CORPO CASES v. Corporate Powers

CORPO LAWCASES: V. Corporate Powers

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G.R. No. L-21601 December 28, 1968NIELSON & COMPANY, INC., plaintiff-appellant, vs.LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.

Lepanto seeks the reconsideration of the decision rendered on December 17, 1966. The motion for reconsideration is based on two sets of grounds — the first set consisting of four principal grounds, and the second set consisting of five alternative grounds, as follows:

Principal Grounds:

1. The court erred in overlooking and failing to apply the proper law applicable to the agency or management contract in question, namely, Article 1733 of the Old Civil Code (Article 1920 of the new), by virtue of which said agency was effectively revoked and terminated in 1945 when, as stated in paragraph 20 of the complaint, "defendant voluntarily ... prevented plaintiff from resuming management and operation of said mining properties."

2. The court erred in holding that paragraph II of the management contract (Exhibit C) suspended the period of said contract.

3. The court erred in reversing the ruling of the trial judge, based on well-settled jurisprudence of this Supreme Court, that the management agreement was only suspended but not extended on account of the war.

4. The court erred in reversing the finding of the trial judge that Nielson's action had prescribed, but considering only the first claim and ignoring the prescriptibility of the other claims.

Alternative Grounds:

5. The court erred in holding that the period of suspension of the contract on account of the war lasted from February 1942 to June 26, 1948.

6. Assuming arguendo that Nielson is entitled to any relief, the court erred in awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of P2,500.00 for the month of January, 1942; and (c) the full contract price for the extended period of sixty months, since these damages were neither demanded nor proved and, in any case, not allowable under the general law of damages.

7. Assuming arguendo that appellant is entitled to any relief, the court erred in ordering appellee to issue and deliver to appellant shares of stock together with fruits thereof.

8. The court erred in awarding to appellant an undetermined amount of shares of stock and/or cash, which award cannot be ascertained and executed without further litigation.


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9. The court erred in rendering judgment for attorney's fees.

We are going to dwell on these grounds in the order they are presented.

1. In its first principal ground Lepanto claims that its own counsel and this Court had overlooked the real nature of the management contract entered into by and between Lepanto and Nielson, and the law that is applicable on said contract. Lepanto now asserts for the first time and this is done in a motion for reconsideration - that the management contract in question is a contract of agency such that it has the right to revoke and terminate the said contract, as it did terminate the same, under the law of agency, and particularly pursuant to Article 1733 of the Old Civil Code (Article 1920 of the New Civil Code).

We have taken note that Lepanto is advancing a new theory. We have carefully examined the pleadings filed by Lepanto in the lower court, its memorandum and its brief on appeal, and never did it assert the theory that it has the right to terminate the management contract because that contract is one of agency which it could terminate at will. While it is true that in its ninth and tenth special affirmative defenses, in its answer in the court below, Lepanto pleaded that it had the right to terminate the management contract in question, that plea of its right to terminate was not based upon the ground that the relation between Lepanto and Nielson was that of principal and agent but upon the ground that Nielson had allegedly not complied with certain terms of the management contract. If Lepanto had thought of considering the management contract as one of agency it could have amended its answer by stating exactly its position. It could have asserted its theory of agency in its memorandum for the lower court and in its brief on appeal. This, Lepanto did not do. It is the rule, and the settled doctrine of this Court, that a party cannot change his theory on appeal — that is, that a party cannot raise in the appellate court any question of law or of fact that was not raised in the court below or which was not within the issue made by the parties in their pleadings (Section 19, Rule 49 of the old Rules of Court, and also Section 18 of the new Rules of Court; Hautea vs. Magallon, L-20345, November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884, February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207; Agoncillo vs. Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil 49).

At any rate, even if we allow Lepanto to assert its new theory at this very late stage of the proceedings, this Court cannot sustain the same.

Lepanto contends that the management contract in question (Exhibit C) is one of agency because: (1) Nielson was to manage and operate the mining properties and mill on behalf, and for the account, of Lepanto; and (2) Nielson was authorized to represent Lepanto in entering, on Lepanto's behalf, into contracts for the hiring of laborers, purchase of supplies, and the sale and marketing of the ores mined. All these, Lepanto claims, show that Nielson was, by the terms of the contract, destined to execute juridical acts not on its own behalf but on behalf of Lepanto under the control of the Board of Directors of Lepanto "at all times". Hence Lepanto claims that the contract is one of agency. Lepanto then maintains that an agency is revocable at the will of


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the principal (Article 1733 of the Old Civil Code), regardless of any term or period stipulated in the contract, and it was in pursuance of that right that Lepanto terminated the contract in 1945 when it took over and assumed exclusive management of the work previously entrusted to Nielson under the contract. Lepanto finally maintains that Nielson as an agent is not entitled to damages since the law gives to the principal the right to terminate the agency at will.

Because of Lepanto's new theory We consider it necessary to determine the nature of the management contract — whether it is a contract of agency or a contract of lease of services. Incidentally, we have noted that the lower court, in the decision appealed from, considered the management contract as a contract of lease of services.

Article 1709 of the Old Civil Code, defining contract of agency, provides:

By the contract of agency, one person binds himself to render some service or do something for the account or at the request of another.

Article 1544, defining contract of lease of service, provides:

In a lease of work or services, one of the parties binds himself to make or construct something or to render a service to the other for a price certain.

In both agency and lease of services one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment.

On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of the new Civil Code has defined the contract of agency in more explicit terms, as follows:

By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.

There is another obvious distinction between agency and lease of services. Agency is a preparatory contract, as agency "does not stop with the agency because the purpose is to enter into other contracts." The most characteristic feature of an agency relationship is the agent's power to bring about business relations between his principal and third persons. "The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease of services contemplate only material (non-juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277).

In the light of the interpretations we have mentioned in the foregoing paragraphs let us now determine the nature of the management contract in question. Under the contract, Nielson had agreed, for a period of five years, with the right to renew for a like period, to explore, develop and operate the mining claims of Lepanto, and to mine, or mine and mill, such pay ore as may


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be found therein and to market the metallic products recovered therefrom which may prove to be marketable, as well as to render for Lepanto other services specified in the contract. We gather from the contract that the work undertaken by Nielson was to take complete charge subject at all times to the general control of the Board of Directors of Lepanto, of the exploration and development of the mining claims, of the hiring of a sufficient and competent staff and of sufficient and capable laborers, of the prospecting and development of the mine, of the erection and operation of the mill, and of the benefication and marketing of the minerals found on the mining properties; and in carrying out said obligation Nielson should proceed diligently and in accordance with the best mining practice. In connection with its work Nielson was to submit reports, maps, plans and recommendations with respect to the operation and development of the mining properties, make recommendations and plans on the erection or enlargement of any existing mill, dispatch mining engineers and technicians to the mining properties as from time to time may reasonably be required to investigate and make recommendations without cost or expense to Lepanto. Nielson was also to "act as purchasing agent of supplies, equipment and other necessary purchases by Lepanto, provided, however, that no purchase shall be made without the prior approval of Lepanto; and provided further, that no commission shall be claimed or retained by Nielson on such purchase"; and "to submit all requisition for supplies, all constricts and arrangement with engineers, and staff and all matters requiring the expenditures of money, present or future, for prior approval by Lepanto; and also to make contracts subject to the prior approve of Lepanto for the sale and marketing of the minerals mined from said properties, when said products are in a suitable condition for marketing."1

It thus appears that the principal and paramount undertaking of Nielson under the management contract was the operation and development of the mine and the operation of the mill. All the other undertakings mentioned in the contract are necessary or incidental to the principal undertaking — these other undertakings being dependent upon the work on the development of the mine and the operation of the mill. In the performance of this principal undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation.

It is true that the management contract provides that Nielson would also act as purchasing agent of supplies and enter into contracts regarding the sale of mineral, but the contract also provides that Nielson could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is clear, therefore, that even in these cases Nielson could not execute juridical acts which would bind Lepanto without first securing the approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an agent.

Lepanto contends that the management contract in question being one of agency it had the right to terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code.


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We find, however, a proviso in the management contract which militates against this stand of Lepanto. Paragraph XI of the contract provides:

Both parties to this agreement fully recognize that the terms of this Agreement are made possible only because of the faith or confidence that the Officials of each company have in the other; therefore, in order to assure that such confidence and faith shall abide and continue, NIELSON agrees that LEPANTO may cancel this Agreement at any time upon ninety (90) days written notice, in the event that NIELSON for any reason whatsoever, except acts of God, strike and other causes beyond its control, shall cease to prosecute the operation and development of the properties herein described, in good faith and in accordance with approved mining practice.

It is thus seen, from the above-quoted provision of paragraph XI of the management contract, that Lepanto could not terminate the agreement at will. Lepanto could terminate or cancel the agreement by giving notice of termination ninety days in advance only in the event that Nielson should prosecute in bad faith and not in accordance with approved mining practice the operation and development of the mining properties of Lepanto. Lepanto could not terminate the agreement if Nielson should cease to prosecute the operation and development of the mining properties by reason of acts of God, strike and other causes beyond the control of Nielson.

The phrase "Both parties to this agreement fully recognize that the terms of this agreement are made possible only because of the faith and confidence of the officials of each company have in the other" in paragraph XI of the management contract does not qualify the relation between Lepanto and Nielson as that of principal and agent based on trust and confidence, such that the contractual relation may be terminated by the principal at any time that the principal loses trust and confidence in the agent. Rather, that phrase simply implies the circumstance that brought about the execution of the management contract. Thus, in the annual report for 19362, submitted by Mr. C. A. Dewit, President of Lepanto, to its stockholders, under date of March 15, 1937

Pursuant to the provisions of paragraph 2 of this offer, Messrs. Nielson & Co., took subscriptions for One Million Fifty Thousand Pesos (P1,050,000.00) in shares of our Company and their underwriting and brokerage commission has been paid. More than fifty per cent of these subscriptions have been paid to the Company in cash. The claim owners have transferred their claims to the Corporation, but the P700,000.00 in stock which they are to receive therefor, is as yet held in escrow.

Immediately upon the formation of the Corporation Messrs. Nielson & Co., assumed the Management of the property under the control of the Board of Directors. A modification in the Management Contract was made with the consent of all the then stockholders, in virtue of which the compensation of Messrs. Nielson & Co., was increased to P2,500.00 per month when mill construction began. The formal Management Contract was not entered into until January 30, 1937.


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We can gather from the foregoing statements in the annual report for 1936, and from the provision of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and manage its mines was principally in consideration of the know-how and technical services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and accepted by Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere in the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management contract because it had lost its trust and confidence in Nielson.

The contention of Lepanto that it had terminated the management contract in 1945, following the liberation of the mines from Japanese control, because the relation between it and Nielson was one of agency and as such it could terminate the agency at will, is, therefore, untenable. On the other hand, it can be said that, in asserting that it had terminated or cancelled the management contract in 1945, Lepanto had thereby violated the express terms of the management contract. The management contract was renewed to last until January 31, 1947, so that the contract had yet almost two years to go — upon the liberation of the mines in 1945. There is no showing that Nielson had ceased to prosecute the operation and development of the mines in good faith and in accordance with approved mining practice which would warrant the termination of the contract upon ninety days written notice. In fact there was no such written notice of termination. It is an admitted fact that Nielson ceased to operate and develop the mines because of the war — a cause beyond the control of Nielson. Indeed, if the management contract in question was intended to create a relationship of principal and agent between Lepanto and Nielson, paragraph XI of the contract should not have been inserted because, as provided in Article 1733 of the old Civil Code, agency is essentially revocable at the will of the principal — that means, with or without cause. But precisely said paragraph XI was inserted in the management contract to provide for the cause for its revocation. The provision of paragraph XI must be given effect.

In the construction of an instrument where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all,3 and if some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual.4

It is Our considered view that by express stipulation of the parties, the management contract in question is not revocable at the will of Lepanto. We rule that this management contract is not a contract of agency as defined in Article 1709 of the old Civil Code, but a contract of lease of services as defined in Article 1544 of the same Code. This contract can not be unilaterally revoked by Lepanto.

The first ground of the motion for reconsideration should, therefore, be brushed aside.


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2. In the second, third and fifth grounds of its motion for reconsideration, Lepanto maintains that this Court erred, in holding that paragraph 11 of the management contract suspended the period of said contract, in holding that the agreement was not only suspended but was extended on account of the war, and in holding that the period of suspension on account of the war lasted from February, 1942 to June 26, 1948. We are going to discuss these three grounds together because they are interrelated.

In our decision we have dwelt lengthily on the points that the management contract was suspended because of the war, and that the period of the contract was extended for a period equivalent to the time when Nielson was unable to perform the work of mining and milling because of the adverse effects of the war on the work of mining and milling.

It is the contention of Lepanto that the happening of those events, and the effects of those events, simply suspended the performance of the obligations by either party in the contract, but did not suspend the period of the contract, much less extended the period of the contract.

We have conscientiously considered the arguments of Lepanto in support of these three grounds, but We are not persuaded to reconsider the rulings that We made in Our decision.

