CORPO CASES #4.docx

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China Banking Corporation vs. Court of Appeals, 270 SCRA 503 , March 26, 1997

Case Title : CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and

VALLEY GOLF and COUNTRY CLUB, INC., respondents.Case Nature : PETITION for review

on certiorari of a decision of the Court of Appeals.

Syllabi Class :Securities and Exchange Commission|Appeals|Loans|Corporation

Law|Actions|Jurisdiction|Corporation Law|By-Laws|Estoppel|Procedural Rules|Remand of

Cases|Pledge|Words and Phrases|

Syllabi:

1.Securit ies and Exchange Comm ission; Act ions; Jur isd ic t ion;The better policy in

determining which body has jurisdiction over a case would be to consider not only the status of

relationship of the parties but also the nature of the question that is the subject of their

controversy.-

The basic issue we must first hurdle is which body has jurisdiction over the controversy, the

regular courts or the SEC. P.D. No. 902-A conferred upon the SEC the following pertinentpowers: * * * The aforecited law was expounded upon in Viray v. CA and in the recent cases of

Mainland Construction Co., Inc. v. Movilla and Bernardo v. CA, thus: . . . . The better policy in

determining which body has jurisdiction over a case would be to consider not only the status or

relationship of the parties but also the nature of the question that is the subject of their

controversy.

2.Securit ies and Exchange Comm ission; Act ions; Jur isd ic t ion; Corporation Law;The

purchase of a share or membership certificate at public auction by a party (and the issuance to

it of the corresponding Certificate of Sale) transfers ownership of the same to the latter and thus

entitle it to have the said share registered in its name as a member.-As to the first query, there is no question that the purchase of the subject share or membership

certificate at public auction by petitioner (and the issuance to it of the corresponding Certificate

of Sale) transferred ownership of the same to the latter and thus entitled petitioner to have the

said share registered in its name as a member of VGCCI. It is readily observed that VGCCI did

not assail the transfer directly and has in fact, in its letter of 27 September 1974, expressly

recognized the pledge agreement executed by the original owner, Calapatia, in favor of

petitioner and has even noted said agreement in its corporate books. In addition, Calapatia, the

original owner of the subject share, has not contested the said transfer. By virtue of the afore-

mentioned sale, petitioner became a bona fide stockholder of VGCCI and, therefore, the conflict

that arose between petitioner and VGCCI aptly exemplifies an intra-corporate controversybetween a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.

3.Securit ies and Exchange Comm ission; Act ions; Jur isd ic t ion; Corporation Law; By-

Laws;The proper interpretation and application of a corporations by-laws is a subject which

irrefutably calls for the special competence of the SEC.-

An important consideration, moreover, is the nature of the controversy between petitioner and

private respondent corporation. VGCCI claims a prior right over the subject share anchored
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mainly on Sec. 3, Art. VIII of its by-laws which provides that after a member shall have been

posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of the Club

. . . It is pursuant to this provision that VGCCI also sold the subject share at public auction, of

which it was the highest bidder. VGCCI caps its argument by asserting that its corporate by-

laws should prevail. The bone of contention, thus, is the proper interpretation and application of

VGCCIs aforequoted bylaws, a subject which irrefutably calls for the special competence of the

SEC.

4.Securit ies and Exchange Comm ission; Act ions; Jur isd ic t ion; Estoppel;The plaintiff who

files a complaint with one court which has no jurisdiction over it is not estopped from filing the

same complaint later with the competent court.-

In Zamora v. Court of Appeals, this Court, through Mr. Justice Isagani A. Cruz, declared that: It

follows that as a rule the filing of a complaint with one court which has no jurisdiction over it

does not prevent the plaintiff from filing the same complaint later with the competent court. The

plaintiff is not estopped from doing so simply because it made a mistake before in the choice of

the proper forum. . . .

5.Appeals; Procedural Rules; Remand of Cases;The remand of the case or of an issue to

the lower court for further reception of evidence is not necessary where the Supreme Court is in

position to resolve the dispute based on the records before it and particularly where the ends of

justice would not be subserved by the remand thereof.+

6.Loans; Pledge;The contracting parties to a pledge agreement may stipulate that the said

pledge will also stand as security for any future advancements (or renewals thereof) that the

pledgor may procure from the pledgee.+

7.Corporation Law; By-Laws;In order to be bound, a third party must have acquiredknowledge of the pertinent by-laws at the time the transaction or agreement between said third

person and the shareholder was entered into.-

8.Corporation Law; Words and Phrases;A membership share is quite different in character

from a pawn ticket.-

Similarly, VGCCIs contention that petitioner is duty-bound to know its by-laws because of Art.

2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with

the diligence of a good father of a family, fails to convince. The case of Cruz Serrano v. Chua A.

H. Lee, is clearly not applicable: In applying this provision to the situation before us it must be

borne in mind that the ordinary pawn ticket is a document by virtue of which the property in thething pledged passes from hand to hand by mere delivery of the ticket; and the contract of the

pledge is, therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge

acquires domination over the pledge; and it is the holder who must renew the pledge, if it is to

be kept alive. It is quite obvious from the aforequoted case that a membership share is quite

different in character from a pawn ticket and to reiterate, petitioner was never informed of

Calapatias unpaid accounts and the restrictive provisions in VGCCIs by-laws.
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9.Corporation Law; Words and Phrases;The term unpaid claim in Sec. 63 of the

Corporation Code refers to any unpaid claim arising from unpaid sub -scription, and not to any

indebtedness which a subscriber or stockholder may owe the corporation arising from any other

transaction, such as monthly dues.-

Finally, Sec. 63 of the Corporation Code which provides that no shares of stock against which

the corporation holds any unpaid claim shall be transferable in the books of the corporation

cannot be utilized by VGCCI. The term unpaid claim refers to anyunpaid claim arising from

unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe

the corporation arising from any other transaction. In the case at bar, the subscription for the

share in question has been fully paid as evidenced by the issuance of Membership Certificate

No. 1219. What Calapatia owed the corporation were merely the monthly dues. Hence, the

aforequoted provision does not apply.

Division: FIRST DIVISION

Docket Number: G.R. No. 117604

Counsel: Lim, Vigilia & Orencia, Jose F. Manacop

Ponente: KAPUNAN

Dispositive Portion:

WHEREFORE, premises considered, the assailed decision Court of Appeals is REVERSED

and the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.

CHINA BANKING CORPORATION, petitioner,vs.COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.

