G.R. No. 172843, September 24, 2014 validity.
23cralawlawlibrary
ALFREDO L. VILLAMOR, JR., Petitioner, v. JOHN S. UMALE, IN SUBSTITUTION OF HERNANDO F. BALMORES, Respondent.
G.R. NO. 172881
RODIVAL E. REYES, HANS M. PALMA AND DOROTEO M. PANGILINAN, Petitioners, v. HERNANDO F. BALMORES, Respondent.
DECISION
LEONEN, J.:
Before us is a petition for review on certiorari 1 under Rule 45 of the Rules of Court, assailing the decision 2 of the Court of Appeals
dated March 2, 2006 and its resolution 3 dated May 29, 2006, denying petitioners' motions for reconsideration. The Court of Appeals
placed Pasig Printing Corporation (PPC) under receivership and appointed an interim management committee for the
corporation.4cralawlawlibrary
MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part of the area owned by Mid-Pasig
Development Corporation (Mid-Pasig).5cralawlawlibrary
On March 1, 2004, PPC obtained an option to lease portions of Mid-Pasig's property, including the Rockland area.6cralawlawlibrary
On November 11, 2004, PPC's board of directors issued a resolution 7 waiving all its rights, interests, and participation in the option
to lease contract in favor o£ the law firm of Atty. Alfredo Villamor, Jr. (Villamor), petitioner in G.R. No. 172843. PPC received no
consideration for this waiver in favor of Villamor's law firm.8cralawlawlibrary
On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement (MOA) with MC Home
Depot.9 Under the MO A, MC Home Depot would continue to occupy the area as PPC's sublessee for four (4) years, renewable for
another four (4) years, at a monthly rental of P4,500,000.00 plus goodwill of P18,000,000.00. 10cralawlawlibrary
In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks representing rental payments for one year
and the goodwill money. The checks were given to Villamor who did not turn these or the equivalent amount over to PPC, upon
encashment.11cralawlawlibrary
Hernando Balmores, respondent in G.R. No. 172843 and G.R. No. 172881 and a stockholder and director of PPC,12 wrote a letter
addressed to PPJC's directors, petitioners in G.R. No. 172881, on April 4, 2005. 13He informed them that Villamor should be made to
deliver to PPC and account for MC Home Depot's checks or their equivalent value.14cralawlawlibrary
Due to the alleged inaction of the directors, respondent Balmores filed with the Regional Trial Court an intra-corporate
controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-Corporate Controversies15 (Interim Rules) against
petitioners for their alleged devices or schemes amounting to fraud or misrepresentation "detrimental to the interest of the
Corporation and its stockholders."16cralawlawlibrary
Respondent Balmores alleged in his complaint that because of petitioners' actions, PPC's assets were ". . . not only in imminent
danger, but have actually been dissipated, lost, wasted and destroyed." 17cralawlawlibrary
Respondent Balmores prayed that a receiver be appointed from his list of nominees.18 He also prayed for petitioners' prohibition
from "selling, encumbering, transferring or disposing in any manner any of [PPC's] properties, including the MC Home [Depot]
checks and/or their proceeds."19 He prayed for the accounting and remittance to PPC of the MC Home Depot checks or their
proceeds and for the annulment of the board's resolution "vaiving PPC's rights in favor of Villamor's law firm. 20cralawlawlibrary
Ruling of the
Regional Trial Court
In its resolution21 dated June 15, 2005, the Regional Trial Court denied respondent Balmores' prayer for the appointment of a
receiver or the creation of a management committee. The dispositive portion reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered the appointment of a Receiver and the creation of aManagement Committee applied for by
plaintiff Hernando F. Balmores are, as they are hereby, DENIED.22 (Emphasis in the original)
According to the trial court, PPC's entitlement to the checks was doubtful. The resolution issued by PPC's board of directors;
waiving its rights to the option to lease contract in favor of Villamor's law firm, must be accorded prima facie
The trial court also noted that there was a pending case filed by one Leonardo Umale against Villamor, involving the same checks.
Umale was also claiming ownership of the checks.24 This, according to the trial court, weakened respondent Balmores' claim that
the checks were properties of PPC.25cralawlawlibrary
The trial court also found that there was "no clear and positive showing of dissipation, loss, wastage, or destruction of [PPC's]
assets . . . [that was] prejudicial to the interest of the minority stockholders, parties-litigants or the general public."26 The board's
failure to recover the disputed amounts was not an indication of mismanagement resulting in the dissipation of
assets.27cralawlawlibrary
The trial court noted that PPC was earning substantial rental income from its other sub-lessees.28cralawlawlibrary
The trial court added that the failure to implead PPC was. fatal. PPC should have been impleaded as an indispensable party,
without which, there would be no final determination of the action. 29cralawlawlibrary
Ruling of the
Court of Appeals
Respondent Balmores filed with the Court of Appeals a petition for certiorari under Rule 65 of the Rules of Court.30 He assailed the
decision of the trial court, which denied his "application for the appointment of a [r]eceiver and the creation of a [management
[c]ommittee."31cralawlawlibrary
In the decision promulgated on March 2, 2006, the Court of Appeals gave due course to respondent Balmores' petition. It reversed
the trial court's decision, and issued a new order placing PPC under receivership and creating an interim management
committee.32 The dispositive portion reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the instant petition is hereby GRANTED and GIVEN DUE COURSE and the June 15, 2005
Order/Resolution of the commercial court, the Regional Trial Court of Pasig City, Branch 167, in S.E.C. Case No. 05-62, is
herebyREVERSED and SET ASIDE and a NEW ORDER is ISSUED that, during the pendency of the derivative suit, until judgment on
the merits is rendered by the commercial court, in order to prevent dissipation, loss, wastage or destruction of the assets, in order
to prevent paralization of business operations which may be prejudicial to the interest of stockholders, parties-litigants or the
general public, and in order to prevent violations of the corporation laws: (1) Pasig Printing Corporation (PPC) is hereby placed
under receivership pursuant to the Rules Governing Intra-Corporate Controversies under R.A. No. 8799; (2) an Interim Management
Committee is hereby created for Pasig Printing Corporation (PPC) composed of Andres Narvasa, Jr., Atty. Francis Gustilo and Ms
Rosemarie Salvio-Leonida; (3) the interim management committee is hereby directed to forthwith, during the pendency of the
derivative suit until judgment on the merits is rendered by the commercial court, to: (a) take over the business of Pasig Printing
Corporation (PPC), (b) take custody and control of all assets and properties owned and possessed by Pasig Printing Corporation
(PPC), (c) take the place of the management and the board of directors of Pasig Printing Corporation (PPC), (d) preserve Pasig
Printing Corporation's assets and properties, (e) stop and prevent any disposal, in any manner, of any of the properties of Pasig
Printing Corporation (PPC) including the MC Home Depot checks and/or their proceeds; and (3) [sic] restore the status quo ante
prevailing by directing respondents their associates and agents to account and return to the Interim Management Committee for
Pasig Printing Corporation (PPC) all the money proceeds of the 20 MC Home Depot checks taken by them and to account and
surrender to the Interim Management Committee all subsequent MC Home Depot checks or proceeds. 33 (Citation omitted)
The Court of Appeals characterized the assailed order/resolution of the trial court as an interlocutory order that is not
appealable.34 In reversing tie trial court order/resolution, the Court of Appeals considered the danger of dissipation, wastage, and
loss of PPC's assets if the review of the trial court's judgment would be delayed. 35cralawlawlibrary
The Court of Appeals ruled that the case filed by respondent Balmores with the trial court "[was] a derivative suit because there
were allegations of fraud or ultra vires acts ... by [PPC's directors]." 36cralawlawlibrary
According to the Court of Appeals, the trial court abandoned its duty to the stockholders in a derivative suit when it refused to
appoint a receiver or create a management committee, all during the pendency of the proceedings. The assailed order of the trial
court removed from the stockholders their right, in an intra-corporate controversy, to be allowed the remedy of appointment of a
receiver during the pendency of a derivative suit, leaving the corporation under the control of an outsider and its assets prone to
dissipation.37 The Court of Appeals also ruled that this amounts to "despotic, capricious, or whimsical exercise of judicial
power"38 on the part of the trial court.
In justifying its decision to place PPC under receivership and to create a management committee, the Court of Appeals stated that
the board's waiver of PPC's rights in favor of Villamor's law firm without any consideration and its inaction on Villamor's failure to
turn over the proceeds of rental payments to PPC warrant the creation of a management committee.39 The circumstances resulted
in the imminent danger of loss, waste, or dissipation of PPC's assets. 40cralawlawlibrary
Petitioners filed separate motions for reconsideration. Both motions were denied by the Court of Appeals on May 29, 2006. The
dispositive portion of the Court of Appeals' resolution reads:chanRoblesvirtualLawlibrary
WHEREFORE, for lack of merit, respondents' March 10/2006 and March 20, 2006 Motions for Reconsideration are
hereby DENIED.41chanrobleslaw
Petitioners filed separate petitions for review under Rule 45, raising the following threshold issues:chanRoblesvirtualLawlibrary
I. Whether the Court of Appeals correctly characterized respondent Balmores' action as a derivative suit
II. Whether the Court of Appeals properly placed PPC under receivership and created a receiver or management
committee
PPC's directors argued that the Court of Appeals erred in characterizing respondent Balmores' suit as a derivative suit because of
his failure to implead PPC as party in the case. Hence, the appellate court did not acquire jurisdiction over the corporation, and
the appointment of a receiver or management committee is not valid. 42cralawlawlibrary
The directors further argued that the requirements for the appointment of a receiver or management committee under Rule 943 of
the Interim Rules were not satisfied. The directors pointed out that respondent Balmores failed to prove that the assets of the
corporation were in imminent danger of being dissipated.44cralawlawlibrary
According to the directors, assuming that a receiver or management committee may be appointed in the case, it is the Regional
Trial Court only arid not the. Court of Appeals that must appoint them.45cralawlawlibrary
Meanwhile, Villamor argued that PPC's entitlement to the checks or their proceeds was still in dispute. In a separate civil case
against Villamor, a certain Leonardo Umale was claiming ownership of the checks. 46cralawlawlibrary
Villamor also argued that the Court of Appeals' order to place PPC under receivership and to appoint a management committee
does not endanger PPC's assets because the MC Home Depot checks were not the only assets of PPC. 47 Therefore, it would not
affect the operation of PPC or result in its paralysation.48cralawlawlibrary
In his comment, respondent Balmores argued that Villamor's and the directors' petitions raise questions of facts, which cannot be
allowed in a petition for review under Rule 45.49cralawlawlibrary
On the appointment of a receiver or management committee, respondent Balmores stated that the ". . . very practice of waiving
assets and income for no consideration can in fact lead, not only to the paralyzation of business, but to the complete loss or
cessation of business of PPC[.] It is precisely because of this fraudulent practice that a receiver/management committee must be
appointed to protect the assets of PPC from further fraudulent acts, devices and schemes." 50cralawlawlibrary
The petitions have merit.
I In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
Petition for review on
certiorari under Rule 45
was proper
First, we rule on the issue of whether petitioners properly filed a petition for review on certiorari under Rule 45.
Respondent Balmores argued that the petition raises questions of fact.
Under Rule 45, only questions of law may be raised.51 There is a question of law "when there is doubt or controversy as to what the
law is on a certain [set] of facts."52 The test is "whether the appellate court can determine the issue-raised without reviewing or
evaluating the evidence."53 Meanwhile, there is a question of fact when there is "doubt... as to the truth or falsehood of
facts."54 The question must involve the examination of probative value of the evidence presented.
In this case, petitioners raise issues on the correctness of the Court of Appeals' conclusions.
Specifically, petitioners ask (1) whether respondent Balmores' failure to implead PPC in his action with the trial court was fatal;
(2) whether the Court of Appeals correctly characterized respondent Balmores' action as a derivative suit; (3) whether the Court of
Appeals' appointment of a management committee was proper; and (4) whether the Court of Appeals may exercise the power to
appoint a management committee.
These are questions of law that may be determined without looking into the evidence presented. The question of whether the
conclusion drawn by the Court of Appeals from a set of facts is correct is a question of law, cognizable by this
court.55cralawlawlibrary
Petitioners, therefore, properly filed, a petition for review under Rule 45.
II
Respondent Balmores' action in
the trial court is not a derivative suit
A derivative suit is an action filed by stockholders to enforce a corporate action. 56 It is an exception to the general rule that the
corporation's power to sue57 is exercised only by the board of directors or trustees.58cralawlawlibrary
Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or officers of the corporation
refuse to sue to vindicate the rights of the corporation or are the ones to be sued and are in control of the corporation. 59 It is
allowed when the "directors [or officers] are guilty of breach of . . . trust, [and] not of mere error of judgment." 60 In derivative
suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal party.61 Thus, this court
noted:chanRoblesvirtualLawlibrary
The Court has recognized that a stockholder's right to institute a derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. In
effect, the suit is an action for specific performance of an obligation, owed by the corporation to the stockholders, to assist its
rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to adopt
suitable measures for its protection.62chanrobleslaw
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (Interim Rules) provides the five (5)
requisites63 for filing derivative suits:chanRoblesvirtualLawlibrary
SECTION 1. Derivative action. - A stockholder or member may bring an action in the name of a corporation or association, as the
case may be, provided, that:chanRoblesvirtualLawlibrary
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the
action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the
relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first paragraph of Rule 8,
Section 1 of the Interim Rules: The action brought by the stockholder or member must be "in the name of [the] corporation or
association. ..." This requirement has already been settled in jurisprudence.
Thus, in Western Institute of Technology, Inc., et al v. Solas, et al,64 this court said that "[a]mong the basic requirements for a
derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join [him]."65 This principle on derivative suits has been repeated in, among other
cases, Tarn Wing Tak v. Hon. Makasiar and De Guia66 and in Chua v. Court of Appeals,67 which was cited in Hi-Yield Realty,
Incorporated v. Court of Appeals.68cralawlawlibrary
Moreover, it is important that the corporation be made a party to the case. 69cralawlawlibrary
This court explained in Asset Privatization Trust v. Court of Appeals70 why it is a condition sine qua nonthat the corporation be
impleaded as party in derivative suits. Thus:chanRoblesvirtualLawlibrary
Not only is the corporation an indispensible party, but it is also the present rule that it must be served with process. The reason
given is that the judgment must be made binding upon the corporation in order that the corporation may get the benefit of the
suit and may not bring a subsequent suit against the same defendants for the same cause of action. In other words the corporation
must be joined as party because it is its cause of action that is being litigated and because judgment must be a res
judicata against it.71chanrobleslaw
In the same case, this court enumerated the reasons for disallowing a direct individual suit.
The reasons given for not allowing direct individual suit are:chanRoblesvirtualLawlibrary
(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate
property; that both of. these are in the corporation itself for the benefit of the stockholders." In other words, to allow
shareholders to sue separately would conflict with the separate corporate entity principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case of Evangelista v.
Santos, that 'the stockholders may not directly claim those damages for themselves for that would result in the
appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the corporation
and the liquidation of its debts and liabilities, something which cannot be legally done in view of Section 16 of the
Corporation Law. . .";
(3) the filing of such suits would conflict with the duty of the management to sue for the protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the damages recoverable by the
corporation for the same act.72
While it is true that the basis for allowing stockholders to file derivative suits on behalf of corporations is based on equity, the
above legal requisites for its filing must necessarily be complied with for its institution. 73cralawlawlibrary
Respondent Balmores' action in the trial court failed to satisfy all the requisites of a derivative suit.
Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for. Though he tried to communicate
with PPC's directors about the checks in Villamor's possession before he filed an action with the trial court, respondent Balmores
was not able to show that this comprised -all the remedies available under the articles of incorporation, bylaws, laws, or rules
governing PPC.
An allegation that appraisal rights were not available for the acts complained of is another requisite for filing derivative suits
under Rule 8, Section 1(3) of the Interim Rules.
Section 81 of the Corporation Code provides the instances of appraisal right:chanRoblesvirtualLawlibrary
SEC. 81. Instances of appraisal right.— Any stockholder of a corporation shah1 have the right to dissent and demand payment of
the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any
stockholders or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the
corporate property and assets as provided in this Code; and
3. In case of merger or consolidation.
Section 82 of the Corporation Code provides that the stockholder may exercise the right if he or she voted against the proposed
corporate action and if he made a written demand for payment on the corporation within thirty (30) days after the date of voting.
Respondent Balmores complained about the alleged inaction of PPC's directors in his letter informing them that Villamor should be
made to deliver to PPC and account for MC Home Depot's checks or their equivalent value. He alleged that these are devices or
schemes amounting to fraud or misrepresentation detrimental to the corporation's and the stockholders' interests. He also alleged
that the directors' inaction placed PPC's assets in imminent and/or actual dissipation, loss, wastage, and destruction.
Granting that (a) respondent Balmores' attempt to communicate with the other PPC directors already comprised all the available
remedies that he could have exhausted and (b) the corporation was under full- control of petitioners that exhaustion of remedies
became impossible or futile,74 respondent Balmores failed to allege that appraisal rights were not available for the acts
complained of here.
Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was filing on behalf of the corporation.
The non-derivative character of respondent Balmores' action may also be gleaned from his allegations in the trial court complaint.
In the complaint, he described the nature of his action as an action under Rule 1, Section l(a)(l) of the Interim Rules, and not an
action under Rule 1, Section l(a)(4) of the Interim Rules, which refers to derivative suits. Thus, respondent Balmores
said:chanRoblesvirtualLawlibrary
1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-corporate Controversies,
involving devices or schemes employed by, or acts of, the defendants as board of directors, business associates and officers of
Pasig Printing Corporation (PPC), amounting to fraud or misrepresentation, which are detrimental to the interest of the plaintiff as
stockholder of PPC.75 (Emphasis supplied)
Rule 1, Section 1 (a)(1) of the Interim Rules refers to acts of the board, associates, and officers, amounting to fraud or
misrepresentation, which may be detrimental to the interest of the stockholders. This is different from a derivative suit.
While devices and schemes of the board of directors, business associates,-or officers amounting to fraud under Rule 1, Section
l(a)(l) of the Interim Rules are causes of a derivative suit, it is not always the case that derivative suits are limited to such causes
or that they are necessarily derivative suits. Hence, they are separately enumerated in Rule 1, Section 1 (a) of the Interim
Rules:chanRoblesvirtualLawlibrary
SECTION 1. (a) Cases covered. - These Rules shall govern the procedure to be observed in civil cases involving the
following:chanRoblesvirtualLawlibrary
(1) Devices or schemes employed by, or any act of, the board of directors, business associates, officers or partners,
amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/or of the
stockholders, partners, or members of any corporation, partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders,
members, or associates; and between, any or all of them and the corporation, partnership, or association of which they are
stockholders, members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or
associations;
(4) Derivative suits; and
(5) Inspection of corporate books. (Emphasis supplied)
Stockholder/s' suits based on fraudulent or wrongful acts of directors, associates, or officers may also be individual suits or class
suits.
Individual suits are filed when the cause of action belongs to the individual stockholder personally, and not to the stockholders as
a group or to the corporation, e.g., denial of right to inspection and denial of dividends to a stockholder.76 If the cause of action
belongs to a group of stockholders, such as when the rights violated belong to preferred stockholders, a class or representative suit
may be filed to protect the stockholders in the group.77cralawlawlibrary
In this case, respondent Balmores filed an individual suit. His intent was very clear from his manner of describing the nature of his
action:chanRoblesvirtualLawlibrary
1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-corporate Controversies, involving
devices or schemes employed by, or acts of, the defendants as board of directors, business associates and officers of Pasig Printing
Corporation (PPC), amounting to fraud or misrepresentation, which are detrimental to the interest of the plaintiff as
stockholder of PPC.78 (Emphasis supplied)
His intent was also explicit from his prayer:chanRoblesvirtualLawlibrary
WHEREFORE, plaintiff respectfully prays that the Honorable Court -
2. After notice and due proceedings -
Declare that the acts of defendant Directors in allowing defendant VILLAMOR to retain custody of the MC Home checks and
encash them upon maturity, as well as their refusal or failure to take any action against defendant VILLAMOR to make him account
and deliver the MC Home checks and/or their proceeds to Pasig Printing Corporation are devices, schemes or acts amounting to
fraud that are detrimental to plaintiff's interest as a stockholder of PPC;79 (Emphasis supplied)
Respondent Balmores did not bring the action for the benefit of the corporation. Instead, he was alleging that the acts of PPC's
directors, specifically the waiver of rights in favor of Villamor's law firm and their failure to take back the MC Home Depot checks
from Villamor, were detrimental to his individual interest as a stockholder. In filing an action, therefore, his intention was to
vindicate his individual interest and not PPC's or a group of stockholders'.
The essence of a derivative suit is that it must be filed on behalf of the corporation. This is because the cause of action belongs,
primarily, to the corporation. The stockholder who sues on behalf of a corporation is merely a nominal party.

