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CORPORATION LAW CASE MATRIX 5

TITLE FACTS ISSUE/S HELD DOCTRINE

Section 32
Mead v. - Mead, McCullough and three others - Whether or not the - Yes. It has to be remembered that the - A majority of the
McCullough organized the Philippine Engineering remaining directors 5 directors herein are also the only stockholders or directors
and Construction Company. The 5 of have the power to stockholders. When the four have the power to sell or
them were the only stockholders and sell or transfer to remaining directors met to resolve for transfer to one of its
also the directors of the company, one of its members the assignment, there was a quorum members the corporate
with general ordinary powers. the assets of the not only of the directors but also of property, where the
- Mead was elected as the general corporation. the stockholders. stockholders or directors
manager of the company. Under him, - McCullough, while he was the have general ordinary
the company failed in their president of the corporation, did not powers, and where there is
undertaking to raise sunken Spanish sit in the said meeting as a nothing in the articles of
fleet. It became a losing concern and representative of the corporation. The incorporation which
a financial failure. corporation was represented by the 3 prohibit such a sale.
- After 9 mos. as general manager, directors who by themselves already
Mead resigned to accept the position constituted a quorum. - Whether a private
of engineer of the Canton and - Hence, McCullough’s vote was not corporation remains
Shanghai Railway Company and thus necessary in this case, nor was his solvent or is insolvent,
left for China. presence needed to have a quorum. there is no reason why a
- Thereafter, realizing that continuing - The contact was also fair and director or officer, by
the operations of the company would reasonable as the company was authority of the majority of
mean more losses, the remaining already in bad shape. its stockholders or board of
directors unanimously assigned all the managers, may not deal
rights and interests of the company to with the corporation, loan it
McCullough for value, who also money, or buy property
assigned the same for value to other from it in like manner as a
people who with McCullough stranger. But in all cases,
subsequently formed the Manila such officer or director
Salvage Association. must act in good faith and
- Mead is now alleging that he is pay an adequate
entitled to receive his salary as consideration.
general manager, profits made before
the assignment and the value of his
personal property which he have left
and sold by the defendants. (main
issue but impertinent to the lesson).
Prime White - Prime White (thru its President & BOD - WON the dealership - NO. While it is true that the Board may - A contract of a director
Cement v. IAC Chair) and Te (also a director of Prime agreement was a delegate its powers to the President or with his corporation, if fair
White) entered into a dealership valid and any of its officers and that contracts and reasonable, may be
agreement wherein the former will enforceable contract entered into by such officers are ratified by the stockholders
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supply Te with 20,000 bags of cement binding upon the corporation, SC held provided a full disclosure of
per month at Php 9.70 per bag. that such general rules apply when his adverse interest is
- Te would open an irrevocable letter of the corporation deals with a third made.
credit in a bank each time he received person. - See Section 32 also
a delivery. - In this case, Te was also a director of
- Te then started to advertise that he Prime White. He holds a position of
was the exclusive dealer of the white trust and as such, he owes a duty of
cement, and entered into several loyalty to his corporation.
written agreements to supply the said - SC held that the contract was neither
cement with third parties. fair nor reasonable. The very low price
- Te was later on informed by the of the cement was meant to benefit
corporate secretary of Prime White Te. He was a businessman and knew
that the BOD decided to impose the ff. of the real market prices of cement.
conditions: (at that time, the price was at least
 delivery shall start at the end Nov. Php 14.50 and became Php 37.50 in
1970 1975)
 only 8000 bags would be delivered
for a period of 3 months
 price will be Php 13.30 per bag
 price may be unilaterally adjusted
by Prime White
 delivery place is Austutias (sic)
 letter of credit to be opened with
the Makati branch of Prudential
Bank
- Despite demands to enforce the
dealership agreement, Prime White
refused, forcing Te to cancel the
agreements with third parties.
- RTC adjudged Prime White liable for
damages. CA affirmed

Section 36
TITLE FACTS ISSUE/S HELD DOCTRINE
Montelibano v. - The Montelibanos and some others - Whether or not the - The SC held in the affirmative. - The test to be applied is
Bacolod – are sugar planters with identical requested increase - The resolution is supported by a valid whether the act in question
Murcia Milling milling contracts with Bacolod milling. in the annual consideration and is therefore not a is in immediate furtherance
Co. - The Montelibanos were originally production should donation ultra vires. of the corporation’s
granted a share in the resulting be granted the - It is to be noted that the contract is business, fairly incident to
product at a ratio of 45%-55%. (the farmers. signed only after the resolution. Thus, the express powers and
55% pertaining to the farmers.) the such resolution shall be deemed as a reasonably necessary to
contract has a 30-year period. modification to the proposed their exercise.
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- Sometime in 1936, the farmers and Amended Contract. Therefore, that - The acts must have a
the Milling Company entered into a resolution is considered integrated logical relation to the
modified Milling Contract which with the contract, without which, the corporate purpose
increased the former’s share to 60% farmers would not have assented to expressed in the charter.
but also with the condition that the the said Amended Contract. As such,
period of their contract will be the consideration for the main
extended for an additional 15 years., contract is deemed to be the
- In the same year a resolution was consideration for the grant of further
passed by the Board of the milling concessions in the resolution (e.g. the
company granting the farmers further extended period of the contract.)
concessions over and above the - The directors’ lack of power to amend
provisions of the Proposed Amended would be relevant if the resolution was
Milling Contract. passed after the farmers had already
- It was only days after the passing of bound themselves to the terms of the
the said resolution that the proposed printed milling contract. In this case,
milling contract was signed by both the resolution was adopted 21 days
parties. before the farmers’ assented to the
- Sometime in 1950, 3 of the major contract or while the latter were not
sugar centrals granted an increase in yet bound.
the share of their workers to the - It could not also be seen as a
product yield. novation, since the resolution
- Montelibanos et.al wanted to avail of modified only a proposal, not yet
similar increase based on the binding between the parties.
provision of the 1936 resolution. - In this light, it cannot be gainsaid that
- The Milling company denied such the board has the power to modify the
liability by contending that the terms of the proposal. The standard
resolution was granted without for such validity is whether the act is
consideration and is therefore a in immediate furtherance of the
donation ultra vires. corporation’s business, fairly incident
- The resolution being ultra vires, it is to the express powers and reasonably
contended to be void ab initio. necessary to their exercise.
Regardless if it will cause losses.
- This standard is met in the adoption of
the resolution.

