the present case, actually, where the IDP-Tamano Group became a principal party, as petitioner, with the Iglesia Ni Cristo, as private respondent. Clearly, there is no identity of parties in both cases.

In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751, was entitled, "Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant," 31 the IDP can not be considered essentially a formal party thereto for the simple reason that it was not duly represented by a legitimate Board of Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a case for Specific Performance with Damages, a mere action in personam, did not become final and executory insofar as the true IDP is concerned since petitioner corporation, for want of legitimate representation, was effectively deprived of its day in court in said case. Res inter alios judicatae nullum allis praejudicium faciunt. Matters adjudged in a cause do not prejudice those who were not parties to it. 32 Elsewise put, no person (natural or juridical) shall be affected by a proceeding to which he is a stranger. 33

Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a "bar by former judgment" will still not set in on the ground that the cause of action in the two cases are different. The cause of action in G.R. No. 107751 is the surrender of the owner's duplicate copy of the transfer certificates of title to the rightful possessor thereof, whereas the cause of action in the present case is the validity of the Carpizo Group-INC Deed of Absolute Sale.

Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed incidental to the resolution of the primary issue posed in said case which is: Who between Ligon

and INC has the better right of possession over the owner's duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be considered determinative and conclusive on the matter of the validity of the sale for this particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause grave and irreparable injustice to IDP which never gave its consent to the sale, thru a legitimate Board of Trustees.

In any case, while it is true that the principle of res judicata is a fundamental component of our judicial system, it should be disregarded if its rigid application would involve the sacrifice of justice to technicality. 34

The main question though in this petition is: Did the Court of Appeals commit reversible error in setting aside that portion of the SEC's Decision in SEC Case No. 4012 which declared the sale of two (2) parcels of land in Quezon City between the IDP-Carpizo Group and private respondent INC null and void?

We rule in the affirmative.

There can be no question as to the authority of the SEC to pass upon the issue as to who among the different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly falling within the original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A:

Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnership or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines . . . .

xxx xxx xxx

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

xxx xxx xxx

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

If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also declare who is not the legitimate IDP Board. This is precisely what the SEC did in SEC Case No. 4012 when it adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null andvoid. 35 By this ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo Group is a bogus Board of Trustees. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of ID property.

It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to pass upon the status of the Carpizo Group. As far back as October 3, 1986, the SEC,

in Case No. 2687, 36 in a suit between the Carpizo Group and the Abbas Group, already declared the election of the Carpizo Group (as well as the Abbas Group) to the IDP Board as null and void for being violative of the Articles of Incorporation. 37 Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private respondent INC contracted is a fake Board.

Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora property, allegedly in the name of the IDP, have to be struck down for having been done without the consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the essential requisites of contracts:

There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

All these elements must be present to constitute a valid contract. For, where even one is absent, the contract is void. As succinctly put by Tolentino, consent is essential for the existence of a contract, and where it is wanting, the contract is non-existent. 38 In this case, the IDP, owner of the subject parcels of land, never gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent on the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is void and produces no effect whatsoever.

The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or substantially all assets of the corporation:

Sec. 40. Sale or other disposition of assets. — Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting

stockholder may exercise his appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

xxx xxx xxx

The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the corporation should have been obtained. These twin requirements were not met as the Carpizo Group which voted to sell the Tandang Sora property was a fake Board of Trustees, and those whose names and signatures were affixed by the Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale were, from all indications, not bona fide members of the IDP as they were made to appear to be. Apparently, there are only fifteen (15) official members of the petitioner corporation including the eight (8) members of the Board of Trustees. 39

All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent INC was intrinsically void ab initio.

Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made outside of its jurisdiction, the same not being an intra-corporate dispute.

The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale null and void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack of consent of the IDP, owner of the subject property. No end of substantial justice will be served if we reverse the SEC's conclusion on the matter, and remand the case to the regular courts for further litigation over an issue which is already determinable based on what we have in the records.

It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board of Trustees in Civil Case. No. Q-90-6937, a case for Specific Performance with Damages between INC and the Carpizo Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have been granted ample opportunity before the regional trial court to shed light on the true status of the Carpizo Board and settled the matter as to the validity of the sale then and there. But INC, wanting to acquire the property at all costs and threatened by the participation of the legitimate IDP Board in the civil suit, argued for the denial of the motion averring, inter alia, that the issue sought to be litigated by the movant is intra-corporate in nature and outside the jurisdiction of the regional trial court. 40 As a result, the motion for intervention was denied. When the Decision in SEC Case No. 4012 came out nullifying the sale, INC came forward, this time, quibbling over the issue that it is the regional trial court, and not the SEC, which has jurisdiction to rule on the validity

of the sale. INC is here trifling with the courts. We cannot put a premium on this clever legal maneuverings of private respondent which, if countenanced, would result in a failure of justice.

Furthermore, the Court observes that the INC bought the questioned property from the Carpizo Group without even seeing the owner's duplicate copy of the titles covering the property. This is very strange considering that the subject lot is a large piece of real property in Quezon City worth millions, and that under the Torrens System of Registration, the minimum requirement for one to be a good faith buyer for value is that the vendee at least sees the owner's duplicate copy of the title and relies upon the same. 41 The private respondent, presumably knowledgeable on the aforesaid workings of the Torrens System, did not take heed of this and nevertheless went through with the sale with undue haste. The unexplained eagerness of INC to buy this valuable piece of land in Quezon City without even being presented with the owner's copy of the titles casts very serious doubt on the rightfulness of its position as vendee in the transaction.

WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The Register of Deeds of Quezon City is hereby ordered to cancel the registration of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo, if one has already been made. If new titles have been issued in the name of Iglesia Ni Cristo, the Register of Deeds is hereby ordered to cancel the same, and issue new ones in the name of petitioner Islamic Directorate of the Philippines. Petitioner corporation is ordered to return to private respondent whatever amount has been initially paid by INC as consideration for the property with legal interest, if the same was actually received by IDP. Otherwise, INC may run after Engineer Farouk Carpizo and his group for the amount of money paid.

SO ORDERED.

Kapunan, J., concurs.

Vitug, J,. concurs in the result.

Bellosillo, J., took no part.

Padilla, J., is on leave.

Footnotes1 Docketed as CA G.R. SP No. 33295.2 Rollo, p. 197.3 Annex "C"; Rollo, p. 40.4 Annex "B"; Rollo, p. 39.5 Now deceased.6 Rollo, p. 99.7 IDP-Carpizo Group.8 Hadja Potri Zorayda Tamano, et. al.9 Rollo, p. 45.10 Composed of Farouk Carpizo, Musib M. Buat, Abdulla U. Camlian, Suleiman Clem Antonio, Al-Haj, Ustadz Iljas Ismael, Abdurafih Sayedy, and Abdurahman Linzag.11 Rollo, pp. 135-145.12 Annex "E"; Rollo, pp. 46-48.

13 Rollo, pp. 51-52.14 Rollo, pp. 67-72.15 Order, pp. 1-2; Rollo, pp. 75-76.16 Rollo, p. 79.17 Iglesia Ni Cristo.18 Rollo, p. 82.19 Rollo, p. 158.20 Rollo, p. 164.21 Engr. Farouk Carpizo, et. al.22 Carpizo Group.23 Ibid.24 Decision, p. 19; Rollo, p. 104.25 Annex "P"; Rollo, p. 109.26 Petition, p. 14; Rollo, p. 22.27 Nabus v. Court of Appeals, 193 SCRA 732, 739-740 [1991].28 Rollo of G.R. No. 107751, p. 561.29 Big Country Ranch Corp. v. Court of Appeals, 227 SCRA 161, 167 [1993]; Carino v. Ofilada, 217 SCRA 206, 215 [1993]; Ordonez v. Gustilo, 192 SCRA 469 [1990]; Chavez v. Ongpin, 186 SCRA 331, 338 [1990]; Republic v. Sandiganbayan, 182 SCRA 911, 918 [1990].30 Carino, supra., citing Clareza v. Rosales, 2 SCRA 455, 457 [1961].31 Rollo, p. 80.32 Tan v. Barrios, 190 SCRA 686, 698 [1990], citing 54 C.J. 719.33 Filamer Christian Institute v. Court of Appeals, 190 SCRA 485, 492 [1990], citing Church Assistance Program v. Sibulo, G.R. No. 76552, March 21, 1989.34 Zaldarriaga v. Court of Appeals, 255 SCRA 254, 268 [1996], citing Ronquillo v. Marasigan, L-11621, May 31, 1962, 5 SCRA 304, 312, cited in Republic v. De los Santos, L-30240, March 25, 1988, 159 SCRA 264, 285 and in the concurring opinion of Justice Florenz D. Regalado in Sumaoang v. Judge, RTC, Br. XXX1, Guimba, Nueva Ecija, G.R. No. 78173, October 26, 1992, 215 SCRA 136, 150-151; Suarez v. Court of Appeals, 193 SCRA 183, 189 [1991].35 Supra., note 24.36 Annex "D"; Rollo, p. 41.37 Id., p. 45.38 Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, 1991 ed., p. 445.39 Rollo, p. 200.40 Supra., note 14.41 See Realty Sales Enterprise, Inc. v. IAC, 154 SCRA 328 [1987].

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-17504 & L-17506             February 28, 1969

RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and PATRIA

SALAS, heirs of Magdalena Salas, as stockholders on their own behalf and for the benefit of the Ma-ao Sugar Central Co., Inc., and other stockholders thereof who may wish to

join in this action, plaintiffs-appellants, vs.

MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA, ROMUALDO

M. ARANETA, and RAMON A. YULO, defendants-appellants.

San Juan, Africa and Benedicto for plaintiffs-appellants.Vicente Hilado and Gianzon, Sison, Yulo and Associates for defendants-appellants.

CAPISTRANO, J.:

This was a representative or derivative suit commenced on October 20, 1953, in the Court of First Instance of Manila by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three other directors of the corporation.

The complaint comprising the period November, 1946 to October, 1952, stated five causes of action, to wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and unauthorized investments; (2) for alleged gross mismanagement; (3) for alleged forfeiture of corporate rights warranting dissolution; (4) for alleged damages and attorney's fees; and (5) for receivership.

Plaintiffs prayed, in substance, as follows:

Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta and his individual co-defendants be ordered to render an accounting of all transactions made and carried out by them for defendant corporation, and "to collect, produce and/or pay to the defendant corporation the outstanding balance of the amounts so diverted and still unpaid to defendant corporation";

Under the SECOND CAUSE OF ACTION, that the individual defendants be held liable and be ordered to pay to the defendant corporation "whatever amounts may be recovered by the plaintiffs in Civil Case No. 20122, entitled 'Francisco Rodriguez vs. Ma-ao Sugar Central Co.'"; to return to the defendant corporation all amounts withdrawn by way of discretionary funds or backpay, and to account for the difference between the corporation's crop loan accounts payable and its crop loan accounts receivable;

Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and its net assets be distributed to the stockholders; and

Under the FOURTH CAUSE OF ACTION, that the defendants be ordered "to pay the sum of P300,000.00 by way of compensatory, moral and exemplary damages and for

expenses of litigation, including attorney's fees and costs of the suit."

THE FIFTH CAUSE OF ACTION was an application for the provisional remedy of receivership.

In their answer originally filed on December 1, 1953, and amended on February 1, 1955, defendants denied "the allegations regarding the supposed gross mismanagement, fraudulent use and diversion of corporate funds, disregard of corporate requirements, abuse of trust and violation of fiduciary relationship, etc., supposed to have been discovered by plaintiffs, all of which are nothing but gratuitous, unwarranted, exaggerated and distorted conclusions not supported by plain and specific facts and transactions alleged in the complaint."

BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the complaint "is premature, improper and unjustified"; (2) that plaintiffs did not make an "earnest, not simulated effort" to exhaust first their remedies within the corporation before filing their complaint; (3) that no actual loss had been suffered by the defendant corporation on account of the transactions questioned by plaintiffs; (4) that the payments by the debtors of all amounts due to the defendant corporation constituted a full, sufficient and adequate remedy for the grievances alleged in the complaint and (5) that the dissolution and/or receivership of the defendant corporation would violate and impair the obligation of existing contracts of said corporation.

BY WAY OF COUNTERCLAIM, the defendants in substance further alleged, among others, that the complaint was premature, improper and malicious, and that the language used was "unnecessarily vituperative abusive and insulting, particularly against defendant J. Amado Araneta who appears to be the main target of their hatred." Wherefore, the defendant sought to recover "compensation for damages, actual, moral, exemplary and corrective, including reasonable attorney's fees."

After trial, the Lower Court rendered its Decision (later supplemented by an Order resolving defendants' Motion for Reconsideration), the dispositive portion of which reads:

IN VIEW WHEREOF, the Court dismisses the petition for dissolution but condemns J. Amado Araneta to pay unto Ma-ao Sugar Central Co., Inc. the amount of P46,270.00 with 8% interest from the date of the filing of this complaint, plus the costs; the Court reiterates the preliminary injunction restraining the Ma-ao Sugar Central Co., Inc. management to give any loans or advances to its officers and orders that this injunction be as it is hereby made, permanent; and orders it to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other company whose purpose is not connected with the Sugar Central business; costs of plaintiffs to be borne by the Corporation and J. Amado Araneta.

From this judgment both parties appealed directly to the Supreme Court.

Before taking up the errors respectively, assigned by the parties, we should state that the following findings of the

Lower Court on the commission of corporate irregularities by the defendants have not been questioned by the defendants:

1. Failure to hold stockholders' meetings regularly. No stockholders' meetings were held in 1947, 1950 and 1951;

2. Irregularities in the keeping of the books. Untrue entries were made in the books which could not simply be considered as innocent errors;

3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining, P7,000.00. The investments were made not in pursuance of the corporate purpose and without the requisite authority of two-thirds of the stockholders;

4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which, according to the defendants, had been fully paid), in violation of the by-laws of the corporation which prohibits any director from borrowing money from the corporation;

5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to:

J. Amado Araneta & Co. P243,415.62

Luzon Industrial Corp. 585,918.17

Associated Sugar 463,860.36

General Securities 86,743.65

Bacolod Murcia 501,030.61

Central Azucarera del Danao 97,884.42

Talisay-Silay 4,365.90

The Court found that sums were taken out of the funds of the Ma-ao Sugar Central Co., Inc. and delivered to these affiliated companies, and vice versa, without the approval of the Ma-ao Board of Directors, in violation of Sec. III, Art. 6-A of the by-laws.

The errors assigned in the appeal of the plaintiffs, as appellants, are as follows:

I.

THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE FUNDS OF THE MA-AO SUGAR CENTRAL CO., INC., IN THE PHILIPPINE FIBER PROCESSING CO., INC. WAS NOT A VIOLATION OF SEC. 17-½ OF THE CORPORATION LAW.

II.

THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO SUGAR CENTRAL CO., INC. WAS INSOLVENT.

III.

THE LOWER COURT ERRED IN HOLDING THAT THE DISCRIMINATORY ACTS COMMITTED AGAINST PLANTERS DID NOT CONSTITUTE MISMANAGEMENT.

IV.

THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE ACTS WERE INSUFFICIENT FOR THE DISSOLUTION OF THE CORPORATION.

The portions of the Decision of the Lower Court assailed by the plaintiffs as appellants are as follows:

(1) ".... Finally, as to the Philippine Fiber, the Court takes it that defendants admit having invested P655,000.00 in shares of stock of this company but that this was ratified by the Board of Directors in Resolutions 60 and 80, Exhibits "R" and "R-2"; more than that, defendants contend that since said company was engaged in the manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar either to manufacture sugar bags or invest in another corporation engaged in said manufacture, and they quote authorities for the purpose, pp. 28-31, memorandum; the Court is persuaded to believe that the defendants on this point are correct, because while Sec. 17-1/2 of the Corporation Law provides that:

No corporation organized under this act shall invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized unless its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such proposal at the stockholders' meeting called for the purpose.

the Court is convinced that that law should be understood to mean as the authorities state, that it is prohibited to the Corporation to invest in shares of another corporation unless such an investment is authorized by two-thirds of the voting power of the stockholders, if the purpose of the corporation in which investment is made is foreign to the purpose of the investing corporation because surely there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the Power of the Board of Directors; the only trouble here is that the investment was made without any previous authority of the Board of Directors but was only ratified afterwards; this of course would have the effect of legalizing the unauthorized act but it is an indication of the manner in which corporate business is transacted by the Ma-ao Sugar administration, the fact that off and on, there would be passed by the Board of Directors, resolutions ratifying all acts previously done by the management, e.g. resolutions passed on February 25, 1947, and February 25, 1952, by the Board of Directors as set forth in the affidavit of Isidro T.

Dunca p. 127, etc. Vol. 1. (Decision, pp. 239-241 of Record on Appeal.)

x x x           x x x           x x x

(2) "On the other hand, the Court has noted against plaintiffs that their contention that Ma-ao Sugar is on the verge of bankruptcy has not been clearly shown; against this are Exh. C to Exh. C-3 perhaps the best proof that insolvency is still far is that this action was filed in 1953 and almost seven years have passed since then without the company apparently getting worse than it was before; ..." (Decision, pp. 243-244,supra.)

x x x           x x x           x x x

(3) "As to the crop loan anomalies in that instead of giving unto the planters the entire amount alloted for that, the Central withheld a certain portion for their own use, as can be seen in Appendix A of Exh. C-1, while the theory of plaintiffs is that since between the amount of P3,791,551.78 the crop loan account payable, and the amount of P1,708,488.22, the crop loan receivable, there is a difference of P2,083,063.56, this would indicate that this latter sum had been used by the Central itself for its own purposes; on the other hand, defendants contend that the first amount did not represent the totality of the crop loans obtained from the Bank for the purpose of relending to the planters, but that it included the Central's own credit line on its 40% share in the standing crop; and that this irregularity amounts to a grievance by plaintiffs as planters and not as stockholders, the Court must find that as to this count, there is really reason to find that said anomaly is not a clear basis for the derivative suit, first, because plaintiffs' evidence is not very sufficient to prove clearly the alleged diversion in the face of defendants' defense; there should have been a showing that the Central had no authority to make the diversion; and secondly, if the anomaly existed, there is ground to hold with defendants that it was an anomaly pernicious not to the Central but to the planters; it was not even pernicious to the stockholders.

Going to the discriminatory acts of J. Amado Araneta, namely, manipulation of cane allotments, withholding of molasses and alcohol shares, withholding of trucking allowance, formation of rival planters associations, refusal to deal with legitimate planters group, Exh. S; the Court notices that as to the failure to provide hauling transportation, this in a way is corroborated by Exh. 7, that part containing the decision of the Court of First Instance of Manila, civil 20122, Francisco Rodriguez v. Ma-ao Sugar; for the reason, however, that even if these were true, those grievances were grievances of plaintiffs as planters and not as stockholders — just as the grievance as to the crop loans already adverted to, — this Court will find insufficient merit on this count. (Decision, pp. 230-231, supra.)

x x x           x x x           x x x

(4) "...; for the Court must admit its limitations and confess that it cannot pretend to know better than the Board in matters where the Board has not transgressed any positive statute or by-law especially where as here, there is the circumstance that presumably, an impartial representative in the Board of Directors, — the one from the Philippine National Bank, — against whom apparently plaintiffs have no quarrel, does not appear to have made any protest against the same; the net result will be to hold that the culpable acts proved are not enough to secure a dissolution; the Court will only order the correction of abuses, proved as already mentioned; nor will the Court grant any more damages one way or the other. (Decision, p. 244,supra.)

On the other hand, the errors assigned in the appeal of the defendants as appellants are as follows:

I.

THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO SUGAR CENTRAL CO., INC., THE AMOUNT OF P46,270.00, WITH 8% INTEREST FROM THE DATE OF FILING OF THE COMPLAINT.

II.

THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS TO PAY THE DEFENDANTS, PARTICULARLY J. AMADO ARANETA, THE DAMAGES PRAYED FOR IN THE COUNTERCLAIM OF SAID DEFENDANTS.

The portions of the Decision of the Lower Court assailed by the defendants as appellants are as follows:

(1) "As to the alleged juggling of books in that the personal account of J. Amado Araneta of P46,270.00 was closed on October 31, 1947 by charges transferred to loans receivable nor was interest paid on this amount, the Court finds that this is related to charge No. 1, namely, the granting of personal loans to J. Amado Araneta; it is really true that according to the books, and as admitted by defendants, J. Amado Araneta secured personal loans; in 1947, the cash advance to him was P132,082.00 (Exh. A); the Court has no doubt that this was against the By-Laws which provided that:

The Directors shall not in any case borrow money from the Company. (Sec. III, Art. 7);

the Court therefore finds this count to be duly proved; worse, the Court also finds that as plaintiffs contend, while the books of the Corporation would show that the last balance of P46,270.00 was written off as paid, as testified to by Auditor Mr. Sanchez, the payment appeared to be nothing more than a transfer of his loan receivable account, stated otherwise, the item was only transferred from the personal account to the loan receivable account, so that again the Court considers established the juggling of the books; and then again, it is also true that the loans were secured without any interest and while it is true that in the

Directors' meeting of 21 October, 1953, it was resolved to collect 8%, the Court does not see how such a unilateral action of the Board could bind the borrowers. Be it stated that defendants have presented in evidence Exh. 5 photostatic copy of the page in loan receivable and it is sought to be proved that J. Amado Araneta's debt was totally paid on 31 October, 1953; to the Court, in the absence of definite primary proof of actual payment having found out that there had already been a juggling of books, it cannot just believe that the amount had been paid as noted in the books. (Decision, pp. 233-235 of Record on Appeal.)

(2) "With respect to the second point in the motion for reconsideration to the effect that the Court did not make any findings of fact on the counterclaim of defendants, although the Court did not say that in so many words, the Court takes it that its findings of fact on pages 17 to 21 of its decision were enough to justify a dismissal of the counterclaim, because the counterclaims were based on the fact that the complaint was premature, improper, malicious and that the language is unnecessarily vituperative abusive and insulting; but the Court has not found that the complaint is premature; nor has the Court found that the complaint was malicious; these findings can be gleaned from the decision with respect to the allegation that the complaint was abusive and insulting, the Court does not concur; for it has not seen anything in the evidence that would justify a finding that plaintiffs and been actuated by bad faith, nor is there anything in the complaint essentially libelous; especially as the rule is that allegations in pleading where relevant, are privileged even though they may not clearly proved afterwards; so that the Court has not seen any merit in the counterclaims; and the Court had believed that the decision already carried with it the implication of the dismissal of the counterclaims, but if that is not enough, the Court makes its position clear on this matter in this order, and clarifies that it has dismissed the counterclaims of defendant; ..." (Order of September 3, 1960, pp. 248-249, supra.)

Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs as appellants, it appears to us that the Lower Court was correct in its appreciation (1) that the evidence presented did not show that the defendant Ma-ao Sugar Company was insolvent (2) that the alleged discriminatory acts committed by the defendant Central against the planters were not a proper subject of derivative suit, but, at most, constituted a cause of action of the individual planters; and (3) that the acts of mismanagement complained of and proved do not justify a dissolution of the corporation.

Whether insolvency exists is usually a question of fact, to be determined from an inventory of the assets and their value, as well as a consideration of the liabilities.... But the mere impairment of capital stock alone does not establish insolvency there being other evidence as to the corporation being a going concern

with sufficient assets. Also, the excess of liabilities over assets does not establish insolvency, when other assets are available. (Fletcher Cyc. of the Law of Private Corporations, Vol. 15A, 1938 Ed pp. 34-37; Emphasis supplied).

But relief by dissolution will be awarded in such cases only where no other adequate remedy is available, and is not available where the rights of the stockholders can be, or are, protected in some other way. (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing "Thwing v. McDonald", 134 Minn. 148, 156 N.W. 780, 158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell v. Bank of St. Paul, 7 Minn. 252).

The First Assignment of Error in the brief of the plaintiffs as appellants, contending that the investment of corporate funds by the Ma-ao Sugar Co., Inc., in another corporation (the Philippine Fiber Processing Co., Inc.) constitutes a violation of Sec. 17-½ of the Corporation Law, deserves consideration.

Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc., through its President, J. Amado Araneta,, subscribed for P300,000.00 worth of capital stock of the Philippine Fiber Processing Co. Inc., that payments on the subscription were made on September 20, 1950, for P150,000.00, on April 30, 1951, for P50,000.00, and on March 6, 1952, for P100,000.00; that at the time the first two payments were made there was no board resolution authorizing the investment; and that it was only on November 26, 1951, that the President of Ma-ao Sugar Central Co., Inc., was so authorized by the Board of Directors.

In addition, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc., owned by Luzon Industrial, corporation were transferred on May 31, 1952, to the defendant Ma-ao Sugar Central Co., Inc., with a valuation of P355,000.00 on the basis of P1.00 par value per share. Again the "investment" was made without prior board resolution, the authorizing resolution having been subsequentIy approved only on June 4, 1952.

Plaintiffs-appellants also contend that even assuming, arguendo, that the said Board Resolutions are valid, the transaction, is still wanting in legality, no resolution having been approved by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power, as required in Sec. 17-½ of the Corporation Law.

The legal provision invoked by the plaintiffs, as appellants, Sec. 17-½ of the Corporation Law, provides:

No corporation organized under this act shall invest its funds in any other corporation or business, or for any purpose other than the main purpose for which it was organized, unless its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such proposal at a stockholders' meeting called for the purpose ....

On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law, which provides:

SEC. 13. — Every corporation has the power:

x x x           x x x           x x x

(9) To enter into any obligation or contract essential to the proper administration of its corporate affairs or necessary for the proper transaction of the business or accomplishment of the purpose for which the corporation was organized;

(10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated in the articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities and other evidences of indebtedness of any domestic or foreign corporation.

A reading of the two afore-quoted provisions shows that there is need for interpretation of the apparent conflict.

In his work entitled "The Philippine Corporation Law," now in its 5th edition, Professor Sulpicio S. Guevara of the University of the Philippines, College of Law, a well-known authority in commercial law, reconciled these two apparently conflicting legal provisions, as follows:

j. Power to acquire or dispose of shares or securities. — A private corporation, in order to accomplish its purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase of such shares or securities must be subject to the limitations established by the Corporation Law; namely, (a) that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation; or (b) that a non-agricultural or non-mining corporation shall be restricted to own not more than 15% of the voting stock of any agricultural or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce or combination in restraint of trade. (The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89.) (Emphasis ours.)lawphi1.nêt

40. Power to invest corporate funds. — A private corporation has the power to invest its corporate funds in any other corporation or business, or for any purpose other than the main purpose for which it was organized, provided that 'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal at a stockholders' meeting called for that purpose,' and provided further,

that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in it articles of incorporation, the approval of the stockholders is not necessary. (Id., p. 108.) (Emphasis ours.)

We agree with Professor Guevara.

We therefore agree with the finding of the Lower Court that the investment in question does not fall under the purview of Sec. 17- ½ of the Corporation Law.

With respect to the defendants' assignment of errors, the second (referring to the counterclaim) is clearly without merit. As the Lower Court aptly ruled in its Order of September 3, 1960 (resolving the defendants' Motion for Reconsideration) the findings of fact were enough to justify a dismissal of the counterclaim, "because the counterclaims were based on the fact that the complaint was premature, improper, malicious and that the language is unnecessarily vituperative abusive and insulting; but the Court has not found that the complaint is premature; nor has the Court found that the complaint was malicious; these findings can be gleaned from the decision; with respect to the allegation that the complaint was abusive and insulting, the Court does not concur; for it has not seen anything in the evidence that would justify a finding that plaintiffs had been actuated by bad faith, nor is there anything in the complaint essentially libelous especially as the rule is that allegations in pleadings where relevant, are privileged even though they may not be clearly proved afterwards; ..."

As regards defendants' first assignment of error, referring to the status of the account of J. Amado Araneta in the amount of P46,270.00, this Court likewise agrees with the finding of the Lower Court that Exhibit 5, photostatic copy of the page on loans receivable does not constitute definite primary proof of actual payment, particularly in this case where there is evidence that the account in question was transferred from one account to another. There is no better substitute for an official receipt and a cancelled check as evidence of payment.

In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing and any other company whose purpose is not connected with the sugar central business." This portion of the decision should be reversed because, Sec. 17-½ of the Corporation Law allows a corporation to "invest its fund in any other corporation or business, or for any purpose other than the main purpose for which it was organized," provided that its board of directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power.

IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other: company whose purpose is not connected with the sugar central business," is reversed. The other parts of the judgment are, affirmed. No special pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro, Fernando and Barredo, JJ., concur.Makalintal, Sanchez and Teehankee, JJ., took no part.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

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

NIELSON & COMPANY, INC., plaintiff-appellant, vs.

LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.

R E S O L U T I O N

ZALDIVAR, J.:

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

Principal Grounds:

1. The court erred in overlooking and failing to apply the proper law applicable 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 1945 when, as stated in paragraph 20 of the complaint, "defendant voluntarily ... prevented plaintiff from resuming management and operation of said mining properties."

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

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

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

Alternative Grounds:

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

6. Assuming arguendo that Nielson is entitled to any relief, the court erred in awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of P2,500.00 for the month of January, 1942; and (c) the full contract price for the extended period of sixty months, since these damages were neither demanded

nor proved and, in any case, not allowable under the general law of damages.

7. Assuming arguendo that appellant is entitled to any relief, the court erred 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 of shares of stock and/or cash, which award cannot be ascertained and executed 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 Court had overlooked the real nature of the management contract entered into by and between Lepanto and Nielson, and the law that is applicable on said contract. Lepanto now asserts for the first time and this is done in a motion for reconsideration - that the management contract in question is a contract of agency such that it has the right to revoke and terminate the said contract, as it did 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 carefully examined the pleadings filed by Lepanto in the lower court, its memorandum and its brief on appeal, and never did it assert the theory that it has the right to terminate the management contract because that contract is one of agency which it could terminate at will. While it is true that in its ninth and tenth special affirmative defenses, in its answer in the court below, Lepanto pleaded that it had the right to terminate the management contract in question, that plea of its right to terminate was not based upon the ground that the relation between Lepanto and Nielson was that of principal and agent but upon the ground that Nielson had allegedly not complied with certain terms of the management contract. If Lepanto had thought of considering the management contract as one of agency it could have amended its answer by stating exactly its position. 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, and the settled doctrine of this Court, that a party cannot change his theory on appeal — that is, that a party cannot raise in the appellate court any question of law or of fact that was not raised in the court below or which was not within the issue made by the parties in their pleadings (Section 19, Rule 49 of the old Rules of 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; Agoncillo vs. 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 late stage of the proceedings, this Court cannot sustain the same.

Lepanto contends that the management contract in question (Exhibit C) is one of agency because: (1) Nielson was to

manage and operate the mining properties and mill on behalf, and for the account, of Lepanto; and (2) Nielson was authorized to represent Lepanto in entering, on Lepanto's behalf, into contracts for the hiring of laborers, purchase of supplies, and the sale and marketing of the ores mined. All these, Lepanto claims, show that Nielson was, by the terms of the contract, destined to execute juridical acts not on its own behalf but on behalf of Lepanto under the control of the Board of Directors of Lepanto "at all times". Hence Lepanto claims that the contract is one of agency. Lepanto then maintains that an agency is revocable at the will of the principal (Article 1733 of the 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 in 1945 when it took over and assumed exclusive management of the work previously entrusted to Nielson under the contract. Lepanto finally maintains that Nielson as an agent is not entitled to damages since the law gives to the principal 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 a contract of lease of services. Incidentally, we have noted that the lower court, in the decision appealed from, considered the management contract as a contract of 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 some service 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 make or construct something or to render a service to the other for a price certain.

In both agency and lease of services one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment. The lessor of services does not represent his employer, while the agent represents his principal. Manresa, in his "Commentarios al Codigo Civil Español" (1931, Tomo IX, pp. 372-373), points out that the element of representation distinguishes agency from lease of services, as follows:

Nuestro art. 1.709 como el art. 1.984 del Codigo de Napoleon y cuantos textos legales citamos en lasconcordancias, expresan claramente esta idea de la representacion, "hacer alguna cosa por cuenta o encargo de otra" dice nuestro Codigo; "poder de hacer alguna cosa para el mandante o en su nombre" dice el Codigo de Napoleon, y en tales palabras aparece vivo y luminoso el concepto y la teoria de la representacion, tan fecunda en ensenanzas, que a su sola luz es como se explican las diferencias que separan 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 su ejecucion, se trabaja, en verdad, para el dueno 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, Article 1868 of the new Civil Code has defined the contract of agency in more explicit terms, as follows:

By the contract of agency a person binds himself to render some service 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 agency because the purpose is to enter into other contracts." The most characteristic feature of an agency relationship is the agent's power to bring about business relations between his principal and third persons. "The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease of services contemplate only material (non-juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277).

In the light of the interpretations we have mentioned in the foregoing paragraphs let us now determine the nature of the management contract in question. Under the contract, Nielson had agreed, for a period of five years, with the right to renew for a like period, to explore, develop and operate the mining claims 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 may prove to be marketable, as well as to render for Lepanto other services specified in the contract. We gather from the contract that the work undertaken by Nielson was to take complete charge subject at all times to the general control of the Board of Directors of Lepanto, of the exploration and development of the mining claims, of the hiring of a sufficient and competent staff and of sufficient and capable laborers, of the prospecting and development of the mine, of the erection and operation of the mill, and of the benefication and marketing of the minerals found on the mining properties; and in carrying out said obligation Nielson should proceed diligently and in accordance with the best mining practice. In connection with its work Nielson was to submit reports, maps, plans and recommendations with respect to the operation and development of the mining properties, make recommendations and plans on the erection or enlargement of any existing mill, dispatch mining engineers and technicians to the mining properties as from time to time may reasonably be required to investigate and make recommendations without cost or expense to Lepanto. Nielson was also to "act as purchasing agent of supplies, equipment and other necessary purchases by Lepanto, provided, however, that no purchase shall be made without the prior approval of Lepanto; and provided further, that no commission shall be claimed or retained by Nielson on such purchase"; and "to submit all requisition for supplies, all constricts 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 prior approve of Lepanto for the sale and marketing of the minerals mined from said properties, when said products are in a suitable condition for marketing."1

It thus appears that the principal and paramount undertaking of Nielson under the management contract was the operation and development of the mine and the operation of the mill. All the other undertakings mentioned in the contract are necessary or incidental to the principal undertaking — these other undertakings being dependent upon the work on the development of the mine and the operation of the mill. In the performance of this principal undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation.

It is true that the management contract provides that Nielson would also act as purchasing agent of supplies and enter into contracts regarding the sale of mineral, but the contract also provides that Nielson could not make any purchase, 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 which would 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 of agency it had the right to terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code. We find, however, a proviso in the management contract which militates against this stand of Lepanto. Paragraph XI 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 confidence that the Officials of each company have in the other; therefore, in order to assure that such confidence and faith shall abide and continue, NIELSON agrees that LEPANTO may cancel this Agreement at any time upon ninety (90) days written notice, 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 operation and 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 the management contract, that Lepanto could not terminate the agreement at will. Lepanto could terminate or cancel the agreement by giving notice of termination ninety days in advance only in the event that Nielson should prosecute in bad faith and not in accordance with approved mining practice the operation and development of the mining properties of Lepanto. Lepanto could not terminate the agreement if Nielson should cease to prosecute the operation and 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 this agreement are made possible only because of the faith and confidence of the officials of each company have in the other" in paragraph XI of the management contract does not qualify the relation between Lepanto and Nielson as that

of principal and agent based on trust and confidence, such that the contractual relation may be terminated by the principal at any time that the principal loses trust and confidence in the agent. Rather, that phrase simply implies the circumstance that brought about the execution of the management contract. Thus, in the annual report for 19362, submitted by Mr. C. A. Dewit, President of Lepanto, to its stockholders, under date of March 15, 1937, we read the following:

To the stockholders

xxx      xxx      xxx

The incorporation of our Company was effected as a result of negotiations with Messrs. Nielson & Co., Inc., and an offer by these gentlemen 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 have decided to offer as we hereby offer to underwrite the entire issue of stock of a corporation to be formed for the purpose of taking over said properties, said corporation to have an authorized capital of P1,750,000.00, of which P700,000.00 will be issued in escrow to the claim-owners in exchange for their claims, and the balance of P1,050,000.00 we will sell to the public at par or take ourselves.

The arrangement will be under the following conditions:

1. The subscriptions for cash shall be payable 50% at time of subscription 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 of 10% of the P1,050,000.00 to be sold for cash to the public, said commission to be payable from the first payment of 50% on each subscription.

3. We will bear the cost of preparing and mailing any prospectus that may be required, but no such prospectus will be sent out until the text thereof has been first approved by the Board of Directors of the proposed corporation.

4. That after the organization of the corporation, all operating contract be entered into between ourselves and said corporation, under the terms which the property will be developed and mined and a mill erected, under our supervision, our compensation to be P2,000.00 per month until the property is put on a profitable basis and P2,500.00 per month plus 10% of the net profits for a period of five years thereafter.

5. That we shall have the option to renew said operating contract for an additional period of five years, on the same basis as the original 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 the expenditures therefor shall be subject to the general control of the Board of Directors of the proposed corporation, and, in case you accept this proposition, that a detailed operating contract will be 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 underwriting and brokerage commission has been paid. More than fifty per cent of these subscriptions have been paid to the Company in cash. The claim owners have transferred their claims to the Corporation, but the P700,000.00 in stock which they are to receive therefor, is as yet held in escrow.

Immediately upon the formation of the Corporation Messrs. Nielson & Co., assumed the Management of the property under the control of the Board of Directors. A modification in the Management Contract was made with the consent of all the then stockholders, in virtue of which the compensation of Messrs. Nielson & Co., was increased to P2,500.00 per month when mill construction began. The formal Management Contract 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, and from the provision of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and manage its mines was principally in consideration of the know-how and technical services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer 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 shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management contract because it had lost its trust and confidence in Nielson.

The contention of Lepanto that it had terminated the management contract in 1945, following the liberation of the mines from Japanese control, because the relation between it and Nielson was one of agency and as such it could terminate the agency at will, is, therefore, untenable. On the other hand, it can be said that, in asserting that it had terminated or cancelled the management contract in 1945, Lepanto had thereby violated the express terms of the management contract. 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 the mines in 1945. There is no showing that Nielson had ceased to prosecute the operation and development of the mines in good faith and in accordance

with approved mining practice which would warrant the termination of the contract upon ninety days written notice. In fact there was no such written notice of termination. It is an admitted fact that Nielson ceased to operate and develop the mines because of the war — a cause beyond the control of Nielson. Indeed, if the management contract in question was intended to create a relationship of principal and agent between Lepanto and Nielson, paragraph XI of the 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 inserted in the management contract to provide for the cause for its revocation. The provision of paragraph XI must be given effect.

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

It is Our considered view that by express stipulation of the parties, the management contract in question is not revocable at the will of Lepanto. We rule that this management contract is not a contract of agency as defined in Article 1709 of the old Civil Code, but a contract of lease of services as defined in Article 1544 of the same Code. This contract can not be unilaterally revoked by Lepanto.

The first ground of the motion for reconsideration should, therefore, be brushed aside.

2. In the second, third and fifth grounds of its motion for reconsideration, Lepanto maintains that this Court erred, in holding that paragraph 11 of the management contract suspended the period of said contract, in holding that the agreement was not only suspended but was extended on account of the war, and in holding that the period of suspension on account of the war lasted from February, 1942 to June 26, 1948. We are going to discuss these three grounds together because they are interrelated.

In our decision we have dwelt lengthily on the points that the management contract was suspended because of the war, and that the period of the contract was extended for a period equivalent to the time when Nielson was unable to perform the work of mining and milling because of the adverse effects of the war on the work of mining and milling.

It is the contention of Lepanto that the happening of those events, and the effects of those events, simply suspended the performance of the obligations by either party in the contract, but did not suspend the period of the contract, much less extended the period of the contract.

We have conscientiously considered the arguments of Lepanto in support of these three grounds, but We are not persuaded to reconsider the rulings that We made in Our decision.

We want to say a little more on these points, however. Paragraph II of the management contract provides as follows:

In the event of inundation, flooding of the mine, typhoon, earthquake or any other force majeure, war,

insurrection, civil commotion, organized strike, riot, fire, injury to the machinery or other event or cause reasonably beyond the control of NIELSON and which adversely affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or breach of the terms of this Agreement,the same shall remain in suspense, wholly or partially during the terms of such inability. (Emphasis supplied)

A reading of the above-quoted paragraph II cannot but convey the idea that upon the happening of any of the events enumerated therein, which adversely affects the work of mining and milling, the agreement is deemed suspended for as long as Nielson is unable to perform its work of mining and milling because of the adverse effects of the happening of the event on the work of mining and milling. During the period when the adverse effects on the work of mining and milling exist, neither party in the contract would be held liable for non-compliance of its obligation under the contract. In other words, the operation of the contract is suspended for as long as the adverse effects of the happening of any 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 the management contract readily supports the conclusion that it is the agreement, or the contract, that is suspended. The phrase "the same" can refer to no other than the term "Agreement" which immediately precedes it. The "Agreement" may be wholly or partially suspended, and this situation will depend on whether the event wholly or partially affected adversely the work of mining and milling. In the instant case, the war had adversely affected — and wholly at that — the work of mining and milling. We have clearly stated in Our decision the circumstances 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 quote from the brief of LEPANTO:

Probably, what Nielson meant was, it was prevented by Lepanto to assume again the management of the mine in 1945, at the precise time when defendant was at the feverish phase of rehabilitation and although the 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 in the 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 case fortuitous event or force majeure, such as war, adversely affects the work of mining and milling. (Lepanto's Brief, p. 49).

Lepanto is correct when it said that the obligations under the contract were suspended upon the happening of any of the events enumerated in paragraph II of the management contract. Indeed, those obligations were suspended because the contract itself was suspended. When we talk of a contract that has been suspended we certainly mean that the contract temporarily ceased to be operative, and the contract becomes

operative again upon the happening of a condition — or when a situation obtains — which warrants the termination of the suspension of the contract.

In Our decision We pointed out that the agreement in the management contract would be suspended when two conditions concur, namely: (1) the happening of the event constituting a force majeure that was reasonably beyond the control of Nielson, and (2) that the event constituting the force majeure adversely affected the work of mining and milling. The suspension, therefore, would last not only while the event constituting the force majeure continued to occur but also for as long as the adverse effects of the force majeure on the work of mining and milling had not been eliminated. Under the management contract the happening alone of the event constituting the force majeure which did not affect adversely the work of mining and milling would not suspend the period of the contract. It is only when the two conditions concur that the period of the agreement 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 at the 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 the duration 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 of the mines, the mill, the power plant and other installations, was not the same as in 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 milling could not be undertaken by Nielson under the same favorable circumstances that obtained before February 1942. The work of mining and milling, as undertaken by Nielson in January, 1942, could not be resumed by Nielson soon after liberation because of the adverse effects of the war, and this situation continued until June of 1948. Hence, the suspension of the management contract did not end upon the liberation of the mines in August, 1945. The mines and the mill and the installations, laid waste by the ravages of war, had to be reconstructed and rehabilitated, and it can be said that it was only on June 26, 1948 that the adverse effects of the war on the work of mining and milling had ended, because it 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 1942 until 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. The mines and the installations had to be rehabilitated because of the adverse effects of the war. The work of rehabilitation started soon after the liberation of the mines in August, 1945 and lasted until June 26, 1948 when, as stated in Lepanto's annual report to its stockholders for the year 1948, "June 28, 1948 marked the official return to operation of this company at its properties at Mankayan, Mountain Province, Philippines" (Exh. F-1).

Lepanto would argue that if the management contract was suspended at all the suspension should cease in August of 1945, contending that the effects of the war should cease upon the liberation of the mines from the enemy. This contention cannot be sustained, because the period of rehabilitation was

still a period when the physical effects of the war — the destruction of the mines and of all the mining installations — adversely affected, and made impossible, the work of mining and milling. Hence, the period of the reconstruction and rehabilitation of the mines and the installations must be counted as part of the period of suspension of the contract.

Lepanto claims that it would not be unfair to end the period of suspension upon the liberation of the mines because soon after the liberation of the mines Nielson insisted to resume the management work, and that Nielson was under obligation to reconstruct the mill in the same way that it was under obligation to construct the mill in 1937. This contention is untenable. It is true that Nielson insisted to resume its management work after liberation, but this was only for the purpose of restoring the mines, the mill, and other installations to their operating and producing condition as of February 1942 when they were ordered destroyed. It is not shown by any evidence in the record, that Nielson had agreed, or would have agreed, that the period of suspension of the contract would end upon the liberation of the mines. This is so because, as found 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 as the adverse effects of the force majeure on the work of mining and milling had not been removed, and the contract would be extended for as long as it was suspended. Under the management contract Nielson had the obligation to erect and operate the mill, but not to erect or reconstruct the mill in case of its destruction by force majeure.

It is the considered view of this court that it would not be fair to Nielson to consider the suspension of the contract as terminated upon the liberation of the mines 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 under the management of Nielson was already under beneficial conditions, so much so that dividends were already declared by Lepanto for the years 1939, 1940 and 1941. To make the management contract immediately operative after the liberation of the mines from the Japanese, at the time when the mines and all its installations 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 in placing the Lepanto mines in profitable operation before the outbreak of the war in December, 1941. The record shows that Nielson started its management operation way back in 1936, even before the management contract was entered into. As early as August 1936 Nielson negotiated with Messrs. C. I. Cookes and V. L. Lednicky for the operation of the Mankayan mines and it was the result of those negotiations that Lepanto was incorporated; that it was Nielson that helped to capitalize Lepanto, and that after the formation of the corporation (Lepanto) Nielson immediately assumed the management of the mining properties of Lepanto. It was not until January 30, 1937 when the management contract in question was entered into between Lepanto and Nielson (Exhibit A).

A contract for the management and operation of mines calls for a speculative and risky venture on the part of the manager-operator. The manager-operator invests its technical know-how, undertakes back-breaking efforts and tremendous spade-

work, so to say, in the first years of its management and operation of the mines, in the expectation that the investment and the efforts employed might be rewarded later with success. This expected success may never come. This had happened in the very case of the Mankayan mines where, as recounted by Mr. Lednicky of Lepanto, various persons and entities of different nationalities, including Lednicky himself, invested all their money and failed. 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 even until 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, and technicians begun working on the Mankayan mines of Lepanto since the latter part 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 the efforts of Nielson started to be rewarded when Lepanto realized profits and the first dividends were declared. From that time on Nielson could expect profit to come to it — as in fact Lepanto declared dividends for 1940 and 1941 — if the development and operation of the mines and the mill would continue unhampered. 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 the destruction of the mines and the mill. One of these diverse causes, or one after the other, may consume the whole period of the contract, and if it should happen that way the manager-operator would reap no profit to compensate for the first years of spade-work and investment of efforts and know-how. Hence, in fairness 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 a standard clause in contracts for the management and operation of mines.

The nature of the contract for the management and operation of mines justifies the 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 the contract by way of an extension. We, therefore, reiterate the ruling in Our decision that the management contract in the instant case was suspended from February, 1942 to June 26, 1948, and that from the latter date the contract had yet five years to go.

3. In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court erred in reversing the finding of the trial court that Nielson's action has prescribed, by considering only the first claim and ignoring the prescriptibility of the 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 written document, and, as such, the cause of action prescribes in ten years.5 Inasmuch as there are different claims which accrued on different dates the prescriptive periods for all the claims are not the same. The claims of Nielson that have been awarded 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 in the sum of P17,500.00, which is equivalent to 10% of the cash dividends declared by Lepanto in December, 1941. As we have stated in Our decision, this claim accrued on December 31, 1941, and the right to commence an action thereon started on January 1, 1942. We declared that the action on this claim did not prescribe although the complaint was filed on February 6, 1958 — or after a lapse of 16 years, 1 month and 5 days — because of the operation of the moratorium law.

We declared that under the applicable decisions of this Court6 the moratorium period of 8 years, 2 months and 8 days should be deducted 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 less than 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 monetary obligations payable in the Philippines, except debts and other monetary obligations entered into in any area after declaration by Presidential Proclamation that such area has been freed from enemy occupation and control, is temporarily suspended pending action by the Commonwealth Government. (41 O.G. 56-57; Emphasis supplied)

Executive Order No. 32 covered all debts and monetary obligation contracted before the war (or before December 8, 1941) and those contracted subsequent to December 8, 1941 and during the Japanese occupation. Republic Act No. 342, approved on July 26, 1948, lifted the moratorium provided for in Executive Order No. 32 on pre-war (or pre-December 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 Republic Act No. 342, the debt moratorium was limited: (1) to debts and other monetary obligations which were contracted after December 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, 1953 when this Court declared Republic Act No. 342 unconstitutional.7 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 Republic Act No. 342 was declared unconstitutional — or a period of 8 years, 2 months and 8 days — the debt moratorium was in force, and had the effect of suspending the period of prescription.8

Lepanto is wrong when in its motion for reconsideration it claims that the moratorium provided for in Executive Order No. 32 was continued by Republic Act No. 342 "only with respect to debtors of pre-war obligations or those incurred prior to December 8, 1941," and that "the moratorium was 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 contracted during the war and did not lift the moratorium in relations thereto.10 In the case of 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 took effect on July 26, 1948, lifted the moratorium on debts contracted during the Japanese occupation. The court has already held that Republic Act No. 342 did not lift the moratorium on debts contracted during 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 the protection available only to debtors who had war damage claims (Sison v. 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 of action of the claim involved in the first item in the award also holds true with respect to the second item in the award, which refers to Nielson's claim for management fee of P2,500.00 for January, 1942. Lepanto admits that this second item, like the first, is a monetary obligation. The right of action of Nielson 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 discuss the question of prescription regarding these items. The claims of Nielson involved in these items are based on the management contract, and Nielson's cause of action regarding these claims prescribes in ten years. Corollary to Our ruling that the management contract was suspended from February, 1942 until June 26, 1948, and that the contract was extended for five years from June 26, 1948, the right of action of Nielson to claim for what is due to it during that period of extension 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 June 26, 1948 as the starting date of the ten-year period in connection with the prescriptibility of the claims involved in items 3, 4, 5, 6 and 7 of the awards in the decision, it is obvious that when the complaint was filed on February 6, 1958 the ten-year prescriptive period had not yet lapsed.

In Our decision We have also ruled that the right of action of Nielson against Lepanto had not prescribed because of the arbitration clause in the Management contract. We are satisfied that there is evidence that Nielson had asked for arbitration, and an arbitration committee had been constituted. The arbitration committee, however, failed to bring about any settlement of the differences between Nielson and Lepanto. On June 25, 1957 counsel for Lepanto definitely advised Nielson that they were not entertaining any 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 that this Court "erred in awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of P2,500.00 for the 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 management contract regarding the compensation of Nielson was modified, such that instead of receiving a monthly compensation of P2,500.00 plus 10% of the net profits from the operation of the properties for the preceding month,11 Nielson would receive a compensation of P2,500.00 a month, plus (1) 10% of the dividends declared and paid, when and as paid, during the period of the contract, and at the 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 for capital account.

It is shown that in December, 1941, cash dividends amounting to P175,000.00 was declared by Lepanto.12Nielson, therefore, should receive the equivalent of 10% of this amount, or the sum of P17,500.00. We have found that this amount was not paid to Nielson.

In its motion for reconsideration, Lepanto inserted a photographic copy of page 127 of its cash disbursement book, allegedly for 1941, in an effort to show that this amount of P17,500.00 had been paid to Nielson. It appears, however, in this photographic copy of page 127 of the cash disbursement book that the sum of P17,500.00 was entered on October 29 as "surplus a/c Nielson & Co. Inc." The entry 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 cash disbursement book, also attached to the motion for reconsideration, there is an entry 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 the participation of Nielson in the profits based on dividends declared in April 1941 as shown in Exhibit L. But in the same Exhibit L it is not stated that any dividend was declared in October 1941. On the contrary it is stated in Exhibit L that dividends were declared in December 1941. We cannot entertain this piece of evidence for several reasons: (1) because this evidence was not presented during 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 said evidence when this case was being tried in the court below; and (3) according to Exhibit L cash dividends of P175,000.00 were declared in December, 1941, and so the sum of P17,500.00 which appears to have been paid to Nielson in October 1941 could not be payment of the equivalent of 10% of the cash dividends that were later declared in December, 1941.

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

It having been declared in Our decision, as well as in this resolution, that the management contract had been extended for 5 years, or sixty months, from June 27, 1948 to June 26, 1953, and that the cause of action of Nielson to claim for its

compensation during that period of extension had not prescribed, it follows that Nielson should be awarded the management fees during the whole period 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 capital account.

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

In Our decision, We declared that pursuant to the modified agreement regarding the compensation of Nielson which provides, among others, that Nielson would receive 10% of any dividends declared and paid, when and as paid, Nielson should be paid 10% of the stock dividends declared by Lepanto during the period of extension of the contract.

It is not denied that on November 28, 1949, Lepanto declared stock dividends worth P1,000,000.00; and on August 22, 1950, it declared stock dividends worth P2,000,000.00). In other words, during the period of extension Lepanto had declared stock dividends worth P3,000,000.00. We held in Our decision that Nielson is entitled to receive l0% of the stock dividends declared, or shares of stock worth P300,000.00 at the par value of P0.10 per share. We ordered Lepanto to issue and deliver to Nielson those shares of stocks as well as all the fruits or dividends that accrued to said shares.

