CHAPTER 5: CORPORATION CASE DIGESTS
No. The transfer made by Tabora to the Cagayan fishing
Cagayan v. Fishing Dev. Co v. Sandiko
G.R. No. L-43350
December 23, 1937
FACTS:
Manuel Tabora is the registered owner of four parcels of land
situated in the Province of Cagayan. As security for a loan, he
executed in favor of the PNB a first mortgage on the four
parcels of land. A second mortgage in favor of the same bank
was executed by Tabora over the same lands to guarantee
the payment of another loan. A third mortgage on the same
lands was executed in favor of Severina Buzon to whom
Tabora was indebted.
On May 31, 1930, Tabora executed a public document
entitled "Escritura de Transpaso de Propiedad Inmueble"
(Exhibit A) by virtue of which the four parcels of land owned
by him was sold to the plaintiff company, said to under
process of incorporation. The plaintiff company filed its article
incorporation with the Bureau of Commerce and Industry only
on October, 1930.
Subsequently, the board of directors of plaintiff company
passed a resolution authorizing Ventura, its president to sell
the four parcels of lands in question to Teodoro Sandiko for
P42,000. In addition, Exhibits B, C and D were thereafter
made and executed. Exhibit B is a deed of sale where the
plaintiff sold ceded and transferred to the defendant all its
right, titles, and interest in and to the four parcels of land.
Exhibit C is a promissory note drawn by the defendant in
favor of the plaintiff, payable after one year from the date
thereof. Exhibit D is a deed of mortgage executed where the
four parcels of land were given a security for the payment of
the promissory note, Exhibit C.
Defendant failed to pay the note thus, this case.
ISSUE:
Whether Exhibit B, the deed of sale executed in favor of
Teodoro Sandiko, was valid
HELD:
Development was affected on May 31, 1930 (Exhibit A) and
the actual incorporation of said company was affected later
on October 22, 1930. In other words, the transfer was made
almost five months before the incorporation of the company.
Unquestionably, a duly organized corporation has the power
to purchase and hold such real property as the purposes for
which such corporation was formed may permit and for this
purpose may enter into such contracts as may be necessary.
But before a corporation may be said to be lawfully
organized, many things have to be done. Among other things,
the law requires the filing of articles of incorporation. Although
there is a presumption that all the requirements of law have
been complied with, in the case before us it can not be
denied that the plaintiff was not yet incorporated when it
entered into a contract of sale, Exhibit A. It was not even a de
facto corporation at the time. Not being in legal existence
then, it did not possess juridical capacity to enter into the
contract.
The contract here (Exhibit A) was entered into not
between Manuel Tabora and a non-existent corporation
but between the Manuel Tabora as owner of the four
parcels of lands on the one hand and the same Manuel
Tabora, his wife and others, as mere promoters of a
corporations on the other hand. For reasons that are self-
evident, these promoters could not have acted as agent
for a projected corporation since that which no legal
existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It is, as
it were, a child in ventre sa mere.
This is not saying that under no circumstances may the acts
of promoters of a corporation be ratified by the corporation if
and when subsequently organized. There are, of course,
exceptions but under the peculiar facts and circumstances of
the present case we decline to extend the doctrine of
ratification which would result in the commission of injustice
or fraud to the candid and unwary.
RIZAL LIGHT & ICE CO., INC. v. THE PUBLIC SERVICE
COMMISSION
G.R. No. L-20993 & L-21221
September 28, 1968
FACTS: This is a decision consolidating two cases. The
first case is a petition to review the decision of the Public
Service Commission (“Commission”) to cancel and revoke
the certificate of public convenience and necessity granted to
petitioner and to forfeit the franchise of said petitioner. The
second case, on the other hand, is a petition to review the
decision of the Commission to grant respondent Morong
Electric Co., Inc. a certificate of public convenience and
necessity to operate an electric light, heat and power service
in the municipality of Morong, Rizal. In both cases, petitioner
prayed for a writ of preliminary injunction ex parte but both
writs were denied.
Petitioner Rizal Light & Ice Co., Inc. is a domestic
corporation with business address at Morong, Rizal. On
August 15, 1949, it was granted by the Commission a
certificate of public convenience and necessity for the
installation, operation and maintenance of an electric light,
heat and power service in the municipality of Morong, Rizal.
In December 19, 1956, the Commission required the
petitioner to appear before it on February 18, 1957 to show
cause why it should not be penalized for violation of the
conditions of its certificate of public convenience and the
regulations of the Commission, and for failure to comply with
the directives to raise its service voltage and maintain them
within the limits prescribed in the Revised Order No. 1 of the
Commission, and to acquire and install a kilowattmeter to
indicate the load in kilowatts at any particular time of the
generating unit.
Petitioner failed to appear so the Commission decided
to cancel and revoke the certificate of public convenience and
necessity as well as to forfeit their franchise. In a MR by
petitioner, the decision was reversed because it was found
that the manager was ill.
Subsequently, the Municipality of Morong formally
requested the Commission to revoke petitioner's certificate of
public convenience and necessity and to forfeit its franchise
on the ground, among other things, that it failed to comply
with the conditions of said certificate and franchise. While
waiting for the hearing with order to show cause to push
through (this had several postponements), inspections had
been made of petitioner's electric plant and installations by
the engineers of the Commission upon the request of the
petitioner who manifested during the hearing on December
15, 1960 that improvements have been made on its service
since the last inspection on July 1960, and that, on the basis
of the inspection report to be submitted, it would agree to the
submission of the case for decision without further hearing.