Section 37
TITLE FACTS ISSUE/S HELD DOCTRINE
Alhambra - The term of existence of Alhambra - Whether or not - NO. When Alhambra made its attempt - Sec. 37, Corporation Code –
Cigar v. SEC Cigar & Cigarette Manufacturing Co., Alhambra could to extend its corporate existence, its A private corporation may
(Alhambra) Inc. for fifty (50) years extend the term of original term of fifty hyears had extend or shorten its term
from incorporation had expired on its corporate already expired; it was in the midst of as stated in the articles of
January 15, 1962. existence pursuant the three-year grace period for incorporation when
- Following the expiration of its term as to RA 3531. liquidation. approved by a majority
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provided in its articles of - As provided in Section 77 of the vote of the board of
incorporation, the company Corporation Law, continuance of a directors or trustees and
commenced its liquidation and a new “dissolved” corporation as a body ratified at a meeting by the
corporation, Alhambra Industries, Inc., corporate for three years has for its stockholders representing
was formed to carry on the business purpose the final closure of its affairs, at least two-thirds (2/3) of
of Alhambra. and no other; the corporation is the outstanding capital
- On June 20, 1963, within Alhambra’s specifically enjoined from “continuing stock or by at least two-
three-year statutory period for the business for which it was thirds (2/3) of the members
liquidation, Republic Act 3531 was established.” in case of non-stock
enacted into law, amending Section - Liquidation of the corporation’s affairs corporations.
18 of the Corporation Law to the had become necessary precisely - As provided in Section 77
effect that domestic private because its life had ended, hence, the of the Corporation Law,
corporations were empowered to corporate existence and juridical continuance of a
extend their corporate life beyond the personality of that corporation to do “dissolved” corporation as
period fixed by the articles of business may no longer be extended. a body corporate for three
incorporation for a term not to exceed - The moment a corporation’s right to years has for its purpose
fifty (50) years in any one instance. exist as an “artificial person” ceases, the final closure of its
- Thereafter, Alhambra’s board of its corporate powers are terminated affairs, and no other; the
directors amended their articles of “just as the powers of a natural corporation is specifically
incorporation to extend its corporate person to take part in mundane affairs enjoined from “continuing
life for an additional fifty years. cease to exist upon his death”; there the business for which it
- Alhambra’s stockholders, representing is nothing left but to conduct, as it was established.”
more than two-thirds of the were, the settlement of the estate of a - To renew a charter is to
company’s outstanding capital stock, deceased juridical person. revive a charter which has
voted to approve the resolution. - Under Section 77, no corporation in a expired, or, in other words,
- The amended articles of incorporation state of liquidation can act in any way, ‘to give a new existence to
were file with the Securities and much less amend its articles, “for the one which has been
Exchange Commission (SEC) which purpose of continuing the business for forfeited, or which has lost
rejected the same as it averred that which it was established.” its vitality by lapse of time’.
Alhambra could not avail of RA 3531 - Nowhere in RA 3531 could be found - To extend a charter is ‘to
as its term of existence had already the word “renew” in reference to the increase the time for the
expired when the law took effect; in authority given to corporations to existence of one which
short, said law had no retroactive protract their lives; the law limits itself would otherwise reach its
effect. to extension of corporate existence; limit at an earlier period.
as such extension may be made only
before the term provided in the
corporate charter expires.
- Allowing Alhambra to extend its
corporate existence in view of he
circumstances would open the gates
for all defunct corporations – whose
charters have expired even long
before RA 3531 came into being – to

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resuscitate their corporate existence.
- At the time of the passage of RA 3531,
Alhambra’s corporate life had already
expired. It had overstepped the limits
of its limited existence; no life there is
to prolong.
- With the creation of Alhambra
Industries, Inc., the word Alhambra,
the name that counts (it has goodwill),
remains.

Section 38
TITLE FACTS ISSUE/S HELD DOCTRINE
Phil. Trust v. - Cooperativa Naval Filipina was duly - Whether or not the - YES. The resolution releasing the - It is established doctrine
Rivera incorporated under the laws of the resolution was ineffectual shareholders from their obligation to that subscription to the
Philippine Islands, with a capital of pay 50 per centum of their respective capital of a corporation
P100,000, divided into one thousand subscriptions was an attempted constitute a find to which
shares of a par value of P100 each. withdrawal of so much capital from creditors have a right to
Among the incorporators of this the fund upon which the company's look for satisfaction of their
company was Mariano Rivera, who creditors were entitled ultimately to claims and that the
subscribed for 450 shares rely and, having been effected without assignee in insolvency can
representing a value of P45,000, the compliance with the statutory maintain an action upon
remainder of the stock being taken by requirements, was wholly ineffectual. any unpaid stock
other persons. subscription in order to
- The articles of incorporation were duly realize assets for the
registered in the Bureau of Commerce payment of its debts.
and Industry on October 30 of the - A corporation has no power
same year. to release an original
- In the course of time the company subscriber to its capital
became insolvent and went into the stock from the obligation of
hands of the Philippine Trust paying for his shares,
Company, as assignee in bankruptcy; without a valuable
and by it this action was instituted to consideration for such
recover one-half of the stock release; and as against
subscription of Rivera , which creditors a reduction of the
admittedly has never been paid. capital stock can take place
- The reason given for the failure of the only in the manner an
Rivera to pay the entire subscription under the conditions
is, that not long after the Cooperativa prescribed by the statute
Naval Filipina had been incorporated, or the charter or the
a meeting of its stockholders articles of incorporation.
occurred, at which a resolution was Moreover, strict compliance
adopted to the effect that the capital with the statutory
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should be reduced by 50 per centum regulations is necessary.
and the subscribers released from the
obligation to pay any unpaid balance
of their subscription in excess of 50
per centum of the same. As a result of
this resolution it seems to have been
supposed that the subscription of the
various shareholders had been
cancelled to the extent stated; and
fully paid certificate were issued to
each shareholders for one-half of his
subscription.
- It does not appear that the formalities
prescribed in section 17 of the
Corporation Law, as amended, relative
to the reduction of capital stock in
corporations were observed, and in
particular it does not appear that any
certificate was at any time filed in the
Bureau of Commerce and Industry,
showing such reduction.
Madrigal & Co. - Petitioner was engaged in the mgmt. of Rizal - WON the NLRC was - No. As a general rule, findings of administrative - Section 38 of the corporation code
v. Zamora Cement Co., Inc. In fact, the 2 are sister incorrect with its agencies are accorded not only respect but even talks about the power of the
companies because both are owned by the same findings. finality. In no way can the questioned decisions corporation to increase or decrease
or practically the same stockholders. be seen as arbitrary. The decisions themselves capital stock or create or increase
- Respondent Zamora of the Madrigal Central show why. bonded indebtedness. For such to
Office Employees Union sought for the renewal - There was no substantial compliance with the happen, it needs the vote of the
of its CBA with petitioner; but the latter clearance requirement to terminate. The letter majority of the Board, approved
requested for a deferment in the negotiations. was unverified, not even a single document by 2/3 of outstanding stock or
- Then, petitioner on 2 several occasions had its submitted in support thereof, the same failed to members and approved by the
capitalization reduced from 765,000 to 267,366 specify the individual employees to be affected SEC.
to 110,085 shares by effecting distribution of by the intended retrenchment. It was not clear. - In the case at bar, petitioner,
marketable securities owned by petitioner to its - That’s why it was correctly concluded that the wanting to evade the pains of
stockholders in exchange for their shares in an letter was insufficient in form and substance to dealing with union’s asking for
equivalent amount in the corporation. constitute a valid compliance with the clearance wage and benefits increase,
- After the failure of the petitioner to sit down requirement. decided to reduce its capital stock
with respondent union, the latter commenced - What clearly emerges from the recorded facts is to make it appear that they were
with the NLRC a complaint for ULP, but that the petitioner, awash with profits its operating at a loss though in
petitioner filed its position paper alleging business operations but confronted with the reality they weren’t.
operational losses; the Rizal had ceased demand of the union for wage increases,
operating temporarily; that because of the desire decided to evade its responsibility towards the
of stockholders to phase out the operations of employees by a devised capital reduction.
Madrigal it has effected reduction in - While the reduction in capital stock created an