In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends as compensation for its services under the management 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 out of stock dividends declared by Lepanto. We have assiduously considered the arguments adduced by Lepanto in support of its contention, as well as the answer of Nielson in this connection, and We have arrived at the conclusion that there 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, notes or other evidence of debt, for circulation as money, and no corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for: (1) property actually received by it at a fair valuation equal to the par or issued value of the stock or bonds so issued; and in case of disagreement as to their value, the same shall be presumed to be the assessed value or the value appearing in invoices or other commercial documents, as the case may be; and the burden or proof that the real present value of the property is greater than the assessed value or value appearing in invoices or other commercial documents, as the case may be, shall be upon the corporation, or for (2) profits earned by it but not distributed among its stockholders or members; Provided, however, That no stock or bond dividend shall be issued without the approval of stockholders representing not less than

two-thirds of all stock then outstanding and entitled to vote at a general meeting of the corporation or at a special meeting duly called for the purpose.

xxx      xxx      xxx

No corporation shall make or declare any dividend except from the surplus profits arising from its business, or divide or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution: Provided, That banking, savings and loan, and trust corporations may receive deposits and issue certificates 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, the consideration for which shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock are given the special name "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 do not fall under the category of "stock dividends". A corporation may legally issue shares of 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, because services is equivalent to property.14 Likewise a share of stock issued in payment 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 the corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized. In other words, it is the shares of stock that are originally issued by the corporation and forming part of 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 to a person already a stockholder in exchange for services rendered or for cash or property. But a share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation.

A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead 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 the dividend money to purchase additional shares of stock at par.16 When a corporation issues stock dividends, it shows that the corporation's accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or kind, should opportunity offer. Far from being a realization of profits for

the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets and no longer available for actual distribution.17 Thus, it is apparent that stock dividends are issued only to 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 of the surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholder; the proportional interest of each stockholder remains the same.18If a stockholder is deprived of his stock dividends - and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder — then the proportion of the stockholder's interest changes radically. Stock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits.19

The term "dividend" both in the technical sense and its ordinary acceptation, is that 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 capital stock. It means the fund actually set aside, and declared by the directors of the corporation as dividends and duly ordered by the director, or by the stockholders at a corporate meeting, to be divided or distributed among the stockholders according to their respective interests.20

It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends can not be issued to a person who is not a stockholder in payment of services rendered. And so, in the case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract. We sustain the contention of Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. And this conclusion of Ours finds support in the record.

We had adverted to in Our decision that in 1940 there was some dispute between 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 be made. 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 the computation of the 10% participation of Nielson & Company, Inc. to the dividend, because Nielson will then be able to definitely compute its net participation by the amount of the dividends declared. In addition to the dividend, we have been setting up a depletion reserve and it does not seem fair to burden the 10% participation of Nielson with the depletion reserve, as the depletion reserve should not be considered as an operating expense. After a prolonged discussion, upon motion duly made and seconded, it was —

RESOLVED, That the President, be, and he hereby is, authorized to enter into an agreement with Nielson & Company, Inc., modifying Paragraph V of management contract of January 30, 1937, effective January 1, 1940, in such a way that Nielson & Company, Inc. shall receive 10% of any dividends declared and paid, when and as paid during the period of the contract and at the end of each year, 10% of any depletion reserve that may be set up and 10% of any amount expended during the year out of surplus earnings for capital account. (Emphasis supplied.)

From the sentence, "The Chairman stated that he believed that it would be better to tie the computation of the 10% participation of Nielson & Company, Inc., to the dividend, because Nielson will then be able to definitely compute its net participation by the amount of the dividends declared" the idea is conveyed that the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was to make the value of the dividends declared — whether the dividends were in cash or in stock — as the basis for determining the amount of compensation that should 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 compensation of Nielson would be taken from the amount actually declared as cash dividend to be distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders as stock dividends, but from the other assets or funds of the corporation which are not burdened by the dividends thus declared. In other words, if, for example, cash dividends of P300,000.00 are declared, Nielson would be entitled to a compensation of P30,000.00, but this P30,000.00 should not be taken from the P300,000.00 to be distributed as cash dividends to the stockholders but from some other funds or assets of the corporation which are not included in the amount to answer for the cash dividends thus declared. This is so because if the P30,000.00 would be taken out from the P300,000.00 declared as cash dividends, then the stockholders would not be getting P300,000.00 as dividends but only P270,000.00. There would be a dilution of the dividend that corresponds to each share of stock held by the stockholders. Similarly, if there were stock dividends worth one million pesos that were declared, which means an issuance of ten million shares at the par value of ten centavos per share, it does not mean that Nielson would be given 100,000 shares. It only means that Nielson should be given the equivalent of 10% of the aggregate 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 appeal brief Nielson urged that it should be paid "P300,000.00 being 10% of the P3,000,000.00 stock dividends declared on November 28, 1949 and August 20, 1950...."21

We, therefore, reconsider that part of Our decision which declares that Nielson is entitled 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 the fruits accruing thereto. Instead, We declare that Nielson is entitled to payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money value of the stock dividends worth P3,000,000.00 which were declared on November 28, 1949 and on August 20, 1950, with interest thereon at the rate of 6% from February 6, 1958.

6. In the eighth ground of its motion for reconsideration Lepanto maintains that this Court erred in awarding to Nielson an undetermined amount of shares of stock and/or cash, which award can not be ascertained and executed without further 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 the management contract, We do not consider it necessary to discuss this ground of the motion for reconsideration. The awards in the present case are all reduced to specific sums of money.

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

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

Accordingly, We resolve to modify the decision that We rendered on December 17, 1966, in the sense that instead of awarding Nielson shares of stock worth P300,000.00 at the par value of ten centavos (P0.10) per share based on the stock dividends declared by Lepanto on November 28, 1949 and August 20, 1950, together with their fruits, Nielson should be awarded the sum of P300,000.00 which is an amount equivalent to 10% of the cash value of the stock dividends thus declared, as part of the compensation due Nielson under the 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 the decision of the court a quo and enter in lieu thereof another, ordering the appellee Lepanto to pay the appellant Nielson the different amounts as specified hereinbelow:

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

(3) One hundred fifty thousand pesos (P150,000.00), representing management fees for the sixty-month period of extension of the management contract, with legal 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 the management 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 cash value 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 eight centavos (P53,928.88), equivalent to 10% of the depletion reserve set up during the period of extension, with

legal interest thereon from the date of the filing of the complaint;

(7) Six hundred ninety four thousand three hundred sixty four pesos and seventy six centavos (P694,364.76), equivalent to 10% of the expenses for capital account during the period of extension, with legal interest thereon from the date of 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 Castro, JJ., concur.

Fernando, Capistrano, Teehankee and Barredo, JJ., took no part.

Footnotes1 Annex A to complaint, pp. 43-46, R.A.; Also Exhibit C.2 Exhibit A.3 Sec. 9, Rule 130 of the Rules of Court.4 Article 1373 of the (new) Civil Code.5 Section 43, par. 1, Act 190.6 Tiosejo vs. Day, et al., L-9944, April 30, 1937; Levi Hermanos, Inc. vs. Perez, L-14487, April 29, 1960.7 Rutter vs. Esteban, 93 Phil. 68.8 Tiosejo vs. Day, supra; Levi Hermanos, Inc. vs. Perez, supra.9 Motion for reconsideration, p. 60.10 Uy v. Kalaw Katigbak, G.R. No. L-1830, Dec. 31, 1949; Sison v. Mirasol, L-4711, Oct. 31, 1962; Compania Maritima v. Court of Appeals, L-14949, May 30, 1960.11 Par. V of Management Contract, Exhibit C.12 Page 3, Exhibit L, Report for 1954.13 Exhibit 1.14 Sec. 5187, 11 Fletcher, Cyclopedia of the Law on Private Corporations, p. 422.15 Sec. 16, Corporation Law .16 Words and Phrases, p. 270.17 Fisher vs. Trinidad, 43 Phil. 973..18 Towns vs. Eisner, 62 L. Ed. 372.19 Art. 441, Civil Code of the Philippines.20 7 Thompson on Corporations 134-135.21 . 115, Nielson's Appeal Brief.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-56655 July 25, 1983

DATU TAGORANAO BENITO, petitioner, vs.

SECURITIES AND EXCHANGE COMMISSION and JAMIATUL PHILIPPINE-AL ISLAMIA,

INC., respondents.

The Solicitor General for respondent.

Tacod D. Macaraya for private respondent.

 

RELOVA, J.:

On February 6, 1959, the Articles of Incorporation of respondent Jamiatul Philippine-Al Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed with the Securities and Exchange Commission (SEC) and were approved on December 14, 1962. The corporation had an authorized capital stock of P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of the authorized capital stock, 8,058 shares worth P80,580.00 were subscribed and fully paid for. Herein petitioner Datu Tagoranao Benito subscribed to 460 shares worth P4,600.00.

On October 28, 1975, the respondent corporation filed a certificate of increase of its capital stock from P200,000.00 to P1,000,000.00. It was shown in said certificate that P191,560.00 worth of shares were represented in the stockholders' meeting held on November 25, 1975 at which time the increase was approved. Thus, P110,980.00 worth of shares were subsequently issued by the corporation from the unissued portion of the authorized capital stock of P200,000.00. Of the increased capital stock of P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto.

On November 18, 1976, petitioner Datu Tagoranao filed with respondent Securities and Exchange Commission a petition alleging that the additional issue (worth P110,980.00) of previously subscribed shares of the corporation was made in violation of his pre-emptive right to said additional issue and that the increase in the authorized capital stock of the corporation from P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record were not notified of the meeting wherein the proposed increase was in the agenda. Petitioner prayed that the additional issue of shares of previously authorized capital stock as well as the shares issued from the increase in capital stock of respondent corporation be cancelled; that the secretary of respondent corporation be

ordered to register the 2,540 shares acquired by him (petitioner) from Domocao Alonto and Moki-in Alonto; and that the corporation be ordered to render an accounting of funds to the stockholders.

In their answer, respondents denied the material allegations of the petition and, by way of special defense, claimed that petitioner has no cause of action and that the stock certificates covering the shares alleged to have been sold to petitioner were only given to him as collateral for the loan of Domocao Alonto and Moki-in Alonto.

On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities and Exchange Commission, after due proceedings, rendered a decision which was affirmed by the Commission En Banc during its executive session held on March 9, 1981, as follows:

RESOLVED, That the decision of the hearing Officer in SEC Case No. 1392, dated July 11, 1980, the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing considerations, this Commission hereby rules: (a) That the issuance by the corporation of its unissued shares was validly made and was not subject to the pre-emptive rights of stockholders, including the petitioner, herein; (b) That there is no sufficient legal basis to set aside the certificate issued by this Commission authorizing the increase in capital stock of respondent corporation from P200,000.00 to Pl,000,000.00. Considering, however, that petitioner has not waived his pre-emptive right to subscribe to the increased capitalization, respondent corporation is hereby directed to allow petitioner to subscribe thereto, at par value, proportionate to his present shareholdings, adding thereto the 2,540 shares transferred to him by Mr. Domocao Alonto and Mrs. Moki-in Alonto; (c) To direct as it hereby directs, the respondent corporation to immediately cancel Certificates of Stock Nos. 216, 223, 302, all in the name of Domocao Alonto, and Certificate of Stock No. 217, in the name of Moki-in Alonto, upon their presentation by the petitioner and to issue new certificates corresponding thereto in the name of petitioner herein; (d) To direct, as it hereby directs, respondent corporation to religiously comply with the requirement of filing annual financial statements under pain of a more drastic action; (e) To declare, as it hereby declares, as irregular, the election of the nine (9) members of the Board of Trustees of respondent corporation on October 30, 1976, for which reason, respondent corporation is hereby ordered to call a stockholders' meeting to elect a new set of five (5) members of the Board of Trustees, unless in the meantime the said number is accordingly increased and the requirement of law to make such increase effective have been complied with. It is understood that the said stockholders' meeting be called within thirty (30) days from the time petitioner shall have subscribed to the increased capitalization.'

be, as the same is hereby AFFIRMED, the same being in accordance with law and the facts of the case. (pp. 28-29, Reno)

Hence, this petition for review by way of appeal from the aforementioned decision of the Securities and Exchange Commission, petitioner contending that (1) the issuance of the 11,098 shares without the consent of the stockholders or of the Board of Directors, and in the absence of consideration, is null and void; (2) the increase in the authorized capital stock from P200,000.00 to P1,000,000.00 without the consent or express waiver of the stockholders, is null and void; (3) he is entitled to attorneys' fees, damages and expenses of litigation in filing this suit against the directors of respondent corporation.

We are not persuaded. As aptly stated by the Securities and Exchange Commission in its decision:

xxx xxx xxx

... the questioned issuance of the unsubscribed portion of the capital stock worth P110,980.00 is ' not invalid even if assuming that it was made without notice to the stockholders as claimed by petitioner. The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders' meeting is necessary to consider it because additional issuance of shares of stocks does not need approval of the stockholders. The by-laws of the corporation itself states that 'the Board of Trustees shall, in accordance with law, provide for the issue and transfer of shares of stock of the Institute and shall prescribe the form of the certificate of stock of the Institute. (Art. V, Sec. 1).

Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance, he was not able to exercise his right of pre-emption over the unissued shares. However, the general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later re-offered, he cannot therefore claim a dilution of interest. (Campos and Lopez-Campos Selected Notes and Cases on Corporation Law, p. 855, citing Yasik V. Wachtel 25 Del. Ch. 247,17A. 2d 308 (1941). (pp. 33-34, Rollo)

With respect to the claim that the increase in the authorized capital stock was without the consent, expressed or implied, of the stockholders, it was the finding of the Securities and Exchange Commission that a stockholders' meeting was held on November 25,1975, presided over by Mr. Ahmad Domocao Alonto, Chairman of the Board of Trustees and, among the many items taken up then were the change of name of the corporation from Kamilol Islam Institute Inc. to Jamiatul Philippine-Al Islamia, Inc., the increase of its capital stock from P200,000.00 to P1,000,000.00, and the increase of the number of its Board of Trustees from five to nine. "Despite the

insistence of petitioner, this Commission is inclined to believe that there was a stockholders' meeting on November 25, 1975 which approved the increase. The petitioner had not sufficiently overcome the evidence of respondents that such meeting was in fact held. What petitioner successfully proved, however, was the fact that he was not notified of said meeting and that he never attended the same as he was out of the country at the time. The documentary evidence of petitioner conclusively proved that he was attending the Mecca pilgrimage when the meeting was held on November 25, 1975. (Exhs. 'Q', 'Q-14', 'R', 'S' and 'S-l'). While petitioner doubts the authenticity of the alleged minutes of the proceedings (Exh. '4'), the Commission notes with significance that said minutes contain numerous details of various items taken up therein that would negate any claim that it was not authentic. Another thing that petitioner was able to disprove was the allegation in the certificate of increase (Exh. 'E-l') that all stockholders who did not subscribe to the increase of capital stock have waived their pre-emptive right to do so. As far as the petitioner is concerned, he had not waived his pre-emptive right to subscribe as he could not have done so for the reason that he was not present at the meeting and had not executed a waiver, thereof. Not having waived such right and for reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to his present shareholdings." (pp. 36-37, Rollo)

Well-settled is the rule that the findings of facts of administrative bodies will not be interfered with by the courts in the absence of grave abuse of discretion on the part of said agencies, or unless the aforementioned findings are not supported by substantial evidence. (Gokongwei, Jr. vs. SEC, 97 SCRA 78). In a long string of cases, the Supreme Court has consistently adhered to the rule that decisions of administrative officers are not to be disturbed by the courts except when the former have acted without or in excess of their jurisdiction or with grave abuse of discretion (Sichangco vs. Board of Commissioners of Immigration, 94 SCRA 61). Thus, in the case ofDeluao vs. Casteel ( L-21906, Dec. 24, 1968, 26 SCRA 475, 496, citing Pajo vs. Ago, et al., L-15414, June 30, 1960) and Genitano vs. Secretary of Agriculture and Natural Resources, et al. (L-2ll67, March 31, 1966), the Supreme Court held that:

... Findings of fact by an administrative board or official, following a hearing, are binding upon the courts and win not be disturbed except where the board or official has gone beyond his statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to his duty or with grave abuse of discretion. ...

ACCORDINGLY, this petition is hereby dismissed for lack of merit.

SO ORDERED.

Plana, Escolin and Gutierrez, Jr., JJ., concur.

Teehankee, J., concurs in the result.

Melencio-Herrera and Vasquez, JJ., are on leave.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 76801 August 11, 1995

LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners, 

vs.FLORENTINA FONTECHA, ET AL., AND THE

NATIONAL LABOR RELATIONS COMMISSION, respondents.

 

PUNO, J.:

The controversy at bench arose from a complaint filed by private respondents, 1 namely, Florentina Fontecha, Mila Refuerzo, Marcial Mamaril, Perfecto Bautista, Edward Mamaril, Marissa Pascual and Allan Pimentel, against their employer Lopez Realty Incorporated (petitioner) and its majority stockholder, Asuncion Lopez Gonzales, for alleged non-payment of their gratuity pay and other benefits.  2 The case was docketed as NLRC-NCR Case No. 2-2176-82.

Lopez Realty, Inc., is a corporation engaged in real estate business, while petitioner Asuncion Lopez Gonzales is one of its majority shareholders. Her interest in the company vis-a-vis the other shareholders is as follows:

1 Asuncion Lopez Gonzales 7831 shares

2 Teresita Lopez Marquez 7830 shares

3 Arturo F. Lopez 7830 shares

4 Rosendo de Leon 4 shares

5 Benjamin Bernardino 1 share

6 Leo Rivera 1 shareExcept for Arturo F. Lopez, the rest of the shareholders also sit as members of the Board of Directors.

As found by the Labor arbiter. 3 sometime in 1978, Arturo Lopez submitted a proposal relative to the distribution of certain assets of petitioner corporation among its three (3) main shareholders. The proposal had three (3) aspects,viz: (1) the sale of assets of the company to pay for its obligations; (2) the transfer of certain assets of the company to its three (3) main shareholders, while some other assets shall remain with the company; and (3) the reduction of employees with provision for their gratuity pay. The proposal was deliberated upon and approved in a special meeting of the board of directors held on April 17, 1978.

It appears that petitioner corporation approved two (2) resolutions providing for the gratuity pay of its employees, viz: (a) Resolution No. 6, Series of 1980, passed by the stockholders in a special meeting held on September 8, 1980, resolving to set aside, twice a year, a certain sum of money for the gratuity pay of its retiring employees and to create a Gratuity Fund for the said contingency; and (b) Resolution No. 10,Series of 1980, setting aside the amount of P157,750.00 as Gratuity Fund covering the period from 1950 up to 1980.

Meanwhile, on July 28, 1981, board member and majority stockholder Teresita Lopez Marquez died.

On August 17, 1981, except for Asuncion Lopez Gonzales who was then abroad, the remaining members of the Board of Directors, namely: Rosendo de Leon, Benjamin Bernardino, and Leo Rivera, convened a special meeting and passed a resolution which reads:

Resolved, as it is hereby resolved that the gratuity (pay) of the employees be given as follows:

(a) Those who will be laid off be given the full amount of gratuity;

(b) Those who will be retained will receive 25% of their gratuity (pay) due on September 1, 1981, and another 25% on January 1, 1982, and 50% to be retained by the office in the meantime. (emphasis supplied)

Private respondents were the retained employees of petitioner corporation. In a letter, dated August 31, 1981, private respondents requested for the full payment of their gratuity pay. Their request was granted in a special meeting held on September 1, 1981. The relevant, portion of the minutes of the said board meeting reads:

In view of the request of the employees contained in the letter dated August 31, 1981, it was also decided that, all those remaining employees will receive another 25% (of their gratuity) on or before October 15, 1981 and another 25% on or before the end of November, 1981 of their respective gratuity.

At that, time, however, petitioner Asuncion Lopez Gonzales was still abroad. Allegedly, while she was still out of the country, she sent a cablegram to the corporation, objecting to certain matters taken up by the board in her absence, such as the sale of some of the assets of the corporation. Upon her return, she flied a derivative suit with the Securities and Exchange Commission (SEC) against majority shareholder Arturo F. Lopez.

Notwithstanding the "corporate squabble" between petitioner Asuncion Lopez Gonzales and Arturo Lopez, the first two (2) installments of the gratuity pay of private respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista were paid by petitioner corporation.

Also, petitioner corporation had prepared the cash vouchers and checks for the third installments of gratuity pay of said private respondents (Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista). For some reason, said vouchers were cancelled by petitioner Asuncion Lopez Gonzales.

Likewise, the first, second and third installments of gratuity pay of the rest of private respondents, particularly, Edward Mamaril, Marissa Pascual and Allan Pimentel, were prepared but cancelled by petitioner Asuncion Lopez Gonzales. Despite private respondents' repeated demands for their gratuity pay, corporation refused to pay the same. 4

On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered judgment in favor of private respondents. 5

Petitioners appealed the adverse ruling of the Labor arbiter to public respondent National Labor Relations Commission. The appeal focused on the alleged non-ratification and non-approval of the assailed August 17, 1981 and September 1, 1981 Board Resolutions during the Annual Stockholders' Meeting held on March 1, 1982. Petitioners further insisted that the payment of the gratuity to some of the private respondents was a mere "mistake" on the part of petitioner corporation since, pursuant to Resolution No. 6, dated September 8, 1980, and Resolution No. 10, dated October 6, 1980, said gratuity pay should be given only upon the employees' retirement.

On November 20, 1985, public respondent, through its Second Division, dismissed the appeal for lack of merit, the pertinent portion of which states: 6

We cannot agree with the contention of respondents (petitioners') that the Labor Arbiter a quo committed abuse of discretion in his decision.

Respondents' (petitioners') contention that, the two (2) resolutions dated 17 August 1981 and 1 September 1981 . . . which were not approved in the annual stockholders meeting had no force and effect, deserves scant consideration. The records show that the stockholders did not revoke nor nullify these resolutions granting gratuities to complainants.

On record, it appears that the said resolutions arose from the legitimate creation of the Board of Directors who steered the corporate affairs of the corporation. . . .

Respondents' (petitioners') allegation that the three (3) complainants, Mila E. Refuerzo, Marissa S. Pascual and Edward Mamaril, who had resigned after filing the complaint on February 8, 1982, were precluded to (sic) receive gratuity because the said resolutions referred to only retiring employee could not be given credence. A reading of Resolutions dated 17 August 1981 and 1 September 1981 disclosed that there were periods mentioned for the payment of complainants' gratuities. This disproves respondents' argument allowing gratuities upon retirement of employees. Additionally, the proposed distribution of assets (Exh. C-1) filed by Mr. Arturo F. Lopez also made mention of gratuity pay, " . . . (wherein) an employee who desires to resign from the LRI will be given the gratuity pay he or she earned." (Emphasis supplied) Let us be reminded, too, that the complainants' resignation was not voluntary but it was pressurized (sic) due to "power struggle" which was evident between Arturo Lopez and Asuncion Gonzales.

The respondents' (petitioners') contention of a mistake to have been committed in granting the first two (2) installments of gratuities to complainants Perfecto Bautista, Florentina Fontecha, Marcial Mamaril and Mila Refuerzo, (has) no legal leg to stand on. The record is bereft of any evidence that the Board of Directors had passed a resolution nor is there any minutes of whatever nature proving mistakes in the award of damages (sic).

With regard to the award of service incentive leave and others, the Commission finds no cogent reason to disturb the appealed decision.

We affirm.

WHEREFORE, let the appealed decision be, as it is hereby, AFFIRMED and let the instant appeal (be) dismissed for lack of merit.

SO ORDERED.

Petitioners reconsidered. 7 In their motion for reconsideration, petitioners assailed the validity of the board resolutions passed on August 17, 1981 and September 1, 1981, respectively, and claimed, for the first time, that petitioner Asuncion Lopez Gonzales was not notified of the special board meetings held on said dates. The motion for reconsideration was denied by the Second Division on July 24, 1986.

On September 4, 1986, petitioners filed another motion for reconsideration. Again, the motion was denied by public respondent in a Minute Resolution dated November 19, 1986. 8

Hence, the petition. As prayed for, we issued a Temporary Restraining Order, 9 enjoining public respondent from enforcing or executing the Resolution, dated November 20, 1986 (sic), in NLRC-NCR-2-2176-82. 10

The sole issue is whether or not public respondent acted with grave abuse of discretion in holding that private respondents are entitled to receive their gratuity pay under the assailed board resolutions dated August 17, 1951 and September 1, 1981.

Petitioners contend that the board resolutions passed on August 17, 1981 and September 1, 1981, granting gratuity pay to their retained employees, are ultra vires on the ground that petitioner Asuncion Lopez Gonzales was not duly notified of the said special meetings. They aver, further, that said board resolutions were not ratified by the stockholders of the corporation pursuant to Section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). They also insist that the gratuity pay must be given only to the retiring employees, to the exclusion of the retained employees or those who voluntarily resigned from their posts.

At the outset, we note that petitioners allegation on lack of notice to petitioner Asuncion Lopez Gonzales was raised for the first time in the in their motion for reconsideration filed before public respondent National Labor Relations Commission, or after said public respondent had affirmed the decision of the labor arbiter. To stress, in their appeal before the NLRC, petitioners never raised the issue of lack of notice to Asuncion Lopez Gonzales. The appeal dealt with (a) the failure of the stockholders to ratify the assailed resolutions and (b) the alleged "mistake" committed by petitioner corporation

in giving the gratuity pay to some of its employees who are yet to retire from employment.

In their comment, 11 private respondents maintain that the new ground of lack of notice was not raised before the labor arbiter, hence, petitioners are barred from raising the same on appeal. Private respondents claim, further, that such failure on the part of petitioners, had deprived them the opportunity to present evidence that, in a subsequent special board meeting held on September 29, 1981, the subject resolution dated September 1, 1981, was unanimously approved by the board of directors of petitioner corporation, including petitioner Asuncion Lopez Gonzales. 12

Indeed, it would be offensive to the basic rules of fair play and justice to allow petitioners to raise questions which have not been passed upon by the labor arbiter and the public respondent NLRC. It is well settled that questions not raised in the lower courts cannot, be raised for the first time on appeal. 13 Hence, petitioners may not invoke any other ground, other than those it specified at the labor arbiter level, to impugn the validity of the subject resolutions.

We now come to petitioners' argument that the resolutions passed by the board of directors during the special meetings on August 1, 1981, and September 1, 1981, were ultra vires for lack of notice.

The general rule is that a corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. 14 Thus, directors must act as a body in a meeting called pursuant to the law or the corporation's by-laws, otherwise, any action taken therein may be questioned by any objecting director or shareholder. 15

Be that as it may, jurisprudence 16 tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of conduct. Thus, in one case, 17 it was held:

. . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations (Perm. Ed.) sec. 429, at page 290, it is stated:

Thus, acts of directors at a meeting which was illegal because of want of notice may be ratified by the directors at a subsequent legal meeting, or by the corporations course of conduct. . .

Fletcher, supra, further states in sec. 762, at page 1073-1074:

Ratification by directors may be by an express resolution or vote to that effect, or it may be implied from adoption of the act, acceptance or acquiescence. Ratification may be effected by a resolution or vote of the board of directors expressly ratifying previous acts either of corporate officers or agents; but it is not necessary, ordinarily, to show a meeting and formal action by the

board of directors in order to establish a ratification.

In American Casualty Co., v. Dakota Tractor and Equipment Co., 234 F. Supp. 606, 611 (D.N.D. 1964), the court stated:

Moreover, the unauthorized acts of an officer of a corporation may be ratified by the corporation by conduct implying approval and adoption of the act in question. Such ratification may be express or may be inferred from silence and inaction.

In the case at bench, it was established that petitioner corporation did not issue any resolution revoking nor nullifying the board resolutions granting gratuity pay to private respondents. Instead, they paid the gratuity pay, particularly, the first two (2) installments thereof, of private respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista.

Despite the alleged lack of notice to petitioner Asuncion Lopez Gonzales at that time the assailed resolutions were passed, we can glean from the records that she was aware of the corporation's obligation under the said resolutions. More importantly, she acquiesced thereto. As pointed out by private respondents, petitioner Asuncion Lopez Gonzales affixed her signature on Cash Voucher Nos. 81-10-510 and 81-10-506, both dated October 15, 1981, evidencing the 2nd installment of the gratuity pay of private respondents Mila Refuerzo and Florentina Fontecha. 18

We hold, therefore, that the conduct of petitioners after the passage of resolutions dated August, 17, 1951 and September 1, 1981, had estopped them from assailing the validity of said board resolutions.

Assuming, arguendo, that there was no notice given to Asuncion Lopez Gonzalez during the special meetings held on August 17, 1981 and September 1, 1981, it is erroneous to state that the resolutions passed by the board during the said meetings were ultra vires. In legal parlance, "ultra vires" act refers to one which is not within the corporate powers conferred by the Corporation Code or articles of incorporation or not necessary or incidental in the exercise of the powers so conferred. 19

The assailed resolutions before us cover a subject which concerns the benefit and welfare of the company's employees. To stress, providing gratuity pay for its employees is one of the express powers of the corporation under the Corporation Code, hence, petitioners cannot invoke the doctrine of ultra vires to avoid any liability arising from the issuance the subject resolutions. 20

We reject petitioners' allegation that private respondents, namely, Mila Refuerzo, Marissa Pascual and Edward Mamaril who resigned from petitioner corporation after the filing of the case, are precluded from receiving their gratuity pay. Pursuant to board resolutions dated August 17, 1981 and September 1, 1981, respectively, petitioner corporation obliged itself to give the gratuity pay of its retained employees in four (4) installments: on September 1, 1981; October 15, 1981; November, 1981; and January 1, 1982. Hence, at the time the aforenamed private respondents tendered their resignation, the

aforementioned private respondents were already entitled to receive their gratuity pay.

Petitioners try to convince us that the subject resolutions had no force and effect in view of the non-approval thereof during the Annual Stockholders' Meeting held on March 1, 1982. To strengthen their position, petitioners cite section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). We are not persuaded.

The cited provision is not applicable to the case at bench as it refers to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets, including its goodwill. In such a case, the action taken by the board of directors requires the authorization of the stockholders on record.

It will be observed that, except far Arturo Lopez, the stockholders of petitioner corporation also sit as members of the board of directors. Under the circumstances in field, it will be illogical and superfluous to require the stockholders' approval of the subject resolutions. Thus, even without the stockholders' approval of the subject resolutions, petitioners are still liable to pay private respondents' gratuity pay.

IN VIEW WHEREOF, the instant petition is DISMISSED for lack of merit and the temporary restraining order we issued on February 9, 1987 is LIFTED. Accordingly, the assailed resolution of the National Labor Relations Commission in NLRC-NCR-2176-82 is AFFIRMED. This decision is immediately executory. Costs against petitioners.

SO ORDERED.

Narvasa, C.J., Regalado, Mendoza and Francisco, JJ., concur.

 

Footnotes

1. Private respondents' basic monthly salary and date of employment with said company are as follows:

Employee Date Employed Latest Salary

Florentina U. Fontecha 10/03/68 P1,090.00

Mila C. Refuerzo 08/02/68 930.00

Marcial C. Mamaril 09/01/51 560.00

Perfecto Bautista 12/01/54 540.00

Edward S. Mamaril 10/01/80 540.00

Marissa S. Pascual 02/01/81 540.00

Allan M. Pimentel 03/01/81 540.00

2 The case was docketed as NLRC-NCR Case No. 2-2176-82.

3 See Decision, dated July 23, 1984, Rollo, pp. 20-35.

4 Decision, dated July 23, 1984, Rollo, pp. 20-35.

5 Rollo, pp. 20-35.

6 Rollo, p. 51.

7 See Annex "E" of Petition, Rollo, pp. 56-61.

8 Annex "A" of Petition, Rollo, p. 19.

9 Resolution, dated February 9, 1987, Rollo, p. 72.

10 On November 20, 1985, the National Labor Relations Commission promulgated its Resolution, dismissing the appeal of petitioners, in NLRC-NCR-2-2176-82, for lack if merit. The November 20, 1986 Resolution alluded to refers to the NLRC notice re: November 19, 1986 Resolution, dismissing the second motion for reconsideration of petitioners, dated September 4, 1986; Rollo, p. 19.

11 Rollo, pp. 98-113.

12 Ibid, p. 180.

13 Anchuelo v. IAC, G.R. No. 71391, January 29, 1987, 147 SCRA 434.

14 19 C.J.S. 432-444.

15 cf. Section 53 of the Corporation Code.

16 Johnson v. Community Development Corp., 222 N.W. 2d 847.

17 Ibid.

18 Rollo, p. 109.

19 Section 45 of the Corporation Code provides:

Sec. 45. Ultra vires acts of corporation. — No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred.

20 Section 36 (10) of the Corporation Code provides, inter alia, that a corporation has the power and capacity "to establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees.

THIRD DIVISION

[G.R. No. 125778.  June 10, 2003]

INTER-ASIA INVESTMENTS INDUSTRIES, INC., petitioner, vs. COURT OF APPEALS and

ASIA INDUSTRIES, INC., respondents.

D E C I S I O N

CARPIO-MORALES, J.:

The present petition for review on certiorari assails the Court of Appeals Decision[1] of January 25, 1996 and Resolution[2] of July 11, 1996.

The material facts of the case are as follows:

On September 1, 1978, Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase Agreement[3] (the Agreement), sold to Asia Industries, Inc. (private respondent) for and in consideration of the sum of P19,500,000.00 all its right, title and interest in and to all the outstanding shares of stock of FARMACOR, INC. (FARMACOR).[4] The Agreement was signed by Leonides P. Gonzales and Jesus J. Vergara, presidents of petitioner and private respondent, respectively.[5]

Under paragraph 7 of the Agreement, petitioner as seller made warranties and representations among which were “(iv.) [t]he audited financial statements of FARMACOR at and for the year ended December 31, 1977... and the audited financial statements of FARMACOR as of September 30, 1978 being prepared by S[ycip,] G[orres,] V[elayo and Co.]... fairly present or will present the financial position of FARMACOR and the results of its operations as of said respective dates; said financial statements show or will show all liabilities and commitments of FARMACOR, direct or contingent, as of said respective dates . . .”; and “(v.) [t]he Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978 shall be Twelve Million Pesos (P12,000,000.00).”[6]

The Agreement was later amended with respect to the “Closing Date,” originally set up at 10:00 a.m. of September 30, 1978, which was moved to October 31, 1978, and to the mode of payment of the purchase price.[7]

The Agreement, as amended, provided that pending submission by SGV of FARMACOR’s audited financial statements as of October 31, 1978, private respondent may retain the sum of P7,500,000.00 out of the stipulated purchase price of P19,500,000.00; that from this retained amount of P7,500,000.00, private respondent may deduct any shortfall on the Minimum Guaranteed Net Worth of P12,000,000.00;[8] and that if the amount retained is not sufficient to make up for the deficiency in the Minimum Guaranteed Net Worth, petitioner shall pay the difference within 5 days from date of receipt of the audited financial statements.[9]

Respondent paid petitioner a total amount of P 12,000,000.00:  P5,000,000.00 upon the signing of the Agreement, and P7,000,000.00 on November 2, 1978.[10]

From the STATEMENT OF INCOME AND DEFICIT attached to the financial report[11] dated November 28, 1978

submitted by SGV, it appears that FARMACOR had, for the ten months ended October 31, 1978, a deficit of P11,244,225.00.[12] Since the stockholder’s equity amounted to P10,000,000.00, FARMACOR had a net worth deficiency of P1,244,225.00. The guaranteed net worth shortfall thus amounted to P13,244,225.00 after adding the net worth deficiency of P1,244,225.00 to the Minimum Guaranteed Net Worth of P12,000,000.00.

The adjusted contract price, therefore, amounted to P6,225,775.00 which is the difference between the contract price of P19,500,000.00 and the shortfall in the guaranteed net worth of P13,224,225.00. Private respondent having already paid petitioner P12,000,000.00, it was entitled to a refund of P5,744,225.00.

Petitioner thereafter proposed, by letter[13] of January 24, 1980, signed by its president, that private respondent’s claim for refund be reduced to P4,093,993.00, it promising to pay the cost of the Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the amount of P759,570.00. To the proposal respondent agreed. Petitioner, however, weiched on its promise. Petitioner’s total liability thus stood at P4,853,503.00 (P4,093,993.00 plus P759,570.00)[14] exclusive of interest.[15]

On April 5, 1983, private respondent filed a complaint[16] against petitioner with the Regional Trial Court of Makati, one of two causes of action of which was for the recovery of above-said amount of P4,853,503.00[17] plus interest.

Denying private respondent’s claim, petitioner countered that private respondent failed to pay the balance of the purchase price and accordingly set up a counterclaim.

Finding for private respondent, the trial court rendered on November 27, 1991 a Decision,[18] the dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of plaintiff and against defendant (a) ordering the latter to pay to the former the sum of P4,853,503.00[19] plus interest thereon at the legal rate from the filing of the complaint until fully paid, the sum of P30,000.00 as attorney’s fees and the costs of suit; and (b) dismissing the counterclaim.

SO ORDERED.

On appeal to the Court of Appeals, petitioner raised the following errors:

THE TRIAL COURT ERRED IN HOLDING THE DEFENDANT LIABLE UNDER THE FIRST CAUSE OF ACTION PLEADED BY THE PLAINTIFF.

THE TRIAL COURT ERRED IN AWARDING ATTORNEY’S FEES AND IN DISMISSING THE COUNTERCLAIM.

THE TRIAL COURT ERRED IN RENDERING JUDGMENT IN FAVOR OF THE PLAINTIFF, THE ALLEGED BREACH OF WARRANTIES AND REPRESENTATION NOT HAVING BEEN SHOWN, MUCH LESS ESTABLISHED BY THE PLAINTIFF.[20]

By Decision of January 25, 1996, the Court of Appeals affirmed the trial court’s decision. Petitioner’s motion for reconsideration of the decision having been denied by the

Court of Appeals by Resolution of July 11, 1996, the present petition for review on certiorari was filed, assigning the following errors:

I

THE RESPONDENT COURT ERRED IN NOT HOLDING THAT THE LETTER OF THE PRESIDENT OF THE PETITIONER IS NOT BINDING ON THE PETITIONER BEING ULTRA VIRES.

II

THE LETTER CAN NOT BE AN ADMISSION AND WAIVER OF THE PETITIONER AS A CORPORATION.

III

THE RESPONDENT COURT ERRED IN NOT DECLARING THAT THERE IS NO BREACH OF WARRANTIES AND REPRESENTATION AS ALLEGED BY THE PRIVATE RESPONDENT.

IV

THE RESPONDENT COURT ERRED IN ORDERING THE PETITIONER TO PAY ATTORNEY’S FEES AND IN SUSTAINING THE DISMISSAL OF THE COUNTERCLAIM.18  (Underscoring in the original)

Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of private respondent’s claim for refund upon petitioner’s promise to pay the cost of NOCOSII superstructures in the amount of P759,570.00) which was signed by its president has no legal force and effect against it as it was not authorized by its board of directors, it citing the COrporation Law which provides that unless the act of the president is authorized by the board of directors, the same is not binding on it.

This Court is not persuaded.

The January 24, 1980 letter signed by petitioner’s president is valid and binding. The case of People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals 1 9 instructs:

The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. A corporation is a juridical person, separate and distinct from its stockholders and members, “having x x x powers, attributes and properties expressly authorized by law or incident to its existence.”

Being a juridical entity, a corporation may act through its board of directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management, as provided in Section 23 of the Corporation Code of the Philippines:

SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees x x x.

Under this provision, the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of

law.  However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business, viz:

A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that [the] authority to do so has been conferred upon him, and this includes powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused person dealing with the officer or agent to believe that it has conferred.

x x x

[A]pparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts whichestablishes apparent authority, but the vesting of a corporate officer with power to bind the corporation.

x x x (Emphasis and underscoring supplied)

As correctly argued by private respondent, an officer of a corporation who is authorized to purchase the stock of another corporation has the implied power to perform all other obligations arising therefrom, such as payment of the shares of stock. By allowing its president to sign the Agreement on its behalf, petitioner clothed him with apparent capacity to perform all acts which are expressly, impliedly and inherently stated therein.[21]

Petitioner further argues that when the Agreement was executed on September 1, 1978, its financial statements were extensively examined and accepted as correct by private respondent, hence, it cannot later be disproved “by resorting to some scheme such as future financial auditing;”[22] and that it should not be bound by the SGV Report because it is self-serving and biased, SGV having been hired solely by private respondent, and the alleged shortfall of FARMACOR occurred only after the execution of the Agreement.

This Court is not persuaded either.

The pertinent provisions of the Agreement read:

7.       Warranties and Representations - (a) SELLER warrants and represents as follows:

x x x

(iv)     The audited financial statements of FARMACOR as at and for the year ended December 31, 1977 and

the audited financial statements of FARMACOR as at September 30, 1978 beingprepared by SGV pursuant to paragraph 6(b) fairly present or will present the financial position of FARMACOR and the results of its operations as of said respective dates; said financial statements show or will show all liabilities and commitments of FARMACOR, direct or contingent, as of said respective dates; and the receivables set forth in said financial statements are fully due and collectible, free and clear of any set-offs, defenses, claims and other impediments to their collectibility.

(v)     The Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978 shall be Twelve Million Pesos (P12,000,000.00), Philippine Currency.

x x x (Underscoring in the original; emphasis supplied)[23]

True, private respondent accepted as correct the financial statements submitted to it when the Agreement was executed on September 1, 1978.  But petitioner expressly warranted that the SGV Reports “fairly present or will present the financial position of FARMACOR.” By such warranty, petitioner is estopped from claiming that the SGV Reports are self-serving and biased.

As to the claim that the shortfall occurred after the execution of the Agreement, the declaration of Emmanuel de Asis, supervisor in the Accounting Division of SGV and head of the team which conducted the auditing of FARMACOR, that the period covered by the audit was from January to October 1978 shows that the period before the Agreement was entered into (on September 1, 1978) was covered.[24]

As to petitioner’s assigned error on the award of attorney’s fees which, it argues, is bereft of factual, legal and equitable justification, this Court finds the same well-taken.

On the matter of attorney’s fees, it is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule, and counsel’s fees are not to be awarded every time a party wins a suit.  The power of the court to award attorney’s fees under Article 2208 of the Civil Code demands factual, legal and equitable justification, without which the award is a conclusion without apremise, its basis being improperly left to speculation and conjecture. In all events, the court must explicitly state in the text of the decision, and not only in the decretal portion thereof, the legal reason for the award of attorney’s fees.[25]

x x x (Emphasis and underscoring supplied; citations omitted)

WHEREFORE, the instant petition is PARTLY GRANTED.  The assailed decision of the Court of Appeals affirming that of the trial court is modified in that the award of attorney’s fees in favor of private respondent is deleted. The decision is affirmed in other respects.

SO ORDERED.

Puno, (Chairman), Panganiban, Sandoval-Gutierrez, and Corona, JJ., concur.

[1] Rollo at 29-42.[2] Id. at 44-45.[3] Records at 9-23.[4] Id. at 10-11.[5] Id. at 22.[6] Id. at 16-17.[7] Exhibits “G-1”, “G-2”, G-3”; Records at 586-593.[8] Ibid.[9] Records at 12.[10] Rollo, at 12 and 82.[11] Records at 322-327.[12] Id. at 324-325.[13] Exhibit “G-6”; Records at 598-604.[14] P4,853,503.00 is the amount prayed for in the complaint

but it is noted that the total amount of these figures is P4,853,563.00.

[15] Id. at 13; Records at 4.[16] Records at 1-25. [17] See footnote 14.[18] Id. at 757-760.[19] See footnote 14. Plaintiff did not move to reconsider the

amount adjudged to it.[20] Rollo at 14.18 Id at 15.19 297 SCRA 170 (1998).[21] Rollo at 92-93.[22] Id. at 21.[23] Records at 17-18.[24] Transcript of Stenographic Notes, July 27, 1988 at 5.[25] Central Azucarera de Bais v. CA, 188 SCRA 328 (1990).

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 166862             December 20, 2006

MANILA METAL CONTAINER CORPORATION, petitioner, 

REYNALDO C. TOLENTINO, intervenor, vs.

PHILIPPINE NATIONAL BANK, respondent,DMCI-PROJECT DEVELOPERS, INC., intervenor.

D E C I S I O N

CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R. No. 46153 which affirmed the decision2 of the Regional Trial Court (RTC), Branch 71, Pasig City, in Civil Case No. 58551, and its Resolution3 denying the motion for reconsideration filed by petitioner Manila Metal Container Corporation (MMCC).

The Antecedents

Petitioner was the owner of a 8,015 square meter parcel of land located in Mandaluyong (now a City), Metro Manila. The property was covered by Transfer Certificate of Title (TCT) No. 332098 of the Registry of Deeds of Rizal. To secure a P900,000.00 loan it had obtained from respondent Philippine National Bank (PNB), petitioner executed a real estate mortgage over the lot. Respondent PNB later granted petitioner a new credit accommodation of P1,000,000.00; and, on November 16, 1973, petitioner executed an Amendment4 of Real Estate Mortgage over its property. On March 31, 1981, petitioner secured another loan of P653,000.00 from respondent PNB, payable in quarterly installments of P32,650.00, plus interests and other charges.5

On August 5, 1982, respondent PNB filed a petition for extrajudicial foreclosure of the real estate mortgage and sought to have the property sold at public auction for P911,532.21, petitioner's outstanding obligation to respondent PNB as of June 30, 1982,6 plus interests and attorney's fees.

After due notice and publication, the property was sold at public auction on September 28, 1982 where respondent PNB was declared the winning bidder for P1,000,000.00. The Certificate of Sale7 issued in its favor was registered with the Office of the Register of Deeds of Rizal, and was annotated at the dorsal portion of the title on February 17, 1983. Thus, the period to redeem the property was to expire on February 17, 1984.

Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that it be granted an extension of time to redeem/repurchase the property.8 In its reply dated August 30, 1983, respondent PNB informed petitioner that the request had

been referred to its Pasay City Branch for appropriate action and recommendation.9

In a letter10 dated February 10, 1984, petitioner reiterated its request for a one year extension from February 17, 1984 within which to redeem/repurchase the property on installment basis. It reiterated its request to repurchase the property on installment.11 Meanwhile, some PNB Pasay City Branch personnel informed petitioner that as a matter of policy, the bank does not accept "partial redemption."12

Since petitioner failed to redeem the property, the Register of Deeds cancelled TCT No. 32098 on June 1, 1984, and issued a new title in favor of respondent PNB.13 Petitioner's offers had not yet been acted upon by respondent PNB.

Meanwhile, the Special Assets Management Department (SAMD) had prepared a statement of account, and as of June 25, 1984 petitioner's obligation amounted to P1,574,560.47. This included the bid price of P1,056,924.50, interest, advances of insurance premiums, advances on realty taxes, registration expenses, miscellaneous expenses and publication cost.14 When apprised of the statement of account, petitioner remitted P725,000.00 to respondent PNB as "deposit to repurchase," and Official Receipt No. 978191 was issued to it.15

In the meantime, the SAMD recommended to the management of respondent PNB that petitioner be allowed to repurchase the property for P1,574,560.00. In a letter dated November 14, 1984, the PNB management informed petitioner that it was rejecting the offer and the recommendation of the SAMD. It was suggested that petitioner purchase the property for P2,660,000.00, its minimum market value. Respondent PNB gave petitioner until December 15, 1984 to act on the proposal; otherwise, its P725,000.00 deposit would be returned and the property would be sold to other interested buyers.16

Petitioner, however, did not agree to respondent PNB's proposal. Instead, it wrote another letter dated December 12, 1984 requesting for a reconsideration. Respondent PNB replied in a letter dated December 28, 1984, wherein it reiterated its proposal that petitioner purchase the property for P2,660,000.00. PNB again informed petitioner that it would return the deposit should petitioner desire to withdraw its offer to purchase the property.17 On February 25, 1985, petitioner, through counsel, requested that PNB reconsider its letter dated December 28, 1984. Petitioner declared that it had already agreed to the SAMD's offer to purchase the property forP1,574,560.47, and that was why it had paid P725,000.00. Petitioner warned respondent PNB that it would seek judicial recourse should PNB insist on the position.18

On June 4, 1985, respondent PNB informed petitioner that the PNB Board of Directors had accepted petitioner's offer to purchase the property, but for P1,931,389.53 in cash less the P725,000.00 already deposited with it.19 On page two of the letter was a space above the typewritten name of petitioner's President, Pablo Gabriel, where he was to affix his signature. However, Pablo Gabriel did not conform to the letter but merely indicated therein that he had received it.20 Petitioner did not respond, so PNB requested petitioner in a letter dated June 30, 1988 to submit an amended offer to repurchase.

Petitioner rejected respondent's proposal in a letter dated July 14, 1988. It maintained that respondent PNB had agreed to sell the property for P1,574,560.47, and that since its P725,000.00 downpayment had been accepted, respondent PNB was proscribed from increasing the purchase price of the property.21 Petitioner averred that it had a net balance payable in the amount of P643,452.34. Respondent PNB, however, rejected petitioner's offer to pay the balance of P643,452.34 in a letter dated August 1, 1989.22

On August 28, 1989, petitioner filed a complaint against respondent PNB for "Annulment of Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific Performance with Damages." To support its cause of action for specific performance, it alleged the following:

34. As early as June 25, 1984, PNB had accepted the down payment from Manila Metal in the substantial amount of P725,000.00 for the redemption/repurchase price of P1,574,560.47 as approved by its SMAD and considering the reliance made by Manila Metal and the long time that has elapsed, the approval of the higher management of the Bank to confirm the agreement of its SMAD is clearly a potestative condition which cannot legally prejudice Manila Metal which has acted and relied on the approval of SMAD. The Bank cannot take advantage of a condition which is entirely dependent upon its own will after accepting and benefiting from the substantial payment made by Manila Metal.

35. PNB approved the repurchase price of P1,574,560.47 for which it accepted P725,000.00 from Manila Metal. PNB cannot take advantage of its own delay and long inaction in demanding a higher amount based on unilateral computation of interest rate without the consent of Manila Metal.

Petitioner later filed an amended complaint and supported its claim for damages with the following arguments:

36. That in order to protect itself against the wrongful and malicious acts of the defendant Bank, plaintiff is constrained to engage the services of counsel at an agreed fee of P50,000.00 and to incur litigation expenses of at least P30,000.00, which the defendant PNB should be condemned to pay the plaintiff Manila Metal.

37. That by reason of the wrongful and malicious actuations of defendant PNB, plaintiff Manila Metal suffered besmirched reputation for which defendant PNB is liable for moral damages of at leastP50,000.00.

38. That for the wrongful and malicious act of defendant PNB which are highly reprehensible, exemplary damages should be awarded in favor of the plaintiff by way of example or correction for the public good of at least P30,000.00.23

Petitioner prayed that, after due proceedings, judgment be rendered in its favor, thus:

a) Declaring the Amended Real Estate Mortgage (Annex "A") null and void and without any legal force and effect.

b) Declaring defendant's acts of extra-judicially foreclosing the mortgage over plaintiff's property and setting it for auction sale null and void.

c) Ordering the defendant Register of Deeds to cancel the new title issued in the name of PNB (TCT NO. 43792) covering the property described in paragraph 4 of the Complaint, to reinstate TCT No. 37025 in the name of Manila Metal and to cancel the annotation of the mortgage in question at the back of the TCT No.37025 described in paragraph 4 of this Complaint.

d) Ordering the defendant PNB to return and/or deliver physical possession of the TCT No. 37025described in paragraph 4 of this Complaint to the plaintiff Manila Metal.

e) Ordering the defendant PNB to pay the plaintiff Manila Metal's actual damages, moral and exemplary damages in the aggregate amount of not less than P80,000.00 as may be warranted by the evidence and fixed by this Honorable Court in the exercise of its sound discretion, and attorney's fees of P50,000.00 and litigation expenses of at least P30,000.00 as may be proved during the trial, and costs of suit.

Plaintiff likewise prays for such further reliefs which may be deemed just and equitable in the premises.24

In its Answer to the complaint, respondent PNB averred, as a special and affirmative defense, that it had acquired ownership over the property after the period to redeem had elapsed. It claimed that no contract of sale was perfected between it and petitioner after the period to redeem the property had expired.

During pre-trial, the parties agreed to submit the case for decision, based on their stipulation of facts.25 The parties agreed to limit the issues to the following:

1. Whether or not the June 4, 1985 letter of the defendant approving/accepting plaintiff's offer to purchase the property is still valid and legally enforceable.

2. Whether or not the plaintiff has waived its right to purchase the property when it failed to conform with the conditions set forth by the defendant in its letter dated June 4, 1985.

3. Whether or not there is a perfected contract of sale between the parties.26

While the case was pending, respondent PNB demanded, on September 20, 1989, that petitioner vacate the property within 15 days from notice,27 but petitioners refused to do so.

