SET 2 CORPO CASES
reconsideration, clarification and annulment of said Order.
1.[G.R. No. 131715. December 8, 1999]PHILIPPINE NATIONAL
CONSTRUCTION CORPORATION, petitioner, vs. ERNESTO
PABION and LOUELLA RAMIRO, respondents.PANGANIBAN, J.:
The Securities and Exchange Commission (SEC) has jurisdiction over
corporations organized pursuant to the Corporation Code, even if the
majority or controlling shares are owned by the government.Hence, it
can competently order the holding of a shareholders meeting for the
purpose of electing the corporate board of directors. While the SEC may
not have authority over government corporations with original charters
or those created by special law, it does have jurisdiction over acquired
asset corporations as defined in AO 59. Specifically, the Philippine
National Construction Company (PNCC) may be ordered by SEC to hold
a shareholders meeting to elect its board of directors in accordance with
its Articles of Incorporation and By-Laws as well as with the Corporation
Code. The chairman and the members of the PNCC Board of Directors
hold office by virtue of their election by the shareholders, not by their
appointment thereto by the President of the Republic.
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court assailing the Decision of the Court of Appeals[1] (CA)
promulgated on October 23, 1997, as well as its subsequent
Resolution[2] dated December 2, 1997, denying petitioners Motion for
Reconsideration.
The CA effectively affirmed[3] the October 2, 1996 Order issued by
the Securities and Exchange Commission,[4] which disposed as follows:
WHEREFORE, premises considered, this Petition is hereby
GRANTED. The President or the Chairman of the PNCC is hereby
ordered to call a special stockholders meeting within thirty (30) days
from receipt of this order for the purpose of electing the members of the
Board to hold office up to March, 1997 or until the next stockholders
meeting will be held. Accordingly, the Corporate Secretary of PNCC is
hereby directed to issue required notices to the stockholders.[5]
In a subsequent Resolution dated April 11, 1997,[6] SEC denied
The Facts
The Court of Appeals adequately narrates the facts in this wise:
On September 16, 1994, private respondents Ernesto
Pabion and Louella Ramiro, claiming to be stockholders of the PNCC,
filed with the SEC a verified petition, therein alleging that since 1982 or
for a period of twelve (12) years, there has been no stockholders
meeting of the PNCC to elect the corporations board of directors, thus
enabling the incumbent directors to hold on to their position beyond their
1-year term, in violation of PNCCs By-Laws and the Corporation
Code. Pabion and Ramiro, therefore, prayed the SEC to issue an order
ordering the officers of PNCC or, in the alternative, authorizing
petitioners, to call and hold a meeting of the stockholders x x x for the
purpose of electing new directors x x x. Docketed as SEC Case No. 09-
94-4876, the verified petition was assigned to SEC Hearing Officer
Manuel Perea.
In due time, PNCC filed its answer. Therein, PNCC claimed that it is a
government-owned corporation whose organizational and functional
management, administration, and supervision are governed by
Administrative Order (AO) No. 59, issued by then President Corazon
Aquino on February 16, 1988. PNCC asserts that its board of directors
does not hold office by virtue of a stockholders election but by
appointment of the President of the Philippines, relying on Article IV,
Section 16 [1], of AO No. 59, which reads:
(1) Governing Boards. - GOCC (government-owned and/or controlled
corporation) shall be governed by a Board of Directors or equivalent
body composed of an appropriate number of members to be appointed
by the President of the Philippines upon the recommendation of the
Secretary of whose Department the GOCC is attached. The Chairman
of the board shall likewise be appointed by the President upon the
recommendation of the Secretary
1
In the same answer, PNCC expressed the fear that if granted, the prayer
in the verified petition would amount to a contravention of AO No. 59
and an interference with the Presidents power of control and
appointment over government-owned and/or controlled corporations
(GOCCs). PNCC added that under Executive Order No. 399, series of
1951, a GOCC is not required to hold a general meeting of stockholders
but, instead, the general manager thereof is merely required to submit
an annual report to the President of the Philippines.
In the ensuing pre-trial conference conducted by Hearing Officer Perea,
the parties defined the issues, as follows:
(a) Whether or not PNCC is a GOCC subject to and governed
by LOI 1295 (1983), AO No. 59 (1988) and Executive Order
No. 399 (1951), or by its articles-of-incorporation and by-laws
only.
(b) Whether or not PNCC is required to call a regular annual
stockholders meetings
on the basis of which the parties agreed to submit the case for resolution
after they shall have filed their respective memoranda, which they did.
It appears, however, that in a motion dated September 4,
1995, Pabion and Ramiro prayed for the re-opening of the pre-trial
conference on the ground that the common assumption on the 75%
ownership by several government financial institutions (GFIs) in the
PNCC was proved false by their discovery that the GFI[s] are merely a
minority among the owners of PNCC. They, therefore, moved that a trial
be conducted to determine the extent of ownership by the government
in the PNCC.
Acting on the aforementioned motion, SEC Hearing Officer Perea
issued, on January 30, 1996, the following order:
In view of the necessity of a prior determination of whether or not
respondent Philippine National Construction Corporation (PNCC) is a
government owned or controlled corporation before resolving the instant
incident, either or both of the parties are hereby directed to secure a
ruling/opinion from competent authority as to whether or not the PNCC
is a government corporation or not, as the matter does not fall within the
competence of the Commission to determine.
Unless said ruling/opinion is obtained by either or both parties, further
proceedings should be held in abeyance.
SO ORDERED
Their motion for reconsideration of the aforequoted order having been
denied by the same Hearing Officer in his subsequent order of April 10,
1996, Pabion and Ramiro then went to the Commission en banc via a
petition for certiorari. Thus came about SEC-EB No. 495 wherein
therein petitioners Pabion and Ramiro sought the nullification of
Hearing Officer Pereas twin orders of January 30, 1996 and April 10,
1996 for having been allegedly issued with grave abuse of discretion
amounting to lack or in excess of jurisdiction. In the same recourse, the
two likewise asked the SEC en banc to direct Perea to proceed with the
trial on the merits of SEC Case No. 09-94-4876.
In its first assailed order of October 2, 1996, the SEC en banc declared
Hearing Officer Perea to have acted with grave abuse of discretion in
issuing his two (2) questioned orders. The Commission ruled that Perea
should have conducted a trial on the merits to resolve the factual issue
of whether PNCC is majority or only minority-owned by the
government. Explains the Commission en banc in its challenged order:
Sec. 5 [b] of P.D. # 902-A confers on SEC original and exclusive
jurisdiction to hear and decide intra-corporate controversies. The main
issue in the petition is clearly an intra-corporate dispute as it is a
controversy between the petitioners as stockholders of PNCC and
respondent corporation PNCC regarding the holding of regular
stockholders meeting. This matter, therefore, falls within the scope of
the jurisdiction of the SEC. In resolving the main issue of whether PNCC
should hold regular stockholders meetings, the hearing officer has
jurisdiction to resolve the incidental issue of whether PNCC is a GOCC
2
or not. Having validly acquired original and exclusive jurisdiction over
the instant petition, the public respondent is mandated to hear and
decide all the issues involved in the dispute.
In the same order, the Commission en banc, instead of remanding the
case to the Hearing Officer to resolve the question of whether PNCC is
government-owned or controlled, itself resolved the issue by holding that
PNCC, being incorporated under the Corporation Code, is,
therefore, subject to Section 50 of the Corporation Code which
requires the holding of regular stockholders meeting for the
purpose of selecting PNCCs Board of Directors, citing, as basis
therefor the ruling in PNOC-EDC vs. NLRC, 20 SCRA 487, to the effect
that the determination as to what law governs a corporation is the
manner of its creation, adding that PNCC is an acquired asset
corporation which, by express provision of Section 2 of AO No. 59, is
not considered as a GOCC. And taking judicial notice of PNCCs by-
laws thereunder the corporations directors shall be elected at the
annual meeting of the stockholders, the Commission en
banc concluded that PNCC is, therefore, required to conduct a
regular stockholders meeting for the purpose of electing its Board
of Directors, considering that the Corporation Code and its own
By-Laws require the holding of such meeting.
xxx xxx xxx
A timely motion for reconsideration was filed by the PNCC but the same
was denied by the Commission en banc in its assailed Resolution of
April 11, 1997.[7] (citations omitted but bold types and italics found in
originial)
Ruling of the Court of AppealsUpholding
SEC, the Court of Appeals declared
that PNCC, though majority-owned by government financial institutions
(GFIs), retained its character as a private corporation. As such, PNCC
was required under the Corporation Code to hold regular shareholders
meetings to elect its board of directors. The CA ruled:
The petition lacks merit.
Although the case reached the SEC en banc through a petition for
certiorari, the said body is not helpless to resolve the controversy on its
substantive merits. There are indications that PNCC is not a GOCC
which the SEC en banc cannot ignore. A trial for the purpose of
determining the status of PNCC is unnecessary since the issue can be
resolved on the basis of records. A remand will only delay the resolution
of the case and frustrate the ends of justice.
It may be so, as pointed out by petitioner PNCC, that the rule which
allows the SEC en banc to correct instances of grave abuse of discretion
is patterned after Rule 65 of the 1997 Rules of Civil Procedure, and
therefore, it is only proper that the SEC en banc adhere to the
pronouncements of the Supreme Court on the proper treatment of
petitions for review on certiorari under Rule 65. It is equally true,
however, that the rule enunciated in several cases to the effect that the
inquiry in a petition for certiorari is limited only to searching for traces of
grave abuse [of] discretion is not cast in stone. For sure, the Supreme
Court no less has resolved factual issues in certiorari cases on the basis
of the records before it. If the Supreme Court can relax the restriction on
the disposition of certiorari cases, We see no reason why a mere quasi-
administrative body unsaddled by the stringent rules of procedure, like
the SEC en banc, cannot follow the High Courts example, more so
when, as rationalized by the same Court in Gokongwei, Jr. vs.
Securities and Exchange Commission, et. al., 89 SCRA 336, 360, the
underlying justification for the relaxation of the rule applies to the instant
case as well. Says the High Court in that case:
It is an accepted rule of procedure that the Supreme court should always
strive to settle the entire controversy in a single proceeding, leaving no
root or branch to bear the seeds of future litigation. Thus, in Francisco
v. City of Davao (12 SCRA 682), this Court resolved to decide the case
on the merits instead of remanding it to the trial court for further
proceedings since the ends of justice would not be subserved by the
remand of the case. In Republic v. Security Credit and Acceptance
Corporation, et. al. (19 SCRA 58), this Court, finding that the main
issue is one of law, resolved to decide the case on the merits because
public interest demands an early disposition of the case, and
3
in Republic v. Central Surety and Insurance Company, (25 SCRA
641), this Court denied remand of the third-party complaint to the trial
court for further proceedings, citing precedents where this Court, in
similar situations, resolved to decide the cases on the merits, instead of
remanding them to the trial court where (a) the ends of justice would not
be subserved by the remand of the case; or (b) where public interest
demand an early disposition of the case; or (c) where the trial court ha[s]
already received all the evidence presented by both parties and the
Supreme Court is now in a position, based upon said evidence, todecide
the case on the merits. xxx
Moreover, it cannot be denied that the parties herein are embroiled in
an intra-corporate controversy and the question on the identity of PNCC
is only an incident of that controversy. Pabion and Ramiro are among
the stockholders of PNCC, a circumstance which classifies the dispute
as an intra-corporate controversy. The authority of the Commission to
determine whether or not PNCC can be compelled to hold a
stockholders meeting is unquestioned as even PNCC itself concedes
that the issues of the propriety of calling a stockholders meeting is within
the competence of the SEC. The source of authority of the SEC over the
present case can be found in Section 5(b) of Presidential Decree (PD)
No. 902-A, as amended, which empowers the SEC to hear and resolve
cases involving controversies arising out of intra-corporate or
partnership relations, between and among stockholders, members, or
associates; between any or all of them and the corporation, partnership
or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association
and the State insofar as it concerns their individual franchise or right to
exist as such entity.
The finding of the SEC en banc that PNCC is not a GOCC was made in
the exercise of its jurisdiction over an intra-corporate controversy. To
disallow the Commission to determine the nature of petitioner PNCC is
to deprive it of the power to resolve the intra-corporate controversy
between the parties. The jurisdiction of the SEC over intra-corporate
controversies emanates from law and PNCC cannot divest the
Commission of that jurisdiction. As the body charged with exclusive
authority over intra-corporate controversies, aside from being
possessed under Section 3 of PD No. 902-A, as amended, with absolute
jurisdiction over all corporations which are grantees of primary franchise
from the government, the SEC en banc can be trusted with the
competence to distinguish a private corporation from a GOCC.
The second assigned error must likewise fall.
Administrative Order No. 59 does not consider the so-called acquired
asset corporations, although majority owned by the government, as
GOCCs. The salient provisions of AO No. 59 read, as follows:
SEC. 2. Definition of Terms. - As used in this Administrative Order, the
following terms shall mean:
(a) Government-owned and/or controlled corporation,
hereinafter referred to as GOCC or government corporation,
is a corporation which is created by special law or organized
under the Corporation Code in which the government,
directly or indirectly, has ownership of the majority of the
capital or has voting control; Provided, That an acquired
asset corporation as defined in the next paragraph shall
not be considered as GOCC or government corporation.
(b) Acquired asset corporation is a corporation (1) which is
under private ownership, the voting or outstanding
shares of which (i) were conveyed to the government
agency, instrumentality or corporation in satisfaction of
debts whether by foreclosure or otherwise, or (ii) were
duly acquired by the government through final judgment in a
sequestration proceeding; or (2) which is a subsidiary of a
government corporation organized exclusively to own and
manage, or lease, or operate specific physical assets
acquired by a government financial institution in satisfaction
of debts incurred therewith, and which in any case by law or
by enunciated policy is required to be disposed of to private
ownership within a specified period of time.
4
In order to be considered as an acquired asset corporation, the
aforequoted provision requires, among other things, that the
corporations conveyance of its outstanding shares to the government
must be aimed at the satisfaction of its debts. While, on one breath,
petitioner admits that the GFIs gained majority ownership of PNCC by
converting their loans into equity, on another breath, petitioner denies
that the debt-to-equity conversion resulted in the satisfaction of the
outstanding debts of PNCC because it did not pay the loans. If the loans
remained unpaid as maintained by PNCC, what then was the effect on
its debt when the GFIs converted their loans into equity? It would be the
height of irresponsibility for PNCC to surrender majority ownership of its
voting or outstanding shares without getting something in return.When
PNCC ceded the majority ownership to the GFIs, there could be no other
motivation behind the action than PNCCs desire to satisfy its obligation
to the creditors. PNCCs effort to ward off the exclusionary proviso of AO
No. 59 only produces incongruity in its position.
The case of Quimpo vs. Tanodbayan, 146 SCRA 137, cannot assist
the petitioners cause. There, the Supreme Courts inquiry centered on
whether or not Petrophil Corporation is a GOCC because an affirmative
answer will affirm the Tanodbayans jurisdiction over the Petrophil
employees pursuant to the provisions of the Anti-Graft and Corrupt
Practices Act. In declaring that Petrophil is a GOCC, the Supreme Court
deemed it crucial to its conclusion that Petrophil was purchased by the
government through the Philippine National Oil Corporation, itself a
GOCC. The situation of Petrophil bears no parallelism with that of PNCC
because the latter was not purchased by the GFIs. The GFIs became
majority owners of PNCC because they converted their loans into
equity. The manner of partial acquisition of PNCC by the GFIs fits the
condition set forth in Section 2, paragraph (b), subparagraph, (1) (i) of
AO no. 59, supra.
PNCCs position that it cannot be considered as an acquired asset
corporation in the absence of law or enunciated policy mandating its
privatization within a definite period can only be a product of strained
interpretation of AO No. 59. The Administrative Order shows that there
are only two (2) classes of acquired asset corporations. Although the
description of each class is compressed in a single paragraph, the
disjunctive word or separates the first class from the second class which
connotes a variance in their characteristics. The word or is a disjunctive
term signifying disassociation and independence of one thing from each
of the other things enumerated. It should, as a rule, be construed in the
sense in which it ordinarily implies, as a disjunctive word. Each class
has its own set of conditions. The conversion by the GFIs of their loans
into equity in PNOC is sufficient to transform it as an acquired asset
corporation. The requirement for a pretender for the status of an
acquired asset corporation to be subject to a law or policy that
commands its privatization applies to another class of acquired asset
corporations which does not include PNCC.[8] (citations omitted,
emphasis in the original)
The Issues
Disagreeing with the appellate court, petitioner lodged this recourse
before us[9] and presents these issues:
1. WHETHER OR NOT PNCC IS A GOCC;
2. WHETHER OR NOT THE SEC HAS JURISDICTION TO ORDER
PNCC TO HOLD A STOCKHOLDERS MEETING FOR THE PURPOSE
OF ELECTING THE MEMBERS OF ITS BOARD OF DIRECTORS;
3. WHETHER OR NOT PNCC IS REQUIRED UNDER THE LAW TO
HOLD A STOCKHOLDERS MEETING FOR THIS PURPOSE; AND
4. WHETHER OR NOT THE SEC, IN CERTIORARI PROCEEDINGS,
CAN RULE ON THE MERITS OF A CASE EVEN BEFORE THE
HEARING OFFICER HAS RECEIVED EVIDENCE.[10]
We shall take up the above issues in the following
sequence: 1) whether SEC can determine the corporate status of
PNCC, 2) whether SEC has jurisdiction over GOCCs, and 3) whether
PNCC is an acquired asset corporation.
5
The Courts Ruling
The Petition has no merit. Simply stated, PNCC claims that SEC has
no jurisdiction over it and that members of the corporations board of
directors hold office, not by virtue of a shareholders election but by
appointment of the President of the Philippines. We hold that SEC has
authority over PNCC and that the latter's directors owe their offices to
their shareholders and not to presidential fiat. To justify these plain
conclusions, we need to wade through rather complicated legal
processes and reasoning in resolving seriatim the legal issues raised by
petitioners.
First Issue: May SEC Determine Whether PNCC Is a GOCC?
Underlying this confusing controversy is the misconception that
government owned and/or controlled corporations (GOCCs) are beyond
the jurisdiction of SEC. From this broad and sweeping assumption,
petitioner asserts that SEC is without competence to determine whether
PNCC is a GOCC.[11] It insists that such a determination falls solely upon
the President of Philippines and is therefore beyond SECs jurisdiction.
We disagree. It is certainly absurd to say that SEC is without
jurisdiction to determine if PNCC is a GOCC simply because the
latter claims to be one. The President does not determine whether a
corporation is a GOCC or not. It is the law that does. PNCCs status as
a GOCC can be ruled upon by SEC -- as well as by other competent
authorities for that matter -- based on law, specifically the Revised
Administrative Code of 1987[12] which provides inter alia as follows:
Sec. 2. General Terms Defined. --- Unless the specific words of the text,
or the context as a whole, or a particular statute, shall require a different
meaning:
xxx xxx xxx
(13) Government-owned or controlled corporation -- refers to any
agency organized as a stock or non-stock corporation, vested with
functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of
stock corporations, to the extent of at least fifty-one (51) per cent of its
capital stock: Provided, That government owned or controlled
corporations may be further categorized by the Department of Budget,
the Civil Service Commission, and the Commission on Audit for
purposes of the exercise and discharge of their respective powers,
functions and responsibilities with respect to such corporations.
(emphasis ours)
Thus, we agree with the CA that the SEC en banc can be trusted
with the competence to distinguish a private corporation from a
GOCC.[13] Whether such determination is correct would be an altogether
different matter.
SEC Ruled on the Merits
Petitioner argues that certiorari, which was used by private
respondents to challenge the ruling of the hearing officer before the SEC
en banc, is generally limited to determining whether or not there has
been grave abuse of discretion committed by the officer below. It further
claims that the SEC rule[14] used by respondents was patterned after
Rule 65 of the 1997 Rules of Court.[15] Hence, the same principles
governing the latter should apply to the former. It thus submits that SEC
erred when it ruled not only on the issue of jurisdiction but also on the
merits of the case. It contends that SEC en banc should have limited
itself to the issue of grave abuse and thereafter remanded the case
below for further proceedings.
Again, we disagree. What petitioner invokes is a general rule that
admits of exceptions.[16] As the CA aptly pointed out, this general rule is
not cast in stone.[17] Indeed, one chiseled exception arises when the
court or administrative agency is in a position to resolve the dispute on
the merits based on the records before it.[18] That is, a reviewing court
or agency may decide the lis mota of a case on its merits if there are
enough undisputed facts to warrant such resolution.
Here we stress that SECs ruling was factually based on the judicial
admission of petitioner that there was a debt-to-equity conversion of
PNCCs obligations to several government financial institutions (GFIs)
pursuant to LOI 1295.[19] PNCC admits that at least 76.48 percent of its
equity is owned by GFI's.[20] Thus, in view of such admission extant on
the records, SEC en banc was in a position to validly dispose of the
6
controversy directly, without need of remanding the matter to the hearing
officer. It aptly based its actions on the fact that PNCC was organized
pursuant to the general corporation law and is thus subject to SEC
regulation.
We agree with SEC because a remand would have merely delayed
unnecessarily the resolution of the question. As we have said before and
say so again:
A litigation is not a game of technicalities in which one, more deeply
schooled and skilled in the subtle art of movement and position, entraps
and destroys the other. It is, rather, a contest in which each contending
party fully and fairly lays before the court the facts in issue and then,
brushing aside as wholly trivial and indecisive all imperfections of form
and technicalities of procedure, asks that justice be done upon the
merits. Lawsuits, unlike duels, are not to be won by a rapiers
thrust. Technicality, when it deserts its proper office as an aid to justice
and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in
technicalities.[21]
Indeed, justice unnecessarily delayed is justice necessarily denied.
Second Issue: Does SEC Have Jurisdiction over GOCCs?
As adverted to above, petitioner proceeds from the erroneous
proposition that SECs jurisdiction does not extend to x x x [a]
government-owned and controlled corporation or GOCC x x x.[22] This is
an inaccurate generalization. GOCCs may either be (1) with original
charter or created by special law; or (2) incorporated under general
law,[23] via either the Old Corporation Code[24] or the New Corporation
Code.[25]
We concede that SEC has no jurisdiction over corporations of the
first type -- GOCCs with original charter or created by special law --
primarily because they are governed by their charters.[26] But even this
concession is not absolute, since the Corporation Code may apply
suppletorily, either by operation of law[27] or through express provisions
in the charter.[28]
On the other hand, we have no doubt that over GOCCs established
or organized under the Corporation Code, SEC can exercise
jurisdiction. These GOCCs are regarded as private corporations despite
common misconceptions.[29] That the government may own the
controlling shares in the corporation does not diminish the fact that the
latter owes its existence to the Corporation Code. More pointedly,
Section 143 of the Corporation Code[30] gives SEC the authority and
power to implement its provisions, specifically for the purpose of
regulating the entities created pursuant to such provisions. These
entities include corporations in which the controlling shares are owned
by the government or its agencies.