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capitalization, and had turned to retrenching apparent need for retrenchment, it was, by all
employees for reorganization. They then asked indications just a mask for the purge of union
that they may be allowed to effect members, who, by then, had agitated for wage
reorganization gradually. increases.
- The letter however was not verified neither was - Therefore the petitions are dismissed. Findings
it accompanied by the proper supporting of LA affirmed.
documents thus DOLE took no action.
- Labor Arbiter then rendered a decision granting
a general wage increase plus a monthly living
allowance in favor of the employees.
- Petitioner then applied for clearance to
terminate a number of employees but this was
denied. Also, the other case was affirmed by the
NLRC.
- Hence this appeal

Section 39
TITLE FACTS ISSUE/S HELD DOCTRINE
Benito v. SEC - Jamiatul Philippine Al Islamia Inc. had - Whether or not a - NO. The power to issue shares of -
an authorized capital stock of stockholders’ stocks in the corporation is lodged in
P200,000.00 divided into 20,000 meeting is the BOD and no stockholders’ meeting
shares at par value of P10.00. 8,058 necessary for the is necessary to consider it because
shares were fully paid for. Benito issuance of the additional issuance of shares of stock
subscribed to 460 shares. unsubscribed does not need the approval of the
- In 1975, the corporation filed a portion of the stockholders.
certificate of increase of its capital capital stock - The by-laws of the corporation itself
stock from P200,000.00 to states that “the Board of Trustees
P1,000,000.00. It was shown in the shall, in accordance with law, provide
certificate that P191,560.00 worth of for the issue and transfer of shares of
shares were represented. stock of the Institute and shall
- Thus, P110,980.00 worth of shares - Whether or not a prescribe the form of the certificate of
were subsequently issued by the stockholder enjoys stock of the Institute”.
corporation from the unissued portion pre-emptive right to - NO. The general rule is that the pre-
of the authorized capital stock of buy unissued shares emptive right is recognized only with
P200,000.00. Of the increased capital of originally respect to new issue of shares, and
stock of P1,000,000.00, P160,000.00 authorized capital not with respect to additional issues of
worth of shares were subscribed by stock. originally authorized shares.
Ramos, Lucman and Alonto. - This is on the theory that when a
- Benito filed a petition with the SEC corporation at its inception offers its
praying that the additional issue of first shares, it is presumed to have
shares of previously authorized capital offered all of those which it is
stock as well as the shares issued authorized to issue. An original
from the increase of capital stock be subscriber is deemed to have taken
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cancelled on the following grounds: his shares knowing that they form a
- the stockholders were not definite proportionate part of the
notified of the meeting wherein whole number of authorized shares.
the proposed increase was in the - When the shares left unsubscribed are
agenda later reoffered, he cannot therefore
- the additional issue of previously claim a dilution of interest.
subscribed shares was made in
violation of his pre-emptive right
to said additional issue

Section 40
TITLE FACTS ISSUE/S HELD DOCTRINE
Islamic - The Islamic Directorate of the Philippines (IDP) - W/N the contract of sale - NO.
Directorate v. is composed of all major tribal groups in the entered into between the - The Corporation Code provides that for the sale
CA Phils. Carpizo group and INC is to be valid, the majority vote of the legitimate
- When martial law was declared, most of the valid Board of Members/Trustees must be obtained
members of the Board of Trustees went into and concurred in by the vote of at least 2/3 of
hiding to escape political persecution. the bona fide members of the corporation.
- Thereafter, 2 Muslim groups sprung – the - Since the SC had earlier ruled that the election
Carpizo group and the Tamano group. Both of the Carpizo group as board members is null
claim to be the legitimate IDP. and void, the latter is bereft of any authority to
- In a suit between them, however, the SEC bind the IDP in any kind of transaction.
declared that neither of them are IDP board
members and further ordered the election of a
new board members.
- Without having been elected as Board
Members, the Carpizo group sold a parcel of
land owned by the IDP to the Iglesia ni Cristo
(INC).
- The IDP now seeks to have the contract of sale
declared null and void because the Carpizo
group is bereft of any authority to bind IDP in
any kind of transaction.
Edward Nell v. - Nell Company sued Insular Farms for - Whether or not - SC held that it is not liable because: - Generally where a
Pacific Farms the unpaid balance of the purchase Pacific Farms is - The sale was not entered into to corporation sells or
price of the pump that it sold to the liable to Nell defraud Nell because the sale otherwise transfers all of
latter. After the writ of execution was Company. happened 1 month before the filing of its assets to another
returned unsatisfied because the the case. corporation, the latter is
Insular Farms has no leviable property, - Pacific purchased the shares as the not liable for the debts and
Nell Company sued against Pacific highest bidder at an auction sale held liabilities of the transferor,
Farms to claim the amount upon the at the instance of bank to which the except:
theory that the latter company is an shares were pledged. 1. Where the purchaser
alter ego of Insular Farms. - Pacific paid for the shares separately expressly or impliedly
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- Pacific Farms bought 1,000 shares of from the subsequent sale of assets. agrees to assume such
Insular and then sold them to a group - No consolidation or merger because debts,
of individuals who reorganized the the allegations of being an alter ego 2. Where the transaction
corporation, then the BOD sold the clearly negates such. amounts to a
reorganized company and all of its - The inadequacy of the P10,000 is consolidation or merger
assets to Nell for 10,000. untenable because the sale was of the corporation,
approved by the SEC, hence, price 3. Where the purchasing
was fair and reasonable. corporation is merely a
continuation of the
selling corporation,
4. Where the transaction is
entered into fraudulently
in order to escape
liability for such debts.