We want to say a little more on these points, however. Paragraph II of the management contract provides as follows:

In the event of inundation, flooding of the mine, typhoon, earthquake or any other force majeure, war, insurrection, civil commotion, organized strike, riot, fire, injury to the machinery or other event or cause reasonably beyond the control of NIELSON and which adversely affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or breach of the terms of this Agreement, the same shall remain in suspense, wholly or partially during the terms of such inability. (Emphasis supplied)

A reading of the above-quoted paragraph II cannot but convey the idea that upon the happening of any of the events enumerated therein, which adversely affects the work of mining and milling, the agreement is deemed suspended for as long as Nielson is unable to perform its work of mining and milling because of the adverse effects of the happening of the event on the work of mining and milling. During the period when the adverse effects on the work of mining and milling exist, neither party in the contract would be held liable for non-compliance of its obligation under the contract. In other words, the operation of the contract is suspended for as long as the adverse effects of the happening of any of those events had impeded or obstructed the work of mining and milling. An analysis of the phraseology of the above-quoted paragraph II of the management contract readily supports the conclusion that it is the agreement, or the contract, that is suspended. The phrase "the same" can refer to no other than the term "Agreement" which immediately precedes it. The "Agreement" may be wholly or partially suspended, and this situation will depend on whether the event wholly or partially affected adversely the work of mining and milling. In the instant case, the war had adversely affected —


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and wholly at that — the work of mining and milling. We have clearly stated in Our decision the circumstances brought about by the war which caused the whole or total suspension of the agreement or of the management contract.

LEPANTO itself admits that the management contract was suspended. We quote from the brief of LEPANTO:

Probably, what Nielson meant was, it was prevented by Lepanto to assume again the management of the mine in 1945, at the precise time when defendant was at the feverish phase of rehabilitation and although the contract had already been suspended. (Lepanto's Brief, p. 9).

... it was impossible, as a result of the destruction of the mine, for the plaintiff to manage and operate the same and because, as provided in the agreement, the contract was suspended by reason of the war (Lepanto's Brief, pp. 9-10).

Clause II, by its terms, is clear that the contract is suspended in case fortuitous event or force majeure, such as war, adversely affects the work of mining and milling. (Lepanto's Brief, p. 49).

Lepanto is correct when it said that the obligations under the contract were suspended upon the happening of any of the events enumerated in paragraph II of the management contract. Indeed, those obligations were suspended because the contract itself was suspended. When we talk of a contract that has been suspended we certainly mean that the contract temporarily ceased to be operative, and the contract becomes operative again upon the happening of a condition — or when a situation obtains — which warrants the termination of the suspension of the contract.

In Our decision We pointed out that the agreement in the management contract would be suspended when two conditions concur, namely: (1) the happening of the event constituting a force majeure that was reasonably beyond the control of Nielson, and (2) that the event constituting the force majeure adversely affected the work of mining and milling. The suspension, therefore, would last not only while the event constituting the force majeure continued to occur but also for as long as the adverse effects of the force majeure on the work of mining and milling had not been eliminated. Under the management contract the happening alone of the event constituting the force majeure which did not affect adversely the work of mining and milling would not suspend the period of the contract. It is only when the two conditions concur that the period of the agreement is suspended.

It is not denied that because of the war, in February 1942, the mine, the original mill, the original power plant, the supplies and equipment, and all installations at the Mankayan mines of Lepanto, were destroyed upon order of the United States Army, to prevent their utilization by the enemy. It is not denied that for the duration of the war Nielson could not undertake the work of mining and milling. When the mines were liberated from the enemy in August, 1945, the condition of the mines, the mill, the power plant and other installations, was not the same as in February 1942 when they were ordered destroyed by the US army. Certainly, upon the


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liberation of the mines from the enemy, the work of mining and milling could not be undertaken by Nielson under the same favorable circumstances that obtained before February 1942. The work of mining and milling, as undertaken by Nielson in January, 1942, could not be resumed by Nielson soon after liberation because of the adverse effects of the war, and this situation continued until June of 1948. Hence, the suspension of the management contract did not end upon the liberation of the mines in August, 1945. The mines and the mill and the installations, laid waste by the ravages of war, had to be reconstructed and rehabilitated, and it can be said that it was only on June 26, 1948 that the adverse effects of the war on the work of mining and milling had ended, because it was on that date that the operation of the mines and the mill was resumed. The period of suspension should, therefore, be reckoned from February 1942 until June 26, 1948, because it was during this period that the war and the adverse effects of the war on the work of mining and milling had lasted. The mines and the installations had to be rehabilitated because of the adverse effects of the war. The work of rehabilitation started soon after the liberation of the mines in August, 1945 and lasted until June 26, 1948 when, as stated in Lepanto's annual report to its stockholders for the year 1948, "June 28, 1948 marked the official return to operation of this company at its properties at Mankayan, Mountain Province, Philippines" (Exh. F-1).

Lepanto would argue that if the management contract was suspended at all the suspension should cease in August of 1945, contending that the effects of the war should cease upon the liberation of the mines from the enemy. This contention cannot be sustained, because the period of rehabilitation was still a period when the physical effects of the war — the destruction of the mines and of all the mining installations — adversely affected, and made impossible, the work of mining and milling. Hence, the period of the reconstruction and rehabilitation of the mines and the installations must be counted as part of the period of suspension of the contract.

Lepanto claims that it would not be unfair to end the period of suspension upon the liberation of the mines because soon after the liberation of the mines Nielson insisted to resume the management work, and that Nielson was under obligation to reconstruct the mill in the same way that it was under obligation to construct the mill in 1937. This contention is untenable. It is true that Nielson insisted to resume its management work after liberation, but this was only for the purpose of restoring the mines, the mill, and other installations to their operating and producing condition as of February 1942 when they were ordered destroyed. It is not shown by any evidence in the record, that Nielson had agreed, or would have agreed, that the period of suspension of the contract would end upon the liberation of the mines. This is so because, as found by this Court, the intention of the parties in the management contract, and as understood by them, the management contract was suspended for as long as the adverse effects of the force majeure on the work of mining and milling had not been removed, and the contract would be extended for as long as it was suspended. Under the management contract Nielson had the obligation to erect and operate the mill, but not to erect or reconstruct the mill in case of its destruction by force majeure.


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It is the considered view of this court that it would not be fair to Nielson to consider the suspension of the contract as terminated upon the liberation of the mines because then Nielson would be placed in a situation whereby it would have to suffer the adverse effects of the war on the work of mining and milling. The evidence shows that as of January 1942 the operation of the mines under the management of Nielson was already under beneficial conditions, so much so that dividends were already declared by Lepanto for the years 1939, 1940 and 1941. To make the management contract immediately operative after the liberation of the mines from the Japanese, at the time when the mines and all its installations were laid waste as a result of the war, would be to place Nielson in a situation whereby it would lose all the benefits of what it had accomplished in placing the Lepanto mines in profitable operation before the outbreak of the war in December, 1941. The record shows that Nielson started its management operation way back in 1936, even before the management contract was entered into. As early as August 1936 Nielson negotiated with Messrs. C. I. Cookes and V. L. Lednicky for the operation of the Mankayan mines and it was the result of those negotiations that Lepanto was incorporated; that it was Nielson that helped to capitalize Lepanto, and that after the formation of the corporation (Lepanto) Nielson immediately assumed the management of the mining properties of Lepanto. It was not until January 30, 1937 when the management contract in question was entered into between Lepanto and Nielson (Exhibit A).

A contract for the management and operation of mines calls for a speculative and risky venture on the part of the manager-operator. The manager-operator invests its technical know-how, undertakes back-breaking efforts and tremendous spade-work, so to say, in the first years of its management and operation of the mines, in the expectation that the investment and the efforts employed might be rewarded later with success. This expected success may never come. This had happened in the very case of the Mankayan mines where, as recounted by Mr. Lednicky of Lepanto, various persons and entities of different nationalities, including Lednicky himself, invested all their money and failed. The manager-operator may not strike sufficient ore in the first, second, third, or fourth year of the management contract, or he may not strike ore even until the end of the fifth year. Unless the manager-operator strikes sufficient quantity of ore he cannot expect profits or reward for his investment and efforts. In the case of Nielson, its corps of competent engineers, geologists, and technicians begun working on the Mankayan mines of Lepanto since the latter part of 1936, and continued their work without success and profit through 1937, 1938, and the earlier part of 1939. It was only in December of 1939 when the efforts of Nielson started to be rewarded when Lepanto realized profits and the first dividends were declared. From that time on Nielson could expect profit to come to it — as in fact Lepanto declared dividends for 1940 and 1941 — if the development and operation of the mines and the mill would continue unhampered. The operation, and the expected profits, however, would still be subject to hazards due to the occurrence of fortuitous events, fires, earthquakes, strikes, war, etc., constituting force majeure, which would result in the destruction of the mines and the mill. One of these diverse causes, or one after the other, may consume the whole period of the contract, and if it should happen that way the manager-operator would reap no profit to compensate for the first years of spade-work and investment of efforts and know-how. Hence, in fairness to the manager-operator, so that he may not be deprived of the benefits of the work


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he had accomplished, the force majeure clause is incorporated as a standard clause in contracts for the management and operation of mines.

The nature of the contract for the management and operation of mines justifies the interpretation of the force majeure clause, that a period equal to the period of suspension due to force majeure should be added to the original term of the contract by way of an extension. We, therefore, reiterate the ruling in Our decision that the management contract in the instant case was suspended from February, 1942 to June 26, 1948, and that from the latter date the contract had yet five years to go.

3. In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court erred in reversing the finding of the trial court that Nielson's action has prescribed, by considering only the first claim and ignoring the prescriptibility of the other claims.

This ground of the motion for reconsideration has no merit.

In Our decision We stated that the claims of Nielson are based on a written document, and, as such, the cause of action prescribes in ten years.5 Inasmuch as there are different claims which accrued on different dates the prescriptive periods for all the claims are not the same. The claims of Nielson that have been awarded by this Court are itemized in the dispositive part of the decision.

The first item of the awards in Our decision refers to Nielson's compensation in the sum of P17,500.00, which is equivalent to 10% of the cash dividends declared by Lepanto in December, 1941. As we have stated in Our decision, this claim accrued on December 31, 1941, and the right to commence an action thereon started on January 1, 1942. We declared that the action on this claim did not prescribe although the complaint was filed on February 6, 1958 — or after a lapse of 16 years, 1 month and 5 days — because of the operation of the moratorium law.

We declared that under the applicable decisions of this Court6 the moratorium period of 8 years, 2 months and 8 days should be deducted from the period that had elapsed since the accrual of the cause of action to the date of the filing of the complaint, so that there is a period of less than 8 years to be reckoned for the purpose of prescription.

This claim of Nielson is covered by Executive Order No. 32, issued on March 10, 1945, which provides as follows:

Enforcement of payments of all debts and other monetary obligations payable in the Philippines, except debts and other monetary obligations entered into in any area after declaration by Presidential Proclamation that such area has been freed from enemy occupation and control, is temporarily suspended pending action by the Commonwealth Government. (41 O.G. 56-57; Emphasis supplied)


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Executive Order No. 32 covered all debts and monetary obligation contracted before the war (or before December 8, 1941) and those contracted subsequent to December 8, 1941 and during the Japanese occupation. Republic Act No. 342, approved on July 26, 1948, lifted the moratorium provided for in Executive Order No. 32 on pre-war (or pre-December 8, 1941) debts of debtors who had not filed war damage claims with the United States War Damage Commission. In other words, after the effectivity of Republic Act No. 342, the debt moratorium was limited: (1) to debts and other monetary obligations which were contracted after December 8, 1941 and during the Japanese occupation, and (2) to those pre-war (or pre-December 8, 1941) debts and other monetary obligations where the debtors filed war damage claims. That was the situation up to May 18, 1953 when this Court declared Republic Act No. 342 unconstitutional.7 It has been held by this Court, however, that from March 10, 1945 when Executive Order No. 32 was issued, to May 18, 1953 when Republic Act No. 342 was declared unconstitutional — or a period of 8 years, 2 months and 8 days — the debt moratorium was in force, and had the effect of suspending the period of prescription.8

Lepanto is wrong when in its motion for reconsideration it claims that the moratorium provided for in Executive Order No. 32 was continued by Republic Act No. 342 "only with respect to debtors of pre-war obligations or those incurred prior to December 8, 1941," and that "the moratorium was lifted and terminated with respect to obligations incurred after December 8, 1941."9

This Court has held that Republic Act No. 342 does not apply to debts contracted during the war and did not lift the moratorium in relations thereto.10 In the case of Abraham, et al. vs. Intestate Estate of Juan C. Ysmael, et al., L-16741, Jan. 31, 1962, this Court said:

Respondents, however, contend that Republic Act No. 342, which took effect on July 26, 1948, lifted the moratorium on debts contracted during the Japanese occupation. The court has already held that Republic Act No. 342 did not lift the moratorium on debts contracted during the war (Uy vs. Kalaw Katigbak, G.R. No. L-1830, Dec. 31, 1949) but modified Executive Order No. 32 as to pre-war debts, making the protection available only to debtors who had war damage claims (Sison v. Mirasol, G.R. No. L-4711, Oct. 3, 1952).

We therefore reiterate the ruling in Our decision that the claim involved in the first item awarded to Nielson had not prescribed.

What we have stated herein regarding the non-prescription of the cause of action of the claim involved in the first item in the award also holds true with respect to the second item in the award, which refers to Nielson's claim for management fee of P2,500.00 for January, 1942. Lepanto admits that this second item, like the first, is a monetary obligation. The right of action of Nielson regarding this claim accrued on January 31, 1942.