When the case was called for hearing on July 5, 1961,
petitioner failed to appear. Respondent municipality was then
allowed to present its documentary evidence, and thereafter
the case was submitted for decision.
On July 7, 1961, petitioner filed a motion to reopen the
case upon the ground that it had not been furnished with a
copy of the report of the inspection by the engineers of the
Commission for it to reply as previously agreed. Petitioner
was granted a period of 10 days within which to submit its
written reply to said inspection report, on condition that
should it fail to do so within the said period the case would be
considered submitted for decision. Petitioner failed to file the
reply. Therefore, the Commission proceeded to decide the
case. On July 29, 1962 petitioner's electric plant was burned.
On the basis of the inspection reports of its engineers,
it was found that the petitioner had failed to comply with the
directives contained in its letters, and had violated the
conditions of its certificate of public convenience as well as
the rules and regulations of the Commission. The
Commission concluded that the petitioner "cannot render the
efficient, adequate and satisfactory electric service required
by its certificate and that it is against public interest to allow it
to continue its operation." Accordingly, it ordered the
cancellation and revocation of petitioner's certificate of public
convenience and the forfeiture of its franchise.
In another MR, petitioner alleged that before its electric
plant was burned its service was greatly improved and that it
had still existing investment which the Commission should
protect. But eight days before said MR was filed Morong
Electric, having been granted a municipal franchise on May 6,
1962 by respondent municipality to install, operate and
maintain an electric heat, light and power service in said
municipality filed with the Commission an application for a
certificate of public convenience and necessity for said
service.
Petitioner opposed in writing the application of Morong
Electric, alleging among other things, that it is a holder of a
certificate of public convenience to operate an electric light,
heat and power service in the same municipality of Morong,
Rizal, and that the approval of said application would not
promote public convenience, but would only cause ruinous
and wasteful competition.
ISSUES and HELD: *Skip to the Second Case if you are after
the doctrine coverage only*
First Case
1. Whether the Commission acted without or in excess of
its jurisdiction when it delegated the hearing of the
case and the reception of evidence to Mr. Pedro S.
Talavera who is not allowed by law to hear the same –
No
a. It is true that Sec. 32 of C.A. No. 146 only
allows division chiefs who are lawyers to hear a
case and receive evidence. However, petitioner
never raised any objection to the delegation of
the Commission and even appeared and
submitted evidence at the hearings conducted
by Mr. Talavera. This Court in several cases
has ruled that this is a procedural, not a
jurisdictional point, and is waived by failure to
interpose timely the objection and the case had
been decided by the Commission.
2. Whether the cancellation of petitioner's certificate of
public convenience was unwarranted because no
sufficient evidence was adduced against the petitioner
and that petitioner was not able to present evidence in
its defense – No
a. Settled is the rule that in reviewing the decision
of the Commission this Court is not required to
examine the proof de novo and determine for
itself whether or not the preponderance of
evidence really justifies the decision. The only
function of this Court is to determine whether or
not there is evidence before the Commission
upon which its decision might reasonably be
based. The Commission based its decision on
the inspection reports submitted by its
engineers who conducted the inspection of
petitioner's electric service upon orders of the
Commission.
b. Additionally, petitioners cannot claim that they
were deprived a day in court because the
transcript of the proceeding showed that the
lawyer of petitioner manifested in clear
language a waiver of the same and its decision
to abide by the last inspection report of
Engineer Martinez.
3. Whether the Commission failed to give protection to
petitioner's investment – Yes but with cause
a. The "protection-of-investment rule" provides that
it is the duty of the Commission to protect rather
than to destroy his investment [in public utilities]
by the granting of the second license to another
person for the same thing over the same route
 of travel. The granting of such a second license
does not serve its convenience or promote the
interests of the public.
b. This, however, is not an absolute rule for
nobody has exclusive right to secure a franchise
or a certificate of public convenience. Like in
this case where, it has been shown by ample
evidence that the petitioner, despite ample time
and opportunity given to it by the Commission,
had failed to render adequate, sufficient and
satisfactory service and had violated the
important conditions of its certificate as well as
the directives and the rules and regulations of
the Commission, the rule cannot apply.
4. Whether the Commission erred in imposing the
extreme penalty of revocation of the certificate – No
a. Section 16(n) of Commonwealth Act No. 146,
as amended, confers upon the Commission
ample power and discretion to order the
cancellation and revocation of any certificate of
public convenience issued to an operator who
has violated, or has willfully and contumaciously
refused to comply with, any order, rule or
regulation of the Commission or any provision
of law.
Second Case
1. Whether Morong Electric Co., Inc. (“Morong
Electric”) did not have a corporate personality at
the time it was granted a franchise and when it
applied for said certificate – Yes but was
subsequently cured
a. The juridical personality and legal existence of
Morong Electric began only on October 17,
1962 when its certificate of incorporation was
issued by the SEC. Before that date, or pending
the issuance of said certificate of incorporation,
the incorporators cannot be considered as de
facto corporation. But the fact that Morong
Electric had no corporate existence on the day
the franchise was granted in its name does not
render the franchise invalid, because later
Morong Electric obtained its certificate of
incorporation and then accepted the franchise in
accordance with the terms and conditions
thereof. This view is sustained by eminent
American authorities. Thus, McQuillin says:
i. “The fact that a company is not
completely incorporated at the time the
grant is made to it by a municipality to
use the streets does not, in most
jurisdictions, affect the validity of the
grant. But such grant cannot take effect
until the corporation is organized. And in
Illinois it has been decided that the
ordinance granting the franchise may be
presented before the corporation grantee
is fully organized, where the organization
is completed before the passage and
acceptance”
b. The conclusion herein reached regarding the
validity of the franchise granted to Morong
Electric is not incompatible with the holding of
this Court in Cagayan Fishing Development
Co., Inc. vs. Teodoro Sandiko upon which the
petitioner leans heavily in support of its position.