Section 41
TITLE FACTS ISSUE/S HELD DOCTRINE
Steinberg v. - Steinberg is the receiver of the - Whether Sibuguey - NO. In this issue, the SC held that the - See Section 41
Velasco Sibuguey Trading Company. could legally directors did not act in good faith or - The creditors of a
- It is alleged that the defendants purchase its own that they were grossly ignorant of corporation have the right
(president, vice president, secretary- stock. (Sec. 41) their duties. to assume that so long as
treasurer and director), at a meeting, - It appeared that the action of the there are debts and
approved and authorized various board in purchasing the stock and in liabilities, the board of
unlawful purchases already made of a declaring dividends was all done at directors of the corporation
large portion of the capital stock of the same meeting of the board of will not use its assets to
Sibuguey from its various directors. At that time, Ganzon and purchase its own stock or
stockholders, thereby diverting its Mendaros were formally directors and to declare dividends to its
funds to the injury, damage, and in resigned before the board approved stockholders when the
fraud of the creditors of the the purchase and declared dividends. corporation is insolvent.
corporation. (Sec. 41 applicable) - In other words, they were permitted to - If the directors of a
- That when the capital stock resign so that they could sell their corporation do acts clearly
amounting to Php 3,300 was - Whether the Board stock to the corporation. beyond their power, by
purchased, Sibuguey had accounts of Directors of - NO. It seemed that the board of reason of which a loss
payable to about Php 14K. Sibuguey could directors acted on the assumption ensued, or dispose of its
- As another cause of action, it is also legally declare a that, because it appeared from the property without authority,
alleged that the officers and directors dividend. (Sec. 43) books that it had accounts receivable, they will be required to
of the corporation approved a therefore it had a surplus over and make good the loss out of
resolution for the payment of Php 3K above its debts and liabilities. their private estate.
dividends to its stockholders when - However, the SC noted that there was
during that time Sibuguey had no stipulation as to the actual cash
accounts payable of about Php 9K. value of those accounts. Thus, that in
(Sec. 43 applicable) the purchase of its own stock and in
- Steinberg prayed that the defendants declaring dividends, the real assets of
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be liable for the amount of the capital the corporation were diminished by
stock purchased and the amount of Php 6,300.
the dividends paid. - In other words, the corporation did not
- The lower court dismissed the have then an actual bona fide surplus
complained and rendered judgment in from which dividends could be paid,
favor of the defendants. and that eh payment of them in full at
that time would “affect the financial
condition of the corporation.”
- The SC reversed the decision of the
lower court and held the defendants
liable.