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As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is not applicable. That is the reason why in Our decision We did not discuss the question of prescription regarding these items. The claims of Nielson involved in these items are based on the management contract, and Nielson's cause of action regarding these claims prescribes in ten years. Corollary to Our ruling that the management contract was suspended from February, 1942 until June 26, 1948, and that the contract was extended for five years from June 26, 1948, the right of action of Nielson to claim for what is due to it during that period of extension accrued during the period from June 26, 1948 till the end of the five-year extension period or until June 26, 1953. And so, even if We reckon June 26, 1948 as the starting date of the ten-year period in connection with the prescriptibility of the claims involved in items 3, 4, 5, 6 and 7 of the awards in the decision, it is obvious that when the complaint was filed on February 6, 1958 the ten-year prescriptive period had not yet lapsed.

In Our decision We have also ruled that the right of action of Nielson against Lepanto had not prescribed because of the arbitration clause in the Management contract. We are satisfied that there is evidence that Nielson had asked for arbitration, and an arbitration committee had been constituted. The arbitration committee, however, failed to bring about any settlement of the differences between Nielson and Lepanto. On June 25, 1957 counsel for Lepanto definitely advised Nielson that they were not entertaining any claim of Nielson. The complaint in this case was filed on February 6, 1958.

4. In the sixth ground of its motion for reconsideration, Lepanto maintains that this Court "erred in awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of P2,500.00 for the month of January 1942; and (c) the full contract price for the extended period of 60 months, since the damages were never demanded nor proved and, in any case, not allowable under the general law on damages."

We have stated in Our decision that the original agreement in the management contract regarding the compensation of Nielson was modified, such that instead of receiving a monthly compensation of P2,500.00 plus 10% of the net profits from the operation of the properties for the preceding month,11 Nielson would receive a compensation of P2,500.00 a month, plus (1) 10% of the dividends declared and paid, when and as paid, during the period of the contract, and at the end of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of any amount expended during the year out of surplus earnings for capital account.

It is shown that in December, 1941, cash dividends amounting to P175,000.00 was declared by Lepanto.12 Nielson, therefore, should receive the equivalent of 10% of this amount, or the sum of P17,500.00. We have found that this amount was not paid to Nielson.

In its motion for reconsideration, Lepanto inserted a photographic copy of page 127 of its cash disbursement book, allegedly for 1941, in an effort to show that this amount of P17,500.00 had been paid to Nielson. It appears, however, in this photographic copy of page 127 of the cash disbursement book that the sum of P17,500.00 was entered on October 29 as "surplus a/c


14

Nielson & Co. Inc." The entry does not make any reference to dividends or participation of Nielson in the profits. On the other hand, in the photographic copy of page 89 of the 1941 cash disbursement book, also attached to the motion for reconsideration, there is an entry for P17,500.00 on April 23, 1941 which states "Accts. Pay. Particip. Nielson & Co. Inc." This entry for April 23, 1941 may really be the participation of Nielson in the profits based on dividends declared in April 1941 as shown in Exhibit L. But in the same Exhibit L it is not stated that any dividend was declared in October 1941. On the contrary it is stated in Exhibit L that dividends were declared in December 1941. We cannot entertain this piece of evidence for several reasons: (1) because this evidence was not presented during the trial in the court below; (2) there is no showing that this piece of evidence is newly discovered and that Lepanto was not in possession of said evidence when this case was being tried in the court below; and (3) according to Exhibit L cash dividends of P175,000.00 were declared in December, 1941, and so the sum of P17,500.00 which appears to have been paid to Nielson in October 1941 could not be payment of the equivalent of 10% of the cash dividends that were later declared in December, 1941.

As regards the management fee of Nielson corresponding to January, 1942, in the sum of P2,500.00, We have also found that Nielson is entitled to be paid this amount, and that this amount was not paid by Lepanto to Nielson. Whereas, Lepanto was able to prove that it had paid the management fees of Nielson for November and December, 1941,13 it was not able to present any evidence to show that the management fee of P2,500.00 for January, 1942 had been paid.

It having been declared in Our decision, as well as in this resolution, that the management contract had been extended for 5 years, or sixty months, from June 27, 1948 to June 26, 1953, and that the cause of action of Nielson to claim for its compensation during that period of extension had not prescribed, it follows that Nielson should be awarded the management fees during the whole period of extension, plus the 10% of the value of the dividends declared during the said period of extension, the 10% of the depletion reserve that was set up, and the 10% of any amount expended out of surplus earnings for capital account.

5. In the seventh ground of its motion for reconsideration, Lepanto maintains that this Court erred in ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof.

In Our decision, We declared that pursuant to the modified agreement regarding the compensation of Nielson which provides, among others, that Nielson would receive 10% of any dividends declared and paid, when and as paid, Nielson should be paid 10% of the stock dividends declared by Lepanto during the period of extension of the contract.

It is not denied that on November 28, 1949, Lepanto declared stock dividends worth P1,000,000.00; and on August 22, 1950, it declared stock dividends worth P2,000,000.00). In other words, during the period of extension Lepanto had declared stock dividends worth


15

P3,000,000.00. We held in Our decision that Nielson is entitled to receive l0% of the stock dividends declared, or shares of stock worth P300,000.00 at the par value of P0.10 per share. We ordered Lepanto to issue and deliver to Nielson those shares of stocks as well as all the fruits or dividends that accrued to said shares.

In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends as compensation for its services under the management contract is a violation of the Corporation Law, and that it was not, and it could not be, the intention of Lepanto and Nielson — as contracting parties — that the services of Nielson should be paid in shares of stock taken out of stock dividends declared by Lepanto. We have assiduously considered the arguments adduced by Lepanto in support of its contention, as well as the answer of Nielson in this connection, and We have arrived at the conclusion that there is merit in the contention of Lepanto.

Section 16 of the Corporation Law, in part, provides as follows:

No corporation organized under this Act shall create or issue bills, notes or other evidence of debt, for circulation as money, and no corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for: (1) property actually received by it at a fair valuation equal to the par or issued value of the stock or bonds so issued; and in case of disagreement as to their value, the same shall be presumed to be the assessed value or the value appearing in invoices or other commercial documents, as the case may be; and the burden or proof that the real present value of the property is greater than the assessed value or value appearing in invoices or other commercial documents, as the case may be, shall be upon the corporation, or for (2) profits earned by it but not distributed among its stockholders or members; Provided, however, That no stock or bond dividend shall be issued without the approval of stockholders representing not less than two-thirds of all stock then outstanding and entitled to vote at a general meeting of the corporation or at a special meeting duly called for the purpose.

xxx xxx xxx

No corporation shall make or declare any dividend except from the surplus profits arising from its business, or divide or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution: Provided, That banking, savings and loan, and trust corporations may receive deposits and issue certificates of deposit, checks, drafts, and bills of exchange, and the like in the transaction of the ordinary business of banking, savings and loan, and trust corporations. (As amended by Act No. 2792, and Act No. 3518; Emphasis supplied.)

From the above-quoted provision of Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits.


16

Shares of stock are given the special name "stock dividends" only if they are issued in lieu of undistributed profits. If shares of stocks are issued in exchange of cash or property then those shares do not fall under the category of "stock dividends". A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property, because services is equivalent to property.14 Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the original capital stock of the corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized. In other words, it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalization. Those shares of stock may be issued to a person who is not a stockholder, or to a person already a stockholder in exchange for services rendered or for cash or property. But a share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation.

A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus profits.15 So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par.16 When a corporation issues stock dividends, it shows that the corporation's accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets and no longer available for actual distribution.17 Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders are entitled to dividends. They are the only ones who have a right to a proportional share in that part of the surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholder; the proportional interest of each stockholder remains the same.18If a stockholder is deprived of his stock dividends - and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder — then the proportion of the stockholder's interest changes radically. Stock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits.19

The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. It means the fund actually set aside, and declared by the directors of the corporation as dividends and duly ordered by the director,


17

or by the stockholders at a corporate meeting, to be divided or distributed among the stockholders according to their respective interests.20

It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends can not be issued to a person who is not a stockholder in payment of services rendered. And so, in the case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract. We sustain the contention of Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. And this conclusion of Ours finds support in the record.

We had adverted to in Our decision that in 1940 there was some dispute between Lepanto and Nielson regarding the application and interpretation of certain provisions of the original contract particularly with regard to the 10% participation of Nielson in the net profits, so that some adjustments had to be made. In the minutes of the meeting of the Board of Directors of Lepanto on August 21, 1940, We read the following:

The Chairman stated that he believed that it would be better to tie the computation of the 10% participation of Nielson & Company, Inc. to the dividend, because Nielson will then be able to definitely compute its net participation by the amount of the dividends declared. In addition to the dividend, we have been setting up a depletion reserve and it does not seem fair to burden the 10% participation of Nielson with the depletion reserve, as the depletion reserve should not be considered as an operating expense. After a prolonged discussion, upon motion duly made and seconded, it was —

RESOLVED, That the President, be, and he hereby is, authorized to enter into an agreement with Nielson & Company, Inc., modifying Paragraph V of management contract of January 30, 1937, effective January 1, 1940, in such a way that Nielson & Company, Inc. shall receive 10% of any dividends declared and paid, when and as paid during the period of the contract and at the end of each year, 10% of any depletion reserve that may be set up and 10% of any amount expended during the year out of surplus earnings for capital account. (Emphasis supplied.)

From the sentence, "The Chairman stated that he believed that it would be better to tie the computation of the 10% participation of Nielson & Company, Inc., to the dividend, because Nielson will then be able to definitely compute its net participation by the amount of the dividends declared" the idea is conveyed that the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was to make the value of the dividends declared — whether the dividends were in cash or in stock — as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the dividends so declared. It does not mean, however, that the compensation of Nielson would be taken from the amount actually declared as cash dividend to be distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders as stock dividends, but from the other assets or


18

funds of the corporation which are not burdened by the dividends thus declared. In other words, if, for example, cash dividends of P300,000.00 are declared, Nielson would be entitled to a compensation of P30,000.00, but this P30,000.00 should not be taken from the P300,000.00 to be distributed as cash dividends to the stockholders but from some other funds or assets of the corporation which are not included in the amount to answer for the cash dividends thus declared. This is so because if the P30,000.00 would be taken out from the P300,000.00 declared as cash dividends, then the stockholders would not be getting P300,000.00 as dividends but only P270,000.00. There would be a dilution of the dividend that corresponds to each share of stock held by the stockholders. Similarly, if there were stock dividends worth one million pesos that were declared, which means an issuance of ten million shares at the par value of ten centavos per share, it does not mean that Nielson would be given 100,000 shares. It only means that Nielson should be given the equivalent of 10% of the aggregate cash value of those shares issued as stock dividends. That this was the understanding of Nielson itself is borne out by the fact that in its appeal brief Nielson urged that it should be paid "P300,000.00 being 10% of the P3,000,000.00 stock dividends declared on November 28, 1949 and August 20, 1950...."21

We, therefore, reconsider that part of Our decision which declares that Nielson is entitled to shares of stock worth P300,000.00 based on the stock dividends declared on November 28, 1949 and on August 20, 1950, together with all the fruits accruing thereto. Instead, We declare that Nielson is entitled to payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money value of the stock dividends worth P3,000,000.00 which were declared on November 28, 1949 and on August 20, 1950, with interest thereon at the rate of 6% from February 6, 1958.

6. In the eighth ground of its motion for reconsideration Lepanto maintains that this Court erred in awarding to Nielson an undetermined amount of shares of stock and/or cash, which award can not be ascertained and executed without further litigation.

In view of Our ruling in this resolution that Nielson is not entitled to receive shares of stock as stock dividends in payment of its compensation under the management contract, We do not consider it necessary to discuss this ground of the motion for reconsideration. The awards in the present case are all reduced to specific sums of money.

7. In the ninth ground of its motion for reconsideration Lepanto maintains that this Court erred in rendering judgment or attorney's fees.

The matter of the award of attorney's fees is within the sound discretion of this Court. In Our decision We have stated the reason why the award of P50,000.00 for attorney's fees is considered by this Court as reasonable.

Accordingly, We resolve to modify the decision that We rendered on December 17, 1966, in the sense that instead of awarding Nielson shares of stock worth P300,000.00 at the par value of ten


19

centavos (P0.10) per share based on the stock dividends declared by Lepanto on November 28, 1949 and August 20, 1950, together with their fruits, Nielson should be awarded the sum of P300,000.00 which is an amount equivalent to 10% of the cash value of the stock dividends thus declared, as part of the compensation due Nielson under the management contract. The dispositive portion of the decision should, therefore, be amended, to read as follows:

IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a quo and enter in lieu thereof another, ordering the appellee Lepanto to pay the appellant Nielson the different amounts.

G.R. No. 117897 May 14, 1997ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE COMMISSION, petitioners, vs.COURT OF APPEALS and IGLESIA NI CRISTO, respondents.

Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic Center in Quezon City for the construction of a "Mosque (prayer place), Madrasah (Arabic School), and other religious infrastructures" so as to facilitate the effective practice of Islamic faith in the area. 2

Towards this end, that is, in the same year, the Libyan government donated money to the IDP to purchase land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land, with an area of 49,652 square meters, was covered by two titles: Transfer Certificate of Title Nos. RT-26520 (176616) 3 and RT-26521 (170567), 4 both registered in the name of IDP.

