21. Torres vs De Leon
REPUBLIC PLANTERS BANK v AGANA
Facts: Philippine National Red Cross (PNRC) Internal Auditing Office
conducted an audit of the funds and accounts of the PNRC General
Santos City chapter. Based on the audit report, Torres incurred a
technical shortage in the amount of Php 4.3 Million. De Leon, as
secretary general of PNRC, charged Torres with Grave Misconduct.
De Leon issued a memorandum imposing penalties of one-month
suspension (July 1-31) and transfer to national headquarters against
Torres. The latter filed a notice of appeal addressed to the Board of
Governors of the PNRC and furnished copy to the CSC. The appeal
memorandum was addressed to the CSC and copies were sent to
the PNRC. De Leon denied the appeal. However, the CSC
promulgated a resolution imposing a penalty of dismissal from
service against Torres. The latter questioned the jurisdiction of the
CSC because the PNRC is not a government-owned and controlled
corporation.
Issue: Whether the Civil Service Commission have appellate
jurisdiction over the case.
Held: Yes. The PNRC, although not a GOCC, is sui generis in
character. The sui generis character of PNRC requires the court to
approach controversies involving the PNRC on a case-to-case basis.
Since the issue involves in the enforcement of labor laws and penal
statutes, PNRC can be treated as a GOCC. Thus, the CSC has
jurisdiction. Having jurisdiction over the PNRC, the CSC had
authority to modify the penalty and order the dismissal of Torres
from the service. Moreover, the CSC has appellate jurisdiction on
administrative disciplinary cases involving the imposition of a
penalty of suspension for more than thirty days or fine in an amount
exceeding thirty days’ salary.
22.
Facts: On 18 September 1961, the Robes-Francisco Realty &
Development Corporation (RFRDC) secured a loan from the Republic
Planters Bank in the amount of P120,000.00. As part of the
proceeds of the loan, preferred shares of stocks were issued to
RFRDC through its officers then, Adalia F. Robes and one Carlos F.
Robes. In other words, instead of giving the legal tender totaling to
the full amount of the loan, which is P120,000.00, the Bank lent
such amount partially in the form of money and partially in the form
of stock certificates numbered 3204 and 3205, each for 400 shares
with a par value of P10.00 per share, or for P4,000.00 each, for a
total of P8,000.00. Said stock certificates were in the name of Adalia
F. Robes and Carlos F. Robes, who subsequently, however, endorsed
his shares in favor of Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
"The Preferred Stock shall have the following rights, preferences,
qualifications and limitations, to wit: 1. Of the right to receive a
quarterly dividend of 1%, cumulative and participating. xxx 2. That
such preferred shares may be redeemed, by the system of drawing
lots, at any time after 2 years from the date of issue at the option of
the Corporation." On 31 January 1979, RFRDC and Robes proceeded
against the Bank and filed a complaint anchored on their alleged
rights to collect dividends under the preferred shares in question
and to have the bank redeem the same under the terms and
conditions of the stock certificates. The bank filed a Motion to
Dismiss 3 private respondents' Complaint on the following grounds:
(1) that the trial court had no jurisdiction over the subject-matter of
the action; (2) that the action was unenforceable under substantive
law; and (3) that the action was barred by the statute of limitations
and/or laches. The bank's Motion to Dismiss was denied by the trial
court in an order dated 16 March 1979. The bank then filed its
Answer on 2 May 1979. Thereafter, the trial court gave the parties
10 days from 30 July 1979 to submit their respective memoranda
after the submission of which the case would be deemed submitted
for resolution. On 7 September 1979, the trial court rendered the
decision in favor of RFRDC and Robes; ordering the bank to pay
RFRDC and Robes the face value of the stock certificates as
redemption price, plus 1% quarterly interest thereon until full
payment. The bank filed the petition for certiorari with the Supreme
Court, essentially on pure questions of law.
Issues: 1. Whether the bank can be compelled to redeem the
preferred shares issued to RFRDC and Robes.
2. Whether RFRDC and Robes are entitled to the payment of
certain rate of interest on the stocks as a matter of right
without necessity of a prior declaration of dividend.
