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INCORPORATION AND ORGANIZATION CASES

G.R. No. 182729


September 29, 2010
KUKAN INTERNATIONAL CORPORATION, Petitioner,
vs. HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of Manila,
Branch 21, and ROMEO M. MORALES, doing business under the name and style "RM Morales
Trophies and Plaques," Respondents.
This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January 23, 2008
Decision1and the April 16, 2008 Resolution2 rendered by the Court of Appeals (CA) in CA-G.R. SP No.
100152.
The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders of the Regional Trial
Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo M. Morales, doing
business under the name and style RM Morales Trophies and Plaques v. Kukan, Inc. In the said orders,
the RTC disregarded the separate corporate identities of Kukan, Inc. and Kukan International
Corporation and declared them to be one and the same entity. Accordingly, the RTC held Kukan
International Corporation, albeit not impleaded in the underlying complaint of Romeo M. Morales,
liable for the judgment award decreed in a Decision dated November 28, 20025 in favor of Morales and
against Kukan, Inc.
The Facts
Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of signages in
a building being constructed in Makati City. Morales tendered the winning bid and was awarded the
PhP 5 million contract. Some of the items in the project award were later excluded resulting in the
corresponding reduction of the contract price to PhP 3,388,502. Despite his compliance with his
contractual undertakings, Morales was only paid the amount of PhP 1,976,371.07, leaving a balance of
PhP 1,412,130.93, which Kukan, Inc. refused to pay despite demands. Shortchanged, Morales filed a
Complaint6 with the RTC against Kukan, Inc. for a sum of money, the case docketed as Civil Case No.
99-93173 and eventually raffled to Branch 17 of the court.
Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial ensued. However,
starting November 2000, Kukan, Inc. no longer appeared and participated in the proceedings before the
trial court, prompting the RTC to declare Kukan, Inc. in default and paving the way for Morales to
present his evidence ex parte.
On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan, Inc.,
disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY
FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until
full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorneys fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS
(P7,960.06) as litigation expenses.
For lack of factual foundation, the counterclaim is DISMISSED.
IT IS SO ORDERED.7
After the above decision became final and executory, Morales moved for and secured a writ of
execution8 against Kukan, Inc. The sheriff then levied upon various personal properties found at what
was supposed to be Kukan, Inc.s office at Unit 2205, 88 Corporate Center, Salcedo Village, Makati City.
Alleging that it owned the properties thus levied and that it was a different corporation from Kukan, Inc.,
Kukan International Corporation (KIC) filed an Affidavit of Third-Party Claim. Notably, KIC was
incorporated in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil Case No.
99-93173.
In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30, 2003. In it,
Morales prayed, applying the principle of piercing the veil of corporate fiction, that an order be issued

for the satisfaction of the judgment debt of Kukan, Inc. with the properties under the name or in the
possession of KIC, it being alleged that both corporations are but one and the same entity. KIC opposed
Morales motion. By Order of May 29, 20039as reiterated in a subsequent order, the court denied the
omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true relationship
between the two, Morales filed a Motion for Examination of Judgment Debtors dated May 4, 2005. In
this motion Morales sought that subponae be issued against the primary stockholders of Kukan, Inc.,
among them Michael Chan, a.k.a. Chan Kai Kit. This too was denied by the trial court in an Order dated
May 24, 2005.10
Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually
granted the motion. The case was re-raffled to Branch 21, presided by public respondent Judge Amor
Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate Fiction to
declare KIC as having no existence separate from Kukan, Inc. This time around, the RTC, by Order dated
March 12, 2007, granted the motion, the dispositive portion of which reads:
WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby declares as
follows:
1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the same
corporation;
2. the levy made on the properties of Kukan International Corp. is hereby valid;
3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the amount
awarded to plaintiff pursuant to the decision of November [28], 2002 which has long been final
and executory.
From the above order, KIC moved but was denied reconsideration in another Order dated June 7, 2007.
KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7, 2007 RTC
Orders.
On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which states:
WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders dated March
12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED. No costs.
SO ORDERED.11
The CA later denied KICs motion for reconsideration in the assailed resolution.
Hence, the instant petition for review, with the following issues KIC raises for the Courts consideration:
1. There is no legal basis for the [CA] to resolve and declare that petitioners Constitutional Right
to Due Process was not violated by the public respondent in rendering the Orders dated March
12, 2007 and June 7, 2007 and in declaring petitioner to be liable for the judgment obligations of
the corporation "Kukan, Inc." to private respondent as petitioner is a stranger to the case and
was never made a party in the case before the trial court nor was it ever served a summons and a
copy of the complaint.
2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007
and June 7, 2007 rendered by public respondent declaring the petitioner liable to the judgment
obligations of the corporation "Kukan, Inc." to private respondent are valid as said orders of the
public respondent modify and/or amend the trial courts final and executory decision rendered on
November 28, 2002.
3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007
and June 7, 2007 rendered by public respondent declaring the petitioner [KIC] and the
corporation "Kukan, Inc." as one and the same, and, therefore, the Veil of Corporate Fiction
between them be pierced as the procedure undertaken by public respondent which the [CA]
upheld is not sanctioned by the Rules of Court and/or established jurisprudence enunciated by
this Honorable Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first, whether the trial court can, after the
judgment against Kukan, Inc. has attained finality, execute it against the property of KIC; second,
whether the trial court acquired jurisdiction over KIC; and third, whether the trial and appellate courts

correctly applied, under the premises, the principle of piercing the veil of corporate fiction.
The Ruling of the Court: The petition is meritorious.
First Issue: Against Whom Can a Final and Executory Judgment Be Executed
The preliminary question that must be answered is whether or not the trial court can, after adjudging
Kukan, Inc. liable for a sum of money in a final and executory judgment, execute such judgment debt
against the property of KIC.
The poser must be answered in the negative.
In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the execution
of its judgment:
A case in which an execution has been issued is regarded as still pending so that all proceedings on the
execution are proceedings in the suit. There is no question that the court which rendered the judgment
has a general supervisory control over its process of execution, and this power carries with it the right to
determine every question of fact and law which may be involved in the execution.
We reiterated the above holding in Javier v. Court of Appeals14 in this wise: "The said branch has a
general supervisory control over its processes in the execution of its judgment with a right to determine
every question of fact and law which may be involved in the execution."
The courts supervisory control does not, however, extend as to authorize the alteration or amendment
of a final and executory decision, save for certain recognized exceptions, among which is the correction
of clerical errors. Else, the court violates the principle of finality of judgment and its immutability,
concepts which the Court, in Tan v. Timbal,15 defined:
As we held in Industrial Management International Development Corporation vs. NLRC:
It is an elementary principle of procedure that the resolution of the court in a given issue as embodied
in the dispositive part of a decision or order is the controlling factor as to settlement of rights of the
parties. Once a decision or order becomes final and executory, it is removed from the power or
jurisdiction of the court which rendered it to further alter or amend it. It thereby becomes immutable
and unalterable and any amendment or alteration which substantially affects a final and executory
judgment is null and void for lack of jurisdiction, including the entire proceedings held for that purpose.
An order of execution which varies the tenor of the judgment or exceeds the terms thereof is a nullity.
(Emphasis supplied.)
Republic v. Tango16 expounded on the same principle and its exceptions:
Deeply ingrained in our jurisprudence is the principle that a decision that has acquired finality
becomes immutable and unalterable. As such, it may no longer be modified in any respect even if
the modification is meant to correct erroneous conclusions of fact or law and whether it will be made by
the court that rendered it or by the highest court of the land. x x x
The doctrine of finality of judgment is grounded on the fundamental principle of public policy and
sound practice that, at the risk of occasional error, the judgment of courts and the award of
quasi-judicial agencies must become final on some definite date fixed by law. The only exceptions to
the general rule are the correction of clerical errors, the so-called nunc pro tunc entries which cause no
prejudice to any party, void judgments, and whenever circumstances transpire after the finality of the
decision which render its execution unjust and inequitable. None of the exceptions obtains here to
merit the review sought. (Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order the
execution of its final decision in a manner as would amount to its prohibited alteration or modification?
We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY
FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until
full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorneys fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS

(P7,960.06) as litigation expenses.


x x x x (Emphasis supplied.)
As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the
aforementioned awards to Morales. Thus, making KIC, thru the medium of a writ of execution,
answerable for the above judgment liability is a clear case of altering a decision, an instance of granting
relief not contemplated in the decision sought to be executed. And the change does not fall under any
of the recognized exceptions to the doctrine of finality and immutability of judgment. It is a settled rule
that a writ of execution must conform to the fallo of the judgment; as an inevitable corollary, a writ
beyond the terms of the judgment is a nullity.17
Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an examination of
the other issues raised by KIC would be proper.
Second Issue: Propriety of the RTC Assuming Jurisdiction over KIC
The next issue turns on the validity of the execution the trial court authorized against KIC and its
property, given that it was neither made a party nor impleaded in Civil Case No. 99-93173, let alone
served with summons. In other words, did the trial court acquire jurisdiction over KIC?
In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to the
jurisdiction of the trial court owing to its filing of four (4) pleadings adverted to earlier, namely: (a) the
Affidavit of Third-Party Claim;18 (b) the Comment and Opposition to Plaintiffs Omnibus Motion;19 (c) the
Motion for Reconsideration of the RTC Order dated March 12, 2007;20 and (d) the Motion for Leave to
Admit Reply.21 The CA, citing Section 20, Rule 14 of the Rules of Court, stated that "the procedural rule
on service of summons can be waived by voluntary submission to the courts jurisdiction through any
form of appearance by the party or its counsel."22
We cannot give imprimatur to the appellate courts appreciation of the thrust of Sec. 20, Rule 14 of the
Rules in concluding that the trial court acquired jurisdiction over KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire jurisdiction over the
parties in a civil case:
Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other hand,
jurisdiction over the defendants in a civil case is acquired either through the service of summons upon
them or through their voluntary appearance in court and their submission to its authority. (Emphasis
supplied.)
In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security Corporation,
stating: "[I]n civil cases, the trial court acquires jurisdiction over the person of the defendant either by
the service of summons or by the latters voluntary appearance and submission to the authority of the
former."
The courts jurisdiction over a party-defendant resulting from his voluntary submission to its authority is
provided under Sec. 20, Rule 14 of the Rules, which states:
Section 20. Voluntary appearance. The defendants voluntary appearance in the actions shall be
equivalent to service of summons. The inclusion in a motion to dismiss of other grounds aside from lack
of jurisdiction over the person of the defendant shall not be deemed a voluntary appearance.
To be sure, the CAs ruling that any form of appearance by the party or its counsel is deemed as
voluntary appearance finds support in the kindred Republic v. Ker & Co., Ltd.25 and De Midgely v.
Ferandos.26
Republic and De Midgely, however, have already been modified if not altogether superseded27 by La
Naval Drug Corporation v. Court of Appeals,28 wherein the Court essentially ruled and elucidated on the
current view in our jurisdiction, to wit: "[A] special appearance before the courtchallenging its
jurisdiction over the person through a motion to dismiss even if the movant invokes other groundsis
not tantamount to estoppel or a waiver by the movant of his objection to jurisdiction over his person;
and such is not constitutive of a voluntary submission to the jurisdiction of the court."29
In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it is
conceded that it raised affirmative defenses through its aforementioned pleadings, KIC never
abandoned its challenge, however implicit, to the RTCs jurisdiction over its person. The challenge was
subsumed in KICs primary assertion that it was not the same entity as Kukan, Inc. Pertinently, in its

Comment and Opposition to Plaintiffs Omnibus Motion dated May 20, 2003, KIC entered its "special
but not voluntary appearance" alleging therein that it was a different entity and has a separate legal
personality from Kukan, Inc. And KIC would consistently reiterate this assertion in all its pleadings, thus
effectively resisting all along the RTCs jurisdiction of its person. It cannot be overemphasized that KIC
could not file before the RTC a motion to dismiss and its attachments in Civil Case No. 99-93173,
precisely because KIC was neither impleaded nor served with summons. Consequently, KIC could only
assert and claim through its affidavits, comments, and motions filed by special appearance before the
RTC that it is separate and distinct from Kukan, Inc.
Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection to the
courts lack of jurisdiction over its person. It would defy logic to say that KIC unequivocally submitted
itself to the jurisdiction of the RTC when it strongly asserted that it and Kukan, Inc. are different entities.
In the scheme of things obtaining, KIC had no other option but to insist on its separate identity and
plead for relief consistent with that position.
Third Issue: Piercing the Veil of Corporate Fiction
The third and main issue in this case is whether or not the trial and appellate courts correctly applied
the principle of piercing the veil of corporate entitycalled also as disregarding the fiction of a separate
juridical personality of a corporationto support a conclusion that Kukan, Inc. and KIC are but one and
the same corporation with respect to the contract award referred to at the outset. This principle finds its
context on the postulate that a corporation is an artificial being invested with a personality separate and
distinct from those of the stockholders and from other corporations to which it may be connected or
related.31
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission,32 the Court
revisited the subject principle of piercing the veil of corporate fiction and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a
mere collection of individuals or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation unifying the group. Another
formulation of this doctrine is that when two business enterprises are owned, conducted and controlled
by the same parties, both law and equity will, when necessary to protect the rights of third parties,
disregard the legal fiction that two corporations are distinct entities and treat them as identical or as
one and the same.
Whether the separate personality of the corporation should be pierced hinges on obtaining facts
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when
necessary in the interest of justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:
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, 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.
To disregard the separate juridical personality of a corporation, the wrongdoing must be established
clearly and convincingly. It cannot be presumed.33 (Emphasis supplied.)
Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to due
process when, in the execution of its November 28, 2002 Decision, the court authorized the issuance of
the writ against KIC for Kukan, Inc.s judgment debt, albeit KIC has never been a party to the underlying
suit. As a counterpoint, Morales argues that KICs specific concern on due process and on the validity of
the writ to execute the RTCs November 28, 2002 Decision would be mooted if it were established that
KIC and Kukan, Inc. are indeed one and the same corporation.
Morales contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related
corporations as one and the same juridical person with respect to a given transaction, is basically
applied only to determine established liability;34 it is not available to confer on the court a jurisdiction it
has not acquired, in the first place, over a party not impleaded in a case. Elsewise put, a corporation not
impleaded in a suit cannot be subject to the courts process of piercing the veil of its corporate fiction.
In that situation, the court has not acquired jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its property would infringe on its right to due process.
Aguedo Agbayani, a recognized authority on Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the
trial of the case after the court has already acquired jurisdiction over the corporation. Hence, before this
doctrine can be applied, based on the evidence presented, it is imperative that the court must first have
jurisdiction over the corporation.35 x x x (Emphasis supplied.)
The implication of the above comment is twofold: (1) the court must first acquire jurisdiction over the
corporation or corporations involved before its or their separate personalities are disregarded; and (2)
the doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a
cause of action duly commenced involving parties duly brought under the authority of the court by way
of service of summons or what passes as such service.
The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter of the
time and manner of raising the principle in question, it is undisputed that no full-blown trial involving
KIC was had when the RTC disregarded the corporate veil of KIC. The reason for this actuality is simple
and undisputed: KIC was not impleaded in Civil Case No. 99-93173 and that the RTC did not acquire
jurisdiction over it. It was dragged to the case after it reacted to the improper execution of its properties
and veritably hauled to court, not thru the usual process of service of summons, but by mere motion of
a party with whom it has no privity of contract and after the decision in the main case had already
become final and executory. As to the propriety of a plea for the application of the principle by mere
motion, the following excerpts are instructive:
Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and is not
available to settle important questions of law, or to dispose of the merits of the case. A motion is usually
a proceeding incidental to an action, but it may be a wholly distinct or independent proceeding. A
motion in this sense is not within this discussion even though the relief demanded is denominated an
"order."
A motion generally relates to procedure and is often resorted to in order to correct errors which have
crept in along the line of the principal actions progress. Generally, where there is a procedural defect in
a proceeding and no method under statute or rule of court by which it may be called to the attention of
the court, a motion is an appropriate remedy. In many jurisdictions, the motion has replaced the
common-law pleas testing the sufficiency of the pleadings, and various common-law writs, such as writ
of error coram nobis and audita querela. In some cases, a motion may be one of several remedies
available. For example, in some jurisdictions, a motion to vacate an order is a remedy alternative to an
appeal therefrom.
Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)
The bottom line issue of whether Morales can proceed against KIC for the judgment debt of Kukan,
Inc.assuming hypothetically that he can, applying the piercing the corporate veil principleresolves
itself into the question of whether a mere motion is the appropriate vehicle for such purpose.
Verily, Morales espouses the application of the principle of piercing the corporate veil to hold KIC liable
on theory that Kukan, Inc. was out to defraud him through the use of the separate and distinct
personality of another corporation, KIC. In net effect, Morales adverted motion to pierce the veil of
corporate fiction dated January 3, 2007 stated a new cause of action, i.e., for the liability of judgment
debtor Kukan, Inc. to be borne by KIC on the alleged identity of the two corporations. This new cause of
action should be properly ventilated in another complaint and subsequent trial where the doctrine of
piercing the corporate veil can, if appropriate, be applied, based on the evidence adduced. Establishing
the claim of Morales and the corresponding liability of KIC for Kukan Inc.s indebtedness could hardly