Section 42
TITLE FACTS ISSUE/S HELD DOCTRINE
De la Rama v. - This case was filed by four minority - Whether the - NO. The SC agreed with the finding of - An investment of corporate
Ma-ao Sugar stockholders against the Ma-ao Sugar investment of the the lower court that the investment in funds in another
Central Co., Central and four of its directors. corporate funds by question does not fall under the corporation, if done in
Inc. - It is alleged that Ma-ao Sugar Central, Ma-ao in Philippine purview of the Section 17 ½ of the pursuance of the corporate
through its President (Araneta), Fiber constitutes a Corporation Law. purpose, does not need the
subscribed for Php 300K worth of violation of the - The SC quoted Prof. Guevara in approval of the
capital stock of the Philippine Fiber Corporation Law. explaining the said provision. “Such stockholders.
Processing Co. an act, if done in pursuance of the - But when the purchase of
- At that at the time the first two corporate purpose, does not need the shares of another
payments were made, there was no approval of the stockholders. But corporation is done solely
board resolution authorizing such when the purchase of shares of for investment and not to
investment. It was only a few months another corporation is done solely for accomplish the purpose of
after that Araneta was authorized by investment and not to accomplish the its incorporation, the vote
the Board of Directors. purpose of its incorporation, the vote of approval of the
- It was also alleged that 355,000 of approval of the stockholders is stockholders is necessary.
shares of stock of Philippine Fiber, necessary.” - Further, when the purpose
owned by Luzon Industrial, were - Also, “when the investment is is as stated in its articles of
transferred to Ma-ao without prior necessary to accomplish its purpose incorporation, the approval
board resolution. Such transfer or purposes as stated in the articles of of the stockholders is not
however was subsequently approved. - Whether Ma-ao may incorporation, the approval of necessary.
- The lower court held that the make investments in stockholders is not necessary. - The Corporation Law allows
investment of corporate funds was not any other company - YES. The SC reversed the order of the a corporation to invest its
a violation of the Corporation Law. It whose purpose is lower court refraining Ma-ao from funds in any other
considered the defendants correct in not connected with making investments in other company corporation or business, or
contending that since the company the sugar central whose purpose not connected with for any purpose other than
was engaged in the manufacture of business. the sugar central business. the main purpose for which
sugar bags it was legitimate for Ma-ao - It reasoned that the Corporation Law it was organized, provided
to either manufacture sugar bags or allows a corporation to invest its funds that its board of directors
invest in another corporation engaged in any other corporation or business, has been so authorized by
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in said manufacture. or for any purpose other than the the affirmative vote of
- However, the lower court ordered Ma- main purpose for which it was stockholders holding
ao to refrain from making investments organized, provided that its board of shares entitling them to
in any other companied whose directors has been so authorized by exercise at lease 2/3 of the
purpose is not connected with sugar the affirmative vote of stockholders voting power.
central business. holding shares entitling them to
exercise at lease 2/3 of the voting
power.
Gokongwei v. - Gokongwei Jr. is a stockholder of San - WON the transaction - NO. The law allows a corporation to - If the investment is made
SEC Miguel Corporation (SMC). He seeks to was invalid invest its funds in any other in the pursuance of the
have the court nullify the amended corporation or business or for any corporate purpose, it does
by-laws which disqualifies any person other purpose other than the main not need the approval of
for nomination or election to the purpose for which it was organized. the stockholders.
Board of Directors (BOD) if he is - The purchase of the beer - But when the purchase of
engaged in any business whose manufacturing facilities was in shares is done solely for
interests are adverse to the SMC. furtherance of the corporate purpose investment and not to
- It was enacted by the majority of the - WON the purchase and as such, no prior approval of the accomplish the purpose of
BOD. was ultra vires stockholders was necessary. its incorporation, the vote
- Gokongwei is also owner/stockholder - NO. The mere fact that SMC submitted of approval of the
of Universal Robina Corp. and CFC. the investment for ratification at the stockholders is needed. At
Both businesses are engaged in annual meeting cannot be construed least 2/3 of the outstanding
agriculture, ice cream, coffee which as an admission that SMC committed stock is needed.
are also businesses engaged in by an ultra vires act.
SMC.
- As one of his causes of action,
Gokongwei, questions the investment
of SMC corporate funds without prior
authority of the stockholders.
- The transaction that he questions is
the purchase of beer manufacturing
facilities.
- This purchase was later ratified by the
stockholders.
Gokongwei v. - Petitioner seeks to nullify the en banc - WON the petition for - NO. -
SEC (MR) decision of the SEC upholding the review should be - SC already ruled on the validity of the
findings of the San Miguel Corporation granted by-laws and such cannot be re-
(SMC) BOD that Gokongwei is litigated being the law of the case.
engaged in a business competitive to - The alleged disqualification of some of
that of SMC. the board members was not an issue
- Thus, he is ineligible to run for during the hearing; nor has petitioner
election as director, pursuant to the submitted evidence to prove this
by-laws. contention.
- Petitioner contends that the matter of - The basis of the SEC’s order was
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his disqualification has not yet been based on several testimonial evidence
heard since an MR is pending before as well as documentary evidence
the SC. submitted showing that petitioner is
- According to the petitioner, SEC failed engaged in agricultural and poultry
to consider that SMC cannot disqualify business competitive with that of
Gokongwei because they were in pari SMC. No evidence was offered by the
delicto since some of the board petitioner to rebut such evidence.
members were also disqualified being
similarly situated like the petitioner.
- Also, petitioner claims that the BOD of
SMC over exerted its corporate power
for them to remain in position.

Section 43
TITLE FACTS ISSUE/S HELD DOCTRINE
Nielson & Co. - Nielson & Company entered into a - Whether or not - The SC overruled its earlier decision, - “No corporation shall issue
v. Lepanto management contract with Lepanto, Nielson should be - It is recognized that stocks can be stocks or bond except in
Consolidated where Nielson was given the right for entitled to P300,000 issued in exchange of cash, property exchange for actual cash
five years (renewable for the same worth of stocks as or as undistributed profits. paid to the corporation
period) to develop and operate the compensation for its - The Supreme Court then distinguished or for property actually
mining claims of Lepanto. services. the legal implications of issuing stocks received by it…or for
- Said contract was modified and one of as dividends and issuing of stocks in profits earned by it but
the contested provisions of which is exchange for cash or property. not distributed among its
that which grants Nielson as - On the one hand, issuing stocks in stockholders or members.”
compensation for its services “10% of payment of services is considered as - Stocks issued in exchange
any dividends declared and paid.” to be one in exchange of property for cash or property are
- The SC ruled before that the import of since services are deemed as issued for capital
this provision is that Nielson will be property. generation and can be
given 10% of what is actually going - And the Court enunciated that issued to a non-
to be declared and distributed as issuance of stocks in exchange of cash stockholder.
dividends by Lepanto. or property is culled from the original - Stock dividends should be
- Thus, since Lepanto declared a total of capitalization of the company or from considered as 1.) a
P3M of dividends during the period of the increased capitalization. They are dividend, and 2.) an
extension of the contract, the SC done in order to generate capital. enforced use of the
ordered Lepanto to grant P300,000 Thus, they can be issued to persons dividend money to
worth of its stocks to Nielson. not yet stockholders of the company. purchase additional shares
- Lepanto contests this judgment - This is not however the case with at par.
primarily because such provision, as stock dividends. A dividend is defined - A dividend is defined as the
alleged, is contrary to the Corporation as the portion of the profits of the portion of the profits of the
Code. enterprise which the corporation sets enterprise which the
apart for ratable division among the corporation sets apart for
holders of the capital stock. ratable division among the
- From this definition, it can be easily holders of the capital stock.
12
gleaned that stocks issued as dividend - As such, stock dividends
can only be issued to existing can only be granted to
stockholders, since they are the only existing stockholders in
ones entitled to a proportional share proportion to their shares.
in that part of the surplus which is
declared as dividends.
- From this conclusion, it is not right to
give Nielson a corresponding 10% of
the stocks dividend declared since this
amounts to issuance of stocks to
someone not yet a stockholder.
- Furthermore, since dividends are
distributed ratably, issuance of stock
dividends to Lepanto in payment of
his compensation will deprive other
stockholders to their rightful share of
the profits.
- Finally, The Court also looked upon
the minutes held by both parties to
interpret the contested provision of
the contract. It was seen that the
intention was only to tie the
computation of Nielson’s
compensation with 10% of the
declared dividends, in what form they
might be. The dividend is only the
basis but not the source for such
payment.
- As such, the SC modified its ruling
entitling Nielson with P300,000 in
cash and 6% legal interest of such
amount.
Steinberg v. - Steinberg is the receiver of the - Whether Sibuguey - NO. In this issue, the SC held that the - See Section 43
Velasco Sibuguey Trading Company. could legally directors did not act in good faith or - The creditors of a
- It is alleged that the defendants purchase its own that they were grossly ignorant of corporation have the right
(president, vice president, secretary- stock. (Sec. 41) their duties. to assume that so long as
treasurer and director), at a meeting, - It appeared that the action of the there are debts and
approved and authorized various board in purchasing the stock and in liabilities, the board of
unlawful purchases already made of a declaring dividends was all done at directors of the corporation
large portion of the capital stock of the same meeting of the board of will not use its assets to
Sibuguey from its various directors. At that time, Ganzon and purchase its own stock or
stockholders, thereby diverting its Mendaros were formally directors and to declare dividends to its
funds to the injury, damage, and in resigned before the board approved stockholders when the