Glaringly erroneous, therefore, is petitioners reliance on Quimpo v.
Tanodbayan[31] and its theory that it is immaterial whether a corporation
is acquired by purchase or through the conversion of the loans of the
GFIs into equity in a corporation [because] such corporation loses its
status as a private corporation and attains a new status as a
GOCC.[32] First, based on the discussions above, PNCC does not lose
its status as a private corporation, even if we were to assume that it is a
GOCC. Second, neither would such loss of status prevent it from being
further classified into an acquired asset corporation, as will be discussed
below.
The Controversy Is Within SEC Jurisdiction
SECs assumption of jurisdiction over this case is proper, as
the controversy involves the election of PNCCs directors. Petitioner
does not really contradict the nature of the question presented and
agrees that there is an intra-corporate question involved. However, it
emphasizes that the main question to be resolved is the status of PNCC
as a GOCC[33] which, it submits, is outside SECs competence to rule
on.[34] As already explained, there is no reason why SEC cannot make
such determination which, though not final and may be subject to review,
is nonetheless made pursuant to its exercise of
its original andexclusive jurisdiction over cases involving controversies
in the election of directors.[35]
SEC May Compel Stockholders' Meeting
Prescinding from the above premises, it necessarily follows that
SEC can compel PNCC to hold a stockholders meeting for the purpose
7
of electing members of the latter's board of directors.[36] This is clearly
provided for by Section 50 of the Corporation Code, which we quote:
Sec. 50. Regular and special meetings of stockholders or members. -- x
x x Whenever, for any cause, there is no person authorized to call a
meeting, the Securities and Exchange Commission, upon petition of a
stockholder or member, and on the showing of good cause therefor, may
issue an order to the petitioning stockholder or member directing him to
call a meeting of the corporation by giving proper notice required by this
Code or by the by-laws. The petitioning stockholder or member shall
preside thereat until at least a majority of the stockholders or members
present have chosen one of their member[s] as presiding officer.
(emphasis ours)
As respondents point out, the SECs action is also justified by its
regulatory and administrative powers[37] to implement the Corporation
Code, specifically to compel the PNCC to hold a stockholders meeting
for election purposes. Apropos here is the SECs ruling as follows:
The Commission takes judicial notice of the PNCC by-laws as follows:
Art. V, Sec. 5
(1) The Board of Directors shall be composed of eleven (11) directors.
(2) The directors shall be elected at the annual meeting of the
stockholders, each director to hold office for a term on one (1) year and
until his successor is duly elected and qualified.
Art. IV Sec. 4
(1) The annual meeting of the stockholders shall be held at 3:00 P.M. on
the fourth (4th) Tuesday of March every year.
Respondent PNCC is therefore required to conduct a regular
stockholders meeting for the purpose of electing its Board of Directors,
considering that the Corporation Code and its own By-Laws require the
holding of such meeting. The failure of PNCC to call and hold annual
stockholders meetings since 1983 or for thirteen (13) years constitutes
a gross, continuing violation of its by-laws and the Corporation
Code. For the refusal of PNCCs Board of Directors to call said meeting,
petitioners, as stockholders of PNCC, can rightfully petition the SEC to
order the same.
Third Issue: What is the Status of PNCC?
Petitioner differs from the foregoing conclusion and avers that there
is no necessity to hold a stockholders meeting to elect members of the
board of directors, because the President of the Philippines is
empowered to appoint them, by virtue of Article IV, Section 16 (1) of
Administrative Order No. 59[38] (December 5, 1988):
xxxxxxxxx
(1) Governing Boards. -- A GOCC shall be governed by a Board
of Directors or equivalent body composed of an appropriate
number of members to be appointed by the President of the
Philippines upon the recommendation of the Secretary to
whose Department the GOCC is attached. The Chairman of
the Board shall likewise be appointed by the President upon
the recommendation of the Secretary.
Respondents counter that the above-quoted provision is
inapplicable, since PNCC is not a GOCC. Instead, it is an acquired asset
corporation, based on the definition given in Section 2 (a) of the same
law, AO 59:
xxxxxxxxx
(a) Government-owned and/or controlled corporation,
hereinafter referred to as GOCC or government corporation,
is a corporation which is created by special law or organized
under the Corporation Code in which the Government,
directly or indirectly, has ownership of the majority of the
capital or has voting control; Provided that an acquired asset
8
 corporation as defined in the next paragraph shall not be
considered as GOCC or government corporation.
(b) Acquired asset corporation is a corporation (1) which is
under private ownership, the voting or outstanding shares of
which (i) were conveyed to the government or to a
government agency, instrumentality or corporation in
satisfaction of debts whether by foreclosure or otherwise, or
(ii) were duly acquired by the government through final
judgment in a sequestration proceeding; or (2) which is a
subsidiary of a government corporation organized exclusively
to own and manage, or lease, or operate specific physical
assets acquired by a government financial institution in
satisfaction of debts incurred therewith, and which in any
case by law or by enunciated policy is required to be
disposed of to private ownership within a specified period of
time. (emphasis supplied)
Thus, at this point these questions arise: (a) Is PNCC an acquired
asset corporation? (b) Is Section 2 of AO 59 inconsistent with Section 2
(13) of EO 292? (c) Is Section 16 of AO 59 applicable to PNCC?
PNCC Is an Acquired Asset Corporation
We agree with the respondents that PNCC falls under the exception
carved out from Section 2 (a and b) above which removes an acquired
asset corporation from the category of a GOCC.[39] In the context of the
entire administrative order and in relation to presidential
issuances,[40] these provisions clearly indicate that PNCC is indeed an
acquired asset corporation. This is because PNCC is a corporation that
is, to quote said AO, under private ownership, the voting or outstanding
shares of which (i) were conveyed to the government financial
institutions in satisfaction of debts x x x
Petitioner posits the interpretation that an acquired asset
corporation is one that is set to be privatized pursuant to a law or an
enunciated policy.[41] On this particular point, we agree. It should be
noted that under Section 2 (b) of AO 59, there are two kinds of acquired
asset corporations: one, a corporation which is under private ownership,
the voting or outstanding shares of which were either conveyed to the
government or to a government agency, instrumentality or corporation
in satisfaction of debts whether by foreclosure or otherwise, or were duly
acquired by the government in a sequestration proceeding; and two, a
corporation which is a subsidiary of a government entity organized
exclusively to own and manage or lease or operate specific physical
assets acquired by a government financial institution in satisfaction of
debts incurred therewith.
Both kinds of acquired asset corporations are by law or by
enunciated policy required to be privatized within a specified
period. Such interpretation of AO 59 is supported by Section 18 thereof
which provides:
SEC. 18. Dissolution of Acquired Asset Corporations. -- All executive
agencies, offices and instrumentalities shall take steps to
dissolve any acquired asset corporation which has not been disposed
of to the private sector within five (5) years from the date of the decision
to dissolve the corporation. xxx[42] (emphasis supplied)
Reading these sections together, it becomes evident that an
acquired asset corporation is singled out for eventual disposition to the
private sector or, failing in that, for dissolution.[43]
True, respondents failed to show that PNCC was headed either for
privatization or for dissolution. However, Article I, Section 1 of
Proclamation No. 50,[44] provides the enunciated policy required under
AO 59 in this wise:
SECTION 1. Statement of Policy. -- It shall be the policy of the State to
promote privatization through an orderly, coordinated and efficient
program for the prompt disposition of the large number of non-
performing assets of the government financial institutions, and certain
government-owned or controlled corporations which have been found
unnecessary or inappropriate for the government sector to maintain.
Pursuant to this policy, AO 64,[45] which was issued by then President
Corazon Aquino, transferred to the national government certain assets
held by the Philippine Export and Foreign Loan Guarantee
9
(Philguarantee) and the National Development Company
(NDC). Certain shares in PNCC were included. This fact was confirmed
by President Fidel V. Ramos who issued AO 397 [46] on May 13,
1998. The said administrative order states that PNCC is one of the
corporations slated to be privatized.[47]
When confronted with the same question, the Department of Justice
(DOJ) in DOJ Opinion No. 37, Series of 1995, stated that PNCC was an
acquired asset corporation, as follows:
At the outset, we note from the attached papers that in its letter dated
May 20, 1991 to the PNCC, the Office of the President already declared
that PNCC is an acquired asset corporation as defined in Administrative
Order No. 59. (emphasis supplied)
DOJ Opinion No. 22, Series of 1998, had a similar tenor:
The question whether PNCC is a government-owned or controlled
corporation (GOCC) and, therefore, a government entity ha[s] been
previously passed upon by the Office of the President. In a letter dated
May 20, 1991, Deputy Executive Secretary Sonny Coloma informed the
then PNCC President that PNCC is an acquired asset corporation as
defined under Section 2 of Administrative Order No. 59. The conclusion,
although not explicitly stated in said letter, is that PNCC is not a GOCC.
(emphasis supplied)
While not controlling, official opinions of the justice secretary are
persuasive. We uphold such opinions in the present milieu.
There Is No Inconsistency With the Administrative Code
Its earlier posturing notwithstanding, petitioner simultaneously
asserts that AO 59 is insufficient in its definition of "GOCC," which is
allegedly inconsistent with that found in Executive Order (EO)
292,[48] otherwise known as the Revised Administrative Code
(RAC). The inconsistency, according to petitioner, lies in the fact that AO
59 distinguishes between a GOCC and an acquired asset corporation,
while EO 292 does not. Petitioner maintains that [s]ince A.O. No. 59 is
a mere administrative issuance of the President, it is clear that its
definition of a GOCC cannot prevail over that given by E.O. No. 292,
which is a law.[49]
We do not find any inconsistency. The definition given in AO 59
explicitly applies only to that particular administrative order. We quote
the section in full:
Sec. 2. Definition of Terms. --- As used in this Administrative Order,
the following terms shall mean:
(a) Government-owned and/or controlled corporation,
hereinafter referred to as GOCC or government corporation,
is a corporation which is created by special law or organized
under the Corporation Code in which the Government,
directly or indirectly, has ownership of the majority of the
capital or has voting control; Provided that an acquired asset
corporation as defined in the next paragraph shall not be
considered as GOCC or government corporation.
(b) Acquired asset corporation is a corporation (1) which is
under private ownership, the voting or outstanding shares of
which (i) were conveyed to the government or to a
government agency, instrumentality or corporation in
satisfaction of debts whether by foreclosure or otherwise, or
(ii) were duly acquired by the government through final
judgment in a sequestration proceeding; or (2) which is a
subsidiary of a government corporation organized exclusively
to own and manage, or lease, or operate specific physical
assets acquired by a government financial institution in
satisfaction of debts incurred therewith, and which in any
case by law or by enunciated policy is required to be
disposed of to private ownership within a specified period of
time. (boldface and italics supplied)
AO 59 does not purport to have established a new kind of
corporation that supersedes EO 292. Neither does the former seek to
revise the definition of "GOCC" given in the latter. What AO 59 in fact
does is to distinguish GOCCs in general from those that are sought to
be privatized. In fact, the definition given in EO 292 itself states that the
10
GOCCs may be further categorized.[50] This caveat suggests that the to a department of the executive branch vis--vis the inter-departmental
definition is broad enough to admit distinctions as to the kinds of GOCCs supervision announced in the said Administrative Order. Here, the
defined under AO 59. President shall appoint members of the board upon the recommendation
of the Secretary to whose Department the GOCC is attached. Second,
Thus, contrary to respondents assertion that PNCC is not a
the GOCC referred to in Section 16 is one with an original charter, and
GOCC,[51] we hold that it may be deemed so under EO 292. However,
not one created under general corporation law.This is evident from a
for purposes of AO 59, particularly in the application of Section 16
reading of Section 16 (2) of AO 59:
thereof, PNCC is an acquired asset corporation. In this light, the alleged
inconsistency is more apparent than real. It should be emphasized that
(2) Powers and Functions of the Board. --- Insofar as it is not
an acquired asset corporation is a GOCC set to be privatized pursuant
inconsistent with the charter of a given GOCC, the Board of Directors
to the governments policy[52] as enunciated in Proclamation 50,[53] which
or equivalent body shall have the following powers and functions:
defines "assets" to include GOCCs thus:
x x x x x x x x x (emphasis supplied)
Sec. 2. Definition of Terms. -- As used in this Proclamation and unless
the context otherwise requires, the term:
In sum, it is clear that PNCC is an acquired asset corporation under
AO 59. Thus, Section 16 (1) of AO 59 is inapplicable. The alleged
(1) Assets shall include xxx (iv) the government institutions themselves,
derogation of the Presidents power over GOCCs is without basis.We
whether as parent or subsidiary corporations.
note, at this point, petitioners admission that members of the PNCC
board of directors are nominated by the GFIs in proportion to their equity
(2) Government institutions shall refer to government-owned or
ownership therein.[57] Petitioners vacillation in seeking to apply Section
controlled corporations, financial or otherwise, whether organized by
16 (1) of AO 59 while at same time asserting the invalidity of Section 2
special charter as in the case of a parent cooperation, or under general
(a and b) thereof betrays the stark weakness of its position.
law as in the case of a subsidiary corporation. (emphasis ours)
One final point. Petitioner is represented in this litigation by private
Under Section 5[54]
of same Proclamation thereof, the Committee on counsel, not by the government corporate counsel or by the solicitor
Privatization is empowered to identify and transfer these assets for general. In fact, the OSGs Memorandum submitted in representation of
disposition to the private sector. SEC debunks the Petition and sides with respondents. Petitioner should
not find it strange then that it is rightly adjudged as a private corporation
The allusions to an implied repeal by EO 292 of Section 2 (a and b)
subject to regulation by the SEC, since by its very act of retaining private
of AO 59 deserves scant consideration. Suffice it to say that, as
counsel and by the government's act of opposing its claims, it is indeed
respondents pointed out, it would be absurd for an earlier law to
a SEC-regulated entity.
impliedly repeal a subsequent one.[55] In any case, implied repeal is Epilogue
generally not favored.[56] Equally important, there is really no
Lest the focus of our disposition of this case be lost in the maze of
inconsistency.
Section 16 of AO 59 Is Inapplicable to PNCC arguments strewn before us, we stress that PNCC is a corporation
created in accordance with the general corporation statute. Hence, it
Assuming arguendo that PNCC is a GOCC and not an acquired is essentially a private corporation, notwithstanding the governments
asset corporation under AO 59, Section 16 thereof is inapplicable. First, interest therein through the debt-to-equity conversion imposed by PD
the GOCC referred to in Section 16 (1) of AO 59 is that which is attached
11
1295. Being a private corporation, PNCC is subject to SEC regulation
and jurisdiction.
Petitioner contends that Proclamation 50[58] and AO 59[59] limit the
exercise of that jurisdiction. But, after wading into the complex issues
submitted by the parties, we have shown that such laws and issuances
are not applicable to this particular case. We must emphasize also, and
this should be clear to all concerned, that our ruling here does not in any
way affect the factual issue of whether the government owns a majority
of the shares in PNCC. This matter, as can be gleaned from the factual
narration of the CA, was not settled below. However, from our
painstaking explanation above, it should be obvious that this issue of
fact is irrelevant to the disposition of the legal issues herein raised. To
repeat, whether PNCC is majority-owned by the government or not is
unimportant since our decision is essentially based on the verity that
PNCC is a private corporation created pursuant to the general
corporation law.
WHEREFORE, the Petition is hereby DENIED. The assailed
Decision and the Resolution of the Court of Appeals
are AFFIRMED. Costs against petitioner.
SO ORDERED.
2. [G.R. Nos. 84132-33 : December 10, 1990.]192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC.,
Petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO
SHERIFF and GODOFREDO QUILING, in his capacity as Deputy
Sheriff of Calamba, Laguna, Respondents.
This case involves the constitutionality of a presidential decree which,
like all other issuances of President Marcos during his regime, was at
that time regarded as sacrosanct. It is only now, in a freer atmosphere,
that his acts are being tested by the touchstone of the fundamental law
that even then was supposed to limit presidential action.: rd
The particular enactment in question is Pres. Decree No. 1717, which
ordered the rehabilitation of the Agrix Group of Companies to be
administered mainly by the National Development Company. The law
outlined the procedure for filing claims against the Agrix companies and
created a Claims Committee to process these claims. Especially
relevant to this case, and noted at the outset, is Sec. 4(1) thereof
providing that "all mortgages and other liens presently attaching to any
of the assets of the dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of
private respondent Philippine Veterans Bank a real estate mortgage
dated July 7, 1978, over three (3) parcels of land situated in Los Baños,
Laguna. During the existence of the mortgage, AGRIX went bankrupt. It
was for the expressed purpose of salvaging this and the other Agrix
companies that the aforementioned decree was issued by President
Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX
Claims Committee for the payment of its loan credit. In the meantime,
the New Agrix, Inc. and the National Development Company, petitioners
herein, invoking Sec. 4 (1) of the decree, filed a petition with the
Regional Trial Court of Calamba, Laguna, for the cancellation of the
mortgage lien in favor of the private respondent. For its part, the private
respondent took steps to extrajudicially foreclose the mortgage,
prompting the petitioners to file a second case with the same court to
stop the foreclosure. The two cases were consolidated.
After the submission by the parties of their respective pleadings, the trial
court rendered the impugned decision. Judge Francisco Ma. Guerrero
annulled not only the challenged provision, viz., Sec. 4 (1), but the entire
Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise
of legislative power was a violation of the principle of separation of
powers; (2) the law impaired the obligation of contracts; and (3) the
decree violated the equal protection clause. The motion for
reconsideration of this decision having been denied, the present petition
was filed.: rd
The petition was originally assigned to the Third Division of this Court
but because of the constitutional questions involved it was transferred
to the Court en banc. On August 30, 1988, the Court granted the
petitioner's prayer for a temporary restraining order and instructed the
respondents to cease and desist from conducting a public auction sale
of the lands in question. After the Solicitor General and the private
12
respondent had filed their comments and the petitioners their reply, the
Court gave due course to the petition and ordered the parties to file
simultaneous memoranda. Upon compliance by the parties, the case
was deemed submitted.
The petitioners contend that the private respondent is now estopped
from contesting the validity of the decree. In support of this contention,
it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where the
constitutionality of Pres. Decree No. 1717 was also raised but not
resolved. The Court, after noting that the petitioners had already filed
their claims with the AGRIX Claims Committee created by the decree,
had simply dismissed the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent also
invoked the provisions of Pres. Decree No. 1717 by filing a claim with
the AGRIX Claims Committee. Failing to get results, it sought to
foreclose the real estate mortgage executed by AGRIX in its favor, which
had been extinguished by the decree. It was only when the petitioners
challenged the foreclosure on the basis of Sec. 4 (1) of the decree, that
the private respondent attacked the validity of the provision. At that
stage, however, consistent with Mendoza, the private respondent was
already estopped from questioning the constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX
Claims Committee pursuant to this decree. It must be noted, however,
that this was done in 1980, when President Marcos was the absolute
ruler of this country and his decrees were the absolute law. Any judicial
challenge to them would have been futile, not to say foolhardy. The
private respondent, no less than the rest of the nation, was aware of that
reality and knew it had no choice under the circumstances but to
conform.: nad
It is true that there were a few venturesome souls who dared to question
the dictator's decisions before the courts of justice then. The record will
show, however, that not a single act or issuance of President Marcos
was ever declared unconstitutional, not even by the highest court, as
long as he was in power. To rule now that the private respondent is
estopped for having abided with the decree instead of boldly assailing it
is to close our eyes to a cynical fact of life during that repressive time.
This case must be distinguished from Mendoza, where the petitioners,
after filing their claims with the AGRIX Claims Committee, received in
settlement thereof shares of stock valued at P40,000.00 without protest
or reservation. The herein private respondent has not been paid a single
centavo on its claim, which was kept pending for more than seven years
for alleged lack of supporting papers. Significantly, the validity of that
claim was not questioned by the petitioner when it sought to restrain the
extrajudicial foreclosure of the mortgage by the private respondent. The
petitioner limited itself to the argument that the private respondent was
estopped from questioning the decree because of its earlier compliance
with its provisions.
Independently of these observations, there is the consideration that an
affront to the Constitution cannot be allowed to continue existing simply
because of procedural inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted
above, extinguishing all mortgages and other liens attaching to the
assets of AGRIX. It also notes, with equal concern, the restriction in
Subsection (ii) thereof that all "unsecured obligations shall not bear
interest" and in Subsection (iii) that "all accrued interests, penalties or
charges as of date hereof pertaining to the obligations, whether secured
or unsecured, shall not be recognized."
These provisions must be read with the Bill of Rights, where it is clearly
provided in Section 1 that "no person shall be deprived of life, liberty or
property without due course of law nor shall any person be denied the
equal protection of the law" and in Section 10 that "no law impairing the
obligation of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like
all rights, are subject to regulation under the police power for the
promotion of the common welfare. The contention is that this inherent
power of the state may be exercised at any time for this purpose so long
as the taking of the property right, even if based on contract, is done with
due process of law.
13
This argument is an over-simplification of the problem before us. The
police power is not a panacea for all constitutional maladies. Neither
does its mere invocation conjure an instant and automatic justification
for every act of the government depriving a person of his life, liberty or
property.
A legislative act based on the police power requires the concurrence of
a lawful subject and a lawful method. In more familiar words, a) the
interests of the public generally, as distinguished from those of a
particular class, should justify the interference of the state; and b) the
means employed are reasonably necessary for the accomplishment of
the purpose and not unduly oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that
the interests of the public are not sufficiently involved to warrant the
interference of the government with the private contracts of AGRIX. The
decree speaks vaguely of the "public, particularly the small investors,"
who would be prejudiced if the corporation were not to be assisted.
However, the record does not state how many there are of such
investors, and who they are, and why they are being preferred to the
private respondent and other creditors of AGRIX with vested property
rights.:-cralaw
The public interest supposedly involved is not identified or explained. It
has not been shown that by the creation of the New Agrix, Inc. and the
extinction of the property rights of the creditors of AGRIX, the interests
of the public as a whole, as distinguished from those of a particular class,
would be promoted or protected. The indispensable link to the welfare
of the greater number has not been established. On the contrary, it
would appear that the decree was issued only to favor a special group
of investors who, for reasons not given, have been preferred to the
legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds
that the means employed to rehabilitate AGRIX fall far short of the
requirement that they shall not be unduly oppressive. The
oppressiveness is patent on the face of the decree. The right to property
in all mortgages, liens, interests, penalties and charges owing to the
creditors of AGRIX is arbitrarily destroyed. No consideration is paid for
the extinction of the mortgage rights. The accrued interests and other
charges are simply rejected by the decree. The right to property is
dissolved by legislative fiat without regard to the private interest violated
and, worse, in favor of another private interest.
A mortgage lien is a property right derived from contract and so comes
under the protection of the Bill of Rights. So do interests on loans, as
well as penalties and charges, which are also vested rights once they
accrue. Private property cannot simply be taken by law from one person
and given to another without compensation and any known public
purpose. This is plain arbitrariness and is not permitted under the
Constitution.