Held:
1. A preferred share of stock, on one hand, is one which entitles the
holder thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to subscribe
for shares of a corporation. Preferred shares take a multiplicity of
forms. The most common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred shares as to
dividends. The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation in
case of liquidation; the latter is a share the holder of which is
entitled to receive dividends on said share to the extent agreed
upon before any dividends at all are paid to the holders of common
stock. There is no guaranty, however, that the share will receive any
dividends. Under the old Corporation Law in force at the time the
contract between the petitioner and the private respondents was
entered into, it was provided that "no corporation shall make or
declare any dividend except from the surplus profits arising from its
business, or distribute its capital stock or property other than actual
profits among its members or stockholders until after the payment
of its debts and the termination of its existence by limitation or
lawful dissolution." Similarly, the present Corporation Code provides
that the board of directors of a stock corporation may declare
dividends only out of unrestricted retained earnings. The Code, in
Section 43, adopting the change made in accounting terminology,
substituted the phrase unrestricted retained earnings," which may
be a more precise term, in place of "surplus profits arising from its
business" in the former law. Thus, the declaration of dividends is
dependent upon the availability of surplus profit or unrestricted
retained earnings, as the case may be. Preferences granted to
preferred stockholders, moreover, do not give them a lien upon the
property of the corporation nor make them creditors of the
corporation, the right of the former being always subordinate to the
latter. Dividends are thus payable only when there are profits
earned by the corporation and as a general rule, even if there are
existing profits, the board of directors has the discretion to
determine whether or not dividends are to be declared.
Shareholders, both common and preferred, are considered risk
takers who invest capital in the business and who can look only to
what is left after corporate debts and liabilities are fully paid.
Redeemable shares, on the other hand, are shares usually
preferred, which by their terms are redeemable at a fixed date, or at
the option of either issuing corporation, or the stockholder, or both
at a certain redemption price. A redemption by the corporation of
its stock is, in a sense, a repurchase of it for cancellation. The
present Code allows redemption of shares even if there are no
unrestricted retained earnings on the books of the corporation. This
is a new provision which in effect qualifies the general rule that the
corporation cannot purchase its own shares except out of current
retained earnings. However, while redeemable shares may be
redeemed regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the corporation has,
after such redemption, assets in its books to cover debts and
liabilities inclusive of capital stock. Redemption, therefore, may not
be made where the corporation is insolvent or if such redemption
will cause insolvency or inability of the corporation to meet its debts
as they mature.
While the stock certificate does allow redemption, the option to do
so was clearly vested in the bank. The redemption therefore is
clearly the type known as "optional". Thus, except as otherwise
provided in the stock certificate, the redemption rests entirely with
the corporation and the stockholder is without right to either
compel or refuse the redemption of its stock. Furthermore, the
terms and conditions set forth therein use the word "may". It is a
settled doctrine in statutory construction that the word "may"
denotes discretion, and cannot be construed as having a mandatory
effect. The redemption of said shares cannot be allowed. The
Central Bank made a finding that the Bank has been suffering from
chronic reserve deficiency, and that such finding resulted in a
directive, issued on 31 January 1973 by then Gov. G. S. Licaros of the
Central Bank, to the President and Acting Chairman of the Board of
the bank prohibiting the latter from redeeming any preferred share,
on the ground that said redemption would reduce the assets of the
Bank to the prejudice of its depositors and creditors. Redemption of
preferred shares was prohibited for a just and valid reason. The
directive issued by the Central Bank Governor was obviously meant
to preserve the status quo, and to prevent the financial ruin of a
banking institution that would have resulted in adverse
repercussions, not only to its depositors and creditors, but also to
the banking industry as a whole. The directive, in limiting the
exercise of a right granted by law to a corporate entity, may thus be
considered as an exercise of police power.
