SECOND DIVISION

VALLE VERDE COUNTRY CLUB, INC., G.R. No. 151969 DECISION

ERNESTO VILLALUNA, RAY GAMBOA,
AMADO M. SANTIAGO, JR., FORTUNATO DEE,
AUGUSTO SUNICO, VICTOR SALTA,
FRANCISCO ORTIGAS III, ERIC ROXAS, in Present:
their capacities as members of the Board of
Directors of Valle Verde Country Club, Inc., and BRION, J.:
JOSE RAMIREZ,
QUISUMBING, J., Chairperson,
CARPIO-MORALES,
Petitioners, BRION,
DEL CASTILLO, and In this petition for review on certiorari,1[1] the parties raise a legal question
ABAD, JJ.
on corporate governance: Can the members of a corporations board of directors elect
another director to fill in a vacancy caused by the resignation of a hold-over director?

- versus -
THE FACTUAL ANTECEDENTS

VICTOR AFRICA,
On February 27, 1996, during the Annual Stockholders Meeting of petitioner
Respondent. Valle Verde Country Club, Inc. (VVCC), the following were elected as members of the
VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan),
Promulgated:
Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M.
Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa. 2[2] In the years 1997,
1998, 1999, 2000, and 2001, however, the requisite quorum for the holding of the
stockholders meeting could not be obtained. Consequently, the above-named directors
September 4, 2009 continued to serve in the VVCC Board in a hold-over capacity.

x ---------------------------------------------------------------------------------------------- x 1
2
1

On September 1, 1998, Dinglasan resigned from his position as member of
the VVCC Board. In a meeting held on October 6, 1998, the remaining directors, still
constituting a quorum of VVCCs nine-member board, elected Eric Roxas (Roxas) to
fill in the vacancy created by the resignation of Dinglasan.
A year later, or on November 10, 1998, Makalintal also resigned as member
of the VVCC Board. He was replaced by Jose Ramirez (Ramirez), who was elected by
the remaining members of the VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the election of
Roxas and Ramirez as members of the VVCC Board with the Securities and Exchange
Commission (SEC) and the Regional Trial Court (RTC), respectively. The SEC case
questioning the validity of Roxas appointment was docketed as SEC Case No. 01-99-
6177. The RTC case questioning the validity of Ramirez appointment was docketed as
Civil Case No. 68726.
In his nullification complaint3[3] before the RTC, Africa alleged that the
election of Roxas was contrary to Section 29, in relation to Section 23, of the
Corporation Code of the Philippines (Corporation Code). These provisions read:
Sec. 23. The board of directors or trustees. - Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
3
2
and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of
the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
xxxx
Sec. 29. Vacancies in the office of director or trustee. - Any
vacancy occurring in the board of directors or trustees other
than by removal by the stockholders or members or by expiration
of term, may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the stockholders in a
regular or special meeting called for that purpose. A director or
trustee so elected to fill a vacancy shall be elected only for the
unexpired term of his predecessor in office. xxx. [Emphasis
supplied.]
Africa claimed that a year after Makalintals election as member of the VVCC Board in
1996, his [Makalintals] term as well as those of the other members of the VVCC
Board should be considered to have already expired. Thus, according to Africa, the
resulting vacancy should have been filled by the stockholders in a regular or special
meeting called for that purpose, and not by the remaining members of the VVCC
Board, as was done in this case.
Africa additionally contends that for the members to exercise the authority to
fill in vacancies in the board of directors, Section 29 requires, among others, that there
should be an unexpired term during which the successor-member shall serve. Since
Makalintals term had already expired with the lapse of the one-year term provided in
Section 23, there is no more unexpired term during which Ramirez could serve.
 Through a partial decision4[4] promulgated on January 23, 2002, the RTC ruled
in favor of Africa and declared the election of Ramirez, as Makalintals replacement, to
the VVCC Board as null and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the
election of Roxas as member of the VVCC Board, vice hold-over director Dinglasan.
While VVCC manifested its intent to appeal from the SECs ruling, no petition was
actually filed with the Court of Appeals; thus, the appellate court considered the case
5
closed and terminated and the SECs ruling final and executory. [5]
THE PETITION
VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial
decision for being contrary to law and jurisprudence. VVCC made a direct resort to the
Court via a petition for review on certiorari, claiming that the sole issue in the present
case involves a purely legal question.
As framed by VVCC, the issue for resolution is whether the remaining
directors of the corporations Board, still constituting a quorum, can elect another
director to fill in a vacancy caused by the resignation of a hold-over director.
4
5 6
3
Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy
created by the resignation of a hold-over director is expressly granted to the remaining
members of the corporations board of directors.
Under the above-quoted Section 29 of the Corporation Code, a vacancy
occurring in the board of directors caused by the expiration of a members term shall be
filled by the corporations stockholders. Correlating Section 29 with Section 23 of the
same law, VVCC alleges that a members term shall be for one year and until his
successor is elected and qualified; otherwise stated, a members term expires only
when his successor to the Board is elected and qualified. Thus, until such time as [a
successor is] elected or qualified in an annual election where a quorum is present,
VVCC contends that the term of [a member] of the board of directors has yet not
expired.
As the vacancy in this case was caused by Makalintals resignation, not by the
expiration of his term, VVCC insists that the board rightfully appointed Ramirez to fill
in the vacancy.
In support of its arguments, VVCC cites the Courts ruling in the 1927 El
Hogar6[6] case which states:
Owing to the failure of a quorum at most of the general meetings
since the respondent has been in existence, it has been the
practice of the directors to fill in vacancies in the directorate by
choosing suitable persons from among the stockholders. This
 custom finds its sanction in Article 71 of the By-Laws, which reads
as follows:
We are not persuaded by VVCCs arguments and, thus, find its petition
Art. 71. The directors shall elect from among
the shareholders members to fill the vacancies unmeritorious.
that may occur in the board of directors until the
election at the general meeting.