be the subject, under the premises, of a mere motion interposed after the principal action against
Kukan, Inc. alone had peremptorily been terminated. After all, a complaint is one where the plaintiff
alleges causes of action.
In any event, the principle of piercing the veil of corporate fiction finds no application to the instant
case.
As a general rule, courts should be wary of lifting the corporate veil between corporations, however
related. Philippine National Bank v. Andrada Electric Engineering Company37 explains why:
A corporation is an artificial being created by operation of law. x x x It has a personality separate and
distinct from the persons composing it, as well as from any other legal entity to which it may be related.
This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of
public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in
disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may result from an erroneous application.
This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate
assets as part of the estate of the decedent, to escape liability arising from a debt, or to perpetuate
fraud and/or confuse legitimate issues either to promote or to shield unfair objectives or to cover up an
otherwise blatant violation of the prohibition against forum-shopping. Only in these and similar
instances may the veil be pierced and disregarded. (Emphasis supplied.)
In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and convincing
proof that the separate and distinct personality of the corporation was purposefully employed to evade
a legitimate and binding commitment and perpetuate a fraud or like wrongdoings. To be sure, the
Court has, on numerous occasions,38 applied the principle where a corporation is dissolved and its
assets are transferred to another to avoid a financial liability of the first corporation with the result that
the second corporation should be considered a continuation and successor of the first entity.
In those instances when the Court pierced the veil of corporate fiction of two corporations, there was a
confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second corporation to avoid a financial
liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such that the second
corporation should be considered as a continuation and successor of the first corporation.
In the instant case, however, the second and third factors are conspicuously absent. There is, therefore,
no compelling justification for disregarding the fiction of corporate entity separating Kukan, Inc. from
KIC. In applying the principle, both the RTC and the CA miserably failed to identify the presence of the
abovementioned factors. Consider:
The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the following
premises and arguments:
While it is true that a corporation has a separate and distinct personality from its stockholder, director
and officers, the law expressly provides for an exception. When Michael Chan, the Managing Director of
defendant Kukan, Inc. (majority stockholder of the newly formed corporation [KIC]) confirmed the
award to plaintiff to supply and install interior signages in the Enterprise Center he (Michael Chan,
Managing Director of defendant Kukan, Inc.) knew that there was no sufficient corporate funds to pay
its obligation/account, thus implying bad faith on his part and fraud in contracting the obligation.
Michael Chan neither returned the interior signages nor tendered payment to the plaintiff. This
circumstance may warrant the piercing of the veil of corporation fiction. Having been guilty of bad faith
in the management of corporate matters the corporate trustee, director or officer may be held

personally liable. x x x
Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the
circumstances of the case. x x x [A]nd the circumstances are: the signature of Michael Chan, Managing
Director of Kukan, Inc. appearing in the confirmation of the award sent to the plaintiff; signature of
Chan Kai Kit, a British National appearing in the Articles of Incorporation and signature of Michael Chan
also a British National appearing in the Articles of Incorporation [of] Kukan International Corp. give the
impression that they are one and the same person, that Michael Chan and Chan Kai Kit are both
majority stockholders of Kukan International Corp. and Kukan, Inc. holding 40% of the stocks; that
Kukan International Corp. is practically doing the same kind of business as that of Kukan, Inc.39
(Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of Kukan,
Inc. and KIC on the main argument that Michael Chan owns 40% of the common shares of both
corporations, obviously oblivious that overlapping stock ownership is a common business phenomenon.
It must be remembered, however, that KICs properties were the ones seized upon levy on execution
and not that of Kukan, Inc. or of Michael Chan for that matter. Mere ownership by a single stockholder
or by another corporation of a substantial block of shares of a corporation does not, standing alone,
provide sufficient justification for disregarding the separate corporate personality.40 For this ground to
hold sway in this case, there must be proof that Chan had control or complete dominion of Kukan and
KICs finances, policies, and business practices; he used such control to commit fraud; and the control
was the proximate cause of the financial loss complained of by Morales. The absence of any of the
elements prevents the piercing of the corporate veil.41 And indeed, the records do not show the
presence of these elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x x worth
more than three million pesos although it had only Php5,000.00 paid-up capital; [KIC] was incorporated
shortly before Kukan, Inc. suddenly ceased to appear and participate in the trial; [KICs] purpose is
related and somewhat akin to that of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan Kai Kit, holds
forty percent of the outstanding stocks, while he formerly held the same amount of stocks in Kukan Inc.
These would lead to the inescapable conclusion that Kukan, Inc. committed fraudulent representation
by awarding to the private respondent the contract with full knowledge that it was not in a position to
comply with the obligation it had assumed because of inadequate paid-up capital. It bears stressing
that shareholders should in good faith put at the risk of the business, unencumbered capital reasonably
adequate for its prospective liabilities. The capital should not be illusory or trifling compared with the
business to be done and the risk of loss.
Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan, a.k.a. Chan Kai
Kit has the largest block of shares in both business enterprises. The emergence of the former was
cleverly timed with the hasty withdrawal of the latter during the trial to avoid the financial liability that
was eventually suffered by the latter. The two companies have a related business purpose. Considering
these circumstances, the obvious conclusion is that the creation of Kukan International Corporation
served as a device to evade the obligation incurred by Kukan, Inc. and yet profit from the goodwill
attained by the name "Kukan" by continuing to engage in the same line of business with the same list of
clients.42
Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of the
business activities in which both corporations are engaged as a jumping board to its conclusion that the
creation of KIC "served as a device to evade the obligation incurred by Kukan, Inc." The appellate court,
however, left a gaping hole by failing to demonstrate that Kukan, Inc. and its stockholders defrauded
Morales. In fine, there is no showing that the incorporation, and the separate and distinct personality, of
KIC was used to defeat Morales right to recover from Kukan, Inc. Judging from the records, no serious
attempt was made to levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that
Kukan, Inc. tried to avoid liability or had no property against which to proceed.
Morales further contends that Kukan, Inc.s closure is evidenced by its failure to file its 2001 General
Information Sheet (GIS) with the Securities and Exchange Commission. However, such fact does not

necessarily mean that Kukan, Inc. had altogether ceased operations, as Morales would have this Court
believe, for it is stated on the face of the GIS that it is only upon a failure to file the corporate GIS for five
(5) consecutive years that non-operation shall be presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up capital of
PhP 5,000 is not an indication of the intent on the part of its management to defraud creditors. Paid-up
capital is merely seed money to start a corporation or a business entity. As in this case, it merely
represented the capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up capitalization of PhP
5,000 is not and should not be taken as a reflection of the firms capacity to meet its recurrent and
long-term obligations. It must be borne in mind that the equity portion cannot be equated to the
viability of a business concern, for the best test is the working capital which consists of the liquid assets
of a given business relating to the nature of the business concern.lawphil
Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a badge of
fraud, for it is in compliance with Sec. 13 of the Corporation Code,43 which only requires a minimum
paid-up capital of PhP 5,000.1avvphi1
The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and controlled as
they are by the same stockholders, stands without factual basis. It is true that Michael Chan, a.k.a. Chan
Kai Kit, owns 40% of the outstanding capital stock of both corporations. But such circumstance,
standing alone, is insufficient to establish identity. There must be at least a substantial identity of
stockholders for both corporations in order to consider this factor to be constitutive of corporate
identity.
It would not avail Morales any to rely44 on General Credit Corporation v. Alsons Development and
Investment Corporation.45 General Credit Corporation is factually not on all fours with the instant case.
There, the common stockholders of the corporations represented 90% of the outstanding capital stock
of the companies, unlike here where Michael Chan merely represents 40% of the outstanding capital
stock of both KIC and Kukan, Inc., not even a majority of it. In that case, moreover, evidence was
adduced to support the finding that the funds of the second corporation came from the first. Finally,
there was proof in General Credit Corporation of complete control, such that one corporation was a
mere dummy or alter ego of the other, which is absent in the instant case.
Evidently, the aforementioned case relied upon by Morales cannot justify the application of the
principle of piercing the veil of corporate fiction to the instant case. As shown by the records, the name
Michael Chan, the similarity of business activities engaged in, and incidentally the word "Kukan"
appearing in the corporate names provide the nexus between Kukan, Inc. and KIC. As illustrated, these
circumstances are insufficient to establish the identity of KIC as the alter ego or successor of Kukan, Inc.
It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly, those who
seek to pierce the veil must clearly establish that the separate and distinct personalities of the
corporations are set up to justify a wrong, protect fraud, or perpetrate a deception. In the concrete and
on the assumption that the RTC has validly acquired jurisdiction over the party concerned, Morales
ought to have proved by convincing evidence that Kukan, Inc. was collapsed and thereafter KIC
purposely formed and operated to defraud him. Morales has not to us discharged his burden.
WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008 Decision and April 16, 2008
Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and SET ASIDE. The levy placed upon the
personal properties of Kukan International Corporation is hereby ordered lifted and the personal
properties ordered returned to Kukan International Corporation. The RTC of Manila, Branch 21 is hereby
directed to execute the RTC Decision dated November 28, 2002 against Kukan, Inc. with reasonable
dispatch.
G.R. No. 147629
July 28, 2010
JAKA INVESTMENTS CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
Respondent.
Before the Court is a petition for review of the Decision1 of the Court of Appeals dated August 22, 2000
sustaining the Court of Tax Appeals in denying petitioners (JAKA Investments Corporations) claim for
refund of its alleged overpayment of documentary stamp tax and surcharges, as well as the Resolution2

dated March 27, 2001 likewise denying petitioners Motion for Reconsideration.
The antecedent facts are undisputed.
Sometime in 1994, petitioner sought to invest in JAKA Equities Corporation (JEC), which was then
planning to undertake an initial public offering (IPO) and listing of its shares of stock with the Philippine
Stock Exchange. JEC increased its authorized capital stock from One Hundred Eighty-Five Million Pesos
(P185,000,000.00) to Two Billion Pesos (P2,000,000,000.00). Petitioner proposed to subscribe to Five
Hundred Eight Million Eight Hundred Six Thousand Two Hundred Pesos (P508,806,200.00) out of the
increase in the authorized capital stock of JEC through a tax-free exchange under Section 34(c)(2) of the
National Internal Revenue Code (NIRC) of 1977, as amended, which was effected by the execution of a
Subscription Agreement and Deed of Assignment of Property in Payment of Subscription. Under this
Agreement, as payment for its subscription, petitioner will assign and transfer to JEC the following
shares of stock:
(a) 154,208,404 shares in Republic Glass Holdings Corporation (RGHC),
(b) 2,822,500 shares in Philippine Global Communications, Inc. (PGCI),
(c) 7,495,488 shares in United Coconut Planters Bank (UCPB), and
(d) 1,313,176 shares in Far East Bank and Trust Company (FEBTC).3
The intended IPO and listing of shares of JEC did not materialize. However, JEC still decided to proceed
with the increase in its authorized capital stock and petitioner agreed to subscribe thereto, but under
different terms of payment. Thus, petitioner and JEC executed the Amended Subscription Agreement4
on September 5, 1994, wherein the above-enumerated RGHC, PGCI, and UCPB shares of stock were
transferred to JEC. In lieu of the FEBTC shares, however, the amount of Three Hundred Seventy Million
Seven Hundred Sixty-Six Thousand Pesos (P370,766,000.00) was paid for in cash by petitioner to JEC.
On October 14, 1994, petitioner paid One Million Three Thousand Eight Hundred Ninety-Five Pesos and
Sixty-Five Centavos (P1,003,895.65) for basic documentary stamp tax inclusive of the 25% surcharge for
late payment on the Amended Subscription Agreement.
On October 17, 1994, Revenue District Officer (RDO) Atty. Sixto S. Esquivias IV (RDO Esquivias) issued
three Certifications,6 as follows:
Petitioner, after seeing the RDOs certifications, the total amount of which was less than the actual
amount it had paid as documentary stamp tax, concluded that it had overpaid. Petitioner subsequently
sought a refund for the alleged excess documentary stamp tax and surcharges it had paid on the
Amended Subscription Agreement in the amount of Four Hundred Ten Thousand Three Hundred
Sixty-Seven Pesos (P410,367.00), the difference between the amount of documentary stamp tax it had
paid and the amount of documentary stamp tax certified to by the RDO, through a letter-request7 to
the BIR dated October 10, 1996.
On October 11, 1996, petitioner filed a petition for refund before the Court of Tax Appeals, docketed as
C.T.A. Case No. 5428, which was denied in a Decision8 dated January 19, 1999. The Court of Tax Appeals
likewise denied petitioners Motion for Reconsideration in its Resolution9 dated March 1, 1999.
Petitioner appealed to the Court of Appeals by way of petition for review. The Court of Appeals
sustained the Court of Tax Appeals in its Decision on CA-G.R. SP No. 51834 dated August 22, 2000 as
well as in its Resolution dated March 27, 2001 of petitioners Motion for Reconsideration.
Hence, petitioner is now before this Court to seek the reversal of the questioned Decision and
Resolution of the Court of Appeals.
Petitioners main contention in this claim for refund is that the tax base for the documentary stamp tax
on the Amended Subscription Agreement should have been only the shares of stock in RGHC, PGCI, and
UCPB that petitioner had transferred to JEC as payment for its subscription to the JEC shares, and
should not have included the cash portion of its payment, based on Section 176 of the National Internal
Revenue Code of 1977, as amended by Republic Act No. 7660, or the New Documentary Stamps Tax
Law (the 1994 Tax Code), the law applicable at the time of the transaction. Petitioner argues that the
cash component of its payment for its subscription to the JEC shares, totaling Three Hundred Seventy
Million Seven Hundred Sixty-Six Thousand Pesos (P370,766,000.00) should not have been charged any
documentary stamp tax. Petitioner claims that there was overpayment because the tax due on the
transferred shares was only Five Hundred Ninety-Three Thousand Five Hundred Twenty-Eight and

