Republic of the Philippines

SUPREME 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:
xxx xxx xxx
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.

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

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
xxx xxx xxx
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.
xxx xxx xxx
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.

xxx xxx xxx

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
xxx xxx xxx
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:
xxx xxx xxx
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.

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.
xxx xxx xxx

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.

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.

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

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
xxx xxx xxx
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:
xxx xxx xxx
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.

makes a total surplus of P6,138,628.91 as of June 30,

1975. 39

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

xxx xxx xxx

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):
xxx xxx xxx
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,

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
xxx xxx xxx

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

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.

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.

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.

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.

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.

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.

28 Id., 78-80.

44 Nos. L-39598 and 39603, January 13, 1976, 69

SCRA 10 (1976).

29 Id., 86-Al.

45 Supra, 25-26.

30 Id., 85-86; Id., G.R. No. 48237, 77-78.

46 Id., G.R. No, 48237,144.

31 Id., G.R. No. 48237, 6.

47 Id., 18-19.

32 Id., G.R. No. 49023, 8.

48 Id., 25.

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).

49 Id., 26.

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

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. L63779, 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 Philippines

SUPREME 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:
5

Senator Mamintal Tamano

Congressman Ali Dimaporo
Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor 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. SP27973 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

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.

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
original
29
parties. 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.

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 this connection, although it is true that Civil Case No. Q90-6937, 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-906937, 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

We rule in the affirmative.

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?

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 and
void. 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.
Footnotes
1 Docketed as CA G.R. SP No. 33295.
2 Rollo, p. 197.

3 Annex "C"; Rollo, p. 40.

28 Rollo of G.R. No. 107751, p. 561.

4 Annex "B"; Rollo, p. 39.

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].

5 Now deceased.
6 Rollo, p. 99.
7 IDP-Carpizo Group.
8 Hadja Potri Zorayda Tamano, et. al.
9 Rollo, p. 45.

30 Carino, supra., citing Clareza v. Rosales,

2 SCRA 455, 457 [1961].
31 Rollo, p. 80.

10 Composed of Farouk Carpizo, Musib M.

Buat, Abdulla U. Camlian, Suleiman Clem
Antonio, Al-Haj, Ustadz Iljas Ismael,
Abdurafih Sayedy, and Abdurahman Linzag.

32 Tan v. Barrios, 190 SCRA 686, 698

[1990], citing 54 C.J. 719.

11 Rollo, pp. 135-145.

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.

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].

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 Philippines

SUPREME 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, defendantsappellants.
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 bylaws.
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-
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 Maao 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.)
xxx

xxx

xxx

(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. 243244,supra.)
xxx

xxx

xxx

(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.)
xxx

xxx

xxx

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

xxx

xxx

(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 nonagricultural 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.nt

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- 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- 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 Philippines
SUPREME 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 ES OLUTION
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 Espaol" (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.

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

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....

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.

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

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 1936 2, submitted by Mr. C. A.
Dewit, President of Lepanto, to its stockholders, under date of
March 15, 1937, we read the following:

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.

To the stockholders
xxx

xxx

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

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:
Lednicky,

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.

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 claimowners in exchange for their claims, and the balance
of P1,050,000.00 we will sell to the public at par or
take ourselves.

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.

The arrangement will be under the following

conditions:

xxx

Messrs.
Present

Cookes

and

Re: Mankayan Copper Mines

GENTLEMEN:

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.

xxx

xxx

Manila, March 15, 1937

(Sgd.) C. A. DeWitt President

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.

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.

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

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,

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.

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 manageroperator. The manager-operator invests its technical knowhow, undertakes back-breaking efforts and tremendous spadework, 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 manageroperator 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 manageroperator 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.

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.

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.

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

part.

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:

Footnotes

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

Annex A to complaint, pp. 43-46, R.A.; Also

Exhibit C.
2

Exhibit A.

Sec. 9, Rule 130 of the Rules of Court.

Article 1373 of the (new) Civil Code.

