FULL TEXT CASES – CORPORATION LAW

7. (a)

G.R. No. 143866. August 22, 2005

POLIAND INDUSTRIAL LIMITED, Petitioners,

vs.
NATIONAL DEVELOPMENT COMPANY, DEVELOPMENT BANK OF THE
PHILIPPINES, and THE HONORABLE COURT OF APPEALS (Fourteenth Division)
respondents.

G.R. No. 143877. August 22, 2005

NATIONAL DEVELOPMENT COMPANY, Petitioners,

vs.
POLIAND INDUSTRIAL LIMITED, Respondent.

DECISION

TINGA, J.:

Before this Court are two Rule 45 consolidated petitions for review seeking the review of the
Decision1 of the Court of Appeals (Fourth Division) in CA-G.R. CV No. 53257, which modified
the Decision of the Regional Trial Court, Branch 61, Makati City in Civil Case No. 91-2798.
Upon motion of the Development Bank of the Philippines (DBP), the two petitions were
consolidated since both assail the same Decision of the Court of Appeals.

In G.R. No. 143866, petitioner Poliand Industrial Limited (POLIAND) seeks judgment declaring
the National Development Company (NDC) and the DBP solidarily liable in the amount of
US$2,315,747.32, representing the maritime lien in favor of POLIAND and the net amount of
loans incurred by Galleon Shipping Corporation (GALLEON). It also prays that NDC and DBP
be ordered to pay the attorney’s fees and costs of the proceedings as solidary debtors. In G.R.
No. 143877, petitioner NDC seeks the reversal of the Court of Appeals’ Decision ordering it to
pay POLIAND the amount of One Million Nine Hundred Twenty Thousand Two Hundred
Ninety-Eight and 56/100 United States Dollars (US$1,920,298.56), corresponding to the
maritime lien in favor of POLIAND, plus interest.

ANTECEDENTS

The following factual antecedents are matters of record.

Between October 1979 and March 1981, Asian Hardwood Limited (Asian Hardwood), a Hong
Kong corporation, extended credit accommodations in favor of GALLEON totaling
US$3,317,747.32.2 At that time, GALLEON, a domestic corporation organized in 1977 and
headed by its president, Roberto Cuenca, was engaged in the maritime transport of goods. The
advances were utilized to augment GALLEON’s working capital depleted as a result of the
purchase of five new vessels and two second-hand vessels in 1979 and competitiveness of the
shipping industry. GALLEON had incurred an obligation in the total amount of
US$3,391,084.91 in favor of Asian Hardwood.

To finance the acquisition of the vessels, GALLEON obtained loans from Japanese lenders,
namely, Taiyo Kobe Bank, Ltd., Mitsui Bank Ltd. and Marubeni Benelux. On October 10, 1979,
GALLEON, through Cuenca, and DBP executed a Deed of Undertaking3 whereby DBP
guaranteed the prompt and punctual payment of GALLEON’s borrowings from the Japanese
lenders. To secure DBP’s guarantee under the Deed of Undertaking, GALLEON promised,
among others, to secure a first mortgage on the five new vessels and on the second-hand vessels.
Thus, GALLEON executed on January 25, 1982 a mortgage contract over five of its vessels
namely, M/V "Galleon Honor," M/V "Galleon Integrity," M/V "Galleon Dignity," M/V "Galleon
Pride," and M/V "Galleon Trust" in favor of DBP.4

Meanwhile, on January 21, 1981, President Ferdinand Marcos issued Letter of Instruction (LOI)
No. 1155, directing NDC to acquire the entire shareholdings of GALLEON for the amount
originally contributed by its shareholders payable in five (5) years without interest cost to the
government. In the same LOI, DBP was to advance to GALLEON within three years from its
effectivity the principal amount and the interest thereon of GALLEON’s maturing obligations.

On August 10, 1981, GALLEON, represented by its president, Cuenca, and NDC, represented by
Minister of Trade Roberto Ongpin, forged a Memorandum of Agreement,5 whereby NDC and
GALLEON agreed to execute a share purchase agreement within sixty days for the transfer of
GALLEON’s shareholdings. Thereafter, NDC assumed the management and operations of
GALLEON although Cuenca remained president until May 9, 1982.6 Using its own funds, NDC
paid Asian Hardwood on January 15, 1982 the amount of US$1,000,000.00 as partial settlement
of GALLEON’s obligations.7

On February 10, 1982, LOI No. 1195 was issued directing the foreclosure of the mortgage on the
five vessels. For failure of GALLEON to pay its debt despite repeated demands from DBP, the
vessels were extrajudicially foreclosed on various dates and acquired by DBP for the total
amount of ₱539,000,000.00. DBP subsequently sold the vessels to NDC for the same amount.8

On April 22, 1982, the Board of Directors of GALLEON amended the Articles of Incorporation
changing the corporate name from Galleon Shipping Corporation to National Galleon Shipping
Corporation and increasing the number of directors from seven to nine.9

Asian Hardwood assigned its rights over the outstanding obligation of GALLEON of
US$2,315,747.32 to World Universal Trading and Investment Company, S.A. (World
Universal), embodied in a Deed of Assignment executed on April 29, 1989.10 World Universal,
in turn, assigned the credit to petitioner POLIAND sometime in July 1989.11

On March 24, 1988, then President Aquino issued Administrative Order No. 64, directing NDC
and Philippine Export and Foreign Loan Guarantee Corporation (now Trade and Investment
Development Corporation of the Philippines) to transfer some of their assets to the National
Government, through the Asset Privatization Trust (APT) for disposition. Among those
transferred to the APT were the five GALLEON vessels sold at the foreclosure proceedings.

On September 24, 1991, POLIAND made written demands on GALLEON, NDC, and DBP for
the satisfaction of the outstanding balance in the amount of US$2,315,747.32.12 For failure to
heed the demand, POLIAND instituted a collection suit against NDC, DBP and GALLEON filed
on October 10, 1991 with the Regional Trial Court, Branch 61, Makati City. POLIAND claimed
that under LOI No. 1155 and the Memorandum of Agreement between GALLEON and NDC,
defendants GALLEON, NDC, and DBP were solidarily liable to POLIAND as assignee of the
rights of the credit advances/loan accommodations to GALLEON. POLIAND also claimed that
it had a preferred maritime lien over the proceeds of the extrajudicial foreclosure sale of
GALLEON’s vessels mortgaged by NDC to DBP. The complaint prayed for judgment ordering
NDC, DBP, and GALLEON to pay POLIAND jointly and severally the balance of the credit
advances/loan accommodations in the amount of US$2,315,747.32 and attorney’s fees of
₱100,000.00 plus 20% of the amount recovered. By way of an alternative cause of action,
POLIAND sought reimbursement from NDC and DBP for the preferred maritime lien of
US$1,193,298.56.13

In its Answer with Compulsory Counterclaim and Cross-claim, DBP denied being a party to any
of the alleged loan transactions. Accordingly, DBP argued that POLIAND’s complaint stated no
cause of action against DBP or was barred by the Statute of Frauds because DBP did not sign
any memorandum to act as guarantor for the alleged credit advances/loan accommodations in
favor of POLIAND. DBP also denied any liability under LOI No. 1155, which it described as
immoral and unconstitutional, since it was rescinded by LOI No. 1195. By way of its Affirmative
Allegations and Defenses, DBP countered that it was unaware of the maritime lien on the five
vessels mortgaged in its favor and that as far as GALLEON’s foreign borrowings are concerned,
DBP agreed to act as guarantor thereof only under the conditions laid down under the Deed of
Undertaking. DBP prayed for the award of actual, moral and exemplary damages and attorney’s
fees against POLIAND as compulsory counterclaim. In the event that it be adjudged liable for
the payment of the loan accommodations and the maritime liens, DBP prayed that its co-
defendant GALLEON be ordered to indemnify DBP for the full amount.14

For its part, NDC denied any participation in the execution of the loan accommodations/credit
advances and acquisition of ownership of GALLEON, asserting that it acted only as manager of
GALLEON. NDC specifically denied having agreed to the assumption of GALLEON’s
liabilities because no purchase and sale agreement was executed and the delivery of the required
shares of stock of GALLEON did not take place.15

Upon motion by POLIAND, the trial court dropped GALLEON as a defendant, despite vigorous
oppositions from NDC and DBP. At the pre-trial conference on April 29, 1993, the trial court
issued an Order limiting the issues to the following: (1) whether or not GALLEON has an
outstanding obligation in the amount of US$2,315,747.32; (2) whether or not NDC and DBP
may be held solidarily liable therefor; and (3) whether or not there exists a preferred maritime
lien of ₱1,000,000.00 in favor of POLIAND.16

After trial on the merits, the court a quo rendered a decision on August 9, 1996 in favor of
POLIAND. Finding that GALLEON’s loan advances/credit accommodations were duly
established by the evidence on record, the trial court concluded that under LOI No. 1155, DBP
and NDC are liable for those obligations. The trial court also found NDC liable for GALLEON’s
obligations based on the Memorandum of Agreement dated August 1981 executed between
GALLEON and NDC, where it was provided that NDC shall prioritize repayments of
GALLEON’s valid and subsisting liabilities subject of a meritorious lawsuit or which have been
arranged and guaranteed by Cuenca. The trial court was of the opinion that despite the
subsequent issuance of LOI No. 1195, NDC and DBP’s obligation under LOI No. 1155 subsisted
because "vested rights of the parties have arisen therefrom." Accordingly, the trial court
interpreted LOI No. 1195’s directive to "limit and protect" to mean that "DBP and NDC should
not assume or incur additional exposure with respect to GALLEON."17

The trial court dismissed NDC’s argument that the Memorandum of Agreement was merely a
preliminary agreement, noting that under paragraph nine thereof, the only condition for the
payment of GALLEON’s subsisting loans by NDC was the determination by the latter that those
obligations were incurred in the ordinary course of GALLEON’s business. The trial court did not
regard the non-execution of the stock purchase agreement as fatal to POLIAND’s cause since its
non-happening was solely attributable to NDC. The trial court also ruled that POLIAND had
preference to the maritime lien over the proceeds of the extrajudicial foreclosure sale of
GALLEON’s vessels since the loan advances/credit accommodations utilized for the payment of
expenses on the vessels were obtained prior to the constitution of the mortgage in favor of DBP.

In sum, NDC and DBP were ordered to pay POLIAND as follows:

WHEREFORE, premises above considered, judgment is hereby rendered for plaintiff as against
defendants DBP and NDC, who are hereby ORDERED as follows:

1. To jointly and severally PAY plaintiff POLIAND the amount of TWO MILLION THREE
HUNDRED FIFTEEN THOUSAND SEVEN HUNDRED FORTY SEVEN AND 21/100 [sic]
United States Dollars (US$2,315,747.32) computed at the official exchange rate at the time of
payment, plus interest at the rate of 12% per annum from 25 September 1991 until fully paid;
2. To PAY the amount of ONE MILLION (₱1,000,000.) Pesos, Philippine Currency, for and as
attorney’s fees; and

3. To PAY the costs of the proceedings.

SO ORDERED.18

Both NDC and DBP appealed the trial court’s decision.

The Court of Appeals rendered a modified judgment, absolving DBP of any liability in view of
POLIAND’s failure to clearly prove its action against DBP. The appellate court also discharged
NDC of any liability arising from the credit advances/loan obligations obtained by GALLEON
on the ground that NDC did not acquire ownership of GALLEON but merely assumed control
over its management and operations. However, NDC was held liable to POLIAND for the
payment of the preferred maritime lien based on LOI No. 1195 which directed NDC to
"discharge such maritime liens as may be necessary to allow the foreclosed vessels to engage on
the international shipping business," as well as attorney’s fees and costs of suit. The dispositive
portion of the Decision reads:

WHEREFORE, the assailed decision is MODIFIED, in accordance with the foregoing findings,
as follows:

The case against defendant-appellant DBP is hereby DISMISSED.

Defendant-appellant NDC is hereby ordered to pay plaintiff-appellee POLIAND the amount of

US$1,920,298.56 plus legal interest effective September 12, 1984.

The award of attorney’s fees and cost of suit is addressed only against NDC.

Costs against defendant-appellant NDC.

SO ORDERED.19

Not satisfied with the modified judgment, both POLIAND and NDC elevated it to this Court via
two separate petitions for review on certiorari. In G.R. No. 143866 filed on August 21, 2000,
petitioner POLIAND raises the following arguments:

RESPONDENT COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE

ERRORS IN ITS QUESTIONED DECISION DATED 29 JUNE 2000 AND DECIDED
QUESTIONS CONTRARY TO LAW AND THE APPLICABLE DECISIONS OF THE
HONORABLE COURT WHEN IT MODIFIED THE DECISION DATED 09 AUGUST 1996
RENDERED BY THE REGIONAL TRIAL COURT (BRANCH 61) CONSIDERING THAT:

A.

CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS,

RESPONDENT NDC NOT ONLY TOOK OVER TOTALLY THE MANAGEMENT AND
CONTROL OF GALLEON BUT ALSO ASSUMED OWNERSHIP OF GALLEON
PURSUANT TO LOI NO. 1155 AND THE MEMORANDUM OF AGREEMENT DATED 10
AUGUST 1981; THUS, RESPONDENT NDC’S ACQUISITION OF FULL OWNERSHIP
AND CONTROL OF GALLEON CARRIED WITH IT THE ASSUMPTION OF THE
LATTER’S LIABILITIES TO THIRD PARTIES SUCH AS ASIAN HARDWOOD,
PETITIONER POLIAND’S PREDECESSOR-IN-INTEREST.

B.
RESPONDENT COURT OF APPEALS, IN VIOLATION OF THE CONSTITUTION AND
THE RULES OF COURT, DISMISSED THE CASE AGAINST RESPONDENT DBP
WITHOUT STATING CLEARLY AND DISTINCTLY THE REASONS FOR SUCH A
DISMISSAL.

C.

CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS, PETITIONER

POLIAND WAS ABLE TO ESTABLISH THAT RESPONDENT DBP IS SOLIDARILY
LIABLE, TOGETHER WITH RESPONDENT NDC, WITH RESPECT TO THE NET TOTAL
AMOUNT OWING TO PETITIONER POLIAND.

D.

RESPONDENT COURT OF APPEALS GRAVELY ERRED ALSO IN NOT FINDING THAT

RESPONDENT DBP IS JOINTLY AND SOLIDARILY LIABLE WITH RESPONDENT NDC
FOR THE PAYMENT OF MARITIME LIENS PLUS INTEREST PURSUANT TO SECTION
17 OF PRESIDENTIAL DECREEE 1521.20

On August 25, 2000, NDC filed its petition, docketed as G.R. No. 143877, imputing the
following errors to the Court of Appeals:

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER NDC IS LIABLE

TO PAY GALLEON’S OUTSTANDING OBLIGATION TO RESPONDENT POLIAND IN
THE AMOUNT OF US$ 1,920,298.56, TO SATISFY THE PREFERRED MARITIME LIENS
OVER THE PROCEEDS OF THE FORECLOSURE SALE OF THE FIVE GALLEON
VESSELS.

(A) PRESIDENTIAL DECREE NO. 1521 OTHERWISE KNOWN AS THE ‘SHIP

MORTGAGE DECREE OF 1978 IS NOT APPLICABLE IN THE CASE AT BAR.

(B) PETITIONER NDC DOES NOT HOLD THE PROCEEDS OF THE FORECLOSURE
SALE OF THE FIVE (5) GALLEON VESSELS.

(C) THE FORECLOSURE SALE OF THE FIVE (5) GALLEON VESSELS EXTINGUISHES
ALL CLAIMS AGAINST THE VESSELS.

II.

THE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES TO

RESPONDENT POLIAND.21

The two petitions were consolidated considering that both petitions assail the same Court of
Appeals’ Decision, although on different fronts. In G.R. No. 143866, POLIAND questions the
appellate court’s finding that neither NDC nor DBP can be held liable for the loan
accommodations to GALLEON. In G.R. No. 143877, NDC asserts that it is not liable to
POLIAND for the preferred maritime lien.

ISSUES

The bone of contention revolves around two main issues, namely: (1) Whether NDC or DBP or
both are liable to POLIAND on the loan accommodations and credit advances incurred by
GALLEON, and (2) Whether POLIAND has a maritime lien enforceable against NDC or DBP
or both.
RULING of the COURT

I. Liability on loan accommodations

and credit advances incurred by GALLEON

The Court of Appeals reversed the trial court’s conclusion that NDC and DBP are both liable to
POLIAND for GALLEON’s debts on the basis of LOI No. 1155 and the Memorandum of
Agreement. It ratiocinated thus:

With respect to appellant NDC, resolution of the matters raised in its assignment of errors hinges
on whether or not it acquired the shareholdings of GALLEON as directed by LOI 1155; and if in
the negative, whether or not it is liable to pay GALLEON’s outstanding obligation.

The Court answers the issue in the negative. The MOA executed by GALLEON and NDC
following the issuance of LOI 1155 called for the execution of a "formal share purchase
agreement and the transfer of all the shareholdings of seller to Buyer." Since no such execution
and consequent transfer of shareholdings took place, NDC did not acquire ownership of
GALLEON. It merely assumed "actual control over the management and operations" of
GALLEON in the exercise of which it, on January 15, 1982, after being satisfied of the existence
of GALLEON’s obligation to ASIAN HARDWOOD, partially paid the latter One Million
($1,000,000.00) US dollars.22

....

With respect to defendant-appellant DBP, POLIAND failed to clearly prove its cause of action
against it. This leaves it unnecessary to dwell on DBP’s other assigned errors, including that
bearing on its claim for damages and attorney’s fees which does not persuade.23

POLIAND’s cause of action against NDC is premised on the theory that when NDC acquired all
the shareholdings of GALLEON, the former also assumed the latter’s liabilities, including the
loan advances/credit accommodations obtained by GALLEON from POLIAND’s predecessors-
in-interest. In G.R. No. 143866, POLIAND argues that NDC acquired ownership of GALLEON
pursuant to paragraphs 1 and 2 of LOI No. 1155, which was implemented through the execution
of the Memorandum of Agreement. It believes that no conditions were required prior to the
assumption by NDC of GALLEON’s ownership and subsisting loans. Even assuming that
conditions were set, POLIAND opines that the conditions were deemed fulfilled pursuant to
Article 1186 of the Civil Code because of NDC’s apparent intent to prevent the execution of the
share purchase agreement.24

On the other hand, NDC asserts that it could not have acquired GALLEON’s equity and,
consequently, its liabilities because LOI No. 1155 had been rescinded by LOI No. 1195, and
therefore, became inoperative and non-existent. Moreover, NDC, relying on the pronouncements
in Philippine Association of Service Exporters, Inc. et al. v. Ruben D. Torres25 and Parong, et
al. v. Minister Enrile,26 is of the opinion that LOI No. 1155 does not have the force and effect of
law and cannot be a valid source of obligation.27 NDC denies POLIAND’s contention that it
deliberately prevented the execution of the share purchase agreement considering that Cuenca
remained GALLEON’s president seven months after the signing of the Memorandum of
Agreement.28 NDC contends that the Memorandum of Agreement was a mere preliminary
agreement between Cuenca and Ongpin for the intended purchase of GALLEON’s equity,
prescribing the manner, terms and conditions of said purchase.29

NDC, not liable under LOI No. 1155

As a general rule, letters of instructions are simply directives of the President of the Philippines,
issued in the exercise of his administrative power of control, to heads of departments and/or
officers under the executive branch of the government for observance by the officials and/or
employees thereof.30 Being administrative in nature, they do not have the force and effect of a
law and, thus, cannot be a valid source of obligation. However, during the period when then
President Marcos exercised extraordinary legislative powers, he issued certain decrees, orders
and letters of instruction which the Court has declared as having the force and effect of a statute.
As pointed out by the Court in Legaspi v. Minister of Finance,31 paramount considerations
compelled the grant of extraordinary legislative power to the President at that time when the
nation was beset with threats to public order and the purpose for which the authority was granted
was specific to meet the exigencies of that period, thus:

True, without loss of time, President Marcos made it clear that there was no military take-over of
the government, and that much less was there being established a revolutionary government,
even as he declared that said martial law was of a double-barrelled type, unfamiliar to traditional
constitutionalists and political scientists—for two basic and transcendental objectives were
intended by it: (1) the quelling of nation-wide subversive activities characteristic not only of a
rebellion but of a state of war fanned by a foreign power of a different ideology from ours, and
not excluding the stopping effectively of a brewing, if not a strong separatist movement in
Mindanao, and (2) the establishment of a New Society by the institution of disciplinary measures
designed to eradicate the deep-rooted causes of the rebellion and elevate the standards of living,
education and culture of our people, and most of all the social amelioration of the poor and
underprivileged in the farms and in the barrios, to the end that hopefully insurgency may not rear
its head in this country again.32

Thus, before a letter of instruction is declared as having the force and effect of a statute, a
determination of whether or not it was issued in response to the objectives stated in Legaspi is
necessary. Parong, et al. v. Minister Enrile33 differentiated between LOIs in the nature of mere
administrative issuances and those forming part of the law of the land. The following conditions
must be established before a letter of instruction may be considered a law:

To form part of the law of the land, the decree, order or LOI must be issued by the President in
the exercise of his extraordinary power of legislation as contemplated in Section 6 of the 1976
amendments to the Constitution, whenever in his judgment, there exists a grave emergency or
threat or imminence thereof, or whenever the interim Batasan Pambansa or the regular National
Assembly fails or is unable to act adequately on any matter for any reason that in his judgment
requires immediate action.34

Only when issued under any of the two circumstances will a decree, order, or letter be qualified
as having the force and effect of law. The decree or instruction should have been issued either
when there existed a grave emergency or threat or imminence or when the Legislature failed or
was unable to act adequately on the matter. The qualification that there exists a grave emergency
or threat or imminence thereof must be interpreted to refer to the prevailing peace and order
conditions because the particular purpose the President was authorized to assume legislative
powers was to address the deteriorating peace and order situation during the martial law period.

There is no doubt that LOI No. 1155 was issued on July 21, 1981 when then President Marcos
was vested with extraordinary legislative powers. LOI No. 1155 was specifically directed to
DBP, NDC and the Maritime Industry Authority to undertake the following tasks:

LETTER OF INSTRUCTIONS NO. 1155

DEVELOPMENT BANK OF THE PHILIPPINES

NATIONAL DEVELOPMENT COMPANY

MARITIME INDUSTRY AUTHORITY

DIRECTING A REHABILITATION PLAN FOR GALLEON SHIPPING CORPORATION

....

1. NDC shall acquire 100% of the shareholdings of Galleon Shipping Corporation from its
present owners for the amount of ₱46.7 million which is the amount originally contributed by the
present shareholders, payable after five years with no interest cost.

2. NDC to immediately infuse ₱30 million into Galleon Shipping Corporation in lieu of is
previously approved subscription to Philippine National Lines. In addition, NDC is to provide
additional equity to Galleon as may be required.

3. DBP to advance for a period of three years from date hereof both the principal and the interest
on Galleon's obligations falling due and to convert such advances into 12% preferred shares in
Galleon Shipping Corporation.

4. DBP and NDC to negotiate a restructuring of loans extended by foreign creditors of Galleon.

5. MARINA to provide assistance to Galleon by mandating a rational liner shipping schedule

considering existing freight volumes and to immediately negotiate a bilateral agreement with the
United States in accordance with UNCTAD resolutions.

....

Although LOI No. 1155 was undoubtedly issued at the time when the President exercised
legislative powers granted under Amendment No. 6 of the 1973 Constitution, the language and
purpose of LOI No. 1155 precludes this Court from declaring that said LOI had the force and
effect of law in the absence of any of the conditions set out in Parong. The subject matter of LOI
No. 1155 is not connected, directly or remotely, to a grave emergency or threat to the peace and
order situation of the nation in particular or to the public interest in general. Nothing in the
language of LOI No. 1155 suggests that it was issued to address the security of the nation.
Obviously, LOI No. 1155 was in the nature of a mere administrative issuance directed to NDC,
DBP and MARINA to undertake a policy measure, that is, to rehabilitate a private corporation.

NDC, not liable under the Corporation Code

The Court cannot accept POLIAND’s theory that with the effectivity of LOI No. 1155, NDC
ipso facto acquired the interests in GALLEON without disregarding applicable statutory
requirements governing the acquisition of a corporation. Ordinarily, in the merger of two or more
existing corporations, one of the combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights, properties and liabilities are acquired by
the surviving corporation.35 The merger, however, does not become effective upon the mere
agreement of the constituent corporations.36

As specifically provided under Section 7937 of said Code, the merger shall only be effective
upon the issuance of a certificate of merger by the Securities and Exchange Commission (SEC),
subject to its prior determination that the merger is not inconsistent with the Code or existing
laws. Where a party to the merger is a special corporation governed by its own charter, the Code
particularly mandates that a favorable recommendation of the appropriate government agency
should first be obtained. The issuance of the certificate of merger is crucial because not only
does it bear out SEC’s approval but also marks the moment whereupon the consequences of a
merger take place. By operation of law, upon the effectivity of the merger, the absorbed
corporation ceases to exist but its rights, and properties as well as liabilities shall be taken and
deemed transferred to and vested in the surviving corporation.38

The records do not show SEC approval of the merger. POLIAND cannot assert that no
conditions were required prior to the assumption by NDC of ownership of GALLEON and its
subsisting loans. Compliance with the statutory requirements is a condition precedent to the
effective transfer of the shareholdings in GALLEON to NDC. In directing NDC to acquire the
shareholdings in GALLEON, the President could not have intended that the parties disregard the
requirements of law. In the absence of SEC approval, there was no effective transfer of the
shareholdings in GALLEON to NDC. Hence, NDC did not acquire the rights or interests of
GALLEON, including its liabilities.

DBP, not liable under LOI No. 1155

POLIAND argues that paragraph 3 of LOI No. 1155 unequivocally obliged DBP to advance the
obligations of GALLEON.39 DBP argues that POLIAND has no cause of action against it under
LOI No. 1155 which is void and unconstitutional.40

The Court affirms the appellate court’s ruling that POLIAND does not have any cause of action
against DBP under LOI No. 1155. Being a mere administrative issuance, LOI No. 1155 cannot
be a valid source of obligation because it did not create any privity of contract between DBP and
POLIAND or its predecessors-in-interest. At best, the directive in LOI No. 1155 was in the
nature of a grant of authority by the President on DBP to enter into certain transactions for the
satisfaction of GALLEON’s obligations. There is, however, nothing from the records of the case
to indicate that DBP had acted as surety or guarantor, or had otherwise accommodated
GALLEON’s obligations to POLIAND or its predecessors-in-interest.

II. Liability on maritime lien

On the second issue of whether or not NDC is liable to POLIAND for the payment of maritime
lien, the appellate court ruled in the affirmative, to wit:

Non-acquisition of ownership of GALLEON notwithstanding, NDC is liable to pay ASIAN

HARDWOOD’s successor-in-interest POLIAND the equivalent of US$1,930,298.56
representing the proceeds of the loan from Asian Hardwood which were spent by GALLEON for
ship modification and salaries of crew, to satisfy the preferred maritime liens over the proceeds
of the foreclosure sale of the 5 vessels.41

POLIAND contends that NDC can no longer raise the issue on the latter’s liability for the
payment of the maritime lien considering that upon appeal to the Court of Appeals, NDC did not
assign it as an error.42 Generally, an appellate court may only pass upon errors assigned.
However, this rule is not without exceptions. In the following instances, the Court ruled that an
appellate court is accorded a broad discretionary power to waive the lack of assignment of errors
and consider errors not assigned:

(a) Grounds not assigned as errors but affecting the jurisdiction of the court over the subject
matter;

(b) Matters not assigned as errors on appeal but are evidently plain or clerical errors within
contemplation of law;

(c) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at
a just decision and complete resolution of the case or to serve the interests of a justice or to avoid
dispensing piecemeal justice;

(d) Matters not specifically assigned as errors on appeal but raised in the trial court and are
matters of record having some bearing on the issue submitted which the parties failed to raise or
which the lower court ignored;

(e) Matters not assigned as errors on appeal but closely related to an error assigned;

(f) Matters not assigned as errors on appeal but upon which the determination of a question
properly assigned, is dependent.43
It is noteworthy that the question of NDC and DBP’s liability on the maritime lien had been
raised by POLIAND as an alternative cause of action against NDC and DBP and was passed
upon by the trial court. The Court of Appeals, however, reversed the trial court’s finding that
NDC and DBP are liable to POLIAND for the payment of the credit advances and loan
accommodations and instead found NDC to be solely liable on the preferred maritime lien
although NDC did not assign it as an error.

The records, however, reveal that the issue on the liability on the preferred maritime lien had
been properly raised and argued upon before the Court of Appeals not by NDC but by DBP who
was also adjudged liable thereon by the trial court. DBP’s appellant’s brief44 pointed out
POLIAND’s failure to present convincing evidence to prove its alternative cause of action,
which POLIAND disputed in its appellee’s brief.45 The issue on the maritime lien is a matter of
record having been adequately ventilated before and passed upon by the trial court and the
appellate court. Thus, by way of exception, NDC is not precluded from again raising the issue
before this Court even if it did not specifically assign the matter as an error before the Court of
Appeals. Besides, this Court is clothed with ample authority to review matters, even if they are
not assigned as errors in the appeal if it finds that their consideration is necessary in arriving at a
just decision of the case.46

Articles 578 and 580 of the Code

of Commerce, not applicable

NDC cites Articles 57847 and 58048 of the Code of Commerce to bolster its argument that the
foreclosure of the vessels extinguished all claims against the vessels including POLIAND’s
claim.49 Article 578 of the Code of Commerce is not relevant to the facts of the instant case
because it governs the sale of vessels in a foreign port. Said provision outlines the formal and
registration requirements in order that a sale of a vessel on voyage or in a foreign port becomes
effective as against third persons. On the other hand, the resolution of the instant case depends on
the determination as to which creditor is entitled to the proceeds of the foreclosure sale of the
vessels. Clearly, Article 578 of the Code of Commerce is inapplicable.

Article 580, while providing for the order of payment of creditors in the event of sale of a vessel,
had been repealed by the pertinent provisions of Presidential Decree (P.D.) No. 1521, otherwise
known as the Ship Mortgage Decree of 1978. In particular, Article 580 provides that in case of
the judicial sale of a vessel for the payment of creditors, the debts shall be satisfied in the order
specified therein. On the other hand, Section 17 of P.D. No. 152150 also provides that in the
judicial or extrajudicial sale of a vessel for the enforcement of a preferred mortgage lien
constituted in accordance with Section 2 of P.D. No. 1521, such preferred mortgage lien shall
have priority over all pre-existing claims against the vessel, save for those claims enumerated
under Section 17, which have preference over the preferred mortgage lien in the order stated
therein. Since P.D. No. 1521 is a subsequent legislation and since said law in Section 17 thereof
confers on the preferred mortgage lien on the vessel superiority over all other claims, thereby
engendering an irreconcilable conflict with the order of preference provided under Article 580 of
the Code of Commerce, it follows that the Code of Commerce provision is deemed repealed by
the provision of P.D. No. 1521, as the posterior law.51

P.D. No. 1521 is applicable, not the

Civil Code provisions on

concurrence/preference of

credits

Whether or not the order of preference under Section 17, P.D. No. 1521 may be properly applied
in the instant case depends on the classification of the mortgage on the GALLEON vessels, that
is, if it falls within the ambit of Section 2, P.D. No. 1521, defining how a preferred mortgage is
constituted.

NDC and DBP both argue that POLIAND’s claim cannot prevail over DBP’s mortgage credit
over the foreclosed vessels because the mortgage executed in favor of DBP pursuant to the
October 10, 1979 Deed of Undertaking signed by GALLEON and DBP was an ordinary ship
mortgage and not a preferred one, that is, it was not given in connection with the construction,
acquisition, purchase or initial operation of the vessels, but for the purpose of guaranteeing
GALLEON’s foreign borrowings.52

Section 2 of P.D. No. 1521 recognizes the constitution of a mortgage on a vessel, to wit:

SECTION 2. Who may Constitute a Ship Mortgage. — Any citizen of the Philippines, or any
association or corporation organized under the laws of the Philippines, at least sixty per cent of
the capital of which is owned by citizens of the Philippines may, for the purpose of financing the
construction, acquisition, purchase of vessels or initial operation of vessels, freely constitute a
mortgage or any other lien or encumbrance on his or its vessels and its equipment with any bank
or other financial institutions, domestic or foreign.

If the mortgage on the vessel is constituted for the purpose stated under Section 2, the mortgage
obtains a preferred status provided the formal requisites enumerated under Section 453 are
complied with. Upon enforcement of the preferred mortgage and eventual foreclosure of the
vessel, the proceeds of the sale shall be first applied to the claim of the mortgage creditor unless
there are superior or preferential liens, as enumerated under Section 17, namely:

SECTION 17. Preferred Maritime Lien, Priorities, Other Liens. — (a) Upon the sale of any
mortgaged vessel in any extra-judicial sale or by order of a district court of the Philippines in any
suit in rem in admiralty for the enforcement of a preferred mortgage lien thereon, all pre-existing
claims in the vessel, including any possessory common-law lien of which a lienor is deprived
under the provisions of Section 16 of this Decree, shall be held terminated and shall thereafter
attach in like amount and in accordance with the priorities established herein to the proceeds of
the sale. The preferred mortgage lien shall have priority over all claims against the vessel, except
the following claims in the order stated: (1) expenses and fees allowed and costs taxed by the
court and taxes due to the Government; (2) crew's wages; (3) general average; (4) salvage
including contract salvage; (5) maritime liens arising prior in time to the recording of the
preferred mortgage; (6) damages arising out of tort; and (7) preferred mortgage registered
prior in time.

(b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number
or grade, the residue shall be divided among them pro rata. All credits not paid, whether fully or
partially shall subsist as ordinary credits enforceable by personal action against the debtor. The
record of judicial sale or sale by public auction shall be recorded in the Record of Transfers and
Encumbrances of Vessels in the port of documentation. (Emphasis supplied.)

There is no question that the mortgage executed in favor of DBP is covered by P.D. No. 1521.
Contrary to NDC’s assertion, the mortgage constituted on GALLEON’s vessels in favor of DBP
may appropriately be characterized as a preferred mortgage under Section 2, P.D. No. 1521
because GALLEON constituted the same for the purpose of financing the construction,
acquisition, purchase of vessels or initial operation of vessels. While it is correct that GALLEON
executed the mortgage in consideration of DBP’s guarantee of the prompt payment of
GALLEON’s obligations to the Japanese lenders, DBP’s undertaking to pay the Japanese banks
was a condition sine qua non to the acquisition of funds for the purchase of the GALLEON
vessels. Without DBP’s guarantee, the Japanese lenders would not have provided the funds
utilized in the purchase of the GALLEON vessels. The mortgage in favor of DBP was therefore
constituted to facilitate the acquisition of funds necessary for the purchase of the vessels.
NDC adds that being an ordinary ship mortgage, the Civil Code provisions on concurrence and
preference of credits and not P.D. No. 1521 should govern. NDC contends that under Article
2246, in relation to Article 2241 of the Civil Code, the credits guaranteed by a chattel mortgage
upon the thing mortgaged shall enjoy preference (with respect to the thing mortgaged), to the
exclusion of all others to the extent of the value of the personal property to which the preference
exists.54 Following NDC’s theory, DBP’s mortgage credit, which is fourth in the order of
preference under Article 2241, is superior to POLIAND’s claim, which enjoys no preference.

NDC’s argument does not persuade the Court.

The provision of P.D. No. 1521 on the order of preference in the satisfaction of the claims
against the vessel is the more applicable statute to the instant case compared to the Civil Code
provisions on the concurrence and preference of credit. General legislation must give way to
special legislation on the same subject, and generally be so interpreted as to embrace only cases
in which the special provisions are not applicable.55

POLIAND’s alternative cause of action for the payment of maritime liens is based on Sections
17 and 21 of P.D. No. 1521. POLIAND also contends that by virtue of the directive in LOI No.
1195 on NDC to discharge maritime liens to allow the vessels to engage in international
business, NDC is liable therefor.56

POLIAND’s maritime lien is superior

to DBP’s mortgage lien

Before POLIAND’s claim may be classified as superior to the mortgage constituted on the
vessel, it must be shown to be one of the enumerated claims which Section 17, P.D. No. 1521
declares as having preferential status in the event of the sale of the vessel. One of such claims
enumerated under Section 17, P.D. No. 1521 which is considered to be superior to the preferred
mortgage lien is a maritime lien arising prior in time to the recording of the preferred mortgage.
Such maritime lien is described under Section 21, P.D. No. 1521, which reads:

SECTION 21. Maritime Lien for Necessaries; persons entitled to such lien. — Any person
furnishing repairs, supplies, towage, use of dry dock or marine railway, or other necessaries to
any vessel, whether foreign or domestic, upon the order of the owner of such vessel, or of a
person authorized by the owner, shall have a maritime lien on the vessel, which may be enforced
by suit in rem, and it shall be necessary to allege or prove that credit was given to the vessel.

Under the aforequoted provision, the expense must be incurred upon the order of the owner of
the vessel or its authorized person and prior to the recording of the ship mortgage. Under the law,
it must be established that the credit was extended to the vessel itself.57

The trial court found that GALLEON’s advances obtained from Asian Hardwood were used to
cover for the payment of bunker oil/fuel, unused stores and oil, bonded stores, provisions, and
repair and docking of the GALLEON vessels.58 These expenses clearly fall under Section 21,
P.D. No. 1521.

The trial court also found that the advances from Asian Hardwood were spent for ship
modification cost and the crew’s salary and wages. DBP contends that a ship modification cost is
omitted under Section 17, P.D. No. 1521, hence, it does not have a status superior to DBP’s
preferred mortgage lien.

As stated in Section 21, P.D. No. 1521, a maritime lien may consist in "other necessaries spent
for the vessel." The ship modification cost may properly be classified under this broad category
because it was a necessary expenses for the vessel’s navigation. As long as an expense on the
vessel is indispensable to the maintenance and navigation of the vessel, it may properly be
treated as a maritime lien for necessaries under Section 21, P.D. No. 1521.
With respect to the claim for salary and wages of the crew, there is no doubt that it is also one of
the enumerated claims under Section 17, P.D. No. 1521, second only to judicial costs and taxes
due the government in preference and, thus, having a status superior to DBP’s mortgage lien.

All told, the determination of the existence and the amount of POLIAND’s claim for maritime
lien is a finding of fact which is within the province of the courts below. Findings of fact of
lower courts are deemed conclusive and binding upon the Supreme Court except when the
findings are grounded on speculation, surmises or conjectures; when the inference made is
manifestly mistaken, absurd or impossible; when there is grave abuse of discretion in the
appreciation of facts; when the factual findings of the trial and appellate courts are conflicting;
when the Court of Appeals, in making its findings, has gone beyond the issues of the case and
such findings are contrary to the admissions of both appellant and appellee; when the judgment
of the appellate court is premised on a misapprehension of facts or when it has failed to notice
certain relevant facts which, if properly considered, will justify a different conclusion; when the
findings of fact are conclusions without citation of specific evidence upon which they are based;
and when findings of fact of the Court of Appeals are premised on the absence of evidence but
are contradicted by the evidence on record.59 The Court finds no sufficient justification to
reverse the findings of the trial court and the appellate court in respect to the existence and
amount of maritime lien.

Only NDC is liable on the maritime lien

POLIAND maintains that DBP is also solidarily liable for the payment of the preferred maritime
lien over the proceeds of the foreclosure sale by virtue of Section 17, P.D. No. 1521. It claims
that since the lien was incurred prior to the constitution of the mortgage on January 25, 1982, the
preferred maritime lien attaches to the proceeds of the sale of the vessels and has priority over all
claims against the vessels in accordance with Section 17, P.D. No. 1521.60

In its defense, DBP reiterates the following arguments: (1) The salary and crew’s wages cannot
be claimed by POLIAND or its predecessors-in-interest because none of them is a sailor or
mariner;61 (2) Even if conceded, POLIAND’s preferred maritime lien is unenforceable pursuant
to Article 1403 of the Civil Code; and (3) POLIAND’s claim is barred by prescription and
laches.62

The first argument is absurd. Although POLIAND or its predecessors-in-interest are not sailors
entitled to wages, they can still make a claim for the advances spent for the salary and wages of
the crew under the principle of legal subrogation. As explained in Philippine National Bank v.
Court of Appeals,63 a third person who satisfies the obligation to an original maritime lienor
may claim from the debtor because the third person is subrogated to the rights of the maritime
lienor over the vessel. The Court explained as follows:

From the foregoing, it is clear that the amount used for the repair of the vessel M/V "Asean
Liberty" was advanced by Citibank and was utilized for the purpose of paying off the original
maritime lienor, Hong Kong United Dockyards, Ltd. As a person not interested in the fulfillment
of the obligation between PISC and Hong Kong United Dockyards, Ltd., Citibank was
subrogated to the rights of Hong Kong United Dockyards, Ltd. as a maritime lienor over the
vessel, by virtue of Article 1302, par. 2 of the New Civil Code. By definition, subrogation is the
transfer of all the rights of the creditor to a third person, who substitutes him in all his rights.
Considering that Citibank paid off the debt of PISC to Hong Kong United Dockyards, Ltd. it
became the transferee of all the rights of Hong Kong Dockyards, Ltd. as against PISC, including
the maritime lien over the vessel M/V "Asian Liberty."64

DBP’s reliance on the Statute of Frauds is misplaced. Article 1403 (2) of the Civil Code, which
enumerates the contracts covered by the Statue of Frauds, is inapplicable. To begin with, there is
no privity of contract between POLIAND or its predecessors-in-interest, on one hand, and DBP,
on the other. POLIAND hinges its claim on the maritime lien based on LOI No. 1195 and P.D.
No. 1521, and not on any contract or agreement.
Neither can DBP invoke prescription or laches against POLIAND. Under Article 1144 of the
Civil Code, an action upon an obligation created by law must be brought within ten years from
the time the right of action accrues. The right of action arose after January 15, 1982, when NDC
partially paid off GALLEON’s obligations to POLIAND’s predecessor-in-interest, Asian
Hardwood. At that time, the prescriptive period for the enforcement by action of the balance of
GALLEON’s outstanding obligations had commenced. Prescription could not have set in
because the prescriptive period was tolled when POLIAND made a written demand for the
satisfaction of the obligation on September 24, 1991, or before the lapse of the ten-year
prescriptive period. Laches also do not lie because there was no unreasonable delay on the part
of POLIAND in asserting its rights. Indeed, it instituted the instant suit seasonably.

All things considered, however, the Court finds that only NDC is liable for the payment of the
maritime lien. A maritime lien is akin to a mortgage lien in that in spite of the transfer of
ownership, the lien is not extinguished. The maritime lien is inseparable from the vessel and until
discharged, it follows the vessel. Hence, the enforcement of a maritime lien is in the nature and
character of a proceeding quasi in rem.65 The expression "action in rem" is, in its narrow
application, used only with reference to certain proceedings in courts of admiralty wherein the
property alone is treated as responsible for the claim or obligation upon which the proceedings
are based.66 Considering that DBP subsequently transferred ownership of the vessels to NDC,
the Court holds the latter liable on the maritime lien. Notwithstanding the subsequent transfer of
the vessels to NDC, the maritime lien subsists.

This is a unique situation where the extrajudicial foreclosure of the GALLEON vessels took
place without the intervention of GALLEON’s other creditors including POLIAND’s
predecessors-in-interest who were apparently left in the dark about the foreclosure proceedings.
At that time, GALLEON was already a failing corporation having borrowed large sums of
money from banks and financial institutions. When GALLEON defaulted in the payment of its
obligations to DBP, the latter foreclosed on its mortgage over the GALLEON ships. The other
creditors, including POLIAND’s predecessors-in-interest who apparently had earlier or superior
rights over the foreclosed vessels, could not have participated as they were unaware and were not
made parties to the case.