KAPUNAN, J .:

Through a petition for review on certiorariunder Rule 45 of the Revised Rules of Court,petitioner China Banking Corporation seeks the reversal of the decision of the Court of Appeals

dated 15 August 1994 nullifying the Securities and Exchange Commission's order andresolution dated 4 June 1993 and 7 December 1993, respectively, for lack of jurisdiction.Similarly impugned is the Court of Appeals' resolution dated 4 September 1994 which deniedpetitioner's motion for reconsideration.

The case unfolds thus:
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On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of privaterespondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock CertificateNo. 1219 to petitioner China Banking Corporation (CBC, for brevity). 1

On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledgeagreement be recorded in its books. 2

In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed byCalapatia in petitioner's favor was duly noted in its corporate books. 3

On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of whichwas secured by the aforestated pledge agreement still existing between Calapatia andpetitioner. 4

Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition forextrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latterto conduct a public auction sale of the pledged stock. 5

On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedingsand requested that the pledged stock be transferred to its (petitioner's) name and the same berecorded in the corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressingits inability to accede to petitioner's request in view of Calapatia's unsettled accounts with theclub. 6

Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 andpetitioner emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently,petitioner was issued the corresponding certificate of sale. 7

On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue

account in the amount of P18,783.24.8

Said notice was followed by a demand letter dated 12December 1985 for the same amount 9and another notice dated 22 November 1986 forP23,483.24. 10

On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a noticeof auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00a.m. Included therein was Calapatia's own share of stock (Stock Certificate No. 1219).

Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of hismembership due to the sale of his share of stock in the 10 December 1986 auction. 11

On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock

Certificate No. 1219 by virtue of being the highest bidder in the 17 September 1985 auction andrequested that a new certificate of stock be issued in its name. 12

On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold atthe public auction held on 10 December 1986 for P25,000.00. 13


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On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock andthereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10December 1986 auction and for the issuance of a new stock certificate in its name. 14

On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack ofjurisdiction over the subject matter on the theory that it involves an intra-corporate dispute and

on 27 August 1990 denied petitioner's motion for reconsideration.

On 20 September 1990, petitioner filed a complaint with the Securities and ExchangeCommission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; thecancellation of any new stock certificate issued pursuant thereto; for the issuance of a newcertificate in petitioner's name; and for damages, attorney's fees and costs of litigation.

On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor ofVGCCI, stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) hadvalid reason not to transfer the share in the name of the petitioner in the books of (VGCCI) untilliquidation ofdelinquency." 15Consequently, the case was dismissed. 16

On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration. 17

Petitioner appealed to the SEC en bancand on 4 June 1993, the Commission issued an orderreversing the decision of its hearing officer. It declared thus:

The Commission en bancbelieves that appellant-petitioner has a prior right overthe pledged share and because of pledgor's failure to pay the principal debt uponmaturity, appellant-petitioner can proceed with the foreclosure of the pledgedshare.

WHEREFORE, premises considered, the Orders of January 3, 1992 and April14, 1992 are hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on December 10, 1986 is declared NULL and VOID. Finally,appellee-respondent Club is ordered to issue another membership certificate inthe name of appellant-petitioner bank.

SO ORDERED. 18

VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same inits resolution dated 7 December 1993. 19

The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15

August 1994, the Court of Appeals rendered its decision nullifying and setting aside the ordersof the SEC and its hearing officer on ground of lack of jurisdiction over the subject matter and,consequently, dismissed petitioner's original complaint. The Court of Appeals declared that thecontroversy between CBC and VGCCI is not intra-corporate. It ruled as follows:

In order that the respondent Commission can take cognizance of a case, thecontroversy must pertain to any of the following relationships: (a) between thecorporation, partnership or association and the public; (b) between thecorporation, partnership or association and its stockholders, partners, members,


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or officers; (c) between the corporation, partnership or association and the statein so far as its franchise, permit or license to operate is concerned, and (d)among the stockholders, partners or associates themselves (Union Glass andContainer Corporation vs. SEC, November 28, 1983, 126 SCRA 31). Theestablishment of any of the relationship mentioned will not necessarily alwaysconfer jurisdiction over the dispute on the Securities and Exchange Commission

to the exclusion of the regular courts. The statement made in Philex MiningCorp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions ordistinctions is not that absolute. The better policy in determining which body has

jurisdiction over a case would be to consider not only the status or relationship ofthe parties but also the nature of the question that is the subject of theircontroversy (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).

Indeed, the controversy between petitioner and respondent bank which involvesownership of the stock that used to belong to Calapatia, Jr. is not within thecompetence of respondent Commission to decide. It is not any of thosementioned in the aforecited case.

WHEREFORE, the decision dated June 4, 1993, and order dated December 7,1993 of respondent Securities and Exchange Commission (Annexes Y and BB,petition) and of its hearing officer dated January 3, 1992 and April 14, 1992(Annexes S and W, petition) are all nullified and set aside for lack of jurisdictionover the subject matter of the case. Accordingly, the complaint of respondentChina Banking Corporation (Annex Q, petition) is DISMISSED. Nopronouncement as to costs in this instance.

SO ORDERED. 20

Petitioner moved for reconsideration but the same was denied by the Court of Appeals in itsresolution dated 5 October 1994. 21

Hence, this petition wherein the following issues were raised:

II

ISSUES

WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former EighthDivision) GRAVELY ERRED WHEN:

1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 ANDORDER DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGECOMMISSION EN BANC, AND WHEN IT DISMISSED THE COMPLAINT OFPETITIONER AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OFJURISDICTION OVER THE SUBJECT MATTER OF THE CASE;

2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES ANDEXCHANGE COMMISSION EN BANCDATED JUNE 04, 1993 DESPITEPREPONDERANT EVIDENCE SHOWING THAT PETITIONER IS THE LAWFUL


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OWNER OF MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE SHARE OFRESPONDENT VALLEY GOLF.

The petition is granted.

The basic issue we must first hurdle is which body has jurisdiction over the controversy, theregular courts or the SEC.

P. D. No. 902-A conferred upon the SEC the following pertinent powers:

Sec. 3. The Commission shall have absolute jurisdiction, supervision and controlover all corporations, partnerships or associations, who are the grantees ofprimary franchises and/or a license or permit issued by the government tooperate in the Philippines, and in the exercise of its authority, it shall have thepower to enlist the aid and support of and to deputize any and all enforcementagencies of the government, civil or military as well as any private institution,corporation, firm, association or person.

xxx xxx xxx

Sec. 5. In addition to the regulatory and adjudicative functions of the Securitiesand Exchange Commission over corporations, partnerships and other forms ofassociations registered with it as expressly granted under existing laws anddecrees, it shall have original and exclusive jurisdiction to hear and decide casesinvolving:

a) Devices or schemes employed by or any acts of the board ofdirectors, business associates, its officers or partners, amountingto fraud and misrepresentation which may be detrimental to the

interest of the public and/or of the stockholders, partners,members of associations or organizations registered with theCommission.

b) Controversies arising out of intra-corporate or partnershiprelations, between and among stockholders, members, orassociates; between any or all of them and the corporation,partnership or association of which they are stockholders,members or associates, respectively; and between suchcorporation, partnership or association and the State insofar as itconcerns their individual franchise or right to exist as such entity;

c) Controversies in the election or appointment of directors,trustees, officers, or managers of such corporations, partnershipsor associations.

d) Petitions of corporations, partnerships or associations to bedeclared in the state of suspension of payments in cases wherethe corporation, partnership or association possesses property tocover all of its debts but foresees the impossibility of meeting themwhen they respectively fall due or in cases where the corporation,


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partnership or association has no sufficient assets to cover itsliabilities, but is under the Management Committee createdpursuant to this Decree.

