Freight Services, Co. (2002) by the sale made by Cruz.
Facts: Held:
Dieselman is a domestic corp. No. Section 23 of the Corporation
owning a parcel of commercial lot. In 1988, Code expressly provides that the corporate Manuel Cruz, a member of Diesels BOD, powers of all corporations shall be issued a letter dominated as Authority to exercised by the board of directors. Thus, Sell Real Estate. He authorized Polintan, a contracts or acts of a corporation must be real estate broker, to sell the same. made either by the board of directors or by Polintan, on the other hand, authorized a corporate agent duly authorized by the Felicima Noble to sell the same. The lot was board. Absent such valid sold to Zenaida Ranullo, VP of AF Realty, delegation/authorization, the rule is that the who issued a 300,000 check to Dieselman. declarations of an individual director relating Polintan received the same and signed an to the affairs of the corporation, but not in acknowledgement receipt. When AF Realty the course of, or connected with, the confirmed the same, Ranullo asked for a performance of authorized duties of such board resolution authorizing the sale but the director, are held not binding on the same was not given. Thereafter, Cruz, as corporation. In the case at bar, Cruz had no president of Dieselman, acknowledged the written authority from the BOD to sell the receipt of partial payment but required AF same. There being no authority, it could not Realty to finalize the sale at 4000/sq.m. transfer any authority as well to Polintan nor When the same was not complied, Cruz to Noble (Nemo dat quod non habet). terminated the offer and demanded the Moreover, Art. 1874, NCC provides that return of the TCT. Aggrieved, AF Realty filed when a sale of piece of land or interest is a complaint for specific performance to through an agent, the authority of the latter deliver the TCT against Dieselman and shall be in writing otherwise, the sale is Cruz. It was Dieselmans contention void. Having had no written authority, the however, that there was no perfected sale to AF Realty is considered void thus, contract of sale and that it did not authorize incapable of ratification contrary to AF any person to enter into such transaction. Realtys contention that ratification took Meanwhile, Dieselman sold said lot to place when Cruz and Dieselman accepted Midas Corp. which compelled the latter to the partial payment for the same. On the file a Motion for Intervention. The lower other hand, the sale to Midas Co. is valid for court ruled in favor of AF Realty. On appeal, having been authorized by Dieselmans the CA reversed and ruled that since there Board Resolution. was no authorization by Dieselman, the sale to AF Realty is void and the sale to Midas is valid. Nectarina Raniel v. Paul Jochico (2007) Issue: Facts: Petitioner Raniel was the Corporate its duly authorized officers and agents, Secretary and Administrator of Nephro except in instances where the Corporation Dialysis Center while Pag-ong was a Code requires stockholders approval for Director. Respondent Jochico on the other certain specific acts. (Sec. 23) hand, is the president of Nephro. A conflict corporations board of directors is the body stemmed when respondent planned to enter which (1) exercises all powers provided for into a joint venture with Butuan Doctors under the Corporation Code; (2) conducts Hospital which was opposed by petitioner. all business of the corporation; and (3) On account of this, petitioner claims that controls and holds all property of respondent compelled then to waive and the corporation. Its members have been assign their shares in Nephro. Thereafter, characterized as trustees or directors petitioners took an indefinite leave of clothed with a fiduciary absence due to stress. In 1998, Jochico character. Moreover, the directors may issued a Notice of Special Board Meeting appoint officers and agents and as incident and duly notified petitioners of the same. to this power of appointment, they may However, despite said notice, petitioners still discharge those appointed. The Board of failed to attend the same. In said meeting, Directors had sufficient ground to remove the Board ratified the disapproval of Raniel as the Corporate Secretary due to petitioners request for leave and dismissed loss of trust and confidence, as her abrupt her as the Corporate Secretary. The and unauthorized leave of absence position was subsequently took over by exhibited her disregard of her OtelioJochico. Thereafter, another Notice for responsibilities as an officer and disrupted Special Stockholders Meeting was issued the operations of Nephro. Thus, she is with petitioners duly informed of the same, considered to have abandoned her who still, refused to attend. In said meeting, positions. Petitioners were also validly petitioners were removed from the BOD dismissed from the BOD. SEC. 28. Removal thus, petitioners filed a complaint with SEC of directors or trustees. -- Any director or for the Annulment of respondents illegal trustee of a corporation may be removed acts. The SEC however, ruled in favor of from office by a vote of the stockholders respondents stating that the corporation, holding or representing at least two- acting through its BOD, may validly remove thirds (2/3) of the outstanding capital petitioners from their positions. On appeal, stock. Nephro has five directors two were the CA affirmed SECs decision. occupied by complainants and the remaining three, by respondents. Thus, Issue: presence of all three respondents in the Whether or not petitioners were Special Meeting of the Board established a validly removed from their respective quorum. The unanimous resolutions by the positions. Board during such meeting are therefore valid and binding against complainants. Held: Nephro had a total of 500 shares. 