CORPORATION LAW  CASE DIGEST BATCH 6  EH 501-PELAEZ.
KAREN GAVIOLA-CLIMACO
1. Teresita Electric and Power Co vs Public Service
Commission and Filipinas Cement Corp
FACTS:
The Teresa Electric Light and Power Co., Inc., —
hereinafter referred to as PETITIONER — is a domestic
corporation operating an electric plant in Teresa, Rizal,
under a subsisting certificate of public convenience and
necessity issued on June 2, 1960 (PSC Case No. 129940),
while the RESPONDENT Filipinas is likewise a domestic
corporation engaged in the manufacture and sale of cement
(who applied for a certificate of public convenience to
install, maintain and operate an electric plan for its factory
and employees living within its compound).
On May 24, 1962 Filipinas filed an application
with the Public Service Commission for a certificate of
public convenience to install, maintain and operate an
electric plant in sitio Kaysapon of barrio Pamanaan,
municipality of Teresa, Rizal, for the purpose of supplying
electric power and light to its cement factory and its
employees living within its compound.
Petitioner filed its written opposition alleging:
that it is the duly authorized operator of an electric light,
heat and power service in Teresa, Rizal; that Filipinas is
not authorized by its articles of incorporation to operate an
electric plant; that the Municipal Council of Teresa had not
authorized it either to operate the proposed service; that it
is willing to supply Filipinas' need for electricity; and that
Filipinas' principal business does not come within the
jurisdiction of the respondent Commission.
Answering the opposition, Filipinas averred that,
under paragraph 7 of its articles of incorporation, it is
authorized to operate the proposed electric plant; that there
is no need for securing the approval of the Municipal
Council before operating its electric plant as this is not a
necessary requisite for the issuance of a certificate of public
convenience inasmuch as it already possesses the 3 basic
requirements of law, namely: Filipino citizenship, financial
capacity and the need for the service in the interest and
convenience of the consuming public.
Upon consideration of the evidence, oral and
documentary, adduced by Filipinas to the effect that the
proposed electric service will be limited to the exclusive
needs of its cement factory and to give light facilities to its
employees living in the compound only, without adversely
affecting the interests and services of petitioner; that like
the latter, Filipinas will not generate its own electric current
but buy it from the MERALCO; and that no municipal
streets will be traversed by its electric wires and posts
except small portions of private properties, the
Commission, pursuant to section 15 of Commonwealth
Act 146, as amended, issued a certificate of public
convenience to it on March 15, 1963, subject to the
conditions set forth therein.|||
ISSUE:
1. whether or not Filipinas should have secured either a
municipal or legislative franchise before it could be
entitled to a certificate of public convenience and
necessity to operate and maintain an electric plant
2. whether under its articles of incorporation Filipinas is
authorized to operate and maintain an electric plant|||
ATTY.
3. whether Filipinas could be granted a certificate of
public convenience and necessity to operate and
maintain an electric plant notwithstanding the
existence of an electric plant operator (the petitioner)
in the same municipality.||
RULING:
1. No. The purpose is not for business but for exclusive
use for its own factory and employees.
petitioner contends that under the provisions
of Act No. 667 of the Philippine Commission, a municipal
or legislative franchise is a condition precedent to the
granting to Filipinas of a certificate of public convenience
and necessity to operate and maintain an electric plant.
Section 1 of the act mentioned above requires the
filing of a formal application with the Council of the
municipality in which or through which the petitioner
desires to construct or maintain its line, stating, among
other things, the rate per month to be charged for electric
light by lamp of specified standard candle-power, and by
amount of electricity consumed where a meter is used, and
the rate per centum of the gross receipts which petitioner is
willing to pay into the provincial treasury for the franchise.
Paragraphs 2 and 3, section 2 of the same act also provide
that not less than one-half of one per centum of the gross
earnings shall be paid into the provincial treasury, and that
the rates to be charged shall always be subject to
regulations by act of the Philippine Commission or the
legislative body of the Islands.
The above requirements show that the act was
intended to apply exclusively to any person or corporation
who desires a franchise to construct and maintain an
electric line or power plant and line for business purposes,
that is, to render service to the general public at such rate
of compensation as may be approved and regulated by the
government. Clearly, therefore, it should not be made to
apply to Filipinas who applied for a certificate of public
convenience and service to operate and maintain an electric
plant exclusively for its own use in connection with the
operation of its cement factory and for the use of its
employees living within the compound of the factory —
the latter to receive service free of charge.
It is, consequently, our view that all that Filipinas
needs for the purpose above mentioned is a certificate of
public convenience and necessity such as the one granted
to it by the respondent Public Service Commission.
|||
2. Yes, it is necessarily connected with the business of
manufacturing cement.
In relation to the second question, it appears that
the Articles of Incorporation of Filipinas (paragraph 7)
provide for authority to secure from any governmental,
state, municipality, or provincial, city or other authority,
and to utilize and dispose of in any lawful manner, rights,
powers, and privileges, franchises and concessions —
obviously necessary or at least related to the operation of
its cement factory. Moreover, said Articles of
Incorporation also provide that the corporation may