13
fraud of the creditors of the the purchase and declared dividends. corporation is insolvent.
corporation. (Sec. 41 applicable) - In other words, they were permitted to - If the directors of a
- That when the capital stock resign so that they could sell their corporation do acts clearly
amounting to Php 3,300 was - Whether the Board stock to the corporation. beyond their power, by
purchased, Sibuguey had accounts of Directors of - NO. It seemed that the board of reason of which a loss
payable to about Php 14K. Sibuguey could directors acted on the assumption ensued, or dispose of its
- As another cause of action, it is also legally declare a that, because it appeared from the property without authority,
alleged that the officers and directors dividend. (Sec. 43) books that it had accounts receivable, they will be required to
of the corporation approved a therefore it had a surplus over and make good the loss out of
resolution for the payment of Php 3K above its debts and liabilities. their private estate.
dividends to its stockholders when - However, the SC noted that there was
during that time Sibuguey had no stipulation as to the actual cash
accounts payable of about Php 9K. value of those accounts. Thus, that in
(Sec. 43 applicable) the purchase of its own stock and in
- Steinberg prayed that the defendants declaring dividends, the real assets of
be liable for the amount of the capital the corporation were diminished by
stock purchased and the amount of Php 6,300.
the dividends paid. - In other words, the corporation did not
- The lower court dismissed the have then an actual bona fide surplus
complained and rendered judgment in from which dividends could be paid,
favor of the defendants. and that eh payment of them in full at
that time would “affect the financial
condition of the corporation.”
- The SC reversed the decision of the
lower court and held the defendants
liable.

Section 45
TITLE FACTS ISSUE/S HELD DOCTRINE
Pirovano v. - Enrico Pirovano was executed by the - Whether or not the - NO. A review of the corporation’s - With respect to the
dela Rama Japanese. corporation’s articles of incorporation manifested meaning, extent, and
- The Board of Directors of De la Rama donation was ultra that the corporation had broad powers scope of an ultra vires act,
Steamship Co., composed chiefly of vires and therefore to: a) deal with the moneys of the many authorities are
members of the De la Rama family, invalid. company not immediately required, in uniform and unanimous
adopted a resolution donating the such manner as from time to time that the same may be
proceeds of the life insurance policies may be determined; and b) to aid in either an act performed
of said Enrico Pirovano, husband of any other manner any person, merely outside the scope
Estefania de la Rama, to his minor association, or corporation of which of the powers granted to
children. any obligation of in which any interest corporation by its articles
- The donation was made in recognition is held by this corporation or in the of incorporation, or one
of Pirovano’s contribution to the great affairs or prosperity of which this which is contrary to law or
success of the company when he was corporation has a lawful interest. violative of any principle
president and general manager - Under the first power, the word deal which would void any
14
thereof. is broad enough to include any contract whether done
- It was earlier resolved that P400,000 manner of disposition, and refers to individually or collectively.
worth of shares, or 4,000 shares with moneys not immediately required by - Illegal corporate acts
a par value of P100 per share, will be the corporation, and such disposition contemplate the doing of
issued in favor of Pirovano’s children may be made in such manner as from an act contrary to law,
where each of the four children will time to time may be determined by morals, or public order, etc.
get 1,000 shares. the corporation. and are void.
- However, this was later nullified upon - The donation in question is within the - Mere ultra vires acts which
showing by Lourdes de la Rama, wife scope of said broad power for it is a are not illegal or void ab
of Sergio Osmeña, Jr., that the value of fact appearing in the evidence that initio but are not merely
the stocks then was 3.6 times their the insurance proceeds were not within the scope of the
par value, thus P1.44 million was the immediately required when they were articles of incorporation,
amount in fact donated. given away. are merely voidable and
- Another resolution was adopted - Under the second broad power, the may become binding and
whereby the company renounced its record of the case is replete with enforceable when ratified
rights to the proceeds of the life instances which clearly show that the by the stockholders.
insurance policies but were retained corporation knew well its scope and - (As deduced) ultra vires
as a loan drawing interest payable meaning as many similar donations acts are valid when they
after its National Development Co. were made to former employees and are approved by the Board
obligation shall have been settled. even non-employees by reason of and ratified by the
- A New York property owned by certain moral or political stockholders. They are not
Demwood Realty, upon approval by considerations. merely executory but
the Board of Directors, was purchased - An issue could be raised as to the size executed and
by Mrs. Pirovino from the proceeds of of the donation but aside from being consummated, and no
the insurance policies. similar to the past donations, creditors are prejudiced, or
- The latter resolution with some gratuities or pensions, the gratuity if there are creditors
clarifying modifications, including the here was given not merely motivated affected, the latter have
purchase of the New York property, by pure liberality but also by a deep expressly given their
was ratified by the stockholders sense of recognition of Enrico conformity.
- Sergio Osmeña, Jr. as the new Pirovano’s contributions to the
President and General Manager corporation.
challenged the validity of the donation - It is also to be considered that Enrico
with the SEC which decided that the Pirovano is a member of the de la
act was void as being ultra vires Rama family, having been married to
because the corporation could not one of the de la Rama scions.
dispose of its assets by gift. - Also, granting innuendo that the
- A measure was thus considered to donation was ultra vires, the
circumvent the prohibition by way of resolution was adopted by the Board
declaring cash dividends and asking of Directors and was later on ratified
the shareholders to donate the same by the stockholders, thus obliterating
to the minor children but did not any infirmity and making the act
materialize. perfectly valid and enforceable. The
- Majority of the stockholders thereafter corporation is thus now prevented or