The aforecited law was expounded upon in Viray v. CA22and in the recent cases ofMainlandConstruction Co., Inc.v. Movilla23and Bernardo v. CA, 24thus:

. . . .The better policy in determining which body has jurisdiction over a casewould be to consider not only the status or relationship of the parties but also thenature of the question that is the subject of their controversy.

Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdictionwe have to determine therefore whether or not petitioner is a stockholder of VGCCI and whetheror not the nature of the controversy between petitioner and private respondent corporation isintra-corporate.

As to the first query, there is no question that the purchase of the subject share or membershipcertificate at public auction by petitioner (and the issuance to it of the corresponding Certificateof Sale) transferred ownership of the same to the latter and thus entitled petitioner to have thesaid share registered in its name as a member of VGCCI. It is readily observed that VGCCI didnot assail the transfer directly and has in fact, in its letter of 27 September 1974, expresslyrecognized the pledge agreement executed by the original owner, Calapatia, in favor ofpetitioner and has even noted said agreement in its corporate books. 25In addition, Calapatia,the original owner of the subject share, has not contested the said transfer.

By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and,therefore, the conflict that arose between petitioner and VGCCI aptly exemplies an intra-corporate controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.

An important consideration, moreover, is the nature of the controversy between petitioner andprivate respondent corporation. VGCCI claims a prior right over the subject share anchoredmainly on Sec. 3, Art VIII of its by-laws which provides that "after a member shall have beenposted as delinquent, the Board may order his/her/its share sold to satisfy the claims of theClub. . ." 26It is pursuant to this provision that VGCCI also sold the subject share at publicauction, of which it was the highest bidder. VGCCI caps its argument by asserting that itscorporate by-laws should prevail. The bone of contention, thus, is the proper interpretation andapplication of VGCCI's aforequoted by-laws, a subject which irrefutably calls for the specialcompetence of the SEC.

We reiterate herein the sound policy enunciated by the Court inAbejo v. De la Cruz27:

6. In the fifties, the Court taking cognizance of the move to vest jurisdiction inadministrative commissions and boards the power to resolve specializeddisputes in the field of labor (as in corporations, public transportation and publicutilities) ruled that Congress in requiring the Industrial Court's intervention in theresolution of labor-management controversies likely to cause strikes or lockoutsmeant such jurisdiction to be exclusive, although it did not so expressly state inthe law. The Court held that under the "sense-making and expeditious doctrine ofprimary jurisdiction . . . the courts cannot or will not determine a controversyinvolving a question which is within the jurisdiction of an administrative tribunal,


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where the question demands the exercise of sound administrative discretionrequiring the special knowledge, experience, and services of the administrativetribunal to determine technical and intricate matters of fact, and a uniformity ofruling is essential to comply with the purposes of the regulatory statuteadministered.

In this era of clogged court dockets, the need for specialized administrativeboards or commissions with the special knowledge, experience and capability tohear and determine promptly disputes on technical matters or essentially factualmatters, subject to judicial review in case of grave abuse of discretion, hasbecome well nigh indispensable. Thus, in 1984, the Court noted that "betweenthe power lodged in an administrative body and a court, the unmistakable trendhas been to refer it to the former. 'Increasingly, this Court has been committed tothe view that unless the law speaks clearly and unequivocably, the choice shouldfall on [an administrative agency.]'" The Court in the earlier case ofEbon v. DeGuzman, noted that the lawmaking authority, in restoring to the labor arbiters andthe NLRC their jurisdiction to award all kinds of damages in labor cases, asagainst the previous P.D. amendment splitting their jurisdiction with the regular

courts, "evidently, . . . had second thoughts about depriving the Labor Arbitersand the NLRC of the jurisdiction to award damages in labor cases because thatsetup would mean duplicity of suits, splitting the cause of action and possibleconflicting findings and conclusions by two tribunals on one and the same claim."

In this case, the need for the SEC's technical expertise cannot be over-emphasized involving asit does the meticulous analysis and correct interpretation of a corporation's by-laws as well asthe applicable provisions of the Corporation Code in order to determine the validity of VGCCI'sclaims. The SEC, therefore, took proper cognizance of the instant case.

VGCCI further contends that petitioner is estopped from denying its earlier position, in the firstcomplaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate

relations between itself and VGCCI.

VGCCI's contention lacks merit.

In Zamora v. Court of Appeals, 28this Court, through Mr. Justice Isagani A. Cruz, declared that:

It follows that as a rule the filing of a complaint with one court which has nojurisdiction over it does not prevent the plaintiff from filing the same complaintlater with the competent court. The plaintiff is not estopped from doing so simplybecause it made a mistake before in the choice of the proper forum. . . .

We remind VGCCI that in the same proceedings before the RTC of Makati, it categoricallystated (in its motion to dismiss) that the case between itself and petitioner is intra-corporate andinsisted that it is the SEC and not the regular courts which has jurisdiction. This is precisely thereason why the said court dismissed petitioner's complaint and led to petitioner's recourse to theSEC.

Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court ofAppeals, this Court likewise deems it procedurally sound to proceed and rule on its merits in thesame proceedings.


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It must be underscored that petitioner did not confine the instant petition for reviewon certiorarion the issue of jurisdiction. In its assignment of errors, petitioner specifically raisedquestions on the merits of the case. In turn, in its responsive pleadings, private respondent dulyanswered and countered all the issues raised by petitioner.

Applicable to this case is the principle succinctly enunciated in the case ofHeirs of Crisanta

Y. Gabriel-Almoradie v.Court of Appeals, 29citing Escudero v. Dulay30and The Roman CatholicArchbishop of Manila v. Court of Appeals.31

In the interest of the public and for the expeditious administration of justice theissue on infringement shall be resolved by the court considering that this casehas dragged on for years and has gone from one forum to another.