On March 18, 1993, petitioner offered to repurchase the property for P3,500,000.00.28 The offer was however rejected by respondent PNB, in a letter dated April 13, 1993. According to it, the prevailing market value of the property was approximately P30,000,000.00, and as a matter of policy, it could not sell the property for less than its market value.29 On June 21, 1993, petitioner offered to purchase the

property for P4,250,000.00 in cash.30The offer was again rejected by respondent PNB on September 13, 1993.31

On May 31, 1994, the trial court rendered judgment dismissing the amended complaint and respondent PNB's counterclaim. It ordered respondent PNB to refund the P725,000.00 deposit petitioner had made.32 The trial court ruled that there was no perfected contract of sale between the parties; hence, petitioner had no cause of action for specific performance against respondent. The trial court declared that respondent had rejected petitioner's offer to repurchase the property. Petitioner, in turn, rejected the terms and conditions contained in the June 4, 1985 letter of the SAMD. While petitioner had offered to repurchase the property per its letter of July 14, 1988, the amount of P643,422.34 was way below the P1,206,389.53 which respondent PNB had demanded. It further declared that the P725,000.00 remitted by petitioner to respondent PNB on June 4, 1985 was a "deposit," and not a downpayment or earnest money.

On appeal to the CA, petitioner made the following allegations:

I

THE LOWER COURT ERRED IN RULING THAT DEFENDANT-APPELLEE'S LETTER DATED 4 JUNE 1985 APPROVING/ACCEPTING PLAINTIFF-APPELLANT'S OFFER TO PURCHASE THE SUBJECT PROPERTY IS NOT VALID AND ENFORCEABLE.

II

THE LOWER COURT ERRED IN RULING THAT THERE WAS NO PERFECTED CONTRACT OF SALE BETWEEN PLAINTIFF-APPELLANT AND DEFENDANT-APPELLEE.

III

THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLLANT WAIVED ITS RIGHT TO PURCHASE THE SUBJECT PROPERTY WHEN IT FAILED TO CONFORM WITH CONDITIONS SET FORTH BY DEFENDANT-APPELLEE IN ITS LETTER DATED 4 JUNE 1985.

IV

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT IT WAS THE DEFENDANT-APPELLEE WHICH RENDERED IT DIFFICULT IF NOT IMPOSSIBLE FOR PLAINTIFF-APPELLANT TO COMPLETE THE BALANCE OF THEIR PURCHASE PRICE.

V

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT THERE WAS NO VALID RESCISSION OR CANCELLATION OF SUBJECT CONTRACT OF REPURCHASE.

VI

THE LOWER COURT ERRED IN DECLARING THAT PLAINTIFF FAILED AND REFUSED TO SUBMIT THE AMENDED REPURCHASE OFFER.

VII

THE LOWER COURT ERRED IN DISMISSING THE AMENDED COMPLAINT OF PLAINTIFF-APPELLANT.

VIII

THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT ACTUAL, MORAL AND EXEMPLARY DAMAGES, ATTOTRNEY'S FEES AND LITIGATION EXPENSES.33

Meanwhile, on June 17, 1993, petitioner's Board of Directors approved Resolution No. 3-004, where it waived, assigned and transferred its rights over the property covered by TCT No. 33099 and TCT No. 37025 in favor of Bayani Gabriel, one of its Directors.34 Thereafter, Bayani Gabriel executed a Deed of Assignment over 51% of the ownership and management of the property in favor of Reynaldo Tolentino, who later moved for leave to intervene as plaintiff-appellant. On July 14, 1993, the CA issued a resolution granting the motion,35 and likewise granted the motion of Reynaldo Tolentino substituting petitioner MMCC, as plaintiff-appellant, and his motion to withdraw as intervenor.36

The CA rendered judgment on May 11, 2000 affirming the decision of the RTC.37 It declared that petitioner obviously never agreed to the selling price proposed by respondent PNB (P1,931,389.53) since petitioner had kept on insisting that the selling price should be lowered to P1,574,560.47. Clearly therefore, there was no meeting of the minds between the parties as to the price or consideration of the sale.

The CA ratiocinated that petitioner's original offer to purchase the subject property had not been accepted by respondent PNB. In fact, it made a counter-offer through its June 4, 1985 letter specifically on the selling price; petitioner did not agree to the counter-offer; and the negotiations did not prosper. Moreover, petitioner did not pay the balance of the purchase price within the sixty-day period set in the June 4, 1985 letter of respondent PNB. Consequently, there was no perfected contract of sale, and as such, there was no contract to rescind.

According to the appellate court, the claim for damages and the counterclaim were correctly dismissed by the court a quo for no evidence was presented to support it. Respondent PNB's letter dated June 30, 1988 cannot revive the failed negotiations between the parties. Respondent PNB merely asked petitioner to submit an amended offer to repurchase. While petitioner reiterated its request for a lower selling price and that the balance of the repurchase be reduced, however, respondent rejected the proposal in a letter dated August 1, 1989.

Petitioner filed a motion for reconsideration, which the CA likewise denied.

Thus, petitioner filed the instant petition for review on certiorari, alleging that:

I. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THERE IS NO PERFECTED CONTRACT OF SALE BETWEEN THE PETITIONER AND RESPONDENT.

II. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE AMOUNT OF PHP725,000.00 PAID BY THE PETITIONER IS NOT AN EARNEST MONEY.

III. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE FAILURE OF THE PETITIONER-APPELLANT TO SIGNIFY ITS CONFORMITY TO THE TERMS CONTAINED IN PNB'S JUNE 4, 1985 LETTER MEANS THAT THERE WAS NO VALID AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.

IV. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW THAT NON-PAYMENT OF THE PETITIONER-APPELLANT OF THE BALANCE OF THE OFFERED PRICE IN THE LETTER OF PNB DATED JUNE 4, 1985, WITHIN SIXTY (60) DAYS FROM NOTICE OF APPROVAL CONSTITUTES NO VALID AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.

V. THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE LETTERS OF PETITIONER-APPELLANT DATED MARCH 18, 1993 AND JUNE 21, 1993, OFFERING TO BUY THE SUBJECT PROPERTY AT DIFFERENT AMOUNT WERE PROOF THAT THERE IS NO PERFECTED CONTRACT OF SALE.38

The threshold issue is whether or not petitioner and respondent PNB had entered into a perfected contract for petitioner to repurchase the property from respondent.

Petitioner maintains that it had accepted respondent's offer made through the SAMD, to sell the property forP1,574,560.00. When the acceptance was made in its letter dated June 25, 1984; it then deposited P725,000.00 with the SAMD as partial payment, evidenced by Receipt No. 978194 which respondent had issued. Petitioner avers that the SAMD's acceptance of the deposit amounted to an acceptance of its offer to repurchase. Moreover, as gleaned from the letter of SAMD dated June 4, 1985, the PNB Board of Directors had approved petitioner's offer to purchase the property. It claims that this was the suspensive condition, the fulfillment of which gave rise to the contract. Respondent could no longer unilaterally withdraw its offer to sell the property forP1,574,560.47, since the acceptance of the offer resulted in a perfected contract of sale; it was obliged to remit to respondent the balance of the original purchase price of P1,574,560.47, while respondent was obliged to transfer ownership and deliver the property to petitioner, conformably with Article 1159 of the New Civil Code.

Petitioner posits that respondent was proscribed from increasing the interest rate after it had accepted respondent's offer to sell the property for P1,574,560.00. Consequently, respondent could no longer validly make a counter-offer of P1,931,789.88 for the purchase of the property. It likewise maintains that, although theP725,000.00 was considered as "deposit for the repurchase of the property" in the receipt issued by the SAMD, the amount constitutes earnest money as contemplated in Article 1482 of the New Civil Code. Petitioner cites the rulings of this Court in Villonco v. Bormaheco39 and Topacio v. Court of Appeals.40

Petitioner avers that its failure to append its conformity to the June 4, 1984 letter of respondent and its failure to pay the balance of the price as fixed by respondent within the 60-day period from notice was to protest respondent's breach of its obligation to petitioner. It did not amount to a rejection of

respondent's offer to sell the property since respondent was merely seeking to enforce its right to pay the balance of P1,570,564.47. In any event, respondent had the option either to accept the balance of the offered price or to cause the rescission of the contract.

Petitioner's letters dated March 18, 1993 and June 21, 1993 to respondent during the pendency of the case in the RTC were merely to compromise the pending lawsuit, they did not constitute separate offers to repurchase the property. Such offer to compromise should not be taken against it, in accordance with Section 27, Rule 130 of the Revised Rules of Court.

For its part, respondent contends that the parties never graduated from the "negotiation stage" as they could not agree on the amount of the repurchase price of the property. All that transpired was an exchange of proposals and counter-proposals, nothing more. It insists that a definite agreement on the amount and manner of payment of the price are essential elements in the formation of a binding and enforceable contract of sale. There was no such agreement in this case. Primarily, the concept of "suspensive condition" signifies a future and uncertain event upon the fulfillment of which the obligation becomes effective. It clearly presupposes the existence of a valid and binding agreement, the effectivity of which is subordinated to its fulfillment. Since there is no perfected contract in the first place, there is no basis for the application of the principles governing "suspensive conditions."

According to respondent, the Statement of Account prepared by SAMD as of June 25, 1984 cannot be classified as a counter-offer; it is simply a recital of its total monetary claims against petitioner. Moreover, the amount stated therein could not likewise be considered as the counter-offer since as admitted by petitioner, it was only recommendation which was subject to approval of the PNB Board of Directors.

Neither can the receipt by the SAMD of P725,000.00 be regarded as evidence of a perfected sale contract. As gleaned from the parties' Stipulation of Facts during the proceedings in the court a quo, the amount is merely an acknowledgment of the receipt of P725,000.00 as deposit to repurchase the property. The deposit ofP725,000.00 was accepted by respondent on the condition that the purchase price would still be approved by its Board of Directors. Respondent maintains that its acceptance of the amount was qualified by that condition, thus not absolute. Pending such approval, it cannot be legally claimed that respondent is already bound by any contract of sale with petitioner.

According to respondent, petitioner knew that the SAMD has no capacity to bind respondent and that its authority is limited to administering, managing and preserving the properties and other special assets of PNB. The SAMD does not have the power to sell, encumber, dispose of, or otherwise alienate the assets, since the power to do so must emanate from its Board of Directors. The SAMD was not authorized by respondent's Board to enter into contracts of sale with third persons involving corporate assets. There is absolutely nothing on record that respondent authorized the SAMD, or made it appear to petitioner that it represented itself as having such authority.

Respondent reiterates that SAMD had informed petitioner that its offer to repurchase had been approved by the Board subject to the condition, among others, "that the selling price shall be the total bank's claim as of documentation date x x x payable in cash (P725,000.00 already deposited)

within 60 days from notice of approval." A new Statement of Account was attached therein indicating the total bank's claim to be P1,931,389.53 less deposit of P725,000.00, or P1,206,389.00. Furthermore, while respondent's Board of Directors accepted petitioner's offer to repurchase the property, the acceptance was qualified, in that it required a higher sale price and subject to specified terms and conditions enumerated therein. This qualified acceptance was in effect a counter-offer, necessitating petitioner's acceptance in return.

The Ruling of the Court

The ruling of the appellate court that there was no perfected contract of sale between the parties on June 4, 1985 is correct.

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.41 Under Article 1318 of the New Civil Code, there is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

Contracts are perfected by mere consent which is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract.42 Once perfected, they bind other contracting parties and the obligations arising therefrom have the form of law between the parties and should be complied with in good faith. The parties are bound not only to the fulfillment of what has been expressly stipulated but also to the consequences which, according to their nature, may be in keeping with good faith, usage and law.43

By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.44 The absence of any of the essential elements will negate the existence of a perfected contract of sale. As the Court ruled in Boston Bank of the Philippines v. Manalo:45

A definite agreement as to the price is an essential element of a binding agreement to sell personal or real property because it seriously affects the rights and obligations of the parties. Price is an essential element in the formation of a binding and enforceable contract of sale. The fixing of the price can never be left to the decision of one of the contracting parties. But a price fixed by one of the contracting parties, if accepted by the other, gives rise to a perfected sale.46

A contract of sale is consensual in nature and is perfected upon mere meeting of the minds. When there is merely an offer by one party without acceptance of the other, there is no contract.47 When the contract of sale is not perfected, it cannot,

as an independent source of obligation, serve as a binding juridical relation between the parties.48

In San Miguel Properties Philippines, Inc. v. Huang,49 the Court ruled that the stages of a contract of sale are as follows: (1) negotiation, covering the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is perfected; (2) perfection, which takes place upon the concurrence of the essential elements of the sale which are the meeting of the minds of the parties as to the object of the contract and upon the price; and (3) consummation, which begins when the parties perform their respective undertakings under the contract of sale, culminating in the extinguishment thereof.

A negotiation is formally initiated by an offer, which, however, must be certain.50 At any time prior to the perfection of the contract, either negotiating party may stop the negotiation. At this stage, the offer may be withdrawn; the withdrawal is effective immediately after its manifestation. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional and without variance of any sort from the proposal. In Adelfa Properties, Inc. v. Court of Appeals,51the Court ruled that:

x x x The rule is that except where a formal acceptance is so required, although the acceptance must be affirmatively and clearly made and must be evidenced by some acts or conduct communicated to the offeror, it may be shown by acts, conduct, or words of the accepting party that clearly manifest a present intention or determination to accept the offer to buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a party recognizing the existence of the contract of sale.52

A qualified acceptance or one that involves a new proposal constitutes a counter-offer and a rejection of the original offer. A counter-offer is considered in law, a rejection of the original offer and an attempt to end the negotiation between the parties on a different basis.53 Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to guarantee consent because any modification or variation from the terms of the offer annuls the offer.54 The acceptance must be identical in all respects with that of the offer so as to produce consent or meeting of the minds.

In this case, petitioner had until February 17, 1984 within which to redeem the property. However, since it lacked the resources, it requested for more time to redeem/repurchase the property under such terms and conditions agreed upon by the parties.55 The request, which was made through a letter dated August 25, 1983, was referred to the respondent's main branch for appropriate action.56 Before respondent could act on the request, petitioner again wrote respondent as follows:

1. Upon approval of our request, we will pay your goodselves ONE HUNDRED & FIFTY THOUSAND PESOS (P150,000.00);

2. Within six months from date of approval of our request, we will pay another FOUR HUNDRED FIFTY THOUSAND PESOS (P450,000.00); and

3. The remaining balance together with the interest and other expenses that will be incurred will be paid within the last six months of the one year grave period requested for.57

When the petitioner was told that respondent did not allow "partial redemption,"58 it sent a letter to respondent's President reiterating its offer to purchase the property.59 There was no response to petitioner's letters dated February 10 and 15, 1984.

The statement of account prepared by the SAMD stating that the net claim of respondent as of June 25, 1984 was P1,574,560.47 cannot be considered an unqualified acceptance to petitioner's offer to purchase the property. The statement is but a computation of the amount which petitioner was obliged to pay in case respondent would later agree to sell the property, including interests, advances on insurance premium, advances on realty taxes, publication cost, registration expenses and miscellaneous expenses.

There is no evidence that the SAMD was authorized by respondent's Board of Directors to accept petitioner's offer and sell the property for P1,574,560.47. Any acceptance by the SAMD of petitioner's offer would not bind respondent. As this Court ruled in AF Realty Development, Inc. vs. Diesehuan Freight Services, Inc.:60

Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of such director, are held not binding on the corporation.

Thus, a corporation can only execute its powers and transact its business through its Board of Directors and through its officers and agents when authorized by a board resolution or its by-laws.61

It appears that the SAMD had prepared a recommendation for respondent to accept petitioner's offer to repurchase the property even beyond the one-year period; it recommended that petitioner be allowed to redeem the property and pay P1,574,560.00 as the purchase price. Respondent later approved the recommendation that the property be sold to petitioner. But instead of the P1,574,560.47 recommended by the SAMD and to which petitioner had previously conformed, respondent set the purchase price at P2,660,000.00. In fine, respondent's acceptance of petitioner's offer was qualified, hence can be at most considered as a counter-offer. If petitioner had accepted this counter-offer, a perfected contract of sale would have arisen; as it turns out, however, petitioner merely sought to have the counter-offer reconsidered. This

request for reconsideration would later be rejected by respondent.

We do not agree with petitioner's contention that the P725,000.00 it had remitted to respondent was "earnest money" which could be considered as proof of the perfection of a contract of sale under Article 1482 of the New Civil Code. The provision reads:

ART. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract.

This contention is likewise negated by the stipulation of facts which the parties entered into in the trial court:

8. On June 8, 1984, the Special Assets Management Department (SAMD) of PNB prepared an updated Statement of Account showing MMCC's total liability to PNB as of June 25, 1984 to be P1,574,560.47 and recommended this amount as the repurchase price of the subject property.

9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase the property. The deposit of P725,000 was accepted by PNB on the condition that the purchase price is still subject to the approval of the PNB Board.62

Thus, the P725,000.00 was merely a deposit to be applied as part of the purchase price of the property, in the event that respondent would approve the recommendation of SAMD for respondent to accept petitioner's offer to purchase the property for P1,574,560.47. Unless and until the respondent accepted the offer on these terms, no perfected contract of sale would arise. Absent proof of the concurrence of all the essential elements of a contract of sale, the giving of earnest money cannot establish the existence of a perfected contract of sale.63

It appears that, per its letter to petitioner dated June 4, 1985, the respondent had decided to accept the offer to purchase the property for P1,931,389.53. However, this amounted to an amendment of respondent's qualified acceptance, or an amended counter-offer, because while the respondent lowered the purchase price, it still declared that its acceptance was subject to the following terms and conditions:

1. That the selling price shall be the total Bank's claim as of documentation date (pls. see attached statement of account as of 5-31-85), payable in cash (P725,000.00 already deposited) within sixty (60) days from notice of approval;

2. The Bank sells only whatever rights, interests and participation it may have in the property and you are charged with full knowledge of the nature and extent of said rights, interests and participation and waive your right to warranty against eviction.

3. All taxes and other government imposts due or to become due on the property, as well as expenses including costs of documents and science stamps, transfer fees, etc., to be incurred in connection with the execution and registration of all covering documents shall be borne by you;

4. That you shall undertake at your own expense and account the ejectment of the occupants of the property subject of the sale, if there are any;

5. That upon your failure to pay the balance of the purchase price within sixty (60) days from receipt of advice accepting your offer, your deposit shall be forfeited and the Bank is thenceforth authorized to sell the property to other interested parties.

6. That the sale shall be subject to such other terms and conditions that the Legal Department may impose to protect the interest of the Bank.64

It appears that although respondent requested petitioner to conform to its amended counter-offer, petitioner refused and instead requested respondent to reconsider its amended counter-offer. Petitioner's request was ultimately rejected and respondent offered to refund its P725,000.00 deposit.

In sum, then, there was no perfected contract of sale between petitioner and respondent over the subject property.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED.

The assailed decision is AFFIRMED. Costs against petitioner Manila Metal Container Corporation.

SO ORDERED.

Ynares-Santiago, J., Working Chairperson, Austria-Martinez, and Chico-Nazario, JJ., concur.Panganiban, C.J., retired as of December 7, 2006.

Footnotes1 Penned by Associate Justice Corona Ibay-Somera (retired) with Associate Justices Portia Aliño-Hormachuelos and Elvi-John S. Asuncion, concurring; rollo, pp. 47-60.2 Penned by Judge Celso D. Laviña; id. at 89-103.3 Penned by Associate Justice Portia Aliño-Hormachuelos with Associate Justices Rebecca De Guia-Salvador and Aurora Santiago-Lagman, concurring; id. at 62-64.4 Exhibit "A," rollo, p. 65.5 Exhibit "B," id. at 66.6 Statement of Account, Exhibit "D," records, pp. 20-23.7 Exhibit "E," id. at 24.8 Exhibits "F" and "17," rollo, p. 69.9 Exhibit "F-1," id. at 68.10 Exhibits "F-2" and "18," id. at 70.11 Exhibit "F-3" and "20," id. at 71.12 Exhibit "F-4," id. at 72.13 Exhibit "B," records, pp. 264-265.14 Exhibit "G," rollo, p. 73.15 Exhibit "G-1," id. at 75.16 Exhibit "H" and "22," id. at 76.17 Exhibit "H" and "24," id. at 74.18 Exhibit "I" and "25," records, pp. 34-36.19 Exhibit "J" and "26," rollo, pp. 80-81, Exhibit "J-2" and "26-B," rollo, p. 82.20 Exhibit "J-1" and "26-A," id. at p. 81.21 Exhibit "K" to "K-4," id. at 84-88.

22 Exhibit "M" and "30," records, p. 46.23 Records, pp. 63-67.24 Id. at 67-68.25 1. The subject property is an eight thousand fifteen (8,015) square meter land located at Dansalan St., Barrio Barranca, Mandaluyong, Metro Manila, originally registered in the name of Manila Metal Container Corporation (MMCC) under Transfer Certificate of Title No. 332098 of the Registry of Deeds for the Province of Rizal.2. On August 5, 1982, the Philippine National Bank (PNB) filed with the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure and sale of the subject property under Act No. 3135, as amended, and Presidential Decree No. 385 to satisfy the mortgage indebtedness of MMCC in the amount of P911,532.21 plus interest at the rate of 21% per annum on the amount of P679,768.29 and 3% penalty charge as well as 10% attorney's fees on the total amount due and the Sheriff's fees.3. At the public auction sale held on September 28, 1982, the Provincial Sheriff of Rizal sold the subject property to PNB as the sole and highest bidder for P1,056,924.40.4. The period of redemption of the property was until February 17, 1984.5. On August 25, 1983, MMCC requested PNB by its latter of even date for the opportunity to redeem/repurchase the property by giving them more time to do so under terms and conditions which may be agreed upon.6. On August 30, 1983, MMCC's said letter was referred by PNB to its Pasay City Branch for appropriate action.7. On March 1, 1984, TCT No. 332078 in the name of MMCC was cancelled. In its steed, the Register of Deeds of Mandaluyong issued TCT No. 43792 in the name of PNB.8. On June 8, 1984, the Special Assets Management Department (SAMD) of PNB prepared an updated Statement of Account showing MMCC's total liability to PNB as of June 25, 1984 to be P1,574,560.47 and recommended this amount as the repurchase price of the subject property.9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase the property. The deposit of P725,000 was accepted by PNB on the condition that the purchase price is still subject to the approval of the PNB Board.10. In its letters dated November 14, 1984 and December 28, 1984, Special Assets Management Department formally informed MMCC President Pablo Gabriel that MMCC's offer to repurchase the bank acquired Mandaluyong property was returned by top management as the offered price was too low. PNB then proposed that the offered repurchase price be increased to at least the then minimum market value of the property that it is P2,660,000.00.11. On June 4, 1985, PNB's SAMD informed MMCC by letter that its offer to purchase the subject property has been approved by the PNB Board, subject to the condition among others, that the selling price shall be

the total banks claim as of documentation date payable within sixty (60) days from notice of approval.12. MMCC did not signify its conformity to the terms contained in PNB's June 4, 1985 letter.13. By letter dated June 30, 1988, PNB's SAMD gave MMCC fifteen (15) days from receipt thereof to submit its amended repurchase offer. Otherwise, PNB will be constrained to cancel the approved sale in favor of MMCC and advertise the property for sale.14. On July 14, 1988, MMCC reiterated its request to PNB to reduce the balance of the repurchase price toP643,452.34, which request was denied by PNB in its letter dated August 1, 1989. PNB then informed MMCC that it is refunding the deposit of P725,000 at any time during banking hours and that it will advertise the property for sale thru public bidding.15. In a letter dated September 20, 1989, PNB demanded MMCC to vacate the premises.16. In a letter dated May 3, 1992, Mr. Bayani Gabriel and Magtanggol Gabriel children of MMCC President Mr. Pablo Gabriel requested once again to buy back the subject property. In reply, PNB informed the Gabriels in a letter dated June 18, 1992 that it can recommend the sale of the property for P25 M subject to the approval of the PNB Board and to other terms and conditions.17. In a letter dated March 18, 1993, MMCC proposed to repurchase the property for P3.5 M but PNB informed MMCC in its letter dated April 13, 1993 that, as a matter of policy, all assets acquired by the bank thru foreclosure sale can only be disposed of at market value or banks claim whichever is higher and that PNB cannot accommodate MMCC's request to repurchase the property for P3.5 Million which as of the bank's latest appraisal has a market value of P30 Million.18. The latest offer of MMCC per letter dated June 21, 1993 is P4,250 Million which offer was denied by PNB in its letter dated September 13, 1993, reiterating PNB's policy that sale of foreclosed assets shall be based on the current market value of the property, and that the offer is too low.19. The claims for annulment of mortgage and mortgage foreclosure in the amended complaint are already waived, cancelled and/or withdrawn thereby leaving the claims for specific performance and damages as the remaining issues to be resolved in the instant case.26 Records, p. 267.27 Exhibit "L," id. at 281.28 Exhibit "O," id. at 286-289.29 Exhibit "P," id. at 290.30 Exhibit "Q," id. at 291.31 Exhibit "R," id. at 292.32 Records, pp. 371-381.33 Rollo, pp. 52-53.34 CA rollo, pp. 158-159.35 Id. at 263-266.36 Id. at 360-364.37 Rollo, pp. 47-60.

38 Id. at 25.39 G.R. No. L-26872, July 25, 1975, 65 SCRA 352.40 G.R. No. 102606, July 3, 1992, 211 SCRA 291, 295.41 New Civil Code, Article 1305.42 Gomez v. Court of Appeals, 395 Phil. 115, 125-126 (2000).43 New Civil Code, Article 1315.44 New Civil Code, Article 1458.45 G.R. No. 158149, February 9, 2006, 482 SCRA 108.46 Id. at 129.47 Palattao v. Court of Appeals, 431 Phil. 438, 450 (2002).48 Boston Bank of the Philippines v. Manalo, supra note 48, at 129.49 391 Phil. 636, 645 (2000).50 New Civil Code, Article 1319.51 310 Phil. 623 (1995).52 Id. at 642.53 Logan v. Philippine Acetylene Company, 33 Phil. 177, 183-184 (1916).54 ABS-CBN Broadcasting Corporation v. Court of Appeals, G.R. No. 128690, July 21, 1999, 361 SCRA 499, 520.55 Exhibit "F," rollo, p. 69.56 Exhibit "F-1," id. at 68.57 Exhibit "F-2, Records, p. 27.58 Exhibit "F-4," rollo, p. 72.59 Exhibit "F-3," id. at 71.60 424 Phil. 446, 454 (2002).61 Firme v. Bohol Enterprises and Development Corporation, G.R. No. 146608, October 23, 2003, 414 SCRA 190.62 Records, p. 258.63 San Miguel Properties Philippines, Inc., v. Huang, supra note 52, at 647.64 Records, pp. 37-38.

G.R. No. 161886             March 16, 2007

FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ and MINDANAO

TERMINAL AND BROKERAGE SERVICES, INC., Petitioners, 

vs.VICTORIANO S. GO, ARSENIO LOPEZ CHUA,

EDGAR C. TRINIDAD, HERMENEGILDO M. TRINIDAD, JESUS SYBICO, MARY JEAN D. CO,

HENRY CHUA, JOSELITO S. JAYME, ERNESTO S. JAYME, and ELIEZER B. DE JESUS, Respondents.

D E C I S I O N

GARCIA, J.:

Assailed and sought to be set aside in this petition for review on certiorari is the Decision1 dated 19 January 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 73827, reversing an earlier decision of the Regional Trial Court (RTC) of Davao City and accordingly dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz for and in behalf of the stockholders of co-petitioner Filipinas Port Services, Inc. (Filport, hereafter).

The case is actually an intra-corporate dispute involving Filport, a domestic corporation engaged in stevedoring services with principal office in Davao City. It was initially instituted with the Securities and Exchange Commission (SEC) where the case hibernated and remained unresolved for several years until it was overtaken by the enactment into law, on 19 July 2000, of Republic Act (R.A.) No. 8799, otherwise known as the Securities Regulation Code. From the SEC and consistent with R.A. No. 8799, the case was transferred to the RTC of Manila, Branch 14, sitting as a corporate court. Subsequently, upon respondents’ motion, the case eventually landed at the RTC of Davao City where it was docketed as Civil Case No. 28,552-2001. RTC-Davao City, Branch 10, ruled in favor of the petitioners prompting respondents to go to the CA in CA-G.R. CV No. 73827. This time, the respondents prevailed, hence, this petition for review by the petitioners.

The relevant facts:

On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president from 1968 until he lost his bid for reelection as Filport’s president during the general stockholders’ meeting in 1991, wrote a letter2 to the corporation’s Board of Directors questioning the board’s creation of the following positions with a monthly remuneration of P13,050.00 each, and the election thereto of certain members of the board, to wit:

Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)

Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)

Asst. Vice-President for Finance - Mary Jean D. Co (Director)

Asst. Vice-President for Administration - Henry Chua (Director)

Special Asst. to the Chairman - Arsenio Lopez Chua (Director)

Special Asst. to the President - Fortunato V. de Castro

In his aforesaid letter, Cruz requested the board to take necessary action/actions to recover from those elected to the aforementioned positions the salaries they have received.

On 15 September 1992, the board met and took up Cruz’s letter. The records do not show what specific action/actions the board had taken on the letter. Evidently, whatever action/actions the board took did not sit well with Cruz.

On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a petition3 which he describes as a derivative suit against the herein respondents who were then the incumbent members of Filport’s Board of Directors, for alleged acts of mismanagement detrimental to the interest of the corporation and its shareholders at large, namely:

1. creation of an executive committee in 1991 composed of seven (7) members of the board with compensation of P500.00 for each member per meeting, an office which, to Cruz, is not provided for in the by-laws of the corporation and whose function merely duplicates those of the President and General Manager;

2. increase in the emoluments of the Chairman, Vice-President, Treasurer and Assistant General Manager which increases are greatly disproportionate to the volume and character of the work of the directors holding said positions;

3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate Planning, Operations, Finance and Administration, and the election thereto of board members Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and Henry Chua, respectively; and

4. creation of the additional positions of Special Assistants to the President and the Board Chairman, with Fortunato V. de Castro and Arsenio Lopez Chua elected to the same, the directors elected/appointed thereto not doing any work to deserve the monthly remuneration of P13,050.00 each.

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite demands made upon the respondent members of the board of directors to desist from creating the positions in question and to account for the amounts incurred in creating the same, the demands were unheeded. Cruz thus prayed that the respondent members of the board of directors be made to pay Filport, jointly and severally, the sums of

money variedly representing the damages incurred as a result of the creation of the offices/positions complained of and the aggregate amount of the questioned increased salaries.

In their common Answer with Counterclaim,4 the respondents denied the allegations of mismanagement and materially averred as follows:

1. the creation of the executive committee and the grant of per diems for the attendance of each member are allowed under the by-laws of the corporation;

2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer and Assistant General Manager were well within the financial capacity of the corporation and well-deserved by the officers elected thereto; and

3. the positions of AVPs for Corporate Planning, Operations, Finance and Administration were already in existence during the tenure of Cruz as president of the corporation, and were merely recreated by the Board, adding that all those appointed to said positions of Assistant Vice Presidents, as well as the additional position of Special Assistants to the Chairman and the President, rendered services to deserve their compensation.

In the same Answer, respondents further averred that Cruz and his co-petitioner Minterbro, while admittedly stockholders of Filport, have no authority nor standing to bring the so-called "derivative suit" for and in behalf of the corporation; that respondent Mary Jean D. Co has already ceased to be a corporate director and so with Fortunato V. de Castro, one of those holding an assailed position; and that no demand to cease and desist from further committing the acts complained of was made upon the board. By way of affirmative defenses, respondents asserted that (1) the petition is not duly verified by petitioner Filport which is the real party-in-interest; (2) Filport, as represented by Cruz and Minterbro, failed to exhaust remedies for redress within the corporation before bringing the suit; and (3) the petition does not show that the stockholders bringing the suit are joined as nominal parties. In support of their counterclaim, respondents averred that Cruz filed the alleged derivative suit in bad faith and purely for harassment purposes on account of his non-reelection to the board in the 1991 general stockholders’ meeting.

As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC for a long period of time. With the enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila, Branch 14, sitting as a corporate court. Thereafter, on respondents’ motion, it was eventually transferred to the RTC of Davao City whereat it was docketed as Civil Case No. 28,552-2001 and raffled to Branch 10 thereof.

On 10 December 2001, RTC-Davao City rendered its decision5 in the case. Even as it found that (1) Filport’s Board of Directors has the power to create positions not provided for in the by-laws of the corporation since the board is the governing body; and (2) the increases in the salaries of the board chairman, vice-president, treasurer and assistant general manager are reasonable, the trial court nonetheless rendered judgment against the respondents by ordering the directors

holding the positions of Assistant Vice President for Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman to refund to the corporation the salaries they have received as such officers "considering that Filipinas Port Services is not a big corporation requiring multiple executive positions" and that said positions "were just created for accommodation." We quote the fallo of the trial court’s decision.

WHEREFORE, judgment is rendered ordering:

Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation the total amount of salaries he received as assistant vice president for corporate planning; and likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua under the fourth cause of action to restore to the corporation the salaries they each received as special assistants respectively to the president and board chairman. In case of insolvency of any or all of them, the members of the board who created their positions are subsidiarily liable.

The counter claim is dismissed.

From the adverse decision of the trial court, herein respondents went on appeal to the CA in CA-G.R. CV No. 73827.

In its decision6 of 19 January 2004, the CA, taking exceptions to the findings of the trial court that the creation of the positions of Assistant Vice President for Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman was merely for accommodation purposes, granted the respondents’ appeal, reversed and set aside the appealed decision of the trial court and accordingly dismissed the so-called derivative suit filed by Cruz, et al., thus:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged decision is REVERSED andSET ASIDE, and a new one entered DISMISSING Civil Case No. 28,552-2001 with no pronouncement as to costs.

SO ORDERED.

Intrigued, and quite understandably, by the fact that, in its decision, the CA, before proceeding to address the merits of the appeal, prefaced its disposition with the statement reading "[T]he appeal is bereft of merit,"7 thereby contradicting the very fallo of its own decision and the discussions made in the body thereof, respondents filed with the appellate court a Motion For Nunc Pro Tunc Order,8 thereunder praying that the phrase "[T]he appeal is bereft of merit," be corrected to read "[T]he appeal is impressed with merit." In its resolution9 of 23 April 2004, the CA granted the respondents’ motion and accordingly effected the desired correction.

Hence, petitioners’ present recourse.

Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we shall formulate the issues as follows:

1. Whether the CA erred in holding that Filport’s Board of Directors acted within its powers in creating the executive committee and the positions of AVPs for Corporate Planning, Operations, Finance and Administration, and those of the Special Assistants to the President and the Board Chairman, each with

corresponding remuneration, and in increasing the salaries of the positions of Board Chairman, Vice-President, Treasurer and Assistant General Manager; and

2. Whether the CA erred in finding that no evidence exists to prove that (a) the positions of AVP for Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman were created merely for accommodation, and (b) the salaries/emoluments corresponding to said positions were actually paid to and received by the directors appointed thereto.

For their part, respondents, aside from questioning the propriety of the instant petition as the same allegedly raises only questions of fact and not of law, also put in issue the purported derivative nature of the main suit initiated by petitioner Eliodoro C. Cruz allegedly in representation of and in behalf of Filport and its stockholders.

The petition is bereft of merit.

It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules of Court, only questions of law may be raised and passed upon by the Court. Factual findings of the CA are binding and conclusive and will not be reviewed or disturbed on appeal.10 Of course, the rule is not cast in stone; it admits of certain exceptions, such as when the findings of fact of the appellate court are at variance with those of the trial court,11 as here. For this reason, and for a proper and complete resolution of the case, we shall delve into the records and reexamine the same.

The governing body of a corporation is its board of directors. Section 23 of the Corporation Code12 explicitly provides that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be exercised, all business conducted and all property of the corporation shall be controlled and held by a board of directors. Thus, with the exception only of some powers expressly granted by law to stockholders (or members, in case of non-stock corporations), the board of directors (or trustees, in case of non-stock corporations) has the sole authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and relevant provisions of law. Verily, the authority of the board of directors is restricted to the management of the regular business affairs of the corporation, unless more extensive power is expressly conferred.

The raison d’etre behind the conferment of corporate powers on the board of directors is not lost on the Court. Indeed, the concentration in the board of the powers of control of corporate business and of appointment of corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the conduct of corporate business.13

In the present case, the board’s creation of the positions of Assistant Vice Presidents for Corporate Planning, Operations, Finance and Administration, and those of the Special

Assistants to the President and the Board Chairman, was in accordance with the regular business operations of Filport as it is authorized to do so by the corporation’s by-laws, pursuant to the Corporation Code.

The election of officers of a corporation is provided for under Section 25 of the Code which reads:

Sec. 25. Corporate officers, quorum. – Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. (Emphasis supplied.)

In turn, the amended Bylaws of Filport14 provides the following:

Officers of the corporation, as provided for by the by-laws, shall be elected by the board of directors at their first meeting after the election of Directors. xxx

The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a Secretary, a Treasurer, a General Manager and such other officers as the Board of Directors may from time to time provide, and these officers shall be elected to hold office until their successors are elected and qualified. (Emphasis supplied.)

Likewise, the fixing of the corresponding remuneration for the positions in question is provided for in the same by-laws of the corporation, viz:

xxx The Board of Directors shall fix the compensation of the officers and agents of the corporation. (Emphasis supplied.)

Unfortunately, the bylaws of the corporation are silent as to the creation by its board of directors of an executive committee. Under Section 3515 of the Corporation Code, the creation of an executive committee must be provided for in the bylaws of the corporation.

Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the creation of the executive committee by the board of directors is illegal or unlawful. One reason is the absence of a showing as to the true nature and functions of said executive committee considering that the "executive committee," referred to in Section 35 of the Corporation Code which is as powerful as the board of directors and in effect acting for the board itself, should be distinguished from other committees which are within the competency of the board to create at anytime and whose actions require ratification and confirmation by the board.16 Another reason is that, ratiocinated by both the two (2) courts below, the Board of Directors has the power to create positions not provided for in Filport’s bylaws since the board is the corporation’s governing body, clearly upholding the power of its board to exercise its prerogatives in managing the business affairs of the corporation.

As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz himself, it was during his incumbency as Filport president that the executive committee in question was created, and that he was even the one who moved for the creation of the positions of the AVPs for Operations, Finance and Administration. By his acquiescence

and/or ratification of the creation of the aforesaid offices, Cruz is virtually precluded from suing to declare such acts of the board as invalid or illegal. And it makes no difference that he sues in behalf of himself and of the other stockholders. Indeed, as his voice was not heard in protest when he was still Filport’s president, raising a hue and cry only now leads to the inevitable conclusion that he did so out of spite and resentment for his non-reelection as president of the corporation.

With regard to the increased emoluments of the Board Chairman, Vice-President, Treasurer and Assistant General Manager which are supposedly disproportionate to the volume and nature of their work, the Court, after a judicious scrutiny of the increase vis-à-vis the value of the services rendered to the corporation by the officers concerned, agrees with the findings of both the trial and appellate courts as to the reasonableness and fairness thereof.

Continuing, petitioners contend that the CA did not appreciate their evidence as to the alleged acts of mismanagement by the then incumbent board. A perusal of the records, however, reveals that petitioners merely relied on the testimony of Cruz in support of their bold claim of mismanagement. To the mind of the Court, Cruz’ testimony on the matter of mismanagement is bereft of any foundation. As it were, his testimony consists merely of insinuations of alleged wrongdoings on the part of the board. Without more, petitioners’ posture of mismanagement must fall and with it goes their prayer to hold the respondents liable therefor.

But even assuming, in gratia argumenti, that there was mismanagement resulting to corporate damages and/or business losses, still the respondents may not be held liable in the absence, as here, of a showing of bad faith in doing the acts complained of.

If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not liable.17 For them to be held accountable, the mismanagement and the resulting losses on account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud.18 We have searched the records and nowhere do we find a "dishonest purpose" or "some moral obliquity," or "conscious doing of a wrong" on the part of the respondents that "partakes of the nature of fraud."

We thus extend concurrence to the following findings of the CA, affirmatory of those of the trial court:

xxx As a matter of fact, it was during the term of appellee Cruz, as president and director, that the executive committee was created. What is more, it was appellee himself who moved for the creation of the positions of assistant vice presidents for operations, for finance, and for administration. He should not be heard to complain thereafter for similar corporate acts.

The increase in the salaries of the board chairman, president, treasurer, and assistant general manager are indeed reasonable enough in view of the responsibilities assigned to them, and the special knowledge required, to be able to effectively discharge their respective functions and duties.

Surely, factual findings of trial courts, especially when affirmed by the CA, are binding and conclusive on this Court.

There is, however, a factual matter over which the CA and the trial court parted ways. We refer to the accommodation angle.

The trial court was with petitioner Cruz in saying that the creation of the positions of the three (3) AVPs for Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman, each with a salary of P13,050.00 a month, was merely for accommodation purposes considering that Filport is not a big corporation requiring multiple executive positions. Hence, the trial court’s order for said officers to return the amounts they received as compensation.

On the other hand, the CA took issue with the trial court and ruled that Cruz’s accommodation theory is not based on facts and without any evidentiary substantiation.

We concur with the line of the appellate court. For truly, aside from Cruz’s bare and self-serving testimony, no other evidence was presented to show the fact of "accommodation." By itself, the testimony of Cruz is not enough to support his claim that accommodation was the underlying factor behind the creation of the aforementioned three (3) positions.

It is elementary in procedural law that bare allegations do not constitute evidence adequate to support a conclusion. It is basic in the rule of evidence that he who alleges a fact bears the burden of proving it by the quantum of proof required. Bare allegations, unsubstantiated by evidence, are not equivalent to proof under the Rules of Court.19 The party having the burden of proof must establish his case by a preponderance of evidence.20

Besides, the determination of the necessity for additional offices and/or positions in a corporation is a management prerogative which courts are not wont to review in the absence of any proof that such prerogative was exercised in bad faith or with malice.1awphi1.nét

Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were the Court to determine the propriety or impropriety of the creation of offices therein and the grant of salary increases to officers thereof. Such are corporate and/or business decisions which only the corporation’s Board of Directors can determine.

So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court unequivocally held:

Questions of policy or of management are left solely to the honest decision of the board as the business manager of the corporation, and the court is without authority to substitute its judgment for that of the board, and as long as it acts in good faith and in the exercise of honest judgment in the interest of the corporation, its orders are not reviewable by the courts.

In a last-ditch attempt to salvage their cause, petitioners assert that the CA went beyond the issues raised in the court of

origin when it ruled on the absence of receipt of actual payment of the salaries/emoluments pertaining to the positions of Assistant Vice-President for Corporate Planning, Special Assistant to the Board Chairman and Special Assistant to the President. Petitioners insist that the issue of nonpayment was never raised by the respondents before the trial court, as in fact, the latter allegedly admitted the same in their Answer With Counterclaim.

We are not persuaded.

By claiming that Filport suffered damages because the directors appointed to the assailed positions are not doing anything to deserve their compensation, petitioners are saddled with the burden of proving that salaries were actually paid. Since the trial court, in effect, found that the petitioners successfully proved payment of the salaries when it directed the reimbursements of the same, respondents necessarily have to raise the issue on appeal. And the CA rightly resolved the issue when it found that no evidence of actual payment of the salaries in question was actually adduced. Respondents’ alleged admission of the fact of payment cannot be inferred from a reading of the pertinent portions of the parties’ respective initiatory pleadings. Respondents’ allegations in their Answer With Counterclaim that the officers corresponding to the positions created "performed the work called for in their positions" or "deserve their compensation," cannot be interpreted to mean that they were "actually paid" such compensation. Directly put, the averment that "one deserves one’s compensation" does not necessarily carry the implication that "such compensation was actually remitted or received." And because payment was not duly proven, there is no evidentiary or factual basis for the trial court to direct respondents to make reimbursements thereof to the corporation.

This brings us to the respondents’ claim that the case filed by the petitioners before the SEC, which eventually landed in RTC-Davao City as Civil Case No. 28,552-2001, is not a derivative suit, as maintained by the petitioners.

We sustain the petitioners.

Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or because they hold control of the corporation.22 In such actions, the corporation is the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party.23

Here, the action below is principally for damages resulting from alleged mismanagement of the affairs of Filport by its directors/officers, it being alleged that the acts of mismanagement are detrimental to the interests of Filport. Thus, the injury complained of primarily pertains to the corporation so that the suit for relief should be by the corporation. However, since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may validly institute a "derivative suit" to vindicate the alleged corporate injury, in which case Cruz is

only a nominal party while Filport is the real party-in-interest. For sure, in the prayer portion of petitioners’ petition before the SEC, the reliefs prayed were asked to be made in favor of Filport.

Besides, the requisites before a derivative suit can be filed by a stockholder are present in this case, to wit:

a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.24

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success to have its board of directors remedy what he perceived as wrong when he wrote a letter requesting the board to do the necessary action in his complaint; and (3) the alleged wrong was in truth a wrong against the stockholders of the corporation generally, and not against Cruz or Minterbro, in particular. In the end, it is Filport, not Cruz which directly stands to benefit from the suit. And while it is true that the complaining stockholder must show to the satisfaction of the court that he has exhausted all the means within his reach to attain within the corporation itself the redress for his grievances, or actions in conformity to his wishes, nonetheless, where the corporation is under the complete control of the principal defendants, as here, there is no necessity of making a demand upon the directors. The reason is obvious: a demand upon the board to institute an action and prosecute the same effectively would have been useless and an exercise in futility. In fine, we rule and so hold that the petition filed with the SEC at the instance of Cruz, which ultimately found its way to the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative suit of which Cruz has the necessary legal standing to institute.

WHEREFORE, the petition is DENIED and the challenged decision of the CA is AFFIRMED in all respects.

No pronouncement as to costs SO ORDERED.

Foonotes

1 Penned by Associate Justice Conrado M. Vasquez, Jr., and concurred in by Associate Justices Bienvenido L. Reyes and Arsenio J. Magpale; Rollo, pp. 29-37.2 Id. at 56-57.3 Id. at 38-44.4 Id. at 45-51.5 Id. at 109-114.6 Supra at note 17 CA decision, p. 5; Rollo, p. 33.8 Id. at 292-293.9 Id. at 305-306.10 Bank of the Philippine Islands v. Carlos Leobrero, G.R. No. 137147, November 18, 2003, 416 SCRA 15, 18.11 Id.12 Batas Pambasa Blg. 68.13 Aguedo Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Phils., 1980 ed., Vol. III.14 Rollo, pp. 120-130.15 Sec. 35. Executive committee. – The by-laws of a corporation may create an executive committee, composed of not less than three members of the board to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific

matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: xxx16 H. de Leon, The Corporation Code of the Phils., 2002 ed., pp. 310-311.17 Board of Liquidators v. Heirs of Maximo M. Kalaw, et al., G.R. No. L-18805, August 15, 1967, 20 SCRA 987.18 Philippine Stock Exchange v. CA, G.R. No. 125469, October 27, 1997, 281 SCRA 232.19 Garcia v. De Vera, A.C. No. 6052, December 11, 2003, 418 SCRA 27.20 Pastor v. PNB, G.R. No. 141316, November 20, 2003, 416 SCRA 283.21 Supra.22 Chua v. CA, G.R. No. 150793, November 19, 2004, 443 SCRA 259, 267.23 Asset Privatization Trust v. CA, 360 Phil. 768, 804-805 (1998).24 San Miguel Corporation, represented by Eduardo De Los Angeles v. Ernest Khan, G.R. No. 85339, August 11, 1989, 176 SCRA 447, 462.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-43413             August 31, 1937

HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE, 

as stockholders for an in behalf and for the benefit of the corporation, Parañaque Rice Mill, Inc. and the other

stockholders who may desire to join, plaintiffs-appellees, vs.

TEODORICO B. SANTOS, ESTANISLAO MAYUGA, APOLONIO PASCUAL, and BASILISA

RODRIGUEZ,defendant-appellants.

P. Masalin and A. Sta. Maria for appellants.Eulogio P. Revilla and Barrera and Reyes for appellees.

LAUREL, J.:

The plaintiff and the defenant aree all stockholders and member of the board of directors of the "Parañaque Rice Mill, Inc., "a corporation organized for the purpose of operating a rice mill in the municipality of Parañaque, Province of Rizal. On September 6, 1932, a complaint entitle "Higinio Angeles, Jose de Lara, Aguedo Bernabe, as stockholders, for and in behalf of the corporation, Parañaque Rice Mill, Inc., and other stockholders of said corporation who may desire to join, plaintiff, vs. Teodorico B. Santos, Estanislao Mayuga, Apolonio Pascual, and Basilisa Rodriguez, defendant was filed with the Court of First Instance of Rizal. After formal allegation relative to age and residence of the parties and the due incorporation of the Parañaque Rice Mill, Inc., the complaint avers subtantially the following: (a) That the plaintiffs are stockholders and constitute the minority and the defendants are also stockholers and constitute the majority of the board of directors of the Parañaque Rice Mill, Inc.; (b) that at an extraordinary meeting held on February 21, 1932, the stockholders appointed an investigation committee of which the plaintiff Jose de Lara was chairman and the stockholers Dionisio Tomas and Aguedo Bernabe were members, to investigate and determine the properties, operations, and losses of the corporation as shown in the auditor's report corresponding to the year 1931, but the defendants, particularly Teodorico B. Santos, who was the president of the corporation, denied access to the properties, books and record of the corporation which were in their possession (c) That the defendant Teodorico B. Santos, in violation of the by-laws of the corporation, had taken possession of the books, vouchers, and corporate records as well as of the funds and income of the Parañaque Rice Mill, Inc., all of which, according to the

by-laws, should be under the exclusive control and possession of the secretary-treasurer, the plaintiff Aguedo Bernabe; (d) That the said Teodorico B. Santos, had appropriated to his own benefit properties, funds, and income of the corporation in the sum of P10,000; (e) that Teodoro B. Santos, for the purpose of illegally controlling the affairs of the corporation, refuse to sign and issue the corresponding certificate of stock for the 600 fully paid-up share of the plaintiff, Higinio Angeles, of the total value of P15,000; ( f ) that notwithstanding written requests made in conformity with the by-laws of the corporation of three members of the board of directors who are holders of more than one-third of the subscribed capital stock of the corporation, the defendant Teodorico B. Santos as president of the corporation refuse to call a meeting of the board of directors and of the stockholers; (g) that in violation of the by-laws of the corporation, the defendant who constitute the majority of the board of directors refused to hold ordinary monthly meetings of the board since March, 19332; (h) that Teodorico B. Santos as president of the corporation, in connivance with his co-defendants, was disposing of the properties and records of the corporation without authority from the board of directors or the stockholders of the corporation and without making any report of his acts to the said board of directors or to any other officer of the corporation, and that, to prevent any interferrence with or examination of his arbitrary acts, he arbitrarily suspended plaintiff Jose de Lara from the office of general manager to which office the latter had been lawfully elected by the stockholders; and (i) that the corporation had gained about P4,000 during the first half of the year 1932, but that because of the illegal and arbitrary acts of the defendants not only the funds but also the books and records of the corporation are in danger of disappearing.

The complaint prays: (a) That after the filing of the bond in an amount to be fixed by the court, Melchor de Lara of Parañaque, Rizal, be appointed receiver of the properties, funds and business of the Parañaque Rice Mill, Inc., as well as the books and record thereof, with authority to continue the business of the corporation; (b) that the defendant Teodorico B. Santos be ordered to render a detailed accounting of the properties, funds and income of the corporation from the year 1927 to date; (c) that the said defendant be required to pay to the corporation the amount of P10,000 and other amounts which may be found due to the said corporation as damages or for my other cause, (d) that said defendant be ordered to sign the certificate of stock subscribed to and paid by the plaintiff Higinio Angeles; and (e) that the members of the board of directors of the Parañaque Rice Mill, Inc., be removed and an exrtraodinary meeting of the stockholders called for the purpose of electing a new board of directors.

On the date of the filling of the complaint, September 6, 1932, the court issue an ex parte order of receivership appointing Melchor de Lara as receiver of the corporation upon the filling of a bond of P1,000 by the plaintiffs-appellees. The bond of the receiver was fixed at P4,000.

Upon an urgent motion of the defendants-appellants setting forth the reasons why Melchor de Lara should not have been appointed receiver, and upon agreement of the parties, the trial court, by order of September 13, 1932, appointed Benigno Agco, as receiver, in lieu of Melchor de Lara. About a month

after, or on October 14, 1932, the court, after considering the memoranda filed by both parties revoked its order appointing Agco as receiver.

On July 12, 1933, the defendants-appellants presented their amended answer to the complaint, containing a general and specific denial, and alleging as special defense that the defendant Teodorico B. Santos refused to sign the certificate of stock in favor of the plaintiff Higinio Angeles for 600 shares valued at P15,00, because the board of directors decided to give Higinio Angeles only 320 shares of stock worth P8,000. The answer contains a counter-claim for P5,000 alleged illegal and malicious procurement by the plaintiffs of an ex parte order of receivership. Damages in the amount of P2,000 are also alleged to have been suffered by the defendants by reason of the failure of the plaintiffs to present their grievances to the Board of directors before going to court. The amended answer sets forth, furthermore, a cross-complaint against the plaintiffs, and in behalf of the Parañaque Rice Mill, Inc., based on the alleged failure of the plaintiff Higinio Angeles to render a report of his administration of the corporation from February 14 to June 30, 1928, during which time the corporation is alleged to have accrued earnings of approximately P3,000. In both the counter claim and cross-complaint Parañaque Rice Mill, Inc. is joined as party defendant.