It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of its Articles of Incorporation:

Senator Mamintal Tamano 5Congressman Ali DimaporoCongressman Salipada PendatunDean Cesar Adib MajulSultan Harun Al-Rashid LucmanDelegate Ahmad AlontoCommissioner Datu Mama SinsuatMayor Aminkadra Abubakar 6


20

According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name of IDP, Martial Law was declared by the late President Ferdinand Marcos. Most of the members of the 1971 Board of Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and Congressman Al-Rashid Lucman flew to the Middle East to escape political persecution.

Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending groups, came out with a Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group and the Abbas Group as IDP board members to be null and void. The dispositive portion of the SEC Decision reads:

WHEREFORE, judgment is hereby rendered declaring the elections of both the petitioners 7 and respondents 8 as null and void for being violative of the Articles of Incorporation of petitioner corporation. With the nullification of the election of the respondents, the approved by-laws which they certified to this Commission as members of the Board of Trustees must necessarily be likewise declared null and void. However, before any election of the members of the Board of Trustees could be conducted, there must be an approved by-laws to govern the internal government of the association including the conduct of election. And since the election of both petitioners and respondents have been declared null and void, a vacuum is created as to who should adopt the by-laws and certify its adoption. To remedy this unfortunate situation that the association has found itself in, the members of the petitioning corporation are hereby authorized to prepare and adopt their by-laws for submission to the Commission. Once approved, an election of the members of the Board of Trustees shall immediately be called pursuant to the approved by-laws.

SO ORDERED. 9

Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision, and, thus, no valid election of the members of the Board of Trustees of IDP was ever called. Although the Carpizo Group 10 attempted to submit a set of by-laws, the SEC found that, aside from Engineer Farouk Carpizo and Atty. Musib Buat, those who prepared and adopted the by-laws were not bona fide members of the IDP, thus rendering the adoption of the by-laws likewise null and void.

On April 20, 1989, without having been properly elected as new members of the Board of Trustee of IDP, the Carpizo Group caused to be signed an alleged Board Resolution 11 of the IDP, authorizing the sale of the subject two parcels of land to the private respondent INC for a consideration of P22,343,400.00, which sale was evidenced by a Deed of Absolute Sale 12 dated April 20, 1989.


21

On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal Tamano, or the Tamano Group, filed a petition before the SEC, docketed as SEC Case No. 4012, seeking to declare null and void the Deed of Absolute Sale signed by the Carpizo Group and the INC since the group of Engineer Carpizo was not the legitimate Board of Trustees of the IDP.

Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an action for Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of the Regional Trial Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to clear the property of squatters and deliver complete and full physical possession thereof to INC. Likewise, INC filed a motion in the same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the Register of Deeds of Quezon City the owner's duplicate copy of TCT Nos. RT-26521 and RT-26520 covering the aforementioned two parcels of land, so that the sale in INC's favor may be registered and new titles issued in the name of INC. Mrs. Ligon was alleged to be the mortgagee of the two parcels of land executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco claimed to be in behalf of the Carpizo Group.

The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring, inter alia:

xxx xxx xxx

2. That the Intervenor has filed a case before the Securities and Exchange Commission (SEC) against Mr. Farouk Carpizo, et. al., who, through false schemes and machinations, succeeded in executing the Deed of Sale between the IDP and the Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of Sale is the subject of the case at bar;

3. That the said case before the SEC is docketed as Case No. 04012, the main issue of which is whether or not the aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void, hence, Intervenor's legal interest in the instant case. A copy of the said case is hereto attached as Annex "A";

4. That, furthermore, Intervenor herein is the duly constituted body which can lawfully and legally represent the Islamic Directorate of the Philippines;

xxx xxx xxx 13

Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by way of intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC. 14


22

Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioner's motion to intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues being raised by way of intervention are intra-corporate in nature, jurisdiction thereto properly pertaining to the SEC. 15

Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo Group but without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered Partial Judgment in Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its obligation under the Deed of Sale of clearing the subject lots of squatters and of delivering the actual possession thereof to INC. 16

Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-90-6937, treated INC as the rightful owner of the real properties and disposed as follows:

WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to plaintiff 17 the owner's copy of RT-26521 (170567) and RT-26520 (176616) in open court for the registration of the Deed of Absolute Sale in the latter's name and the annotation of the mortgage executed in her favor by herein defendant Islamic Directorate of the Philippines on the new transfer certificate of title to be issued to plaintiff.

SO ORDERED. 18

On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon "to deliver the owner's duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City for the purposes stated in the Order of March 2, 1992." 19

Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R No. SP-27973, assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on October 28, 1992. 20

Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No. 107751.

In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this wise:1. Declaring the by-laws submitted by the respondents 21 as unauthorized, and hence, null and void.2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into by Iglesia ni Kristo and the Islamic Directorate of the Philippines, Inc. 22 null and void;3. Declaring the election of the Board of Directors, 23 of the corporation from 1986 to 1991 as null and void;


23

4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat, as members of the IDP null and void.

Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012, but the same was denied on account of the fact that the decision of the case had become final and executory, no appeal having been taken therefrom. 25

INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil action for certiorari, docketed as CA-G.R SP No. 33295. On October 28, 1994, the court a quo promulgated a Decision in CA-G.R. SP No. 33295 granting INC's petition. The portion of the SEC Decision in SEC Case No. 4012 which declared the sale of the two (2) lots in question to INC as void was ordered set aside by the Court of Appeals.

Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994, submitting that the Court of Appeals gravely erred in:

1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;2) Encouraging multiplicity of suits; and3) Not applying the principles of estoppel and laches. 26

While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No. 107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon petition and affirmed the October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owner's duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City so that the Deed of Absolute Sale in INC's favor may be properly registered.

Before we rule upon the main issue posited in this petition, we would like to point out that our disposition in G.R. No. 107751 entitled, "Ligon v. Court of Appeals," promulgated on June 1, 1995, in no wise constitutes res judicata such that the petition under consideration would be barred if it were the ease. Quite the contrary, the requisites or res judicata do not obtain in the case at bench.

Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in personam, to wit:

Effect of judgment. — The effect of a judgment or final order rendered by a court or judge of the Philippines, having jurisdiction to pronounce the judgment or order, may be as follows:

xxx xxx xxx


24

(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to any other matter that could have been raised in relation thereto, conclusive between the parties and their successors in interest by title subsequent to the commencement of the action or special proceeding, litigating for the same thing and under the same title and in the same capacity;

(c) In any other litigation between the same parties or their successors in interest, that only is deemed to have been adjudged in a former judgment which appears upon its face to have been so adjudged, or which was actually and necessarily included therein or necessary thereto.

Section 49(b) enunciates the first concept of res judicata known as "bar by prior judgment," whereas, Section 49(c) is referred to as "conclusiveness of judgment."

There is "bar by former judgment" when, between the first case where the judgment was rendered, and the second case where such judgment is invoked, there is identity of parties, subject matter and cause of action. When the three identities are present, the judgment on the merits rendered in the first constitutes an absolute bar to the subsequent action. But where between the first case wherein judgment is rendered and the second case wherein such judgment is invoked, there is only identity of parties but there is no identity of cause of action, the judgment is conclusive in the second case, only as to those matters actually and directly controverted and determined, and not as to matters merely involved therein. This is what is termed "conclusiveness of judgment." 27

Neither of these concepts of res judicata find relevant application in the case at bench. While there may be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group, was only made an ancillary party in G.R. No. 107751 as intervenor. 28 It was never originally a principal party thereto. It must be noted that intervention is not an independent action, but is merely collateral, accessory, or ancillary to the principal action. It is just an interlocutory proceeding dependent on or subsidiary to the case between the originalparties. 29 Indeed, the IDP-Tamano Group cannot be considered a principal party in G.R. No. 107751 for purposes of applying the principle of res judicata since the contrary goes against the true import of the action of intervention as a mere subsidiary proceeding without an independent life apart from the principal action as well as the intrinsic character of the intervenor as a mere subordinate party in the main case whose right may be said to be only in aid of the right of the original party. 30 It is only in the present case, actually, where the IDP-Tamano Group became a principal party, as petitioner, with the Iglesia Ni Cristo, as private respondent. Clearly, there is no identity of parties in both cases.

In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751, was entitled, "Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines,


25

Defendant," 31 the IDP can not be considered essentially a formal party thereto for the simple reason that it was not duly represented by a legitimate Board of Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a case for Specific Performance with Damages, a mere action in personam, did not become final and executory insofar as the true IDP is concerned since petitioner corporation, for want of legitimate representation, was effectively deprived of its day in court in said case. Res inter alios judicatae nullum allis praejudicium faciunt. Matters adjudged in a cause do not prejudice those who were not parties to it. 32 Elsewise put, no person (natural or juridical) shall be affected by a proceeding to which he is a stranger. 33

Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a "bar by former judgment" will still not set in on the ground that the cause of action in the two cases are different. The cause of action in G.R. No. 107751 is the surrender of the owner's duplicate copy of the transfer certificates of title to the rightful possessor thereof, whereas the cause of action in the present case is the validity of the Carpizo Group-INC Deed of Absolute Sale.

Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed incidental to the resolution of the primary issue posed in said case which is: Who between Ligon and INC has the better right of possession over the owner's duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be considered determinative and conclusive on the matter of the validity of the sale for this particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause grave and irreparable injustice to IDP which never gave its consent to the sale, thru a legitimate Board of Trustees.

In any case, while it is true that the principle of res judicata is a fundamental component of our judicial system, it should be disregarded if its rigid application would involve the sacrifice of justice to technicality. 34

The main question though in this petition is: Did the Court of Appeals commit reversible error in setting aside that portion of the SEC's Decision in SEC Case No. 4012 which declared the sale of two (2) parcels of land in Quezon City between the IDP-Carpizo Group and private respondent INC null and void?

We rule in the affirmative.

There can be no question as to the authority of the SEC to pass upon the issue as to who among the different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly falling within the original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A:


26

Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnership or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines . . . .xxx xxx xxx

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:xxx xxx xxxc) Controversies in the selection or appointment of directors, trustees, officers, or managers of such corporations, partnerships or associations. . . . .

If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also declare who is not the legitimate IDP Board. This is precisely what the SEC did in SEC Case No. 4012 when it adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null andvoid. 35 By this ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo Group is a bogus Board of Trustees. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of ID property.

It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to pass upon the status of the Carpizo Group. As far back as October 3, 1986, the SEC, in Case No. 2687, 36 in a suit between the Carpizo Group and the Abbas Group, already declared the election of the Carpizo Group (as well as the Abbas Group) to the IDP Board as null and void for being violative of the Articles of Incorporation. 37 Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private respondent INC contracted is a fake Board.

Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora property, allegedly in the name of the IDP, have to be struck down for having been done without the consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the essential requisites of contracts:

There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;(2) Object certain which is the subject matter of the contract;(3) Cause of the obligation which is established.

All these elements must be present to constitute a valid contract. For, where even one is absent, the contract is void. As succinctly put by Tolentino, consent is essential for the existence of a


27

contract, and where it is wanting, the contract is non-existent. 38 In this case, the IDP, owner of the subject parcels of land, never gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent on the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is void and produces no effect whatsoever.

The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or substantially all assets of the corporation:

Sec. 40. Sale or other disposition of assets. — Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

xxx xxx xxx

The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the corporation should have been obtained. These twin requirements were not met as the Carpizo Group which voted to sell the Tandang Sora property was a fake Board of Trustees, and those whose names and signatures were affixed by the Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale were, from all indications, not bona fide members of the IDP as they were made to appear to be. Apparently, there are only fifteen (15) official members of the petitioner corporation including the eight (8) members of the Board of Trustees. 39


28

All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent INC was intrinsically void ab initio.

Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made outside of its jurisdiction, the same not being an intra-corporate dispute.

The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale null and void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack of consent of the IDP, owner of the subject property. No end of substantial justice will be served if we reverse the SEC's conclusion on the matter, and remand the case to the regular courts for further litigation over an issue which is already determinable based on what we have in the records.

It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board of Trustees in Civil Case. No. Q-90-6937, a case for Specific Performance with Damages between INC and the Carpizo Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have been granted ample opportunity before the regional trial court to shed light on the true status of the Carpizo Board and settled the matter as to the validity of the sale then and there. But INC, wanting to acquire the property at all costs and threatened by the participation of the legitimate IDP Board in the civil suit, argued for the denial of the motion averring, inter alia, that the issue sought to be litigated by the movant is intra-corporate in nature and outside the jurisdiction of the regional trial court. 40 As a result, the motion for intervention was denied. When the Decision in SEC Case No. 4012 came out nullifying the sale, INC came forward, this time, quibbling over the issue that it is the regional trial court, and not the SEC, which has jurisdiction to rule on the validity of the sale. INC is here trifling with the courts. We cannot put a premium on this clever legal maneuverings of private respondent which, if countenanced, would result in a failure of justice.

Furthermore, the Court observes that the INC bought the questioned property from the Carpizo Group without even seeing the owner's duplicate copy of the titles covering the property. This is very strange considering that the subject lot is a large piece of real property in Quezon City worth millions, and that under the Torrens System of Registration, the minimum requirement for one to be a good faith buyer for value is that the vendee at least sees the owner's duplicate copy of the title and relies upon the same. 41 The private respondent, presumably knowledgeable on the aforesaid workings of the Torrens System, did not take heed of this and nevertheless went through with the sale with undue haste. The unexplained eagerness of INC to buy this valuable piece of land in Quezon City without even being presented with the owner's copy of the titles casts very serious doubt on the rightfulness of its position as vendee in the transaction.

WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange Commission dated July 5, 1993 in SEC Case No. 4012 is


29

REINSTATED. The Register of Deeds of Quezon City is hereby ordered to cancel the registration of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo, if one has already been made. If new titles have been issued in the name of Iglesia Ni Cristo, the Register of Deeds is hereby ordered to cancel the same, and issue new ones in the name of petitioner Islamic Directorate of the Philippines. Petitioner corporation is ordered to return to private respondent whatever amount has been initially paid by INC as consideration for the property with legal interest, if the same was actually received by IDP. Otherwise, INC may run after Engineer Farouk Carpizo and his group for the amount of money paid.

G.R. No. L-60502 July 16, 1991PEDRO LOPEZ DEE, petitioner, vs.SECURITIES AND EXCHANGE COMMISSION, HEARING OFFICER EMMANUEL SISON, NAGA TELEPHONE CO., INC., COMMUNICATION SERVICES, INC., LUCIANO MAGGAY, AUGUSTO FEDERIS, NILDA RAMOS, FELIPA JAVALERA, DESIDERIO SAAVEDRA, respondents.

G.R. No. L-63922 July 16, 1991JUSTINO DE JESUS, SR., PEDRO LOPEZ DEE, JULIO LOPEZ DEE, and VICENTE TORDILLA, JR., petitioners,vs.INTERMEDIATE APPELLATE COURT, LUCIANO MAGGAY, NILDA I. RAMOS, DESIDERIO SAAVEDRA, AUGUSTO FEDERIS, ERNESTO MIGUEL, COMMUNICATION SERVICES, INC., and NAGA TELEPHONE COMPANY, INC., respondents.

Naga Telephone Company, Inc. was organized in 1954, the authorized capital was P100,000.00. In 1974 Naga Telephone Co., Inc. (Natelco for short) decided to increase its authorized capital to P3,000,000.00. As required by the Public Service Act, Natelco filed an application for the approval of the increased authorized capital with the then Board of Communications under BOC Case No. 74-84. On January 8, 1975, a decision was rendered in said case, approving the said application subject to certain conditions, among which was:

3. That the issuance of the shares of stocks will be for a period of one year from the date hereof, "after which no further issues will be made without previous authority from this Board."

Pursuant to the approval given by the then Board of Communications, Natelco filed its Amended Articles of Incorporation with the Securities and Exchange Commission (SEC for short). When the amended articles were filed with the SEC, the original authorized capital of P100,000.00 was already paid. Of the increased capital of P2,900,000.00 the subscribers subscribed to P580,000.00 of which P145,000 was fully paid.


30

The capital stock of Natelco was divided into 213,000 common shares and 87,000 preferred shares, both at a par value of P10.00 per shares.

On April 12, 1977, Natelco entered into a contract with Communication Services, Inc. (CSI for short) for the "manufacture, supply, delivery and installation" of telephone equipment. In accordance with this contract, Natelco issued 24,000 shares of common stocks to CSI on the same date as part of the downpayment. On May 5, 1979, another 12,000 shares of common stocks were issued to CSI. In both instances, no prior authorization from the Board of Communications, now the National Telecommunications Commission, was secured pursuant to the conditions imposed by the decision in BOC Case NO. 74-84 aforecited (Rollo, Vol. III, Memorandum for private respondent Natelco, pp. 814-816).

On May 19, 1979, the stockholders of the Natelco held their annual stockholders' meeting to elect their seven directors to their Board of Directors, for the year 1979-1980. In this election Pedro Lopez Dee (Dee for short) was unseated as Chairman of the Board and President of the Corporation, but was elected as one of the directors, together with his wife, Amelia Lopez Dee (Rollo, Vol. III, Memorandum for private respondents, p. 985; p. 2).

In the election CSI was able to gain control of Natelco when the latter's legal counsel, Atty. Luciano Maggay (Maggay for short) won a seat in the Board with the help of CSI. In the reorganization Atty. Maggay became president (Ibid., Memorandum for Private Respondent Natelco, p. 811).

The following were elected in the May 19, 1979 election: Atty. Luciano Maggay, Mr. Augusto Federis, Mrs. Nilda Ramos, Ms. Felipa Javalera, Mr. Justino de Jesus, Sr., Mr. Pedro Lopez Dee and Mrs Amelia C. Lopez Dee. The last three named directors never attended the meetings of the Maggay Board. The members of the Maggay Board who attended its meetings were Maggay. Federis, Ramos and Javalera. The last two were and are CSI representatives (Ibid., p. 812).

Petitioner Dee having been unseated in the election, filed a petition in the SEC docketed as SEC Case No. 1748, questioning the validity of the elections of May 19, 1979 upon the main ground that there was no valid list of stockholders through which the right to vote could be determined (Rollo, Vol. I, pp. 254-262-A). As prayed for in the petition (Ibid., p. 262), a restraining order was issued by the SEC placing petitioner and the other officers of the 1978-1979 Natelco Board in hold-over capacity (Rollo, Vol. II, Reply, p. 667).

The SEC restraining order was elevated to the Supreme Court in G.R. No. 50885 where the enforcement of the SEC restraining order was restrained. Private respondents therefore, replaced the hold-over officers (Rollo, Vol. 11, p. 897).

During the tenure of the Maggay Board, from June 22, 1979 to March 10, 1980, it did not reform the contract of April 12, 1977, and entered into another contract with CSI for the supply


31

and installation of additional equipment but also issued to CSI 113,800 shares of common stock (Ibid., p. 812).

Subsequently, the Supreme Court dismissed the petition in G.R. No. 50885 upon the ground that the same was premature and the Commission should be allowed to conduct its hearing on the controversy. The dismissal of the petition resulted in the unseating of the Maggay group from the board of directors of Natelco in a "hold-over" capacity (Rollo, Vol. II, p. 533).

In the course of the proceedings in SEC Case No. 1748, respondent hearing officer issued an order on June 23, 1981, declaring: (1) that CSI is a stockholder of Natelco and, therefore, entitled to vote; (2) that unexplained 16,858 shares of Natelco appear to have been issued in excess to CSI which should not be allowed to vote; (3) that 82 shareholders with their corresponding number of shares shall be allowed to vote; and (4) consequently, ordering the holding of special stockholder' meeting to elect the new members of the Board of Directors for Natelco based on the findings made in the order as to who are entitled to vote (Rollo, Vol. 1, pp. 288-299).

From the foregoing order dated June 23, 1981, petitioner Dee filed a petition for certiorari/appeal with the SEC en banc. The petition/appeal was docketed as SEC-AC NO. 036. Thereafter, the Commission en banc rendered a decision on April 5, 1982, the dispositive part of which leads:

Now therefore, the Commission en banc resolves to sustain the order of the Hearing Officer; to dismiss the petition/appeal for lack of merit; and order new elections as the Hearing Officer shall set after consultations with Natelco officers. For the protection of minority stockholders and in the interest of fair play and justice, the Hearing Officer shall order the formation of a special committee of three, one from the respondents (other than Natelco), one from petitioner, and the Hearing Officer as Chairman to supervise the election.

It remains to state that the Commission en banc cannot pass upon motions belatedly filed by petitioner and respondent Natelco to introduce newly discovered evidence — any such evidence may be introduced at hearings on the merits of SEC Case No. 1748.

SO ORDERED. (Rollo, Vol. I, p. 24).

On April 21, 1982, petitioner filed a motion for reconsideration (Rollo, Vol. I, pp. 25-30). Likewise, private respondent Natelco filed its motion for reconsideration dated April 21, 1982 (Ibid., pp. 32-51).

Pending resolution of the motions for reconsideration, on May 4, 1982, respondent healing officer without waiting for the decision of the commission en banc to become final and


32

executory rendered an order stating that the election for directors would be held on May 22, 1982 (Ibid., pp. 300-301).

On May 20, 1982, the SEC en banc denied the motions for reconsideration (Rollo, Vol. II, pp. 763-765).

Meanwhile on May 20, 1982 (G.R. No. 63922), petitioner Antonio Villasenor (as plaintiff) filed Civil Case No. 1507 with the Court of First Instance of Camarines Sur, Naga City, against private respondents and co-petitioners, de Jesus, Tordilla and the Dee's all defendants therein, which was raffled to Branch I, presided over by Judge Delfin Vir Sunga (Rollo, G.R. No. 63922; pp. 25-30). Villasenor claimed that he was an assignee of an option to repurchase 36,000 shares of common stocks of Natelco under a Deed of Assignment executed in his favor (Rollo, p. 31). The defendants therein (now private respondents), principally the Maggay group, allegedly refused to allow the repurchase of said stocks when petitioner Villasenor offered to defendant CSI the repurchase of said stocks by tendering payment of its price (Rollo, p. 26 and p. 78). The complaint therefore, prayed for the allowance to repurchase the aforesaid stocks and that the holding of the May 22, 1982 election of directors and officers of Natelco be enjoined (Rollo, pp. 28-29).

A restraining order dated May 21, 1982 was issued by the lower court commanding desistance from the scheduled election until further orders (Rollo, p. 32).

Nevertheless, on May 22, 1982, as scheduled, the controlling majority of the stockholders of the Natelco defied the restraining order, and proceeded with the elections, under the supervision of the SEC representatives (Rollo, Vol. III, p. 985); p. 10; G.R. No. 60502).

On May 25, 1982, the SEC recognized the fact that elections were duly held, and proclaimed that the following are the "duly elected directors" of the Natelco for the term 1982-1983:

Despite service of the order of May 25, 1982, the Lopez Dee group headed by Messrs. Justino De Jesus and Julio Lopez Dee kept insisting no elections were held and refused to vacate their positions (Rollo, Vol. III, p. 985; p. 11).

On May 28, 1982, the SEC issued another order directing the hold-over directors and officers to turn over their respective posts to the newly elected directors and officers and directing the Sheriff of Naga City, with the assistance of PC and INP of Naga City, and other law enforcement agencies of the City or of the Province of Camarines Sur, to enforce the aforesaid order (Rollo, Vol. 11, pp. 577-578).

On May 29, 1982, the Sheriff of Naga City, assisted by law enforcement agencies, installed the newly elected directors and officers of the Natelco, and the hold-over officers peacefully vacated their respective offices and turned-over their functions to the new officers (Rollo, Vol. III, p. 985; pp. 12-13).


33

On June 2, 1982, a charge for contempt was filed by petitioner Villasenor alleging that private respondents have been claiming in press conferences and over the radio airlanes that they actually held and conducted elections on May 22, 1982 in the City of Naga and that they have a new set of officers, and that such acts of herein private respondents constitute contempt of court (G.R. 63922; Rollo, pp. 35-37).

On September 7, 1982, the lower court rendered judgment on the contempt charge, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered:

1. Declaring respondents, CSI Nilda Ramos, Luciano Maggay, Desiderio Saavedra, Augusto Federis and Ernesto Miguel, guilty of contempt of court, and accordingly punished with imprisonment of six (6) months and to pay fine of P1,000.00 each; and

2. Ordering respondents, CSI Nilda Ramos, Luciano Maggay, Desiderio Saavedra, Augusto Federis and Ernesto Miguel, and those now occupying the positions of directors and officers of NATELCO to vacate their respective positions therein, and ordering them to reinstate the hold-over directors and officers of NATELCO, such as Pedro Lopez Dee as President, Justino de Jesus, Sr., as Vice President, Julio Lopez Dee as Treasurer and Vicente Tordilla, Jr. as Secretary, and others referred to as hold-over directors and officers of NATELCO in the order dated May 28, 1982 of SEC Hearing Officer Emmanuel Sison, in SEC Case No. 1748 (Exh. 6), by way of RESTITUTION, and consequently, ordering said respondents to turn over all records, property and assets of NATELCO to said hold-over directors and officers. (Ibid., Rollo, p. 49).

The trial judge issued an order dated September 10, 1982 directing the respondents in the contempt charge to "comply strictly, under pain of being subjected to imprisonment until they do so" (Ibid., p. 50). The order also commanded the Deputy Provincial Sheriff, with the aid of the PC Provincial Commander of Camarines Sur and the INP Station Commander of Naga City to "physically remove or oust from the offices or positions of directors and officers of NATELCO, the aforesaid respondents (herein private respondents) . . . and to reinstate and maintain, the hold-over directors and officers of NATELCO referred to in the order dated May 28, 1982 of SEC Hearing Officer Emmanuel Sison." (Ibid.).

Private respondents filed on September 17, 1982, a petition for certiorari and prohibition with preliminary injunction or restraining order against the CFI Judge of Camarines Sur, Naga City and herein petitioners, with the then Intermediate Appellate Court which issued a resolution ordering herein petitioners to comment on the petition, which was complied with, and at the same time temporarily refrained from implementing and/or enforcing the questioned judgment and order of the lower court (Rollo, p. 77), Decision of CA, p. 2).


34

On April 14, 1983, the then Intermediate Appellate Court, rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered as follows:

1. Annuling the judgment dated September 7, 1982 rendered by respondent judge on the contempt charge, and his order dated September 10, 1982, implementing said judgment;

2. Ordering the "hold-over" directors and officers of NATELCO to vacate their respective offices;

3. Directing respondents to restore or re-establish petitioners (private respondents in this case) who were ejected on May 22, 1982 to their respective offices in the NATELCO, . . .;

4. Prohibiting whoever may be the successor of respondent Judge from interfering with the proceedings of the Securities and Exchange Commission in SE-CAC No. 036;

xxx xxx xxx

(Rollo, p. 88).