2. Both Section 16 of the Corporation Law and Section 43 of the
present Corporation Code prohibit the issuance of any stock
dividend without the approval of stockholders, representing not less
than two-thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. These provisions
underscore the fact that payment of dividends to a stockholder is
not a matter of right but a matter of consensus. Furthermore,
"interest bearing stocks", on which the corporation agrees
absolutely to pay interest before dividends are paid to common
stockholders, is legal only when construed as requiring payment of
interest as dividends from net earnings or surplus only. In
compelling the bank to redeem the shares and to pay the
corresponding dividends, the Trial committed grave abuse of
discretion amounting to lack or excess of jurisdiction in ignoring
both the terms and conditions specified in the stock certificate, as
well as the clear mandate of the law.
23. LANUZA vs. CA
FACTS: The Philippine Merchant Marine School (PMMI) was
incorporated in 1952 with 700 founders’ shares and 76 common
shares as its initial stock subscription reflected in the articles of
incorporation. it was only in 1978 when the company’s stock and
transfer book was registered, recording 33 common shares as the
only issued and outstanding shares of PMMI. In a dispute over the
basis of a quorum in a stockholders’ meeting, private respondents
contend that the same should be based on the initial subscribed
capital stock as reflected in the 1052 articles of incorporation, and
not on the number of issued and outstanding shares as recorded in
1978 in the company’s stock and transfer book. Petitioners contend
otherwise. Both the SEC en banc and the Court of Appeals ruled in
favor of private respondents. Hence, this petition seeking to nullify
the assailed decision.
ISSUE: What should be the basis in determining the quorum in the
stockholders’ meeting?
HELD: The initial subscribed capital stock as reflected in the articles
of incorporation should be made the basis in the determination of a
quorum. The articles of incorporation defines the charter of the
corporation and its contractual relations with the state and the
stockholders. The contents thereof are binding not only on the
corporation but also on its shareholders. In the instant case, the
articles of incorporation indicate that the company had 776 issued
and outstanding shares. On the other hand, the stock and transfer
book is not in any sense a public record and only constitutes prima
facie evidence. Hence, it may be impeached by other competent
evidence. Therefore, the same cannot be used as the sole basis for
determining the quorum as it does not reflect the totality of shares
which have been subscribed, more so when the articles of
incorporation show a significantly larger amount of shares issued
and outstanding.
24. EXCELLENT QUALITY APPAREL vs WIN MULTI-RICH
FACTS: Excellent Quality Apparel (EXCELLENT) entered into a
contract with Multi Rich Builders (MULTI-RICH) for the construction
of a garment factory in the Cavite Philippine Economic Zone
Authority (CAPEZ). Included in the contract is an arbitration clause
providing for the resort to arbitration should any unresolvable
matter arise therefrom. The construction of the building was
completed. Win Multi-Rich Builders, Inc. (WIN) was incorporated
with the SEC. WIN filed a complaint for sum of money (around
P8.6M) with a prayer for the issuance of a writ of preliminary
attachment against EXCELLENT. The RTC issued a writ of attachment
against EXCELLENT. EXCELLENT issued a check for P8.6M to prevent
the implementation of the writ. In a hearing, WIN’s counsel moved
to change its name in this case from Win Multi-Rich Builders, Inc. to
Multi-Rich Builders, Inc. EXCELLENT moved to dismiss the case on
the ground that WIN is not a party to the contract and thus cannot
institute this case. EXCELLENT obtained a Certificate of Non-
Registration of Corporation/Partnership from the SEC which
certified that it did not have any records of a Multi-Rich Builders,
Inc. WIN admitted that it was incorporated after the execution of
the construction contract, and that at the time of execution MULTI-
RICH was a sole proprietorship. The RTC denied the motion to
dismiss and ordered the release of the amount to WIN from the
check issued by EXCELLENT. EXCELLENT went up to the CA which
annulled the RTC denial and order but ruled that the RTC had
jurisdiction since it is a case for collection of a sum of money.
EXCELLENT went up to the SC assailing WIN’s legal personality in the
case and the jurisdiction of the RTC.
ISSUE: Whether or not WIN has a legal personality to institute the
present case?