15/100 Pesos (P593,528.15), as indicated in the certifications issued by RDO Esquivias. Petitioner alleges
that it is entitled to a refund for the overpayment, which is the difference in the amount it had actually
paid (P1,003,895.65) and the amount of documentary stamp tax due on the transfer of said shares
(P593,528.15), or a total of Four Hundred Ten Thousand Three Hundred Sixty-Seven Pesos
(P410,367.00).
Petitioner contends that both the Court of Appeals and the Court of Tax Appeals erroneously relied on
respondents (Commissioner of Internal Revenues) assertions that it had paid the documentary stamp
tax on the original issuance of the shares of stock of JEC under Section 175 of the 1994 Tax Code.
Petitioner explains that in this instance where shares of stock are used as subscription payment, there
are two documentary stamp tax incidences, namely, the documentary stamp tax on the original
issuance of the shares subscribed (the JEC shares), which is imposed under Section 175; and the
documentary stamp tax on the shares transferred in payment of such subscription (the transfer of the
RGHC, PGCI and UCPB shares of stock from petitioner to JEC), which is imposed under Section 176 of
the 1994 Tax Code. Petitioner argues that the documentary stamp tax imposed under Section 175 is
due on original issuances of certificates of stock and is computed based on the aggregate par value of
the shares to be issued; and that these certificates of stock are issued only upon full payment of the
subscription price such that under the Bureau of Internal Revenues (BIRs) Revised Documentary Stamp
Tax Regulations,10 it is stated that the documentary stamp tax on the original issuance of certificates of
stock is imposed on fully paid shares of stock only. Petitioner alleges that it is the issuing corporation
which is primarily liable for the payment of the documentary stamp tax on the original issuance of
shares of stock. Petitioner further argues that the documentary stamp tax on Section 176 of the 1994
Tax Code is imposed for every transfer of shares or certificates of stock, computed based on the par
value of the shares to be transferred, and is due whether a certificate of stock is actually issued,
indorsed or delivered pursuant to such transfer. It is the transferor who is liable for the documentary
stamp tax on the transfer of shares.
Petitioner claims that the documentary stamp tax under Section 175 attaches to the certificate/s of
stock to be issued by virtue of petitioners subscription while the documentary stamp tax under Section
176 attaches to the Amended Subscription Agreement, since it is this instrument that evidences the
transfer of the RGHC, PGCI and UCPB shares from petitioner to JEC.
Petitioner contends that at the time of the execution of the Amended Subscription Agreement, the JEC
shares or certificates subscribed by petitioner could not have been issued by JEC because the same
were yet to be sourced from the increase in authorized capital stock of JEC, which in turn had yet to be
approved by the Securities and Exchange Commission (SEC). Petitioner thus reasons that the
documentary stamp tax under Section 175 could not have accrued at the time the Amended
Subscription Agreement was executed because no right to the shares had neither been nor could be
established in favor of the petitioner at such time. Petitioner theorizes that the earliest time that the
subscription could actually be executed would be when the SEC approves the increase in the authorized
capital stock of JEC. On the other hand, upon the execution of the Amended Subscription Agreement,
the assignment or the transfer of RGHC, PGCI and UCPB shares in favor of JEC (which is evidenced by
said agreement), is deemed immediately enforceable as this is a necessary requirement of the SEC.
Petitioner points out that Section 175 of the 1994 Tax Code imposes a documentary stamp tax on every
original issuance of certificates of stock, whereas Republic Act No. 8424, the Tax Reform Act of 1997
(the 1997 Tax Code), amended this provision and imposed a documentary stamp tax on the original
issuance of shares of stock. Petitioner argues that under Section 175 of the 1994 Tax Code, there was
no documentary stamp tax due on the mere execution of a subscription agreement to shares of stock,
and the tax only accrued upon issuance of the certificates of stock. In this case, the change in wording
introduced by the 1997 Tax Code cannot be made applicable to the Amended Subscription Agreement,
which was executed in 1994, because it is a well-settled doctrine in taxation that a law must have
prospective application.
Lastly, petitioner alleges that it is entitled to refund under the NIRC.11
In his Comment (To Petition for Review),12 respondent avers that the lower courts did not err in denying
petitioners claim for refund, and that petitioner is raising issues in this petition which were not raised in

the lower courts.


Respondent maintains that the documentary stamp tax imposed in this case is on the original issue of
certificates of stock of JEC on the subscription by the petitioner of the P508,806,200.00 shares out of the
increase in the authorized capital stock of the former pursuant to Section 175 of the NIRC. The
documentary stamp tax was not imposed on the shares of stock owned by petitioner in RGHC, PGCI,
and UCPB, which merely form part of the partial payment of the subscribed shares in JEC. Respondent
avers that the amounts indicated in the Certificates of RDO Esquivias are the amounts of documentary
stamp tax representing the equivalent of each group of shares being applied for payment. Considering
that the amount of documentary stamp tax represented by the shares of stock in the aforementioned
companies amounted only to P593,528.15, while the basic documentary stamp tax for the entire
subscription of P508,806,200.00 was computed by respondents revenue officers to the tune
ofP803,116.72, exclusive of the penalties, leaving a balance of P209,588.57, is a clear indication that the
payment made with the shares of stock is insufficient.
Respondent claims that the certifications were issued by RDO Esquivias purposely to allow the
registration of transfer of the shares of stock used in payment of the subscribed shares in the name of
JEC from petitioner by the Corporate Secretary of the UCPB and are not evidence of the payment of the
documentary stamp tax on the issuance of the increased shares of stocks of JEC.13
Respondent argues that the documentary stamp tax attaches upon acceptance by the corporation of
the stockholders subscription in the capital stock of the corporation, and that the term "original issue"
of the certificate of stock means "the point at which the stockholder acquires and may exercise
attributes of ownership over the stocks."14 Respondent further argues that the stocks can be alienated;
the dividends or fruits derived therefrom can be enjoyed; and they can be conveyed, pledged, or
encumbered; that the certificate, irrespective of whether or not it is in the actual constructive possession
of the stockholder, is considered issued because it is with value and, hence, the documentary stamp tax
must be paid; and concludes that a person may own shares of stock without possessing a certificate of
stock. Respondent cites Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,15
where the Court held:
The delivery of the certificates of stocks to the private respondent's stockholders whether actual or
constructive, is not essential for the documentary and science stamps taxes to attach. What is taxed is
the privilege of issuing shares of stock and, therefore, the taxes accrue at the time the shares are issued.
The only question before us is whether or not said private respondents issued the certificates of stock
covering the paid-in-capital ofP17,880,000.00.
Respondent claims that it is well-settled as a general rule of Corporation Law that a subscriber for stock
in a corporation or purchaser of stock becomes a stockholder as soon as his subscription is accepted by
the corporation whether a certificate of stock is issued to him or not, and although he may have no
certificate, he is thereupon entitled to all the rights and is subject to all the liabilities of a stockholder.
Respondent argues, based on the above, that the contention of petitioner that the documentary stamp
tax under Section 175 of the 1994 Tax Code could not have accrued at the time the Amended
Subscription Agreement was executed since the increase in capital stock of JEC had yet to be approved
by the SEC was inaccurate. He states that it is evident from the Amended Subscription Agreement that
the subscribed shares from the increase in JECs stock were fully paid through cash and shares of stock.
Respondent submits that the change in wording, from "certificates" to "shares" of stock, introduced to
Section 175 by the 1997 Tax Code, was a mere clarification and codification of the foregoing principle
or policy.
Respondent stresses that the documentary stamp tax can be levied or collected from the person
making, signing, issuing, accepting, or transferring the obligation or property, as provided in Section
173 of the Tax Code.
In its Reply to Respondents Comment to the Petition,16 petitioner contends that respondent
erroneously insists that the documentary stamp tax sought to be refunded is the one imposed on the
subscription by petitioner toP508,806,200.00 new shares of JEC. Petitioner further contends that since
the documentary stamp tax due on the issuance of new shares or on original shares is P2.00 for every
P200 under Section 175 of the Tax Code, then the documentary stamp tax on petitioners subscription

to JEC shares should amount to P5,088,062.00, which is much higher than the P803,116.72 basic
documentary stamp tax paid under ATAP No. 1511920.17 Petitioner argues that at the time the
documentary stamp tax was paid, before a taxpayer was allowed to pay the taxes due, a BIR revenue
officer would first compute the tax due and then issue an authority to accept payment (ATAP) and it was
very unlikely that the revenue officer could have made such a glaring mistake.
Petitioner alleges that there is no BIR certification requirement prior to the issuance of original shares of
stock; and that it is only upon the regular annual audit of the books of a corporation that the BIR
determines if the documentary stamp tax on new or original issuances of shares, if any were issued, had
in fact been paid. If not, then a deficiency assessment, with penalties and surcharges, would then be
made by the BIR. Petitioner further alleges that, on the other hand, before the transfer of issued and
outstanding shares to a new owner is recorded in the books of a corporation, the capital gains tax
thereon and the documentary stamp tax on the transfer must first be paid, and a BIR certification must
be presented to the Corporate Secretary authorizing the corporation to record the transfer, otherwise,
the corporate secretary shall be subjected to penalties.
Petitioner claims that the three BIR certifications in this case specifically allow the registration of the
UCPB, RGHC, and PGCI shares in the name of JEC, the transferee, and that said certifications evidence
payment of the taxes due on the transfer of the shares from petitioner to JEC, not on the original
issuance of shares of JEC.
The parties respective memoranda contained reiterations of the allegations raised in their respective
pleadings as discussed above.
The sole issue to be resolved is whether petitioner is entitled to a partial refund of the documentary
stamp tax and surcharges it paid on the execution of the Amended Subscription Agreement.
In claims for refund, the burden of proof is on the taxpayer to prove entitlement to such refund. As we
held in Compagnie Financiere Sucres Et Denrees v. Commissioner of Internal Revenue18 Along with police power and eminent domain, taxation is one of the three basic and necessary
attributes of sovereignty. Thus, the State cannot be deprived of this most essential power and attribute
of sovereignty by vague implications of law. Rather, being derogatory of sovereignty, the governing
principle is that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally
in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by
the clearest grant of statute.
x x x Tax refunds are a derogation of the State's taxing power. Hence, like tax exemptions, they are
construed strictly against the taxpayer and liberally in favor of the State. Consequently, he who claims a
refund or exemption from taxes has the burden of justifying the exemption by words too plain to be
mistaken and too categorical to be misinterpreted. x
It was thus incumbent upon petitioner to show clearly its basis for claiming that it is entitled to a tax
refund. This, to our mind, the petitioner failed to do.
The Court of Tax Appeals construed the claim for exemption strictly against petitioner and held that:
The focal issue which is presented for our consideration is whether or not the transfer of the 1,313,176
FEBTC shares under the "Amended Subscription Agreement and Deed of Assignment of Property in
Payment of Subscription" should be excluded in the taxable base for the computation of DST, thus
entitling petitioner to the refund of the amount of P410,367.00.
We find nothing ambiguous nor obscure in the language of Section 173, taken in relation to Section
175 of the 1994 Tax Code x x x insofar as the same is brought to bear upon the circumstances in the
instant case. These provisions furnish the best means of their own exposition that a documentary stamp
tax (DST) is due and payable on documents, instruments, loan agreements and papers, acceptances,
assignments, sales and transfers which evidenced the transaction agreed upon by the parties and
should be paid by the person making, signing, issuing, accepting or transferring the property, right or
obligation.
Sec. 173. Stamp taxes upon documents, instruments, and papers. Upon documents, instruments, and
papers, and upon acceptances, assignments, sales, and transfers of the obligation, or property incident
thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or
accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this