On July 24, 1934, the plaintiffs-appellees renewed their petition for the appointment of a receiver pendente litealleging, among other things, that defendant Teodorico B. Santos was using the funds of the corporation for purely personal ends; that said Teodorico B. Santos was managing to the interest of the Corporation and its stockholders; that said defendant did not render any account of his management or for the condition of the business of the corporation; that since 1932 said defendant called no meeting of the board of directors or of the stockholders thus enabling him to continue holding, without any election, the position of present and, finally, that of manager; and that, without the knowledge and consent of the stockholders and of the board of directors, the said defendant installed a small rice mill for converting rice husk into "tiqui-tiqui", the income of which was never turned over or reported to the treasurer of the corporation.

The defendant-appellants objected to the petition for the appointment of a receiver on the ground, among others, that the court had no jurisdiction over the Parañaque Rice Mill, Inc., because it had not been include as party defendant in this case and that, therefore the court could not properly appoint a receiver of the corporation pendente lite.

After hearing both parties, the trial court by order of October 31, 1934, appointed Emilio Figueroa, as receiver of the corporation, after giving a bond in the amount of P2,000. An urgent for the reconsideration of this order filed by counsel for the defendant-appellant on November 3, 1934, was denied by the court on November 7, 1934.

On November 8, 1934, the trial court, having heard the case on its merits rendered a decision, the dispositive part of which is as follows:

Por todo lo expuesto el Juzgado fall este asunto:

1. Ordenando al demandado Teodorico B. Santos a rendircuenta ellada de las propiedads, fondos e ingresos dela corporacion Parañaque Rice Mill, Inc., de el año 1931 hasta la fecha;

2. Condenando a dicho demandado a pagar a la corporacion Parañaque Rice Mill, Inc., cualesquiera cantida o cantidades que resultate en deber a dicha corporacion; de acuerdo con dicha rendicion de cuentas;

3. Declarando al demanante Higinio M. Angeles con derecho a tener expedido a su nombre 600 acciones por valor par de P15,000.

4. Destituyendo a los demandados de su cargo como directores e la corporacion hasta la nueva eleccion por los accionistas que se convocara una vez firme esta sentencia; y

5. Condenando a los demandados a pagar las costas.

On November 21, 1934, the defendants-appellants, moved for reconsideration of the decision and at the same time prayed for the dismissal of the case, because of defect of parties defendant.

On December 6, 1934, the Parañaque Rice Mill, Inc., thru counsel for the defendants, entered a special appearance for the sole purpose of objecting to the order of the court of October 31, 1934, appointing a receiver, on the ground that the Parañaque Rice Mill, Inc., was not a party to the proceedings. And on December 8, 1934, the defendants excepted to the decision of the trial court and moved for a new trial on the ground that the evidence presented was insufficient to justify the decision and that said decision was contrary to law. The motions for reconsideration and new trial and the special appearance were, by separate orders bearing date of December 19, 1934, denied by the trial court. The case was finally elevated to this court by bill of exceptions.

The defendants-appellants submit the following assignment of errors:

1. The lower court erred in holding that it has jurisdiction to appoint a receiver o the corporation, "Parañaque Rice Mill, Inc.," on October 31, 1934.

2. The lower court erred in overruling the motion of the defendants the include the defendant corporation as party defendant and in holding that it is not a necessary party.

3. The lower court erred in not granting a motion for a new trial because there is a defect of party defendant.

4. The lower court erred in not dismissing the case because a necessary defendant was not made a party in the case.

5. The lower court erred in ordering the defendant Teodorico B. Santos to render a detailed accounting of the properties, funds and income of the corporation "Parañaque Rice Mill, Inc.," from the year 1931 to this date.

6. The lower court erred in condemning the defendant Teodorico B. Santos to pay the corporation whatever sum or sums which may be found owing to said corporation, in accordance with the said accounting to be one by him.

7. The lower court erred in ordering the destitution of the defendants from their office as members of the board of directors of the corporation, until the new election of the stockholders which shall be held once the decision has become final..

8. The lower court erred in declaring that Higino Angeles is entitled to have in his name 600 shares of stock of the par value of P15,000.

9. The lower court erred in overruling and denying appellants' motion for the reconsideration and the dismissal of the case dated November 21, 1934.

10. The lower court erred in denying the motion of these appellants for new trial.

In their discussion of the first, second, third, and fourth assignment of error, the defendants-appellants vigorously assert that the Parañaque Rice Mill, Inc., is a necessary party in this case, and that not having been made a party, the trial court was without jurisdiction to appoint a receiver and should have dismissed the case.

There is ample evidence in the present case to show that the defendants have been guilty of breach of trust as directors of the corporation and the lower court so found. The board of directors of a corporation is a creation of the stockholders and controls and directs the affairs of the corporation by allegation of the stockholers. But the board of directors, or the majority thereof, in drawing to themselves the power of the corporation, occupies a position of trusteeship in relation to the minority of the stock in the sense that the board should exercise good faith, care and diligence in the administration of the affairs of the corporation and should protect not only the interest of the majority but also those of the minority of the stock. Where a majority of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra viresacts, the court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the board of directors, for and in behalf of the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise redress the injuries of the minority stockholders against the wrongdoing of the majority. The action in such a case is said to be brought derivatively in behalf of the corporation to protect the rights of the minority stockholers thereof (7 R. C. L., pars. 293 and 294, and authority therein cited; 13 Fletcher, Cyc. of Corp., pars. 593, et seq., an authorities therein cite).

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholers. An illustration of a suit of this kind is found in the

case of Pascual vs. Del Sanz Orozco (19 Phil., 82), decided by this court as early as 1911. In that case, the Banco Español-Filipino suffered heavy losses due to fraudulent connivance between a depositor and an employee of the bank, which losses, it was contened, could have been avoided if the president and directors has been more vigilant in the administration of the affairs of the bank. The stockholers constituting the minority brought a suit in behalf of the bank against the directors to recover damages, and this over the objection of the majority of the stockholers and the directors. This court held that the suit properly be maintained.

The contention of the defendants in the case at bar that the Parañaque Rice Mill, Inc., should have been brought in as necessary party and the action maintained in its name and in its behalf directly states the general rule, but not the exception recognize by this court in the case of Everrett vs. Asia Banking Corporation (49 Phil., 512, 527). In that case, upon invocation of the general rule by the appellees there, this court said:

Invoking the well-known rule that shareholers cannot ordinarily sue in equity to redress wrong done to the corporation, but that the action must be brought by the board of directors, the appellees argue — and the court below held — that the corporation Teal & Company is a necessary party plaintiff and that the plaintiff stockholder, not having made any demand on the board to bring the action, are not the proper parties plaintiff. But, like most rules, the rule in question has its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the corporation Teal & Company is under the complete control of the principal defendants in the case, and, in these circumstances it is obvious that a demand upon the board of directors to institute action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts. (Exchange Bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenen, 106 Cal., 329; Glem vs. Kittanning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water Company, 104 U.S., 450.)

The action having been properly brought and by the lower court entertained it was within its power, upon proper showing, to appoint a receiver of the corporation pendente lite (secs. 173, 174, et seq. Code of Civil Procedure). The appointment of a receiver upon application of the minority stockholers is power to be exercised with great caution. But this does not mean that right of the minority stockholers may be entirely disregarded, and where the necessity has arisen, the appointment of a receiver for a corporation is a matter resting largely in the sound discretion of the trial court. Counsel for appellants argue that the appointment of a receiver pendente lite in the present case has deprived the corporation, Parañaque Rice Mill, Inc., of property without due process of law. But it is too plain to require argument that the receiver was precisely appointed to preserve the properties of the corporation. The receivership in this case shall continue until a new board of directors shall have been elected and the corporation.

The first, second, third, and fourth assignments of error are, therefore, overruled.

The appellants contend in their fifth and sixth assignments of error that lower court erred in ordering the defendant, Tedorico B. Santos, to render a detailed accounting of the properties, funds and income of the corporation, Parañaque Rice Mill., Inc., from the year 1931 and in condemning him to pay "the corporation whatever sum or sums which may be found owing to said corporation, in accordance with said accounting to be done by him." We note that the lower court in its decision not only orders the defendant Santos to account for the properties and funds of the corporation, but it also and at the same time adjudges him to pay an undermine amount which is made to depend upon the result of such accounting. The accounting order was probably intended by the lower court to be file with it in this proceeding. This requirement will delay the final disposition of the case and we are of the opinion that this accounting should better be filed with the new board of directors whose election has been ordered by the lower court. The decision of the lower court in this respect is therefore modified so that the defendant Santos shall render a complete accounting of all the corporate properties and funds that may have come to his possession during the period mentioned in the jugment of the lower court to the new board of director to be elected by the stockholders.

In the seventh assignment of error, the appellants contend that the lower court erred in ordering the removal of the defendants from their offices as members of the board of directors of the corporation. The Corporation Law, as amended, in section 29 to 34, provide for the election and removal of the directors of a corporation. Our Corporation Law (Act No. 1459, as amended), does not confer expressly upon the court the power to remove a director of a corporation. In some jurisdictions, statutes expressly provide a more or less summary method for the confirmation of the election and for the a motion of the directors of a corporation. This is true in New York, New Jersey, Virginia and other states of the American Union. There are abundant authorities, however, which hold that if the court has acquire jurisdiction to appoint a receiver because of the mismanagement of directors these may thereafter be remove and others appointed in their place by the court in the exercise of its equity jurisdiction (2 Fletcher, Cyc. of Corp., ftn. sec. 358, pp. 18 an 119). In the present case, however, the properties and assets of the corporation being amply protected by the appointment of a receiver and view of the statutory provisions above referred to, we are of the opinion that the removal of the directors is, under the circumstances, unnecessary and unwarranted. The seventh assignment of error is, therefore, sustained.

Under the eighth assignment of error, the appellants argue that the lower court erred in deciding that the plaintiff Higinio Angeles is entitled to the issuance in his name of a certificate covering 600 shares of stock of the total par value of P15,000. A review of the evidence, oral and documentary, relative to the number of shares of stock to which Higinio Angeles is entitled, shows that Higinio Angeles brought in P15,000 party in money and party in property, for 600 shares of stock. The very articles of incorporation signed by all the incorporators, among whom are the defendants, show that Higinio Angeles paid P5,600 on account of his subscription amounting to

P10,000. The amount of P5,600 is the value of Angeles' cinematograph building in Bacoor, Cavite, which he transferred to the municipality of Parañaque where the same was reconstructed for the use of the corporation. The receipts signed by the Philippine Engineering Company and the testimony of Higinio Angeles and Aguedo Bernabe (secretary-treasurer of the corporation) show that Higinio Angeles paid with his own funds the sum of P2,750 to the Philippine Engineering Co., as part of the purchase price of the ricemill bought for the corporation. Angeles paid a further sum of P2,397.99 to the Philippine Engineering Company. It also appears that for the installation of the Rice Mill, the construction of camarin, and the cement paving (cementacion) of the whole area of twocamarines, and for the excavation of a well for the use of the rice mill the plaintiff Higinio Angeles paid with his own funds the amount of P7,431.47. Adding all these sums together we have a total of P18, 179.46. At a meeting of the board of directors on December 27, 1931, which meeting was convoked by Angeles, it seemed to have been agreed that Angeles was to be given shares of stock of the total par value of P15,000. Angeles wanted to have P16,000 worth of stock to his credit for having made the disbursements mentioned above, but he finally agreed to accept 600 share worth only P15,000. The certificate of stock, however, was not issued as disagreement arose between him and the defendant Santos. We, therefore, find no error in the decision of the lower court ordering the issuance of a certificate for 600 shares of stock of the total par value of P15,000 to Higinio Angeles.

It is unnecessary to consider the ninth and tenth assignments of error.

In view of the foregoing, we hold:

(1) That the action in the present case was properly instituted by the plaintiff as stockholders for and in behalf of the corporation Parañaque Rice Mill, Inc., and other stockholders of the said corporation;

(2) That the lower court committed no reveiwable error in appointing a receiver of the corporation pendente lite;

(3) That the lower court committed no error in ordering an election of the new board of directors, which election shall be held within thirty days from the date this decision becomes final;

(4) That Teodorico B. Santos shall render an accounting of all the properties, funds and income of the corporation which may have come into his possession to the new board of directors;

(5) That the receiver, Emilio Figueroa, shall continue in office until the election and qualification of the members of the new board of directors;

(6) That upon the constitution of the new board of directors, the said receiver shall turn over all the properties of the corporation in his possession to the corporation, or such person or persons as may be duly authorized by it; and.

(7) That Higinio Angeles, or his successor in interest, is entitled to 600 shares of stock at the par value of

P15,000 and the lower court committed no error in ordering the issuance of the corresponding certificate of stock.

On June 10, 1937, counsel for the plaintiff-appellees filed a motion making it appear of record that Higinio Angeles, one of the plaintiffs and appellees, died on May 4, 1937 and that one of his daughters, Maura Angeles y Reyes, had been granted letters of administration as evidenced by the document attached to the motion as Exhibit A, and praying that said Maura Angeles y Reyes be substituted as one of the plaintiffs and appellees in lieu of Higinio Angeles, deceased. This motion is hereby granted.

Defendant-appellants shall pay the costs in both instances. So ordered.

Avanceña, C.J., Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

FIRST DIVISIONG.R. No. 153468

PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN, ERNESTO

TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO  PADILLA JR., EDUARDO P. LIZARES and

GRACE CHRISTIAN HIGH SCHOOL,  Petitioners,- versus -

PAUL SYCIP and MERRITTO LIM,  Respondents.

Promulgated:     August 17, 2006x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

  DECISION

 PANGANIBAN, CJ.

For stock corporations, the “quorum” referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For nonstock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members’ meetings.  Dead members shall not be counted.

The Case

The present Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court seeks the reversal of the January 23[2] and May 7, 2002,[3] Resolutions of the Court of Appeals (CA) in CA-GR SP No. 68202.  The first assailed Resolution dismissed the appeal filed by petitioners with the CA.  Allegedly, without the proper authorization of the other petitioners, the Verification and Certification of Non-Forum Shopping were signed by only one of them -- Atty. Sabino Padilla Jr.  The second Resolution denied reconsideration.             The Facts           Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen (15) regular members, who also constitute the board of trustees.[4]  During the annual members’ meeting held on April 6, 1998, there were only eleven (11)[5] livingmember-trustees, as four (4) had already died.  Out of the eleven, seven (7)[6] attended the meeting through their respective proxies.  The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was

no quorum.[7]  In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees.

           When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the deceased member-trustees should not be counted in the computation of the quorum because, upon their death, members automatically lost all their rights (including the right to vote) and interests in the corporation.

          SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum.  She held that the basis for determining the quorum in a meeting of members should be their number as specified in the articles of incorporation, not simply the number ofliving members.[8]  She explained that the qualifying phrase “entitled to vote” in Section 24[9] of the Corporation Code, which provided the basis for determining a quorum for the election of directors or trustees, should be read together with Section 89.[10]

The hearing officer also opined that Article III (2)[11] of the By-Laws of GCHS, insofar as it prescribed the mode of filling vacancies in the board of trustees, must be interpreted in conjunction with Section 29[12] of the Corporation Code.  The SEC en banc denied the appeal of petitioners and affirmed the Decision of the hearing officer in toto.[13]  It found to be untenable their contention that the word “members,” as used in Section 52[14] of the Corporation Code, referred only to the living members of a nonstock corporation.[15]

As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr.  No Special Power of Attorney had been attached to show his authority to sign for the rest of the petitioners.

 Hence, this Petition.[16]

Issues

           Petitioners state the issues as follows: 

             “Petitioners principally pray for the resolution of the legal question of whether or not in NON-STOCK corporations, dead members should still be counted in determination of quorum for purposed of conducting the Annual Members’ Meeting.

             “Petitioners have maintained before the courts below  that the DEAD members should no longer be counted in computing quorum primarily on the ground that members’ rights are ‘personal and non-transferable’ as provided in Sections 90 and 91 of the Corporation Code of the Philippines.

             “The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did not even involve a non-stock corporation as petitioner GCHS.

           “The Honorable Court of Appeals on the other hand simply refused to resolve this question and instead dismissed the petition for review on a technicality – the failure to timely submit an SPA from the petitioners authorizing their co-petitioner Padilla, their counsel and also a petitioner before the Court of Appeals, to sign the petition on behalf of the rest of the petitioners.

             “Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not in accord with law particularly the pronouncements of this Honorable Court in Escorpizo v. University of Baguio (306 SCRA 497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA 183).  Due course should have been given the petition below and the merits of the case decided in petitioners’ favor.”[17]

          In sum, the issues may be stated simply in this wise:  1) whether the CA erred in denying the Petition below, on the basis of a defective Verification and Certification; and 2) whether dead members should still be counted in the determination of the quorum, for purposes of conducting the annual members’ meeting.  

The Court’s Ruling

The present Petition is partly meritorious.

Procedural Issue:

 Verification and Certification of Non-Forum Shopping

The Petition before the CA was initially flawed, because the Verification and Certification of Non-Forum Shopping were signed by only one, not by all, of the petitioners; further, it failed to show proof that the signatory was authorized to sign on behalf of all of them.  Subsequently, however, petitioners submitted a Special Power of Attorney, attesting that Atty. Padilla was authorized to file the action on their behalf.[18]                                                                 

In the interest of substantial justice, this initial procedural lapse may be excused. [19] There appears to be no intention to circumvent the need for proper verification and certification, which are aimed at assuring the truthfulness and correctness of the allegations in the Petition for Review and at discouraging forum shopping.[20]  More important, the substantial merits of petitioners’ case and the purely legal question involved in the Petition should be considered special circumstances[21] or compelling reasons that justify an exception to the strict requirements of the verification and the certification of non-forum shopping.[22] 

         

Main Issue:

Basis for Quorum

          Generally, stockholders’ or members’ meetings are called for the purpose of electing directors or trustees[23] and

transacting some other business calling for or requiring the action or consent of the shareholders or members,[24] such as the amendment of the articles of incorporation and bylaws, sale or disposition of all or substantially all corporate assets, consolidation and merger and the like, or any other business that may properly come before the meeting.

          Under the Corporation Code, stockholders or members periodically elect the board of directors or trustees, who are charged with the management of the corporation.[25] The board, in turn, periodically elects officers to carry out management functions on a day-to-day basis.  As owners, though, the stockholders or members have residual powers over fundamental and major corporate changes. 

         

          While stockholders and members (in some instances) are entitled to receive profits, the management and direction of the corporation are lodged with their representatives and agents -- the board of directors or trustees.[26]  In other words, acts of management pertain to the board; and those of ownership, to the stockholders or members.  In the latter case, the board cannot act alone, but must seek approval of the stockholders or members.[27]

          Conformably with the foregoing principles, one of the most important rights of a qualified shareholder or member is the right to vote -- either personally or by proxy -- for the directors or trustees who are to manage the corporate affairs.[28]  The right to choose the persons who will direct, manage and operate the corporation is significant, because it is the main way in which a stockholder can have a voice in the management of corporate affairs, or in which a member in a nonstock corporation can have a say on how the purposes and goals of the corporation may be achieved.[29]  Once the directors or trustees are elected, the stockholders or members relinquish corporate powers to the board in accordance with law.

          In the absence of an express charter or statutory provision to the contrary, the general rule is that every member of a nonstock corporation, and every legal owner of shares in a stock corporation, has a right to be present and to vote in all corporate meetings. Conversely, those who are not stockholders or members have no right to vote.[30]  Voting may be expressed personally, or through proxies who vote in their representative capacities.[31]  Generally, the right to be present and to vote in a meeting is determined by the time in which the meeting is held.[32]

          Section 52 of the Corporation Code states: 

“Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations.”

          In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by the Code thus:

                        “SECTION 137.  Outstanding capital stock defined. – The term ‘outstanding capital stock’ as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares.” (Underscoring supplied)

The Right to Vote in Stock Corporations

          The right to vote is inherent in and incidental to the ownership of corporate stocks.[33]  It is settled that unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders’ meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act.  Only stock actually issued and outstanding may be voted.[34]  Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent[35]under Section 67 of the Code. 

          Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders; or, having so passed, have again been purchased by the corporation.[36]  These shares are not to be taken into consideration in determining majorities.  When the law speaks of a given proportion of the stock, it must be construed to mean the shares that have passed from the corporation, and that may be voted.[37]

Section 6 of the Corporation Code, in part, provides:

                        “Section 6.  Classification of shares. – The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation:  Provided, That no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code:  Provided, further, that there shall always be a class or series of shares which have complete voting rights.

 

x x x

 

                        “Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

 

1.      Amendment of the articles of incorporation;

2.      Adoption and amendment of by-laws;

3.      Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporation property;

4.      Incurring, creating or increasing bonded indebtedness;

5.      Increase or decrease of capital stock;

6.      Merger or consolidation of the corporation with another corporation or other corporations;

7.      Investment of corporate funds in another corporation or business in accordance with this Code; and

8.      Dissolution of the corporation.

 

                        “Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.”

Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the intention of the lawmakers was to base the quorum mentioned in Section 52 on the number of outstanding voting stocks.[38] 

The Right to Vote in Nonstock Corporations

          In nonstock corporations, the voting rights attach to membership.[39]  Members vote as persons, in accordance with the law and the bylaws of the corporation.  Each member shall be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation or bylaws.[40]  We hold that when the principle for determining the quorum for stock corporations is applied by analogy to nonstock corporations, only those who are actual members with voting rights should be counted. 

Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting rights, not the number or numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum.[41] 

The March 3, 1986 SEC Opinion[42] cited by the hearing officer uses the phrase “majority vote of the members”; likewise Section 48 of the Corporation Code refers to 50 percent of 94 (the number of registered members of the association mentioned therein) plus one.  The best evidence of who are the present members of the corporation is the “membership book”; in the case of stock corporations, it is the stock and transfer book.[43]

  Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of incorporation, shall constitute a quorum for the transaction of corporate business (unless the articles of incorporation or the bylaws provide for a greater majority).  If the intention of the lawmakers was to base the quorum in the meetings of stockholders or members on their absolute number as fixed in the articles of incorporation, it would have expressly specified so.  Otherwise, the only logical conclusion is that the legislature did not have that intention.

Effect of the Death of a Member or Shareholder

Having thus determined that the quorum in a members’ meeting is to be reckoned as the actual number of

members of the corporation, the next question to resolve is what happens in the event of the death of one of them.        

          In stock corporations, shareholders may generally transfer their shares.  Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it.  Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor.[44] 

          On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise.[45]  In other words, the determination of whether or not “dead members” are entitled to exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws. 

          Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member.[46]  Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws. 

          Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members’ meeting.  With 11 remaining members, the quorum in the present case should be 6.  Therefore, there being a quorum, the annual members’ meeting, conducted with six[47] members present, was valid.  

Vacancy in theBoard of Trustees             As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code provides:         

“SECTION 29.  Vacancies in the office of director or trustee. -- Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose.  A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office.”   

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a quorum.  The phrase “may be filled” in Section 29 shows that the filling of vacancies in the board by the remaining directors or trustees constituting a quorum is merely permissive, not mandatory.[48]  Corporations, therefore, may choose how vacancies in their respective boards may be filled up -- either by the remaining directors constituting a quorum, or by the stockholders or members in a regular or special meeting called for the purpose.[49]

          The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by a majority vote of the remaining members of the board.[50] 

While a majority of the remaining corporate members were present, however, the “election” of the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees.  We are not unmindful of the fact that the members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the remaining trustees.  In other words, these remaining member-trustees must sit as a board in order to validly elect the new ones.

         

          Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by the constituent members of the corporation.  The board of trustees must act, not individually or separately, but as a body in a lawful meeting.  On the other hand, in their annual meeting, the members may be represented by their respective proxies, as in the contested annual members’ meeting of GCHS. 

WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions of the Court of Appeals are hereby REVERSED AND SET ASIDE.  The remaining members of the board of trustees of Grace Christian High School (GCHS) may convene and fill up the vacancies in the board, in accordance with this Decision.  No pronouncement as to costs in this instance. 

SO ORDERED.        

[1]               Dated June 25, 2002; rollo, pp. 10-24.[2]           Annex “A” of the Petition; rollo, p. 35.  Penned by Justice B.A. Adefuin-de la

Cruz (Division chair) and concurred in by Justices Wenceslao I. Agnir Jr. and Josefina Guevara-Salonga.

[3]           Annex “B” of the Petition; rollo, p. 37.[4]           Art. II (1), Amended By-Laws of GCHS, provides:

“1.           Number – The regular members of the Corporation shall be fifteen (15) in number and they shall constitute the Board of Trustees.  Associate, non-voting members may be admitted upon such terms as the Board of Trustees may determine.”  (Memorandum for petitioners, p. 2; rollo, p. 92.)

[5]               Petitioners James Tan, Paul Lee Tan, Andrew Liuson, Esther Wong, Stephen Co; Respondents Paul Sycip and Merritto Lim and four others not parties in this Petition – John Tan, Claro Ben Lim, Wang Ta Peng and Anita So.  (Memorandum for petitioners, p. 2; rollo, p. 92.)

[6]           Wang Ta Peng, Esther Wong, Stephen Co and James L. Tan, represented by Atty. Sabino Padilla; Paul Lee Tan and Andrew Liuson, represented by Atty. Eduardo P. Lizares; and Anita So, represented by Atty. Antonio C. Pacis.  (Id.; id. at 92-93)

[7]           See Decision dated June 21, 2000, SEC Case No. 08-98-6065, p. 2; rollo, p. 40.[8]           Id. at 4-6; id. at 42-43.[9]           “Section 24.  Election of directors or trustees. – At all elections of directors or

trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. x x x. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote.” (Underscoring supplied)

[10]         “Section 89.  Right to vote. – The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws.  Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote.”

                        “Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code.

                        “Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission.”

[11]             “Article III (2).  Vacancies – Any vacancy in the Board of Trustees shall be filled by a majority vote of the remaining members of the Board.” (Cited in Decision, SEC Case No. 08-98-6065, p. 6; rollo, p. 43.)

[12]         “Section 29.  Vacancies in the office of director or trustee. – Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. x x x.” (Underscoring supplied)

[13]         See SEC Order dated July 6, 2001, Annex “D” of Petition; rollo, pp. 46-51.[14]         “Section 52.  Quorum in meetings. – Unless otherwise provided for in this Code

or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations.”  (Underscoring supplied)

[15]         SEC Order dated July 6, 2001, p. 3; rollo, p. 48.[16]         To resolve old cases, the Court created the Committee on Zero Backlog of Cases

on January 26, 2006. Consequently, the Court resolved to prioritize the adjudication of long-pending cases by redistributing them among all the justices.  This case was recently re-raffled and assigned to the undersigned ponente for study and report.

[17]         Petitioner’s Memorandum, pp. 6-7; rollo, pp. 96-97.[18]         Ateneo De Naga University v. Manalo, 458 SCRA 325, May 9, 2005; Vicar

International Construction, Inc. v. FEB Leasing and Finance Corporation, 456 SCRA 588, April 22, 2005;  Alternative Center for Organizational Reforms and Development, Inc. (ACORD)  v. Zamora, 459 SCRA 578, June 8, 2005. 

[19]         Estares v. Court of Appeals, 459 SCRA 604, June 8, 2005; Torres v. Specialized Packaging Development Corporation, 433 SCRA 455, July 6, 2004; National Steel Corp. v. CA, 436 Phil. 656, August 29, 2002;  Sy Chin v. Court of Appeals, 399 Phil. 442, November 23, 2000.

[20]         Pilipinas Shell Petroleum Corporation v. John Bordman Ltd. of Iloilo, Inc., GR No. 159831, October 14, 2005.

[21]         In certain exceptional circumstances, the Court has allowed the relaxation of the rule requiring verification and certification of non-forum shopping.  LDP Marketing, Inc., v. Monter, GR No. 159653, January 25, 2006 citing Uy v. Land Bank of the Philippines, 336 SCRA 419, July 24, 2000, Roadway Express, Inc. v. Court of Appeals, et al., 264 SCRA 696, November 21, 1996, and Loyola v. Court of Appeals, et al., 245 SCRA 477, June 29, 1995; Ateneo De Naga University v. Manalo, 458 SCRA 325, May 9, 2005.

[22]         Uy v. Land Bank of the Philippines, supra. [23]         CORPORATION CODE, Sec. 24.[24]         See CORPORATION CODE, Secs. 6, 16, 24, 28-30, 32, 34, 38, 40, 42-44, 46,

48, 77, 118-120.[25]         CORPORATION CODE, Sec. 23. 

“Sec. 23.  The board of directors or trustees. – Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation x x x.”

[26]         J. CAMPOS, JR. AND M.C. CAMPOS, THE CORPORATION CODE 341, Vol. I (1990); see also Ramirez v. Orientalist Co., 38 Phil. 634 (1918).

[27]         J. CAMPOS, JR. AND M.C. CAMPOS, supra at 490.[28]         5 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE

CORPORATIONS 116 (1976).[29]         J. CAMPOS, JR. AND M.C. CAMPOS, supra note 26 at 436.[30]         5 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE

CORPORATIONS 127 (1976).[31]         Id.[32]         Id.[33]         R. LOPEZ, THE CORPORATION CODE OF THE PHILS. 396, Vol. I (1994).[34]         5 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS

77 (1976).[35]         “Section 71.  Effect of delinquency. – No delinquent stock shall be voted for or be

entitled to vote or to representation at any stockholders’ meeting. x x x.”[36]         “Section 9.  Treasury shares. – Treasury shares are shares of stock which have

been issued and fully paid for but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. x x x.”

            “Section 57.  Voting right for treasury shares. – Treasury shares shall have no voting right as long as such stock remains in the Treasury.”

[37]         90 ALR 316.[38]         J. CAMPOS, JR. AND M.C. CAMPOS, supra note 26 at 423.[39]         R. LOPEZ, supra note 33 at 965.[40]         CORPORATION CODE, Sec. 89.[41]                     In Noremac, Inc. v. Centre Hill Court, Inc., (178 SE 877, March 14,

1935) the management and control of the corporation were vested in lot owners who were members of the corporation, by virtue of their ownership; and the bylaws provided that a quorum should consist of members

representing a majority of the lots, numbered from 1 to 30, inclusive; but the number of lots was later reduced to 29 so the Court said that the majority of members representing actual number of lots was a quorum.

                        The landmark case Avelino v. Cuenca (83 Phil. 17, March 4, 1949) can be used by analogy.  In that case, the Supreme Court said that “[t]here is a difference between a majority of “all the members of the House” and a majority of “the House,” which requires less number than the first.

                        In this case, the law refers to the “majority of the members” and not the “majority of all the members.”  Thus, we can use the same reasoning that the “majority of the members” requires a lesser number than the “majority of all the members.”

[42]         See the Decision dated June 21, 2000, SEC Case No. 08-98-6065, pp. 3-4; rollo, pp. 41-42.

[43]         R. LOPEZ, supra note 33 at 973.[44]         SEC Letter-Opinion to Ms. Rosevelinda E. Calingasan, et al., (R. Lopez) May 14,

1993; CORPORATION CODE, Sec. 55.[45]         CORPORATION CODE, Sec. 90.[46]         See Petition, p. 11 (citing Art. III, Amended By-Laws of GCHS on Termination

of Membership); rollo, p. 20.[47]         Excluding Atty. Antonio C. Pacis (proxy for Anita So), who left the meeting in

protest of the alleged lack of quorum.[48]         SEC Letter-Opinion to Mr. Noe S. Andaya (R. Lopez) September 20, 1990.[49]         J. CAMPOS, JR. AND M.C. CAMPOS, supra note 26 at 465.[50]         Article III (2), By-laws of GCHS (cited in the Decision dated June 21, 2000, SEC

Case No. 08-98-6065, p. 6); rollo, p. 43.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-18805             August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE

PHILIPPINES, plaintiff-appellant, vs.

HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO

GARCIA,3 and LEONOR MOLL, defendants-appellees.

Simeon M. Gopengco and Solicitor General for plaintiff-appellant.

L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion Reyna, Montecillo and

Belo for defendants-appellees.

SANCHEZ, J.:

The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation and development of the coconut industry in the Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that corporation the express power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra, and dessicated coconut, as well as their by-products, and to act as agent, broker or commission merchant of the producers, dealers or merchants" thereof. The charter amendment was enacted to stabilize copra prices, to serve coconut producers by securing advantageous prices for them, to cut down to a minimum, if not altogether eliminate, the margin of middlemen, mostly aliens.4

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia were members of the Board; defendant Leonor Moll became director only on December 22, 1947.

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the scores of contracts

executed by general manager Kalaw are the disputed contracts, for the delivery of copra, viz:

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b., delivery: August and September, 1947. This contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.

(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton, f.o.b., Philippine ports, to be shipped: September-October, 1947. This contract was also assigned to Louis Dreyfus & Co. (Overseas) Ltd.

(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery: September, 1947.

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los Angeles, California, delivery: November, 1947.

(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long tons, $164,00 per ton, c.i.f., New York, to be shipped in November, 1947.

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00 per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery: November and December, 1947. This contract was assigned to Pacific Vegetable Co.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery: December, 1947 and January, 1948. This contract was assigned to Pacific Vegetable Co.

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery: January, 1948. This contract was assigned to Pacific Vegetable Co.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature supervened. Four devastating typhoons visited the Philippines: the first in October, the second and third in November, and the fourth in December, 1947. Coconut trees throughout the country suffered extensive damage. Copra production decreased. Prices spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export facilities increased the time necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing a problem.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval. It was not until December 22, 1947 when the membership was completed. Defendant Moll took her oath on that date. A meeting was then held. Kalaw made a full disclosure of the situation, apprised the board of the impending heavy losses. No action was taken on the contracts. Neither did the board vote thereon at the meeting of January 7, 1948 following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO head did his best to avert the losses, emphasized that government concerns faced the same risks

that confronted private companies, that NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereafter, that is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the contracts hereinbefore enumerated.

As was to be expected, NACOCO but partially performed the contracts, as follows:

BuyersTons Delivered

Undelivered

Pacific Vegetable Oil 2,386.45 4,613.55

Spencer Kellog None 1,000

Franklin Baker 1,000 500

Louis Dreyfus 800 2,200

Louis Dreyfus (Adamson contract of July 30, 1947)

1,150 850

Louis Dreyfus (Adamson Contract of August 14, 1947)

1,755 245

T O T A L S 7,091.45 9,408.55

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons, P159,040.00.

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance of Manila, upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case 4459); P287,028.00; for the balance on the August 14 contract (Civil Case 4398), P75,098.63; for that per the September 12 contract reduced to judgment (Civil Case 4322, appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-of-court amicable settlement when the Kalaw management was already out. The corporation thereunder paid Dreyfus P567,024.52 representing 70% of the total claims. With particular reference to the Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do business here; and (2) failure to deliver was due to force majeure, the typhoons. To project the utter unreasonableness of this compromise, we reproduce in haec verba this finding below:

x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim of P345,654.68 wherein defendant set upsame defenses as above, plaintiff accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the same proportion, the claim of Dreyfus against NACOCO should have been compromised for only P10,000.00, if at all. Now, why should defendants be held liable for the large

sum paid as compromise by the Board of Liquidators? This is just a sample to show how unjust it would be to hold defendants liable for the readiness with which the Board of Liquidators disposed of the NACOCO funds, although there was much possibility of successfully resisting the claims, or at least settlement for nominal sums like what happened in the Syjuco case.5

All the settlements sum up to P1,343,274.52.

In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and defendant board members, including Kalaw, with bad faith and/or breach of trust for having approved the contracts. The fifth amended complaint, on which this case was tried, was filed on July 2, 1959. Defendants resisted the action upon defenses hereinafter in this opinion to be discussed.

The lower court came out with a judgment dismissing the complaint without costs as well as defendants' counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw from NACOCO.

Plaintiff appealed direct to this Court.

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.

Right at the outset, two preliminary questions raised before, but adversely decided by, the court below, arrest our attention. On appeal, defendants renew their bid. And this, upon established jurisprudence that an appellate court may base its decision of affirmance of the judgment below on a point or points ignored by the trial court or in which said court was in error.6

1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators has lost its legal personality to continue with this suit.

Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation Law]7 whereby, upon voluntary dissolution of a corporation, the court may direct "such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation Law, whereby a corporation whose corporate existence is terminated, "shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established;" and (3) under Section 78 of the Corporation Law, by virtue of which the corporation, within the three year period just mentioned, "is authorized and empowered to convey all of its property to trustees for the benefit of members, stockholders, creditors, and others interested."8

It is defendants' pose that their case comes within the coverage of the second method. They reason out that suit was commenced in February, 1949; that by Executive Order 372, dated November 24, 1950, NACOCO, together with other government-owned corporations, was abolished, and the Board of Liquidators was entrusted with the function of settling and closing its affairs; and that, since the three year period has elapsed, the Board of Liquidators may not now continue with, and prosecute, the present case to its conclusion, because Executive Order 372 provides in Section 1 thereof that —

Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation, the National Tobacco Corporation, the National Food Producer Corporation and the former enemy-owned or controlled corporations or associations, . . . are hereby abolished. The said corporations shall be liquidated in accordance with law, the provisions of this Order, and/or in such manner as the President of the Philippines may direct; Provided, however, That each of the said corporations shall nevertheless be continued as a body corporate for a period of three (3) years from the effective date of this Executive Order for the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of and, convey its property in the manner hereinafter provided.

Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible within the 3 year period to reduce disputed claims to judgment, nonetheless, "suits by or against a corporation abate when it ceases to be an entity capable of suing or being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its existence so that there must be statutory authority for prolongation of its life even for purposes of pending litigation"9 and that suit "cannot be continued or revived; nor can a valid judgment be rendered therein, and a judgment, if rendered, is not only erroneous, but void and subject to collateral attack." 10 So it is, that abatement of pending actions follows as a matter of course upon the expiration of the legal period for liquidation, 11 unless the statute merely requires a commencement of suit within the added time. 12 For, the court cannot extend the time alloted by statute. 13

We, however, express the view that the executive order abolishing NACOCO and creating the Board of Liquidators should be examined in context. The proviso in Section 1 of Executive Order 372, whereby the corporate existence of NACOCO was continued for a period of three years from the effectivity of the order for "the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of and convey its property in the manner hereinafter provided", is to be read not as an isolated provision but in conjunction with the whole. So reading, it will be readily observed that no time limit has been tacked to the existence of the Board of Liquidators and its function of closing the affairs

of the various government owned corporations, including NACOCO.

By Section 2 of the executive order, while the boards of directors of the various corporations were abolished, their powers and functions and duties under existing laws were to be assumed and exercised by the Board of Liquidators. The President thought it best to do away with the boards of directors of the defunct corporations; at the same time, however, the President had chosen to see to it that the Board of Liquidators step into the vacuum. And nowhere in the executive order was there any mention of the lifespan of the Board of Liquidators. A glance at the other provisions of the executive order buttresses our conclusion. Thus, liquidation by the Board of Liquidators may, under section 1, proceed in accordance with law, the provisions of the executive order, "and/or in such manner as the President of the Philippines may direct." By Section 4, when any property, fund, or project is transferred to any governmental instrumentality "for administration or continuance of any project," the necessary funds therefor shall be taken from the corresponding special fund created in Section 5. Section 5, in turn, talks of special funds established from the "net proceeds of the liquidation" of the various corporations abolished. And by Section, 7, fifty per centum of the fees collected from the copra standardization and inspection service shall accrue "to the special fund created in section 5 hereof for the rehabilitation and development of the coconut industry." Implicit in all these, is that the term of life of the Board of Liquidators is without time limit. Contemporary history gives us the fact that the Board of Liquidators still exists as an office with officials and numerous employees continuing the job of liquidation and prosecution of several court actions.

Not that our views on the power of the Board of Liquidators to proceed to the final determination of the present case is without jurisprudential support. The first judicial test before this Court is National Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already dissolved, commenced suit within the three-year extended period for liquidation. That suit was for recovery of money advanced to defendant for the purchase of hemp in behalf of the corporation. She failed to account for that money. Defendant moved to dismiss, questioned the corporation's capacity to sue. The lower court ordered plaintiff to include as co-party plaintiff, The Board of Liquidators, to which the corporation's liquidation was entrusted by Executive Order 372. Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its counsel prepared the amended complaint, as directed, and instructed the board's incoming and outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court and a copy of the same to defendant's counsel. She mailed the copy to the latter but failed to send the original to the court. This motion was rejected below. Plaintiff came to this Court on appeal. We there said that "the rule appears to be well settled that, in the absence of statutory provision to the contrary, pending actions by or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs." We there said that "[o]ur Corporation Law contains no provision authorizing a corporation, after three (3) years from the expiration of its lifetime, to continue in its corporate name

actions instituted by it within said period of three (3) years." 14 However, these precepts notwithstanding, we, in effect, held in that case that the Board of Liquidators escapes from the operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is what impelled the President to create a Board of Liquidators, to continue the management of such matters as may then be pending." 15 We accordingly directed the record of said case to be returned to the lower court, with instructions to admit plaintiff's amended complaint to include, as party plaintiff, the Board of Liquidators.

Defendants' position is vulnerable to attack from another direction.

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its assets in the hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of the government. It was an express trust. The legal interest became vested in the trustee — the Board of Liquidators. The beneficial interest remained with the sole stockholder — the government. At no time had the government withdrawn the property, or the authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we cannot stay the hand of the Board of Liquidators from prosecuting this case to its final conclusion. 16 The provisions of Section 78 of the Corporation Law — the third method of winding up corporate affairs — find application.

We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in this case.

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their nineteenth special defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and may not be deemed to have survived after his death.18 They say that the controlling statute is Section 5, Rule 87, of the 1940 Rules of Court.19 which provides that "[a]ll claims for money against the decedent, arising from contract, express or implied", must be filed in the estate proceedings of the deceased. We disagree.

The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned contracts without prior approval of the board of directors, to the damage and prejudice of plaintiff; and is against Kalaw and the other directors for having subsequently approved the said contracts in bad faith and/or breach of trust." Clearly then, the present case is not a mere action for the recovery of money nor a claim for money arising from contract. The suit involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for an injury to person or property, real or personal", which survive. 20

The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There, plaintiffs sought to recover damages from defendant Llemos. The complaint averred that Llemos had served plaintiff by registered mail with a copy of a petition for a writ of possession in Civil Case 4824 of the Court of First Instance at Catbalogan, Samar, with

notice that the same would be submitted to the Samar court on February 23, 1960 at 8:00 a.m.; that in view of the copy and notice served, plaintiffs proceeded to the said court of Samar from their residence in Manila accompanied by their lawyers, only to discover that no such petition had been filed; and that defendant Llemos maliciously failed to appear in court, so that plaintiffs' expenditure and trouble turned out to be in vain, causing them mental anguish and undue embarrassment. Defendant died before he could answer the complaint. Upon leave of court, plaintiffs amended their complaint to include the heirs of the deceased. The heirs moved to dismiss. The court dismissed the complaint on the ground that the legal representative, and not the heirs, should have been made the party defendant; and that, anyway, the action being for recovery of money, testate or intestate proceedings should be initiated and the claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes, there declared:

Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the Rules of Court, those concerning claims that are barred if not filed in the estate settlement proceedings (Rule 87, sec. 5) and those defining actions that survive and may be prosecuted against the executor or administrator (Rule 88, sec. 1), it is apparent that actions for damages caused by tortious conduct of a defendant (as in the case at bar) survive the death of the latter. Under Rule 87, section 5, the actions that are abated by death are: (1) claims for funeral expenses and those for the last sickness of the decedent; (2) judgments for money; and (3) "all claims for money against the decedent, arising from contract express or implied." None of these includes that of the plaintiffs-appellants; for it is not enough that the claim against the deceased party be for money, but it must arise from "contract express or implied", and these words (also used by the Rules in connection with attachments and derived from the common law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,

"to include all purely personal obligations other than those which have their source in delict or tort."

Upon the other hand, Rule 88, section 1, enumerates actions that survive against a decedent's executors or administrators, and they are: (1) actions to recover real and personal property from the estate; (2) actions to enforce a lien thereon; and (3) actions to recover damages for an injury to person or property. The present suit is one for damages under the last class, it having been held that "injury to property" is not limited to injuries to specific property, but extends to other wrongs by which personal estate is injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause a party to incur unnecessary expenses, as charged in this case, is certainly injury to that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).

The ruling in the preceding case was hammered out of facts comparable to those of the present. No cogent reason exists why we should break away from the views just expressed.

And, the conclusion remains: Action against the Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia survives.

The preliminaries out of the way, we now go to the core of the controversy.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the controverted contracts without the prior approval of the corporation's directorate. Plaintiff leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as amongst the duties of the general manager, the obligation: "(b) To perform or execute on behalf of the Corporation upon prior approval of the Board, all contracts necessary and essential to the proper accomplishment for which the Corporation was organized."

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general manager's position in the corporate structure. A rule that has gained acceptance through the years is that a corporate officer "intrusted with the general management and control of its business, has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. 21As such officer, "he may, without any special authority from the Board of Directors perform all acts of an ordinary nature, which by usage or necessity are incident to his office, and may bind the corporation by contracts in matters arising in the usual course of business. 22

The problem, therefore, is whether the case at bar is to be taken out of the general concept of the powers of a general manager, given the cited provision of the NACOCO by-laws requiring prior directorate approval of NACOCO contracts.

The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this enterprise are copra sales for future delivery. The movement of the market requires that sales agreements be entered into, even though the goods are not yet in the hands of the seller. Known in business parlance as forward sales, it is concededly the practice of the trade. A certain amount of speculation is inherent in the undertaking. NACOCO was much more conservative than the exporters with big capital. This short-selling was inevitable at the time in the light of other factors such as availability of vessels, the quantity required before being accepted for loading, the labor needed to prepare and sack the copra for market. To NACOCO, forward sales were a necessity. Copra could not stay long in its hands; it would lose weight, its value decrease. Above all, NACOCO's limited funds necessitated a quick turnover. Copra contracts then had to be executed on short notice — at times within twenty-four hours. To be appreciated then is the difficulty of calling a formal meeting of the board.

Such were the environmental circumstances when Kalaw went into copra trading.

Long before the disputed contracts came into being, Kalaw contracted — by himself alone as general manager — for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts for the sale of copra to divers parties. During that period, from those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased was NACOCO's board of directors that, on December

5, 1946, in Kalaw's absence, it voted to grant him a special bonus "in recognition of the signal achievement rendered by him in putting the Corporation's business on a self-sufficient basis within a few months after assuming office, despite numerous handicaps and difficulties."

These previous contract it should be stressed, were signed by Kalaw without prior authority from the board. Said contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to prove one thing: Obviously, NACOCO board met the difficulties attendant to forward sales by leaving the adoption of means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.

Liberally spread on the record are instances of contracts executed by NACOCO's general manager and submitted to the board after their consummation, not before. These agreements were not Kalaw's alone. One at least was executed by a predecessor way back in 1940, soon after NACOCO was chartered. It was a contract of lease executed on November 16, 1940 by the then general manager and board chairman, Maximo Rodriguez, and A. Soriano y Cia., for the lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its general manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca. On December 22, 1947, when the controversy over the present contract cropped up, the board voted to approve a lease contract previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On the same date, the board gave its nod to a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the board requested Kalaw to report for action all copra contracts signed by him "at the meeting immediately following the signing of the contracts." This practice was observed in a later instance when, on January 7, 1948, the board approved two previous contracts for the sale of 1,000 tons of copra each to a certain "SCAP" and a certain "GNAPO".

And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such ratification was necessary because, as stated by Kalaw in that same meeting, "under an existing resolution he is authorized to give a brokerage fee of only 1% on sales of copra made through brokers." On January 15, 1947, the brokerage fee agreements of 1-1/2% on three export contracts, and 2% on three others, for the sale of copra were approved by the board with a proviso authorizing the general manager to pay a commission up to the amount of 1-1/2% "without further action by the Board." On February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted upon by the board. On March 19, 1947, a 2% brokerage commission was similarly approved by the board for Pacific Trading Corporation on the sale of 2,000 tons of copra.

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by the board,not the sales contracts themselves. And even those fee agreements were submitted only when the commission exceeded the ceiling fixed by the board.

Knowledge by the board is also discernible from other recorded instances.1äwphï1.ñët

When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow downward trend but belief was entertained that the nadir might have already been reached and an improvement in prices was expected. In view thereof, Kalaw informed the board that "he intends to wait until he has signed contracts to sell before starting to buy copra."23

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current: The copra market appeared to have become fairly steady; it was not expected that copra prices would again rise very high as in the unprecedented boom during January-April, 1947; the prices seemed to oscillate between $140 to $150 per ton; a radical rise or decrease was not indicated by the trends. Kalaw continued to say that "the Corporation has been closing contracts for the sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24

We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:

521. In connection with the buying and selling of copra the Board inquired whether it is the practice of the management to close contracts of sale first before buying. The General Manager replied that this practice is generally followed but that it is not always possible to do so for two reasons:

(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease buying even when it does not have actual contracts of sale since the suspension of buying by the Nacoco will result in middlemen taking advantage of the temporary inactivity of the Corporation to lower the prices to the detriment of the producers.

(2) The movement of the market is such that it may not be practical always to wait for the consummation of contracts of sale before beginning to buy copra.

The General Manager explained that in this connection a certain amount of speculation is unavoidable. However, he said that the Nacoco is much more conservative than the other big exporters in this respect.25

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors. 26 In varying language, existence of such authority is established, by proof of the course of business, the usage and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. 27So also,

x x x authority to act for and bind a corporation may be presumed from acts of recognition in other instances where the power was in fact exercised. 28

x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in his

official capacity to manage its affairs, his authority to represent the corporation may be implied from the manner in which he has been permitted by the directors to manage its business.29

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on January 30, 1948, though it is our (and the lower court's) belief that ratification here is nothing more than a mere formality.

Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;" and that " [t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time." 30 The language of one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more or less than the making of an original contract. The theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority." 31

Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the moment it was constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus purged of whatever vice or defect they may have. 33

In sum, a case is here presented whereunder, even in the face of an express by-law requirement of prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations. And, the conclusion inevitably is that the embattled contracts remain valid.

5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach of trust" in the board's ratification of the contracts without prior approval of the board. For, in reality, all that we have on the government's side of the scale is that the board knew that the contracts so confirmed would cause heavy losses.

As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior approval. Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first thrown on the way only when the contracts turned out to be unprofitable for NACOCO.

Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud.34 Applying

this precept to the given facts herein, we find that there was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or "Some motive or interest or ill will" that "partakes of the nature of fraud."

Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve their own private interests, or to pocket money at the expense of the corporation. 35 We have had occasion to affirm that bad faith contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-interest or ill will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close examination of all the reported cases, although there are many dicta not easily reconcilable, yet I have found no judgment or decree which has held directors to account, except when they have themselves been personally guilty of some fraud on the corporation, or have known and connived at some fraud in others, or where such fraud might have been prevented had they given ordinary attention to their duties. . . ." Plaintiff did not even dare charge its defendant-directors with any of these malevolent acts.

Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates of fairness. They did not think of raising their voice in protest against past contracts which brought in enormous profits to the corporation. By the same token, fair dealing disagrees with the idea that similar contracts, when unprofitable, should not merit the same treatment. Profit or loss resulting from business ventures is no justification for turning one's back on contracts entered into. The truth, then, of the matter is that — in the words of the trial court — the ratification of the contracts was "an act of simple justice and fairness to the general manager and the best interest of the corporation whose prestige would have been seriously impaired by a rejection by the board of those contracts which proved disadvantageous." 37

The directors are not liable." 38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions. Result: Copra production was impaired, prices spiralled, warehouses destroyed. Quick turnovers could not be expected. NACOCO was not alone in this misfortune. The record discloses that private traders, old, experienced, with bigger facilities, were not spared; also suffered tremendous losses. Roughly estimated, eleven principal trading concerns did run losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department of NACOCO, observed that from late 1947 to early 1948 "there were many who lost money in the trade." 39 NACOCO was not immune from such usual business risk.

The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus & Co. by pleading in its answers force majeure as an affirmative defense and there vehemently asserted that "as a result of the said typhoons, extensive damage was caused to the coconut trees in the copra producing regions of the Philippines and according to

estimates of competent authorities, it will take about one year until the coconut producing regions will be able to produce their normal coconut yield and it will take some time until the price of copra will reach normal levels;" and that "it had never been the intention of the contracting parties in entering into the contract in question that, in the event of a sharp rise in the price of copra in the Philippine market produce byforce majeure or by caused beyond defendant's control, the defendant should buy the copra contracted for at exorbitant prices far beyond the buying price of the plaintiff under the contract." 40

A high regard for formal judicial admissions made in court pleadings would suffice to deter us from permitting plaintiff to stray away therefrom, to charge now that the damage suffered was because of Kalaw's negligence, or for that matter, by reason of the board's ratification of the contracts. 41

Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread throughout the islands. It could purchase 2,000 tons of copra a day. The various contracts involved delivery of but 16,500 tons over a five-month period. Despite the typhoons, NACOCO was still able to deliver a little short of 50% of the tonnage required under the contracts.