And not only is there arbitrary taking, there is discrimination as well. In
extinguishing the mortgage and other liens, the decree lumps the
secured creditors with the unsecured creditors and places them on the
same level in the prosecution of their respective claims. In this respect,
all of them are considered unsecured creditors. The only concession
given to the secured creditors is that their loans are allowed to earn
interest from the date of the decree, but that still does not justify the
cancellation of the interests earned before that date. Such interests,
whether due to the secured or the unsecured creditors, are all
extinguished by the decree. Even assuming such cancellation to be
valid, we still cannot see why all kinds of creditors, regardless of security,
are treated alike.
Under the equal protection clause, all persons or things similarly situated
must be treated alike, both in the privileges conferred and the obligations
imposed. Conversely, all persons or things differently situated should be
treated differently. In the case at bar, persons differently situated are
similarly treated, in disregard of the principle that there should be
equality only among equals.- nad
One may also well wonder why AGRIX was singled out for government
help, among other corporations where the stockholders or investors
were also swindled. It is not clear why other companies entitled to similar
concern were not similarly treated. And surely, the stockholders of the
private respondent, whose mortgage lien had been cancelled and
legitimate claims to accrued interests rejected, were no less deserving
of protection, which they did not get. The decree operated, to use the
words of a celebrated case, 3 "with an evil eye and an uneven hand."
14
On top of all this, New Agrix, Inc. was created by special decree
notwithstanding the provision of Article XIV, Section 4 of the 1973
Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law,
provide for the formation, organization, or regulation of private
corporations, unless such corporations are owned or controlled by the
Government or any subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the government.
The National Development Corporation was merely required to extend
a loan of not more than P10,000,000.00 to New Agrix, Inc. Pending
payment thereof, NDC would undertake the management of the
corporation, but with the obligation of making periodic reports to the
Agrix board of directors. After payment of the loan, the said board can
then appoint its own management. The stocks of the new corporation
are to be issued to the old investors and stockholders of AGRIX upon
proof of their claims against the abolished corporation. They shall then
be the owners of the new corporation. New Agrix, Inc. is entirely private
and so should have been organized under the Corporation Law in
accordance with the above-cited constitutional provision.
The Court also feels that the decree impairs the obligation of the contract
between AGRIX and the private respondent without justification. While
it is true that the police power is superior to the impairment clause, the
principle will apply only where the contract is so related to the public
welfare that it will be considered congenitally susceptible to change by
the legislature in the interest of the greater number. 5 Most present-day
contracts are of that nature. But as already observed, the contracts of
loan and mortgage executed by AGRIX are purely private transactions
and have not been shown to be affected with public interest. There was
therefore no warrant to amend their provisions and deprive the private
respondent of its vested property rights.
It is worth noting that only recently in the case of the Development Bank
of the Philippines v. NLRC, 6 we sustained the preference in payment
of a mortgage creditor as against the argument that the claims of
laborers should take precedence over all other claims, including those
of the government. In arriving at this ruling, the Court recognized the
mortgage lien as a property right protected by the due process and
contract clauses notwithstanding the argument that the amendment in
Section 110 of the Labor Code was a proper exercise of the police
power.: nad
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise
of the police power, not being in conformity with the traditional
requirements of a lawful subject and a lawful method. The extinction of
the mortgage and other liens and of the interest and other charges
pertaining to the legitimate creditors of AGRIX constitutes taking without
due process of law, and this is compounded by the reduction of the
secured creditors to the category of unsecured creditors in violation of
the equal protection clause. Moreover, the new corporation, being
neither owned nor controlled by the Government, should have been
created only by general and not special law. And insofar as the decree
also interferes with purely private agreements without any demonstrated
connection with the public interest, there is likewise an impairment of the
obligation of the contract.
With the above pronouncements, we feel there is no more need to rule
on the authority of President Marcos to promulgate Pres. Decree No.
1717 under Amendment No. 6 of the 1973 Constitution. Even if he had
such authority, the decree must fall just the same because of its violation
of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is
declared UNCONSTITUTIONAL. The temporary restraining order dated
August 30, 1988, is LIFTED. Costs against the petitioners.- nad
SO ORDERED.
3. G.R. No. 136374 February 9, 2000
FRANCISCA S. BALUYOT, petitioner,
vs.PAUL E. HOLGANZA and the OFFICE OF THE OMBUDSMAN
(VISAYAS) represented by its Deputy Ombudsman for the Visayas
ARTURO C. MOJICA, Director VIRGINIA PALANCA-SANTIAGO,
and Graft Investigation Officer I ANNA MARIE P.
MILITANTE, respondents.
15
Before us is a special civil action for certiorari, seeking the reversal of
the Orders dated August 21, 1998 and October 28, 1998 issued by the
Office of the Ombudsman, which denied petitioner's motion to dismiss
and motion for reconsideration, respectively.1âwphi1.nêt
The facts are:
During a spot audit conducted on March 21, 1977 by a team of auditors
from the Philippine National Red Cross (PNRC) headquarters, a cash
shortage of P154,350.13 was discovered in the funds of its Bohol
chapter. The chapter administrator, petitioner Francisca S. Baluyot, was
held accountable for the shortage. Thereafter, on January 8, 1998,
private respondent Paul E. Holganza, in his capacity as a member of the
board of directors of the Bohol chapter, filed an affidavit-
complaint1 before the Office of the Ombudsman charging petitioner of
malversation under Article 217 of the Revised Penal Code. The
complaint was docketed as OMB-VIS-CRIM-98-0022. However, upon
recommendation by respondent Anna Marie P. Militante, Graft
Investigation Officer I, an administrative docket for dishonesty was also
opened against petitioner; hence, OMB-VIS-ADM-98-0063.2
On February 6, 1998, public respondent issued an Order 3 requiring
petitioner to file her counter-affidavit to the charges of malversation and
dishonesty within ten days from notice, with a warning that her failure to
comply would be construed as a waiver on her part to refute the charges,
and that the case would be resolved based on the evidence on record.
On March 14, 1998, petitioner filed her counter-affidavit,4 raising
principally the defense that public respondent had no jurisdiction over
the controversy. She argued that the Ombudsman had authority only
over government-owned or controlled corporations, which the PNRC
was not, or so she claimed.
On August 21, 1998, public respondent issued the first assailed
Order5 denying petitioner's motion to dismiss. It further scheduled a
clarificatory hearing on the criminal aspect of the complaint and a
preliminary conference on its administrative aspect on September 2,
1998. Petitioner received the order on August 26, 1998 and she filed a
motion for reconsideration6 the next day.
On October 28, 1998, public respondent issued the second assailed
Order7 denying petitioner's motion for reconsideration. Hence, this
recourse.
We dismiss the petition.
Petitioner contends that the Ombudsman has no jurisdiction over the
subject matter of the controversy since the PNRC is allegedly a private
voluntary organization. The following circumstances, she insists, are
indicative of the private character of the organization: (1) the PNRC does
not receive any budgetary support from the government, and that all
money given to it by the latter and its instrumentalities become private
funds of the organization; (2) funds for the payment of personnel's
salaries and other emoluments come from yearly fund campaigns,
private contributions and rentals from its properties; and (3) it is not
audited by the Commission on Audit. Petitioner states that the PNRC
falls under the International Federation of Red Cross, a Switzerland-
based organization, and that the power to discipline employees accused
of misconduct, malfeasance, or immorality belongs to the PNRC
Secretary General by virtue of Section "G", Article IX of its by-laws.8 She
threatens that "to classify the PNRC as a government-owned or
controlled corporation would create a dangerous precedent as it would
lose its neutrality, independence and impartiality . . . .9
Practically the same issue was addressed in Camporedondo v. National
Labor Relations Commission, et. al.,10where an almost identical set of
facts obtained. Petitioner therein was the administrator of the Surigao
del Norte chapter of the PNRC. An audit conducted by a field auditor
revealed a shortage in the chapter funds in the sum of P109,000.00.
When required to restitute the amount of P135,927.78, petitioner therein
instead applied for early retirement, which was denied by the Secretary
General of the PNRC. Subsequently, the petitioner filed a complaint for
illegal dismissal and damages against PNRC before the National Labor
Relations Commission. In turn, PNRC moved to dismiss the complaint
16
on the ground of lack of jurisdiction, averring that PNRC was a
government corporation whose employees are embraced by civil service
regulation. The labor arbiter dismissed the complaint, and the
Commission sustained his order. The petitioner assailed the dismissal
of his complaint via a petition for certiorari, contending that the PNRC is
a private organization and not a government-owned or controlled
corporation. In dismissing the petition, we ruled thus:
Resolving the issue set out in the opening paragraph of this opinion, we
rule that the Philippine National Red Cross (PNRC) is a government
owned and controlled corporation, with an original charter under
Republic Act No. 95, as amended. The test to determine whether a
corporation is government owned or controlled, or private in nature is
simple. Is it created by its own charter for the exercise of a public
function, or by incorporation under the general corporation law? Those
with special charters are government corporations subject to its
provisions, and its employees are under the jurisdiction of the Civil
Service Commission, and are compulsory members of the Government
Service Insurance System. The PNRC was not "impliedly converted to
a private corporation" simply because its charter was amended to vest
in it the authority to secure loans, be exempted from payment of all
duties, taxes, fees and other charges of all kinds on all importations and
purchases for its exclusive use, on donations for its disaster relief work
and other services and in its benefits and fund raising drives, and be
allotted one lottery draw a year by the Philippine Charity Sweepstakes
Office for the support of its disaster relief operation in addition to its
existing lottery draws for blood program.
Clearly then, public respondent has jurisdiction over the matter,
pursuant to Section 13, of Republic Act No. 6770, otherwise known as
"The Ombudsman Act of 1989", to wit:
Sec. 13. Mandate. — The Ombudsman and his Deputies, as protectors
of the people, shall act promptly on complaints filed in any form or
manner against officers or employees of the Government, or of any
subdivision, agency or instrumentality thereof, including government-
owned or controlled corporations, and enforce their administrative, civil
and criminal liability in ever case where the evidence warrants in order
to promote efficient service by the Government to the people. 11
WHEREFORE, the petition for certiorari is hereby DISMISSED. Costs
against petitioner.
SO ORDERED.
4. G.R. No. L-61259 April 26, 1983
LIONS CLUBS INTERNATIONAL and JAMES L. SO, petitioners,
vs.HON. AUGUSTO M. AMORES, Presiding Judge of the Court of
First Instance of Manila, Branch XXIV, COURT OF APPEALS and
VICENTE JOSEFA, respondents.
GUERRERO, J.:
Where the Constitution of petitioner association, the Lions Clubs
International, specifically provides that all Lions Clubs so organized shall
be under the exclusive jurisdiction of the International Board of Directors
(Sec. 5, Art. III) and that all District Governor election results shall be
adopted by the International Board of Directors and thereby become
effective, except in the case of an election protest filed or legal action
resulting therefrom, in which event the appointment or election of such
District Governor shall be subject to action by the International Board of
Directors [Sec. 8(a), (1) 2nd par., Art. VII] and in accordance therewith,
the election protest between petitioner So and respondent Josefa for the
position of District Governor of District 301-Al Philippines for the fiscal
year 1982-1983 was filed and elevated to the International Board of
Directors through its Constitution and By-Laws Committee following the
prescribed Constitutional Complaints Procedure and said Committee
conducted a hearing therein attended by the parties, each claiming to
be duly elected to the disputed position, the decision of the International
Board of Directors adopting the Committee's Report and approving the
election of petitioner James L. So to server as District Governor of
District 301-Al for the fiscal year 1982-1983 is final, binding, and
conclusive, it being a question of policy, discipline, and internal
17
government in the relation of the mother organization with local clubs
organized, chartered and supervised exclusively thereunder, absent any
clear showing of mistake, fraud, conclusion or arbitrariness and,
therefore, the basic matter in dispute in the instant petition as to who has
the right to the contested office presents no justiciable controversy that
necessitates judicial interference or intervention.
The case at bar is a special civil action for certiorari, mandamus and
prohibition with prayer to lift the restraining order issued by the Court of
Appeals, (now the Intermediate Appellate Court) in CA-G.R. No. 14599-
SP entitled "Vicente Josefa. Petitioner, versus Hon. Judge Augusto M.
Amores, Lions Clubs International, and James L. So. Respondents."
The principal adversaries in this controversy are respondent Vicente
Josefa of the Manila Traders Lions Club and petitioner James L. So of
the Manila Centrum Lions Club, which Lions clubs are duly organized,
chartered, and affiliated with Lions Clubs International having its
International offices at 300 22nd Street, Oakbrook, Illinois 60570, U.S.A.
The Manila Traders Lions Club and the Manila Centrum Lions Club,
together with other Lions clubs, are embraced and constituted into the
newly organized District 301-Al. The Lions districts in the country form
the so-called Multiple District 301,Philippines. All clubs so organized and
chartered under the Constitution of Lions Clubs International are under
the exclusive supervision of the International Board of Directors.
The records show that on July 1, 1982, Vicente Josefa filed a complaint
for Quo Warranto, Injunction, Damages with writ of preliminary injunction
and prayer for temporary restraining order docketed as Civil Case No.
82-10588 in the Court of First Instance of Manila against Lions Clubs
International and James L. So, defendants. alleging inter aliathe
following material and pertinent allegations: that Josefa and So filed their
certificates of candidacy for the position of District Governor of District
301-Al for the fiscal year 1982-83; that before the elections, or on April
22, 1982, an agreement was executed between Josefa and So for the
purpose of avoiding an expensive, full-blown election contest, whereby
the latter withdrew his certificate of candidacy in favor of Josefa; that
said withdrawal of So was duly accepted by District 301-A through
Governor Huang who affixed his signature to the aforesaid agreement;
that however, news items were published conveying the Idea that So
had not withdrawn from the gubernatorial race; that Gov. Huang
informed Josefa that So had not filed a new certificate of candidacy and
that the District did not recognize So as a candidate to any position; that
a telex was sent to Lions Clubs International requesting information
whether So was still a candidate after his withdrawal and Lions
International admonished incumbent Governor Huang to enforce the
Constitution and By-Laws of Multiple District 301 if the withdrawal was
in fact made and accepted by the District.
It was further alleged that on the day of the election, June 6, 1982, the
Chairman of the Nominations Committee reported at the Plenary
Session of the 33rd Multiple District Convention held at the Little Theater
of the Olongapo High School, Olongapo City, that because of So's
failure to file another certificate of candidacy, the District recognized only
one candidate, Vicente Josefa, for Governor; that, however, some
members of the Council of Past District Governors arbitrarily set aside
said report and proclaimed So as a qualified candidate, which action
was vigorously objected to by some Lions present in the Plenary
Session on the ground that the session was not the proper quorum to
deliberate and decide on the matter as some of those present were
Lions and Lionesses who were not qualified to vote; that the Past District
Governors dismissed the members of the Nomination Committee,
Election Committee, and other committees incharge of the accreditation
of votes and unlawfully appointed new members thereof.
The complaint likewise alleged that during all this time, armed men by
force and intimidation prevented known leaders and followers of Josefa
from entering the Plenary Session; that forced by the deteriorated peace
and order in the convention hall and by virtue of the powers vested in
him by the State Council of Governors, as well as the Rules of
Procedure, Gov. Huang through his Cabinet Secretary announced in the
Plenary Session that he has changed the venue of the election from the
Little Theater of the Olongapo High School to its new site at the ground
floor of Admiral Hotel, also at Olongapo City; that to this transfer, Vice
Chairman of the State Council of Governors, Gov. Ramon Beleno and
18
the Secretary General of the hosting clubs Estanislao Cesa, Jr. made
no objections, provided the cost of facilities of new venue is not
shouldered by them.
Plaintiff Josefa also alleged that So and some members of the Council
of Past District Governors continued to hold and supervise an illegal
election at the old site where voting and non-voting delegates and
alternates were allowed to cast their votes without ballots, without ballot
boxes and without the issuance of valid accreditation papers of the
registered voting delegates; that in the meantime, at the election held at
the Admiral Hotel Supervised by Gov. Huang, Josefa obtained 115
votes, a majority of the qualified voting delegates duly accredited, and
was duly proclaimed as the Governor-elect of District 301-Al by the State
Council of Governors; that, however, defendant Lions Clubs
International unlawfully recognized So as the winner.
And finally alleging that So would assume the powers and prerogatives
of Governor of District 301-Al at the closing program of the International
Convention on July 3, 1982, Josefa prayed for the issuance of a writ of
preliminary injunction or at least a temporary restraining order. He
likewise asked for moral damages and for attorney's fees.
Finding the foregoing allegations of the complaint to be sufficient in form
and substance, the Court of First Instance on the same date, July 1,
1982, issued a temporary restraining order enjoining So from assuming
the powers and prerogatives of the office of Governor of District 301-Al,
and Lions Clubs International, represented by Antonio Ramos, from
recognizing and proclaiming So as the Governor of District 301-Al for
the fiscal year 1982- 1983.
On July 8, 1982, defendants So and Lions Club International filed a
Motion to Dismiss and to Lift Restraining Order on the grounds that: (1)
the Court of First Instance had no jurisdiction over the person of the
defendants or over the subject of the action or suit; (2) venue is
improperly laid; and (3) there is another action pending between the
same parties for the same cause. Plaintiff Josefa filed his Opposition, to
which defendants filed a Reply.
On July 26, 1982, the Court of First Instance issued an Order denying
defendants' motion to dismiss. Finding the Motion to lift restraining order
to be meritorious, the Court set aside said restraining order.
Before the hearing on the application for a writ of preliminary injunction,
Josefa filed in the Court of Appeals on July 29, 1982 a petition docketed
as CA-G.R. No. 14599-SP for certiorari with preliminary and mandatory
injunction and a prayer for a temporary restraining order, assailing that
portion of the Order of the Court of First Instance dated July 26, 1982
lifting the restraining order. Josefa contended that by lifting said
restraining order without awaiting the evidence on his petition for a writ
of injunction, So would immediately assume the contested position, the
very act sought to be enjoined, thereby making the action moot and
academic and whatever favorable judgment may be rendered in the
main action would be rendered useless and nugatory.
The appellate court in a Resolution dated July 29, 1982 issued a
temporary restraining order "restraining and prohibiting the respondents
(Hon. Judge Augusto M. Amores, Lions Clubs International and James
L. So) from implementing the questioned Order of July 26, 1982 issued
in Civil Case No. 82-10588 particularly the portion thereof lifting the
temporary restraining order issued by the respondent Judge on July 1,
1982 until further orders ... "
Herein petitioners Lions Clubs International and James L. So now come
to this Court attributing grave abuse of discretion to the Court of First
Instance of Manila for the denial of their Motion to Dismiss dated July 6,
1982, and contending that the Court of Appeals acted in excess of its
jurisdiction in issuing its temporary restraining order of July 29, 1982. As
prayed for by said petitioners, We issued on August 4, 1982 a temporary
restraining order enjoining the enforcement of the assailed temporary
restraining order of the Court of Appeals.
The basic issue posed for Our determination is the justiciability of the
election dispute between herein petitioner James L. So and private
respondent Vicente Josefa for the position of District Governor of District
301-Al Philippines. It is petitioners' submission that the subject matter of
19
the instant case is purely an internal affair of the Lions organization and,
therefore, is beyond judicial review. On the other hand, private
respondent maintains that court intervention is warranted when, as he
alleges in this case, there is fraud, oppression. bad faith, when the
proceedings in question are violative of the laws of the association, or
where the proceedings are illegal.
We find for the petitioners and in finding so, We adopt the general rule
that "... the courts will not interfere with the internal affairs of an
unincorporated association so as to settle disputes between the
members, or questions of policy, discipline, or internal government, so
long as the government of the society is fairly and honestly administered
in conformity with its laws and the law of the land, and no property or
civil rights are invaded. Under such circumstances, the decision of the
governing body or established private tribunal of the association is
binding and conclusive and not subject to review or collateral attack in
the courts. " (7 C.J.S. pp. 38- 39).
The general rule of non-interference in the internal affairs of associations
is, however, subject to exceptions, but the power of review is extremely
limited. Accordingly, the courts have and will exercise power to interfere
in the internal affairs of an association where law and justice so require,
and the proceedings of the association are subject to judicial review
where there is fraud, oppression, or bad faith, or where the action
complained of is capricious, arbitrary, or unjustly discriminatory. Also,
the courts will usually entertain jurisdiction to grant relief in case property
or civil rights are invaded, although it has also been held that the
involvement of property rights does not necessarily authorize judicial
intervention, in the absence of arbitrariness, fraud or collusion.
Moreover, the courts will intervene where the proceedings in question
are violative of the laws of the society, or the law of the land, as by
depriving a person of due process of law. Similarly, judicial intervention
is warranted where there is a lack of jurisdiction on the part of the tribunal
conducting the proceedings, where the organization exceeds its powers,
or where the proceedings are otherwise illegal. (7 C.J.S., pp. 39-41).
In accordance with the general rules as to judicial interference cited
above, the decision of an unincorporated association on the question of
an election to office is a matter peculiarly and exclusively to be
determined by the association, and, in the absence of fraud, is final and
binding on the courts. (7 C.J.S., p. 44).
The instant controversy between petitioner So and respondent Josefa
falls squarely within the ambit of the rule of judicial non-intervention or
non- interference. The elections in dispute, the manner by which it was
conducted and the results thereof, is strictly the internal affair that
concerns only the Lions association and/or its members, and We find
from the records that the same was resolved within the organization of
Lions Clubs International in accordance with the Constitution and By-
Laws which are not immoral, unreasonable, contrary to public policy, or
in contravention of the laws of the land.
It is of judicial notice that a Lions club is a voluntary association of civic-
minded men whose general purpose and aim is to serve the people and
the community. It appears from the records that duly organized and
chartered Lions clubs all over the world are under the supervision of the
mother club known as The International Association of Lions Clubs for
Lions Clubs International) which holds international offices in Illinois,
U.S.A., and is governed by its constitution and by-laws. The objects of
this worldwide organization are:
(a) To create and foster a spirit of understanding among
the peoples of the world.
(b) To promote the principles of good government and
good citizenship.
(c) To take an active interest in the civil, cultural, social and
moral welfare of the community.
(d) To unite the clubs in the bonds of friendship, good
fellowship and mutual understanding.
20
 (e) To provide a forum for the open discussion of all
matters of public interest provided, however, that partisan
politics and secretarian religon shall not be debated by
club members.
(f) To encourage service-minded men to serve their
community without personal financial reward, and to
encourage efficiency and -promote high ethical standards
in commerce, industry, professions, public works and
private endeavors. (Constitution of the International
Association of Lions Clubs, Article II, Section 2.)
Member clubs are chartered in accordance with the provisions of its
constitution which provide that:
Section 4. ... A Lions club shall be considered chartered when its charter
has been officially issued. The acceptance of a charter by a Lions Club
shall be a ratification of, and agreement on its part to be bound by, the
Constitution and By-Laws of this Association and a submission by said
Lions Club to have its relationship with this Association interpreted and
governed by this Constitution and By-Laws according to the laws in
effect, from time to time, in the State of Incorporation of The International
Association of Lions Clubs.