On this note, the Court believes and so holds that the institution of the extrajudicial foreclosure
proceedings was tainted with bad faith. It took place when NDC had already assumed the
management and operations of GALLEON. NDC could not have pleaded ignorance over the
existence of a prior or preferential lien on the vessels subject of foreclosure. As aptly held by the
Court of Appeals:

NDC’s claim that even if maritime liens existed over the proceeds of the foreclosure sale of the
vessels which it subsequently purchased from DBP, it is not liable as it was a purchaser in good
faith fails, given the fact that in its "actual control over the management and operations" of
GALLEON, it was put on notice of the various obligations of GALLEON including those
secured from ASIAN HARDWOOD as in fact it even paid ASIAN HARDWOOD
US$1,000,000.00 in partial settlement of GALLEON’s obligations, before it (NDC) mortgaged
the 5 vessels to DBP on January 25, 1982.

Parenthetically, LOI 1195 directed NDC to "discharge such maritime liens as may be necessary
to allow the foreclosed vessels to engage on the international shipping business."

In fine, it is with respect to POLIAND’s claim for payment of US$1,930,298.56 representing

part of the proceeds of GALLEON’s loan which was spent by GALLEON "for ship modification
and salaries of crew" that NDC is liable.67

Thus, NDC cannot claim that it was a subsequent purchaser in good faith because it had
knowledge that the vessels were subject to various liens. At the very least, to evince good faith,
NDC could have inquired as to the existence of other claims against the vessels apart from
DBP’s mortgage lien. Considering that NDC was also in a position to know or discover the
financial condition of GALLEON when it took over its management, the lack of notice to
GALLEON’s creditors suggests that the extrajudicial foreclosure was effected to prejudice the
rights of GALLEON’s other creditors.

NDC also cannot rely on Administrative Order No. 64,68 which directed the transfer of the
vessels to the APT, on its hypothesis that such transfer extinguished the lien. APT is a mere
conduit through which the assets acquired by the National Government are provisionally held
and managed until their eventual disposal or privatization. Administrative Order No. 64 did not
divest NDC of its ownership over the GALLEON vessels because APT merely holds the vessels
in trust for NDC until the same are disposed. Even if ownership was transferred to APT, that
would not be sufficient to discharge the maritime lien and deprive POLIAND of its recourse
based on the lien. Such denouement would smack of denial of due process and taking of property
without just compensation.

NDC’s liability for attorney’s fees

The lower court awarded attorney’s fees to POLIAND in the amount of ₱1,000,000.00 on
account of the amount involved in the case and the protracted character of the litigation.69 The
award was affirmed by the Court of Appeals as against NDC only.70

This Court finds no reversible error with the award as upheld by the appellate court. Under
Article 220871 of the Civil Code, attorney’s fees may be awarded inter alia when the
defendant’s act or omission has compelled the plaintiff to incur expenses to protect his interest or
in any other case where the court deems it just and equitable that attorney’s fees and expenses of
litigation be recovered.

One final note. There is a discrepancy between the dispositive portion of the Court of Appeals’
Decision and the body thereof with respect to the amount of the maritime lien in favor of
POLIAND. The dispositive portion ordered NDC to pay POLIAND "the amount of
US$1,920,298.56" plus interest72 despite a finding that NDC’s liability to POLIAND represents
the maritime lien73 which according to the complaint74 is the alternative cause of action of
POLIAND in the smaller amount of US$1,193,298.56, as prayed for by POLIAND in its
complaint.

The general rule is that where there is conflict between the dispositive portion or the fallo and the
body of the decision, the fallo controls. This rule rests on the theory that the fallo is the final
order while the opinion in the body is merely a statement ordering nothing. However, where the
inevitable conclusion from the body of the decision is so clear as to show that there was a
mistake in the dispositive portion, the body of the decision will prevail.75 In the instant case, it is
clear from the trial court records and the Court of Appeals’ Rollo that the bigger amount awarded
in the dispositive portion of the Court of Appeals’ Decision was a typographical mistake.
Considering that the appellate court’s Decision merely affirmed the trial court’s finding with
respect to the amount of maritime lien, the bigger amount stated in the dispositive portion of the
Court of Appeals’ Decision must have been awarded through indavertence.

WHEREFORE, both Petitions in G.R. No. 143866 and G.R. No. 143877 are DENIED. The
Decision of the Court of Appeals in CA-G.R. CV No. 53257 is MODIFIED to the extent that
National Development Company is liable to Poliand Industrial Limited for the amount of One
Million One Hundred Ninety Three Thousand Two Hundred Ninety Eight US Dollars and Fifty-
Six US Cents (US$ 1,193,298.56), plus interest of 12% per annum computed from 25 September
1991 until fully paid. In other respects, said Decision is AFFIRMED. No pronouncement as to
costs.

SO ORDERED.

7. (b)
G.R. No. 195615 April 21, 2014

BANK OF COMMERCE, Petitioner,

vs.
RADIO PHILIPPINES NETWORK, INC., INTERCONTINENTAL BROADCASTING
CORPORATION, and BANAHA W BROADCASTING CORPORATION, THRU
BOARD OF ADMINISTRATOR, and SHERIFF BIENVENIDO S. REYES, JR., Sheriff,
Regional Trial Court of Quezon City, Branch 98, Respondents.

DECISION

ABAD, J.:

In late 2001 the Traders Royal Bank (TRB) proposed to sell to petitioner Bank of Commerce
(Bancommerce) for ₱10.4 billion its banking business consisting of specified assets and
liabilities. Bancommerce agreed subject to prior Bangko Sentral ng Pilipinas' (BSP's) approval of
their Purchase and Assumption (P & A) Agreement. On November 8, 2001 the BSP approved
that agreement subject to the condition that Bancommerce and TRB would set up an escrow fund
of PSO million with another bank to cover TRB liabilities for contingent claims that may
subsequently be adjudged against it, which liabilities were excluded from the purchase.

Specifically, the BSP Monetary Board Min. No. 58 (MB Res. 58) decided as follows:

1. To approve the revised terms sheet as finalized on September 21, 2001 granting certain
incentives pursuant to Circular No. 237, series of 2000 to serve as a basis for the final Purchase
and Assumption (P & A) Agreement between the Bank of Commerce (BOC) and Traders Royal
Bank (TRB); subject to inclusion of the following provision in the P & A:

The parties to the P & A had considered other potential liabilities against TRB, and to address
these claims, the parties have agreed to set up an escrow fund amounting to Fifty Million Pesos
(₱50,000,000.00) in cash to be invested in government securities to answer for any such claim
that shall be judicially established, which fund shall be kept for 15 years in the trust department
of any other bank acceptable to the BSP. Any deviation therefrom shall require prior approval
from the Monetary Board.

xxxx

Following the above approval, on November 9, 2001 Bancommerce entered into a P & A
Agreement with TRB and acquired its specified assets and liabilities, excluding liabilities arising
from judicial actions which were to be covered by the BSP-mandated escrow of ₱50 million.

To comply with the BSP mandate, on December 6, 2001 TRB placed ₱50 million in escrow with
Metropolitan Bank and Trust Co. (Metrobank) to answer for those claims and liabilities that were
excluded from the P & A Agreement and remained with TRB. Accordingly, the BSP finally
approved such agreement on July 3, 2002.

Shortly after or on October 10, 2002, acting in G.R. 138510, Traders Royal Bank v. Radio
Philippines Network (RPN), Inc., this Court ordered TRB to pay respondents RPN,
Intercontinental Broadcasting Corporation, and Banahaw Broadcasting Corporation (collectively,
RPN, et al.) actual damages of ₱9,790,716.87 plus 12% legal interest and some amounts. Based
on this decision, RPN, et al.filed a motion for execution against TRB before the Regional Trial
Court (RTC) of Quezon City. But rather than pursue a levy in execution of the corresponding
amounts on escrow with Metrobank, RPN, et al. filed a Supplemental Motion for Execution1
where they described TRB as "now Bank of Commerce" based on the assumption that TRB had
been merged into Bancommerce.
On February 20, 2004, having learned of the supplemental application for execution,
Bancommerce filed its Special Appearance with Opposition to the same2 questioning the
jurisdiction of the RTC over Bancommerce and denying that there was a merger between TRB
and Bancommerce. On August 15, 2005 the RTC issued an Order3 granting and issuing the writ
of execution to cover any and all assets of TRB, "including those subject of the
merger/consolidation in the guise of a Purchase and Sale Agreement with Bank of Commerce,
and/or against the Escrow Fund established by TRB and Bank of Commerce with the
Metropolitan Bank and Trust Company."

This prompted Bancommerce to file a petition for certiorari with the Court of Appeals (CA) in
CA-G.R. SP 91258 assailing the RTC’s Order. On December 8, 2009 the CA4 denied the
petition. The CA pointed out that the Decision of the RTC was clear in that Bancommerce was
not being made to answer for the liabilities of TRB, but rather the assets or properties of TRB
under its possession and custody.5

In the same Decision, the CA modified the Decision of the RTC by deleting the phrase that the P
& A Agreement between TRB and Bancommerce is a farce or "a mere tool to effectuate a
merger and/or consolidation between TRB and BANCOM." The CA Decision partly reads:

xxxx

We are not prepared though, unlike the respondent Judge, to declare the PSA between TRB and
BANCOM as a farce or "a mere tool to effectuate a merger and/or consolidation" of the parties to
the PSA. There is just a dearth of conclusive evidence to support such a finding, at least at this
point. Consequently, the statement in the dispositive portion of the assailed August 15, 2005
Order referring to a merger/consolidation between TRB and BANCOM is deleted.6

xxxx

WHEREFORE, the herein consolidated Petitions are DENIED. The assailed Orders dated
August 15, 2005 and February 22, 2006 of the respondent Judge, are AFFIRMED with the
MODIFICATION that the pronouncement of respondent Judge in the August 15, 2005 Order
that the PSA between TRB and BANCOM is a farce or "a mere tool to effectuate a merger
and/or consolidation between TRB and BANCOM" is DELETED.

SO ORDERED.7

On January 8, 2010 RPN, et al. filed with the RTC a motion to cause the issuance of an alias writ
of execution against Bancommerce based on the CA Decision. The RTC granted8 the motion on
February 19, 2010 on the premise that the CA Decision allowed it to execute on the assets that
Bancommerce acquired from TRB under their P & A Agreement.

On March 10, 2010 Bancommerce sought reconsideration of the RTC Order considering that the
December 8,2009 CA Decision actually declared that no merger existed between TRB and
Bancommerce. But, since the RTC had already issued the alias writ on March 9, 2010
Bancommerce filed on March 16, 2010 a motion to quash the same, followed by supplemental
Motion9 on April 29, 2010.

On August 18, 2010 the RTC issued the assailed Order10 denying Bancommerce pleas and,
among others, directing the release to the Sheriff of Bancommerce’s "garnished monies and
shares of stock or their monetary equivalent" and for the sheriff to pay 25% of the amount "to the
respondents’ counsel representing his attorney’s fees and ₱200,000.00 representing his
appearance fees and litigation expenses" and the balance to be paid to the respondents after
deducting court dues.

Aggrieved, Bancommerce immediately elevated the RTC Order to the CA via a petition for
certiorari under Rule 65 to assail the Orders dated February 19, 2010 and August 18, 2010. On
November 26, 2010 the CA11 dismissed the petition outright for the supposed failure of
Bancommerce to file a motion for reconsideration of the assailed order. The CA denied
Bancommerce’s motion for reconsideration on February 9, 2011, prompting it to come to this
Court.

The issues this case presents are:

1. Whether or not the CA gravely erred in holding that Bancommerce had no valid excuse
in failing to file the required motion for reconsideration of the assailed RTC Order before
coming to the CA; and

2. Whether or not the CA gravely erred in failing to rule that the RTC’s Order of
execution against Bancommerce was a nullity because the CA Decision of December 8,
2009 in CA-G.R. SP 91258 held that TRB had not been merged into Bancommerce as to
make the latter liable for TRB’s judgment debts.

Direct filing of the petition for

certiorari by Bancommerce

Section 1, Rule 65 of the Rules of Court provides that a petition for certiorari may only be filed
when there is no plain, speedy, and adequate remedy in the course of law. Since a motion for
reconsideration is generally regarded as a plain, speedy, and adequate remedy, the failure to first
take recourse to is usually regarded as fatal omission.

But Bancommerce invoked certain recognized exceptions to the rule.12 It had to forego the filing
of the required motion for reconsideration of the assailed RTC Order because a) there was an
urgent necessity for the CA to resolve the questions it raised and any further delay would
prejudice its interests; b) under the circumstances, a motion for reconsideration would have been
useless; c) Bancommerce had been deprived of its right to due process when the RTC issued the
challenged order ex parte, depriving it of an opportunity to object; and d) the issues raised were
purely of law.

In this case, the records amply show that Bancommerce’s action fell within the recognized
exceptions to the need to file a motion for reconsideration before filing a petition for certiorari.

First. The filing of a motion for reconsideration would be redundant since actually the RTC’s
August 18, 2010 Order amounts to a denial of Bancommerce motion for reconsideration of the
February 19, 2010 Order which granted the application for the issuance of the alias writ.

Significantly, the alias writ of execution itself, the quashal of which was sought by
Bancommerce two times (via a motion to quash the writ and a supplemental motion to quash the
writ) derived its existence from the RTC’s February 19, 2010 Order. Another motion for
reconsideration would have been superfluous. The RTC had not budge on those issues in the
preceding incidents. There was no point in repeatedly asking it to reconsider.

Second. An urgent necessity for the immediate resolution of the case by the CA existed because
any further delay would have greatly prejudiced Bancommerce. The Sheriff had been resolute
and relentless in trying to execute the judgment and dispose of the levied assets of
Bancommerce. Indeed, on April 22, 2010 the Sheriff started garnishing Bancommerce’s deposits
in other banks, including those in Banco de Oro-Salcedo-Legaspi Branch and in the Bank of the
Philippine Islands Ayala Paseo Branch.

Further, the Sheriff forcibly levied on Bancommerce’s Lipa Branch cash on hand amounting to
₱1,520,000.00 and deposited the same with the Landbank. He also seized the bank’s computers,
printers, and monitors, causing the temporary cessation of its banking operations in that branch
and putting the bank in an unwarranted danger of a run. Clearly, Bancommerce had valid
justifications for skipping the technical requirement of a motion for reconsideration.
Merger and De Facto Merger

Merger is a re-organization of two or more corporations that results in their consolidating into a
single corporation, which is one of the constituent corporations, one disappearing or dissolving
and the other surviving. To put it another way, merger is the absorption of one or more
corporations by another existing corporation, which retains its identity and takes over the rights,
privileges, franchises, properties, claims, liabilities and obligations of the absorbed
corporation(s). The absorbing corporation continues its existence while the life or lives of the
other corporation(s) is or are terminated.13

The Corporation Code requires the following steps for merger or consolidation:

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan
must include any amendment, if necessary, to the articles of incorporation of the
surviving corporation, or in case of consolidation, all the statements required in the
articles of incorporation of a corporation.

(2) Submission of plan to stockholders or members of each corporation for approval. A

meeting must be called and at least two (2) weeks’ notice must be sent to all stockholders
or members, personally or by registered mail. A summary of the plan must be attached to
the notice. Vote of two-thirds of the members or of stockholders representing two thirds
of the outstanding capital stock will be needed. Appraisal rights, when proper, must be
respected.

(3) Execution of the formal agreement, referred to as the articles of merger o[r]
consolidation, by the corporate officers of each constituent corporation. These take the
place of the articles of incorporation of the consolidated corporation, or amend the
articles of incorporation of the surviving corporation.

(4) Submission of said articles of merger or consolidation to the SEC for approval.

(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least
two weeks before.

(6) Issuance of certificate of merger or consolidation.14

Indubitably, it is clear that no merger took place between Bancommerce and TRB as the
requirements and procedures for a merger were absent. A merger does not become effective
upon the mere agreement of the constituent corporations.15 All the requirements specified in the
law must be complied with in order for merger to take effect. Section 79 of the Corporation Code
further provides that the merger shall be effective only upon the issuance by the Securities and
Exchange Commission (SEC) of a certificate of merger.

Here, Bancommerce and TRB remained separate corporations with distinct corporate
personalities. What happened is that TRB sold and Bancommerce purchased identified recorded
assets of TRB in consideration of Bancommerce’s assumption of identified recorded liabilities of
TRB including booked contingent accounts. There is no law that prohibits this kind of
transaction especially when it is done openly and with appropriate government approval. Indeed,
the dissenting opinions of Justices Jose Catral Mendoza and Marvic Mario Victor F. Leonen are
of the same opinion. In strict sense, no merger or consolidation took place as the records do not
show any plan or articles of merger or consolidation. More importantly, the SEC did not issue
any certificate of merger or consolidation.

The dissenting opinion of Justice Mendoza finds, however, that a "de facto" merger existed
between TRB and Bancommerce considering that (1) the P & A Agreement between them
involved substantially all the assets and liabilities of TRB; (2) in an Ex Parte Petition for
Issuance of Writ of Possession filed in a case, Bancommerce qualified TRB, the petitioner, with
the words "now known as Bancommerce;" and (3) the BSP issued a Circular Letter (series of
2002) advising all banks and non-bank financial intermediaries that the banking activities and
transaction of TRB and Bancommerce were consolidated and that the latter continued the
operations of the former.

The idea of a de facto merger came about because, prior to the present Corporation Code, no law
authorized the merger or consolidation of Philippine Corporations, except insurance companies,
railway corporations, and public utilities.16 And, except in the case of insurance corporations, no
procedure existed for bringing about a merger.17 Still, the Supreme Court held in Reyes v.
Blouse,18 that authority to merge or consolidate can be derived from Section 28½ (now Section
40) of the former Corporation Law which provides, among others, that a corporation may "sell,
exchange, lease or otherwise dispose of all or substantially all of its property and assets" if the
board of directors is so authorized by the affirmative vote of the stockholders holding at least
two-thirds of the voting power. The words "or otherwise dispose of," according to the Supreme
Court, is very broad and in a sense, covers a merger or consolidation.

But the facts in Reyes show that the Board of Directors of the Corporation being dissolved
clearly intended to be merged into the other corporations. Said this Court:

It is apparent that the purpose of the resolution is not to dissolve the [company] but merely to
transfer its assets to a new corporation in exchange for its corporation stock. This intent is clearly
deducible from the provision that the [company] will not be dissolved but will continue existing
until its stockholders decide to dissolve the same. This comes squarely within the purview of
Section 28½ of the corporation law which provides, among others, that a corporation may sell,
exchange, lease, or otherwise dispose of all its property and assets, including its good will, upon
such terms and conditions as its Board of Directors may deem expedient when authorized by the
affirmative vote of the shareholders holding at least 2/3 of the voting power. [The phrase] "or
otherwise dispose of" is very broad and in a sense covers a merger or consolidation."19

In his book, Philippine Corporate Law,20 Dean Cesar Villanueva explained that under the
Corporation Code, "a de facto merger can be pursued by one corporation acquiring all or
substantially all of the properties of another corporation in exchange of shares of stock of the
acquiring corporation. The acquiring corporation would end up with the business enterprise of
the target corporation; whereas, the target corporation would end up with basically its only
remaining assets being the shares of stock of the acquiring corporation." (Emphasis supplied)

No de facto merger took place in the present case simply because the TRB owners did not get in
exchange for the bank’s assets and liabilities an equivalent value in Bancommerce shares of
stock. Bancommerce and TRB agreed with BSP approval to exclude from the sale the TRB’s
contingent judicial liabilities, including those owing to RPN, et al.21

The Bureau of Internal Revenue (BIR) treated the transaction between the two banks purely as a
sale of specified assets and liabilities when it rendered its opinion22 on the tax consequences of
the transaction given that there is a difference in tax treatment between a sale and a merger or
consolidation.

Indubitably, since the transaction between TRB and Bancommerce was neither a merger nor a de
facto merger but a mere "sale of assets with assumption of liabilities," the next question before
the Court is whether or not the RTC could regard Bancommerce as RPN, et al.’s judgment
debtor.

It is pointed out that under common law,23 if one corporation sells or otherwise transfers all its
assets to another corporation, the latter is not liable for the debts and liabilities of the transferor if
it has acted in good faith and has paid adequate consideration for the assets, except: (1) where the
purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts
to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely
a continuation of the selling corporation; and (4) where the transaction is entered into
fraudulently in order to escape liability for such debts.24

But, in the first place, common law has no application in this jurisdiction where existing statutes
governing the situation are in place. Secondly, none of the cited exceptions apply to this case.

1. Bancommerce agreed to assume those liabilities of TRB that are specified in their P & A
Agreement. That agreement specifically excluded TRB’s contingent liabilities that the latter
might have arising from pending litigations in court, including the claims of respondent RPN, et
al.

The pertinent provision of the P & A provides:

Article II
CONSIDERATION: ASSUMPTION OF LIABILITIES

In consideration of the sale of identified recorded assets and properties covered by this
Agreement, BANCOMMERCE shall assume identified recorded TRB’s liabilities including
booked contingent liabilities as listed and referred to in its Consolidated Statement of Condition
as of August 31, 2001, in the total amount of PESOS: TEN BILLION FOUR HUNDRED ONE
MILLION FOUR HUNDRED THIRTY SIX THOUSAND (₱10,410,436,000.00), provided that
the liabilities so assumed shall not include:

xxxx

2. Items in litigation, both actual and prospective, against TRB which include but not limited to
the following:

2.1 Claims of sugar planters for alleged under valuation of sugar export sales x x x;

2.2 Claims of the Republic of the Philippines for peso-denominated certificates supposed
to have been placed by the Marcos family with TRB;

2.3 Other liabilities not included in said Consolidated Statement of Condition; and

2.4 Liabilities accruing after the effectivity date of this Agreement that were not incurred
in the ordinary course of business.25 (Underscoring supplied)

2. As already pointed out above, the sale did not amount to merger or de facto merger of
Bancommerce and TRB since the elements required of both were not present.

3. The evidence in this case fails to show that Bancommerce was a mere continuation of TRB.
TRB retained its separate and distinct identity after the purchase. Although it subsequently
changed its name to Traders Royal Holding’s, Inc. such change did not result in its dissolution.
"The changing of the name of a corporation is no more than creation of a corporation than the
changing of the name of a natural person is the begetting of a natural person. The act, in both
cases, would seem to be what the language which we use to designate it imports—a change of
name and not a change of being."26 As such, Bancommerce and TRB remained separate
corporations.

4. To protect contingent claims, the BSP directed Bancommerce and TRB to put up ₱50 million
in escrow with another bank. It was the BSP, not Bancommerce that fixed the amount of the
escrow. Consequently, it cannot be said that the latter bank acted in bad faith with respect to the
excluded liabilities. They did not enter into the P & A Agreement to enable TRB to escape from
its liability to creditors with pending court cases.
Further, even without the escrow, TRB continued to be liable to its creditors although under its
new name. Parenthetically, the P & A Agreement shows that Bancommerce acquired greater
amount of TRB liabilities than assets. Article II of the P & A Agreement shows that
Bancommerce assumed total liabilities of ₱10,401,436,000.00 while it received total assets of
only ₱10,262,154,000.00. This proves the arms length quality of the transaction.

The dissenting opinion of Justice Mendoza cites certain instances indicating the existence of a de
facto merger in this case. One of these is the fact that the P & A Agreement involved
substantially all the assets and liabilities of TRB. But while this is true, such fact alone would not
prove the existence of a de facto merger because a corporation "does not really lose its juridical
entity"27 on account of such sale. Actually, the law allows a corporation to "sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially all of its properties and
assets including its goodwill" to another corporation.28 This is not merger because it recognizes
the separate existence of the two corporations that transact the sale.

The dissenting opinion of Justice Mendoza claims that another proof of a de facto merger is that
in a case, Bancommerce qualified TRB in its Ex Parte Petition for Issuance of Writ of Possession
with the words "now known as Bancommerce." But paragraph 3 of the Ex Parte Petition shows
the context in which such qualification was made. It reads:29

3. On November 09, 2001, Bank of Commerce and Traders Royal Bank executed and signed a
Purchase and Sale Agreement. The account of the mortgagor was among those acquired under
the agreement. Photocopy of the agreement is hereto attached as Annex "A."

It is thus clear that the phrase "now known as Bank of Commerce" used in the petition served
only to indicate that Bancommerce is now the former property owner’s creditor that filed the
petition for writ of possession as a result of the P & A Agreement. It does not indicate a merger.

Lastly, the dissenting opinion of Justice Mendoza cited the Circular Letter (series of 2002) issued
by the BSP advising all banks and non-bank financial intermediaries that the banking activities
and transaction of TRB and Bancommerce were consolidated and that the latter continued the
operations of the former as an indication of a de facto merger. The Circular Letter30 reads:

CIRCULAR LETTER
(series of 2002)

TO: ALL BANK AND NON-BANK

FINANCIAL INTERMEDIARIES

The Securities and Exchange Commission approved on August 15, 2002 the Amendment of the
Articles of Incorporation and By-Laws of Traders Royal Bank on the deletion of the term
"banks" and "banking" from the corporate name and purpose, pursuant to the purchase of assets
and assumption of liabilities of Traders Royal Bank by Bank of Commerce. Accordingly, the
bank franchise of Traders Royal Bank has been automatically revoked and Traders Royal Bank
has ceased to operate as a banking entity.

Effective July 3, 2002, the banking activities and transactions of Bank of Commerce and Traders
Royal Bank have been consolidated and the former has carried their operations since then.

For your information and guidance.

(Sgd.)

ALBERTO V. REYES
Deputy Governor
Indeed, what was "consolidated" per the above letter was the banking activities and transactions
of Bancommerce and TRB, not their corporate existence. The BSP did not remotely suggest a
merger of the two corporations. What controls the relationship between those corporations
cannot be the BSP letter circular, which had been issued without their participation, but the terms
of their P & A Agreement that the BSP approved through its Monetary Board.

Also, in a letter dated November 2,2005 Atty. Juan De Zuñiga, Jr., Assistant Governor and
General Counsel of the BSP, clarified to the RTC the use of the word "merger" in their January
29, 2003 letter. According to him, the word "merger" was used "in a very loose sense x x x and
merely repeated, for convenience" the term used by the RTC.31 It further stated that "Atty.
Villanueva did not issue any legal pronouncement in the said letter, which is merely transmittal
in nature. Thus it cannot, by any stretch of construction, be considered as binding on the BSP.
What is binding to the BSP is MB Res. 58 referring to the aforementioned transaction between
TRB and Bancommerce as a purchase and assumption agreement."32

Since there had been no merger, Bancommerce cannot be considered as TRB’s successor-in-
interest and against which the Court’s Decision of October 10, 2002 in G.R. 138510 may been
forced. Bancommerce did not hold the former TRBs assets in trust for it as to subject them to
garnishment for the satisfaction of the latter’s liabilities to RPN, et al. Bancommerce bought and
acquired those assets and thus, became their absolute owner.

The CA Decision in
CA-G.R. SP 91258

According to the dissenting opinion of Justice Mendoza, the CA Decision dated December 8,
2009 did not reverse the RTC’s Order causing the issuance of a writ of execution against
Bancommerce to enforce the judgment against TRB. It also argues that the CA did not find grave
abuse of discretion on the RTC’s part when it issued its August 15, 2005 Order granting the
issuance of a writ of execution. In fact, it affirmed that order.1âwphi1 Moreover, it argued that
the CA’s modification of the RTC Order merely deleted an opinion there expressed and not
reversed such order.

But it should be the substance of the CA’s modification of the RTC Order that should control,
not some technical flaws that are taken out of context. Clearly, the RTC’s basis for holding
Bancommerce liable to TRB was its finding that TRB had been merged into Bancommerce,
making the latter liable for TRB’s debts to RPN, et al. The CA clearly annulled such finding in
its December 8, 2009 Decision in CA-G.R. SP 91258, thus:

WHEREFORE, the herein consolidated Petitions are DENIED. The assailed Orders dated
August 15, 2005 and February 22, 2006 of the respondent Judge, are AFFIRMED with the
MODIFICATION that the pronouncement of respondent Judge in the August 15, 2005 Order
that the PSA between TRB and BANCOM is a farce or "a mere tool to effectuate a merger
and/or consolidation between TRB and BANCOM" is DELETED.

SO ORDERED.33

Thus, the CA was careful in its decision to restrict the enforcement of the writ of execution only
to "TRB’s properties found in Bancommerce’s possession." Indeed, the CA clearly said in its
decision that it was not Bancommerce that the RTC Order was being made to answer for TRB’s
judgment credit but "the assets/properties of TRB in the hands of BANCOM." The CA then went
on to state that it is not prepared, unlike the RTC, to declare the P & A Agreement but a farce or
a "mere tool to effectuate a merger and/or consolidation." Thus, the CA deleted the RTC’s
reliance on such supposed merger or consolidation between the two as a basis for its questioned
order.

The enforcement, therefore, of the decision in the main case should not include the assets and
properties that Bancommerce acquired from TRB. These have ceased to be assets and properties
of TRB under the terms of the BSP-approved P & A Agreement between them. They are not
TRB assets and properties in the possession of Bancommerce. To make them so would be an
unwarranted departure from the CA’s Decision in CA-G.R. SP 91258.

WHEREFORE, the petition is GRANTED. The assailed Resolution of November 26, 2010 and
the Resolution of February 9, 2011 of the Court of Appeals both in CA-G.R. SP 116704 are
REVERSED and SET ASIDE. Accordingly, the assailed Orders dated February 19, 2010 and
August 18, 2010, the Alias Writ of Execution dated March 9, 2010, all issued by the Regional
Trial Court and all orders, notices of garnishment/levy, or notices of sale and any other action
emanating from the Orders dated February 19, 2010 and August 18, 2010 in Civil Case Q-89-
3580 are ANNULLED and SET ASIDE. The Temporary Restraining Order issued by this Court
on April 13, 2011 is hereby made PERMANENT.

SO ORDERED.

8.

G.R. No. 159355 August 9, 2010

GABRIEL C. SINGSON, ANDRE NAVATO, EDGARDO P. ZIALCITA, ARACELI E.

VILLANUEVA, TYRONE M. REYES, JOSE CLEMENTE, JR., FEDERICO PASCUAL,
ALEJANDRA C. CLEMENTE, ALBERT P. FENIX, JR., and MELPIN A. GONZAGA,
Petitioners,
vs.
COMMISSION ON AUDIT, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for certiorari seeking to set aside Decision No. 2002-081,1 dated
April 23, 2002, of the Commission on Audit (COA), which affirmed the Decision No. 2000-
008,2 dated June 1, 2000, and the Resolution in CAO I Decision No. 2000-012,3 dated August
11, 2000, of the Corporate Audit Office I, and the COA Resolution No. 2003-115,4 dated July
31, 2003, which denied petitioners’ motion for reconsideration thereof and upheld the
disallowance of petitioners’ Representation and Transportation Allowance (RATA) in the total
amount of ₱1,565,000.00 under Notice of Disallowance No. 99-001-101 (96-96) dated June 7,
1999.

The antecedents are as follows:

The Philippine International Convention Center, Inc. (PICCI) is a government corporation whose
sole stockholder is the Bangko Sentral ng Pilipinas (BSP). Petitioner Araceli E. Villanueva was
then a member of the PICCI Board of Directors and Officer-in-Charge (OIC) of PICCI, while co-
petitioners Gabriel C. Singson, Andre Navato, Edgardo P. Zialcita, and Melpin A. Gonzaga,
Alejandra C. Clemente, Jose Clemente, Jr., Federico Pascual, Albert P. Fenix, Jr., and Tyrone M.
Reyes were then members of the PICCI Board of Directors and officials of the BSP. By virtue of
the PICCI By-Laws, petitioners were authorized to receive ₱1,000.00 per diem each for every
meeting attended. Pursuant to its Monetary Board (MB) Resolution No. 155 dated January 5,
1994, as amended by MB Resolution No. 34 dated January 12, 1994, the BSP MB granted
additional monthly RATA, in the amount of ₱1,500.00, to each of the petitioners, as members of
the Board of Directors of PICCI. Consequently, from January 1996 to December 1998,
petitioners received their corresponding RATA in the total amount of ₱1,565,000.00.

On June 7, 1999, then PICCI Corporate Auditor Adelaida A. Aldovino issued Notice of
Disallowance No. 99-001-101 (96-98),6 addressed to petitioner Araceli E. Villanueva (through
then OIC Susan M. Galang of the Accounting Division of PICCI), disallowing in audit the
payment of petitioners’ RATA in the total amount of ₱1,565,000.00,7 and directing them to settle
immediately the said disallowances, due to the following reasons: (a) As to petitioner Araceli E.
Villanueva, there was double payment of RATA to her as member of the PICCI Board and as
OIC of PICCI, which was in violation of Section 8, Article IX-B of the 1987 Constitution and,
moreover, Compensation Policy Guideline No. 6 provides that an official already granted
commutable RATA and designated by competent authority to perform duties in concurrent
capacity as OIC of another position whether or not in the same agency and entitled to similar
benefits, shall not be granted said similar benefits, except where said similar allowances are
higher in rates than those of his regular position, in which case he may be allowed to collect the
difference thereof; and (b) As to petitioners Gabriel Singson, Andre Navato, Edgardo Zialcita,
Melpin Gonzaga, Alejandra Clemente, Jose Clemente, Jr., Federico Pascual, Albert P. Fenix, Jr.,
and Tyrone M. Reyes, there was double payment of RATA to them as members of the PICCI
Board and as officers of BSP, which was in violation of Section 8, Article IX-B of the 1987
Constitution and PICCI By-laws and, further, the contemplation of the constitutional provisions
which authorized double compensation is construed to mean statutes passed by the national
legislative body and does not include resolutions passed by governing boards, i.e., Section 229 of
the Government Accounting and Auditing Manual.

In a letter8 dated September 27, 1999, petitioners, through Board Member and OIC of PICCI
Araceli E. Villanueva, sought reconsideration of the Notice of Disallowance No. 99-001-01 (96-
98) dated June 7, 1999.

In a letter9 dated October 14, 1999, PICCI Corporate Auditor Aldovino denied petitioners’
motion for reconsideration and, on February 18, 2000, petitioners filed their Notice of Appeal10
and Appeal Memorandum.11

On June 1, 2000, Director Crescencio S. Sunico of the Corporate Audit Office I, COA, rendered
a Decision in CAO I Decision No. 2000-208 affirming the disallowance of the RATA received
by petitioners in their capacity as Directors of the PICCI Board. He stated that except for per
diems, Section 8, Article III of the PICCI By-Laws prohibits the payment of salary to directors in
the form of compensation or reimbursement of expenses, based upon the principle expression
unius est exclusio alterius (the express mention of one thing in a law means the exclusion of
others not expressly mentioned). Neither can the payment of RATA be legally founded on
Section 30 of the Corporation Code which states that in the absence of any provision in the by-
laws fixing their compensation, the directors shall not receive any compensation as such
directors, except for reasonable per diems; provided, however, that any such compensation (other
than per diems) may be granted to directors by the vote of the stockholders representing at least a
majority of the outstanding capital stock at a regular or special stockholders' meeting. The power
to fix the compensation which the directors shall receive, if any, is left to the corporation, to be
determined in its by-laws or by the vote of stockholders. The PICC By-Laws allows only the
payment of per diem to the directors. Thus, the BSP board resolution granting RATA of
₱1,500.00 to petitioners violated the PICCI By-Laws. Director Sunico also explained that
although MB Resolution No. 15, dated January 5, 1994, as amended by MB Resolution No. 34,
dated January 12, 1994, would have the effect of amending the PICCI By-laws, and may render
the grant of RATA valid, such amendment, however, had no effect because it failed to comply
with the procedural requirements set forth under Section 48 of the Corporation Code.12

On August 11, 2000, Director Sunico issued a Resolution in CAO I Decision No. 2000-012,
affirming the disallowance of the RATA received by the petitioners in their capacity as directors
in the total amount of ₱1,565,000.00.

On petition for review by petitioners, the COA rendered the assailed COA Decision No. 2002-
081 dated April 23, 2002, affirming CAO I Decision No. 2000-008 dated June 1, 2000 and
Notice of Disallowance No. 99-001-101 (96-98) dated June 7, 1999. It also directed the Auditor
to determine the amounts to be refunded by petitioners and to enforce and monitor their
settlement. It ruled that petitioners’ receipt of the ₱1,500.00 RATA from the BSP for every
meeting they attended as members of the PICCI Board of Directors was not valid.
In COA Decision No. 2003-115, dated July 31, 2003, the COA issued a Resolution denying
petitioners’ motion for reconsideration and upheld the disallowance of the petitioners’ RATA
amounting to ₱1,565,000.00.

Hence, this present petition for certiorari raising the following grounds:

I.

THE RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION IN FINDING

THAT THE PETITIONERS VIOLATED ITS BY-LAWS WHEN SECTION 30 OF THE
CORPORATION CODE AUTHORIZES THE STOCKHOLDERS TO GRANT
COMPENSATION TO ITS DIRECTORS.

II.

THE RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION IN FINDING

THAT THE PAYMENT OF RATA TO BSP OFFICIALS WHO ARE MEMBERS OF THE
PICCI BOARD VIOLATED ITEM NO. 4 OF NATIONAL COMPENSATION CIRCULAR
(NCC) NO. 67 DATED JANUARY [1], 1992 ISSUED BY THE DEPARTMENT OF BUDGET
AND MANAGEMENT (DBM) AS SAID NCC SPECIFICALLY APPLIES ONLY TO
"NATIONAL GOVERNMENT OFFICIALS AND EMPLOYEES."

III.

THE RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION IN

DIRECTING THE AUDITOR TO ENFORCE REFUND OF THE PAYMENTS TO THE
PETITIONERS [WHO ARE] DIRECTORS AS THE PETITIONERS ENJOY THE
PRESUMPTION OF GOOD FAITH AND ARE CONVINCED THAT THEY ARE LEGALLY
ENTITLED THERETO IN THE LIGHT OF THE SUPREME COURT DECISION IN
ASSOCIATION OF DEDICATED EMPLOYEES OF THE PHILIPPINE TOURISM
AUTHORITY (ADEPT) VS. COA, 295 SCRA 366.13

Petitioners contend that since PICCI was incorporated with the Securities and Exchange
Commission (SEC) (SEC Regulation No. 68840) and has no original charter, it should be
governed by Section 30 of the Corporation Code. According to petitioners, their receipt of
RATA as directors of PICCI was sanctioned by PICCI’s sole stockholder, BSP (through its own
governing body, the Monetary Board), per MB Resolution No. 15 dated January 5, 1994, as
amended by MB Resolution No. 34 dated January 12, 1994.

Respondent counters that said provision does not apply to petitioners as Section 8 of the PICCI
By-laws provides that the compensation of the members of the PICCI Board of Directors shall be
given only through per diems.

Section 30 of the Corporation Code, which authorizes the stockholders to grant compensation to
its directors, states:

Sec. 30. Compensation of Directors. – In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors, except for
reasonable per diems; Provided, however, that any such compensation (other than per diems)
may be granted to directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding year.

In construing the said provision, it bears stressing that the directors of a corporation shall not
receive any compensation for being members of the board of directors, except for reasonable per
diems. The two instances where the directors are to be entitled to compensation shall be when it
is fixed by the corporation’s by-laws or when the stockholders, representing at least a majority of
the outstanding capital stock, vote to grant the same at a regular or special stockholder’s meeting,
subject to the qualification that, in any of the two situations, the total yearly compensation of
directors, as such directors, shall in no case exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year.

Section 8 of the Amended By-Laws of PICCI,14 in consonance with Section 30 of the

Corporation Code, restricted the scope of petitioners’ compensation by fixing their per diem at
₱1,000.00:

Sec. 8. Compensation. Directors, as such, shall not receive any salary for their services but
shall receive a per diem of one thousand pesos (₱1,000.00) per meeting actually attended;
Provided, that the Board of Directors at a regular and special meeting may increase and decrease,
as circumstances shall warrant, such per diems to be received. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in any capacity and receiving
compensation therefor.15

The nomenclature for the compensation of the directors used herein is per diems, and not salary
or any other words of similar import. Thus, petitioners are allowed to receive only per diems of
₱1,000.00 for every meeting that they actually attended. However, the Board of Directors may
increase or decrease the amount of per diems, when the prevailing circumstances shall warrant.
No other compensation may be given to them, except only when they serve the corporation in
another capacity.

Petitioners justify their entitlement to ₱1,500.00 RATA from the PICCI, on the theory that:

[T]he purpose in issuing NCC No. 67 is to ensure uniformity and consistency of actions on
claims for RATA which is granted by law to national government officials and employees to
cover expenses incurred in the discharge or performance of their duties and responsibilities.
Moreover, Item 2 of NCC 67 enumerated the national government officials and employees that
are covered by the Circular, to wit:

[1] Those whose positions are listed under Service Code 18 of the Index of Occupational
Services issued by the Department of Budget and Management (DBM), pursuant to NCC
No. 57, except for the positions of the President, Vice-President, Lupon Member and
Lupon Chairman and positions under the Local Executives Group;

[2] Those whose positions are identified as chiefs of division in the Personal Services
Itemization;

[3] Those whose positions are determined by the DBM to be of equivalent rank with the
officials and employees enumerated under Section 2.1 and 2.2 hereof x x x; and

[4] Those who are duly designated by competent authority to perform the full-time duties
and responsibilities, whether or not in concurrent capacity, as Officers-in-Charge for one
(1) final calendar month or more of the positions enumerated in Sections 2.1, 2.2 and 2.3
hereof.

The PICCI is not an originally chartered corporation, but a subsidiary corporation of BSP
organized in accordance with the Corporation Code of the Philippines. The Articles of
Incorporation of PICCI was registered on July 29, 1976 in the Securities and Exchange
Commission. As such, PICCI does not fall within the coverage of NCC No. 67. As a matter of
fact, by virtue of P.D. [No.] 520, PICCI is exempt from the coverage of the civil service law and
regulations (and Constitution defining coverage of civil service as limited to those with original
[charter] (TUCP v. NHA, G.R. No. 49677, May 4, 1089, Article IX-B, Sec. 1). Certainly, if
PICCI is not part of the National Government, but a mere subsidiary of a government-owned
and/or controlled corporation (BSP), its officers, and more importantly, its directors, are not
covered by the term "national government officials and employees" to which NCC No. 67 finds
application.

Even the BSP, which is the sole stockholder of PICCI, is not covered by NCC No. 67, not only
for the same reasons stated above but for the reason that it enjoys fiscal and administrative
autonomy, which is defined as the "guarantee of full flexibility to allocate and utilize their
resources with the wisdom and dispatch that their needs require" (Bengzon v. Drilon, 208 SCRA
133).16

Respondent maintains that petitioners’ receipt of RATA from PICCI, in addition to their per
diem of ₱1,000 per meeting, and another RATA from BSP, violates the rule against double
compensation; that as former officers of the BSP, petitioners Gabriel P. Singson, Araceli E.
Villanueva, Andre Navato, Edgardo P. Zialcita, and Melpin A. Gonzaga were also receiving
RATA from the BSP, in addition to the RATA granted to them as PICCI Directors; that there is
double payment of RATA, since petitioners’ membership in the PICCI Board is a mere adjunct
of their positions as BSP officials; that double compensation refers to two sets of compensations
for two different offices held concurrently by one officer; and that while there is no general
prohibition against holding two offices which are not incompatible, when an officer accepts a
second office, he can draw the salary attached to such second office only when he is specifically
authorized by law which does not exist in the present case.

In her letter, dated October 14, 1999, to petitioner Araceli E. Villanueva, Corporate Auditor
Adelaida A. Aldovino reiterated her decision disallowing disbursements for RATA of PICCI
directors for the reasons set forth in Notice of Disallowance No. 99-001-101 (96-98). Thus,

Moreover, while the directors are not strictly speaking Officers-in-Charge, but because they are
doing duties in concurrent capacities and are already receiving RATA from their principal office,
Budget Compensation Policy Guideline No. 6, dated September 1, 1982, is applicable.