Title, by the person making, signing, issuing, accepting, or transferring the same, whenever the
document is made, signed, issued, accepted or transferred when the obligation or right arises from
Philippine sources or the property is situated in the Philippines, and at the same time such act is done or
transaction had: Provided, That whenever one party to the taxable document enjoys exemption from
the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the
tax. (as amended by R.A. No. 7660)
xxxx
Understood to mean what it plainly expressed, the DST imposition is essentially addressed and directly
brought to bear upon the DOCUMENT evidencing the transaction of the parties which establishes its
rights and obligations.
In the case at bar, the rights and obligations between petitioner JAKA Investments Corporation and
JAKA Equities Corporation are established and enforceable at the time the "Amended Subscription
Agreement and Deed of Assignment of Property in Payment of Subscription" were signed by the parties
and their witness, so is the right of the state to tax the aforestated document evidencing the transaction.
DST is a tax on the document itself and therefore the rate of tax must be determined on the basis of
what is written or indicated on the instrument itself independent of any adjustment which the parties
may agree on in the future x x x. The DST upon the taxable document should be paid at the time the
contract is executed or at the time the transaction is accomplished. The overriding purpose of the law is
the collection of taxes. So that when it paid in cash the amount ofP370,766,000.00 in substitution for, or
replacement of the 1,313,176 FEBTC shares, its payment ofP1,003,835.65 documentary stamps tax
pursuant to Section 175 of NIRC is in order.
Thus, applying the settled rule in this jurisdiction that, a claim for refund is in the nature of a claim for
exemption, thus, should be construed in strictissimi juris against the taxpayer (Commissioner of Internal
Revenue vs. Tokyo Shipping Co., Ltd., 244 SCRA 332) and since the petitioner failed to adduce evidence
that will show that it is exempt from DST under Section 199 or other provision of the tax code, We rule
the focal issue in the negative.19(Emphases ours.)
In the questioned Decision, the Court of Appeals concurred with the findings of the Court of Tax
Appeals and we quote with approval the relevant portions below:
Petitioner alleges, though, that considering that the assessment of payment of documentary stamp tax
was made payable only to the aforesaid issuances of certificates of [stock] exclusive of that of FEBTC
shares of stock which were paid in cash, and that it has paid a total of Php1,003,895.65 inclusive of
surcharges for late payment, the petitioner is entitled to a refund of Php410,367.00. This argument does
not hold water. As discussed earlier, a documentary stamp is levied upon the privilege, the opportunity
and the facility offered at exchanges for the transaction of the business. This being the case, and as
correctly found by the tax court, the documentary stamp tax imposition is essentially addressed and
directly brought to bear upon the document evidencing the transaction of the parties which establishes
its rights and obligations, which in the case at bar, was established and enforceable upon the execution
of the Amended Subscription Agreement and Deed of Assignment of Property in Payment of
Subscription.
Moreover, the documentary stamp tax is imposed on the entire subscription (i.e., subscribed capital
stock) which is the amount of the capital stock subscribed whether fully paid or not. It connotes an
original subscription contract for the acquisition by a subscriber of unissued shares in a corporation,
which in this case is equivalent to a total par value of Php508,806,200.00.
Besides, a tax cannot be imposed unless it is supported by the clear and express language of a statute;
on the other hand, once the tax is unquestionably imposed, a claim of exemption from tax payments
must be clearly shown and based on language in the law too plain to be mistaken. And since a claim for
refund is in the nature of a claim for exemption the same is likewise construed in strictissimi juris against
the taxpayer. Furthermore, it is a basic rule in taxation that the factual findings of the Court of Tax
Appeals, when supported by substantial evidence, will not be disturbed on appeal unless it [is] shown
that the said court committed gross error in the appreciation of facts. In this case, the tax court did not
deviate from this rule.
We find no error in the above pronouncements of the Court of Appeals.

A documentary stamp tax is in the nature of an excise tax. It is not imposed upon the business
transacted but is an excise upon the privilege, opportunity or facility offered at exchanges for the
transaction of the business. It is an excise upon the facilities used in the transaction of the business
separate and apart from the business itself. Documentary stamp taxes are levied on the exercise by
persons of certain privileges conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments.20
Thus, we have held that documentary stamp taxes are levied independently of the legal status of the
transactions giving rise thereto. The documentary stamp taxes must be paid upon the issuance of the
said instruments, without regard to whether the contracts which gave rise to them are rescissible, void,
voidable, or unenforceable.21
The relevant provisions of the Tax Code at the time of the transaction are quoted below:
Sec. 175. Stamp tax on original issue of certificates of stock. On every original issue, whether on
organization, reorganization or for any lawful purpose, of certificates of stock by any association,
company, or corporations, there shall be collected a documentary stamp tax of Two pesos (P2.00) on
each two hundred pesos, or fractional part thereof, of the par value of such certificates: Provided, That
in the case of the original issue of stock without par value the amount of the documentary stamp tax
herein prescribed shall be based upon the actual consideration received by the association, company, or
corporation for the issuance of such stock, and in the case of stock dividends on the actual value
represented by each share.
Sec. 176. Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer of due-bills,
certificates of obligation, or shares or certificates of stock. On all sales, or agreements to sell, or
memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or
certificates of stock in any association, company or corporation, or transfer of such securities by
assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences
of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills,
certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of
any due-bill, certificates of obligation or stock, there shall be collected a documentary stamp tax of One
peso (P1.00) on each two hundred pesos, or fractional part thereof, of the par value of such due-bill,
certificates of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer
of stock or securities from one person to another, regardless of whether or not a certificate of stock or
obligation is issued, endorsed, or delivered in pursuance of such sale or transfer: and Provided, further,
That in the case of stock without par value the amount of the documentary stamp herein prescribed
shall be equivalent to twenty-five per centum of the documentary stamp tax paid upon the original
issue of said stock:Provided, furthermore, That the tax herein imposed shall be increased to One peso
and fifty centavos (P1.50) beginning 1996.
We find our discussion in the case of Commissioner of Internal Revenue v. First Express Pawnshop
Company, Inc.22 regarding these same provisions of the Tax Code to be instructive, and we quote:
In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The DST, as an
excise tax, is levied upon the privilege, the opportunity and the facility of issuing shares of stock. In
Commissioner of Internal Revenue v. Construction Resources of Asia, Inc., this Court explained that the
DST attaches upon acceptance of the stockholder's subscription in the corporation's capital stock
regardless of actual or constructive delivery of the certificates of stock. Citing Philippine Consolidated
Coconut Ind., Inc. v. Collector of Internal Revenue, the Court held:
The documentary stamp tax under this provision of the law may be levied only once, that is upon the
original issue of the certificate. The crucial point therefore, in the case before Us is the proper
interpretation of the word 'issue'. In other words, when is the certificate of stock deemed 'issued' for the
purpose of imposing the documentary stamp tax? Is it at the time the certificates of stock are printed, at
the time they are filled up (in whose name the stocks represented in the certificate appear as certified
by the proper officials of the corporation), at the time they are released by the corporation, or at the
time they are in the possession (actual or constructive) of the stockholders owning them?
Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the
corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the

attributes of ownership over the stocks mentioned on its face. The stocks can be alienated; the
dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or
encumbered. The certificate as issued by the corporation, irrespective of whether or not it is in the
actual or constructive possession of the stockholder, is considered issued because it is with value and
hence the documentary stamp tax must be paid as imposed by Section 212 of the National Internal
Revenue Code, as amended.
In Section 176 of the Tax Code, DST is imposed on the sales, agreements to sell, memoranda of sales,
deliveries or transfer of shares or certificates of stock in any association, company, or corporation, or
transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or
memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the
benefit of such certificates of stock, or to secure the future payment of money, or for the future transfer
of certificates of stock. In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue,
this Court held that under Section 176 of the Tax Code, sales to secure the future transfer of due-bills,
certificates of obligation or certificates of stock are subject to documentary stamp tax.
Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines on the corporate stock
documentary stamp tax program. RMO 08-98 states that:
1. All existing corporations shall file the Corporation Stock DST Declaration, and the DST Return, if
applicablewhen DST is still due on the subscribed share issued by the corporation, on or before the
tenth day of the month following publication of this Order.
3. All existing corporations with authorization for increased capital stock shall file their Corporate Stock
DST Declaration, together with the DST Return, if applicable when DST is due on subscriptions made
after the authorization, on or before the tenth day of the month following the date of authorization.
(Boldfacing supplied)
RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 47-97), also states that what is
being taxed is the privilege of issuing shares of stock, and, therefore, the taxes accrue at the time the
shares are issued. RMC 47-97 also defines issuance as the point in which the stockholder acquires and
may exercise attributes of ownership over the stocks.
As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription
agreement in order for a taxpayer to be liable to pay the DST. A subscription contract is defined as any
contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be
formed. A stock subscription is a contract by which the subscriber agrees to take a certain number of
shares of the capital stock of a corporation, paying for the same or expressly or impliedly promising to
pay for the same. (Emphases ours.)
Petitioner claims overpayment of the documentary stamp tax but its basis for such is not clear at all.
While insisting that the documentary stamp tax it had paid for was not based on the original issuance of
JEC shares as provided in Section 175 of the 1994 Tax Code, petitioner failed in showing, even through a
mere basic computation of the tax base and the tax rate, that the documentary stamp tax was based on
the transfer of shares under Section 176 either. It would have been helpful for petitioners cause had it
submitted proof of the par value of the shares of stock involved, to show the actual basis for the
documentary stamp tax computation. For comparison, the original Subscription Agreement ought to
have been submitted as well.
All that petitioner submitted to back up its claim were the certifications issued by then RDO As correctly
pointed out by respondent, however, the amounts in the RDO certificates were the amounts of
documentary stamp tax representing the equivalent of each group of shares being applied for payment.
The purpose for issuing such certifications was to allow registration of transfer of shares of stock used in
partial payment for petitioners subscription to the original issuance of JEC shares. It should not be used
as evidence of payment of documentary stamp tax. Neither should it be the lone basis of a claim for a
documentary stamp tax refund.
The fact that it was petitioner and not JEC that paid for the documentary stamp tax on the original
issuance of shares is of no moment, as Section 173 of the 1994 Tax Code states that the documentary
stamp tax shall be paid by the person making, signing, issuing, accepting or transferring the property,
right or obligation.

Lastly, we deem it appropriate to reiterate the well-established doctrine that as a matter of practice and
principle, this Court will not set aside the conclusion reached by an agency, like the Court of Tax
Appeals, especially if affirmed by the Court of Appeals. By the very nature of its function, it has
dedicated itself to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part,
which we find is not present here.23
WHEREFORE, premises considered, the petition is hereby DISMISSED.
G.R. No. 144476
April 8, 2003
ONG YONG petitioners, vs. DAVID S. TIU, respondents.
G.R. No. 144629
April 8, 2003
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES
C. TIU, and INTRALAND RESOURCES DEVELOPMENT CORP., petitioners,
vs. ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T.
ONG, and JULIA ONG ALONZO, respondents.
Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants Ong Yong,
Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2)
motion for partial reconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking a
reversal of this Court's Decision,1 dated February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with
modification the decision2 of the Court of Appeals, dated October 5, 1999, which in turn upheld,
likewise with modification, the decision of the SEC en banc, dated September 11, 1998; and (3) motion
for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D.
Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage
and incompletion when its owner, the First Landlink Asia Development Corporation (FLADC),
which was owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the
Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the
two lots where the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T.
Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the
Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal
shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value of P100.00
each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition
to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius
were entitled to nominate the Vice-President and the Treasurer plus five directors while the Ongs
were entitled to nominate the President, the Secretary and six directors (including the chairman)
to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and
operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while
the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively
valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800
shares) to cover their additional 549,800 stock subscription therein. The Ongs paid in another P70
million3 to FLADC and P20 million to the Tius over and above their P100 million investment, the total
sum of which (P190 million) was used to settle the P190 million mortgage indebtedness of FLADC to
PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the
Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of (1)
refusing to credit to them the FLADC shares covering their real property contributions; (2) preventing
David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as
Vice-President and Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the positions and
perform the duties of Vice-President and Treasurer, respectively, but the Ongs prevented them from

doing so. Furthermore, the Ongs refused to provide them the space for their executive offices as
Vice-President and Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares
corresponding to their property contributions of a four-story building, a 1,902.30 square-meter lot and
a 151 square-meter lot. Hence, they felt they were justified in setting aside their Pre-Subscription
Agreement with the Ongs who allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of
Vice-President and Treasurer of FLADC but that it was they who refused to comply with the corporate
duties assigned to them. It was the contention of the Ongs that they wanted the Tius to sign the checks
of the corporation and undertake their management duties but that the Tius shied away from helping
them manage the corporation. On the issue of office space, the Ongs pointed out that the Tius did in
fact already have existing executive offices in the mall since they owned it 100% before the Ongs came
in. What the Tius really wanted were new offices which were anyway subsequently provided to them. On
the most important issue of their alleged failure to credit the Tius with the FLADC shares commensurate
to the Tius' property contributions, the Ongs asserted that, although the Tius executed a deed of
assignment for the 1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690
for capital gains tax and documentary stamp tax. Without the payment thereof, the SEC would not
approve the valuation of the Tius' property contribution (as opposed to cash contribution). This, in turn,
would make it impossible to secure a new Transfer Certificate of Title (TCT) over the property in FLADC's
name. In any event, it was easy for the Tius to simply pay the said transfer taxes and, after the new TCT
was issued in FLADC's name, they could then be given the corresponding shares of stocks. On the 151
square-meter property, the Tius never executed a deed of assignment in favor of FLADC. The Tius
initially claimed that they could not as yet surrender the TCT because it was "still being reconstituted"
by the Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC had in reality
owned the property all along, even before their Pre-Subscription Agreement was executed in 1994. This
meant that the 151 square-meter property was at that time already the corporate property of FLADC for
which the Tius were not entitled to the issuance of new shares of stock.
The controversy finally came to a head when this case was commenced4 by the Tius on February 27,
1996 at the Securities and Exchange Commission (SEC), seeking confirmation of their rescission of the
Pre-Subscription Agreement. After hearing, the SEC, through then Hearing Officer Rolando G. Andaya,
Jr., issued a decision on May 19, 1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription
Agreement, and consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the
return of their contribution for 1,000,000 shares of FLADC;
(c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended articles of
incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly
15587), 135325 and 134204 and any other title or deed in the name of FLADC, failing in which said
titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel
the annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No. 134066
(formerly 15587);
(f) The individual defendants, individually and collectively, their agents and representatives, to
desist from exercising or performing any and all acts pertaining to stockholder, director or officer
of FLADC or in any manner intervene in the management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest payment in the
amount of P8,866,669.00 and all interest payments as well as any payments on principal received
from the P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of
their receipt of such payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing his
loan from said defendants plus legal interest from the date of receipt of such amount.