Section 5. Except as otherwise provided herein, the International Board
of Directors shall have full power and authority to sanction the
organization and chartering of all clubs, under such rules and
regulations as it may prescribe.
Subject to the provisions of this Constitution and By-Laws, all club so
organized shall be under the exclusive jurisdiction of said Board of
Directors."
Aside from the obligation to carry on activities for the advancement of
the civic, cultural, social or moral welfare of the community and for the
promotion of international understanding, a chartered Lions club shall
"(j) abide by the policies and requirements as determined, from time to
time, by the International Board of Directors." (Constitution, Art. XI, Sec.
1). The International Board of Directors is composed of the President,
Immediate Past President, First and Second and Third Vice Presidents
and 28 Directors. (Art. V, Sec. 1, Constitution).
In the matter of the election for the office of District Governor, the
Constitution of Lions International provides:
Section 8 (a) Subject to the provisions of Sec. 2 of this Article VII:
(1) ...
An election for the office of District Governor shall be conducted in
accordance with the provisions of the respective District (Single, Sub or
Multiple) Constitution and By-Laws. The results of each District
Governor election shall be reported to the International Office by the
respective current District Governor and/or the Association's Extension
Representative. The results so reported shall be presented to the
International Board of Directors. All District Governor election results
shall be adopted by the International Board of Directors and thereby
become effective, except in the case of an election protest filed or legal
action resulting therefrom in which event the appointment or election of
such District Governor shall be subject to action by the International
Board of Directors, (Emphasis supplied)
The records disclose that the election dispute between petitioner James
L. So and respondent Vicente Josefa was brought before and elevated
to the International Board of Directors through the Constitution and By-
Laws Committee of Lions Clubs International, 300 22nd Street,
Oakbrook, Illinois 60570, U.S.A. (See Letter Protest of petitioner So
marked Annex "20", pp. 187-190, Records and Answer of Gov. Huang
marked Annex "21 ", pp. 191-196, Records).
In his formal protest dated June 11, 1982, petitioner So assailed the
validity of the "alleged election and proclamation" of Lion Vicente Josefa
as District Governor of District 301-Al for the Lions fiscal year 1982-1983
and called attention to the "blatant display of oppressive conduct of Gov.
21
James T. Huang of District 301-Al before, during, and after the just
concluded convention in the hope that the mistakes and miscarriage of
justice be rectified." Narrating the sequence of events, petitioner claimed
that Gov. Huang failed to constitute and present within the prescribed
periods, the District Nominations and Elections Committee in violation
of the Multiple District 301 Constitution and By-Laws; that duly
registered delegates were deliberately disenfranchised; that Gov.
Huang arbitrarily transferred the venue of election from the Little
Theater, Olongapo City National High School, to the Admiral Hotel which
was the headquarters of his opponent, Vicente Josefa, without the
sanction and authority of the State Council of Governors and the
Convention.
Petitioner So pointed out that he was duly nominated by the District
Nominations Committee as well as respondent Vicente Josefa and in
the elections duly conducted by the Election Committee at the official
venue at the Little Theater, he received 147 votes as against 3 votes in
favor of Josefa and that the 147 votes he received is a clear majority of
the total number of registered delegates of District 301-Al which was
251, or a clear majority of 59%. The election results were duly certified
by the Convention Chairman and by the official representative of the
State Council of Governors, District Gov. Ramon Beleno of District 301-
E. Petitioner, therefore, prayed that he be recognized as the duly elected
District Governor of District 301-Al for the Lion fiscal year 1982-1983.
Answering the letter-protest of petitioner So and as directed by Lions
Clubs International, Gov. Huang in his letter dated June 17, 1982 denied
the assertions of the protestant, petitioner So, and maintained that he
had faithfully performed all the duties and responsibilities of his office in
accordance With the Constitution and By-Laws, of the Multiple District,
citing incidents wherein followers of petitioner So allegedly created
trouble by booing, shouting and uttering invectives and armed men
intimidated followers of Josefa from entering the Little Theater. In
changing the venue of elections, Huang said he wanted "a democratic
and peaceful election which could not be achieved in the old site
because of the unruly and deteriorated atmosphere caused by the
agitations from the camp of James L. So." Gov. Huang, moreover,
contended that the election in the Little Theater was never legally
convened as there were no ballots, no accreditation papers, no ballot
boxes and other important papers relative to an honest election. And
since the election of Josefa was proclaimed by the State Council of
Governors, Gov. Huang prayed that the election of Governor-elect
Vicente Josefa be sustained and affirmed. Filed and attached to the
Answer of Gov. Huang is the Report of the Governor to Lions Clubs
International including reports of the Election Committee, the Board of
Canvassers, Minutes of the Election Proceedings, Certification of the
Proclamation of Governor-elect Josefa and Resolution of the State
Council of Governors confirming the proclamation. (See Annex "22",
pp.197-203).
Thereafter, the Constitution and by-Laws Committee, through Joseph D.
Stone, General Counsel of the International Association of Lions Clubs,
submitted to the International Board of Directors the following Report:
The International Board of Directors has received a complaint filed by
Lion James L. So. This complaint has been filed in accordance with the
Constitutional Complaints Procedure of the International Board of
Directors. All parties have been given the opportunity to respond and
have filed their official response with the International Association.
Your Committee has examined the evidence submitted by the parties
and has conducted a hearing attended by Lion So, District Governor of
District 301-A Lion James Huang Lion Vicente Josefa and Multiple
District 301 Council Chairman Lion Antonio Ramos.
Your Committee hereby makes the following finding of facts and
recommendations respecting the election for the office of District
Governor in District 301-Al for the fiscal year 1982-83:
1. That there were two properly nominated candidates for the
office of District Governor, District 301-Al, for the fiscal year 1982-83:
Lion James L. So and Lion Vicente Josefa.
22
 2. That one hour after the designated convening time, District
Governor Huang transferred the election meeting from the designated
site to the Admiral Royal Hotel.
3. That after the announcement of District Governor Huang
transferring the election meeting, a majority of the delegates of the newly
authorized District 301-Al remained at the designated site and convened
an election for District Governor between the two candidates, Lion So
and Lion Josefa.
4. That there were two elections held on June 6, 1982 for the
office of District Governor of District 301-Al.
5. That one election was held as a part of the official District
Convention at the designated election meeting site, the Little Theater
Olongapo National High School, at which Lion So received 147 votes
and Lion Josefa received 3 votes.
6. That the other election was held at the Admiral Royale Hotel at
which Lion Josefa received 115 votes.
7. That the action of District Governor Huang in transferring the
election meeting away from the convention site was without approval of
a majority of the delegates and was without any clear authority and
justification.
8. That the said election meeting held at the Little Theatre
Olongapo National High School was properly conducted and resulted in
the election of Lion So.
9. That said election of Lion So was duly certified by the official
Election Committee Chairman Lion Ernesto Castañeda, appointed by
District Governor Huang and District Governor Beleno of District 301-E,
the official Multiple District Council representative.
Based upon the above finding of facts your Committee is of the
opinion that Lion James L. So was duly elected as District Governor,
District 301- Al for the fiscal year 1982-83 and that said election should
be recognized by the International Board of Directors. Your Committee
is also of the opinion that the election conducted by District Governor
Huang, 301-A, at the Admiral Royale Hotel was unauthorized and
improper and is thereby null and void. Your Committee recommends
that the Board concur in said finding of facts and recommendations by
the adoption of RESOLUTION III-A hereinafter." (Annexes "O" and "O-
1", Reply, pp. 237-238, Records).
At the meeting of the International Board of Directors held on June 27,
1982, the election of petitioner James L. So to serve as District Governor
of District 301-Al for the fiscal year 1982-83 was approved and said
petitioner was duly informed thereof by Richard G. Rice, Manager,
District Operations Department, Lions Clubs International in his letter
dated July 8, 1982 and marked Annex "K" to the petition, p. 79, Records.
Petitioner attended and completed the District Governors' Executive
Seminar as District Governor of 301-Al (see Annex "L", P. 80, Records).
On June 29, 1982, petitioner So was proclaimed, sworn to and installed
to office as District Governor of District 301-Al by the President of Lions
International at the close of the 65th Lions Clubs International
Convention held in Atlanta, Georgia, U.S.A.
The Report of the Constitution and By-laws Committee duly approved
and adopted by the International Board of Directors clearly belies the
claim of injustice alleged by respondent Josefa in his complaint in Civil
Case No. 82-10588 that petitioner So was illegally and arbitrarily
nominated; that the latter's election was illegal and that he (Josefa) was
legally elected in a valid election held at the new venue and was duly
proclaimed by the State Council of Governors and that Lions
International unlawfully recognized So as the winner on the basis of his
illegal election. These findings upon the evidence submitted and
examined at the hearing of the election protest before the Committee
personally attended by both petitioner So and respondent Josefa may
not be disturbed by the courts. The decision of the Association's tribunal,
the International Board of Directors, is controlling since respondent
Josefa alleges no invasion of this property or civil rights and neither is it
23
claimed that the government of the Association is not fairly and honestly
administered in conformity with its laws and the law of the land.
It is clear that under the Constitution of Lions International, Art. IV,
Section, 8, the District Governor serves without compensation. Lionism
prides itself in that its motto is: "We serve", and "Liberty, Intelligence,
Our Nation's Safety" its slogan or credo. (Secs. 2 and 3, Art. 1,
Constitution). There is, therefore, no proprietary or pecuniary interest
involved in the membership of the Lions and in the offices they seek and
hold in the club and district levels. Being merely a member or officer of
the Lions Clubs or District is only a privilege and an opportunity for
service to the community that is not enforceable at law. And since the
disputed election to the position of District Governor is within the peculiar
province and function of Lions International through its established
tribunal to decide and determine in accordance with its governing laws,
its resolution may not be questioned elsewhere, much less in the courts.
Thus, in Our jurisprudence in U.S. vs. Cañete 38 Phil. 253, the Supreme
Court held that in matters purely ecclesiastical, the decision of the proper
church tribunals are conclusive upon the civil tribunals and that a church
member who is expelled from membership by the church authorities or
a priest or minister who is by then deprived of his sacred office, is without
remedy in the civil court, which will not inquire into the correctness of the
decision of the ecclesiastical tribunals. So also in Felipe vs. Leuterio, et
al, 91 Phil. 482, We held that the judiciary has no power to reverse the
award of the Board of Judges of an oratorical contest and for that matter,
it would not interfere in literary contests, beauty contests, and similar
competitions.
In essence, the courts, considering the nature of the action or suit at bar,
are without jurisdiction and authority to review and reverse the decision
of the International Board of Directors, Lions Clubs International,
approving and recognizing the petitioner as duly elected District
Governor of District 301-A1 for the fiscal year 1982-1983.
WHEREFORE, IN VIEW OF THE FOREGOING, Civil Case No. 82-
10588 entitled "Vicente Josefa vs. Lions Clubs International, Antonio
Ramos and Lion James L. So", Court of First Instance of Manila, Branch
XXIV (now Regional Trial Court, National Capital Region) and the
petition entitled "Vicente Josefa vs. Hon. Judge Augusto M. Amores,
Lions Clubs International and James L. So", CA-G.R. No. 14599-SP
(now Intermediate Appellate Court) are hereby DISMISSED. No costs.
5G.R. No. 149110 April 9, 2003 NATIONAL POWER
CORPORATION, petitioner,
vs.CITY OF CABANATUAN, respondent.
This is a petition for review1 of the Decision2 and the Resolution3 of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively,
finding petitioner National Power Corporation (NPC) liable to pay
franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created
under Commonwealth Act No. 120, as amended.4 It is tasked to
undertake the "development of hydroelectric generations of power and
the production of electricity from nuclear, geothermal and other sources,
as well as, the transmission of electric power on a nationwide
basis."5 Concomitant to its mandated duty, petitioner has, among others,
the power to construct, operate and maintain power plants, auxiliary
plants, power stations and substations for the purpose of developing
hydraulic power and supplying such power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of
Cabanatuan City, posting a gross income of P107,814,187.96 in
1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent
assessed the petitioner a franchise tax amounting to P808,606.41,
representing 75% of 1% of the latter's gross receipts for the preceding
year.9
Petitioner, whose capital stock was subscribed and paid wholly by the
Philippine Government,10 refused to pay the tax assessment. It argued
that the respondent has no authority to impose tax on government
entities. Petitioner also contended that as a non-profit organization, it is
exempted from the payment of all forms of taxes, charges, duties or
24
fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended,
viz:
"Sec.13. Non-profit Character of the Corporation; Exemption
from all Taxes, Duties, Fees, Imposts and Other Charges by
Government and Governmental Instrumentalities.- The
Corporation shall be non-profit and shall devote all its return from
its capital investment, as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act,
the Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges,
costs and service fees in any court or administrative proceedings
in which it may be a party, restrictions and duties to the Republic
of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities,
municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced
sales tax, and wharfage fees on import of foreign goods required
for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges
imposed by the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale
of electric power."12
The respondent filed a collection suit in the Regional Trial Court of
Cabanatuan City, demanding that petitioner pay the assessed tax due,
plus a surcharge equivalent to 25% of the amount of tax, and 2%
monthly interest.13Respondent alleged that petitioner's exemption from
local taxes has been repealed by section 193 of Rep. Act No.
7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural
or juridical, including government owned or controlled
corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon
the effectivity of this Code."
On January 25, 1996, the trial court issued an Order15 dismissing the
case. It ruled that the tax exemption privileges granted to petitioner
subsist despite the passage of Rep. Act No. 7160 for the following
reasons: (1) Rep. Act No. 6395 is a particular law and it may not be
repealed by Rep. Act No. 7160 which is a general law; (2) section 193
of Rep. Act No. 7160 is in the nature of an implied repeal which is not
favored; and (3) local governments have no power to tax
instrumentalities of the national government. Pertinent portion of the
Order reads:
"The question of whether a particular law has been repealed or
not by a subsequent law is a matter of legislative intent. The
lawmakers may expressly repeal a law by incorporating therein
repealing provisions which expressly and specifically cite(s) the
particular law or laws, and portions thereof, that are intended to
be repealed. A declaration in a statute, usually in its repealing
clause, that a particular and specific law, identified by its number
or title is repealed is an express repeal; all others are implied
repeal. Sec. 193 of R.A. No. 7160 is an implied repealing clause
because it fails to identify the act or acts that are intended to be
repealed. It is a well-settled rule of statutory construction that
repeals of statutes by implication are not favored. The
presumption is against inconsistency and repugnancy for the
25
legislative is presumed to know the existing laws on the subject
and not to have enacted inconsistent or conflicting statutes. It is
also a well-settled rule that, generally, general law does not
repeal a special law unless it clearly appears that the legislative
has intended by the latter general act to modify or repeal the
earlier special law. Thus, despite the passage of R.A. No. 7160
from which the questioned Ordinance No. 165-92 was based, the
tax exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of
the Supreme Court in the case of Basco vs. Philippine
Amusement and Gaming Corporation, 197 SCRA 52, where it
was held that:
'Local governments have no power to tax instrumentalities
of the National Government. PAGCOR is a government
owned or controlled corporation with an original charter,
PD 1869. All of its shares of stocks are owned by the
National Government. xxx Being an instrumentality of the
government, PAGCOR should be and actually is exempt
from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by mere local
government.'
Like PAGCOR, NPC, being a government owned and controlled
corporation with an original charter and its shares of stocks
owned by the National Government, is beyond the taxing power
of the Local Government. Corollary to this, it should be noted here
that in the NPC Charter's declaration of Policy, Congress
declared that: 'xxx (2) the total electrification of the Philippines
through the development of power from all services to meet the
needs of industrial development and dispersal and needs of rural
electrification are primary objectives of the nations which shall be
pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.'
(underscoring supplied). To allow plaintiff to subject defendant to
its tax-ordinance would be to impede the avowed goal of this
government instrumentality.
Unlike the State, a city or municipality has no inherent power of
taxation. Its taxing power is limited to that which is provided for in
its charter or other statute. Any grant of taxing power is to be
construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself,
it is very clear that the plaintiff could not impose the subject tax
on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the
ground that section 193, in relation to sections 137 and 151 of the LGC,
expressly withdrew the exemptions granted to the petitioner.18 It ordered
the petitioner to pay the respondent city government the following: (a)
the sum of P808,606.41 representing the franchise tax due based on
gross receipts for the year 1992, (b) the tax due every year thereafter
based in the gross receipts earned by NPC, (c) in all cases, to pay a
surcharge of 25% of the tax due and unpaid, and (d) the sum of P
10,000.00 as litigation expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the
Court of Appeal's Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its
arguments reiterated therein that the taxing power of the province
under Art. 137 (sic) of the Local Government Code refers merely
to private persons or corporations in which category it (NPC)
does not belong, and that the LGC (RA 7160) which is a general
law may not impliedly repeal the NPC Charter which is a special
law—finds the answer in Section 193 of the LGC to the effect that
'tax exemptions or incentives granted to, or presently enjoyed by
all persons, whether natural or juridical, including government-
owned or controlled corporations except local water districts xxx
are hereby withdrawn.' The repeal is direct and unequivocal, not
implied.
26
 IN VIEW WHEREOF, the motion for reconsideration is hereby
DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING
THAT NPC, A PUBLIC NON-PROFIT CORPORATION, IS
LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO
CONSIDER THAT SECTION 137 OF THE LOCAL
GOVERNMENT CODE IN RELATION TO SECTION 131
APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS
ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING
THAT NPC'S EXEMPTION FROM ALL FORMS OF TAXES HAS
BEEN REPEALED BY THE PROVISION OF THE LOCAL
GOVERNMENT CODE AS THE ENACTMENT OF A LATER
LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE
CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT
CONSIDERING THAT AN EXERCISE OF POLICE POWER
THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE
LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the
authority to issue Ordinance No. 165-92 and impose an annual tax on
"businesses enjoying a franchise," pursuant to section 151 in relation to
section 137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption
granted by any law or other special law, the province may impose
a tax on businesses enjoying a franchise, at a rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed
one-twentieth (1/20) of one percent (1%) of the capital
investment. In the succeeding calendar year, regardless of when
the business started to operate, the tax shall be based on the
gross receipts for the preceding calendar year, or any fraction
thereof, as provided herein." (emphasis supplied)
x x x
Sec. 151. Scope of Taxing Powers.- Except as otherwise
provided in this Code, the city, may levy the taxes, fees, and
charges which the province or municipality may
impose: Provided, however, That the taxes, fees and charges
levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the
maximum rates allowed for the province or municipality by not
more than fifty percent (50%) except the rates of professional and
amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual
franchise tax to the respondent city government. It contends that
sections 137 and 151 of the LGC in relation to section 131, limit the
taxing power of the respondent city government to private entities that
are engaged in trade or occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege,
affected with public interest which is conferred upon private persons or
corporations, under such terms and conditions as the government and
its political subdivisions may impose in the interest of the public welfare,
security and safety." From the phraseology of this provision, the
petitioner claims that the word "private" modifies the terms "persons"
27
and "corporations." Hence, when the LGC uses the term "franchise,"
petitioner submits that it should refer specifically to franchises granted
to private natural persons and to private corporations.23 Ergo, its charter
should not be considered a "franchise" for the purpose of imposing the
franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as
"trade or commercial activity regularly engaged in as means of livelihood
or with a view to profit." Petitioner claims that it is not engaged in an
activity for profit, in as much as its charter specifically provides that it is
a "non-profit organization." In any case, petitioner argues that the
accumulation of profit is merely incidental to its operation; all these
profits are required by law to be channeled for expansion and
improvement of its facilities and services.24
Petitioner also alleges that it is an instrumentality of the National
Government,25 and as such, may not be taxed by the respondent city
government. It cites the doctrine in Basco vs. Philippine Amusement and
Gaming Corporation26where this Court held that local governments have
no power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the
National Government.
PAGCOR has a dual role, to operate and regulate gambling
casinos. The latter role is governmental, which places it in the
category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be
and actually is exempt from local taxes. Otherwise, its operation
might be burdened, impeded or subjected to control by a mere
local government.
'The states have no power by taxation or otherwise, to
retard, impede, burden or in any manner control the
operation of constitutional laws enacted by Congress to
carry into execution the powers vested in the federal
government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L
Ed. 579)'
This doctrine emanates from the 'supremacy' of the National
Government over local governments.
'Justice Holmes, speaking for the Supreme Court, made
reference to the entire absence of power on the part of the
States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state
or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even
seriously burden it from accomplishment of them.'
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics
supplied)
Otherwise, mere creatures of the State can defeat National
policies thru extermination of what local authorities may perceive
to be undesirable activities or enterprise using the power to tax
as ' a tool regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the
'power to destroy' (Mc Culloch v. Maryland, supra) cannot be
allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing
the tax privileges of government-owned or controlled corporations, is in
the nature of an implied repeal. A special law, its charter cannot be
amended or modified impliedly by the local government code which is a
general law. Consequently, petitioner claims that its exemption from all
taxes, fees or charges under its charter subsists despite the passage of
the LGC, viz:
28
 "It is a well-settled rule of statutory construction that repeals of
statutes by implication are not favored and as much as possible,
effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC
constitutes a special law. Republic Act No. 7160, is a general law.
It is a basic rule in statutory construction that the enactment of a
later legislation which is a general law cannot be construed to
have repealed a special law. Where there is a conflict between a
general law and a special statute, the special statute should
prevail since it evinces the legislative intent more clearly than the
general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid
exercise of police power, should prevail over the LGC. It alleges that the
power of the local government to impose franchise tax is subordinate to
petitioner's exemption from taxation; "police power being the most
pervasive, the least limitable and most demanding of all powers,
including the power of taxation."29
The petition is without merit.
Taxes are the lifeblood of the government, 30 for without taxes, the
government can neither exist nor endure. A principal attribute of
sovereignty,31 the exercise of taxing power derives its source from the
very existence of the state whose social contract with its citizens obliges
it to promote public interest and common good. The theory behind the
exercise of the power to tax emanates from necessity; 32 without taxes,
government cannot fulfill its mandate of promoting the general welfare
and well-being of the people.
In recent years, the increasing social challenges of the times expanded
the scope of state activity, and taxation has become a tool to realize
social justice and the equitable distribution of wealth, economic progress
and the protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the
ratification of the 1987 Constitution. Thenceforth, the power to tax is no
longer vested exclusively on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and other charges34 pursuant to
Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to
create its own sources of revenue, to levy taxes, fees and
charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees and charges shall accrue exclusively
to the Local Governments."