xxxx
Upon failure of a quorum at any annual meeting the directorate
naturally holds over and continues to function until another
directorate is chosen and qualified. Unless the law or the charter of a
corporation expressly provides that an office shall become vacant at
the expiration of the term of office for which the officer was elected,
the general rule is to allow the officer to hold over until his successor
is duly qualified. Mere failure of a corporation to elect officers does
not terminate the terms of existing officers nor dissolve the
corporation. The doctrine above stated finds expression in article 66
of the by-laws of the respondent which declares in so many words
that directors shall hold office "for the term of one year or until their
successors shall have been elected and taken possession of their
offices." xxx.
To repeat, the issue for the Court to resolve is whether the remaining
directors of a corporations Board, still constituting a quorum, can elect another
director to fill in a vacancy caused by the resignation of a hold-over director. The
resolution of this legal issue is significantly hinged on the determination of what
constitutes a directors term of office.
The holdover period is not part
of the term of office of a
member of the board of
directors

It results that the practice of the directorate of filling vacancies by

the action of the directors themselves is valid. Nor can any
exception be taken to the personality of the individuals chosen by
the directors to fill vacancies in the body. [Emphasis supplied.]
Africa, in opposing VVCCs contentions, raises the same arguments that he did
before the trial court.
The word term has acquired a definite meaning in jurisprudence. In several
cases, we have defined term as the time during which the officer may claim to hold
the office as of right, and fixes the interval after which the several incumbents shall
succeed one another.7[7] The term of office is not affected by the holdover. 8[8] The
term is fixed by statute and it does not change simply because the office may have
become vacant, nor because the incumbent holds over in office beyond the end of the
term due to the fact that a successor has not been elected and has failed to qualify.

Term is distinguished from tenure in that an officers tenure represents the

term during which the incumbent actually holds office. The tenure may be shorter

THE COURTS RULING

7
8
4
(or, in case of holdover, longer) than the term for reasons within or beyond the power
of the incumbent.
Based on the above discussion, when Section 239[9] of the Corporation Code
declares that the board of directorsshall hold office for one (1) year until their
successors are elected and qualified, we construe the provision to mean that the term
of the members of the board of directors shall be only for one year; their term
expires one year after election to the office. The holdover period that time from the
lapse of one year from a members election to the Board and until his successors
election and qualification is not part of the directors original term of office, nor is it a
new term; the holdover period, however, constitutes part of his tenure. Corollary, when
an incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, and the
10
incumbent is holding the succeeding term. [10]
After the lapse of one year from his election as member of the VVCC Board in
1996, Makalintals term of office is deemed to have already expired. That he continued
to serve in the VVCC Board in a holdover capacity cannot be considered as extending
his term. To be precise, Makalintals term of office began in 1996 and expired in 1997,
but, by virtue of the holdover doctrine in Section 23 of the Corporation Code, he
continued to hold office until his resignation on November 10, 1998. This holdover
period, however, is not to be considered as part of his term, which, as declared, had
already expired.
With the expiration of Makalintals term of office, a vacancy resulted which,
by the terms of Section 2911[11] of the Corporation Code, must be filled by the
stockholders of VVCC in a regular or special meeting called for the purpose. To
9
10
11
5
assume as VVCC does that the vacancy is caused by Makalintals resignation in 1998,
not by the expiration of his term in 1997, is both illogical and unreasonable. His
resignation as a holdover director did not change the nature of the vacancy; the
vacancy due to the expiration of Makalintals term had been created long before his
resignation.
The powers of the corporations
board of directors emanate
from its stockholders
VVCCs construction of Section 29 of the Corporation Code on the authority to
fill up vacancies in the board of directors, in relation to Section 23 thereof, effectively
weakens the stockholders power to participate in the corporate governance by electing
their representatives to the board of directors. The board of directors is the directing
and controlling body of the corporation. It is a creation of the stockholders and derives
its power to control and direct the affairs of the corporation from them. The board of
directors, in drawing to themselves the powers of the corporation, occupies a position
of trusteeship in relation to the stockholders, in the sense that the board should
exercise not only care and diligence, but utmost good faith in the management of
corporate affairs.12[12]
The underlying policy of the Corporation Code is that the business and affairs of
a corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the directors' continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own.13[13]
12
13
 This theory of delegated power of the board of directors similarly explains why,
under Section 29 of the Corporation Code, in cases where the vacancy in the
corporations board of directors is caused not by the expiration of a members term, the WHEREFORE, we DENY the petitioners petition for review on certiorari,

successor so elected to fill in a vacancy shall be elected only for the unexpired term of and AFFIRM the partial decision of the Regional Trial Court, Branch 152, Manila,

the his predecessor in office. The law has authorized the remaining members of the promulgated on January 23, 2002, in Civil Case No. 68726. Costs against the

board to fill in a vacancy only in specified instances, so as not to retard or impair the petitioners.

corporations operations; yet, in recognition of the stockholders right to elect the

members of the board, it limited the period during which the successor shall serve only
to the unexpired term of his predecessor in office. SO ORDERED.

While the Court in El Hogar approved of the practice of the directors to fill THIRD DIVISION

vacancies in the directorate, we point out that this ruling was made before the present
Corporation Code was enacted14[14] and before its Section 29 limited the instances
when the remaining directors can fill in vacancies in the board, i.e., when the
remaining directors still constitute a quorum and when the vacancy is caused for UNITED COCONUT G.R. No. 179015
reasons other than by removal by the stockholders or by expiration of the term.
PLANTERS BANK,

It also bears noting that the vacancy referred to in Section 29 contemplates a Petitioner, Present:
vacancy occurring within the directors term of office. When a vacancy is created by
the expiration of a term, logically, there is no more unexpired term to speak of. Hence,
Section 29 declares that it shall be the corporations stockholders who shall possess the PERALTA, J.,
authority to fill in a vacancy caused by the expiration of a members term.
Acting Chairperson,15*

As correctly pointed out by the RTC, when remaining members of the VVCC - versus - ABAD,
Board elected Ramirez to replace Makalintal, there was no more unexpired term to
VILLARAMA, JR.,16**
speak of, as Makalintals one-year term had already expired. Pursuant to law, the
authority to fill in the vacancy caused by Makalintals leaving lies with the VVCCs MENDOZA, and
stockholders, not the remaining members of its board of directors.