Section 43, par. 1, Act 190.

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.

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 Philippines

SUPREME 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.

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.

The Solicitor General for respondent.

Tacod D. Macaraya for private respondent.

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:

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.

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.'

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)

be, as the same is hereby AFFIRMED, the same

being in accordance with law and the facts of the
case. (pp. 28-29, Reno)

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)

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

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 Philippines

SUPREME 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-avis 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
share
Except 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 nonapproval 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.

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 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

In American Casualty Co., v. Dakota Tractor and

Equipment Co., 234 F. Supp. 606, 611 (D.N.D. 1964),
the court stated:

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.

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.

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

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.

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. 22176-82.

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-NCR2-2176-82, 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.

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 FARMACORs 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]

THIRD DIVISION
[G.R. No. 125778. June 10, 2003]
INTER-ASIA INVESTMENTS INDUSTRIES,
INC., petitioner, vs. COURT OF APPEALS and
ASIA INDUSTRIES, INC., respondents.
DECISION
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

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 stockholders 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 respondents 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. Petitioners 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 respondents 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 attorneys 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
ATTORNEYS 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 courts decision. Petitioners 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 ATTORNEYS FEES AND IN
SUSTAINING
THE
DISMISSAL
OF
THE
COUNTERCLAIM.18 (Underscoring in the original)
Petitioner argues that the January 24, 1980 letterproposal (for the reduction of private respondents claim for
refund upon petitioners 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 petitioners
president is valid and binding. The case of Peoples Aircargo
and Warehousing Co., Inc. v. Court of Appeals19 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.
xxx
[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) execut

ed 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 selfserving 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 warrants and represents as follows:

(a) SELLER

xxx
(iv)

The audited financial statements of FARMACOR as

at and for the year ended December 31, 1977 and
the audited financial statements of FARMACOR a
s at September 30, 1978 beingprepared by SGV pu
rsuant to paragraph 6(b) fairly present or will pre
sent 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 petitioners assigned error on the award of
attorneys fees which, it argues, is bereft of factual, legal and
equitable justification, this Court finds the same well-taken.
On the matter of attorneys fees, it is an accepted doctrine that
the award thereof as an item of damages is the exception
rather than the rule, and counsels fees are not to be awarded
every time a party wins a suit. The power of
the court to award
attorneys 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 attorneys 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
attorneys fees in favor of private respondent is deleted. The
decision is affirmed in other respects.
SO ORDERED.
Puno,
(Chairman),
Panganiban,
Gutierrez, and Corona, JJ., concur.

[1]

Sandoval-

Rollo at 29-42.
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).
[2]

[21]

Rollo at 92-93.
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).
[22]

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

Republic of the Philippines

SUPREME 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.
DECISION
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

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 PETITIONERAPPELLANT 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 PETITIONERAPPELLANT 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 counterproposals, 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.
Footnotes
1
Penned by Associate Justice Corona Ibay-Somera
(retired) with Associate Justices Portia AlioHormachuelos and Elvi-John S. Asuncion,
concurring; rollo, pp. 47-60.

Penned by Judge Celso D. Lavia; id. at 89-103.

Penned by Associate Justice Portia AlioHormachuelos 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. 2023.
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
3

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.

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.
DECISION
GARCIA, J.:
Assailed and sought to be set aside in this petition for review
on certiorari is the Decision 1 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, Filports
president from 1968 until he lost his bid for reelection as
Filports president during the general stockholders meeting in
1991, wrote a letter2 to the corporations Board of Directors
questioning the boards 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:

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,

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 Cruzs
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 copetitioner Mindanao Terminal and Brokerage Services, Inc.
(Minterbro), filed with the SEC a petition 3 which he describes
as a derivative suit against the herein respondents who were
then the incumbent members of Filports 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, VicePresident, 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 VicePresidents (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. 06-934491) 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) Filports 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
courts 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 resolution 9 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 Filports
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, VicePresident, 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.

shall be a resident and citizen of the Philippines, and such

other officers as may be provided for in the by-laws.
(Emphasis supplied.)