This paradigm shift results from the realization that genuine
development can be achieved only by strengthening local autonomy and
promoting decentralization of governance. For a long time, the country's
highly centralized government structure has bred a culture of
dependence among local government leaders upon the national
leadership. It has also "dampened the spirit of initiative, innovation and
imaginative resilience in matters of local development on the part of local
government leaders."35 The only way to shatter this culture of
dependence is to give the LGUs a wider role in the delivery of basic
services, and confer them sufficient powers to generate their own
sources for the purpose. To achieve this goal, section 3 of Article X of
the 1987 Constitution mandates Congress to enact a local government
code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code
which shall provide for a more responsive and accountable local
government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative,
and referendum, allocate among the different local government
units their powers, responsibilities, and resources, and provide
for the qualifications, election, appointment and removal, term,
salaries, powers and functions and duties of local officials, and all
other matters relating to the organization and operation of the
local units."
29
To recall, prior to the enactment of the Rep. Act No. 7160,36 also known
as the Local Government Code of 1991 (LGC), various measures have
been enacted to promote local autonomy. These include the Barrio
Charter of 1959,37 the Local Autonomy Act of 1959,38 the
Decentralization Act of 196739 and the Local Government Code of
1983.40 Despite these initiatives, however, the shackles of dependence
on the national government remained. Local government units were
faced with the same problems that hamper their capabilities to
participate effectively in the national development efforts, among which
are: (a) inadequate tax base, (b) lack of fiscal control over external
sources of income, (c) limited authority to prioritize and approve
development projects, (d) heavy dependence on external sources of
income, and (e) limited supervisory control over personnel of national
line agencies.41
Considered as the most revolutionary piece of legislation on local
autonomy,42 the LGC effectively deals with the fiscal constraints faced
by LGUs. It widens the tax base of LGUs to include taxes which were
prohibited by previous laws such as the imposition of taxes on forest
products, forest concessionaires, mineral products, mining operations,
and the like. The LGC likewise provides enough flexibility to impose tax
rates in accordance with their needs and capabilities. It does not
prescribe graduated fixed rates but merely specifies the minimum and
maximum tax rates and leaves the determination of the actual rates to
the respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the
blanket exclusion of instrumentalities and agencies of the national
government from the coverage of local taxation. Although as a general
rule, LGUs cannot impose taxes, fees or charges of any kind on the
National Government, its agencies and instrumentalities, this rule now
admits an exception, i.e., when specific provisions of the LGC authorize
the LGUs to impose taxes, fees or charges on the aforementioned
entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the
Local Government Units.- Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
x x x
(o) Taxes, fees, or charges of any kind on the National
Government, its agencies and instrumentalities, and local
government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco
vs. Philippine Amusement and Gaming Corporation44 relied upon by the
petitioner to support its claim no longer applies. To emphasize,
the Basco case was decided prior to the effectivity of the LGC, when no
law empowering the local government units to tax instrumentalities of
the National Government was in effect. However, as this Court ruled in
the case of Mactan Cebu International Airport Authority (MCIAA) vs.
Marcos,45 nothing prevents Congress from decreeing that even
instrumentalities or agencies of the government performing
governmental functions may be subject to tax.46 In enacting the LGC,
Congress exercised its prerogative to tax instrumentalities and agencies
of government as it sees fit. Thus, after reviewing the specific provisions
of the LGC, this Court held that MCIAA, although an instrumentality of
the national government, was subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC,
we conclude that as a general rule, as laid down in section 133,
the taxing power of local governments cannot extend to the levy
of inter alia, 'taxes, fees and charges of any kind on the national
government, its agencies and instrumentalities, and local
government units'; however, pursuant to section 232, provinces,
cities and municipalities in the Metropolitan Manila Area may
impose the real property tax except on, inter alia, 'real property
owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been
granted for consideration or otherwise, to a taxable person as
provided in the item (a) of the first paragraph of section 12.'"47
30
In the case at bar, section 151 in relation to section 137 of the LGC
clearly authorizes the respondent city government to impose on the
petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by
government authority, which does not belong to citizens of the country
generally as a matter of common right.48 In its specific sense, a franchise
may refer to a general or primary franchise, or to a special or secondary
franchise. The former relates to the right to exist as a corporation, by
virtue of duly approved articles of incorporation, or a charter pursuant to
a special law creating the corporation.49 The right under a primary or
general franchise is vested in the individuals who compose the
corporation and not in the corporation itself.50 On the other hand, the
latter refers to the right or privileges conferred upon an existing
corporation such as the right to use the streets of a municipality to lay
pipes of tracks, erect poles or string wires.51 The rights under a
secondary or special franchise are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general power granted to
a corporation to dispose of its property, except such special or
secondary franchises as are charged with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a
franchise in the sense of a secondary or special franchise. This is to
avoid any confusion when the word franchise is used in the context of
taxation. As commonly used, a franchise tax is "a tax on the privilege of
transacting business in the state and exercising corporate franchises
granted by the state."53 It is not levied on the corporation simply for
existing as a corporation, upon its property54 or its income,55 but on its
exercise of the rights or privileges granted to it by the government.
Hence, a corporation need not pay franchise tax from the time it ceased
to do business and exercise its franchise.56 It is within this context that
the phrase "tax on businesses enjoying a franchise" in section 137 of
the LGC should be interpreted and understood. Verily, to determine
whether the petitioner is covered by the franchise tax in question, the
following requisites should concur: (1) that petitioner has a "franchise"
in the sense of a secondary or special franchise; and (2) that it is
exercising its rights or privileges under this franchise within the territory
of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as
amended by Rep. Act No. 7395, constitutes petitioner's primary and
secondary franchises. It serves as the petitioner's charter, defining its
composition, capitalization, the appointment and the specific duties of
its corporate officers, and its corporate life span.57 As its secondary
franchise, Commonwealth Act No. 120, as amended, vests the petitioner
the following powers which are not available to ordinary
corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of
water power in any part of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring
or waterfall in the Philippines, for the purposes specified in this
Act; to intercept and divert the flow of waters from lands of
riparian owners and from persons owning or interested in waters
which are or may be necessary for said purposes, upon payment
of just compensation therefor; to alter, straighten, obstruct or
increase the flow of water in streams or water channels
intersecting or connecting therewith or contiguous to its works or
any part thereof: Provided, That just compensation shall be paid
to any person or persons whose property is, directly or indirectly,
adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary
plants, dams, reservoirs, pipes, mains, transmission lines, power
stations and substations, and other works for the purpose of
developing hydraulic power from any river, creek, lake, spring
and waterfall in the Philippines and supplying such power to the
inhabitants thereof; to acquire, construct, install, maintain,
operate, and improve gas, oil, or steam engines, and/or other
prime movers, generators and machinery in plants and/or
31
auxiliary plants for the production of electric power; to establish,
develop, operate, maintain and administer power and lighting
systems for the transmission and utilization of its power
generation; to sell electric power in bulk to (1) industrial
enterprises, (2) city, municipal or provincial systems and other
government institutions, (3) electric cooperatives, (4) franchise
holders, and (5) real estate subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent,
mortgage, encumber and otherwise dispose of property incident
to, or necessary, convenient or proper to carry out the purposes
for which the Corporation was created: Provided, That in case a
right of way is necessary for its transmission lines, easement of
right of way shall only be sought: Provided, however, That in case
the property itself shall be acquired by purchase, the cost thereof
shall be the fair market value at the time of the taking of such
property;
(i) To construct works across, or otherwise, any stream,
watercourse, canal, ditch, flume, street, avenue, highway or
railway of private and public ownership, as the location of said
works may require xxx;
(j) To exercise the right of eminent domain for the purpose of this
Act in the manner provided by law for instituting condemnation
proceedings by the national, provincial and municipal
governments;
x x x franchise tax simply because its stocks are wholly owned by the National
(m) To cooperate with, and to coordinate its operations with those
of the National Electrification Administration and public service
entities;
(n) To exercise complete jurisdiction and control over watersheds
surrounding the reservoirs of plants and/or projects constructed
or proposed to be constructed by the Corporation. Upon
determination by the Corporation of the areas required for
watersheds for a specific project, the Bureau of Forestry, the
Reforestation Administration and the Bureau of Lands shall, upon
written advice by the Corporation, forthwith surrender jurisdiction
to the Corporation of all areas embraced within the watersheds,
subject to existing private rights, the needs of waterworks
systems, and the requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the
Corporation shall adopt measures to prevent environmental
pollution and promote the conservation, development and
maximum utilization of natural resources xxx " 58
With these powers, petitioner eventually had the monopoly in the
generation and distribution of electricity. This monopoly was
strengthened with the issuance of Pres. Decree No. 40, 59 nationalizing
the electric power industry. Although Exec. Order No. 215 60 thereafter
allowed private sector participation in the generation of electricity, the
transmission of electricity remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the
respondent city government's territorial jurisdiction pursuant to the
powers granted to it by Commonwealth Act No. 120, as amended. From
its operations in the City of Cabanatuan, petitioner realized a gross
income of P107,814,187.96 in 1992. Fulfilling both requisites, petitioner
is, and ought to be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the
Government, and its charter characterized it as a "non-profit"
organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on
the exercise by the corporation of a privilege to do business. The taxable
entity is the corporation which exercises the franchise, and not the
32
individual stockholders. By virtue of its charter, petitioner was created
as a separate and distinct entity from the National Government. It can
sue and be sued under its own name,61 and can exercise all the powers
of a corporation under the Corporation Code.62
To be sure, the ownership by the National Government of its entire
capital stock does not necessarily imply that petitioner is not engaged in
business. Section 2 of Pres. Decree No. 202963 classifies government-
owned or controlled corporations (GOCCs) into those performing
governmental functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a
non-stock corporation, whether performing governmental or
proprietary functions, which is directly chartered by special law or
if organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a
parent corporation or subsidiary corporation, to the extent of at
least a majority of its outstanding voting capital stock x x x."
(emphases supplied)
Governmental functions are those pertaining to the administration of
government, and as such, are treated as absolute obligation on the part
of the state to perform while proprietary functions are those that are
undertaken only by way of advancing the general interest of society, and
are merely optional on the government.64 Included in the class of
GOCCs performing proprietary functions are "business-like" entities
such as the National Steel Corporation (NSC), the National
Development Corporation (NDC), the Social Security System (SSS), the
Government Service Insurance System (GSIS), and the National Water
Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric
generation of power and the production of electricity from nuclear,
geothermal and other sources, as well as the transmission of electric
power on a nationwide basis."66 Pursuant to this mandate, petitioner
generates power and sells electricity in bulk. Certainly, these activities
do not partake of the sovereign functions of the government. They are
purely private and commercial undertakings, albeit imbued with public
interest. The public interest involved in its activities, however, does not
distract from the true nature of the petitioner as a commercial enterprise,
in the same league with similar public utilities like telephone and
telegraph companies, railroad companies, water supply and irrigation
companies, gas, coal or light companies, power plants, ice plant among
others; all of which are declared by this Court as ministrant or proprietary
functions of government aimed at advancing the general interest of
society.67
A closer reading of its charter reveals that even the legislature treats the
character of the petitioner's enterprise as a "business," although it limits
petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate
affairs or necessary for the proper transaction of its business or
to carry out the purposes for which it was organized, to contract
indebtedness and issue bonds subject to approval of the
President upon recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be
reasonably necessary to carry out the business and purposes for
which it was organized, or which, from time to time, may be
declared by the Board to be necessary, useful, incidental or
auxiliary to accomplish the said purpose xxx."(emphases
supplied)
It is worthy to note that all other private franchise holders receiving at
least sixty percent (60%) of its electricity requirement from the petitioner
are likewise imposed the cap of twelve percent (12%) on profits. 69 The
main difference is that the petitioner is mandated to devote "all its returns
from its capital investment, as well as excess revenues from its
operation, for expansion"70 while other franchise holders have the option
to distribute their profits to its stockholders by declaring dividends. We
do not see why this fact can be a source of difference in tax treatment.
In both instances, the taxable entity is the corporation, which exercises
the franchise, and not the individual stockholders.
33
We also do not find merit in the petitioner's contention that its tax
exemptions under its charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant.
Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provisions.71 In the case at bar, the petitioner's
sole refuge is section 13 of Rep. Act No. 6395 exempting from, among
others, "all income taxes, franchise taxes and realty taxes to be paid to
the National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities." However, section 193 of
the LGC withdrew, subject to limited exceptions, the sweeping tax
privileges previously enjoyed by private and public corporations.
Contrary to the contention of petitioner, section 193 of the LGC is an
express, albeit general, repeal of all statutes granting tax exemptions
from local taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon
the effectivity of this Code." (emphases supplied)
It is a basic precept of statutory construction that the express mention of
one person, thing, act, or consequence excludes all others as expressed
in the familiar maxim expressio unius est exclusio alterius.73 Not being
a local water district, a cooperative registered under R.A. No. 6938, or a
non-stock and non-profit hospital or educational institution, petitioner
clearly does not belong to the exception. It is therefore incumbent upon
the petitioner to point to some provisions of the LGC that expressly grant
it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly
states that the LGUs can impose franchise tax "notwithstanding any
exemption granted by any law or other special law." This particular
provision of the LGC does not admit any exception. In City Government
of San Pablo, Laguna v. Reyes,74 MERALCO's exemption from the
payment of franchise taxes was brought as an issue before this Court.
The same issue was involved in the subsequent case of Manila Electric
Company v. Province of Laguna.75 Ruling in favor of the local
government in both instances, we ruled that the franchise tax in question
is imposable despite any exemption enjoyed by MERALCO under
special laws, viz:
"It is our view that petitioners correctly rely on provisions of
Sections 137 and 193 of the LGC to support their position that
MERALCO's tax exemption has been withdrawn. The explicit
language of section 137 which authorizes the province to impose
franchise tax 'notwithstanding any exemption granted by any law
or other special law' is all-encompassing and clear. The franchise
tax is imposable despite any exemption enjoyed under special
laws.
Section 193 buttresses the withdrawal of extant tax exemption
privileges. By stating that unless otherwise provided in this Code, tax
exemptions or incentives granted to or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled
corporations except (1) local water districts, (2) cooperatives duly
registered under R.A. 6938, (3) non-stock and non-profit hospitals and
educational institutions, are withdrawn upon the effectivity of this code,
the obvious import is to limit the exemptions to the three enumerated
entities. It is a basic precept of statutory construction that the express
mention of one person, thing, act, or consequence excludes all others
as expressed in the familiar maxim expressio unius est exclusio alterius.
In the absence of any provision of the Code to the contrary, and we find
no other provision in point, any existing tax exemption or incentive
enjoyed by MERALCO under existing law was clearly intended to be
withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that
under the LGC the local government unit may now impose a local tax at
a rate not exceeding 50% of 1% of the gross annual receipts for the
34
preceding calendar based on the incoming receipts realized within its
territorial jurisdiction. The legislative purpose to withdraw tax privileges
enjoyed under existing law or charter is clearly manifested by the
language used on (sic) Sections 137 and 193 categorically withdrawing
such exemption subject only to the exceptions enumerated. Since it
would be not only tedious and impractical to attempt to enumerate all
the existing statutes providing for special tax exemptions or privileges,
the LGC provided for an express, albeit general, withdrawal of such
exemptions or privileges. No more unequivocal language could have
been used."76(emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs,
through ordinances duly approved, to grant tax exemptions, initiatives
or reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which
imposes an annual franchise tax "notwithstanding any exemption
granted by law or other special law," the respondent city government
clearly did not intend to exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise
needed revenues to finance and support myriad activities of the local
government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. As this Court observed in
the Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or controlled
corporations and all other units of government were that such privilege
resulted in serious tax base erosion and distortions in the tax treatment
of similarly situated enterprises."78 With the added burden of devolution,
it is even more imperative for government entities to share in the
requirements of development, fiscal or otherwise, by paying taxes or
other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed
Decision and Resolution of the Court of Appeals dated March 12, 2001
and July 10, 2001, respectively, are hereby AFFIRMED.
SO ORDERED.
6. [G.R. No. 119002. October 19, 2000]
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES,
INC., petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN,
PHILIPPINE FOOTBALL FEDERATION, respondents.
On June 30 1989, petitioner International Express Travel and Tour
Services, Inc., through its managing director, wrote a letter to the
Philippine Football Federation (Federation), through its president private
respondent Henri Kahn, wherein the former offered its services as a
travel agency to the latter.[1] The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and
officials of the Federation to the South East Asian Games in Kuala
Lumpur as well as various other trips to the People's Republic of China
and Brisbane. The total cost of the tickets amounted to
P449,654.83. For the tickets received, the Federation made two partial
payments, both in September of 1989, in the total amount of
P176,467.50.[2]
On 4 October 1989, petitioner wrote the Federation, through the
private respondent a demand letter requesting for the amount of
P265,894.33.[3] On 30 October 1989, the Federation, through the
Project Gintong Alay, paid the amount of P31,603.00.[4]
On 27 December 1989, Henri Kahn issued a personal check in the
amount of P50,000 as partial payment for the outstanding balance of the
Federation.[5] Thereafter, no further payments were made despite
repeated demands.
This prompted petitioner to file a civil case before the Regional Trial
Court of Manila. Petitioner sued Henri Kahn in his personal capacity and
as President of the Federation and impleaded the Federation as an
alternative defendant. Petitioner sought to hold Henri Kahn liable for the
unpaid balance for the tickets purchased by the Federation on the
ground that Henri Kahn allegedly guaranteed the said obligation.[6]
Henri Kahn filed his answer with counterclaim. While not denying
the allegation that the Federation owed the amount P207,524.20,
representing the unpaid balance for the plane tickets, he averred that
35
the petitioner has no cause of action against him either in his personal
capacity or in his official capacity as president of the Federation. He
maintained that he did not guarantee payment but merely acted as an
agent of the Federation which has a separate and distinct juridical
personality.[7]
On the other hand, the Federation failed to file its answer, hence,
was declared in default by the trial court.[8]
In due course, the trial court rendered judgment and ruled in favor
of the petitioner and declared Henri Kahn personally liable for the unpaid
obligation of the Federation. In arriving at the said ruling, the trial court
rationalized:
Defendant Henri Kahn would have been correct in his contentions had
it been duly established that defendant Federation is a corporation. The
trouble, however, is that neither the plaintiff nor the defendant Henri
Kahn has adduced any evidence proving the corporate existence of the
defendant Federation. In paragraph 2 of its complaint, plaintiff asserted
that "Defendant Philippine Football Federation is a sports association
xxx." This has not been denied by defendant Henri Kahn in his Answer.
Being the President of defendant Federation, its corporate existence is
within the personal knowledge of defendant Henri Kahn. He could have
easily denied specifically the assertion of the plaintiff that it is a mere
sports association, if it were a domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation has
no power to enter into, or to ratify, a contract. The contract entered into
by its officers or agents on behalf of such association is not binding on,
or enforceable against it. The officers or agents are themselves
personally liable.
x x x[9]
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to
pay the plaintiff the principal sum of P207,524.20, plus the interest
thereon at the legal rate computed from July 5, 1990, the date the
complaint was filed, until the principal obligation is fully liquidated; and
another sum of P15,000.00 for attorney's fees.
The complaint of the plaintiff against the Philippine Football Federation
and the counterclaims of the defendant Henri Kahn are hereby
dismissed.
With the costs against defendant Henri Kahn.[10]
Only Henri Kahn elevated the above decision to the Court of
Appeals. On 21 December 1994, the respondent court rendered a
decision reversing the trial court, the decretal portion of said decision
reads:
WHEREFORE, premises considered, the judgment appealed from is
hereby REVERSED and SET ASIDE and another one is rendered
dismissing the complaint against defendant Henri S. Kahn.[11]
In finding for Henri Kahn, the Court of Appeals recognized the
juridical existence of the Federation. It rationalized that since petitioner
failed to prove that Henri Kahn guaranteed the obligation of the
Federation, he should not be held liable for the same as said entity has
a separate and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative
prayer pleaded that the Federation be held liable for the unpaid
obligation. The same was denied by the appellate court in its resolution
of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by
expressly declaring in the dispositive portion thereof the Philippine
Football Federation (PFF) as liable for the unpaid obligation, it should
be remembered that the trial court dismissed the complaint against the
Philippine Football Federation, and the plaintiff did not appeal from this
decision. Hence, the Philippine Football Federation is not a party to this
36
appeal and consequently, no judgment may be pronounced by this
Court against the PFF without violating the due process clause, let alone
the fact that the judgment dismissing the complaint against it, had
already become final by virtue of the plaintiff's failure to appeal
therefrom. The alternative prayer is therefore similarly DENIED.[12]
Petitioner now seeks recourse to this Court and alleges that the
respondent court committed the following assigned errors:[13]
A. THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT PETITIONER HAD DEALT WITH THE
PHILIPPINE FOOTBALL FEDERATION (PFF) AS A
CORPORATE ENTITY AND IN NOT HOLDING THAT
PRIVATE RESPONDENT HENRI KAHN WAS THE ONE
WHO REPRESENTED THE PFF AS HAVING A
CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING PRIVATE RESPONDENT HENRI KAHN
PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH
PETITIONER AND CONTRACTED THE OBLIGATION IN
BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND
ASSURED PETITIONER OF FULLY SETTLING THE
OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT
KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE
COURT OF APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF IS SOLELY
LIABLE FOR THE OBLIGATION.
The resolution of the case at bar hinges on the determination of the
existence of the Philippine Football Federation as a juridical person. In
the assailed decision, the appellate court recognized the existence of
the Federation. In support of this, the CA cited Republic Act 3135,
otherwise known as the Revised Charter of the Philippine Amateur
Athletic Federation, and Presidential Decree No. 604 as the laws from
which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and
P.D. No. 604 recognized the juridical existence of national sports
associations. This may be gleaned from the powers and functions
granted to these associations. Section 14 of R.A. 3135 provides:
SEC. 14. Functions, powers and duties of Associations. - The National
Sports' Association shall have the following functions, powers and
duties:
1. To adopt a constitution and by-laws for their internal organization and
government;
2. To raise funds by donations, benefits, and other means for their
purposes.
3. To purchase, sell, lease or otherwise encumber property both real
and personal, for the accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after due
consultation with the executive committee;
xxx
13. To perform such other acts as may be necessary for the proper
accomplishment of their purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports
associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association.
- The National sports associations shall have the following functions,
powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and
government which shall be submitted to the Department and any
amendment thereto shall take effect upon approval by the
Department:Provided, however, That no team, school, club,
37
organization, or entity shall be admitted as a voting member of an
association unless 60 per cent of the athletes composing said team,
school, club, organization, or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose
subject to the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real
and personal, for the accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the
Olympic and Asian Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due
consultation with the Department;
xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports
associations clearly indicate that these entities may acquire a juridical
personality. The power to purchase, sell, lease and encumber property
are acts which may only be done by persons, whether natural or artificial,
with juridical capacity. However, while we agree with the appellate court
that national sports associations may be accorded corporate status,
such does not automatically take place by the mere passage of these
laws.