No. 3.0 of the guideline provides:

3.1 An Official/employee already entitled/granted commutable transportation/representation

allowances and designated by competent authority to perform duties and responsibilities in
concurrent capacity as Officer-in-Charge of another position(s), whether CES or non-CES,
whether or not in the same ministry/bureau/office or agency and entitled to similar
benefits/allowances, whether commutable or reimbursable, except where similar allowances are
higher in rates than those of his regular position, in which case he may be allowed to collect the
difference thereof, provided the period of his temporary stewardship is not less than one month
on a reimbursable basis.

In view of the foregoing, we are reiterating our decision disallowing disbursement for RATA of
PICCI directors for reasons stated in our Notice of Disallowance No. 99-001-01 (96-
98).1avvphi1

Further, please be reminded that disallowance not appealed within six (6) months as prescribed
under Section 48, 50 and 51 of PD 1445 shall become final and executory.17

In COA Decision No. 2002-081 dated April 23, 2002, respondent concluded that the payment of
RATA to petitioners violated Item No. 4 of National Compensation Circular (NCC) No. 67,
dated January 1, 1992, issued by the DBM, as the petitioners were already drawing RATA from
their mother agencies and, hence, their receipt of RATA from PICCI was without legal basis and
constituted double compensation of RATA which is prohibited under the Constitution. It also
explained that under the By-Laws of PICCI, the compensation of its directors should be in the
form of per diem and not RATA, and as the By-Laws have the same force and effect of law as
the corporate charter, its directors and officers are under obligation to comply therewith.
Section 8, Article IX-B of the Constitution provides that no elective or appointive public officer
or employee shall receive additional, double or indirect compensation, unless specifically
authorized by law, nor accept without the consent of the Congress, any present emolument,
office or title of any kind from any foreign government. Pensions and gratuities shall not be
considered as additional, double or indirect compensation.

This provision, however, does not apply to the present case as there was no double compensation
of RATA to the petitioners.

In Leynes v. Commission on Audit,18 the Court clarified that what National Compensation
Circular (NCC) No. 67 seeks to prevent is the dual collection of RATA by a national official
from the budgets of "more than one national agency." In the said case, the interpretation was that
NCC No. 67 cannot be construed as nullifying the power of therein local government units to
grant allowances to judges under the Local Government Code of 1991. Further, NCC No. 67
applies only to the national funds administered by the DBM, not the local funds of the local
government units. Thus,

The pertinent provisions of NCC No. 67 read:

3. Rules and Regulations:

3.1.1 Payment of RATA, whether commutable or reimbursable, shall be in accordance with the
rates prescribed for each of the following officials and employees and those of equivalent ranks,
and the conditions enumerated under the pertinent sections of the General Provisions of the
annual General Appropriations Act (GAA):

xxx xxx xxx

4. Funding Source:

In all cases, commutable and reimbursable RATA shall be paid from the amount appropriated
for the purpose and other personal services savings of the agency or project from where the
officials and employees covered under this Circular draw their salaries. No one shall be allowed
to collect RATA from more than one source. (Italics ours)

In construing NCC No. 67, we apply the principle in statutory construction that force and effect
should not be narrowly given to isolated and disjoined clauses of the law but to its spirit, broadly
taking all its provisions together in one rational view. Because a statute is enacted as a whole and
not in parts or sections, that is, one part is as important as the others, the statute should be
construed and given effect as a whole. A provision or section which is unclear by itself may be
clarified by reading and construing it in relation to the whole statute.

Taking NCC No. 67 as a whole then, what it seeks to prevent is the dual collection of RATA by
a national official from the budgets of "more than one national agency." We emphasize that the
other source referred to in the prohibition is another national agency. This can be gleaned from
the fact that the sentence "no one shall be allowed to collect RATA from more than one source"
(the controversial prohibition) immediately follows the sentence that RATA shall be paid from
the budget of the national agency where the concerned national officials and employees draw
their salaries. The fact that the other source is another national agency is supported by RA 7645
(the GAA of 1993) invoked by respondent COA itself and, in fact, by all subsequent GAAs for
that matter, because the GAAs all essentially provide that (1) the RATA of national officials
shall be payable from the budgets of their respective national agencies and (2) those officials on
detail with other national agencies shall be paid their RATA only from the budget of their parent
national agency:

xxx xxx xxx

Clearly therefore, the prohibition in NCC No. 67 is only against the dual or multiple collection of
RATA by a national official from the budgets of two or more national agencies. Stated
otherwise, when a national official is on detail with another national agency, he should get his
RATA only from his parent national agency and not from the other national agency he is detailed
to.19 (Italics supplied.)

Moreover, Section 6 of Republic Act No. 7653 (The New Central Bank Act) defines that the
powers and functions of the BSP shall be exercised by the BSP Monetary Board, which is
composed of seven (7) members appointed by the President of the Philippines for a term of six
(6) years. MB Resolution No. 15,20 dated January 5, 1994, as amended by MB Resolution No.
34, dated January 12, 1994, are valid corporate acts of petitioners that became the bases for
granting them additional monthly RATA of ₱1,500.00, as members of the Board of Directors of
PICCI. The RATA is distinct from salary (as a form of compensation). Unlike salary which is
paid for services rendered, the RATA is a form of allowance intended to defray expenses deemed
unavoidable in the discharge of office. Hence, the RATA is paid only to certain officials who, by
the nature of their offices, incur representation and transportation expenses.21 Indeed, aside from
the RATA that they have been receiving from the BSP, the grant of ₱1,500.00 RATA to each of
the petitioners for every board meeting they attended, in their capacity as members of the Board
of Directors of PICCI, in addition to their ₱1,000.00 per diem, does not run afoul the
constitutional proscription against double compensation.

Petitioners invoke the ruling of ADEPT v. COA22 whereby the Court took into consideration the
good faith of therein petitioners and, thus, allowed them to retain the incentive benefits they had
received for the year 1992.

Respondent points out that the records of the case do not support petitioners’ claim of good faith,
because they themselves were the authors of the By-Laws of PICCI which prohibit the receipt of
compensation other than per diems and, therefore, should have been conversant with the
constitutional prohibition on double compensation.

The Court upholds the findings of respondent that petitioners’ right to compensation as members
of the PICCI Board of Directors is limited only to per diem of ₱1,000.00 for every meeting
attended, by virtue of the PICCI By-Laws. In the same vein, we also clarify that there has been
no double compensation despite the fact that, apart from the RATA they have been receiving
from the BSP, petitioners have been granted the RATA of ₱1,500.00 for every board meeting
they attended, in their capacity as members of the Board of Directors of PICCI, pursuant to MB
Resolution No. 1523 dated January 5, 1994, as amended by MB Resolution No. 34 dated January
12, 1994, of the Bangko Sentral ng Pilipinas. In this regard, we take into consideration the good
faith of petitioners.

The ruling in Blaquera, to which the cited case of ADEPT v. COA was consolidated with, is
applicable to the present case as petitioners acted in good faith. The disposition in De Jesus v.
Commission on Audit,24 which cited Blaquera, is instructive:

Nevertheless, our pronouncement in Blaquera v. Alcala25 supports petitioners’ position on the

refund of the benefits they received. In Blaquera, the officials and employees of several
government departments and agencies were paid incentive benefits which the COA disallowed
on the ground that Administrative Order No. 29 dated 19 January 1993 prohibited payment of
these benefits. While the Court sustained the COA on the disallowance, it nevertheless declared
that:

Considering, however, that all the parties here acted in good faith, we cannot countenance the
refund of subject incentive benefits for the year 1992, which amounts the petitioners have
already received. Indeed, no indicia of bad faith can be detected under the attendant facts and
circumstances. The officials and chiefs of offices concerned disbursed such incentive benefits in
the honest belief that the amounts given were due to the recipients and the latter accepted the
same with gratitude, confident that they richly deserve such benefits.
This ruling in Blaquera applies to the instant case. Petitioners here received the additional
allowances and bonuses in good faith under the honest belief that LWUA Board Resolution No.
313 authorized such payment. At the time petitioners received the additional allowances and
bonuses, the Court had not yet decided Baybay Water District [v. Commission on Audit].26
Petitioners had no knowledge that such payment was without legal basis. Thus, being in good
faith, petitioners need not refund the allowances and bonuses they received but disallowed by the
COA.27

In subsequent cases,28 the Court took into account the good faith of the recipients of the
allowances, bonuses, and other benefits disallowed by respondent and ruled that they need not
refund the same.

As petitioners believed in good faith that they are entitled to the RATA of ₱1,500.00 for every
board meeting they attended, in their capacity as members of the Board of Directors of PICCI,
pursuant to MB Resolution No. 1529 dated January 5, 1994, as amended by MB Resolution No.
34 dated January 12, 1994, of the BSP, the Court sees no need for them to refund their RATA
respectively, in the total amount of ₱1,565,000.00, covering the period from 1996-1998.

WHEREFORE, the petition is DISMISSED. Decision No. 2002-081, dated April 23, 2002, of
the Commission on Audit and its Resolution No. 2003-115, dated July 31, 2003, which denied
petitioners’ motion for reconsideration thereof and upheld the disallowance of petitioners’
Representation and Transportation Allowance (RATA) in the total amount of ₱1,565,000.00
under Notice of Disallowance No. 99-001-101 (96-96) dated June 7, 1999, are AFFIRMED
WITH MODIFICATION. Petitioners need not refund the Representation and Transportation
Allowance (RATA) they received pursuant to Monetary Board Resolution No. 1530 dated
January 5, 1994, as amended by Monetary Board Resolution No. 34 dated January 12, 1994, of
the Bangko Sentral ng Pilipinas granting each of them an additional monthly RATA of
₱1,500.00, for every meeting attended, in their capacity as members of the Board of Directors of
Philippine International Convention Center, Inc. (PICCI), or in the total amount of
₱1,565,000.00, covering the period from 1996-1998.

SO ORDERED.

9.

G.R. No. 157479 November 24, 2010

PHILIP TURNER and ELNORA TURNER, Petitioners,

vs.
LORENZO SHIPPING CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

This case concerns the right of dissenting stockholders to demand payment of the value of their
shareholdings.

In the stockholders’ suit to recover the value of their shareholdings from the corporation, the
Regional Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered
the corporation, herein respondent, to pay. Execution was partially carried out against the
respondent. On the respondent’s petition for certiorari, however, the Court of Appeals (CA)
corrected the RTC and dismissed the petitioners’ suit on the ground that their cause of action for
collection had not yet accrued due to the lack of unrestricted retained earnings in the books of the
respondent.
Thus, the petitioners are now before the Court to challenge the CA’s decision promulgated on
March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon.
Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional Trial Court of
Manila, et al.1

Antecedents

The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged
primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles
of incorporation to remove the stockholders’ pre-emptive rights to newly issued shares of stock.
Feeling that the corporate move would be prejudicial to their interest as stockholders, the
petitioners voted against the amendment and demanded payment of their shares at the rate of
₱2.276/share based on the book value of the shares, or a total of ₱2,298,760.00.

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It
insisted that the market value on the date before the action to remove the pre-emptive right was
taken should be the value, or ₱0.41/share (or a total of ₱414,100.00), considering that its shares
were listed in the Philippine Stock Exchange, and that the payment could be made only if the
respondent had unrestricted retained earnings in its books to cover the value of the shares, which
was not the case.

The disagreement on the valuation of the shares led the parties to constitute an appraisal
committee pursuant to Section 82 of the Corporation Code, each of them nominating a
representative, who together then nominated the third member who would be chairman of the
appraisal committee. Thus, the appraisal committee came to be made up of Reynaldo Yatco, the
petitioners’ nominee; Atty. Antonio Acyatan, the respondent’s nominee; and Leo Anoche of the
Asian Appraisal Company, Inc., the third member/chairman.

On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for an
aggregate value of ₱2,565,400.00 for the petitioners.2

Subsequently, the petitioners demanded payment based on the valuation of the appraisal
committee, plus 2%/month penalty from the date of their original demand for payment, as well
as the reimbursement of the amounts advanced as professional fees to the appraisers.3

In its letter to the petitioners dated January 2, 2001,4 the respondent refused the petitioners’
demand, explaining that pursuant to the Corporation Code, the dissenting stockholders exercising
their appraisal rights could be paid only when the corporation had unrestricted retained earnings
to cover the fair value of the shares, but that it had no retained earnings at the time of the
petitioners’ demand, as borne out by its Financial Statements for Fiscal Year 1999 showing a
deficit of ₱72,973,114.00 as of December 31, 1999.

Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and
damages in the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No.
01-086, was initially assigned to Branch 132.5

On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:

7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN

MILLION NINE HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED
NINETY (P11,975,490.00) PESOS, Philippine Currency, evidenced by its Financial
Statement as of the Quarter Ending March 31, 2002; xxx

8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal Committee
is final, that the same cannot be disputed xxx
 9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled,
as a matter of right, to a summary judgment. xxx 6

The respondent opposed the motion for partial summary judgment, stating that the determination
of the unrestricted retained earnings should be made at the end of the fiscal year of the
respondent, and that the petitioners did not have a cause of action against the respondent.

During the pendency of the motion for partial summary judgment, however, the Presiding Judge
of Branch 133 transmitted the records to the Clerk of Court for re-raffling to any of the RTC’s
special commercial courts in Makati City due to the case being an intra-corporate dispute. Hence,
Civil Case No. 01-086 was re-raffled to Branch 142.

Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-
086 was ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio
Tipon,7 pursuant to the Interim Rules of Procedure on Intra-Corporate Controversies (Interim
Rules) requiring intra-corporate cases to be brought in the RTC exercising jurisdiction over the
place where the principal office of the corporation was found.

After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners’
counsel did not attend, Judge Tipon issued an order,8 granting the petitioners’ motion for partial
summary judgment, stating:

As to the motion for partial summary judgment, there is no question that the 3-man committee
mandated to appraise the shareholdings of plaintiff submitted its recommendation on October 27,
2000 fixing the fair value of the shares of stocks of the plaintiff at P2.54 per share. Under Section
82 of the Corporation Code:

"The findings of the majority of the appraisers shall be final, and the award shall be paid by the
corporation within thirty (30) days after the award is made."

"The only restriction imposed by the Corporation Code is–"

"That no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earning in its books to cover such payment."

The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted
to the Securities and Exchange Commission, the defendant has retained earnings of P11,975,490
as of March 21, 2002. This is not disputed by the defendant. Its only argument against paying is
that there must be unrestricted retained earning at the time the demand for payment is made.

This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not
say that the unrestricted retained earnings must exist at the time of the demand. Even if there are
no retained earnings at the time the demand is made if there are retained earnings later, the fair
value of such stocks must be paid. The only restriction is that there must be sufficient funds to
cover the creditors after the dissenting stockholder is paid. No such allegations have been made
by the defendant.9

On November 12, 2002, the respondent filed a motion for reconsideration.

On the scheduled hearing of the motion for reconsideration on November 22, 2002, the
petitioners filed a motion for immediate execution and a motion to strike out motion for
reconsideration. In the latter motion, they pointed out that the motion for reconsideration was
prohibited by Section 8 of the Interim Rules. Thus, also on November 22, 2002, Judge Tipon
denied the motion for reconsideration and granted the petitioners’ motion for immediate
execution.10

Subsequently, on November 28, 2002, the RTC issued a writ of execution.11

Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge
the two aforecited orders of Judge Tipon, claiming that:

A.

JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY

JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT THE TIME THE
"COMPLAINT" WAS FILED, LSC HAD NO RETAINED EARNINGS, AND THUS
WAS COMPLYING WITH THE LAW, AND NOT VIOLATING ANY RIGHTS OF
THE SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF
THEIR LSC SHARES. ANY RETAINED EARNINGS MADE A YEAR AFTER THE
"COMPLAINT" WAS FILED ARE IRRELEVANT TO THE SPOUSES TURNER’S
RIGHT TO RECOVER UNDER THE "COMPLAINT", BECAUSE THE WELL-
SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPON’S ATTENTION, IS
"IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED THE
SUIT CANNOT BE MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY
HAVE ACCRUED THEREAFTER.

B.

JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY

ABUSED HIS DISCRETION, WHEN HE GRANTED AND ISSUED THE
QUESTIONED "WRIT OF EXECUTION" DIRECTING THE EXECUTION OF HIS
PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES TURNER,
BECAUSE THAT JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1
OF RULE 39 OF THE RULES OF COURT AND THEREFORE CANNOT BE
SUBJECT OF EXECUTION UNDER THE SUPREME COURT’S CATEGORICAL
HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF APPEALS.

Upon the respondent’s application, the CA issued a temporary restraining order (TRO), enjoining
the petitioners, and their agents and representatives from enforcing the writ of execution. By
then, however, the writ of execution had been partially enforced.

The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the
execution. Thereupon, the sheriff resumed the enforcement of the writ of execution.

The CA promulgated its assailed decision on March 4, 2003,12 pertinently holding:

However, it is clear from the foregoing that the Turners’ appraisal right is subject to the legal
condition that no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment. Thus, the Supreme Court held
that:

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which means that the capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a
corporation are preferred over the stockholders in the distribution of corporate assets. There can
be no distribution of assets among the stockholders without first paying corporate creditors.
Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Creditors
of a corporation have the right to assume that so long as there are outstanding debts and
liabilities, the board of directors will not use the assets of the corporation to purchase its own
stock.

In the instant case, it was established that there were no unrestricted retained earnings when the
Turners filed their Complaint. In a letter dated 20 August 2000, petitioner informed the Turners
that payment of their shares could only be made if it had unrestricted earnings in its books to
cover the same. Petitioner reiterated this in a letter dated 2 January 2001 which further informed
the Turners that its Financial Statement for fiscal year 1999 shows that its retained earnings
ending December 31, 1999 was at a deficit in the amount of ₱72,973,114.00, a matter which has
not been disputed by private respondents. Hence, in accordance with the second paragraph of
sec. 82, BP 68 supra, the Turners’ right to payment had not yet accrued when they filed their
Complaint on January 22, 2001, albeit their appraisal right already existed.

In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court
declared that:

Now, before an action can properly be commenced all the essential elements of the cause of
action must be in existence, that is, the cause of action must be complete. All valid conditions
precedent to the institution of the particular action, whether prescribed by statute, fixed by
agreement of the parties or implied by law must be performed or complied with before
commencing the action, unless the conduct of the adverse party has been such as to prevent or
waive performance or excuse non-performance of the condition.

It bears restating that a right of action is the right to presently enforce a cause of action, while a
cause of action consists of the operative facts which give rise to such right of action. The right of
action does not arise until the performance of all conditions precedent to the action and may be
taken away by the running of the statute of limitations, through estoppel, or by other
circumstances which do not affect the cause of action. Performance or fulfillment of all
conditions precedent upon which a right of action depends must be sufficiently alleged,
considering that the burden of proof to show that a party has a right of action is upon the person
initiating the suit.

The Turners’ right of action arose only when petitioner had already retained earnings in the
amount of ₱11,975,490.00 on March 21, 2002; such right of action was inexistent on January 22,
2001 when they filed the Complaint.

In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court ruled:

Subject to certain qualifications, and except as otherwise provided by law, an action commenced
before the cause of action has accrued is prematurely brought and should be dismissed. The fact
that the cause of action accrues after the action is commenced and while it is pending is of no
moment. It is a rule of law to which there is, perhaps, no exception, either at law or in equity,
that to recover at all there must be some cause of action at the commencement of the suit. There
are reasons of public policy why there should be no needless haste in bringing up litigation, and
why people who are in no default and against whom there is as yet no cause of action should not
be summoned before the public tribunals to answer complaints which are groundless. An action
prematurely brought is a groundless suit. Unless the plaintiff has a valid and subsisting cause of
action at the time his action is commenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a supplemental complaint or an
amendment setting up such after-accrued cause of action is not permissible.

The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of
Appeals.

The Turners’ apprehension that their claim for payment may prescribe if they wait for the
petitioner to have unrestricted retained earnings is misplaced. It is the legal possibility of
bringing the action that determines the starting point for the computation of the period of
prescription. Stated otherwise, the prescriptive period is to be reckoned from the accrual of their
right of action.

Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the
herein Complaint and issued the assailed Orders. Excess of jurisdiction is the state of being
beyond or outside the limits of jurisdiction, and as distinguished from the entire absence of
jurisdiction, means that the act although within the general power of the judge, is not authorized
and therefore void, with respect to the particular case, because the conditions which authorize the
exercise of his general power in that particular case are wanting, and hence, the judicial power is
not in fact lawfully invoked.

We find no necessity to discuss the second ground raised in this petition.

WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the
corresponding Writs of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby
ordered DISMISSED without prejudice to refiling by the private respondents of the action for
enforcement of their right to payment as withdrawing stockholders.

SO ORDERED.

The petitioners now come to the Court for a review on certiorari of the CA’s decision, submitting
that:

I.

THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT

GRANTED THE PETITION FOR CERTIORARI WHEN THE REGIONAL TRIAL COURT
OF MANILA DID NOT ACT BEYOND ITS JURISDICTION AMOUNTING TO LACK OF
JURISDICTION IN GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT
AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;

II.

THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT

ORDERED THE DISMISSAL OF THE CASE, WHEN THE PETITION FOR CERTIORARI
MERELY SOUGHT THE ANNULMENT OF THE ORDER GRANTING THE MOTION FOR
PARTIAL SUMMARY JUDGMENT AND OF THE ORDER GRANTING THE MOTION
FOR IMMEDIATE EXECUTION OF THE JUDGMENT;

III.

THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE

NOT THEREFORE DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT
IN A WAY NOT IN ACCORD WITH LAW OR WITH JURISPRUDENCE.

Ruling

The petition fails.

The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the
petitioners’ complaint in Civil Case No. 01-086, and in rendering the summary judgment and
issuing writ of execution.

A.

Stockholder’s Right of Appraisal, In General

A stockholder who dissents from certain corporate actions has the right to demand payment of
the fair value of his or her shares. This right, known as the right of appraisal, is expressly
recognized in Section 81 of the Corporation Code, to wit:

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall 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 stockholder 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 the Code; and

3. In case of merger or consolidation. (n)

Clearly, the right of appraisal may be exercised when there is a fundamental change in the
charter or articles of incorporation substantially prejudicing the rights of the stockholders. It does
not vest unless objectionable corporate action is taken.13 It serves the purpose of enabling the
dissenting stockholder to have his interests purchased and to retire from the
corporation.141avvphil

Under the common law, there were originally conflicting views on whether a corporation had the
power to acquire or purchase its own stocks. In England, it was held invalid for a corporation to
purchase its issued stocks because such purchase was an indirect method of reducing capital
(which was statutorily restricted), aside from being inconsistent with the privilege of limited
liability to creditors.15 Only a few American jurisdictions adopted by decision or statute the strict
English rule forbidding a corporation from purchasing its own shares. In some American states
where the English rule used to be adopted, statutes granting authority to purchase out of surplus
funds were enacted, while in others, shares might be purchased even out of capital provided the
rights of creditors were not prejudiced.16 The reason underlying the limitation of share purchases
sprang from the necessity of imposing safeguards against the depletion by a corporation of its
assets and against the impairment of its capital needed for the protection of creditors.17

Now, however, a corporation can purchase its own shares, provided payment is made out of
surplus profits and the acquisition is for a legitimate corporate purpose.18 In the Philippines, this
new rule is embodied in Section 41 of the Corporation Code, to wit:

Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not
limited to the following cases: Provided, That the corporation has unrestricted retained earnings
in its books to cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares

under the provisions of this Code. (n)

The Corporation Code defines how the right of appraisal is exercised, as well as the implications
of the right of appraisal, as follows:

1. The appraisal right is exercised by any stockholder who has voted against the proposed
corporate action by making a written demand on the corporation within 30 days after the date on
which the vote was taken for the payment of the fair value of his shares. The failure to make the
demand within the period is deemed a waiver of the appraisal right.19

2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares
within a period of 60 days from the date the stockholders approved the corporate action, the fair
value shall be determined and appraised by three disinterested persons, one of whom shall be
named by the stockholder, another by the corporation, and the third by the two thus chosen. The
findings and award of the majority of the appraisers shall be final, and the corporation shall pay
their award within 30 days after the award is made. Upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer his or her shares to the
corporation.20

3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend
rights, shall be suspended from the time of demand for the payment of the fair value of the shares
until either the abandonment of the corporate action involved or the purchase of the shares by the
corporation, except the right of such stockholder to receive payment of the fair value of the
shares.21

4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall
submit to the corporation the certificates of stock representing his shares for notation thereon that
such shares are dissenting shares. A failure to do so shall, at the option of the corporation,
terminate his rights under this Title X of the Corporation Code. If shares represented by the
certificates bearing such notation are transferred, and the certificates are consequently canceled,
the rights of the transferor as a dissenting stockholder under this Title shall cease and the
transferee shall have all the rights of a regular stockholder; and all dividend distributions that
would have accrued on such shares shall be paid to the transferee.22

5. If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.23

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to cover the payment. In case the
corporation has no available unrestricted retained earnings in its books, Section 83 of the
Corporation Code provides that if the dissenting stockholder is not paid the value of his shares
within 30 days after the award, his voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded as equity in trust for the payment
of corporate creditors, who are preferred in the distribution of corporate assets.24 The creditors of
a corporation have the right to assume that the board of directors will not use the assets of the
corporation to purchase its own stock for as long as the corporation has outstanding debts and
liabilities.25 There can be no distribution of assets among the stockholders without first paying
corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors
is null and void.26

B.

Petitioners’ cause of action was premature

That the respondent had indisputably no unrestricted retained earnings in its books at the time the
petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondent’s
legal obligation to pay the value of the petitioners’ shares did not yet arise. Thus, the CA did not
err in holding that the petitioners had no cause of action, and in ruling that the RTC did not
validly render the partial summary judgment.

A cause of action is the act or omission by which a party violates a right of another.27 The
essential elements of a cause of action are: (a) the existence of a legal right in favor of the
plaintiff; (b) a correlative legal duty of the defendant to respect such right; and (c) an act or
omission by such defendant in violation of the right of the plaintiff with a resulting injury or
damage to the plaintiff for which the latter may maintain an action for the recovery of relief from
the defendant.28 Although the first two elements may exist, a cause of action arises only upon the
occurrence of the last element, giving the plaintiff the right to maintain an action in court for
recovery of damages or other appropriate relief.29

Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based
on a cause of action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for
being without any cause of action.

The RTC concluded that the respondent’s obligation to pay had accrued by its having the
unrestricted retained earnings after the making of the demand by the petitioners. It based its
conclusion on the fact that the Corporation Code did not provide that the unrestricted retained
earnings must already exist at the time of the demand.

The RTC’s construal of the Corporation Code was unsustainable, because it did not take into
account the petitioners’ lack of a cause of action against the respondent. In order to give rise to
any obligation to pay on the part of the respondent, the petitioners should first make a valid
demand that the respondent refused to pay despite having unrestricted retained earnings.
Otherwise, the respondent could not be said to be guilty of any actionable omission that could
sustain their action to collect.

Neither did the subsequent existence of unrestricted retained earnings after the filing of the
complaint cure the lack of cause of action in Civil Case No. 01-086. The petitioners’ right of
action could only spring from an existing cause of action. Thus, a complaint whose cause of
action has not yet accrued cannot be cured by an amended or supplemental pleading alleging the
existence or accrual of a cause of action during the pendency of the action.30 For, only when
there is an invasion of primary rights, not before, does the adjective or remedial law become
operative.31 Verily, a premature invocation of the court’s intervention renders the complaint
without a cause of action and dismissible on such ground.32 In short, Civil Case No. 01-086,
being a groundless suit, should be dismissed.

Even the fact that the respondent already had unrestricted retained earnings more than sufficient
to cover the petitioners’ claims on June 26, 2002 (when they filed their motion for partial
summary judgment) did not rectify the absence of the cause of action at the time of the
commencement of Civil Case No. 01-086. The motion for partial summary judgment, being a
mere application for relief other than by a pleading,33 was not the same as the complaint in Civil
Case No. 01-086. Thereby, the petitioners did not meet the requirement of the Rules of Court
that a cause of action must exist at the commencement of an action, which is "commenced by the
filing of the original complaint in court."34

The petitioners claim that the respondent’s petition for certiorari sought only the annulment of
the assailed orders of the RTC (i.e., granting the motion for partial summary judgment and the
motion for immediate execution); hence, the CA had no right to direct the dismissal of Civil
Case No. 01-086.

The claim of the petitioners cannot stand.

Although the respondent’s petition for certiorari targeted only the RTC’s orders granting the
motion for partial summary judgment and the motion for immediate execution, the CA’s
directive for the dismissal of Civil Case No. 01-086 was not an abuse of discretion, least of all
grave, because such dismissal was the only proper thing to be done under the circumstances.
According to Surigao Mine Exploration Co., Inc. v. Harris:35

Subject to certain qualification, and except as otherwise provided by law, an action commenced
before the cause of action has accrued is prematurely brought and should be dismissed. The
fact that the cause of action accrues after the action is commenced and while the case is pending
is of no moment. It is a rule of law to which there is, perhaps no exception, either in law or in
equity, that to recover at all there must be some cause of action at the commencement of the suit.
There are reasons of public policy why there should be no needless haste in bringing up
litigation, and why people who are in no default and against whom there is as yet no cause of
action should not be summoned before the public tribunals to answer complaints which are
groundless. An action prematurely brought is a groundless suit. Unless the plaintiff has a valid
and subsisting cause of action at the time his action is commenced, the defect cannot be
cured or remedied by the acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-accrued cause of action is not
permissible.

Lastly, the petitioners argue that the respondent’s recourse of a special action for certiorari was
the wrong remedy, in view of the fact that the granting of the motion for partial summary
judgment constituted only an error of law correctible by appeal, not of jurisdiction.

The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it
exceeded its jurisdiction by taking cognizance of the complaint that was not based on an existing
cause of action.

WHEREFORE, the petition for review on certiorari is denied for lack of merit.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled
Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of
Branch 46 of the Regional Trial Court of Manila, et al.

Costs of suit to be paid by the petitioners.

SO ORDERED.

10.

G.R. No. 171993 December 12, 2011

MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners,

vs.
ALFREDO M. JOSON, Respondent.

DECISION

PEREZ, J.:

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners
Marc II Marketing, Inc. and Lucila V. Joson assailed the Decision1 dated 20 June 2005 of the
Court of Appeals in CA-G.R. SP No. 76624 for reversing and setting aside the Resolution2 of the
National Labor Relations Commission (NLRC) dated 15 October 2002, thereby affirming the
Labor Arbiter’s Decision3 dated 1 October 2001 finding herein respondent Alfredo M. Joson’s
dismissal from employment as illegal. In the questioned Decision, the Court of Appeals upheld
the Labor Arbiter’s jurisdiction over the case on the basis that respondent was not an officer but
a mere employee of petitioner Marc II Marketing, Inc., thus, totally disregarding the latter’s
allegation of intra-corporate controversy. Nonetheless, the Court of Appeals remanded the case
to the NLRC for further proceedings to determine the proper amount of monetary awards that
should be given to respondent.

Assailed as well is the Court of Appeals Resolution4 dated 7 March 2006 denying their Motion
for Reconsideration.

Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and
existing under and by virtue of the laws of the Philippines. It is primarily engaged in buying,
marketing, selling and distributing in retail or wholesale for export or import household
appliances and products and other items.5 It took over the business operations of Marc
Marketing, Inc. which was made non-operational following its incorporation and registration
with the Securities and Exchange Commission (SEC). Petitioner Lucila V. Joson (Lucila) is the
President and majority stockholder of petitioner corporation. She was also the former President
and majority stockholder of the defunct Marc Marketing, Inc.

Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager,
incorporator, director and stockholder of petitioner corporation.

The controversy of this case arose from the following factual milieu:

Before petitioner corporation was officially incorporated,6 respondent has already been engaged
by petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to work as the General
Manager of petitioner corporation. It was formalized through the execution of a Management
Contract7 dated 16 January 1994 under the letterhead of Marc Marketing, Inc.8 as petitioner
corporation is yet to be incorporated at the time of its execution. It was explicitly provided
therein that respondent shall be entitled to 30% of its net income for his work as General
Manager. Respondent will also be granted 30% of its net profit to compensate for the possible
loss of opportunity to work overseas.9

Pending incorporation of petitioner corporation, respondent was designated as the General

Manager of Marc Marketing, Inc., which was then in the process of winding up its business. For
occupying the said position, respondent was among its corporate officers by the express
provision of Section 1, Article IV10 of its by-laws.11

On 15 August 1994, petitioner corporation was officially incorporated and registered with the
SEC. Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to
discharge his duties as General Manager but this time under petitioner corporation.

Pursuant to Section 1, Article IV12 of petitioner corporation’s by-laws,13 its corporate officers are
as follows: Chairman, President, one or more Vice-President(s), Treasurer and Secretary. Its
Board of Directors, however, may, from time to time, appoint such other officers as it may
determine to be necessary or proper.

Per an undated Secretary’s Certificate,14 petitioner corporation’s Board of Directors conducted a

meeting on 29 August 1994 where respondent was appointed as one of its corporate officers with
the designation or title of General Manager to function as a managing director with other duties
and responsibilities that the Board of Directors may provide and authorized.15

Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations, as
evidenced by an Affidavit of Non-Operation16 dated 31 August 1998, due to poor sales collection
aggravated by the inefficient management of its affairs. On the same date, it formally informed
respondent of the cessation of its business operation. Concomitantly, respondent was apprised of
the termination of his services as General Manager since his services as such would no longer be
necessary for the winding up of its affairs.17

Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against
petitioners before the Labor Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-
99.

In his complaint, respondent averred that petitioner Lucila dismissed him from his employment
with petitioner corporation due to the feeling of hatred she harbored towards his family. The
same was rooted in the filing by petitioner Lucila’s estranged husband, who happened to be
respondent’s brother, of a Petition for Declaration of Nullity of their Marriage.18

For the parties’ failure to settle the case amicably, the Labor Arbiter required them to submit
their respective position papers. Respondent complied but petitioners opted to file a Motion to
Dismiss grounded on the Labor Arbiter’s lack of jurisdiction as the case involved an intra-
corporate controversy, which jurisdiction belongs to the SEC [now with the Regional Trial Court
(RTC)].19 Petitioners similarly raised therein the ground of prescription of respondent’s monetary
claim.

On 5 September 2000, the Labor Arbiter issued an Order20 deferring the resolution of petitioners’
Motion to Dismiss until the final determination of the case. The Labor Arbiter also reiterated his
directive for petitioners to submit position paper. Still, petitioners did not comply. Insisting that
the Labor Arbiter has no jurisdiction over the case, they instead filed an Urgent Motion to
Resolve the Motion to Dismiss and the Motion to Suspend Filing of Position Paper.

In an Order21 dated 15 February 2001, the Labor Arbiter denied both motions and declared final
the Order dated 5 September 2000. The Labor Arbiter then gave petitioners a period of five days
from receipt thereof within which to file position paper, otherwise, their Motion to Dismiss will
be treated as their position paper and the case will be considered submitted for decision.

Petitioners, through counsel, moved for extension of time to submit position paper. Despite the
requested extension, petitioners still failed to submit the same. Accordingly, the case was
submitted for resolution.

On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal
portion reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered declaring [respondent’s]

dismissal from employment illegal. Accordingly, [petitioners] are hereby ordered:

1. To reinstate [respondent] to his former or equivalent position without loss of seniority

rights, benefits, and privileges;

2. Jointly and severally liable to pay [respondent’s] unpaid wages in the amount of
₱450,000.00 per month from [26 March 1996] up to time of dismissal in the total amount
of ₱6,300,000.00;

3. Jointly and severally liable to pay [respondent’s] full backwages in the amount of
₱450,000.00 per month from date of dismissal until actual reinstatement which at the
time of promulgation amounted to ₱21,600,000.00;

4. Jointly and severally liable to pay moral damages in the amount of ₱100,000.00 and
attorney’s fees in the amount of 5% of the total monetary award.22 [Emphasis supplied.]

In the aforesaid Decision, the Labor Arbiter initially resolved petitioners’ Motion to Dismiss by
finding the ground of lack of jurisdiction to be without merit. The Labor Arbiter elucidated that
petitioners failed to adduce evidence to prove that the present case involved an intra-corporate
controversy. Also, respondent’s money claim did not arise from his being a director or
stockholder of petitioner corporation but from his position as being its General Manager. The
Labor Arbiter likewise held that respondent was not a corporate officer under petitioner
corporation’s by-laws. As such, respondent’s complaint clearly arose from an employer-
employee relationship, thus, subject to the Labor Arbiter’s jurisdiction.

The Labor Arbiter then declared respondent’s dismissal from employment as illegal.
Respondent, being a regular employee of petitioner corporation, may only be dismissed for a
valid cause and upon proper compliance with the requirements of due process. The records,
though, revealed that petitioners failed to present any evidence to justify respondent’s dismissal.

Aggrieved, petitioners appealed the aforesaid Labor Arbiter’s Decision to the NLRC.
In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving
credence to the Secretary’s Certificate, which evidenced petitioner corporation’s Board of
Directors’ meeting in which a resolution was approved appointing respondent as its corporate
officer with designation as General Manager. Therefrom, the NLRC reversed and set aside the
Labor Arbiter’s Decision dated 1 October 2001 and dismissed respondent’s Complaint for want
of jurisdiction.23

The NLRC enunciated that the validity of respondent’s appointment and termination from the
position of General Manager was made subject to the approval of petitioner corporation’s Board
of Directors. Had respondent been an ordinary employee, such board action would not have been
required. As such, it is clear that respondent was a corporate officer whose dismissal involved a
purely intra-corporate controversy. The NLRC went further by stating that respondent’s claim
for 30% of the net profit of the corporation can only emanate from his right of ownership therein
as stockholder, director and/or corporate officer. Dividends or profits are paid only to
stockholders or directors of a corporation and not to any ordinary employee in the absence of any
profit sharing scheme. In addition, the question of remuneration of a person who is not a mere
employee but a stockholder and officer of a corporation is not a simple labor problem. Such
matter comes within the ambit of corporate affairs and management and is an intra-corporate
controversy in contemplation of the Corporation Code.24

When respondent’s Motion for Reconsideration was denied in another Resolution25 dated 23
January 2003, he filed a Petition for Certiorari with the Court of Appeals ascribing grave abuse
of discretion on the part of the NLRC.

On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the
Labor Arbiter has jurisdiction over the present controversy. It upheld the finding of the Labor
Arbiter that respondent was a mere employee of petitioner corporation, who has been illegally
dismissed from employment without valid cause and without due process. Nevertheless, it
ordered the records of the case remanded to the NLRC for the determination of the appropriate
amount of monetary awards to be given to respondent. The Court of Appeals, thus, decreed:

WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is

DECLARED to have jurisdiction over the controversy. The records are REMANDED to the
NLRC for further proceedings to determine the appropriate amount of monetary awards to be
adjudged in favor of [respondent]. Costs against the [petitioners] in solidum.26

Petitioners moved for its reconsideration but to no avail.27

Petitioners are now before this Court with the following assignment of errors:

THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF

DISCRETION IN DECIDING THAT THE NLRC HAS THE JURISDICTION IN
RESOLVING A PURELY INTRA-CORPORATE MATTER WHICH IS
COGNIZABLE BY THE SECURITIES AND EXCHANGE
COMMISSION/REGIONAL TRIAL COURT.

ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER

THE CASE, STILL THE COURT OF APPEALS SERIOUSLY ERRED IN NOT
RULING THAT THERE IS NO EMPLOYER-EMPLOYEE RELATIONSHIP
BETWEEN [RESPONDENT] ALFREDO M. JOSON AND MARC II MARKETING,
INC. [PETITIONER CORPORATION].

ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER

THE CASE, THE COURT OF APPEALS ERRED IN NOT RULING THAT THE
LABOR ARBITER COMMITTED GRAVE ABUSE OF DISCRETION IN
AWARDING MULTI-MILLION PESOS IN COMPENSATION AND BACKWAGES
 BASED ON THE PURPORTED GROSS INCOME OF [PETITIONER
CORPORATION].

THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE

ABUSE OF DISCRETION IN NOT MAKING ANY FINDINGS AND RULING THAT
[PETITIONER LUCILA] SHOULD NOT BE HELD SOLIDARILY LIABLE IN THE
ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH ON HER PART.28

Petitioners fault the Court of Appeals for having sustained the Labor Arbiter’s finding that
respondent was not a corporate officer under petitioner corporation’s by-laws. They insist that
there is no need to amend the corporate by-laws to specify who its corporate officers are. The
resolution issued by petitioner corporation’s Board of Directors appointing respondent as
General Manager, coupled with his assumption of the said position, positively made him its
corporate officer. More so, respondent’s position, being a creation of petitioner corporation’s
Board of Directors pursuant to its by-laws, is a corporate office sanctioned by the Corporation
Code and the doctrines previously laid down by this Court. Thus, respondent’s removal as
petitioner corporation’s General Manager involved a purely intra-corporate controversy over
which the RTC has jurisdiction.

Petitioners further contend that respondent’s claim for 30% of the net profit of petitioner
corporation was anchored on the purported Management Contract dated 16 January 1994. It
should be noted, however, that said Management Contract was executed at the time petitioner
corporation was still nonexistent and had no juridical personality yet. Such being the case,
respondent cannot invoke any legal right therefrom as it has no legal and binding effect on
petitioner corporation. Moreover, it is clear from the Articles of Incorporation of petitioner
corporation that respondent was its director and stockholder. Indubitably, respondent’s claim for
his share in the profit of petitioner corporation was based on his capacity as such and not by
virtue of any employer-employee relationship.

Petitioners further avow that even if the present case does not pose an intra-corporate
controversy, still, the Labor Arbiter’s multi-million peso awards in favor of respondent were
erroneous. The same was merely based on the latter’s self-serving computations without any
supporting documents.

Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner
corporation. There was neither allegation nor iota of evidence presented to show that she acted
with malice and bad faith in her dealings with respondent. Moreover, the Labor Arbiter, in his
Decision, simply concluded that petitioner Lucila was jointly and severally liable with petitioner
corporation without making any findings thereon. It was, therefore, an error for the Court of
Appeals to hold petitioner Lucila solidarily liable with petitioner corporation.

From the foregoing arguments, the initial question is which between the Labor Arbiter or the
RTC, has jurisdiction over respondent’s dismissal as General Manager of petitioner corporation.
Its resolution necessarily entails the determination of whether respondent as General Manager of
petitioner corporation is a corporate officer or a mere employee of the latter.

While Article 217(a)229 of the Labor Code, as amended, provides that it is the Labor Arbiter who
has the original and exclusive jurisdiction over cases involving termination or dismissal of
workers when the person dismissed or terminated is a corporate officer, the case automatically
falls within the province of the RTC. The dismissal of a corporate officer is always regarded as a
corporate act and/or an intra-corporate controversy.30

Under Section 531 of Presidential Decree No. 902-A, intra-corporate controversies are those
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. It also includes controversies in the election or
appointments of directors, trustees, officers or managers of such corporations, partnerships or
associations.32

Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the
controversy, the status or relationship of the parties and the nature of the question that is the
subject of their controversy must be taken into consideration.33

In Easycall Communications Phils., Inc. v. King, this Court held that in the context of
Presidential Decree No. 902-A, corporate officers are those officers of a corporation who are
given that character either by the Corporation Code or by the corporation’s by-laws. Section 2534
of the Corporation Code specifically enumerated who are these corporate officers, to wit: (1)
president; (2) secretary; (3) treasurer; and (4) such other officers as may be provided for in the
by-laws.35

The aforesaid Section 25 of the Corporation Code, particularly the phrase "such other officers as
may be provided for in the by-laws," has been clarified and elaborated in this Court’s recent
pronouncement in Matling Industrial and Commercial Corporation v. Coros, where it held, thus:

Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in order
to be considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-
[l]aw enabling provision is not enough to make a position a corporate office. [In] Guerrea v.
Lezama [citation omitted] the first ruling on the matter, held that the only officers of a
corporation were those given that character either by the Corporation Code or by the [b]y-[l]aws;
the rest of the corporate officers could be considered only as employees or subordinate officials.
Thus, it was held in Easycall Communications Phils., Inc. v. King [citation omitted]:

An "office" is created by the charter of the corporation and the officer is elected by the directors
or stockholders. On the other hand, an employee occupies no office and generally is employed
not by the action of the directors or stockholders but by the managing officer of the corporation
who also determines the compensation to be paid to such employee.

xxxx

This interpretation is the correct application of Section 25 of the Corporation Code, which
plainly states that the corporate officers are the President, Secretary, Treasurer and such other
officers as may be provided for in the [b]y-[l]aws. Accordingly, the corporate officers in the
context of PD No. 902-A are exclusively those who are given that character either by the
Corporation Code or by the corporation’s [b]y[l]aws.