Respondent Balmores' intent to file an individual suit removes it from the coverage of derivative suits.
III
Respondent Balmores has no
cause of action that would entitle
him to the reliefs sought
Corporations have a personality that is separate and distinct from their stockholders and directors. A wrong to the corporation
does not necessarily create an individual cause of action. "A cause of action is the act or omission by which a party violates the
right of another."80 A cause of action must pertain to complainant if he or she is to be entitled to the reliefs sought.
Thus, in Cua v. Tan,81 this court emphasized:chanRoblesvirtualLawlibrary
. . . the creation and appointment of a management committee and a receiver is an extraordinary and drastic remedy to be
exercised with care and caution; and only when the requirements under the Interim Rules are shown. It is a drastic course for the
benefit of the minority stockholders, the parties-litigants or the general public are allowed only under pressing circumstances and,
when there is inadequacy, ineffectual or exhaustion of legal or other remedies . . . The power of the court to continue a business
of a corporation . . . must be exercised with the greatest care and caution. There should be a full consideration of all the
attendant facts, including the interest of all the parties concerned. 88chanrobleslaw
PPC waived its rights, without any consideration in favor of Villamor. The checks were already in Villamor's possession. Some of
the checks may have already been encashed. This court takes judicial notice that the goodwill money of PI 8,000,000.00 and the
rental payments of P4,500,000.00 every month are not meager amounts only to be waived without any consideration. It is,
therefore, enough to constitute loss or dissipation of assets under the Interim Rules.
Respondent Balmores, however, failed to show that there was an imminent danger of paralysis of PPC's business operations.
Apparently, PPC was- earning substantial amounts from its other sub-lessees. Respondent Balmores did not prove otherwise. He,
therefore, failed to show at least one of the requisites for appointment of a receiver or management committee.