The governing body of a corporation is its board of directors.

Section 23 of the Corporation Code 12 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 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.)

The raison detre 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 boards 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 corporations 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

In turn, the amended Bylaws of Filport 14 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

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 Filports 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
Filports bylaws since the board is the corporations 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
Filports 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--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 courts
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 Cruzs 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 Cruzs 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.nt
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
corporations Board of Directors can determine.

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.

21

So it is that in Philippine Stock Exchange, Inc. v. CA, 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 ones compensation" does not necessarily carry the
implication that "such compensation was actually remitted or

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 partyin-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

13

Aguedo Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the

Phils., 1980 ed., Vol. III.
14

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.

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: xxx
16

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.

WHEREFORE, the petition is DENIED and the challenged

decision of the CA is AFFIRMED in all respects.
Republic of the Philippines
SUPREME COURT
Manila

No pronouncement as to costs SO ORDERED.

Foonotes

EN BANC
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.

Id. at 38-44.

Id. at 45-51.

Id. at 109-114.

Supra at note 1

CA decision, p. 5; Rollo, p. 33.

Id. at 292-293.

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.

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, Paraaque 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 "Paraaque Rice Mill,
Inc., "a corporation organized for the purpose of operating a

rice mill in the municipality of Paraaque, 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, Paraaque 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 Paraaque 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 Paraaque 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 Paraaque 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
Paraaque, Rizal, be appointed receiver of the properties,
funds and business of the Paraaque 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 Paraaque 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 crosscomplaint against the plaintiffs, and in behalf of the Paraaque
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 crosscomplaint Paraaque 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 Paraaque 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.

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 Paraaque 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
Paraaque 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.

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.

The defendants-appellants submit the following assignment of

errors:

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:

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.

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 Paraaque Rice Mill, Inc.,
de el ao 1931 hasta la fecha;
2. Condenando a dicho demandado a pagar a la
corporacion Paraaque Rice Mill, Inc., cualesquiera

1. The lower court erred in holding that it has

jurisdiction to appoint a receiver o the corporation,
"Paraaque Rice Mill, Inc.," on October 31, 1934.

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
"Paraaque 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 Paraaque 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 EspaolFilipino 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
Paraaque 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,
Paraaque 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, Paraaque 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 Paraaque 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 (secretarytreasurer 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.

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.
Avancea, C.J., Villa-Real, Abad Santos, Imperial, Diaz and
Concepcion, JJ., concur.
FIRST DIVISION

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 Paraaque 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

G.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, 2006

x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 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)
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.
[11]

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 nontransferable 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 nonstock 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.

[15]

As earlier stated, the CA dismissed the appeal of

petitioners, because the Verification and Certification of NonForum 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.

The Courts Ruling

The present Petition is partly meritorious.
Procedural Issue:

[16]

Verification and Certification of Non-Forum Shopping

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

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:

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]

Basis for Quorum

Section 52 of the Corporation Code states:
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

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]

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.

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.

xxx

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
incorporation;

the

articles

of

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
bonded indebtedness;

5.

or

increasing

Increase or decrease of capital stock;

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.

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.

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 nontransferable, 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.

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 membertrustees 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.

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

[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]

[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]

Petitioners Memorandum, pp. 6-7; rollo, pp. 96-97.

[18]

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.)

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]

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)

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.

Art. II (1), Amended By-Laws of GCHS, provides:

1.

[5]

[6]

Number The regular members of the

Corporation shall be fifteen (15) in
number and they shall constitute the
Board of Trustees. Associate, nonvoting members may be admitted
upon such terms as the Board of
Trustees
may
determine. (Memorandum
for
petitioners, p. 2; rollo, p. 92.)

[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.

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.

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]

[12]

[13]

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.)
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)
See SEC Order dated July 6, 2001, Annex D of Petition; rollo, pp. 46-51.

[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
CORPORATIONS 116 (1976).