SO ORDERED.5
On motion of both parties, the above decision was partially reconsidered but only insofar as the Ongs'
P70 million was declared not as a premium on capital stock but an advance (loan) by the Ongs to FLADC
and that the imposition of interest on it was correct.6
Both parties appealed7 to the SEC en banc which rendered a decision on September 11, 1998, affirming
the May 19, 1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission of the
Pre-Subscription Agreement but reverted to classifying the P70 million paid by the Ongs as premium on
capital and not as a loan or advance to FLADC, hence, not entitled to earn interest.8
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange
Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the
Pre-Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the following
MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation
in accordance with the following cash and property contributions of the parties therein.
(a) Ong Group P100,000,000.00 cash contribution for one (1) million shares in First
Landlink Asia Development Corporation at a par value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for 450,200 shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share;
2) A four-storey building described in Transfer Certificate of Title No. 15587 in the
name of Intraland Resources and Development Corporation valued at P20,000,000.00
for 200,000 shares in First Landlink Asia Development Corporation at a par value of
P100.00 per share;
3) A 1,902.30 square-meter parcel of land covered by Transfer Certificate of Title No.
15587 in the name of Masagana Telamart, Inc. valued at P30,000,000.00 for 300,000
shares in First Landlink Asia Development Corporation at a par value of P100.00 per
share.
2) Whatever remains of the assets of the First Landlink Asia Development Corporation and the
management thereof is (sic) hereby ordered transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby ordered to pay the amount of
P70,000,000.00 that was advanced to it by the Ong Group upon the finality of this decision.
Should the former incur in delay in the payment thereof, it shall pay the legal interest thereon
pursuant to Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the Ongs
upon the finality of this decision. Should the former incur in delay in the payment thereof, it shall
pay the legal interest thereon pursuant to Article 2209 of the New Civil Code.
SO ORDERED.9
An interesting sidelight of the CA decision was its description of the rescission made by the Tius as the
"height of ingratitude" and as "pulling a fast one" on the Ongs. The CA moreover found the Tius guilty
of withholding FLADC funds from the Ongs and diverting corporate income to their own MATTERCO
account.10 These were findings later on affirmed in our own February 1, 2002 Decision which is the
subject of the instant motion for reconsideration.11
But there was also a strange aspect of the CA decision. The CA concluded that both the Ongs and the
Tius were in pari delicto (which would not have legally entitled them to rescission) but, "for practical
considerations," that is, their inability to work together, it was best to separate the two groups by
rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs and
awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed separate petitions for review
before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that the Tius may
not properly avail of rescission under Article 1191 of the Civil Code considering that the

Pre-Subscription Agreement did not provide for reciprocity of obligations; that the rights over the
subject matter of the rescission (capital assets and properties) had been acquired by a third party
(FLADC); that they did not commit a substantial and fundamental breach of their agreement since they
did not prevent the Tius from assuming the positions of Vice-President and Treasurer of FLADC, and
that the failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property
covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay the required
transfer taxes to secure the approval of the SEC for the property contribution and, thereafter, the
issuance of title in FLADC's name. They also argued that the liquidation of FLADC may not legally be
ordered by the appellate court even for so called "practical considerations" or even to prevent "further
squabbles and numerous litigations," since the same are not valid grounds under the Corporation Code.
Moreover, the Ongs bewailed the failure of the CA to grant interest on their P70 million and P20 million
advances to FLADC and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other hand,
contended that the rescission should have been limited to the restitution of the parties' respective
investments and not the liquidation of FLADC based on the erroneous perception by the court that: the
Masagana Citimall was threatened with incompletion since FLADC was in financial distress; that the Tius
invited the Ongs to invest in FLADC to settle its P190 million loan from PNB; that they violated the
Pre-Subscription Agreement when it was the Lichaucos and not the Tius who executed the deed of
assignment over the 151 square-meter property commensurate to 49,800 shares in FLADC thereby
failing to pay the price for the said shares; that they did not turn over to the Ongs the entire amount of
FLADC funds; that they were diverting rentals from lease contracts due to FLADC to their own
MATTERCO account; that the P70 million paid by the Ongs was an advance and not a premium on
capital; and that, by rescinding the Pre-Subscription Agreement, they wanted to wrestle away the
management of the mall and prevent the Ongs from enjoying the profits of their P190 million
investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions), affirming
the assailed decision of the Court of Appeals but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent (12%)
per annum to be computed from the time of judicial demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%) per
annum to be computed from the date of the FLADC Board Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution,
specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their respective obligations under
the Pre-Subscription Agreement. The Ongs prevented the Tius from assuming the positions of
Vice-President and Treasurer of the corporation. On the other hand, the Decision established that the
Tius failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to
their MATTERCO account. Consequently, it held that rescission was not possible since both parties were
in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of specific
performance, as espoused by the Ongs, was not practical and sound either and would only lead to
further "squabbles and numerous litigations" between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on the
grounds that: (a) the SEC order had become executory as early as September 11, 1998 pursuant to
Sections 1 and 12, Rule 43 of the Rules of Court; (b) any further delay would be injurious to the rights of
the Tius since the case had been pending for more than six years; and (c) the SEC no longer had
quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code). The Ongs filed their opposition,
contending that the Decision dated February 1, 2002 was not yet final and executory; that no good
reason existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC
retained jurisdiction over pending cases involving intra-corporate disputes already submitted for final
resolution upon the effectivity of the said law.
Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution, the Ongs filed their
own "Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002

Decision)" on March 15, 2002, raising two main points: (a) that specific performance and not rescission
was the proper remedy under the premises; and (b) that, assuming rescission to be proper, the subject
decision of this Court should be modified to entitle movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the proper remedy), movants Ong
argue that their alleged breach of the Pre-Subscription Agreement was, at most, casual which did not
justify the rescission of the contract. They stress that providing appropriate offices for David S. Tiu and
Cely Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on their obligations under the
Pre-Subscription Agreement since the said obligation (to provide executive offices) pertained to FLADC
itself. Such obligation arose from the relations between the said officers and the corporation and not
any of the individual parties such as the Ongs. Likewise, the alleged failure of the Ongs to credit shares
of stock in favor of the Tius for their property contributions also pertained to the corporation and not to
the Ongs. Just the same, it could not be done in view of the Tius' refusal to pay the necessary transfer
taxes which in turn resulted in the inability to secure SEC approval for the property contributions and
the issuance of a new TCT in the name of FLADC.

Besides, according to the Ongs, the principal objective of both parties in entering into the
Pre-Subscription Agreement in 1994 was to raise the P190 million desperately needed for the payment
of FLADC's loan to PNB. Hence, in this light, the alleged failure to provide office space for the two
corporate officers was no more than an inconsequential infringement. For rescission to be justified, the
law requires that the breach of contract should be so "substantial or fundamental" as to defeat the
primary objective of the parties in making the agreement. At any rate, the Ongs claim that it was the
Tius who were guilty of fundamental violations in failing to remit funds due to FLADC and diverting the
same to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties were guilty of violating
the Pre-Subscription Agreement, neither of them could resort to rescission under the principle of pari
delicto. In addition, since the cash and other contributions now sought to be returned already belong to
FLADC, an innocent third party, said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be given their proportionate
share of the mall), movants Ong vehemently take exception to the second item in the dispositive
portion of the questioned Decision insofar as it decreed that whatever remains of the assets of FLADC
and the management thereof (after liquidation) shall be transferred to the Tius. They point out that the
mall itself, which would have been foreclosed by PNB if not for their timely investment of P190 million in
1994 and which is now worth about P1 billion mainly because of their efforts, should be included in any
partition and distribution. They (the Ongs) should not merely be given interest on their capital
investments. The said portion of our Decision, according to them, amounted to the unjust enrichment
of the Tius and ran contrary to our own pronouncement that the act of the Tius in unilaterally rescinding
the agreement was "the height of ingratitude" and an attempt "to pull a fast one" as it would prevent
the Ongs from enjoying the fruits of their P190 million investment in FLADC. It also contravenes this
Court's assurance in the questioned Decision that the Ongs and Tius "will have a bountiful return of
their respective investments derived from the profits of the corporation."
Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8, 2002, pointing out that
there was no violation of the Pre-Subscription Agreement on the part of the Ongs; that, after more than
seven years since the mall began its operations, rescission had become not only impractical but would
also adversely affect the rights of innocent parties; and that it would be highly inequitable and unfair to

simply return the P100 million investment of the Ongs and give the remaining assets now amounting to
about P1 billion to the Tius.
The Tius, in their opposition to the Ongs' motion for reconsideration, counter that the arguments
therein are a mere re-hash of the contentions in the Ongs' petition for review and previous motion for
reconsideration of the Court of Appeals' decision. The Tius compare the arguments in said pleadings to
prove that the Ongs do not raise new issues, and, based on well-settled jurisprudence,12 the Ongs'
present motion is therefore pro-forma and did not prevent the Decision of this Court from attaining
finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments on the respective

positions of the parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong filed their
respective memoranda. On February 28, 2003, the Tius submitted their memorandum.
We grant the Ongs' motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for reconsideration. In Philippine
Consumers Foundation, Inc. vs. National Telecommunications Commission,13 this Court, through then
Chief Justice Felix V. Makasiar, said that its members may and do change their minds, after a re-study of
the facts and the law, illuminated by a mutual exchange of views.14 After a thorough re-examination of
the case, we find that our Decision of February 1, 2002 overlooked certain aspects which, if not
corrected, will cause extreme and irreparable damage and prejudice to the Ongs, FLADC and its
creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to
meritorious motions for reconsideration. As long as the same adequately raises a valid ground15 (i.e., the
decision or final order is contrary to law), this Court has to evaluate the merits of the arguments to
prevent an unjust decision from attaining finality. In Security Bank and Trust Company vs. Cuenca,16 we
ruled that a motion for reconsideration is not pro-forma for the reason alone that it reiterates the
arguments earlier passed upon and rejected by the appellate court. We explained there that a movant
may raise the same arguments, if only to convince this Court that its ruling was erroneous. Moreover,
the rule (that a motion is pro-forma if it only repeats the arguments in the previous pleadings) will not
apply if said arguments were not squarely passed upon and answered in the decision sought to be
reconsidered. In the case at bar, no ruling was made on some of the petitioner Ongs' arguments. For
instance, no clear ruling was made on why an order distributing corporate assets and property to the
stockholders would not violate the statutory preconditions for corporate dissolution or decrease of
authorized capital stock. Thus, it would serve the ends of justice to entertain the subject motion for
reconsideration since some important issues therein, although mere repetitions, were not considered or
clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-Subscription
Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius
owning 450,200 shares representing the paid-up capital. When the Tius invited the Ongs to invest in
FLADC as stockholders, an increase of the authorized capital stock became necessary to give each
group equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized
capital stock was thus increased from 500,000 shares to 2,000,000 shares with a par value of P100 each,
with the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their
450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was the 1,000,000
unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares, the parties'
Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60, Title VII of
the Corporation Code:
Any contract for the acquisition of unissued stock in an existing corporation or a corporation still
to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the
fact that theparties refer to it as a purchase or some other contract (Italics supplied).
A subscription contract necessarily involves the corporation as one of the contracting parties since the
subject matter of the transaction is property owned by the corporation its shares of stock. Thus, the
subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs
invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the
Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in
their personal capacities with the Ongs since they were not selling any of their own shares to them. It
was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement were FLADC and
the Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius in their
personal capacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly
not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs
inasmuch as it was the real party in interest therein. Article 1311 of the Civil Code provides that

"contracts take effect only between the parties, their assigns and heirs" Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless
he shows that he has a real interest affected thereby.17
In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the
Pre-Subscription Agreement: a shareholder's agreement between the Tius and the Ongs defining and
governing their relationship and a subscription contract between the Tius, the Ongs and FLADC
regarding the subscription of the parties to the corporation. They point out that these two component
parts form one whole agreement and that their terms and conditions are intrinsically related and
dependent on each other. Thus, the breach of the shareholders' agreement, which was allegedly the
consideration for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until
after the oral arguments on January 29, 2003, we find this argument too strained for comfort. It is
obviously intended to remedy and cover up the Tius' lack of legal personality to rescind an agreement
in which they were personally not parties-in-interest. Assuming arguendo that there were two
"sub-agreements" embodied in the Pre-Subscription Agreement, this Court fails to see how the
shareholders agreement between the Ongs and Tius can, within the bounds of reason, be interpreted as
the consideration of the subscription contract between FLADC and the Ongs. There was nothing in the
Pre-Subscription Agreement even remotely suggesting such alleged interdependence. Be that as it may,
however, the Tius are nevertheless not the proper parties to raise this point because they were not
parties to the subscription contract between FLADC and the Ongs. Thus, they are not in a position to
claim that the shareholders agreement between them and the Ongs was what induced FLADC and the
Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though FLADC was
represented by the Tius in the subscription contract, FLADC had a separate juridical personality from the
Tius. The case before us does not warrant piercing the veil of corporate fiction since there is no proof
that the corporation is being used "as a cloak or cover for fraud or illegality, or to work injustice."18
The Tius also argue that, since the Ongs represent FLADC as its management, breach by the Ongs is
breach by FLADC. This must also fail because such an argument disregards the separate juridical
personality of FLADC.
The Tius allege that they were prevented from participating in the management of the corporation.
There is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu, from exercising
her function as such. The records show that the President, Wilson Ong, supervised the collection and
receipt of rentals in the Masagana Citimall;19 that he ordered the same to be deposited in the bank;20
and that he held on to the cash and properties of the corporation.21 Section 25 of the Corporation Code
prohibits the President from acting concurrently as Treasurer of the corporation. The rationale behind
the provision is to ensure the effective monitoring of each officer's separate functions.
However, although the Tius were adversely affected by the Ongs' unwillingness to let them assume their
positions, rescission due to breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the Rules of Court provide for appropriate
and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is
certainly not one of them, specially if the party asking for it has no legal personality to do so and the
requirements of the law therefor have not been met. A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or imagined offense,
to demand rescission of his subscription and call for the distribution of some part of the corporate
assets to him without complying with the requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of
rescission of the subject agreement based on a less than substantial breach of subscription contract.
Not only are they not parties to the subscription contract between the Ongs and FLADC; they also have
other available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for
rescission based on breach of contract, said action will nevertheless still not prosper since rescission will
violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property
under the Corporation Code.