A different interpretation can easily leave the way open for the Board of Directors to circumvent
the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in
the [b]y-[l]aws of an enabling clause on the creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency administering the
Corporation Code, adopted a similar interpretation of Section 25 of the Corporation Code in its
Opinion dated November 25, 1993 [citation omitted], to wit:

Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the
corporate officers enumerated in the by-laws are the exclusive Officers of the corporation and the
Board has no power to create other Offices without amending first the corporate [b]y-laws.
However, the Board may create appointive positions other than the positions of corporate
Officers, but the persons occupying such positions are not considered as corporate officers
within the meaning of Section 25 of the Corporation Code and are not empowered to exercise
the functions of the corporate Officers, except those functions lawfully delegated to them. Their
functions and duties are to be determined by the Board of Directors/Trustees.36 [Emphasis
supplied.]
A careful perusal of petitioner corporation’s by-laws, particularly paragraph 1, Section 1, Article
IV,37 would explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2)
President; (3) one or more Vice-President; (4) Treasurer; and (5) Secretary.38 The position of
General Manager was not among those enumerated.

Paragraph 2, Section 1, Article IV of petitioner corporation’s by-laws, empowered its Board of

Directors to appoint such other officers as it may determine necessary or proper.39 It is by virtue
of this enabling provision that petitioner corporation’s Board of Directors allegedly approved a
resolution to make the position of General Manager a corporate office, and, thereafter, appointed
respondent thereto making him one of its corporate officers. All of these acts were done without
first amending its by-laws so as to include the General Manager in its roster of corporate officers.

With the given circumstances and in conformity with Matling Industrial and Commercial
Corporation v. Coros, this Court rules that respondent was not a corporate officer of petitioner
corporation because his position as General Manager was not specifically mentioned in the roster
of corporate officers in its corporate by-laws. The enabling clause in petitioner corporation’s by-
laws empowering its Board of Directors to create additional officers, i.e., General Manager, and
the alleged subsequent passage of a board resolution to that effect cannot make such position a
corporate office. Matling clearly enunciated that the board of directors has no power to create
other corporate offices without first amending the corporate by-laws so as to include therein the
newly created corporate office. Though the board of directors may create appointive positions
other than the positions of corporate officers, the persons occupying such positions cannot be
viewed as corporate officers under Section 25 of the Corporation Code.40 In view thereof, this
Court holds that unless and until petitioner corporation’s by-laws is amended for the inclusion of
General Manager in the list of its corporate officers, such position cannot be considered as a
corporate office within the realm of Section 25 of the Corporation Code.

This Court considers that the interpretation of Section 25 of the Corporation Code laid down in
Matling safeguards the constitutionally enshrined right of every employee to security of tenure.
To allow the creation of a corporate officer position by a simple inclusion in the corporate by-
laws of an enabling clause empowering the board of directors to do so can result in the
circumvention of that constitutionally well-protected right.41

It is also of no moment that respondent, being petitioner corporation’s General Manager, was
given the functions of a managing director by its Board of Directors. As held in Matling, the only
officers of a corporation are those given that character either by the Corporation Code or by the
corporate by-laws. It follows then that the corporate officers enumerated in the by-laws are the
exclusive officers of the corporation while the rest could only be regarded as mere employees or
subordinate officials.42 Respondent, in this case, though occupying a high ranking and vital
position in petitioner corporation but which position was not specifically enumerated or
mentioned in the latter’s by-laws, can only be regarded as its employee or subordinate official.
Noticeably, respondent’s compensation as petitioner corporation’s General Manager was set,
fixed and determined not by the latter’s Board of Directors but simply by its President, petitioner
Lucila. The same was not subject to the approval of petitioner corporation’s Board of Directors.
This is an indication that respondent was an employee and not a corporate officer.

To prove that respondent was petitioner corporation’s corporate officer, petitioners presented
before the NLRC an undated Secretary’s Certificate showing that corporation’s Board of
Directors approved a resolution making respondent’s position of General Manager a corporate
office. The submission, however, of the said undated Secretary’s Certificate will not change the
fact that respondent was an employee. The certification does not amount to an amendment of the
by-laws which is needed to make the position of General Manager a corporate office.

Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned in
that undated Secretary’s Certificate and the latter itself were obvious fabrications, a mere
afterthought. Here we quote with conformity the Court of Appeals findings on this matter stated
in this wise:
The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29
August 1994], why did not [herein petitioners] attach it to their [M]otion to [D]ismiss filed on
[26 August 1999], when it could have been the best evidence that [herein respondent] was a
corporate officer? Secondly, why did they report the [respondent] instead as [herein petitioner
corporation’s] employee to the Social Security System [(SSS)] on [11 October 1994] or a later
date than their [29 August 1994] board resolution? Thirdly, why is there no indication that the
[respondent], the person concerned himself, and the [SEC] were furnished with copies of said
board resolution? And, lastly, why is the corporate [S]ecretary’s [C]ertificate not notarized in
keeping with the customary procedure? That is why we called it manipulative evidence as it was
a shameless sham meant to be thrown in as a wild card to muddle up the [D]ecision of the Labor
Arbiter to the end that it be overturned as the latter had firmly pointed out that [respondent] is not
a corporate officer under [petitioner corporation’s by-laws]. Regrettably, the [NLRC] swallowed
the bait hook-line-and sinker. It failed to see through its nature as a belatedly manufactured
evidence. And even on the assumption that it were an authentic board resolution, it did not make
[respondent] a corporate officer as the board did not first and properly create the position of a
[G]eneral [M]anager by amending its by-laws.

(2) The scope of the term "officer" in the phrase "and such other officers as may be
provided for in the by-laws["] (Sec. 25, par. 1), would naturally depend much on the
provisions of the by-laws of the corporation. (SEC Opinion, [4 December 1991.]) If the
by-laws enumerate the officers to be elected by the board, the provision is conclusive,
and the board is without power to create new offices without amending the by-laws.
(SEC Opinion, [19 October 1971.])

(3) If, for example, the general manager of a corporation is not listed as an officer, he is
to be classified as an employee although he has always been considered as one of the
principal officers of a corporation [citing De Leon, H. S., The Corporation Code of the
Philippines Annotated, 1993 Ed., p. 215.]43 [Emphasis supplied.]

That respondent was also a director and a stockholder of petitioner corporation will not
automatically make the case fall within the ambit of intra-corporate controversy and be subjected
to RTC’s jurisdiction. To reiterate, not all conflicts between the stockholders and the corporation
are classified as intra-corporate. Other factors such as the status or relationship of the parties and
the nature of the question that is the subject of the controversy44 must be considered in
determining whether the dispute involves corporate matters so as to regard them as intra-
corporate controversies.45 As previously discussed, respondent was not a corporate officer of
petitioner corporation but a mere employee thereof so there was no intra-corporate relationship
between them. With regard to the subject of the controversy or issue involved herein, i.e.,
respondent’s dismissal as petitioner corporation’s General Manager, the same did not present or
relate to an intra-corporate dispute. To note, there was no evidence submitted to show that
respondent’s removal as petitioner corporation’s General Manager carried with it his removal as
its director and stockholder. Also, petitioners’ allegation that respondent’s claim of 30% share of
petitioner corporation’s net profit was by reason of his being its director and stockholder was
without basis, thus, self-serving. Such an allegation was tantamount to a mere speculation for
petitioners’ failure to substantiate the same.

In addition, it was not shown by petitioners that the position of General Manager was offered to
respondent on account of his being petitioner corporation’s director and stockholder. Also, in
contrast to NLRC’s findings, neither petitioner corporation’s by-laws nor the Management
Contract stated that respondent’s appointment and termination from the position of General
Manager was subject to the approval of petitioner corporation’s Board of Directors. If, indeed,
respondent was a corporate officer whose termination was subject to the approval of its Board of
Directors, why is it that his termination was effected only by petitioner Lucila, President of
petitioner corporation? The records are bereft of any evidence to show that respondent’s
dismissal was done with the conformity of petitioner corporation’s Board of Directors or that the
latter had a hand on respondent’s dismissal. No board resolution whatsoever was ever presented
to that effect.
With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying
the General Manager position, was not a corporate officer of petitioner corporation rather he was
merely its employee occupying a high-ranking position.

Accordingly, respondent’s dismissal as petitioner corporation’s General Manager did not amount
to an intra-corporate controversy. Jurisdiction therefor properly belongs with the Labor Arbiter
and not with the RTC.

Having established that respondent was not petitioner corporation’s corporate officer but merely
its employee, and that, consequently, jurisdiction belongs to the Labor Arbiter, this Court will
now determine if respondent’s dismissal from employment is illegal.

It was not disputed that respondent worked as petitioner corporation’s General Manager from its
incorporation on 15 August 1994 until he was dismissed on 30 June 1997. The cause of his
dismissal was petitioner corporation’s cessation of business operations due to poor sales
collection aggravated by the inefficient management of its affairs.

In termination cases, the burden of proving just and valid cause for dismissing an employee from
his employment rests upon the employer. The latter's failure to discharge that burden would
necessarily result in a finding that the dismissal is unjustified.46

Under Article 283 of the Labor Code, as amended, one of the authorized causes in terminating
the employment of an employee is the closing or cessation of operation of the establishment or
undertaking. Article 283 of the Labor Code, as amended, reads, thus:

ART. 283. Closure of establishment and reduction of personnel. – The employer may also
terminate the employment of any employee due to the installation of labor saving-devices,
redundancy, retrenchment to prevent losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the workers and the Department of Labor
and Employment at least one (1) month before the intended date thereof. x x x In case of
retrenchment to prevent losses and in cases of closures or cessation of operations of
establishment or undertaking not due to serious business losses or financial reverses, the
separation pay shall be equivalent to one (1) month pay or to at least one-half (1/2) month pay
for every year of service, whichever is higher. A fraction of at least six (6) months shall be
considered one (1) whole year. [Emphasis supplied.]

From the afore-quoted provision, the closure or cessation of operations of establishment or

undertaking may either be due to serious business losses or financial reverses or otherwise. If the
closure or cessation was due to serious business losses or financial reverses, it is incumbent upon
the employer to sufficiently and convincingly prove the same. If it is otherwise, the employer can
lawfully close shop anytime as long as it was bona fide in character and not impelled by a motive
to defeat or circumvent the tenurial rights of employees and as long as the terminated employees
were paid in the amount corresponding to their length of service.47

Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a
valid cessation of business operations: (a) service of a written notice to the employees and to the
Department of Labor and Employment (DOLE) at least one month before the intended date
thereof; (b) the cessation of business must be bona fide in character; and (c) payment to the
employees of termination pay amounting to one month pay or at least one-half month pay for
every year of service, whichever is higher.

In this case, it is obvious that petitioner corporation’s cessation of business operations was not
due to serious business losses. Mere poor sales collection, coupled with mismanagement of its
affairs does not amount to serious business losses. Nonetheless, petitioner corporation can still
validly cease or close its business operations because such right is legally allowed, so long as it
was not done for the purpose of circumventing the provisions on termination of employment
embodied in the Labor Code.48 As has been stressed by this Court in Industrial Timber
Corporation v. Ababon, thus:

Just as no law forces anyone to go into business, no law can compel anybody to continue the
same. It would be stretching the intent and spirit of the law if a court interferes with
management's prerogative to close or cease its business operations just because the business is
not suffering from any loss or because of the desire to provide the workers continued
employment.49

A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and
ceased business operations beginning 30 June 1997. This was evidenced by a notarized Affidavit
of Non-Operation dated 31 August 1998. There was also no showing that the cessation of its
business operations was done in bad faith or to circumvent the Labor Code. Nevertheless, in
doing so, petitioner corporation failed to comply with the one-month prior written notice rule.
The records disclosed that respondent, being petitioner corporation’s employee, and the DOLE
were not given a written notice at least one month before petitioner corporation ceased its
business operations. Moreover, the records clearly show that respondent’s dismissal was effected
on the same date that petitioner corporation decided to stop and cease its operation. Similarly,
respondent was not paid separation pay upon termination of his employment.

As respondent’s dismissal was not due to serious business losses, respondent is entitled to
payment of separation pay equivalent to one month pay or at least one-half month pay for every
year of service, whichever is higher. The rationale for this was laid down in Reahs Corporation
v. National Labor Relations Commission,50 thus:

The grant of separation pay, as an incidence of termination of employment under Article 283, is
a statutory obligation on the part of the employer and a demandable right on the part of the
employee, except only where the closure or cessation of operations was due to serious business
losses or financial reverses and there is sufficient proof of this fact or condition. In the absence of
such proof of serious business losses or financial reverses, the employer closing his business is
obligated to pay his employees and workers their separation pay.

The rule, therefore, is that in all cases of business closure or cessation of operation or
undertaking of the employer, the affected employee is entitled to separation pay. This is
consistent with the state policy of treating labor as a primary social economic force, affording
full protection to its rights as well as its welfare. The exception is when the closure of business or
cessation of operations is due to serious business losses or financial reverses duly proved, in
which case, the right of affected employees to separation pay is lost for obvious reasons.51
[Emphasis supplied.]

As previously discussed, respondent’s dismissal was due to an authorized cause, however,

petitioner corporation failed to observe procedural due process in effecting such dismissal. In
Culili v. Eastern Telecommunications Philippines, Inc.,52 this Court made the following
pronouncements, thus:

x x x there are two aspects which characterize the concept of due process under the Labor Code:
one is substantive — whether the termination of employment was based on the provision of the
Labor Code or in accordance with the prevailing jurisprudence; the other is procedural — the
manner in which the dismissal was effected.

Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:

(d) In all cases of termination of employment, the following standards of due process shall be
substantially observed:

xxxx
For termination of employment as defined in Article 283 of the Labor Code, the requirement of
due process shall be deemed complied with upon service of a written notice to the employee and
the appropriate Regional Office of the Department of Labor and Employment at least thirty days
before effectivity of the termination, specifying the ground or grounds for termination.

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of notices was intended not only to enable the
employees to look for another employment and therefore ease the impact of the loss of their jobs
and the corresponding income, but more importantly, to give the Department of Labor and
Employment (DOLE) the opportunity to ascertain the verity of the alleged authorized cause of
termination.53 [Emphasis supplied].

The records of this case disclosed that there was absolutely no written notice given by petitioner
corporation to the respondent and to the DOLE prior to the cessation of its business operations.
This is evident from the fact that petitioner corporation effected respondent’s dismissal on the
same date that it decided to stop and cease its business operations. The necessary consequence of
such failure to comply with the one-month prior written notice rule, which constitutes a violation
of an employee’s right to statutory due process, is the payment of indemnity in the form of
nominal damages.54 In Culili v. Eastern Telecommunications Philippines, Inc., this Court further
held:

In Serrano v. National Labor Relations Commission [citation omitted], we noted that "a job is
more than the salary that it carries." There is a psychological effect or a stigma in immediately
finding one’s self laid off from work. This is exactly why our labor laws have provided for
mandating procedural due process clauses. Our laws, while recognizing the right of employers to
terminate employees it cannot sustain, also recognize the employee’s right to be properly
informed of the impending severance of his ties with the company he is working for. x x x.

x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon
employers who fail to comply with the procedural due process requirements in terminating its
employees. In Agabon v. National Labor Relations Commission [citation omitted], this Court
reverted back to the doctrine in Wenphil Corporation v. National Labor Relations Commission
[citation omitted] and held that where the dismissal is due to a just or authorized cause, but
without observance of the due process requirements, the dismissal may be upheld but the
employer must pay an indemnity to the employee. The sanctions to be imposed however, must
be stiffer than those imposed in Wenphil to achieve a result fair to both the employers and the
employees.

In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from
Agabon, held that since there is a clear-cut distinction between a dismissal due to a just cause
and a dismissal due to an authorized cause, the legal implications for employers who fail to
comply with the notice requirements must also be treated differently:

Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282
but the employer failed to comply with the notice requirement, the sanction to be imposed upon
him should be tempered because the dismissal process was, in effect, initiated by an act
imputable to the employee; and (2) if the dismissal is based on an authorized cause under Article
283 but the employer failed to comply with the notice requirement, the sanction should be stiffer
because the dismissal process was initiated by the employer's exercise of his management
prerogative.55 [Emphasis supplied.]

Thus, in addition to separation pay, respondent is also entitled to an award of nominal damages.
In conformity with this Court’s ruling in Culili v. Eastern Telecommunications Philippines, Inc.
and Shimizu Phils. Contractors, Inc. v. Callanta, both citing Jaka Food Processing Corporation v.
Pacot,56 this Court fixed the amount of nominal damages to ₱50,000.00.
With respect to petitioners’ contention that the Management Contract executed between
respondent and petitioner Lucila has no binding effect on petitioner corporation for having been
executed way before its incorporation, this Court finds the same meritorious.

Section 19 of the Corporation Code expressly provides:

Sec. 19. Commencement of corporate existence. - A private corporation formed or organized

under this Code commences to have corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and corporate under the name stated in the articles
of incorporation for the period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law. [Emphasis supplied.]

Logically, there is no corporation to speak of prior to an entity’s incorporation. And no contract

entered into before incorporation can bind the corporation.

As can be gleaned from the records, the Management Contract dated 16 January 1994 was
executed between respondent and petitioner Lucila months before petitioner corporation’s
incorporation on 15 August 1994. Similarly, it was done when petitioner Lucila was still the
President of Marc Marketing, Inc. Undeniably, it cannot have any binding and legal effect on
petitioner corporation. Also, there was no evidence presented to prove that petitioner corporation
adopted, ratified or confirmed the Management Contract. It is for the same reason that petitioner
corporation cannot be considered estopped from questioning its binding effect now that
respondent was invoking the same against it. In no way, then, can it be enforced against
petitioner corporation, much less, its provisions fixing respondent’s compensation as General
Manager to 30% of petitioner corporation’s net profit. Consequently, such percentage cannot be
the basis for the computation of respondent’s separation pay. This finding, however, will not
affect the undisputed fact that respondent was, indeed, the General Manager of petitioner
corporation from its incorporation up to the time of his dismissal.

Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to
conduct further proceedings for the sole purpose of determining the compensation that
respondent was actually receiving during the period that he was the General Manager of
petitioner corporation, this, for the proper computation of his separation pay.

As regards petitioner Lucila’s solidary liability, this Court affirms the same.

As a rule, corporation has a personality separate and distinct from its officers, stockholders and
members such that corporate officers are not personally liable for their official acts unless it is
shown that they have exceeded their authority. However, this corporate veil can be pierced when
the notion of the legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for
the evasion of an existing obligation, and to confuse legitimate issues. Under the Labor Code, for
instance, when a corporation violates a provision declared to be penal in nature, the penalty shall
be imposed upon the guilty officer or officers of the corporation.57

Based on the prevailing circumstances in this case, petitioner Lucila, being the President of
petitioner corporation, acted in bad faith and with malice in effecting respondent’s dismissal
from employment. Although petitioner corporation has a valid cause for dismissing respondent
due to cessation of business operations, however, the latter’s dismissal therefrom was done
abruptly by its President, petitioner Lucila. Respondent was not given the required one-month
prior written notice that petitioner corporation will already cease its business operations. As can
be gleaned from the records, respondent was dismissed outright by petitioner Lucila on the same
day that petitioner corporation decided to stop and cease its business operations. Worse,
respondent was not given separation pay considering that petitioner corporation’s cessation of
business was not due to business losses or financial reverses.
WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7
March 2006, respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are hereby
AFFIRMED with the MODIFICATION finding respondent’s dismissal from employment legal
but without proper observance of due process. Accordingly, petitioner corporation, jointly and
solidarily liable with petitioner Lucila, is hereby ordered to pay respondent the following; (1)
separation pay equivalent to one month pay or at least one-half month pay for every year of
service, whichever is higher, to be computed from the commencement of employment until
termination; and (2) nominal damages in the amount of ₱50,000.00.

This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct
further proceedings for the sole purpose of determining the compensation that respondent was
actually receiving during the period that he was the General Manager of petitioner corporation
for the proper computation of his separation pay.

Costs against petitioners.

SO ORDERED.

11.

G.R. No. 168008 August 17, 2011

PETRONILO J. BARAYUGA, Petitioner,

vs.
ADVENTIST UNIVERSITY OF THE PHILIPPINES, THROUGH ITS BOARD OF
TRUSTEES, REPRESENTED BY ITS CHAIRMAN, NESTOR D. DAYSON, Respondents.

DECISION

BERSAMIN, J.:

The injunctive relief protects only a right in esse. Where the plaintiff does not demonstrate that
he has an existing right to be protected by injunction, his suit for injunction must be dismissed
for lack of a cause of action.

The dispute centers on whether the removal of the petitioner as President of respondent
Adventist University of the Philippines (AUP) was valid, and whether his term in that office was
five years, as he insists, or only two years, as AUP insists.

We hereby review the decision promulgated on August 5, 2004,1 by which the Court of Appeals
(CA) nullified and set aside the writ of preliminary injunction issued by the Regional Trial Court
(RTC), Branch 21, in Imus, Cavite to prevent AUP from removing the petitioner.

Antecedents

AUP, a non-stock and non-profit domestic educational institution incorporated under Philippine
laws on March 3, 1932, was directly under the North Philippine Union Mission (NPUM) of the
Southern Asia Pacific Division of the Seventh Day Adventists. During the 3rd Quinquennial
Session of the General Conference of Seventh Day Adventists held from November 27, 2000 to
December 1, 2000, the NPUM Executive Committee elected the members of the Board of
Trustees of AUP, including the Chairman and the Secretary. Respondent Nestor D. Dayson was
elected Chairman while the petitioner was chosen Secretary.

On January 23, 2001, almost two months following the conclusion of the 3rd Quinquennial
Session, the Board of Trustees appointed the petitioner President of AUP.2 During his tenure, or
from November 11 to November 13, 2002, a group from the NPUM conducted an external
performance audit. The audit revealed the petitioner’s autocratic management style, like making
major decisions without the approval or recommendation of the proper committees, including the
Finance Committee; and that he had himself done the canvassing and purchasing of materials
and made withdrawals and reimbursements for expenses without valid supporting receipts and
without the approval of the Finance Committee. The audit concluded that he had

committed serious violations of fundamental rules and procedure in the disbursement and use of
funds.

The NPUM Executive Committee and the Board of Trustees decided to immediately request the
services of the General Conference Auditing Service (GCAS) to determine the veracity of the
audit findings. Accordingly, GCAS auditors worked in the campus from December 4 to
December 20, 2002 to review the petitioner’s transactions during the period from April 2002 to
October 2002. On December 20, 2002, CGAS auditors reported the results of their review, and
submitted their observations and recommendations to the Board of Trustees.

Upon receipt of the CGAS report that confirmed the initial findings of the auditors on January 8,
2003, the NPUM informed the petitioner of the findings and required him to explain.

On January 15, 2003, Chairman Dayson and the NPUM Treasurer likewise informed the
petitioner inside the NPUM office on the findings of the auditors in the presence of the AUP
Vice-President for Financial Affairs, and reminded him of the possible consequences should he
fail to satisfactorily explain the irregularities cited in the report. He replied that he had already
prepared his written explanation.

The Board of Trustees set a special meeting at 2 p.m. on January 22, 2003. Being the Secretary,
the petitioner himself prepared the agenda and included an item on his case. In that meeting, he
provided copies of the auditors’ report and his answers to the members of the Board of Trustees.
After hearing his explanations and oral answers to the questions raised on issues arising from the
report, the members of the Board of Trustees requested him to leave to allow them to analyze
and evaluate the report and his answers. Despite a long and careful deliberation, however, the
members of the Board of Trustees decided to adjourn that night and to set another meeting in the
following week considering that the meeting had not been specifically called for the purpose of
deciding his case. The adjournment would also allow the Board of Trustees more time to ponder
on the commensurate disciplinary measure to be meted on him.

On January 23, 2003, Chairman Dayson notified the petitioner in writing that the Board of
Trustees would hold in abeyance its deliberation on his answer to the auditors’ report and would
meet again at 10:00 a.m. on January 27, 2003. Chairman Dayson indicated that some sectors in
the campus had not been properly represented in the January 22, 2003 special meeting, and
requested the petitioner as Secretary to ensure that all sectors are duly represented in the next
meeting of the Board of Trustees.3

In the January 27, 2003 special meeting, the petitioner sent a letter to the Board of Trustees. The
members, by secret ballot, voted to remove him as President because of his serious violations of
fundamental rules and procedures in the disbursement and use of funds as revealed by the special
audit; to appoint an interim committee consisting of three members to assume the powers and
functions of the President; and to recommend him to the NPUM for consideration as Associate
Director for Secondary Education.4

On January 28, 2003, the petitioner was handed inside the NPUM office a letter, together with a
copy of the minutes of the special meeting held the previous day. In turn, he handed to Chairman
Dayson a letter requesting two weeks within which to seek a reconsideration, stating that he
needed time to obtain supporting documents because he was then attending to his dying mother.5

In the evening of January 28, 2003, the Board of Trustees, most of whose members had not yet
left Cavite, reconvened to consider and decide the petitioner’s request for reconsideration.
During the meeting, he made an emotional appeal to allow him to continue as President,
promising to immediately vacate his office should he again commit any of the irregularities cited
in the auditors’ report. He added that should the Board of Trustees not favor his appeal, he would
settle for a retirement package for him and his wife and would leave the church.

The Board of Trustees denied the petitioner’s request for reconsideration because his reasons
were not meritorious. Board Member Elizabeth Role served the notice of the denial on him the
next day, but he refused to receive the notice, simply saying Alam ko na yan.6

The petitioner later obtained a copy of the inter-school memorandum dated January 31, 2003
informing AUP students, staff, and faculty members about his relief as President and the
appointment of an interim committee to assume the powers and duties of the President.

On February 4, 2003, the petitioner brought his suit for injunction and damages in the RTC, with
prayer for the issuance of a temporary restraining order (TRO), impleading AUP and its Board of
Trustees, represented by Chairman Dayson, and the interim committee. His complaint alleged
that the Board of Trustees had relieved him as President without valid grounds despite his five-
year term; that the Board of Trustees had thereby acted in bad faith; and that his being denied
ample and reasonable time to present his evidence deprived him of his right to due process.7

The suit being intra-corporate and summary in nature, the application for TRO was heard by
means of affidavits. In the hearing of February 7, 2003, the parties agreed not to harass each
other. The RTC used the mutual agreement as its basis to issue a status quo order on February
11, 2003.8

In their answer with counterclaim, the respondents denied the allegations of the petitioner, and
averred that he had been validly removed for cause; and that he had been granted ample
opportunity to be heard in his defense.9

Order of the RTC

On March 21, 2003, after summary hearing, the RTC issued the TRO enjoining the respondents
and persons acting for and in their behalf from implementing the resolution removing him as
President issued by the Board of Trustees during the January 27, 2003 special meeting, and
enjoining the interim committee from performing the functions of President of AUP. The RTC
did not require a bond.10

After further hearing, the RTC issued on April 25, 2003 its controversial order,11 granting the
petitioner’s application for a writ of preliminary injunction. It thereby resolved three issues,
namely: (a) whether the special board meetings were valid; (b) whether the conflict-of-interest
provision in the By-Laws and Working Policy was violated; and (c) whether the petitioner was
denied due process. It found for the petitioner upon all the issues. On the first issue, it held that
there was neither a written request made by any two members of the Board of Trustees nor
proper notices sent

to the members as required by AUP’s By-Laws, which omissions, being patent defects, tainted
the special board meetings with nullity. Anent the second issue, it ruled that the purchase of coco
lumber from his balae (i.e., mother-in-law of his son) was not covered by the conflict-of-interest
provision, for AUP’s Model Statement of Acceptance form mentioned only the members of the
immediate family and did not extend to the relationship between him and his balae. On the third
issue, it concluded that he was deprived of due process when the Board of Trustees refused to
grant his motion for reconsideration and his request for additional time to produce his evidence,
and instead immediately implemented its decision by relieving him from his position without
according him the treatment befitting a university President.

Proceedings in the CA
With the Interim Rules for Intra-Corporate Controversies prohibiting a motion for
reconsideration, the respondents forthwith filed a petition for certiorari in the CA,12 contending
that the petitioner’s complaint did not meet the requirement that an injunctive writ should be
anchored on a legal right; and that he had been merely appointed, not elected, as President for a
term of office of only two years, not five years, based on AUP’s amended By-Laws.

In the meanwhile, on September 17, 2003, the petitioner filed a supplemental petition in the
CA,13 alleging that after the commencement of his action, he filed in the RTC an urgent motion
for the issuance of a second TRO to enjoin the holding of an AUP membership meeting and the
election of a new Board of Trustees, capitalizing on the admission in the respondents’ answer
that he had been elected in 2001 to a five-year term of office. He argued that the admission
estopped the respondents from insisting to the contrary.

The respondents filed in the CA a verified urgent motion for a TRO and to set a hearing on the
application for preliminary injunction to enjoin the RTC from implementing the assailed order
granting a writ of preliminary injunction and from further proceeding in the case. The petitioner
opposed the motion for TRO, but did not object to the scheduling of preliminary injunctive
hearings.

On February 24, 2004, the CA issued a TRO to enjoin the RTC from proceeding for a period of
60 days, and declared that the prayer for injunctive relief would be resolved along with the
merits of the main case.

The petitioner sought a clarification of the TRO issued by the CA, considering that his cause of
action in his petitions to cite the respondents in indirect contempt dated March 5, 2004 and
March 16, 2004 filed in the RTC involved the election of a certain Robin Saban as the new
President of AUP in blatant and malicious violation of the writ of preliminary injunction issued
by the RTC. In clarifying the TRO, the CA explained that it did not go beyond the reliefs prayed
for in the respondents’ motion for TRO and preliminary injunctive hearings.

On August 5, 2004, the CA rendered its decision nullifying the RTC’s writ of preliminary
injunction. It rejected the petitioner’s argument that Article IV, Section 3 of AUP’s Constitution
and By-Laws and Working Policy of the Conference provided a five-year term for him, because
the provision was inexistent. It ruled that the petitioner’s term of office had expired on January
22, 2003, or two years from his appointment, based on AUP’s amended By-Laws; that,
consequently, he had been a mere de facto officer appointed by the members of the Board of
Trustees; and that he held no legal right warranting the issuance of the writ of preliminary
injunction.

The CA declared that the rule on judicial admissions admitted of exceptions, as held in National
Power Corporation v. Court of Appeals,14 where the Court held that admissions were not
evidence that prevailed over documentary proof; that the petitioner’s being able to answer the
results of the special audit point-by-point belied his allegation of denial of due process; that AUP
was the party that stood to be injured by the issuance of the injunctive writ in the form of a
"demoralized administration, studentry, faculty and staff, sullied reputation, and dishonest
leadership;" and that the assailed RTC order sowed confusion and chaos because the RTC
thereby chose to subordinate the interest of the entire AUP community to that of the petitioner
who had been deemed not to have satisfied the highest ideals required of his office.

Issues

Undeterred, the petitioner has appealed, contending that:

I.
THE COURT OF APPPEALS HAS DECIDED CONTRARY TO LAW AND
JURISPRUDENCE WHEN IT RULED THAT THE EXTRAORDINARY WRIT OF
CERTIORARI APPLIED IN THE CASE AT BAR.

II.

THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN

ACCORD WITH THE ESTABLISHED LAW AND JURISPRUDENCE THAT
"ADMISSIONS, VERBAL OR WRITTEN, MADE BY A PARTY IN THE COURSE OF THE
PROCEEDINGS IN THE SAME CASE, DOES NOT REQUIRE PROOF," BY REQUIRING
PETITIONER BARAYUGA TO PRESENT EVIDENCE THAT HIS TERM AS PRESIDENT
OF AUP IS FOR FIVE (5) YEARS.

III.

THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN

ACCORD WITH LAW AND ESTABLISHED FACTS WHEN IT RULED THAT
PETITIONER BARAYUGA HAS ONLY A TERM OF TWO (2) YEARS INSTEAD OF FIVE
(5) YEARS AS CLEARLY ADMITTED BY PRIVATE RESPONDENT AUP IN ITS
ANSWER.

IV.

THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN

ACCORD WITH LAW AND JURISPRUDENCE BY SOLELY RELYING ON THE CASE OF
NATIONAL POWER CORPORATION v. COURT OF APPEALS, WHICH INVOLVE FACTS
DIFFERENT FROM THE PRESENT CASE.

V.

THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN

ACCORD WITH LAW AND ESTABLISHED FACTS WHEN IT UNJUSTIFIABLY
ALLOWED THE WAIVER OF NOTICE FOR THE SPECIAL MEETING OF THE BOARD
OF TRUSTEES.

VI.

THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN

ACCORD WITH LAW AND ESTABLISHED FACTS WHEN IT ERRONEOUSLY
CONCLUDED THAT PETITIONER BARAYUGA WAS MERELY OCCUPYING THE
POSITION OF AUP PRESIDENT IN A HOLD-OVER CAPACITY.

The petitioner argues that the assailed RTC order, being supported by substantial evidence,
accorded with law and jurisprudence; that his tenure as President under the Constitution, By-
Laws and the Working Policy of the Conference was for five years, contrary to the CA’s findings
that he held the position in a hold-over capacity; that instead, the CA should have applied the
rule on judicial admission, because the holding in National Power Corporation v. Court of
Appeals, cited by the CA, did not apply, due to AUP not having presented competent evidence to
prove that he had not been elected by the Board of Trustees as President of AUP; and that his
removal during the special board meeting that was invalidly held for lack of notice denied him
due process.

AUP counters that:

I
PETITIONER IS NOT AN ELECTED TRUSTEE OF THE AUP BOARD, NOR WAS (HE)
ELECTED AS PRESIDENT, AND AS SUCH, HE CAN CLAIM NO RIGHT TO THE AUP
PRESIDENCY, BEING TWICE DISQUALIFIED BY LAW, WHICH RENDERS MOOT AND
ACAMEDIC ALL OF THE ARGUMENTS IN THIS PETITION.

II

EVEN IF WE FALSELY ASSUME EX GRATIA THAT PETITIONER IS AN ELECTED

TRUSTEE AND ELECTED PRESIDENT, THE TWO (2) YEAR TERM PROVIDED IN
AUP’S BY-LAWS – REQUIRED BY THE CORPORATION CODE AND APPROVED BY
THE SEC – IS WHAT GOVERNS THE INTRA-CORPORATE CONTROVERSY, THE
AUP’S ADMISSION IN ITS ANSWER THAT HE HAS A FIVE (5) YEAR TERM BASED
ON HIS INVOKED SAMPLE CONSTITUTION, BY-LAWS AND POLICY OF THE
SEVENTH DAY ADVENTIST NOTWITHSTANDING.

III

PURSUANT TO THE RULES AND SETTLED JURISPRUDENCE, THE ADMISSION IN

THE ANSWER IS NOT EVEN PREJUDICIAL AT ALL.

IV

EVEN IF WE FALSELY ASSUME, JUST FOR THE SAKE OF ARGUMENT, THAT THE
PETITIONER HAD A FIVE (5) YEAR TERM AS UNIVERSITY PRESIDENT, HE WAS
NONETHELESS VALIDLY TERMINATED FOR LOSS OF CONFIDENCE, GIVEN THE
NUMEROUS ADMITTED ANOMALIES HE COMMITTED.

PETITIONER CANNOT COMPLAIN THAT NOTICES OF THE BOARD MEETING WERE

NOT SENT TO ALL "THE TWENTY FIVE (25) TRUSTEES OF THE AUP BOARD",
SINCE: [1] AS THE AUP SECRETARY, IT WAS HE WHO HAD THE DUTY TO SEND
THE NOTICES; [2] WORSE, HE ATTENDED AND EXHAUSTIVELY DEFENDED HIS
WRITTEN ANSWER IN THE AUP BOARD OF TRUSTEES MEETING, THUS, WAIVING
ANY "NOTICE OBJECTION"; [3] WORST OF ALL, HIS AFTERTHOUGHT OBJECTION IS
DECEPTIVELY FALSE IN FACT.

The decisive question is whether the CA correctly ruled that the petitioner had no legal right to
the position of President of AUP that could be protected by the injunctive writ issued by the
RTC.

Ruling

We deny the petition for review for lack of merit.

1.

Petition is already moot

The injunctive writ issued by the RTC was meant to protect the petitioner’s right to stay in office
as President. Given that the lifetime of the writ of preliminary injunction was co-extensive with
the duration of the act sought to be prohibited,15 this injunctive relief already became moot in the
face of the admission by the petitioner himself, through his affidavit,16 that his term of office
premised on his alleged five-year tenure as President had lasted only until December 2005. In
short, the injunctive writ granted by the RTC had expired upon the end of the term of office (as
posited by him).
The mootness of the petition warranted its denial. When the resolution of the issue submitted in a
case has become moot and academic, and the prayer of the complaint or petition, even if granted,
has become impossible of enforcement – for there is nothing more to enjoin – the case should be
dismissed.17 No useful purpose would then be served by passing on the merits of the petition,
because any ruling could hardly be of any practical or useful purpose in the premises. It is a
settled rule that a court will not determine a moot question or an abstract proposition, nor express
an opinion in a case in which no practical relief can be granted.18 Indeed, moot and academic
cases cease to present any justiciable controversies by virtue of supervening events,19 and the
courts of law will not determine moot questions,20 for the courts should not engage in academic
declarations and determine a moot question.21

2.

RTC acted in patently grave abuse of discretion

in issuing the TRO and writ of injunction

Nonetheless, the aspect of the case concerning the petitioner’s claim for damages has still to be
decided. It is for this reason that we have to resolve whether or not the petitioner had a right to
the TRO and the injunctive writ issued by the RTC.

A valid writ of preliminary injunction rests on the weight of evidence submitted by the plaintiff
establishing: (a) a present and unmistakable right to be protected; (b) the acts against which the
injunction is directed violate such right; and (c) a special and paramount necessity for the writ to
prevent serious damages.22 In the absence of a clear legal right, the issuance of the injunctive
writ constitutes grave abuse of discretion23 and will result to nullification thereof. Where the
complainant’s right is doubtful or disputed, injunction is not proper. The possibility of
irreparable damage sans proof of an actual existing right is not a ground for a preliminary
injunction.24

It is clear to us, based on the foregoing principles guiding the issuance of the TRO and the writ
of injunction, that the issuance of the assailed order constituted patently grave abuse of discretion
on the part of the RTC, and that the CA rightly set aside the order of the RTC.

To begin with, the petitioner rested his claim for injunction mainly upon his representation that
he was entitled to serve for five years as President of AUP under the Constitution, By-Laws and
Working Policy of the General Conference of the Seventh Day Adventists (otherwise called the
Bluebook). All that he presented in that regard, however, were mere photocopies of pages 225-
226 of the Bluebook, which read:

Article IV-Board of Directors

Sec. 1. This school operated by the _____________ Union Conference/Mission of Seventh-Day

Adventists shall be under the direct control of a board of directors, elected by the constituency in
its quinquennial sessions. The board of directors shall consist of 15 to 21 members, depending on
the size of the institution. Ex officio members shall be the union president as chairperson, the
head of the school as secretary, the union secretary, the union treasurer, the union director of
education, the presidents of the conferences/missions within the union. xxx.

Sec. 2. The term of office of members of the board of directors shall be five years to coincide
with the ______________ Union Conference/Mission quinquennial period.

Sec. 3. The duties of the board of directors shall be to elect quinquenially the president, xxx.

Yet, the document had no evidentiary value. It had not been officially adopted for submission to
and approval of the Securities and Exchange Commission. It was nothing but an unfilled model
form. As such, it was, at best, only a private document that could not be admitted as evidence in
judicial proceedings until it was first properly authenticated in court.
Section 20, Rule 132 of the Rules of Court requires authentication as a condition for the
admissibility of a private document, to wit:

Section 20. Proof of private document. – Before any private document offered as authentic is
received in evidence, its due execution and authenticity must be proved either:

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of the maker.

Any other private document need only be identified as that which it is claimed to be. (21 a)

For the RTC to base its issuance of the writ of preliminary injunction on the mere photocopies of
the document, especially that such document was designed to play a crucial part in the resolution
of the decisive issue on the length of the term of office of the petitioner, was gross error.

Secondly, even assuming that the petitioner had properly authenticated the photocopies of the
Bluebook, the provisions contained therein did not vest the right to an office in him. An unfilled
model form creates or establishes no rights in favor of anyone.

Thirdly, the petitioner’s assertion of a five-year duration for his term of office lacked legal basis.

Section 108 of the Corporation Code determines the membership and number of trustees in an
educational corporation, viz:

Section 108. Board of trustees. – Trustees of educational institutions organized as educational

corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That
the number of trustees shall be in multiples of five (5).

Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so
classify themselves that the term of office of one-fifth (1/5) of their number shall expire every
year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular
term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and authority of trustees shall be
defined in the by-laws.

For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations.

The second paragraph of the provision, although setting the term of the members of the Board of
Trustees at five years, contains a proviso expressly subjecting the duration to what is otherwise
provided in the articles of incorporation or by-laws of the educational corporation. That contrary
provision controls on the term of office.25

In AUP’s case, its amended By-Laws provided the term of the members of the Board of
Trustees, and the period within which to elect the officers, thusly:

Article I
Board of Trustees

Section 1. At the first meeting of the members of the corporation, and thereafter every two years,
a Board of Trustees shall be elected. It shall be composed of fifteen members in good and regular
standing in the Seventh-day Adventist denomination, each of whom shall hold his office for a
term of two years, or until his successor has been elected and qualified. If a trustee ceases at any
time to be a member in good and regular standing in the Seventh-day Adventist denomination, he
shall thereby cease to be a trustee.

xxxx

Article IV
Officers

Section 1. Election of officers. – At their organization meeting, the members of the Board of
Trustees shall elect from among themselves a Chairman, a Vice-Chairman, a President, a
Secretary, a Business Manager, and a Treasurer. The same persons may hold and perform the
duties of more than one office, provided they are not incompatible with each other.26

In light of foregoing, the members of the Board of Trustees were to serve a term of office of only
two years; and the officers, who included the President, were to be elected from among the
members of the Board of Trustees during their organizational meeting, which was held during
the election of the Board of Trustees every two years. Naturally, the officers, including the
President, were to exercise the powers vested by Section 2 of the amended By-Laws for a term of
only two years, not five years.

Ineluctably, the petitioner, having assumed as President of AUP on January 23, 2001, could
serve for only two years, or until January 22, 2003. By the time of his removal for cause as
President on January 27, 2003, he was already occupying the office in a hold-over capacity, and
could be removed at any time, without cause, upon the election or appointment of his successor.
His insistence on holding on to the office was untenable, therefore, and with more reason when
one considers that his removal was due to the loss of confidence on the part of the Board of
Trustees.

4.

Petitioner was not denied due process

The petitioner complains that he was denied due process because he was deprived of the right to
be heard and to seek reconsideration; and that the proceedings of the Board of Trustees were
illegal due to its members not being properly notified of the meeting.