[29]

J. CAMPOS, JR. AND M.C. CAMPOS, supra note 26 at 436.

[30]

5 FLETCHER
CYCLOPEDIA
CORPORATIONS 127 (1976).

OF

OF

THE

THE

LAW

LAW

OF

PRIVATE

OF

PRIVATE

[31]

Id.

[50]

[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.

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.

(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.
Republic of the Philippines
SUPREME COURT
Manila

(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.

EN BANC
G.R. No. L-18805

(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.

August 14, 1967

1

THE BOARD OF LIQUIDATORS 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.

(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.

Simeon M. Gopengco and Solicitor General for plaintiffappellant.

L. H. Hernandez, Emma Quisumbing, Fernando and
Quisumbing, Jr.; Ponce Enrile, Siguion Reyna, Montecillo and
Belo for defendants-appellees.

(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.

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.

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.

(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.

As was to be expected, NACOCO but partially performed the

contracts, as follows:
Buyers

Tons
Delivered

Undelivered

(c) August 22, 1947: Pacific Vegetable Co., for 3,000

tons, $137.50 per ton, delivery: September, 1947.

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

1,150
contract of July 30, 1947)

850

Louis Dreyfus (Adamson

1,755
Contract of August 14, 1947)

245

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.

T O TAL 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

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.1wph1.t
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

though it is our (and the lower court's) belief that ratification

here is nothing more than a mere formality.

We now lift the following excerpts from the minutes of that

same board meeting of July 29, 1947:

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

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 bylaw 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,

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 defendantdirectors 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., L15092, 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.
Footnotes
1

Original 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.
2
Defendant Maximo M. Kalaw died in March of 1955 before trial.
3
Substituted for defendant Casimiro Garcia, deceased.
4
Explanatory 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. 4Heirs.
5
R.A., p. 238; Emphasis supplied.
6
Garcia Valdez vs. Tuason, 40 Phil. 943, 951-952; Lucero vs. Guzman, 45
Phil. 852, 879; Relative vs. Castro, 76 Phil. 563, 567-568.
7
III Agbayani, Corporation Law, 1964 ed., p. 1679.
8
Government vs. Wise & Co., Ltd. (C.A.), 37 O.G. No. 26, pp. 545, 546.
9
10 C.J.S., p. 1503; emphasis supplied.
10
1 C.J.S., p. 141.
11
Id., p. 143; 16 Fletcher, p. 901.
12
16 Fletcher, p. 902.
13
Service & Wright Lumber Co. vs. Sumpter Valley Ry. Co., 152 P. 262, 265.
14
Citing Sumera vs. Valencia, 67 Phil. 721, 726-727.
15
Emphasis ours.
16
See: Section 3, Rule 3, Rules of Court.
17
Record on Appeal, pp. 21-25.
18
Id., p. 154.
19
Now Section 5, Rule 86.
20
Section 1, Rule 88 of the 1940 Rules of Court; now Section 1 Rule 87,
Revised Rules of Court.
21
2 Fletcher Cyclopedia Corporations, p. 607. See: Yu Chuck vs. Kong Li Po,
46 Phil. 608, 614.
22
Sparks 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.
23
Emphasis supplied.
24
Emphasis supplied.
25
Emphasis supplied.
26
Harris vs. H. C. Talton Wholesale Grocery Co., 123 So. 480.