2/3 vote of the same is 333.33 shares thus, the votes Yes. A corporation exercises its casted in the Special Meeting (400) shares powers through its board of directors and/or was more than enough to oust petitioners as members of the Board with or without Directors, no person, not even the officers cause. of the corporation, can validly bind the corporation.) relied upon by CTA was not on Cagayan Valley Drug, Co. v. CIR (2008) all fours with the case at bar. With respect to Facts: a juridical person, Rule 7 on verification and certification for non-forum shopping are Petitioner is a duly licensed retailer silent as to who the authorized signatory of medicine and pharmaceutical products. In should be. Sec. 23, in relation to Sec. 25 of 1995, it granted 20% sales discounts to the Corporation Code, clearly enunciates senior citizens on purchase of medicines that all corporate powers are exercised, all pursuant to RA 7432. The petitioner treated business conducted, and all properties the discount as deductions from gross sales controlled by the BOD. Thus, it is clear that instead as tax credits. On Dec. 1996 an individual corporate officer cannot solely however, petitioner filed with the BIR a claim exercise any corporate power pertaining to for tax credit/refund for the full amount of the corporation without authority from the 20% discount which was 123,083.00. On BOD. The Court has consistently held that appeal to the CTA due to BIRs inaction, the following officials or employees of the CTA ruled that petitioner is not entitled to tax company can sign the verification and credit because 1st: RA 7432 only grants the certification without need of a board 20% sales discounts extended to qualified resolution: (1) the Chairperson of the BOD, senior citizens as tax credit and not as tax (2) the President, (3) the General Manager refund and 2nd: in rejecting the tax credit, the or Acting General Manager, (4) Personnel CTA reasoned that while petitioner may be Officer, and (5) an Employment Specialist in qualified for a tax credit, it cannot be so a labor case. The rationale is to justify the extended to petitioner on account of its net authority of corporate officers or loss in 1995. Said decision was appealed by representatives of the corporation to sign the petitioner through its President, Jacinto the verification or certificate against forum Concepcion to the CA. The CA, on the other shopping, being in a position to verify the hand, dismissed the petition on procedural truthfulness and correctness of the ground that the person who signed the allegations in the petition. The required verification and certification for non-forum submission of the board resolution is shopping failed to prove that he was duly grounded on the precept that corporate authorized by the Board to do so. powers are exercised by the BOD, and not solely by an officer of the Issue: corporation. Hence, the power to sue and WON petitioners president can sign be sued in any court or quasi-judicial the subject verification and certification tribunal is necessarily lodged with the said sans the approval of its Board of Directors. board. In the case at bar however, there was substantial compliance with Rule 7, Held: ROC since: First, the requisite board resolution has been submitted albeit The Premium case (ruling: in the belatedly by petitioner. Second, we apply absence of an authority from the Board of our ruling in Lepanto with the rationale that the President of petitioner is in a position to Issue: verify the truthfulness and correctness of the allegations in the petition; and third, the WON RCPI is liable to the petitioner President of petitioner has signed the on the promissory note executed by its complaint before the CTA at the inception of President and Accounting Officer. this judicial claim for refund or tax credit. Held: As to the issue on entitlement of tax Hornbook is the rule that a credit, the Court held that Sec. 4 of RA 7432 corporation, may act only through its BOD provides that private establishments may or, when authorized either by its by-laws or claim the cost as tax credit thus; the net loss by board resolution, through its officers or suffered by petitioner in 1995 does not agents in the normal course of business. preclude the grant of tax credit. The respondent denies that it ever authorized David Halican, to contract a loan with the petitioner and execute a promissory Natividad Reyes v. RCPI Employees note in connection therewith. With that Credit Union, Inc. (2006) denial, it behooves upon the petitioner to establish that Halican was in fact authorized Facts: by the respondent to represent and bind it in In 1986, David Halican and the questioned transaction. Unfortunately Estremera, President and Accounting for the petitioner, she failed to discharge her Officers, respectively of respondent Credit burden. Thus, Halican's