In said case this Court held that a corporation
should have a full and complete organization
and existence as an entity before it can enter
into any kind of a contract or transact any
business. It should be pointed out, however,
that this Court did not say in that case that the
rule is absolute or that under no circumstances
may the acts of promoters of a corporation be
ratified or accepted by the corporation if and
when subsequently organized. Of course, there
are exceptions. It will be noted that American
courts generally hold that a contract made by
 the promoters of a corporation on its behalf may
be adopted, accepted or ratified by the
corporation when organized.
2. Whether Morong Electric is not financially capable of
undertaking an electric service – No
a. An examination of the record of this case readily
shows that the testimony of Mr. Ingal and the
documents he presented to establish the
financial capability of Morong Electric provide
reasonable grounds for the above finding of the
Commission.
3. Whether petitioner was rendering efficient service
before its electric plant was burned, and therefore,
being a prior operator its investment should be
protected and no new party should be granted a
franchise and certificate of public convenience and
necessity to operate an electric service in the same
locality – No
a. And it has been held time and again that where
the Commission has reached a conclusion of
fact after weighing the conflicting evidence, that
conclusion must be respected, and the
Supreme Court will not interfere unless it clearly
appears that there is no evidence to support the
decision of the Commission.
FERMIN Z. CARAM,JR. v. CA
G.R. No. L-48627
June 30, 1987
FACTS:
Barretto initiated the incorporation of a company called
Filipinas Orient Airways (FOA). Before FOA’s creation,
Barretto contracted with Alberto Arellano for the latter to
prepare a project study for the feasibility of creating a
corporation like FOA. The project study was then presented
to the would-be incorporators and investors. On the basis of
said project study, Fermin Caram, Jr. and Rosa Caram
agreed to be incorporators of FOA. Later however, Arellano
filed a collection suit against FOA, Barretto, and the Carams.
Arellano claims that he was not paid for his work on the
project study.
ISSUE: Whether or not the Carams are personally and
solidarily liable considering that the project study was
contracted before FOA became a corporation.
HELD: NO. The Carams cannot be solidarily liable with FOA.
The FOA is a bona fide corporation. As such, FOA alone
should be liable for its corporate acts as duly authorized by its
officers and directors. This includes acts which ultimately led
to its incorporation i.e., the project study made by Arellano.
FOA has a separate and distinct personality from its
incorporators. It is not justified to make the Carams, as
principal stockholders, to be responsible for FOA’s
obligations.
Arnold Hall v Piccio
86 Phil. 634
June 29, 1950
Chapter V, 2. De Facto Corporation (Sec. 20); a. Elements
Facts:
In May 28, 1947, Arnold Hall and Bradley Hall, together with
respondents Fred Brown, Hipolita Chapman and Ceferino
Abella signed and acknowledged the Articles of Incorporation
of the Far Eastern Lumber and Commercial Co., Inc,
organized to engage in a general lumber business. The
corporation proceeded to do business after the execution of
the Articles but it was only in December 2, 1947 that it filed
the said Articles with the SEC so the latter could issue the
corresponding certificate of incorporation.
Pending action on the Articles by the SEC, the respondents
filed before the CFI a civil case alleging that Far Eastern
Lumber was an unregistered partnership and that they
wished to have it dissolved because of bitter dissension
among the members, mismanagement and fraud, and heavy
financial losses. Hall filed a motion to dismiss, contesting the
court’s jurisdiction and the sufficiency of the cause of action.
Herein Petitioners Hall argue that the CFI had no jurisdiction
over the action because they alleged that Far Eastern was a
de facto corporation and that dissolution thereof may only be
ordered in a quo warranto proceeding instituted under
Section 19 of the Corporation Law.
After hearing, Judge Piccio ordered the dissolution of the
company but Hall offered to file a counter-bond for the
discharge of the receiver. Piccio refused to accept the offer
and discharge the receiver.
Issues:
1. Whether Far Eastern is a de facto corporation
2. Whether the court had jurisdiction over the action
Held:
 1. No. According to Section 11 of the Corporation Law, SALVATIERRA vs. GARLITOS
the personality of a corporation begins to exist only G.R. No. L11442.
from the moment the certificate of incorporation and May 23, 1958
not before. Also, for a corporation to be considered a Corporation by Estoppel Doctrine
de facto corporation, there must be the requirement of
good faith. The corporation must be under the claim of FACTS:
good faith of being a corporation under the law. A lease contract was entered into between Petitioner
Manuela T. Vda. de Salvatierra, owner of a parcel of land
Looking at the two requirements above, Far Eastern located at Leyte and the Philippine Fibers Producers Co.,
cannot be considered a de facto corporation because Inc.,(PFPCI) allegedly a corporation "duly organized and
the SEC has not issued the corresponding certificate existing under the laws of the Philippines domiciled at
of incorporation, therefore the personality of Far Burauen, Leyte, Philippines, and with business address
Eastern has not began to exist yet. Far Eastern cannot therein, represented in this instance by Mr. Segundino Q.