15
14 16
6
 PERLAS-BERNABE, fertilizers to her, payable from the proceeds of the loan that petitioner United Coconut
JJ.
Planters Bank (UCPB) extended to her. On February 11, 1980 Layson executed a
PLANTERS PRODUCTS, INC., document called pagares, written on the dorsal side of a UCPB promissory note. 17[1]
The pagares stated that Layson had an approved loan with UCPB-Iloilo Branch for
JANET LAYSON and Promulgated:
P200,000.00. The second portion of the pagares, signed by that branchs manager
GREGORY GREY, respondent Gregory Grey, stated that the assignment has been duly accepted and
payment duly guaranteed within 60 days from PPIs Invoice. Specifically, the pagares
Respondents. June 13, 2012
said:

x --------------------------------------------------------------------------------------- x
I/We irrevocably assign the proceeds of this Promissory Note to
Planters Products, Inc., for the account of Janet Layson as payment
for my fertilizer/agchemicals withdrawals covered by Invoice Nos.
DECISION _______ for application to my fertilizer line.

I/We hereby attest and affirm that I/We have an approved loan with
United Coconut Planters Bank, Iloilo Branch, in the amount of Pesos
ABAD, J.: TWO HUNDRED THOUSAND (P200,000.00) which is allotted for
fertilizer.

Sgd.
JANET LAYSON
Feb. 11, 1980

This case is about the liability of the bank for a transaction entered into by its Assignment accepted and payment unconditionally guaranteed
branch manager in connivance with a client. within sixty (60) days from Planters Products, Inc. Invoice date up to
Pesos: Two Hundred Thousand (P200,000.00) only.

Sgd.
GREGORY GREY
Manager
The Facts and the Case

Subsequently, Layson executed a third document Letter Guarantee by the Dealer,

stating that she binds herself to pay PPI the face value of the pagares in case UCPB
Respondent Planters Products, Incorporated (PPI), a fertilizer manufacturer,
entered into an arrangement with respondent Janet Layson for the delivery of 17
7
did not pay the same at maturity. But contrary to her undertakings, on the following
day, February 12, 1980, Layson withdrew with branch manager Greys connivance the
P200,000.00 loan that UCPB granted her.
On the strength of the three documents, PPI delivered quantities of fertilizers to
Layson. Layson and Grey duplicated their transactions with PPI on February 18 and
27, 1980 covering two loans of P100,000.00 each.
On April 28, 1980 PPI presented the documents of the financed transactions to
UCPB for collection. But the bank denied the claim on the ground that it neither
authorized the transactions nor the execution of the documents which were not part of
its usual banking transactions. UCPB claimed that branch manager Grey exceeded his
authority in guaranteeing payment of Laysons purchases on credit. The pagares, said
UCPB, were illegal and void since banking laws prohibit bank officers from
guaranteeing loans of bank clients.
Consequently, in April 1980 PPI sued Layson, UCPB, and Grey for breach of
contract with damages before the Regional Trial Court (RTC) of Makati. 18[2] Grey
died while the case was on trial. Although the RTC ordered Greys substitution by any
of his heirs, no one came to substitute him. Trial proceeded without prejudice to the
claims against his estate.
18
8
On April 28, 1999 the RTC rendered a decision, absolving UCPB from liability
for the value of the fertilizer products that PPI sold to Layson on credit. Since Grey
acted in excess of his authority in guaranteeing the payment of the pagares and in
involving himself in the transaction, UCPB cannot be bound by the same. Further, the
promissory notes, on the dorsal side of which appeared the pagares, were not in
negotiable form. They had neither a fixed date of maturity nor a fixed amount of
obligation. The pagares is also void under the Civil Code because the prestation,
Greys act of guaranteeing the loan, is prohibited under Section 83 of the General
Banking Act.
The court held Layson liable to PPI a) for P399,966.25 with 6% interest from the
time it filed its complaint until fully paid and b) for attorneys fees of P30,000.00. Since
Grey impliedly admitted19[3] having no authority on his own to grant Layson the credit
accommodation and UCPBs guarantee to pay for the fertilizers she bought, the court
found him subsidiarily liable for the principal amount. PPI appealed the decision to the
Court of Appeals (CA).
On March 22, 2007 the CA rendered a decision, reversing that of the RTC and
declaring UCPB jointly and severally liable with Layson for the latters obligation to
PPI to the extent of P200,000.00 covering the February 11, 1980 credit
accommodation. The court deleted the award for attorneys fees. As regard to the
second and third pagares, the CA ruled that PPI failed to prove the subsequent
assignments. Essentially, the CA ruled
that Laysons pagares were in the nature of assignment of credit, consisting in the
proceeds of the loan that UCPB granted her. Since UCPB, acting through Grey,
19
undertook to deliver those proceeds to PPI in payment of the fertilizers she was going fertilizers that she wanted to buy from PPI. She wrote the pagares at the back of the
to buy, UCPB is bound by such undertaking. pro forma promissory note that she executed in UCPBs favor. The CA did not consider
the pagares as a guaranty, a contract, or a negotiable promissory note.

UCPB brings the present petition for review of the CA decision.

The CA also held that Laysons assignment to PPI of the P200,000.00 coming to
her from UCPB, with respect to which UCPB may be regarded as an obligor, is
binding on the bank.20[4] A formal notice is not required to bind the bank regarding its
Issues Presented
undertaking to make good the assignment. UCPB may be deemed to have acted in bad
faith when it delivered the proceeds of the loan to Layson, despite its undertaking to
turn them over to PPI.