generally perform any and all acts connected with the
business of manufacturing portland cement or arising
therefrom or incidental thereto.
CORPORATION LAW  CASE DIGEST BATCH 6  EH 501-PELAEZ.
It can not be denied that the operation of an
electric light, heat and power plant is necessarily connected
with the business of manufacturing cement. If in the
modern world where we live today electricity is virtually a
necessity for our daily needs, it is more so in the case of
industries like the manufacture of cement.
3. No. Nobody has any exclusive right to secure a
franchise or a certificate of public convenience. Just
because there is an existing grantee does not preclude
the grant to another, but such grant must be guided by
public service and interest.
While it is true that operators of public
convenience and service deserve some protection from
unnecessary or unlawful competition, yet the rule is that
nobody has any exclusive right to secure a franchise or a
certificate of public convenience. Above any or all
considerations, the grant of franchises and certificates of
public convenience and service should be guided by public
service and interest; the latter are the primordial
considerations to be taken into account.
Moreover, it has been established in this case that
petitioner was in no condition to supply the power needs of
Filipinas, because its load capacity was only 200 kilowatts
while Filipinas was in need of 6,000 kilowatts power to
operate its cement factory.
2. MAJORITY STOCKHOLDERS OF RUBY
INDUSTRIAL CORPORATION vs MIGUEL LIM et al.
Topic: POWER of CORPORATION, Pre-emptive right
Note: This digest focused on the powers of a corporation. For
the other issues in this case, please refer to full text.
FACTS:
Ruby Industrial Corporation (RUBY) is a domestic corporation
engaged in glass manufacturing. Reeling from severe liquidity
problems beginning in 1980, RUBY filed on December 13,
1983 a petition for suspension of payments with the Securities
and Exchange Commission (SEC).
On December 20, 1983, the SEC issued an order declaring
RUBY under suspension of payments and enjoining the
disposition of its properties pending hearing of the petition,
except insofar as necessary in its ordinary operations, and
making payments outside of the necessary or legitimate
expenses of its business.
On August 10, 1984, the SEC Hearing Panel created the
management committee (MANCOM) for RUBY, composed of
representatives from Allied Leasing and Finance Corporation
(ALFC), Philippine Bank of Communications (PBCOM),
China Banking Corporation (China Bank), Pilipinas Shell
Petroleum Corporation (Pilipinas Shell), and RUBY
represented by Mr. Yu Kim Giang.
The MANCOM was tasked to perform the following functions:
(1) undertake the management of RUBY; (2) take custody and
control over all existing assets and liabilities of RUBY; (3)
evaluate RUBYs existing assets and liabilities, earnings and
operations; (4) determine the best way to salvage and protect
the interest of its investors and creditors; and (5) study, review
and evaluate the proposed rehabilitation plan for RUBY.
ATTY. KAREN GAVIOLA-CLIMACO
Subsequently, two (2) rehabilitation plans were submitted to the
SEC: the BENHAR/RUBY Rehabilitation Plan of the majority
stockholders led by Yu Kim Giang, and the Alternative Plan of
the minority stockholders represented by Miguel Lim (Lim).
Plan 1 (BENHAR/RUBY): Benhar International, Inc.
(BENHAR) — a domestic corporation engaged in the
importation and sale of vehicle spare parts which is wholly
owned by the Yu family and headed by Henry Yu, who is also
a director and majority stockholder of RUBY — shall lend its
P60 million credit line in China Bank to RUBY, payable within
ten (10) years. Moreover, BENHAR shall purchase the credits
of RUBY's creditors and mortgage RUBY's properties to obtain
credit facilities for RUBY. Upon approval of the rehabilitation
plan, BENHAR shall control and manage RUBY's operations.
For its service, BENHAR shall receive a management fee
equivalent to 7.5% of RUBY's net sales.
Plan 2 (Alternative/Minority): On the other hand, the
Alternative Plan of RUBY's minority stockholders proposed to:
(1) pay all RUBY's creditors without securing any bank loan;
(2) run and operate RUBY without charging management fees;
(3) buy-out the majority shares or sell their shares to the
majority stockholders; (4) rehabilitate RUBY's two plants; and
(5) secure a loan at 25% interest, as against the 28% interest
charged in the loan under the BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the MANCOM for
evaluation. In 1988, SEC approved BENHAR/RUBY Plan.
Meanwhile, BENHAR started to pay off secured creditors
of RUBY and executed deeds of assignments of credit and
mortgage rights in favor of BENHAR. These were done
despite the TRO and injunction and even before the SEC
Hearing Panel.
AFLC and Lim moved to nullify the deeds of assignment in
favor of BENHAR and cite the parties in contempt for
willfull violation of SEC order on suspension of payments.
They also charged that in paying of FEBTC debts, it was
given undue preference over the other creditors of Ruby.
SEC nullified the deeds of assignments, upon appeal SEC
En Banc denied appeal for BENHAR et al, CA affirmed
SEC ruling nullifying the deeds.
On the other hand, it appears that even during the pendency of
appeals, BENHAR and Ruby have performed other acts in
pursuance of BENHAR/RUBY Plan approved by SEC (even if
there was an injunction).
Lim received a notice of stockholder’s meeting signed by Mr
Magtalas the “designated secretary” of Ruby and stating the
matters to be taken up in said meeting which includes extention
of Ruby’s corporate term for another 25 years and election
of directors. At the scheduled stockholder’s meeting, Lim
together with other minority stockholders appeared in
order to put on record their objections on the validity of the
holding thereof and the matters taken therein. Specifically,
they questioned the percentage of stockholders present in
the meeting which the majority claimed stood at 74.75% of
Ruby. Lim also argued that a majority of the stockholders
claiming to be 74.75% of Ruby increased their shares to
75.75% by subscribing from the unissued shares of the