act of executing Union, executed a promissory note in favor and signing the subject promissory note of petitioner, another member of cannot bind the respondent credit union. respondents BOD. When the respondent Petitioner was also a member of the BOD defaulted in payment, Halican issued 4 which allegedly resolved to allow the postdated checks which all bounced due to corporation to borrow money from outside insufficiency of funds. Thus, petitioner filed sources and such being the case, she could a complaint for sum of money against RCPI have just presented said board resolution to and Halican. It was RCPIs defense that it prove that Halican was authorized to borrow did not authorize the signatories of the money as it can be fairly presumed that she promissory note to act for and in behalf of had access to copies of the defendant the corporation hence, plaintiff has no cause corporation's board resolution. Failing in this of action against it. It also alleged in its respect, petitioners action was left without counterclaim, the amount allegedly any leg to stand on. As to the contention misappropriated by petitioner while serving that RCPI is in Estoppel when it failed to as RCPIs treasurer. The trial court ruled in state by way of defense, the lack of favor of petitioner while the CA reversed the authority of Halican to sign the checks in its same on appeal contending that petitioner criminal complaint for BP 22, considering failed to prove that Halican was indeed, that it merely alleged that she could not sue authorized by the BOD to borrow money, as she was also a signatory to those checks much less execute the subject promissory is also ruled in negative. As a general rule, note. the acts of corporate officers within the scope of their authority are binding on the court dismissed the complaint thus, the corporation, but when these officers instant petition. exceeded their authority, their actions cannot bind the corporation, unless it has Issue: ratified such acts or is estopped from disclaiming them. In the case at bar, WON petitioner is bound by the petitioner has not shown that the Resolution alleged to be Ultra Vires. respondent credit union ratified, expressly or impliedly, the act of Halican in executing Held: and signing in its behalf the promissory note in dispute. While it is true that under its By- Laws, it is not empowered to mortgage its properties as a security for the payment of the obligations of third parties, this is on the Zomer Development Company, Inc. v. general premise that the properties of a International Exchange Bank (2009) corporation are regarded as held in trust for the payment of corporate creditors and not Facts: for the creditors of third parties. However, the Petitioner is not proscribed from In 1997, The BOD of Zomer Dvt. mortgaging its properties as security for the Approved a resolution authorizing the payment of obligations of third parties. The Treasurer and General Manager to apply SEC ruled that a private corp., may give a and obtain a credit line with respondent, third party mortgage: when it will be done IEB. The Board also authorized the for the interest of the corp. AND to secure mortgage of its properties to secure the loan the debt of a subsidiary. In the case at bar, obtained by its sister/subsidiary corp., Prime Prime Aggregates was held to be the sister Aggregates. Prime Aggregates obtained a company of petitioner, which was a family loan iao 90,267,000.00 (obtained through corp., and that the two (2) corporations are several loans) thus, Amparo (Treasurer) and enhancing, boosting and promoting a Zosa (General Mgr.) executed a real estate common interest, the interest of family mortgage for 3 parcels of land. The having ownership of both corporations. mortgaged properties were foreclosed and Furthermore, said Third-party mortgage sold on a public auction when Prime were duly authorized by the BOD in its defaulted in its payment. This prompted Resolution. Pet.s act of assailing the Zomer Dvt. To file a complaint for Injunction authority of its BOD to approve the and for the nullification of the real estate said Resolution and of its Treasurer and mortageg on the grounds that Amparo and General Manager to execute the deed and Zosa were only authorized to execute it to brand the Resolution as ultra vires and not secure only one obligation of Prime and that binding on the Petitioner, is of no the real estate mortgage were null and void moment. Before then, the Petitioner for being Ultra Vires as it was not maintained a stoic silence and adopted a empowered to mortgage its properties as hands off stance. He who remains silent security for third-party obligations. The trial when he ought to speak cannot be heard to speak when he ought to be silent. More, the secured by the mortgage. When BEC transactions between the Petitioner and the defaulted in payment, the property was Private Respondent over its properties are disclosed and was sold at a public auction neither malum in se or malum to one, Trinidad. Thus, the Sps. Filed before prohibitum. Hence, the Petitioner cannot the RTC a complaint for the Annulment of hide behind the cloak of ultra vires for a the Real Estate Mortgage, the extrajudicial defense. foreclosure and the auction sale on the ground that the promissory notes, trust The plea of ultra vires will not be receipts, export bills were all ultra vires acts allowed to prevail, whether interposed for or as Teresita was not authorized by a against a corporation, when it will not requisite board resolution of BEC to execute advance justice but, on the contrary, will the same. Petitioners likewise invoked the accomplish a legal wrong to the prejudice of Doctrine of Corporate Entity. The court another who acted in good faith. applied the Alter-Ego Doctrine in piercing the veil of corporate fiction and dismissed the complaint. The CA affirmed.