likewise claim good faith because it was aware that it Refuerzo, the President". The obligation contained in the
did not obtain the said required certificate. contract were (1) the lease was for a period of 10 years ; (2)
the land would be planted to kenaf, ramie or other crops
2. Yes. The Court ruled that this is not a suit in which the suitable to the soil; (3) that the lessor would be entitled to 30
“corporation” is a party. This is a litigation between per cent of the net income accruing from the harvest of any
stockholders of the alleged corporation, for the crop without being responsible for the cost of production
purpose of obtaining its dissolution. Even the existence thereof; and (4) that after every harvest, the lessee was
of a de jure corporation may be terminated in a private bound to declare at the earliest possible time the income
suit for its dissolution between stockholders, without derived therefrom and (5) to deliver the corresponding share
the intervention of the State, as what is supposedly due the lessor.
required under Section 191 of the Corporation Law.
The obligations were not complied with thus a
complaint for accounting, rescission and damages was filed
by the petitioner against PFPCI in the CFI. The court granted
the prayer of the petitioner and no appeal was made
therefrom. The court then, upon motion of plaintiff, issued a
writ of execution for the attachment of 3 parcels of land
registered in the name of its President Refuerzo. No property
of the Philippine Fibers Producers Co., Inc., was found
available for attachment.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
Section 19 of Act 1459 states that “if a corporation does not formally organize and Refuerzo in praying for his exoneration from liability
commence the transaction of its business or the construction of is works within two years
from date of its incorporation, its corporate powers cease. The due incorporation of any resulting from the non-fulfillment of the obligation imposed on
corporation claiming in good faith to be a corporation under this Act and its right to defendant Philippine Fibers Producers Co., Inc., interposed
exercise corporate powers shall not be inquired into collaterally in any private suit to the defense that the complaint filed with the lower court
which the corporation may be a party, but such inquiry may be had at the suit of the
Insular Government on information of the Attorney-General. contained no allegation which would hold him liable
personally, for while it was stated therein that he was a
signatory to the lease contract, he did so in his capacity as
president of the corporation. Plaintiff on the other hand tried
to refute this averment by contending that her failure to
specify defendant's personal liability was due to the fact that
all the time she was under the impression that the Philippine
Fibers Producers Co., Inc., represented by Refuerzo was a
duly registered corporation as appearing in the contract, but a
subsequent inquiry from the Securities & Exchange
Commission yielded otherwise.
CFI relieved Segundino Refuerzo of liability and
ordered to release all properties belonging to the movant that
might have already been attached.
ISSUE: Whether the President is personally liable on the
lease contract
HELD: YES.
While as a general rule, a person who deals with an
association in such a way to recognize its existence as a
corporate body is estopped from denying the same in an
action arising out of such transaction, yet this [corporation by
estoppel] doctrine may not be held to be applicable where
fraud takes a part in the said transaction.
In the instant case, on plaintiff's charge that she was
unaware of the fact that the defendant corporation had
no juridical personality, its president gave no confirmation
or denial of the same and the circumstance surrounding the
execution of the contract lead to the inescapable conclusion
that plaintiff was really made to believe that such corporation
was duly organized in accordance with law.
A corporation when registered has a juridical personality
separate and distinct from its component members or
stockholders and officers, such that a corporation cannot be
held liable for the personal indebtedness of a stockholder
even if he should be its president and conversely, a
stockholder cannot be held personally liable for any financial
obligation by the corporation in excess of his unpaid
subscription. But this rule is understood to refer merely to
registered corporations and cannot be made applicable to the
liability of members of an unincorporated association. The
reason behind this doctrine is obvious—an unincorporated
association has no personality and would be incompetent to
act and appropriate for itself the power and attributes of a
corporation as provided by law, it cannot create agents or
confer authority on another to act in its behalf; thus, those
who act or purport to act as its representatives or agents do
so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an
agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and
subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for
other acts performed as such agent.
CLV notes:
• The court did not apply the doctrine of corporation by
estoppel, but instead the law on agency.
• Salvatierra applies when there is fraud or
misrepresentation on the part of one of the contracting
parties, not when both are in good faith.
MARIANO A. ALBERT v. UNIVERSITY PUBLISHING CO.,
INC.
G.R. No. L-19118
January 30, 1965
Piercing the Veil
FACTS:
In Albert vs. University Publishing Co. (1958) we found
plaintiff entitled to damages (for breach of contract) but
reduced the amount from P23,000.00 to P15,000.00.Then in
Albert vs. University Publishing Co.(1960) we held that the
judgment for P15,000.00 which had become final and
executory, should be executed to its full amount, since in
fixing it, payment already made had been considered. This
petition now is asking for the implementation of decision on
the President himself, Jose Aruego.
The facts are: Plaintiff alleges that defendant
corporation, through Jose Aruego, its President, entered into
a contract with plaintifif; that defendant had thereby agreed to
pay plaintiff P30,000.00 for the exclusive right to publish his
revised Commentaries on the Revised Penal Code and for
his share in previous sales of the book's first edition; that
defendant had undertaken to pay in eight quarterly
installments of P3,750.00 starting July 15, 1948; that per
contract failure to pay one installment would render the rest
due; and that defendant had failed to pay the second
installment. Plaintiff died before trial and Justo R. Albert, his
estate's administrator, was substituted for him.