authorized capital stock as “capital infusion”.
Accordingly, Lim said that the extension of corporate term
and increase in capital stock were done in violation CA and
without compliance to legal requirements of Corporation
Code.
CORPORATION LAW  CASE DIGEST BATCH 6  EH 501-PELAEZ.
SEC Ruling:
On the petition for suspension of payments, SEC denied the
petition on the ground of violation of SEC Rules of Procedure
on Corporate Recovery. SEC declared the mancom dissolved
and ordered the mancom to make an inventory, render an
accounting, and submit the final report. The SEC’s basis for its
ruling was Sec 4-9 of Rules of Procedure on Corporate
Recovery, which provides 180 days for suspension of
payments, and so it already lapsed. On the objection of the
minority on the issuance of shares of stock by majority
stockholders and extension of corporate term, SEC cited
presumption of regularity in the act of a government entity
(SEC) which approved Ruby’s amendment of AOI. It
pointed out that Lim raised the issue only in the year 2000.
Moreover, the SEC found that notwithstanding allegations of
fraud, Lim never proved the illegality of the additional infusion
of the capitalization by Ruby.
CA Ruling:
CA set aside the ruling of SEC. It declared the infusion of
additional capital void and restored the capital structure of
Ruby to its original structure. It also declared the extension
of the corporate term to another 25 years void. It
invalidated all illegal assignments of credit/purchase of
credits and the cancellation of mortgages made by creditors
of Ruby during the effectivity of the suspension of
payments. It ordered the delivery of the deeds of
assignments and registered titles to the management
committee or Liquidator. Lastly, it ordered SEC to
supervise the liquidation of Ruby. In sum, CA found that
SEC erred in not finding that Ruby’s BOD meeting was
illegal because the management committee was neither
involved nor consulted in the resolution approving the
issuance of additional shares of Ruby.
ISSUE: Whether the minority’s pre-emptive rights were
violated by the BOD meeting conducted to issue additional
shares and to extend the corporate term of Ruby to 25 years?
RULING:
Yes, there was a blatant violation of the pre-emptive right of
minority stockholders.
Pre-emptive right under Sec. 39 of the Corporation Code refers
to the right of a stockholder of a stock corporation to subscribe
to all issues or disposition of shares of any class, in proportion
to their respective shareholdings. The right may be restricted or
denied under the articles of incorporation, and subject to certain
exceptions and limitations. The stockholder must be given a
reasonable time within which to exercise their preemptive
rights. Upon the expiration of said period, any stockholder who
has not exercised such right will be deemed to have waived it.
The validity of issuance of additional shares may be questioned
if done in breach of trust by the controlling stockholders. Thus,
even if the pre-emptive right does not exist, either because the
issue comes within the exceptions in Section 39 or because it is
denied or limited in the articles of incorporation, an issue of
shares may still be objectionable if the directors acted in breach
of trust and their primary purpose is to perpetuate or shift
ATTY. KAREN GAVIOLA-CLIMACO
control of the corporation, or to “freeze out” the minority
interest.
In this case, the following relevant observations should have
signaled greater circumspection on the part of the SEC — upon
the third and last remand to it pursuant to our January 20, 1998
decision — to demand transparency and accountability from the
majority stockholders, in view of the illegal assignments and
objectionable features of the Revised BENHAR/RUBY Plan,
as found by the CA and as affirmed by this Court:
There can be no gainsaying the well-established rule
in corporate practice and procedure that the will of
the majority shall govern in all matters within the
limits of the act of incorporation and lawfully enacted
by-laws not proscribed by law.
It is, however, equally true that other stockholders are
afforded the right to intervene especially during
critical periods in the life of a corporation like
reorganization, or in this case, suspension of
payments, more so, when the majority seek to impose
their will and through fraudulent means, attempt to
siphon off Ruby’s valuable assets to the great
prejudice of Ruby itself, as well as the minority
stockholders and the unsecured creditors.
Certainly, the minority stockholders and the
unsecured creditors are given some measure of
protection by the law from the abuses and impositions
of the majority, more so in this case, considering the
give-away signs of private respondents perfidy strewn
all over the factual landscape.
Indeed, equity cannot deprive the minority of
a remedy against the abuses of the majority, and the
present action has been instituted precisely for the
purpose of protecting the true and legitimate interests
of Ruby against the Majority Stockholders. On this
score, the Supreme Court, has ruled that:
“Generally speaking, the voice of the majority of the
stockholders is the law of the corporation, but there
are exceptions to this rule. There must necessarily be
a limit upon the power of the majority. Without such a
limit the will of the majority will be absolute and
irresistible and might easily degenerate into absolute
tyranny.x x x” (Additional emphasis supplied.)
Lamentably, the SEC refused to heed the plea of the minority
stockholders and MANCOM for the SEC to order RUBY to
commence liquidation proceedings, which is allowed under
Sec. 4-9 of the Rules on Corporate Recovery.
Under the circumstances, liquidation was the only hope of the
minority stockholders for effecting an orderly and equitable
settlement of RUBYs obligations, and compelling the majority
stockholders to account for all funds, properties and documents
in their possession, and make full disclosure on the nullified
credit assignments.
Oblivious to these pending incidents so crucial to the protection
of the interest of the majority of creditors and minority
shareholders, the SEC simply stated that in the interim, RUBYs