V
. . . where the acts complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and
not to the individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is
necessarily affected because the value of his interest therein would be impaired, this fact of itself is not sufficient to give him an
The Court of Appeals had no
individual cause of action since the corporation is a person distinct and separate from him, and can and should itself sue the
jurisdiction to appoint the receiver
wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity of suits as well as
or management committee
a violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount of damages that
should be paid to each individual stockholder.82chanrobleslaw
The Court of Appeals has no power to appoint a receiver or management committee. The Regional Trial Court has original and
exclusive jurisdiction89 to hear and decide intra-corporate controversies,90including incidents of such controversies.91 These
In this case, respondent Balmores did not allege any cause of action that is personal to him. His allegations are limited to the facts
incidents include applications for the appointment of receivers or management committees.
that PPC's directors waived their rights to rental income in favor of Villamor's law firm without consideration and that they failed
to take action when Villamor refused to turn over the amounts to PPC. These are wrongs that pertain to PPC. Therefore, the cause
"The receiver and members of the management committee . . . are considered officers of the court and shall be under its control
of action belongs to PPC — not to respondent Balmores or any stockholders as individuals.
and supervision."92 They are required to report to the court on the status of the corporation within sixty (60) days from their
appointment and every three (3) months after.93cralawlawlibrary
For this reason, respondent Balmores is not entitled to the reliefs sought in the complaint. Only the corporation, or arguably the
stockholders as a group, is entitled to these reliefs, which should have been sought in a proper derivative suit filed on behalf of
When respondent Balmores filed his petition for certiorari with the Court of Appeals, there was still a pending action in the trial
the corporation.
court. No less than the Court of Appeals stated that it allowed respondent Balmores' petition under Rule 65 because the order or
resolution in question was an interlocutory one. This means that jurisdiction over the main case was still lodged with the trial
PPC will not be bound by a decision granting the application for the appointment of a receiver or management committee. Since it
court.
was not impleaded in the complaint, the courts did not acquire jurisdiction over it. On this matter, it is an indispensable party,
without which, no final determination can be had.
The court making the appointment controls and supervises the appointed receiver or management committee. Thus, the Court of
Appeals' appointment of a management committee would result in an absurd scenario wherein while the main case is still pending
Hence, it is not only respondent Balmores' failure to implead PPC that is fatal to his action, as petitioners point out. It is the fact
before the trial court, the receiver or management committee reports' to the Court of Appeals.
that he alleged no cause of action that pertains personally to him that disqualifies him from the reliefs he sought in his complaint.
WHEREFORE, the petitions are GRANTED. The decision of the Court of Appeals dated March 2, 2006 and its resolution dated May
On this basis alone, the Court of Appeals erred in giving due course to respondent Balmores' petition forcertiorari , reversing the
29, 2006 are SET ASIDE.
trial court's decision, and issuing a new order placing PPC under receivership and creating an interim management committee.
SO ORDERED.
IV

Appointment of a management
committee was not proper

Assuming that respondent Balmores has an individual cause of action, the Court of Appeals still erred in placing PPC under
receivership and in creating and appointing a management committee.