As stated earlier, the court ruled in favor of plaintiff.
Plaintiff, however, on August 10, 1961, petitioned for a writ of
execution against Jose M. Aruego, as the real defendant,
stating, "plaintiff's counsel and the Sheriff of Manila
discovered that there is no such entity as University
Publishing Co., Inc. registered under SEC.
. were made by him; that he violated its terms, thereby
ISSUE:
1. Whether the court can make Jose Aruego as the real
party in interest in this case.
HELD:
1. Yes
The non-registration of University Publishing Co. does
not grant it the status of a corporation de facto. It has
therefore no personality separate from Jose M. Aruego; it
cannot be sued independently. Additionally, the corporation-
by-estoppel doctrine has not been invoked. At any rate, the
same is inapplicable here. Aruego represented a non-existent
entity and induced not only the plaintiff but even the court to
believe in such representation. He signed the contract as
"President" of "University Publishing Co., Inc.," stating that
this was "a corporation duly organized and existing under the
laws of the Philippines," and obviously misled plaintiff
One who has induced another to act upon his wilful
misrepresentation that a corporation was duly organized and
existing under the law, cannot thereafter set up against his
victim the principle of corporation by estoppel. University
Publishing being a non-existent corporation cannot come to
court to litigate its rights given it is just a name.
Jose M. Aruego was, in reality, the one who answered
and litigated, through his own law firm as counsel. He was in
fact, if not, in name, the defendant. Even assuming that
University Publishing is like other corporations duly organized
and existing under the law, we have in many a case pierced
the veil of corporate fiction to administer the ends of justice.
In Salvatiera vs. Garlitoswe ruled that: "A person acting or
purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for
other acts performed as such agent. The evidence is patently
clear that Jose M. Aruego, acting as representative of a non-
existent principal, was the real party to the contract sued
upon; that he was the one who reaped the benefits resulting
from it, so much so that partial payments of the consideration
precipitating the suit in question; and that in the litigation he
was the real defendant.
ASIA BANKING CORPORATION v. STANDARD favor and making partial payments on the same is therefore
PRODUCTS CO., INC. estopped to deny said plaintiff's corporate existence. It is, of
G.R. No. 22106 (46 Phil. 144) course, also estopped from denying its own corporate
September 11, 1924 existence.
Corporate Contract Law; Corporation by Estoppel
Doctrine Judgment affirmed; petitioner rightfully can recover the
balance.
FACTS:
The action started with a promissory note with the total
amount of P37,757.22 that was signed by Standard Products
Co., Inc. (respondent) addressed to petitioner Asia Banking
Corporation. The remaining balance was P24,736.47 (this
was the amount being sought to be recovered).
The lower courts ruled in favor of petitioner to recover
the balance P24,736.47 with 10% interest.

ISSUE:
Whether the lower court erred in ruling in favor of
petitioner to recover the balance due

HELD:
No.
The general rule is that in the absence of fraud, a
person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect
admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action
leading out of or involving such contract or dealing, unless its
existence is attacked for causes which have arisen since
making the contract or other dealing relied on as an estoppel
and this applies to foreign as well as to domestic
corporations.
The defendant having recognized the corporate
existence of the plaintiff by making a promissory note in its
Pioneer Insurance v. CA
175 SCRA 668
July 28, 1969
Facts:
Lim is an owner-operator of Southern Airlines (SAL).
Japan Domestic Airlines (JDA) and Lim entered into a sales
contract for the sale and purchase of two DC-3A Type
Aircrafts and one set of necessary spare parts amounting to
$109,000 to be paid in installments. Pioneer Insurance and
Surety Corp., as a surety, executed its surety bond in favor of
JDA on behalf of its principal Lim.
Border Machinery and Heacy Equipment Co, Inc.,
Francisco and Modesto Cervantes, and Constancio Maglana
contributed funds based on the misrepresentation of Lim that
they will form a new corporation to expand his business. They
executed two separate indemnity agreements in favor of
Pioneer, one signed by Maglana and the other jointly signed
by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the indemnitors
principally agree and bind themselves jointly and severally to
indemnify and hold and save Pioneer from and against any/all
damages, losses, etc. of whatever kind and nature may incur
in consequence of having become surety.
Subsequently, Lim executed in favor of Pioneer a deed
of chattel mortgage as security. Upon default on the
payments, Pioneer paid for him and filed a petition for the
foreclosure of chattel mortgage as security. Maglana,
Bormaheco and the Cervantes’s filed cross-claims against
Lim alleging that they were not privies to the contracts signed
by Lim and for recovery of the sum of money they advanced
to Lim for the purchase of the aircrafts. The decision was
rendered holding Lim liable to pay.
The petitioner theorizes that as a result of the failure of
the respondents Bormaheco Spouses Cervantes, Constancio
Maglana and petitioner Lim to incorporate, a de facto
partnership among them was created, and that as a
consequence of such relationship all must share in the losses
and/or gains of the venture in proportion to their contribution.
The petitioner, therefore, questions the appellate court’s
findings ordering him to reimburse certain amounts given by
the respondents to the petitioner as their contributions to the
intended corporation
Issue: Whether the failure to incorporate would automatically
results into a de facto partnership
Held: No. There was no de facto partnership.