It is a rule of procedure for the Supreme Court to strive to settle the entirecontroversy in a single proceeding leaving no root or branch to bear the seeds offuture litigation. No useful purpose will be served if a case or the determination ofan issue in a case is remanded to the trial court only to have its decision raisedagain to the Court of Appeals and from there to the Supreme Court.

We have laid down the rule that the remand of the case or of an issue to thelower court for further reception of evidence is not necessary where the Court isin position to resolve the dispute based on the records before it and particularlywhere the ends of justice would not be subserved by the remand thereof.Moreover, the Supreme Court is clothed with ample authority to review matters,even those not raised on appeal if it finds that their consideration is necessary inarriving at a just disposition of the case.

In the recent case ofChina Banking Corp., et al. v. Court of Appeals, et al., 32this Court,through Mr. Justice Ricardo J. Francisco, ruled in this wise:

At the outset, the Court's attention is drawn to the fact that since the filing of thissuit before the trial court, none of the substantial issues have been resolved. Toavoid and gloss over the issues raised by the parties, as what the trial court andrespondent Court of Appeals did, would unduly prolong this litigation involving arather simple case of foreclosure of mortgage. Undoubtedly, this will run counterto the avowed purpose of the rules, i.e., to assist the parties in obtaining just,speedy and inexpensive determination of every action or proceeding. The Court,therefore, feels that the central issues of the case, albeit unresolved by the courtsbelow, should now be settled specially as they involved pure questions of law.Furthermore, the pleadings of the respective parties on file have amply ventilatedtheir various positions and arguments on the matter necessitating prompt

adjudication.

In the case at bar, since we already have the records of the case (from the proceedings beforethe SEC) sufficient to enable us to render a sound judgment and since only questions of lawwere raised (the proper jurisdiction for Supreme Court review), we can, therefore, unerringlytake cognizance of and rule on the merits of the case.

The procedural niceties settled, we proceed to the merits.


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VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor.It contends that the same was null and void for lack of consideration because the pledgeagreement was entered into on 21 August1974 33but the loan or promissory note which it secured was obtained by Calapatia much lateror only on 3 August 1983. 34

VGCCI's contention is unmeritorious.

A careful perusal of the pledge agreement will readily reveal that the contracting partiesexplicitly stipulated therein that the said pledge will also stand as security for any futureadvancements (or renewals thereof) that Calapatia (the pledgor) may procure from petitioner:

xxx xxx xxx

This pledge is given as security for the prompt payment when due of all loans,overdrafts, promissory notes, drafts, bills or exchange, discounts, and all otherobligations of every kind which have heretofore been contracted, or which mayhereafter be contracted, by the PLEDGOR(S) and/or DEBTOR(S) or any one ofthem, in favor of the PLEDGEE, including discounts of Chinese drafts, bills ofexchange, promissory notes, etc., without any further endorsement by thePLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND(P20,000.00) PESOS, together with the accrued interest thereon, as hereinafterprovided, plus the costs, losses, damages and expenses (including attorney'sfees) which PLEDGEE may incur in connection with the collectionthereof. 35(Emphasis ours.)

The validity of the pledge agreement between petitioner and Calapatia cannot thus be heldsuspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 inthe amount of P20,000.00 was but a renewal of the first promissory note covered by the samepledge agreement.

VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had theright to sell the share in question in accordance with the express provision found in its by-laws.

Private respondent's insistence comes to naught. It is significant to note that VGCCI begansending notices of delinquency to Calapatia afterit was informed by petitioner (through its letterdated 14 May 1985) of the foreclosure proceedings initiated against Calapatia's pledged share,although Calapatia has been delinquent in paying his monthly dues to the club since 1975.Stranger still, petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia'sshare, was neither informed nor furnished copies of these letters of overdue accounts untilVGCCI itself sold the pledged share at another public auction. By doing so, VGCCI completely

disregarded petitioner's rights as pledgee. It even failed to give petitioner notice of said auctionsale. Such actuations of VGCCI thus belie its claim of good faith.

In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. Itargues in this wise:

The general rule really is that third persons are not bound by the by-laws of acorporation since they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil.584). The exception to this is when third persons have actual or constructive


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knowledge of the same. In the case at bar, petitioner had actual knowledge of theby-laws of private respondent when petitioner foreclosed the pledge made byCalapatia and when petitioner purchased the share foreclosed on September 17,1985. This is proven by the fact that prior thereto, i.e., on May 14, 1985 petitionereven quoted a portion of private respondent's by-laws which is material to theissue herein in a letter it wrote to private respondent. Because of this actual

knowledge of such by-laws then the same bound the petitioner as of the timewhen petitioner purchased the share. Since the by-laws was already bindingupon petitioner when the latter purchased the share of Calapatia on September17, 1985 then the petitioner purchased the said share subject to the right of theprivate respondent to sell the said share for reasons of delinquency and the rightof private respondent to have a first lien on said shares as these rights areprovided for in the by-laws very very clearly. 36

VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37

And moreover, the by-law now in question cannot have any effect on theappellee. He had no knowledge of such by-law when the shares were assigned

to him. He obtained them in good faith and for a valuable consideration. He wasnot a privy to the contract created by said by-law between the shareholderManuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot operate todefeat his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without firstoffering them to the corporation for a period of thirty days is not binding upon anassignee of the stock as a personal contract, although his assignor knew of theby-law and took part in its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co.,21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate stock, apurchaser is not affected by any contractual restriction of which he had no notice.(Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

The assignment of shares of stock in a corporation by one who has assented toan unauthorized by-law has only the effect of a contract by, and enforceableagainst, the assignor; the assignee is not bound by such by-law by virtue of theassignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.)

A by-law of a corporation which provides that transfers of stock shall not be validunless approved by the board of directors, while it may be enforced as areasonable regulation for the protection of the corporation against worthless

stockholders, cannot be made available to defeat the rights of third persons.(Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)(Emphasis ours.)

In order to be bound, the third party must have acquired knowledge of the pertinent by-laws atthe time the transaction or agreement between said third party and the shareholder was enteredinto, in this case, at the time the pledge agreement was executed. VGCCI could have easilyinformed petitioner of its by-laws when it sent notice formally recognizing petitioner as pledgee


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of one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-laws atthe time of foreclosure will not suffice. The ruling of the SEC en bancis particularly instructive:

By-laws signifies the rules and regulations or private laws enacted by thecorporation to regulate, govern and control its own actions, affairs and concernsand its stockholders or members and directors and officers with relation thereto

and among themselves in their relation to it. In other words, by-laws are therelatively permanent and continuing rules of action adopted by the corporation forits own government and that of the individuals composing it and having thedirection, management and control of its affairs, in whole or in part, in themanagement and control of its affairs and activities. (9 Fletcher 4166, 1982 Ed.)