27

Van 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.
28
McIntosh vs. Dakota Trust Co., 204 N.W. 818. 824.
29
Murphy 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.
30
2 Fletcher, p. 858, citing cases.
31
Kridelbaugh vs. Aldrehn Theatres Co., 191 N.W. 803, 804, citing cases;
emphasis supplied.
32
Article 1313, old Civil Code; now Article 1396, new Civil Code.
33
Tagaytay Development Co. vs. Osorio, 69 Phil. 180, 184.
34
Spiegel vs. Beacon Participations, 8 N.E. (2d) 895, 907, citing cases.
35
See: 3 Fletcher, Sec. 850, pp. 162-165.
36
Air France vs. Carrascoso, L-21438, September 28, 1966.
37
R.A., pp. 234-235.
38
3 Fletcher, pp. 450-452, citing cases. Cf. Angeles vs. Santos, 64 Phil. 697,
707.
39
Tr., p. 30, August 29, 1960.
40
See 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."
41
Section 2, Rule 129, Rules of Court; 20 Am. Jur., pp. 469-470.
42
The 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.
43
Churchill and Tait vs. Rafferty 32 Phil. 580, 605; Ladrera vs Secretary of
Agriculture and Natural Resources, L-13385, April 28, 1960.
44
Memorandum 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.
45
Tr., pp. 18, 29, August 29, 1960.
46
See Exhibit 20-Heirs.
47
Exhibit 25-Heirs.
48
Emphasis supplied.
49
3 Fletcher, pp. 450-452, supra.

and continue to be held in trust by one Rebecco Panlilio for

then President Marcos and now, effectively for his estate, and
requested PALIs application to be deferred. PALI was
requested to comment upon the said letter.
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.
DECISION
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 PALIs
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 PALIs application, recommended to the
PSEs Board of Governors the approval of PALIs listing
application.
On February 14, 1996, before it could act upon PALIs
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

PALIs 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 PALIs
application, citing the existence of serious claims, issues and
circumstances surrounding PALIs ownership over its assets
that adversely affect the suitability of listing PALIs 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 SECs 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 PSEs action on
PALIs 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 PSEs decision. The dispositive portion of the said order
reads:
WHEREFORE, premises considered, and invoking the
Commissioners 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;

On June 27, 1996, the Court of Appeals promulgated its

Resolution dismissing the PSEs 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 respondents 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 SECs 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;

SERIOUS ERROR AND

OF DISCRETION IN
PSE ACTED IN AN
ABUSIVE MANNER IN
PALIS
LISTING

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;

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

3.
It appears that the claims and issues on the title to
PALIs 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;

II. SEC COMMITTED

GRAVE ABUSE
FINDING THAT
ARBITRARY AND
DISAPPROVING
APPLICATION;

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.

4.
No action has been filed in any court of competent
jurisdiction seeking to nullify PALIs ownership over the
disputed properties, neither has the government instituted
recovery proceedings against these properties. Yet the import
of PSEs decision in denying PALIs 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 PALIs 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.

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.

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 PCGGs 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 PCGGs 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.

It is, likewise, intimidated that the Court of Appeals

sanction that PALIs 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 nonalienable. Thus, when a title covers a forest reserve or a
government reservation, such title is void.

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 countrys
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
PALIs 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
issuers 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

PSE, likewise, assails the SECs and the Court of

Appeals reliance on the alleged policy of full disclosure to
uphold the listing of the PALIs 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, PALIs documents supporting its application contained
misrepresentations and misleading statements, and concealed
material information. The matter of sequestration of PALIs
properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALIs
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 PSEs 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 countrys economy.
Due to this special nature of stock exchanges, the
countrys 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 SECs 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 SECs regulatory authority over private
corporations encompasses a wide margin of areas, touching
nearly all of a corporations concerns. This authority springs
from the fact that a corporation owes its existence to the
concession of its corporate franchise from the state.
The SECs 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 SECs
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 SECs 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 SECs 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 petitioners 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 PSEs 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 PSEs 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 PSEs
decision in matters of application for listing in the market, the
SEC may exercise such power only if the PSEs 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 PALIs 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)
(i)

The issuer or registrant - 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 resum, 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.

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
[2]

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).

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.

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.
DECISION
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 Belas 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-infact to obtain loans and other credit accommodations from
respondent Pacific Banking Corporation (Pacific Bank). She

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 Belas 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 vicepresident 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 Banks
demand letters, Estelita Lipat went to the office of the banks

liquidator and asked for additional time to enable her to

personally settle BECs 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 corporations
sole obligation, it having a personality distinct and separate
from spouses Lipat. It was likewise pointed out that Teresitas
authority to secure a loan from Pacific Bank was specifically
limited to Mrs. Lipats sole use and benefit and that the real
estate mortgage was executed to secure the Lipats and
BETs 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 BECs 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.