Ordinarily, when co-investors agreed to do business
through a corporation but failed to incorporate, a de facto
partnership would have been formed, and as such, all must
share in the losses and/or gains of the venture in proportion
to their contribution. However, such a relation does not
necessarily exist, for ordinarily persons cannot be made to
assume the relation of partners, as between themselves,
when their purpose is that no partnership shall exist and it
should be implied only when necessary to do justice between
the parties. Thus, one who takes no part except to subscribe
for stock in a proposed corporation which is never legally
formed does not become a partner with other subscribers
who engage in business under the name of the pretended
corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution
But in this case, it was shown that Lim did not have the
intent to form a corporation with Maglana et al. This can be
inferred from 1) acts of unilaterally taking out a surety from
Pioneer Insurance, 2) not using the funds he got from
Maglana et al. and 3) based on the complaint Lim had
refused, failed and still refuses to set up the
corporation.Furthermore, the record shows that Lim was
acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and
spare parts.
Lim Tong Lim v. Philippine Fishing Gear Industries, Inc.
GR NO. 136448
November 3, 1999
FACTS:
Antonio Chua and Peter Yao entered into a contract on behalf
of Ocean Quest Fishing Corporation, for the purchase of
fishing nets and floats from respondent Philppine Fishing
Gear. Chua and Yao claimed that they were in a business
venture with petitioner Lim Tong Lim who however was not a
signatory to the contract. Upon default in payment, the
respondent sued the Chua, Yao and Lim, as general
partners, alleging that Ocean Quest was a non-existent
corporation. A writ of preliminary attachment was enforced,
so the fishing nets were attached. Yao failed to appear the
hearings, Chua admitted his liability and expressed his
willingness to pay, but Lim argued for the lifting of the writ of
attachment. The fishing nets were sold at a public auction
with the respondent as the highest bidder for P900,000. The
RTC ruled that Chua, Yao and Lim were jointly liable to the
respondent, for it was clear that a partnership was formed
among the three. The RTC mentioned that as evidence of a
partnership formed, the 3 entered into a compromise
agreement in the past for one case, wherein they agreed to
have 4 vessels they own be sold to be applied as payment to
their debt to Lim’s brother who financed the business, and if
there be an excess, it will be divided equally among them.
Due to this, the RTC stated that joint liability can be
presumed from the equal distribution of the profit and loss.
The CA affirmed the decision of the RTC, ruling that Chua,
Yao and also Lim were partners.
ISSUE:
1. Whether or not by their acts, Chua, Yao and Lim could
be deemed to have entered into a partnership.
2. Whether or not the doctrine of Corporation by Estoppel
applies in the case at bar.
HELD:
1. YES.
Lim argued that he did not have any direct participation in the
purchase of the nets, for the negotiations were conducted
only by Chua and Yao. He stated that he was just a lessor
and not a partner of Chua and Yao, of a fishing boat. The
Court found this argument untenable. Article 1767 of the Civil
Code provides that “by the contract of partnership, 2 or more
persons bind themselves to contribute money, property,
industry to a common fund, with the intention of dividing the
profits among themselves.” The Court affirmed the factual
findings of the lower courts, that Lim, Chua and Yao were
engaged in a fishing venture, for Lim requested Yao to join
him in the business, while Chua was already Yao’s partner.
The 3 agreed to provide for the money to meet the expenses
for the boats for the business. They even obtained a loan
from the brother of Lim to finance the business. It was clearly
an arrangement wherein they shared equally the losses as
well as the profits. Although there was no express money or
credit as common fund which is required by a partnership, the
boats and borrowed money fall under the “common fund”.
The fishing nets and floats were also purchased for these are
essential to the fishing business.
The argument of the petitioner that he was merely a lessor of
the boats to Chua and Yao was rejected by the Court, for
although he was named as the owner of the boats, it would
defy logic for a lessor such as him to consent to the sale of
his own boats to pay the debt of Chua and Yao to Lim’s
brother, with the excess to be divided among the three of
them. His consent to the sale just proved that there was a
pre-existing partnership.
2. YES.
A Corporation by estoppel is formed when persons assume to
act as a corporation, knowing it to be without authority to do
so. These persons shall be liable as general partners for all
liabilities or damages which may result thereof. The lack of
corporate personality cannot be put up as a defense. The
Court ruled that even if a corporation is proven to be legally
non-existent, a party is estopped from denying liability in a
suit against it by a 3rd person who relied in good faith on the
representation. All those who benefited from the transaction
by the corporation by estoppel may be held liable for
contracts they assented to or took advantage of. Lim in the
case at bar, he benefited from the use of the nets for the
fishing venture, so although he did not directly act on behalf
of the corporation, he is covered by the doctrine of
corporation by estoppel.
HALLY v. PRINTWELL
GR 157549
May 30, 2011
FACTS: Petitioner was an incorporator and original director
of Business Media Philippines, Inc. (BMPI). At its
incorporation on November 12, 1987, it had an authorized
capital stock of P3,000,000.00 divided into 300,000 shares
each with a par value of P10.00,of which 75,000 were initially
subscribed.