The purpose of a by-law is to regulate the conduct and define the duties of themembers towards the corporation and among themselves. They are self-imposedand, although adopted pursuant to statutory authority, have no status as publiclaw. (Ibid.)

Therefore, it is the generally accepted rule that third persons are not bound byby-laws, except when they have knowledge of the provisions either actually orconstructively. In the case ofFleisher v. Botica Nolasco, 47 Phil. 584, theSupreme Court held that the by-law restricting the transfer of shares cannot haveany effect on the transferee of the shares in question as he "had no knowledge ofsuch by-law when the shares were assigned to him. He obtained them in goodfaith and for a valuable consideration. He was not a privy to the contract createdby the by-law between the shareholder. . . and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser. (Emphasis supplied.)

By analogy of the above-cited case, the Commission en bancis of the opinionthat said case is applicable to the present controversy. Appellant-petitioner bankas a third party can not be bound by appellee-respondent's by-laws. It must berecalled that when appellee-respondent communicated to appellant-petitionerbank that the pledge agreement was duly noted in the club's books there was nomention of the shareholder-pledgor's unpaid accounts. The transcript ofstenographic notes of the June 25, 1991 Hearing reveals that the pledgorbecame delinquent only in 1975. Thus, appellant-petitioner was in good faithwhen the pledge agreement was contracted.

The Commission en bancalso believes that for the exception to the generalaccepted rule that third persons are not bound by by-laws to be applicable andbinding upon the pledgee, knowledge of the provisions of the VGCI By-laws mustbe acquired at the time the pledge agreement was contracted. Knowledge of saidprovisions, either actual or constructive, at the time of foreclosure will not affectpledgee's right over the pledged share. Art. 2087 of the Civil Code provides that itis also of the essence of these contracts that when the principal obligationbecomes due, the things in which the pledge or mortgage consists maybealienated for the payment to the creditor.

In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., theCommission issued an opinion to the effect that:


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According to the weight of authority, the pledgee's right is entitledto full protection without surrender of the certificate, theircancellation, and the issuance to him of new ones, and whendone, the pledgee will be fully protected against a subsequentpurchaser who would be charged with constructive notice that thecertificate is covered by the pledge. (12-A Fletcher 502)

The pledgee is entitled to retain possession of the stock until thepledgor pays or tenders to him the amount due on the debtsecured. In other words, the pledgee has the right to resort to itscollateral for the payment of the debts. (Ibid, 502)

To cancel the pledged certificate outright and the issuance of newcertificate to a third person who purchased the same certificatecovered by the pledge, will certainly defeat the right of the pledgeeto resort to its collateral for the payment of the debt. The pledgoror his representative or registered stockholders has no right torequire a return of the pledged stock until the debt for which it was

given as security is paid and satisfied, regardless of the length oftime which have elapsed since debt was created. (12-A Fletcher409)

A bona fide pledgee takes free from any latent or secret equities or liens in favoreither of the corporation or of third persons, if he has no notice thereof, but nototherwise. He also takes it free of liens or claims that may subsequently arise infavor of the corporation if it has notice of the pledge, although no demand for atransfer of the stock to the pledgee on the corporate books has been made. (12-

A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739) 38

Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art.2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged withthe diligence of a good father of a family, fails to convince. The case ofCruz & Serranov. ChuaA. H. Lee, 39is clearly not applicable:

In applying this provision to the situation before us it must be borne in mind thatthe ordinary pawn ticket is a document by virtue of which the property in the thingpledged passes from hand to hand by mere delivery of the ticket; and thecontract of the pledge is, therefore, absolvable to bearer. It results that one whotakes a pawn ticket in pledge acquires domination over the pledge; and it is theholder who must renew the pledge, if it is to be kept alive.

It is quite obvious from the aforequoted case that a membership share is quite differentin character from a pawn ticket and to reiterate, petitioner was never informed ofCalapatia's unpaid accounts and the restrictive provisions in VGCCI's by-laws.

Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against whichthe corporation holds any unpaid claim shall be transferable in the books of the corporation"cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising fromunpaid subscription, and not to any indebtedness which a subscriber or stockholder may owethe corporation arising from any other transaction." 40In the case at bar, the subscription for the


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share in question has been fully paid as evidenced by the issuance of Membership CertificateNo. 1219. 41What Calapatia owed the corporation were merely the monthly dues. Hence, theaforequoted provision does not apply.

WHEREFORE, premises considered, the assailed decision of the Court of Appeals isREVERSED and the order of the SEC en bancdated 4 June 1993 is hereby AFFIRMED.

SO ORDERED.

Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.


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Grace Christian High School vs. Court of Appeals, 281 SCRA 133 ,

October 23, 1997Case Title : GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURTOF APPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G.

BELTRAN, and ERNESTO L. GO, respondents.Case Nature : PETITION forreview on certiorari of a decision of the Court of Appeals.Syllabi Class :Corporation Law|Board of Directors|By-Laws|Syllabi:

1.Corporation Law; Board of Directors; The board of directors of

corporations must be elected from among the stockholders or mem-bers.-These provisions of the former and present corporation law leave no room

for doubt as to their meaning: the board of directors of corporations must be

elected from among the stockholders or members. There may be

corporations in which there are unelected members in the board but it is

clear that in the examples cited by petitioner the unelected members sit asex officio members, i.e., by virtue of and for as long as they hold a particular

office. But in the case of petitioner, there is no reason at all for its

representative to be given a seat in the board. Nor does petitioner claim a

right to such seat by virtue of an office held. In fact it was not given such

seat in the beginning. It was only in 1975 that a proposed amendment to

the by-laws sought to give it one.

2.Corporation Law; Board of Directors; By-Laws; No provision of the

by-laws can be adopted if it is contrary to law.-Since the provision in question is contrary to law, the fact that for fifteen

years it has not been questioned or challenged but, on the contrary, appearsto have been implemented by the members of the association cannot

forestall a later challenge to its validity. Neither can it attain validity through

acquiescence because, if it is contrary to law, it is beyond the power of the

members of the association to waive its invalidity. For that matter the

members of the association may have formally adopted the provision in

question, but their action would be of no avail because no provision of the

by-laws can be adopted if it is contrary to law.

3.Corporation Law; Board of Directors; By-Laws; Tolerance cannot be

considered a ratification.-

It is probable that, in allowing petitioners representative to sit on the board,the members of the association were not aware that this was contrary to

law. It should be noted that they did not actually implement the provision in

question except perhaps insofar as it increased the number of directors from

11 to 15, but certainly not the allowance of petitioners representative as an

unelected member of the board of directors. It is more accurate to say that
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the members merely tolerated petitioners representative and tolerance

cannot be considered ratification.