As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of damage and wrong is here absent. There cannot be an actionable wrong if either one or the other is wanting. 43

7. On top of all these, is that no assertion is made and no proof is presented which would link Kalaw's acts — ratified by the board — to a matrix for defraudation of the government. Kalaw is clear of the stigma of bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that he had authority to enter into the contracts, that he did so in the best interests of the corporation; that he entered into the contracts in pursuance of an overall policy to stabilize prices, to free the producers from the clutches of the middlemen. The prices for which NACOCO contracted in the disputed agreements, were at a level calculated to produce profits and higher than those prevailing in the local market. Plaintiff's witness, Barretto, categorically stated that "it would be foolish to think that one would sign (a) contract when you are going to lose money" and that no contract was executed "at a price unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO envisioned a profit of around P752,440.00. 46

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and quotations from abroad were guideposts to him.

Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the coming of unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty. He exerted efforts to stave off losses. He asked the Philippine National Bank to implement its commitment to extend a P400,000.00 loan. The bank did not release the loan, not even the sum of P200,000.00, which, in October, 1947, was approved by the bank's board of directors. In frustration, on December 12, 1947, Kalaw turned to the President, complained about the bank's short-sighted policy. In

the end, nothing came out of the negotiations with the bank. NACOCO eventually faltered in its contractual obligations.

That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem to be supported by the fact that even as the contracts were being questioned in Congress and in the NACOCO board itself, President Roxas defended the actuations of Kalaw. On December 27, 1947, President Roxas expressed his desire "that the Board of Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as acting general manager of the corporation.

Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-15092, May 18, 1962:

"They (the directors) hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of a corporation should be operated at a loss during a business depression, or closed down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation, and not by the court. It is a well known rule of law that questions of policy of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment for the judgment of the board of directors; the board is the business manager of the corporation, and solong as it acts in good faith its orders are not reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390.)48

Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49

Viewed in the light of the entire record, the judgment under review must be, as it is hereby, affirmed.

Without costs. So ordered.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and Angeles, JJ., concur.Fernando, J., took no part.Concepcion, C.J. and Dizon, J., are on leave.

Footnotes1Original plaintiff, National Coconut Corporation, was dissolved on November 24, 1950 by the President's Executive Order 372, which created the Board of Liquidators. Hence, the substitution of party plaintiff.2Defendant Maximo M. Kalaw died in March of 1955 before trial.3Substituted for defendant Casimiro Garcia, deceased.4Explanatory Note of House Bill 295, 1st Session, 2nd Congress, later Republic Act 5; Congressional Record, House of Representatives, July 22, 1946; Minutes of the NACOCO Directors' Meeting of July 2, 1946, Exh. 4-Heirs.5R.A., p. 238; Emphasis supplied.6Garcia Valdez vs. Tuason, 40 Phil. 943, 951-952; Lucero vs. Guzman, 45 Phil. 852, 879; Relative vs. Castro, 76 Phil. 563, 567-568.7III Agbayani, Corporation Law, 1964 ed., p. 1679.8Government vs. Wise & Co., Ltd. (C.A.), 37 O.G. No. 26, pp. 545, 546.910 C.J.S., p. 1503; emphasis supplied.101 C.J.S., p. 141.11Id., p. 143; 16 Fletcher, p. 901.1216 Fletcher, p. 902.13Service & Wright Lumber Co. vs. Sumpter Valley Ry. Co., 152 P. 262, 265.

14Citing Sumera vs. Valencia, 67 Phil. 721, 726-727.15Emphasis ours.16See: Section 3, Rule 3, Rules of Court.17Record on Appeal, pp. 21-25.18Id., p. 154.19Now Section 5, Rule 86.20Section 1, Rule 88 of the 1940 Rules of Court; now Section 1 Rule 87, Revised Rules of Court.212 Fletcher Cyclopedia Corporations, p. 607. See: Yu Chuck vs. Kong Li Po, 46 Phil. 608, 614.22Sparks vs. Dispatch Transfer Co., 15 S.W. 417, 419; Pacific Concrete Products Corporation vs. Dimmick, 289 P. 2d 501, 504; Massachusetts Bonding & Ins. Co. vs. Transamerican Freight Lines, 281 N.W. 584, 588-589; Sealy Oil Mill & Mfg. Co. vs. Bishop Mfg. Co., 235 S.W. 850, 852.23Emphasis supplied.24Emphasis supplied.25Emphasis supplied.26Harris vs. H. C. Talton Wholesale Grocery Co., 123 So. 480.27Van Denburgh vs. Tungsten Reef Mines Co., 67 P. (2d) 360, 361, citing First National Fin. Corp. vs. Five-O Drilling Co., 289 P. 844, 845.28McIntosh vs. Dakota Trust Co., 204 N.W. 818. 824.29Murphy vs. W. H. & F. W. Cane, 82 Atl. 854, 856. See Martin vs. Webb, 110 U.S. 7, 14-15, 28 L. ed. 49, 52. See also Victory Investment Corporation vs. Muskogee Electric T. CO., 150 F. 2d. 889, 893.302 Fletcher, p. 858, citing cases.31Kridelbaugh vs. Aldrehn Theatres Co., 191 N.W. 803, 804, citing cases; emphasis supplied.32Article 1313, old Civil Code; now Article 1396, new Civil Code.33Tagaytay Development Co. vs. Osorio, 69 Phil. 180, 184.34Spiegel vs. Beacon Participations, 8 N.E. (2d) 895, 907, citing cases.35See: 3 Fletcher, Sec. 850, pp. 162-165.36Air France vs. Carrascoso, L-21438, September 28, 1966.37R.A., pp. 234-235.383 Fletcher, pp. 450-452, citing cases. Cf. Angeles vs. Santos, 64 Phil. 697, 707.39Tr., p. 30, August 29, 1960.40See Exhibit 29-Heirs, NACOCO's Second Amended Answer in Civil Case 4322, Court of First instance of Manila, entitled "Louis Dreyfus & Co. (Overseas) Limited, plaintiff vs. National Coconut Corporation, defendant."41Section 2, Rule 129, Rules of Court; 20 Am. Jur., pp. 469-470.42The time for delivery of copra under the July 30, 1947 contract was extended. Fifth Amended Complaint, R.A., P. 15. See also Exhibit 26- Heirs.43Churchill and Tait vs. Rafferty 32 Phil. 580, 605; Ladrera vs Secretary of Agriculture and Natural Resources, L-13385, April 28, 1960.44Memorandum of Government Corporate Counsel Marcial P. Lichauco dated February 9, 1949, addressed to the Secretary of Justice, 8 days after the original complaint herein was filed in court. R.A., pp. 69, 90-112.45Tr., pp. 18, 29, August 29, 1960.46See Exhibit 20-Heirs.47Exhibit 25-Heirs.48Emphasis supplied.493 Fletcher, pp. 450-452, supra.

SECOND DIVISION

[G.R. No. 125469.  October 27, 1997]

PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE HONORABLE COURT OF APPEALS,

SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND, INC., respondents.

D E C I S I O N

TORRES, JR., J.:

The Securities and Exchange Commission is the government agency, under the direct general supervision of the Office of the President,[1] with the immense task of enforcing the Revised Securities Act, and all other duties assigned to it by pertinent laws.  Among its inumerable functions, and one of the most important, is the supervision of all corporations, partnerships or associations, who are grantees or primary franchise and/or a license or permit issued by the government to operate in the Philippines.[2] Just how far this regulatory authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar.

In this Petition for Review of Certiorari, petitioner assails the resolution of the respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way for the public offering of PALI’s shares.

The facts of the case are undisputed, and are hereby restated in sum.

The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the public in order to raise funds allegedly to develop its properties and pay its loans with several banking institutions.  In January, 1995, PALI was issued a Permit to Sell its shares to the public by the Securities and Exchange Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to course the trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which purpose it

filed with the said stock exchange an application to list its shares, with supporting documents attached.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI’s application, recommended to the PSE’s Board of Governors the approval of PALI’s listing application.

On February 14, 1996, before it could act upon PALI’s application, the Board of Governors of PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the legal and beneficial owner of certain properties forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its assets and that the Ternate Development Corporation, which is among the stockholders of PALI, likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio for then President Marcos and now, effectively for his estate, and requested PALI’s application to be deferred.  PALI was requested to comment upon the said letter.

PALI’s answer stated that the properties forming part of Puerto Azul Beach Hotel and Resort Complex were not claimed by PALI as its assets.  On the contrary, the resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of PALI.  The Marcoses responded that their claim is not confined to the facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting legal and beneficial ownership of other properties titled under the name of PALI.

On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission on Good Government (PCGG) requesting for comments on the letter of the PALI and the Marcoses.  On March 4, 1996, the PSE was informed that the Marcoses received a Temporary Restraining Order on the same date, enjoining the Marcoses from, among others, “further impeding, obstructing, delaying or interfering in any manner by or any means with the consideration, processing and approval by the PSE of the initial public offering of PALI.” The TRO was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its decision to reject PALI’s application, citing the existence of serious claims, issues and circumstances surrounding PALI’s ownership over its assets that adversely affect the suitability of listing PALI’s shares in the stock exchange.

On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SEC’s attention the action taken by the PSE in the application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in the exercise of its supervisory and regulatory powers over stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSE’s action on PALI’s listing application and institute such measures as are just and proper and under the circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI and directing the PSE to file its comments thereto within five days from its receipt and for its authorized representative to appear for an “inquiry” on the matter.  On April 22, 1996, the PSE submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI.

On April 24, 1996, the SEC rendered its Order, reversing the PSE’s decision.  The dispositive portion of the said order reads:

“WHEREFORE, premises considered, and invoking the Commissioner’s authority and jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m) of the Presidential Decree No. 902-A, the decision of the Board of Governors of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside, and the PSE is hereby ordered to immediately cause the listing of the PALI shares in the Exchange, without prejudice to its authority to require PALI to disclose such other material information it deems necessary for the protection of the investing public.

This Order shall take effect immediately.

SO ORDERED.”

PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however denied by the Commission in its May 9, 1996 Order which states:

“WHEREFORE, premises considered, the Commission finds no compelling reason to consider its order dated April 24, 1996, and in the light of recent developments on the adverse claim against the PALI properties, PSE should require PALI to submit full disclosure of material facts and information to protect the investing public. In this regard, PALI is hereby ordered to amend its registration statements filed with the Commission to incorporate the full disclosure of these material facts and information.”

Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for Review (with application for Writ of Preliminary Injunction and Temporary Restraining Order), assailing the above mentioned orders of the SEC, submitting the following as errors of the SEC:

I.  SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;

II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING PALI’S LISTING APPLICATION;

III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM PART OF NAVAL/MILITARY RESERVATION; AND

IV.  THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED AND ITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE CONSTITUTION.

On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment and Motion to Dismiss.  On June 10, 1996, PSE filed its Reply to Comment and Opposition to Motion to Dismiss.

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE’s Petition for Review.  Hence, this Petition by the PSE.

The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of the petitioner PSE, pursuant to Section 3[3] of the Revised Securities Act in relation to Section 6(j) and 6(m)[4] of P.D. No. 902-A, and Section 38(b)[5] of the Revised Securities Act, and for the purpose of ensuring fair administration of the exchange. Both as a corporation and as a stock exchange, the petitioner is subject to public respondent’s jurisdiction, regulation and control.  Accepting the argument that the public respondent has the authority merely to supervise or regulate, would amount to serious consequences, considering that the petitioner is a stock exchange whose business is impressed with public interest.  Abuse is not remote if the public respondent is left without any system of control.  If the securities act vested the public respondent with jurisdiction and control over all corporations; the power to authorize the establishment of stock exchanges; the right to supervise and regulate the same; and the power to alter and supplement rules of the exchange in the listing or delisting of securities, then the law certainly granted to the public respondent the plenary authority over the petitioner; and the power of review necessarily comes within its authority.

All in all, the court held that PALI complied with all the requirements for public listing, affirming the SEC’s ruling to the effect that:

“x x x the Philippine Stock Exchange has acted in an arbitrary and abusive manner in disapproving the application of PALI for listing of its shares in the face of the following considerations:

1.             PALI has clearly and admittedly complied with the Listing Rules and full disclosure requirements of the Exchange;

2.             In applying its clear and reasonable standards on the suitability for listing of shares, PSE has failed to justify why it acted differently on the application of PALI, as compared to the IPOs of other companies similarly that were allowed listing in the Exchange;

3.             It appears that the claims and issues on the title to PALI’s properties were even less serious than the claims against the assets of the other companies in that, the assertions of the Marcoses that they are owners of the disputed properties were not substantiated enough to overcome the strength of a title to properties issued under the Torrens System as evidence of ownership thereof;

4.             No action has been filed in any court of competent jurisdiction seeking to nullify PALI’s ownership over the disputed properties, neither has the government instituted recovery proceedings against these properties. Yet the import of PSE’s decision in denying PALI’s application is that it would be PALI, not the Marcoses, that must go to court to prove the legality of its ownership on these properties before its shares can be listed.”

In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not inspire belief.  The point is, the PALI properties are now titled.  A property losses its public character the moment it is covered by a title.  As a matter of fact, the titles have long been settled by a final judgment; and the final decree having been registered, they can no longer be re-opened considering that the one year period has already passed.  Lastly, the determination of what standard to apply in allowing PALI’s application for listing, whether the discretion method or the system of public disclosure adhered to by the SEC, should be addressed to the Securities Commission, it being the government agency that exercises both supervisory and regulatory authority over all corporations.

On August 15, 1996, the PSE, after it was granted an extension, filed an instant Petition for Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals. Respondent PALI filed its Comment to the petition on October 17, 1996.  On the same date, the PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by the PCGG’s Petition for Intervention on October 21, 1996.  A supplemental Comment was filed by PALI on October 25, 1997.  The Office of the Solicitor General, representing the SEC and the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGG’s motion for leave to file petition for intervention, PALI filed its Comment thereto on January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.

On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996).  On may 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.

PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list the shares of PALI in the stock exchange.  Under presidential decree No. 902-A, the powers of the SEC over stock exchanges are more limited as compared to its authority over ordinary corporations.  In connection with this, the powers of the SEC over stock exchanges under the Revised Securities Act are specifically enumerated, and these do not include the power to reverse the decisions of the stock exchange.  Authorities are in abundance even in the United States, from which the country’s

security policies are patterned, to the effect of giving the Securities Commission less control over stock exchanges, which in turn are given more lee-way in making the decision whether or not to allow corporations to offer their stock to the public through the stock exchange.  This is in accord with the “business judgment rule” whereby the SEC and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith.  The said rule precludes the reversal of the decision of the PSE to deny PALI’s listing application, absent a showing a bad faith on the part of the PSE.  Under the listing rule of the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to accept or reject applications for listing.  Thus, even if an issuer has complied with the PSE listing rules and requirements, PSE retains the discretion to accept or reject the issuer’s listing application if the PSE determines that the listing shall not serve the interests of the investing public.

Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with corporations whose properties are under sequestration.  A reading of Republic of the Philippines vs. Sandiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI, which were derived from the Ternate Development Corporation (TDC) and the Monte del Sol Development Corporation (MSDC), are under sequestration by the PCGG, and the subject of forfeiture proceedings in the Sandiganbayan.  This ruling of the Court is the “law of the case” between the Republic and the TDC and MSDC.  It categorically declares that the assets of these corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988.

It is, likewise, intimidated that the Court of Appeals’ sanction that PALI’s ownership over its properties can no longer be questioned, since certificates of title have been issued to PALI and more than one year has since lapsed, is erroneous and ignores well settled jurisprudence on land titles.  That a certificate of title issued under the Torrens System is a conclusive evidence of ownership is not an absolute rule and admits certain exceptions.  It is fundamental that forest lands or military reservations are non-alienable.  Thus, when a title covers a forest reserve or a government reservation, such title is void.

PSE, likewise, assails the SEC’s and the Court of Appeals reliance on the alleged policy of “full disclosure” to uphold the listing of the PALI’s shares with the PSE, in the absence of a clear mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI did not comply with the listing rules and disclosure requirements. In fact, PALI’s documents supporting its application contained misrepresentations and misleading statements, and concealed material information.  The matter of sequestration of PALI’s properties and the fact that the same form part of military/naval/forest reservations were not reflected in PALI’s application.

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed with the marking of a corporate entity, its functions as the primary channel through which the vessels of capital trade ply.  The PSE’s relevance to the continued operation and filtration of the securities transactions in the country gives it a distinct color of importance such that government intervention in its affairs

becomes justified, if not necessary. Indeed, as the only operational stock exchange in the country today, the PSE enjoys a monopoly of securities transactions, and as such, it yields an immense influence upon the country’s economy.

Due to this special nature of stock exchanges, the country’s lawmakers has seen it wise to give special treatment to the administration and regulation of stock exchanges.[6]

These provisions, read together with the general grant of jurisdiction, and right of supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be vigilant in the supervision of the affairs of stock exchanges so that the interests of the investing public may be fully safeguarded.

Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC’s challenged control authority over the petitioner PSE even as it provides that “the Commission shall have absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines…” The SEC’s regulatory authority over private corporations encompasses a wide margin of areas, touching nearly all of a corporation’s concerns.  This authority springs from the fact that a corporation owes its existence to the concession of its corporate franchise from the state.

The SEC’s power to look into the subject ruling of the PSE, therefore, may be implied from or be considered as necessary or incidental to the carrying out of the SEC’s express power to insure fair dealing in securities traded upon a stock exchange or to ensure the fair administration of such exchange.[7] It is, likewise, observed that the principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development.[8]

Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to deny the application for listing in the stock exchange of the private respondent PALI. The SEC’s action was affirmed by the Court of Appeals.

We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares of stock of a corporation, may be traded or not in the stock exchange.  This is in line with the SEC’s mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and disposition of securities in the country.[9] As the appellate court explains:

“Paramount policy also supports the authority of the public respondent to review petitioner’s denial of the listing. Being a stock exchange, the petitioner performs a function that is vital to the national economy, as the business is affected with public interest.  As a matter of fact, it has often been said that the economy moves on the basis of the rise and fall of stocks being traded. By its economic power, the petitioner certainly can dictate which and how many users are allowed to sell securities thru the facilities of a stock exchange, if allowed to interpret its own rules liberally as it may please.  Petitioner

can either allow or deny the entry to the market of securities.  To repeat, the monopoly, unless accompanied by control, becomes subject to abuse; hence, considering public interest, then it should be subject to government regulation.”

The role of the SEC in our national economy cannot be minimized.  The legislature, through the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted to it the serious responsibility of enforcing all laws affecting corporations and other forms of associations not otherwise vested in some other government office.[10]

This is not to say, however, that the PSE’s management prerogatives are under the absolute control of the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business.  One of the PSE’s main concerns, as such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right to sue and be sued, to hold property in its own name, to enter (or not to enter) into contracts with third persons, and to perform all other legal acts within its allocated express or implied powers.

A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality.  In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such body.[11] As to its corporate and management decisions, therefore, the state will generally not interfere with the same.  Questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors.  The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.[12]

Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSE’s decision in matters of application for listing in the market, the SEC may exercise such power only if the PSE’s judgment is attended by bad faith.  In board of Liquidators vs. Kalaw,[13] it was held that bad faith does not simply connote bad judgment or negligence.  It imports a dishonest purpose or some moral obliquity and conscious doing of wrong.  It means a breach of a known duty through some motive or interest of ill will, partaking of the nature of fraud.

In reaching its decision to deny the application for listing of PALI, the PSE considered important facts, which in the general scheme, brings to serious question the qualification of PALI to sell its shares to the public through the stock exchange.  During the time for receiving objections to the application, the PSE heard from the representative of the late President Ferdinand E. Marcos and his family who claim the properties of the private respondent to be part of the Marcos estate.  In time, the PCGG confirmed this claim.  In fact, an order of sequestration has been issued covering the properties of PALI, and suit for reconveyance to the state has been filed in the Sandiganbayan Court.  How the properties were effectively transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in only a short span of time, are not yet

explained to the Court, but it is clear that such circumstances give rise to serious doubt as to the integrity of PALI as a stock issuer.  The petitioner was in the right when it refused application of PALI, for a contrary ruling was not to the best interest of the general public.  The purpose of the Revised Securities Act, after all, is to give adequate and effective protection to the investing public against fraudulent representations, or false promises, and the imposition of worthless ventures.[14]

It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental to legitimate business, thus:

“The Securities Act, often referred to as the “truth in securities” Act, was designed not only to provide investors with adequate information upon which to base their decisions to buy and sell securities, but also to protect legitimate business seeking to obtain capital through honest presentation against competition form crooked promoters and to prevent   fraud in the sale of securities. (Tenth Annual Report, U.S. Securities and Exchange Commission, p. 14).

As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses and fraudulent transactions, merely by requirement of that details be revealed; (2) placing the market during the early stages of the offering of a security a body of information, which operating indirectly through investment services and expert investors, will tend to produce a more accurate appraisal of a security.  x x x.  Thus, the Commission may refuse to permit a registration statement to become effective if it appears on its face to be incomplete or inaccurate in any material respect, and empower the Commission to issue a stop order suspending the effectiveness of any registration statement which is found to include any untrue statement of a material fact or to omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading.  (Idem).”

Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the right to protect such goodwill by maintaining a reasonable standard of propriety in the entities who choose to transact through its facilities.  It was reasonable for PSE, therefore, to exercise its judgment in the manner it deems appropriate for its business identity, as long as no rights are trampled upon, and public welfare is safeguarded.

In this connection, it is proper to observe that the concept of government absolutism in a thing of the past, and should remain so.

The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no moment.  At this juncture, there is the claim that the properties were owned by the TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses that such properties belong to Marcos estate, and were held only in trust by Rebecco Panlilio.  It is also alleged by the petitioner that these properties belong to naval and forest reserves, and therefore beyond private dominion.  If any of these claims is established to be true, the certificates of title over the subject properties now held by PALI may be disregarded, as it is an established rule that a registration of a certificate of title does not confer

ownership over the properties described therein to the person named as owner. The inscription in the registry, to be effective, must be made in good faith.  The defense of indefeasibility of a Torrens Title does not extend to a transferee who takes the certificate of title with notice of a flaw.

In any case, for the purpose of determining whether PSE acted correctly in refusing the application of PALI, the true ownership of the properties of PALI need not be determined as an absolute fact.  What is material is that the uncertainty of the properties’ ownership and alienability exists, and this puts to question the qualification of PALI’s public offering.  In sum, the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of approving the application for listing in the PSE of the private respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a corporate entity, whose business judgments are respected in the absence of bad faith.

The question as to what policy is, or should be relied upon in approving the registration and sale of securities in the SEC is not for the Court to determine, but is left to the sound discretion of the Securities and Exchange Commission.  In mandating the SEC to administer the Revised Securities Act, and in performing its other functions under pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the power to promulgate such rules and regulations as it may consider appropriate in the public interest for the enforcement of the said laws.  The second paragraph of Section 4 of the said law, on the other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold, transferred or in any other manner conveyed to the public, unless registered in accordance with the rules and regulations that shall be promulgated in the public interest and for the protection of investors by the Commission.  Presidential Decree No. 902-A, on the other hand, provides that the SEC, as regulatory agency, has supervision and control over all corporations and over the securities market as a whole, and as such, is given ample authority in determining appropriate policies.  Pursuant to this regulatory authority, the SEC has manifested that it has adopted the policy of “full material disclosure” where all companies, listed or applying for listing, are required to divulge truthfully and accurately, all material information about themselves and the securities they sell, for the protection of the investing public, and under pain of administrative, criminal and civil sanctions.  In connection with this, a fact is deemed material if it tends to induce or otherwise effect the sale or purchase of its securities.[15] While the employment of this policy is recognized and sanctioned by laws, nonetheless, the Revised Securities Act sets substantial and procedural standards which a proposed issuer of securities must satisfy.[16] Pertinently, Section 9 of the Revised Securities Act sets forth the possible Grounds for the Rejection of the registration of a security:

“- - The Commission may reject a registration statement and refuse to issue a permit to sell the securities included in such registration statement if it finds that - -

(1)           The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material facts

required to be stated therein or necessary to make the statements therein not misleading; or

(2)           The issuer or registrant - -

(i)     is not solvent or not is sound financial condition;

(ii)    has violated or has not complied with the provisions of this Act, or the rules promulgated pursuant thereto, or any order of the Commission;

(iii)   has failed to comply with any of the applicable requirements and conditions that the Commission may, in the public interest and for the protection of investors, impose before the security can be registered;

(iv)   had been engaged or is engaged or is about to engaged in fraudulent transactions;

(v)    is in any was dishonest of is not of good repute; or

(vi)   does not conduct its business in accordance with law or is engaged in a business that is illegal or contrary or government rules and regulations.

(3)           The enterprise or the business of the issuer is not shown to be sound or to be based on sound business principles;

(4)           An officer, member of the board of directors, or principal stockholder of the issuer is disqualified to such officer, director or principal stockholder; or

(5)                       The issuer or registrant has not shown to the satisfaction of the Commission that the sale of its security would not work to the prejudice to the public interest or as a fraud upon the purchaser or investors.” (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and issuance of securities dependent, to a certain extent, on the merits of the securities themselves, and of the issuer, to be determined by the Securities and Exchange Commission.  This measure was meant to protect the interest of the investing public against fraudulent and worthless securities, and the SEC is mandated by law to safeguard these interests, following the policies and rules therefore provided.  The absolute reliance on the full disclosure method in the registration of securities is, therefore, untenable.  At it is, the Court finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to support the propriety of the issue of its shares with unfailing clarity, thereby lending support to the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock exchange.  This does not discount the effectivity of whatever method the SEC, in the exercise of its vested authority, chooses in setting the standard for public offerings of corporations wishing to do so.  However, the SEC must recognize and implement the mandate of the law, particularly the Revised Securities Act, the provisions of which cannot be amended or supplanted my mere administrative issuance.

In resumé, the Court finds that the PSE has acted with justified circumspection, discounting, therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI in the stock exchange is justified by the law and by the circumstances attendant to this case.

ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition for Review on Certiorari.  The decisions of the Court of Appeals and the Securities and Exchage Commission dated July 27, 1996 and April 24, 1996, respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of the Philippine Stock Exchange to deny the application for listing of the private respondent Puerto Azul Land, Inc.

SO ORDERED.

Regalado (Chairman) and Puno, JJ., concur.

Mendoza, J., in the result.

[1] Section 1, Presidential Decree no. 902-A.[2] Section 3, Ibid.[3] Sec. 3. Administrative Agency.-- This act shall be administered by the (Securities and Exchange) Commission which shall continue to have the organization, powers, and functions provided by Presidential Decree Numbered 902-A, 1653, 1758, and 1799 and Executive Order No. 708. The Commission shall, except as otherwise expressly provided, have the power to promulgate such rules and regulations as it may consider appropriate in the public interest for the enforcement of the provisions hereof.[4] Sec. 6. In order to effectively exercise such jurisdiction, the (Securities and Exchange) Commission shall possess the following powers:                  xxx(j) To authorize the establishment and operation of stock exchanges, commodity exchanges and such other similar organizations and to supervise and regulate the same; including the authority to determine their number, size and location, in the light of national or regional requirements for such activities with the view to promote, conserve or rationalize investment;                  xxx(m) To exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted to the Commission or to achieve the objectives and purposes of this Decree.[5] Sec. 38. Powers with respect to exchanges and securities.—(a) xxx(b) The Commission is further authorized, if after making appropriate request in writing to a securities exchange that such exchange effect on its own behalf specified changes in the rules and practices and, after appropriate notice and opportunity for hearing, it determines that such exchange has not made the changes so requested, and that such changes are necessary or appropriate for the protection of investors or to insure fair dealing in securities traded upon such exchange, by rules or regulations or by order, to alter or supplement the rules of such exchange (insofar as necessary or appropriate to effect such changes) in respect of such matters as --(1)         Safeguards in respect of the financial responsibility of members and adequate provision against the evasion of financial responsibility through the use of corporate forms or special partnerships;(2)         The limitation or prohibition of the registration or trading in any security within a specified period after the issuance or primary distribution thereof;(3)         The listing or striking from listing of any security;(4)         Hours of trading;(5)         The manner, method, and place of soliciting business;(6)         Fictitious accounts;(7)         The time and method of making settlements, payments, and deliveries, and of closing accounts;(8)         The reporting of transactions on the exchange upon tickets maintained by or with the consent of the exchange, including the method of reporting short sales, stopped sales, sales of securities of issuers in default, bankruptcy or receivership, and sales involving other special circumstances;(9)         The fixing of reasonable rates of commission, interests, listing, and other charges;(10)       Minimum units of trading;(11)       Odd-lot purchases and sales; and(12)       Minimum deposits on margin accounts.[6] See SEC. 6(j), P.D. 902-A; Sec. 8, Revised Securities Act.[7] Section 6(m), Presidential Decree No. 902-A.[8] Abad vs. CFI of Pangasinan, Branch VIII, et. al., G.R. Nos. 58507-08, February 26, 1992, 206 SCRA 567.[9] Securities and Exchange Commission vs. Court of Appeals, G.R. Nos. 106425 & 106431-32, July 21, 1995, 246 SCRA 738.

[10] Pineda vs. Lantin, No. L-15350, November 30, 1962, 6 SCRA 757.[11] Bache & Co. (Phil.), Inc. vs. Hon. Judge Ruiz, et. al., No. L-32409, February 27, 1971, 37 SCRA 823.[12] Sales vs. Securities and Exchange Commission, G.R. No. 54330, January 13, 1989, 169 SCRA 109.[13] No. L-18805, August 14, 1967, 20 SCRA 987.[14] Makati Stock Exchage, Inc. vs. Securities and Exchange Commission, No. L-23004, June 30, 1964, 14 SCRA 620.[15] See SEC Rules Requiring Disclosure of Material Facts by Corporations Whose Securities are Listed in Any Stock Exchange or Registered/Licensed under the Revised Securities Act.  (Approved by the SEC Chairman on February 8, 1973, and published in the Bulletin Today of February 19, 1973).

SECOND DIVISION

[G.R. No. 142435.  April 30, 2003]

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs. PACIFIC BANKING

CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF QUEZON CITY and

the Heirs of EUGENIO D. TRINIDAD, respondents.

D E C I S I O N

QUISUMBING, J.:

This petition for review on certiorari seeks the reversal of the Decision[1] dated October 21, 1999 of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners’ appeal from the Decision[2] dated February 10, 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 84, in Civil Case No. Q-89-4152.  The trial court had dismissed petitioners’ complaint for annulment of real estate mortgage and the extra-judicial foreclosure thereof.  Likewise brought for our review is the Resolution[3] dated February 23, 2000 of the Court of Appeals which denied petitioners’ motion for reconsideration.

The facts, as culled from records, are as follows:

Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned “Bela’s Export Trading” (BET), a single proprietorship with principal office at No. 814 Aurora Boulevard, Cubao, Quezon City.  BET was engaged in the manufacture of garments for domestic and foreign consumption.  The Lipats also owned the “Mystical Fashions” in the United States, which sells goods imported from the Philippines through BET.  Mrs. Lipat designated her daughter, Teresita B. Lipat, to manage BET in the Philippines while she was managing “Mystical Fashions” in the United States.

In order to facilitate the convenient operation of BET, Estelita Lipat executed on December 14, 1978, a special power of attorney appointing Teresita Lipat as her attorney-in-fact to obtain loans and other credit accommodations from respondent Pacific Banking Corporation (Pacific Bank).  She likewise authorized Teresita to execute mortgage contracts on properties owned or co-owned by her as security for the obligations to be extended by Pacific Bank including any extension or renewal thereof.

Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to “Mystical Fashions” in the United States.  As security therefor, the Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage over their property located at No. 814 Aurora Blvd., Cubao, Quezon City.  Said property was likewise made to secure “other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole or part of said original, additional or new loans, discounting lines, overdrafts and other credit accommodations, including interest and expenses or other obligations of the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly, principal or secondary, as appears in the accounts, books and records of the Mortgagee.”[4]

On September 5, 1979, BET was incorporated into a family corporation named Bela’s Export Corporation (BEC) in order to facilitate the management of the business.  BEC was engaged in the business of manufacturing and exportation of all kinds of garments of whatever kind and description[5] and utilized the same machineries and equipment previously used by BET.  Its incorporators and directors included the Lipat spouses who owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other close relatives and friends of the Lipats.[6] Estelita Lipat was named president of BEC, while Teresita became the vice-president and general manager.

Eventually, the loan was later restructured in the name of BEC and subsequent loans were obtained by BEC with the corresponding promissory notes duly executed by Teresita on behalf of the corporation.  A letter of credit was also opened by Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the corresponding trust receipt therefor.  Export bills were also executed in favor of Pacific Bank for additional finances.  These transactions were all secured by the real estate mortgage over the Lipats’ property.

The promissory notes, export bills, and trust receipt eventually became due and demandable.  Unfortunately, BEC defaulted in its payments.  After receipt of Pacific Bank’s demand letters, Estelita Lipat went to the office of the bank’s liquidator and asked for additional time to enable her to personally settle BEC’s obligations.  The bank acceded to her request but Estelita failed to fulfill her promise.

Consequently, the real estate mortgage was foreclosed and after compliance with the requirements of the law the mortgaged property was sold at public auction. On January 31, 1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder.

On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a complaint for annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale issued over the property against Pacific Bank and Eugenio D. Trinidad.  The complaint, which was docketed as Civil Case No. Q-89-4152, alleged, among others, that the promissory notes, trust receipt, and export bills were all ultra vires acts of Teresita as they were executed without the requisite board resolution of the Board of Directors of BEC.  The Lipats also averred that assuming said acts were valid and binding on BEC, the same were the corporation’s sole obligation, it having a personality distinct and separate from spouses Lipat.  It was likewise pointed out that Teresita’s authority to secure a loan from Pacific Bank was specifically limited to Mrs. Lipat’s sole use and benefit and that the real estate mortgage was executed to secure the Lipats’ and BET’s P583,854.00 loan only.

In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners Lipat cannot evade payments of the value of the promissory notes, trust receipt, and export bills with their property because they and the BEC are one and the same, the latter being a family corporation.  Respondent Trinidad further claimed that he was a buyer in good faith and for value and that petitioners are estopped from denying BEC’s existence after holding themselves out as a corporation.

After trial on the merits, the RTC dismissed the complaint, thus:

WHEREFORE, this Court holds that in view of the facts contained in the record, the complaint filed in this case must be, as is hereby, dismissed.  Plaintiffs however has five (5) months and seventeen (17) days reckoned from the finality of this decision within which to exercise their right of redemption.  The writ of injunction issued is automatically dissolved if no redemption is effected within that period.

The counterclaims and cross-claim are likewise dismissed for lack of legal and factual basis.

No costs.

IT IS SO ORDERED.[7]

The trial court ruled that there was convincing and conclusive evidence proving that BEC was a family corporation of the Lipats.  As such, it was a mere extension of petitioners’ personality and business and a mere alter ego or business conduit of the Lipats established for their own benefit.  Hence, to allow petitioners to invoke the theory of separate corporate personality would sanction its use as a shield to further an end subversive of justice.[8] Thus, the trial court pierced the veil of corporate fiction and held that Bela’s Export Corporation and petitioners (Lipats) are one and the same.  Pacific Bank had transacted business with both BET and BEC on the supposition that both are one and the same.  Hence, the Lipats were estopped from disclaiming any obligations on the theory of separate personality of

corporations, which is contrary to principles of reason and good faith.

The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV No. 41536.  Said appeal, however, was dismissed by the appellate court for lack of merit.  The Court of Appeals found that there was ample evidence on record to support the application of the doctrine of piercing the veil of corporate fiction.  In affirming the findings of the RTC, the appellate court noted that Mrs. Lipat had full control over the activities of the corporation and used the same to further her business interests.[9] In fact, she had benefited from the loans obtained by the corporation to finance her business.  It also found unnecessary a board resolution authorizing Teresita Lipat to secure loans from Pacific Bank on behalf of BEC because the corporation’s by-laws allowed such conduct even without a board resolution.  Finally, the Court of Appeals ruled that the mortgage property was not only liable for the original loan of P583,854.00 but likewise for the value of the promissory notes, trust receipt, and export bills as the mortgage contract equally applies to additional or new loans, discounting lines, overdrafts, and credit accommodations which petitioners subsequently obtained from Pacific Bank.

The Lipats then moved for reconsideration, but this was denied by the appellate court in its Resolution of February 23, 2000.[10]

Hence, this petition, with petitioners submitting that the court a quo erred—

1) ….IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION APPLIES IN THIS CASE.

2) ….IN HOLDING THAT PETITIONERS’ PROPERTY CAN BE HELD LIABLE UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF P583,854.00 BUT ALSO FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND EXPORT BILLS OF BELA’S EXPORT CORPORATION.

3) ….IN HOLDING THAT “THE IMPOSITION OF 15% ATTORNEY’S FEES IN THE EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS COURT’S JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST TIME IN THIS APPEAL.”

4) ….IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND TRUST RECEIPTS DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM.

5) ….IN DENYING PETITIONERS’ MOTION FOR RECONSIDERATION AND IN HOLDING THAT SAID MOTION FOR RECONSIDERATION IS “AN UNAUTHORIZED MOTION, A MERE

SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY CONSEQUENCE TO APPELLANTS.”[11]

In sum, the following are the relevant issues for our resolution:

1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this case;

2. Whether or not petitioners' property under the real estate mortgage is liable not only for the amount of P583,854.00 but also for the value of the promissory notes, trust receipt, and export bills subsequently incurred by BEC; and

3. Whether or not petitioners are liable to pay the 15% attorney’s fees stipulated in the deed of real estate mortgage.

On the first issue, petitioners contend that both the appellate and trial courts erred in holding them liable for the obligations incurred by BEC through the application of the doctrine of piercing the veil of corporate fiction absent any clear showing of fraud on their part.

Respondents counter that there is clear and convincing evidence to show fraud on part of petitioners given the findings of the trial court, as affirmed by the Court of Appeals, that BEC was organized as a business conduit for the benefit of petitioners.

Petitioners’ contentions fail to persuade this Court.  A careful reading of the judgment of the RTC and the resolution of the appellate court show that in finding petitioners’ mortgaged property liable for the obligations of BEC, both courts below relied upon the alter ego doctrine or instrumentality rule, rather than fraud in piercing the veil of corporate fiction.  When the corporation is the mere alter ego or business conduit of a person, the separate personality of the corporation may be disregarded.[12] This is commonly referred to as the “instrumentality rule” or the alter ego doctrine, which the courts have applied in disregarding the separate juridical personality of corporations.  As held in one case,

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the ‘instrumentality’ may be disregarded.  The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. xxx[13]

We find that the evidence on record demolishes, rather than buttresses, petitioners’ contention that BET and BEC are separate business entities. Note that Estelita Lipat admitted that she and her husband, Alfredo, were the owners of BET[14] and were two of the incorporators and majority stockholders of BEC.[15] It is also undisputed that Estelita Lipat executed a special power of attorney in favor of her daughter, Teresita, to obtain loans and credit lines from Pacific Bank on her behalf.[16] Incidentally, Teresita was designated as executive-vice president and general manager of both BET

and BEC, respectively.[17] We note further that: (1) Estelita and Alfredo Lipat are the owners and majority shareholders of BET and BEC, respectively;[18] (2) both firms were managed by their daughter, Teresita;[19] (3) both firms were engaged in the garment business, supplying products to “Mystical Fashion,” a U.S. firm established by Estelita Lipat; (4) both firms held office in the same building owned by the Lipats;[20] (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the business operations of the BEC were so merged with those of Mrs. Lipat such that they were practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and the corporation itself had no visible assets; (8) the board of directors of BEC was composed of the Burgos and Lipat family members;[21] (9) Estelita had full control over the activities of and decided business matters of the corporation;[22] and that (10) Estelita Lipat had benefited from the loans secured from Pacific Bank to finance her business abroad[23] and from the export bills secured by BEC for the account of “Mystical Fashion.”[24] It could not have been coincidental that BET and BEC are so intertwined with each other in terms of ownership, business purpose, and management.  Apparently, BET and BEC are one and the same and the latter is a conduit of and merely succeeded the former.  Petitioners’ attempt to isolate themselves from and hide behind the corporate personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy.  In our view, BEC is a mere continuation and successor of BET, and petitioners cannot evade their obligations in the mortgage contract secured under the name of BEC on the pretext that it was signed for the benefit and under the name of BET.  We are thus constrained to rule that the Court of Appeals did not err when it applied the instrumentality doctrine in piercing the corporate veil of BEC.

On the second issue, petitioners contend that their mortgaged property should not be made liable for the subsequent credit lines and loans incurred by BEC because, first, it was not covered by the mortgage contract of BET which only covered the loan of P583,854.00 and which allegedly had already been paid; and, second, it was secured by Teresita Lipat without any authorization or board resolution of BEC.

We find petitioners’ contention untenable.  As found by the Court of Appeals, the mortgaged property is not limited to answer for the loan of P583,854.00.  Thus:

Finally, the extent to which the Lipats’ property can be held liable under the real estate mortgage is not limited to P583,854.00.  It can be held liable for the value of the promissory notes, trust receipt and export bills as well.  For the mortgage was executed not only for the purpose of securing the Bela’s Export Trading’s original loan of P583,854.00, but also for “other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole or part of said original, additional or new loans, discounting lines, overdrafts and other credit accommodations, including interest and expenses or other obligations of the Mortgagor and/or Debtor owing to the Mortgagee, whether

directly, or indirectly principal or secondary, as appears in the accounts, books and records of the mortgagee.[25]

As a general rule, findings of fact of the Court of Appeals are final and conclusive, and cannot be reviewed on appeal by the Supreme Court, provided they are borne out by the record or based on substantial evidence.[26] As noted earlier, BEC merely succeeded BET as petitioners’ alter ego; hence, petitioners’ mortgaged property must be held liable for the subsequent loans and credit lines of BEC.

Further, petitioners’ contention that the original loan had already been paid, hence, the mortgaged property should not be made liable to the loans of BEC, is unsupported by any substantial evidence other than Estelita Lipat’s self-serving testimony.  Two disputable presumptions under the rules on evidence weigh against petitioners, namely: (a) that a person takes ordinary care of his concerns;[27] and (b) that things have happened according to the ordinary course of nature and the ordinary habits of life.[28] Here, if the original loan had indeed been paid, then logically, petitioners would have asked from Pacific Bank for the required documents evidencing receipt and payment of the loans and, as owners of the mortgaged property, would have immediately asked for the cancellation of the mortgage in the ordinary course of things.  However, the records are bereft of any evidence contradicting or overcoming said disputable presumptions.

Petitioners contend further that the mortgaged property should not bind the loans and credit lines obtained by BEC as they were secured without any proper authorization or board resolution.  They also blame the bank for its laxity and complacency in not requiring a board resolution as a requisite for approving the loans.

Such contentions deserve scant consideration.

Firstly, it could not have been possible for BEC to release a board resolution since per admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners’ rebuttal witness, no business or stockholder’s meetings were conducted nor were there election of officers held since its incorporation.  In fact, not a single board resolution was passed by the corporate board[29] and it was Estelita Lipat and/or Teresita Lipat who decided business matters.[30]

Secondly, the principle of estoppel precludes petitioners from denying the validity of the transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on the authority of the former as manager to act on behalf of petitioner Estelita Lipat and both BET and BEC.  While the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in its board of directors, subject to the articles of incorporation, by-laws, or relevant provisions of law, yet, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees, or agents.  The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws, or authorization from the board, either expressly or impliedly by habit, custom, or acquiescence in the general course of business.[31] Apparent authority, is derived not merely from practice.  Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer

or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers.[32]

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a special power of attorney executed by Estelita Lipat.  Recall that Teresita Lipat acted as the manager of both BEC and BET and had been deciding business matters in the absence of Estelita Lipat.  Further, the export bills secured by BEC were for the benefit of “Mystical Fashion” owned by Estelita Lipat.[33] Hence, Pacific Bank cannot be faulted for relying on the same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power of attorney.  It is a familiar doctrine that if a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.[34]

We find no necessity to extensively deal with the liability of Alfredo Lipat for the subsequent credit lines of BEC.  Suffice it to state that Alfredo Lipat never disputed the validity of the real estate mortgage of the original loan; hence, he cannot now dispute the subsequent loans obtained using the same mortgage contract since it is, by its very terms, a continuing mortgage contract.

On the third and final issue, petitioners assail the decision of the Court of Appeals for not taking cognizance of the issue on attorney’s fees on the ground that it was raised for the first time on appeal.  We find the conclusion of the Court of Appeals to be in accord with settled jurisprudence.  Basic is the rule that matters not raised in the complaint cannot be raised for the first time on appeal.[35]  A close perusal of the complaint yields no allegations disputing the attorney’s fees imposed under the real estate mortgage and petitioners cannot now allege that they have impliedly disputed the same when they sought the annulment of the contract.

In sum, we find no reversible error of law committed by the Court of Appeals in rendering the decision and resolution herein assailed by petitioners.

WHEREFORE, the petition is DENIED.  The Decision dated October 21, 1999 and the Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are AFFIRMED.  Costs against petitioners.

SO ORDERED.

Bellosillo, (Chairman), Austria-Martinez, and Callejo, Sr., JJ., concur.

[1] Rollo, pp. 45-62. Penned by Associate Justice Ramon A. Barcelona, with Associate Justices Demetrio G. Demetria and Mercedes Gozo-Dadole concurring.

[2] Id. at 65-74.[3] Id. at 63-64.[4] Records, Civil Case No. Q-89-4152, pp. 12-14.[5] Id. at  77-85.[6] Id. at 81-82.[7] Rollo, p. 74.

[8] Id. at 70.[9] Id. at 56.[10] Supra, note 3.[11] Rollo, pp. 14-15.[12] Cagayan Valley Enterprises, Inc. v. Court of Appeals, G.R. No. 78413, 8

November 1989, 179 SCRA 218, 230.[13] Concept Builders, Inc. v. NLRC, G.R. No. 108734, 29 May 1996, 257

SCRA 149, 158.[14] TSN, 17 August 1990, p. 3.[15] Id. at 16-17.[16] Rollo, p. 87.[17] TSN, 17 August 1990, pp. 26-27.[18] Supra, note 14.[19] Ibid.[20] Rollo, p. 50.[21] Id. at 51.[22] Id. at 56; TSN, 20 March 1992, p. 7.[23] TSN, 17 August 1990, p. 19.[24] Id. at 21.[25] Rollo, pp. 60-61,[26] Milestone Realty and Co., Inc. and William L. Perez v. CA, G.R. No.

135999, 19 April 2002, p. 8.[27] Revised Rules of Court, Rule 131, Sec. 3(d).[28] Id. at Sec. 3(y).[29] See TSN, 17 August 1990, p. 29 and TSN, 20 March 1992, p. 6.[30] See TSN, 20 March 1992, p. 7.[31] See People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals,

G.R. No. 117847, 7 October 1998, 297 SCRA 170, 182.[32] Id. at 183-184.[33] TSN, 17 August 1990, p. 21.[34] Supra, note 31 at 184-185.[35] Orosa v. Court of Appeals, G.R. No. 111080, 5 April 2000, 329 SCRA

652, 661.

SECOND DIVISION

G.R. No. 140667

WOODCHILD HOLDINGS, INC.,  Petitioner,

-   versus   -

ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., Respondent.

Promulgated: August 12, 2004

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

D E C I S I O N

CALLEJO, SR., J.:

          This is a petition for review on certiorari of the Decision[1] of the Court of Appeals in CA-G.R. CV No. 56125 reversing the Decision[2] of the Regional Trial Court of Makati, Branch 57, which ruled in favor of the petitioner.

The Antecedents

          The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the Roxas Electric and Construction Company, was the owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by Transfer Certificate of Title (TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086.  A portion of Lot No. 491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a dirt road accessing to the Sumulong Highway, Antipolo, Rizal.

At a special meeting on May 17, 1991, the respondent’s Board of Directors approved a resolution authorizing the corporation, through its president, Roberto B. Roxas, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, with an area of 7,213 square meters, at a price and

under such terms and conditions which he deemed most reasonable and advantageous to the corporation; and to execute, sign and deliver the pertinent sales documents and receive the proceeds of the sale for and on behalf of the company.[3]

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered by TCT No. 78086 on which it planned to construct its warehouse building, and a portion of the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot container van would be able to readily enter or leave the property.  In a Letter to Roxas dated June 21, 1991, WHI President Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2 under stated terms and conditions for P1,000 per square meter or at the price of P7,213,000.[4]  One of the terms incorporated in Dy’s offer was the following provision:

 5.    This Offer to Purchase is made on the representation and warranty of the OWNER/SELLER, that he holds a good and registrable title to the property, which shall be conveyed CLEAR and FREE of all liens and encumbrances, and that the area of 7,213 square meters of the subject property already includes the area on which the right of way traverses from the main lot (area) towards the exit to the Sumulong Highway as shown in the location plan furnished by the Owner/Seller to the buyer.  Furthermore, in the event that the right of way is insufficient for the buyer’s purposes (example: entry of a 45-foot container), the seller agrees to sell additional square meter from his current adjacent property to allow the buyer to full access and full use of the property.[5]

          Roxas indicated his acceptance of the offer on page 2 of the deed.  Less than a month later or on July 1, 1991, Roxas, as President of RECCI, as vendor, and Dy, as President of WHI, as vendee, executed a contract to sell in which RECCI bound and obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT No. 78086 for P7,213,000.[6]  On September 5, 1991, a Deed of Absolute Sale[7] in favor of WHI was issued, under which Lot No. 491-A-3-B-2 covered by TCT No. 78086 was sold for P5,000,000, receipt of which was acknowledged by Roxas under the following terms and conditions:

            The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the beneficial use of and a right of way from Sumulong Highway to the property herein conveyed consists of 25 square meters wide to be used as the latter’s egress from and ingress to and an additional 25 square meters in the corner of Lot No. 491-A-3-B-1, as turning and/or maneuvering area for Vendee’s vehicles. 

            The Vendor agrees that in the event that the right of way is insufficient for the Vendee’s use (ex entry of a 45-foot container) the Vendor agrees to sell additional square meters from its current adjacent property to allow the Vendee full access and full use of the property.

…

            The Vendor hereby undertakes and agrees, at its account, to defend the title of the Vendee to the parcel of land and improvements herein conveyed, against all claims of any and all persons or entities, and that the Vendor hereby warrants the right of the Vendee to possess and own the said parcel of land and improvements thereon and will defend the Vendee against all present and future claims and/or action in relation thereto, judicial and/or administrative.  In particular, the Vendor shall eject all existing squatters and occupants of the premises within two (2) weeks from the signing hereof.  In case of failure on the part of the Vendor to eject all occupants and squatters within the two-week period or breach of any of the stipulations, covenants and terms and conditions herein provided and that of contract to sell dated 1 July 1991, the Vendee shall have the right to cancel the sale and demand reimbursement for all payments made to the Vendor with interest thereon at 36% per annum.[8]

 

          On September 10, 1991, the Wimbeco Builder’s, Inc. (WBI) submitted its quotation for P8,649,000 to WHI for the construction of the warehouse building on a portion of the property with an area of 5,088 square meters.[9]  WBI proposed to start the project on October 1, 1991 and to turn over the building to WHI on February 29, 1992.[10]

In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc. confirmed its lease agreement with WHI of a 5,000-square-meter portion of the warehouse yet to be constructed at the rental rate of P65 per square meter.  Ponderosa emphasized the need for the warehouse to be ready for occupancy before April 1, 1992.[11]  WHI accepted the offer.  However, WBI failed to commence the construction of the warehouse in October 1, 1991 as planned because of the presence of squatters in the property and suggested a renegotiation of the contract after the squatters shall have been evicted.[12]  Subsequently, the squatters were evicted from the property.

On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of the warehouse building for P11,804,160.[13]  The contractor started construction in April 1992 even before the building officials of Antipolo City issued a building permit on May 28, 1992.  After the warehouse was finished, WHI issued on March 21, 1993 a certificate of occupancy by the building official.  Earlier, or on March 18, 1993, WHI, as lessor, and Ponderosa, as lessee, executed a contract of lease over a portion of the property for a monthly rental of P300,000 for a period of three years from March 1, 1993 up to February 28, 1996.[14]

In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked on a portion of the property over which WHI had been granted a right of way.  Roxas promised to look into the matter.  Dy and Roxas

discussed the need of the WHI to buy a 500-square-meter portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 as provided for in the deed of absolute sale.  However, Roxas died soon thereafter.  On April 15, 1992, the WHI wrote the RECCI, reiterating its verbal requests to purchase a portion of the said lot as provided for in the deed of absolute sale, and complained about the latter’s failure to eject the squatters within the three-month period agreed upon in the said deed.

The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 for its beneficial use within 72 hours from notice thereof, otherwise the appropriate action would be filed against it.  RECCI rejected the demand of WHI.  WHI reiterated its demand in a Letter dated May 29, 1992. There was no response from RECCI.

On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial Court of Makati, for specific performance and damages, and alleged,inter alia, the following in its complaint:

            5.         The “current adjacent property” referred to in the aforequoted paragraph of the Deed of Absolute Sale pertains to the property covered by Transfer Certificate of Title No. N-78085 of the Registry of Deeds of Antipolo, Rizal, registered in the name of herein defendant Roxas Electric.

            6.         Defendant Roxas Electric in patent violation of the express and valid terms of the Deed of Absolute Sale unjustifiably refused to deliver to Woodchild Holdings the stipulated beneficial use and right of way consisting of 25 square meters and 55 square meters to the prejudice of the plaintiff.