corporate term was validly extended, as if such extension would
provide the solution to RUBYs myriad problems.
Extension of corporate term requires the vote of 2/3 of the
outstanding capital stock in a stockholders meeting called for
the purpose. The actual percentage of shareholdings in RUBY
CORPORATION LAW  CASE DIGEST BATCH 6  EH 501-PELAEZ.
as of September 3, 1996 — when the majority stockholders
allegedly ratified the board resolution approving the extension
of RUBY’s corporate life to another 25 years was seriously
disputed by the minority stockholders, and we find the evidence
of compliance with the notice and quorum requirements
submitted by the majority stockholders insufficient and
doubtful. Consequently, the SEC had no basis for its ruling
denying the motion of the minority stockholders to declare as
without force and effect the extension of RUBY’s corporate
existence.
DENIED.
3. Atrium Management Corporation v CA, et al (G.R. No.
109491) and De Leon v CA, et al (G.R. No. 121794) |
February 28, 2001
FACTS: Hi-Cement Corporation through its corporate
signatories—petitioner Lourdes M. de Leon, its treasurer, and
the late chairman Antonio de las Alas—issued 4 RCBC crossed
checks in favor of E.T. Henry and Co. Inc. The checks were
endorsed to petitioner Atrium Management Corporation. Upon
presentment for payment, the drawee bank dishonored all the
checks for the common reason of "payment stopped". Atrium
filed with the RTC of Manila an action for collection of the
proceeds in the total amount of P2M.
Atrium presented as its witness Carlos C. Syquia. He testified
that Enrique Tan of E.T. Henry approached Atrium for financial
assistance, offering to discount the four crossed checks. Atrium
sent letters to Hi-Cement to confirm the transaction. Syquia
identified two letters signed by de Leon, stating that the crossed
checks were payment for petroleum products and could be
validly endorsed. On the other hand, Hi-Cement presented as
witness Erlinda Yap, who was once a secretary to de Leon. She
testified that the checks were given to secure a loan, not as
payment.
The RTC rendered a decision ordering de Leon, her husband
Rafael de Leon, E.T. Henry and Hi-Cement to pay Atrium
jointly and severally. However, the CA modified this. It ruled
that Hi-Cement and de las Alas were not liable. Only E.T.
Henry and de Leon were liable. Furthermore, Atrium and the
liable defendants were also liable for the attorney’s fees to Hi-
Cement.
ISSUES:
1. W/N the issuance of the checks was an ultra vires act
2. W/N de Leon is personally liable
3. W/N Atrium is a holder in due course
RULING: The CA decision is affirmed.
1. NO. As the corporate treasurer, de Leon is authorized
to sign checks for the corporation. The act of issuing
the checks is well within the ambit of a valid corporate
act, for it was for securing a loan. Thus, it was not an
ultra vires act.
2. YES. De Leon was aware that the checks were strictly
endorsed for deposit only. They must not to be further
ATTY. KAREN GAVIOLA-CLIMACO
negotiated. She was negligent when she signed the
confirmation letter for the rediscounting of the crossed
checks. This is worsened by the fact that the letter
contained the false claim that checks were payment for
petroleum products. Her negligence resulted in
damage to Hi-Cement. Hence, as a corporate officer,
she may be held personally liable therefor.
3. NO. This case involves crossed checks which were
specifically indorsed for deposit only. Atrium was
aware of this fact, making it not a holder in due course.
It is thus subject to defenses as if the instrument were
nonnegotiable. One such defense is absence or failure
of consideration. Thus, it can only collect payment
from E.T. Henry and de Leon.
4. Y-I Lesiure v Yu
Facts:This case involves a complaint for collection of sum of
money and damages with prayer for preliminary attachment
against MADCI and its president Rogelio Sangil (Sangil) to
recover his payment for the purchase of golf and country club
shares.
Mt. Arayat Development Co., Inc.(MADCI) was a real estate
development corporation. Respondent James Yu (Yu) was a
businessman, interested in purchasing golf and country club
shares.
Sometime in 1997, MADCI offered for sale shares of a golf and
country club located in the vicinity of Mt. Arayat for the price
of P550.00 per share. Relying on the representation of
MADCI's brokers and sales agents, Yu bought 500 golf and 150
country club shares for a total price of P650,000.00 which he
paid by installment with fourteen (14) Far East Bank and Trust
Company (FEBTC) checks.
Upon full payment of the shares to MADCI, Yu visited the
supposed site of the golf and country club and discovered that
it was non-existent. In a letter, Yu demanded from MADCI that
his payment be returned to him. MADCI recognized that Yu
had an investment of P650,000.00, but the latter had not yet
received any refund.
Yu filed with the RTC above-said complaint. In his transactions
with MADCI, Yu alleged that he dealt with Sangil, who used
MADCI's corporate personality to defraud him.
Sangil alleged
o that Yu dealt with MADCI as a juridical person;
o that he did not benefit from the sale of shares;
o that the return of Yu's money was no longer possible
because its approval had been blocked by the new set of
CORPORATION LAW  CASE DIGEST BATCH 6  EH 501-PELAEZ.
officers of MADCI, which controlled the majority of its
board of directors
o that MADCI failed to develop the golf course because its
properties were taken over by YIL after he allegedly
violated the MOA
▪ The lands of MADCI were eventually sold to YICRI
for a consideration of P9.3 million, which was
definitely lower than their market price.
▪ Unfortunately, the case assailing the transfers was
dismissed by a trial court in Pampanga
MADCI
o claimed that it was Sangil who defrauded Yu
o invoked the Memorandum of Agreement (MOA) entered
into by MADCI, Sangil and petitioner Yats International
Ltd. (YIL) wherein Sangil undertook to redeem MADCI
proprietary shares sold to third persons or settle in full all
their claims for refund of payments
o claimed that Sangil should be ultimately liable to refund
the payment for shares purchased
Yu filed an Amended Complaint, impleaded YIL, Y-I
Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts, Inc.
(YICRI).
o According to Yu, he discovered in the Registry of
Deeds of Pampanga that, substantially, all the assets of
MADCI, consisting of 120 hectares of land located in
Magalang, Pampanga, were sold to YIL, YILPI and
YICRI.
o The transfer was done in fraud of MADCI's creditors,
and without the required approval of its stockholders
and board of directors under Section 40 of the
Corporation Code.
o Yu also alleged that Sangil even filed a case in
Pampanga which assailed the said irregular transfers
of lands.
YIL, YILPI and YICRI alleged
o that they only had an interest in MADCI in 1999 when
YIL bought some of its corporate shares pursuant to
the MOA. This occurred two (2) years after Yu bought
his golf and country club shares from MADCI
o that as a mere stockholder of MADCI, YIL could not
be held responsible for the liabilities of the corporation
o as to the transfer of properties from MADCI to YILPI
and subsequently to YICRI, they averred that it was
not undertaken to defraud MADCI's creditors and it
was done in accordance with the MOA. In fact, it was
stipulated in the MOA that Sangil undertook to settle
all claims for refund of third parties
The President and CEO of YILPI and YICRI, and
managing director of YIL, Denny On Yat Wang (Wang)
testified
ATTY. KAREN GAVIOLA-CLIMACO
o that YIL was an investment company engaged in the
development of real estates, projects, leisure, tourism,
and related businesses
o that YIL subscribed to the shares of MADCI because
it was interested in its golf course development project
in Pampanga. Thus, he signed the MOA on behalf of
YIL and he paid P31.5 million to subscribe to
MADCI's shares, subject to the fulfillment of Sangil's
obligations
o that the MOA stipulated that MADCI would execute a
special power of attorney in his favor, empowering
him to sell the property of MADCI in case of default
in the performance of obligations.
o that due to Sangil's subsequent default, a deed of
absolute sale over the lands of MADCI was eventually
executed in favor of YICRI, its designated company
o that, aside from its lands, MADCI had other assets in
the form of loan advances of its directors
Issue: Whether fraud must exist in the transfer of all the
corporate assets in order for the transferee to assume the
liabilities of the transferor. No.
Whether or not the petitioners indeed became a continuation of
MADCI’s business. Yes
Ruling:Corporate assumption of liabilities
Nell doctrine (Nell v Pacific Farms Inc) states the general rule
that the transfer of all the assets of a corporation to another shall
not render the latter liable to the liabilities of the transferor,
except:
1. Where the purchaser expressly or impliedly agrees to assume
such debts;
▪ Article 2047, NCC: When a person binds himself
solidarily with the principal debtor, then a contract of
suretyship is produced. Necessarily, the corporation
which expressly or impliedly agrees to assume the
transferor's debts shall be liable to the same.
2. Where the transaction amounts to a consolidation or merger
of the corporations;
▪ Sections 76 to 80, Corporation Code: If the transfer of
assets of one corporation to another amounts to a merger
or consolidation, then the transferee corporation must
take over the liabilities of the transferor.
3. Where the purchasing corporation is merely a continuation
of the selling corporation; and
▪ transferee purchases not only the assets of the transferor,
but also its business thus the transferor is merely left with
its juridical existence, devoid of its industry and earning
capacity.
CORPORATION LAW  CASE DIGEST BATCH 6  EH 501-PELAEZ.
4. Where the transaction is entered into fraudulently in order to
escape liability for such debts
▪ Article 1388, NCC: whoever acquires in bad faith the
things alienated in fraud of creditors, shall indemnify the
latter for damages suffered. Thus, if there is fraud in the
transfer of all the assets of the transferor corporation, its
creditors can hold the transferee liable. This exception
contemplates the “business-enterprise transfer” where the
transferee coproration’s interest goes beyond the assets of
the transferor’s assets and its desires to acquire the latter’s
business enterprise including its goodwill. The transferee
here actually purchases not only the assets but the
business itself that the transferor is merely left with its
juridical existence.
▪ The proper provision of law that is contemplate by this
exception (business-enterprise transfer) is Section 40
refers to the sale, lease, exchange or disposition of all or
substantially all of the corporation's assets, including its
goodwill. The sale under this provision does not
contemplate an ordinary sale of all corporate assets; the
transfer must be of such degree that the transferor
corporation is rendered incapable of continuing its
business or its corporate purpose.
▪ A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated.
▪ However, not every transfer of the entire corporate assets
would qualify under Section 40. It does not apply:
ATTY. KAREN GAVIOLA-CLIMACO
corporation alleged distinct and separate personality of it from
its partnership predecessor to avoid the complusory coverage of
the SS Law. But the Court held that entire business of the
partnership was transferred to the corporation for a valuable
consideration and the juridical person remain the same even if
its legal personality was changed.
More importanlty, in the case of Caltex, the court held that the
only way the transfer can proceed without prejudice to the
creditors is to hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or substantially
all of the assets of the assignor necessarily includes the
assumption of the assignor's liabilities, unless the creditors who
did not consent to the transfer choose to rescind the transfer on
the ground of fraud.
Fraud is not an essential consideration in a business-
enterprise transfer.
Under the Nell Doctrine, the transferee corporation may inherit
the liabilities of the transferor despite the lack of fraud due to
the continuity of the latter's business.
The purpose of the business-enterprise transfer is to protect the
creditors by allowing them a remedy.