4.Corporation Law; Board of Directors; By-Laws; Practice, no matter

how long continued, cannot give rise to any vested right if it is contrary to

law.-Nor can petitioner claim a vested right to sit in the board on the basis ofpractice. Practice, no matter how long continued, cannot give rise to any

vested right if it is contrary to law. Even less tenable is petitioners claim

that its right is coterminus with the existence of the association.

Division: SECOND DIVISION

Docket Number: G.R. No. 108905

Counsel: Padilla Law Office, Racela, Manguera & Fabie

Ponente: MENDOZA

Dispositive Portion:WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

GRACE CHRISTIAN HIGH SCHOOL, peti t ioner, vs. THE COURT OFAPPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDROG. BELTRAN, and ERNESTO L. GO, respondents.

D E C I S I O N

MENDOZA, J .:

The question for decision in this case is the right of petitionersrepresentative to sit in the board of directors of respondent Grace Village

Association, Inc. as a permanent member thereof. For fifteen years from

1975 until 1989 petitioners representative had been recognized as apermanent director of the association. But on February 13, 1990, petitionerreceived notice from the associations committee on election that the latterwas reexamining (actually, reconsidering) the right of petitionersrepresentative to continue as an unelected member of the board. As theboard denied petitioners request to be allowed representation withoutelection, petitioner brought an action formandamus in the Home Insurance
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and Guaranty Corporation. Its action was dismissed by the hearing officerwhose decision was subsequently affirmed by the appeals board. Petitionerappealed to the Court of Appeals, which in turn upheld the decision of theHIGCs appeals board. Hence this petition for review based on the followingcontentions:

1. The Petitioner herein has already acquired a vested right to a permanent seat in the

Board of Directors of Grace Village Association;

2. The amended By-laws of the Association drafted and promulgated by a Committee

on December 20, 1975 is valid and binding; and

3. The Practice of tolerating the automatic inclusion of petitioner as a permanent

member of the Board of Directors of the Association without the benefit of election is

allowed under the law.[1]

Briefly stated, the facts are as follows:

Petitioner Grace Christian High School is an educational institution offeringpreparatory, kindergarten and secondary courses at the Grace Village inQuezon City. Private respondent Grace Village Association, Inc., on the otherhand, is an organization of lot and/or building owners, lessees and residentsat Grace Village, while private respondents Alejandro G. Beltran and ErnestoL. Go were its president and chairman of the committee on election,respectively, in 1990, when this suit was brought.

As adopted in 1968, the by-laws of the association provided in Article IV,as follows:

The annual meeting of the members of the Association shall be held on the first

Sunday of January in each calendar year at the principal office of the Association at

2:00 P.M. where they shall elect by plurality vote and by secret balloting, the Board of

Directors, composed of eleven (11) members to serve for one (1) year until their

successors are duly elected and have qualified.[2]

It appears, that on December 20, 1975, a committee of the board of

directors prepared a draft of an amendment to the by-laws, reading asfollows:[3]

VI. ANNUAL MEETING
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The Annual Meeting of the members of the Association shall be held on the second

Thursday of January of each year. Each Charter or Associate Member of the

Association is entitled to vote. He shall be entitled to as many votes as he has

acquired thru his monthly membership fees only computed on a ratio of TEN (P10.00)

PESOS for one vote.

The Charter and Associate Members shall elect the Directors of the Association. The

candidates receiving the first fourteen (14) highest number of votes shall be declared

and proclaimed elected until their successors are elected and qualified. GRACE

CHRISTIAN HIGH SCHOOL representative is a permanent Director of the

ASSOCIATION.

This draft was never presented to the general membership forapproval. Nevertheless, from 1975, after it was presumably submitted to theboard, up to 1990, petitioner was given a permanent seat in the board of

directors of the association. On February 13, 1990, the associationscommittee on election in a letter informed James Tan, principal of the school,that it was the sentiment that all directors should be elected by members ofthe association because to make a person or entity a permanent Directorwould deprive the right of voters to vote for fifteen (15) members of theBoard, and it is undemocratic for a person or entity to hold office inperpetuity.[4]For this reason, Tan was told that the proposal to make theGrace Christian High School representative as a permanent director of theassociation, although previously tolerated in the past elections should bereexamined. Following this advice, notices were sent to the members of theassociation that the provision on election of directors of the 1968 by-laws ofthe association would be observed.

Petitioner requested the chairman of the election committee to change thenotice of election by following the procedure in previous elections, claimingthat the notice issued for the 1990 elections ran counter to the practice inprevious years and was in violation of the by-laws (of 1975) and unlawfullydeprive[d] Grace Christian High School of its vested right [to] a permanentseat in the board.[5]

As the association denied its request, the school brought suitformandamus in the Home Insurance and Guaranty Corporation to compelthe board of directors of the association to recognize its right to a permanentseat in the board. Petitioner based its claim on the following portion of theproposed amendment which, it contended, had become part of the by-laws ofthe association as Article VI, paragraph 2, thereof:
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The Charter and Associate Members shall elect the Directors of the Association. The

candidates receiving the first fourteen (14) highest number of votes shall be declared

and proclaimed elected until their successors are elected and qualified. GRACE

CHRISTIAN HIGH SCHOOL representative is a permanent Director of the

ASSOCIATION.

It appears that the opinion of the Securities and Exchange Commission onthe validity of this provision was sought by the association and that in reply tothe query, the SEC rendered an opinion to the effect that the practice ofallowing unelected members in the board was contrary to the existing by-lawsof the association and to 92 of the Corporation Code (B.P. Blg. 68).

Private respondent association cited the SEC opinion in itsanswer. Additionally, the association contended that the basis of the petitionformandamuswas merely a proposed by-laws which has not yet been

approved by competent authority nor registered with the SEC or HIGC. Itargued that the by-laws which was registered with the SEC on January 16,1969 should be the prevailing by-laws of the association and not the proposedamended by-laws.[6]

In reply, petitioner maintained that the amended by-laws is valid andbinding and that the association was estopped from questioning the by-laws.[7]

A preliminary conference was held on March 29, 1990 but nothingsubstantial was agreed upon. The parties merely agreed that the board ofdirectors of the association should meet on April 17, 1990 and April 24, 1990

for the purpose of discussing the amendment of the by-laws and a possibleamicable settlement of the case. A meeting was held on April 17, 1990, butthe parties failed to reach an agreement. Instead, the board adopted aresolution declaring the 1975 provision null and void for lack of approval bymembers of the association and the 1968 by-laws to be effective.