15
revoked the donation. estopped from contesting the validity
- The minor children thus brought an of the donation.
action demanding payment of he - It is not contended that donation was
credit due them. illegal or contrary to any of the
express provisions of the articles of
incorporation, nor prejudicial to the
creditors of the corporation.
- To allow the corporation to revoke the
donation would not only be unfair but
would also contravene the well-settled
doctrine that the defense of ultra
vires cannot be set up or availed of in
completed transactions.
Republic v. - Acoje Mining Company, Inc. wrote the - WON the resolution is - NO. The contention that the resolution - The weight of authority in
Acoje Mining Director of Posts requesting the ultra vires adopted by the board is ultra vires in the state courts is to the
opening of a post, telegraph and the sense that it has no authority to effect that a transaction
money order offices at its mining act on a matter which may render the which is merely ultra vires
camp at Sta. Cruz, Zambales, to company liable as a guarantor has no and not malum in se or
service its employees and their factual or legal basis. In the first malum prohibitum, is, if
families that were living in said camp. place, it should be noted that the performed by one party,
- Acting on the request, the Director of opening of a post office branch at the not void as between the
Posts wrote in reply stating that if mining camp the corporation was parties to all intents and
aside from free quarters the company undertaken because of a request purposes, and that an
would provide for all essential submitted by it to promote the action may be brought
equipment and assign a responsible convenience and benefit of its directly on the transaction
employee to perform the duties of a employees. The idea did not come and relief had according to
postmaster without compensation from the government, and the its terms.
from his office until such time as funds Director of Posts was prevailed upon - This rule is based on the
therefor may be available he would to agree to the request only after consideration that as
agree to put up the offices requested. studying the necessity for its between private
- The company in turn replied signifying establishment and after imposing corporations, one party
its willingness to comply with all the upon the company certain cannot receive the benefits
requirements outlined in the letter of requirements intended to safeguard which are embraced in
the Director of Posts requesting at the and protect the interest of the total performance of a
same time that it be furnished with government. contract made with it by
the necessary forms for the early - Thus, after the company had signified another party and then set
establishment of a post office branch. its willingness to comply with the up the invalidity of the
- The Director of Posts again wrote a requirement of the government that it transaction as a defense."
letter to the company stating among furnish free quarters and all the - The defense of ultra vires
other things that "In cases where a essential equipment that may be rests on violation of trust or
post office will be opened under necessary for the operation of the duty toward stockholders,
circumstances similar to the present, office including the assignment of an and should not be
it is the policy of this office to have employee who will perform the duties entertained where its

16
the company assume direct of a postmaster, the Director of Posts allowance will do greater
responsibility for whatever pecuniary agreed to the opening of the post wrong to innocent parties
loss may be suffered by the Bureau of office stating that "In cases where a dealing with corporation.
Posts by reason of any act of post office will be opened under - The acceptance of benefits
dishonesty, carelessness or circumstances similar to the present, arising from the
negligence on the part of the it is the policy of this office to have performance by the other
employee of the company who is the company assume direct party may give rise to an
assigned to take charge of the post responsibility for whatever pecuniary estoppel precluding
office," thereby suggesting that a loss may be suffered by the Bureau of repudiation of the
resolution be adopted by the board of Posts by reason of any act of transaction.
directors of the company expressing dishonesty, carelessness or - The current of modern
conformity to the above condition negligence on the part of the authorities favors the rule
relative to the responsibility to be employee of the company who is that where the ultra vires
assumed buy it in the event a post assigned to take charge of the post transaction has been
office branch is opened as requested. office," and accepting this condition, executed by the other
- The company informed the Director of the company, thru its board of party and the corporation
Posts of the passage by its board of directors, adopted forthwith a has received the benefit of
directors of a resolution of the resolution of the following tenor: "That it, the law interposes an
following tenor: "That the requirement the requirement of the Bureau of Posts estoppel, and will not
of the Bureau of Posts that the that the company should accept full permit the validity of the
Company should accept full responsibility for all cash received by transaction or contract to
responsibility for all cash received by the Postmaster, be complied with, and be questioned, and this is
the Postmaster be complied with, and that a copy of this resolution be especially true where there
that a copy of this resolution be forwarded to the Bureau of Posts." is nothing in the
forwarded to the Bureau of Posts." - The claim that the resolution adopted circumstances to put the
- The letter further states that the by the board of directors of appellant other party to the
company feels that that resolution company is an ultra vires act cannot transaction on notice that
fulfills the last condition imposed by also be entertained it appearing that the corporation has
the Director of Posts and that, the same covers a subject which exceeded its powers in
therefore, it would request that an concerns the benefit, convenience and entering into it and has in
inspector be sent to the camp for the welfare of its employees and their so doing overstepped the
purpose of acquainting the families. While as a rule an ultra vires line of corporate privileges.
postmaster with the details of the act is one committed outside the
operation of the branch office. object for which a corporation is
- The post office branch was opened at created as defined by the law of its
the camp with Sanchez as postmaster. organization and therefore beyond the
- The postmaster went on a three-day powers conferred upon it by law, there
leave but never returned. The are however certain corporate acts
company immediately informed the that may be performed outside of the
officials of the Manila Post Office and scope of the powers expressly
the provincial auditor of Zambales of conferred if they are necessary to
Sanchez' disappearance with the promote the interest or welfare of the
result that the accounts of the corporation. Thus, it has been held

17
postmaster were checked and a that "although not expressly
shortage was found in the amount of authorized to do so a corporation may
P13,867.24. become a surety where the particular
- The several demands made upon the transaction is reasonably necessary or
company for the payment of the proper to the conduct of its business,"
shortage in line with the liability it has and here it is undisputed that the
assumed having failed, the establishment of the local post office
government commenced the action is a reasonable and proper adjunct to
seeking to recover the amount of the conduct of the business of
Pl3,867.24. The company in its answer appellant company. Indeed, such post
denied liability for said amount office is a vital improvement in the
contending that the resolution of the living condition of its employees and
board of directors wherein it assumed laborers who came to settle in its
responsibility for the act of the mining camp which is far removed
postmaster is ultra vires, and in any from the postal facilities or means of
event its liability under said resolution communication accorded to people
is only that of a guarantor who living in a city or municipality.
answers only after the exhaustion of - Even assuming that the resolution in
the properties of the principal, aside question constitutes an ultra vires act,
from the fact that the loss claimed by the same however is not void for it
the plaintiff is not supported by the was approved not in contravention of
office record. law, customs, public order or public
policy. The term ultra vires should be
distinguished from an illegal act for
the former is merely voidable which
may be enforced by performance,
ratification, or estoppel, while the
latter is void and cannot be validated.
It being merely voidable, an ultra vires
act can be enforced or validated if
there are equitable grounds for taking
such action. Here it is fair that the
resolution be upheld at least on the
ground of estoppel.
- Neither can we entertain the claim of
appellant that its liability is only that
of a guarantor. A mere reading of the
resolution of the Board of Directors
would show that the responsibility of
the defendant company is not just
that of a guarantor. Notice that the
phraseology and the terms employed
are so clear and sweeping and that