(1) if the sale of the entire property and assets is

necessary in the usual and regular course of business of Based on the factual findings, the Court is convinced that
corporation, or MADCI indeed had assets consisting of 120 hectares of
(2) if the proceeds of the sale or other disposition of
landholdings in Magalang, Pampanga, to be developed into a
such property and assets will be appropriated for the
golf course, pursuant to its primary purpose. Because of its
conduct of its remaining business.
alleged violation of the MOA, however, MADCI was made to
transfer all its assets to the petitioners. No evidence existed that
Thus, the litmus test to determine the applicability of Section
MADCI subsequently acquired other lands for its development
40 would be the capacity of the corporation to continue its
projects. Thus, MADCI, as a real estate development
business after the sale of all or substantially all its assets.
corporation, was left without any property to develop
eventually rendering it incapable of continuing the business or
Business-enterprise transfer has been recognized in a number
accomplishing the purpose for which it was incorporated.
of cases where the transferee was held liable for the debts and Section 40 must apply.
liabilities of the transferor arising from the business enterprise
conveyed.

The MOA cannot prejudice respondent Yu. CA correctly ruled

that there was novation of its provision. Since it was done
As in the case of AD Santos v Vasquez where a taxi business
without securing the consent of respondent, the agreement
was transferred from a sole proprietary to a corporation after a cannot prejudice him and MADCI is still its debtor and given
taxi driver filed a suit for workmen’s compensation. The Court
that there was transfer to the petitioners, then the petitioners
applied the piercing doctrine and held that petitioner should still
shall be liable.
be held liable due to the transfer of the business and should not
be allowed to confuse the legitimate issues.
Petition is denied.
On the other hand, the Court applied the business-enterprise
5. UNIVERSITY OF MINDANAO, INC. , petitioner, vs.
transfer doctrine independent of the piercing doctrine as in the
BANGKO SENTRAL NG PILIPINAS, ET AL.,
case of San Teodoro Development Enterprises v SSS where the
CORPORATION LAW  CASE DIGEST BATCH 6  EH 501-PELAEZ.
respondents.
Doctrine: Acts of an officer that are not authorized by the board
of directors/trustees do not bind the corporation unless the
corporation ratifies the acts or holds the officer out as a person
with authority to transact on its behalf.
FACTS: University of Mindanao (UM) is an educational
institution. For the year 1982, its Board of Trustees was chaired
by Guillermo B. Torres. His wife, Dolores P. Torres, sat as
University of Mindanao's Assistant Treasurer.
Guillermo B. Torres and Dolores P. Torres incorporated and
operated two (2) thrift banks: (1) First Iligan Savings & Loan
Association, Inc. (FISLAI); and (2) Davao Savings and Loan
Association, Inc. (DSLAI). Guillermo B. Torres chaired both
thrift banks. He acted as FISLAI's President, while his wife,
Dolores P. Torres, acted as DSLAI's President and FISLAI's
Treasurer.
Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas
issued a P1.9 million standby emergency credit to FISLAI.
There were three promissory notes. All these promissory notes
were signed by Guillermo B. Torres, and were co-signed by
either his wife, Dolores P. Torres, or FISLAI's Special Assistant
to the President Ramos, Jr.
On May 25, 1982, University of Mindanao's Vice President for
Finance, Saturnino Petalcorin, executed a deed of real estate
mortgage over University of Mindanao's property in Cagayan
de Oro City in favor of Bangko Sentral ng Pilipinas. There was
allegedly executed on University of Mindanao’s behalf. Proof
of the authority to execute the REM was a Secretary’s
Certificate showed by Saturnino Petalcorin authorizing him to
represent the University of Mindanao to transact, transfer,
convey, lease, mortgage, or otherwise hypothecate any or all of
the following properties situated at Cagayan de Oro and Iligan
City and authorizing further Mr. Petalcorin to sign any or all
documents relative thereto.
FISLAI, DSLAI, and Land Bank of the Philippines entered into
a Memorandum of Agreement intended to rehabilitate the thrift
banks, which had been suffering from their depositors' heavy
withdrawals. Among the terms of the agreement was the merger
of FISLAI and DSLAI, with DSLAI as the surviving
corporation. DSLAI later became known as Mindanao Savings
and Loan Association, Inc. (MSLAI). MSLAI failed to recover
from its losses and was liquidated. Bangko Sentral ng Pilipinas
sent a letter to University of Mindanao, informing it that the
bank would foreclose its properties if MSLAI's total
outstanding obligation of P12,534,907.73 remained unpaid.
In its reply, University of Mindanao denied that University of
Mindanao's properties were mortgaged. It also denied having
received any loan proceeds from Bangko Sentral ng Pilipinas,
which prompted them to file for nullification and cancellation
of mortgage.
University of Mindanao also alleged that Aurora de Leon's
certification was anomalous. It never authorized Saturnino
ATTY. KAREN GAVIOLA-CLIMACO
Petalcorin to execute real estate mortgage contracts involving
its properties to secure FISLAI's debts. There was no board
resolution to that effect. Thus, the mortgages executed by
Saturnino Petalcorin were unenforceable. It never ratified the
execution of the mortgage contracts. Moreover, as an
educational institution, it cannot mortgage its properties to
secure another person's debts. The execution of the mortgage
contract was ultra vires. As an educational institution, it may
not secure the loans of third persons. Securing loans of third
persons is not among the purposes for which petitioner was
established.
Bangko Sentral argued that petitioner's act of mortgaging its
properties to guarantee FISLAI's loans was consistent with
petitioner's business interests, since petitioner UM was
presumably a FISLAI shareholder whose officers and
shareholders interlock with FISLAI. It also argued that it
merely relied on the regularity of the Secretary Certificate
authorizing Petalcorin.
The Regional Trial Court of Cagayan de Oro City ruled that
Saturnino Petalcorin was not authorized to execute mortgage
contracts for University of Mindanao. Hence, the mortgage of
University of Mindanao's Cagayan de Oro City property was
unenforceable. Saturnino Petalcorin's unauthorized acts should
be annulled.
The Iligan City trial court ruled that the lack of a board
resolution authorizing Saturnino Petalcorin to execute
documents of mortgage on behalf of University of Mindanao
made the real estate mortgage contract unenforceable under
Article 1403 of the Civil Code.
The Court of Appeals ruled in favor of BSP: "although BSP
failed to prove that the UM Board of Trustees actually passed a
Board Resolution authorizing Petalcorin to mortgage the
subject real properties," Aurora de Leon's Secretary's
Certificate "clothed Petalcorin with apparent and ostensible
authority to execute the mortgage deed on its behalf. Bangko