A corporation may be placed under receivership, or management committees may be created to preserve properties involved in a
suit and to protect the rights of the parties under the control and supervision of the court. 83 Management committees and
receivers are appointed when the corporation is in imminent danger of "(1) [dissipation, loss, wastage or destruction of assets or
other properties; and (2) [p]aralysation of its business operations that may be prejudicial to' the interest of the minority
stockholders, parties-litigants, or the general public."84cralawlawlibrary

Applicants for the appointment of a receiver or management committee need to establish the confluence of these two requisites.
This is because appointed receivers and management committees will immediately take over the management of the corporation
and will have the management powers specified in law.85 This may have a negative effect on the operations and affairs of the
corporation with third parties,86 as persons who are more familiar with its operations are necessarily dislodged from their positions
in favor of appointees who are strangers to the corporation's operations and affairs.

Thus, in Sy Chim v. Sy Sly Ho & Sons, Inc.,87 this court said:chanRoblesvirtualLawlibrary


G.R. Nos. 163356-57 July 10, 2015
JOSE A. BERNAS, CECILE H. CHENG, VICTOR AFRICA, JESUS B. MARAMARA, JOSE T. FRONDOSO, IGNACIO T. MACROHON, JR.,
AND PAULINO T. LIM, ACTING IN THEIR CAP A CITY AS INDIVIDUAL DIRECTORS OF MAKATI SPORTS CLUB, INC., AND ON BEHALF
OF THE BOARD OF DIRECTORS OF MAKATI SPORTS CLUB, Petitioners,
vs.
JOVENCIO F. CINCO, VICENTE R. AYLLON, RICARDO G. LIBREA, SAMUEL L. ESGUERRA, ROLANDO P. DELA CUESTA, RUBEN L.
TORRES, ALEX Y. PARDO, MA. CRISTINA SIM, ROGER T. AGUILING, JOSE B. QUIMSON, CELESTINO L. ANG, ELISEO V. VILLAMOR,
FELIPE L. GOZON, CLAUDIO B. ALTURA, ROGELIO G. VILLAROSA, MANUEL R. SANTIAGO, BENJAMIN A. CARANDANG, REGINA DE
LEON-HERLIHY, CARLOS Y. RAMOS, JR., ALEJANDRO Z. BARIN, EFRENILO M. CAYANGA AND JOHN DOES, Respondents.
x-----------------------x
G.R. Nos. 163368-69
JOVENCIO F. CINCO, RICARDO G. LIBREA AND ALEX Y. PARDO, Petitioners,
vs.
JOSE A BERNAS, CECILE H. CHENG AND IGNACIO A. MACROHON, Respondents.
DECISION
PEREZ, J.:
Before us are two consolidated Petitions for Review on Certiorari 1 assailing the 28 April 2003 Decision and the 27 April 2004
Resolution of the Court of Appeals in CA-G.R. SP No. 62683,2 which declared the 17 December 1997 Special Stockholders' Meeting
of the Makati Sports Club invalid for having been improperly called but affirmed the actions taken during the Annual Stockholders'
Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000. The dispositive portion of the assailed decision reads:
WHEREFORE, foregoing considered, the instant petition for review is hereby GRANTED. The appealed Decision dated December 12,
2000 of the SEC en bane is SET ASIDE and the Decision dated April 20, 1998 of the Hearing Officer is REINSTATED and AMENDED as
follows:
1. The supposed Special Stockholders' Meeting of December 17, 1997 was prematurely or invalidly called by the [Cinco
Group]. It therefore failed to produce any legal effects and did not effectively remove [the Bernas Group] as directors
of the Makati Sports Club, Inc.;
2. The expulsion of petitioner Jose A. Bernas as well as the public auction of his share[s] is hereby declared void and
without legal effect;
3. The ratification of the removal of [the Bernas Group] as directors, the expulsion of petitioner Bernas and the sale of
his share by the defendants and by the stockholders held in their Regular Stockholders' Meeting held in April of 1998,
1999 and 2000, is void and produces no effects as they were not the proper party to cause the ratification;
4. All other actions of the [Cinco Group] and stockholders taken during the Regular Stockholders' Meetings held in April
1998, 1999 and 2000, including the election of the [Cinco Group] as directors after the expiration of the term of office
of petitioners as directors, are hereby declared valid;
5. No awards for damages and attorney's fees.3
The Facts
Makati Sports Club (MSC) is a domestic corporation duly organized and existing under Philippine laws for the primary purpose of
establishing, maintaining, and providing social, cultural, recreational and athletic . activities among its members.
Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso,
Ignacio T. Macrohon and Paulino T. Lim (Bernas Group) were among the Members of the Board of Directors and Officers of the
corporation whose terms were to expire either in 1998 or 1999.
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea · and Alex Y. Pardo (Cinco Group) are the members and
stockholders of the corporation who were elected Members of the Board of Directors and Officers of the club during the 17
December 1997 Special Stockholders Meeting.
The antecedent events of the meeting and its results, follow:
Alarmed with the rumored anomalies in handling the corporate funds, the MSC Oversight Committee (MSCOC), composed of the
past presidents of the club, demanded from the Bernas Group, who were then incumbent officers of the corporation, to resign
from their respective positions to pave the way for the election of new set of officers. 4Resonating this clamor were the
stockholders of the corporation representing at least 100 shares who sought the assistance of the MSCOC to call for a special
stockholders meeting for the purpose of removing the sitting officers and electing new ones. 5 Pursuant to such request, the MSCOC
called a Special Stockholders' Meeting and sent out notices6 to all stockholders and members stating therein the time, place and
purpose of the meeting. For failure of the Bernas Group to secure an injunction before the Securities Commission (SEC), the
meeting proceeded wherein Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T.
Macrohon, Jr. and Paulino T. Lim were removed from office and, in their place and stead, Jovencio F. Cinco, Ricardo G. Librea,
Alex Y. Pardo, Roger T. Aguiling, Rogelio G. · Villarosa, Armando David, Norberto Maronilla, Regina de Leon-Herlihy and Claudio B.
Altura, were elected.7
Aggrieved by the turn of events, the Bernas Group initiated an action before the Securities Investigation and Clearing Department
(SICD) of the SEC docketed as SEC Case No. 5840 seeking for the nullification of the 17 December 1997 Special Stockholders
Meeting on the ground that it was improperly called. Citing Section 28 of the Corporation Code, the Bernas Group argued that the
authority to call a meeting lies with the Corporate . Secretary and not with the MSCOC which functions merely as an oversight
body and is not vested with the power to call corporate meetings. For being called by the persons not authorized to do so, the
Bernas Group urged the SEC. to declare the 17 December 1997 Special Stockholders' Meeting, including the removal of the sitting
officers and the election of new ones, be nullified.
For their part, the Cinco Group insisted that the 17 December 1997 Special Stockholders' Meeting is sanctioned by the Corporation
Code and the MSC by-laws. In justifying the call effected by the MSCOC, they reasoned that Section 25 8 of the MSC by-laws merely
authorized the Corporate Secretary to issue notices of meetings and nowhere does it state that such authority solely belongs to
him. It was further asseverated by the Cinco Group that it would be useless to course the request to call a meeting thru the
Corporate Secretary because he repeatedly refused to call a special stockholders' meeting despite demands and even "filed a suit
to restrain the holding of a special meeting.9
Meanwhile, the newly elected directors initiated an investigation on the alleged anomalies in administering the corporate affairs
and after finding Bernas guilty of irregularities,10 the Board resolved to expel him from the club by selling his shares at public
auction.11 After the notice12 requirement was complied with, Bernas' shares was accordingly sold for ₱902,000.00 to the highest
bidder:
Prior to the resolution of SEC Case No. 5840, an Annual Stockholders' Meeting was held on 20 April 1998 pursuant to Section 8 of
the MSC bylaws.13 During the said meeting, which was attended by 1,017 stockholders representing 2/3 of the outstanding shares,
the majority resolved to approve, confirm and ratify, among others, the calling and · holding of 17 December 1997 Special
Stockholders' Meeting, the acts and resolutions adopted therein including the removal of Bernas Group from the Board and the
election of their replacements.14
Due to the filing of several petitions for and against the removal of the Bernas Group from the Board pending before the SEC
resulting in the piling up of legal controversies involving MSC, the SEC En Banc, in its Decision 15 dated 30 March 1999, resolved to
supervise the holding of the 1999 Annual Stockholders' Meeting. During the said meeting, the stockholders once again approved,
ratified and confirmed the holding of the 17 December 1997 Special Stockholders' Meeting.
The conduct of the 17 December 1997 Special Stockholders' Meeting was likewise ratified by the stockholders during the 2000
Annual Stockholders' Meeting which was held on 17 April 2000. 16
On 9 May 2000, the SICD rendered a Decision 17 in SEC Case No. 12-. 97-5840 finding, among others, that the 17 December 1997
Special Stockholders' Meeting and the Annual Stockholders' Meeting conducted on 20 April 1998 and 19 April 1999 are invalid. The
SICD likewise nullified the expulsion of Bernas from the corporation and the sale of his share at the public auction. The dispositive The Issues
portion of the said decision reads:

I.
WHEREFORE, in view of the foregoing considerations this Office, through the undersigned Hearing Officer, hereby declares as
follows:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE 17 DECEMBER 1997 SPECIAL STOCKHOLDERS'
MEETING IS INVALID; AND
(1) The supposed Special Stockholders' Meeting of December 17, 1997 was prematurely or invalidly called by the [the
Cinco Group]. It therefore failed to produce any legal effects and did not effectively remove [the Bernas Group] as
directors of the Makati Sports Club, Inc. II.

(2) The April 20, 1998 meeting was not attended by a sufficient number of valid proxies. No quorum could have been WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO NULLIFY THE HOLDING OF THE ANNUAL
present at the said meeting. No corporate business could have been validly completed and/or transacted during the STOCKHOLDERS' MEETING ON 20 APRIL 1998, 19 APRIL 1999 AND 17 APRIL 2000.
said meeting. Further, it was not called by the validly elected Corporate Secretary Victor Africa nor presided over by
the validly elected president Jose A. Bernas. Even if the April 20, 1998 meeting was valid, it could not ratify the
The Court's Ruling
December 17, 1997 meeting because being a void meeting, the December 1 7, 1997 meeting may not be ratified.

The Corporation Code laid down the rules on the removal of the Directors of the corporation by providing, inter alia, the persons
(3) The April 1998 meeting was null and void and therefore produced no legal effect.
authorized to call the meeting and the number of votes required for the purpose of removal, thus:

(4) The April 1999 meeting has not been raised as a defense in the Answer nor assailed in a supplemental complaint.
However, it has been raised by [the Cinco Group] in a manifestation dated April 21, 1999 and in their position paper
dated April 8, 2000. Its legal effects must be the subject of this Decision in order to put an end to the controversy at
hand. In the first place, by [the Cinco Group's] own admission, the alleged attendance at the April 1999 meeting
amounted to less than 2/3 of the stockholders entitled to vote, the minimum number required to effect a removal. No
removal or ratification of a removal may be effected by less than 2/3 vote of the stockholders. Further, it cannot ratify
the December 1997 meeting for failure to adhere to the requirement of the By-laws on notice as explained in
paragraph (2) above, even if it was accompanied by valid proxies, which it was not.
(5) The [the Cinco Group], their agents, representatives and all persons acting for and conspiring on their behalf, are
hereby permanently enjoined from carrying into effect the resolutions and actions adopted during the 17 December
1997 and April 20, 1998 meetings and of the Board of Directors and/or other stockholders' meetings resulting
therefrom, and from performing acts of control and management of the club.
Sec. 28. Removal of directors or trustees. -Any director or trustee of a corporation may be removed from office by a vote of the
stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place
either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous
notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting
of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be
called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a
majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give
the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any
stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the
intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right
of representation to which they may be entitled under Section 24 of this Code. (Emphasis supplied)

(6) The expulsion of complainant Jose A. Bernas as well as the public auction of his share is hereby declared void and
without legal effect, as prayed for. While it is true that [the Cinco Group] were no.t restrained from acting as directors Corollarily, the pertinent provisions of MSC by-laws which govern the manner of calling and sending of notices of the annual
during the pendency of this case, their tenure as directors prior to this Decision is in the nature of de facto directors of stockholders' meeting and the special stockholders' meeting provide:
a de facto Board. Only the ordinary acts of administration which [the Cinco Group] carried out de facto in good faith
are valid. Other acts, such as political acts and the expulsion or other disciplinary acts imposed on the [the Bernas
SEC. 8. Annual Meetings. The annual meeting of stockholders shall be held at the Clubhouse on the third Monday of April of every
Group] may not be appropriately taken by de facto officers because the legality of their tenure as directors is not
year unless such day be a holiday in which case the annual meeting shall be held on the next succeeding business day. At such
complete and subject to the outcome of this case. (7) No awards for damages and attorney's fees. 18
meeting, the President shall render a report to the stockholders of the clubs.