RULING: NO. (*However, the petition is granted.) WIN admitted
that the contract was executed between MULTI-RICH and
EXCELLENT. It further admitted that MULTI-RICH was a sole
proprietorship. A sole proprietorship is the oldest, simplest, and
most prevalent form of business enterprise. It is an unorganized
business owned by one person. The sole proprietor is personally
liable for all the debts and obligations of the business. There is no
law authorizing sole proprietorships to file a suit in court. A
sole proprietorship does not possess a juridical personality
separate and distinct from the personality of the owner of the
enterprise. The law merely recognizes the existence of a
sole proprietorship as a form of business organization conducted for
profit by a single individual and requires its proprietor or
owner to secure licenses and permits, register its business name,
and pay taxes to the national government. The law does not vest a
separate legal personality on the sole proprietorship or empower
it to file or defend an action in court. The original petition was
instituted by WIN, which is a SEC-registered corporation. It filed a
collection of sum of money suit which involved a construction
contract entered into by EXCELLENT and MULTI-RICH, a sole
proprietorship. The counsel of WIN wanted to change the name of
the plaintiff in the suit to MULTI-RICH. The change cannot be
countenanced. The plaintiff in the collection suit is a corporation.
The name cannot be changed to that of a sole proprietorship.
Again, a sole proprietorship is not vested with juridical personality
to file or defend an action. WIN was given ample opportunity to
adduce evidence to show that it had legal personality. It failed to do
so. Where an individual or sole trader organizes a corporation to
take over his business and all his assets, and it becomes in effect
merely an alter ego of the incorporator, the corporation, either on
the grounds of implied assumption or on the grounds that the
business is the same and is merely being conducted under a new
guise, is liable for the incorporator's preexisting debts and liabilities.
In order for a corporation to be able to file suit and claim the
receivables of its predecessor in business, in this case a sole
proprietorship, it must show proof that the corporation had
acquired the assets and liabilities of the sole proprietorship. WIN
could have easily presented or attached any document e.g., deed of
assignment which will show whether the assets, liabilities and
receivables of MULTI-RICH were acquired by WIN. Having been
given the opportunity to rebut the allegations made by EXCELLENT,
WIN failed to use that opportunity. Thus, we cannot presume that
MULTI-RICH is the predecessor-in-business of WIN and hold that
the latter has standing to institute the collection suit.
*However, E.O. No. 1008 provides that The CIAC acquires
jurisdiction over a construction contract by the mere fact that the
parties agreed to submit to voluntary arbitration. The law does not
distinguish between claims involving payment of money or not.
Clearly, the RTC should not have taken cognizance of the collection
suit. The presence of the arbitration clause vested jurisdiction to the
CIAC over all construction disputes between EXCELLENT and MULTI-
RICH. The RTC does not have jurisdiction.
25. FONG v. DUENAS
FACTS: Dueñas is engaged in the bakery, food manufacturing, and
retailing business, which are all operated under his two companies,
D.C. DANTON, Inc. (Danton) and Bakcom Food Industries, Inc.
(Bakcom). He was an old acquaintance of Fong as they were former
schoolmates at the De La Salle University.law
Sometime in Nov 1996, Dueñas and Fong entered into a verbal joint
venture contract where they agreed to engage in the food business
and to incorporate a holding company under the name Alliance
Holdings, Inc. (Alliance or the proposed corporation). Its
capitalization would be Sixty Five P65 Million, to which they would
contribute in equal parts.
The parties agreed that Fong would contribute P32.5 Million in cash
while Dueñas would contribute all his Danton and Bakcom shares
which he valued at P32.5 Million. Fong required Dueñas to submit
the financial documents supporting the valuation of these shares.
On Nov 25, 1996, Fong started remitting in tranches his share in the
proposed corporation’s capital. He made the remittances under the
impression that his contribution would be applied as his
subscription to 50% of Alliance’s total shareholdings. On the other
hand, Dueñas started processing the Boboli international license
that they would use in their food business. Fong’s cash
contributions are summarized below.
Date Amount
November 25, 1996 P1,980,475.20
January 14, 1997 P1,000,000.00
February 8, 1997 P500,000.00
March 7, 1997 P100,000.00
April 28, 1997 P500,000.00
 June 13, 1997 P919,524.80
Total P5,000,000.00
On June 13, 1997, Fong sent a letter to Dueñas informing him of
his decision to limit his total contribution from P32.5 Million to P5
Million.