The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs.
Rivera,22provides that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims.23 This doctrine is the underlying
principle in the procedure for the distribution of capital assets, embodied in the Corporation Code,
which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles
of Incorporation to reduce the authorized capital stock,24(2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings,25 and (3) dissolution and
eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the
power of a corporation to acquire its own shares26 and in Section 122 on the prohibition against the
distribution of corporate assets and property unless the stringent requirements therefor are complied
with.27
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, or even, for that matter, on the
earnest desire of the court a quo "to prevent further squabbles and future litigations" unless the
indispensable conditions and procedures for the protection of corporate creditors are followed.
Otherwise, the "corporate peace" laudably hoped for by the court will remain nothing but a dream
because this time, it will be the creditors' turn to engage in "squabbles and litigations" should the court
order an unlawful distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby violating the
Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one
of the instances when distribution of capital assets and property of the corporation is allowed.
Contrary to the Tius' allegation, rescission will, in the final analysis, result in the premature liquidation of
the corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and
120 of the Corporation Code.28 The Tius maintain that rescinding the subscription contract is not
synonymous to corporate liquidation because all rescission will entail would be the simple restoration
of the status quo ante and a return to the two groups of their cash and property contributions. We wish
it were that simple. Very noticeable is the fact that the Tius do not explain why rescission in the instant
case will not effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-result of
rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable
and disastrous effect on the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will not
result in an unauthorized liquidation of the corporation because their case is actually a petition to
decrease capital stock pursuant to Section 38 of the Corporation Code. Section 122 of the law provides
that "(e)xcept by decrease of capital stock, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and liabilities." The Tius claim that their
case for rescission, being a petition to decrease capital stock, does not violate the liquidation
procedures under our laws. All that needs to be done, according to them, is for this Court to order (1)
FLADC to file with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to
approve said decrease. This new argument has no merit.
The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock because such
action never complied with the formal requirements for decrease of capital stock under Section 33 of
the Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any
stockholders meeting at which the approval of stockholders owning at least two-thirds of the
outstanding capital stock was secured. There was no revised treasurer's affidavit and no proof that said
decrease will not prejudice the creditors' rights. On the contrary, all their pleadings contained were
alleged acts of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel
FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a
corporation's authorized capital stock is an amendment of the Articles of Incorporation. It is a decision
that only the stockholders and the directors can make, considering that they are the contracting parties
thereto. In this case, the Tius are actually not just asking for a review of the legality and fairness of a

corporate decision. They want this Court to make a corporate decision for FLADC. We decline to
intervene and order corporate structural changes not voluntarily agreed upon by its stockholders and
directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADC's directors and
stockholders is a violation of the "business judgment rule" which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the
corporation and courts will not interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs
aver that the defendants (members of the board), have concluded a transaction among
themselves as will result in serious injury to the plaintiffs stockholders.29
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author in
corporate law, thus:
Courts and other tribunals are wont to override the business judgment of the board mainly
because, courts are not in the business of business, and the laissez faire rule or the free enterprise
system prevailing in our social and economic set-up dictates that it is better for the State and its
organs to leave business to the businessmen; especially so, when courts are ill-equipped to make
business decisions. More importantly, the social contract in the corporate family to decide the
course of the corporate business has been vested in the board and not with courts.30
Apparently, the Tius do not realize the illegal consequences of seeking rescission and control of the
corporation to the exclusion of the Ongs. Such an act infringes on the law on reduction of capital stock.
Ordering the return and distribution of the Ongs' capital contribution without dissolving the
corporation or decreasing its authorized capital stock is not only against the law but is also prejudicial
to corporate creditors who enjoy absolute priority of payment over and above any individual
stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to understand. If
rescission is denied, will injustice be inflicted on any of the parties? The answer is no because the
financial interests of both the Tius and the Ongs will remain intact and safe within FLADC. On the other
hand, if rescission is granted, will any of the parties suffer an injustice? Definitely yes because the Ongs
will find themselves out in the streets with nothing but the money they had in 1994 while the Tius will
not only enjoy a windfall estimated to be anywhere from P450 million to P900 million31 but will also take
over an extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our Decision dated February 1,
2002, stated that both groups were in pari delicto, meaning, that both the Tius and the Ongs committed
breaches of the Pre-Subscription Agreement. This may be true to a certain extent but, judging from the
comparative gravity of the acts separately committed by each group, we find that the Ongs' acts were
relatively tame vis--vis those committed by the Tius in not surrendering FLADC funds to the
corporation and diverting corporate income to their own MATTERCO account. The Ongs were right in
not issuing to the Tius the shares corresponding to the four-story building and the 1,902.30
square-meter lot because no title for it could be issued in FLADC's name, owing to the Tius' refusal to
pay the transfer taxes. And as far as the 151 square-meter lot was concerned, why should FLADC issue
additional shares to the Tius for property already owned by the corporation and which, in the final
analysis, was already factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to "pull a fast one" on
the Ongs because that was where the problem precisely started. It is clear that, when the finances of
FLADC improved considerably after the equity infusion of the Ongs, the Tius started planning to take
over the corporation again and exclude the Ongs from it. It appears that the Tius' refusal to pay transfer
taxes might not have really been at all unintentional because, by failing to pay that relatively small
amount which they could easily afford, the Tius should have expected that they were not going to be
given the corresponding shares. It was, from every angle, the perfect excuse for blackballing the Ongs.
In other words, the Tius created a problem then used that same problem as their pretext for showing
their partners the door. In the process, they stood to be rewarded with a bonanza of anywhere between
P450 million to P900 million in assets (from an investment of only P45 million which was nearly

foreclosed by PNB), to the extreme and irreparable damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not be
what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. There
are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for
this and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their
investments assuming good faith and honest intentions we cannot allow the rescission of the
subject subscription agreement. The Ongs' shortcomings were far from serious and certainly less than
substantial; they were in fact remediable and correctable under the law. It would be totally against all
rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong, Juanita
Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion for
partial reconsideration, dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The
Petition for Confirmation of the Rescission of the Pre-Subscription Agreement docketed as SEC Case No.
02-96-5269 is hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject
Pre-Subscription Agreement, dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S. Tiu,
Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED
for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the decision
of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September 11, 1998, is
hereby REVERSED.
Costs against the petitioner Tius.
G.R. No. L-23606
July 29, 1968
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., petitioner, vs.
SECURITIES & EXCHANGE COMMISSION, respondent.
To the question May a corporation extend its life by amendment of its articles of incorporation
effected during the three-year statutory period for liquidation when its original term of existence had
already expired? the answer of the Securities and Exchange Commissioner was in the negative.
Offshoot is this appeal.
That problem emerged out of the following controlling facts:
Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc. (hereinafter referred to simply
asAlhambra) was duly incorporated under Philippine laws on January 15, 1912. By its corporate articles
it was to exist for fifty (50) years from incorporation. Its term of existence expired on January 15, 1962.
On that date, it ceased transacting business, entered into a state of liquidation.
Thereafter, a new corporation. Alhambra Industries, Inc. was formed to carry on the business of
Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution named Angel S. Gamboa trustee to take charge
of its liquidation.
On June 20, 1963 within Alhambra's three-year statutory period for liquidation - Republic Act 3531
was enacted into law. It amended Section 18 of the Corporation Law; it empowered domestic private
corporations to extend their corporate life beyond the period fixed by the articles of incorporation for a
term not to exceed fifty years in any one instance. Previous to Republic Act 3531, the maximum
non-extendible term of such corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to amend paragraph
"Fourth" of its articles of incorporation to extend its corporate life for an additional fifty years, or a total
of 100 years from its incorporation.
On August 26, 1963, Alhambra's stockholders, representing more than two-thirds of its subscribed
capital stock, voted to approve the foregoing resolution. The "Fourth" paragraph of Alhambra's articles
of incorporation was thus altered to read:
FOURTH. That the term for which said corporation is to exist is fifty (50) years from and after the

date of incorporation, and for an additional period of fifty (50) years thereafter.
On October 28, 1963, Alhambra's articles of incorporation as so amended certified correct by its
president and secretary and a majority of its board of directors, were filed with respondent Securities
and Exchange Commission (SEC).
On November 18, 1963, SEC, however, returned said amended articles of incorporation to Alhambra's
counsel with the ruling that Republic Act 3531 "which took effect only on June 20, 1963, cannot be
availed of by the said corporation, for the reason that its term of existence had already expired when
the said law took effect in short, said law has no retroactive effect."
On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's ruling aforesaid, refiled the
amended articles of incorporation.
On September 8, 1964, SEC, after a conference hearing, issued an order denying the reconsideration
sought.
Alhambra now invokes the jurisdiction of this Court to overturn the conclusion below.1
1. Alhambra relies on Republic Act 3531, which amended Section 18 of the Corporation Law. Well it is to
take note of the old and the new statutes as they are framed. Section 18, prior to and after its
modification by Republic Act 3531, covers the subject of amendment of the articles of incorporation of
private corporations. A provision thereof which remains unaltered is that a corporation may amend its
articles of incorporation "by a majority vote of its board of directors or trustees and ... by the vote or
written assent of the stockholders representing at least two-thirds of the subscribed capital stock ... "
But prior to amendment by Republic Act 3531, an explicit prohibition existed in Section 18, thus:
... Provided, however, That the life of said corporation shall not be extended by said amendment
beyond the time fixed in the original articles: ...
This was displaced by Republic Act 3531 which enfranchises all private corporations to extend their
corporate existence. Thus incorporated into the structure of Section 18 are the following:
... Provided, however, That should the amendment consist in extending the corporate life, the
extension shall not exceed fifty years in any one instance: Provided, further, That the original
articles, and amended articles together shall contain all provisions required by law to be set out in
the articles of incorporation: ...
As we look in retrospect at the facts, we find these: From July 15 to October 28, 1963, when Alhambra
made its attempt to extend its corporate existence, its original term of fifty years had already expired
(January 15, 1962); it was in the midst of the three-year grace period statutorily fixed in Section 77 of
the Corporation Law, thus: .
SEC. 77. Every corporation whose charter expires by its own limitation or is annulled by forfeiture
or otherwise, or whose corporate existence for other purposes is terminated in any other manner,
shall nevertheless be continued as a body corporate for three years after the time when it would
have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of

enabling it gradually to settle and close its affairs, to dispose of and convey its property and to
divide its capital stock, but not for the purpose of continuing the business for which it was
established.2
Plain from the language of the provision is its meaning: continuance of a "dissolved" corporation as a
body corporate for three years has for its purpose the final closure of its affairs, and no other; the
corporation is specifically enjoined from "continuing the business for which it was established". The
liquidation of the corporation's affairs set forth in Section 77 became necessary precisely because its life
had ended. For this reason alone, the corporate existence and juridical personality of that corporation to
do business may no longer be extended.
Worth bearing in mind, at this juncture, is the basic development of corporation law.
The common law rule, at the beginning, was rigid and inflexible in that upon its dissolution, a
corporation became legally dead for all purposes. Statutory authorizations had to be provided for its
continuance after dissolution "for limited and specified purposes incident to complete liquidation of its
affairs".3 Thus, the moment a corporation's right to exist as an "artificial person" ceases, its corporate
powers are terminated "just as the powers of a natural person to take part in mundane affairs cease to
exist upon his death".4 There is nothing left but to conduct, as it were, the settlement of the estate of a

deceased juridical person.


2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent, it is true, as to when such
act of extension may be made. But even with a superficial knowledge of corporate principles, it does not
take much effort to reach a correct conclusion. For, implicit in Section 77 heretofore quoted is that the
privilege given toprolong corporate life under the amendment must be exercised before the expiry of
the term fixed in the articles of incorporation.
Silence of the law on the matter is not hard to understand. Specificity is not really necessary. The
authority to prolong corporate life was inserted by Republic Act 3531 into a section of the law that deals
with the power of a corporation to amend its articles of incorporation. (For, the manner of prolongation
is through an amendment of the articles.) And it should be clearly evident that under Section 77 no
corporation in a state of liquidation can act in any way, much less amend its articles, "for the purpose of
continuing the business for which it was established".
All these dilute Alhambra's position that it could revivify its corporate life simply because when it
attempted to do so, Alhambra was still in the process of liquidation. It is surely impermissible for us to
stretch the law that merely empowers a corporation to act in liquidation to inject therein the
power to extend its corporate existence.
3. Not that we are alone in this view. Fletcher has written: "Since the privilege of extension is purely
statutory, all of the statutory conditions precedent must be complied with in order that the extension
may be effectuated. And, generally these conditions must be complied with, and the steps necessary to
effect the extension must be taken,during the life of the corporation, and before the expiration of the

term of existence as original fixed by its charter or the general law, since, as a rule, the corporation is
ipso facto dissolved as soon as that time expires. So where the extension is by amendment of the
articles of incorporation, the amendment must be adopted before that time. And, similarly, the filing
and recording of a certificate of extension after that time cannot relate back to the date of the passage
of a resolution by the stockholders in favor of the extension so as to save the life of the corporation. The
contrary is true, however, and the doctrine of relation will apply, where the delay is due to the neglect of
the officer with whom the certificate is required to be filed, or to a wrongful refusal on his part to
receive it. And statutes in some states specifically provide that a renewal may be had within a specified
time before or after the time fixed for the termination of the corporate existence".5
The logic of this position is well expressed in a foursquare case decided by the Court of Appeals of
Kentucky.6There, pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any corporation expires by the terms of its
articles of incorporation, it may be thereafter continued to act for the purpose of closing up its
business, but for no other purpose. The corporate life of the Home Building Association expired
on May 3, 1905. After that date, by the mandate of the statute, it could continue to act for the
purpose of closing up its business, but for no other purpose. The proposed amendment was not
made until January 16, 1908, or nearly three years after the corporation expired by the terms of
the articles of incorporation. When the corporate life of the corporation was ended, there was
nothing to extend. Here it was proposed nearly three years after the corporate life of the
association had expired to revivify the dead body, and to make that relate back some two years
and eight months. In other words, the association for two years and eight months had only
existed for the purpose of winding up its business, and, after this length of time, it was proposed
to revivify it and make it a live corporation for the two years and eight months daring which it had
not been such.
The law gives a certain length of time for the filing of records in this court, and provides that the
time may be extended by the court, but under this provision it has uniformly been held that when
the time was expired, there is nothing to extend, and that the appeal must be dismissed... So,
when the articles of a corporation have expired, it is too late to adopt an amendment extending
the life of a corporation; for, the corporation having expired, this is in effect to create a new
corporation ..."7
True it is, that the Alabama Supreme Court has stated in one case.8 that a corporation empowered by
statute torenew its corporate existence may do so even after the expiration of its corporate life,

provided renewal is taken advantage of within the extended statutory period for purposes of liquidation.
That ruling, however, is inherently weak as persuasive authority for the situation at bar for at least two
reasons: First. That case was a suit for mandamus to compel a former corporate officer to turn over
books and records that came into his possession and control by virtue of his office. It was there held
that such officer was obliged to surrender his books and records even if the corporation had already
expired. The holding on the continued existence of the corporation was a mere dictum. Second.
Alabama's law is different. Corporations in that state were authorized not only to extend but also to
renew their corporate existence.That very case defined the word "renew" as follows; "To make new
again; to restore to freshness; to make new spiritually; to regenerate; to begin again; to recommence; to
resume; to restore to existence, to revive; to re-establish; to recreate; to replace; to grant or obtain an
extension of Webster's New International Dict.; 34 Cyc. 1330; Carter v. Brooklyn Life Ins. Co., 110 N.Y. 15,
21, 22, 17 N.E. 396; 54 C.J. 379. Sec".9
On this point, we again draw from Fletcher: "There is a broad distinction between the extension of a
charter and the grant of a new one. To renew a charter is to revive a charter which has expired, or, in
other words, "to give a new existence to one which has been forfeited, or which has lost its vitality by
lapse of time". To "extend" a charter is "to increase the time for the existence of one which would
otherwise reach its limit at an earlier period".10Nowhere in our statute Section 18, Corporation Law,
as amended by Republic Act 3531 do we find the word "renew" in reference to the authority given to
corporations to protract their lives. Our law limits itself to extensionof corporate existence. And, as so
understood, extension may be made only before the term provided in the corporate charter expires.
Alhambra draws attention to another case11 which declares that until the end of the extended period for
liquidation, a dissolved corporation "does not become an extinguished entity". But this statement was
obviously lifted out of context. That case dissected the question whether or not suits can be
commenced by or against a corporation within its liquidation period. Which was answered in the
affirmative. For, the corporation still exists for the settlement of its affairs.
People, ex rel. vs. Green,12 also invoked by Alhambra, is as unavailing. There, although the corporation
amended its articles to extend its existence at a time when it had no legal authority yet, it adopted the
amended articles later on when it had the power to extend its life and during its original term when it

could amend its articles.