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 Belas
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 corporations bylaws 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

The counterclaims and cross-claim are likewise dismissed for

lack of legal and factual basis.

1) .IN HOLDING THAT THE DOCTRINE OF

PIERCING THE VEIL OF CORPORATE
FICTION APPLIES IN THIS CASE.

No costs.

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 BELAS EXPORT
CORPORATION.
3) .IN HOLDING THAT THE IMPOSITION
OF 15% ATTORNEYS FEES IN THE
EXTRA-JUDICIAL
FORECLOSURE
IS
BEYOND THIS COURTS 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%
attorneys 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 Belas Export Tradings 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 Lipats 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 stockholders 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 agents 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 attorneys 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 attorneys 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 GozoDadole 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.

The Antecedents

[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.

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-B1 which abutted Lot No. 491-A-3-B-2 was a dirt road
accessing to the Sumulong Highway, Antipolo, Rizal.

[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 Peoples 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
DECISION
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.

At a special meeting on May 17, 1991, the

respondents 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 Dys 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
buyers 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 latters egress from and
ingress to and an additional 25 square
meters in the corner of Lot No. 491-A-3-B1, as turning and/or maneuvering area for
Vendees vehicles.
The Vendor agrees that in the event
that the right of way is insufficient for the
Vendees 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 Builders, 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 latters 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 Electrics 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, plaintiffs 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 Electrics
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 plaintiffs
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 Electrics
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
attorneys 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 attorneys 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-B1, 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 WHIs 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 plaintiffs unrealized income;
(5)
To pay plaintiff P100,000
attorneys fees; and To pay the costs of suit.
SO ORDERED.[19]

representing

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. 491A-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 WHIs 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
PLAINTIFFS UNREALIZED INCOME AS WELL
AS ATTORNEYS 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
respondents 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
corporations 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, bylaws, 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,

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.
[24]

In this case, the respondent denied authorizing its then

president Roberto B. Roxas to sell a portion of Lot No. 491-A3-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 petitioners 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 petitioners 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 petitioners contention that by receiving and
retaining the P5,000,000 purchase price of Lot No. 491-A-3B-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 respondents 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 (petitioners) 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 petitioners
warehouse was due to its late filing of an application for a
building permit, only on May 28, 1992.
The petitioners 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 petitioners
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
respondents failure to cause their eviction as agreed upon, the
petitioners 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 courts award of damages
and attorneys 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 attorneys
fees. No costs.

[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:

SO ORDERED.
(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.
[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.

[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]

Bankers 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.

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.

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

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 plaintiffmortgagor 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.

GSIS BOARD APPROVED YOUR REQUEST RE

REDEMPTION OF FORECLOSED PROPERTY OF
YOUR DAUGHTER
xxx

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.
t/ VICENTE J. FRANCISCO

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:

xxx

xxx

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.

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

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. 1wph1.t
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

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.

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.

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:

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
his
sub-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,
PROCEEDINGS.

COURSE

OF

JUDICIAL

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 Acua 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.

Yao Ka Sin
Tacloban City

10 Ibid.

Gentlemen:
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 Philippines

SUPREME 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.:

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.

Assailed in this petition for review is the decision of the

respondent Court of Appeals in C.A.-G.R. No. 61072R, 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."

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.

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:

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-avis 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.

PRIME WHITE CEMENT CORPORATION

602 Cardinal Life Building
Herran Street, Manila

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 CORPORATION
BY: (SGD) CONSTANCIO B. MAGLANA
President & Chairman
CONFORME:
YAO
KA
BY: (SGD) HENRY YAO

SIN

TRADING

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
BY:

WHITE

CEMENT

(SGD)
CONSTANCIO
President & Chairman 4

CORPORATION

B.