Estelita Lipat v. Pacific Banking Corp. Issue:
(2003) WON said acts of Teresita are Ultra Vires. Facts: Held: Sps. Lipat owned Belas Export Trading (BET), engaged in the manufacture The Doctrine of Piercing the of garments to be exported to Mystical Corporate Fiction is properly applied in this Fashions in the US, its other corporation. In case. The Court relied on the alter 1978, Estelita Lipat executed a Special ego doctrine or instrumentality rule, rather Power of Attorney authorizing her daughter, than fraud in piercing the veil of corporate Teresita, to manage BET in the Ph; to obtain fiction. When the corporation is the loans from the Pacific Bank on her behalf mere alter ego or business conduit of a and to execute mortgage contracts on person, the separate personality of the properties owned by her to secure said corporation may be disregarded. Where one loans. In 1979, Teresita obtained a loan corporation is so organized and controlled from Pacific Bank and mortgaged the and its affairs are conducted so that it is, in building owned by the Sps. To secure the fact, a mere instrumentality or adjunct of the same. The mortgage was said to secure all other, the fiction of the corporate entity of other subsequent loans obtained by BET as the instrumentality may be disregarded. well. Thereafter, BET was incorporated into Petitioners attempt to isolate themselves a family corporation named Belas Export from and hide behind the corporate Corp. (BEC). Subsequent loans were personality of BEC so as to evade their obtained in the name of BEC thru Teresita, liabilities to Pacific Bank is precisely what as well as trust receipts, promissory notes, the doctrine of piercing the veil of corporate export bills and several other finances, all entity seeks to prevent and remedy. In our view, BEC is a mere continuation and successor of BET, and petitioners cannot evade their obligations in the mortgage Donald Kwok v. Philippine Carpet contract secured under the name of BEC on Manufacturing Corp. (2005) the pretext that it was signed for the benefit Facts: and under the name of BET. Thus, the application of the doctrine in piercing the Petitioner Kwok was the then corporate veil of BEC is proper. Genaral Manager and Executive VP of PCMC, the President and BOD Chairman of As to the second issue that the the same being his father-in-law, Patricio subsequent loans and credit lines were Lim. When Kwok retired in 1996, he Ultra Vires for having been secured by demanded the cash equivalent of his Teresita w/o a board resolution, the Court unused vacation and sick leaves amounting ruled that firstly, it could not have been to more than 7M. He claims that Lim has possible for BEC to release a board granted him unlimited sick and vacation resolution since per admissions by both leaves as well as the cash conversion of the petitioner Estelita Lipat and Alice Burgos, same upon its retirement, as one of his petitioners rebuttal witness, no business or many privileges. When PCMC refused to stockholders meetings were conducted nor pay the same, petitioner filed a complaint were there election of officers held since its against the respondent corporation before incorporation. In fact, not a single board the NLRC for its recovery, on the basis of resolution was passed by the corporate Lims verbal promise on the same. The board. Secondly, the principle of estoppel corporation, on the other hand claimed that precludes petitioners from denying the although Lim has made said verbal promise, validity of the transactions entered into by the same is considered unenforceable since Teresita Lipat with Pacific Bank, who in it was not confirmed or approved via good faith, relied on the authority of the resolution by the BOD. Furthermore, former as manager to act on behalf of respondent contends that pet. Could not be petitioner Estelita Lipat and both BET and considered entitled to the cash conversion BEC. In this case, Teresita Lipat had dealt since he was granted unlimited with Pacific Bank on the mortgage contract vacation/sick leaves thus, there could be no by virtue of a special power of attorney unused leaves to speak of. On his counter- executed by Estelita Lipat. It is a familiar argument, petitioner also claims that the doctrine that if a corporation knowingly Corporation, having already represented permits one of its officers or any other agent that Lim has the power to grant said to act within the scope of an apparent privileges. The LA ruled in favor of petitioner authority, it holds him out to the public as which was reversed by the NLRC. possessing the power to do those acts; thus, the corporation will, as against anyone Issue: who has in good faith dealt with it through such agent, be estopped from denying the WON the verbal promise made by a agents authority. corporate officer as to the