The foregoing notwithstanding, Alhambra falls back on the contention that its case is arguably within
the purview of the law. It says that before cessation of its corporate life, it could not have extended the
same, for the simple reason that Republic Act 3531 had not then become law. It must be remembered
that Republic Act 3531 took effect on June 20, 1963, while the original term of Alhambra's existence
expired before that date on January 15, 1962. The mischief that flows from this theory is at once
apparent. It would certainly open the gates for all defunct corporations whose charters have expired
even long before Republic Act 3531 came into being to resuscitate their corporate existence.
4. Alhambra brings into argument Republic Act 1932, which amends Section 196 of the Insurance Act,
now reading as follows: 1wph1.t
SEC. 196. Any provision of law to the contrary notwithstanding, every domestic life insurance
corporation, formed for a limited period under the provisions of its articles of incorporation, may
extend its corporate existence for a period not exceeding fifty years in any one instance by
amendment to its articles of incorporation on or before the expiration of the term so fixed in said
articles ...
To be observed is that the foregoing statute unlike Republic Act 3531 expressly authorizes
domestic insurance corporations to extend their corporate existence "on or before the expiration of the
term" fixed in their articles of incorporation. Republic Act 1932 was approved on June 22, 1957, long
before the passage of Republic Act 3531 in 1963. Congress, Alhambra points out, must have been aware
of Republic Act 1932 when it passed Republic Act 3531. Since the phrase "on or before", etc., was
omitted in Republic Act 3531, which contains no similar limitation, it follows, according to Alhambra,
that it is not necessary to extend corporate existence on or before the expiration of its original term.
That Republic Act 3531 stands mute as to when extention of corporate existence may be made,
assumes no relevance. We have already said, in the face of a familiar precept, that a defunct corporation

is bereft of any legal faculty not otherwise expressly sanctioned by law.


Illuminating here is the explanatory note of H.B. 1774, later Republic Act 3531 now in dispute. Its first
paragraph states that "Republic Act No. 1932 allows the automatic extension of the corporate existence
of domestic life insurance corporations upon amendment of their articles of incorporation on or before
the expiration of the terms fixed by said articles". The succeeding lines are decisive: "This is a good law,
a sane and sound one.There appears to be no valid reason why it should not be made to apply to other
private corporations.13
The situation here presented is not one where the law under consideration is ambiguous, where courts
have to put in harness extrinsic aids such as a look at another statute to disentangle doubts. It is an
elementary rule in legal hermeneutics that where the terms of the law are clear, no statutory
construction may be permitted. Upon the basic conceptual scheme under which corporations operate,
and with Section 77 of the Corporation Law particularly in mind, we find no vagueness in Section 18, as
amended by Republic Act 3531. As we view it, by directing attention to Republic Act 1932, Alhambra
would seek to create obscurity in the law; and, with that, ask of us a ruling that such obscurity be
explained. This, we dare say, cannot be done.
The pari materia rule of statutory construction, in fact, commands that statutes must be harmonized
with each other.14 So harmonizing, the conclusion is clear that Section 18 of the Corporation Law, as
amended by Republic Act 3531 in reference to extensions of corporate existence, is to be read in the
same light as Republic Act 1932. Which means that domestic corporations in general, as with domestic
insurance companies, can extend corporate existence only on or before the expiration of the term fixed
in their charters.
5. Alhambra pleads for munificence in interpretation, one which brushes technicalities aside. Bases for
this posture are that Republic Act 3531 is a remedial statute, and that extension of corporate life is
beneficial to the economy.
Alhambra's stance does not induce assent. Expansive construction is possible only when there is
something to expand. At the time of the passage of Republic Act 3531, Alhambra's corporate life had
already expired. It had overstepped the limits of its limited existence. No life there is to prolong.
Besides, a new corporation Alhambra Industries, Inc., with but slight change in stockholdings15 has
already been established. Its purpose is to carry on, and it actually does carry on,16 the business of the
dissolved entity. The beneficial-effects argument is off the mark.
The way the whole case shapes up then, the only possible drawbacks of Alhambra might be that,
instead of the new corporation (Alhambra Industries, Inc.) being written off, the old one (Alhambra
Cigar & Cigarette Manufacturing Company, Inc.) has to be wound up; and that the old corporate name
cannot be retained fully in its exact form.17 What is important though is that the word Alhambra, the
name that counts [it has goodwill], remains.
FOR THE REASONS GIVEN, the ruling of the Securities and Exchange Commission of November 18, 1963,
and its order of September 8, 1964, both here under review, are hereby affirmed.
Costs against petitioner Alhambra Cigar & Cigarette Manufacturing Company, Inc. So ordered.
G.R. No. 63201 May 27, 1992
PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF FIRST INSTANCE OF RIZAL, PASIG
BRANCH XXI, PRESIDED BY JUDGE GREGORIO G. PINEDA respondents.
This is a petition for certiorari under Rule 65 of the Rules of Court seeking to annul and set aside the
orders of respondent Court of First Instance of Rizal, Pasig, Branch 21 (now Regional Trial Court) dated
April 22, 1982, September 14, 1982 and January 12, 1983 in LRC Case No. R-2744 on the ground that
they had been issued without or in excess of jurisdiction and with grave abuse of discretion.
The antecedent facts of this case are as follows:
Private respondents are the registered owners of three parcels of land in Pasig, Metro Manila covered
by OCT No. 853, TCT Nos. 32843 and 32897 of the Registry of Deeds of Rizal. On March 1, 1954, private
respondents entered into a contract of lease with Philippine Blooming Mills, Co., Inc., (PBM for brevity)
whereby the letter shall lease the aforementioned parcels of land as factory site. PBM was duly
organized and incorporated on January 19, 1952 with a corporate term of twenty-five (25) years. This

leasehold right of PBM covering the parcels of land was duly annotated at the back of the above stated
certificates of title as Entry No. 9367/T-No. 32843.
The contract of lease provides that the term of the lease is for twenty years beginning from the date of
the contract and "is extendable for another term of twenty years at the option of the LESSEE should its
term of existence be extended in accordance with law." (p. 76, Rollo). The contract also states that the
lessee agrees to "use the property as factory site and for that purpose to construct whatever buildings
or improvements may be necessary or convenient and/or . . . for any purpose it may deem fit; and
before the termination of the lease to remove all such buildings and improvements" (pp. 76-77 Rollo).
In accordance with the contract, PBM introduced on the land, buildings, machineries and other useful
improvements. These constructions and improvements were registered with the Registry of Deeds of
Rizal and annotated at the back of the respondents' certificates of title as Entry No. 85213/T-No. 43338.
On October 11, 1963, PBM executed in favor of Philippine National Bank (PNB for brevity), petitioner
herein, a deed of assignment, conveying and transferring all its rights and interests under the contract
of lease which it executed with private respondents. The assignment was for and in consideration of the
loans granted by PNB to PBM. The deed of assignment was registered and annotated at the back of the
private respondents' certificates of title as Entry No. 85215/T-No. 32843.
On November 6, 1963 and December 23, 1963 respectively, PBM executed in favor of PNB a real estate
mortgage for a loan of P100,000.00 and an addendum to real estate mortgage for another loan of
P1,590,000.00, covering all the improvements constructed by PBM on the leased premises. These
mortgages were registered and annotated at the back of respondents' certificates as Entry No.
85214/T-No. 43338 and Entry No. 870971/T-No. 32843, respectively.
PBM filed a petition for registration of improvements in the titles of real property owned by private
respondents docketed as Case No. 6530.
On October 7, 1981, private respondents filed a motion in the same proceedings which was given a
different case number to wit, LRC Case No.
R-2744, because of the payment of filing fees for the motion. The motion sought to cancel the
annotations on respondents' certificates of title pertaining to the assignment by PBM to PNB of the
former's leasehold rights, inclusion of improvements and the real estate mortgages made by PBM in
favor of PNB, on the ground that the contract of lease entered into between PBM and
respondents-movants had already expired by the failure of PBM and/or its assignee to exercise the
option to renew the second 20-year lease commencing on March 1, 1974 and also by the failure of PBM
to extend its corporate existence in accordance with law. The motion also states that since PBM failed to
remove its improvements on the leased premises before the expiration of the contract of lease, such
improvements shall accrue to respondents as owners of the land.
On April 22, 1982, respondent court issued an order directing the cancellation of the inscriptions on
respondents' certificates of title. The dispositive portion of the order provides: WHEREFORE, the
Register of Deeds having jurisdiction over the movant's land Certificates of Title Nos. 853, 32843 and
32897 is hereby ordered, upon the payment of the corresponding fees, to cancel therein
memoranda/inscriptions/entries Nos. 85213/T-No. 43338, 85215/T-No. 32843, 85214/T-No. 43338 and
87097/T-No. 32843.
Petitioner PNB filed a motion for reconsideration of the above order of the respondent court but the
latter denied it on June 28, 1982.
On August 25, 1982, private respondents filed a motion for entry of final judgment and issuance of a
writ of execution of the order of April 22, 1982.
On September 14, 1982, respondent court granted the aforesaid motion for entry of final judgment and
ordered the Register of Deeds of Pasig, Rizal to cancel the entries on respondents' certificates of title
stated in the order of April 22, 1982.
Petitioner PNB filed an omnibus motion to set aside the entry of judgment as ordered by the
respondent court on the ground that it has no prior notice or knowledge of the order of respondent
court dated June 28, 1982 which denied its motion for reconsideration of the order of April 22, 1982
and that while there was a certification from the Bureau of Posts that three registry notices were sent to
petitioner's counsel, there was no allegation or certification whatsoever that said notices were actually

received by the addressee.


On January 12, 1983, the respondent court denied the omnibus motion.
Hence, this petition.
Petitioner alleges that respondent court acted capriciously and arbitrarily in issuing the orders of
September 14, 1982 and January 12, 1983 which considered its previous order of April 22, 1982 as
having become final on the ground that it had no notice or knowledge that the order of June 28, 1982
denying its motion for reconsideration was issued; that the notices of registered mail allegedly
containing the order of June 28, 1982 were not received by petitioner's counsel of record, and that the
certification of the Bureau of Posts refers only to the fact that registry notices were sent, and not to the
fact that the notices were actually received by the addressee.
In resolving this matter, the respondent court stated in the questioned order of January 12, 1983 as
follows:
The respondent PNB filed a motion of May 20, 1982 to set aside the Order of April 22, 1982. This was
denied by the Order of June 28, 1982. Then the movants filed a motion of August 25, 1982 for entry of
judgment, based on the postmaster's certification that not only one but three notices of the registered
mail containing a copy of the order of June 28, 1982 was sent to respondent PNB's counsel at the PNB
Building at Escolta, Manila which is his address of record in this case. Consequently the entry of
judgment Order of September 14, 1982.
The respondent PNB's counsel at the hearing of said incidents on October 12, 1982 admitted that the
aforesaid registered notices could have been received by PNB's regular Receiving Section at the PNB
Building at the Escolta but could not have been forwarded by said Receiving Section to said counsel's
Litigation and Collection Division, Legal Department at an upper floor of the same building. Thus the
presumption that official duty was regularly performed by the postmaster was not overcome, as most
recently reiterated by the Supreme Court in Feraren vs. Santos promulgated on April 27, 1982, 113,
SCRA 707 . . . (p. 195, Rollo)
Section 8 of Rule 13 of the Rules of Court, as amended, provides that service by registered mail is
complete upon actual receipt by the addressee; but if he fails to claim his mail from the post office
within five (5) days from the date of first notice of the postmaster, service shall take effect at the
expiration of such time. The fair and just application of that exception depends upon the conclusive
proof that the first notice was sent by the postmaster to the addressee. The best evidence of that fact
would be the certification from the postmaster (Barrameda v. Castillo, L-27211, July 6, 1977, 78 SCRA 1).
In the instant case, the respondent court found that the postmaster's certification stated that three (3)
notices of the registered mail which contained the order of June 28, 1982 denying the motion for
reconsideration of the order of April 22, 1982, were sent to petitioner PNB's counsel at Escolta, Manila
which is the address stated in the record of the case. The factual findings of the trial court bear great
weight and is binding upon this Court. Hence, as between the denial of the petitioners' counsel that he
received the notice of the registered mail and the postmaster's certification that said notices were sent
to him, the postmaster's claim should prevail. The postmaster has the official duty to send notices of
registered mail and the presumption is that official duty was regularly performed (Aportadera, Sr. v.
Court of Appeals, G.R. No. 41358, March 16, 1988, 158 SCRA 695).
Petitioner alleges that it is not the respondent court but the Securities and Exchange Commission which
has jurisdiction over the private respondents' motions, which raised as issue the corporate existence of
PBM. Petitioner further submits that the respondent court committed grave abuse of discretion in
ordering the cancellation of entries in the certificates of title of respondents on the following grounds: 1)
the motion for cancellation would amount to a collateral attack upon the due incorporation of PBM
which cannot be done legally, 2) the contract of lease between PBM as petitioner's assignor and private
respondents did not expire since PBM exercised its option to renew the lease with the acquiescence of
private respondents, and 3) respondent court's ruling that ownership over the improvements passed
from PBM to private respondents upon the expiration of lease violates the law and the contract
between the parties.
Even if We were to set aside the questioned orders directing the entry of finality of the order cancelling
entries in the titles, petitioner's case must still fail on the merits.