Sentral ng Pilipinas merely relied in good faith on the
Secretary's Certificate. University of Mindanao is estopped
from denying Saturnino Petalcorin's authority.
RULING: On whether or not act was ultra vires Yes. Corporate
acts that are outside those express definitions under the law or
articles of incorporation or those "committed outside the object
for which a corporation is created" are ultra vires. The only
exception to this rule is when acts are necessary and incidental
to carry out a corporation's purposes, and to the exercise of
powers conferred by the Corporation Code and under a
corporation's articles of incorporation.
TEST TO BE APPLIED: The test to be applied is whether the
act in question is in direct and immediate furtherance of the
corporation's business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has
the power to do it; otherwise, not.
CORPORATION LAW  CASE DIGEST BATCH 6  EH 501-PELAEZ.
Petitioner does not have the power to mortgage its properties in
order to secure loans of other persons. As an educational
institution, it is limited to developing human capital through
formal instruction. It is not a corporation engaged in the
business of securing loans of others.
Securing FISLAI's loans by mortgaging petitioner's properties
does not appear to have even the remotest connection to the
operations of petitioner as an educational institution. Securing
loans is not an adjunct of the educational institution's conduct
of business. It does not appear that securing third-party loans
was necessary to maintain petitioner's business of providing
instruction to individuals.
On whether mortgage was incidental to UM’s business
Respondent points out that petitioner and its key officers held
substantial shares in MSLAI when DSLAI and FISLAI merged.
Therefore, it was safe to assume that when the mortgages were
executed in 1982, petitioner held substantial shares in FISLAI.
Acquiring shares in another corporation is not a means to create
new powers for the acquiring corporation. Being a shareholder
of another corporation does not automatically change the nature
and purpose of a corporation's business. Appropriate
amendments must be made either to the law or the articles of
incorporation before a corporation can validly exercise powers
outside those provided in law or the articles of incorporation. In
other words, without an amendment, what is ultra vires before
a corporation acquires shares in other corporations is still ultra
vires after such acquisition.
On unenforceability
Being a juridical person, petitioner cannot conduct its business,
make decisions, or act in any manner without action from its
Board of Trustees. The Board of Trustees must act as a body in
order to exercise corporate powers. Individual trustees are not
clothed with corporate powers just by being a trustee. Hence,
the individual trustee cannot bind the corporation by himself or
herself.
Consent of a person cannot be presumed from representations
of another, especially if obligations will be incurred as a result.
Thus, authority is required to make actions made on his or her
behalf binding on a person. Contracts entered into by persons
without authority from the corporation shall generally be
considered ultra vires and unenforceable against the
corporation.
Not having the proper board resolution to authorize Saturnino
Petalcorin to execute the mortgage contracts for petitioner, the
contracts he executed are unenforceable against petitioner.
They cannot bind petitioner. However, personal liabilities may
be incurred by directors who assented to such unauthorized act
and by the person who contracted in excess of the limits of his
or her authority without the corporation's knowledge.
ATTY. KAREN GAVIOLA-CLIMACO
Illegal Acts v Ultra Vires Act
A distinction should be made between corporate acts or
contracts which are illegal and those which are merely ultra
vires. The former contemplates the doing of an act which is
contrary to law, morals, or public order, or contravene some
rules of public policy or public duty, and are, like similar
transactions between individuals, void. They cannot serve as
basis of a court action, nor acquire validity by performance,
ratification, or estoppel. Mere ultra vires acts, on the other hand,
or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable
when ratified by the stockholders. Thus, even though a person
did not give another person authority to act on his or her behalf,
the action may be enforced against him or her if it is shown that
he or she ratified it or allowed the other person to act as if he or
she had full authority to do so.
No act by petitioner can be interpreted as anything close to
ratification. It was not shown that it issued a resolution ratifying
the execution of the mortgage contracts. It was not shown that
it received proceeds of the loans secured by the mortgage
contracts. There was also no showing that it received any
consideration for the execution of the mortgage contracts. It
even appears that petitioner was unaware of the mortgage
contracts until respondent notified it of its desire to foreclose
the mortgaged properties. Ratification must be knowingly and
voluntarily done. Petitioner's lack of knowledge about the
mortgage executed in its name precludes an interpretation that
there was any ratification on its part.
6. Republic vs Acoje Mining Company
Facts: Acoje Mining Company has a lot of employees. In order
to provide more convenience to its employees, the company
wrote the Director of Posts requesting the opening of a post,
telegraph and money order offices at its mining camp at
Zamables for the use of its employees and their families in said
camp.
The Director of Posts said yes but with a condition. The
Director conditioned that the company should assume direct
responsibility for whatever pecuniary loss may be suffered by
the Bureau of Posts by reason of any act of dishonesty,
carelessness or negligence on the part of the employee of Acoje
who is assigned to take charge of the post.
The BOD of Acoje passed a resolution stating that:
“That the requirement of the Bureau of Posts that the
company should accept full responsibility for all cash
received by the Postmaster be complied with, and that
CORPORATION LAW  CASE DIGEST BATCH 6  EH 501-PELAEZ.
a copy of this resolution be forwarded to the Bureau
of Posts.”
Post Office branch was opened in October 13, 1949. However,
after 5 years, the postmaster, an employee of Acoje, went on a
3-day leave and never returned.
Acoje informed the Manila Post Office and upon auditing, it
was found that P13,867.24 was missing.
The post office demanded payment and filed a suit with the CFI
of Manila for the amount but Acoje denied liability alleging that
the BOD’s act in assigning a postmaster was ultra vires; also,
the company alleged that their liability was merely that of a
guarantor.
ATTY. KAREN GAVIOLA-CLIMACO
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 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."
The terms employed in the resolution are clear and sweeping.
Acoje assumed “full responsibility for all cash received by the
Postmaster”. Its liability is that of a principal.