18
the defendant assumed 'full
responsibility for all cash received by
the Postmaster. Here the responsibility
of the defendant is not just that of a
guarantor. It is clearly that of a
principal.
Carlos v. - This is an action to recover the value of 4 bonds - WON, the lower court - Yes. Phil. Trust although secondarily engaged in - “It is not, however ultra-vires for a
Mindoro Sugar issued by Mindanao Sugar Company and placed erred in saying that the banking, was primarily organized as a trust corporation to enter into contracts
in trust with the Philippine Trust Company. Phil. Trust Co. has no corporation with full power to acquire personal of guaranty or suretyship where it
- Mindanao is a corporation incorporated here in power to guarantee the property such as the bonds in question does so in the legitimate
the Phils. obligation of another according to the Corporation Law. furtherance of its purposes and
- On the other hand, Phil. Trust Company is juridical personality, for - Thus, being authorized to acquire the bonds, it business. And it is well settled that
another domestic corporation with the principal value received. was given implied power to guarantee them in where a corporation acquires
purpose is to engage in the trust business. order to place them upon the market under commercial paper or bonds in the
- On Nov. 17, 1917, the BOD’s of Phil. Trust better, more advantageous conditions, and legitimate transaction of its
adopted a resolution authorizing its president, thereby secure the profit derived from their sale. business it may sell them, and in
among others, to purchase at par and in the - A corporation which has power by its charter to furtherance of such a sale it may,
name and for the use of the trust corporation all issue its own bonds has power to guarantee the in order to make them the more
or such part as he may deem expedient, of the bonds of another corporation, which has been readily marketable indorse or
bonds in the value of P3,000,000 that Mindoro taken in payment of its own debt, the guaranty guarantee their payment.
was about to issue, and to resell them, with or being given to enable it to dispose of the bond
without the guarantee of said trust corporation, to better advantage, - “When a contract is not on its face
at a price not less than par, and to guarantee to - And so, guarantee of payment of bonds taken by necessarily beyond the scope of
the PNB the payment of the indebtedness to said a loan and trust company in the ordinary course the power of the corporation by
bank by Mindoro up to P2,000,000. of its business, made in connection with their which it was made, it will, in the
- Pursuant to this, Mindoro executed in favor of sale, are not ultra vires, and are binding. absence of proof to the contrary,
Phil. Trust Co. the deed of trust, transferring all - Also, although it is not clear that Mindoro be presumed valid. Corporations
of its property to it in consideration of the bonds transferred the bonds to Phil. Trust, are presumed to contract within
it had issued to the value of P3,000,000 nevertheless, the president of Phil. Trust was their powers. The doctrine of ultra
- Phil. Trust sold 13 bonds to a certain Ramon expressly authorized to purchase all or some of vires, when invoked for or against
Diaz at a net profit of P100 per bond. The four the bonds and to guarantee them. a corporation, should not be
bonds in dispute are included here. - There are other considerations leading to the allowed to prevail where it would
- Phil. Trust paid appellant upon presentation of same conclusion that Phil. Trust didn’t acquire defeat the ends of justice or work
the coupons the stipulated interest until when it the bonds but just guaranteed them. as a legal wrong.”
stopped payments when it alleged that it did not - In such a case, the guarantee would be valid and
deem itself bound to pay such interest or to Phil. Trust would be bound to pay the Carlos
redeem the obligation because the guarantee their value with the accrued interest.
given for the bonds was illegal and void.
- Hence this appeal by the appellant.
Japanese War - Abcede, President of JWNCAI , a non- - Whether or nor - NO.
Notes v. SEC stock non profit corporation, was JWNCAI had the - Under its articles of Incorporation,
issued an order to show cause why it right to continue JWNCAI is a non-profit corporation.
should not be proceeded against for: with the Thus, it must not engage in business

19
- 1) making misrepresentations to the abovementioned for profit.
public about the need for registering activities. - JWNCAI has the privilege to work for
and depositing Japanese war notes, the redemption of war notes of its
with a view to their possible members alone, but it cannot offer its
redemption; services to the public for a
- 2) receiving deposits of such notes consideration.
and charging fees therefor; - As to the third activity, SC held that it
- 3) accepting and collecting fees for has no relation to the avowed purpose
reparation claims for civilian of the corporation.
casualties and other injuries.
- -Abcede claims that these acts are not
prohibited by the Corporation Law,
and the corporation’s authority to
engage in such acts is implied from its
Articles of Incorporation.
Crisologo-Jose - This is a case for the violation of BP22. - W/N Benares and - Yes. - Ultra vires acts done by
v. CA - Atty. Benares and Ricardo Santos are Santos are - The law provides that an officer or an agents of the corporation
the signatories of the check in personally liable for agent of a corporation shall have the cannot be enforced against
question. They are the president and the check issued power to execute or indorse a the corporation even if
vice-president, respectively, of Mover under the account of negotiable paper in the name of the made in the name of the
Enterprises. The check was under the Mover Enterprises corporation for the accommodation of latter.
account of Mover Enterprises and a third person only if he is specifically
drawn against Traders Royal Bank. authorized to do so. Absent such
- Benares and Santos issued a check to authority, such act is ultra vires.
Ernestina Crisologo-Jose as Hence, it cannot be enforced against
consideration for her waiver over a the corporation but only against the
certain property w/c the GSIS agreed signatories thereof who shall be
to sell to their client, spouses Ong, w/ personally liable thereofr.
the understanding that upon approval -
of the GSIS of the compromise
agreement, the check will be
encashed accordingly. Since the
agreement was not approved within
the expected time, it was replaced.
Upon deposit, however, said check
was dishonored for insufficiency of
funds. Thus, this case for violation of
BP 22 fiels by Crisologo-Jose against
Benares and Santos.
- Benares and Santos contends that the
check was issued for accommodation
purposes by Mover Enterprises and
they merely signed it in a

20
representative capacity. Hence, they
are not liable.

21