On June 20, 1990, the hearing officer of the HIGC rendered a decisiondismissing petitioners action. The hearing officer held that the amended by-laws, upon which petitioner based its claim, [was] merely a proposed by-lawswhich, although implemented in the past, had not yet been ratified by the

members of the association nor approved by competent authority; that, onthe contrary, in the meeting held on April 17, 1990, the directors of theassociation declared the proposed by-law dated December 20, 1975prepared by the committee on by-laws . . . null and void and the by-laws ofDecember 17, 1968 as the prevailing by-laws under which the association isto operate until such time that the proposed amendments to the by-laws areapproved and ratified by a majority of the members of the association and


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duly filed and approved by the pertinent government agency. The hearingofficer rejected petitioners contention that it had acquired a vested right to apermanent seat in the board of directors. He held that past practice inelection of directors could not give rise to a vested right and that departurefrom such practice was justified because it deprived members of association

of their right to elect or to be voted in office, not to say that allowing theautomatic inclusion of a member representative of petitioner as permanentdirector [was] contrary to law and the registered by-laws of respondentassociation.[8]

The appeals board of the HIGC affirmed the decision of the hearing officerin its resolution dated September 13, 1990. It cited the opinion of the SECbased on 92 of the Corporation Code which reads:

92. Election and term of trustees. - Unless otherwise provided in the articles of

incorporation or the by-laws, the board of trustees of non-stock corporations, whichmay be more than fifteen (15) in number as may be fixed in their articles of

incorporation or by-laws, shall, as soon as organized, so classify themselves that the

term of office of one-third (1/3) of the number shall expire every year; and subsequent

elections of trustees comprising one-third (1/3) of the board of trustees shall be held

annually and trustees so elected shall have a term of three (3) years. Trustees

thereafter elected to fill vacancies occurring before the expiration of a particular term

shall hold office only for the unexpired period.

The HIGC appeals board denied claims that the school [was] being deprived

of its right to be a member of the Board of Directors of respondentassociation, because the fact was that it may nominate as manyrepresentatives to the Associations Board as it may deem appropriate. Itsaid that what is merely being upheld is the act of the incumbent directors ofthe Board of correcting a long standing practice which is not anchored uponany legal basis.[9]

Petitioner appealed to the Court of Appeals but petitioner again lost as theappellate court on February 9, 1993, affirmed the decision of the HIGC. TheCourt of Appeals held that there was no valid amendment of the associationsby-laws because of failure to comply with the requirement of its existing by-laws, prescribing the affirmative vote of the majority of the members of theassociation at a regular or special meeting called for the adoption ofamendment to the by-laws. Article XIX of the by-laws provides:[10]

The members of the Association by an affirmative vote of the majority at any regular

or special meeting called for the purpose, may alter, amend, change or adopt any new

by-laws.
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This provision of the by-laws actually implements 22 of the CorporationLaw (Act No. 1459) which provides:

22. The owners of a majority of the subscribed capital stock, or a majority of the

members if there be no capital stock, may, at a regular or special meeting duly called

for the purpose, amend or repeal any by-law or adopt new by-laws. The owners oftwo-thirds of the subscribed capital stock, or two-thirds of the members if there be no

capital stock, may delegate to the board of directors the power to amend or repeal any

by-law or to adopt new by-laws: Provided, however, That any power delegated to the

board of directors to amend or repeal any by-law or adopt new by-laws shall be

considered as revoked whenever a majority of the stockholders or of the members of

the corporation shall so vote at a regular or special meeting. And provided, further,

That the Director of the Bureau of Commerce and Industry shall not hereafter file an

amendment to the by-laws of any bank, banking institution or building and loan

association, unless accompanied by certificate of the Bank Commissioner to the effect

that such amendments are in accordance with law.

The proposed amendment to the by-laws was never approved by themajority of the members of the association as required by these provisions ofthe law and by-laws. But petitioner contends that the members of thecommittee which prepared the proposed amendment were duly authorized todo so and that because the members of the association thereafterimplemented the provision for fifteen years, the proposed amendment for allintents and purposes should be considered to have been ratified bythem. Petitioner contends:[11]

Considering, therefore, that the agents or committee were duly authorized to draft

the amended by-laws and the acts done by the agents were in accordance with such

authority, the acts of the agents from the very beginning were lawful and binding on

the homeowners (the principals)per se without need of any ratification or

adoption. The more has the amended by-laws become binding on the homeowners

when the homeowners followed and implemented the provisions of the amended by-

laws. This is not merely tantamount to tacit ratification of the acts done by duly

authorized agents but express approval and confirmation of what the agents did

pursuant to the authority granted to them.

Corollarily, petitioner claims that it has acquired a vested right to apermanent seat in the board. Says petitioner:

The right of the petitioner to an automatic membership in the board of the Association

was granted by the members of the Association themselves and this grant has been

implemented by members of the board themselves all through the years. Outside the
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present membership of the board, not a single member of the Association has

registered any desire to remove the right of herein petitioner to an automatic

membership in the board. If there is anybody who has the right to take away such

right of the petitioner, it would be the individual members of the Association through

a referendum and not the present board some of the members of which are motivated

by personal interest.

Petitioner disputes the ruling that the provision in question, giving petitionersrepresentative a permanent seat in the board of the association, is contrary tolaw. Petitioner claims that that is not so because there is really no provision oflaw prohibiting unelected members of boards of directors ofcorporations. Referring to 92 of the present Corporation Code, petitionersays:

It is clear that the above provision of the Corporation Code only provides for the

manner of election of the members of the board of trustees of non-stock corporationswhich may be more than fifteen in number and which manner of election is even

subject to what is provided in the articles of incorporation or by-laws of the

association thus showing that the above provisions [are] not even mandatory.

Even a careful perusal of the above provision of the Corporation Code would not

show that it prohibits a non-stock corporation or association from granting one of its

members a permanent seat in its board of directors or trustees. If there is no such

legal prohibition then it is allowable provided it is so provided in the Articles of

Incorporation or in the by-laws as in the instant case.

. . . .

If fact, the truth is that this is allowed and is being practiced by some corporations

duly organized and existing under the laws of the Philippines.

One example is the Pius XII Catholic Center, Inc. Under the by-laws of this

corporation, that whoever is the Archbishop of Manila is considered a member of the

board of trustees without benefit of election. And not only that. He also automatically

sits as the Chairman of the Board of Trustees, again without need of any election.

Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also

provided in the by-laws of this corporation that whoever is the Archbishop of Manila

is considered a member of the board of trustees year after year without benefit of any

election and he also sits automatically as the Chairman of the Board of Trustees.


