LIM TAY vs. COURT OF APPEALS, GO FAY AND CO. INC.

, SY GUIOK, and THE ESTATE OF ALFONSO

SY LIM (TRINIDAD)
G.R. No. 126891 August 5, 1998 PANGANIBAN, J.:
FACTS: LIM TAY is in the business of lending money to people. A few of his clients are Sy GUIOK and Alfonso
SY LIM who borrowed from him P40,000 each. As a security, each of them, GUIOK and SY LIM, executed a
Contract of Pledge in favor of LIM TAY whereby they pledged their 300 shares of stock each in the GO
FAY & Company Inc. It was provided in the Contract of Pledge that the event of the failure of the PLEDGOR
to pay in due time, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of
stock by selling the same at public or private sale, at which sale the PLEDGEE may be the purchaser; and
PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books
of the corporation to his own name and to hold the certificate issued in lieu thereof under the terms of this
pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of
the said sum and interest, in the manner hereinabove provided.
GUIOK and SY LIM failed to pay the loans in due time. LIM TAY filed a Petition for Mandamus with SEC
praying the corporate secretary of GO FAY & Co., Inc. be directed to register the stock transfers in his favor.
LIM TAY claimed that as a stockholder, the controversy was intra-corporate, thus falling under the SECs
jurisdiction.
The Corporation GO FAY in its Answer said there was no cause of action. LIM TAY is not a stockholder. SEC
has no jurisdiction. No intracorporate relationship between complainant and respondent. The pledge did not
automatically vest in LIM TAY ownership of the pledged shares.
SEC dismissed the action because as the ownership of the shares of stock has not yet been established, it
had no jurisdiction over the action and as such, there is likewise no basis for an action for Mandamus. LIM TAY
failed to establish a clear and legal right. Mandamus will not issue to establish a right, but only to enforce one
that is already established. Aggrieved, LIM TAY sought relief from the SC.
ISSUE/S: (a) Whether the pledge automatically vested in LIM TAY ownership of the pledged shares of stocks.
[NO] ; (b) SECs jurisdiction [NO] ; and (c) Whether mandamus should lie against the GO FAY & Co., Inc. [NO]
HELD: (a) The pledgee LIM TAY is only authorized to foreclose the pledge and thereafter, to sell the same
to satisfy the loan. However, to this point in time, he has not foreclosed; no sales consummated that would
transfer to him the shares of stocks and therefore, any demand to transfer the shares of stocks to his
name has no legal basis. The appropriation of the stocks without compliance with the formality of law,
would amount to "pactum commissorium" therefore, null and void. Granting for the sake of argument that
there was a valid foreclosure and sale of the stocks, still the contract allows redemption, for which GUIOK
and SY LIM are willing to redeem.
The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot be compelled
to do so when the transferee's title to said shares has no prima facie validity or is uncertain. More specifically, a
pledgor, prior to foreclosure and sale, does not acquire ownership rights over the pledged shares and
thus cannot compel the corporate secretary to record his alleged ownership of such shares on the
basis merely of the contract of pledge.
(b) Similarly, the SEC does not acquire jurisdiction over a dispute when a party's claim to being a shareholder
is, on the face of the complaint, invalid or inadequate.
The registration of shares in a stockholder's name, the issuance of stock certificates, and the right to receive
dividends which pertain to the said shares are all rights that flow from ownership. However, if ownership of
the shares is not clearly established and is still unresolved at the time the action for mandamus is
filed, then jurisdiction lies with the regular courts.
Jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint. In

the present case, however, LIM TAYS claim that he was the owner of the shares of stock in question
has no prima facie basis. In his Complaint, he alleged that, pursuant to the contracts of pledge, he
became the owner of the shares when the term for the loans expired. This is wrong. The contract of pledge
shows that LIM TAY was merely authorized to foreclose the pledge upon maturity of the loans, not to
own them. Such foreclosure is not automatic, for it must be done in a public or private sale. His status
as a mere pledgee does not, under civil law, entitle him to ownership of the subject shares.
(c) LIM TAY failed to establish a clear and legal right. Mandamus will not issue to establish a right, but
only to enforce one that is already established. Petition DENIED.