The order of re-implementation was issued, and, finally, the Maggay group has been restored as the officers of the Natelco (Rollo, G.R. No. 60502, p. 985; p. 37).

Hence, these petitions involve the same parties and practically the same issues. Consequently, in the resolution of the Court En Banc dated August 23, 1983, G.R. No. 63922 was consolidated with G.R. No. 60502.

In G.R. No. 60502 — In a resolution issued by the Court En Banc dated March 22, 1983, the Court gave due course to the petition and required the parties to submit their respective memoranda (Rollo, Resolution, p. 638-A; Vol. II).

In G.R. No. 60502

The main issues in this case are:

(1) Whether or not the Securities and Exchange Commission has the power and jurisdiction to declare null and void shares of stock issued by NATELCO to CSI for violation of Sec. 20 (h) of the Public Service Act;

(2) Whether or not the issuance of 113,800 shares of Natelco to CSI made during the pendency of SEC Case No. 1748 in the Securities and Exchange Commission was valid;


35

(3) Whether or not Natelco stockholders have a right of preemption to the 113,800 shares in question; and

(4) Whether or not the private respondents were duly elected to the Board of Directors of Natelco at an election held on May 22, 1982.

In G.R. No. 63922

The crucial issue to be resolved is whether or not the trial judge has jurisdiction to restrain the holding of an election of officers and directors of a corporation. The petitions are devoid of merit.

In G.R. No. 60502

I

It is the contention of petitioner that the Securities and Exchange Commission En Banc committed grave abuse of discretion when, in its decision dated April 5, 1982, in SEC-AC No. 036, it refused to declare void the shares of stock issued by Natelco to CSI allegedly in violation of Sec. 20 (h) of the Public Service Act. This section requires prior administrative approval of any transfer or sale of shares of stock of any public service which vest in the transferee more than forty percentum of the subscribed capital of the said public service.

Section 5 of P.D. No. 902-A, as amended, enumerates the jurisdiction of the Securities and Exchange Commission:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over Corporations, partnerships and other forms of associations, registered with it as expressly granted under the existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting to 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 the Commission.

(b) 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;


36

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

d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree, (As added by PD 1758)

In other words, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between corporation, partnership or association and the public; (b) between the corporation, partnership, or association and its stockholders, partners, members or officers; (c) between the corporation, partnership or association and the state insofar as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners, or associates themselves (Union Glass & Container Corp. vs. SEC, 126 SCRA 31 [1983]).

The jurisdiction of the SEC is limited to matters intrinsically connected with the regulation of corporations, partnerships and associations and those dealing with internal affairs of such entities; P.D. 902-A does not confer jurisdiction to SEC over all matters affecting corporations (Pereyra vs. IAC, 181 SCRA 244 [1990]; Sales vs. SEC, 169 SCRA 121 [1989]).

The jurisdiction of the SEC in SEC Case No. 1748 is limited to deciding the controversy in the election of the directors and officers of Natelco. Thus, the SEC was correct when it refused to rule on whether the issuance of the shares of Natelco stocks to CSI violated Sec. 20 (h) of the Public Service Act.

The SEC ruling as to the issue involving the Public Service Act, Section 20 (h), asserts that the Commission En Banc is not empowered to grant much less cancel franchise for telephone and communications, and therefore has no authority to rule that the issuance and sale of shares would in effect constitute a violation of Natelco's secondary franchise. It would be in excess of jurisdiction on our part to decide that a violation of our public service laws has been committed. The matter is better brought to the attention of the appropriate body for determination. Neither can the SEC provisionally decide the issue because it is only vested with the power to grant or revoke the primary corporate franchise. The SEC is empowered by P.D. 902-A to decide intra-corporate controversies and that is precisely the only issue in this case.

II

The issuance of 113,800 shares of Natelco stock to CSI made during the pendency of SEC Case No. 1748 in the Securities and Exchange Commission was valid. The findings of the SEC En Banc as to the issuance of the 113,800 shares of stock was stated as follows:


37

But the issuance of 113,800 shares were (sic) pursuant to a Board Resolution and stockholders' approval prior to May 19, 1979 when CSI was not yet in control of the Board or of the voting shares. There is distinction between an order to issue shares on or before May 19, 1979 and actual issuance of the shares after May 19, 1979. The actual issuance, it is true, came during the period when CSI was in control of voting shares and the Board (if they were in fact in control but only pursuant to the original Board and stockholders' orders, not on the initiative to the new Board, elected May 19, 1979, which petitioners are questioning. The Commission en banc finds it difficult to see how the one who gave the orders can turn around and impugn the implementation of the orders lie had previously given. The reformation of the contract is understandable for Natelco lacked the corporate funds to purchase the CSI equipment.

xxx xxx xxx

Appellant had raise the issue whether the issuance of 113,800 shares of stock during the incumbency of the Maggay Board which was allegedly CSI controlled, and while the case was sub judice, amounted to unfair and undue advantage. This does not merit consideration in the absence of additional evidence to support the proposition.

In effect, therefore, the stockholders of Natelco approved the issuance of stock to CSI

III

While the group of Luciano Maggay was in control of Natelco by virtue of the restraining order issued in G.R. No. 50885, the Maggay Board issued 113,800 shares of stock to CSI Petitioner said that the Maggay Board, in issuing said shares without notifying Natelco stockholders, violated their right of pre-emption to the unissued shares.

This Court in Benito vs. SEC, et al., has ruled that:

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 issues 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 (sic) claim a dilution of interest (Benito vs. SEC, et al., 123 SCRA 722).

The questioned issuance of the 113,800 stocks is not invalid even assuming that it was made without notice to the stockholders as claimed by the petitioner. The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders meeting is


38

required to consider it because additional issuance of shares of stocks does not need approval of the stockholders. Consequently, no pre-emptive right of Natelco stockholders was violated by the issuance of the 113,800 shares to CSI.

IV

Petitioner insists that no meeting and election were held in Naga City on May 22, 1982 as directed by respondent Hearing Officer. This fact is shown by the Sheriffs return of a restraining order issued by the Court of First Instance of Camarines Sur in Case No. 1505 entitled "Antonio Villasenor v. Communications Service Inc, et al." (Rollo, Vol. 1, p. 309).

There is evidence of the fact that the Natelco special stockholders' meeting and election of members of the Board of Directors of the corporation were held at its office in Naga City on May 22, 1982 as shown when the Hearing Officer issued an order on May 25, 1982, declaring the stockholders named therein as corporate officers duly elected for the term 1982-1983.

More than that, private respondents were in fact charged with contempt of court and found guilty for holding the election on May 22, 1982, in defiance of the restraining order issued by Judge Sunga (Rollo, Vol. II, p. 750).

It is, therefore, very clear from the records that an election was held on May 22, 1982 at the Natelco Offices in Naga City and its officers were duly elected, thereby rendering the issue of election moot and academic, not to mention the fact that the election of the Board of Directors/Officers has been held annually, while this case was dragging for almost a decade.

The contempt charge against herein private respondents was predicated on their failure to comply with the restraining order issued by the lower court on May 21, 1982, enjoining them from holding the election of officers and directors of Natelco scheduled on May 22, 1982. The SEC en banc, in its decision of April 5, 1982, directed the holding of a new election which, through a conference attended by the hold-over directors of Natelco accompanied by their lawyers and presided by a SEC hearing officer, was scheduled on May 22, 1982 (Rollo, p. 59). Contrary to the claim of petitioners that the case is within the jurisdiction of the lower court as it does not involve an intra-corporate matter but merely a claim of a private party of the right to repurchase common shares of stock of Natelco and that the restraining order was not meant to stop the election duly called for by the SEC, it is undisputed that the main objective of the lower court's order of May 21, 1982 was precisely to restrain or stop the holding of said election of officers and directors of Natelco, a matter purely within the exclusive jurisdiction of the SEC (P.D. No. 902-A, Section 5). The said restraining order reads in part:

. . . A temporary restraining order is hereby issued, directing defendants (herein respondents), their agents, attorneys as well as any and all persons, whether public officers or private individuals to desist from conducting and holding, in any manner whatsoever, an election of the directors and officers of the Naga Telephone Co. (Natelco). . . . (Rollo, P. 32).


39

Indubitably, the aforesaid restraining order, aimed not only to prevent the stockholders of Natelco from conducting the election of its directors and officers, but it also amounted to an injunctive relief against the SEC, since it is clear that even "public officers" (such as the Hearing Officer of the SEC) are commanded to desist from conducting or holding the election "under pain of punishment of contempt of court" (Ibid.) The fact that the SEC or any of its officers has not been cited for contempt, along with the stockholders of Natelco, who chose to heed the lawful order of the SEC to go on with the election as scheduled by the latter, is of no moment, since it was precisely the acts of herein private respondents done pursuant to an order lawfully issued by an administrative body that have been considered as contemptuous by the lower court prompting the latter to cite and punish them for contempt (Rollo, p. 48).

Noteworthy is the pertinent portion of the judgment of the lower court which states:

Certainly, this Court will not tolerate, or much less countenance, a mere Hearing Officer of the Securities and Exchange Commission, to render a restraining order issued by it (said Court) within its jurisdiction, nugatory and ineffectual and abet disobedience and even defiance by individuals and entities of the same. . . . (Rollo, p. 48).

Finally, in the case of Philippine Pacific Fishing Co., Inc. vs. Luna, 12 SCRA 604, 613 [1983], this Tribunal stated clearly the following rule:

Nowhere does the law (P.D. No. 902-A) empower any Court of First Instance to interfere with the orders of the Commission (SEC). Not even on grounds of due process or jurisdiction. The Commission is, conceding arguendo a possible claim of respondents, at the very least, a co-equal body with the Courts of First Instance. Even as such co-equal, one would have no power to control the other. But the truth of the matter is that only the Supreme Court can enjoin and correct any actuation of the Commission.

Accordingly, it is clear that since the trial judge in the lower court (CFI of Camarines Sur) did not have jurisdiction in issuing the questioned restraining order, disobedience thereto did not constitute contempt, as it is necessary that the order be a valid and legal one. It is an established rule that the court has no authority to punish for disobedience of an order issued without authority (Chanco v. Madrilejos, 9 Phil. 356; Angel Jose Realty Corp. v. Galao, et al., 76 Phil. 201).

Finally, it is well-settled that the power to punish for contempt of court should be exercised on the preservative and not on the vindictive principle. Only occasionally should the court invoke its inherent power in order to retain that respect without which the administration of justice must falter or fail (Rivera v. Florendo, 144 SCRA 643, 662-663 [1986]; Lipata v. Tutaan, 124 SCRA 880 [1983]).

PREMISES CONSIDERED, both petitioners are hereby DISMISSED for lack of merit.


40

[G.R. No. 142936. April 17, 2002]PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners, vs. ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.

Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMILs contractual debts to respondent.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 57610. The decretal portion of the challenged Decision reads as follows:

WHEREFORE, the judgment appealed from is hereby AFFIRMED.[2]

The Facts

The factual antecedents of the case are summarized by the Court of Appeals as follows:

In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly organized, existing, and operating under the laws of the Philippines, with office and principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while the defendant [herein petitioner] Philippine National Bank (herein referred to as PNB), is a semi-government corporation duly organized, existing and operating under the laws of the Philippines, with office and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semi-government corporation and the sugar arm of the PNB, with office and principal place of business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating under the 1975 laws of the Philippines, and had its business office before 1975 at Del Carmen,


41

Floridablanca, Pampanga; that the plaintiff is engaged in the business of general construction for the repairs and/or construction of different kinds of machineries and buildings; that on August 26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL that were earlier foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311; that the defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession of the assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a contract for the plaintiff to perform the following, to wit

(a) Construction of one (1) power house building;

(b) Construction of three (3) reinforced concrete foundation for three (3) units 350 KW diesel engine generating set[s];

(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo generator sets;

(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating set[s];

(e) Installation of turbine and diesel generating sets including transformer, switchboard, electrical wirings and pipe provided those stated units are completely supplied with their accessories;

(f) Relocating of 2,400 V transmission line, demolition of all existing concrete foundation and drainage canals, excavation, and earth fillings all for the total amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached as Annex A and made an integral part of this complaint;

that aside from the work contract mentioned-above, the defendant PASUMIL required the plaintiff to perform extra work, and provide electrical equipment and spare parts, such as:

(a) Supply of electrical devices;

(b) Extra mechanical works;

(c) Extra fabrication works;

(d) Supply of materials and consumable items;


42

(e) Electrical shop repair;

(f) Supply of parts and related works for turbine generator;

(g) Supply of electrical equipment for machinery;

(h) Supply of diesel engine parts and other related works including fabrication of parts.

that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to P527,263.80, as shown in the Certification of the chief accountant of the PNB, a machine copy of which is appended as Annex C of the complaint; that out of said unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to the plaintiff of P14,000.00, in broken amounts, covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO, failed and refused to pay the plaintiff their just, valid and demandable obligation; that the President of the NASUDECO is also the Vice-President of the PNB, and this official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets of the defendant PASUMIL, and these defendants all benefited from the works, and the electrical, as well as the engineering and repairs, performed by the plaintiff; that because of the failure and refusal of the defendants to pay their just, valid, and demandable obligations, plaintiff suffered actual damages in the total amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the professional services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of attorneys fees. Accordingly, the plaintiff prayed that judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL, jointly and severally to wit:

(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest of 14% from the time the obligation falls due and demandable;

(2) Condemning the defendants to pay attorneys fees amounting to 25% of the amount claim;

(3) Ordering the defendants to pay the costs of the suit.