Still, the petitioner fails to convince us.

The requirements of due process in an administrative context are satisfied when the parties are
afforded fair and reasonable opportunity to explain their respective sides of the controversy,27 for
the essence of due process is an opportunity to be heard.28 Here, the petitioner was accorded the
full opportunity to be heard, as borne by the fact that he was granted the opportunity to refute the
adverse findings contained in the GCAS audit report and that the Board of Trustees first heard
his side during the board meetings before his removal. After having voluntarily offered his
refutations in the proceedings before the Board of Trustees, he should not now be permitted to
denounce the proceedings and to plead the denial of due process after the decision of the Board
of Trustees was adverse to him.1avvphi1

Nor can his urging that the proceedings were illegal for lack of prior notification be plausible in
light of the fact that he willingly participated therein without raising the objection of lack of
notification. Thereby, he effectively waived his right to object to the validity of the proceedings
based on lack of due notice.29

5.

Conclusion
The removal of the petitioner as President of AUP, being made in accordance with the AUP
Amended By-Laws, was valid. With that, our going into the other issues becomes unnecessary.
We conclude that the order of the RTC granting his application for the writ of preliminary
injunction was tainted with manifestly grave abuse of discretion; that the CA correctly nullified
and set aside the order; and that his claim for damages, being bereft of factual and legal warrant,
should be dismissed.

WHEREFORE, we DENY the petition for review on certiorari for lack of merit, and hereby
DISMISS SEC Case No. 028-03 entitled Dr. Petronilo Barayuga v. Nelson D. Dayson, et al.

The petitioner shall pay the cost of suit.

SO ORDERED.

12.

G.R. No. 176579 June 28, 2011

WILSON P. GAMBOA, Petitioner,

vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY
JOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR
CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC
CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO
OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF
THE SECURITIES EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF
THE PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity
of the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC)
by the government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc.
(MPAH), an affiliate of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance
Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a
franchise and the right to engage in telecommunications business. In 1969, General Telephone
and Electronics Corporation (GTE), an American company and a major PLDT stockholder, sold
26 percent of the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc.
(PHI) was incorporated by several persons, including Roland Gapud and Jose Campos, Jr.
Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by virtue of three
Deeds of Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla.
In 1986, the 111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415 PTIC shares, which represent about
46.125 percent of the outstanding capital stock of PTIC, were later declared by this Court to be
owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the
remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-
Agency Privatization Council (IPC) of the Philippine Government announced that it would sell
the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a
public bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset
to 8 December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-
Asia Presidio Capital, submitted their bids. Parallax won with a bid of ₱25.6 billion or US$510
million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However,
First Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its
right to PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On
14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale
and Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding
capital stock of PTIC, with the Philippine Government for the price of ₱25,217,556,000 or
US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent
of PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of the
outstanding common shares of PLDT. With the sale, First Pacific’s common shareholdings in
PLDT increased from 30.7 percent to 37 percent, thereby increasing the common
shareholdings of foreigners in PLDT to about 81.47 percent. This violates Section 11, Article
XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public
utility to not more than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary
John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of
investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total
PLDT outstanding common shares. PHI, on the other hand, was incorporated in 1977, and
became the owner of 111,415 PTIC shares or 46.125 percent of the outstanding capital stock of
PTIC by virtue of three Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso
Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the PCGG, and
subsequently declared by this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of the Philippines in
accordance with this Court’s decision4 which became final and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent
of the outstanding common shares of stock of PLDT, and designated the Inter-Agency
Privatization Council (IPC), composed of the Department of Finance and the PCGG, as the
disposing entity. An invitation to bid was published in seven different newspapers from 13 to 24
November 2006. On 20 November 2006, a pre-bid conference was held, and the original
deadline for bidding scheduled on 4 December 2006 was reset to 8 December 2006. The
extension was published in nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest
bidder with a bid of ₱25,217,556,000. The government notified First Pacific, the majority owner
of PTIC shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its
right of first refusal in accordance with PTIC’s Articles of Incorporation. First Pacific announced
its intention to match Parallax’s bid.
On 31 January 2007, the House of Representatives (HR) Committee on Good Government
conducted a public hearing on the particulars of the then impending sale of the 111,415 PTIC
shares. Respondents Teves and Sevilla were among those who attended the public hearing. The
HR Committee Report No. 2270 concluded that: (a) the auction of the government’s 111,415
PTIC shares bore due diligence, transparency and conformity with existing legal procedures; and
(b) First Pacific’s intended acquisition of the government’s 111,415 PTIC shares resulting
in First Pacific’s 100% ownership of PTIC will not violate the 40 percent constitutional
limit on foreign ownership of a public utility since PTIC holds only 13.847 percent of the
total outstanding common shares of PLDT.5 On 28 February 2007, First Pacific completed the
acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public
bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of
PTIC (the remaining 54 percent of PTIC shares was already owned by First Pacific and its
affiliates); (b) Parallax offered the highest bid amounting to ₱25,217,556,000; (c) pursuant to the
right of first refusal in favor of PTIC and its shareholders granted in PTIC’s Articles of
Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the
highest bid offered for PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale
was consummated when MPAH paid IPC ₱25,217,556,000 and the government delivered the
certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other allegations of
facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory
relief, and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among
others, that the sale of the 111,415 PTIC shares would result in an increase in First Pacific’s
common shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined with
Japanese NTT DoCoMo’s common shareholdings in PLDT, would result to a total foreign
common shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional
limit.6 Petitioner asserts:

If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to
37.0 percent of its common – or voting- stockholdings, x x x. Hence, the consummation of the
sale will put the two largest foreign investors in PLDT – First Pacific and Japan’s NTT
DoCoMo, which is the world’s largest wireless telecommunications firm, owning 51.56 percent
of PLDT common equity. x x x With the completion of the sale, data culled from the official
website of the New York Stock Exchange (www.nyse.com) showed that those foreign entities,
which own at least five percent of common equity, will collectively own 81.47 percent of
PLDT’s common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT
submitted to the New York Stock Exchange for the period 2003-2005, revealed that First Pacific
and several other foreign entities breached the constitutional limit of 40 percent ownership as
early as 2003. x x x"7

Petitioner raises the following issues: (1) whether the consummation of the then impending sale
of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a
public utility; (2) whether public respondents committed grave abuse of discretion in allowing
the sale of the 111,415 PTIC shares to First Pacific; and (3) whether the sale of common shares
to foreigners in excess of 40 percent of the entire subscribed common capital stock violates the
constitutional limit on foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to
Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the
Court granted the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others, to

enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or
assignee." Petitioners-in-intervention claim that, as PLDT subscribers, they have a "stake in the
outcome of the controversy x x x where the Philippine Government is completing the sale of
government owned assets in [PLDT], unquestionably a public utility, in violation of the
nationality restrictions of the Philippine Constitution."

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner,9 which
indisputably demand a thorough examination of the evidence of the parties, are generally beyond
this Court’s jurisdiction. Adhering to this well-settled principle, the Court shall confine the
resolution of the instant controversy solely on the threshold and purely legal issue of whether
the term "capital" in Section 11, Article XII of the Constitution refers to the total common shares
only or to the total outstanding capital stock (combined total of common and non-voting
preferred shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks,
only the petition for prohibition is within the original jurisdiction of this court, which however is
not exclusive but is concurrent with the Regional Trial Court and the Court of Appeals. The
actions for declaratory relief,10 injunction, and annulment of sale are not embraced within the
original jurisdiction of the Supreme Court. On this ground alone, the petition could have been
dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since
on 28 February 2007, the questioned sale was consummated when MPAH paid IPC
₱25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution has far-reaching implications to the national economy,
the Court treats the petition for declaratory relief as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory
relief as one for mandamus considering the grave injustice that would result in the interpretation
of a banking law. In that case, which involved the crime of rape committed by a foreign tourist
against a Filipino minor and the execution of the final judgment in the civil case for damages on
the tourist’s dollar deposit with a local bank, the Court declared Section 113 of Central Bank
Circular No. 960, exempting foreign currency deposits from attachment, garnishment or any
other order or process of any court, inapplicable due to the peculiar circumstances of the case.
The Court held that "injustice would result especially to a citizen aggrieved by a foreign guest
like accused x x x" that would "negate Article 10 of the Civil Code which provides that ‘in case
of doubt in the interpretation or application of laws, it is presumed that the lawmaking body
intended right and justice to prevail.’" The Court therefore required respondents Central Bank of
the Philippines, the local bank, and the accused to comply with the writ of execution issued in
the civil case for damages and to release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the
procedural infirmity of the petition for declaratory relief and treated the same as one for
mandamus. In Alliance, the issue was whether the government unlawfully excluded petitioners,
who were government employees, from the enjoyment of rights to which they were entitled
under the law. Specifically, the question was: "Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or controlled corporations
included among the four ‘employers’ under Presidential Decree No. 851 which are required to
pay their employees x x x a thirteenth (13th) month pay x x x ?" The Constitutional principle
involved therein affected all government employees, clearly justifying a relaxation of the
technical rules of procedure, and certainly requiring the interpretation of the assailed presidential
decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for
mandamus if the issue involved has far-reaching implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory relief.
However, exceptions to this rule have been recognized. Thus, where the petition has far-
reaching implications and raises questions that should be resolved, it may be treated as one
for mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term "capital" in Section
11, Article XII of the Constitution. He prays that this Court declare that the term "capital" refers
to common shares only, and that such shares constitute "the sole basis in determining foreign
equity in a public utility." Petitioner further asks this Court to declare any ruling inconsistent
with such interpretation unconstitutional.

The interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-
reaching implications to the national economy. In fact, a resolution of this issue will determine
whether Filipinos are masters, or second class citizens, in their own country. What is at stake
here is whether Filipinos or foreigners will have effective control of the national economy.
Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation, and to
future generations of Filipinos, it is the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term "capital" in Section 11, Article
XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16
That case involved the same public utility (PLDT) and substantially the same private
respondents. Despite the importance and novelty of the constitutional issue raised therein and
despite the fact that the petition involved a purely legal question, the Court declined to resolve
the case on the merits, and instead denied the same for disregarding the hierarchy of courts.17
There, petitioner Fernandez assailed on a pure question of law the Regional Trial Court’s
Decision of 21 February 2003 via a petition for review under Rule 45. The Court’s Resolution,
denying the petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle this
purely legal issue which is of transcendental importance to the national economy and a
fundamental requirement to a faithful adherence to our Constitution. The Court must forthwith
seize such opportunity, not only for the benefit of the litigants, but more significantly for the
benefit of the entire Filipino people, to ensure, in the words of the Constitution, "a self-reliant
and independent national economy effectively controlled by Filipinos."18 Besides, in the light of
vague and confusing positions taken by government agencies on this purely legal issue, present
and future foreign investors in this country deserve, as a matter of basic fairness, a categorical
ruling from this Court on the extent of their participation in the capital of public utilities and
other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has
remained unresolved for over 75 years since the 1935 Constitution. There is no reason for this
Court to evade this ever recurring fundamental issue and delay again defining the term "capital,"
which appears not only in Section 11, Article XII of the Constitution, but also in Section 2,
Article XII on co-production and joint venture agreements for the development of our natural
resources,19 in Section 7, Article XII on ownership of private lands,20 in Section 10, Article XII
on the reservation of certain investments to Filipino citizens,21 in Section 4(2), Article XIV on
the ownership of educational institutions,22 and in Section 11(2), Article XVI on the ownership
of advertising companies.23
 Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question
the subject sale, which he claims to violate the nationality requirement prescribed in Section 11,
Article XII of the Constitution. If the sale indeed violates the Constitution, then there is a
possibility that PLDT’s franchise could be revoked, a dire consequence directly affecting
petitioner’s interest as a stockholder.

More importantly, there is no question that the instant petition raises matters of transcendental
importance to the public. The fundamental and threshold legal issue in this case, involving the
national economy and the economic welfare of the Filipino people, far outweighs any perceived
impediment in the legal personality of the petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of
transcendental importance to the public, thus:

In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the
object of mandamus is to obtain the enforcement of a public duty, the people are regarded
as the real parties in interest; and because it is sufficient that petitioner is a citizen and as
such is interested in the execution of the laws, he need not show that he has any legal or
special interest in the result of the action. In the aforesaid case, the petitioners sought to
enforce their right to be informed on matters of public concern, a right then recognized in
Section 6, Article IV of the 1973 Constitution, in connection with the rule that laws in order to be
valid and enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners’ legal standing, the Court declared that the right they
sought to be enforced ‘is a public right recognized by no less than the fundamental law of the
land.’

Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a
mandamus proceeding involves the assertion of a public right, the requirement of personal
interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the
general ‘public’ which possesses the right.’

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been
involved under the questioned contract for the development, management and operation of the
Manila International Container Terminal, ‘public interest [was] definitely involved
considering the important role [of the subject contract] . . . in the economic development of
the country and the magnitude of the financial consideration involved.’ We concluded that,
as a consequence, the disclosure provision in the Constitution would constitute sufficient
authority for upholding the petitioner’s standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public
importance, the petitioner has the requisite locus standi.

Definition of the Term "Capital" in

Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates
the Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of whose
capital is owned by such citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution,
thus:

Section 5. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of the
capital of which is owned by such citizens, nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the National Assembly when the public interest so requires. The State shall encourage
equity participation in public utilities by the general public. The participation of foreign investors
in the governing body of any public utility enterprise shall be limited to their proportionate share
in the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz:

Section 8. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
other entities organized under the laws of the Philippines sixty per centum of the capital of
which is owned by citizens of the Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years. No franchise or
right shall be granted to any individual, firm, or corporation, except under the condition that it
shall be subject to amendment, alteration, or repeal by the Congress when the public interest so
requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission,
reminds us that the Filipinization provision in the 1987 Constitution is one of the products of the
spirit of nationalism which gripped the 1935 Constitutional Convention.25 The 1987 Constitution
"provides for the Filipinization of public utilities by requiring that any form of authorization for
the operation of public utilities should be granted only to ‘citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least sixty per centum
of whose capital is owned by such citizens.’ The provision is [an express] recognition of the
sensitive and vital position of public utilities both in the national economy and for national
security."26 The evident purpose of the citizenship requirement is to prevent aliens from
assuming control of public utilities, which may be inimical to the national interest.27 This
specific provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an
overriding economic goal of the 1987 Constitution: to "conserve and develop our patrimony"28
and ensure "a self-reliant and independent national economy effectively controlled by
Filipinos."29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the
minimum nationality requirement prescribed in Section 11, Article XII of the Constitution.
Hence, for a corporation to be granted authority to operate a public utility, at least 60 percent of
its "capital" must be owned by Filipino citizens.

The crux of the controversy is the definition of the term "capital." Does the term "capital" in
Section 11, Article XII of the Constitution refer to common shares or to the total outstanding
capital stock (combined total of common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers
only to common shares because such shares are entitled to vote and it is through voting that
control over a corporation is exercised. Petitioner posits that the term "capital" in Section 11,
Article XII of the Constitution refers to "the ownership of common capital stock subscribed and
outstanding, which class of shares alone, under the corporate set-up of PLDT, can vote and elect
members of the board of directors." It is undisputed that PLDT’s non-voting preferred shares are
held mostly by Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16
June 1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT telephone
line to subscribe to non-voting preferred shares to pay for the investment cost of installing the
telephone line.32

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s

definition of the term "capital."33 Petitioners-in-intervention allege that "the approximate foreign
ownership of common capital stock of PLDT x x x already amounts to at least 63.54% of the
total outstanding common stock," which means that foreigners exercise significant control over
PLDT, patently violating the 40 percent foreign equity limitation in public utilities prescribed by
the Constitution.

Respondents, on the other hand, do not offer any definition of the term "capital" in Section 11,
Article XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan
of PLDT do not dispute that more than 40 percent of the common shares of PLDT are held by
foreigners.

In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the

procedural infirmities of the petition and the supposed violation of the due process rights of the
"affected foreign common shareholders." Respondent Nazareno does not deny petitioner’s
allegation of foreigners’ dominating the common shareholdings of PLDT. Nazareno stressed
mainly that the petition "seeks to divest foreign common shareholders purportedly exceeding
40% of the total common shareholdings in PLDT of their ownership over their shares."
Thus, "the foreign natural and juridical PLDT shareholders must be impleaded in this suit so that
they can be heard."34 Essentially, Nazareno invokes denial of due process on behalf of the
foreign common shareholders.

While Nazareno does not introduce any definition of the term "capital," he states that "among
the factual assertions that need to be established to counter petitioner’s allegations is the
uniform interpretation by government agencies (such as the SEC), institutions and
corporations (such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and common shares in
"controlling interest" in view of testing compliance with the 40% constitutional limitation
on foreign ownership in public utilities."35

Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in Section 11,
Article XII of the Constitution. Neither does he refute petitioner’s claim of foreigners holding
more than 40 percent of PLDT’s common shares. Instead, respondent Pangilinan focuses on the
procedural flaws of the petition and the alleged violation of the due process rights of foreigners.
Respondent Pangilinan emphasizes in his Memorandum (1) the absence of this Court’s
jurisdiction over the petition; (2) petitioner’s lack of standing; (3) mootness of the petition; (4)
non-availability of declaratory relief; and (5) the denial of due process rights. Moreover,
respondent Pangilinan alleges that the issue should be whether "owners of shares in PLDT as
well as owners of shares in companies holding shares in PLDT may be required to relinquish
their shares in PLDT and in those companies without any law requiring them to surrender their
shares and also without notice and trial."

Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution]
imposes no nationality requirement on the shareholders of the utility company as a
condition for keeping their shares in the utility company." According to him, "Section 11
does not authorize taking one person’s property (the shareholder’s stock in the utility company)
on the basis of another party’s alleged failure to satisfy a requirement that is a condition only for
that other party’s retention of another piece of property (the utility company being at least 60%
Filipino-owned to keep its franchise)."36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P.
Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the
definition of the term "capital." In its Memorandum37 dated 24 September 2007, the OSG also
limits its discussion on the supposed procedural defects of the petition, i.e. lack of standing, lack
of jurisdiction, non-inclusion of interested parties, and lack of basis for injunction. The OSG
does not present any definition or interpretation of the term "capital" in Section 11, Article XII of
the Constitution. The OSG contends that "the petition actually partakes of a collateral attack on
PLDT’s franchise as a public utility," which in effect requires a "full-blown trial where all the
parties in interest are given their day in court."38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the
Philippine Stock Exchange (PSE), does not also define the term "capital" and seeks the dismissal
of the petition on the following grounds: (1) failure to state a cause of action against Lim; (2) the
PSE allegedly implemented its rules and required all listed companies, including PLDT, to make
proper and timely disclosures; and (3) the reliefs prayed for in the petition would adversely
impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a

stockholder of record of PLDT, contended that the term "capital" in the 1987 Constitution refers
to shares entitled to vote or the common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares,
considering that it is through voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions
on fully nationalized and partially nationalized activities is for Filipino nationals to be always in
control of the corporation undertaking said activities. Otherwise, if the Trial Court’s ruling
upholding respondents’ arguments were to be given credence, it would be possible for the
ownership structure of a public utility corporation to be divided into one percent (1%) common
stocks and ninety-nine percent (99%) preferred stocks. Following the Trial Court’s ruling
adopting respondents’ arguments, the common shares can be owned entirely by foreigners thus
creating an absurd situation wherein foreigners, who are supposed to be minority shareholders,
control the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed
by the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it must be shown that the legal
and beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of
petitioner PLDT, since it is already admitted that the voting interests of foreigners which would
gain entry to petitioner PLDT by the acquisition of SMART shares through the Questioned
Transactions is equivalent to 82.99%, and the nominee arrangements between the foreign
principals and the Filipino owners is likewise admitted, there is, therefore, a violation of Section
11, Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial
Court to support the proposition that the meaning of the word "capital" as used in Section 11,
Article XII of the Constitution allegedly refers to the sum total of the shares subscribed and paid-
in by the shareholder and it allegedly is immaterial how the stock is classified, whether as
common or preferred, cannot stand in the face of a clear legislative policy as stated in the FIA
which took effect in 1991 or way after said opinions were rendered, and as clarified by the
above-quoted Amendments. In this regard, suffice it to state that as between the law and an
opinion rendered by an administrative agency, the law indubitably prevails. Moreover, said
Opinions are merely advisory and cannot prevail over the clear intent of the framers of the
Constitution.

In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best
merely advisory for it is the courts that finally determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A.
Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres,
Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that
the term "capital" in Section 11, Article XII of the Constitution includes preferred shares since
the Constitution does not distinguish among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporation’s "capital,"
without distinction as to classes of shares. x x x

In this connection, the Corporation Code – which was already in force at the time the present
(1987) Constitution was drafted – defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in
this Code, means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and preferred
shares, nor exclude either class of shares, in determining the outstanding capital stock (the
"capital") of a corporation. Consequently, petitioner’s suggestion to reckon PLDT’s foreign
equity only on the basis of PLDT’s outstanding common shares is without legal basis. The
language of the Constitution should be understood in the sense it has in common use.

xxxx

17. But even assuming that resort to the proceedings of the Constitutional Commission is
necessary, there is nothing in the Record of the Constitutional Commission (Vol. III) – which
petitioner misleadingly cited in the Petition x x x – which supports petitioner’s view that only
common shares should form the basis for computing a public utility’s foreign equity.

xxxx

18. In addition, the SEC – the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the
Constitution’s foreign equity restrictions as regards nationalized activities x x x – has
categorically ruled that both common and preferred shares are properly considered in
determining outstanding capital stock and the nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. The term "capital" in Section 11,
Article XII of the Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares,41 and not to the total outstanding
capital stock comprising both common and non-voting preferred shares.

The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation: Provided, That no
share may be deprived of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided, further, That there
shall always be a class or series of shares which have complete voting rights. Any or all of the
shares or series of shares may have a par value or have no par value as may be provided for in
the articles of incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be permitted to issue no-
par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution
of the assets of the corporation in case of liquidation and in the distribution of dividends, or such
other preferences as may be stated in the articles of incorporation which are not violative of the
provisions of this Code: Provided, That preferred shares of stock may be issued only with a
stated par value. The Board of Directors, where authorized in the articles of incorporation, may
fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That
such terms and conditions shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the corporation or to its creditors in respect
thereto: Provided; That shares without par value may not be issued for a consideration less than
the value of five (₱5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as capital and shall not be
available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.

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

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

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

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

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

corporations;

7. Investment of corporate funds in another corporation or business in accordance with

this Code; and

8. Dissolution of the corporation.

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

Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation.43 This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the corporation.44 In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred shareholders are often
excluded from any control, that is, deprived of the right to vote in the election of directors and on
other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.45 In fact, under the Corporation Code
only preferred or redeemable shares can be deprived of the right to vote.46 Common shares
cannot be deprived of the right to vote in any corporate meeting, and any provision in the articles
of incorporation restricting the right of common shareholders to vote is invalid.47

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article XII
of the Constitution refers only to common shares. However, if the preferred shares also have the
right to vote in the election of directors, then the term "capital" shall include such preferred
shares because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short, the term "capital" in
Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the
election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the
hands of Filipino citizens the control and management of public utilities. As revealed in the
deliberations of the Constitutional Commission, "capital" refers to the voting stock or
controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base
the equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on
the paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP
Law Center who provided us a draft. The phrase that is contained here which we adopted
from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting
stock or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such
citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital
to be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let
us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the
Filipinos own the nonvoting shares. So we can have a situation where the corporation is
controlled by foreigners despite being the minority because they have the voting capital.
That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and
1935 Constitutions is that according to Commissioner Rodrigo, there are associations that
do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the
corporation. Reinforcing this interpretation of the term "capital," as referring to controlling
interest or shares entitled to vote, is the definition of a "Philippine national" in the Foreign
Investments Act of 1991,50 to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of
the capital stock outstanding and entitled to vote of each of both corporations must be owned and
held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board
of Directors of each of both corporations must be citizens of the Philippines, in order that the
corporation, shall be considered a "Philippine national." (Emphasis supplied)
In explaining the definition of a "Philippine national," the Implementing Rules and Regulations
of the Foreign Investments Act of 1991 provide:

b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or

association wholly owned by the citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty percent [60%] of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee
of funds for pension or other employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent [60%] of the fund will accrue to the benefit of the
Philippine nationals; Provided, that where a corporation its non-Filipino stockholders own stocks
in a Securities and Exchange Commission [SEC] registered enterprise, at least sixty percent
[60%] of the capital stock outstanding and entitled to vote of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent [60%] of the members of the
Board of Directors of each of both corporation must be citizens of the Philippines, in order that
the corporation shall be considered a Philippine national. The control test shall be applied for this
purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on

the basis of outstanding capital stock whether fully paid or not, but only such stocks which
are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership
of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting
rights of which have been assigned or transferred to aliens cannot be considered held by
Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are

considered as non-Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent
of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with
the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine
national[s]."

Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned
by such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments." Thus, in numerous laws Congress has reserved certain areas of investments to
Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned by
Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or
R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for
Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A.
No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship
Mortgage Decree or P.D. No. 1521. Hence, the term "capital" in Section 11, Article XII of the
Constitution is also used in the same context in numerous laws reserving certain areas of
investments to Filipino citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including both
common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the "State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos." A broad definition unjustifiably disregards who owns the all-
important voting stock, which necessarily equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term "capital." Let us
assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-
voting preferred shares owned by Filipinos, with both classes of share having a par value of one
peso (₱1.00) per share. Under the broad definition of the term "capital," such corporation would
be considered compliant with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding
capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity
of less than 0.001 percent, exercise control over the public utility. On the other hand, the
Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of directors
and hence, have no control over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the Constitution, to place the control
of public utilities in the hands of Filipinos. It also renders illusory the State policy of an
independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the
present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of
directors. PLDT’s Articles of Incorporation expressly state that "the holders of Serial Preferred
Stock shall not be entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose or otherwise participate in any action taken by the
corporation or its stockholders, or to receive notice of any meeting of stockholders."51

On the other hand, holders of common shares are granted the exclusive right to vote in the
election of directors. PLDT’s Articles of Incorporation52 state that "each holder of Common
Capital Stock shall have one vote in respect of each share of such stock held by him on all
matters voted upon by the stockholders, and the holders of Common Capital Stock shall have
the exclusive right to vote for the election of directors and for all other purposes."53

In short, only holders of common shares can vote in the election of directors, meaning only
common shareholders exercise control over PLDT. Conversely, holders of preferred shares, who
have no voting rights in the election of directors, do not have any control over PLDT. In fact,
under PLDT’s Articles of Incorporation, holders of common shares have voting rights for all
purposes, while holders of preferred shares have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the
common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet (GIS),54
which is a document required to be submitted annually to the Securities and Exchange
Commission,55 foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold
only 66,750,622 common shares.56 In other words, foreigners hold 64.27% of the total number of
PLDT’s common shares, while Filipinos hold only 35.73%. Since holding a majority of the
common shares equates to control, it is clear that foreigners exercise control over PLDT. Such
amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership of
public utilities expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that
per share the SIP58 preferred shares earn a pittance in dividends compared to the common shares.
PLDT declared dividends for the common shares at ₱70.00 per share, while the declared
dividends for the preferred shares amounted to a measly ₱1.00 per share.59 So the preferred
shares not only cannot vote in the election of directors, they also have very little and obviously
negligible dividend earning capacity compared to common shares.

As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common
shares is ₱5.00 per share, whereas the par value of preferred shares is ₱10.00 per share. In other
words, preferred shares have twice the par value of common shares but cannot elect directors and
have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are
owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares.61
Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while
common shares constitute only 22.15%.62 This undeniably shows that beneficial interest in
PLDT is not with the non-voting preferred shares but with the common shares, blatantly
violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial
ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the State’s grant of authority to operate a public utility. The
undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and
earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership of a
public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60
percent of the dividends, of PLDT. This directly contravenes the express command in Section
11, Article XII of the Constitution that "[n]o franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to x x x corporations x x
x organized under the laws of the Philippines, at least sixty per centum of whose capital is
owned by such citizens x x x."

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over PLDT;
(2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting
stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by
Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that
common shares earn;63 (5) preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares
only 22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution.

Incidentally, the fact that PLDT common shares with a par value of ₱5.00 have a current stock
market value of ₱2,328.00 per share,64 while PLDT preferred shares with a par value of ₱10.00
per share have a current stock market value ranging from only ₱10.92 to ₱11.06 per share,65 is a
glaring confirmation by the market that control and beneficial ownership of PLDT rest with the
common shares, not with the preferred shares.

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to
include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the State’s
constitutional duty to limit control of public utilities to Filipino citizens. Such an interpretation
certainly runs counter to the constitutional provision reserving certain areas of investment to
Filipino citizens, such as the exploitation of natural resources as well as the ownership of land,
educational institutions and advertising businesses. The Court should never open to foreign
control what the Constitution has expressly reserved to Filipinos for that would be a betrayal of
the Constitution and of the national interest. The Court must perform its solemn duty to defend
and uphold the intent and letter of the Constitution to ensure, in the words of the Constitution, "a
self-reliant and independent national economy effectively controlled by Filipinos."

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly
reserving to Filipinos specific areas of investment, such as the development of natural resources
and ownership of land, educational institutions and advertising business, is self-executing. There
is no need for legislation to implement these self-executing provisions of the Constitution. The
rationale why these constitutional provisions are self-executing was explained in Manila Prince
Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a

constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-
executing, the legislature would have the power to ignore and practically nullify the mandate of
the fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has
always been, that —

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution
should be considered self-executing, as a contrary rule would give the legislature discretion
to determine when, or whether, they shall be effective. These provisions would be
subordinated to the will of the lawmaking body, which could make them entirely meaningless by
simply refusing to pass the needed implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno,
later Chief Justice, agreed that constitutional provisions are presumed to be self-executing.
Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as
requiring future legislation for their enforcement. The reason is not difficult to discern. For if
they are not treated as self-executing, the mandate of the fundamental law ratified by the
sovereign people can be easily ignored and nullified by Congress. Suffused with wisdom of
the ages is the unyielding rule that legislative actions may give breath to constitutional
rights but congressional inaction should not suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches
and seizures, the rights of a person under custodial investigation, the rights of an accused, and
the privilege against self-incrimination. It is recognized that legislation is unnecessary to enable
courts to effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty
and the protection of property. The same treatment is accorded to constitutional provisions
forbidding the taking or damaging of property for public use without just compensation.
(Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied
directly the provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to
Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his

land to an alien, and as both the citizen and the alien have violated the law, none of them should
have a recourse against the other, and it should only be the State that should be allowed to
intervene and determine what is to be done with the property subject of the violation. We have
said that what the State should do or could do in such matters is a matter of public policy,
entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R.
No. L-5996, June 27, 1956.) While the legislature has not definitely decided what policy
should be followed in cases of violations against the constitutional prohibition, courts of
justice cannot go beyond by declaring the disposition to be null and void as violative of the
Constitution. x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since
the 1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly
reserving specific areas of investments to corporations, at least 60 percent of the "capital" of
which is owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987
Constitutions miserably failed to effectively reserve to Filipinos specific areas of investment, like
the operation by corporations of public utilities, the exploitation by corporations of mineral
resources, the ownership by corporations of real estate, and the ownership of educational
institutions. All the legislatures that convened since 1935 also miserably failed to enact
legislations to implement these vital constitutional provisions that determine who will effectively
control the national economy, Filipinos or foreigners. This Court cannot allow such an absurd
interpretation of the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions."69 Under its
regulatory functions, the SEC can be compelled by mandamus to perform its statutory duty when
it unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial functions, the
SEC can be also be compelled by mandamus to hear and decide a possible violation of any law it
administers or enforces when it is mandated by law to investigate such violation.1awphi1

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or
disapprove the Articles of Incorporation of any corporation where "the required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the Constitution." Thus, the SEC is the
government agency tasked with the statutory duty to enforce the nationality requirement
prescribed in Section 11, Article XII of the Constitution on the ownership of public utilities. This
Court, in a petition for declaratory relief that is treated as a petition for mandamus as in the
present case, can direct the SEC to perform its statutory duty under the law, a duty that the SEC
has apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the "power and
function" to "suspend or revoke, after proper notice and hearing, the franchise or certificate
of registration of corporations, partnerships or associations, upon any of the grounds
provided by law." The SEC is mandated under Section 5(d) of the same Code with the "power
and function" to "investigate x x x the activities of persons to ensure compliance" with the
laws and regulations that SEC administers or enforces. The GIS that all corporations are required
to submit to SEC annually should put the SEC on guard against violations of the nationality
requirement prescribed in the Constitution and existing laws. This Court can compel the SEC, in
a petition for declaratory relief that is treated as a petition for mandamus as in the present case, to
hear and decide a possible violation of Section 11, Article XII of the Constitution in view of the
ownership structure of PLDT’s voting shares, as admitted by respondents and as stated in
PLDT’s 2010 GIS that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section
11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, and not to the total
outstanding capital stock (common and non-voting preferred shares). Respondent Chairperson of
the Securities and Exchange Commission is DIRECTED to apply this definition of the term
"capital" in determining the extent of allowable foreign ownership in respondent Philippine Long
Distance Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.

SO ORDERED.

13.

G.R. No. 175109 August 6, 2008

PARAMOUNT INSURANCE CORP., petitioner,

vs.
A.C. ORDOÑEZ CORPORATION and FRANKLIN SUSPINE, respondents.

DECISION
YNARES-SANTIAGO, J.:

This petition for review on certiorari seeks to annul and set aside the July 17, 2006 Decision1 of
the Court of Appeals in CA-G.R. SP No. 93073, which reversed and set aside the September 21,
2005 Decision of the Regional Trial Court of Makati City, Branch 582 and reinstated the August
25, 2000 and September 26, 2000 Orders of the Metropolitan Trial Court of Makati City, Branch
66,3 which admitted respondent’s Answer and set the case for pre-trial, as well as its October 12,
2006 Resolution4 denying the Motion for Reconsideration.

Petitioner Paramount Insurance Corp. is the subrogee of Maximo Mata, the registered owner of a
Honda City sedan involved in a vehicular accident with a truck mixer owned by respondent
corporation and driven by respondent Franklin A. Suspine on September 10, 1997, at Brgy.
Panungyanan, Gen. Trias, Cavite.

On February 22, 2000, petitioner filed before the Metropolitan Trial Court of Makati City, a
complaint for damages against respondents. Based on the Sheriff’s Return of Service, summons
remained unserved on respondent Suspine,5 while it was served on respondent corporation and
received by Samuel D. Marcoleta of its Receiving Section on April 3, 2000.6

On May 19, 2000, petitioner filed a Motion to Declare Defendants in Default; however, on June
28, 2000, respondent corporation filed an Omnibus Motion (And Opposition to Plaintiff’s
Motion to Declare Defendant in Default) alleging that summons was improperly served upon it
because it was made to a secretarial staff who was unfamiliar with court processes; and that the
summons was received by Mr. Armando C. Ordoñez, President and General Manager of
respondent corporation only on June 24, 2000. Respondent corporation asked for an extension of
15 days within which to file an Answer.

Pending resolution of its first motion to declare respondents in default, petitioner filed on June
30, 2000 a Second Motion to Declare Defendants in Default.

On July 26, 2000, respondent corporation filed a Motion to Admit Answer alleging honest
mistake and business reverses that prevented them from hiring a lawyer until July 10, 2000, as
well as justice and equity. The Answer with Counterclaim specifically denied liability, averred
competency on the part of respondent Suspine, and due selection and supervision of employees
on the part of respondent corporation, and argued that it was Maximo Mata who was at fault.

On August 25, 2000, the Metropolitan Trial Court of Makati City, Branch 66, issued an Order
admitting the answer and setting the case for pre-trial, thus:

When this case was called for the hearing of Motion, the Court’s attention was brought to the
Answer filed by the defendant.

WHEREFORE, in order to afford the defendants a day in Court, defendant’s answer is

admitted and the pre-trial is set for October 17, 2000 at 8:30 in the morning.

SO ORDERED.

Petitioner moved for reconsideration but it was denied. Thus, it filed a petition for certiorari and
mandamus with prayer for preliminary injunction and temporary restraining order before the
Regional Trial Court of Makati City. Petitioner claimed that the Metropolitan Trial Court gravely
abused its discretion in admitting the answer which did not contain a notice of hearing, contrary
to Sections 4 and 5, Rule 15 of the Rules of Court. It also assailed respondent corporation’s
Omnibus Motion for being violative of Section 9, Rule 15 because while it sought leave to file an
answer, it did not attach said answer but only asked for a 15-day extension to file the same.
Petitioner also averred that assuming the Omnibus Motion was granted, the Motion to Admit
Answer and the Answer with Counterclaim were filed 26 days beyond the extension period it
requested.
On October 16, 2000, the Regional Trial Court of Makati City, Branch 58 issued a temporary
restraining order, and on May 22, 2001, issued a writ of preliminary injunction. On September
21, 2005, the Regional Trial Court rendered a Decision7 granting the petition, thus:

WHEREFORE, premises considered, the petition for certiorari and mandamus is hereby
GRANTED. The Orders of public respondent dated August 25, 2000 and September 26,
2000 are hereby SET ASIDE. The writ of preliminary injunction issued by this Court on
May 22, 2001 is hereby made permanent.

The case is hereby remanded to the court a quo to act on petitioner’s (plaintiff’s) "Second
motion to declare defendants in Default" dated June 29, 2000.

SO ORDERED.

Respondent corporation moved for reconsideration but it was denied; hence, it appealed to the
Court of Appeals which rendered the assailed Decision dated July 17, 2006, thus:

By and large, We find no abuse of discretion committed by the first level court in the
contested orders.

IN VIEW OF ALL THE FOREGOING, the instant appeal is hereby GRANTED, the
challenged RTC Decision dated September 21, 2005 is hereby REVERSED and SET
ASIDE, and a new one entered REINSTATING the Orders dated August 25, 2000 and
September 26, 2000 of the Metropolitan Trial Court of Makati City. No pronouncement
as to cost.

SO ORDERED.

Petitioner’s motion for reconsideration was denied. Hence, the instant petition raising the
following issues:

I. WHETHER THERE WAS VALID SERVICE OF SUMMONS ON DEFENDANT AC

ORDONEZ CONSTRUCTION CORPORATION.

II. WHETHER A PARTY WITHOUT CORPORATE EXISTENCE MAY FILE AN

APPEAL.

III. WHETHER THIS COURT ERRED IN NOT CALLING THE PARTIES INTO
MEDIATION.

IV. WHETHER THERE WAS FRAUD COMMITTED BY THE PETITIONER IN ITS

PLEADINGS.

The petition lacks merit.

Section 11, Rule 14 of the Rules of Court provides:

SEC. 11. Service upon domestic private juridical entity. – When the defendant is a
corporation, partnership or association organized under the laws of the Philippines with a
juridical personality, service may be made on the president, managing partner, general
manager, corporate secretary, treasurer, or in-house counsel.

Section 11, Rule 14 sets out an exclusive enumeration of the officers who can receive summons
on behalf of a corporation. Service of summons to someone other than the corporation’s
president, managing partner, general manager, corporate secretary, treasurer, and in-house
counsel, is not valid.
The designation of persons or officers who are authorized to receive summons for a domestic
corporation or partnership is limited and more clearly specified in the new rule. The phrase
‘agent, or any of its directors’ has been conspicuously deleted.8 Moreover, the argument of
substantial compliance is no longer compelling. We have ruled that the new rule, as opposed to
Section 13, Rule 14 of the 1964 Rules of Court, is restricted, limited and exclusive, following the
rule in statutory construction that expressio unios est exclusio alterius. Had the Rules of Court
Revision Committee intended to liberalize the rule on service of summons, it could have done so
in clear and concise language. Absent a manifest intent to liberalize the rule, strict compliance
with Section 11, Rule 14 of the 1997 Rules of Civil Procedure is required.9

Thus, the service of summons to respondent corporation’s Receiving Section through Samuel D.
Marcoleta is defective and not binding to said corporation.

Moreover, petitioner was served with a copy of the Sheriff’s Return which states:

3. MANNER OF SERVICE: DULY SERVED thru SAMUEL D. MARCOLETA

(receiving section-A.C. Ordonez Construction Corp.,) and who was authorized by A. C.
Ordonez Construction Corp., management to receive such court processes.

On its face, the return shows that the summons was received by an employee who is not among
the responsible officers enumerated by law. Such being invalid, petitioner should have sought the
issuance and proper service of new summons instead of moving for a declaration of default.

Consequently, the motions for declaration of default filed on May 19, 2000 and June 30, 2000
were both premature.

Thus, there was no grave abuse of discretion when the Metropolitan Trial Court admitted
respondent corporation’s Answer. Although it was filed beyond the extension period requested
by respondent corporation, however, Sec. 11, Rule 11 grants discretion to the trial court to allow
an answer or other pleading to be filed after the reglementary period, upon motion and on such
terms as may be just. An answer should be admitted where it had been filed before the defendant
was declared in default and no prejudice is caused to plaintiff. The hornbook rule is that default
judgments are generally disfavored.10

There is likewise no merit in petitioner’s claim that respondent corporation lacks legal
personality to file an appeal. Although the cancellation of a corporation’s certificate of
registration puts an end to its juridical personality, Sec. 122 of the Corporation Code, however
provides that a corporation whose corporate existence is terminated in any manner continues to
be a body corporate for three years after its dissolution for purposes of prosecuting and
defending suits by and against it and to enable it to settle and close its affairs.11 Moreover, the
rights of a corporation, which is dissolved pending litigation, are accorded protection by law
pursuant to Sec. 145 of the Corporation Code, to wit:

Section 145. Amendment or repeal. No right or remedy in favor of or against any

corporation, its stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or of any part
thereof. (Emphasis ours)

Dissolution or even the expiration of the three-year liquidation period should not be a bar to a
corporation’s enforcement of its rights as a corporation.12

Finally, the decision to refer a case to mediation involves judicial discretion. Although Sec. 9 B,
Rule 141 of the Rules of Court, as amended by A. M. No. 04-2-04-SC, requires the payment of
P1,000.00 as mediation fee upon the filing of a mediatable case, petition, special civil action,
comment/answer to the petition or action, and the appellee’s brief, the final decision to refer a
case to mediation still belongs to the ponente, subject to the concurrence of the other members of
the division.

As clarified by A. M. No. 04-3-15 (Revised Guidelines for the Implementation of Mediation in

the Court of Appeals) dated March 23, 2004:

II. SELECTION OF CASES

Division Clerks of Court, with the assistance of the Philippine Mediation Center (PMC),
shall identify the pending cases to be referred to mediation for the approval either of the
Ponente for completion of records, or, the Ponente for decision. Henceforth, the
petitioner or appellant shall specify – by writing or by stamping on the right side of the
caption of the initial pleading (under the case number) that the case is mediatable.

Any party who is interested to have the appealed case mediated may also submit a
written request in any form to the Court of Appeals. If the case is eligible for
mediation, the Ponente, with the concurrence of the other members of the Division, shall
refer the case to the PMC. (Emphasis ours)

Thus, for cases pending at the time the said guidelines were issued, the Division Clerks of Court,
with the assistance of the Philippine Mediation Center, shall identify the cases to be referred to
mediation. Thereafter, the petitioner or appellant shall specify, by writing or by stamping on the
right side of the caption of the initial pleading (under the case number), that the case is
mediatable. Further, any party who is interested to have the appealed case mediated may also
submit a "written request in any form to the Court of Appeals." In the instant case, petitioner
failed to write or stamp the notation "mediatable" on its Memorandum of Appeal. Moreover, it
failed to submit any written request for mediation.

WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals dated
July 17, 2006 reinstating the August 25, 2000 and September 26, 2000 Orders of the
Metropolitan Trial Court of Makati City, Branch 66 which admitted respondent corporation’s
Answer and set the case for pre-trial, as well as the Resolution dated October 12, 2006 denying
the motion for reconsideration, are AFFIRMED.

SO ORDERED.

14. (a)

G.R. No. 171392 October 30, 2006

RUPERTO SULDAO, petitioner,

vs.
CIMECH SYSTEM CONSTRUCTION, INC. and ENGR. RODOLFO S. LABUCAY,
respondents.

DECISION

YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the Decision1 dated June 23, 2005 of the Court of
Appeals in CA-G.R. SP No. 83963, which reversed and set aside the February 27, 2004
Resolution2 of the National Labor Relations Commission (NLRC) in NLRC CA No. 036963-03
and the August 5, 2003 Decision of the Labor Arbiter finding petitioner to have been
constructively dismissed. Also assailed is the January 10, 2006 Resolution3 denying petitioner’s
motion for reconsideration.

The facts are as follows:

Respondent Cimech Systems Construction, Inc. employed the services of petitioner Ruperto
Suldao on August 31, 2001 as a machinist with a daily wage of P300.00 on a contractual status
for a period of five months. After January 31, 2002, respondent continued to engage the services
of petitioner as a machinist until he became a permanent employee.

Petitioner alleged that owing to a dearth in projects being handled by the respondent, he was
ordered by Ms. Elsa Labocay to take a leave of absence from November 1 to 6, 2002. He
reported for work on November 7, 2002 but was again ordered to take a leave of absence from
November 7 to 14, 2002. On November 15, 2002, he was purportedly ordered to make a letter-
request for field work transfer which he complied. The following day, he failed to report back for
work because he was sick. On November 17, 2002, he reported for work but was allegedly
barred from entering by the security guard on duty. On November 21, 2002, he was again barred
from entering the premises, hence he filed the instant complaint4 for constructive dismissal.5

Respondent alleged that due to lack of available work in the machine shop, petitioner was
temporarily transferred to its fabrication department sometime in November 2002. Petitioner
refused to accept the transfer and insisted to work as a machinist. Because of petitioner’s
arrogant and unruly behavior, he was led away by a guard. When petitioner returned for work, he
purportedly demanded a salary increase and wages for the days that he did not work. Respondent
considered the actuations of petitioner tantamount to insubordination, hence, it suspended6 the
petitioner for six days.

After his suspension on November 28, 2002, petitioner accepted his transfer to the fabrication
department but worked for only one day. During the company’s Christmas party on December
21, 2002, petitioner came and asked for his 13th month pay. On January 13, 2003, petitioner
demanded to get his one day salary deposit but was told to secure a clearance which he failed to
comply. Thereafter, petitioner filed the instant complaint for illegal dismissal.

On August 5, 2003, Labor Arbiter Melquiades Sol D. Del Rosario rendered a decision, the
dispositive portion of which reads:

CONFORMABLY WITH THE FOREGOING, judgment is hereby rendered finding

complainant to have been illegally dismissed constructively. Consequently, he should be
reinstated to his former position and paid his backwages which has accumulated as of
July 17, 2003 in the sum of P62,400.00 plus his one month separation pay of P7,800.00.

SO ORDERED.7

The NLRC concurred with the findings of the Labor Arbiter that petitioner was constructively
dismissed.

Hence, respondent filed a petition for certiorari8 which was granted by the Court of Appeals. In
its assailed June 23, 2005 decision, the Court of Appeals reversed the NLRC by declaring:

WHEREFORE, premises considered, the Petition is hereby given DUE COURSE, and
the February 27, 2004 Decision of the NLRC is hereby REVERSED and SET ASIDE.
The December 20, 2002 Complaint is hereby DISMISSED.

SO ORDERED.9

Hence, this petition raising the sole issue of:

 WHETHER THE COURT OF APPEALS COMMITED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
REVERSING THE DECISION OF THE LABOR ARBITER AND THE NLRC THAT
THE PETITIONER WAS CONSTRUCTIVELY DISMISSED.

As a general rule, a petition for review on certiorari under Rule 45 of the Rules of Court is
limited to questions of law. However, this rule admits of exceptions,10 such as in this case where
the findings of the Labor Arbiter and the NLRC vary from the findings of the Court of Appeals.

The petition is impressed with merit.

After a painstaking review of the records, we uphold the findings of the Labor Arbiter and of the
NLRC that petitioner was constructively dismissed. Constructive dismissal or a constructive
discharge has been defined as quitting because continued employment is rendered impossible,
unreasonable or unlikely, as an offer involving a demotion in rank and a diminution in pay.11 In
the instant case, there is constructive dismissal because the continued employment of petitioner
is rendered impossible so as to foreclose any choice on his part except to resign from such
employment.12

In cases of constructive dismissal, the burden of proof is on the employer to show that the
employee was dismissed for a valid and a just cause.13 In the instant case, respondent failed to
discharge this burden. As aptly observed by the NLRC:

In essence, respondents would have it that they have not dismissed complainant, rather it
was he who did not return to his job after 13 January 2003.

To begin with, the issues raised undoubtedly was factual, the determination of which lies
within the competence of the Labor Arbiter’s jurisdiction, over which this Commission
will interfere only when grave abuse or serious errors were committed by him in the
interpretation of the evidence on records.

In this case however, respondents failed to show by substantial proof the veracity of their
assertion. For one, while claiming that complainant was placed on a six (6) days
suspension for an alleged infraction, they failed nonetheless to adduce evidence showing
that indeed complainant committed the offense and was placed as such as disciplinary
measure.

Relevant on this score is the observation and findings of the Labor Arbiter, to wit:

Respondents’ averment that complainant was arrogant, and did not want to be transferred
to another position or department is belied by complainant’s letter dated November 28,
2002.

Excerpts from complainant’s letter reads:

"Na tinatanggap ko na utos ng kumpanyang ito na umako ng ibang gawain para sa

kabutihan ng lahat. Na ang pagtanggap ko ng ibang trabaho ay pansamantala lang
habang walang gawain sa dati ko puwesto or gawain trabaho sa kompanya.

Nang ang sulat salaysay kong ito ay aking isinagawa bilang pagtalima sa kautusan
ng atin kumpanya.

xxxx

Complainant’s claim that he was required to go on a leave of absence due to a dearth of

work is consistent with respondent’s claim that there was scarcity of work because of the
economic crisis.
 By all appearances, complainant does not have a high educational attainment and his skill
is limited to being a machinist. As such, all he can do is to obey the biddings of his
superior. So when required to go on leave, he meekly obeys.

Even his claim that he failed to report for work due to indisposition is supported by a
medical certificate. As between the conflicting claims of the parties, this Arbitration
Branch has to accord more weight to complainant’s claim that he was no longer allowed
to work because he was barred by the security guard of the company to enter the premises
for reasons only known to respondents.

Had there been truth to respondents’ claim that complainant abandoned his work because
he did not want the job in the fabrication department, complainant would not have made a
letter of conformity to do the bidding of the company. Moreover, complainant would not
have taken steps to protect his rights like the institution of the present labor suit if he had
abandoned his work because rather than spend time, effort and a little money in attending
to the hearings of this case, he would have concentrated in his new job or in finding one
in order to feed his family.14

While the decision to transfer employees to other areas of its operations forms part of the well
recognized prerogatives of management, it must be stressed, however, that the managerial
prerogative to transfer personnel must not be exercised with grave abuse of discretion, bearing in
mind the basic elements of justice and fair play. Having the right should not be confused with the
manner in which that right is exercised. Thus it cannot be used as a subterfuge by the employer
to rid himself of an undesirable worker.15

In the instant case, while petitioner’s transfer was valid, the manner by which respondent
unjustifiably prevented him from returning to work on several occasions runs counter to the
claim of good faith on the part of respondent corporation. By reporting for work, petitioner
manifested his willingness to comply with the regulations of the corporation and his desire to
continue working for the latter. However, he was barred from entering the premises without any
explanation. This is a clear manifestation of disdain and insensibility on the part of an employer
towards a particular employee and a veritable hallmark of constructive dismissal.

We cannot sustain the theory of respondent that since petitioner was allowed to join its 2002
Christmas Party, there can be no constructive dismissal. Petitioner’s joining the Christmas party
does not negate his illegal dismissal. Neither does it detract us from the fact that petitioner was
prevented from entering the premises of the respondent corporation on previous occasions.

While the liability of the respondent corporation for the constructive dismissal of the petitioner
has been clearly established, the same does not hold true with the other respondent, Engr.
Rodolfo S. Labucay, President and General Manager of the respondent corporation.16 In finding
Labucay also liable, the Labor Arbiter declared that:

The foregoing circumstances support the view that complainant was constructively
dismissed in an illegal manner. Consequently, respondents, in solidum, are ordered to
reinstate the complainant to his former position and pay complainant his backwages x x
x.

A corporation is invested by law with a personality separate from that of its stockholders or
members. It has a personality separate and distinct from those of the persons composing it as
well as from that of any other entity to which it may be related. Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is
not in itself sufficient ground for disregarding the separate corporate personality. A corporation’s
authority to act and its liability for its actions are separate and apart from the individuals who
own it.
The veil of corporate fiction treats as separate and distinct the affairs of a corporation and its
officers and stockholders. As a general rule, a corporation will be looked upon as a legal entity,
unless and until sufficient reason to the contrary appears. When the notion of legal entity is used
to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard
the corporation as an association of persons. Also, the corporate entity may be disregarded in the
interest of justice in such cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third persons. In both instances, there
must have been fraud and proof of it. For the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly established. It cannot be
presumed.17

In the instant case, no reason exists that will justify the piercing of the veil of corporate fiction
such as to hold Labucay, as the president and general manager of the respondent corporation,
solidarily liable with it. Thus, the liability for the constructive dismissal of the petitioner solely
devolves upon the respondent corporation. Consequently, the decision of the Labor Arbiter and
of the NLRC should be modified in that only the respondent corporation should be held liable.

WHEREFORE, the petition is GRANTED. The June 23, 2005 Decision of the Court of
Appeals in CA-G.R. SP No. 83963 and its January 10, 2006 Resolution are REVERSED and
SET ASIDE. The February 27, 2004 Resolution of the National Labor Relations Commission in
NLRC CA No. 036963-03 affirming the decision of the Labor Arbiter finding that petitioner was
constructively dismissed, is REINSTATED with MODIFICATION that only the respondent
corporation, Cimech System Construction, Inc. is held liable.

No pronouncement as to costs.

SO ORDERED.

14. (b)

G.R. No. 158262 July 21, 2008

SPS. PEDRO AND FLORENCIA VIOLAGO, Petitioners,

vs.
BA FINANCE CORPORATION and AVELINO VIOLAGO, Respondents.

DECISION

VELASCO, JR., J.:

This is a Petition for Review on Certiorari of the August 20, 2002 Decision1 and May 15, 2003
Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled BA Finance
Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia Violago, Defendants and Third Party
Plaintiffs-Appellants v. Avelino Violago, Third Party Defendant-Appellant. Petitioners-spouses
Pedro and Florencia Violago pray for the reversal of the appellate court’s ruling which held them
liable to respondent BA Finance Corporation (BA Finance) under a promissory note and a chattel
mortgage. Petitioners likewise pray that respondent Avelino Violago be adjudged directly liable
to BA Finance.

The Facts

Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC),
offered to sell a car to his cousin, Pedro F. Violago, and the latter’s wife, Florencia. Avelino
explained that he needed to sell a vehicle to increase the sales quota of VMSC, and that the
spouses would just have to pay a down payment of PhP 60,500 while the balance would be
financed by respondent BA Finance. The spouses would pay the monthly installments to BA
Finance while Avelino would take care of the documentation and approval of financing of the
car. Under these terms, the spouses then agreed to purchase a Toyota Cressida Model 1983 from
VMSC.3

On August 4, 1983, the spouses and Avelino signed a promissory note under which they bound
themselves to pay jointly and severally to the order of VMSC the amount of PhP 209,601 in 36
monthly installments of PhP 5,822.25 a month, the first installment to be due and payable on
September 16, 1983. Avelino prepared a Disclosure Statement of Loan/Credit Transportation
which showed the net purchase price of the vehicle, down payment, balance, and finance
charges. VMSC then issued a sales invoice in favor of the spouses with a detailed description of
the Toyota Cressida car. In turn, the spouses executed a chattel mortgage over the car in favor of
VMSC as security for the amount of PhP 209,601. VMSC, through Avelino, endorsed the
promissory note to BA Finance without recourse. After receiving the amount of PhP 209,601,
VMSC executed a Deed of Assignment of its rights and interests under the promissory note and
chattel mortgage in favor of BA Finance. Meanwhile, the spouses remitted the amount of PhP
60,500 to VMSC through Avelino.4

The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which
issued Certificate of Registration No. 0137032 in the name of Pedro on August 8, 1983. The
spouses were unaware that the same car had already been sold in 1982 to Esmeraldo Violago,
another cousin of Avelino, and registered in Esmeraldo’s name by the LTO-San Rafael Branch.
Despite the spouses’ demand for the car and Avelino’s repeated assurances, there was no
delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay any monthly
amortization to BA Finance. 5

On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in Pasay
City a complaint for Replevin with Damages against the spouses. The complaint, docketed as
Civil Case No. 1628-P, prayed for the delivery of the vehicle in favor of BA Finance or, if
delivery cannot be effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per
month from February 15, 1984 until fully paid. BA Finance also asked for the payment of
attorney’s fees, liquidated damages, replevin bond premium, expenses in the seizure of the
vehicle, and costs of suit. The RTC issued an Order of Replevin on March 28, 1984. The Violago
spouses, as defendants a quo, were declared in default for failing to file an answer. Eventually,
the RTC rendered on December 3, 1984 a decision in favor of BA Finance. A writ of execution
was thereafter issued on January 11, 1985, followed by an alias writ of execution.6

In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued
Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On
May 8, 1987, Jose executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez as
security for a loan covered by a promissory note in the amount of PhP 260,664. This promissory
note was later endorsed to BA Finance, Cebu City branch.7

On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to
Quash Writ of Execution on the basis of lack of a valid service of summons on them, among
other reasons. The RTC denied the motions; hence, the spouses filed a petition for certiorari
under Rule 65 before the CA, docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA
nullified the RTC’s order. This CA decision became final and executory.

On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following: they
never received the vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA
Finance was not a holder in due course under Section 59 of the Negotiable Instruments Law
(NIL); and the recourse of BA Finance should be against VMSC. On February 25, 1995, the
Violago spouses, with prior leave of court, filed a Third Party Complaint against Avelino praying
that he be held liable to them in the event that they be held liable to BA Finance, as well as for
damages. VMSC was not impleaded as third party defendant. In his Motion to Dismiss and
Answer, Avelino contended that he was not a party to the transaction personally, but VMSC.
Avelino’s motion was denied and the third party complaint against him was entertained by the
trial court. Subsequently, the spouses belabored to prove that they affixed their signatures on the
promissory note and chattel mortgage in favor of VMSC in blank.8

The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the Violago
spouses. The RTC, however, declared that they are entitled to be indemnified by Avelino. The
dispositive portion of the RTC’s decision reads:

WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R.

Violago are ordered to deliver to plaintiff BA Finance Corporation, at its principal office the
BAFC Building, Gamboa St., Legaspi Village, Makati, Metro Manila the Toyota Cressida car,
model 1983, bearing Engine No. 21R-02854117, and with Serial No. RX60-804614, covered by
the deed of chattel mortgage dated August 4, 1983; or if such delivery cannot be made, to pay,
jointly and severally, to the plaintiff the sum of P198,003.06 together with the penalty [thereon]
at three percent (3%) a month, from March 1, 1984, until the amount is fully paid.

In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally, to the
plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney’s fees, and
another amount also equivalent to twenty five percent (25%) of the said unpaid balance, as
liquidated damages. The defendant-third party-plaintiffs are also required to shoulder the
litigation expenses and costs.1awphil

As indemnification, third-party defendant Avelino Violago is ordered to deliver to defendants-

third-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago the aforedescribed
motor vehicle; or if such delivery is not possible, to pay to the said spouses the sum of
P198,003.06, together with the penalty thereon at three (3%) a month from March 1, 1984, until
the amount is entirely paid.

In either case, the third-party defendant should pay to the defendant-third-party plaintiffs spouses
a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney’s fees, and another
sum equivalent also to twenty-five percent (25%) of the said unpaid balance, as liquidated
damages.

Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs the
sum of P60,500.00 they paid to him as down payment for the car; and to pay them P15,000.00 as
moral damages; P10,000.00 as exemplary damages; and reimburse them for all the expenses and
costs of the suit.

The counterclaims of the defendants and third-party defendant, for lack of merit, are dismissed.9

The Ruling of the CA

Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory
note is a negotiable instrument; hence, the trial court should have applied the NIL and not the
Civil Code. The spouses also asserted that since VMSC was not the owner of the vehicle at the
time of sale, the sale was null and void for the failure in the "cause or consideration" of the
promissory note, which in this case was the sale and delivery of the vehicle. The spouses also
alleged that BA Finance was not a holder in due course of the note since it knew, through its
Cebu City branch, that the car was never delivered to the spouses.10 On the other hand, Avelino
prayed for the dismissal of the complaint against him because he was not a party to the
transaction, and for an order to the spouses to pay him moral damages and costs of suit.

The appellate court ruled that the promissory note was a negotiable instrument and that BA
Finance was a holder in due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted
petitioners for failing to implead VMSC, the seller of the vehicle and creditor in the promissory
note, as a party in their Third Party Complaint. Citing Salas v. Court of Appeals,11 the appellate
court reasoned that since VMSC is an indispensable party, any judgment will not bind it or be
enforced against it. The absence of VMSC rendered the proceedings in the RTC and the
judgment in the Third Party Complaint "null and void, not only as to the absent party but also to
the present parties, namely the Defendants-Appellants (petitioners herein) and the Third-Party-
Defendant-Appellant (Avelino Violago)." The CA set aside the trial court’s order holding
Avelino liable for damages to the spouses without prejudice to the action of the spouses against
VMSC and Avelino in a separate action.12

The dispositive portion of the August 20, 2002 CA Decision reads:

IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is

DISMISSED. The appeal of the Third-Party-Defendant-Appellant is GRANTED. The Decision
of the Court a quo is AFFIRMED, with the modification that the Third-Party Complaint against
the Third-Party-Defendant-appellant is DISMISSED, without prejudice. The counterclaims of
the Third-Party Defendant Appellant against the Defendants-Appellants are DISMISSED, also
without prejudice.13

The spouses Violago sought but were denied reconsideration by the CA per its Resolution of
May 15, 2003.

The Issues

Petitioners raise the following issues:

WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE

PROMISSORY NOTE MAY BE CONSIDERED A HOLDER IN DUE COURSE

WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED

VALID DESPITE VITIATION OF CONSENT OF, AND THE FRAUD COMMITTED
ON, THE MORTGAGORS BY AVELINO, AND THE CLEAR ABSENCE OF
OBJECT CERTAIN

WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED

AND SUSTAINED DESPITE THE FRAUD AND DECEPTION OF AVELINO

The Court’s Ruling

The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the third
party complaint of petitioners against Avelino thereby effectively absolving Avelino from any
liability under the third party complaint.

In addressing the threshold issue of whether BA Finance is a holder in due course of the
promissory note, we must determine whether the note is a negotiable instrument and, hence,
covered by the NIL. In their appeal to the CA, petitioners argued that the promissory note is a
negotiable instrument and that the provisions of the NIL, not the Civil Code, should be applied.
In the present petition, however, petitioners claim that Article 1318 of the Civil Code14 should be
applied since their consent was vitiated by fraud, and, thus, the promissory note does not carry
any legal effect despite its negotiation. Either way, the petitioners’ arguments deserve no merit.

The promissory note is clearly negotiable. The appellate court was correct in finding all the
requisites of a negotiable instrument present. The NIL provides:

Section 1. Form of Negotiable Instruments. – An instrument to be negotiable must conform to

the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;
 (c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.

The promissory note signed by petitioners reads:

209,601.00 Makati, Metro Manila, Philippines, August 4, 1983

For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO
MOTOR SALES CORPORATION, its office, the principal sum of TWO HUNDRED NINE
THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00), Philippines Currency, with
interest at the rate stipulated herein below, in installments as follows:

Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid on
9-16-83, and the succeeding monthly installments on the 16th day of each and every succeeding
month thereafter until the account is fully paid, provided that the penalty charge of three (3%)
per cent per month or a fraction thereof shall be added on each unpaid installment from maturity
thereof until fully paid.

xxxx

Notice of demand, presentment, dishonor and protest are hereby waived.

(Sgd.) (Sgd.)
PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO
763 Constancia St., Sampaloc, Manila same
(Address) (Address)
(Sgd.) (Sgd.)
Marivic Avaria Jesus Tuazon
(WITNESS) (WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATION

WITHOUT RECOURSE

VIOLAGO MOTOR SALES CORPORATION

By: (Sgd.)
AVELINO A. VIOLAGO, Pres. 15

The promissory note clearly satisfies the requirements of a negotiable instrument under the NIL.
It is in writing; signed by the Violago spouses; has an unconditional promise to pay a certain
amount, i.e., PhP 209,601, on specific dates in the future which could be determined from the
terms of the note; made payable to the order of VMSC; and names the drawees with certainty.
The indorsement by VMSC to BA Finance appears likewise to be valid and regular.

The more important issue now is whether or not BA Finance is a holder in due course. The
resolution of this issue will determine whether petitioners’ defense of fraud and nullity of the
sale could validly be raised against respondent corporation. Sec. 52 of the NIL provides:
Section 52. What constitutes a holder in due course.––A holder in due course is a holder who has
taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

The law presumes that a holder of a negotiable instrument is a holder thereof in due course. 16 In
this case, the CA is correct in finding that BA Finance meets all the foregoing requisites:

In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is complete and
regular; (b) the "Promissory Note" was endorsed by the VMSC in favor of the Appellee; (c) the
Appellee, when it accepted the Note, acted in good faith and for value; (d) the Appellee was
never informed, before and at the time the "Promissory Note" was endorsed to the Appellee,
that the vehicle sold to the Defendants-Appellants was not delivered to the latter and that VMSC
had already previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged
the vehicle to Generoso Lopez, who assigned his rights to the BA Finance Corporation (Cebu
Branch), the same occurred only on May 8, 1987, much later than August 4, 1983, when VMSC
assigned its rights over the "Chattel Mortgage" by the Defendants-Appellants to the Appellee.
Hence, Appellee was a holder in due course.17

In the hands of one other than a holder in due course, a negotiable instrument is subject to the
same defenses as if it were non-negotiable.18 A holder in due course, however, holds the
instrument free from any defect of title of prior parties and from defenses available to prior
parties among themselves, and may enforce payment of the instrument for the full amount
thereof.19 Since BA Finance is a holder in due course, petitioners cannot raise the defense of non-
delivery of the object and nullity of the sale against the corporation. The NIL considers every
negotiable instrument prima facie to have been issued for a valuable consideration.20 In Salas,
we held that a party holding an instrument may enforce payment of the instrument for the full
amount thereof. As such, the maker cannot set up the defense of nullity of the contract of sale.21
Thus, petitioners are liable to respondent corporation for the payment of the amount stated in the
instrument.

From the third party complaint to the present petition, however, petitioners pray that the veil of
corporate fiction be set aside and Avelino be adjudged directly liable to BA Finance. Petitioners
likewise pray for damages for the fraud committed upon them.

In Concept Builders, Inc. v. NLRC, we held:

It is a fundamental principle of corporation law that a corporation is an entity separate and

distinct from its stockholders and from other corporations to which it may be connected. But, this
separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate juridical personality is used
to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device
to defeat the labor laws, this separate personality of the corporation may be disregarded or the
veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct,
a business conduit or an alter ego of another corporation.

xxxx
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is
as follows:

1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
acts in contravention of plaintiffs legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of.22

This case meets the foregoing test. VMSC is a family-owned corporation of which Avelino was
president. Avelino committed fraud in selling the vehicle to petitioners, a vehicle that was
previously sold to Avelino’s other cousin, Esmeraldo. Nowhere in the pleadings did Avelino
refute the fact that the vehicle in this case was already previously sold to Esmeraldo; he merely
insisted that he cannot be held liable because he was not a party to the transaction. The fact that
Avelino and Pedro are cousins, and that Avelino claimed to have a need to increase the sales
quota, was likely among the factors which motivated the spouses to buy the car. Avelino,
knowing fully well that the vehicle was already sold, and with abuse of his relationship with the
spouses, still proceeded with the sale and collected the down payment from petitioners. The trial
court found that the vehicle was not delivered to the spouses. Avelino clearly defrauded
petitioners. His actions were the proximate cause of petitioners’ loss. He cannot now hide behind
the separate corporate personality of VMSC to escape from liability for the amount adjudged by
the trial court in favor of petitioners.

The fact that VMSC was not included as defendant in petitioners’ third party complaint does not
preclude recovery by petitioners from Avelino; neither would such non-inclusion constitute a bar
to the application of the piercing-of-the-corporate-veil doctrine. We suggested as much in Arcilla
v. Court of Appeals, an appellate proceeding involving petitioner Arcilla’s bid to avoid the
adverse CA decision on the argument that he is not personally liable for the amount adjudged
since the same constitutes a corporate liability which nevertheless cannot even be enforced
against the corporation which has not been impleaded as a party below. In that case, the Court
found as well-taken the CA’s act of disregarding the separate juridical personality of the
corporation and holding its president, Arcilla, liable for the obligations incurred in the name of
the corporation although it was not a party to the collection suit before the trial court. An excerpt
from Arcilla:

x x x In short, even if We are to assume arguendo that the obligation was incurred in the name of
the corporation, the petitioner [Arcilla] would still be personally liable therefor because for all
legal intents and purposes, he and the corporation are one and the same. Csar Marine Resources,
Inc. is nothing more than his business conduit and alter ego. The fiction of separate juridical
personality conferred upon such corporation by law should be disregarded. Significantly,
petitioner does not seriously challenge the [CA’s] application of the doctrine which permits the
piercing of the corporate veil and the disregarding of the fiction of a separate juridical
personality; this is because he knows only too well that from the beginning, he merely used the
corporation for his personal purposes.23

WHEREFORE, the CA’s August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R.
CV No. 48489 are SET ASIDE insofar as they dismissed without prejudice the third party
complaint of petitioners-spouses Pedro and Florencia Violago against respondent Avelino
Violago. The March 5, 1994 Decision of the RTC is REINSTATED and AFFIRMED. Costs
against Avelino Violago.
SO ORDERED.

14. (c)

G.R. No. 146667 January 23, 2007

JOHN F. McLEOD, Petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION (First Division), FILIPINAS
SYNTHETIC FIBER CORPORATION (FILSYN), FAR EASTERN TEXTILE MILLS,
INC., STA. ROSA TEXTILES, INC., (PEGGY MILLS, INC.), PATRICIO L. LIM, and
ERIC HU, Respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review1 to set aside the Decision2 dated 15 June 2000 and the Resolution3
dated 27 December 2000 of the Court of Appeals in CA-G.R. SP No. 55130. The Court of
Appeals affirmed with modification the 29 December 1998 Decision4 of the National Labor
Relations Commission (NLRC) in NLRC NCR 02-00949-95.

The Facts

The facts, as summarized by the Labor Arbiter and adopted by the NLRC and the Court of
Appeals, are as follows:

On February 2, 1995, John F. McLeod filed a complaint for retirement benefits, vacation and
sick leave benefits, non-payment of unused airline tickets, holiday pay, underpayment of salary
and 13th month pay, moral and exemplary damages, attorney’s fees plus interest against
Filipinas Synthetic Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc.,
Patricio Lim and Eric Hu.

In his Position Paper, complainant alleged that he is an expert in textile manufacturing process;
that as early as 1956 he was hired as the Assistant Spinning Manager of Universal Textiles, Inc.
(UTEX); that he was promoted to Senior Manager and worked for UTEX till 1980 under its
President, respondent Patricio Lim; that in 1978 Patricio Lim formed Peggy Mills, Inc. with
respondent Filsyn having controlling interest; that complainant was absorbed by Peggy Mills as
its Vice President and Plant Manager of the plant at Sta. Rosa, Laguna; that at the time of his
retirement complainant was receiving P60,000.00 monthly with vacation and sick leave benefits;
13th month pay, holiday pay and two round trip business class tickets on a Manila-London-
Manila itinerary every three years which is convertible to cas[h] if unused; that in January 1986,
respondents failed to pay vacation and leave credits and requested complainant to wait as it was
short of funds but the same remain unpaid at present; that complainant is entitled to such benefit
as per CBA provision (Annex "A"); that respondents likewise failed to pay complainant’s
holiday pay up to the present; that complainant is entitled to such benefits as per CBA provision
(Annex "B"); that in 1989 the plant union staged a strike and in 1993 was found guilty of staging
an illegal strike; that from 1989 to 1992 complainant was entitled to 4 round trip business class
plane tickets on a Manila-London-Manila itinerary but this benefit not (sic) its monetary
equivalent was not given; that on August 1990 the respondents reduced complainant’s monthly
salary of P60,000.00 by P9,900.00 till November 1993 or a period of 39 months; that in 1991
Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as per agreement (Annex "D") and
this was renamed as Sta. Rosa Textile with Patricio Lim as Chairman and President; that
complainant worked for Sta. Rosa until November 30 that from time to time the owners of Far
Eastern consulted with complainant on technical aspects of reoperation of the plant as per
correspondence (Annexes "D-1" and "D-2"); that when complainant reached and applied
retirement age at the end of 1993, he was only given a reduced 13th month pay of P44,183.63,
leaving a balance of P15,816.87; that thereafter the owners of Far Eastern Textiles decided for
cessation of operations of Sta. Rosa Textiles; that on two occasions, complainant wrote letters
(Annexes "E-1" to "E-2") to Patricio Lim requesting for his retirement and other benefits; that in
the last quarter of 1994 respondents offered complainant compromise settlement of only
P300,000.00 which complainant rejected; that again complainant wrote a letter (Annex "F")
reiterating his demand for full payment of all benefits and to no avail, hence this complaint; and
that he is entitled to all his money claims pursuant to law.

On the other hand, respondents in their Position Paper alleged that complainant was the former
Vice-President and Plant Manager of Peggy Mills, Inc.; that he was hired in June 1980 and
Peggy Mills closed operations due to irreversible losses at the end of July 1992 but the
corporation still exists at present; that its assets were acquired by Sta. Rosa Textile Corporation
which was established in April 1992 but still remains non-operational at present; that
complainant was hired as consultant by Sta. Rosa Textile in November 1992 but he resigned on
November 30, 1993; that Filsyn and Far Eastern Textiles are separate legal entities and have no
employer relationship with complainant; that respondent Patricio Lim is the President and Board
Chairman of Sta. Rosa Textile Corporation; that respondent Eric Hu is a Taiwanese and is
Director of Sta. Rosa Textiles, Inc.; that complainant has no cause of action against Filsyn, Far
Eastern Textile Ltd., Sta. Rosa Textile Corporation and Eric Hu; that Sta. Rosa only acquired the
assets and not the liabilities of Peggy Mills, Inc.; that Patricio Lim was only impleaded as Board
Chairman of Sta. Rosa Textile and not as private individual; that while complainant was Vice
President and Plant Manager of Peggy Mills, the union staged a strike up to July 1992 resulting
in closure of operations due to irreversible losses as per Notice (Annex "1"); that complainant
was relied upon to settle the labor problem but due to his lack of attention and absence the strike
continued resulting in closure of the company; and losses to Sta. Rosa which acquired its assets
as per their financial statements (Annexes "2" and "3"); that the attendance records of
complainant from April 1992 to November 1993 (Annexes "4" and "5") show that he was either
absent or worked at most two hours a day; that Sta. Rosa and Peggy Mills are interposing
counterclaims for damages in the total amount of P36,757.00 against complainant; that
complainant’s monthly salary at Peggy Mills was P50,495.00 and not P60,000.00; that Peggy
Mills, does not have a retirement program; that whatever amount complainant is entitled should
be offset with the counterclaims; that complainant worked only for 12 years from 1980 to 1992;
that complainant was only hired as a consultant and not an employee by Sta. Rosa Textile; that
complainant’s attendance record of absence and two hours daily work during the period of the
strike wipes out any vacation/sick leave he may have accumulated; that there is no basis for
complainant’s claim of two (2) business class airline tickets; that complainant’s pay already
included the holiday pay; that he is entitled to holiday pay as consultant by Sta. Rosa; that he has
waived this benefit in his 12 years of work with Peggy Mills; that he is not entitled to 13th month
pay as consultant; and that he is not entitled to moral and exemplary damages and attorney’s
fees.

In his Reply, complainant alleged that all respondents being one and the same entities are
solidarily liable for all salaries and benefits and complainant is entitled to; that all respondents
have the same address at 12/F B.A. Lepanto Building, Makati City; that their counsel holds
office in the same address; that all respondents have the same offices and key personnel such as
Patricio Lim and Eric Hu; that respondents’ Position Paper is verified by Marialen C. Corpuz
who knows all the corporate officers of all respondents; that the veil of corporate fiction may be
pierced if it is used as a shield to perpetuate fraud and confuse legitimate issues; that complainant
never accepted the change in his position from Vice-President and Plant Manger to consultant
and it is incumbent upon respondents to prove that he was only a consultant; that the Deed of
Dation in Payment with Lease (Annex "C") proves that Sta. Rosa took over the assets of Peggy
Mills as early as June 15, 1992 and not 1995 as alleged by respondents; that complainant never
resigned from his job but applied for retirement as per letters (Annexes "E-1", "E-2" and "F");
that documents "G", "H" and "I" show that Eric Hu is a top official of Peggy Mills that the
closure of Peggy Mills cannot be the fault of complainant; that the strike was staged on the issue
of CBA negotiations which is not part of the usual duties and responsibilities as Plant Manager;
that complainant is a British national and is prohibited by law in engaging in union activities;
that as per Resolution (Annex "3") of the NLRC in the proper case, complainant testified in favor
of management; that the alleged attendance record of complainant was lifted from the logbook of
a security agency and is hearsay evidence; that in the other attendance record it shows that
complainant was reporting daily and even on Saturdays; that his limited hours was due to the
strike and cessation of operations; that as plant manager complainant was on call 24 hours a day;
that respondents must pay complainant the unpaid portion of his salaries and his retirement
benefits that cash voucher No. 17015 (Annex "K") shows that complainant drew the monthly
salary of P60,000.00 which was reduced to P50,495.00 in August 1990 and therefore without the
consent of complainant; that complainant was assured that he will be paid the deduction as soon
as the company improved its financial standing but this assurance was never fulfilled; that
Patricio Lim promised complainant his retirement pay as per the latter’s letters (Annexes "E-1",
"E-2" and "F"); that the law itself provides for retirement benefits; that Patricio Lim by way of
Memorandum (Annex "M") approved vacation and sick leave benefits of 22 days per year
effective 1986; that Peggy Mills required monthly paid employees to sign an acknowledgement
that their monthly compensation includes holiday pay; that complainant was not made to sign
this undertaking precisely because he is entitled to holiday pay over and above his monthly pay;
that the company paid for complainant’s two (2) round trip tickets to London in 1983 and 1986
as reflected in the complainant’s passport (Annex "N"); that respondents claim that complainant
is not entitled to 13th month pay but paid in 1993 and all the past 13 years; that complainant is
entitled to moral and exemplary damages and attorney’s fees; that all doubts must be resolved in
favor of complainant; and that complainant reserved the right to file perjury cases against those
concerned.

In their Reply, respondents alleged that except for Peggy Mills, the other respondents are not
proper persons in interest due to the lack of employer-employee relationship between them and
complainant; that undersigned counsel does not represent Peggy Mills, Inc.

In a separate Position Paper, respondent Peggy Mills alleged that complainant was hired on
February 10, 1991 as per Board Minutes (Annex "A"); that on August 19, 1987, the workers
staged an illegal strike causing cessation of operations on July 21, 1992; that respondent filed a
Notice of Closure with the DOLE (Annex "B"); that all employees were given separation pay
except for complainant whose task was extended to December 31, 1992 to wind up the affairs of
the company as per vouchers (Annexes "C" and "C-1"); that respondent offered complainant his
retirement benefits under RA 7641 but complainant refused; that the regular salaries of
complainant from closure up to December 31, 1992 have offset whatever vacation and sick
leaves he accumulated; that his claim for unused plane tickets from 1989 to 1992 has no policy
basis, the company’s formula of employees monthly rate x 314 days over 12 months already
included holiday pay; that complainant’s unpaid portion of the 13th month pay in 1993 has no
basis because he was only an employee up to December 31, 1992; that the 13th month pay was
based on his last salary; and that complainant is not entitled to damages.5

On 3 April 1998, the Labor Arbiter rendered his decision with the following dispositive portion:

WHEREFORE, premises considered, We hold all respondents as jointly and solidarily liable for
complainant’s money claims as adjudicated above and computed below as follows:

Retirement Benefits (one month salary for every year of service)

6/80 - 11/30/93 = 14 years

P60,000 x 14.0 mos. …………………… P840,000.00

Vacation and Sick Leave (3 yrs.)

P2,000.00 x 22 days x 3 yrs. …………… 132,000.00

 Underpayment of Salaries (3 yrs.)

P60,000 - P50,495 = P9,505

P 9,505 x 36.0 mos. …………………... 342,180.00

Holiday Pay (3 yrs.)

P2,000 x 30 days ………………………. 60,000.00

Underpayment of 13th month pay (1993) ……... 15,816.87

Moral Damages ……………………………….. 3,000,000.00

Exemplary Damages ………………………….. 1,000,000.00

10% Attorney’s Fees …………………………. 138,999.68

TOTAL P5,528,996.55

Unused Airline Tickets (3 yrs.)

(To be converted in Peso upon payment)

$2,450.00 x 3.0 [yrs.]..……………… $7,350.00

SO ORDERED.6

Filipinas Synthetic Fiber Corporation (Filsyn), Far Eastern Textile Mills, Inc. (FETMI), Sta.
Rosa Textiles, Inc. (SRTI), Patricio L. Lim (Patricio), and Eric Hu appealed to the NLRC. The
NLRC rendered its decision on 29 December 1998, thus:

WHEREFORE, the Decision dated 3 April 1998 is hereby REVERSED and SET ASIDE and a
new one is entered ORDERING respondent Peggy Mills, Inc. to pay complainant his retirement
pay equivalent to 22.5 days for every year of service for his twelve (12) years of service from
1980 to 1992 based on a salary rate of P50,495.00 a month.

All other claims are DISMISSED for lack of merit.

SO ORDERED.7

John F. McLeod (McLeod) filed a motion for reconsideration which the NLRC denied in its
Resolution of 30 June 1999.8 McLeod thus filed a petition for certiorari before the Court of
Appeals assailing the decision and resolution of the NLRC.9

The Ruling of the Court of Appeals

On 15 June 2000, the Court of Appeals rendered judgment as follows:

WHEREFORE, the decision dated December 29, 1998 of the NLRC is hereby AFFIRMED with
the MODIFICATION that respondent Patricio Lim is jointly and solidarily liable with Peggy
Mills, Inc., to pay the following amounts to petitioner John F. McLeod:

1. retirement pay equivalent to 22.5 days for every year of service for his twelve (12)
years of service from 1980 to 1992 based on a salary rate of P50,495, a month;

2. moral damages in the amount of one hundred thousand (P100,000.00) Pesos;

 3. exemplary damages in the amount of fifty thousand (P50,000.00) Pesos; and

4. attorney’s fees equivalent to 10% of the total award.

No costs is awarded.

SO ORDERED.10

The Court of Appeals rejected McLeod’s theory that all respondent corporations are the same
corporate entity which should be held solidarily liable for the payment of his monetary claims.

The Court of Appeals ruled that the fact that (1) all respondent corporations have the same
address; (2) all were represented by the same counsel, Atty. Isidro S. Escano; (3) Atty. Escano
holds office at respondent corporations’ address; and (4) all respondent corporations have
common officers and key personnel, would not justify the application of the doctrine of piercing
the veil of corporate fiction.

The Court of Appeals held that there should be clear and convincing evidence that SRTI,
FETMI, and Filsyn were being used as alter ego, adjunct or business conduit for the sole benefit
of Peggy Mills, Inc. (PMI), otherwise, said corporations should be treated as distinct and separate
from each other.

The Court of Appeals pointed out that the Articles of Incorporation of PMI show that it has six
incorporators, namely, Patricio, Jose Yulo, Jr., Carlos Palanca, Jr., Cesar R. Concio, Jr., E. A.
Picasso, and Walter Euyang. On the other hand, the Articles of Incorporation of Filsyn show that
it has 10 incorporators, namely, Jesus Y. Yujuico, Carlos Palanca, Jr., Patricio, Ang Beng Uh,
Ramon A. Yulo, Honorio Poblador, Jr., Cipriano Azada, Manuel Tomacruz, Ismael Maningas,
and Benigno Zialcita, Jr.

The Court of Appeals pointed out that PMI and Filsyn have only two interlocking incorporators
and directors, namely, Patricio and Carlos Palanca, Jr.

Reiterating the ruling of this Court in Laguio v. NLRC,11 the Court of Appeals held that mere
substantial identity of the incorporators of two corporations does not necessarily imply fraud, nor
warrant the piercing of the veil of corporate fiction.

The Court of Appeals also pointed out that when SRTI and PMI executed the Dation in Payment
with Lease, it was clear that SRTI did not assume the liabilities PMI incurred before the
execution of the contract.

The Court of Appeals held that McLeod failed to substantiate his claim that all respondent
corporations should be treated as one corporate

entity. The Court of Appeals thus upheld the NLRC’s finding that no employer-employee
relationship existed between McLeod and respondent corporations except PMI.

The Court of Appeals ruled that Eric Hu, as an officer of PMI, should be exonerated from any
liability, there being no proof of malice or bad faith on his part. The Court of Appeals, however,
ruled that McLeod was entitled to recover from PMI and Patricio, the company’s Chairman and
President.

The Court of Appeals pointed out that Patricio deliberately and maliciously evaded PMI’s
financial obligation to McLeod. The Court of Appeals stated that, on several occasions, despite
his approval, Patricio refused and ignored to pay McLeod’s retirement benefits. The Court of
Appeals stated that the delay lasted for one year prompting McLeod to initiate legal action. The
Court of Appeals stated that although PMI offered to pay McLeod his retirement benefits, this
offer for P300,000 was still below the "floor limits" provided by law. The Court of Appeals held
that an employee could demand payment of retirement benefits as a matter of right.

The Court of Appeals stated that considering that PMI was no longer in operation, its "officer
should be held liable for acting on behalf of the corporation."

The Court of Appeals also ruled that since PMI did not have a retirement program providing for
retirement benefits of its employees, Article 287 of the Labor Code must be followed. The Court
of Appeals thus upheld the NLRC’s finding that McLeod was entitled to retirement pay
equivalent to 22.5 days for every year of service from 1980 to 1992 based on a salary rate of
P50,495 a month.

The Court of Appeals held that McLeod was not entitled to payment of vacation, sick leave and
holiday pay because as Vice President and Plant Manager, McLeod is a managerial employee
who, under Article 82 of the Labor Code, is not entitled to these benefits.

The Court of Appeals stated that for McLeod to be entitled to payment of service incentive leave
and holidays, there must be an agreement to that effect between him and his employer.

Moreover, the Court of Appeals rejected McLeod’s argument that since PMI paid for his two
round-trip tickets Manila-London in 1983 and 1986, he was also "entitled to unused airline
tickets." The Court of Appeals stated that the fact that PMI granted McLeod "free transport to
and from Manila and London for the year 1983 and 1986 does not ipso facto characterize it as
regular that would establish a prevailing company policy."