The case presents the following issues:

True, a corporation like UCPB is liable to innocent third persons where it

1. Whether or not UCPB is bound by Greys undertaking on its behalf to knowingly permits its officer, or any other agent, to perform acts within the scope of
deliver to PPI the proceeds of the banks loan to Layson in payment of the fertilizers his general or apparent authority, holding him out to the public as possessing power to
she bought; and
do those acts.21[5]

2. In the negative, whether or not UCPB is entitled to an award of attorneys

fees.
But, here, it is plain from the guarantee Grey executed that he was acting for
himself, not in representation of UCPB. Grey wrote that undertaking at the bottom of
the pagares as follows:
The Ruling of the Court

One. The CA held that, in executing the pagares, Layson simply assigned to PPI
the P200,000.00 proceeds of her approved loan with UCPB in payment of the 20
21
9
 Assignment accepted and payment unconditionally guaranteed agreed to the assignment and, apparently without authority from the bank, undertook
within sixty (60) days from Planters Products, Inc. Invoice date up to
to guarantee the payment of the pagares. Notwithstanding this undertaking, however,
Pesos: Two Hundred Thousand (P200,000.00) only.
Grey released the P200,000.00 proceeds of the loan to Layson the next day, February
Sgd.
12, 1980. It is evident that Grey connived with Layson to lure PPI to deliver to her
GREGORY GREY
Manager fertilizers worth P200,000.00 on credit.

UCPB cannot be bound by Greys above undertaking since he appears to have

UCPB also adduced evidence that Grey lent Layson that P200,000.00 without
made it in his personal capacity. He signed it under his own name, not in UCPBs name
proper authorization from the bank. The authority the bank gave him for unilaterally
or as its branch manager. Indeed, the wordings of the undertaking do not at all make
extending unsecured loans has a ceiling of P10,000.00 only. Grey needed under
any allusion to UCPB.
UCPBs Revised Branch Lending Authority23[7] the unanimous approval24[8] of the
Branch Credit Committee,25[9] of which he was only a member, before he can grant a
higher loan of the kind.

Besides, by its tenor, Greys undertaking was a guarantee. It says, payment

unconditionally guaranteed within sixty (60) days from Planters Products, Inc.
Invoice date up to Pesos: Two Hundred Thousand (P200,000.00) only. As it happens,
With UCPB absolved of any liability, the Court affirms the ruling of the RTC
bank guarantees are highly regulated transactions under the law. 22[6] They are
of Makati that finds Layson primarily liable to PPI with the latter having the right of
undertakings that are not so casually issued by banks or by their branch managers at
recourse to Grey in the event that it could not recover from her. Importantly, Layson
the dorsal side of a clients promissory note as if an afterthought. A bank guarantee is a
never denied her business dealings with PPI and her receipt of PPIs fertilizer products.
contract that binds the bank and so may be entered into only under authority granted
This admission cements her liability for the fertilizers she got from it.
by its board of directors. Such authority does not appear on any document. Indeed, PPI
had no right to expect branch manager Grey to issue one without such authorization.

Two. The CA properly deleted the award of attorneys fees in favor of UCPB.
Such fees may be awarded when one was compelled to litigate and incurred expenses
Notably, the evidence shows that on February 11, 1980, claiming that UCPB
to protect his interests or when the suit filed was baseless or when the defendant acted
had already approved her loan of P200,000.00, Layson assigned all the proceeds of
such loan to PPI in payment of fertilizers she wanted to buy from it. For his part, Grey 23
24
22 25
10
in bad faith in filing or impleading the litigant. Here, however, PPI had good reason to BERSAMIN, JJ.
implead UCPB since, after all, its branch manager played a pivotal role in facilitating
the anomalous transaction. Thus, it cannot be said that PPI acted in bad faith in - versus -
impleading the bank.

WHEREFORE, the Court GRANTS the petition, REVERSES the decision

of the Court of Appeals in CA-G.R. CV 67364 dated March 22, 2007, and
REINSTATES in toto the decision of the Regional Trial Court of Makati.
MASAHIRO TSUKAHARA, Promulgated:

Respondent. July 17, 2009

SO ORDERED.
x-----------------------------------------------------------------------------------------x

FIRST DIVISION

DECISION

CEBU MACTAN MEMBERS G.R. No. 159624

CENTER, INC.,

CARPIO, J.:
Petitioner, Present:

PUNO, C.J., Chairperson, The Case

CARPIO,
CORONA,
LEONARDO-DE CASTRO, and
11
 Check No. Date Amount
This is a petition for review 26[1] of the Court of Appeals Decision 27[2] dated
29 July 2003 in CA-G.R. CV No. 68321. The Court of Appeals affirmed the
Decision28[3] dated 24 September 1999 of the Regional Trial Court of Cebu City, PNB Check No. 6 May 1994 P4,860,000
892657
Branch 58 (RTC).

PNB Check No. 6 September 1994 280,000

892683

PNB Check No. 25 December 1994 270,000

892684

The Antecedent Facts

PNB Check No. 31 March 1995 270,000

892685

In February 1994, petitioner Cebu Mactan Members Center, Inc. (CMMCI),

through Mitsumasa Sugimoto (Sugimoto), the President and Chairman of the Board of PNB Check No. 30 June 1995 280,000
892686
Directors of CMMCI, obtained a loan amounting to P6,500,000 from respondent
Masahiro Tsukahara. As payment for the loan, CMMCI issued seven postdated checks
of CMMCI payable to Tsukahara, with details as follows:29[4] PNB Check No. 30 September 1995 270,000
892687