Printwell, on the other hand, engaged in commercial
and industrial printing. BMPI commissioned Printwell for the
printing of the magazine Philippines, Inc. (together with
wrappers and subscription cards) that BMPI published and
sold. For that purpose, Printwell extended 30-day credit
accommodations to BMPI. From October 11, 1988 to July
12, 1989, BMPI placed with Printwell several orders on credit,
evidenced by invoices and delivery receipts totalling
P316,342.76. Considering that BMPI paid only P25,000.00,
Printwell sued BMPI on January 26, 1990 for the collection
of the unpaid balance of P291,342.76. Printwell impleaded all
the original stockholders and incorporators to recover on their
unpaid subscriptions. Defendants averred that they all had
paid their subscriptions in full; that BMPI had a separate
personality from those of its stockholders; that Rizalino C.
Vieza had assigned his fully-paid up shares to a certain
Gerardo R. Jacinto in 1989; and that the directors and
stockholders of BMPI had resolved to dissolve BMPI. To
prove payment, defendant stockholders submitted as
evidence official receipts and other documents, such as audit
reports, tax returns, journal vouchers, deposit slips, BPI
savings account in the name of BMPI and financial
statements.
ISSUE: (1) Whether the CA erred in affirming RTC
decision which essentially allowed the piercing of the
veil of corporate fiction; (2) Whether the CA erred in
applying the trust fund doctrine when grounds
thereof were unsatisfied (MAIN ISSUE)

HELD:
1. No. CA and RTC were correct. Stockholders of a
corporation are liable for the debts of the corporation up to
the extent of their unpaid subscriptions. They cannot invoke
the veil of corporate identity as a shield from liability, because
the veil may be lifted to avoid defrauding corporate creditors.
Printwell impleaded the petitioner and the other stockholders
of BMPI for two reasons, namely: (a) to reach the unpaid
subscriptions because it appeared that such subscriptions
were the remaining visible assets of BMPI; and (b) to avoid
multiplicity of suits.
Petitioner Donnina Halley submits that she had no
participation in the transaction between BMPI and Printwell;
that BMPI acted on its own; and that she had no hand in
persuading BMPI to renege on its obligation to pay. Hence,
she should not be personally liable. Although a corporation
has a personality separate and distinct from those of its
stockholders, directors, or officers such separate and distinct
personality is merely a fiction created by law for the sake of
convenience and to promote the ends of justice. The
corporate personality may be disregarded, and the individuals
composing the corporation will be treated as individuals, if the
corporate entity is being used as a cloak or cover for fraud or
illegality; as a justification for a wrong; as an alter ego, an
adjunct, or a business conduit for the sole benefit of the
stockholders. As a general rule, a corporation is looked upon
as a legal entity, unless and until sufficient reason to the
contrary appears. Thus, the courts always presume good
faith, and for that reason accord prime importance to the
separate personality of the corporation, disregarding the
corporate personality only after the wrongdoing is first clearly
and convincingly established.
Although nowhere in Printwells amended complaint or
in the testimonies Printwell offered can it be read or inferred
from that the petitioner was instrumental in persuading BMPI
to renege on its obligation to pay; or that she induced
Printwell to extend the credit accommodation by
misrepresenting the solvency of BMPI to Printwell, her
personal liability, together with that of her co-defendants,
remained because the CA found her and the other defendant
stockholders to be in charge of the operations of BMPI at the
time the unpaid obligation was transacted and incurred.
2. No. Petitioner argues that the trust fund doctrine was
inapplicable because she had already fully paid her
subscriptions to the capital stock of BMPI. She thus insists
that both lower courts erred in disregarding the evidence on
the complete payment of the subscription, like receipts,
income tax returns, and relevant financial statements. These
are devoid of merit.
The trust fund doctrine enunciates a rule that the
property of a corporation is a trust fund for the payment of
creditors, but such property can be called a trust fund only by
way of analogy or metaphor. As between the corporation
itself and its creditors it is a simple debtor, and as between its
creditors and stockholders its assets are in equity a fund for
the payment of its debts. It is established doctrine that
subscriptions to the capital of a corporation constitute a fund
to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in order to realize
assets for the payment of its debts.
The trust fund doctrine is not limited to reaching the
stockholders unpaid subscriptions. The scope of the doctrine
when the corporation is insolvent encompasses not only the
capital stock, but also other property and assets generally
regarded in equity as a trust fund for the payment of
corporate debts. All assets and property belonging to the
corporation held in trust for the benefit of creditors that were
distributed or in the possession of the stockholders,
regardless of full payment of their subscriptions, may be
reached by the creditor in satisfaction of its claim. Under the
trust fund doctrine, a corporation has no legal capacity to
release an original subscriber to its capital stock from the
obligation of paying for his shares, in whole or in part, without
a valuable consideration, or fraudulently, to the prejudice of
creditors. The creditor is allowed to maintain an action upon
any unpaid subscriptions and thereby steps into the shoes of
the corporation for the satisfaction of its debt. To make out a
prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its
debts by making good unpaid balances upon their
subscriptions, it is only necessary to establish that the
stockholders have not in good faith paid the par value of the
stocks of the corporation.
Ong Yong v. Tiu
G.R. No. 144476
April 8, 2003
Trust Fund Doctrine: Rescission of Subscription
Agreement
FACTS: In 1994, Private respondent Tius owned First
Landlink Asia Development Corporation (FLADC), and is
constructing the Masagana Citimall in Pasay. They
encountered financial difficulties being indebted to PNB for
190 million PHP, and in order to save their project they invited
the Ongs, herein petitioner, to invest in FLADC. They
executed a Pre-Subscription Agreement and agreed to
maintain equal shareholding of FLADC with the Ongs
subscribing 1,000,000 shares with the par value of 100 PHP,
while the Tius subscribed an additional 549,800 shares at
100 PHP in addition to the existing 450,200 shares. The Tius
were entitled to nominate the Vice-president and treasurer
plus 5 directors while the Ongs were entitled to nominate the
President, Secretary and 6 directors—they were also given
the right to manage and operate the mall. Consequently, the
Ongs paid 190 million PHP for the subscription of 1,000,000
shares of stock, while the Tius contributed a 4-storey building
and two parcels of land—settling the debt of FLADC to PNB.