The Court of Appeals also denied McLeod’s claims for underpayment of salaries and his 13th
month pay for the year 1994. The Court of Appeals upheld the NLRC’s ruling that it could be
deduced from McLeod’s own narration of facts that he agreed to the reduction of his
compensation from P60,000 to P50,495 in August 1990 to November 1993.

The Court of Appeals found the award of moral damages for P50,000 in order because of the
"stubborn refusal" of PMI and Patricio to respect McLeod’s valid claims.

The Court of Appeals also ruled that attorney’s fees equivalent to 10% of the total award should
be given to McLeod under Article 2208, paragraph 2 of the Civil Code.12

Hence, this petition.

The Issues

McLeod submits the following issues for our consideration:

1. Whether the challenged Decision and Resolution of the 14th Division of the Court of
Appeals promulgated on 15 June 2000 and 27 December 2000, respectively, in CA-G.R.
SP No. 55130 are in accord with law and jurisprudence;

2. Whether an employer-employee relationship exists between the private respondents

and the petitioner for purposes of determining employer liability to the petitioner;

3. Whether the private respondents may avoid their financial obligations to the petitioner
by invoking the veil of corporate fiction;

4. Whether petitioner is entitled to the relief he seeks against the private respondents;

5. Whether the ruling of [this] Court in Special Police and Watchman Association
(PLUM) Federation v. National Labor Relations Commission cited by the Office of the
Solicitor General is applicable to the case of petitioner; and
 6. Whether the appeal taken by the private respondents from the Decision of the labor
arbiter meets the mandatory requirements recited in the Labor Code of the Philippines, as
amended.13

The Court’s Ruling

The petition must fail.

McLeod asserts that the Court of Appeals should not have upheld the NLRC’s findings that he
was a managerial employee of PMI from 20 June 1980 to 31 December 1992, and then a
consultant of SRTI up to 30 November 1993. McLeod asserts that if only for this "brazen
assumption," the Court of Appeals should not have sustained the NLRC’s ruling that his cause of
action was only against PMI.

These assertions do not deserve serious consideration.

Records disclose that McLeod was an employee only of PMI.14 PMI hired McLeod as its acting
Vice President and General Manager on 20 June 1980.15 PMI confirmed McLeod’s appointment
as Vice President/Plant Manager in the Special Meeting of its Board of Directors on 10 February
1981.16 McLeod himself testified during the hearing before the Labor Arbiter that his "regular
employment" was with PMI.17

When PMI’s rank-and-file employees staged a strike on 19 August 1989 to July 1992, PMI
incurred serious business losses.18 This prompted PMI to stop permanently plant operations and
to send a notice of closure to the Department of Labor and Employment on 21 July 1992.19

PMI informed its employees, including McLeod, of the closure.20 PMI paid its employees,
including managerial employees, except McLeod, their unpaid wages, sick leave, vacation leave,
prorated 13th month pay, and separation pay. Under the compromise agreement between PMI
and its employees, the employer-employee relationship between them ended on 25 November
1992.21

Records also disclose that PMI extended McLeod’s service up to 31 December 1992 "to wind up
some affairs" of the company.22 McLeod testified on cross-examination that he received his last
salary from PMI in December 1992.23

It is thus clear that McLeod was a managerial employee of PMI from 20 June 1980 to 31
December 1992.

However, McLeod claims that after FETMI purchased PMI in January 1993, he "continued to
work at the same plant with the same responsibilities" until 30 November 1993. McLeod claims
that FETMI merely renamed PMI as SRTI. McLeod asserts that it was for this reason that when
he reached the retirement age in 1993, he asked all the respondents for the payment of his
benefits.24

These assertions deserve scant consideration.

What took place between PMI and SRTI was dation in payment with lease. Pertinent portions of
the contract that PMI and SRTI executed on 15 June 1992 read:

WHEREAS, PMI is indebted to the Development Bank of the Philippines ("DBP") and as
security for such debts (the "Obligations") has mortgaged its real properties covered by TCT
Nos. T-38647, T-37136, and T-37135, together with all machineries and improvements found
thereat, a complete listing of which is hereto attached as Annex "A" (the "Assets");

WHEREAS, by virtue of an inter-governmental agency arrangement, DBP transferred the

Obligations, including the Assets, to the Asset Privatization Trust ("APT") and the latter has
received payment for the Obligations from PMI, under APT’s Direct Debt Buy-Out ("DDBO")
program thereby causing APT to completely discharge and cancel the mortgage in the Assets and
to release the titles of the Assets back to PMI;

WHEREAS, PMI obtained cash advances from SRTC in the total amount of TWO HUNDRED
TEN MILLION PESOS (P210,000,000.00) (the "Advances") to enable PMI to consummate the
DDBO with APT, with SRTC subrogating APT as PMI’s creditor thereby;

WHEREAS, in payment to SRTC for PMI’s liability, PMI has agreed to transfer all its rights,
title and interests in the Assets by way of a dation in payment to SRTC, provided that
simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the Assets
under terms and conditions stated hereunder;

xxxx

NOW THEREFORE, for and in consideration of the foregoing premises, and of the terms and
conditions hereinafter set forth, the parties hereby agree as follows:

1. CESSION. In consideration of the amount of TWO HUNDRED TEN MILLION PESOS

(P210,000,000.00), PMI hereby cedes, conveys and transfers to SRTC all of its rights, title and
interest in and to the Assets by way of a dation in payment.25 (Emphasis supplied)

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for
such assets, except when any of the following circumstances is present: (1) where the purchaser
expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a
consolidation or merger of the corporations, (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the selling corporation fraudulently enters
into the transaction to escape liability for those debts.26

None of the foregoing exceptions is present in this case.

Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the sum of
P210,000,000. We are not convinced that PMI fraudulently transferred these assets to escape its
liability for any of its debts. PMI had already paid its employees, except McLeod, their money
claims.

There was also no merger or consolidation of PMI and SRTI.

Consolidation is the union of two or more existing corporations to form a new corporation called
the consolidated corporation. It is a combination by agreement between two or more corporations
by which their rights, franchises, and property are united and become those of a single, new
corporation, composed generally, although not necessarily, of the stockholders of the original
corporations.

Merger, on the other hand, is a union whereby one corporation absorbs one or more existing
corporations, and the absorbing corporation survives and continues the combined business.

The parties to a merger or consolidation are called constituent corporations. In consolidation, all
the constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all
constituents, except the surviving corporation, are dissolved. In both cases, however, there is no
liquidation of the assets of the dissolved corporations, and the surviving or consolidated
corporation acquires all their properties, rights and franchises and their stockholders usually
become its stockholders.
The surviving or consolidated corporation assumes automatically the liabilities of the dissolved
corporations, regardless of whether the creditors have consented or not to such merger or
consolidation.27

In the present case, there is no showing that the subject dation in payment involved any corporate
merger or consolidation. Neither is there any showing of those indicative factors that SRTI is a
mere instrumentality of PMI.

Moreover, SRTI did not expressly or impliedly agree to assume any of PMI’s debts. Pertinent
portions of the subject Deed of Dation in Payment with Lease provide, thus:

2. WARRANTIES AND REPRESENTATIONS. PMI hereby warrants and represents the

following:

xxxx

(e) PMI shall warrant that it will hold SRTC or its assigns, free and harmless from any liability
for claims of PMI’s creditors, laborers, and workers and for physical injury or injury to property
arising from PMI’s custody, possession, care, repairs, maintenance, use or operation of the
Assets except ordinary wear and tear;28 (Emphasis supplied)

Also, McLeod did not present any evidence to show the alleged renaming of "Peggy Mills, Inc."
to "Sta. Rosa Textiles, Inc."

Hence, it is not correct for McLeod to treat PMI and SRTI as the same entity.

Respondent corporations assert that SRTI hired McLeod as consultant after PMI stopped
operations.29 On the other hand, McLeod asserts that he was respondent corporations’ employee
from 1980 to 30 November 1993.30 However, McLeod failed to present any proof of employer-
employee relationship between him and Filsyn, SRTI, or FETMI. McLeod testified, thus:

ATTY. ESCANO:

Do you have any employment contract with Far Eastern Textile?

WITNESS:

It is my belief up the present time.

ATTY. AVECILLA:

May I request that the witness be allowed to go through his Annexes, Your Honor.

ATTY. ESCANO:

Yes, but I want a precise answer to that question. If he has an employment contract with Far
Eastern Textile?

WITNESS:

Can I answer it this way, sir? There is not a valid contract but I was under the impression taking
into consideration that the closeness that I had at Far Eastern Textile is enough during that period
of time of the development of Peggy Mills to reorganize a staff. I was under the basic impression
that they might still retain my status as Vice President and Plant Manager of the company.

ATTY. ESCANO:
But the answer is still, there is no employment contract in your possession appointing you in any
capacity by Far Eastern?

WITNESS:

There was no written contract, sir.

xxxx

ATTY. ESCANO:

So, there is proof that you were in fact really employed by Peggy Mills?

WITNESS:

Yes, sir.

ATTY. ESCANO:

Of course, my interest now is to whether or not there is a similar document to present that you
were employed by the other respondents like Filsyn Corporation?

WITNESS:

I have no document, sir.

ATTY. ESCANO:

What about Far Eastern Textile Mills?

WITNESS:

I have no document, sir.

ATTY. ESCANO:

And Sta. Rosa Textile Mills?

WITNESS:

There is no document, sir.31

xxxx

ATTY. ESCANO:

Q Yes. Let me be more specific, Mr. McLeod. Do you have a contract of employment from Far
Eastern Textiles, Inc.?

A No, sir.

Q What about Sta. Rosa Textile Mills, do you have an employment contract from this company?

A No, sir.

xxxx
Q And what about respondent Eric Hu. Have you had any contract of employment from Mr. Eric
Hu?

A Not a direct contract but I was taken in and I told to take over this from Mr. Eric Hu.
Automatically, it confirms that Mr. Eric Hu, in other words, was under the control of Mr.
Patricio Lim at that period of time.

Q No documents to show, Mr. McLeod?

A No. No documents, sir.32

McLeod could have presented evidence to support his allegation of employer-employee

relationship between him and any of Filsyn, SRTI, and FETMI, but he did not. Appointment
letters or employment contracts, payrolls, organization charts, SSS registration, personnel list, as
well as testimony of co-employees, may serve as evidence of employee status.33

It is a basic rule in evidence that parties must prove their affirmative allegations. While technical
rules are not strictly followed in the NLRC, this does not mean that the rules on proving
allegations are entirely ignored. Bare allegations are not enough. They must be supported by
substantial evidence at the very least.34

However, McLeod claims that "for purposes of determining employer liability, all private
respondents are one and the same employer" because: (1) they have the same address; (2) they
are all engaged in the same business; and (3) they have interlocking directors and officers.35

This assertion is untenable.

A corporation is an artificial being invested by law with a personality separate and distinct from
that of its stockholders and from that of other corporations to which it may be connected.36

While a corporation may exist for any lawful purpose, the law will regard it as an association of
persons or, in case of two corporations, merge them into one, when its corporate legal entity is
used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction.
The doctrine applies only when such corporate fiction is used to defeat public convenience,
justify wrong, protect fraud, or defend crime,37 or when it is made as a shield to confuse the
legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another corporation.38

To disregard the separate juridical personality of a corporation, the wrongdoing must be

established clearly and convincingly. It cannot be presumed.39

Here, we do not find any of the evils sought to be prevented by the doctrine of piercing the
corporate veil.

Respondent corporations may be engaged in the same business as that of PMI, but this fact alone
is not enough reason to pierce the veil of corporate fiction.40

In Indophil Textile Mill Workers Union v. Calica,41 the Court ruled, thus:

In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that
the creation of the corporation is a devise to evade the application of the CBA between petitioner
Union and private respondent Company. While we do not discount the possibility of the
similarities of the businesses of private respondent and Acrylic, neither are we inclined to apply
the doctrine invoked by petitioner in granting the relief sought. The fact that the businesses of
private respondent and Acrylic are related, that some of the employees of the private respondent
are the same persons manning and providing for auxiliary services to the units of Acrylic, and
that the physical plants, offices and facilities are situated in the same compound, it is our
considered opinion that these facts are not sufficient to justify the piercing of the corporate veil
of Acrylic.42 (Emphasis supplied)

Also, the fact that SRTI and PMI shared the same address, i.e., 11/F BA-Lepanto Bldg., Paseo de
Roxas, Makati City,43 can be explained by the two companies’ stipulation in their Deed of
Dation in Payment with Lease that "simultaneous with the dation in payment, SRTC shall grant
unto PMI the right to lease the Assets under terms and conditions stated hereunder."44

As for the addresses of Filsyn and FETMI, Filsyn held office at 12th Floor, BA-Lepanto Bldg.,
Paseo de Roxas, Makati City,45 while FETMI held office at 18F, Tun Nan Commercial Building,
333 Tun Hwa South Road, Sec. 2, Taipei, Taiwan, R.O.C.46 Hence, they did not have the same
address as that of PMI.

That respondent corporations have interlocking incorporators, directors, and officers is of no

moment.

The only interlocking incorporators of PMI and Filsyn were Patricio and Carlos Palanca, Jr.47
While Patricio was Director and Board Chairman of Filsyn, SRTI, and PMI,48 he was never an
officer of FETMI.

Eric Hu, on the other hand, was Director of Filsyn and SRTI.49 He was never an officer of PMI.

Marialen C. Corpuz, Filsyn’s Finance Officer,50 testified on cross-examination that (1) among all
of Filsyn’s officers, only she was the one involved in the management of PMI; (2) only she and
Patricio were the common officers between Filsyn and PMI; and (3) Filsyn and PMI are "two
separate companies."51

Apolinario L. Posio, PMI’s Chief Accountant, testified that "SRTI is a different corporation from
PMI."52

At any rate, the existence of interlocking incorporators, directors, and officers is not enough
justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy
considerations.53

In Del Rosario v. NLRC,54 the Court ruled that substantial identity of the incorporators of
corporations does not necessarily imply fraud.

In light of the foregoing, and there being no proof of employer-employee relationship between
McLeod and respondent corporations and Eric Hu, McLeod’s cause of action is only against his
former employer, PMI.

On Patricio’s personal liability, it is settled that in the absence of malice, bad faith, or specific
provision of law, a stockholder or an officer of a corporation cannot be made personally liable
for corporate liabilities.55

To reiterate, a corporation is a juridical entity with legal personality separate and distinct from
those acting for and in its behalf and, in general, from the people comprising it. The rule is that
obligations incurred by the corporation, acting through its directors, officers, and employees, are
its sole liabilities.56

Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to
a patently unlawful act of the corporation, or when they are guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of interest resulting in damages to
the corporation, its stockholders or other persons; (2) they consent to the issuance of watered
down stocks or when, having knowledge of such issuance, do not forthwith file with the
corporate secretary their written objection; (3) they agree to hold themselves personally and
solidarily liable with the corporation; or (4) they are made by specific provision of law
personally answerable for their corporate action.57

Considering that McLeod failed to prove any of the foregoing exceptions in the present case,
McLeod cannot hold Patricio solidarily liable with PMI.

The records are bereft of any evidence that Patricio acted with malice or bad faith. Bad faith is a
question of fact and is evidentiary. Bad faith does not connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity and conscious wrongdoing. It means breach
of a known duty through some ill motive or interest. It partakes of the nature of fraud.58

In the present case, there is nothing substantial on record to show that Patricio acted in bad faith
in terminating McLeod’s services to warrant Patricio’s personal liability. PMI had no other
choice but to stop plant operations. The work stoppage therefore was by necessity. The company
could no longer continue with its plant operations because of the serious business losses that it
had suffered. The mere fact that Patricio was president and director of PMI is not a ground to
conclude that he should be held solidarily liable with PMI for McLeod’s money claims.

The ruling in A.C. Ransom Labor Union-CCLU v. NLRC,59 which the Court of Appeals cited,
does not apply to this case. We quote pertinent portions of the ruling, thus:

(a) Article 265 of the Labor Code, in part, expressly provides:

"Any worker whose employment has been terminated as a consequence of an unlawful lockout
shall be entitled to reinstatement with full backwages."

Article 273 of the Code provides that:

"Any person violating any of the provisions of Article 265 of this Code shall be punished by a
fine of not exceeding five hundred pesos and/or imprisonment for not less than one (1) day nor
more than six (6) months."

(b) How can the foregoing provisions be implemented when the employer is a corporation? The
answer is found in Article 212 (c) of the Labor Code which provides:

"(c) ‘Employer’ includes any person acting in the interest of an employer, directly or indirectly.
The term shall not include any labor organization or any of its officers or agents except when
acting as employer.".

The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since RANSOM
is an artificial person, it must have an officer who can be presumed to be the employer, being the
"person acting in the interest of (the) employer" RANSOM. The corporation, only in the
technical sense, is the employer.

The responsible officer of an employer corporation can be held personally, not to say even
criminally, liable for non-payment of back wages. That is the policy of the law.

xxxx

(c) If the policy of the law were otherwise, the corporation employer can have devious ways for
evading payment of back wages. In the instant case, it would appear that RANSOM, in 1969,
foreseeing the possibility or probability of payment of back wages to the 22 strikers,
organized ROSARIO to replace RANSOM, with the latter to be eventually phased out if
the 22 strikers win their case. RANSOM actually ceased operations on May 1, 1973, after the
December 19, 1972 Decision of the Court of Industrial Relations was promulgated against
RANSOM.60 (Emphasis supplied)
Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade
payment of backwages to the 22 strikers. This situation, or anything similar showing malice or
bad faith on the part of Patricio, does not obtain in the present case. In Santos v. NLRC,61 the
Court held, thus:

It is true, there were various cases when corporate officers were themselves held by the Court to
be personally accountable for the payment of wages and money claims to its employees. In A.C.
Ransom Labor Union-CCLU vs. NLRC, for instance, the Court ruled that under the Minimum
Wage Law, the responsible officer of an employer corporation could be held personally liable for
nonpayment of backwages for "(i)f the policy of the law were otherwise, the corporation
employer (would) have devious ways for evading payment of backwages." In the absence of a
clear identification of the officer directly responsible for failure to pay the backwages, the Court
considered the President of the corporation as such officer. The case was cited in Chua vs.
NLRC in holding personally liable the vice-president of the company, being the highest and most
ranking official of the corporation next to the President who was dismissed for the latter’s claim
for unpaid wages.

A review of the above exceptional cases would readily disclose the attendance of facts and
circumstances that could rightly sanction personal liability on the part of the company officer. In
A.C. Ransom, the corporate entity was a family corporation and execution against it could not be
implemented because of the disposition posthaste of its leviable assets evidently in order to
evade its just and due obligations. The doctrine of "piercing the veil of corporate fiction" was
thus clearly appropriate. Chua likewise involved another family corporation, and this time the
conflict was between two brothers occupying the highest ranking positions in the company.
There were incontrovertible facts which pointed to extreme personal animosity that resulted,
evidently in bad faith, in the easing out from the company of one of the brothers by the other.

The basic rule is still that which can be deduced from the Court’s pronouncement in Sunio vs.
National Labor Relations Commission; thus:

We come now to the personal liability of petitioner, Sunio, who was made jointly and severally
responsible with petitioner company and CIPI for the payment of the backwages of private
respondents. This is reversible error. The Assistant Regional Director’s Decision failed to
disclose the reason why he was made personally liable. Respondents, however, alleged as
grounds thereof, his being the owner of one-half (½) interest of said corporation, and his alleged
arbitrary dismissal of private respondents.

Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of
petitioner corporation. There appears to be no evidence on record that he acted maliciously or in
bad faith in terminating the services of private respondents. His act, therefore, was within the
scope of his authority and was a corporate act.

It is basic that a corporation is invested by law with a personality separate and distinct from those
of the persons composing it as well as from that of any other legal entity to which it may be
related. Mere ownership by a single stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personality. Petitioner Sunio, therefore, should not have been made personally
answerable for the payment of private respondents’ back salaries.62 (Emphasis supplied)

Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime. In the absence of malice, bad faith, or a specific provision of law making a corporate
officer liable, such corporate officer cannot be made personally liable for corporate liabilities.
Neither Article 212(c) nor Article 273 (now 272) of the Labor Code expressly makes any
corporate officer personally liable for the debts of the corporation. As this Court ruled in H.L.
Carlos Construction, Inc. v. Marina Properties Corporation:63
We concur with the CA that these two respondents are not liable. Section 31 of the Corporation
Code (Batas Pambansa Blg. 68) provides:

"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 ... shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders and other persons."

The personal liability of corporate officers validly attaches only when (a) they assent to a
patently unlawful act of the corporation; or (b) they are guilty of bad faith or gross negligence in
directing its affairs; or (c) they incur conflict of interest, resulting in damages to the corporation,
its stockholders or other persons.

The records are bereft of any evidence that Typoco acted in bad faith with gross or inexcusable
negligence, or that he acted outside the scope of his authority as company president. The
unilateral termination of the Contract during the existence of the TRO was indeed contemptible –
for which MPC should have merely been cited for contempt of court at the most – and a
preliminary injunction would have then stopped work by the second contractor. Besides, there is
no showing that the unilateral termination of the Contract was null and void.64

McLeod is not entitled to payment of vacation leave and sick leave as well as to holiday pay.
Article 82, Title I, Book Three of the Labor Code, on Working Conditions and Rest Periods,
provides:

Coverage. ─ The provisions of this title shall apply to employees in all establishments and
undertakings whether for profit or not, but not to government employees, managerial employees,
field personnel, members of the family of the employer who are dependent on him for support,
domestic helpers, persons in the personal service of another, and workers who are paid by results
as determined by the Secretary of Labor in appropriate regulations.

As used herein, "managerial employees" refer to those whose primary duty consists of the
management of the establishment in which they are employed or of a department or subdivision
thereof, and to other officers or members of the managerial staff. (Emphasis supplied)

As Vice President/Plant Manager, McLeod is a managerial employee who is excluded from the
coverage of Title I, Book Three of the Labor Code. McLeod is entitled to payment of vacation
leave and sick leave only if he and PMI had agreed on it. The payment of vacation leave and sick
leave depends on the policy of the employer or the agreement between the employer and
employee.65 In the present case, there is no showing that McLeod and PMI had an agreement
concerning payment of these benefits.

McLeod’s assertion of underpayment of his 13th month pay in December 1993 is unavailing.66
As already stated, PMI stopped plant operations in 1992. McLeod himself testified that he
received his last salary from PMI in December 1992. After the termination of the employer-
employee relationship between McLeod and PMI, SRTI hired McLeod as consultant and not as
employee. Since McLeod was no longer an employee, he was not entitled to the 13th month
pay.67 Besides, there is no evidence on record that McLeod indeed received his alleged "reduced
13th month pay of P44,183.63" in December 1993.68

Also unavailing is McLeod’s claim that he was entitled to the "unpaid monetary equivalent of
unused plane tickets for the period covering 1989 to 1992 in the amount of P279,300.00."69 PMI
has no company policy granting its officers and employees expenses for trips abroad.70 That at
one time PMI reimbursed McLeod for his and his wife’s plane tickets in a vacation to London71
could not be deemed as an established practice considering that it happened only once. To be
considered a "regular practice," the giving of the benefits should have been done over a long
period, and must be shown to have been consistent and deliberate.72
In American Wire and Cable Daily Rated Employees Union v. American Wire and Cable Co.,
Inc.,73 the Court held that for a bonus to be enforceable, the employer must have promised it, and
the parties must have expressly agreed upon it, or it must have had a fixed amount and had been
a long and regular practice on the part of the employer.

In the present case, there is no showing that PMI ever promised McLeod that it would continue
to grant him the benefit in question. Neither is there any proof that PMI and McLeod had
expressly agreed upon the giving of that benefit.

McLeod’s reliance on Annex M74 can hardly carry the day for him. Annex M, which is
McLeod’s letter addressed to "Philip Lim, VP Administration," merely contains McLeod’s
proposals for the grant of some benefits to supervisory and confidential employees. Contrary to
McLeod’s allegation, Patricio did not sign the letter. Hence, the letter does not embody any
agreement between McLeod and the management that would entitle McLeod to his money
claims.

Neither can McLeod’s assertions find support in Annex U.75 Annex U is the Agreement which
McLeod and Universal Textile Mills, Inc. executed in 1959. The Agreement merely contains the
renewal of the service agreement which the parties signed in 1956.

McLeod cannot successfully pretend that his monthly salary of P60,000 was reduced without his
consent.

McLeod testified that in 1990, Philip Lim explained to him why his salary would have to be
reduced. McLeod said that Philip told him that "they were short in finances; that it would be
repaid."76 Were McLeod not amenable to that reduction in salary, he could have immediately
resigned from his work in PMI.

McLeod knew that PMI was then suffering from serious business losses. In fact, McLeod
testified that PMI was not able to operate from August 1989 to 1992 because of the strike. Even
before 1989, as Vice President of PMI, McLeod was aware that the company had incurred "huge
loans from DBP."77 As it happened, McLeod continued to work with PMI. We find it pertinent to
quote some portions of Apolinario Posio’s testimony, to wit:

Q You also stated that before the period of the strike as shown by annex "K" of the reply filed by
the complainant which was I think a voucher, the salary of Mr. McLeod was roughly P60,000.00
a month?

A Yes, sir.

Q And as shown by their annex "L" to their reply, that this was reduced to roughly P50,000.00 a
month?

A Yes, sir.

Q You stated that this was indeed upon the instruction by the Vice-President of Peggy Mills at
that time and that was Mr. Philip Lim, would you not?

A Yes, sir.

Q Of your own personal knowledge, can you say if this was, in fact, by agreement between Mr.
Philip Lim or any other officers of Peggy Mills and Mr. McLeod?

A If I recall it correctly, I assume it was an agreement, verbal agreement with, between Mr.
Philip Lim and Mr. McLeod, because the voucher that we prepared was actually acknowledged
by Mr. McLeod, the reduced amount was acknowledged by Mr. McLeod thru the voucher that
we prepared.
Q In other words, Mr. Witness, you mean to tell us that Mr. McLeod continuously received the
reduced amount of P50,000.00 by signing the voucher and receiving the amount in question?

A Yes, sir.

Q As far as you remember, Mr. Posio, was there any complaint by Mr. McLeod because of this
reduced amount of his salary at that time?

A I don’t have any personal knowledge of any complaint, sir.

Q At least, that is in so far as you were concerned, he said nothing when he signed the voucher in
question?

A Yes, sir.

Q Now, you also stated that the reason for what appears to be an agreement between Peggy Mills
and Mr. McLeod in so far as the reduction of his salary from P60,000.00 to P50,000.00 a month
was because he would have a reduced number of working days in view of the strike at Peggy
Mills, is that right?

A Yes, sir.

Q And that this was so because on account of the strike, there was no work to be done in the
company?

A Yes, sir.78

xxxx

Q Now, you also stated if you remember during the first time that you testified that in the
beginning, the monthly salary of the complainant was P60,000.00, is that correct?

A Yes, sir.

Q And because of the long period of the strike, when there was no work to be done, by
agreement with the complainant, his monthly salary was adjusted to only P50,495 because he
would not have to report for work on Saturday. Do you remember having made that explanation?

A Yes, sir.

Q You also stated that the complainant continuously received his monthly salary in the adjusted
amount of P50,495.00 monthly signing the necessary vouchers or pay slips for that without
complaining, is that not right, Mr. Posio?

A Yes, sir.79

Since the last salary that McLeod received from PMI was P50,495, that amount should be the
basis in computing his retirement benefits. McLeod must be credited only with his service to
PMI as it had a juridical personality separate and distinct from that of the other respondent
corporations.

Since PMI has no retirement plan,80 we apply Section 5, Rule II of the Rules Implementing the
New Retirement Law which provides:

5.1 In the absence of an applicable agreement or retirement plan, an employee who retires
pursuant to the Act shall be entitled to retirement pay equivalent to at least one-half (1/2) month
salary for every year of service, a fraction of at least six (6) months being considered as one
whole year.

5.2 Components of One-half (1/2) Month Salary. ─ For the purpose of determining the minimum
retirement pay due an employee under this Rule, the term "one-half month salary" shall include
all of the following:

(a) Fifteen (15) days salary of the employee based on his latest salary rate. x x x

With McLeod having worked with PMI for 12 years, from 1980 to 1992, he is entitled to a
retirement pay equivalent to ½ month salary for every year of service based on his latest salary
rate of P50,495 a month.

There is no basis for the award of moral damages.

Moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is
guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual
obligations. The breach must be wanton, reckless, malicious, or in bad faith, oppressive or
abusive.81 From the records of the case, the Court finds no ultimate facts to support a conclusion
of bad faith on the part of PMI.

Records disclose that PMI had long offered to pay McLeod his money claims. In their Comment,
respondents assert that they offered to pay McLeod the sum of P840,000, as "separation benefits,
and not P300,000, if only to buy peace and to forestall any complaint" that McLeod may initiate
before the NLRC. McLeod admitted at the hearing before the Labor Arbiter that PMI has made
this offer ─

ATTY. ESCANO:

x x x According to your own statement in your Position Paper and I am referring to page 8, your
unpaid retirement benefit for fourteen (14) years of service at P60,000.00 per year is
P840,000.00, is that correct?

WITNESS:

That is correct, sir.

ATTY. ESCANO:

And this amount is correct P840,000.00, according to your Position Paper?

WITNESS:

That is correct, sir.

ATTY. ESCANO:

The question I want to ask is, are you aware that this amount was offered to you sometime last
year through your own lawyer, my good friend, Atty. Avecilla, who is right here with us?

WITNESS:

I was aware, sir.

ATTY. ESCANO:

So this was offered to you, is that correct?

WITNESS:

I was told that a fixed sum of P840,000.00 was offered.

ATTY. ESCANO:

And , of course, the reason, if I may assume, that you declined this offer was that, according to
you, there are other claims which you would like to raise against the Respondents which, by your
impression, they were not willing to pay in addition to this particular amount?

WITNESS:

Yes, sir.

ATTY. ESCANO:

The question now is, if the same amount is offered to you by way of retirement which is exactly
what you stated in your own Position Paper, would you accept it or not?

WITNESS:

Not on the concept without all the basic benefits due me, I will refuse.82

xxxx

ATTY. ROXAS:

Q You mentioned in the cross-examination of Atty. Escano that you were offered the separation
pay in 1994, is that correct, Mr. Witness?

WITNESS:

A I was offered a settlement of P300,000.00 for complete settlement and that was I think in
January or February 1994, sir.

ATTY. ESCANO:

No. What was mentioned was the amount of P840,000.00.

WITNESS:

What did you say, Atty. Escano?

ATTY. ESCANO:

The amount that I mentioned was P840,000.00 corresponding to the . . . . . . .

WITNESS:

May I ask that the question be clarified, your Honor?

ATTY. ROXAS:

Q You mentioned that you were offered for the settlement of your claims in 1994 for
P840,000.00, is that right, Mr. Witness?
A During that period in time, while the petition in this case was ongoing, we already filed a case
at that period of time, sir. There was a discussion. To the best of my knowledge, they are willing
to settle for P840,000.00 and based on what the Attorney told me, I refused to accept because I
believe that my position was not in anyway due to a compromise situation to the benefits I am
entitled to.83

Hence, the awards for exemplary damages and attorney’s fees are not proper in the present
case.84

That respondent corporations, in their appeal to the NLRC, did not serve a copy of their
memorandum of appeal upon PMI is of no moment. Section 3(a), Rule VI of the NLRC New
Rules of Procedure provides:

Requisites for Perfection of Appeal. ─ (a) The appeal shall be filed within the reglementary
period as provided in Section 1 of this Rule; shall be under oath with proof of payment of the
required appeal fee and the posting of a cash or surety bond as provided in Section 5 of this Rule;
shall be accompanied by a memorandum of appeal x x x and proof of service on the other party
of such appeal. (Emphasis supplied)

The "other party" mentioned in the Rule obviously refers to the adverse party, in this case,
McLeod. Besides, Section 3, Rule VI of the Rules which requires, among others, proof of service
of the memorandum of appeal on the other party, is merely a rundown of the contents of the
required memorandum of appeal to be submitted by the appellant. These are not jurisdictional
requirements.85

WHEREFORE, we DENY the petition and AFFIRM the Decision of the Court of Appeals in
CA-G.R. SP No. 55130, with the following MODIFICATIONS: (a) the retirement pay of John F.
McLeod should be computed at ½ month salary for every year of service for 12 years based on
his salary rate of P50,495 a month; (b) Patricio L. Lim is absolved from personal liability; and
(c) the awards for moral and exemplary damages and attorney’s fees are deleted. No
pronouncement as to costs.

SO ORDERED.

14. (d)
COMMISSIONER OF INTERNAL G.R. No. 167560
REVENUE,
Petitioner, Present:

YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

DOMINADOR MENGUITO, Promulgated:

Respondent. September 17, 2008

x----------------------------------------------------------x

DECISION

AUSTRIA-MARTINEZ, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
assailing the March 31, 2005 Decision1 of the Court of Appeals (CA) which reversed and set
aside the Court of Tax Appeals (CTA) April 2, 2002 Decision2 and October 10, 2002 Resolution3
ordering Dominador Menguito (respondent) to pay the Commissioner of Internal Revenue
(petitioner) deficiency income and percentage taxes and delinquency interest.

Based on the Joint Stipulation of Facts and Admissions4 of the parties, the CTA summarized the
factual and procedural antecedents of the case, the relevant portions of which read:

Petitioner Dominador Menguito [herein respondent] is a Filipino citizen, of legal age, married to
Jeanne Menguito and is engaged in the restaurant and/or cafeteria business. For the years 1991,
1992 and 1993, its principal place of business was at Gloriamaris, CCP Complex, Pasay City and
later transferred to Kalayaan Bar (Copper Kettle Cafeteria Specialist or CKCS), Departure Area,
Ninoy Aquino International Airport, Pasay City. During the same years, he also operated a
branch at Club John Hay, Baguio City carrying the business name of Copper Kettle Cafeteria
Specialist (Joint Stipulation of Facts and Admissions, p. 133, CTA records).

xxxx

Subsequently, BIR Baguio received information that Petitioner [herein respondent] has
undeclared income from Texas Instruments and Club John Hay, prompting the BIR to conduct
another investigation. Through a letter dated July 28, 1997, Spouses Dominador Menguito and
Jeanne Menguito (Spouses Menguito) were informed by the Assessment Division of the said
office that they have underdeclared sales totaling P48,721,555.96 (Exhibit 11, p. 83, BIR
records). This was followed by a Preliminary Ten (10) Day Letter dated August 11, 1997,
informing Petitioner [herein respondent] that in the investigation of his 1991, 1992 and 1993
income, business and withholding tax case, it was found out that there is still due from him the
total sum of P34,193,041.55 as deficiency income and percentage tax.

On September 2, 1997, the assessment notices subject of the instant petition were issued. These
were protested by Ms. Jeanne Menguito, through a letter dated September 28, 1997 (Exhibit 14,
p. 112, BIR Records), on the ground that the 40% deduction allowed on their computed gross
revenue, is unrealistic. Ms. Jeanne Menguito requested for a period of thirty (30) days within
which to coordinate with the BIR regarding the contested assessment.

On October 10, 1997, BIR Baguio replied, informing the Spouses Menguito that the source of
assessment was not through the disallowance of claimed expenses but on data received from
Club John Hay and Texas Instruments Phils., Inc. Said letter gave the spouses ten (10) days to
present evidence (Exhibit 15, p. 110, BIR Records).

In an effort to clear an alleged confusion regarding Copper Kettle Cafeteria Specialist (CKCS)
being a sole proprietorship owned by the Spouses, and Copper Kettle Catering Services, Inc.
(CKCS, Inc.) being a corporation with whom Texas Instruments and Club John Hay entered
into a contract, Petitioner [respondent] submitted to BIR Baguio a photocopy of the SEC
Registration of Copper Kettle Catering Services, Inc. on March 23, 1999 (pp. 134-141, BIR
Records).

On April 12, 1999, BIR Baguio wrote a letter to Spouses Menguito, informing the latter that a
reinvestigation or reconsideration cannot be given due course by the mere submission of an
uncertified photocopy of the Certificate of Incorporation. Thus, it avers that the amendment
issued is still valid and enforceable.

On May 26, 1999, Petitioner [respondent] filed the present case, praying for the cancellation and
withdrawal of the deficiency income tax and percentage tax assessments on account of
prescription, whimsical factual findings, violation of procedural due process on the issuance of
assessment notices, erroneous address of notices and multiple credit/ investigation by the
Respondent [petitioner] of Petitioner's [respondent’s] books of accounts and other related records
for the same tax year.

Instead of filing an Answer, Respondent [herein petitioner] moved to dismiss the instant petition
on July 1, 1999, on the ground of lack of jurisdiction. According to Respondent [petitioner], the
assessment had long become final and executory when Petitioner [respondent] failed to comply
with the letter dated October 10, 1997.

Petitioner opposed said motion on July 21, 1999, claiming that the final decision on Petitioner's
[respondent’s] protest is the April 12, 1999 letter of the Baguio Regional Office; therefore, the
filing of the action within thirty (30) days from receipt of the said letter was seasonably filed.
Moreover, Petitioner [respondent] asserted that granting that the April 12, 1999 letter in question
could not be construed to mean as a denial or final decision of the protest, still Petitioner's
[respondent’s] appeal was timely filed since Respondent [petitioner] issued a Warrant of
Distraint and/or Levy against the Petitioner [respondent] on May 3, 1999, which warrant
constituted a final decision of the Respondent [petitioner] on the protest of the taxpayer.

On September 3, 1999, this Court denied Respondent's [petitioner’s] 'Motion to Dismiss' for lack
of merit.

Respondent [petitioner] filed his Answer on September 24, 1999, raising the following Special
and Affirmative Defenses:

xxxx

5. Investigation disclosed that for taxable years 1991, 1992 and 1993, petitioner [respondent]
filed false or fraudulent income and percentage tax returns with intent to evade tax by under
declaring his sales.

6. The alleged duplication of investigation of petitioner [respondent] by the BIR Regional Office
in Baguio City and by the Revenue District Office in Pasay City is justified by the finding of
fraud on the part of the petitioner [respondent], which is an exception to the provision in the Tax
Code that the examination and inspection of books and records shall be made only once in a
taxable year (Section 235, Tax Code). At any rate, petitioner [respondent], in a letter dated July
18, 1994, waived his right to the consolidation of said investigation.

7. The aforementioned falsity or fraud was discovered on August 5, 1997. The assessments
were issued on September 2, 1997, or within ten (10) years from the discovery of such falsity
or fraud (Section 223, Tax Code). Hence, the assessments have not prescribed.

8. Petitioner's [respondent’s] allegation that the assessments were not properly addressed is
rendered moot and academic by his acknowledgment in his protest letter dated September 28,
1997 that he received the assessments.

9. Respondent [petitioner] complied with the provisions of Revenue Regulations No. 12-85 by
informing petitioner [respondent] of the findings of the investigation in letters dated July 28,
1997 and August 11, 1997 prior to the issuance of the assessments.

10. Petitioner [respondent] did not allege in his administrative protest that there was a
duplication of investigation, that the assessments have prescribed, that they were not properly
addressed, or that the provisions of Revenue Regulations No. 12-85 were not observed. Not
having raised them in the administrative level, petitioner [respondent] cannot raise the same
for the first time on appeal (Aguinaldo Industries Corp. vs. Commissioner of Internal
Revenue, 112 SCRA 136).

11. The assessments were issued in accordance with law and regulations.
12. All presumptions are in favor of the correctness of tax assessments (CIR vs. Construction
Resources of Asia, Inc., 145 SCRA 67), and the burden to prove otherwise is upon petitioner
[respondent].5 (Emphasis supplied)

On April 2, 2002, the CTA rendered a Decision, the dispositive portion of which reads:

Accordingly, Petitioner [herein respondent] is ORDERED to PAY the Respondent [herein

petitioner] the amount of P11,333,233.94 and P2,573,655.82 as deficiency income and
percentage tax liabilities, respectively for taxable years 1991, 1992 and 1993 plus 20%
delinquency interest from October 2, 1997 until full payment thereof.

SO ORDERED.6

Respondent filed a motion for reconsideration but the CTA denied the same in its Resolution of
October 10, 2002.7

Through a Petition for Review8 filed with the CA, respondent questioned the CTA Decision and
Resolution mainly on the ground that Copper Kettle Catering Services, Inc. (CKCS, Inc.) was a
separate and distinct entity from Copper Kettle Cafeteria Specialist (CKCS); the sales and
revenues of CKCS, Inc. could not be ascribed to CKCS; neither may the taxes due from one,
charged to the other; nor the notices to be served on the former, coursed through the latter.9
Respondent cited the Joint Stipulation in which petitioner acknowledged that its (respondent’s)
business was called Copper Kettle Cafeteria Specialist, not Copper Kettle Catering Services,
Inc.10

Based on the unrefuted11 CTA summary, the CA rendered the Decision assailed herein, the
dispositive portion of which reads:

WHEREFORE, the instant petition is GRANTED. Reversing the assailed Decision dated April
2, 2002 and Resolution dated October 10, 2002, the deficiency income tax and percentage
income tax assessments against petitioner in the amounts of P11,333,233.94 and P2,573,655.82
for taxable years 1991, 1992 and 1993 plus the 20% delinquency interest thereon are annulled.

SO ORDERED.12

Petitioner filed a motion for reconsideration but the CA denied the same in its October 10, 2002
Resolution.13

Hence, herein recourse to the Court for the reversal of the CA decision and resolution on the
following grounds:

The Court of Appeals erred in reversing the decision of the Court of Tax Appeals and in holding
that Copper Kettle Cafeteria Specialist owned by respondent and Copper Kettle Catering
Services, Inc. owned and managed by respondent's wife are not one and the same.

II

The Court of Appeals erred in holding that respondent was denied due process for failure of
petitioner to validly serve respondent with the post-reporting and pre-assessment notices as
required by law.

On the first issue, the CTA has ruled that CKCS, Inc. and CKCS are one and the same
corporation because "[t]he contract between Texas Instruments and Copper Kettle was signed by
petitioner’s [respondent’s] wife, Jeanne Menguito as proprietress."14
However, the CA reversed the CTA on these grounds:

Respondent’s [herein petitioner’s] allegation that Copper Kettle Catering Services, Inc. and
Copper Kettle Cafeteria Specialists are not distinct entities and that the under-declared
sales/revenues of Copper Kettle Catering Services, Inc. pertain to Copper Kettle Cafeteria
Specialist are belied by the evidence on record. In the Joint Stipulation of Facts submitted before
the tax court, respondent [petitioner] admitted "that petitioner’s [herein respondent’s] business
name is Copper Kettle Cafeteria Specialist."