The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that the complaint failed to state sufficient allegations to establish a cause of action against both defendants, inasmuch as there is lack or want of privity of contract between the plaintiff and the two defendants, the PNB and NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the case law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.


43

The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same order, that court directed the defendants to file their answer to the complaint within 15 days.

In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit:

That the complaint does not state a sufficient cause of action against the defendant NASUDECO because: (a) NASUDECO is not x x x privy to the various electrical construction jobs being sued upon by the plaintiff under the present complaint; (b) the taking over by NASUDECO of the assets of defendant PASUMIL was solely for the purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial law powers of the President under the Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No. 311) authorized or commanded the PNB or its subsidiary corporation, the NASUDECO, to assume the corporate obligations of PASUMIL as that being involved in the present case; and, (d) all that was mentioned by the said letter of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its subsidiary corporation the NASUDECO, to make a study of, and submit [a] recommendation on the problems concerning the same.

By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the present suit, which it [labeled] as unfounded or baseless, the defendant NASUDECO was constrained to litigate and incur litigation expenses in the amount of P50,000.00, which plaintiff should be sentenced to pay. Accordingly, NASUDECO prayed that the complaint be dismissed and on its counterclaim, that the plaintiff be condemned to pay P50,000.00 in concept of attorneys fees as well as exemplary damages.

In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1) the complaint states no cause of action against the defendant PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and that the alleged services rendered by the plaintiff to the defendant PASUMIL upon which plaintiffs suit is erected, was rendered long before PNB took possession of the assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose of reconditioning the sugar central so that PASUMIL may resume its operations in time for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of PASUMIL, let alone that for which the present action is brought; (4) that PNBs management and operation under LOI No. 311 did not refer to any asset of PASUMIL which the PNB had to acquire and thereafter [manage], but only to those which were foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5) that conformably to LOI No. 311, on August 15, 1975, the PNB and the Development Bank of the Philippines (DBP) entered into a Redemption Agreement whereby DBP sold, transferred and conveyed in favor of the PNB, by way of redemption, all its (DBP) rights and interest in and over the foreclosed real and/or personal properties of PASUMIL, as shown in Annex C which is made an integral part of the


44

answer; (6) that again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and interest in and under the above Redemption Agreement. This is shown in Annex D which is also made an integral part of the answer; [7] that as a consequence of the said Deed of Assignment, PNB on October 21, 1975 ceased to managed and operate the above-mentioned assets of PASUMIL, which function was now actually transferred to NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had become moot and academic because of the execution of the said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate obligations of PASUMIL, including the alleged obligation upon which this present suit was brought; and [9] that, at most, what was granted to PNB in this respect was the authority to make a study of and submit recommendation on the problems concerning the claims of PASUMIL creditors, under sub-par. 5 LOI No. 311.

In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur expenses in this case, hence it is entitled to claim attorneys fees in the amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay defendant PNB the sum of P50,000.00 as attorneys fees, aside from exemplary damages in such amount that the court may seem just and equitable in the premises.

Summons by publication was made via the Philippines Daily Express, a newspaper with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant PASUMIL, which was thereafter declared in default as shown in the August 7, 1981 Order issued by the Trial Court.

After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally the former the following:

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a corporation to take over and operate the business of another corporation, while disavowing or repudiating any responsibility, obligation or liability arising therefrom.[4]

Hence, this Petition.[5]

Issues


45

In their Memorandum, petitioners raise the following errors for the Courts consideration:

I

The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid corporate debts of PASUMIL, a corporation whose corporate existence has not been legally extinguished or terminated, simply because of petitioners[] take-over of the management and operation of PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311.

II

The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415.[6]

Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of PASUMIL to respondent.

This Courts Ruling

The Petition is meritorious.

Main Issue:Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of Court.[7] To this rule, however, there are some exceptions enumerated in Fuentes v. Court of Appeals.[8] After a careful scrutiny of the records and the pleadings submitted by the parties, we find that the lower courts misappreciated the evidence presented.[9] Overlooked by the CA were certain relevant facts that would justify a conclusion different from that reached in the assailed Decision.[10]

Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their takeover of the latters foreclosed assets did not make them assignees. On the other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity and, as such, jointly and severally held liable for PASUMILs unpaid obligation.

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a


46

continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts.[11]

Piercing the CorporateVeil Not Warranted

A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence.[12] It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related.[13] This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation.[14] For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled[15] only when it becomes a shield for fraud, illegality or inequity committed against third persons.[16]

Hence, any application of the doctrine of piercing the corporate veil should be done with caution.[17] A court should be mindful of the milieu where it is to be applied.[18] It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights.[19] The wrongdoing must be clearly and convincingly established; it cannot be presumed.[20] Otherwise, an injustice that was never unintended may result from an erroneous application.[21]

This Court has pierced the corporate veil to ward off a judgment credit,[22] to avoid inclusion of corporate assets as part of the estate of the decedent,[23] to escape liability arising from a debt,[24] or to perpetuate fraud and/or confuse legitimate issues[25] either to promote or to shield unfair objectives[26] or to cover up an otherwise blatant violation of the prohibition against forum-shopping.[27] Only in these and similar instances may the veil be pierced and disregarded.[28]

The question of whether a corporation is a mere alter ego is one of fact.[29] Piercing the veil of corporate fiction may be allowed only if the following elements concur: (1) control -- not mere stock control, but complete domination -- not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiffs legal right; and (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of.[30]

We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL,


47

there is no showing that their control over it warrants the disregard of corporate personalities.[31] Second, there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person.[32] Third, respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL.[33]

Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule.[34] However, it utterly failed to discharge this burden;[35] it failed to establish by competent evidence that petitioners separate corporate veil had been used to conceal fraud, illegality or inequity.[36]

While we agree with respondents claim that the assets of the National Sugar Development Corporation (NASUDECO) can be easily traced to PASUMIL,[37] we are not convinced that the transfer of the latters assets to petitioners was fraudulently entered into in order to escape liability for its debt to respondent.[38]

A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the highest bidder at the public auction conducted.[39] The bank was justified in foreclosing the mortgage, because the PASUMIL account had incurred arrearages of more than 20 percent of the total outstanding obligation.[40] Thus, DBP had not only a right, but also a duty under the law to foreclose the subject properties.[41]

Pursuant to LOI No. 189-A[42] as amended by LOI No. 311,[43] PNB acquired PASUMILs assets that DBP had foreclosed and purchased in the normal course. Petitioner bank was likewise tasked to manage temporarily the operation of such assets either by itself or through a subsidiary corporation.[44]

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act No. 3135.[45] These assets were later conveyed to PNB for a consideration, the terms of which were embodied in the Redemption Agreement.[46] PNB, as successor-in-interest, stepped into the shoes of DBP as PASUMILs creditor.[47] By way of a Deed of Assignment,[48] PNB then transferred to NASUDECO all its rights under the Redemption Agreement.

In Development Bank of the Philippines v. Court of Appeals,[49] we had the occasion to resolve a similar issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque Minings unpaid obligations to Remington Industrial Sales Corporation (Remington) after the two banks had foreclosed the assets of Marinduque Mining. We likewise held that Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining to justify the piercing of the corporate veil.


48

In the instant case, the CA erred in affirming the trial courts lifting of the corporate mask.[50] The CA did not point to any fact evidencing bad faith on the part of PNB and its transferee.[51] The corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or defend crime.[52] None of the foregoing exceptions was shown to exist in the present case.[53] On the contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot allow.

No Merger or Consolidation

Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of the operations of PASUMIL did not involve any corporate merger or consolidation, because the latter had never lost its separate identity as a corporation.

A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business.[54]

The merger, however, does not become effective upon the mere agreement of the constituent corporations.[55] Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them.[56] For a valid merger or consolidation, the approval by the Securities and Exchange Commission (SEC) of the articles of merger or consolidation is required.[57] These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations.[58]

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code[59] was not followed.

In fact, PASUMILs corporate existence, as correctly found by the CA, had not been legally extinguished or terminated.[60] Further, prior to PNBs acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the formers obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another P14,000.

Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent.[61] LOI No. 11 explicitly provides that PNB shall study and submit recommendations on the claims of PASUMILs creditors.[62] Clearly, the corporate separateness between PASUMIL and PNB remains, despite respondents insistence to the contrary.[63]


49

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to costs.

[G.R. No. 117188. August 7, 1997]

LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO, respondents.May the failure of a corporation to file its by-laws within one month from the date of its incorporation, as mandated by Section 46 of the Corporation Code, result in its automatic dissolution?

This is the issue raised in this petition for review on certiorari of the Decision[1] of the Court of Appeals affirming the decision of the Home Insurance and Guaranty Corporation (HIGC). This quasi-judicial body recognized Loyola Grand Villas Homeowners Association (LGVHA) as the sole homeowners association in Loyola Grand Villas, a duly registered subdivision in Quezon City and Marikina City that was owned and developed by Solid Homes, Inc. It revoked the certificates of registration issued to Loyola Grand Villas Homeowners (North) Association Incorporated (the North Association for brevity) and Loyola Grand Villas Homeowners (South) Association Incorporated (the South Association).

LGVHAI was organized on February 8, 1983 as the association of homeowners and residents of the Loyola Grand Villas. It was registered with the Home Financing Corporation, the predecessor of herein respondent HIGC, as the sole homeowners organization in the said subdivision under Certificate of Registration No. 04-197. It was organized by the developer of the subdivision and its first president was Victorio V. Soliven, himself the owner of the developer. For unknown reasons, however, LGVHAI did not file its corporate by-laws.

Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so.[2] To the officers consternation, they discovered that there were two other organizations within the subdivision the North Association and the South Association. According to private respondents, a non-resident and Soliven himself, respectively headed these associations. They also discovered that these associations had five (5) registered homeowners each who were also the incorporators, directors and officers thereof. None of the members of the LGVHAI was listed as member of the North Association while three (3) members of LGVHAI were listed as members of the South Association.[3] The North Association was registered with the HIGC on February 13, 1989 under Certificate of Registration No. 04-1160 covering Phases West II, East III, West III and East IV. It submitted its by-laws on December 20, 1988.


50

In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not submit its by-laws within the period required by the Corporation Code and, second, there was non-user of corporate charter because HIGC had not received any report on the associations activities. Apparently, this information resulted in the registration of the South Association with the HIGC on July 27, 1989 covering Phases West I, East I and East 11. It filed its by-laws on July 26, 1989.

These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They questioned the revocation of LGVHAIs certificate of registration without due notice and hearing and concomitantly prayed for the cancellation of the certificates of registration of the North and South Associations by reason of the earlier issuance of a certificate of registration in favor of LGVHAI.

On January 26, 1993, after due notice and hearing, private respondents obtained a favorable ruling from HIGC Hearing Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as follows:

WHEREFORE, judgment is hereby rendered recognizing the Loyola Grand Villas Homeowners Association, Inc., under Certificate of Registration No. 04-197 as the duly registered and existing homeowners association for Loyola Grand Villas homeowners, and declaring the Certificates of Registration of Loyola Grand Villas Homeowners (North) Association, Inc. and Loyola Grand Villas Homeowners (South) Association, Inc. as hereby revoked or cancelled; that the receivership be terminated and the Receiver is hereby ordered to render an accounting and turn-over to Loyola Grand Villas Homeowners Association, Inc., all assets and records of the Association now under his custody and possession.

The South Association appealed to the Appeals Board of the HIGC. In its Resolution of September 8, 1993, the Board[4] dismissed the appeal for lack of merit.

Rebuffed, the South Association in turn appealed to the Court of Appeals, raising two issues. First, whether or not LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code resulted in the automatic dissolution of LGVHAI. Second, whether or not two homeowners associations may be authorized by the HIGC in one sprawling subdivision. However, in the Decision of August 23, 1994 being assailed here, the Court of Appeals affirmed the Resolution of the HIGC Appeals Board.

In resolving the first issue, the Court of Appeals held that under the Corporation Code, a private corporation commences to have corporate existence and juridical personality from the date the Securities and Exchange Commission (SEC) issues a certificate of incorporation under its official seal. The requirement for the filing of by-laws under Section 46 of the Corporation Code within one month from official notice of the issuance of the certificate of incorporation presupposes that it is already incorporated, although it may file its by-laws with its articles of


51

incorporation. Elucidating on the effect of a delayed filing of by-laws, the Court of Appeals said:

We also find nothing in the provisions cited by the petitioner, i.e., Sections 46 and 22, Corporation Code, or in any other provision of the Code and other laws which provide or at least imply that failure to file the by-laws results in an automatic dissolution of the corporation. While Section 46, in prescribing that by-laws must be adopted within the period prescribed therein, may be interpreted as a mandatory provision, particularly because of the use of the word must, its meaning cannot be stretched to support the argument that automatic dissolution results from non-compliance.

We realize that Section 46 or other provisions of the Corporation Code are silent on the result of the failure to adopt and file the by-laws within the required period. Thus, Section 46 and other related provisions of the Corporation Code are to be construed with Section 6 (1) of P.D. 902-A. This section empowers the SEC to suspend or revoke certificates of registration on the grounds listed therein. Among the grounds stated is the failure to file by-laws (see also II Campos: The Corporation Code, 1990 ed., pp. 124-125). Such suspension or revocation, the same section provides, should be made upon proper notice and hearing. Although P.D. 902-A refers to the SEC, the same principles and procedures apply to the public respondent HIGC as it exercises its power to revoke or suspend the certificates of registration or homeowners associations. (Section 2 [a], E.O. 535, series 1979, transferred the powers and authorities of the SEC over homeowners associations to the HIGC.)