It is a basic postulate that before a corporation may acquire juridical
personality, the State must give its consent either in the form of a special
law or a general enabling act. We cannot agree with the view of the
appellate court and the private respondent that the Philippine Football
Federation came into existence upon the passage of these
laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision
creating the Philippine Football Federation. These laws merely
recognized the existence of national sports associations and provided
the manner by which these entities may acquire juridical
personality. Section 11 of R.A. 3135 provides:
SEC. 11. National Sports' Association; organization and recognition. - A
National Association shall be organized for each individual sports in the
Philippines in the manner hereinafter provided to constitute the
Philippine Amateur Athletic Federation. Applications for recognition as a
National Sports' Association shall be filed with the executive committee
together with, among others, a copy of the constitution and by-laws and
a list of the members of the proposed association, and a filing fee of ten
pesos.
The Executive Committee shall give the recognition applied for if it is
satisfied that said association will promote the purposes of this Act and
particularly section three thereof. No application shall be held pending
for more than three months after the filing thereof without any action
having been taken thereon by the executive committee. Should the
application be rejected, the reasons for such rejection shall be clearly
stated in a written communication to the applicant. Failure to specify the
reasons for the rejection shall not affect the application which shall be
considered as unacted upon: Provided, however, That until the
executive committee herein provided shall have been formed,
applications for recognition shall be passed upon by the duly elected
members of the present executive committee of the Philippine Amateur
Athletic Federation. The said executive committee shall be dissolved
upon the organization of the executive committee herein
provided: Provided, further, That the functioning executive committee is
charged with the responsibility of seeing to it that the National Sports'
Associations are formed and organized within six months from and after
the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for accreditation or
recognition as a national sports association for each individual sport in
the Philippines shall be filed with the Department together with, among
38
others, a copy of the Constitution and By-Laws and a list of the members
of the proposed association.
The Department shall give the recognition applied for if it is satisfied that
the national sports association to be organized will promote the
objectives of this Decree and has substantially complied with the rules
and regulations of the Department: Provided, That the Department may
withdraw accreditation or recognition for violation of this Decree and
such rules and regulations formulated by it.
The Department shall supervise the national sports
association: Provided, That the latter shall have exclusive technical
control over the development and promotion of the particular sport for
which they are organized.
Clearly the above cited provisions require that before an entity may
be considered as a national sports association, such entity must be
recognized by the accrediting organization, the Philippine Amateur
Athletic Federation under R.A. 3135, and the Department of Youth and
Sports Development under P.D. 604. This fact of recognition, however,
Henri Kahn failed to substantiate. In attempting to prove the juridical
existence of the Federation, Henri Kahn attached to his motion for
reconsideration before the trial court a copy of the constitution and by-
laws of the Philippine Football Federation. Unfortunately, the same does
not prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or the
Department of Youth and Sports Development. Accordingly, we rule that
the Philippine Football Federation is not a national sports association
within the purview of the aforementioned laws and does not have
corporate existence of its own.
Thus being said, it follows that private respondent Henry Kahn
should be held liable for the unpaid obligations of the unincorporated
Philippine Football Federation. It is a settled principal in corporation law
that any person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and becomes
personally liable for contract entered into or for other acts performed as
such agent.[14] As president of the Federation, Henri Kahn is presumed
to have known about the corporate existence or non-existence of the
Federation. We cannot subscribe to the position taken by the appellate
court that even assuming that the Federation was defectively
incorporated, the petitioner cannot deny the corporate existence of the
Federation because it had contracted and dealt with the Federation in
such a manner as to recognize and in effect admit its existence.[15] The
doctrine of corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application of the doctrine applies
to a third party only when he tries to escape liability on a contract from
which he has benefited on the irrelevant ground of defective
incorporation.[16] In the case at bar, the petitioner is not trying to escape
liability from the contract but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET
ASIDE. The decision of the Regional Trial Court of Manila, Branch 35,
in Civil Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.
7. [G.R. No. 144476. April 8, 2003] ONG YONG, JUANITA TAN ONG,
WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG,
and JULIE ONG ALONZO, petitioners, vs. DAVID S. TIU, CELY Y.
TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN
YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT
CORP., MASAGANA TELAMART, INC., REGISTER OF DEEDS OF
PASAY CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.
[G.R. No. 144629. April 8, 2003] DAVID S. TIU, CELY Y. TIU, MOLY
YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES
C. TIU, and INTRALAND RESOURCES DEVELOPMENT
CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG, WILSON
T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and
JULIA ONG ALONZO, respondents.
Before us are the (1) motion for reconsideration, dated March 15, 2002,
of petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna
Ong, William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2)
motion for partial reconsideration, dated March 15, 2002, of petitioner
39
movant Willie Ong seeking a reversal of this Courts Decision,[1] dated
February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with
modification the decision[2] of the Court of Appeals, dated October 5,
1999, which in turn upheld, likewise with modification, the decision of
the SEC en banc, dated September 11, 1998; and (3) motion for
issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu,
Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes
C. Tiu (the Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was
threatened with stoppage and incompletion when its owner, the First
Landlink Asia Development Corporation (FLADC), which was owned by
the Tius, encountered dire financial difficulties. It was heavily indebted
to the Philippine National Bank (PNB) for P190 million. To stave off
foreclosure of the mortgage on the two lots where the mall was being
built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna
L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in
FLADC. Under the Pre-Subscription Agreement they entered into, the
Ongs and the Tius agreed to maintain equal shareholdings in FLADC:
the Ongs were to subscribe to 1,000,000 shares at a par value
of P100.00 each while the Tius were to subscribe to an additional
549,800 shares at P100.00 each in addition to their already existing
subscription of 450,200 shares. Furthermore, they agreed that the Tius
were entitled to nominate the Vice-President and the Treasurer plus five
directors while the Ongs were entitled to nominate the President, the
Secretary and six directors (including the chairman) to the board of
directors of FLADC. Moreover, the Ongs were given the right to manage
and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their
subscription to 1,000,000 shares of stock while the Tius committed to
contribute to FLADC a four-storey building and two parcels of land
respectively valued at P20 million (for 200,000 shares), P30 million (for
300,000 shares) and P49.8 million (for 49,800 shares) to cover their
additional 549,800 stock subscription therein. The Ongs paid in
another P70 million[3] to FLADC and P20 million to the Tius over and
above their P100 million investment, the total sum of which (P190
million) was used to settle the P190 million mortgage indebtedness of
FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC,
however, was shortlived because the Tius, on February 23, 1996,
rescinded the Pre-Subscription Agreement. The Tius accused the Ongs
of (1) refusing to credit to them the FLADC shares covering their real
property contributions; (2) preventing David S. Tiu and Cely Y. Tiu from
assuming the positions of and performing their duties as Vice-President
and Treasurer, respectively, and (3) refusing to give them the office
spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely
S. Tiu to assume the positions and perform the duties of Vice-President
and Treasurer, respectively, but the Ongs prevented them from doing
so. Furthermore, the Ongs refused to provide them the space for their
executive offices as Vice-President and Treasurer. Finally, and most
serious of all, the Ongs refused to give them the shares corresponding
to their property contributions of a four-story building, a 1,902.30 square-
meter lot and a 151 square-meter lot. Hence, they felt they were justified
in setting aside their Pre-Subscription Agreement with the Ongs who
allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had
in fact assumed the positions of Vice-President and Treasurer of FLADC
but that it was they who refused to comply with the corporate duties
assigned to them. It was the contention of the Ongs that they wanted
the Tius to sign the checks of the corporation and undertake their
management duties but that the Tius shied away from helping them
manage the corporation. On the issue of office space, the Ongs pointed
out that the Tius did in fact already have existing executive offices in the
mall since they owned it 100% before the Ongs came in. What the Tius
really wanted were new offices which were anyway subsequently
provided to them. On the most important issue of their alleged failure to
credit the Tius with the FLADC shares commensurate to the Tius
property contributions, the Ongs asserted that, although the Tius
executed a deed of assignment for the 1,902.30 square-meter lot in
favor of FLADC, they (the Tius) refused to pay P 570,690 for capital
gains tax and documentary stamp tax. Without the payment thereof, the
40
SEC would not approve the valuation of the Tius property contribution
(as opposed to cash contribution). This, in turn, would make it impossible
to secure a new Transfer Certificate of Title (TCT) over the property in
FLADCs name. In any event, it was easy for the Tius to simply pay the
said transfer taxes and, after the new TCT was issued in FLADCs name,
they could then be given the corresponding shares of stocks. On the 151
square-meter property, the Tius never executed a deed of assignment
in favor of FLADC. The Tius initially claimed that they could not as yet
surrender the TCT because it was still being reconstituted by the
Lichaucos from whom the Tius bought it. The Ongs later on discovered
that FLADC had in reality owned the property all along, even before their
Pre-Subscription Agreement was executed in 1994. This meant that the
151 square-meter property was at that time already the corporate
property of FLADC for which the Tius were not entitled to the issuance
of new shares of stock.
The controversy finally came to a head when this case was
commenced[4] by the Tius on February 27, 1996 at the Securities and
Exchange Commission (SEC), seeking confirmation of their rescission
of the Pre-Subscription Agreement. After hearing, the SEC, through then
Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19,
1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission
of the Pre-Subscription Agreement, and consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the
individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the
individual defendants representing the return of their
contribution for 1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and
Exchange Commission amended articles of incorporation of
FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos.
132493, 132494, 134066 (formerly 15587), 135325 and
134204 and any other title or deed in the name of FLADC,
failing in which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in
favor of the plaintiffs and to cancel the annotation of the Pre-
Subscription Agreement dated 15 August 1994 on TCT No.
134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their
agents and representatives, to desist from exercising or
performing any and all acts pertaining to stockholder, director
or officer of FLADC or in any manner intervene in the
management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to
FLADC interest payment in the amount of P8,866,669.00 and
all interest payments as well as any payments on principal
received from the P70,000,000.00 inexistent loan, plus the
legal rate of interest thereon from the date of their receipt of
such payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum
of P20,000,000.00 representing his loan from said
defendants plus legal interest from the date of receipt of such
amount.
SO ORDERED.[5]
On motion of both parties, the above decision was partially
reconsidered but only insofar as the Ongs P70 million was declared not
as a premium on capital stock but an advance (loan) by the Ongs to
FLADC and that the imposition of interest on it was correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a
decision on September 11, 1998, affirming the May 19, 1997 decision of
the Hearing Officer. The SEC en banc confirmed the rescission of the
Pre-Subscription Agreement but reverted to classifying the P70 million
paid by the Ongs as premium on capital and not as a loan or advance
to FLADC, hence, not entitled to earn interest.[8]
41
 On appeal, the Court of Appeals (CA) rendered a decision on
October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the
Securities and Exchange Commission En Banc in SEC AC CASE NOS.
598 and 601 confirming the rescission of the Pre-Subscription
Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the
following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First
Landlink Asia Development Corporation in accordance
with the following cash and property contributions of the
parties therein.
(a) Ong Group P100,000,000.00 cash contribution for
one (1) million shares in First Landlink Asia
Development Corporation at a par value of P100.00
per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for
450,200 shares in First Landlink Asia
Development Corporation at a par value of
P100.00 per share;
2) A four-storey building described in Transfer
Certificate of Title No. 15587 in the name of
Intraland Resources and Development
Corporation valued at P20,000,000.00 for
200,000 shares in First Landlink Asia
Development Corporation at a par value of
P100.00 per share;
3) A 1,902.30 square-meter parcel of land covered by
Transfer Certificate of Title No. 15587 in the name
of Masagana Telamart, Inc. valued at
P30,000,000.00 for 300,000 shares in First
Landlink Asia Development Corporation at a par
value of P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia
Development Corporation and the management thereof
is (sic) hereby ordered transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby
ordered to pay the amount of P70,000,000.00 that was
advanced to it by the Ong Group upon the finality of this
decision. Should the former incur in delay in the payment
thereof, it shall pay the legal interest thereon pursuant to
Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of
P20,000,000.00 loaned them by the Ongs upon the
finality of this decision. Should the former incur in delay in
the payment thereof, it shall pay the legal interest thereon
pursuant to Article 2209 of the New Civil Code.
SO ORDERED.[9]
An interesting sidelight of the CA decision was its description of the
rescission made by the Tius as the height of ingratitude and as pulling a
fast one on the Ongs. The CA moreover found the Tius guilty of
withholding FLADC funds from the Ongs and diverting corporate income
to their own MATTERCO account.[10] These were findings later on
affirmed in our own February 1, 2002 Decision which is the subject of
the instant motion for reconsideration.[11]
But there was also a strange aspect of the CA decision. The CA
concluded that both the Ongs and the Tius were in pari delicto (which
would not have legally entitled them to rescission) but, for practical
considerations, that is, their inability to work together, it was best to
separate the two groups by rescinding the Pre-Subscription Agreement,
returning the original investment of the Ongs and awarding practically
everything else to the Tius.
42
 Their motions for reconsideration having been denied, both parties
filed separate petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et
al., the Ongs argued that the Tius may not properly avail of rescission
under Article 1191 of the Civil Code considering that the Pre-
Subscription Agreement did not provide for reciprocity of obligations;
that the rights over the subject matter of the rescission (capital assets
and properties) had been acquired by a third party (FLADC); that they
did not commit a substantial and fundamental breach of their agreement
since they did not prevent the Tius from assuming the positions of Vice-
President and Treasurer of FLADC, and that the failure to credit the
300,000 shares corresponding to the 1,902.30 square-meter property
covered by TCT No. 134066 (formerly 15587) was due to the refusal of
the Tius to pay the required transfer taxes to secure the approval of the
SEC for the property contribution and, thereafter, the issuance of title in
FLADCs name. They also argued that the liquidation of FLADC may not
legally be ordered by the appellate court even for so called practical
considerations or even to prevent further squabbles and numerous
litigations, since the same are not valid grounds under the Corporation
Code. Moreover, the Ongs bewailed the failure of the CA to grant
interest on their P70 million and P20 million advances to FLADC and
David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et
al., the Tius, on the other hand, contended that the rescission should
have been limited to the restitution of the parties respective investments
and not the liquidation of FLADC based on the erroneous perception by
the court that: the Masagana Citimall was threatened with
incompletion since FLADC was in financial distress; that the Tius invited
the Ongs to invest in FLADC to settle its P190 million loan from PNB;
that they violated the Pre-Subscription Agreement when it was the
Lichaucos and not the Tius who executed the deed of assignment over
the 151 square-meter property commensurate to 49,800 shares in
FLADC thereby failing to pay the price for the said shares;that they did
not turn over to the Ongs the entire amount of FLADC funds; that they
were diverting rentals from lease contracts due to FLADC to their own
MATTERCO account; that the P70 million paid by the Ongs was an
advance and not a premium on capital; and that, by rescinding the Pre-
Subscription Agreement, they wanted to wrestle away the management
of the mall and prevent the Ongs from enjoying the profits of their P190
million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the
subject of the instant motions), affirming the assailed decision of the
Court of Appeals but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall
earn interest at twelve percent (12%) per annum to be
computed from the time of judicial demand which is from April
23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall
earn interest at ten percent (10%) per annum to be computed
from the date of the FLADC Board Resolution which is June
19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for
their property contribution, specifically, the 151 sq. m. parcel
of land.
This Court affirmed the fact that both the Ongs and the Tius violated
their respective obligations under the Pre-Subscription Agreement. The
Ongs prevented the Tius from assuming the positions of Vice-President
and Treasurer of the corporation. On the other hand, the Decision
established that the Tius failed to turn over FLADC funds to the Ongs
and that the Tius diverted rentals due to FLADC to their MATTERCO
account. Consequently, it held that rescission was not possible since
both parties were in pari delicto. However, this Court agreed with the
Court of Appeals that the remedy of specific performance, as espoused
by the Ongs, was not practical and sound either and would only lead to
further squabbles and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for
Issuance of a Writ of Execution on the grounds that: (a) the SEC order
had become executory as early as September 11, 1998 pursuant to
Sections 1 and 12, Rule 43 of the Rules of Court; (b) any further delay
would be injurious to the rights of the Tius since the case had been
43
pending for more than six years; and (c) the SEC no longer had quasi-
judicial jurisdiction under RA 8799 (Securities Regulation Code). The
Ongs filed their opposition, contending that the Decision dated February
1, 2002 was not yet final and executory; that no good reason existed to
issue a warrant of execution; and that, pursuant to Section 5.2 of RA
8799, the SEC retained jurisdiction over pending cases involving intra-
corporate disputes already submitted for final resolution upon the
effectivity of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of
Execution, the Ongs filed their own Motion for Reconsideration;
Alternatively, Motion for Modification (of the February 1, 2002 Decision)
on March 15, 2002, raising two main points: (a) that specific
performance and not rescission was the proper remedy under the
premises; and (b) that, assuming rescission to be proper, the subject
decision of this Court should be modified to entitle movants to their
proportionate share in the mall.
On their first point (specific performance and not rescission was the
proper remedy), movants Ong argue that their alleged breach of the Pre-
Subscription Agreement was, at most, casual which did not justify the
rescission of the contract. They stress that providing appropriate offices
for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer,
respectively, had no bearing on their obligations under the Pre-
Subscription Agreement since the said obligation (to provide executive
offices) pertained to FLADC itself. Such obligation arose from the
relations between the said officers and the corporation and not any of
the individual parties such as the Ongs. Likewise, the alleged failure of
the Ongs to credit shares of stock in favor of the Tius for their property
contributions also pertained to the corporation and not to the Ongs. Just
the same, it could not be done in view of the Tius refusal to pay the
necessary transfer taxes which in turn resulted in the inability to secure
SEC approval for the property contributions and the issuance of a new
TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both
parties in entering into the Pre-Subscription Agreement in 1994 was to
raise the P190 million desperately needed for the payment of FLADCs
loan to PNB. Hence, in this light, the alleged failure to provide office
space for the two corporate officers was no more than an
inconsequential infringement. For rescission to be justified, the law
requires that the breach of contract should be so substantial or
fundamental as to defeat the primary objective of the parties in making
the agreement. At any rate, the Ongs claim that it was the Tius who were
guilty of fundamental violations in failing to remit funds due to FLADC
and diverting the same to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that
both parties were guilty of violating the Pre-Subscription Agreement,
neither of them could resort to rescission under the principle of pari
delicto. In addition, since the cash and other contributions now sought
to be returned already belong to FLADC, an innocent third party, said
remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs
should be given their proportionate share of the mall), movants Ong
vehemently take exception to the second item in the dispositive portion
of the questioned Decision insofar as it decreed that whatever remains
of the assets of FLADC and the management thereof (after liquidation)
shall be transferred to the Tius. They point out that the mall itself, which
would have been foreclosed by PNB if not for their timely investment
of P190 million in 1994 and which is now worth about P1 billion mainly
because of their efforts, should be included in any partition and
distribution. They (the Ongs) should not merely be given interest on their
capital investments. The said portion of our Decision, according to them,
amounted to the unjust enrichment of the Tius and ran contrary to our
own pronouncement that the act of the Tius in unilaterally rescinding the
agreement was the height of ingratitude and an attempt to pull a fast
one as it would prevent the Ongs from enjoying the fruits of their P190
million investment in FLADC. It also contravenes this Courts assurance
in the questioned Decision that the Ongs and Tius will have a bountiful
return of their respective investments derived from the profits of the
corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated
March 8, 2002, pointing out that there was no violation of the Pre-
Subscription Agreement on the part of the Ongs;that, after more than
seven years since the mall began its operations, rescission had become
44
not only impractical but would also adversely affect the rights of innocent
parties; and that it would be highly inequitable and unfair to simply return
the P100 million investment of the Ongs and give the remaining assets
now amounting to about P1 billion to the Tius.
The Tius, in their opposition to the Ongs motion for reconsideration,
counter that the arguments therein are a mere re-hash of the contentions
in the Ongs petition for review and previous motion for reconsideration
of the Court of Appeals decision. The Tius compare the arguments in
said pleadings to prove that the Ongs do not raise new issues, and,
based on well-settled jurisprudence,[12] the Ongs present motion is
therefore pro-forma and did not prevent the Decision of this Court from
attaining finality.
On January 29, 2003, the Special Second Division of this Court held
oral arguments on the respective positions of the parties. On February
27, 2003, Dr. Willie Ong and the rest of the movants Ong filed their
respective memoranda. On February 28, 2003, the Tius submitted their
memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a
motion for reconsideration. In Philippine Consumers Foundation, Inc. vs.
National Telecommunications Commission,[13]this Court, through then
Chief Justice Felix V. Makasiar, said that its members may and do
change their minds, after a re-study of the facts and the law, illuminated
by a mutual exchange of views.[14] After a thorough re-examination of
the case, we find that our Decision of February 1, 2002 overlooked
certain aspects which, if not corrected, will cause extreme and
irreparable damage and prejudice to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius
should not be blindly applied to meritorious motions for reconsideration.
As long as the same adequately raises a valid ground [15] (i.e., the
decision or final order is contrary to law), this Court has to evaluate the
merits of the arguments to prevent an unjust decision from attaining
finality. In Security Bank and Trust Company vs. Cuenca,[16] we ruled
that a motion for reconsideration is not pro-forma for the reason alone
that it reiterates the arguments earlier passed upon and rejected by the
appellate court. We explained there that a movant may raise the same
arguments, if only to convince this Court that its ruling was erroneous.
Moreover, the rule (that a motion is pro-forma if it only repeats the
arguments in the previous pleadings) will not apply if said arguments
were not squarely passed upon and answered in the decision sought to
be reconsidered. In the case at bar, no ruling was made on some of the
petitioner Ongs arguments. For instance, no clear ruling was made on
why an order distributing corporate assets and property to the
stockholders would not violate the statutory preconditions for corporate
dissolution or decrease of authorized capital stock. Thus, it would serve
the ends of justice to entertain the subject motion for reconsideration
since some important issues therein, although mere repetitions, were
not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally
rescind the Pre-Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock
of 500,000 shares with the Tius owning 450,200 shares representing the
paid-up capital. When the Tius invited the Ongs to invest in FLADC as
stockholders, an increase of the authorized capital stock became
necessary to give each group equal (50-50) shareholdings as agreed
upon in the Pre-Subscription Agreement. The authorized capital stock
was thus increased from 500,000 shares to 2,000,000 shares with a par
value of P100 each, with the Ongs subscribing to 1,000,000 shares and
the Tius to 549,800 more shares in addition to their 450,200 shares to
complete 1,000,000 shares. Thus, the subject matter of the contract was
the 1,000,000 unissued shares of FLADC stock allocated to the Ongs.
Since these were unissued shares, the parties Pre-Subscription
Agreement was in fact a subscription contract as defined under Section
60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other contract (Italics
supplied).
45
 A subscription contract necessarily involves the corporation as one
of the contracting parties since the subject matter of the transaction is
property owned by the corporation its shares of stock. Thus, the
subscription contract (denominated by the parties as a Pre-Subscription
Agreement) whereby the Ongs invested P100 million for 1,000,000
shares of stock was, from the viewpoint of the law, one between the
Ongs and FLADC, not between the Ongs and the Tius. Otherwise
stated, the Tius did not contract in their personal capacities with the
Ongs since they were not selling any of their own shares to them. It was
FLADC that did.