conversion of vacation/sick leave credits after retirement the court ruled that the same must be is entitled to weight. accompanied by an authorization, approval or ratification in order to bind the Held: corporation. Since there was none in the Petitioner has the burden to prove case at bar, the alleged verbal promise is his claim. In the case at bar, he failed to not binding on the part of the corporation. discharge said burden. In the absence of express provision, a contract need not be in writing in order to be valid and binding. Trinidad Francisco v. GSIS (1963) Thus, corporate policies need not be in writing and contracts entered into by a Facts: corporate officer or obligations or In 1956, Trinidad Francisco obtained prestations assumed by such officer for and a loan iao 400,000 from GSIS and to secure in behalf of such corporation are binding on the same, she executed a real estate the said corporation only if such officer mortgage on the Vic-Mari Compound. Said acted within the scope of his authority or if compound was foreclosed when petitioner such officer exceeded the limits of his defaulted in her payments. Thereafter, authority, the corporation has ratified such petitioners father, Atty. Francisco, wrote a contracts or obligations. In the case at bar, letter of offer to Mr. Andal, the general petitioner failed to provide evidence of the manager of GSIS for the setting aside of the Board Resolution thus, the verbal promise foreclosure in consideration of an initial of Lim could not be held binding to the payment of 30,000 plus the payment of the corporation. Furthermore, as per the balance and the right to take over the Boards memorandum, only regular administration of the mortgaged property. employees are entitled to the conversion of This offer was approved by GSIS when Atty. unused leave credits hence petitioner, not Francisco received a letter from Mr. Andal being a regular employee, is not entitled to on the approval of the same. When the same mainly because he was already petitioner made the initial payment and the granted unlimited leave credits. The general subsequent ones (duly accompanied by rule is that, in the absence of authority from receipts) however, GSIS sent a letter for the the board of directors, no person, not even payment of her full indebtedness on the its officers, can validly bind a ground that the 30k amount that she corporation. Even assuming that Lim did remitted failed to settle her outstanding promise petitioner the cash conversion of obligations plus attorneys fees and other his leaves, we agree with respondent that expenses incident to the foreclosure. It was this cannot bind the company in the GSIS contention that the letter sent by absence of any Board resolution to that Andal is erroneous as it failed to express effect. There is a need to stress that the the true board resolution which provides a personal act of the company president counter-offer that it shall be subject to the cannot bind the corporation. As to condition that petitioner should pay all the petitioners contention that Lim was granted expenses accompanying the foreclosure. power by the corporation to grant benefits, The title was consolidated to GSIS thus, petitioner instituted a complaint for specific signed by Andal, as the general manager performance alleging that the contract was and included the phrases, sent by this concluded when the GSIS had accepted the office. The telegram was likewise quoted benefits paid by the petitioner. The trial verbatim in the remittance by petitioner of court ruled in favor of petitioner stating that the 30,000 initial payment thus, the officer the binding acceptance of the offer was the was presumed to have been already Board Resolution and that GSIS had informed of the alleged unauthorized already unqualifiedly accepted the benefits. telegram, which is binding to the corp. won It was Andals defense that the telegram he communicates said knowledge to the was not signed by him but was only sent by latter. Notwithstanding the same, GSIS still the Board Secretary. kept its silence about it and it was only in 1960, when it informed the petitioner of the Issue: alleged mistakes on the same after reaping WON petitioners reliance on Andals the benefits derived from the compromise letter which failed to express the true intent agreement. This silence, taken together with of the Board Resolution is proper. the unconditional acceptance of three other subsequent remittances from plaintiff, Held: constitutes in itself a binding ratification of the original agreement since between two The offer of compromise made by innocent parties, the one who made it plaintiff in the letter had been validly possible for the wrong to be done should be accepted, and was binding on the the one to bear the resulting loss. defendant. There was nothing in the telegram that hinted at any anomaly, or ground to suspect its veracity, and the plaintiff, therefore, could not be blamed for Peoples Aircargo and Warehousing Co. relying upon it. it is familiar doctrine that if a v. CA (1998) corporation knowingly permits one of its Facts: officers, or any other agent, to do acts within the scope of an apparent authority, and thus Petitioner Corporations President, holds him out to the public as possessing Antonio Punsalan solicited a proposal from power to do those acts, the