MAGLANA

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 lettercontract 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
under
Exhibit "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.

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;

On 24 July 1974, YKS filed its Answer to the Counterclaim. 21

Issues having been joined, the trial court conducted a pretrial. 22 On that occasion, the parties admitted that according to
the By-Laws of PWCC, the Chairman of the Board, who is

(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 LETTERCONTRACT, 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 COUNTEROFFER 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.

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).

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).

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
of
36
usury.
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
Insurance
System 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.

42 Id., 2.

18 Marked as Exhibits "1","2" and "3".

43 Id., 81.

19 Annex "4" to Answer; also Exhibit "4".

44 115 SCRA 783 [1982].

20 Annex "5" to Answer; also Exhibit "5".

45 At page 786.

21 Record on Appeal, 20-21; Rollo, 36-37.

22 Id., 21-30.

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.

23 Paragraph 13, Pre-Trial Order, Id., 24; Id., 40.

47 Jariol, Jr. vs. Sandiganbayan, 188 SCRA 475 [1990].

24 Exhibit "8-A".

48 16 Phil. 315 [1910].

25 Exhibit "8-A".

49 7 SCRA 577 [1963].

26 The trial court's summation of the testimonies of witnesses

for PWCC, Record on Appeal, 81-82; Rollo, 97-98.

50 20 SCRA 987 [1967].

51 19 C.J.S. 455.

27 Record on Appeal, 92; Rollo, 107.

52 19 C.J.S. 456.
28 Id., 87; Id., 102.
29 Record on Appeal, 88; Rollo, 103.

53 Fletcher, Cyclopedia of the law of Private Corporations,

vol. 2 (Perm. Ed.), 1969 Revised Volume, 614.

30 Id., 90; Id., 105.

54 19 C.J.S. 458.

31 Brief for Plaintiff-Appellee, Annex "B" of Petition; Rollo,

111.

55 Fletcher, op. cit., 340.

56 Id., 354.

32 Brief for Defendant-Appellant,

Petition; Rollo, 112.
33 Annex "E" of Petition; Id., 114-122.

Annex

"C"

of
57 Exhibit "1".
58 TOLENTINO, A., Civil Code of the Philippines, vol. IV,
1985 ed., 467.

34 Rollo, 118-120.
59 Gaw vs. Court of Appeals, 191 SCRA 77 [1990].
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.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 71694 August 16, 1991
NYCO SALES CORPORATION, petitioner,
vs.
BA FINANCE CORPORATION, JUDGE ROSALIO A.
DE LEONREGIONAL 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 ACG.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 crossclaim, 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 crossclaim against Sanshell as those made with respect to
the Fernandez brothers.
SO ORDERED.
On appeal, the appellate court also upheld BA Finance
modified the lower court's decision by ordering that
interest should run from February 19, 1979 until paid and
from February 1, 1979. Nyco's subsequent motion
reconsideration was denied (Ibid., pp. 33, 62). Hence,
present recourse.

but
the
not
for
the

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 assignorvendor 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 InesLuciano and Presiding Justice Ramon G. Gaviola, Jr.
** Penned by Judge Rosalio A. de Leon.

Monaliza Pronstroller offered to purchase the property

for P7,500,000.00. Said offer was made through Atty. Jose
Soluta, Jr. (Atty. Soluta), petitioners 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:

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)
[3]
Decision dated November 14, 1997 in Civil Case No. 943298 for Specific Performance. Likewise assailed is the
appellate courts Resolution[4] dated May 31, 2001 denying
petitioners 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

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 buyers 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
petitioners right to possess the subject property. Atty. Soluta
referred respondents proposal to petitioners 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 LetterAgreement 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 petitioners Assistant Vice-President and
Head of the Documentation Section, while Atty. Soluta was
relieved of his responsibilities. Atty. Dayday reviewed
petitioners 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 petitioners
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 petitioners 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
petitioners President. In a letter dated June 9, 1994, petitioner
advised respondents that the former would accept the latters
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 petitioners 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
petitioners right to possess the subject property.