Considering therefore that the real contracting parties to the
subscription agreement were FLADC and the Ongs alone, a civil case
for rescission on the ground of breach of contract filed by the Tius in
their personal capacities will not prosper. Assuming it had valid reasons
to do so, only FLADC (and certainly not the Tius) had the legal
personality to file suit rescinding the subscription agreement with the
Ongs inasmuch as it was the real party in interest therein. Article 1311
of the Civil Code provides that contracts take effect only between the
parties, their assigns and heirs Therefore, a party who has not taken part
in the transaction cannot sue or be sued for performance or for
cancellation thereof, unless he shows that he has a real interest affected
thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there
are two contracts embodied in the Pre-Subscription Agreement: a
shareholders agreement between the Tius and the Ongs defining and
governing their relationship and a subscription contract between the
Tius, the Ongs and FLADC regarding the subscription of the parties to
the corporation. They point out that these two component parts form one
whole agreement and that their terms and conditions are intrinsically
related and dependent on each other. Thus, the breach of the
shareholders agreement, which was allegedly the consideration for the
subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in
any of their previous pleadings until after the oral arguments on January
29, 2003, we find this argument too strained for comfort. It is obviously
intended to remedy and cover up the Tius lack of legal personality to
rescind an agreement in which they were personally not parties-in-
interest. Assuming arguendo that there were two sub-agreements
embodied in the Pre-Subscription Agreement, this Court fails to see how
the shareholders agreement between the Ongs and Tius can, within the
bounds of reason, be interpreted as the consideration of the subscription
contract between FLADC and the Ongs. There was nothing in the Pre-
Subscription Agreement even remotely suggesting such alleged
interdependence. Be that as it may, however, the Tius are nevertheless
not the proper parties to raise this point because they were not parties
to the subscription contract between FLADC and the Ongs. Thus, they
are not in a position to claim that the shareholders agreement between
them and the Ongs was what induced FLADC and the Ongs to enter into
the subscription contract. It is the Ongs alone who can say that. Though
FLADC was represented by the Tius in the subscription contract, FLADC
had a separate juridical personality from the Tius. The case before us
does not warrant piercing the veil of corporate fiction since there is no
proof that the corporation is being used as a cloak or cover for fraud or
illegality, or to work injustice.[18]
The Tius also argue that, since the Ongs represent FLADC as its
management, breach by the Ongs is breach by FLADC. This must also
fail because such an argument disregards the separate juridical
personality of FLADC.
The Tius allege that they were prevented from participating in the
management of the corporation. There is evidence that the Ongs did
prevent the rightfully elected Treasurer, Cely Tiu, from exercising her
function as such. The records show that the President, Wilson Ong,
supervised the collection and receipt of rentals in the Masagana
Citimall;[19] that he ordered the same to be deposited in the bank;[20] and
that he held on to the cash and properties of the corporation.[21] Section
25 of the Corporation Code prohibits the President from acting
concurrently as Treasurer of the corporation. The rationale behind the
provision is to ensure the effective monitoring of each officers separate
functions.
However, although the Tius were adversely affected by the Ongs
unwillingness to let them assume their positions, rescission due to
breach of contract is definitely the wrong remedy for their personal
46
grievances. The Corporation Code, SEC rules and even the Rules of
Court provide for appropriate and adequate intra-corporate
remedies, other than rescission, in situations like this. Rescission
is certainly not one of them, specially if the party asking for it has no
legal personality to do so and the requirements of the law therefor have
not been met.A contrary doctrine will tread on extremely dangerous
ground because it will allow just any stockholder, for just about any real
or imagined offense, to demand rescission of his subscription and call
for the distribution of some part of the corporate assets to him without
complying with the requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the
ultimate and extraordinary remedy of rescission of the subject
agreement based on a less than substantial breach of subscription
contract. Not only are they not parties to the subscription contract
between the Ongs and FLADC; they also have other available and
effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius
possess the legal standing to sue for rescission based on breach of
contract, said action will nevertheless still not prosper since rescission
will violate the Trust Fund Doctrine and the procedures for the valid
distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923
case of Philippine Trust Co. vs. Rivera,[22] provides that subscriptions to
the capital stock of a corporation constitute a fund to which the creditors
have a right to look for the satisfaction of their claims.[23] This doctrine is
the underlying principle in the procedure for the distribution of capital
assets, embodied in the Corporation Code, which allows the distribution
of corporate capital only in three instances: (1) amendment of the
Articles of Incorporation to reduce the authorized capital stock,[24] (2)
purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings,[25] and (3) dissolution and
eventual liquidation of the corporation. Furthermore, the doctrine is
articulated in Section 41 on the power of a corporation to acquire its own
shares[26] and in Section 122 on the prohibition against the distribution
of corporate assets and property unless the stringent requirements
therefor are complied with.[27]
The distribution of corporate assets and property cannot be made to
depend on the whims and caprices of the stockholders, officers or
directors of the corporation, or even, for that matter, on the earnest
desire of the court a quo to prevent further squabbles and future
litigations unless the indispensable conditions and procedures for the
protection of corporate creditors are followed. Otherwise, the corporate
peace laudably hoped for by the court will remain nothing but a dream
because this time, it will be the creditors turn to engage in squabbles
and litigations should the court order an unlawful distribution in blatant
disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription
Agreement will effectively result in the unauthorized distribution of the
capital assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis,
result in the premature liquidation of the corporation without the benefit
of prior dissolution in accordance with Sections 117, 118, 119 and 120
of the Corporation Code.[28] The Tius maintain that rescinding the
subscription contract is not synonymous to corporate liquidation
because all rescission will entail would be the simple restoration of
the status quo ante and a return to the two groups of their cash and
property contributions. We wish it were that simple. Very noticeable is
the fact that the Tius do not explain why rescission in the instant case
will not effectively result in liquidation. The Tius merely refer in cavalier
fashion to the end-result of rescission (which incidentally is 100%
favorable to them) but turn a blind eye to its unfair, inequitable and
disastrous effect on the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that
rescission of the agreement will not result in an unauthorized liquidation
of the corporation because their case is actually a petition to decrease
capital stock pursuant to Section 38 of the Corporation Code. Section
122 of the law provides that (e)xcept by decrease of capital stock, no
corporation shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and liabilities. The
47
Tius claim that their case for rescission, being a petition to decrease
capital stock, does not violate the liquidation procedures under our laws.
All that needs to be done, according to them, is for this Court to order
(1) FLADC to file with the SEC a petition to issue a certificate of
decrease of capital stock and (2) the SEC to approve said decrease.
This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to
decrease capital stock because such action never complied with the
formal requirements for decrease of capital stock under Section 33 of
the Corporation Code. No majority vote of the board of directors was
ever taken. Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds of the outstanding
capital stock was secured. There was no revised treasurers affidavit and
no proof that said decrease will not prejudice the creditors rights. On the
contrary, all their pleadings contained were alleged acts of violations by
the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal
affairs of the corporation to compel FLADC to file at the SEC a petition
for the issuance of a certificate of decrease of stock. Decreasing a
corporations authorized capital stock is an amendment of the Articles of
Incorporation. It is a decision that only the stockholders and the directors
can make, considering that they are the contracting parties thereto. In
this case, the Tius are actually not just asking for a review of the legality
and fairness of a corporate decision. They want this Court to make a
corporate decision for FLADC. We decline to intervene and order
corporate structural changes not voluntarily agreed upon by its
stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the
assent of FLADCs directors and stockholders is a violation of the
business judgment rule which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors
are binding upon the corporation and courts will not interfere unless such
contracts are so unconscionable and oppressive as to amount to wanton
destruction to the rights of the minority, as when plaintiffs aver that the
defendants (members of the board), have concluded a transaction
among themselves as will result in serious injury to the plaintiffs
stockholders.[29]
The reason behind the rule is aptly explained by Dean Cesar L.
Villanueva, an esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment
of the board mainly because, courts are not in the business of business,
and the laissez faire rule or the free enterprise system prevailing in our
social and economic set-up dictates that it is better for the State and its
organs to leave business to the businessmen; especially so, when
courts are ill-equipped to make business decisions. More importantly,
the social contract in the corporate family to decide the course of the
corporate business has been vested in the board and not with courts.[30]
Apparently, the Tius do not realize the illegal consequences of
seeking rescission and control of the corporation to the exclusion of the
Ongs. Such an act infringes on the law on reduction of capital stock.
Ordering the return and distribution of the Ongs capital contribution
without dissolving the corporation or decreasing its authorized capital
stock is not only against the law but is also prejudicial to corporate
creditors who enjoy absolute priority of payment over and above any
individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case
is not difficult to understand. If rescission is denied, will injustice be
inflicted on any of the parties? The answer is no because the financial
interests of both the Tius and the Ongs will remain intact and safe within
FLADC. On the other hand, if rescission is granted, will any of the parties
suffer an injustice?Definitely yes because the Ongs will find themselves
out in the streets with nothing but the money they had in 1994 while the
Tius will not only enjoy a windfall estimated to be anywhere from P450
million to P900 million[31] but will also take over an extremely profitable
business without much effort at all.
Another very important point follows. The Court of Appeals and,
later on, our Decision dated February 1, 2002, stated that both groups
were in pari delicto, meaning, that both the Tius and the Ongs
48
committed breaches of the Pre-Subscription Agreement. This may be
true to a certain extent but, judging from the comparative gravity of the
acts separately committed by each group, we find that the Ongs acts
were relatively tame vis--vis those committed by the Tius in not
surrendering FLADC funds to the corporation and diverting corporate
income to their own MATTERCO account. The Ongs were right in not
issuing to the Tius the shares corresponding to the four-story building
and the 1,902.30 square-meter lot because no title for it could be issued
in FLADCs name, owing to the Tius refusal to pay the transfer
taxes. And as far as the 151 square-meter lot was concerned, why
should FLADC issue additional shares to the Tius for property already
owned by the corporation and which, in the final analysis, was already
factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court
of Appeals, to pull a fast one on the Ongs because that was where the
problem precisely started. It is clear that, when the finances of FLADC
improved considerably after the equity infusion of the Ongs, the Tius
started planning to take over the corporation again and exclude the
Ongs from it. It appears that the Tius refusal to pay transfer taxes might
not have really been at all unintentional because, by failing to pay that
relatively small amount which they could easily afford, the Tius should
have expected that they were not going to be given the corresponding
shares. It was, from every angle, the perfect excuse for blackballing the
Ongs. In other words, the Tius created a problem then used that same
problem as their pretext for showing their partners the door. In the
process, they stood to be rewarded with a bonanza of anywhere
between P450 million to P900 million in assets (from an investment of
only P45 million which was nearly foreclosed by PNB), to the extreme
and irreparable damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that
the Masagana Citimall would not be what it has become today were it
not for the timely infusion of P190 million by the Ongs in 1994. There are
no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally
invested in said mall. If only for this and the fact that this Resolution can
truly pave the way for both groups to enjoy the fruits of their investments
assuming good faith and honest intentions we cannot allow the
rescission of the subject subscription agreement. The Ongs
shortcomings were far from serious and certainly less than substantial;
they were in fact remediable and correctable under the law. It would be
totally against all rules of justice, fairness and equity to deprive the Ongs
of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15,
2002, of petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna
Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion for
partial reconsideration, dated March 15, 2002, of petitioner Willie Ong
are hereby GRANTED. The Petition for Confirmation of the Rescission
of the Pre-Subscription Agreement docketed as SEC Case No. 02-96-
5269 is hereby DISMISSED for lack of merit. The unilateral rescission
by the Tius of the subject Pre-Subscription Agreement, dated August 15,
1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15,
2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See
Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED
for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002,
affirming with modification the decision of the Court of Appeals, dated
October 5, 1999, and the SEC en banc, dated September 11, 1998, is
hereby REVERSED.
Costs against the petitioner Tius.
8. G.R. No. 86738 November 13, 1991 NESTLE PHILIPPINES,
INC., petitioner,
vs.COURT OF APPEALS and SECURITIES AND EXCHANGE
COMMISSION, respondents.
Sometime in February 1983, the authorized capital stock of petitioner
Nestle Philippines Inc. ("Nestle") was increased from P300 million
divided into 3 million shares with a par value of P100.00 per share, to
P600 million divided into 6 million shares with a par value of P100.00
per share. Nestle underwent the necessary procedures involving Board
49
and stockholders approvals and effected the necessary filings to secure
the approval of the increase of authorized capital stock by respondent
Securities and Exchange Commission ("SEC"), which approval was in
fact granted. Nestle also paid to the SEC the amount of P50,000.00 as
filing fee in accordance with the Schedule of Fees and Charges being
implemented by the SEC under the Corporation Code. 1
Nestle has only two (2) principal stockholders: San Miguel Corporation
and Nestle S.A. The other stockholders, who are individual natural
persons, own only one (1) share each, for qualifying purposes, i.e., to
qualify them as members of the Board of Directors being elected thereto
on the strength of the votes of one or the other principal shareholder.
On 16 December 1983, the Board of Directors and stockholders of
Nestle approved resolutions authorizing the issuance of 344,500 shares
out of the previously authorized but unissued capital stock of Nestle,
exclusively to San Miguel Corporation and to Nestle S.A. San Miguel
Corporation subscribed to and completely paid up 168,800 shares, while
Nestle S.A. subscribed to and paid up the balance of 175,700 shares of
stock.
On 28 March 1985, petitioner Nestle filed a letter signed by its Corporate
Secretary, M.L. Antonio, with the SEC seeking exemption of its
proposed issuance of additional shares to its existing principal
shareholders, from the registration requirement of Section 4 of the
Revised Securities Act and from payment of the fee referred to in
Section 6(c) of the same Act. In that letter, Nestle requested confirmation
of the correctness of two (2) propositions submitted by it:
1. That there is no need to file a petition for exemption under Section
6(b) of the Revised Securities Act with respect to the issuance of the
said 344,600 additional shares to our existing stockholders out of our
unissued capital stock; and
2. That the fee provided in Section 6(c) of [the Revised Securities]
Act is not applicable to the said issuance of additional shares. 2
The principal, indeed the only, argument presented by Nestlewas that
Section 6(a) (4) of the Revised Securities Act which provides as follows:
Sec. 6. Exempt transactions. — a) The requirement of
registration under subsection (a) of Section four of this Act shall
not apply to the sale of any security in any of the following
transactions:
xxx xxx xxx
(4) The distribution by a corporation, actively engaged in the
business authorized by its articles of incorporation, of securities
to its stockholders or other security holders as a stock dividend
or other distribution out of surplus; or the issuance of securities
to the security holder or other creditors of a corporation in the
process of a bona fide reorganization of such corporation made
in good faith and not for the purpose of avoiding the provisions of
this Act, either in exchange for the securities of such security
holders or claims of such creditors or partly for cash and partly in
exchange for the securities or claims of such security holders or
creditors; or the issuance of additional capital stock of a
corporation sold or distributed by it among its own stockholders
exclusively, where no commission or other remuneration is paid
or given directly or indirectly in connection with the sale or
distribution of such increased capital stock. (Emphasis supplied)
embraces "not only an increase in the authorized capital stock but also
the issuance of additional shares to existing stockholders of the
unissued portion of the unissued capital stock". 3 Nestle urged that
interpretation upon the following argument.
The use of the term "increased capital stock" should be
interpreted to refer to additional capital stock or equity
50
 participation of the existing stockholders as a consequence of
either an increase of the authorized capital stock or the issuance
of unissued capital stock. If the intention of the pertinent legal
provision [were] to limit the exemption to subscription to proposed
increases in the authorized capital stock of a corporation, we see
no reason why the law should not have been more specific or
accurate about it. It certainly should have mentioned "increase in
the authorized capital stock of the corporation" rather than merely
the expression "the issuance of additional capital stock 4 (Emphasis
supplied)
Nestle expressly represented in the same letter that all the additional
shares proposed to be issued would be issued only to San Miguel
Corporation and Nestle S.A. and that no commission or other form of
remuneration had been given, directly or indirectly, in connection with
the issuance or distribution of such additional shares of stock.
In respect of its claimed exemption from the fee provided for in Section
6(c) of the Revised Securities Act, Nestle contended that since Section
6 (a) (4) of the statute declares (in Nestle's view) the proposed issuance
of 344,500 previously authorized but unissued shares of Nestle's capital
stock to its existing shareholders as an exempt transaction, the SEC
could not collect fees for "the same transaction" twice. Nestle adverted
to its payment back in 21 February 1983 of the amount of P50,000.00
as filing fees to the SEC when it applied for and eventually received
approval of the increase of its authorized capital stock effected by Board
and shareholder action last 16 December 1983.
In a letter dated 26 June 1986, the SEC through its then Chairman Julio
A. Sulit, Jr. responded adversely to petitioner's requests and ruled that
the proposed issuance of shares did not fall under Section 6 (a) (4) of
the Revised Securities Act, since Section 6 (a) (4) is applicable only
where there is an increase in the authorized capital stock of a
corporation. Chairman Sulit held, however, that the proposed
transaction could be considered by the Commission under the
provisions of Section 6 (b) of the Revised Securities Act which reads as
follows:
(b) The Commission may, from time to time and subject to such
terms and conditions as it may prescribe, exempt transactions
other than those provided in the preceding paragraph, if it finds
that the enforcement of the requirements of registration under this
Act with respect to such transactions is not necessary in the
public interest and for the protection of the investors by reason of
the small amount involved or the limited character of the public
offering.
The Commission then advised petitioner to file the appropriate request
for exemption and to pay the fee required under Section 6 (c) of the
statute, which provides:
(c) A fee equivalent to one-tenth of one per centum of the
maximum aggregate price or issued value of the securities shall
be collected by the Commission for granting a general or
particular exemption from the registration requirements of this
Act.
Petitioner moved for reconsideration of the SEC ruling, without success.
On 3 July 1987, petitioner sought review of the SEC ruling before this
Court which, however, referred the petition to the Court of Appeals.
In a decision dated 13 January 1989, the Court of Appeals sustained the
ruling of the SEC.
Dissatisfied with the Decision of the Court of Appeals, Nestle is now
before this Court on a Petition for Review, raising the very same issues
that it had raised before the SEC and the Court of Appeals.
Examining the words actually used in Section 6 (a) (4) of the Revised
Securities Act, and bearing in mind common corporate usage in this
jurisdiction, it will be seen that the statutory phrase "issuance of
additional capital stock" is indeed infected with a certain degree of
ambiguity. This phrase may refer either to: a) the issuance of capital
stock as part of and in the course of increasing the authorized capital
51
stock of a corporation; or (b) issuance of already authorized but still
unissued capital stock. By the same token, the phrase "increased capital
stock" found at the end of Section 6 (a) (4), may refer either: 1) to newly
or contemporaneously authorized capital stock issued in the course of
increasing the authorized capital stock of a corporation; or 2) to
previously authorized but unissued capital stock.
Under Section 38 of the Corporation Code, a corporation engaged in
increasing its authorized capital stock, with the required vote of its Board
of Directors and of its stockholders, must file a sworn statement of the
treasurer of the corporation showing that at least twenty-five percent
(25%) of "such increased capital stock" has been subscribed and that at
least twenty-five percent (25%) of the amount subscribed has been paid
either in actual cash or in property transferred to the corporation. In other
words, the corporation must issue at least twenty-five percent (25%) of
the newly or contemporaneously authorized capital stock in the course
of complying with the requirements of the Corporation Code for
increasing its authorized capital stock.
In contrast, after approval by the SEC of the increase of its authorized
capital stock, and from time to time thereafter, the corporation, by a vote
of its Board of Directors, and without need of either stockholder or SEC
approval, may issue and sell shares of its already authorized but still
unissued capital stock to existing shareholders or to members of the
general public. 5
Both the SEC and the Court of Appeals resolved the ambiguity by
construing Section 6 (a) (4) as referring only to the issuance of shares
of stock as part of and in the course of increasing the authorized capital
stock of Nestle. In the case at bar, since the 344,500 shares of Nestle
capital stock are proposed to be issued from already authorized but still
unissued capital stock and since the present authorized capital stock of
6,000,000 shares with a par value of P100.00 per share is not proposed
to be further increased, the SEC and the Court of Appeals rejected
Nestle's petition.
We believe and so hold that the construction thus given by the SEC and
the Court of Appeals to Section 6 (a) (4) of the Revised Securities Act
must be upheld.
In the first place, it is a principle too well established to require extensive
documentation that the construction given to a statute by an
administrative agency charged with the interpretation and application of
that statute is entitled to great respect and should be accorded great
weight by the courts, unless such construction is clearly shown to be in
sharp conflict with the governing statute or the Constitution and other
laws. As long ago as 1903, this Court said in In re Allen 6 that
[t]he principle that the contemporaneous construction of a statute
by the executive officers of the government, whose duty is to
execute it, is entitled to great respect, and should ordinarily
control the construction of the statute by the courts, is so firmly
embedded in our jurisdiction that no authorities need be cited to
support it. 7
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and satisfying
those needs; it also relates to accumulation of experience and growth of specialized capabilities by the
administrative agency charged with implementing a particular statute. 8
In Asturias Sugar
Central, Inc. v. Commissioner of Customs 9 the Court stressed that
executive officials are presumed to have familiarized themselves with all
the considerations pertinent to the meaning and purpose of the law, and
to have formed an independent, conscientious and competent expert
opinion thereon. The courts give much weight to contemporaneous
construction because of the respect due the government agency or
officials charged with the implementation of the law, their competence,
expertness, experience and informed judgment, and the fact that they
frequently are the drafters of the law they interpret. 10
52

In the second place, and more importantly, consideration of the
underlying statutory purpose of Section 6(a) (4) compels us to sustain
the view taken by the SEC and the Court of Appeals. The reading by the
SEC of the scope of application of Section 6(a) (4) permits greater
opportunity for the SEC to implement the statutory objective of
protecting the investing public by requiring proposed issuers of capital
stock to inform such public of the true financial conditions and prospects
of the corporation. By limiting the class of exempt transactions
contemplated by the last clause of Section 6(a) (4) to issuances of stock
done in the course of and as part of the process of increasing the
authorized capital stock of a corporation, the SEC is enabled to examine
issuances by a corporation of previously authorized but theretofore
unissued capital stock, on a case-to-case basis, under Section 6(b); and
thereunder, to grant or withhold exemption from the normal registration
requirements depending upon the perceived level of need for protection
by the investing public in particular cases.
When capital stock is issued in the course of and in compliance with the
requirements of increasing its authorized capital stock under Section 38
of the Corporation Code, the SEC as a matter of course examines the
financial condition of the corporation, and hence there is no real need
for exercise of SEC authority under the Revised Securities Act. Thus,
one of the multiple documentation requirements under the current
regulations of the SEC in respect of filing a certificate of increase of
authorized capital stock, is submission of "a financial statement duly
certified by an independent Certified Public Accountant (CPA) as of the
latest date possible or as of the date of the meeting when stockholders
approved the increase/decrease in capital stock or
thereabouts. 11 When all or part of the newly authorized capital stock is
proposed to be issued as stock dividends, the SEC requirements are
even more exacting; they require, in addition to the regular audited
financial statements, the submission by the corporation of a "detailed or
Long Form Report of the certifying Auditor." Moreover, since approval of
an increase in authorized capital stock by the stockholders holding two-
thirds (2/3) of the outstanding capital stock is required by Section 38 of
the Corporation Code, at a stockholders meeting held for that purpose,
the directors and officers of the corporation may be expected to take
pains to inform the shareholders of the financial condition and prospects
of the corporation and of the proposed utilization of the fresh capital
sought to be raised.