On appeal, the SEC En Banc, in its 12 December 2000 Decision 19 reversed the findings of the SICD and validated the holding of the
xxxx
17 December 1997 Special Stockholders' Meeting as well as the Annual Stockholders' Meeting held on 20 April 1998 and 19 April
1999.
SEC. 10. Special Meetings. Special meetings of stockholders shall be held at the Clubhouse when called by the President or by the
Board of Directors or upon written request of the stockholders representing not less than one hundred (100) shares. Only matters
On 28 April 2003, the Court of Appeals rendered a Decision 20 declaring the 17 December 1997 Special Stockholders' Meeting invalid
specified in the notice and call will be taken up at special meetings.
for being improperly called but affirmed the actions taken during the Annual Stockholders' Meeting held on 20 April 1998, 19 April
1999 and 17 April 2000.
xxxx
In a Resolution21 dated 27 April 2004, the appellate court refused to reconsider its earlier decision.
SEC. 25. Secretary. The Secretary shall keep the stock and transfer book and the corporate seal, which he shall stamp on all
documents requiring such seal, fill and sign together with the President, all the certificates of stocks issued, give or caused to be
Aggrieved by the disquisition of the Court of Appeals, both parties elevated the case before this Court by filing their respective
given all notices required by law of these By-laws as well as notices of all meeting of the Board and of the stockholders; shall
Petitions for Review on Certiorari. While the Bernas Group agrees with the disquisition of the appellate court that the Special
certify as to quorum at meetings; shall approve and sign all correspondence pertaining to the Office of the Secretary; shall keep
Stockholders' Meeting is invalid for being called by the persons not authorized to do so, they urge the Court to likewise invalidate
the minutes of all meetings of the stockholders, the Board of Directors and of all committees in a book or books kept for that
the holding of the subsequent Annual Stockholders' Meetings invoking the application of the holdover principle. The Cinco Group,
purpose; and shall be acting President in the absence of the President and Vice-:President. The Secretary must be a citizen and a
for its part, insists that the holding. of 17 December 1997 Special Stockholders' Meeting is valid and binding underscoring the
resident of the Philippines. The Secretary shall keep a record of all the addresses and telephone numbers of all stockholders.22
overwhelming ratification made by the stockholders during the subsequent annual stockholders' meetings and the previous refusal
of the Corporate Secretary to call a special stockholders' meeting despite demand. For the resolution of the Court are the
following issues:
Textually, only the President and the Board of Directors are authorized by the by-laws to call a special meeting. In cases where
the person authorized to call a meeting refuses, fails or neglects to call a meeting, then the stockholders representing at least 100
shares, upon written request, may file a petition to call a special stockholder's meeting.
In the instant case, there is no dispute that the 17 December 1997 Special Stockholders' Meeting was called neither by the
President nor by the Board of Directors but by the MSCOC. While the MSCOC, as its name suggests, is created for the purpose of
overseeing the affairs of the corporation, nowhere in the by-laws does it state that it is authorized to exercise corporate powers,
such as the power to call a special meeting, solely vested by law and the MSC by-laws on the President or the Board of Directors.
The board of directors is the directing and controlling body of the corporation. It is a creation of the stockholders and derives its
power to control and direct the affairs of the corporation from them. The board of directors, in drawing to itself the power of the
corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that the board should exercise not only
care and diligence, but utmost good faith in the management of the corporate affairs. 23
The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed by a board of
directors whose members have stood for election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the continued accountability to shareholders, and the legitimacy of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of power by the directors or
officers over the properties that they do not own.24
Even the Corporation Code is categorical in stating that a corporation exercises its powers through its board of directors and/or its
duly authorized officers and agents, except in instances where the Corporation Code requires stockholders' approval for certain
specific acts:
SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all the 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 and trustees x x x.
A corporation's board of directors is understood to be that body which (1) exercises all powers provided for under the Corporation
Code; (2) conducts all business of the corporation; and (3) controls and holds all the property of the corporation. Its members have
been characterized as trustees or directors clothed with fiduciary character. 25
It is ineluctably clear that the fiduciary relation is between the stockholders and the board of directors and who are vested with
the power to manage the affairs of the corporation. The ordinary trust relationship of · directors of a corporation and stockholders
is not a matter of statutory or technical law.26 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. 27 Equity recognizes that stockholders are the
proprietors of the corporate interests and are ultimately the only beneficiaries thereof. 28 Should the board fail to perform its
fiduciary duty to safeguard the interest of the stockholders or commit acts prejudicial to their interest, the law and the by-laws
provide mechanisms to remove and replace the erring director.29
Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in the MSC by-laws can it be gathered that
the Oversight Committee is authorized to step in wherever there is breach of fiduciary duty and call a special meeting for the
purpose of removing the existing officers and electing their replacements even if such call was made upon the request of
shareholders. Needless to say, the MSCOC is neither · empowered by law nor the MSC by-laws to call a meeting and the subsequent
ratification made by the stockholders did not cure the substantive infirmity, the defect having set in at the time the void act was
done. The defect goes into the very authority of the persons who made the call for the meeting. It is apt to recall that illegal acts
of a corporation which contemplate the doing of an act which is contrary to law, morals or public order, or contravenes some rules
of public policy or public duty, are, like similar transactions between individuals, void. 30 They cannot serve as basis for a court
action, nor acquire validity by performance, ratification or estoppel.31 The same principle can apply in the present case. The void
election of 17 December 1997 cannot be ratified by the subsequent Annual Stockholders' Meeting.
A distinction should be made between corporate acts or contracts which are illegal and those which are merely ultra vires. The
former contemplates the doing of an act which are contrary to law, morals or public policy or public duty, and are, like similar
transactions between individuals, void: They cannot serve as basis of a court action nor acquire validity by performance,
ratification or estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal or void ab initio, but are not
merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders.32 The 1 7 December 1997 Meeting belongs to the category of the latter, that is, it is void ab initio and
cannot be validated.
Consequently, such Special Stockholders' Meeting called by the Oversight Committee cannot have any legal effect. The removal of
the Bernas Group, as well as the election of the Cinco Group, effected by the assembly in that improperly called meeting is void,
and since the Cinco Group has no legal right to sit in the board, their subsequent acts of expelling Bernas from the club and the
selling of his shares. at the public auction, are likewise invalid.
The Cinco Group cannot invoke the application of de facto officership doctrine to justify the actions taken after the invalid
election since the operation of the principle is limited to third persons who were originally not part of the corporation but became
such by reason of voting of government-sequestered shares.33 In Cojuangco v. Roxas,34 the Court deemed the directors who were
elected through the voting of government of sequestered shares who assumed office in good faith as de facto officers, viz:
In the light of the foregoing discussion, the Court finds and so holds that the PCGG has no right to vote the sequestered shares of
petitioners including the sequestered corporate shares. Only their owners, duly authorized representatives or proxies may vote the
said shares. Consequently, the election of private respondents Adolfo Azcuna, Edison Coseteng and Patricio Pineda as members of
the board of directors of SMC for 1990-1991 should be set aside. However, petitioners cannot be declared as duly elected members
of the board of directors thereby. An election for the purpose should be held where the questioned shares may be voted by their
owners and/or their proxies. Such election may be held at the next shareholders' meeting in April 1991 or at such date as may be
set under the by-laws of SMC.
Private respondents in both cases are hereby declared to be de facto officers who in good faith assumed their duties and
responsibilities as duly elected members of the board of directors of the SMC. They are thereby legally entitled to emoluments of
the office including salary, fees and other compensation attached to the office until they vacate the same. (Emphasis supplied)
Apparently, the assumption of office of the Cinco Group did not bear parallelism with the factual milieu in Cojuangco and as such
they cannot be considered as de facto officers and thus, they are without colorable authority to authorize the removal of Bernas
and the sale of his shares at the public auction. They cannot bind the corporation to third persons who acquired the shares of
Bernas and such third persons cannot be deemed as buyer in good faith.35
The case would have been different if the petitioning stockholders went directly to the SEC and sought its assistance to call a
special stockholders' meeting citing the previous refusal of the Corporate Secretary to call a meeting. Where there is an officer
authorized to call a meeting and that officer refuses, fails, or neglects to call a meeting, the SEC can assume jurisdiction and issue
an order to the petitioning stockholder to call a meeting pursuant to its regulatory and administrative powers to implement the
Corporation Code.36 This is clearly provided for by Section 50 of the Corporation Code which we quote:
Sec. 50. Regular and special meetings of stockholders or members. - x x x
xxxx
Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition
of a stockholder or member, and on a showing of good cause therefore, may issue an order to the petitioning stockholder or
member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at least majority of the stockholders or members present have
chosen one of their member[s] as presiding officer.
As early as Ponce v. Encarnacion, etc. and Gapol,37 the Court of First Instance (now the SEC)38 is empowered to call a meeting
upon petition of the stockholder or member and upon showing of good cause, thus:
On the showing of good cause therefore, the court may authorize a stockholder to call a meeting and to preside thereat until the
majority stockholders 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 the call for such
meeting has not been done.39
The same jurisprudential rule resonates in Philippine National Construction Corporation v. Pabion,40 where the Court validated the
order of the SEC to compel the corporation to conduct a stockholders' meeting in the exercise of its regulatory and administrative
powers to implement the Corporation Code:
SEC's assumption of jurisdiction over this case is proper, as the controversy involves the election of PNCC's directors. Petitioner
does not really contradict the nature of the question presented and agrees that there is an intra-corporate question involved.
xxxx
Prescinding from the above premises, it necessarily follows that SEC can compel PNCC to hold a stockholders' meeting for the
purpose of electing members of the latter's board of directors.
contrary conclusion if such evidence had been properly appreciated.51 It is not the function of this Court to analyze or weigh all
over again the evidence and credibility of witnesses presented before the lower court, tribunal, or office, as we are not trier of
facts.52 Our jurisdiction is limited to reviewing and revising errors of law imputed to the lower court, the latter's finding of facts
being conclusive and not reviewable by this Court.53 However, when it can be shown that administrative bodies grossly
misappreciated evidence of such nature as to compel a contrary conclusion, the Court will not hesitate to reverse its factual
findings.54 In the case at bar, the incongruent findings of the SEC on the one hand, and the Court of Appeals on the other,
constrained the Court to review the records to ascertain which body correctly appreciated the facts vis-a-vis the standing
statutory and jurisprudential principles.