corporation will, respondent Stefani Sao of PairCargo for a as against anyone who has in good faith feasibility study necessary for it to obtain a dealt with the corporation through such license to operate as a customs bonded agent, be estopped from denying his warehouse from the Bureau of Customs. authority. Therefore, if a private corporation The first contract was executed between intentionally or negligently clothes its them iao 350,000 despite the objection of officers or agents with apparent power to the majority stockholder of petitioner perform acts for it, the corporation will be corporation. Punsalan preferred respondent estopped to deny that such apparent due to its connections with the Bureau of authority is real, as to innocent third persons Customs. Accordingly, a second contract dealing in good faith with such officers or was executed between them for the agents. In the case at bar, the telegram was feasibility study as well as the seminar/workshop of petitioners employees a corporation. In the case at bar, petitioner iao 400,000. Petitioner was duly issued a had previously allowed its president to enter license by the BOC and its employees were into the First Contract with private likewise subjected to a three-day training respondent without a board resolution seminar by the respondent. Thereafter, expressly authorizing him; thus, it had respondent joined the BOC and became the clothed its president with apparent authority technical assistant of the Commissioner. to execute the subject contract. The Meanwhile, Punsalan resigned as the argument that it was merely an isolated President of petitioner corp. In 1988, transaction and not a customary one is of respondent filed a collection suit against no moment since Apparent authority is petitioner for its non-payment of the second derived not merely from practice. Its contract. It was petitioners defense existence may be ascertained through (1) however, that the contract was fictitious and the general manner in which the corporation was made by Punsalan without the Board holds out an officer or agent as having the Resolution/authority. The trial court ruled power to act or, in other words, the apparent that the second contract was simulated and authority to act in general, with which it unenforceable but on appeal, the CA ruled clothes him; or (2) the acquiescence in his that the contract was binding declaring that acts of a particular nature, with actual or the corporation had entered into the First constructive knowledge thereof, whether Contract, which was similar to the Second within or beyond the scope of his ordinary Contract thus, petitioner had clothed its powers. It is not the quantity of similar acts president with apparent authority to enter which establishes apparent authority, but into the disputed agreement. As it had also the vesting of a corporate officer with the become the practice of the petitioner- power to bind the corporation. Furthermore, corporation to allow its president to the petitioner, through its president Antonio negotiate and execute contracts necessary Punsalan Jr., entered into the First Contract to secure its license as a customs bonded without first securing warehouse without prior board approval, the board approval. Despite such lack of board board itself, by its acts and through approval, petitioner did not object to or acquiescence, practically laid aside the repudiate said contract, thus clothing its normal requirement of prior express president with the power to bind the approval. corporation; also, assuming arguendo that the contract is unenforceable, petitioners Issue: ratification of said contract and acceptance WON the President had the of benefits have made it binding, apparent authority to bind petitioner on the nonetheless. second contract. The president of a corporation Held: possesses the power to enter into a contract for the corporation, when the The general rule is that, in the conduct on the part of both the president absence of authority from the BOD, no and the corporation [shows] that he had person, not even its officers, can validly bind been in the habit of acting in similar matters on behalf of the company and that the the TCTs could not be issued in favor of the company had authorized him so to act and Corporation and the shares would not be had recognized, approved and ratified his credited to them. The Tius commenced a former and similar actions. case with the SEC which confimed the rescission. On appeal, the SEC En Banc A party dealing with the president of affirmed the same. The CA, on the other a corporation is entitled to assume that he hand, concluded that both the Ongs and the has the authority to enter, on behalf of the Tius were in pari delicto (which would not corporation, into contracts that are within have legally entitled them to rescission) but, the scope of the powers of said corporation for practical considerations, that is, their and that do not violate any statute or rule on inability to work together, it was best to public policy. separate the two groups by rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs and Ong Yong v. David Tiu (2003) awarding practically everything else to the Tius. It was Ongs contention that rescission Facts: could not be availed of and that the In 1994, the construction of liquidation of FLADC may not legally