Upon the other hand, as already noted, issuance of previously
authorized but theretofore unissued capital stock by the corporation
requires only Board of Directors approval. Neither notice to nor approval
by the shareholders or the SEC is required for such issuance. There
would, accordingly, under the view taken by petitioner Nestle, no
opportunity for the SEC to see to it that shareholders (especially the
small stockholders) have a reasonable opportunity to inform themselves
about the very fact of such issuance and about the condition of the
corporation and the potential value of the shares of stock being offered.
Under the reading urged by petitioner Nestle of the reach and scope of
the third clause of Section 6(a) (4), the issuance of previously authorized
but unissued capital stock would automatically constitute an exempt
transaction,without regard to the length of time which may have
intervened between the last increase in authorized capital stock and the
proposed issuance during which time the condition of the corporation
may have substantially changed, and without regard to whether the
existing stockholders to whom the shares are proposed to be issued are
only two giant corporations as in the instant case, or are individuals
numbering in the hundreds or thousands.
In contrast, under the ruling issued by the SEC, an issuance of
previously authorized but still unissued capital stock may, in a particular
instance, be held to be an exempt transaction by the SEC under Section
6(b) so long as the SEC finds that the requirements of registration under
the Revised Securities Act are "not necessary in the public interest and
for the protection of the investors" by reason, inter alia, of the small
amount of stock that is proposed to be issued or because the potential
buyers are very limited in number and are in a position to protect
themselves. In fine, petitioner Nestle's proposed construction of Section
6(a) (4) would establish an inflexible rule of automatic exemption of
53
issuances of additional, previously authorized but unissued, capital
stock. We must reject an interpretation which may disable the SEC from
rendering protection to investors, in the public interest, precisely when
such protection may be most needed.
Petitioner Nestle's second claim for exemption is from payment of the
fee provided for in Section 6 (c) of the Revised Securities Act, a claim
based upon petitioner's contention that Section 6 (a) (4)
covers both issuance of stock in the course of complying with the
statutory requirements of increase of authorized capital stock and
issuance of previously authorized and unissued capital stock. Petitioner
claims that to require it now to pay one-tenth of one percent (1%) of the
issued value of the 344,500 shares of stock proposed to be issued, is to
require it to pay a second time for the same service on the part of the
SEC. Since we have above rejected petitioner's reading of Section 6 (a)
(4), last clause, petitioner's claim about the additional fee of one-tenth
of one percent (1%) of the issue value of the proposed issuance of stock
(amounting to P34,450 plus P344.50 for other fees or a total of
P37,794.50) need not detain us for long. We think it clear that the fee
collected in 21 February 1983 by the SEC was assessed in connection
with the examination and approval of the certificate of increase of
authorized capital stock then submitted by petitioner. The fee, upon the
other hand, provided for in Section 6 (c) which petitioner will be required
to pay if it does file an application for exemption under Section 6 (b), is
quite different; this is a fee specifically authorized by the Revised
Securities Act, (not the Corporation Code) in connection with the grant
of an exemption from normal registration requirements imposed by that
Act. We do not find such fee either unreasonable or exorbitant.
WHEREFORE, for all the foregoing, the Petition for Review on
Certiorari is hereby DENIED for lack of merit and the Decision of the
Court of Appeals dated 13 January 1989 in C.A.-G.R. No. SP-13522, is
hereby AFFIRMED. Costs against petitioner.
9. G.R. No. L-56655 July 25, 1983 DATU TAGORANAO
BENITO, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION and JAMIATUL
PHILIPPINE-AL ISLAMIA, INC., respondents.
On February 6, 1959, the Articles of Incorporation of respondent
Jamiatul Philippine-Al Islamia, Inc. (originally Kamilol Islam Institute,
Inc.) were filed with the Securities and Exchange Commission (SEC)
and were approved on December 14, 1962. The corporation had an
authorized capital stock of P200,000.00 divided into 20,000 shares at a
par value of P10.00 each. Of the authorized capital stock, 8,058 shares
worth P80,580.00 were subscribed and fully paid for. Herein petitioner
Datu Tagoranao Benito subscribed to 460 shares worth P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate of
increase of its capital stock from P200,000.00 to P1,000,000.00. It was
shown in said certificate that P191,560.00 worth of shares were
represented in the stockholders' meeting held on November 25, 1975 at
which time the increase was approved. Thus, P110,980.00 worth of
shares were subsequently issued by the corporation from the unissued
portion of the authorized capital stock of P200,000.00. Of the increased
capital stock of P1,000,000.00, P160,000.00 worth of shares were
subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs.
Moki-in Alonto.
On November 18, 1976, petitioner Datu Tagoranao filed with respondent
Securities and Exchange Commission a petition alleging that the
additional issue (worth P110,980.00) of previously subscribed shares of
the corporation was made in violation of his pre-emptive right to said
additional issue and that the increase in the authorized capital stock of
the corporation from P200,000.00 to P1,000,000.00 was illegal
considering that the stockholders of record were not notified of the
meeting wherein the proposed increase was in the agenda. Petitioner
prayed that the additional issue of shares of previously authorized
capital stock as well as the shares issued from the increase in capital
stock of respondent corporation be cancelled; that the secretary of
respondent corporation be ordered to register the 2,540 shares acquired
by him (petitioner) from Domocao Alonto and Moki-in Alonto; and that
54
the corporation be ordered to render an accounting of funds to the
stockholders.
In their answer, respondents denied the material allegations of the
petition and, by way of special defense, claimed that petitioner has no
cause of action and that the stock certificates covering the shares
alleged to have been sold to petitioner were only given to him as
collateral for the loan of Domocao Alonto and Moki-in Alonto.
On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities
and Exchange Commission, after due proceedings, rendered a decision
which was affirmed by the Commission En Banc during its executive
session held on March 9, 1981, as follows:
RESOLVED, That the decision of the hearing Officer in SEC Case No.
1392, dated July 11, 1980, the dispositive portion of which reads as
follows:
WHEREFORE, in view of the foregoing considerations, this
Commission hereby rules: (a) That the issuance by the corporation of its
unissued shares was validly made and was not subject to the pre-
emptive rights of stockholders, including the petitioner, herein; (b) That
there is no sufficient legal basis to set aside the certificate issued by this
Commission authorizing the increase in capital stock of respondent
corporation from P200,000.00 to Pl,000,000.00. Considering, however,
that petitioner has not waived his pre-emptive right to subscribe to the
increased capitalization, respondent corporation is hereby directed to
allow petitioner to subscribe thereto, at par value, proportionate to his
present shareholdings, adding thereto the 2,540 shares transferred to
him by Mr. Domocao Alonto and Mrs. Moki-in Alonto; (c) To direct as it
hereby directs, the respondent corporation to immediately cancel
Certificates of Stock Nos. 216, 223, 302, all in the name of Domocao
Alonto, and Certificate of Stock No. 217, in the name of Moki-in Alonto,
upon their presentation by the petitioner and to issue new certificates
corresponding thereto in the name of petitioner herein; (d) To direct, as
it hereby directs, respondent corporation to religiously comply with the
requirement of filing annual financial statements under pain of a more
drastic action; (e) To declare, as it hereby declares, as irregular, the
election of the nine (9) members of the Board of Trustees of respondent
corporation on October 30, 1976, for which reason, respondent
corporation is hereby ordered to call a stockholders' meeting to elect a
new set of five (5) members of the Board of Trustees, unless in the
meantime the said number is accordingly increased and the requirement
of law to make such increase effective have been complied with. It is
understood that the said stockholders' meeting be called within thirty
(30) days from the time petitioner shall have subscribed to the increased
capitalization.'
be, as the same is hereby AFFIRMED, the same being in
accordance with law and the facts of the case. (pp. 28-29,
Reno)
Hence, this petition for review by way of appeal from the aforementioned
decision of the Securities and Exchange Commission, petitioner
contending that (1) the issuance of the 11,098 shares without the
consent of the stockholders or of the Board of Directors, and in the
absence of consideration, is null and void; (2) the increase in the
authorized capital stock from P200,000.00 to P1,000,000.00 without the
consent or express waiver of the stockholders, is null and void; (3) he is
entitled to attorneys' fees, damages and expenses of litigation in filing
this suit against the directors of respondent corporation.
We are not persuaded. As aptly stated by the Securities and Exchange
Commission in its decision:
xxx xxx xxx
.. the questioned issuance of the unsubscribed portion of the capital
stock worth P110,980.00 is ' not invalid even if assuming that it was
made without notice to the stockholders as claimed by petitioner. The
power to issue shares of stocks in a corporation is lodged in the board
of directors and no stockholders' meeting is necessary to consider it
because additional issuance of shares of stocks does not need approval
of the stockholders. The by-laws of the corporation itself states that 'the
55
Board of Trustees shall, in accordance with law, provide for the issue
and transfer of shares of stock of the Institute and shall prescribe the
form of the certificate of stock of the Institute. (Art. V, Sec. 1).
Petitioner bewails the fact that in view of the lack of notice to him of such
subsequent issuance, he was not able to exercise his right of pre-
emption over the unissued shares. However, the general rule is that pre-
emptive right is recognized only with respect to new issue of shares, and
not with respect to additional issues of originally authorized shares. This
is on the theory that when a corporation at its inception offers its first
shares, it is presumed to have offered all of those which it is authorized
to issue. An original subscriber is deemed to have taken his shares
knowing that they form a definite proportionate part of the whole number
of authorized shares. When the shares left unsubscribed are later re-
offered, he cannot therefore claim a dilution of interest. (Campos and
Lopez-Campos Selected Notes and Cases on Corporation Law, p. 855,
citing Yasik V. Wachtel 25 Del. Ch. 247,17A. 2d 308 (1941). (pp. 33-34,
Rollo)
With respect to the claim that the increase in the authorized capital stock
was without the consent, expressed or implied, of the stockholders, it
was the finding of the Securities and Exchange Commission that a
stockholders' meeting was held on November 25,1975, presided over
by Mr. Ahmad Domocao Alonto, Chairman of the Board of Trustees and,
among the many items taken up then were the change of name of the
corporation from Kamilol Islam Institute Inc. to Jamiatul Philippine-Al
Islamia, Inc., the increase of its capital stock from P200,000.00 to
P1,000,000.00, and the increase of the number of its Board of Trustees
from five to nine. "Despite the insistence of petitioner, this Commission
is inclined to believe that there was a stockholders' meeting on
November 25, 1975 which approved the increase. The petitioner had
not sufficiently overcome the evidence of respondents that such meeting
was in fact held. What petitioner successfully proved, however, was the
fact that he was not notified of said meeting and that he never attended
the same as he was out of the country at the time. The documentary
evidence of petitioner conclusively proved that he was attending the
Mecca pilgrimage when the meeting was held on November 25, 1975.
(Exhs. 'Q', 'Q-14', 'R', 'S' and 'S-l'). While petitioner doubts the
authenticity of the alleged minutes of the proceedings (Exh. '4'), the
Commission notes with significance that said minutes contain numerous
details of various items taken up therein that would negate any claim
that it was not authentic. Another thing that petitioner was able to
disprove was the allegation in the certificate of increase (Exh. 'E-l') that
all stockholders who did not subscribe to the increase of capital stock
have waived their pre-emptive right to do so. As far as the petitioner is
concerned, he had not waived his pre-emptive right to subscribe as he
could not have done so for the reason that he was not present at the
meeting and had not executed a waiver, thereof. Not having waived such
right and for reasons of equity, he may still be allowed to subscribe to
the increased capital stock proportionate to his present shareholdings."
(pp. 36-37, Rollo)
Well-settled is the rule that the findings of facts of administrative bodies
will not be interfered with by the courts in the absence of grave abuse of
discretion on the part of said agencies, or unless the aforementioned
findings are not supported by substantial evidence. (Gokongwei, Jr. vs.
SEC, 97 SCRA 78). In a long string of cases, the Supreme Court has
consistently adhered to the rule that decisions of administrative officers
are not to be disturbed by the courts except when the former have acted
without or in excess of their jurisdiction or with grave abuse of discretion
(Sichangco vs. Board of Commissioners of Immigration, 94 SCRA 61).
Thus, in the case of Deluao vs. Casteel ( L-21906, Dec. 24, 1968, 26
SCRA 475, 496, citing Pajo vs. Ago, et al., L-15414, June 30, 1960)
and Genitano vs. Secretary of Agriculture and Natural Resources, et
al. (L-2ll67, March 31, 1966), the Supreme Court held that:
... Findings of fact by an administrative board or official, following a
hearing, are binding upon the courts and win not be disturbed except
where the board or official has gone beyond his statutory authority,
exercised unconstitutional powers or clearly acted arbitrarily and without
regard to his duty or with grave abuse of discretion. ...
ACCORDINGLY, this petition is hereby dismissed for lack of merit.
SO ORDERED.
56
10.[G.R. No. L-17009. September 13, 1966.]
BRITISH-AMERICAN ENGINEERING CORPORATION, Plaintiff-
Appellee, v. ALTO SURETY and INSURANCE COMPANY, INC.,
ANTONIO QUIRINO, ET AL., Defendants-Appellants.
R.C. Gianzon and R.A. Aristorenas, for Defendants-Appellants.
Juan T. David and M.C. Gunigundo for plaintiff and appellee.
1. CORPORATIONS; ILLEGAL ISSUANCE OF CERTIFICATES OF
STOCK; CASE AT BAR. — Appellee paid to appellant company, thru its
Secretary- Treasurer, sums of money totalling P250,000.00. Receipt of
the amount was acknowledged by means of vouchers ostensibly in
payment of 2,500 shares of appellant company subscribed or purchased
by appellee. The amount, however, was actually credited as payment of
the subscriptions of the original subscribers to the capital stock of
appellant company. Not having received any certificate evidencing its
interest in the capital stock, appellee filed the present action, and the
lower court, granting its prayer, ordered appellant company to issue in
favor of appellee the certificates of stock corresponding to the 2,500
shares of capital stock appellee had allegedly purchased. Held: The
judgment below, if carried out, would result in an anomalous and illegal
situation. As it did not provide for the nullification and cancellation of the
2,500 shares of appellant company in the name of the original
subscribers, such number of shares in their name would remain
outstanding, and another 2,500 shares would be issued in appellee’s
name, all with a total par value of P500,000.00, while what had been
actually paid for them was only one-half of said amount.
2. ID.; ID.; RIGHT TO RELIEF OF PURCHASER OF SHARES; CASE
AT BAR. — It appearing from the record that the issuance of the
certificates in the name of the original subscribers was, if not consented
to by appellee, impliedly ratified by it, appellant company had no further
obligation to perform in the premises, appellee’s right to relief being
against the said subscribers. This relief, however, could not have been
granted by the lower court - as in fact it was not — because the Quirino
spouses were made parties in this case in their capacity as officers of
appellant company and not as holders of some of the disputed
certificates of stock, and other persons in whose names a few such
certificates were issued were not made parties at all.
Appeal taken by the Alto Surety and Insurance Co., Inc. — hereinafter
referred to merely as Alto — Antonio Quirino and Aleli R. Guzman-
Quirino, in their respective capacity as President and Secretary-
Treasurer of said company, from the final judgment of the Court of First
Instance of Manila in Civil Case No. 32209 entitled "British-American
Engineering Corporation v. Alto Surety & Insurance Co., Inc., Et.
Al."cralaw virtua1aw library
On April 1, 1957, British-American Engineering Corporation —
hereinafter referred to as appellee — filed the present action in the Court
of First Instance of Manila to compel appellants to issue in its favor
certificates of stock corresponding to 2,500 shares of the capital stock
of Alto, to refund the amount of P99,769.48 representing cash advances
and payments which appellee had allegedly made, with legal interest
from the respective dates they were advanced, plus 30% of the total
amount involved therein as attorney’s fees, and the costs of suit.
Appellee’s claim was that on April 1, 1947, it paid Alto through its
Secretary-Treasurer, Mrs. Aleli P. Guzman-Quirino, the sum of
P150,000.00 as purchase price of 1,500 shares of its capital stock at
P100.00 per share (Exhibit A); that again on November 19, 1947,
appellee paid Alto through the same officer, the sum of P100,084.42 for
1,000 shares of its capital stock at the same par value (Exhibit B); that
despite repeated demands made by appellee, appellants failed or
otherwise refused to issue the corresponding certificates of stock in its
favor.
On the other hand, besides contending that appellee’s cause of action,
if any, had prescribed, appellants claimed that the documents Exhibits
A and B do not represent the true agreement of the parties; that the
amounts mentioned therein were in fact paid for the account of Antonio
Quirino chargeable to his share in the profits realized in his joint venture
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with appellee corporation and/or N. P. Lynevitche, its President and to the capital stock of Alto, and that the certificates of stock
Managing Director, involving the importation and exportation of heavy corresponding to the additional 1,000 shares mentioned heretofore were
equipment and other merchandise done in the name of appellee in 1946 issued in the name of the Quirino spouses, within a reasonable time
and 1947. after April 1, 1947 and November 19 of the same year, respectively.

As far as the record discloses, Alto was formally incorporated on April 8, It appears that Nicolas Lynevitche was not only the President but also
1947. One week prior to that date Mrs. Quirino, acting already as the Managing Director of appellee corporation — virtually the
Secretary-Treasurer of Alto, issued the voucher Exhibit A corporation itself. It is not denied — in fact, it was admitted by Lynevitche
acknowledging receipt of the sum of P150,000.00 ostensibly in payment — that appellee, through him, and Antonio Quirino had embarked upon
of 1,500 shares of Alto subscribed or purchased by appellee. The a joint venture dealing in the importation and exportation of heavy
amount, however, was actually credited as payment of the subscriptions equipment and other merchandise in which they realized profits. So
of the original subscribers to the capital stock of Alto as closely they worked together that appellee and Alto — in other words,
follows:chanrob1es virtual 1aw library Lynevitche and Antonio Quirino — held offices in the same building and
had other transactions with each other: Alto, on different occasions,
Name No. of Shares Amount Amount Paid Up loaned several amounts to appellee and/or Lynevitche.

Antonio Quirino 5,200 P520,000.00 P130,000.00 On the other hand, it appears undisputed that appellee never received
any certificate evidencing its alleged considerable and controlling
Aleli R. Guzman-Quirino 400 40,000.00 10,000.00 interest in the capital stock of Alto. Moreover, its first alleged investment
appears to be precisely the total amount subscribed and paid by the
Tomas Quirino 200 20,000.00 5,000.00 original subscribers to the capital stock of Alto, to whom, naturally, the
corresponding certificates of stock were issued. And yet, the record
Petronila Syquia 100 10,000.00 2,500.00 discloses that, for a period of almost ten years, appellee made no inquiry
as to why no certificate of stock had been issued in its name; much less
Angela A. Guzman 100 10,000.00 2,500.00 did it demand issuance thereof in its name or an accounting in
connection with the business of Alto and the profits derived therefrom.
—— ———— ———— The record shows in this connection that it was only on October 25, 1956
when Lynevitche made a personal demand upon the Quirinos, while
6,000 P600,000.00 P150,000.00 appellee corporation made a similar demand only on December 24,
1956. In fact, the present action was filed only on April 1, 1957 the very
Again, on November 19, 1947, a similar voucher Exhibit B was issued last day of the period of prescription.
by the Secretary-Treasurer of Alto acknowledging receipt of the sum of
P100,000.00 in payment of 1,000 shares of the capital stock of the The foregoing, We believe, affords more than sufficient ground for
corporation, subscribed or purchased by appellee. concluding that during that period of almost ten years, appellee knew
that certificates corresponding to the shares of stock of Alto allegedly
It is not disputed that the certificates of stock for the initial 1,500 shares purchased by it had been issued in the name of the Quirino spouses and
mentioned above were issued in the names of the original subscribers other parties. Whether or not its apparent acquiescence to this situation

58
was due to the fact that the total sum of P250,000.00 covered by the
vouchers mentioned heretofore really represented a partial payment of
the shares of Antonio Quirino in the profits realized by his joint venture
with appellee — profits admitted unconditionally by Lynevitche himself
— is a matter we do not here decide because the Quirinos are not
parties in their personal capacity.
This appeal, therefore, must be decided upon another ground.
As stated heretofore, appellee commenced this action to compel Alto to
issue in its favor certificates of stock corresponding to the 2,500 shares
it had allegedly purchased. Its complaint said so (prayer for relief,
paragraph A); its representation said so during the trial (transcript of
September 1, 1959 pp. 16-17), and the trial court, in the opening
paragraph of its decision quoted in appellee’s brief submitted by Attys.
David and Gunigundo, says exactly the same thing: that the action was
for judgment against Alto ordering it to issue in favor of appellee
certificates of stock corresponding to 2,500 shares of its capital stock.
Finally, because the action was precisely for that purpose, the appealed
judgment is as follows:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants ordering the defendant Alto Surety & Insurance
Co., Inc. to issue in favor of the plaintiff the certificates of stock
corresponding to TWO THOUSAND FIVE HUNDRED (2,500) shares of
its capital stock."cralaw virtua1aw library
to the P250,000.00 paid into its coffers, and the issuance of the
corresponding certificates in the name of the Quirinos and other parties
was, if not consented to by appellee, impliedly ratified by it, it is clear
that Alto had no further obligation to perform in the premises, appellee’s
cause of action, if any, being exclusively against the parties in whose
names the certificates of stock in question were issued. As a matter of
fact, if no certificate had been issued at all by Alto and the right to the
shares had been the subject of adverse claims on the part of appellee
and the Quirinos, the matter could have been a proper subject of
interpleading. But upon the facts before us, appellee’s right to relief
could be only against the parties in whose names the certificates were
issued. This relief could not have been granted by the lower court — as
in fact it was not — because the Quirinos were made parties in this case
in their capacity as officers of Alto, and other persons in whose names
a few certificates of share were issued were not made parties at all.
Wherefore, the decision appealed from is reversed, with the result that
the present case is dismissed, with costs.
Concepcion, C.J., Reyes, J.B.L., Barrera, Makalintal, Bengzon, J.P.,
Zaldivar, Sanchez and Castro, JJ., concur.

It is once obvious that the judgment quoted above, if carried out, would
result in a situation anomalous and illegal because it would give rise to
a situation where 2,500 shares of Alto in the name of the Quirinos would
remain outstanding — because said judgment did not provide for their
nullification and cancellation — and another 2,500 shares would be in
the name of appellee, all of them of a total par value of P500,000.00
while what had been actually paid for them was only one-half of said
amount.

Moreover, as Alto had actually issued certificates of stock corresponding

59