CFI: Ruled in favor of the Post Office but only to the amount of
P9,515.23 (since they could only present evidence for such
amount)

Acoje appealed to SC. (Wa ni mention ug CA)

Issues:

1. W/N the acts of the BOD was ultra vires. – NO

2. W/N its liability is merely that of a guarantor –NO

Ruling:

1. No. The act covers a subject which concerns the benefit,

convenience, and welfare of the company’s employees and their
families. An ultra vires act is one committed outside the object
for which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred upon it
by law. However, there are certain corporate acts that may be
performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interests or
welfare of the corporation. Establishment of the local post
office is a reasonable and proper adjunct to the conduct of the
business.

Moreover, an ultra vires act is merely voidable, in contrast to

illegal acts which are void. It may be enforced by performance,
ratification or estoppel. Here it is fair that the resolution be
upheld at least on the ground of estoppel since the company at
least benefited from the transaction.

The claim that the resolution adopted by the board of directors

of appellant company is an ultra vires act cannot also be
entertained it appearing that the same covers a subject which
concerns the benefit, convenience and welfare of its employees
and their families.

Here it is undisputed that the establishment of the local post

office is a reasonable and proper adjunct to the conduct of the
business of appellant company.

2. NO.

"A mere reading of the resolution of the Board of Directors

dated August 31, 1949, upon which the plaintiff based its claim