            7.         Similarly, in as much as the 25 square meters and 55 square meters alloted to Woodchild Holdings for its beneficial use is inadequate as turning and/or maneuvering area of its 45-foot container van, Woodchild Holdings manifested its intention pursuant to para. 5 of the Deed of Sale to purchase additional square meters from Roxas Electric to allow it full access and use of the purchased property, however, Roxas Electric refused and failed to merit Woodchild Holdings’ request contrary to defendant Roxas Electric’s obligation under the Deed of Absolute Sale (Annex “A”).

            8.         Moreover, defendant, likewise, failed to eject all existing squatters and occupants of the premises within the stipulated time frame and as a consequence thereof, plaintiff’s planned construction has been considerably delayed for seven (7) months due to the squatters who continue to trespass and obstruct the subject property, thereby Woodchild Holdings incurred substantial losses amounting to P3,560,000.00 occasioned by the increased cost of construction materials and labor.

            9.         Owing further to Roxas Electric’s deliberate refusal to comply with its obligation under Annex “A,” Woodchild Holdings suffered unrealized income ofP300,000.00 a month or P2,100,000.00

supposed income from rentals of the subject property for seven (7) months.

            10.       On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to comply with its obligations and warranties under the Deed of Absolute Sale but notwithstanding such demand, defendant Roxas Electric refused and failed and continue to refuse and fail to heed plaintiff’s demand for compliance.

            Copy of the demand letter dated April 15, 1992 is hereto attached as Annex “B” and made an integral part hereof.

            11.       Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to Roxas Electric to particularly annotate on Transfer Certificate of Title No. N-78085 the agreement under Annex “A” with respect to the beneficial use and right of way, however, Roxas Electric unjustifiably ignored and disregarded the same.

            Copy of the letter request dated 29 May 1992 is hereto attached as Annex “C” and made an integral part hereof.

            12.       By reason of Roxas Electric’s continuous refusal and failure to comply with Woodchild Holdings’ valid demand for compliance under Annex “A,” the latter was constrained to litigate, thereby incurring damages as and by way of attorney’s fees in the amount of P100,000.00 plus costs of suit and expenses of litigation.[15]

The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus:

            WHEREFORE, it is respectfully prayed that judgment be rendered in favor of Woodchild Holdings and ordering Roxas Electric the following:

a)    to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square meters and 55 square meters;

b)    to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full access and use of the purchased property pursuant to para. 5 of the Deed of Absolute Sale;

c)    to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use and right of way granted to Woodchild Holdings under the Deed of Absolute Sale;

d)    to pay Woodchild Holdings the amount of P5,660,000.00, representing actual damages and unrealized income;

e)    to pay attorney’s fees in the amount of P100,000.00; and

f)     to pay the costs of suit.

       Other reliefs just and equitable are prayed for.[16]

In its answer to the complaint, the RECCI alleged that it never authorized its former president, Roberto Roxas, to grant the beneficial use of any portion of Lot No. 491-A-3-B-1, nor agreed to sell any portion thereof or create a lien or burden thereon.  It alleged that, under the Resolution approved on May 17, 1991, it merely authorized Roxas to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086.  As such, the grant of a right of way and the agreement to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 in the said deed are ultra vires.  The RECCI further alleged that the provision therein that it would sell a portion of Lot No. 491-A-3-B-1 to the WHI lacked the essential elements of a binding contract.[17]

In its amended answer to the complaint, the RECCI alleged that the delay in the construction of its warehouse building was due to the failure of the WHI’s contractor to secure a building permit thereon.[18]

During the trial, Dy testified that he told Roxas that the petitioner was buying a portion of Lot No. 491-A-3-B-1 consisting of an area of 500 square meters, for the price of P1,000 per square meter.

On November 11, 1996, the trial court rendered judgment in favor of the WHI, the decretal portion of which reads:

WHEREFORE, judgment is hereby rendered directing defendant: 

            (1)        To allow plaintiff the beneficial use of the existing right of way plus the stipulated 25 sq. m. and 55 sq. m.;

            (2)        To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to allow said plaintiff full access and use of the purchased property pursuant to Par. 5 of their Deed of Absolute Sale;

            (3)        To cause annotation on TCT No. N-78085 the beneficial use and right of way granted by their Deed of Absolute Sale;

            (4)        To pay plaintiff the amount of P5,568,000 representing actual damages and plaintiff’s unrealized income;

            (5)        To pay plaintiff P100,000 representing attorney’s fees; and To pay the costs of suit.

SO ORDERED.[19]

The trial court ruled that the RECCI was estopped from disowning the apparent authority of Roxas under the May 17, 1991 Resolution of its Board of Directors.  The court reasoned that to do so would prejudice the WHI which transacted with Roxas in good faith, believing that he had the authority to bind the WHI relating to the easement of right of way, as well as the right to purchase a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085.

The RECCI appealed the decision to the CA, which rendered a decision on November 9, 1999 reversing that of the trial court, and ordering the dismissal of the complaint.  The CA ruled that, under the resolution of the Board of Directors of the RECCI, Roxas was merely authorized to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, but not to grant right of way in favor of the WHI over a portion of Lot No. 491-A-3-B-1, or to grant an option to the petitioner to buy a

portion thereof.  The appellate court also ruled that the grant of a right of way and an option to the respondent were so lopsided in favor of the respondent because the latter was authorized to fix the location as well as the price of the portion of its property to be sold to the respondent.  Hence, such provisions contained in the deed of absolute sale were not binding on the RECCI.  The appellate court ruled that the delay in the construction of WHI’s warehouse was due to its fault. 

The Present Petition

The petitioner now comes to this Court asserting that:

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ABSOLUTE SALE (EXH. “C”) IS ULTRA VIRES.

 

II. THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO ALLOWING THE PLAINTIFF-APPELLEE THE BENEFICIAL USE OF THE EXISTING RIGHT OF WAY PLUS THE STIPULATED 25 SQUARE METERS AND 55 SQUARE METERS BECAUSE THESE ARE VALID STIPULATIONS AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE SALE (EXH. “C”).

III.

THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS TO RULE THAT THE STIPULATIONS OF THE DEED OF ABSOLUTE SALE (EXH. “C”) WERE DISADVANTAGEOUS TO THE APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS PROPERTY WITHOUT DUE PROCESS.

IV.

IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT DUE PROCESS BY THE ASSAILED DECISION.

V.

THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE APPELLANT TO EVICT THE SQUATTERS ON THE LAND AS AGREED IN THE DEED OF ABSOLUTE SALE (EXH. “C”).

VI.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO DIRECTING THE DEFENDANT TO PAY THE PLAINTIFF THE AMOUNT OF P5,568,000.00 REPRESENTING ACTUAL DAMAGES AND PLAINTIFF’S UNREALIZED INCOME AS WELL AS ATTORNEY’S FEES.[20]

          The threshold issues for resolution are the following: (a) whether the respondent is bound by the provisions in the deed of absolute sale granting to the petitioner beneficial use and a

right of way over a portion of Lot No. 491-A-3-B-1 accessing to the Sumulong Highway and granting the option to the petitioner to buy a portion thereof, and, if so, whether such agreement is enforceable against the respondent; (b) whether the respondent failed to eject the squatters on its property within two weeks from the execution of the deed of absolute sale; and, (c) whether the respondent is liable to the petitioner for damages.

          On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the respondent authorized Roxas, then its president, to grant a right of way over a portion of Lot No. 491-A-3-B-1 in favor of the petitioner, and an option for the respondent to buy a portion of the said property.  The petitioner contends that when the respondent sold Lot No. 491-A-3-B-2 covered by TCT No. 78086, it (respondent) was well aware of its obligation to provide the petitioner with a means of ingress to or egress from the property to the Sumulong Highway, since the latter had no adequate outlet to the public highway.  The petitioner asserts that it agreed to buy the property covered by TCT No. 78085 because of the grant by the respondent of a right of way and an option in its favor to buy a portion of the property covered by TCT No. 78085.  It contends that the respondent never objected to Roxas’ acceptance of its offer to purchase the property and the terms and conditions therein; the respondent even allowed Roxas to execute the deed of absolute sale in its behalf.  The petitioner asserts that the respondent even received the purchase price of the property without any objection to the terms and conditions of the said deed of sale.  The petitioner claims that it acted in good faith, and contends that after having been benefited by the said sale, the respondent is estopped from assailing its terms and conditions.  The petitioner notes that the respondent’s Board of Directors never approved any resolution rejecting the deed of absolute sale executed by Roxas for and in its behalf.  As such, the respondent is obliged to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 with an area of 500 square meters at the price of P1,000 per square meter, based on its evidence and Articles 649 and 651 of the New Civil Code.

          For its part, the respondent posits that Roxas was not so authorized under the May 17, 1991 Resolution of its Board of Directors to impose a burden or to grant a right of way in favor of the petitioner on Lot No. 491-A-3-B-1, much less convey a portion thereof to the petitioner.  Hence, the respondent was not bound by such provisions contained in the deed of absolute sale.  Besides, the respondent contends, the petitioner cannot enforce its right to buy a portion of the said property since there was no agreement in the deed of absolute sale on the price thereof as well as the specific portion and area to be purchased by the petitioner.

          We agree with the respondent.

          In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,[21] we held that:

            A corporation is a juridical person separate and distinct from its stockholders or members.  Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the

corporation’s board of directors.  Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides:

            “SEC. 23.  The Board of Directors or Trustees. – Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified.”

Indubitably, a corporation may act only through its board of directors or, when authorized either by its by-laws or by its board resolution, through its officers or agents in the normal course of business.  The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of law. …[22]

 

          Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation.  However, under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them:

            Art. 1910.  The principal must comply with all the obligations which the agent may have contracted within the scope of his authority.

            As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly.

Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation.[23]

In BA Finance Corporation v. Court of Appeals,[24] we also ruled that persons dealing with an assumed agency, whether the assumed agency be a general or special one, are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it.

          In this case, the respondent denied authorizing its then president Roberto B. Roxas to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, and to create a lien or burden thereon.  The petitioner was thus burdened to prove that the respondent so authorized Roxas to sell the same and to create a lien thereon.

          Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of the respondent, which is worded as follows:

            RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to any interested buyer, its 7,213-sq.-meter property at the Sumulong Highway, Antipolo, Rizal, covered by Transfer Certificate of Title No. N-78086, at a price and on terms and conditions which he deems most reasonable and advantageous to the corporation;

            FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the corporation, be, as he is hereby authorized to execute, sign and deliver the pertinent sales documents and receive the proceeds of sale for and on behalf of the company.[25]

          Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof.  The authority of Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon.  Neither may such authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner “on such terms and conditions which he deems most reasonable and advantageous.” Under paragraph 12, Article 1878 of the New Civil Code, a special power of attorney is required to convey real rights over immovable property.[26]  Article 1358 of the New Civil Code requires that contracts which have for their object the creation of real rights over immovable property must appear in a public document.[27]  The petitioner cannot feign ignorance of the need for Roxas to have been specifically authorized in writing by the Board of Directors to be able to validly grant a right of way and agree to sell a portion of Lot No. 491-A-3-B-1.  The rule is that if the act of the agent is one which requires authority in writing, those dealing with him are charged with notice of that fact.[28]

Powers of attorney are generally construed strictly and courts will not infer or presume broad powers from deeds which do not sufficiently include property or subject under which the agent is to deal.[29]  The general rule is that the power of attorney must be pursued within legal strictures, and the agent can neither go beyond it; nor beside it.  The act done must be legally identical with that authorized to be done.[30]  In sum, then, the consent of the respondent to the assailed provisions in the deed of absolute sale was not obtained; hence, the assailed provisions are not binding on it. 

We reject the petitioner’s submission that, in allowing Roxas to execute the contract to sell and the deed of absolute sale and failing to reject or disapprove the same, the respondent thereby gave him apparent authority to grant a right of way over Lot No. 491-A-3-B-1 and to grant an option for the respondent to sell a portion thereof to the petitioner.  Absent estoppel or ratification, apparent authority cannot remedy the lack of the written power required under the statement of frauds.[31]  In addition, the petitioner’s fallacy is its wrong assumption of the unproved premise that the respondent had full knowledge of all the terms and conditions contained in the deed of absolute sale when Roxas executed it.

It bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the principal

may knowingly permit the agent to so hold himself out as having such authority, and in this way, the principal becomes estopped to claim that the agent does not have such authority; second, the principal may so clothe the agent with the indicia of authority as to lead a reasonably prudent person to believe that he actually has such authority.[32]  There can be no apparent authority of an agent without acts or conduct on the part of the principal and such acts or conduct of the principal must have been known and relied upon in good faith and as a result of the exercise of reasonable prudence by a third person as claimant and such must have produced a change of position to its detriment.  The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent.[33] 

For the principle of apparent authority to apply, the petitioner was burdened to prove the following: (a) the acts of the respondent justifying belief in the agency by the petitioner; (b) knowledge thereof by the respondent which is sought to be held; and, (c) reliance thereon by the petitioner consistent with ordinary care and prudence.[34]  In this case, there is no evidence on record of specific acts made by the respondent[35] showing or indicating that it had full knowledge of any representations made by Roxas to the petitioner that the respondent had authorized him to grant to the respondent an option to buy a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden or lien thereon, or that the respondent allowed him to do so. 

The petitioner’s contention that by receiving and retaining the P5,000,000 purchase price of Lot No. 491-A-3-B-2, the respondent effectively and impliedly ratified the grant of a right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to grant to the petitioner an option to sell a portion thereof, is barren of merit.  It bears stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the latter had taken possession of the property.  As such, the respondent had the right to retain the P5,000,000, the purchase price of the property it had sold to the petitioner.  For an act of the principal to be considered as an implied ratification of an unauthorized act of an agent, such act must be inconsistent with any other hypothesis than that he approved and intended to adopt what had been done in his name. [36]  Ratification is based on waiver – the intentional relinquishment  of a known right.  Ratification cannot be inferred from acts that a principal has a right to do independently of the unauthorized act of the agent.  Moreover, if a writing is required to grant an authority to do a particular act, ratification of that act must also be in writing.[37]  Since the respondent had not ratified the unauthorized acts of Roxas, the same are unenforceable.[38]  Hence, by the respondent’s retention of the amount, it cannot thereby be implied that it had ratified the unauthorized acts of its agent, Roberto Roxas.

On the last issue, the petitioner contends that the CA erred in dismissing its complaint for damages against the respondent on its finding that the delay in the construction of its warehouse was due to its (petitioner’s) fault.  The petitioner asserts that the CA should have affirmed the ruling of the trial court that the respondent failed to cause the eviction of the squatters from the property on or before September 29, 1991; hence, was liable for P5,660,000.  The respondent, for its part, asserts that the delay in the construction of the petitioner’s

warehouse was due to its late filing of an application for a building permit, only on May 28, 1992.

The petitioner’s contention is meritorious.  The respondent does not deny that it failed to cause the eviction of the squatters on or before September 29, 1991. Indeed, the respondent does not deny the fact that when the petitioner wrote the respondent demanding that the latter cause the eviction of the squatters on April 15, 1992, the latter were still in the premises.  It was only after receiving the said letter in April 1992 that the respondent caused the eviction of the squatters, which thus cleared the way for the petitioner’s contractor to commence the construction of its warehouse and secure the appropriate building permit therefor.

The petitioner could not be expected to file its application for a building permit before April 1992 because the squatters were still occupying the property. Because of the respondent’s failure to cause their eviction as agreed upon, the petitioner’s contractor failed to commence the construction of the warehouse in October 1991 for the agreed price of P8,649,000.  In the meantime, costs of construction materials spiraled.  Under the construction contract entered into between the petitioner and the contractor, the petitioner was obliged to pay P11,804,160,[39] including the additional work costing P1,441,500, or a net increase of P1,712,980.[40]  The respondent is liable for the difference between the original cost of construction and the increase thereon, conformably to Article 1170 of the New Civil Code, which reads:

Art. 1170.  Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who in any manner contravene the tenor thereof, are liable for damages.

The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income from the lease of the property to the Ponderosa Leather Goods Company. The respondent is, thus, liable to the petitioner for the said amount, under Articles 2200 and 2201 of the New Civil Code:

Art. 2200.  Indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain.

Art. 2201.  In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation.

In sum, we affirm the trial court’s award of damages and attorney’s fees to the petitioner.

IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the assailed Decision of the Court of Appeals WITH

MODIFICATION.  The respondent is ordered to pay to the petitioner the amount of P5,612,980 by way of actual damages and P100,000 by way of attorney’s fees. No costs.

          SO ORDERED.

[1]  Penned by Associate Justice Salome A. Montoya, with Associate Justices Conrado M. Vasquez, Jr. and Teodoro P. Regino, concurring.[2]  Penned by Judge Francisco X. Velez.[3]  Exhibit “L,” Records, p. 213.[4]  Exhibit “M,” Id. at 214.[5]  Ibid.[6]  Exhibit “N,” Id. at 216.[7]  Exhibit “C,” Id. at 192-195.[8]  Id. at 193-194.[9]  Exhibit “D,” Id. at 196.[10] Exhibit “D-1,” Id. at 197.[11] Exhibit “G,” Id. at 201.[12] Exhibit “E,” Id. at 198.[13] Exhibit “F,” Id. at 199.[14] Exhibit “H,” Id. at 202-206.[15] Records, pp. 2-4.[16] Id. at 4-5.[17] Id. at 24-25.[18] Id. at 247.[19] Id. at 482.[20] Rollo, pp. 22-23.[21] 296 SCRA 631 (1998).[22] Id. at 644-645.[23] Art. 1403.  The following contracts are unenforceable, unless they are ratified:    (1)  Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers.[24] 211 SCRA 112 (1992).[25] Records, p. 213.[26] Art. 1878.  Special powers of attorney are necessary in the following cases:…    (5)  To enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration;…    (12) To create or convey real rights over immovable property;…    (14) To ratify or recognize obligations contracted before the agency;    (15) Any other act of strict dominion.[27] Art. 1358.  The following must appear in a public document:    (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by articles 1403, No. 2, and 1405;…    (3)  The power to administer property, or any other power which has for its object an act appearing or which should

appear in a public document, or should prejudice a third person;    (4)  The cession of actions or rights proceeding from an act appearing in a public document.[28] State v. Sellers and Resolute Insurance Company, 258 N.W.2d 292 (1977).[29] Prior v. Hager, 440 S.W.2d 167 (1969).[30] Lang v. Bair, 36 Mo. 85, id.[31] Union Camp Corporation v. Dyal, Jr., 460 F.2d 678 (1972).[32] Banker’s Protective Life Insurance Co. v. Addison, 273 S.W.2d 694 (1951).[33] Id. at 696.[34] Residon v. Miller Distributors Co., Inc., 139 N.W.2d 12 (1966).[35] See Wells Fargo Business v. Kozoff, 695 F.2d 940 (1983).[36] The Board of Supervisors v. Schack, 18 L.E.2d 556 (1897); American Food Corporation v. Central Carolina Bank & Trust Company, 291 S.W.2d 892.[37] Reuschlin and Gregory, The Law of Agency and Partnership, 2nd ed., p. 75.[38] Article 1403, New Civil Code (infra).[39] Exhibit “F,” Records, p. 199.[40] TSN, 30 September 1993, p. 13.

G.R. No. L-18287             March 30, 1963

TRINIDAD J. FRANCISCO, plaintiff-appellee, vs.

GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.

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

G.R. No. L-18155             March 30, 1963

TRINIDAD J. FRANCISCO, plaintiff-appellant, vs.

GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellee.

Vicente J. Francisco for plaintiff-appellee.The Government Corporate Counsel for defendant-appellant.

REYES, J.B.L., J.:

Appeal by the Government Service Insurance System from the decision of the Court of First Instance of Rizal (Hon. Angel H. Mojica, presiding), in its Civil Case No. 2088-P, entitled "Trinidad J. Francisco, plaintiff, vs. Government Service Insurance System, defendant", the dispositive part of which reads as follows:

WHEREFORE, judgment is hereby rendered: (a) Declaring null and void the consolidation in the name of the defendant, Government Service Insurance System, of the title of the VIC-MARI Compound; said title shall be restored to the plaintiff; and all payments made by the plaintiff, after her offer had been accepted by the defendant, must be credited as amortizations on her loan; and (b) Ordering the defendant to abide by the terms of the contract

created by plaintiff's offer and it's unconditional acceptance, with costs against the defendant.

The plaintiff, Trinidad J. Francisco, likewise appealed separately (L-18155), because the trial court did not award the P535,000.00 damages and attorney's fees she claimed. Both appeals are, therefore, jointly treated in this decision.

The following facts are admitted by the parties: On 10 October 1956, the plaintiff, Trinidad J. Francisco, in consideration of a loan in the amount of P400,000.00, out of which the sum of P336,100.00 was released to her, mortgaged in favor of the defendant, Government Service Insurance System (hereinafter referred to as the System) a parcel of land containing an area of 18,232 square meters, with twenty-one (21) bungalows, known as Vic-Mari Compound, located at Baesa, Quezon City, payable within ten (10) years in monthly installments of P3,902.41, and with interest of 7% per annum compounded monthly.

On 6 January 1959, the System extrajudicially foreclosed the mortgage on the ground that up to that date the plaintiff-mortgagor was in arrears on her monthly installments in the amount of P52,000.00. Payments made by the plaintiff at the time of foreclosure amounted to P130,000.00. The System itself was the buyer of the property in the foreclosure sale.

On 20 February 1959, the plaintiff's father, Atty. Vicente J. Francisco, sent a letter to the general manager of the defendant corporation, Mr. Rodolfo P. Andal, the material portion of which recited as follows:

Yesterday, I was finally able to collect what the Government owed me and I now propose to pay said amount of P30,000 to the GSIS if it would agree that after such payment the foreclosure of my daughter's mortgage would be set aside. I am aware that the amount of P30,000 which I offer to pay will not cover the total arrearage of P52,000 but as regards the balance, I propose this arrangement: for the GSIS to take over the administration of the mortgaged property and to collect the monthly installments, amounting to about P5,000, due on the unpaid purchase price of more than 31 lots and houses therein and the monthly installments collected shall be applied to the payment of Miss Francisco's arrearage until the same is fully covered. It is requested, however, that from the amount of the monthly installments collected, the sum of P350.00 be deducted for necessary expenses, such as to pay the security guard, the street-caretaker, the Meralco Bill for the street lights and sundry items.

It will be noted that the collectible income each month from the mortgaged property, which as I said consists of installments amounting to about P5,000, is more than enough to cover the monthly amortization on Miss Francisco's loan. Indeed, had she not encountered difficulties, due to unforeseen circumstances, in collecting the said installments, she could have paid the amortizations as they fell due and there would have been really no need for the GSIS to resort to foreclosure.

The proposed administration by the GSIS of the mortgaged property will continue even after Miss Francisco's account shall have been kept up to date. However, once the arrears shall have been paid, whatever amount of the monthly installments collected in excess of the amortization due on the loan will be turned over to Miss Francisco.

I make the foregoing proposal to show Francisco's sincere desire to work out any fair arrangement for the settlement of her obligation. I trust that the GSIS, under the broadminded policies of your administration, would give it serious consideration.

Sincerely,.                    

s/ Vicente J. Francisco t/ VICENTE J. FRANCISCO

On the same date, 20 February 1959, Atty. Francisco received the following telegram:.

VICENTE FRANCISCO SAMANILLO BLDG. ESCOLTA.

GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF FORECLOSED PROPERTY OF YOUR DAUGHTER ANDAL"                              

On 28 February 1959, Atty. Francisco remitted to the System, through Andal, a check for P30,000.00, with an accompanying letter, which reads:

I am sending you herewith BPI Check No. B-299484 for Thirty Thousand Pesos (P30,000.00) in accordance with my letter of February 20th and your reply thereto of the same date, which reads:

GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF FORECLOSED PROPERTY OF YOUR DAUGHTER

x x x           x x x           x x x

The defendant received the amount of P30,000.00, and issued therefor its official receipt No. 1209874, dated 4 March 1959. It did not, however, take over the administration of the compound. In the meantime, the plaintiff received the monthly payments of some of the occupants thereat; then on 4 March 1960, she remitted, through her father, the amount of P44,121.29, representing the total monthly installments that she received from the occupants for the period from March to December 1959 and January to February 1960, minus expenses and real estate taxes. The defendant also received this amount, and issued the corresponding official receipt.

Remittances, all accompanied by letters, corresponding to the months of March, April, May, and June, 1960 and totalling P24,604.81 were also sent by the plaintiff to the defendant from time to time, all of which were received and duly receipted for.

Then the System sent three (3) letters, one dated 29 January 1960, which was signed by its assistant general manager, and the other two letters, dated 19 and 26 February 1960, respectively, which were signed by Andal, asking the plaintiff for a proposal for the payment of her indebtedness, since

according to the System the one-year period for redemption had expired.

In reply, Atty. Francisco sent a letter, dated 11 March 1960, protesting against the System's request for proposal of payment and inviting its attention to the concluded contract generated by his offer of 20 February 1959, and its acceptance by telegram of the same date, the compliance of the terms of the offer already commenced by the plaintiff, and the misapplication by the System of the remittances she had made, and requesting the proper corrections.

By letter, dated 31 May 1960, the defendant countered the preceding protest that, by all means, the plaintiff should pay attorney's fees of P35,644.14, publication expenses, filing fee of P301.00, and surcharge of P23.64 for the foreclosure work done; that the telegram should be disregarded in view of its failure to express the contents of the board resolution due to the error of its minor employees in couching the correct wording of the telegram. A copy of the excerpts of the resolution of the Board of Directors (No. 380, February 20, 1959) was attached to the letter, showing the approval of Francisco's offer —

... subject to the condition that Mr. Vicente J. Francisco shall pay all expenses incurred by the GSIS in the foreclosure of the mortgage.

Inasmuch as, according to the defendant, the remittances previously made by Atty. Francisco were allegedly not sufficient to pay off her daughter's arrears, including attorney's fees incurred by the defendant in foreclosing the mortgage, and the one-year period for redemption has expired, said defendant, on 5 July 1960, consolidated the title to the compound in its name, and gave notice thereof to the plaintiff on 26 July 1960 and to each occupant of the compound.

Hence, the plaintiff instituted the present suit, for specific performance and damages. The defendant answered, pleading that the binding acceptance of Francisco's offer was the resolution of the Board, and that Andal's telegram, being erroneous, should be disregarded. After trial, the court below found that the offer of Atty. Francisco, dated 20 February 1959, made on behalf of his daughter, had been unqualifiedly accepted, and was binding, and rendered judgment as noted at the start of this opinion.

The defendant-appellant corporation assigns six (6) errors allegedly committed by the lower court, all of which, however, are resolvable on the single issue as to whether or not the telegram generated a contract that is valid and binding upon the parties.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñët

We find no reason for altering the conclusion reached by the court below that the offer of compromise made by plaintiff in the letter, Exhibit "A", had been validly accepted, and was binding on the defendant. The terms of the offer were clear, and over the signature of defendant's general manager, Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted. There was nothing in the

telegram that hinted at any anomaly, or gave ground to suspect its veracity, and the plaintiff, therefore, can not be blamed for relying upon it. There is no denying that the telegram was within Andal's apparent authority, but the defense is that he did not sign it, but that it was sent by the Board Secretary in his name and without his knowledge. Assuming this to be true, how was appellee to know it? Corporate transactions would speedily come to a standstill were every person dealing with a corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face. This Court has observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that —

In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it presents itself to the third party with whom the contract is made. Naturally he can have little or no information as to what occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law; and we would be sorry to announce a doctrine which would permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without recourse against the corporation whose name and authority had been used in the manner disclosed in this case. As already observed, it is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to do acts within the scope of an apparent authority, and thus holds him out to the public as possessing power to do those acts, the corporation will, as against any one who has in good faith dealt with the corporation through such agent, be estopped from denying his authority; and where it is said "if the corporation permits" this means the same as "if the thing is permitted by the directing power of the corporation."

It has also been decided that —

A very large part of the business of the country is carried on by corporations. It certainly is not the practice of persons dealing with officers or agents who assume to act for such entities to insist on being shown the resolution of the board of directors authorizing the particular officer or agent to transact the particular business which he assumes to conduct. A person who knows that the officer or agent of the corporation habitually transacts certain kinds of business for such corporation under circumstances which necessarily show knowledge on the part of those charged with the conduct of the corporate business assumes, as he has the right to assume, that such agent or officer is acting within the scope of his authority. (Curtis Land & Loan Co. vs. Interior Land Co., 137 Wis. 341, 118 N.W. 853, 129 Am. St. Rep. 1068; as cited in 2 Fletcher's Encyclopedia, Priv. Corp. 263, perm. Ed.)

Indeed, it is well-settled that —

If a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents. (2 Fletcher's Encyclopedia, Priv. Corp. 255, Perm. Ed.)

Hence, even if it were the board secretary who sent the telegram, the corporation could not evade the binding effect produced by the telegram..

The defendant-appellant does not disown the telegram, and even asserts that it came from its offices, as may be gleaned from the letter, dated 31 May 1960, to Atty. Francisco, and signed "R. P. Andal, general manager by Leovigildo Monasterial, legal counsel", wherein these phrases occur: "the telegram sent ... by this office" and "the telegram we sent your" (emphasis supplied), but it alleges mistake in couching the correct wording. This alleged mistake cannot be taken seriously, because while the telegram is dated 20 February 1959, the defendant informed Atty. Francisco of the alleged mistake only on 31 May 1960, and all the while it accepted the various other remittances, starting on 28 February 1959, sent by the plaintiff to it in compliance with her performance of her part of the new contract.

The inequity of permitting the System to deny its acceptance become more patent when account is taken of the fact that in remitting the payment of P30,000 advanced by her father, plaintiff's letter to Mr. Andal quoted verbatim the telegram of acceptance. This was in itself notice to the corporation of the terms of the allegedly unauthorized telegram, for as Ballentine says:

Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his employment, and in relation to matters within the scope of his authority, is notice to the corporation, whether he communicates such knowledge or not. (Ballentine, Law on Corporations, section 112.)

since a corporation cannot see, or know, anything except through its officers.

Yet, notwithstanding this notice, the defendant System pocketed the amount, and kept silent about the telegram not being in accordance with the true facts, as it now alleges. This silence, taken together with the unconditional acceptance of three other subsequent remittances from plaintiff, constitutes in itself a binding ratification of the original agreement (Civil Code, Art. 1393).

ART. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.

Nowhere else do the circumstances call more insistently for the application of the equitable maxim that between two innocent parties, the one who made it possible for the wrong to be done should be the one to bear the resulting loss..

The defendant's assertion that the telegram came from it but that it was incorrectly worded renders unnecessary to resolve the other point on controversy as to whether the said telegram constitutes an actionable document..

Since the terms offered by the plaintiff in the letter of 20 February 1959 (Exhibit "A") provided for the setting aside of the foreclosure effected by the defendant System, the acceptance of the offer left the account of plaintiff in the same condition as if no foreclosure had taken place. It follows, as the lower court has correctly held, that the right of the System to collect attorneys' fees equivalent to 10% of the due (P35,694.14) and the expenses and charges of P3,300.00 may no longer be enforced, since by the express terms of the mortgage contract, these sums were collectible only "in the event of foreclosure."

The court a quo also called attention to the unconscionability of defendant's charging the attorney's fees, totalling over P35,000.00; and this point appears well-taken, considering that the foreclosure was merely extra-judicial, and the attorneys' work was limited to requiring the sheriff to effectuate the foreclosure. However, in view of the parties' agreement to set the same aside, with the consequential elimination of such incidental charges, the matter of unreasonableness of the counsel fees need not be labored further.

Turning now to the plaintiff's separate appeal (Case G.R. No. L-18155): Her prayer for an award of actual or compensatory damages for P83,333.33 is predicated on her alleged unrealized profits due to her inability to sell the compound for the price of P750,000.00 offered by one Vicente Alunan, which sale was allegedly blocked because the System consolidated the title to the property in its name. Plaintiff reckons the amount of P83,333.33 by placing the actual value of the property at P666,666.67, a figure arrived at by assuming that the System's loan of P400,000.00 constitutes 60% of the actual value of the security. The court a quo correctly refused to award such actual or compensatory damages because it could not determine with reasonable certainty the difference between the offered price and the actual value of the property, for lack of competent evidence. Without proof we cannot assume, or take judicial notice, as suggested by the plaintiff, that the practice of lending institutions in the country is to give out as loan 60% of the actual value of the collateral. Nor should we lose sight of the fact that the price offered by Alunan was payable in installments covering five years, so that it may not actually represent true market values.

Nor was there error in the appealed decision in denying moral damages, not only on account of the plaintiff's failure to take the witness stand and testify to her social humiliation, wounded feelings, anxiety, etc., as the decision holds, but primarily because a breach of contract like that of defendant, not being malicious or fraudulent, does not warrant the award of moral damages under Article 2220 of the Civil Code (Ventanilla vs. Centeno, L-14333, 28 Jan. 1961; Fores vs. Miranda, L-12163, 4 March 1959).

There is no basis for awarding exemplary damages either, because this species of damages is only allowed in addition to moral, temperate, liquidated, or compensatory damages, none of which have been allowed in this case, for reasons herein

before discussed (Art. 2234, Civil Code; Velayo vs. Shell Co. of P.I., L-7817, Res. July 30, 1957; Singson, et al. vs. Aragon and Lorza, L-5164, Jan. 27, 1953, 49 O.G. No. 2, 515).

As to attorneys' fees, we agree with the trial court's stand that in view of the absence of gross and evident bad faith in defendant's refusal to satisfy the plaintiff's claim, and there being none of the other grounds enumerated in Article 2208 of the Civil Code, such absence precludes a recovery. The award of attorneys' fees is essentially discretionary in the trial court, and no abuse of discretion has been shown.

FOR THE FOREGOING REASONS, the appealed decision is hereby affirmed, with costs against the defendant Government Service Insurance System, in G.R. No.L-18287.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.

G.R. No. L-68555 March 19, 1993

PRIME WHITE CEMENT CORPORATION, petitioner, vs.

HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.

De Jesus & Associates for petitioner.

Padlan, Sutton, Mendoza & Associates for private respondent.

CAMPOS, JR., J.:

Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporation seeking the reversal of the decision * of the then Intermediate Appellate Court, the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in toto. 1

The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted, to wit:

On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as the exclusive dealer and/or distributor of the said defendant corporation of its cement products in the entire Mindanao area for a term of five (5) years and proving (sic) among others that:

a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff, as dealer with 20,000 bags (94 lbs/bag) of white cement per month;

b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag of white cement, FOB Davao and Cagayan de Oro ports;

c. The plaintiff shall, every time the defendant corporation is ready to deliver the good, open with any bank or banking institution a confirmed, unconditional, and irrevocable letter of credit in favor of the corporation and that upon certification by the boat captain on the bill of lading that the goods have been loaded on board the vessel bound for Davao the said bank or banking institution shall release the corresponding amount as payment of the goods so shipped.

Right after the plaintiff entered into the aforesaid dealership agreement, he placed an advertisement in a national, circulating newspaper the fact of his being the exclusive dealer of the defendant corporation's white cement products in Mindanao area, more particularly, in the Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even congratulated by his business associates, so much so, he was asked by some of his businessmen friends and close associates if they can be hissub-dealer in the Mindanao area.

Relying heavily on the dealership agreement, plaintiff sometime in the months of September, October, and December, 1969, entered into a written agreement with several hardware stores dealing in buying and selling white cement in the Cities of Davao and Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular supply of the said commodity, by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by his supposed buyer that his allocation of 20,000 bags of white cement can be disposed of, he informed the defendant corporation in his letter dated August 18, 1970 that he is making the necessary preparation for the opening of the requisite letter of credit to cover the price of the due initial delivery for the month of September, 1970 (Exhibit B), looking forward to the defendant corporation's duty to comply with the dealership agreement. In reply to the aforesaid letter of the plaintiff, the defendant corporation thru its corporate secretary, replied that the board of directors of the said defendant decided to impose the following conditions:

a. Delivery of white cement shall commence at the end of November, 1970;

b. Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered;

c. The price of white cement was priced at P13.30 per bag;

d. The price of white cement is subject to readjustment unilaterally on the part of the defendant;

e. The place of delivery of white cement shall be Austurias (sic);

f. The letter of credit may be opened only with the Prudential Bank, Makati Branch;

g. Payment of white cement shall be made in advance and which payment shall be used by the defendant as guaranty in the opening of a foreign letter of credit to cover costs and expenses in the procurement of materials in the manufacture of white cement. (Exhibit C).

xxx xxx xxx

Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to the defendant, however, defendant refused to comply with the same, and plaintiff by force of circumstances was constrained to cancel his agreement for the supply of white cement with third parties, which were concluded in anticipation of, and pursuant to the said dealership agreement.

Notwithstanding that the dealership agreement between the plaintiff and defendant was in force and subsisting, the defendant corporation, in violation of, and with evident intention not to be bound by the terms and conditions thereof, entered into an exclusive dealership agreement with a certain Napoleon Co for the marketing of white cement in Mindanao (Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90). 2

After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said decision mainly on the following basis, and We quote:

There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership agreement Exhibit "A", they were the President and Chairman of the Board, respectively, of defendant-appellant corporation. Neither is the genuineness of the said agreement contested. As a matter of fact, it appears on the face of the contract itself that both officers were duly authorized to enter into the said agreement and signed the same for and in behalf of the corporation. When they, therefore, entered into the said transaction they created the impression that they were duly clothed with the authority to do so. It cannot now be said that the disputed agreement which possesses all the essential requisites of a valid contract was never intended to bind the corporation as this avoidance is barred by the principle of estoppel. 3

In this petition for review, petitioner Prime White Cement Corporation made the following assignment of errors. 4

I. THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.

II. THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE CORPORATION.

III. THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE.

IV. THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.

V. IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF JUDICIAL PROCEEDINGS.

There is only one legal issue to be resolved by this Court: whether or not the "dealership agreement" referred by the President and Chairman of the Board of petitioner corporation is a valid and enforceable contract. We do not agree with the conclusion of the respondent Court that it is.

Under the Corporation Law, which was then in force at the time this case arose, 5 as well as under the present Corporation Code, all corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. 6Although it cannot completely abdicate its power and responsibility to act for the juridical entity, the Board may expressly delegate specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied ratification may take various forms — like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 7 Furthermore, even in the absence of express or implied authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. 8 These rules are basic, but are all general and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person, i. e., a person outside the corporation.

The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. 9 In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and

guidance of corporate affairs and property and hence of the property interests of the stockholders." 10 In the case ofGokongwei v. Securities and Exchange Commission, this Court quoted with favor from Pepper v. Litton, 11 thus:

. . . He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. . . . He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. . . . .

On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. Section 32 of the Corporation Code provides, thus:

Sec. 32. Dealings of directors, trustees or officers with the corporation. — A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of Directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

Although the old Corporation Law which governs the instant case did not contain a similar provision, yet the cited provision substantially incorporates well-settled principles in corporate law. 12

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a

person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First of all, We believe that the contract was neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for five years starting September, 1970, at thefixed price of P9.70 per bag. Respondent Te is a businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later. He must have known that within that period of six years, there would be a considerable rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would require such a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the President, without authority from the Board of Directors, void or voidable, although it may have been in the ordinary course of business. We believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable. Respondent Te, himself, when he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:

The price of white cement shall be mutually determined by us but in no case shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio Lim was made on December 29, 1969. 15 All of these contracts were entered into soon after his "dealership agreement" with petitioner corporation, and in each one of them he protected himself from any increase in the market price of white cement. Yet, except for the contract with Henry Wee, the contracts were for only two years from October, 1970. Why did he not protect the corporation in the same manner when he entered into the "dealership agreement"? For that matter, why did the President and the Chairman of the Board not do so either? As director, specially since he was the other party in interest, respondent Te's bounden duty was to act in such manner as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the "dealership agreement" or that they were fully aware of its provisions. The contract was therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty.

As a result of this action which has been proven to be without legal basis, petitioner corporation's reputation and goodwill have been prejudiced. However, there can be no award for moral damages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.

In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court dated March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.

# Footnotes

* AC-G.R. No. CV-69947-R, March 30, 1984; penned by Associate Justice Marcelino R Veloso, concurred in by Associate Justices Porfirio V. Sison, Abdulwahid A. Bidin, and Desiderio P. Jurado.1 Rollo, P. 58.2 Ibid., pp. 47-51.3 Ibid., p. 54.4 Petition, pp. 14-15; Rollo, pp. 19-20.5 The Corporation Code (B.P. Blg. 68) replaced the Corporation Law (Act 1459) and took effect on May 1, 1980.6 CORPORATION LAW, Sec. 28; CORPORATION CODE, Sec. 23.7 Acuña vs. Batac Producers Cooperative Marketing Association, Inc., 20 SCRA 526 (1967)8 Yu Chuck vs. "Kong Li Po", 46 Phil. 608 (1924).9 Gokongwei vs. Securities and Exchange Commission, 89 SCRA 336 (1979), and cases cited therein.10 Ibid.11 308 U.S. 295-313, 84 L. Ed. 281, 291-292 (1939).12 Ballantine on Corporations, pp. 167-178.13 Annex "B" to the Complaint; Record on Appeal, p. 11.14 Annex "C" to the Complaint; Record on Appeal, pp. 11-12.15 Annex "D" to the Complaint; Record on Appeal, pp. 12-13.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. L-53820 June 15, 1992

YAO KA SIN TRADING, owned and operated by YAO KA SIN, petitioner, 

vs.HONORABLE COURT OF APPEALS and PRIME

WHITE CEMENT CORPORATION, represented by its President-Chairman, CONSTANCIO B.

MALAGNA, respondents.

DAVIDE, JR., J.:

Assailed in this petition for review is the decision of the respondent Court of Appeals in C.A.-G.R. No. 61072-R, 1 promulgated on 21 December 1979, reversing the decision 2 of the then Court of First Instance (now Regional Trial Court) of Leyte dated 20 November 1975 in Civil Case No. 5064 entitled "Yao Ka Sin Trading versus Prime White Cement Corporation."

The root of this controversy is the undated letter-offer of Constancio B. Maglana, President and Chairman of the Board of private respondent Prime White Cement Corporation, hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter referred to as YKS, which describes itself as "a

business concern of single proprietorship," 3 and is represented by its manager, Mr. Henry Yao; the letter reads as follows:

PRIME WHITE CEMENT CORPORATION602 Cardinal Life BuildingHerran Street, Manila

Yao Ka SinTacloban City

Gentlemen:

We have the pleasure to submit hereby our firm offer to you under the following quotations, terms, and conditions, to wit:

1). Commodity — Prime White Cement

2). Price — At your option: a) P24.30 per 94 lbs. bag net, FOB Cebu City; and b) P23.30 per 94 lbs. bag net, FOB Asturias Cebu.

3). Quality — As fully specified in certificate No. 224-73 by Bureau of Public Works, Republic of the Philippines.

4). Quantity — Forty-five Thousand (45,000) bags at 94 lbs. net per bag withdrawable in guaranteed monthly quantity of Fifteen Thousand (15,000) bags minimum effective from June, 1973 to August 1973.

5). Delivery Schedule — Shipment be made within four (4) days upon receipt of your shipping instruction.

6). Bag/Container — a) All be made of Standard Kraft (water resistant paper, 4 ply, with bursting strength of 220 pounds, and b) Breakage allowance — additional four percent (4%) over the quantity of each shipment.

7). Terms of Payment — Down payment of PESOS: TWO HUNDRED FORTY THREE THOUSAND (P243,000.00) payable on the signing of this contract and the balance to be paid upon presentation of corresponding shipping documents.

It is understood that in the event of a delay in our shipment, you hold the option to discount any price differential resulting from a lower market price vis-a-vis the contract price. In addition, grant (sic) you the option to extend this contract until the complete delivery of Forty Five Thousand (45,000) bags of 94 lbs. each is made by us. You are also hereby granted the option to renew this contract under the same price, terms and conditions.

Please countersign on the space provided for below as your acknowledgement and confirmation of the above transaction. Thank You.

Very truly yours,

PRIME WHITE CEMENT CORPORATIONBY: (SGD) CONSTANCIO B. MAGLANA

President & Chairman

CONFORME:

YAO KA SIN TRADINGBY: (SGD) HENRY YAO

WITNESSES:

(SGD) T. CATINDIG (SGD) ERNESTO LIM

RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in pursuance of the above offer, the sum of Pesos: TWO HUNDRED FORTY THREE THOUSAND ONLY (P243,000.00) in the form of Producers' Bank of the Philippines Check No. C-153576 dated June 7, 1973.

PRIME WHITE CEMENT CORPORATIONBY:

(SGD) CONSTANCIO B. MAGLANAPresident & Chairman 4

This letter-offer, hereinafter referred to as Exhibit "A", was prepared, typed and signed on 7 June 1973 in the office of Mr. Teodoro Catindig, Senior Vice-President of the Consolidated Bank and Trust Corporation (Solid Bank). 5

The principal issue raised in this case is whether or not the aforesaid letter-offer, as accepted by YKS, is a contract that binds the PWCC. The trial court rule in favor of the petitioner, but the respondent Court held otherwise.

The records disclose the following material operative facts:

In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days after the signing of Exhibit "A", the Board of Directors of PWCC disapproved the same; the rejection is evidenced by the following Minutes (Exhibit "10"):

the 10,000 bags of white cement sold to Yao Ka Sin Trading is sold not because of the alledged letter-contract adhered to by them, but must be understood as a new and separate contract, and has in no way to do with the letter-offer which they (sic) as consummated is by this resolution totally disapproved and is unacceptable to the corporation.

On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of the disapproval of Exhibit "A". Pursuant, however, to its decision with respect to the 10,000 bags of cement, it is issued the corresponding Delivery Order (Exhibit "4") and Official Receipt No. 0394 (Exhibit "5") for the payment of the same in the amount of P243,000.00 This is the same amount received and acknowledged by Maglana in Exhibit "A".

YKS accepted without protest both the Delivery and Official Receipts.

While YKS denied having received a copy of Exhibit "1", it was established that the original thereof was shown to Mr. Henry Yao; since no one would sign a receipt for it, the original was left at the latter's office and this fact was duly noted in Exhibit "1" (Exhibit "l-A").

On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to the latter's 4 August 1973 letter stating that it is "withdrawing or taking delivery of not less than 10,000 bags of white cement on August 6-7, 1973 at Asturias, Cebu, thru M/V Taurus." In said reply, PWCC reminded YKS of its (PWCC's) 5 July 1973 letter (Exhibit "1") and told the latter that PWCC "only committed to you and which you

correspondingly paid 10,000 bags of white cement of which 4,150 bags were already delivered to you as of August 11, 1973. 6 Unfortunately, no copy of the said 4 August 1973 letter of YKS was presented in evidence.

On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7 to YKS in reply to the latter's letter of 15 August 1973. Enclosed in the reply was a copy of Exhibit "2". While the records reveal that YKS received this reply also on 21 August 1973 (Exhibit "3" "A"), 8 it still denied having received it. Likewise, no copy of the so-called 15 August 1973 letter was presented in evidence.

On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to PWCC as a follow-up to the letter of 15 August 1973; YKS insisted on the delivery of 45,030 bags of white cement. 10

On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC calling the latter's attention to the statement of delivery dated 24 August 1973, particularly the price change from P23.30 to P24.30 per 94 lbs. bag net FOB Asturias, Cebu. 11

On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to PWCC insisting on the full compliance with the terms of Exhibit "A" and informing the latter that it is exercising the option therein stipulated.

On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a follow-up to the 2 November 1973 telegram, but this was returned to sender as unclaimed. 13

As of 7 December 1973, PWCC had delivered only 9,775 bags of white cement.

On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for the last time, compliance by the latter with its obligation underExhibit "A". 14

On 27 February 1974, PWCC sent an answer (Exhibit "7") to the aforementioned letter of 9 February 1974; PWCC reiterated the unenforceability of Exhibit "A". 15

On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a complaint for Specific Performance with Damages against PWCC. The complaint 16 was based on Exhibit "A" and was docketed as Civil Case No. 5064.

In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied under oath the material averments in the complaint and alleged that: (a) YKS "has no legal personality to sue having no legal personality even by fiction to represent itself;" (b) Mr. Maglana, its President and Chairman, was lured into signing Exhibit "A"; (c) such signing was subject to the condition that Exhibit "A" be approved by the Board of Directors of PWCC, as corporate commitments are made through it; (d) the latter disapproved it, hence Exhibit "A" was never consummated and is not enforceable against PWCC; (e) it agreed to sell 10,000 bags of white cement, not under Exhibit "A", but under a separate contract prepared by the Board; (f) the rejection by the Board of Exhibit "A" was made known to YKS through various letters sent to it, copies of which were attached to the Answer as Annexes 1, 2 and 3; 18 (g) YKS knew, per Delivery Order 19 and Official Receipt 20 issued by PWCC, that only 10;000 bags were sold

to it without any terms or conditions, at P24.30 per bag FOB Asturias, Cebu; (h) YKS is solely to blame for the failure to take complete delivery of 10,000 bags for it did not send its boat or truck to PWCC's plant; and (i) YKS has, therefore, no cause of action.

In its Counterclaim, PWCC asks for moral damages in the amount of not less than P10,000.00, exemplary damages in the sum of P500,000.00 and attorney's fees in the sum of P10,000.00.

On 24 July 1974, YKS filed its Answer to the Counterclaim. 21

Issues having been joined, the trial court conducted a pre-trial. 22 On that occasion, the parties admitted that according to the By-Laws of PWCC, the Chairman of the Board, who is also the President of the corporation, "has the power to execute and sign, for and in behalf of the corporation, all contracts or agreements which the corporation enters into," subject to the qualification that "all the president's actuations, prior to and after he had signed and executed said contracts, shall be given to the board of directors of defendant Corporation." Furthermore, it was likewise stated for the record "that the corporation is a semi-subsidiary of the government because of the NIDC participation in the same, and that all contracts of the corporation should meet the approval of the NIDC and/or the PNB Board because of an exposure and financial involvement of around P10 million therein. 23

During the trial, PWCC presented evidence to prove that Exhibit "A" is not binding upon it because Mr. Maglana was not authorized to make the offer and sign the contract in behalf of the corporation. Per its By-Laws (Exhibit "8"), only the Board of Directors has the power . . . (7) To enter into (sic) agreement or contract of any kind with any person in the name and for and in behalf of the corporation through its President, subject only to the declared objects and purpose of the corporation and the existing provisions of law. 24 Among the powers of the President is "to operate and conduct the business of the corporation according to his own judgment and discretion, whenever the same is not expressly limited by such orders, directives or resolutions." 25 Per standard practice of the corporation, contracts should first pass through the marketing and intelligence unit before they are finalized. Because of its interest in the PWCC, the NIDC, through its comptroller, goes over contracts involving funds of and white cement produced by the PWCC. Finally, among the duties of its legal counsel is to review proposed contracts before they are submitted to the Board. While the president. may be tasked with the preparation of a contract, it must first pass through the legal counsel and the comptroller of the corporation. 26

On 20 November 1975, after trial on the merits, the court handed down its decision in favor of herein petitioner, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

(1) Ordering defendant: to complete the delivery of 45,000 bags of prime white cement at 94 lbs. net per bag at the price agreed, with a breakage allowance of empty bags at 4% over the quantity agreed;

(2) Ordering defendant to pay P50,000.00, as moral damages; P5,000.00 as exemplary damages; P3,000.00 as attorney's fees; and the costs of these proceedings.

SO ORDERED. 27

In disregarding PWCC's theory, the trial court interpreted the provision of the By-Laws — granting its Board of Directors the power to enter into an agreement or contract of any kind with any person through the President, — to mean that the latter may enter into such contract or agreement at any time and that the same is not subject to the ratification of the board of directors but "subject only to the declared objects and purpose of the corporation and existing laws." It then concluded:

It is obvious therefore, that it is not the whole membership of the board of directors who actually enters into any contract with any person in the name and for and in behalf of the corporation, but only its president. It is likewise crystal clear that this automatic representation of the board by the president is limited only by the "declared objects and purpose of the corporation and existing provisions of law." 28

It likewise interpreted the provision on the power of the president to "operate and conduct the business of the corporation according to the orders, directives or resolutions of the board of directors and according to his own judgment and discretion whenever the same is not expressly limited by such orders, directives and resolutions," to mean that the president can operate and conduct the business of the corporation according to his own judgment and discretion as long as it is not expressly limited by the orders, directives or resolutions of the board of directors. 29 The trial court found no evidence that the board had set a prior limitation upon the exercise of such judgment and discretion; it further ruled that the By-Laws, does not require that Exhibit "A" be approved by the Board of Directors. Finally, in the light of the Chairman's power to "execute and sign for and in behalf of the corporation all contracts or agreements which the corporation may enter into" (Exhibit "I-1"), it concluded that Mr. Maglana merely followed the By-Laws "presumably both as president and chairman of the board thereof." 30 Hence, Exhibit "A" was validly entered into by Maglana and thus binds the corporation.

The trial court, however, ruled that the option to sell is not valid because it is not supported by any consideration distinct from the price; it was exercised before compliance with the original contract by PWCC; and the repudiation of the original contract by PWCC was deemed a withdrawal of the option before acceptance by the petitioner.