Also, the Certification of Club John Hay and Letter dated July 9, 1997 of Texas Instruments both
addressed to respondent indicate that these companies transacted with Copper Kettle Catering
Services, Inc., owned and managed by JEANNE G. MENGUITO, NOT petitioner Dominador
Menguito. The alleged under-declared sales income subject of the present assessments were
shown to have been earned by Copper Kettle Catering Services, Inc. in its commercial
transaction with Texas Instruments and Camp John Hay; NOT by petitioner’s dealing with these
companies. In fact, there is nothing on record which shows that Texas Instruments and Camp
John Hay conducted business relations with Copper Kettle Cafeteria Specialist, owned by herein
petitioner Dominador Menguito. In the absence, therefore, of clear and convincing evidence
showing that Copper Kettle Cafeteria Specialist and Copper Kettle Catering Services, Inc. are
one and the same, respondent can NOT validly impute alleged underdeclared sales income
earned by Copper Kettle Catering Services, Inc. as sales income of Copper Kettle Cafeteria
Specialist.15 (Emphasis supplied)

Respondent is adamant that the CA is correct. Many times in the past, the BIR had treated CKCS
separately from CKCS, Inc.: from May 1994 to June 1995, the BIR sent audit teams to examine
the books of account and other accounting records of CKCS, and based on said audits,
respondent was held liable for deficiency taxes, all of which he had paid.16 Moreover, the
certifications17 issued by Club John Hay and Texas Instruments identify the concessionaire
operating therein as CKCS, Inc., owned and managed by his spouse Jeanne Menguito, and not

CKCS.18

Petitioner impugns the findings of the CA, claiming that these are contradicted by evidence on
record consisting of a reply to the September 2, 1997 assessment notice of BIR Baguio which
Jeanne Menguito wrote on September 28, 1997, to wit:

We are in receipt of the assessment notice you have sent us, dated September 2, 1997. Having
taken hold of the same only now following our travel overseas, we were not able to respond
immediately and manifest our protest. Also, with the impending termination of our businesses at
19th Tee, Club John Hay and at Texas Instruments, Loakan, Baguio City, we have already
started the transfer of our records and books in Baguio City to Manila that we will need more
time to review and sort the records that may have to be presented relative to the assessment x x
x.19 (Emphasis supplied)

Petitioner insists that said reply confirms that the assessment notice is directed against the
businesses which she and her husband, respondent herein, own and operate at Club John Hay and
Texas Instruments, and establishes that she is protesting said notice not just for herself but also
for respondent.20

Moreover, petitioner argues that if it were true that CKCS, Inc. and CKCS are separate and
distinct entities, respondent could have easily produced the articles of incorporation of CKCS,
Inc.; instead, what respondent presented was merely a photocopy of the incorporation articles.21
Worse, petitioner adds, said document was not offered in evidence before the CTA, but was
presented only before the CA.22

Petitioner further insists that CKCS, Inc. and CKCS are merely employing the fiction of their
separate corporate existence to evade payment of proper taxes; that the CTA saw through their
ploy and rightly disregarded their corporate individuality, treating them instead as one taxable
entity with the same tax base and liability;23 and that the CA should have sustained the CTA.24

In effect, petitioner would have the Court resolve a purely factual issue25 of whether or not there
is substantial evidence that CKCS, Inc. and CKCS are one and the same taxable entity.

As a general rule, the Court does not venture into a trial of facts in proceedings under Rule 45 of
the Rules of Courts, for its only function is to review errors of law.26 The Court declines to
inquire into errors in the factual assessment of the CA, for the latter’s findings are conclusive,
especially when these are synonymous to those of the CTA.27 But when the CA contradicts the
factual findings of the CTA, the Court deems it necessary to determine whether the CA was
justified in doing so, for one basic rule in taxation is that the factual findings of the CTA, when
supported by substantial evidence, will not be disturbed on appeal unless it is shown that the
CTA committed gross error in its appreciation of facts.28

The Court finds that the CA gravely erred when it ignored the substantial evidence on
record and reversed the CTA.

In a number of cases, the Court has shredded the veil of corporate identity and ruled that
where a corporation is merely an adjunct, business conduit or alter ego of another
corporation or when they practice fraud on our internal revenue laws,[29] the fiction of their
separate and distinct corporate identities shall be disregarded, and both entities treated as one taxable
person, subject to assessment for the same taxable transaction.

The Court considers the presence of the following circumstances, to wit: when the owner of one directs and
controls the operations of the other, and the payments effected or received by one are for the accounts due
from or payable to the other;30 or when the properties or products of one are all sold to the other, which in
turn immediately sells them to the public,[31] as substantial evidence in support of the finding that the two are
actually one juridical taxable personality.

In the present case, overwhelming evidence supports the CTA in disregarding the separate identity of CKCS, Inc.
from CKCS and in treating them as one taxable entity.

First, in respondent’s Petition for Review before the CTA, he expressly admitted that he "is engaged in restaurant
and/or cafeteria business" and that "[i]n 1991, 1992 and 1993, he also operated a branch at Club John Hay, Baguio
City with a business name of Copper Kettle Cafeteria Specialist." 32 Respondent repeated such admission in the Joint
Stipulation.33 And then in Exhibit "1"34 for petitioner, a July 18, 1994 letter sent by Jeanne Menguito to BIR, Baguio
City, she stated thus:

"in connection with the investigation of Copper Kettle Cafeteria Specialist which is located at 19th Tee Club John
Hay, Baguio City under letter of authority nos. 0392897, 0392898, and 0392690 dated May 16, 1994, investigating
my income, business, and withholding taxes for the years 1991, 1992, and 1993."35 (Emphasis supplied)

Jeanne Menguito signed the letter as proprietor of Copper Kettle Cafeteria Specialist. 36

Related to Exhibit "1" is petitioner's Exhibit "14," which is another letter dated September 28, 1997, in which Jeanne
Menguito protested the September 2, 1997 assessment notices directed at Copper Kettle Cafeteria Specialist and
referred to the latter as "our business at 19th Tee Club John Hay and at Texas Instruments." 37 Taken along with the
Joint Stipulation, Exhibits "A" through "C" and the August 3, 1993 Certification of Camp John Hay, Exhibits "1"
and "14," confirm that respondent, together with his spouse Jeanne Menguito, own, operate and manage a branch of
Copper Kettle Cafeteria Specialist, also called Copper Kettle Catering Services at Camp John Hay.

Moreover, in Exhibits "A" to "A-1,"38 Exhibits "B" to "B-1"39 and Exhibits "C" to "C-1"40 which are lists of
concessionaires that operated in Club John Hay in 1992, 1993 and 1991, respectively,41 it appears that there is no
outlet with the name "Copper Kettle Cafeteria Specialist" as claimed by respondent. The name that appears in the
lists is "19th TEE CAFETERIA (Copper Kettle, Inc.)." However, in the light of the express admission of respondent
that in 1991, 1992 and 1993, he operated a branch called Copper Kettle Cafeteria Specialist in Club John Hay, the
entries in Exhibits "A" through "C" could only mean that said branch refers to "19th Tee Cafeteria (Copper Kettle,
Inc.)." There is no evidence presented by respondent that contradicts this conclusion.

In addition, the August 9, 1993 Certification issued by Club John Hay that "COPPER KETTLE CATERING
SERVICES owned and managed by MS. JEANNE G. MENGUITO is a concessionaire in John Hay since July 1991
up to the present and is operating the outlet 19TH TEE CAFETERIA AND THE TEE BAR" 42 convincingly
establishes that respondent's branch which he refers to as Copper Kettle Cafeteria Specialist at Club John Hay also
appears in the latter's records as "Copper Kettle Catering Services" with an outlet called "19th Tee Cafeteria and The
Tee Bar."

Second, in Exhibit "8"43 and Exhibit "E,"44 Texas Instruments identified the concessionaire operating its canteen as
"Copper Kettle Catering Services, Inc."45 and/or "COPPER KETTLE CAFETERIA SPECIALIST SVCS." 46 It being
settled that respondent's "Copper Kettle Cafeteria Specialist" is also known as "Copper Kettle Catering Services,"
and that respondent and Jeanne Menguito both own, manage and act as proprietors of the business, Exhibit "8" and
Exhibit "E" further establish that, through said business, respondent also had taxable transactions with Texas
Instruments.

In view of the foregoing facts and circumstances, the Articles of Incorporation of CKCS, Inc. -- a certified true copy
of which respondent attached only to his Reply filed with the CA47 -- cannot insulate it from scrutiny of its real
identity in relation to CKCS. It is noted that said Articles of Incorporation of CKCS, Inc. was issued in 1989, but
documentary evidence indicate that after said date, CKCS, Inc. has also assumed the name CKCS, and vice-versa.
The most concrete indication of this practice is the 1991 Quarterly Percentage Tax Returns covering the business
name/trade "19th Tee Camp John Hay." In said returns, the taxpayer is identified as "Copper Kettle Cafeteria
Specialist"48 or CKCS, not CKCS, Inc. Yet, in several documents already cited, the purported owner of 19th Tee Bar
at Club John Hay is CKCS, Inc.

All these pieces of evidence buttress the finding of the CTA that in 1991, 1992 and 1993, respondent, together with
his spouse Jeanne Menguito, owned and operated outlets in Club John Hay and Texas Instruments under the names
Copper Kettle Cafeteria Specialist or CKCS and Copper Kettle Catering Services or Copper Kettle Catering
Services, Inc..

Turning now to the second issue.

In respondent's Petition for Review with the CTA, he questioned the validity of the Assessment Notices, 49 all dated
September 2, 1997, issued by BIR, Baguio City against him on the following grounds:

1. The assessment notices, based on income and percentage tax returns filed for 1991, 1992 and 1993, were issued
beyond the three-year prescriptive period under Section 203 of the Tax Code; 50

2. The assessment notices were addressed to Copper Kettle Specialist, Club John Hay, Baguio City, despite notice to
petitioner that respondent's principal place of business was at the CCP Complex, Pasay City.51

3. The assessment notices were issued in violation of the requirement of Revenue Regulations No. 12-85, dated
November 27, 1985, that the taxpayer be issued a post-reporting notice and pre-assessment notice before the
preliminary findings of deficiency may ripen into a formal assessment; 52 and

4. The assessment notices did not give respondent a 15-day period to reply to the findings of deficiency. 53

The Court notes that nowhere in his Petition for Review did respondent deny that he received the September 2, 1997
assessment notices. Instead, during the trial, respondent's witness, Ma. Theresa Nalda (Nalda), testified that she
informed the BIR, Baguio City "that there was no Notice or letter, that we did not receive,

perhaps, because they were not addressed to Mr. Menguito's head office." 54

The CTA correctly upheld the validity of the assessment notices. Citing Section 223 of the Tax Code which provides
that the prescriptive period for the issuance of assessment notices based on fraud is 10 years, the CTA ruled that the
assessment notices issued against respondent on September 2, 1997 were timely because petitioner discovered the
falsity in respondent's tax returns for 1991, 1992 and 1993 only on February 19, 1997. 55 Moreover, in accordance
with Section 2 of Revenue Regulation No. 12-85, which requires that assessment notices be sent to the address
indicated in the taxpayer's return, unless the latter gives a notice of change of address, the assessment notices in the
present case were sent by petitioner to Camp John Hay, for this was the address respondent indicated in his tax
returns.56 As to whether said assessment notices were actually received, the CTA correctly held that since
respondent did not testify that he did not receive said notices, it can be presumed that the same were actually sent to
and received by the latter. The Court agrees with the CTA in considering as hearsay the testimony of Nalda that
respondent did not receive the notices, because Nalda was not competent to testify on the matter, as she was
employed by respondent only in June 1998, whereas the assessment notices were sent on September 2, 1997. 57

Anent compliance with the requirements of Revenue Regulation No. 12-85, the CTA held:
BIR records show that on July 28, 1997, a letter was issued by BIR Baguio to Spouses Menguito, informing the
latter of their supposed underdeclaration of sales totaling P48,721,555.96 and giving them 5 days to communicate
any objection to the results of the investigation (Exhibit 11, p. 83, BIR Records). Records likewise reveal the
issuance of a Preliminary Ten (10) Day Letter on August 11, 1997, informing Petitioner [respondent herein] that the
sum of P34,193,041.55 is due from him as deficiency income and percentage tax (Exhibit 13, p. 173, BIR Records).
Said letter gave the Petitioner [respondent herein] a period of ten (10) days to submit his objection to the proposed
assessment, either personally or in writing, together with any evidence he may want to present.

xxxx

As to Petitioner's allegation that he was given only ten (10) days to reply to the findings of deficiency instead of
fifteen (15) days granted to a taxpayer under Revenue Regulations No. 12-85, this Court believes that when
Respondent [petitioner herein] gave the Petitioner [respondent herein] on October 10, 1997 an additional period of
ten (10) days to present documentary evidence or a total of twenty (20) days, there was compliance with Revenue
Regulations No. 12-85 and the latter was amply given opportunity to present his side x x x. 58

The CTA further held that respondent was estopped from raising procedural issues against the assessment notices,
because these were not cited in the September 28, 1997 letter-protest which his spouse Jeanne Menguito filed with
petitioner.59

On appeal by respondent,60 the CA resolved the issue, thus:

Moreover, if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter
to prove by competent evidence that such notice was indeed received by the addressee. Here, respondent [petitioner
herein] merely alleged that it "forwarded" the assessment notices to petitioner [respondent herein]. The respondent
did not show any proof of mailing, registry receipt or acknowledgment receipt signed by the petitioner [respondent
herein]. Since respondent [petitioner herein] has not adduced sufficient evidence that petitioner [respondent
herein] had in fact received the pre-assessment notice and post-reporting notice required by law, it cannot be
assumed that petitioner [respondent herein] had been served said notices.61

No other ground was cited by the CA for the reversal of the finding of the CTA on the issue.

The CA is gravely mistaken.

In their Petition for Review with the CTA, respondent expressly stated that "[s]ometime in September 1997,
petitioner [respondent herein] received various assessment notices, all dated 02 September 1997, issued by BIR-
Baguio for alleged deficiency income and percentage taxes for taxable years ending 31 December 1991, 1992 and
1993 x x x."62 In their September 28, 1997 protest to the September 2, 1997 assessment notices, respondent, through
his spouses Jeanne Menguito, acknowledged that "[they] are in receipt of the assessment notice you have sent us,
dated September 2, 1997 x x x." 63

Respondent is therefore estopped from denying actual receipt of the September 2, 1997 assessment notices,
notwithstanding the denial of his witness Nalda.

As to the address indicated on the assessment notices, respondent cannot question the same for it is the said address
which appears in its percentage tax returns.64 While respondent claims that he had earlier notified petitioner of a
change in his business address, no evidence of such written notice was presented. Under Section 11 of Revenue
Regulation No. 12-85, respondent's failure to give written notice of change of address bound him to whatever
communications were sent to the address appearing in the tax returns for the period involved in the investigation. 65

Thus, what remain in question now are: whether petitioner issued and mailed a post-reporting notice and a pre-
assessment notice; and whether respondent actually received them.

There is no doubt that petitioner failed to prove that it served on respondent a post-reporting notice and a pre-
assessment notice. Exhibit "11"66 of petitioner is a mere photocopy of a July 28, 1997 letter it sent to respondent,
informing him of the initial outcome of the investigation into his sales, and the release of a preliminary assessment
upon completion of the investigation, with notice for the latter to file any objection within five days from receipt of
the letter. "Exhibit "13"67 of petitioner is also a mere photocopy of an August 11, 1997 Preliminary Ten (10) Day
Letter to respondent, informing him that he had been found to be liable for deficiency income and percentage tax
and inviting him to submit a written objection to the proposed assessment within 10 days from receipt of notice. But
nowhere on the face of said documents can be found evidence that these were sent to and received by respondent.
Nor is there separate evidence, such as a registry receipt of the notices or a certification from the Bureau of Posts,
that petitioner actually mailed said notices.

However, while the lack of a post-reporting notice and pre-assessment notice is a deviation from the requirements
under Section 168 and Section 269 of Revenue Regulation No. 12-85, the same cannot detract from the fact that
formal assessments were issued to and actually received by respondents in accordance with Section 228 of the
National Internal Revenue Code which was in effect at the time of assessment.

It should be emphasized that the stringent requirement that an assessment notice be satisfactorily proven to have
been issued and released or, if receipt thereof is denied, that said assessment notice have been served on the
taxpayer,70 applies only to formal assessments prescribed under Section 228 of the National Internal Revenue Code,
but not to post-reporting notices or pre-assessment notices. The issuance of a valid formal assessment is a
substantive prerequisite to tax collection,71 for it contains not only a computation of tax liabilities but also a demand
for payment within a prescribed period, thereby signaling the time when penalties and interests begin to accrue
against the taxpayer and enabling the latter to determine his remedies therefor. Due process requires that it must be
served on and received by the taxpayer.72

A post-reporting notice and pre-assessment notice do not bear the gravity of a formal assessment notice. The post-
reporting notice and pre-assessment notice merely hint at the initial findings of the BIR against a taxpayer and
invites the latter to an "informal" conference or clarificatory meeting. Neither notice contains a declaration of the tax
liability of the taxpayer or a demand for payment thereof. Hence, the lack of such notices inflicts no prejudice on the
taxpayer for as long as the latter is properly served a formal assessment notice. In the case of respondent, a formal
assessment notice was received by him as acknowledged in his Petition for Review and Joint Stipulation; and, on the
basis thereof, he filed a protest with the BIR, Baguio City and eventually a petition with the CTA.

WHEREFORE, the petition is GRANTED. The March 31, 2005 Decision of the Court of Appeals is REVERSED
and SET ASIDE and the April 2, 2002 Decision and October 10, 2002 Resolution of the Court of Tax Appeals are
REINSTATED.

SO ORDERED.

15.

G.R. No. 150283 April 16, 2008

RYUICHI YAMAMOTO, petitioner,

vs.
NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO, respondents.

DECISION

CARPIO MORALES, J.:

In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese national, organized under

Philippine laws Wako Enterprises Manila, Incorporated (WAKO), a corporation engaged
principally in leather tanning, now known as Nishino Leather Industries, Inc. (NLII), one of
herein respondents.

In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a Japanese national,
forged a Memorandum of Agreement under which they agreed to enter into a joint venture
wherein Nishino would acquire such number of shares of stock equivalent to 70% of the
authorized capital stock of WAKO.

Eventually, Nishino and his brother1 Yoshinobu Nishino (Yoshinobu) acquired more than 70%
of the authorized capital stock of WAKO, reducing Yamamoto’s investment therein to, by his
claim, 10%,2 less than 10% according to Nishino.3

The corporate name of WAKO was later changed to, as reflected earlier, its current name NLII.

Negotiations subsequently ensued in light of a planned takeover of NLII by Nishino who would
buy-out the shares of stock of Yamamoto. In the course of the negotiations, Yoshinobu and
Nishino’s counsel Atty. Emmanuel G. Doce (Atty. Doce) advised Yamamoto by letter dated
October 30, 1991, the pertinent portions of which follow:
 Hereunder is a simple memorandum of the subject matters discussed with me by Mr.
Yoshinobu Nishino yesterday, October 29th, based on the letter of Mr. Ikuo Nishino from
Japan, and which I am now transmitting to you.4

xxxx

12. Machinery and Equipment:

The following machinery/equipment have been contributed by you to the company:

Splitting machine - 1 unit

Samming machine - 1 unit

Forklift - 1 unit

Drums - 4 units

Toggling machine - 2 units

Regarding the above machines, you may take them out with you (for your own use and
sale) if you want, provided, the value of such machines is deducted from your and
Wako’s capital contributions, which will be paid to you.

Kindly let me know of your comments on all the above, soonest.

x x x x5 (Emphasis and underscoring supplied)

On the basis of such letter, Yamamoto attempted to recover the machineries and equipment
which were, by Yamamoto’s admission, part of his investment in the corporation,6 but he was
frustrated by respondents, drawing Yamamoto to file on January 15, 1992 before the Regional
Trial Court (RTC) of Makati a complaint7 against them for replevin.

Branch 45 of the Makati RTC issued a writ of replevin after Yamamoto filed a bond. 8

In their Answer with Counterclaim,9 respondents claimed that the machineries and equipment
subject of replevin form part of Yamamoto’s capital contributions in consideration of his equity
in NLII and should thus be treated as corporate property; and that the above-said letter of Atty.
Doce to Yamamoto was merely a proposal, "conditioned on [Yamamoto’s] sell-out to . . .
Nishino of his entire equity,"10 which proposal was yet to be authorized by the stockholders and
Board of Directors of NLII.

By way of Counterclaim, respondents, alleging that they suffered damage due to the seizure via
the implementation of the writ of replevin over the machineries and equipment, prayed for the
award to them of moral and exemplary damages, attorney’s fees and litigation expenses, and
costs of suit.

The trial court, by Decision of June 9, 1995, decided the case in favor of Yamamoto,11 disposing
thus:

WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff as the rightful owner
and possessor of the machineries in question, and making the writ of seizure permanent;
(2) ordering defendants to pay plaintiff attorney’s fees and expenses of litigation in the
amount of Fifty Thousand Pesos (P50,000.00), Philippine Currency; (3) dismissing
defendants’ counterclaims for lack of merit; and (4) ordering defendants to pay the costs
of suit.
 SO ORDERED.12 (Underscoring supplied)

On appeal,13 the Court of Appeals held in favor of herein respondents and accordingly reversed
the RTC decision and dismissed the complaint.14 In so holding, the appellate court found that the
machineries and equipment claimed by Yamamoto are corporate property of NLII and may not
thus be retrieved without the authority of the NLII Board of Directors;15 and that petitioner’s
argument that Nishino and Yamamoto cannot hide behind the shield of corporate fiction does not
lie,16 nor does petitioner’s invocation of the doctrine of promissory estoppel.17 At the same time,
the Court of Appeals found no ground to support respondents’ Counterclaim.18

The Court of Appeals having denied19 his Motion for Reconsideration,20 Yamamoto filed the
present petition,21 faulting the Court of Appeals

A.

x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION SHOULD NOT BE

PIERCED IN THE CASE AT BAR.

B.

x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY ESTOPPEL DOES

NOT APPLY TO THE CASE AT BAR.

C.

x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR ATTORNEY’S

FEES.22

The resolution of the petition hinges, in the main, on whether the advice in the letter of Atty.
Doce that Yamamoto may retrieve the machineries and equipment, which admittedly were part
of his investment, bound the corporation. The Court holds in the negative.

Indeed, without a Board Resolution authorizing respondent Nishino to act for and in behalf of the
corporation, he cannot bind the latter. Under the Corporation Law, unless otherwise provided,
corporate powers are exercised by the Board of Directors.23

Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:

During the negotiations, the issue as to the ownership of the Machiner[ies] never came
up. Neither did the issue on the proper procedure to be taken to execute the complete
take-over of the Company come up since Ikuo, Yoshinobu, and Yamamoto were the
owners thereof, the presence of other stockholders being only for the purpose of
complying with the minimum requirements of the law.

What course of action the Company decides to do or not to do depends not on the "other
members of the Board of Directors". It depends on what Ikuo and Yoshinobu decide.
The Company is but a mere instrumentality of Ikuo [and] Yoshinobu.24

xxxx

x x x The Company hardly holds board meetings. It has an inactive board, the directors
are directors in name only and are there to do the bidding of the Nish[i]nos, nothing
more. Its minutes are paper minutes. x x x 25

xxxx
 The fact that the parties started at a 70-30 ratio and Yamamoto’s percentage declined to
10% does not mean the 20% went to others. x x x The 20% went to no one else but Ikuo
himself. x x x Yoshinobu is the younger brother of Ikuo and has no say at all in the
business. Only Ikuo makes the decisions. There were, therefore, no other members
of the Board who have not given their approval.26 (Emphasis and underscoring
supplied)

While the veil of separate corporate personality may be pierced when the corporation is merely
an adjunct, a business conduit, or alter ego of a person,27 the mere ownership by a single
stockholder of even all or nearly all of the capital stocks of a corporation is not by itself a
sufficient ground to disregard the separate corporate personality.28

The elements determinative of the applicability of the doctrine of piercing the veil of corporate
fiction follow:

"1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separate mind, will
or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of the plaintiff’s legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In
applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendant’s
relationship to that operation."29 (Italics in the original; emphasis and underscoring
supplied)

In relation to the second element, to disregard the separate juridical personality of a corporation,
the wrongdoing or unjust act in contravention of a plaintiff’s legal rights must be clearly and
convincingly established; it cannot be presumed.30 Without a demonstration that any of the evils
sought to be prevented by the doctrine is present, it does not apply.31

In the case at bar, there is no showing that Nishino used the separate personality of NLII to
unjustly act or do wrong to Yamamoto in contravention of his legal rights.

Yamamoto argues, in another vein, that promissory estoppel lies against respondents, thus:

Under the doctrine of promissory estoppel, x x x estoppel may arise from the making of a
promise, even though without consideration, if it was intended that the promise should be
relied upon and in fact it was relied upon, and if a refusal to enforce it would be virtually
to sanction the perpetration of fraud or would result in other injustice.

x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company. For this purpose
negotiations were had between the parties. Having expressly given Yamamoto, through
the Letter and through a subsequent meeting at the Manila Peninsula where Ikuo himself
confirmed that Yamamoto may take out the Machinery from the Company anytime,
respondents should not be allowed to turn around and do the exact opposite of what they
have represented they will do.
 In paragraph twelve (12) of the Letter, Yamamoto was expressly advised that he could
take out the Machinery if he wanted to so, provided that the value of said machines
would be deducted from his capital contribution x x x.

xxxx

Respondents cannot now argue that they did not intend for Yamamoto to rely upon the
Letter. That was the purpose of the Letter to begin with. Petitioner[s] in fact, relied upon
said Letter and such reliance was further strengthened during their meeting at the Manila
Peninsula.

To sanction respondents’ attempt to evade their obligation would be to sanction the

perpetration of fraud and injustice against petitioner.32 (Underscoring supplied)

It bears noting, however, that the aforementioned paragraph 12 of the letter is followed by a
request for Yamamoto to give his "comments on all the above, soonest."33

What was thus proffered to Yamamoto was not a promise, but a mere offer, subject to his
acceptance. Without acceptance, a mere offer produces no obligation.34

Thus, under Article 1181 of the Civil Code, "[i]n conditional obligations, the acquisition of
rights, as well as the extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition." In the case at bar, there is no showing of
compliance with the condition for allowing Yamamoto to take the machineries and equipment,
namely, his agreement to the deduction of their value from his capital contribution due him in the
buy-out of his interests in NLII. Yamamoto’s allegation that he agreed to the condition35
remained just that, no proof thereof having been presented.

The machineries and equipment, which comprised Yamamoto’s investment in NLII,36 thus
remained part of the capital property of the corporation.37

It is settled that the property of a corporation is not the property of its stockholders or members.38
Under the trust fund doctrine, the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors which are preferred over the
stockholders in the distribution of corporate assets.39 The distribution of corporate assets and
property cannot be made to depend on the whims and caprices of the stockholders, officers, or
directors of the corporation unless the indispensable conditions and procedures for the protection
of corporate creditors are followed.40

WHEREFORE, the petition is DENIED.

Costs against petitioner.

SO ORDERED.

16.

G.R. No. 174353 September 10, 2014

NESTOR CHING and ANDREW WELLINGTON, Petitioners,

vs.
SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU,
HU TSUNG CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD
R. SUAREZ, Respondents.

DECISION
LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the
review of the Decision1 dated October 27, 2005 of the Court of Appeals in CA-G.R. CV No.
81441, which affirmed the Order2 dated July 8, 2003 of the Regional Trial Court (RTC), Branch
72 of Olongapo City in Civil Case No. 03-001 dismissing the Complaint filed by herein
petitioners.

On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a Complaint3 with
the RTC of Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc.
(SBGCCI) against the said country club and its Board of Directors and officers under the
provisions of Presidential Decree No. 902-A in relation to Section 5.2 of the Securities
Regulation Code. The Subic Bay Golfers and Shareholders Incorporated (SBGSI), a corporation
composed of shareholders of the defendant corporation, was also named as plaintiff. The officers
impleaded as defendants were the following: (1) itsPresident, Hu Ho Hsiu Lien alias Susan Hu;
(2) its treasurer, Hu Tsung Chieh alias Jack Hu; (3) corporate secretary Reynald Suarez; and (4)
directors Hu Tsung Hui and Hu Tsung Tzu. The case was docketed as Civil Case No. 03-001.
The complaint alleged that the defendant corporation sold shares to plaintiffs at US$22,000.00
per share, presenting to them the Articles of Incorporation which contained the following
provision:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall
be declared in their favor. Shareholders shall be entitled only to a pro-rata share of the assets of
the Club at the time of its dissolution or liquidation.4

However, on June 27, 1996, an amendment to the Articles of Incorporation was approved by the
Securities and Exchange Commission (SEC), wherein the above provision was changed as
follows:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall
be declared in their favor. In accordance with the Lease and Development Agreement by and
between Subic Bay Metropolitan Authority and The Universal International Group of Taiwan,
where the golf courseand clubhouse component thereof was assigned to the Club, the
shareholders shall not have proprietary rights or interests over the properties of the Club.5 x x x.
(Emphasis supplied.)

Petitioners claimed in the Complaint that defendant corporation did not disclose to them the
above amendment which allegedly makes the shares non-proprietary, as it takes away the rightof
the shareholders to participate in the pro-rata distribution of the assets of the corporation after its
dissolution. According to petitioners, this is in fraud of the stockholders who only discovered the
amendment when they filed a case for injunction to restrain the corporation from suspending
their rights to use all the facilities of the club. Furthermore, petitioners alleged that the Board of
Directors and officers of the corporation did not call any stockholders’ meeting from the time of
the incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the
corporation. Neither did the defendant directors and officers furnish the stockholders with the
financial statements of the corporation nor the financial report of the operation of the corporation
in violation of Section 75 of the Corporation Code. Petitioners also claim that on August 15,
1997, SBGCCI presented to the SEC an amendment to the By-Laws of the corporation
suspending the voting rights of the shareholders except for the five founders’ shares. Said
amendment was allegedly passed without any stockholders’ meeting or notices to the
stockholders in violation of Section 48 of the Corporation Code.

The Complaint furthermore enumerated several instances of fraud in the management of the
corporation allegedly committed by the Board of Directors and officers of the corporation,
particularly:
 a. The Board of Directors and the officers of the corporation did not indicate in its
financial report for the year 1999 the amount of ₱235,584,000.00 collected from the
subscription of 409 shareholders who paid U.S.$22,000.00 for one (1) share of stock at
the then prevailing rate of ₱26.18 to a dollar. The stockholders were not informed how
these funds were spent or its whereabouts.

b. The Corporation has been collecting green fees from the patrons of the golf course at
an average sum of ₱1,600.00 per eighteen (18) holes but the income is not reported in
their yearly report. The yearly report for the year 1999 contains the report of the
Independent Public Accountant who stated that the company was incorporated on April
1, 1996 but has not yet started its regular business operation. The golf course has been in
operation since 1997 and as such has collected green fees from non-members and
foreigners who played golf in the club. There is no financial report as to the income
derived from these sources.

c. There is reliable information that the Defendant Corporation has not paid its rentals to
the Subic Bay Metropolitan Authority which up to the present is estimated to be not less
than one (1) million U.S. Dollars. Furthermore, the electric billings of the corporation
[have] not been paid which amounts also to several millions of pesos.

d. That the Supreme Court sustained the pre-termination of its contract with the SBMA
and presently the club is operating without any valid contract with SBMA. The defendant
was ordered by the Supreme Court to yield the possession, the operation and the
management of the golf course to SBMA. Up to now the defendants [have] defied this
Order.

e. That the value of the shares of stock of the corporation has drastically declined from its
issued value of U.S.$22,000.00 to only Two Hundred Thousand Pesos, (₱200,000.00)
Philippine Currency. The shareholders [have] lost in terms ofinvestment the sum
estimated to be more than two hundred thousand pesos.This loss is due to the fact that the
Club is mismanaged and the golf course is poorly maintained. Other amenities of the
Club has (sic) not yet been constructed and are not existing despite the lapse of morethan
five (5) years from the time the stocks were offered for sale to the public. The cause of
the decrease in value of the sharesof stocks is the fraudulent mismanagement of the
club.6

Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of
the corporation, petitioners prayed in their Complaint for the following:

WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary
restraining order be issued enjoining the defendants from acting as Officers and Board of
Directors of the Corporation. After hearing[,] a writ of preliminary injunction be issued enjoining
defendants to act as Board of Directors and Officers of the Corporation. In the meantime a
Receiver be appointed by the Court to act as such until a duly constituted Board of Directors and
Officers of the Corporation be elected and qualified.

That defendants be ordered to pay the stockholders damages in the sum of Two Hundred
Thousand Pesos each representing the decrease in value of their shares of stocks plus the sum of
₱100,000.00 as legal expense and attorney’s fees, as well as appearance fee of ₱4,000.00 per
hearing.7

In their Answer, respondents specifically denied the allegations of the Complaint and essentially
averred that:

(a) The subscriptions of the 409 shareholders were paid to Universal International Group
Development Corporation (UIGDC), the majority shareholder of SBGCCI, from whom
plaintiffs and other shareholders bought their shares;8
 (b) Contrary to the allegations in the Complaint, said subscriptions were reflected
inSBGCCI’s balance sheets for the fiscal years 1998 and 1999;9

(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI
since their shares were purchased after the amendment of the Articles of Incorporation
and such amendment was publicly known to all members prior and subsequent to the said
amendment;10

(d) Shareholders’ meetingshad been held and the corporate acts complained of were
approved at shareholders’ meetings;11

(e) Financial statements of SBGCCI had always been presented to shareholders

justifiably requesting copies;12

(f) Green fees collected were reported in SBGCCI’s audited financial statements;13

(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI continued
to operate under a valid contract with the SBMA;14 and

(h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in fact the
value of members’ shares have increased.15

Respondents further claimed by way ofdefense that petitioners failed (a) to show that it was
authorized by SBGSI to file the Complaint on the said corporation’s behalf; (b) to comply with
the requisites for filing a derivative suit and an action for receivership; and (c) to justify their
prayer for injunctive relief since the Complaint may be considered a nuisance or harassment suit
under Section 1(b), Rule1 of the Interim Rules of Procedure for Intra-Corporate Controversies.16
Thus, they prayed for the dismissal of the Complaint.

On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the
action is a derivative suit, explaining thus:

The Court finds that this case is intended not only for the benefit of the two petitioners. This is
apparentfrom the caption of the case which reads Nestor Ching, Andrew Wellington and the
Subic Bay Golfers and Shareholders, Inc., for and in behalf of all its members as petitioners. This
is also shown in the allegations of the petition[.] x x x.

On the bases of these allegations of the petition, the Court finds that the case is a derivative suit.
Being a derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders and
members may bring an action in the name of the corporation or association provided that he (the
minority stockholder) exerted all reasonable efforts and allege[d] the same with particularity in
the complaint to exhaust of (sic) all remedies available under the articles of incorporation, by-
laws or rules governing the corporation or partnership to obtain the reliefs he desires. An
examination of the petition does not show any allegation that the petitioners applied for redress
to the Board of Directors of respondent corporation there being no demand, oralor written on the
respondents to address their complaints. Neither did the petitioners appl[y] for redress to the
stockholders of the respondent corporation and ma[k]e an effort to obtain action by the
stockholders as a whole. Petitioners should have asked the Board of Directors of the respondent
corporation and/or its stockholders to hold a meeting for the taking up of the petitioners’ rights in
this petition.17

The RTC held that petitioners failed to exhaust their remedies within the respondent corporation
itself. The RTC further observed that petitioners Ching and Wellington were not authorized by
their co-petitioner Subic Bay Golfers and Shareholders Inc. to filethe Complaint, and therefore
had no personality to file the same on behalf ofthe said shareholders’ corporation. According to
the RTC, the shareholdings of petitioners comprised of two shares out of the 409 alleged
outstanding shares or 0.24% is an indication that the action is a nuisance or harassment suit
which may be dismissed either motu proprio or upon motion in accordance with Section 1(b) of
the Interim Rules of Procedure for Intra-Corporate Controversies.18

Petitioners Ching and Wellington elevated the case to the Court of Appeals, where it was
docketed as CA-G.R. CV No. 81441. On October 27, 2005, the Court of Appeals rendered the
assailed Decision affirming that of the RTC.

Hence, petitioners resort to the present Petition for Review, wherein they argue that the
Complaint they filed with the RTC was not a derivative suit. They claim that they filed the suit in
their own right as stockholders against the officers and Board of Directors of the corporation
under Section 5(a) of Presidential DecreeNo. 902-A, which provides:

Sec. 5. In addition tothe 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 the stockholders, partners, members
of associations or organizations registered with the Commission.

According to petitioners, the above provision (which should be read in relation to Section 5.2 of
the Securities Regulation Code which transfers jurisdiction over such cases to the RTC) allows
any stockholder to file a complaint against the Board of Directors for employing devices or
schemes amounting to fraud and misrepresentation which is detrimental to the interest of the
public and/or the stockholders.

In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative suit,
it should nevertheless reverse the RTC’s dismissal thereof on the ground of failure to exhaust
remedies within the corporation. Petitioners cite Republic Bank v. Cuaderno19 wherein the
Court allowed the derivative suit even without the exhaustion of said remedies as it was futile to
do so since the Board ofDirectors were all members of the same family. Petitioners also point out
that in Cuadernothis Court held that the fact that therein petitioners had only one share of stock
does not justify the denial of the relief prayed for.

To refute the lower courts’ ruling that there had been non-exhaustion of intra-corporate remedies
on petitioners’ part, they claim that they filed in Court a case for Injunction docketed as Civil
Case No. 103-0-01, to restrain the corporation from suspending their rights to use all the
facilities of the club, on the ground that the club cannot collect membership fees until they have
completed the amenities as advertised when the shares of stock were sold to them. They
allegedly asked the Club to produce the minutes of the meeting of the Board of Directors
allowing the amendments of the Articles of Incorporation and By-Laws. Petitioners likewise
assail the dismissal of the Complaint for being a harassment ornuisance suit before the
presentation of evidence. They claim that the evidence they were supposed to present will show
that the members of the Board of Directors are not qualified managers of a golf course.

We find the petition unmeritorious.

At the outset, it should be noted thatthe Complaint in question appears to have been filed only by
the two petitioners, namely Nestor Ching and Andrew Wellington, who each own one stock in
the respondent corporation SBGCCI. While the caption of the Complaint also names the "Subic
Bay Golfers and Shareholders Inc. for and in behalf of all its members," petitioners did not attach
any authorization from said alleged corporation or its members to file the Complaint. Thus, the
Complaint is deemed filed only by petitioners and not by SBGSI.
On the issue of whether the Complaint is indeed a derivative suit, we are mindful of the doctrine
that the nature of an action, as well as which court or body has jurisdiction over it, isdetermined
based on the allegations contained in the complaint of the plaintiff, irrespective of whether or not
the plaintiff is entitled to recover upon all or some of the claims asserted therein.20

We have also held that the body rather than the title of the complaint determines the nature of an
action.21

In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among a derivative suit,
anindividual suit, and a representative or class suit:

A derivative suit must be differentiated from individual and representative or class suits, thus:

"Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of

directors or other persons may be classified intoindividual suits, class suits, and derivative suits.
Where a stockholder or member is denied the right of inspection, his suit would be individual
because the wrong is done to him personally and not to the other stockholders or the corporation.
Where the wrong is done to a group of stockholders, as where preferred stockholders’ rights are
violated, a class or representative suitwill be proper for the protection of all stockholders
belonging to the same group. But 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 individual cause of action since the corporation
is a person distinct and separate from him, and can and should itself sue the wrongdoer.
Otherwise, not only would the theory of separate entity be violated, but there would be
multiplicity of suits as well as 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.

However, in cases of mismanagement where the wrongful acts are committed by the directors or
trustees themselves, a stockholder or member may find that he has no redress because the former
are vested by law with the right to decide whether or notthe corporation should sue, and they will
never be willing to sue themselves. The corporation would thus be helpless to seek remedy.
Because of the frequent occurrence of such a situation, the common law gradually recognized the
right of a stockholder to sue on behalf of a corporation in what eventually became known as a
"derivative suit." It has been proven to be an effective remedy of the minority against the abuses
of management. Thus, an individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever officials of the corporation refuse to sue orare the ones to be sued or hold the control
of the corporation. In such actions, the suing stockholder is regarded as the nominal party, with
the corporation as the party in interest."

xxxx

Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand,
and individual and class suits, on the other, are mutually exclusive, viz.:

"As the Supreme Court has explained: "A shareholder’s derivative suit seeks to recover for the
benefit of the corporation and its whole body of shareholders when injury is caused to the
corporation that may not otherwise be redressed because of failureof the corporation to act. Thus,
‘the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to
the corporation, or to the whole body of its stock and property without any severance or
distribution among individual holders, or it seeks to recover assets for the corporation or to
prevent the dissipation of its assets.’ x x x. In contrast, "a directaction [is one] filed by the
shareholder individually (or on behalf of a classof shareholders to which he or she belongs) for
injury to his or her interestas a shareholder. x x x. [T]he two actions are mutually exclusive: i.e.,
the right of action and recovery belongs to either the shareholders (direct action) *651 or the
corporation(derivative action)." x x x.

Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder alleged that the other
shareholder of the corporation negligently managed the business, resulting in its total failure. x x
x. The appellate court concluded that the plaintiff could not maintain the suit as a direct action:
"Because the gravamen of the complaint is injury to the whole body of its stockholders, it was
for the corporation to institute and maintain a remedial action. x x x. A derivative action would
have been appropriate if its responsible officials had refused or failed to act." x x x. The court
wenton to note that the damages shown at trial were the loss of corporate profits. x x x. Since
"[s]hareholders own neither the property nor the earnings of the corporation," any damages that
the plaintiff alleged that resulted from such loss of corporate profits "were incidental to the injury
to the corporation." (Citations omitted.)

The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers
and Board of Directors of the corporation, the appointment of a receiver, and the prayer for
damages in the amount of the decrease in the value of the sharesof stock, clearly show that the
Complaint was filed to curb the alleged mismanagement of SBGCCI. The causes of action
pleaded by petitioners do not accrue to a single shareholder or a class of shareholders but to the
corporation itself.

However, as minority stockholders, petitioners do not have any statutory right to override the
business judgments of SBGCCI’s officers and Board of Directors on the ground of the latter’s
alleged lackof qualification to manage a golf course. Contraryto the arguments of petitioners,
Presidential Decree No. 902-A, which is entitled REORGANIZATION OF THE SECURITIES
AND EXCHANGE COMMISSION WITH ADDITIONAL POWERS AND PLACING THE
SAID AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF
THE PRESIDENT, does not grant minority stockholders a cause of action against waste and
diversion by the Board of Directors, but merely identifies the jurisdiction of the SEC over
actionsalready authorized by law or jurisprudence. It is settled that a stockholder’s right to
institute a derivative suit is not based on any express provisionof 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.23

At this point, we should take note that while there were allegations in the Complaint of fraud in
their subscription agreements, such as the misrepresentation of the Articles of Incorporation,
petitioners do not pray for the rescission of their subscription or seekto avail of their appraisal
rights. Instead, they ask that defendants be enjoined from managing the corporation and to pay
damages for their mismanagement. Petitioners’ only possible cause of action as minority
stockholders against the actions of the Board of Directors is the common law right to file a
derivative suit. The legal standing of minority stockholders to bring derivative suits is not a
statutory right, there being no provision in the Corporation Code or related statutes authorizing
the same, but is instead a product of jurisprudence based on equity. However, a derivative suit
cannot prosper without first complying with the legal requisites for its institution.24

Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies

imposes the following requirements for derivative suits:

(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 RTC dismissed the Complaint for failure to comply with the second and fourth requisites
above.

Upon a careful examination of the Complaint, this Court finds that the same should not have
been dismissed on the ground that it is a nuisance or harassment suit. Although the shareholdings
of petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%, the Court
has held that it is enough that a member or a minority of stockholders file a derivative suit for
and in behalf of a corporation.25

With regard, however, to the second requisite, we find that petitioners failed to state with
particularity in the Complaint that they had exerted all reasonable efforts to exhaust all remedies
available under the articles of incorporation, by-laws, and laws or rules governing the
corporation to obtain the relief they desire. The Complaint contained no allegation whatsoever of
any effort to avail of intra-corporate remedies. Indeed, even if petitioners thought it was futile to
exhaust intra-corporate remedies, they should have stated the same in the Complaint and
specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint,
even motu proprio, in accordance with the Interim Rules. The requirement of this allegation in
the Complaint is not a useless formality which may be disregarded at will.1âwphi1 We ruled in
Yu v. Yukayguan26:

The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory construction. The second paragraph
thereof requires that the stockholder filing a derivative suit should have exerted all reasonable
efforts to exhaust all remedies availableunder the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires; and to allege such fact
with particularityin the complaint. The obvious intent behind the rule is to make the derivative
suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had
failed.

WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 81441 which affirmed the Order of the Regional Trial Court (RTC)
of Olongapo City dismissing the Complaint filed thereon by herein petitioners is AFFIRMED.

SO ORDERED.