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It is actually 28 and 29 of the Corporation Law not 92 of the presentlaw or 29 of the former one which require members of the boards ofdirectors of corporations to be elected. These provisions read:

28. Unless otherwise provided in this Act, the corporate powers of all corporations

formed under this Act shall be exercised, all business conducted and all property ofsuch corporations controlled and held by a board of not less than five nor more than

eleven directors to be elected from among the holders of stock or, where there is no

stock, from the members of the corporation: Provided, however, That in corporations,

other than banks, in which the United States has or may have a vested interest,

pursuant to the powers granted or delegated by the Trading with the Enemy Act, as

amended, and similar Acts of Congress of the United States relating to the same

subject, or by Executive Order No. 9095 of the President of the United States, as

heretofore or hereafter amended, or both, the directors need not be elected from

among the holders of the stock, or, where there is no stock from the members of the

corporation. (emphasis added)

29. At the meeting for the adoption of the original by-laws, or at such subsequent

meeting as may be then determined, directors shall be elected to hold their offices for

one year and until their successors are elected and qualified. Thereafter the directors

of the corporation shall be elected annually by the stockholders if it be a stock

corporation or by the members if it be a nonstock corporation, and if no provision is

made in the by-laws for the time of election the same shall be held on the first

Tuesday after the first Monday in January. Unless otherwise provided in the by-laws,

two weeks notice of the election of directors must be given by publication in some

newspaper of general circulation devoted to the publication of general news at the

place where the principal office of the corporation is established or located, and by

written notice deposited in the post-office, postage pre-paid, addressed to each

stockholder, or, if there be no stockholders, then to each member, at his last known

place of residence. If there be no newspaper published at the place where the principal

office of the corporation is established or located, a notice of the election of directors

shall be posted for a period of three weeks immediately preceding the election in at

least three public places, in the place where the principal office of the corporation is

established or located. (Emphasis added)

The present Corporation Code (B.P. Blg. 68), which took effect on May 1,1980,[12]similarly provides:

23. The Board of Directors or Trustees. - Unless otherwise provided in this Code,

the corporate powers of all corporations formed under this Code shall be exercised, all

business conducted and all property of such corporations controlled and held by the

board of directors or trustees to be elected from among the holders of stocks, or where
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there is no stock, from among the members of the corporation, who shall hold office

for one (1) year and until their successors are elected and qualified. (Emphasis added)

These provisions of the former and present corporation law leave no roomfor doubt as to their meaning: the board of directors of corporations must be

elected from among the stockholders or members. There may becorporations in which there are unelected members in the board but it is clearthat in the examples cited by petitioner the unelected members sit asexofficio members, i.e., by virtue of and for as long as they hold a particularoffice. But in the case of petitioner, there is no reason at all for itsrepresentative to be given a seat in the board. Nor does petitioner claim aright to such seat by virtue of an office held. In fact it was not given such seatin the beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it one.

Since the provision in question is contrary to law, the fact that for fifteenyears it has not been questioned or challenged but, on the contrary, appearsto have been implemented by the members of the association cannot forestalla later challenge to its validity. Neither can it attain validity throughacquiescence because, if it is contrary to law, it is beyond the power of themembers of the association to waive its invalidity. For that matter themembers of the association may have formally adopted the provision inquestion, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law.[13]

It is probable that, in allowing petitioners representative to sit on theboard, the members of the association were not aware that this was contraryto law. It should be noted that they did not actually implement the provision inquestion except perhaps insofar as it increased the number of directors from11 to 15, but certainly not the allowance of petitioners representative as anunelected member of the board of directors. It is more accurate to say thatthe members merely tolerated petitioners representative and tolerance cannotbe considered ratification.

Nor can petitioner claim a vested right to sit in the board on the basis ofpractice. Practice, no matter how long continued, cannot give rise to any

vested right if it is contrary to law. Even less tenable is petitioners claim thatits right is coterminus with the existence of the association.[14]

Finally, petitioner questions the authority of the SEC to render an opinionon the validity of the provision in question. It contends that jurisdiction overthis case is exclusively vested in the HIGC.


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But this case was not decided by the SEC but by the HIGC. The HIGCmerely cited as authority for its ruling the opinion of the SEC chairman. TheHIGC could have cited any other authority for the view that under the lawmembers of the board of directors of a corporation must be elected and itwould be none the worse for doing so.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

Puno, and Torres, Jr., JJ., concur.


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HENRY FLEISCHER, plaintiff and appellee, vs. BOTICA NoLASCO Co.,

INC., defendant and appellant., 47 Phil. 583 , March 14, 1925Case Title : HENRY FLEISCHER, plaintiff and appellee, vs. BOTICA NoLASCOCo., INC., defendant and appellant.Case Nature : APPEAL from a judgment

of the Court of First Instance of Oriental Negros. Capistrano, J.Syllabi Class :CORPORATIONS|CORPORATE STOCK|Syllabi:

1.CORPORATIONS; CORPORATE STOCK; RlGHT OF CORPORATIONS TO

IMPOSE A LIMITATION ON TRANSFERS OF STOCK.-A stock corporation in adopting by-laws governing the transfer of shares of

stock should take into consideration the specific provisions of the

Corporation Law. The by-laws of corporations should be made to harmonize

with the provisions of the Corporation Law. By-laws must not be inconsistent

with the provisions of the Corporation Law. By-laws of a corporation arevalid if they are reasonable and calculated to carry into effect the objects of

the corporation provided they are not contradictory to the general policy of

the laws of the land. Under a statute authorizing by-laws for the transfer of

stock of a corporation, it can do no more than prescribe a general mode of

transfer on the corporate books and cannot justify an unreasonable

restriction upon the right to sell. The shares of stock of a corporation are

personal property and the holder thereof may transfer the same without

unreasonable restrictions

.

2.CORPORATIONS; TRANSFER OF SHARES OF STOCK.-The power to enact by-laws restraining the sale and transfer of stock must

be found in the governing statute or charter. Restrictions upon the traffic in

stock must have their source in legislative enactments, as the corporation

itself cannot create such impediments. By-laws of a corporation are intended

merely for the protection of the corporation, and prescribe regulations and

not restrictions; they are always subject to the charter of the corporation.

The corporation, in the absence of such a power, cannot ordinarily inquire

into or pass upon the legality of the transaction by which its stock passes

from one person to another, nor can it question the consideration upon

which a sale is based. A by-law of a corporation cannot take away or abridgethe substantial rights of stockholders. Courts will carefully scrutinize any

attempt on the part of a corporation to impose restrictions or limitations

upon the right of stockholders to sell and assign their stock. Restrictions

cannot be imposed upon a stockholder by a by-law without statutory or

charter authority. The owner of corporate stock has the same uncontrollable

right to sell or alienate, which attaches to the ownership of any other species

of property.
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