Fong observed that despite his P5 Million contribution, Dueñas still
failed to give him the financial documents on the valuation of the
Danton and Bakcom shares. Thus, except for Dueñas’
representations, Fong had nothing to rely on to ensure that these
shares were really valued at P32.5 Million. Moreover, Dueñas failed
to incorporate and register Alliance with the SEC.
These circumstances convinced Fong that Dueñas would no longer
honor his obligations in their joint venture agreement. Thus, on Oct
30, 1997, Fong wrote Dueñas informing him of his decision to cancel
the joint venture agreement. He also asked for the refund of the P5
Million that he advanced.
In response, Dueñas admitted that he could not immediately
return the money since he used it to defray the business expenses
of Danton and Bakcom.
To meet Fong’s demand, Dueñas proposed several schemes for
payment of the P5 Million.
However, Fong did not accept any of these proposed schemes. On
March 25, 1998, Fong wrote a final letter of demand17 informing
Dueñas that he would file a judicial action against him should he still
fail to pay after receipt of this written demand.
Since Dueñas did not pay, Fong filed a complaint against him for
collection of a sum of money and damages on April 24, 1998.
ISSUE: Whether or not Fong has the right to revoke his pre-
incorporation subscription
RULING: YES. Fong has the right to revoke his pre-incorporation
subscription: Such revocation entitles plaintiff to a refund of the
amount of P5,000,000.00 he remitted to defendant, representing
advances made in favor of defendant to be considered as payment
on plaintiff’s subscription to the proposed holding company upon its
incorporation, plus interest from receipt by defendant of said
amount until fully paid.
Unlad Resources v. Dragon: Rescission has the effect of "unmaking
a contract, or its undoing from the beginning, and not merely its
termination." Hence, rescission creates the obligation to return the
object of the contract. It can be carried out only when the one who
demands rescission can return whatever he may be obliged to
restore. To rescind is to declare a contract void at its inception and
to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to each
other, but to abrogate it from the beginning and restore the parties
to their relative positions as if no contract has been made.
When a decree for rescission is handed down : it is the duty of the
court to require both parties to surrender that which they have
respectively received and to place each other as far as practicable in
his original situation.
Fong’s prayer for the return of his contribution did not
automatically convert the action to a complaint for a sum of
money : The mutual restitution of the parties’ original contributions
is only a necessary consequence of their agreement’s rescission.
The Joint Venture Agreement: created reciprocal obligations
between Fong and Dueñas that must be performed in order to fully
consummate the contract and achieve the purpose for which it was
entered into.
Dueñas violated his agreement with Fong which justified Fong’s
rescission of the joint venture agreement under Article 1191.
However, Fong also breached his obligation in the joint venture
agreement: Thus, Fong also contributed to the non-incorporation of
Alliance that needed P65 Million as capital to operate. Hence, we
apply Article 1192 of the Civil Code, which provides:
Art. 1192. In case both parties have committed a breach of the
obligation, the liability of the first infractor shall be equitably
tempered by the courts. If it cannot be determined which of the
parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages.

The Court is not aware of the schedule of performance of the

parties’ obligations: since the joint venture agreement was never
reduced to writing which renders the Court unsure as to whose
obligation must be performed first.

The Court holds that the joint venture agreement between Fong
and Dueñas is deemed extinguished through rescission under
Article 1192 in relation with Article 1191 of the Civil Code: Dueñas
must therefore return the P5 Million that Fong initially contributed
since rescission requires mutual restitution.
After rescission : the parties must go back to their original status
before they entered into the agreement. Dueñas cannot keep
Fong's contribution as this would constitute unjust enrichment.
No damages shall be awarded to any party: in accordance with the
rule under Article 1192 of the Civil Code that in case of mutual
breach and the first infractor of the contract cannot exactly be
determined, each party shall bear his own damages.
The parties' respective claims for damages are deemed
EXTINGUISHED and each of them shall bear his own damages.