Both parties appealed from the said decision to the respondent Court of Appeals before which petitioner presented the following Assignment of Errors:

I. THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO RENEW THE CONTRACT OF SALE IS NOT ENFORCEABLE BECAUSE THE OPTION WAS MADE EVEN BEFORE THE COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY DEFENDANT AND THAT DEFENDANT'S PROMISE TO SELL IS NOT SUPPORTED

BY ANY CONSIDERATION DISTINCT FROM THE PRICE.

II. THE TRIAL COURT ERRED IN NOT AWARDING TO THE PLAINTIFF ACTUAL DAMAGES, SUFFICIENT EXEMPLARY DAMAGES AND ATTORNEY'S FEES AS ALLEGED IN THE COMPLAINT AND PROVEN DURING THE TRIAL." 31

while the private respondent cited the following errors:

I. THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A VALID CONTRACT OR PLAINTIFF CAN CLAIM THAT THE PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED PROPOSAL, NOT HAVING BEEN PREVIOUSLY AUTHORIZED TO BE ENTERED INTO OR LATER ON RATIFIED BY THE DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A" WAS TOTALLY REJECTED AND DISAPPROVED IN TOTO BY THE DEFENDANT'S BOARD OF DIRECTORS IN CLEAR, PLAIN LANGUAGE AND DULY INFORMED AND TRANSMITTED TO PLAINTIFF.

II. THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN LEGALLY UTILIZE THE COURTS AS THE FORUM TO GIVE LIFE AND VALIDITY TO A TOTALLY UNENFORCEABLE OR NON-EXISTING CONTRACT.

III. THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO IMPUGN AND CONTRADICT HIS VERY OWN ACTUATIONS AND REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF BENEFITS FROM THE COUNTER-OFFER OF DEFENDANT FOR 10,000 BAGS OF CEMENT ONLY, UNDER THE PRICE, TERMS AND CONDITIONS TOTALLY FOREIGN TO AND WHOLLY DIFFERENT FROM THOSE WHICH APPEAR IN EXHIBIT "A".

IV. THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S COUNTER-CLAIMS AS THE SAME ARE DULY SUPPORTED BY CLEAR AND INDUBITABLE EVIDENCE. 32

In its decision 33 promulgated on 21 December 1979, the respondent Court reversed the decision of the trial court, thus:

WHEREFORE, the judgment appealed from is REVERSED and set aside, Plaintiff's complaint is dismissed with costs. Plaintiff is ordered to pay defendant corporation P25,000.00 exemplary damages, and P10,000.00 attorney's fees.

SO ORDERED.

Such conclusion is based on its findings, to wit:

Before resolving the issue, it is helpful to bring out some preliminary facts. First, the defendant corporation is supervised and principally financed by the National Investment and Development Corporation (NIDC), a subsidiary investment of the Philippine National Bank (PNB), with cash financial exposure of some P10,000,000.00. PNB is a government financial institution whose Board is chairmaned (sic) by the Minister of National

Defense. This fact is very material to the issue of whether defendant corporations president can bind the corporation with his own act.

Second, for failure to deny under oath the following actionable documents in support of defendant's counterclaim:

1. The resolution contained in defendant's letter to plaintiff dated July 5, 1973, on the 10,000 bags of white cement delivered to plaintiff was not by reason of the letter contract, Exhibit "A", which was totally disapproved by defendant corporation's board of directors, clearly stating that "If within ten (10) days from date hereof, we will not hear from you but you will withdraw cement at P24.30 per bag from our plant, then we will deposit your check of P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per instruction of the Board." (Annex "I" to defendant's Answer).

2. Letter of defendant to plaintiff dated August 4, 1973 that defendant "only committed to you and which you accordingly paid 10,000 bags of white cement of which 4,150 bags were already delivered to you as of August 1, 1973" (Annex "2" of defendant's Answer).

3. Letter dated August 21, 1973 to plaintiff reiterating defendant's letter of August 4, 1973 (Annex "3" to defendant's Answer).

4. Letter to stores dated August 21, 1973,

5. Receipt from plaintiff (sic) P243,000.00 in payment of 10,000 bags of white cement at P24.30 per bag (Annex "5", to defendant's Answer).

plaintiff is deemed to have admitted, not only the due execution and genuiness (sic) of said documents, (Rule 8 Sec. 8, Rules of Court) but also the allegations therein (Rule 9, Sec. 1, Rules of Court). All of the foregoing documents tend to prove that the letter-offer, Exhibit "A", was rejected by defendant corporation's Board of Directors and plaintiff was duly notified thereof and that the P243,000.00 check was considered by both parties as payment of the 10,000 bags of cement under a separate transaction. As proof of which plaintiff did not complain nor protest until February 9, 1974, when he threatened legal action.

Third, Maglana's signing the letter-offer prepared for him in the Solidbank was made clearly upon the condition that it was subject to the approval of the board of directors of defendant corporation. We find consistency herein because according to the Corporation Law, and the By-Laws of defendant corporation, all corporate commitments and business are conducted by, and contracts entered into through,

the express authority of the Board of Directors (Sec. 28. Corp. Law, Exh "I" or "8").

Fourth, What Henry Yao and Maglana agreed upon as embodied in Exhibit "A", insofar as defendant corporation is concerned, was an unauthorized contract (Arts. 1317 and 1403 (1), Civil Code). And because Maglana was not authorized by the Board of Directors of defendant corporation nor was his, actuation ratified by the Board, the agreement is unenforceable (Art. 1403 (1), Civil Code; Raquiza et al. vs. Lilles et al., 13 CA Rep. 343; Gana vs. Archbishop of Manila, 43 O-G. 3224).

While it may be true that Maglana is President of defendant corporation nowhere in the Articles of Incorporation nor in the By-Laws of said corporation was he empowered to enter into any contract all by himself and bind the corporation without first securing the authority and consent of the Board of Directors. Whatever authority Maglana may have must be derived from the Board of Directors of defendant corporation. A corporate officers power as an agent must be sought from the law, the articles of incorporation and the By-Laws or from a resolution of the Board (Vicente vs. Geraldez, 52 SCRA 227, Board of Liquidators vs. Kalaw, 20 SCRA 987).

It clearly results from the foregoing that the judgment appealed from is untenable. Having no cause of action against defendant corporation, plaintiff is not entitled to any relief. We see no justification, therefore, for the court a quo's awards in its favor. . . . 34

Its motion for reconsideration having been denied by the respondent Court in its resolution 35 dated 15 April 1980, petitioner filed the instant petition based on the following grounds:

1. That the contract (Exh. "A") entered into by the President and Chairman of the Board of Directors Constancio B. Maglana in behalf of the respondent corporation binds the said corporation.

2. That the contract (Exh. "A") was never novated nor superceded (sic) by a subsequent contract.

3. That the option to renew the contract as contained in Exhibit "A" is enforceable.

4. That Sec. 8, Rule 8 of the Rules of Court only applies when the adverse party appear (sic) to be a party to the instrument but not to one who is not a party to the instrument and Sec. 1, Rule 9 of the said Rules with regards (sic) to denying under oath refers only to allegations ofusury. 36

We gave due course 37 to the petition after private respondent filed its Comment 38 and required the parties to submit simultaneously their Memoranda, which the parties subsequently complied with. 39

Before going any further, this Court must first resolve an issue which, although raised in the Answer of private respondent, was neither pursued in its appeal before the respondent Court

nor in its Comment and Memorandum in this case. It also eluded the attention of the trial court and the respondent Court. The issue, which is of paramount importance, concerns the lack of capacity of plaintiff/petitioner to sue. In the caption of both the complaint and the instant petition, the plaintiff and the petitioner, respectively, is:

YAO KA SIN TRADING,owned and operated by

YAO KA SIN. 40

and is described in the body thereof as "a business concern of single proprietorship owned and operated by Yao Ka Sin." 41 In the body of the petition, it is described as "a single proprietorship business concern." 42 It also appears that, as gathered from the decision of the trial court, no Yao Ka Sin testified. Instead, one Henry Yao took the witness stand and testified that he is the "manager of Yao Ka Sin Trading" and "it was in representation of the plaintiff" that he signed Exhibit "A" 43 Under Section 1, Rule 3 of the Rules of Court, only natural or juridical persons or entities authorized by law may be parties in a civil action. In Juasing Hardware vs. Mendoza, 44 this Court held that a single proprietorship is neither a natural person nor a juridical person under Article 44 of the Civil Code; it is not an entity authorized by law to bring suit in court:

The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a single individual, and requires the proprietor or owner thereof to secure licenses and permits, register the business name, and pair taxes to the national government. It does not vest juridical or legal personality upon the sole proprietorship nor empower it to file or defend an action in court. 45

Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN. 46

The complaint then should have been amended to implead Yao Ka Sin as plaintiff in substitution of Yao Ka Sin Trading. However, it is now too late in the history of this case to dismiss this petition and, in effect, nullify all proceedings had before the trial court and the respondent Court on the sole ground of petitioner's lack of capacity to sue. Considering that private respondent did not pursue this issue before the respondent Court and this Court; that, as We held in Juasing, the defect is merely formal and not substantial, and an amendment to cure such defect is expressly authorized by Section 4, Rule 10 of the Rules of Court which provides that "[a] defect in the designation of the parties may be summarily corrected at any stage of the action provided no prejudice is caused thereby to the adverse party;" and that "[a] sole proprietorship does not, of coarse, possess any juridical personality separate and apart from the personality of the owner of the enterprise and the personality of the persons acting in the name of such proprietorship," 47 We hold and declare that Yao Ka Sin should be deemed as the plaintiff in Civil Case No. 5064 and the petitioner in the instant case. As this Court stated nearly eighty (80) years ago in Alonso vs. Villamor: 48

No one has been misled by the error in the name of the party plaintiff. If we should by reason of this error

send this case back for amendment and new trial, there would be on the retrial the same complaint, the same answer, the same defense, the same interests, the same witnesses, and the same evidence. The name of the plaintiff would constitute the only difference between the old trial and the new. In our judgment there is not enough in a name to justify such action.

And now to the merits of the petition.

The respondent Court correctly ruled that Exhibit "A" is not binding upon the private respondent. Mr. Maglana, its President and Chairman, was not empowered to execute it. Petitioner, on the other hand, maintains that it is a valid contract because the Maglana has the power to enter into contracts for the corporation as implied from the following provisions of the By-Laws of private respondent:

a) The power of the Board of Directors to . . . enter into (sic) agreement or contract of any kind with any person in the name and for and in behalf of the corporation through its President, subject only to the declared objects and purpose of the corporation and the existing provisions of law. (Exhibit "8-A"); and

b) The power of the Chairman of the Board of Directors to "execute and sign, for and in behalf of the corporation, all contracts or agreements which the corporation may enter into" (Exhibit "I-1").

And even admitting, for the sake of argument, that Mr. Maglana was not so authorized under the By-Laws, the private respondent, pursuant to the doctrine laid down by this Court in Francisco vs. Government Service InsuranceSystem 49 and Board of Liquidators vs. Kalaw, 50 is still bound by his act for clothing him with apparent authority.

We are not persuaded.

Since a corporation, such as the private respondent, can act only through its officers and agents, "all acts within the powers of said corporation may be performed by agents of its selection; and, except so far as limitations or restrictions may be imposed by special charter, by-law, or statutory provisions, the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents when once appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons." 51 Moreover, " . . . a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred. 52

While there can be no question that Mr. Maglana was an officer — the President and Chairman — of private respondent corporation at the time he signed Exhibit "A", the

above provisions of said private respondent's By-Laws do not in any way confer upon the President the authority to enter into contracts for the corporation independently, of the Board of Directors. That power is exclusively lodged in the latter. Nevertheless, to expedite or facilitate the execution of the contract, only the President — and not all the members of the Board, or so much thereof as are required for the act — shall sign it for the corporation. This is the import of the words through the president in Exhibit "8-A" and the clear intent of the power of the chairman "to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may enter into" in Exhibit "I-1". Both powers presuppose a prior act of the corporation exercised through the Board of Directors. No greater power can be implied from such express, but limited, delegated authority. Neither can it be logically claimed that any power greater than that expressly conferred is inherent in Mr. Maglana's position as president and chairman of the corporation.

Although there is authority "that if the president is given general control and supervision over the affairs of the corporation, it will be presumed that he has authority to make contract and do acts within the course of its ordinary business," 53 We find such inapplicable in this case. We note that the private corporation has a general manager who, under its By-Laws has, inter alia, the following powers: "(a) to have the active and direct management of the business and operation of the corporation, conducting the same accordingly to the order, directives or resolutions of the Board of Directors or of the president." It goes without saying then that Mr. Maglana did not have a direct and active and in the management of the business and operations of the corporation. Besides, no evidence was adduced to show that Mr. Maglana had, in the past, entered into contracts similar to that of Exhibit "A" either with the petitioner or with other parties.

Petitioner's last refuge then is his alternative proposition, namely, that private respondent had clothed Mr. Maglana with the apparent power to act for it and had caused persons dealing with it to believe that he was conferred with such power. The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time." 54 Also, "if a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority in real, as to innocent third persons dealing in good faith with such officers or agents." 55 This "apparent authority may result from (1) the general manner, by which the corporation holds out an officer or agent as having power to act or, in other words, the apparent authority with which it clothes him to act in general or (2) acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or without the scope of his ordinary powers. 56

It was incumbent upon the petitioner to prove that indeed the private respondent had clothed Mr. Maglana with the apparent power to execute Exhibit "A" or any similar contract. This could have been easily done by evidence of similar acts executed either in its favor or in favor of other parties. Petitioner miserably failed to do that. Upon the other hand, private respondent's evidence overwhelmingly shows that no contract can be signed by the president without first being approved by the Board of Directors; such approval may only be given after the contract passes through, at least, the comptroller, who is the NIDC representative, and the legal counsel.

The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are hopelessly unavailing to the petitioner. In said cases, this Court found sufficient evidence, based on the conduct and actuations of the corporations concerned, of apparent authority conferred upon the officer involved which bound the corporations on the basis of ratification. In the first case, it was established that the offer of compromise made by plaintiff in the letter, Exhibit "A", was validly accepted by the GSIS. The terms of the trial offer were clear, and over the signature of defendant's general manager Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted. It was sent by the GSIS Board Secretary and defendant did not disown the same. Moreover, in a letter remitting the payment of P30,000 advanced by her father, plaintiff quoted verbatim the telegram of acceptance. This was in itself notice to the corporation of the terms of the allegedly unauthorized telegram. Notwithstanding this notice, GSIS pocketed the amount and kept silent about the telegram. This Court then ruled that:

This silence, taken together with the unconditional acceptance of three other subsequent remittances from plaintiff, constitutes in itself a binding ratification of the original agreement (Civil Code, Art. 1393).

Art. 1393. Ratification may be effected expressly or tactly it is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right

In the second case, this Court found:

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and through acquiescence, practically laid aside the by-laws requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

The inevitable conclusion then is that Exhibit "A" is an unenforceable contract under Article 1317 of the Civil Code which provides as follows:

Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it, has been execrated, before it is revoked by the other contracting party.

The second ground is based on a wrong premise. It assumes, contrary to Our conclusion above, that Exhibit "A" is a valid contract binding upon the private respondent. It was effectively disapproved and rejected by the Board of Directors which, at the same time, considered the amount of P243,000.00 received Mr. Maglana as payment for 10,000 bags of white cement, treated as an entirely different contract, and forthwith notified petitioner of its decision that "If within ten (10) days from date hereof we will not hear from you but you will withdraw cement at P24.30 per bag from our plant, then we will deposit your check of P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per instruction of the Board." 57 Petitioner received the copy of this notification and thereafter accepted without any protest the Delivery Receipt covering the 10,000 bags and the Official Receipt for the P243,000.00. The respondent Court thus correctly ruled that petitioner had in fact agreed to a new transaction involving only 10,000 bags of white cement.

The third ground must likewise fail. Exhibit "A" being unenforceable, the option to renew it would have no leg to stand on. The river cannot rise higher than its source. In any event, the option granted in. this case is without any consideration Article 1324 of the Civil Code expressly provides that:

When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised.

while Article 1749 of the same Code provides:

A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.

Accordingly, even if it were accepted, it can not validly bind the private respondent. 58

The fourth ground is, however, meritorious.

Section 8, Rule 8 of the Rules of Court provides:

Sec. 8. How to contest genuineness of such documents — When an action or defense is founded upon a written instrument, copied in or attached in the corresponding pleading as provided in the

preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts; but this provision does not apply when the adverse party does not appear, to be a party to the instrument or when compliance with an order for an inspection of the original instrument is refused.

It is clear that the petitioner is not a party to any of the documents attached to the private respondent's Answer. Thus, the above quoted rule is not applicable. 59 While the respondent Court, erred in holding otherwise, the challenged decision must, nevertheless, stand in view of the above disquisitions on the first to the third grounds of the petition.

WHEREFORE, judgment is hereby rendered AFFIRMING the decision of respondent Court of Appeals in C.A. G.R. No. 61072-R promulgated on 21 December 1979.

Cost against the petitioner.

Gutierrez, Jr., Feliciano, Bidin and Romero, JJ., concur.

 Footnotes

1 Rollo, 114. et seq. Per Acting Presiding Justice Lourdes P. San Diego, concurred in by Associate Justices Samuel F. Reyes and Lino M. Patajo.2 Id., 73.3 Paragraph 1 of Complainant in Civil Case No. 5064, 2; Record on Appeal (Annex "A" Petition); Rollo, 18.4 Court of Appeals Decision, 2; Rollo, 115-117. This was marked and offered in evidence as Exhibit "A".5 Record on Appeal, 76; Rollo, 92.6 Record on Appeal, 77; Rollo, 93.7 Id.8 Id.9 Rollo, 94.10 Id.11 Record on Appeal, 78.12 Id.13 Id.14 Rollo, op. cit.15 Record on Appeal, 78.16 Id., 1-7.17 Id., 7-20.18 Marked as Exhibits "1","2" and "3".19 Annex "4" to Answer; also Exhibit "4".20 Annex "5" to Answer; also Exhibit "5".21 Record on Appeal, 20-21; Rollo, 36-37.22 Id., 21-30.23 Paragraph 13, Pre-Trial Order, Id., 24; Id., 40.24 Exhibit "8-A".25 Exhibit "8-A".26 The trial court's summation of the testimonies of witnesses for PWCC, Record on Appeal, 81-82; Rollo, 97-98.27 Record on Appeal, 92; Rollo, 107.28 Id., 87; Id., 102.29 Record on Appeal, 88; Rollo, 103.30 Id., 90; Id., 105.31 Brief for Plaintiff-Appellee, Annex "B" of Petition; Rollo, 111.32 Brief for Defendant-Appellant, Annex "C" of Petition; Rollo, 112.

33 Annex "E" of Petition; Id., 114-122.34 Rollo, 118-120.35 Rollo, 143.36. Id., 6.37 Id., 56.38 Id., 145, et seq.39 Id., 170, et seq.; 188, et seq.40 Rollo, 17; 2.41 Id., 18.42 Id., 2.43 Id., 81.44 115 SCRA 783 [1982].45 At page 786.46 Conformably with the instruction in the Juasing case, the descriptive words "doing business as "Yao Ka Sing Trading" may be added in the title of the case.47 Jariol, Jr. vs. Sandiganbayan, 188 SCRA 475 [1990].48 16 Phil. 315 [1910].49 7 SCRA 577 [1963].50 20 SCRA 987 [1967].51 19 C.J.S. 455.52 19 C.J.S. 456.53 Fletcher, Cyclopedia of the law of Private Corporations, vol. 2 (Perm. Ed.), 1969 Revised Volume, 614.54 19 C.J.S. 458.55 Fletcher, op. cit., 340.56 Id., 354.57 Exhibit "1".58 TOLENTINO, A., Civil Code of the Philippines, vol. IV, 1985 ed., 467.59 Gaw vs. Court of Appeals, 191 SCRA 77 [1990].

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 71694 August 16, 1991

NYCO SALES CORPORATION, petitioner, vs.

BA FINANCE CORPORATION, JUDGE ROSALIO A. DE LEON—REGIONAL TRIAL COURT, BR. II,

INTERMEDIATE APPELLATE COURT, FIRST CIVIL CASES DIVISION, respondents.

ABC Law Offices for petitioner.

Valera, Urmeneta & Associates for private respondent.

PARAS, J.:p

In this petition for review on certiorari, petitioner challenges the April 22, 1985 decision * and the July 16, 1985 resolution *of the then Intermediate Appellate Court in AC-G.R. CV No. 02553 entitled "BA Finance Corporation v. Nyco Sales Corporation, et al." which affirmed with modification the July 20, 1983 decision ** of the Regional Trial Court, National Capital Region, Manila, Branch II in the same case docketed as Civil Case No. 125909 ordering petitioner to pay respondent the amount of P60,000.00 as

principal obligation plus corresponding interest, the sum of P10,000.00 as and for, attomey's fees and 1/3 of the costs of suit.

It appears on record that petitioner Nyco Sales Corporation (hereinafter referred to as Nyco) whose president and general manager is Rufino Yao, is engaged in the business of selling construction materials with principal office in Davao City. Sometime in 1978, the brothers Santiago and Renato Fernandez (hereinafter referred to as the Fernandezes), both acting in behalf of Sanshell Corporation, approached Rufino Yao for credit accommodation. They requested Nyco, thru Yao, to grant Sanshell discounting privileges which Nyco had with BA Finance Corporation (hereinafter referred to as BA Finance). Yao apparently acquiesced, hence on or about November 15, 1978, the Fernandezes went to Yao for the purpose of discounting Sanshell's post-dated check which was a BPI-Davao Branch Check No. 499648 dated February 17, 1979 for the amount of P60,000.00. The said check was payable to Nyco. Following the discounting process agreed upon, Nyco, thru Yao, endorsed the check in favor of BA Finance. Thereafter, BA Finance issued a check payable to Nyco which endorsed it in favor of Sanshell. Sanshell then made use of and/or negotiated the check. Accompanying the exchange of checks was a Deed of Assignment executed by Nyco in favor of BA Finance with the conformity of Sanshell. Nyco was represented by Rufino Yao, while Sanshell was represented by the Fernandez brothers. Under the said Deed, the subject of the discounting was the aforecited check (Rollo, pp- 26-28). At the back thereof and of every deed of assignment was the Continuing Suretyship Agreement whereby the Fernandezes unconditionally guaranteed to BA Finance the full, faithful and prompt payment and discharge of any and all indebtedness of Nyco (Ibid., pp. 36, 46). The BPI check, however, was dishonored by the drawee bank upon presentment for payment. BA Finance immediately reported the matter to the Fernandezes who thereupon issued a substitute check dated February 19,1979 for the same amount in favor of BA Finance. It was a Security Bank and Trust Company check bearing the number 183157, which was again dishonored when it was presented for payment. Despite repeated demands, Nyco and the Fernandezes failed to settle the obligation with BA Finance, thus prompting the latter to institute an action in court (Ibid., p 28). Nyco and the Fernandezes, despite having been served with summons and copies of the complaint, failed to file their answer and were consequently declared in default. On May 16, 1980, the lower court ruled in favor of BA Finance ordering them to pay the former jointly and severally, the sum of P65,536.67 plus 14% interest per annum from July 1, 1979 and attorney's fees in the amount of P3, 000. 00 as well as the costs of suit (Rollo, pp. 51-52). Nyco, however, moved to set aside the order of default, to have its answer admitted and to be able to implead Sanshell. The prayer was granted through an order dated June 23, 1980, wherein the decision of the court was set aside only as regards Nyco. Trial ensued once more until the court reached a second decision which states:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant Nyco Sales Corporation by ordering the latter to pay the former the following:

1) P60,000.00 as principal obligation, plus interest thereon at the rate of 14% per annum from February 1, 1979 until fully paid;

2) The amount of P100,000.00 as and for attorney's fees; and

3) One-third (1/3) of the costs of this suit.

With respect to defendants Santiago and Renato Fernandez, the decision of May 16, 1980 stands.

The cross-claim of defendant Nyco Sales Corporation against codefendants Santiago B. Fernandez and Renato B. Fernandez is hereby denied, as there is no showing that Nyco's Answer with cross-claim dated May 29, 1980 was ever received by said Fernandez brothers, even as it is noted that the latter have not been declared in default with respect to said cross-claim, nor were evidence adduced in connection therewith.

As to the would-be litigant Sanshell Construction and Development Corporation, defendant Nyco Sales Corporation did not properly implead said corporation which should have been by way of a third-party complaint instead of a mere cross-claim. The same observations are noted as regard this cross-claim against Sanshell as those made with respect to the Fernandez brothers.

SO ORDERED.

On appeal, the appellate court also upheld BA Finance but modified the lower court's decision by ordering that the interest should run from February 19, 1979 until paid and not from February 1, 1979. Nyco's subsequent motion for reconsideration was denied (Ibid., pp. 33, 62). Hence, the present recourse.

The crux of the controversy is whether or not the assignor is liable to its assignee for its dishonored checks.

For its defense, Nyco anchors its arguments on the following premises: a) that the appellate court erred in affirming its liability for the BPI check despite a similar finding of liability for the SBTC check rendered by the same lower court; b) that it was actually discharged of its liability over the SBTC check when BA Finance failed to give it a notice of dishonor; c) that there was novation when BA Finance accepted the SBTC check in replacement of the BPI check; and d) that it cannot be held liable for its Presidents unauthorized acts.

The petition is devoid of merit.

An assignment of credit is the process of transferring the right of the assignor to the assignee, who would then be allowed to proceed against the debtor. It may be done either gratuitously or generously, in which case, the assignment has an effect similar to that of a sale.

According to Article 1628 of the Civil Code, the assignor-vendor warrants both the credit itself (its existence and legality) and the person of the debtor (his solvency), if so stipulated, as in the case at bar. Consequently, if there be any breach of the above warranties, the assignor-vendor should be held answerable therefor. There is no question then that the

assignor-vendor is indeed liable for the invalidity of whatever he as signed to the assignee-vendee.

Considering now the facts of the case at bar, it is beyond dispute that Nyco executed a deed of assignment in favor of BA Finance with Sanshell Corporation as the debtor-obligor. BA Finance is actually enforcing said deed and the check covered thereby is merely an incidental or collateral matter. This particular check merely evidenced the credit which was actually assigned to BA Finance. Thus, the designation is immaterial as it could be any other check. Both the lower and the appellate courts recognized this and so it is utterly misplaced to say that Nyco is being held liable for both the BPI and the SBTC checks. It is only what is represented by the said checks that Nyco is being asked to pay. Indeed, nowhere in the dispositive parts of the decisions of the courts can it be gleaned that BA Finance may recover from the two checks.

Nyco's pretension that it had not been notified of the fact of dishonor is belied not only by the formal demand letter but also by the findings of the trial court that Rufino Yao of Nyco and the Fernandez Brothers of Sanshell had frequent contacts before, during and after the dishonor (Rollo, p. 40). More importantly, it fails to realize that for as long as the credit remains outstanding, it shall continue to be liable to BA Finance as its assignor. The dishonor of an assigned check simply stresses its liability and the failure to give a notice of dishonor will not discharge it from such liability. This is because the cause of action stems from the breach of the warranties embodied in the Deed of Assignment, and not from the dishonoring of the check alone (See Art. 1628, Civil Code).

Novation is the third defense set up by petitioner Nyco. It insists that novation took place when BA Finance accepted the SBTC check in replacement of the BPI cheek. Such is manifestly untenable.

There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. First, novation must be explicitly stated and declared in unequivocal terms as novation is never presumed (Mondragon v. Intermediate Appellate Court, G.R. No. 71889, April 17, 1990; Caneda Jr. v. Court of Appeals, G.R. No. 81322, February 5, 1990). Secondly, the old and the new obligations must be incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence If they cannot, they are incompatible and the latter obligation novates the first (Mondragon v. Intermediate Appellate Court, supra; Caneda Jr. v. Court of Appeals,supra). In the instant case, there was no express agreement that BA Finance's acceptance of the SBTC check will discharge Nyco from liability. Neither is there incompatibility because both checks were given precisely to terminate a single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations, such is inapplicable to this case.

Finally, Nyco disowns its President's acts claiming that it never authorized Rufino Yao (Nyco's President) to even apply to BA Finance for credit accommodation. It supports its argument with the fact that it did not issue a Board resolution giving Yao such authority. However, the very evidence on

record readily belies Nyco's contention. Its corporate By-Laws clearly provide for the powers of its President, which include, inter alia, executing contracts and agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of the corporation. Furthermore, the appellate court correctly adopted the lower court's observation that there was already a previous transaction of discounting of checks involving the same personalities wherein any enabling resolution from Nyco was dispensed with and yet BA Finance was able to collect from Nyco and Sanshell was able to discharge its own undertakings. Such effectively places Nyco under estoppel in pais which arises when one, by his acts, representations or admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts (Panay Electric Co., Inc. v. Court of Appeals, G.R. No. 81939, June 29,1989). Nyco remained silent in the course of the transaction and spoke out only later to escape liability. This cannot be countenanced. Nyco is estopped from denying Rufino Yao's authority as far as the latter's transactions with BA Finance are concerned.

PREMISES CONSIDERED, the decision appealed from is AFFIRMED.

SO ORDERED.

Melencio-Herrera (Chairperson), Padilla, Sarmiento and Regalado, JJ., concur.

Footnotes

* Penned by Associate Justice Eduardo P. Caguioa and concurred in by Associate Justices Ma. Rosario Quetulio-Losa and Leonor Ines-Luciano and Presiding Justice Ramon G. Gaviola, Jr.

** Penned by Judge Rosalio A. de Leon.

THIRD DIVISION

G.R. No. 148444

Promulgated: July 14, 200

ASSOCIATED BANK (now UNITED OVERSEAS BANK [PHILS.]), Petitioner, - versus -

SPOUSES RAFAEL and MONALIZA PRONSTROLLER, Respondents.

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

DECISION

NACHURA, J.:

                   This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by petitioner Associated Bank (now United Overseas Bank [Phils.]) assailing the Court of Appeals (CA) Decision[1] dated February 27, 2001, which in turn affirmed the Regional Trial Court[2] (RTC) Decision[3] dated November 14, 1997 in Civil Case No. 94-3298 for Specific Performance.  Likewise assailed is the appellate court’s Resolution[4] dated May 31, 2001 denying petitioner’s motion for reconsideration.

 The facts of the case are as follows:

 On April 21, 1988, the spouses Eduardo and Ma. Pilar Vaca (spouses Vaca) executed a Real Estate Mortgage (REM) in favor of the petitioner[5] over their parcel of residential land with an area of 953 sq. m. and the house constructed thereon, located at No. 18, Lovebird Street, Green Meadows Subdivision 1, Quezon City (herein referred to as the subject property).  For failure of the spouses Vaca to pay their obligation, the subject property was sold at public auction with the petitioner as the highest bidder.  Transfer Certificate of Title (TCT) No. 254504, in the name of spouses Vaca, was cancelled and a new one --TCT No. 52593-- was issued in the name of the petitioner.[6]

 The spouses Vaca, however, commenced an action for the nullification of the real estate mortgage and the foreclosure sale.  Petitioner, on the other hand, filed a petition for the issuance of a writ of possession which was denied by the RTC.  Petitioner, thereafter, obtained a favorable judgment when the CA granted its petition but the spouses Vaca questioned the CA decision before this Court in the case docketed as G.R. No. 109672.[7]

 During the pendency of the aforesaid cases, petitioner advertised the subject property for sale to interested buyers for P9,700,000.00.[8]  Respondents Rafael and Monaliza Pronstroller offered to purchase the property for P7,500,000.00.  Said offer was made through Atty. Jose Soluta, Jr. (Atty. Soluta), petitioner’s Vice-President, Corporate Secretary and a member of its Board of Directors.[9]  Petitioner accepted respondents’ offer of P7.5 million.  Consequently, respondents paid petitioner P750,000.00, or 10% of the purchase price, as down payment.[10]

 On March 18, 1993, petitioner, through Atty. Soluta, and respondents, executed a Letter-Agreement setting forth therein the terms and conditions of the sale, to wit:

 

1.      Selling price shall be at P7,500,000.00 payable as follows:

 a.       10% deposit and balance of P6,750,000.00 to be deposited under escrow agreement.  Said escrow deposit shall be applied as payment upon delivery of the aforesaid property to the buyers free from occupants.

 b.      The deposit shall be made within ninety (90) days from date hereof.  Any interest earned on the aforesaid investment shall be for the buyer’s account.  However, the 10% deposit is non-interest earning.[11]

           Prior to the expiration of the 90-day period within which to make the escrow deposit, in view of the pendency of the case between the spouses Vaca and petitioner involving the subject property,[12] respondents requested that the balance of the purchase price be made payable only upon service on them of a final decision or resolution of this Court affirming petitioner’s right to possess the subject property.  Atty. Soluta referred respondents’ proposal to petitioner’s Asset Recovery and Remedial Management Committee (ARRMC) but the latter deferred action thereon.[13]

           On July 14, 1993, a month after they made the request and after the payment deadline had lapsed, respondents and

Atty. Soluta, acting for the petitioner, executed another Letter-Agreement allowing the former to pay the balance of the purchase price upon receipt of a final order from this Court (in the Vaca case) and/or the delivery of the property to them free from occupants.[14]

           Towards the end of 1993, or in early 1994, petitioner reorganized its management.  Atty. Braulio Dayday (Atty. Dayday) became petitioner’s Assistant Vice-President and Head of the Documentation Section, while Atty. Soluta was relieved of his responsibilities.  Atty. Dayday reviewed petitioner’s records of its outstanding accounts and discovered that respondents failed to deposit the balance of the purchase price of the subject property.  He, likewise, found that respondents requested for an extension of time within which to pay.  The matter was then resubmitted to the ARRMC during its meeting on March 4, 1994, and it was disapproved.  ARRMC, thus, referred the matter to petitioner’s Legal Department for rescission or cancellation of the contract due to respondents’ breach thereof.[15]

           On May 5, 1994, Atty. Dayday informed respondents that their request for extension was disapproved by ARRMC and, in view of their breach of the contract, petitioner was rescinding the same and forfeiting their deposit.  Petitioner added that if respondents were still interested in buying the subject property, they had to submit their new proposal.[16]  Respondents went to the petitioner’s office, talked to Atty. Dayday and gave him the Letter-Agreement of July 14, 1993 to show that they were granted an extension.  However, Atty. Dayday claimed that the letter was a mistake and that Atty. Soluta was not authorized to give such extension.[17]

           On June 6, 1994, respondents proposed to pay the balance of the purchase price as follows: P3,000,000.00 upon the approval of their proposal and the balance after six (6) months.[18]  However, the proposal was disapproved by the petitioner’s President.  In a letter dated June 9, 1994, petitioner advised respondents that the former would accept the latter’s proposal only if they would pay interest at the rate of 24.5% per annum on the unpaid balance.  Petitioner also allowed respondents a refund of their deposit of P750,000.00 if they would not agree to petitioner’s new proposal.[19] 

         For failure of the parties to reach an agreement, respondents, through their counsel, informed petitioner that they would be enforcing their agreement dated July 14, 1993.[20]  Petitioner countered that it was not aware of the existence of the July 14 agreement and that Atty. Soluta was not authorized to sign for and on behalf of the bank.  It, likewise, reiterated the rescission of their previous agreement because of the breach committed by respondents.[21]

           On July 14, 1994, in the Vaca case, this Court upheld petitioner’s right to possess the subject property.

           On July 28, 1994, respondents commenced the instant suit by filing a Complaint for Specific Performance before the RTC of Antipolo, Rizal.[22]  The case was raffled to Branch 72 and was docketed as Civil Case No. 94-3298.  Respondents prayed that petitioner be ordered to sell the subject property to them in accordance with their letter-agreement of July 14, 1993.  They, likewise, caused the annotation of a notice of lis pendens at the dorsal portion of TCT No. 52593.

           For its part, petitioner contended that their contract had already been rescinded because of respondents’ failure to deposit in escrow the balance of the purchase price within the stipulated period.[23]             

           During the pendency of the case, petitioner sold the subject property to the spouses Vaca, who eventually registered the sale; and on the basis thereof, TCT No. 52593 was cancelled and TCT No. 158082 was issued in their names.[24]  As new owners, the spouses Vaca started demolishing the house on the subject property which, however, was not completed by virtue of the writ of preliminary injunction issued by the court.[25]

           On November 14, 1997, the trial court finally resolved the matter in favor of respondents, disposing, as follows:

             WHEREFORE, premises considered, the Court finds defendant’s rescission of the Agreement to Sell to be null and void for being contrary to law and public policy.

            ACCORDINGLY, defendant bank is hereby ordered to accept plaintiffs’ payment of the balance of the purchase price in the amount of Six Million Seven Hundred Fifty Thousand Pesos (P6,750,000.00) and to deliver the title and possession to subject property, free from all liens and encumbrances upon receipt of said payment.  Likewise, defendant bank is ordered to pay plaintiffs moral damages and attorney’s fees in the amount of One Hundred Thirty Thousand Pesos (P130,000.00) and expenses of litigation in the amount of Twenty Thousand Pesos (P20,000.00).

             SO ORDERED.[26]

           Applying the rule of “apparent authority,”[27] the court upheld the validity of the July 14, 1993 Letter-Agreement where the respondents were given an extension within which to make payment.  Consequently, respondents did not incur in delay, and thus, the court concluded that the rescission of the contract was without basis and contrary to law.[28]

           On appeal, the CA affirmed the RTC decision and upheld Atty. Soluta’s authority to represent the petitioner.  It further ruled that petitioner had no right to unilaterally rescind the contract; otherwise, it would give the bank officers license to continuously review and eventually rescind contracts entered into by previous officers.  As to whether respondents were estopped from enforcing the July 14, 1993 Letter-Agreement, the appellate court ruled in the negative.  It found, instead, that petitioners were estopped from questioning the efficacy of the July 14 agreement because of its failure to repudiate the same for a period of one year.[29]  Thus, the court said in its decision:

             1.  The Appellant (Westmont Bank) is hereby ordered to execute a “Deed of Absolute   Sale”  in favor of the Appellees over the property covered by Transfer Certificate of Title No. 52593, including the improvement thereon, and secure, from the Register of Deeds, a Torrens Title over the said property free from all liens, claims or encumbrances upon the payment by the Appellees of the balance of the purchase price of the property in the amount of P6,750,000.00;

            2.  The Register of Deeds is hereby ordered to cancel Transfer Certificate of Title No. 158082 under the names of the Spouses Eduardo [and Ma. Pilar] Vaca and to issue another under the names of the Appellees as stated in the preceding paragraph;

            3.  The appellant is hereby ordered to pay to the appellee Rafael Pronstroller the amount of P100,000.00 as and by way of moral damages and to pay to the Appellees the amount of P30,000.00 as and by way of attorney’s fees and the amount of P20,000.00 for litigation expense.

 4.      The counterclaims of the Appellant are dismissed.

SO ORDERED.[30]

Petitioner’s motion for reconsideration was denied on May 31, 2001.  Hence, the present petition raising the following issues:

I. THE NARRATION OR STATEMENT OF THE FACTS OF THE CASE BY THE HONORABLE COURT OF APPEALS IS TOTALLY BEREFT OF EVIDENTIARY SUPPORT, CONTRARY TO THE EVIDENCE ON RECORD AND PURELY BASED ON ERRONEOUS ASSUMPTIONS, PRESUMPTIONS, SURMISES, AND CONJECTURES.

II. THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN MERELY RELYING UPON THE MANIFESTLY ERRONEOUS FINDING OF THE HONORABLE TRIAL COURT ON THE ALLEGED APPARENT AUTHORITY OF ATTY. JOSE SOLUTA, JR. IN THAT THE LATTER’S FINDING IS CONTRARY TO THE UNDISPUTED FACTS AND THE EVIDENCE ON RECORD.

III. THE HONORABLE COURT OF APPEALS’ OWN FINDING THAT ATTY. JOSE SOLUTA, JR. HAD AUTHORITY TO SELL THE SUBJECT PROPERTY ON HIS OWN (EVEN WITHOUT THE COMMITTEE’S APPROVAL) IS LIKEWISE GROSSLY ERRONEOUS, FINDS NO EVIDENTIARY SUPPORT AND IS EVEN CONTRARY TO THE EVIDENCE ON RECORD IN THAT –

 A.) AT NO TIME DID PETITIONER ADMIT THAT ATTY. JOSE SOLUTA, JR. IS AUTHORIZED TO SELL THE SUBJECT PROPERTY ON HIS OWN;

 B.) THE AUTHORITY OF ATTY. JOSE SOLUTA, JR. CANNOT BE PRESUMED FROM HIS DESIGNATIONS OR TITLES; AND

 C.) RESPONDENTS FULLY KNEW OR HAD KNOWLEDGE OF THE LACK OF AUTHORITY OF ATTY. JOSE SOLUTA, JR. TO SELL THE SUBJECT PROPERTY ON HIS OWN.

IV. THE HONORABLE TRIAL COURT AND THE HONORABLE COURT OF APPEALS GROSSLY MISAPPLIED THE DOCTRINE OF APPARENT AUTHORITY IN THE PRESENT CASE.

V. THE HONORABLE TRIAL COURT AND THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN NOT HOLDING THAT THE CONTRACT TO SELL CONTAINED IN THE MARCH 18, 1993 LETTER WAS VALIDLY RESCINDED BY PETITIONER.

VI. THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN NOT HOLDING RESPONDENTS ESTOPPED FROM DENYING THE VALIDITY OF THE RESCISSION OF THE CONTRACT TO SELL AS EMBODIED IN THE MARCH 18, 1993 LETTER AND THE LACK OF AUTHORITY OF ATTY. SOLUTA, JR. TO GRANT THE EXTENSION AS CONTAINED IN HIS LETTER OF JULY 14, 1993 AFTER THEY VOLUNTARILY SUBMITTED WITH FULL KNOWLEDGE OF ITS IMPORT AND IMPLICATION A NEW OFFER TO PURCHASE THE SUBJECT PROPERTY CONTAINED IN THEIR LETTER DATED JUNE 6, 1994.

VII. IN ANY EVENT, THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONTRACT TO SELL UNDER THE LETTER OF MARCH 18, 1993 AND THE LETTER OF JULY 14, 1993 HAD BEEN VACATED WHEN RESPONDENTS VOLUNTARILY SUBMITTED WITH FULL KNOWLEDGE OF ITS IMPORT AND IMPLICATION THEIR NEW OFFER CONTAINED IN THEIR LETTER OF JUNE 6, 1994 WITHOUT ANY CONDITION OR RESERVATION WHATSOEVER.

VIII. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER ESTOPPED FROM QUESTIONING THE VALIDITY OF THE JULY 14, 1993 LETTER SIGNED BY ATTY. JOSE SOLUTA, JR. 

IX. THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN HOLDING THAT PETITIONER ALLEGEDLY ACTED FRAUDULENTLY AND IN BAD FAITH IN ITS DEALINGS WITH RESPONDENTS.

X. THE ORDER OF THE HONORABLE COURT OF APPEALS TO CANCEL TCT NO. 158082 UNDER THE NAMES OF SPS. VACA IS A COLLATERAL ATTACK AGAINST THE SAID CERTIFICATE OF TITLE WHICH IS PROSCRIBED BY SECTION 48 OF P.D. 1529.

XI. THE HONORABLE COURT OF APPEALS ERRED IN AWARDING MORAL DAMAGES, ATTORNEY’S FEES, AND EXPENSES OF LITIGATION IN FAVOR OF RESPONDENTS.[31]

          Reduced to bare essentials, the decision on the instant petition hinges on the resolution of the following specific questions: 1) Is the petitioner bound by the July 14, 1993 Letter-Agreement signed by Atty. Soluta under the doctrine of apparent authority? 2) Was there a valid rescission of the March 18, 1993 and/or July 14, 1993 Letter-Agreement? 3) Are the respondents estopped from enforcing

the July 14 Letter-Agreement because of their June 6, 1994 “new” proposal? 4) Is the petitioner estopped from questioning the validity of the July 14 letter because of its failure to repudiate the same and 5) Is the instant case a collateral attack on TCT No. 158082 in the name of the spouses Vaca?   

The petition is unmeritorious.

          Well-settled is the rule that the findings of the RTC, as affirmed by the appellate court, are binding on this Court.  In a petition for review on certiorari under Rule 45 of the Rules of Court, as in this case, this Court may not review the findings of fact all over again.  It must be stressed that this Court is not a trier of facts, and it is not its function to re-examine and weigh anew the respective evidence of the parties.[32]  The findings of the CA are conclusive on the parties and carry even more weight when these coincide with the factual findings of the trial court, unless the factual findings are not supported by the evidence on record.[33]  Petitioner failed to show why the above doctrine should not be applied to the instant case.

          Contrary to petitioner’s contention that the CA’s factual findings are not supported by the evidence on record, the assailed decision clearly shows that the appellate court not only relied on the RTC’s findings but made its own analysis of the record of the case.  The CA decision contains specific details drawn from the contents of the pleadings filed by both parties, from the testimonies of the witnesses and from the documentary evidence submitted.  It was from all these that the appellate court drew its own conclusion using applicable legal principles and jurisprudential rules.     

          The Court notes that the March 18, 1993 Letter-Agreement was written on a paper with petitioner’s letterhead.  It was signed by Atty. Soluta with the conformity of respondents.  The authority of Atty. Soluta to act for and on behalf of petitioner was not reflected in said letter or on a separate paper attached to it.  Yet, petitioner recognized Atty. Soluta’s authority to sign the same and, thus, acknowledged its binding effect.  On the other hand, the July 14, 1993 letter was written on the same type of paper with the same letterhead and of the same form as the earlier letter.  It was also signed by the same person with the conformity of the same respondents.  Again, nowhere in said letter did petitioner specifically authorize Atty. Soluta to sign it for and on its behalf.  This time, however, petitioner questioned the validity and binding effect of the agreement, arguing that Atty. Soluta was not authorized to modify the earlier terms of the contract and could not in any way bind the petitioner.

          We beg to differ.

          The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation.  The power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board of directors.  However, just as a natural person may authorize another to do certain acts for and on his behalf, the board may validly delegate some of its functions and powers to officers, committees and agents.  The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or

impliedly, by habit, custom, or acquiescence, in the general course of business.[34]

          The authority of a corporate officer or agent in dealing with third persons may be actual or apparent.  The doctrine of “apparent authority,” with special reference to banks, had long been recognized in this jurisdiction.[35]  Apparent authority is derived not merely from practice.  Its existence may be ascertained through 1) the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers.[36]  

Accordingly, the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was exercised without any objection from its board or shareholders.  Undoubtedly, petitioner had previously allowed Atty. Soluta to enter into the first agreement without a board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same via the second letter-agreement. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation.[37] 

Naturally, the third person has little or no information as to what occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate consent.  The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law. [38]  What transpires in the corporate board room is entirely an internal matter.  Hence, petitioner may not impute negligence on the part of the respondents in failing to find out the scope of Atty. Soluta’s authority.  Indeed, the public has the right to rely on the trustworthiness of bank officers and their acts.[39]

 

          As early as June 1993, or prior to the 90-day period within which to make the full payment, respondents already requested a modification of the earlier agreement such that the full payment should be made upon receipt of this Court’s decision confirming petitioner’s right to the subject property.  The matter was brought to the petitioner’s attention and was in fact discussed by the members of the Board.  Instead of acting on said request (considering that the 90-day period was about to expire), the board deferred action on the request.  It was only after one year and after the bank’s reorganization that the board rejected respondents’ request. We cannot therefore blame the respondents in relying on the July 14, 1993 Letter-Agreement.  Petitioner’s inaction, coupled with the apparent authority of Atty. Soluta to act on behalf of the corporation, validates the July 14 agreement and thus binds the corporation.  All these taken together, lead to no other conclusion than that the petitioner attempted to defraud the respondents.  This is bolstered by the fact that it forged another contract involving the same property, with another buyer, the spouses Vaca, notwithstanding the pendency of the instant case.

           

          We would like to emphasize that if a corporation knowingly permits its officer, or any other agent, to perform acts within the scope of an apparent authority, holding him out to the public as possessing power to do those acts, the corporation will, as against any person who has dealt in good faith with the corporation through such agent, be estopped from denying such authority.[40]

         

          Petitioner further insists that specific performance is not available to respondents because the Letter-Agreements had already been rescinded ---  the March 18 agreement because of the breach committed by the respondents; and the July 14 letter because of the new offer of the respondents which was not approved by petitioner.

         

Again, the argument is misplaced.

 

Basic is the rule that a contract constitutes the law between the parties.  Concededly, parties may validly stipulate the unilateral rescission of a contract.[41] This is usually in the form of a stipulation granting the seller the right to forfeit installments or deposits made by the buyer in case of the latter’s failure to make full payment on the stipulated date.  While the petitioner in the instant case may have the right, under the March 18 agreement, to unilaterally rescind the contract in case of respondents’ failure to comply with the terms of the contract,[42] the execution of the July 14 Agreement prevented petitioner from exercising the right to rescind. This is so because there was in the first place, no breach of contract, as the date of full payment had already been modified by the later agreement.

Neither can the July 14, 1993 agreement be considered abandoned by respondents’ act of making a new offer, which was unfortunately rejected by petitioner. A careful reading of the June 6, 1994 letter of respondents impels this Court to believe that such offer was made only to demonstrate their capacity to purchase the subject property.[43]  Besides, even if it was a valid new offer, they did so only due to the fraudulent misrepresentation made by petitioner that their earlier contracts had already been rescinded.  Considering respondents’ capacity to pay and their continuing interest in the subject property,[44] to abandon their right to the contract and to the property, absent any form of protection, is contrary to human nature.  The presumption that a person takes ordinary care of his concerns applies and remains unrebutted.[45] Obviously therefore, respondents made the new offer without abandoning the previous contract.  Since there was never a perfected new contract, theJuly 14, 1993 agreement was still in effect and there was no abandonment to speak of.

In its final attempt to prevent respondents from attaining a favorable result, petitioner argues that the instant case should not prosper because the cancellation of TCT No. 158082 is a collateral attack on the title which is proscribed by law.

Such contention is baseless.

Admittedly, during the pendency of the case, respondents timely registered a notice of lis pendens to warn the whole world that the property was the subject of a pending litigation.          

Lis pendens, which literally means pending suit, refers to the jurisdiction, power or control which a court acquires over property involved in a suit, pending the continuance of the action, and until final judgment.   Founded upon public policy and necessity, lis pendens is intended to keep the properties in litigation within the power of the court until the litigation is terminated, and to prevent the defeat of the judgment or decree by subsequent alienation.  Its notice is an announcement to the whole world that a particular property is in litigation and serves as a warning that one who acquires an interest over said property does so at his own risk or that he gambles on the result of the litigation over said property.[46]

The filing of a notice of lis pendens has a twofold effect: (1) to keep the subject matter of the litigation within the power of the court until the entry of the final judgment to prevent the defeat of the final judgment by successive alienations; and (2) to bind a purchaser, bona fide or not, of the land subject of the litigation to the judgment or decree that the court will promulgate subsequently.[47]

This registration, therefore, gives the court clear authority to cancel the title of the spouses Vaca, since the sale of the subject property was made after the notice of lis pendens.  Settled is the rule that the notice is not considered a collateral attack on the title,[48] for the indefeasibility of the title shall not be used to defraud another especially if the latter performs acts to protect his rights such as the timely registration of a notice of lis pendens.

 

As to the liability for moral damages, attorney’s fees and expenses of litigation, we affirm in toto the appellate court’s conclusion.  Article 2220[49] of the New Civil Code allows the recovery of moral damages in breaches of contract where the party acted fraudulently and in bad faith.  As found by the CA, petitioner undoubtedly acted fraudulently and in bad faith in breaching the letter-agreements.  Despite the pendency of the case in the RTC, it sold the subject property to the spouses Vaca and allowed the demolition of the house even if there was already a writ of preliminary injunction lawfully issued by the court.  This is apart from its act of unilaterally rescinding the subject contract.  Clearly, petitioner’s acts are brazen attempts to frustrate the decision that the court may render in favor of respondents.[50]  It is, likewise, apparent that because of petitioner’s acts, respondents were compelled to litigate justifying the award of attorney’s fees and expenses of litigation.

WHEREFORE, premises considered, the petition is DENIED.  The Decision of the Court of Appeals dated February 27, 2001 and its Resolution dated May 31, 2001 in CA-G.R. CV No. 60315 are AFFIRMED.