PNB Check No. 25 December 1995 270,000

892688

------------------
26
27 Total P6,500,000
28
29
12
 On 13 April 1994, CMMCI, through Sugimoto, obtained another loan amounting xxx
to P10,000,000 from Tsukahara. Sugimoto executed and signed a promissory note in
his capacity as CMMCI President and Chairman, as well as in his personal capacity. 30
[5] The promissory note states: Upon maturity, the seven checks were presented for payment by Tsukahara, but
the same were dishonored by PNB, the drawee bank. After several failed attempts to
collect the loan amount totaling P16,500,000, Tsukahara filed the instant case for
collection of sum of money against CMMCI and Sugimoto.
FOR VALUE RECEIVED, the undersigned CEBU
MACTAN MEMBERS CENTER, INC., a corporation duly
organized and existing under and by virtue of the laws of the
Republic of the Philippines, through its undersigned chairman and
president, MITSUMASA SUGIMOTO, hereby promise to pay
MASAHIRO TSUKAHARA or order the sum of TEN MILLION Tsukahara alleged that the amount of P16,500,000 was used by CMMCI for the
PESOS (P10,000,000.00) on or before August 30, 1996, plus interest improvement of its beach resort, which included the construction of a wave fence, the
thereon at the rate of EIGHTEEN PERCENT (18%) per annum
computed from the date of this instrument until fully paid. purchase of airconditioners and curtains, and the provision of salaries of resort
employees. He also asserted that Sugimoto, as the President of CMMCI, has the power
xxx to borrow money for said corporation by any legal means whatsoever and to sign,
endorse and deliver all checks and promissory notes on behalf of the corporation.31[6]

CEBU MACTAN MEMBERS CENTER, INC.

CMMCI, on the other hand, denied borrowing the amount from Tsukahara, and
By:
claimed that both loans were personal loans of Sugimoto. The company also
contended that if the loans were those of CMMCI, the same should have been
(Signed)
supported by resolutions issued by CMMCIs Board of Directors.
MITSUMASA SUGIMOTO

In his capacity as Chairman and President

and in his personal capacity.

On 24 September 1999, the RTC rendered a Decision, the dispositive portion of

which reads:
30 31
13
 SO ORDERED.33[8]

WHEREFORE, premises considered, judgment is hereby rendered

in favor of the plaintiff and against the defendants by ordering the
defendants to pay jointly and severally to the plaintiff the sum of Six
Millions (sic) Five Hundred Thousand Pesos (P6,500,000.00),
Philippine Currency, with interest thereon at the legal rate from the
filing of the amended complaint on September 13, 1996 until fully Hence, this petition.
paid, the sum of Ten Million Pesos (P10,000,000.00), Philippine
Currency, with interest of eighteen percent (18%) per annum from
April 13, 1994 until fully paid, the sum of One Hundred Fifty
Thousand Pesos (P150,000.00), Philippine Currency, as and for
attorneys fees and costs of suit.

As the defendant Mitsumasa Sugimoto, who was served with

summons by publication, was declared in default, let this decision be
served upon him by publication once in a newspaper of general
circulation at the expense of the plaintiff, pursuant to Section 9, Rule
13 of the 1997 Revised Rules of Civil Procedure. The Issue

SO ORDERED.32[7]

The sole issue for resolution in this case is: Whether the Court of Appeals
The Court of Appeals Ruling erred in holding that CMMCI is liable for the loan contracted by its President without
a resolution issued by the CMMCI Board of Directors.

On appeal, the Court of Appeals rendered judgment, affirming the decision of the
RTC, thus: The Courts Ruling

WHEREFORE, the instant appeal is hereby We find the petition without merit.
DISMISSED and the Decision dated September 24, 1999
AFFIRMED.

32 33
14
 A corporation, being a juridical entity, may act through its board of directors,
which exercises almost all corporate powers, lays down all corporate business policies
and is responsible for the efficiency of management.34[9] The general rule is that, in
the absence of authority from the board of directors, no person, not even its officers,
can validly bind a corporation.35[10] Section 23 of the Corporation Code of the
Philippines provides:
have been intentionally conferred, and also such powers as, in the
usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by
custom and usage, as usually pertaining to the particular officer or
agent, and such apparent powers as the corporation has caused
persons dealing with the officer or agent to believe that it has
conferred.39[14]
In this case, the corporate by-laws of CMMCI provide:

SEC. 23. The Board of Directors or Trustees. Unless otherwise

provided in this Code, the corporate powers of all corporations ARTICLE III
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the
board of directors or trustees x x x. Officers

xxx
In Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals,36[11] we
held that under Section 23, the power and the responsibility to decide whether the
corporation should enter into a contract that will bind the corporation are lodged in the
2. President. The President shall be elected by the Board of
board of directors, subject to the articles of incorporation, by-laws, or relevant Directors from their own number. He shall have the following
powers and duties:
provisions of law. However, just as a natural person may authorize another to do
certain acts for and on his behalf, the board of directors may validly delegate some of
its functions and powers to officers, committees or agents.37[12] The authority of such
xxx
individuals to bind the corporation is generally derived from law, corporate by-laws
or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business.38[13] This Court has held, thus:
c. Borrow money for the company by any legal means
whatsoever, including the arrangement of letters of credit
A corporate officer or agent may represent and bind the corporation and overdrafts with any and all banking institutions;
in transactions with third persons to the extent that [the] authority to
do so has been conferred upon him, and this includes powers which d. Execute on behalf of the company all contracts and
agreements which the said company may enter into;
34
35
36
37
38 39
15
 e. Sign, indorse, and deliver all checks, drafts, bill of
exchange, promissory notes and orders of payment of sum of
money in the name and on behalf of the corporation;40[15]
Thus, given the presidents express powers under the CMMCIs by-laws,
It is clear from the foregoing that the president of CMMCI is given the power Sugimoto, as the president of CMMCI, was more than equipped to enter into loan
to borrow money, execute contracts, and sign and indorse checks and promissory transactions on CMMCIs behalf. Accordingly, the loans obtained by Sugimoto from
notes, in the name and on behalf of CMMCI. With such powers expressly conferred Tsukahara on behalf of CMMCI are valid and binding against the latter, and CMMCI
under the corporate by-laws, the CMMCI president, in exercising such powers, need may be held liable to pay such loans.
not secure a resolution from the companys board of directors. We quote with approval
the ruling of the appellate court, viz:

WHEREFORE, we DENY the petition. We AFFIRM the Court of Appeals

Decision dated 29 July 2003 in CA-G.R. CV No. 68321.
x x x The court a quo correctly ruled that a board resolution
in this case is a superfluity given the express provision of the
corporate by-laws.