Private respondent's motion with the respondent court was for the cancellation of the entries on their
titles on the ground that the contract of lease executed between them and PBM had expired. This action
is civil in nature and is within the jurisdiction of the respondent court. The circumstance that PBM as one
of the contracting parties is a corporation whose corporate term had expired and which fact was made
the basis for the termination of the lease is not sufficient to confer jurisdiction on the Securities and
Exchange Commission over the case. Presidential Decree No. 902-A, as amended, enumerates the cases
over which the SEC has exclusive jurisdiction and authority to resolve. The case at bar is not covered by
the enumeration. Anent the issue of whether the cancellation of the entries on respondent's certificates
of title is valid and proper, We find that the respondent court did not act in excess of its jurisdiction, in
ordering the same. The contract of lease expressly provides that the term of the lease shall be twenty
years from the execution of the contract but can be extended for another period of twenty years at the
option of the lessee should the corporate term be extended in accordance with law. Clearly, the option
of the lessee to extend the lease for another period of twenty years can be exercised only if the lessee as
corporation renews or extends its corporate term of existence in accordance with the Corporation Code
which is the applicable law. Contracts are to be interpreted according to their literal meaning and
should not be interpreted beyond their obvious intendment. Thus, in the instant case, the initial term of
the contract of lease which commenced on March 1, 1954 ended on March 1, 1974. PBM as lessee
continued to occupy the leased premises beyond that date with the acquiescence and consent of the
respondents as lessor. Records show however, that PBM as a corporation had a corporate life of only
twenty-five (25) years which ended an January 19, 1977. It should be noted however that PBM allowed
its corporate term to expire without complying with the requirements provided by law for the extension
of its corporate term of existence.
Section 11 of Corporation Code provides that a corporation shall exist for a period not exceeding fifty
(50) years from the date of incorporation unless sooner dissolved or unless said period is extended.
Upon the expiration of the period fixed in the articles of incorporation in the absence of compliance
with the legal requisites for the extension of the period, the corporation ceases to exist and is dissolved
ipso facto (16 Fletcher 671 cited by Aguedo F. Agbayani, Commercial Laws of the Philippines, Vol. 3,
1988 Edition p. 617). When the period of corporate life expires, the corporation ceases to be a body
corporate for the purpose of continuing the business for which it was organized. But it shall
nevertheless be continued as a body corporate for three years after the time when it would have been
so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it
gradually to settle and close its affairs, to dispose of and convey its property and to divide its assets (Sec.
122, Corporation Code). There is no need for the institution of a proceeding for quo warranto to
determine the time or date of the dissolution of a corporation because the period of corporate
existence is provided in the articles of incorporation. When such period expires and without any
extension having been made pursuant to law, the corporation is dissolved automatically insofar as the
continuation of its business is concerned. The quo warranto proceeding under Rule 66 of the Rules of
Court, as amended, may be instituted by the Solicitor General only for the involuntary dissolution of a
corporation on the following grounds: a) when the corporation has offended against a provision of an
Act for its creation or renewal; b) when it has forfeited its privileges and franchises by non-user; c) when
it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or
franchises; d) when it has mis-used a right, privilege or franchise conferred upon it by law, or when it
has exercised a right, privilege or franchise in contravention of law. Hence, there is no need for the SEC
to make an involuntary dissolution of a corporation whose corporate term had ended because its
articles of incorporation had in effect expired by its own limitation.
Considering the foregoing in relation to the contract of lease between the parties herein, when PBM's
corporate life ended on January 19, 1977 and its 3-year period for winding up and liquidation expired
on January 19, 1980, the option of extending the lease was likewise terminated on January 19, 1977
because PBM failed to renew or extend its corporate life in accordance with law. From then on, the
respondents can exercise their right to terminate the lease pursuant to the stipulations in the contract.
We now come to the question of the ownership over the improvements constructed by PBM over the
leased premises, which improvements were mortgaged in favor of PNB, petitioner herein. The rights of

the lessor and the lessee over the improvements which the latter constructed on the leased premises is
governed by Article 1678 of the Civil Code which provides: Art. 1678. If the lessee makes, in good faith,
useful improvements which are suitable to the use for which the lease is intended, without altering the
form or substance of the property leased, the lessor upon the termination of the lease shall pay the
lessee one-half of the value of the improvements at that time. Should the lessor refuse to reimburse
said amount, the lessee may remove the improvements, even though the principal thing may suffer
damage thereby. He shall not however, cause any more impairment upon the property leased than is
necessary. . . .
The aforequoted provision gives the lessee the right to remove the improvements if the lessor chooses
not to pay one-half of the value thereof. However, in the case at bar, the law will not apply because the
parties herein have stipulated in the contract their own terms and conditions concerning the
improvements, to wit, that the lessee, namely PBM, bound itself to remove the improvements before
the termination of the lease. Petitioner PNB, as assignee of PBM succeeded to the obligation of the
latter under the contract of lease. It could not possess rights more than what PBM had as lessee under
the contract. Hence, petitioner was duty bound to remove the improvements before the expiration of
the period of lease as what we have already discussed in the preceding paragraphs. Its failure to do so
when the lease was terminated was tantamount to a waiver of its rights and interests over the
improvements on the leased premises.
In view of the foregoing, this Court finds that respondent court did not act with grave abuse of
discretion in directing the cancellation of entries on private respondents' certificates of title as set forth
in the questioned order.
ACCORDINGLY, the petition is DISMISSED and the assailed orders of respondent court dated April 22,
1982, September 14, 1982 and January 12, 1983 are AFFIRMED. SO ORDERED.
G.R. No. 150416
July 21, 2006
SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN PHILIPPINES, INC., petitioners,
vs. NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY ADVENTIST, INC., Respondents.
This petition for review on certiorari assails the Court of Appeals (CA) decision1 and resolution2 in
CA-G.R. CV No. 41966 affirming, with modification, the decision of the Regional Trial Court (RTC) of
Bayugan, Agusan del Sur, Branch 7 in Civil Case No. 63.
This case involves a 1,069 sq. m. lot covered by Transfer Certificate of Title (TCT) No. 4468 in Bayugan,
Agusan del Sur originally owned by Felix Cosio and his wife, Felisa Cuysona.
On April 21, 1959, the spouses Cosio donated the land to the South Philippine Union Mission of
Seventh Day Adventist Church of Bayugan Esperanza, Agusan (SPUM-SDA Bayugan).3 Part of the deed
of donation read:
KNOW ALL MEN BY THESE PRESENTS:
That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40 years of age, [h]usband and wife, both
are citizen[s] of the Philippines, and resident[s] with post office address in the Barrio of Bayugan,
Municipality of Esperanza, Province of Agusan, Philippines, do hereby grant, convey and forever quit
claim by way of Donation or gift unto the South Philippine [Union] Mission of Seventh Day Adventist
Church of Bayugan, Esperanza, Agusan, all the rights, title, interest, claim and demand both at law and
as well in possession as in expectancy of in and to all the place of land and portion situated in the Barrio
of Bayugan, Municipality of Esperanza, Province of Agusan, Philippines, more particularly and bounded
as follows, to wit:
1. a parcel of land for Church Site purposes only.
2. situated [in Barrio Bayugan, Esperanza].
3. Area: 30 meters wide and 30 meters length or 900 square meters.
4. Lot No. 822-Pls-225. Homestead Application No. V-36704, Title No. P-285.
5. Bounded Areas
North by National High Way; East by Bricio Gerona; South by Serapio Abijaron and West by Feliz Cosio
xxx. 4
The donation was allegedly accepted by one Liberato Rayos, an elder of the Seventh Day Adventist

Church, on behalf of the donee.


Twenty-one years later, however, on February 28, 1980, the same parcel of land was sold by the spouses
Cosio to the Seventh Day Adventist Church of Northeastern Mindanao Mission (SDA-NEMM).5 TCT No.
4468 was thereafter issued in the name of SDA-NEMM.6
Claiming to be the alleged donees successors-in-interest, petitioners asserted ownership over the
property. This was opposed by respondents who argued that at the time of the donation, SPUM-SDA
Bayugan could not legally be a donee
because, not having been incorporated yet, it had no juridical personality. Neither were petitioners
members of the local church then, hence, the donation could not have been made particularly to them.
On September 28, 1987, petitioners filed a case, docketed as Civil Case No. 63 (a suit for cancellation of
title, quieting of ownership and possession, declaratory relief and reconveyance with prayer for
preliminary injunction and damages), in the RTC of Bayugan, Agusan del Sur. After trial, the trial court
rendered a decision7 on November 20, 1992 upholding the sale in favor of respondents.
On appeal, the CA affirmed the RTC decision but deleted the award of moral damages and attorneys
fees.8Petitioners motion for reconsideration was likewise denied. Thus, this petition.
The issue in this petition is simple: should SDA-NEMMs ownership of the lot covered by TCT No. 4468
be upheld?9 We answer in the affirmative.
The controversy between petitioners and respondents involves two supposed transfers of the lot
previously owned by the spouses Cosio: (1) a donation to petitioners alleged predecessors-in-interest
in 1959 and (2) a sale to respondents in 1980.
Donation is undeniably one of the modes of acquiring ownership of real property. Likewise, ownership
of a property may be transferred by tradition as a consequence of a sale.
Petitioners contend that the appellate court should not have ruled on the validity of the donation since
it was not among the issues raised on appeal. This is not correct because an appeal generally opens the
entire case for review.
We agree with the appellate court that the alleged donation to petitioners was void.
Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of
another person who accepts it. The donation could not have been made in favor of an entity yet
inexistent at the time it was made. Nor could it have been accepted as there was yet no one to accept it.
The deed of donation was not in favor of any informal group of SDA members but a supposed
SPUM-SDA Bayugan (the local church) which, at the time, had neither juridical personality nor capacity
to accept such gift.
Declaring themselves a de facto corporation, petitioners allege that they should benefit from the
donation.
But there are stringent requirements before one can qualify as a de facto corporation:
(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.10
While there existed the old Corporation Law (Act 1459),11 a law under which SPUM-SDA Bayugan could
have been organized, there is no proof that there was an attempt to incorporate at that time.
The filing of articles of incorporation and the issuance of the certificate of incorporation are essential for
the existence of a de facto corporation.12 We have held that an organization not registered with the
Securities and Exchange Commission (SEC) cannot be considered a corporation in any concept, not
even as a corporation de facto.13 Petitioners themselves admitted that at the time of the donation, they
were not registered with the SEC, nor did they even attempt to organize14 to comply with legal
requirements.
Corporate existence begins only from the moment a certificate of incorporation is issued. No such
certificate was ever issued to petitioners or their supposed predecessor-in-interest at the time of the
donation. Petitioners obviously could not have claimed succession to an entity that never came to exist.
Neither could the principle of separate juridical personality apply since there was never any
corporation15 to speak of. And, as already stated, some of the representatives of petitioner Seventh Day
Adventist Conference Church of Southern Philippines, Inc. were not even members of the local church

then, thus, they could not even claim that the donation was particularly for them.16
"The de facto doctrine thus effects a compromise between two conflicting public interest[s]the one
opposed to an unauthorized assumption of corporate privileges; the other in favor of doing justice to
the parties and of establishing a general assurance of security in business dealing with corporations."17
Generally, the doctrine exists to protect the public dealing with supposed corporate entities, not to
favor the defective or non-existent corporation.18
In view of the foregoing, petitioners arguments anchored on their supposed de facto status hold no
water. We are convinced that there was no donation to petitioners or their supposed
predecessor-in-interest.
On the other hand, there is sufficient basis to affirm the title of SDA-NEMM. The factual findings of the
trial court in this regard were not convincingly disputed. This Court is not a trier of facts. Only questions
of law are the proper subject of a petition for review on certiorari.19
Sustaining the validity of respondents title as well as their right of ownership over the property, the trial
court stated:
[W]hen Felix Cosio was shown the Absolute Deed of Sale during the hearing xxx he acknowledged that
the same was his xxx but that it was not his intention to sell the controverted property because he had
previously donated the same lot to the South Philippine Union Mission of SDA Church of
Bayugan-Esperanza. Cosio avouched that had it been his intendment to sell, he would not have
disposed of it for a mere P2,000.00 in two installments but for P50,000.00 or P60,000.00. According to
him, the P2,000.00 was not a consideration of the sale but only a form of help extended.
A thorough analysis and perusal, nonetheless, of the Deed of Absolute Sale disclosed that it has
the essential requisites of contracts pursuant to xxx Article 1318 of the Civil Code, except that the
consideration of P2,000.00 is somewhat insufficient for a [1,069-square meter] land. Would then this
inadequacy of the consideration render the contract invalid?
Article 1355 of the Civil Code provides:
Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influence.
No evidence [of fraud, mistake or undue influence] was adduced by [petitioners].
xxx
Well-entrenched is the rule that a Certificate of Title is generally a conclusive evidence of
[ownership] of the land. There is that strong and solid presumption that titles were legally issued and
that they are valid. It is irrevocable and indefeasible and the duty of the Court is to see to it that the title
is maintained and respected unless challenged in a direct proceeding. xxx The title shall be received as
evidence in all the Courts and shall be conclusive as to all matters contained therein.
[This action was instituted almost seven years after the certificate of title in respondents name was
issued in 1980.]20
According to Art. 1477 of the Civil Code, the ownership of the thing sold shall be transferred to the
vendee upon the actual or constructive delivery thereof. On this, the noted author Arturo Tolentino had
this to say:
The execution of [a] public instrument xxx transfers the ownership from the vendor to the vendee who
may thereafter exercise the rights of an owner over the same21
Here, transfer of ownership from the spouses Cosio to SDA-NEMM was made upon constructive
delivery of the property on February 28, 1980 when the sale was made through a public instrument.22
TCT No. 4468 was thereafter issued and it remains in the name of SDA-NEMM.
WHEREFORE, the petition is hereby DENIED.
Costs against petitioners.
SO ORDERED.