be Masagana Citimall was hampered on ordered by the appellate court even for so account of financial difficulties of its owner, called practical considerations or even to First Landlink Asia (owned by Tius), due to prevent further squabbles and numerous its indebtedness iao 190M to PNB. litigations, since the same are not valid Subsequently, it entered into a Pre- grounds under the Corporation Code. Subscription Agreement with the Ongs with Issue: 50-50 shareholdings. The Ongs subscribed to 1M shares at 100 par value and paid WON the Tius could legally rescind 100M in cash for the same. The Tius on the the Pre-Subscription Agreement. other hand, agreed to contribute several properties, including a four-storey building, Held: to cover their additional stock subscription. FLADC was originally incorporated In 1996, the Tius rescinded the Pre- with an authorized capital stock of 500,000. Subscription Agreement alleging that the In order to attain the 50-50 shareholdings, Ongs refused to credit to them the shares there was a need to increase the ACP thus, covering the real property contributions and the same was increased to 2,000,000 that they were prevented to assume their shares with the Ongs having 1,000,000 of positions as VP and Treasurer of the the same and Tius, the other 500k. Corporation. In their defense, the Ongs Therefore, the subject matter of the contract contended however, that their failure to was the 1M unissued shares of FLADC credit the shares on account of the real stock allocated to the Ongs. Since these property contributions was by reason of were unissued shares, the parties Pre- Tius failure to pay the capital gains and Subscription Agreement was in fact a documentary stamp taxes, without which, subscription contract. A subscription contract necessarily involves the capital stock, (2) purchase of redeemable corporation as one of the contracting parties shares by the corporation, regardless of the since the subject matter of the transaction is existence of unrestricted retained earnings, property owned by the corporation its and (3) dissolution and eventual liquidation shares of stock. Thus, the subscription of the corporation. In the instant case, the contract (Pre-Subscription Agreement) rescission of the Pre-Subscription whereby the Ongs invested P100 million for Agreement will effectively result in the 1,000,000 shares of stock was, from the unauthorized distribution of the capital viewpoint of the law, was one between the assets and property of the corporation, Ongs and FLADC, not between the Ongs thereby violating the Trust Fund Doctrine and the Tius. Otherwise stated, the Tius did and the Corporation Code, since rescission not contract in their personal capacities with of a subscription agreement is not one of the Ongs since they were not selling any of the instances when distribution of capital their own shares to them. It was FLADC that assets and property of the corporation is did. Considering that the real contracting allowed. Tius claim that the complaint parties to the subscription agreement were would not result to an unauthorized FLADC and the Ongs alone, a civil case for liquidation but only to the decrease in the rescission on the ground of breach of capital stock is of no moment since the contract filed by the Tius in their personal procedures for the same were not complied capacities will not prosper. Assuming it had with. Furthermore, it is an improper judicial valid reasons to do so, only FLADC the intrusion into the internal affairs of the legal personality to file suit rescinding the corporation to compel FLADC to file at the subscription agreement with the Ongs SEC a petition for the issuance of a inasmuch as it was the real party in interest certificate of decrease of stock. Decreasing therein. Also, rescission could not be had in a corporations authorized capital stock is this case since there are other remedies an amendment of the Articles of available under this code. Incorporation. It is a decision that only the stockholders and the directors can make, Furthermore, said rescission could not considering that they are the contracting be permitted as it will violate the Trust Fund parties thereto otherwise, it would result to Doctrine. The Trust Fund Doctrine, first the violation of the business judgment rule. enunciated by this Court in the 1923 case Moreover, grave injustice would be caused of Philippine Trust Co. vs. Rivera, provides to the Ongs when said rescission is decreed that subscriptions to the capital stock of a since they will receive nothing but the corporation constitute a fund to which the money they had in 1994 while the Tius will creditors have a right to look for the not only enjoy a windfall estimated to be satisfaction of their claims. This doctrine is anywhere from P450 million to P900 million, the underlying principle in the procedure for but will also take over an extremely the distribution of capital assets, embodied profitable business without much effort at in the Corporation Code, which allows the all. Without the Ongs, the Tius would have distribution of corporate capital only in three lost everything they originally invested in instances: (1) amendment of the Articles of said mall. If only for this and the fact that Incorporation to reduce the authorized 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.