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 attorneys 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. Solutas 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 LetterAgreement, 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;

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]

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;

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]

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 attorneys fees and the amount
of P20,000.00 for litigation expense.

On November 14, 1997, the trial court finally resolved

the matter in favor of respondents, disposing, as follows:
WHEREFORE, premises considered, the Court finds
defendants 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

4.
The counterclaims of the Appellant are
dismissed.
SO ORDERED.[30]
Petitioners 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

II.

III.

EVIDENCE ON RECORD AND PURELY BASED

ON
ERRONEOUS
ASSUMPTIONS,
PRESUMPTIONS,
SURMISES,
AND
CONJECTURES.
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 LATTERS
FINDING IS CONTRARY TO THE UNDISPUTED
FACTS AND THE EVIDENCE ON RECORD.
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
COMMITTEES 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,
ATTORNEYS 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 LetterAgreement? 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 petitioners contention that the CAs factual
findings are not supported by the evidence on record, the
assailed decision clearly shows that the appellate court not

only relied on the RTCs 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 LetterAgreement was written on a paper with petitioners
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.
Solutas 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.
Solutas 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 Courts
decision confirming petitioners right to the subject
property. The matter was brought to the petitioners 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 banks
reorganization that the board rejected respondents request. We
cannot therefore blame the respondents in relying on the July
14, 1993 Letter-Agreement. Petitioners 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
latters 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, attorneys fees
and expenses of litigation, we affirm in toto the appellate
courts 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, petitioners 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 petitioners acts, respondents were compelled to
litigate justifying the award of attorneys 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.
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.
[10]

[14]
[15]
[16]

Exhibit E, folder of exhibits, p. 5.

CA rollo, pp. 602-603.
Id. at 603.

[17]
[18]
[19]
[20]
[21]
[22]

Id. at 604.
Exhibit F, folder of exhibits, p. 6.
Exhibit G, folder of exhibits, p. 7.
Exhibit H, folder of exhibits, pp. 8-9.
Exhibit I, folder of exhibits, pp. 10-12.
Records, pp. 1-5.

[23]

Id. at 11-18.
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).
[24]

[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 Peoples
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 Peoples 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;Peoples 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:
xxxx

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).

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.
[46]

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.

Republic of the Philippines

SUPREME 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 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 vicepresident 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 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 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 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 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 July 18, 1988, the petitioners filed their answer to the third
party complaint.

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.

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

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.

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 of the Philippines
SUPREME 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. L34192.
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,

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) cocoprocessing 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 BANK
Manila, Philippines
International Department
October 5, 1965
BATJAK, INCORPORATED
3rd Floor, G. Puyat Bldg.
Escolta, Manila
Attn.: Mr. CIRIACO B. MENDOZA
Vice-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;

Industrial Bank and the Manufacturers Bank & Trust

Company and the Manila Banking Corporation regarding the
above.

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;

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.

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 &

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 AGREEMENT
KNOW 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.

WITNESSETH:
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 shares
CBM FINANCE & INVESTMENT
CORP. (C.B. Mendoza, Pres.)
5,000 shares
ALEJANDRO G. BELTRAN
4,000 shares
ESPERANZA A. ZAMORA
3,000 shares
CIRIACO B. MENDOZA
2,000 shares
FIDELA DE GUZMAN
2,000 shares
LLOYD D. COMBS
2,000 shares
RENATO 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 5year 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 LIEUSON
Stockholder Stockholder
CBM FINANCE & INVESTMENT CORPORATION
By: (SGD) C.B. MENDOZA
President
ESPERANZA A. ZAMORA (SGD) ALEJANDRO G.
BELTRAN
By: (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 Stockholder
NATIONAL INVESTMENT AND
DEVELOPMENT CORPORATION
By:
(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. 34192
20 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 Philippines

SUPREME COURT
Manila
EN BANC
November 28, 1953
G.R. No. L-5883
DOMINGO 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 bylaws, 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.