SO ORDERED.

To insist that a board resolution is still required in order to G.R. No. 93695 February 4, 1992
bind the corporation with respect to the obligations contracted by its
president is to defeat the purpose of the by-laws. By-laws of a
corporation should be construed and given effect according to the RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
general rules governing the construction of contracts. They, as the vs.
self-imposed private laws of a corporation, have, when valid, THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
substantially the same force and effect as laws of the corporation, as PABLO GONZALES, JR. and THOMAS GONZALES, respondents.
have the provisions of its charter insofar as the corporation and the
persons within it are concerned. They are in effect written into the Cayanga, Zuniga & Angel Law Offices for petitioners.
charter and in this sense, they become part of the fundamental law of
the corporation. And the corporation and its directors (or trustees) Timbol & Associates for private respondents.
and officers are bound by and must comply with them.

GUTIERREZ, JR., J.:

The corporation is now estopped from denying the
authority of its president to bind the former into contractual What is the nature of the voting trust agreement executed between two parties in this
relations. x x x41[16] case? Who owns the stocks of the corporation under the terms of the voting trust
agreement? How long can a voting trust agreement remain valid and effective? Did a
40 director of the corporation cease to be such upon the creation of the voting trust
41 agreement? These are the questions the answers to which are necessary in resolving
16
the principal issue in this petition for certiorari whether or not there was proper
service of summons on Alfa Integrated Textile Mills (ALFA, for short) through the
petitioners as president and vice-president, allegedly, of the subject corporation after
the execution of a voting trust agreement between ALFA and the Development Bank
of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the International
Corporate Bank, Inc. against the private respondents who, in turn, filed a third party
complaint against ALFA and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party
complaint which the Regional Trial Court of Makati, Branch 58 denied in an Order
dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP as a consequence of the petitioner's
letter informing the court that the summons for ALFA was erroneously served upon
them considering that the management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to
receive summons on behalf of ALFA since the DBP had not taken over the company
which has a separate and distinct corporate personality and existence.
On August 4, 1988, the trial court issued an order advising the private respondents to
take the appropriate steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for the
Declaration of Proper Service of Summons which the trial court granted on August 17,
1988.
On September 12, 1988, the petitioners filed a motion for reconsideration submitting
that Rule 14, section 13 of the Revised Rules of Court is not applicable since they
were no longer officers of ALFA and that the private respondents should have availed
of another mode of service under Rule 14, Section 16 of the said Rules, i.e., through
publication to effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988, the
private respondents argued that the voting trust agreement dated March 11, 1981 did
17
not divest the petitioners of their positions as president and executive vice-president of
ALFA so that service of summons upon ALFA through the petitioners as corporate
officers was proper.
On January 2, 1989, the trial court upheld the validity of the service of summons on
ALFA through the petitioners, thus, denying the latter's motion for reconsideration and
requiring ALFA to filed its answer through the petitioners as its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the petitioners
reiterating their stand that by virtue of the voting trust agreement they ceased to be
officers and directors of ALFA, hence, they could no longer receive summons or any
court processes for or on behalf of ALFA. In support of their second motion for
reconsideration, the petitioners attached thereto a copy of the voting trust agreement
between all the stockholders of ALFA (the petitioners included), on the one hand, and
the DBP, on the other hand, whereby the management and control of ALFA became
vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous Order
dated January 2, 1989 and declared that service upon the petitioners who were no
longer corporate officers of ALFA cannot be considered as proper service of summons
on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the above
Order which was affirmed by the court in its Order dated August 14, 1989 denying the
private respondent's motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted by the
private respondent before the public respondent which, nonetheless, resolved to give
due course thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending petition
for certiorari with public respondent issued an Order declaring as final the Order dated
April 25, 1989. The private respondents in the said Order were required to take
positive steps in prosecuting the third party complaint in order that the court would not
be constrained to dismiss the same for failure to prosecute. Subsequently, on October
25, 1989 the private respondents filed a motion for reconsideration on which the trial
court took no further action.
On March 19, 1990, after the petitioners filed their answer to the private respondents'
petition for certiorari, the public respondent rendered its decision, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent judge dated April
25, 1989 and August 14, 1989 are hereby SET ASIDE and respondent corporation is
ordered to file its answer within the reglementary period. (CA Decision, p. 8; Rollo, p.
24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of the
public respondent which resolved to deny the same on May 10, 1990. Hence, the
petitioners filed this certiorari petition imputing grave abuse of discretion amounting
to lack of jurisdiction on the part of the public respondent in reversing the questioned
Orders dated April 25, 1989 and August 14, 1989 of the court a quo, thus, holding that
there was proper service of summons on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment on
July 16, 1990 erroneously applying the rule that the period during which a motion for
reconsideration has been pending must be deducted from the 15-day period to appeal.
However, in its Resolution dated January 3, 1991, the public respondent set aside the
aforestated entry of judgment after further considering that the rule it relied on applies
to appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to
appeals from its decision to us pursuant to our ruling in the case of Refractories
Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539
[1989]. (CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments, to wit:
(1) that the execution of the voting trust agreement by a stockholders whereby all his
shares to the corporation have been transferred to the trustee deprives the stockholders
of his position as director of the corporation; to rule otherwise, as the respondent Court
of Appeals did, would be violative of section 23 of the Corporation Code ( Rollo, pp.
270-3273); and
(2) that the petitioners were no longer acting or holding any of the positions provided
under Rule 14, Section 13 of the Rules of Court authorized to receive service of
summons for and in behalf of the private domestic corporation so that the service of
summons on ALFA effected through the petitioners is not valid and ineffective; to
maintain the respondent Court of Appeals' position that ALFA was properly served its
summons through the petitioners would be contrary to the general principle that a
corporation can only be bound by such acts which are within the scope of its officers'
or agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant case, we