Additional notes (optional):

1. Sec. 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as follows:
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:
(a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public
and/or of stockholders, partners, members of associations or organizations registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it concerns their individual franchise or right to
exist as such entity;
(c) Controversies in the election or appointment of directors, trustees, officers or managers of such
corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of
payments in cases where the corporation, partnership or association possesses property to cover all its debts
but foresees the impossibility of meeting them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the
Management Committee created pursuant to this decree.
2. Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank of Salinas, Inc. v. Court
of Appeals is misplaced.
In Abejo, the Abejo spouses sold to Telectronic Systems, Inc. shares of stock. Subsequent to such contract of
sale, the corporate secretary refused to record the transfer of the shares in the corporate books and instead
asked for the annulment of the sale, claiming that his wife's shares were sold without consideration or consent.
At the time the Bragas questioned the validity of the sale, the contract had already been perfected, thereby
demonstrating that Telectronic Systems, Inc. was already the prima facie owner of the shares and,
consequently, a stockholder. Even if the sale were to be annulled later on, Telectronic Systems, Inc. had, in the
meantime, title over the shares from the time the sale was perfected until the time such sale was annulled.
Therefore, making the dispute between the Bragas and the Abejos "intra-corporate" in nature. Hence, the
Court held that "the issue is not on ownership of shares but rather the non-performance by the corporate
secretary of the ministerial duty of recording transfers of shares of stock of the corporation of which he is
secretary."
Unlike Abejo, however, petitioner's ownership over the shares in this case was not yet perfected when
the Complaint was filed. The contract of pledge certainly does not make him the owner of the shares
pledged.
In Rural Bank of Salinas, Melenia Guerrero executed deeds of assignment for the shares in favor of the
respondents in that case. When the corporate secretary refused to register the transfer, an action for
mandamus was instituted. Like the Abejo spouses, the respondents in Rural Bank of Salinas were already
prima facie shareholders when the deeds of assignment were questioned. If the said deeds were to be

annulled later on, respondents would still be considered shareholders of the corporation from the time of the
assignment until the annulment of such contracts.
3. Petitioner did not acquire ownership of the shares by virtue of the contracts of pledge. Article 2112 of the
Civil Code states:
The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the
sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and
the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at
the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second
auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged
to give an acquittance for his entire claim.
There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private
auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. Therefore,
ownership of the shares could not have passed to him. The pledgor remains the owner during the pendency of
the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the same Code:
Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person.
4. There was no novation of the contract. Novation is "the extinguishment of an obligation by a subsequent one
which terminates it, either by changing its object or principal conditions, by substituting a new debtor in place of
the old one, or by subrogating a third person to the rights of the creditor."
Respondents' indorsement and delivery of the certificates of stock were pursuant to paragraph 2 of the
contract of pledge which reads: The said certificates had been delivered by the PLEDGOR endorsed in blank
to be held by the PLEDGEE under the pledge as security for the payment of the aforementioned sum and
interest thereon accruing.
This stipulation did not effect the transfer of ownership to petitioner. It was merely in compliance with Article
2093 of the Civil Code, which requires that the thing pledged be placed in the possession of the creditor or a
third person of common agreement; and Article 2095, which states that if the thing pledged are shares of stock,
then the "instrument proving the right pledged" must be delivered to the creditor.
Moreover, the fact that respondents allowed the petitioner to receive dividends pertaining to the shares was not
meant to relinquish ownership thereof. As stated by respondent corporation, the same was done pursuant to
an agreement between the petitioner and Respondents Sy Guiok and Sy Lim, following Article 2102 of the civil
Code which provides: If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall
compensate what he receives with those which are owing him; but if none are owing him, or insofar as the
amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and the earnings of the right pledged.
5. Neither can there be dacion en pago, in which the certificates of stock are deemed sold to petitioner, the
consideration for which is the extinguishment of the loans and the accrued interests thereon. Dacion en pago is
a form of novation in which a change takes place in the object involved in the original contract. Absent an
explicit agreement, petitioner cannot simply presume dacion en pago.
6. Petitioner submits that "the inaction of the individual respondents with respect to the recovery of the shares
of stock serves to bar them from asserting rights over said shares on the basis of laches."
In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the time to demand payment of
the debt. More important, under the contracts of pledge, petitioner could have foreclosed the pledges as soon
as the loans became due. But for still unknown or unexplained reasons, he failed to do so, preferring instead to
pursue his baseless claim to ownership.