SO ORDERED

[1]               Penned by Associate Justice Romeo J. Callejo, Sr. (now retired Supreme Court Justice), with Associate Justices

Renato C. Dacudao and Josefina Guevara-Salonga, concurring; rollo, pp. 10-29.[2]               Branch 72, Antipolo, Rizal.[3]               Penned by Presiding Judge Rogelio L. Angeles; records, pp. 456-463.[4]               CA rollo, p. 742.[5]               Associated Bank which eventually became “Westmont Bank” and now known as “United Overseas Bank.”[6]               CA rollo, p. 600.[7]               The Court finally resolved the matter on July 14, 1994, 234 SCRA 146.[8]               Exhibit “A,” folder of  exhibits, p. 1. [9]               CA rollo, p. 601.[10]             Payment was made on March 8, 1993; Exhibit “D,” folder of exhibits, p. 4.[11]             Exhibit “B,” folder of exhibits, pp. 2-3.[12]             And, thus, petitioner will not be able to deliver the same free from any occupants.[13]             CA rollo, p. 602. [14]             Exhibit “E,” folder of exhibits, p. 5.[15]             CA rollo, pp. 602-603.[16]             Id. at 603.[17]             Id. at 604.[18]             Exhibit “F,” folder of exhibits, p. 6.[19]             Exhibit “G,” folder of exhibits, p. 7.[20]             Exhibit “H,” folder of exhibits, pp. 8-9.[21]             Exhibit “I,” folder of exhibits, pp. 10-12.[22]             Records, pp. 1-5. [23]             Id. at 11-18.[24]             CA rollo, p. 606.[25]             Id.[26]             Records, p. 463.[27]             The doctrine states that although an officer or agent acts without or in excess of his actual authority, if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith.[28]             Records, pp. 461-462.[29]             CA rollo, pp. 608-617.[30]             Id. at 618.[31]             Rollo, pp. 54-56.[32]             Valdez v. Reyes, G.R. No. 152251, August 17, 2006, 499 SCRA 212, 214-215, citing Pleyto v. Lomboy, 432 SCRA 329, 336 (2004). [33]             Valdez v. Reyes, supra; Mindanao State University v. Roblett Industrial and Construction Corp., G.R. No. 138700, June 9, 2004, 431 SCRA 458, 466.[34]             Inter-Asia Investments Ind., Inc. v. Court of Appeals, 451 Phil. 554, 559-560 (2003), citing People’s Aircargo and Warehousing Co., Inc. v. CA, 357 Phil. 850 (1998); Lipat v. Pacific Banking Corp., 450 Phil. 401, 414 (2003).[35]             First Philippine International Bank v. CA, 322 Phil. 280, 319-320 (1996).[36]             Emphasis supplied.

[37]             Inter-Asia Investments Ind., Inc. v. Court of Appeals, supra note 34, at 560, citing People’s Aircargo and Warehousing Co., Inc. v. CA, 357 Phil. 850 (1998); Lipat v. Pacific Banking Corp., supra note 34.[38]             BPI Family Savings Bank, Inc. v. First Metro Investment Corporation, G.R. No. 132390, May 21, 2004, 429 SCRA 30, 38; Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 381 Phil. 911, 925 (2000).[39]             BPI Family Savings Bank, Inc. v. First Metro Investment Corporation, supra, at 38.[40]             BPI Family Savings Bank, Inc. v. First Metro Investment Corporation, supra note 38, at 37; Lipat v. Pacific Banking Corp., supra note 34, at 415; Rural Bank of Milaor (Camarines Sur) v. Ocfemia, supra note 38;People’s Aircargo and Warehousing Co., Inc. v. CA, supra note 34, at 865.[41]             See Go v. Pura V. Kalaw, Inc., G.R. No. 131408, July 31, 2006, 497 SCRA 154;  see also Multinational Village Homeowners Association, Inc. v. Ara Security & Surveillance Agency, Inc., G.R. No. 154852, October 21, 2004, 441 SCRA 126.[42]             The March 18 Letter-Agreement reads:                We are pleased to inform you that your offer to purchase our property  x x x has been accepted by the Bank under the following terms and conditions:

x x x x                4.  Forfeiture of deposit in case of your default in complying with the terms and conditions herein set forth.  (Exhibit “B,” folder of exhibits, p. 2.)

[43]             Rollo, p. 558.[44]             As they never slept on their rights showed by their repeated follow up of the results of the pending case involving the subject matter and negotiation with the petitioner through its officers, for the payment and delivery of the property. [45]             Revised Rules on Evidence, Rule 131, Sec. 3(d).[46]             Romero v. Court of Appeals, G.R. No. 142406, May 16, 2005, 458 SCRA 483, 492.[47]             Id. at 492-493; Heirs of Eugenio Lopez, Sr. v. Enriquez, G.R. No. 146262, January 21, 2005, 449 SCRA 173, 186.[48]             Id. at 495; Spouses Lim v. Vera Cruz, 408 Phil. 503, 509 (2001).[49]             Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due.  The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith.[50]             Rollo, p. 27.

Republic of the PhilippinesSUPREME COURT

Manila

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 THOMAS GONZALES, respondents.

Cayanga, Zuniga & Angel Law Offices for petitioners.

Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this case? Who owns the stocks of the corporation under the terms of the voting trust agreement? How long can a voting trust agreement remain valid and effective? Did a director of the corporation cease to be such upon the creation of the voting trust agreement? These are the

questions the answers to which are necessary in resolving the principal issue in this petition for certiorari — whether or 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 trust agreement between ALFA and the Development Bank of the Philippines (DBP, for short).

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 the International 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 party complaint which the Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.

On July 18, 1988, the petitioners filed their answer to the third party complaint.

Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA had been transferred to the DBP.

In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and existence.

On August 4, 1988, the trial court issued an order advising the private respondents to take the appropriate steps to serve the summons to ALFA.

On August 16, 1988, the private respondents filed a Manifestation and Motion for the 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 reconsideration submitting that Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private respondents should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e.,through publication to effect proper service upon 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 executive vice-president of ALFA so that service of summons upon ALFA through the petitioners as corporate officers was proper.

On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to filed its answer through the petitioners as its corporate officers.

On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence, they could no longer receive summons or any court processes for or on behalf of ALFA. In support of their second motion for reconsideration, the petitioners attached thereto a copy of the voting trust agreement between all the stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the other hand, whereby the management and control of ALFA became vested upon the DBP.

On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2, 1989 and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA.

On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was affirmed by the court in its Order dated August 14, 1989 denying the private respondent's motion for reconsideration.

On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent before the public respondent which, nonetheless, resolved to give due course thereto on September 21, 1989.

On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with public respondent issued an Order declaring as final the Order dated April 25, 1989. The private respondents in the said Order were required to take positive steps in prosecuting the third party complaint in order that the court would not be constrained to dismiss the same for failure to prosecute. Subsequently, on October 25, 1989 the private respondents filed a motion for reconsideration on which the trial court took no further action.

On March 19, 1990, after the petitioners filed their answer to the private respondents' petition for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25, 1989 and August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered to file its answer within the reglementary period. (CA Decision, p. 8; Rollo, p. 24)

On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners filed this certiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction on the part of the public respondent in reversing the questioned Orders dated April 25, 1989 and August 14, 1989 of the court a quo, thus, holding that there was proper service of summons on ALFA through the petitioners.

In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990 erroneously applying the rule that the period during which a motion for reconsideration has been pending must be deducted from the 15-day period to appeal. However, in its Resolution dated January 3, 1991, the public respondent set aside the aforestated entry of judgment after further considering that the rule it relied on applies to

appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to appeals from its decision to us pursuant to our ruling in the case of Refractories Corporation of the Philippines 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 stockholders whereby all his shares to the corporation have been transferred to the trustee deprives the stockholders of his position as director of the corporation; to rule otherwise, as the respondent Court of Appeals did, would be violative of section 23 of the Corporation Code ( Rollo, pp. 270-3273); and

(2) that the petitioners were no longer acting or holding any of the positions provided under Rule 14, Section 13 of the Rules of Court authorized to receive service of summons for and in behalf of the private domestic corporation so that the service of summons on ALFA effected through the petitioners is not valid and ineffective; to maintain the respondent Court of Appeals' position that ALFA was properly served its summons through the petitioners would be contrary to the general principle that a corporation can only be bound by such acts which are within 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 instant case, we dwell first on the nature of a voting trust agreement and the consequent effects upon its creation in the light of the provisions of the Corporation Code.

A voting trust is defined in Ballentine's Law Dictionary as follows:

(a) trust created by an agreement between a group of the stockholders of a corporation and the trustee or by a group of identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, either for certain purposes or for all purposes, is to be lodged in the trustee, either with or without a reservation to the owners, or persons designated by them, of the power to 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 voting trust agreements, a more definitive meaning may be gathered. The said provision partly reads:

Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the share for a period rights pertaining to the shares for a period not exceeding five (5) years at any one time: Provided, that in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said

agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the 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 of the trustee or trustees is made pursuant to said voting trust agreement.

By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder 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 the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the corporation. However, in order to distinguish a voting trust agreement from proxies and other voting pools and agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the other attributes of ownership; (2) that the 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 acquire voting control of the corporation. (5 Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p. 331citing Tankersly v. Albright, 374 F. Supp. 538)

Under section 59 of the Corporation Code, supra, a voting trust agreement may confer 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 not entered "for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code) Thus, the traditional concept of a voting trust agreement primarily intended to single out a stockholder's right to vote from his other rights as such and made irrevocable for a limited duration may in practice become a legal device whereby a transfer of the stockholder's shares is effected subject to the specific provision of the voting trust agreement.

The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholders, 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 writing whereby one or more stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon the fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The five year-period may be extended in cases where the voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan.

In the instant case, the point of controversy arises from the effects of the creation of the voting trust agreement. The petitioners maintain that with the execution of the voting trust agreement between them and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former assigned and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of the voting trust

agreement the petitioners can no longer be considered directors of ALFA. In support of their contention, the petitioners invoke section 23 of the Corporation Code which provides, in part, that:

Every director must own at least one (1) share of the capital stock of the corporation of which he is a director which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be director . . . (Rollo, p. 270)

The private respondents, on the contrary, insist that the voting trust agreement between ALFA and the DBP had all the more safeguarded the petitioners' continuance as officers and directors of ALFA inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors of a corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right and status of the transferring stockholders, to wit:

The "transferring stockholder", also called the "depositing stockholder", is equitable owner for the stocks represented by the voting trust certificates and the stock reversible on termination of the trust by surrender. It is said that the voting trust agreement does not destroy the status of the transferring stockholders as such, and thus render them ineligible as directors. But a more accurate statement seems to be that for some purposes the depositing stockholder holding voting trust certificates in lieu of his stock and being the beneficial owner thereof, remains and is treated as a stockholder. It seems to be deducible from the case that he may sue as a stockholder if the suit is in equity or is of an equitable nature, such as, a technical stockholders' suit in right of the corporation. [Commercial Laws of the Philippines by Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)

We find the petitioners' position meritorious.

Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of a voting trust agreement on the status of a stockholder who is a party to its execution — from legal titleholder or owner of the shares subject of the voting trust agreement, he becomes the equitable or beneficial owner. (Salonga,Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and Carlos, The Law on Private Corporations and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981, ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is whether the change in his status deprives the stockholder of the right to qualify as a director under section 23 of the present Corporation Code which deletes the phrase "in his own right." Section 30 of the old Code states that:

Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporation. A director who ceases to be the owner of at least one share of the capital stock of a stock corporation of which is a director shall thereby cease to be a director . . . (Emphasis supplied)

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 a voting trust agreement inasmuch as he remains owner (although beneficial or equitable only) 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 36 of the old Corporation Code). No disqualification arises by virtue of the 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 and other persons who in fact are not beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear indication that in order to be eligible as a director, what is material is the legal title to, not beneficial 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 trust agreement executed in 1981 disposed of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective positions as directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is the essence of the subject voting trust agreement as evident from the following stipulations:

1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the shares of the stocks owned by them respectively and shall do all things necessary for the transfer of their respective shares to the TRUSTEE on the books of ALFA.

2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number of shares transferred, which shall be transferrable in the same manner and with the same effect as certificates of stock subject to the 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 that may 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 to the stock;

4. The TRUSTEE may cause to be transferred to any person one share of stock for the purpose of qualifying such person as director of ALFA, and cause a certificate of stock evidencing the share so transferred to be issued in the name of such person;

xxx xxx xxx

9. Any stockholder not entering into this agreement may transfer his shares to the same trustees without the need of revising this agreement, and this agreement shall have the

same force and effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis supplied)

Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have retained their status as officers of ALFA which was the case before the execution of the subject voting trust agreement. There appears to be no dispute from the records that DBP has taken over full control and management of the firm.

Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A. Guevarra, Vice-President of its Special Accounts Department II, Remedial Management Group, the petitioners were no longer included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-142)

Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting trust agreement did not deprive the petitioners of their position as directors of ALFA, the public respondent committed a reversible error when it ruled that:

. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be president and vice-president, respectively, of the corporation 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 terms of Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA and 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 were stripped of their positions as such.

There can be no reliance on the inference that the five-year period of the voting trust 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 the petitioners as beneficial owners pursuant to the 6th paragraph of section 59 of the new Corporation Code which reads:

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificate as well as the certificates of stock in the name of the 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 trust agreement between ALFA and the DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA with the DBP. This is shown by the following portions of the agreement.

WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first mortgage on the manufacturing plant of said company;

WHEREAS, ALFA is also indebted to other creditors for various financial accomodations and because of the burden of

these obligations is encountering very serious difficulties in continuing with its operations.

WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA had offered and the TRUSTEE has accepted participation in the management and control of the company and to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have agreed to execute a voting trust covering their shareholding in ALFA in favor of the TRUSTEE;

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.

NOW, THEREFORE, it is hereby agreed as follows:

xxx xxx xxx

6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as the obligations of ALFA with DBP, or any portion 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 "effective June 30, 1986" to the national government through the Asset Privatization Trust (APT) as attested to in a Certification dated January 24, 1989 of the Vice President 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 which included ALFA's assets pursuant to a management agreement by and between the DBP and APT (CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on ALFA through the petitioners on August 21, 1987, the voting trust agreement in question was not yet terminated so that the 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 proper service of summons on ALFA through the petitioners is readily answered in the negative.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a corporation organized under the laws of the Philippines 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 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 rule on service of processes of a corporation enumerates the representatives of a corporation who can validly receive court processes on its behalf. Not every stockholder or officer can bind the corporation considering the existence of a corporate entity separate from those 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 a priori supposable that he will realize his

responsibilities and know what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197 [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. The service of summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the petitioners, will contravene the general principle that a corporation can only be bound by such acts which are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).

WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED.

SO ORDERED.

Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-34192 June 30, 1988

NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO, petitioners, 

vs.HON. BENJAMIN AQUINO, in his official capacity as

Presiding Judge of Branch VIII of the Court of First Instance of Rizal, BATJAK INC., GRACIANO A.

GARCIA and MARCELINO CALINAWAN JR., respondents.

G.R. No. L-34213 June 30, 1988

PHILIPPINE NATIONAL BANK, petitioner, vs.

HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the Court of First Instance of Rizal,

Branch VIII and BATJAK INCORPORATED, respondents.

Cruz, Palafox, Alfonso and Associates for petitioner NIDC in G.R. No. 34192.

The Chief Legal Counsel for petitioner PNB in G.R. No. 34213.

Reyes and Sundiam Law Office for respondent Batjak, Inc.

Duran, Chuanico Oebanda, Benemerito & Associates for private respondents in G.R. Nos. 34192 & 34213.

Tolentino, Garcia, Cruz & Reyes for movant in G.R. No. L-34192.

 

PADILLA, J.:

These two (2) separate petitions for certiorari and prohibition, with preliminary injunction, seek to annul and set aside the orders of respondent judge, dated 16 August 1971 and 30 September 1971, in Civil Case No. 14452 of the Court of First Instance of Rizal, entitled Batjak Inc. vs. NIDC et al." The order of 16 August 1971 1 granted the alternative petition of private respondent Batjak, Inc. Batjak for short) for the appointment of receiver and denied petitioners' motion to dismiss the complaint of said private respondent. The order dated 30 September 1971 2 denied petitioners' motion for reconsideration of the order dated 16 August 1971.

The herein petitions likewise seek to prohibit the respondent judge from hearing and/or conducting any further proceedings in Civil Case No. 14452 of said court.

Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is a Filipino-American corporation organized under the laws of the Philippines, primarily engaged in the manufacture of coconut oil and copra cake for export. In 1965, Batjak's financial condition deteriorated to the point of bankruptcy. As of that year, Batjak's indebtedness to some private banks and to the Philippine National Bank (PNB) amounted to P11,915,000.00, shown as follows:

Republic Bank P 2,324,000.00

Philippine Commercial and Industrial Bank 1,346,000.00

Manila Banking Corporation 2,000,000.00

Manufacturers Bank 440,000.00

Hongkong and Shanghai Banking Corporation 250,000.00

Foreign Export Advances (against immediate shipment) 555,000.00

PNB export advance line(against immediate shipment) 5,000,000.00

TOTAL 11,915,000.00

As security for the payment of its obligations and advances against shipments, Batjak mortgaged its three (3) coco-processing oil mills in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte to Manila Banking Corporation (Manila Bank), Republic Bank (RB), and Philippine Commercial and Industrial Bank (PCIB), respectively. In need for additional operating capital to place the three (3) coco-processing mills at their optimum capacity and maximum efficiency and to settle, pay or otherwise liquidate pending financial obligations with the different private banks, Batjak applied to PNB for additional financial assistance. On 5 October 1965, a Financial Agreement was submitted by PNB to Batjak for acceptance. The Financial Agreement reads:

PHILIPPINE NATIONAL BANKManila, Philippines

International DepartmentOctober 5, 1965BATJAK, INCORPORATED3rd Floor, G. Puyat Bldg.Escolta, ManilaAttn.: Mr. CIRIACO B. MENDOZAVice-President & General Manager

Gentlemen:We are pleased to advise that our Board of Directors approved for you the following:

1) That NIDC shall invest P6,722,500.00 in the form of preferred shares of stocks at 9% cumulative, participating and convertible within 5 years at par into common stocks to liquidate your accounts with the Republic Bank, Manufacturers Bank & Trust Company and the PCIB which, however, shall be applied to the latter three (3) banks accounts with the Loans & Discounts Dept. NIDC shall match your P 10 million subscription by an additional investment of P3,277,500 within a period of one to two years at NIDC's option;

2) That NIDC will guaranty for five (5) years your account with the Manila Banking Corporation;

3) That the above banks (Republic Bank, PCIB, MBTC and Manila Banking Corp.) shall release in favor of PNB the first and any mortgage they hold on your properties;

4) That you shall exercise (execute) a first mortgage on all your properties located at Sasa, Davao City; Jimenez, Misamis Occidental; and Tanauan, Leyte and assign leasehold rights on the property on which your plant at Sasa, Davao City is erected in favor of PNB;

5) That a voting trust agreement for five (5) years over 60% of the oustanding paid up and subscribed shares shall be executed by your stockholders in favor of NIDC;

6) That this accomodation shall be secured by the joint and several signatures of officers and directors;

7) That the number of the Board of Directors shall be increased to seven (7), three (3) from your firm and the other four (4) from the PNB-NIDC;

8) That a comptroller, at your expense, shall be appointed by PNB-NIDC to supervise the financial management of your firm;

9) That the past due accounts of P 5 million with the International Department of the PNB shall be transferred to the Loans & Discount Department and to be treated as a Demand Loan;

10) That any excess of NIDC investment as required in Condition 1 after payment of the obligations to three (3) Banks (RB, MBTC, & PCIB) shall be applied to reduce the above Demand Loan of P 5 million;

11) That we shall grant you an export advance of P3 million to be used for copra purchases, subject to the following conditions:

a) That the line shall expire on September 30, 1966 but revocable at the Bank(s) option;

b) That drawings against the line shall be allowed only when an irrevocable export L/C for coconut products has been established or assigned in your favor and you shall assign to us all proceeds of negotiations to be received from your letters of credit;

c) That drawings against the line be limited to 60% of the peso value of the export letters of credit computed at P3.50 per $1.00 but total drawings shall not in any event exceed P3,000,000.00;

d) That release or releases against the line shall be covered by promissory note or notes for 90 days but not beyond the expiry dates of the coveting L/C and proceeds of said L/C shall first be applied to the correspondent drawings on the line;

e) That drawings against the line shall be charged interest at the rate of 9% per annum and subject to 1/2% penalty charge on all drawings not paid or extended on maturity date; and

f) That within 90 days from date of release against the line, you shall negotiate with us on equivalent amount in export bills, otherwise, the line shag be temporarily suspended until the outstanding export advance is fully liquidated.

We are writing the National Investment & Development Corporation, the Republic Bank, the Philippine Commercial & Industrial Bank and the Manufacturers Bank & Trust Company and the Manila Banking Corporation regarding the above.

In connection with the above, kindly submit to us two (2) copies of your board resolution certified to under oath by your corporate secretary accepting the conditions enumerated above authorizing the above transactions and the officer or officers to sign on behalf of the corporation.

Thank you.Very truly yours,(SGD.) JOSE B. SAMSON 3

The terms and conditions of the Financial Agreement were duly accepted by Batjak. Under said Agreement, NIDC would, as it actually did, invest P6,722,500.00 in Batjak in the form of preferred shares of stock convertible within five (5) years at par into common stock, to liquidate Batjak's obligations to Republic Bank (RB), Manufacturers Bank and Trust Company (MBTC) and Philippine Commercial & Industrial Bank (PCIB), and the balance of the investment was to be applied to Batjak's past due account of P 5 million with the PNB.Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and any mortgages they held on the properties of Batjak.

As agreed, PNB also granted Batjak an export-advance line of P 3 million, later increased to P 5million, and a standby letter of credit facility in the amount of P5,850,000.00. As of 29 September 1966, the financial accomodation that had been extended by PNB to Batjak amounted to a total of P 14,207,859.51.

As likewise agreed, Batjak executed a first mortgage in favor of PNB on all its properties located at Jimenez, Misamis Occidental and Tanauan, Leyte. Batjak's plant in Sasa, Davao City was mortgaged to the Manila Bank which, in 1967, instituted foreclosure proceedings against the same but which

were aborted by the payment by Batjak of the sum of P2,400,000.00 to Manila Bank, and which amount was advanced to Batjak by NIDC, a wholly-owned subsidiary of PNB. To secure the advance, Batjak mortgaged the oil mill in Sasa, Davao City to NIDC. 4

Next, a Voting Trust Agreement was executed on 26 October 1965 in favor of NIDC by the stockholders representing 60% of the outstanding paid-up and subscribed shares of Batjak. This agreement was for a period of five (5) years and, upon its expiration, was to be subject to negotiation between the parties. The voting Trust Agreement reads:

VOTING TRUST AGREEMENTKNOW ALL MEN BY THESE PRESENTS:

This AGREEMENT made and executed by the undersigned stockholders of BATJAK, INC., a corporation duly organized and existing under the laws of the Philippines, whose names are hereinbelow subscribed hereinafter caged the SUBSCRIBERS, and the NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, hereinafter referred to as the trustee.

W I T N E S S E T H :

WHEREAS, the SUBSCRIBERS are owners respectively of the capital stock of the BATJAK, INC. (hereinafter called the CORPORATION) in the amounts represented by the number of shares set fort opposite their respective names hereunder;

AND WHEREAS, with a view or establishing a safe and competent management to operate the corporation for the best interest of all the stockholders thereof, and as mutually agreed between the SUBSCRIBERS and the TRUSTEE, this Voting Trust Agreement has been executed under the following terms and conditions.

NOW THEREFORE, the undersigned stockholders, in consideration of the premises and of the mutual covenants and agreements herein contained and to carry out the foregoing purposes in order to vest in the TRUSTEE the voting rights of the shares of stock held by the undersigned in the CORPORATION as hereinafter stated it is mutually agreed as follows:

1. PERIOD OF DESIGNATION — For a period of five (5) years from and after date hereof, without power of revocation on the part of the SUBSCRIBERS, the TRUSTEE designated in the manner herein provided is hereby made, constituted and appointed as a VOTING TRUSTEE to act for and in the name of the SUBSCRIBERS, it being understood, however, that this Voting Trust Agreement shall, upon its expiration be subject to a re-negotiation between the parties, as may be warranted by the balance and attending circumstance of the loan investment of the TRUSTEE or otherwise in the CORPORATION.

2. ASSIGNMENT OF STOCK CERTIFICATES UPON ISSUANCE — The undersigned stockholders hereby transfer and assign their common shares to the capital stock of the CORPORATION to the extent shown hereunder:

JAMES A. KEISTER 21,500 shares

JOHNNY LIEUSON 20,300 sharesCBM FINANCE & INVESTMENTCORP. (C.B. Mendoza, Pres.) 5,000 sharesALEJANDRO G. BELTRAN 4,000 sharesESPERANZA A. ZAMORA 3,000 sharesCIRIACO B. MENDOZA 2,000 sharesFIDELA DE GUZMAN 2,000 sharesLLOYD D. COMBS 2,000 sharesRENATO B. BEJAR 200 shares

TOTAL 60,000 shares

to the TRUSTEE by virtue of the provisions hereof and do hereby authorize the Secretary of the CORPORATION to issue the corresponding certificate directly in the name of the TRUSTEE and on which certificates it shall appear that they have been issued pursuant to this Voting Trust Agreement and the said TRUSTEE shall hold in escrow all such certificates during the term of the Agreement. In turn, the TRUSTEE shall deliver to the undersigned stockholders the corresponding Voting Trust certificates provided for in Sec. 36 of Act No. 1459.

3. VOTING POWER OF TRUSTEE — The TRUSTEE and its successors in trust, if anym shall have the power and it shall be its duty to vote the shares of the undersigned subject hereof and covered by this Agreement at all annual, adjourned and special meetings of the CORPORATION on all questions, motions, resolutions and matters including the election of directors and such matters on which the stockholders, by virtue of the by-laws of the CORPORATION and of the existing legislations are entitled to vote, which may be voted upon at any and all said meetings and shall also have the power to execute and acknowledge any agreements or documents that may be necessary in its opinion to express the consent or assent of all or any of the stockholders of the CORPORATION with respect to any matter or thing to which any consent or assent of the stockholders may be necessary, proper or convenient.

4. FILING of AGREEMENT — An executed copy of this Agreement shall be filed with the CORPORATION at its office in the City of Manila wherever it may be transfered therefrom and shall constitute irrevocable authority and absolute direction of the officers of the CORPORATION whose duty is to sign and deliver stock certificates to make delivery only to said voting trustee of the shares and certificates of stock subject to the provisions of this Agreement as aforesaid. Such copy of this Agreement shall at all times be open to inspection by any stockholder, as provided by law.

5. DIVIDEND — the full and absolute beneficial interest in the shares subject of this Agreement shall remain with the stockholders executing the same and any all dividends which may be declared by the CORPORATION shall belong and be paid to them exclusively in accordance with their stockholdings after deducting therefrom or applying the same to whatever liabilities the stockholders may have in favor of the TRUSTEE by virtue of any Agreement or Contract that may have been or will be executed by and between the TRUSTEE and the CORPORATION or between the former and the undersigned stockholders.

6 COMPENSATION; IMMUNITY — The TRUSTEE or its successor in trust shall not receive any compensation for its serviceexcept perhaps that which the CORPORATION may grant to the TRUSTEE's authorized representative, if any. Expenses costs, champs, and other liabilities incurred in the carrying out of the but herein established or by reason thereof, shall be paid for with the funds of the CORPORATION. The TRUSTEE or any of its duly authorized representative shall incur no liability by reason of any error of law or of any matter or thing done or omitted under this Agreement, except for his own individual malfeasance.

7. REPRESENTATION — The TRUSTEE, being a corporation and a juridical person shall accomplish the foregoing objectives and perform its functions under this Agreement as well as enjoy and exercise the powers, privileges, rights and interests herein established through its duly authorized and accredited re resentatives . p with full authority under the specific appointment or designation or Proxy.

8. IRREVOCABILITY — This Agreement shall during its 5-year term or any extension thereof be binding upon and inure to the benefit of the undersigned stockholders and their respective legal representatives, pledges, transferees, and/or assigns and shall be irrevocable during the said terms and/or its extension pursuant to the provisions of paragraph 1 hereof. It is hereby understood and the undersigned stockholders have bound as they hereby bind themselves to make a condition of every pledge, transfer of assignment of their interests in the CORPORATION that the interests and participation so pledged, transferred or assigned is evidenced by annotations in the certificates of stocks or in the books of the corporation, shall be subject to this Agreement and the same shall be binding upon the pledgees, transferees and assigns while the trust herein created still subsists.

9. TERMINATION — Upon termination of this Agreement as heretofore provided, the certificates delivered to the TRUSTEE by virtue hereof shall be returned and delivered to the undersigned stockholders as the absolute owners thereof, upon surrender of their respective voting trust certificates, and the duties of the TRUSTEE shall cease and terminate.

10. ACCEPTANCE OF TRUST — The TRUSTEE hereby accepts the trust created by this Agreement under the signature of its duly authorized representative affixed hereinbelow and agrees to perform the same in accordance with the term/s hereof.

IN WITNTESS HEREOF, the undersigned stockholders and the TRUSTEE by its representatives, have hereunto affixed their signatures this 26 day of October, 1965 in the City of Manila, Philippines.

(SGD) JAMES A. KEISER (SGD) JOHNNY LIEUSONStockholder Stockholder

CBM FINANCE & INVESTMENT CORPORATIONBy: (SGD) C.B. MENDOZA

PresidentESPERANZA A. ZAMORA (SGD) ALEJANDRO G.

BELTRANBy: (SGD) MARIANO ZAMORA Stockholder

ESPERANZA A. ZAMORA(SGD) FIDELA DE GUZMAN (SGD) CIRIACO B.

MENDOZA

Stockholder Stockholder(SGD) RENATO B. BEJAR (SGD) LLOYD D. COMBS

Stockholder StockholderNATIONAL INVESTMENT AND

DEVELOPMENT CORPORATIONBy:

(SGD) IGNACIO DEBUQUE JR.Vice-President 5

In July 1967, forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings against the oil mills of Batjak located in Tanauan, Leyte and Jimenez, Misamis Occidental. The properties were sold to PNB as the highest bidder. One year thereafter, or in September 1968, final Certificates of Sale were issued by the provincial sheriffs of Leyte 6 and Misamis Occidental 7 for the two (2) oil mills in Tanauan and Jimenez in favor of PNB, after Batjak failed to exercise its right to redeem the foreclosed properties within the allowable one year period of redemption. Subsequently, PNB transferred the ownership of the two (2) oil mills to NIDC which, as aforestated, was a wholly-owned PNB subsidiary.As regards the oil mill located at Sasa, Davao City, the same was similarly foreclosed extrajudicial by NIDC. It was sold to NIDC as the highest bidder. After Batjak failed to redeem the property, NIDC consolidated its ownership of the oil mill. 8

Three (3) years thereafter, or on 31 August 1970, Batjak represented by majority stockholders, through Atty. Amado Duran, legal counsel of private respondent Batjak, wrote a letter to NIDC inquiring if the latter was still interested in negotiating the renewal of the Voting Trust Agreement. 9 On 22 September 1970, legal counsel of Batjak wrote another letter to NIDC informing the latter that Batjak would now safely assume that NIDC was no longer interested in the renewal of said Voting Trust Agreement and, in view thereof, requested for the turn-over and transfer of all Batjak assets, properties, management and operations. 10

On 23 September 1970, legal counsel of Batjak sent stin another letter to NIDC, this time asking for a complete accounting of the assets, properties, management and operation of Batjak, preparatory to their turn-over and transfer to the stockholders of Batjak. 11

NIDC replied, confirming the fact that it had no intention whatsoever to comply with the demands of Batjak. 12

On 24 February 1971, Batjak filed before the Court of First Instance of Rizal a special civil action for mandamus with preliminary injunction against herein petitioners docketed as Civil Case No. 14452. 13

On 14 April 1971, in said Civil Case No. 14452, Batjak filed an urgent ex parte motion for the issuance of a writ of preliminary prohibitory and mandatory injunction. 14 On the same day, respondent judge issued a restraining order "prohibiting defendants (herein petitioners) from removing any record, books, commercial papers or cash, and leasing, renting out, disposing of or otherwise transferring any or all of the properties, machineries, raw materials and finished products and/or by-products thereof now in the factory sites of the three (3) modem coco milling plants situated in Jimenez,

Misamis Occidental, Sasa, Davao City, and Tanauan, Leyte." 15

The order of 14 April 1971 was subsequently amended by respondent judge upon an ex parte motion of private respondent Batjak so as to include the premises of NIDC in Makati and those of PNB in Manila, as among the premises which private respondent Batjak was authorized to enter in order to conduct an inventory.

On 24 April 1971, NIDC and PNB filed an opposition to the ex parte application for the issuance of a writ of preliminary prohibitory and mandatory injunction and a motion to set aside restraining order.

Before the court could act on the said motion, private respondent Batjak filed on 3 May 1971 a petition for receivership as alternative to writ of preliminary prohibitory and mandatory injunction. 16 This was opposed by PNB and NIDC . 17

On 8 May 1971., NIDC and PNB filed a motion to dismiss Batjak's complaints. 18

On 16 August 1971, respondent judge issued the now assailed order denying petitioners' motion to dismiss and appointing a set of three (3) receivers. 19 NIDC moved for reconsideration of the aforesaid order. 20 On 30 September 1971, respondent judge denied the motion for reconsideration. 21

Hence, these two (2) petitions, which have been consolidated, as they involve a resolution of the same issues. In their manifestation with motion for early decision, dated 25 August 1986, private respondent, Batjak contends that the NIDC has already been abolished or scrapped by its parent company, the PNB.

After a careful study and examination of the records of the case, the Court finds and holds for the petitioners.

1. On the denial of petitioners' motion to dismiss.

As a general rule, an order denying a motion to quash or to dismiss is interlocutory and cannot be the subject of a petition for certiorari. The remedy of the aggrieved party in a denied motion to dismiss is to file an answer and interpose, as defense or defenses, the objection or objections raised by him in said motion to dismiss, then proceed to trial and, in case of adverse decision, to elevate the entire case by appeal in due course. However, under certain situations, recourse to the extraordinary legal remedies of certiorari, prohibition and mandamus to question the denial of a motion to dismiss or quash is considered proper, in the interest of more enlightened and substantial justice. As the court said in Pineda and Ampil Manufacturing Co. vs. Bartolome, 95 Phil. 930,938

For analogous reasons it may be said that the petition for certiorari interposed by the accused against the order of the court a quo denying the motion to quash may be entertained, not only because it was rendered in a criminal case, but because it was rendered, as claimed, with grave abuse of discretion, as found by the Court of Appeals. ..

and reiterated in Mead v. Argel 22 citing Yap v. Lutero (105 Phil. 1307):

However, were we to require adherence to this pretense, the case at bar would have to be dismissed and petitioner required

to go through the inconvenience, not to say the mental agony and torture, of submitting himself to trial on the merits in Case No. 166443, apart from the expenses incidental thereto, despite the fact that his trial and conviction therein would violate one of this [sic] constitutional rights, and that, an appeal to this Court, we would, therefore, have to set aside the judgment of conviction of the lower court. This would, obviously, be most unfair and unjust. Under the circumstances obtaining the present case, the flaw in the procedure followed by petitioner herein may be overlooked, in the interest of a more enlightened and substantial justice.

Thus, where there is patent grave abuse of discretion, in denying the motion to dismiss, as in the present case, this Court may entertain the petition for certiorari interposed by the party against whom the said order is issued.

In their motion to dismiss Batjaks complaint, in Civil Case No. 14452, NIDC and PNB raised common grounds for its allowance, to wit:

1. This Honorable Court (the trial court) has no jurisdiction over the subject of the action or suit;

2. The venue is improperly laid; and

3. Plaintiff has no legal capacity to sue.

In addition, PNB contended that the complaint states no cause of action (Rule 16, Sec. 1, Par. a, c, d & g, Rules of Court).

Anent the first ground, it is a well-settled rule that the jurisdiction of a Court of First Instance to issue a writ of preliminary or permanent injunction is confined within the boundaries of the province where the land in controversy is situated. 23 The petition for mandamus of Batjak prayed that NIDC and PNB be ordered to surrender, relinquish and turnover to Batjak the assets, management and operation of Batjak particularly the three (3) oil mills located in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte.

Clearly, what Batjak asked of respondent court was the exercise of power or authority outside its jurisdiction.

On the matter of proper venue, Batjak's complaint should have been filed in the provinces where said oil mills are located. Under Rule 4, Sec. 2, paragraph A of the Rules of Court, "actions affecting title to, or for recovery of possession, or for partition or condemnation of, or foreclosure of mortgage on, real property, shall be commenced and tried in the province where the property or any part thereof lies."

In support of the third ground of their motion to dismiss, PNB and NIDC contend that Batjak's complaint for mandamus is based on its claim or right to recovery of possession of the three (3) oil mills, on the ground of an alleged breach of fiduciary relationship. Noteworthy is the fact that, in the Voting Trust Agreement, the parties thereto were NIDC and certain stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec. 2, Rule 3 of the Rules of Court, every action must be prosecuted and defended in the name of the real party in interest. Applying the rule in the present case, the action should have been filed by the stockholders of Batjak, who executed the Voting Trust Agreement with NIDC, and not by Batjak itself which is not a party to said agreement,

and therefore, not the real party in interest in the suit to enforce the same.

In addition, PNB claims that Batjak has no cause of action and prays that the petition for mandamus be dismissed. A careful reading of the Voting Trust Agreement shows that PNB was really not a party thereto. Hence, mandamus will not lie against PNB.

Moreover, the action instituted by Batjak before the respondent court was a special civil action for mandamus with prayer for preliminary mandatory injunction. Generally, mandamus is not a writ of right and its allowance or refusal is a matter of discretion to be exercised on equitable principles and in accordance with well-settled rules of law, and that it should never be used to effectuate an injustice, but only to prevent a failure of justice. 24 The writ does not issue as a matter of course. It will issue only where there is a clear legal right sought to be enforced. It will not issue to enforce a doubtful right. A clear legal right within the meaning of Sec. 3, Rule 65 of the Rules of Court means a right clearly founded in or granted by law, a right which is enforceable as a matter of law.

Applying the above-cited principles of law in the present case, the Court finds no clear right in Batjak to be entitled to the writ prayed for. It should be noted that the petition for mandamus filed by it prayed that NIDC and PNB be ordered to surrender, relinquish and turn-over to Batjak the assets, management, and operation of Batjak particularly the three (3) oil mills and to make the order permanent, after trial, and ordering NIDC and PNB to submit a complete accounting of the assets, management and operation of Batjak from 1965. In effect, what Batjak seeks to recover is title to, or possession of, real property (the three (3) oil mills which really made up the assets of Batjak) but which the records show already belong to NIDC. It is not disputed that the mortgages on the three (3) oil mills were foreclosed by PNB and NIDC and acquired by them as the highest bidder in the appropriate foreclosure sales. Ownership thereto was subsequently consolidated by PNB and NIDC, after Batjak failed to exercise its right of redemption. The three (3) oil mills are now titled in the name of NIDC. From the foregoing, it is evident that Batjak had no clear right to be entitled to the writ prayed for. In Lamb vs. Philippines(22 Phil. 456) citing the case of Gonzales V. Salazar vs. The Board of Pharmacy, 20 Phil. 367, the Court said that the writ of mandamus will not issue to give to the applicant anything to which he is not entitled by law.

2. On the appointment of receiver.

A receiver of real or personal property, which is the subject of the action, may be appointed by the court when it appears from the pleadings that the party applying for the appointment of receiver has an interest in said property. 25 The right, interest, or claim in property, to entitle one to a receiver over it, must be present and existing.

As borne out by the records of the case, PNB acquired ownership of two (2) of the three (3) oil mills by virtue of mortgage foreclosure sales. NIDC acquired ownership of the third oil mill also under a mortgage foreclosure sale. Certificates of title were issued to PNB and NIDC after the lapse of the one (1) year redemption period. Subsequently,

PNB transferred the ownership of the two (2) oil mills to NIDC. There can be no doubt, therefore, that NIDC not only has possession of, but also title to the three (3) oil mills formerly owned by Batjak. The interest of Batjak over the three (3) oil mills ceased upon the issuance of the certificates of title to PNB and NIDC confirming their ownership over the said properties. More so, where Batjak does not impugn the validity of the foreclosure proceedings. Neither Batjak nor its stockholders have instituted any legal proceedings to annul the mortgage foreclosure aforementioned.

Batjak premises its right to the possession of the three (3) off mills on the Voting Trust Agreement, claiming that under said agreement, NIDC was constituted as trustee of the assets, management and operations of Batjak, that due to the expiration of the Voting Trust Agreement, on 26 October 1970, NIDC should tum over the assets of the three (3) oil mills to Batjak. The relevant provisions of the Voting Trust Agreement, particularly paragraph 4 & No. 1 thereof, are hereby reproduced:

NOW THEREFORE, the undersigned stockholders, in consideration of the premises and of the mutual covenants and agreements herein contained and to carry out the foregoing purposes in order to vest in the TRUSTEE the voting right.8 of the shares of stock held by the undersigned in the CORPORATION as hereinafter stated it is mutually agreed as follows:

1. PERIOD OF DESIGNATION — For a period of five (5) years from and after date hereof, without power of revocation on the part of the SUBSCRIBERS, the TRUSTEE designated in the manner herein provided is hereby made, constituted and appointed as a VOTING TRUSTEE to act for and in the name of the SUBSCRIBERS, it being understood, however, that this Voting Trust Agreement shall, upon its expiration be subject to a re-negotiation between the parties, as may be warranted by the balance and attending circumstance of the loan investment of the TRUSTEE or otherwise in the CORPORATION.

and No. 3 thereof reads:

3. VOTING POWER OF TRUSTEE — The TRUSTEE and its successors in trust, if any, shall have the power and it shall be its duty to vote the shares of the undersigned subject hereof and covered by this Agreement at all annual, adjourned and special meetings of the CORPORATION on all questions, motions, resolutions and matters including the election of directors and all such matters on which the stockholders, by virtue of the by-laws of the CORPORATION and of the existing legislations are entitled to vote, which may be voted upon at any and all said meetings and shall also have the power to execute and acknowledge any agreements or documents that may be necessary in its opinion to express the consent or assent of all or any of the stockholders of the CORPORATION with respect to any matter or thing to which any consent or assent of the stockholders may be necessary, proper or convenient.

From the foregoing provisions, it is clear that what was assigned to NIDC was the power to vote the shares of stock of the stockholders of Batjak, representing 60% of Batjak's outstanding shares, and who are the signatories to the agreement. The power entrusted to NIDC also included the

authority to execute any agreement or document that may be necessary to express the consent or assent to any matter, by the stockholders. Nowhere in the said provisions or in any other part of the Voting Trust Agreement is mention made of any transfer or assignment to NIDC of Batjak's assets, operations, and management. NIDC was constituted as trustee only of the voting rights of 60% of the paid-up and outstanding shares of stock in Batjak. This is confirmed by paragraph No. 9 of the Voting Trust Agreement, thus:

9. TERMINATION — Upon termination of this Agreement as heretofore provided, the certificates delivered to the TRUSTEE by virtue hereof shall be returned and delivered to the undersigned stockholders as the absolute owners thereof, upon surrender of their respective voting trust certificates, and the duties of the TRUSTEE shall cease and terminate.-

Under the aforecited provision, what was to be returned by NIDC as trustee to Batjak's stockholders, upon the termination of the agreement, are the certificates of shares of stock belonging to Batjak's stockholders, not the properties or assets of Batjak itself which were never delivered, in the first place to NIDC, under the terms of said Voting Trust Agreement.

In any event, a voting trust transfers only voting or other rights pertaining to the shares subject of the agreement or control over the stock. The law on the matter is Section 59, Paragraph 1 of the Corporation Code (BP 68) which provides:

Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for the purpose of confering upon a trustee or trusties the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any one time: ... 26

The acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak.

Moreover, the prevention of imminent danger to property is the guiding principle that governs courts in the matter of appointing receivers. Under Sec. 1 (b), Rule 59 of the Rules of Court, it is necessary in granting the relief of receivership that the property or fired be in danger of loss, removal or material injury.

In the case at bar, Batjak in its petition for receivership, or in its amended petition therefor, failed to present any evidence, to establish the requisite condition that the property is in danger of being lost, removed or materially injured unless a receiver is appointed to guard and preserve it.

WHEREFORE, the petitions are GRANTED. The orders of the respondent judge, dated 16 August 1971 and 30 September 1971, are hereby ANNULLED and SET ASIDE. The respondent judge and/or his successors are ordered to desist from hearing and/or conducting any further proceedings in Civil Case No. 14452, except to dismiss the same. With costs against private respondents.

SO ORDERED.

Yap, C.J., Melencio-Herrera, Paras and Sarmiento, JJ., concur.

 

Footnotes

1 Annex B, p. 114, Rollo of G.R. No. 34192.2 Annex C, p. 136, Rollo of G.R. No. 34192.3 Annex E, p. 152, Rollo of G.R. No. 34192.4 Annex G, p. 155, Rollo of G.R. No. 34192.5 Annex 2, p. 469, Rollo of G.R. No. 34213.6 Annex M, p. 177, Rollo of G.R. No. 34192.7 Annex N, p. 195, Rollo of G.R. No. 34192.8 Annex O, p. 265, Rollo of G.R. No. 34192.9 Annex Q, p. 226, Rollo of G.R. No. 34192.10 Annex R, p. 228, Rollo of G.R. No. 34192.11 Annex S, p. 230, Rollo of G.R. No. 34192.12 Annex T, p. 232, Rollo of G.R. No. 34192.13 Annex P, p. 206, Rollo of G.R. No. 34192.14 Annex Z, p. 264, Rollo of G.R. No. 34192.15 Annex AA, p. 273, Rollo of G.R. No. 34192.16 Annex H, p. 138, Rollo of G.R. No. 34213.17 Annex FF, p. 323, Rollo of G.R. No. 34192 for PNB.18 Annex GG, p. 331, Rollo of G.R. No. 34192 for NIDC; Annex J, p 178, Rollo of G.R. No. 34213 for PNB.19 Annex B, p. 114, Rollo of G.R. No. 3419220 Annex LL, p. 416, Rollo of G.R. No. 34192.21 Annex C, p. 136, Rollo of G.R. No. 34192.22 G.R. No. L-41958, July 20, 1982, 115 SCRA 256,262.23 Acosta vs. Alvendia, G.R. No. L-14598, Oct. 31, 1960; Central Bank of the Philippines vs. Cajigal G.R. No. L-19278, Dec. 29, 1962, 6 SCRA 1072, 1076.23a (NOTE: Dagupan Electric vs. Pano, 95 SCRA 693, cannot be applied since the principal offices of PNB and NIDC are in Manila)24 Marcelo Steel Corporation vs. Import Central Board, 87 Phil. 375.25 Sec. 1(b), Rule 59 of the Rules of Court.26 Formerly Sec. 36 of the Corporation Law or Act. No. 1459.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

November 28, 1953

G.R. No. L-5883DOMINGO PONCE AND BUHAY L.

PONCE, petitioners, vs.

DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of Manila, Branch I, and POTENCIANO

GAPOL, respondents.

Marcelino Lontok for petitioners.Zavalla, Bautista and Nuevas for respondents.

PADILLA, J.:

This is a petition for a writ of certiorari to annul an order of the respondent court granting Potenciano Gapol authority, pursuant to section 26, Act No. 1459, otherwise known as the Corporation Law, to call a meeting of the stockholders of the Dagunoy Enterprises, Inc. and to preside at such meeting by

giving proper notice to the stockholders, as required by law or by laws of the corporation, until after the majority of the stockholders present and qualified to vote shall have chosen one of them to act as presiding officer of the meeting; another order denying a motion of the petitioners to have the previous order set aside; and a third order denying a motion to the same effect as the one previously filed.

The petitioners aver that the Daguhoy Enterprises, Inc., was duly registered as such on 24 June 1948; that on 16 April 1951 at a meeting duly called, the voluntary dissolution of the corporation and the appointment of Potenciano Gapol as receiver were agreed upon and to that end a petitioner Domingo Ponce; that instead of filing the petition for voluntary dissolution of the of the corporation as agreed upon, the respondent Potenciano Gapol, who is the largest stockholder, charged his mind and filed a complaint in the Court of First Instance of Manila (civil No. 13753) to compel the petitioners to render an accounting of the funds and assets of the corporation, to reimburse it, jointly and severally, in the sum of P4,500, the purchase price of a parcel of land acquired by the corporation; P6,190 loaned to the wife of petitioner Domingo Ponce; and P8,000 spent by the latter in his trip to the United States, or a total sum of P18,690, plus interest, or such sum as may be found after the accounting shall have been rendered to have been misspent, misapplied, missappropriated and converted by the petitioner Domingo Ponce to his own use and benefit; that on 18 May 1951 the plaintiff in that case, the respondent Potenciano Gapol in this case, filed a motion praying that the petitioners be removed as members of the board of directors which was denied by the court; that on 3 January 1952 respondent Potenciano Gapol filed a petition (civil No. 15445, Exhibit L), praying for an order directing him to a call a meeting of the stockholders of the corporation and to preside at such meeting in accordance with section 26 of the Corporation law; that two days later, without notice to the petitioners and to the other members of the board of directors and in violation of the Rules of Court which require that the adverse parties be notified of the hearing of the motion three days in advance, the respondent court issued the order as prayed for (Exhibit M); that the petitioners learned only of this order of the court on 27 February, when the Bank of America refused to recognize the new board of directors elected at such meeting and returned the checks drawn upon it by the said board of directors; that the election of Juanito R. Tianzon as member of the board of directors of the corporation he must be a member of the Legionarios del Trabajo, as required and provided for in article 7 of the by-laws of the corporation; that on 5 March the petitioners filed a petition in the respondent court to have the order of 5 January set aside but on April, the date set for the hearing of the petition, as the respondent judge was on leave vacation judge directed its transfer to the branch of the respondent judge; that without having set the motion for hearing, the respondent court denied the motion of 5 March in its order of 7 May; that on 14 May the petitioners filed another motion inviting the attention of the respondent court to the irregularity and illegality of its procedure and setting the motion for hearing on 21 May, but the court denied the motion by its order of 13 June.

The only question to determine in this case is whether under and pursuant to section 26 of Act No. 1459, known as the

Corporation law, the respondent court may issue the order complained of. Said section provides: —

Whenever, from any cause, there is no person authorized to call a meeting, or when the officer authorized to do so refuses, fails or neglects to call a meeting, any judge of a Court of First Instance on the showing of good cause therefor, may issue an order to any stockholder or member of a corporation, directing him to call a meeting of the corporation by giving the proper notice required by this Act or by-laws; and if there be no person legally authorized to preside at such meeting, the judge of the Court of First Instance may direct the person calling the meeting to preside at the same until a majority of the members or stockholders representing a majority of the stock members or stockholders presenting a majority of the stock present and permitted by law to be voted have chosen one of their number to act as presiding officer for the purposes of the meeting.

On the showing of good cause therefor, the court may authorize a stockholder to call a meeting and to preside threat until the majority stockholders representing a majority strockholders representing a majority of the stock present and permitted to be voted shall have chosen one among them to preside it. And this showing of good cause therefor exists when the court is apprised of the fact that the by-laws of the corporation require the calling of a general meeting of the stockholders to elect the board of directors but call for such meeting has not been done.

Article 9 of the by-laws of the Daguhoy Enterprises, Inc., provides:

The Board of Directors shall compose of five (5) members who shall be elected by the stockholders in a general meeting called for that purpose which shall be held every even year during the month of January.

Article 20 of the by-laws in part provides:

. . . Regular general meetings are those which shall be called for every even year, . . .

The requirement that "on the showing of good cause therefor," the court may grant to a stockholder the authority to call such meeting and to preside thereat does not mean that the petition must be set for hearing with notice served upon the board of directors. The respondent court was satisfied that there was a showing of good cause for authorizing the respondent Potenciano Gapol to call a meeting of the stockholders for the purpose of electing the board of directors as required and provided for in the by-laws, because the chairman of the board of directors called upon to do so had failed, neglected, or refused to perform his duty. It may be likened to a writ of preliminary injunction or of attachment which may be issued ex-parte upon compliance with the requirements of the rules and upon the court being satisfied that the same should be issue. Such provisional reliefs have not been deemed and held as violative of the due process of law clause of the Constitution.

In several state of the Union[[1]] the remedy which may be availed of our resorted to in a situation such as the one brought about in this case is mandamus to compel the officer or

incumbent board of directors to perform a duties specifically enjoined by law or by-laws, to wit: to call a meeting of the stockholders. Dela ware is the estate that has a law similar to ours and there the chancellor of a chancery court may summarily issue or enter an order authorizing a stockholder to call a meeting of the stockholders of the corporation and preside thereat.[[2]] It means that the chancellor may issue such order without notice and hearing.

That the relief granted by the respondent court lies within its jurisdiction is not disputed. Having the authority to grant the relief, the respondent court did not exceed its jurisdiction; nor did it abuse its discretion in granting it.

With persistency petitioners claim that they have been deprived of their right without due process of law. They had no right to continue as directors of the corporation unless reflected by the stockholders in a meeting called for that purpose every even year. They had no right to a hold-over brought about by the failure to perform the duty incumbent upon one of them. If they felt that they were sure to be reelected, why did they fail, neglect, or refuse to call the meeting to elect the members of the board? Or, why did they not seek their reelection at the meeting called to elect the directors pursuant to the order of the respondent court.

The alleged illegality of the election of one member of the board of directors at the meeting called by the respondent Potenciano Gapol as authorized by the court being subsequent to the order complained of cannot affect the validity and legality of the order. If it be true that one of the directors elected at the meting called by the respondent Potenciano Gapol, as authorized by the order of the court complained of, was not qualified in accordance with the provisions of the by-laws, the remedy of an aggrieved party would be quo a warranto. Also, the alleged previous agreement to dissolve the corporation does not affect or render illegal the order issued by the respondent court.

The petition is denied, with costs against the petitioners.

Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo, Bautista Angelo and Labrador, JJ., concur.