dwell first on the nature of a voting trust agreement and the consequent effects upon its
creation in the light of the provisions of the Corporation Code.
18
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders of a corporation
and the trustee or by a group of identical agreements between individual stockholders
and a common trustee, whereby it is provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is terminated, control over the
stock owned by such stockholders, either for certain purposes or for all purposes, is to
be lodged in the trustee, either with or without a reservation to the owners, or persons
designated by them, of the power to direct how such control shall be used. (98 ALR
2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly recognizes voting
trust agreements, a more definitive meaning may be gathered. The said provision
partly reads:
Sec. 59. Voting Trusts One or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees the right to vote
and other rights pertaining to the share for a period rights pertaining to the shares for a
period not exceeding five (5) years at any one time: Provided, that in the case of a
voting trust specifically required as a condition in a loan agreement, said voting trust
may be for a period exceeding (5) years but shall automatically expire upon full
payment of the loan. A voting trust agreement must be in writing and notarized, and
shall specify the terms and conditions thereof. A certified copy of such agreement shall
be filed with the corporation and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust agreement shall be cancelled and new
ones shall be issued in the name of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the corporation, it shall be noted that the
transfer in the name of the trustee or trustees is made pursuant to said voting trust
agreement.
By its very nature, a voting trust agreement results in the separation of the voting
rights of a stockholder from his other rights such as the right to receive dividends, the
right to inspect the books of the corporation, the right to sell certain interests in the
assets of the corporation and other rights to which a stockholder may be entitled until
the liquidation of the corporation. However, in order to distinguish a voting trust
agreement from proxies and other voting pools and agreements, it must pass three
criteria or tests, namely: (1) that the voting rights of the stock are separated from the
other attributes of ownership; (2) that the voting rights granted are intended to be
irrevocable for a definite period of time; and (3) that the principal purpose of the grant
of voting rights is to acquire voting control of the corporation. (5 Fletcher, Cyclopedia
of the Law on Private Corporations, section 2075 [1976] p. 331 citing Tankersly v.
Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer
upon a trustee not only the stockholder's voting rights but also other rights pertaining
to his shares as long as the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations in restraint of
trade or used for purposes of fraud." (section 59, 5th paragraph of the Corporation
Code) Thus, the traditional concept of a voting trust agreement primarily intended to
single out a stockholder's right to vote from his other rights as such and made
irrevocable for a limited duration may in practice become a legal device whereby a
transfer of the stockholder's shares is effected subject to the specific provision of the
voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between
the equitable or beneficial ownership of the corporate shares of a stockholders, on the
one hand, and the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing
whereby one or more stockholders of a corporation consent to transfer his or their
shares to a trustee in order to vest in the latter voting or other rights pertaining to said
shares for a period not exceeding five years upon the fulfillment of statutory
conditions and such other terms and conditions specified in the agreement. The five
year-period may be extended in cases where the voting trust is executed pursuant to a
loan agreement whereby the period is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of the creation of
the voting trust agreement. The petitioners maintain that with the execution of the
voting trust agreement between them and the other stockholders of ALFA, as one
party, and the DBP, as the other party, the former assigned and transferred all their
shares in ALFA to DBP, as trustee. They argue that by virtue to of the voting trust
agreement the petitioners can no longer be considered directors of ALFA. In support of
their contention, the petitioners invoke section 23 of the Corporation Code which
provides, in part, that:
Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be
director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement between
ALFA and the DBP had all the more safeguarded the petitioners' continuance as
officers and directors of ALFA inasmuch as the general object of voting trust is to
insure permanency of the tenure of the directors of a corporation. They cited the
19
commentaries by Prof. Aguedo Agbayani on the right and status of the transferring
stockholders, to wit:
The "transferring stockholder", also called the "depositing stockholder", is equitable
owner for the stocks represented by the voting trust certificates and the stock
reversible on termination of the trust by surrender. It is said that the voting trust
agreement does not destroy the status of the transferring stockholders as such, and thus
render them ineligible as directors. But a more accurate statement seems to be that for
some purposes the depositing stockholder holding voting trust certificates in lieu of his
stock and being the beneficial owner thereof, remains and is treated as a stockholder. It
seems to be deducible from the case that he may sue as a stockholder if the suit is in
equity or is of an equitable nature, such as, a technical stockholders' suit in right of the
corporation. [Commercial Laws of the Philippines by Agbayani, Vol. 3 pp. 492-493,
citing 5 Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a
party to its execution from legal titleholder or owner of the shares subject of the
voting trust agreement, he becomes the equitable or beneficial owner. (Salonga,
Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and Carlos, The
Law on Private Corporations and Corporate Practice, 1969 ed., p. 175; Campos and
Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981,
ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of
the Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is
whether the change in his status deprives the stockholder of the right to qualify as a
director under section 23 of the present Corporation Code which deletes the phrase "in
his own right." Section 30 of the old Code states that:
Every director must own in his own right at least one share of the capital stock of the
stock corporation of which he is a director, which stock shall stand in his name on the
books of the corporation. A director who ceases to be the owner of at least one share of
the capital stock of a stock corporation of which is a director shall thereby cease to be
a director . . . (Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot
be adversely affected by the simple act of such director being a party to a voting trust
agreement inasmuch as he remains owner (although beneficial or equitable only) of the
shares subject of the voting trust agreement pursuant to which a transfer of the
stockholder's shares in favor of the trustee is required (section 36 of the old
Corporation Code). No disqualification arises by virtue of the phrase "in his own right"
provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other
persons who in fact are not beneficial owners of the shares registered in their names on
the books of the corporation becomes formally legalized (see Campos and Lopez-
Campos, supra, p. 296) Hence, this is a clear indication that in order to be eligible as a
director, what is material is the legal title to, not beneficial ownership of, the stock as
appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law of