xxxx
As respondents point out, the SEC's action is also justified by its regulatory and administrative powers to implement the
Corporation Code, specifically to compel the PNCC to hold a stockholders' meeting for election purposes.41
Given the broad administrative and regulatory powers of the SEC outlined under Section 50 of the Corporation Code and Section 6
of Presidential Decree (PD) No. 902-A, the Cinco Group cannot claim that if was left without recourse after the Corporate
Secretary previously refused to heed its demand to call a special stockholders' meeting. If it be true that the Corporate Secretary
refused to call a meeting despite fervent demand from the MSCOC, the remedy of the stockholders would have been to file a
petition to the SEC to direct him to call a meeting by giving proper notice required under the Code. To rule otherwise would open
the floodgates to abuse where any stockholder, who consider himself aggrieved by certain corporate actions, could call a special
stockholders' meeting for the purpose of removing the sitting officers in direct violation of the rules pertaining to the call of
meeting laid down in the by-laws.
Every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.42 The by-
laws of a corporation are its own private laws which substantially have the same effect as the laws of the corporation. They are in
effect written into the charter. In this sense they become part of the fundamental law of the corporation with which the
corporation and its directors and officers must comply.43 The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any, prescribed in its charter or by the general law. Thus, directors must
act as a body in a meeting called pursuant to the law or the corporation's by-laws, otherwise, any action taken therein may be
questioned by the objecting director or shareholder.44
Certainly, the rules set in the by-laws are mandatory for every member of the corporation to respect.1âwphi1 They are the
fundamental law of the corporation with which the corporation and its officers and members must comply. It is on this score that
we cannot upon the other hand sustain the Bernas Group's stance that the subsequent annual stockholders' meetings were invalid.
First, the 20 April 1998 Annual Stockholders Meeting was valid because it was sanctioned by Section 8 45 of the MSC bylaws. Unlike
in Special Stockholders Meeting46 wherein the bylaws mandated that such meeting shall be called by specific persons only, no such
specific requirement can be obtained under Section 8.
After finding that the ruling of the appellate court was in accordance with the existing laws and jurisprudence as exhaustively
discussed above, we hereby quote with approval its disquisition: (1) The supposed Special Stockholders' Meeting of 1 7 December
1997 was prematurely or invalidly called by the [Cinco Group]. It therefore failed to produce any legal effects and did not
effectively remove [the Bernas Group] as directors of the Makati Sports Club, Inc.;
(2) The expulsion of [Bernas] as well as the public auction of his shares is hereby declared void and without legal
effect;
(3) The ratification of the removal of [the Bernas Group] as directors, the expulsion of Bernas and the sale of his share
by the [Cinco Group] and by the stockholders held in their Regular Stockholders' Meeting held in April of 1998, 1999 and
2000, is void and produces no effects as they were not the proper party to cause the ratification;
(4) All other actions of the [Cinco Group] and stockholders taken during the Regular Stockholders' Meetings held in April
1998, 1999 and 2000, including the election of the [Cinco Group] as directors after the expiration of the term of office
of [Bernas Group] as directors, are hereby declared valid.55
In fine, we hold that 17 December 1997 Special Stockholders' Meeting is null and void and produces no effect; the resolution
expelling the Bernas Group from the corporation and authorizing the sale of Bernas' shares at the public auction is likewise null
and void. The subsequent Annual Stockholders' Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000 are valid and binding
except the ratification of the removal of the Bernas Group and the sale of Bernas' shares at the public auction effected by the
body during the said meetings. The expulsion of the Bernas Group and the subsequent auction of Bernas' shares are void from the
very beginning and therefore the ratifications effected during the subsequent meetings cannot be sustained. A void act cannot be
the subject of ratification.56
WHEREFORE, premises considered, the petitions of Jose A. Bernas, Cecile. H. Cheng, Victor Africa, Jesus B. Maramara, Jose T.
Frondoso, Ignacio A. Macrohon and Paulino T. Lim in G.R. Nos. 163356-57 and of Jovencio Cinco, Ricardo Librea and Alex Y. Pardo
in G.R. Nos. 163368-69 are hereby DEN~ED. The assailed Decision dated 28 April 2003 and Resolution dated 27 April 2004 of the
Court of Appeals are hereby AFFIRMED.
SO ORDERED.

Second, the 19 April 1999 Annual Stockholders Meeting is likewise valid because in addition to the fact that it was conducted in
accordance to Section 8 of the MSC bylaws, such meeting was supervised by the SEC in the exercise of its regulatory and
administrative powers to implement the Corporation Code.47

Needless to say, the conduct of SEC supervised Annual Stockholders Meeting gave rise to the presumption that the corporate
officers who won the election were duly elected to their positions and therefore can be rightfully considered as de jure officers.
As de jure officials, they can lawfully exercise functions and legally perform such acts that are within the scope of the business of
the corporation except ratification of actions that are deemed void from the beginning.

Considering that a new set of officers were already duly elected in 1998 and 1999 Annual Stockholders Meetings, the Bernas Group
cannot be permitted to use the holdover principle as a shield to perpetuate in office. Members of the group had no right to
continue as directors of the corporation unless reelected by the stockholders in a meeting called for that purpose every
year.48 They had no right to hold-over brought about by the failure to perform the duty incumbent upon them.49 If they were sure
to be reelected, why did they fail, neglect, or refuse to call the meeting to elect the members of the board? 50