However in 1996, the Tius chose to rescind the agreement
accusing the Ongs of (1) refusing to credit to them the
FLADC shares for their real property contributions (2)
preventing the respective person to assume the VP and
Treasurer position and (3) refusing to give them office
spaces. The Ongs argued that David and Cely Tiu already
assumed the respective positions, that they already have
existing offices since they owned the mall, and that they
cannot approve the valuation of Tiu’s real property since they
refuse to pay the capital gains tax and documentary stamp
tax—in violation of SEC rules. The Securities and Exchange
Commission (SEC) confirmed the rescission of the Pre-
subscription Agreement canceling the 1,000,000 shares of
subscription made by the Ongs to FLADC. The SEC en banc
and the CA confirmed the rescission and ordered the
liquidation of the cash and property contributions of the
parties. The SC affirmed the CA decision stating the both the
Ongs and Tius violated the agreement and are in pari delicto.
The court rationalized that even though parties in pari delicto
cannot claim rescission, in order to prevent further “squabbles
and numerous litigations”, they choose to forego the
technicality and adopt the liquidation of the shares of stocks.
Now, herein petitioner assail the writ of execution filed by the
Tius, stating that there was no substantial breach, that the
decision would lead to an unjust enrichment of the Tius, since
they were only to take 190 million of the shares in 1994, when
the value of the property already reached 1 Billion PHP to
date.
ISSUE: Whether or not the Tius could legally rescinding the
Pre-Subscription Agreement.
HELD: No, the Tius may not. Under the Pre-Subscription
Agreement, the subject matter of the contract was the
1,000,000 unissued shares of the FLADC stock allocated to
the Ongs. These unissued shares was in fact a subscription
contract defined under Section 60, Title VII of the Corporation
Code. A subscription contract involves the corporation as one
of the contracting parties since the transaction involves the
shares of stock. These were not stocks under the name of the
Tius, but rather under FLADC—The Tius never contracted in
their personal capacities since they did not sell their own
shares. Since this is the case, FLADC had the legal
personality to sue the rescission of the agreement and NOT
the Tius. Their allegation that there were two agreements that
is a Pre-Subscription Agreement and Shareholder’s
agreement is untenable considering, even if admitted, there is
no interdependence between the two that would lead them to
be the party to the agreements. Though they represent
FLADC, the corporation had a separate juridical personality.
In this case, the court does not seem it fit to warrant the
piercing of the veil of corporate fiction, as there is no
presence of any fraud or illegality.
Also, the action of rescinding the shares will violate the
Trust fund Doctrine and the procedure for the valid
distribution of assets and property under the Corporation
Code. Under this Doctrine, the subscriptions to the
capital stock of a corporation constitute a fund to which
the creditors have a right to look for the satisfaction of
their claims. Thus, the underlying principle is that the
distribution of assets which allows the distribution of
corporate capital can only be done in 3 instances; (1)
amendment of the Articles of Incorporation to reduce the
authorized capital stock (2) purchase of redeemable
shares by the corporation, regardless of the existence of
unrestricted retained earnings and (3) dissolution and
eventual liquidation of the corporation. The distribution
of corporate assets cannot be made to depend on the
whims of the stockholders, officers and directors of the
corporation, much less the courts. The rescission of the
Pre-Subscription Agreement will result in an
unauthorized distribution of the capital assets and
property against the Trust Fund Doctrine and
Corporation Code—since rescission of a subscription
agreement is not one of the instances where distribution
of capital assets is allowed. Such will result to a
premature liquidation of the corporation without benefit
of prior dissolution in accordance with Sections 117, 118,
119 and 120 of the Corporation Code.
The Tius argument that it will just be tantamount to a
decrease of capital stock cannot be admitted, as this did not
comply with the formal requirements under Section 33 of the
Corporation Code. No majority vote of the board of directors
was ever taken and neither was there any stockholders
meeting for the approval of such course of action. Decreasing
a corporation’s capital stock is an amendment of the Articles
of Incorporation and a decision that only the stockholders and
the directors can make. The court declines to make any
corporate decision for the FLADC. A judicial order decreasing
the capital stocks without the assent of the directors and
stockholders is a violation of the “business judgment rule”—
stating that directors are bound upon the corporation and
courts will not interfere unless such contracts are
unconscionable and oppressive as to amount to wanton
destruction to the right of the minority. Dean Cesar Villanueva
stating that the laissez faire rule or the free enterprise system
prevails in our social and economic set-up has highlighted the
same rule.
If rescission were denied, there would be no injustice as the
financial interests of both parties are intact within FLADC. If
rescission is granted, the Ongs will find themselves out in the
streets with nothing but the money they invested in 1994
while the Tius will enjoy 450-900 million PHP and the take
over of the business. It is clear that the Tius tried to pull a fast
one and started planning to take over the corporation once
their financial status improved.
GRANTED.