Private Corporations, section 300, p. 92 [1969] citing People v. Lihme, 269 Ill. 351,
109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting trust agreement
executed in 1981 disposed of all their shares through assignment and delivery in favor
of the DBP, as trustee. Consequently, the petitioners ceased to own at least one share
standing in their names on the books of ALFA as required under Section 23 of the new
Corporation Code. They also ceased to have anything to do with the management of
the enterprise. The petitioners ceased to be directors. Hence, the transfer of the
petitioners' shares to the DBP created vacancies in their respective positions as
directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is
the essence of the subject voting trust agreement as evident from the following
stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the
shares of the stocks owned by them respectively and shall do all things necessary for
the transfer of their respective shares to the TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the
number of shares transferred, which shall be transferrable in the same manner and with
the same effect as certificates of stock subject to the provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual
or special, upon any resolution, matter or business that may be submitted to any such
meeting, and shall possess in that respect the same powers as owners of the equitable
as well as the legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one share of stock for the
purpose of qualifying such person as director of ALFA, and cause a certificate of stock
evidencing the share so transferred to be issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his shares to the same
trustees without the need of revising this agreement, and this agreement shall have the
same force and effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis
supplied)
20
Considering that the voting trust agreement between ALFA and the DBP transferred
legal ownership of the stock covered by the agreement to the DBP as trustee, the latter
became the stockholder of record with respect to the said shares of stocks. In the
absence of a showing that the DBP had caused to be transferred in their names one
share of stock for the purpose of qualifying as directors of ALFA, the petitioners can
no longer be deemed to have retained their status as officers of ALFA which was the
case before the execution of the subject voting trust agreement. There appears to be no
dispute from the records that DBP has taken over full control and management of the
firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through one
Elsa A. Guevarra, Vice-President of its Special Accounts Department II, Remedial
Management Group, the petitioners were no longer included in the list of officers of
ALFA "as of April 1982." (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim that
the subject voting trust agreement did not deprive the petitioners of their position as
directors of ALFA, the public respondent committed a reversible error when it ruled
that:
. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to
be president and vice-president, respectively, of the corporation at the time of service
of summons on them on August 21, 1987, they were at least up to that time, still
directors . . .
The aforequoted statement is quite inaccurate in the light of the express terms of
Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA and the
DBP, were aware at the time of the execution of the agreement that by virtue of the
transfer of shares of ALFA to the DBP, all the directors of ALFA were stripped of their
positions as such.
There can be no reliance on the inference that the five-year period of the voting trust
agreement in question had lapsed in 1986 so that the legal title to the stocks covered by
the said voting trust agreement ipso facto reverted to the petitioners as beneficial
owners pursuant to the 6th paragraph of section 59 of the new Corporation Code which
reads:
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificate as
well as the certificates of stock in the name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall be reissued in the name of the
transferors.
On the contrary, it is manifestly clear from the terms of the voting trust agreement
between ALFA and the DBP that the duration of the agreement is contingent upon the
fulfillment of certain obligations of ALFA with the DBP. This is shown by the
following portions of the agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured
by a first mortgage on the manufacturing plant of said company;
WHEREAS, ALFA is also indebted to other creditors for various financial
accomodations and because of the burden of these obligations is encountering very
serious difficulties in continuing with its operations.
WHEREAS, in consideration of additional accommodations from the TRUSTEE,
ALFA had offered and the TRUSTEE has accepted participation in the management
and control of the company and to assure the aforesaid participation by the TRUSTEE,
the TRUSTORS have agreed to execute a voting trust covering their shareholding in
ALFA in favor of the TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is renewable for as long
as the obligations of ALFA with DBP, or any portion thereof, remains outstanding;
(CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP would
not have transferred all its rights, titles and interests in ALFA "effective June 30, 1986"
to the national government through the Asset Privatization Trust (APT) as attested to
in a Certification dated January 24, 1989 of the Vice President of the DBP's Special
Accounts Department II. In the same certification, it is stated that the DBP, from 1987
until 1989, had handled APT's account which included ALFA's assets pursuant to a
management agreement by and between the DBP and APT (CA Rollo, p. 142) Hence,
there is evidence on record that at the time of the service of summons on ALFA
through the petitioners on August 21, 1987, the voting trust agreement in question was
not yet terminated so that the legal title to the stocks of ALFA, then, still belonged to
the DBP.
In view of the foregoing, the ultimate issue of whether or not there was proper service
of summons on ALFA through the petitioners is readily answered in the negative.
21
Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
Sec. 13. Service upon private domestic corporation or partnership. If the defendant
is a corporation organized under the laws of the Philippines or a partnership duly
registered, service may be made on the president, manager, secretary, cashier, agent or
any of its directors.
It is a basic principle in Corporation Law that a corporation has a personality separate
and distinct from the officers or members who compose it. (See Sulo ng Bayan Inc. v.
Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v. Department of Labor and
Employment, et al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule on
service of processes of a corporation enumerates the representatives of a corporation
who can validly receive court processes on its behalf. Not every stockholder or officer
can bind the corporation considering the existence of a corporate entity separate from
those who compose it.
The rationale of the aforecited rule is that service must be made on a representative so
integrated with the corporation sued as to make it a priori supposable that he will
realize his responsibilities and know what he should do with any legal papers served
on him. (Far Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit,
Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated officers. The
service of summons upon ALFA, through the petitioners, therefore, is not valid. To
rule otherwise, as correctly argued by the petitioners, will contravene the general
principle that a corporation can only be bound by such acts which are within the scope
of the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed
decision dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990
are SET ASIDE and the Orders dated April 25, 1989 and October 17, 1989 issued by
the Regional Trial Court of Makati, Branch 58 are REINSTATED.
SO ORDERED.