Moreover, it is fundamental rule that factual findings of quasi-judicial agencies like the SEC, if supported by substantial evidence,
are generally accorded not only great respect but even finality, and are binding upon this Court unless it was shown that the quasi-
judicial agencies had arbitrarily disregarded evidence before it had misapprehended evidence to such an extent as to compel a
 G.R. No. 211535, July 22, 2015
BANK OF COMMERCE, Petitioner, v. MARILYN P. NITE, Respondent.
DECISION
CARPIO, ACTING C.J.:
The Case
Before the Court is a petition for review on certiorari assailing the 22 November 2013 Decision 1 and 28 February 2014
Resolution2 of the Court of Appeals in CA-G.R. CV No. 81500. The Court of Appeals affirmed in toto the Order dated 4 April
20033 and the Omnibus Order dated 5 January 20044 of the Regional Trial Court of Makati, Branch 150 (trial court) in Criminal Case
Nos. 94-5267 and 94-5268.
The Antecedent Facts
Respondent Marilyn Nite (Nite) was charged, together with Nunelon Bradley (Bradley) and Victoria Magalona-Escalambre
(Escalambre), with violation of Section 19 of Batas Pambansa Bilang 178 5 (BP Blg. 178) in an Information that
reads:chanRoblesvirtualLawlibrary
That on or about April 25, 1994, in the Municipality of Makati, Metro Manila, and within the jurisdiction of this Honorable Court,
the above-named accused, doing business under the name and style of Bancapital Development Corporation (Bancap) did then and
there, willfully and feloniously engage in the business of selling securities, particularly treasury bills (T-bills) with Bank of
Commerce (Bancom) in the amount of Php250 Million without having been registered as a broker, dealer or salesman with the
Securities and Exchange Commission, in violation of said law.
CONTRARY TO LAW.6
The case was docketed as Criminal Case No. 94-5267.
Nite was also charged, together with Bradley, Escalambre, and Eugene Yang (Yang), with Estafa in an Information that
reads:chanRoblesvirtualLawlibrary
That on or about April 25, 1994, in Makati, Metro Manila, and within the jurisdiction of this Honorable Court, the above-named
accused, confederating together and mutually helping each other, by means of deceit, with unfaithfulness or abuse of confidence
on the part of accused Eugene Yang and taking advantage of his position as senior manager of the Bank of Commerce (Bancom),
did then and there willfully, unlawfully and feloniously defraud Bancom as follows: That Bancapital Development Corporation
(Bancap) thru accused Nite, Bradley and Escalambre by means of fraudulent misrepresentations; offered and confirmed for sale
Php250 Million worth of Treasury bills at a discounted price of Php243,215,972.52 to Bancom which was actually purchased and
fully paid by Bancom, when in truth and in fact Bancap which was not authorized to trade security did not actually have such
Treasury bills worth Php250 Million as only Php88 Million worth of Treasury bills was delivered to Bancom upon receipt by Bancap
of the full payment thereof; that accused Eugene Yang, senior manager of Bancom, willfully, unlawfully and feloniously caused the
preparation, issuance and signing of the manager's check in payment of the treasury bills in question on the basis of the trading
order he himself approved and Bancap's confirmation of sale signed by accused Nite and Escalambre, and, once in possession of
the full payment thereof, the above-named accused misappropriated, misapplied and converted the same to their own personal
use and benefit and despite repeated demands failed to deliver the remaining Treasury bills worth Phpl62 Million, to the damage
and prejudice of Bancom, its creditors and stockholders, in the amount of Phpl62 Million Pesos.
CONTRARY TO LAW.7
The case was docketed as Criminal Case No. 94-5268. The two cases were tried jointly.
Since Bradley was still at large during the trial, and the proceedings against Escalambre and Yang were suspended pending their
petition for certiorari and mandamus before the Court of Appeals in connection with the denial of their demurrer to evidence, a
separate trial was conducted against Nite after she was arrested in the United States of America for overstaying and brought back
to the Philippines.
In Criminal Case No. 94-5267, the thrust of the prosecution's argument was that Nite, as President of Bancapital Development
Corporation (Bancap), violated Section 19 of BP Blg. 178 when Bancap sold P250 million worth of treasury bills to Bank of
Commerce (Bancom) without being registered as broker, dealer, or salesman of securities. In Criminal Case No. 94-5268, the
prosecution alleged that Nite defrauded Bancom by falsely pretending to possess and own P250 million worth of treasury bills that
Bancap supposedly sold to Bancom when none of the treasury bills described in the Confirmation of Sale and Letter of Undertaking
issued by Bancap were ever delivered to Bancom. The prosecution alleged that Bancom paid Bancap the amount of
P243,215,972.52 as payment for the treasury bills but Bancap only delivered substitute bills in the amount of P88 million.
The Ruling of the Trial Court
In a Decision dated 6 December 2002,8 the trial court ruled as follows:chanRoblesvirtualLawlibrary
WHEREFORE, the foregoing considered, accused MARILYN NITE is hereby ACQUITTED of the charge of violating Sec. 19 of Batas
Pambansa Bilang 178 under Criminal Case No. 94-5267 and likewise acquitted of the charge of Estafa under Criminal Case No. 94-
5268.
She, however, is hereby ordered to pay BANK OF COMMERCE the amount of Phpl62 million, representing the civil obligation of
BANCAPITAL.
Let, therefore, the cash bond of accused Nite be released to her by the Office of the Clerk of Court, RTC, Makati City, upon
surrender of the original official receipt.
SO ORDERED.9
The trial court ruled that in Criminal Case No. 94-5267, the prosecution was not able to establish that Bancap acted as a primary
dealer that needed to be accredited. According to the trial court, Bancap acted as a secondary dealer and did not buy the treasury
bills directly from the Central Bank. In Criminal Case No. 94-5268, the trial court ruled that the element of deceit was non-
existent and that at the time of the transaction, Bancom was aware that Bancap was not in physical possession of the treasury bills
subject of the sale.
However, the trial court ruled that Nite, being a responsible officer of Bancap, was civilly liable to Bancom in the amount of P162
million which represented the treasury bills that Bancap undertook to deliver to Bancom since only P88 million worth of substitute
treasury bills had been delivered to and accepted by Bancom.
Nite filed a partial motion for reconsideration.
In the assailed 4 April 2003 Order, the trial court granted the partial motion for reconsideration. In resolving the motion, the trial
court ruled that Bancap's charter allowed it to engage in the buying and selling of government securities as part of its secondary
purpose. The trial court added that even if the buying and selling of securities were outside the scope of Bancap's primary
purpose, the acts could only be considered as ultra vires and not illegal. The trial court could not disregard the rule on separate
corporate identity absent any evidence that Bancap was used as a tool to commit fraud, injustice, or crime against Bancom. The
dispositive portion of the Order reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the Motion for Partial Reconsideration is hereby GRANTED. The DECISION dated December 6,
2002 insofar as the civil aspect of the case is concerned, rinding accused Nite civilly liable to BANCOM in the amount of Phpl62
million, representing the treasury bills BANCAP failed to deliver to BANCOM is hereby set aside. Accordingly, the dispositive
portion of the said decision shall now read as follows:chanRoblesvirtualLawlibrary
"WHEREFORE, the foregoing considered, accused MARILYN NITE is hereby acquitted of the charge of violating Sec. 19 of Batas
Pambansa Bilang 178 under Criminal Case No. 94-5267 and likewise acquitted of the charge of Estafa under Criminal Case No. 94-
5268.
Let, therefore, the cash bond of accused Nite be released to her by the Office of the Clerk of Court, RTC, Makati City, upon
surrender of the original official receipt.
SO ORDERED."
SO ORDERED.10
It was the prosecution's turn to file a motion for reconsideration, alleging that the trial court erred in absolving Nite of her civil
liability to Bancom. The prosecution alleged that the trial court erred in not piercing the corporate veil of Bancap when it was
adequately shown that Nite used the company to perpetuate fraud and to evade an existing obligation.
In its Omnibus Order dated 5 January 2004, the trial court denied the motion for lack of merit.
Bancom sought relief from the Court of Appeals in CA-G.R. CV No. 81500.
The Ruling of the Court of Appeals
In its 22 November 2013 Decision, the Court of Appeals affirmed the trial court's Order dated 4 April 2003 and Omnibus Order
dated 5 January 2004.
The Court of Appeals ruled that Bancom wanted to impose the civil liability of Bancap on Nite when the claim for the contractual
obligation should have been against Bancap itself. The Court of Appeals agreed with the trial court that Bancap was only a
secondary dealer and as such, there was no need for it to secure the license required for primary dealers under BP Blg. 178. The
Court of Appeals further ruled that the transaction between Bancom and Bancap was not patently unlawful. The Court of Appeals
ruled that Bancom was aware of the risks it was taking when it entered into a contract with Bancap and agreed for the delivery of
the treasury bills at a future particular time.
The Court of Appeals ruled that it could not automatically make Bancap's contractual obligation as the contractual obligation of
Nite. Further, the doctrine of piercing the veil of corporate fiction imposed the burden of the corporation's obligations on its
erring officers and shareholders. In this case, none of Bancap's other officers, and not even the corporation itself, were impleaded,
and thus, the Court of Appeals could not make a complete determination of the corporation's liability. According to the Court of
Appeals, the remedy of Bancom was to file a civil action impleading all the parties to the contract.
The dispositive portion of the Decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the assailed Order of the Regional Trial Court of Makati City, Branch 150 dated 4 April 2003,
and its subsequent Omnibus Order dated 5 January 2004 are hereby AFFIRMED IN TOTO.
SO ORDERED.11
Bancom filed a motion for reconsideration. In its Resolution promulgated on 28 February 2014, the Court of Appeals denied the
motion for lack of merit.
Hence, Bancom filed a petition for review before this Court.
The Issues
Bancom raises the following issues before this Court:chanRoblesvirtualLawlibrary
I. The Court of Appeals gravely erred in ruling that the civil liability was only attributable to Bancap and not to respondent Nite
despite the latter's active participation in the commission of patently unlawful acts against petitioner Bancom.
Court of Appeals found that Bancom and Bancap had been dealing with each other as seller and buyer of treasury bills from
December 1991 until the transaction subject of this case on 25 April 1994, which was no different from their previous transactions.
Nite, as Bancap's President, cannot be held personally liable for Bancap's obligation unless it can be shown that she acted
fraudulently. However, the issue of fraud had been resolved with finality when the trial court acquitted Nite of estafa on the
ground that the element of deceit is non-existent in the case. The acquittal had long become final and the finding is conclusive on
this Court. The prosecution failed to show that Nite acted in bad faith. It is no longer open for review. Nite's act of signing the
Confirmation of Sale, by itself, does not make the corporate liability her personal liability.
In addition, we consider the testimony of Lagrimas Nuqui, the Legal Officer in Charge of the Government Securities Department of
the Bangko Sentral ng Pilipinas from 1994 to 1998, who explained that primary issues of treasury bills are supposed to be issued
only to accredited dealers but these accredited banks can sell to anyone who need not be accredited, and such buyers, who may
be corporations or individuals, are classified as the secondary market. The trial court and the Court of Appeals found that Bancap
sold the treasury bills as a secondary dealer.17 As such, Bancap's act of selling securities to Bancom is at most ultra vires and not
patently unlawful.
Based on the foregoing, we cannot hold Nite personally liable for Bancap's corporate liability.
WHEREFORE, we DENY the petition.
SO ORDERED.cralawlawlibrary

II. The Court of Appeals erred in not piercing the corporate veil of Bancap even though the same was being used to perpetuate
fraud.chanroblesvirtuallawlibrary
The Ruling of this Court

We deny the petition.

Nite was acquitted by the trial court of violation of Section 19 of BP Blg. 178 and estafa. Hence, the only issue here is Nite's civil
liability after her acquittal.

Bancom asserts that the Court of Appeals erred in ruling that the civil liability it is claiming pertains to Bancap's and not to Nite's.
Bancom cites Section 31 of the Corporation Code which provides:chanRoblesvirtualLawlibrary
Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other
persons.

xxxx
Bancom insists that while the question raised is one of fact, the factual findings of the lower court, sustained by the Court of
Appeals, are based on a misapprehension of facts. Bancom alleges that since Nite actively participated in the commission of a
patently unlawful act, she is personally liable to Bancom for the amount of treasury bills undelivered by Bancap.

We do not agree.

The general rule is that a corporation is invested by law with a personality separate and distinct from that of the persons
composing it, or from any other legal entity that it may be related to.12 The obligations of a corporation, acting through its
directors, officers, and employees, are its own sole liabilities.13Therefore, the corporation's directors, officers, or employees are
generally not personally liable for the obligations of the corporation. 14chanrobleslaw

Bancom alleges that this case falls under the exception to the general rule and that Nite should be held personally liable for
Bancap's obligation. Bancom alleges that Nite signed the Confirmation of Sale knowing that Bancap did not have the treasury bills,
and thus, the sale was illegal.

Bancom's arguments have no merit.

To hold a director or officer personally liable for corporate obligations, two requisites must concur: (1) complainant must allege in
the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith.15 To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction, the bad faith
or wrongdoing of the director must be established clearly and convincingly. 16chanrobleslaw

It is settled that the transaction between Bancom and Bancap is an ordinary sale. We give weight to the finding of both the trial
court and the Court of Appeals that Bancap's liability arose from its contractual obligation to Bancom. The trial court and the