We also do not agree with the petitioners interpretation that Section 46, Corporation Code prevails over Section 6, P.D. 902-A and that the latter is invalid because it contravenes the former. There is no basis for such interpretation considering that these two provisions are not inconsistent with each other. They are, in fact, complementary to each other so that one cannot be considered as invalidating the other.

The Court of Appeals added that, as there was no showing that the registration of LGVHAI had been validly revoked, it continued to be the duly registered homeowners association in the Loyola Grand Villas. More importantly, the South Association did not dispute the fact that LGVHAI had been organized and that, thereafter, it transacted business within the period prescribed by law.

On the second issue, the Court of Appeals reiterated its previous ruling[5] that the HIGC has the authority to order the holding of a referendum to determine which of two contending associations should represent the entire community, village or subdivision.

Undaunted, the South Association filed the instant petition for review on certiorari. It elevates as sole issue for resolution the first issue it had raised before the Court of Appeals, i.e., whether or not the LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code had the effect of automatically dissolving the said corporation.


52

Petitioner contends that, since Section 46 uses the word must with respect to the filing of by-laws, noncompliance therewith would result in self-extinction either due to non-occurrence of a suspensive condition or the occurrence of a resolutory condition under the hypothesis that (by) the issuance of the certificate of registration alone the corporate personality is deemed already formed. It asserts that the Corporation Code provides for a gradation of violations of requirements. Hence, Section 22 mandates that the corporation must be formally organized and should commence transactions within two years from date of incorporation. Otherwise, the corporation would be deemed dissolved. On the other hand, if the corporation commences operations but becomes continuously inoperative for five years, then it may be suspended or its corporate franchise revoked.

Petitioner concedes that Section 46 and the other provisions of the Corporation Code do not provide for sanctions for non-filing of the by-laws. However, it insists that no sanction need be provided because the mandatory nature of the provision is so clear that there can be no doubt about its being an essential attribute of corporate birth. To petitioner, its submission is buttressed by the facts that the period for compliance is spelled out distinctly; that the certification of the SEC/HIGC must show that the by-laws are not inconsistent with the Code, and that a copy of the by-laws has to be attached to the articles of incorporation. Moreover, no sanction is provided for because in the first place, no corporate identity has been completed. Petitioner asserts that non-provision for remedy or sanction is itself the tacit proclamation that non-compliance is fatal and no corporate existence had yet evolved, and therefore, there was no need to proclaim its demise.[6] In a bid to convince the Court of its arguments, petitioner stresses that:

x x x the word MUST is used in Sec. 46 in its universal literal meaning and corollary human implication its compulsion is integrated in its very essence MUST is always enforceable by the inevitable consequence that is, OR ELSE. The use of the word MUST in Sec. 46 is no exception it means file the by-laws within one month after notice of issuance of certificate of registration OR ELSE. The OR ELSE, though not specified, is inextricably a part of MUST. Do this or if you do not you are Kaput. The importance of the by-laws to corporate existence compels such meaning for as decreed the by-laws is `the government of the corporation. Indeed, how can the corporation do any lawful act as such without by-laws. Surely, no law is intended to create chaos.[7]

Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation Code which itself does not provide sanctions for non-filing of by-laws. For the petitioner, it is not proper to assess the true meaning of Sec. 46 x x x on an unauthorized provision on such matter contained in the said decree.

In their comment on the petition, private respondents counter that the requirement of adoption of by-laws is not mandatory. They point to P.D. No. 902-A as having resolved the issue of whether said requirement is mandatory or merely directory. Citing Chung Ka Bio v.


53

Intermediate Appellate Court,[8] private respondents contend that Section 6(I) of that decree provides that non-filing of by-laws is only a ground for suspension or revocation of the certificate of registration of corporations and, therefore, it may not result in automatic dissolution of the corporation. Moreover, the adoption and filing of by-laws is a condition subsequent which does not affect the corporate personality of a corporation like the LGVHAI. This is so because Section 9 of the Corporation Code provides that the corporate existence and juridical personality of a corporation begins from the date the SEC issues a certificate of incorporation under its official seal. Consequently, even if the by-laws have not yet been filed, a corporation may be considered a de facto corporation. To emphasize the fact the LGVHAI was registered as the sole homeowners association in the Loyola Grand Villas, private respondents point out that membership in the LGVHAI was an unconditional restriction in the deeds of sale signed by lot buyers.

In its reply to private respondents comment on the petition, petitioner reiterates its argument that the word must in Section 46 of the Corporation Code is mandatory. It adds that, before the ruling in Chung Ka Bio v. Intermediate Appellate Court could be applied to this case, this Court must first resolve the issue of whether or not the provisions of P.D. No. 902-A prescribing the rules and regulations to implement the Corporation Code can rise above and change the substantive provisions of the Code.

The pertinent provision of the Corporation Code that is the focal point of controversy in this case states:

Sec. 46. Adoption of by-laws. Every corporation formed under this Code, must within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation, the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members, in the case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to inspection of the stockholders or members during office hours; and a copy thereof, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code.


54

The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law.

As correctly postulated by the petitioner, interpretation of this provision of law begins with the determination of the meaning and import of the word must in this section. Ordinarily, the word must connotes an imperative act or operates to impose a duty which may be enforced.[9] It is synonymous with ought which connotes compulsion or mandatoriness.[10] However, the word must in a statute, like shall, is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the tendency has been to interpret shall as the context or a reasonable construction of the statute in which it is used demands or requires.[11] This is equally true as regards the word must. Thus, if the language of a statute considered as a whole and with due regard to its nature and object reveals that the legislature intended to use the words shall and must to be directory, they should be given that meaning.[12]

This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the by-laws on time was never the intention of the legislature. Moreover, even without resorting to the records of deliberations of the Batasang Pambansa, the law itself provides the answer to the issue propounded by petitioner.

Taken as a whole and under the principle that the best interpreter of a statute is the statute itself (optima statuli interpretatix est ipsum statutum),[14] Section 46 aforequoted reveals the legislative intent to attach a directory, and not mandatory, meaning for the word must in the first sentence thereof. Note should be taken of the second paragraph of the law which allows the filing of the by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory compliance with the requirement of filing the by-laws within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission. It necessarily follows that failure to file the by-laws within that period does not imply the demise of the corporation. By-laws may be necessary for the government of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes.[15] There are in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus:

In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently provides for the government of the body; and even where the governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure to exercise the power will be ascribed to mere nonaction which will not render void any acts of the corporation which would otherwise be valid.[16] (Italics supplied.)


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As Fletcher aptly puts it:

It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have been adopted the corporation may not be able to act for the purposes of its creation, and that the first and most important duty of the members is to adopt them. This would seem to follow as a matter of principle from the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of legal, necessity. Moreover, the peculiar circumstances attending the formation of a corporation may impose the obligation to adopt certain by-laws, as in the case of a close corporation organized for specific purposes. And the statute or general laws from which the corporation derives its corporate existence may expressly require it to make and adopt by-laws and specify to some extent what they shall contain and the manner of their adoption. The mere fact, however, of the existence of power in the corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the validity of any of its acts.[17]

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46. However, such omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which state:

SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers:

xxx xxx xxx xxx

(l) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following:

xxx xxx xxx xxx

5. Failure to file by-laws within the required period;

xxx xxx xxx xxx

In the exercise of the foregoing authority and jurisdiction of the Commissions or by a Commissioner or by such other bodies, boards, committees and/or any officer as may be created or designated by the Commission for the purpose. The decision, ruling or order of any such Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision, ruling or order. The Commission shall promulgate rules of procedures to govern the proceedings, hearings and appeals of cases falling within its jurisdiction.


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The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to the Supreme Court by petition for review in accordance with the pertinent provisions of the Rules of Court.

Even under the foregoing express grant of power and authority, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. There is no outright demise of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same.

That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no moment. P.D. No. 902-A, which took effect immediately after its promulgation on March 11, 1976, is very much apposite to the Code. Accordingly, the provisions abovequoted supply the law governing the situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be so construed and harmonized with other statutes as to form a uniform system of jurisprudence.[18]

As the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it,[19] by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation.

In this regard, private respondents are correct in relying on the pronouncements of this Court in Chung Ka Bio v. Intermediate Appellate Court,[20] as follows:

x x x. Moreover, failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution.

Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code, provided that the powers of the corporation would cease if it did not formally organize and commence the transaction of its business or the continuation of its works within two years from date of its incorporation. Section 20, which has been reproduced with some modifications in Section 46 of the Corporation Code, expressly declared that every corporation formed under this Act, must within one month after the filing of the articles of incorporation with the Securities and Exchange Commission, adopt a code of by-laws. Whether this provision should be given mandatory or only directory effect remained a controversial question until it became academic with the adoption of PD 902-A. Under this decree, it is now clear that the failure to


57

file by-laws within the required period is only a ground for suspension or revocation of the certificate of registration of corporations.

Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(I) of PD 902-A, the SEC is empowered to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of a corporation on the ground inter alia of failure to file by-laws within the required period. It is clear from this provision that there must first of all be a hearing to determine the existence of the ground, and secondly, assuming such finding, the penalty is not necessarily revocation but may be only suspension of the charter. In fact, under the rules and regulations of the SEC, failure to file the by-laws on time may be penalized merely with the imposition of an administrative fine without affecting the corporate existence of the erring firm.

It should be stressed in this connection that substantial compliance with conditions subsequent will suffice to perfect corporate personality. Organization and commencement of transaction of corporate business are but conditions subsequent and not prerequisites for acquisition of corporate personality. The adoption and filing of by-laws is also a condition subsequent. Under Section 19 of the Corporation Code, a corporation commences its corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues certificate of incorporation under its official seal. This may be done even before the filing of the by-laws, which under Section 46 of the Corporation Code, must be adopted within one month after receipt of official notice of the issuance of its certificate of incorporation.[21]

That the corporation involved herein is under the supervision of the HIGC does not alter the result of this case. The HIGC has taken over the specialized functions of the former Home Financing Corporation by virtue of Executive Order No. 90 dated December 17, 1986.[22] With respect to homeowners associations, the HIGC shall exercise all the powers, authorities and responsibilities that are vested on the Securities and Exchange Commission x x x, the provision of Act 1459, as amended by P.D. 902-A, to the contrary notwithstanding.[23]

WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned Decision of the Court of Appeals AFFIRMED. This Decision is immediately executory. Costs against petitioner.

[G.R. No. 117604. March 26, 1997]CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.Through a petition for review on certiorari under 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 and resolution dated 4 June 1993 and 7 December 1993, respectively, for lack of jurisdiction.


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Similarly impugned is the Court of Appeals' resolution dated 4 September 1994 which denied petitioner's motion for reconsideration.

The case unfolds thus:

On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner China Banking Corporation (CBC, for brevity).[1]

On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge agreement be recorded in its books.[2]

In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia 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 which was secured by the aforestated pledge agreement still existing between Calapatia and petitioner.[4]

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

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

Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and petitioner 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 12 December 1985 for the same amount[9] and another notice dated 22 November 1986 for P23,483.24.[10]

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


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Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his membership 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 and requested 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 at the public auction held on 10 December 1986 for P25,000.00.[13]

On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10 December 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 of jurisdiction 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 Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new certificate 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 of VGCCI, stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer the share in the name of the petitioner in the books of (VGCCI) until liquidation of delinquency."[15] Consequently, 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 banc and on 4 June 1993, the Commission issued an order reversing the decision of its hearing officer. It declared thus:

The Commission en banc believes that appellant-petitioner has a prior right over the pledged share and because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner can proceed with the foreclosure of the pledged share.

WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 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 in the name of appellant-petitioner bank.

SO ORDERED.[18]


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VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its 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 orders of 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 the controversy between CBC and VGCCI is not intra-corporate. It ruled as follows:

In order that the respondent Commission can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members, or officers; (c) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned, and (d) among the stockholders, partners or associates themselves (Union Glass and Container Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The establishment of any of the relationship mentioned will not necessarily always confer jurisdiction over the dispute on the Securities and Exchange Commission to the exclusion of the regular courts. The statement made in Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions or distinctions 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 of the parties but also the nature of the question that is the subject of their controversy (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).

Indeed, the controversy between petitioner and respondent bank which involves ownership of the stock that used to belong to Calapatia, Jr. is not within the competence of respondent Commission to decide. It is not any of those mentioned 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 jurisdiction over the subject matter of the case. Accordingly, the complaint of respondent China Banking Corporation (Annex Q, petition) is DISMISSED. No pronouncement as to costs in this instance.

SO ORDERED.[20]

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

Hence, this petition wherein the following issues were raised:


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IIISSUESWHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division) GRAVELY ERRED WHEN:

1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC, AND WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT EVIDENCE SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.

The petition is granted.

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 pertinent powers:

SECTION 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines, and in the exercise of its authority, it shall have the power to enlist the aid and support of and to deputize any and all enforcement agencies of the government, civil or military as well as any private institution, corporation, firm, association or person.

xxx

SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to 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 the Commission.


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b) 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;

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

d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses property to cover all of its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the Management Committee created pursuant to this Decree.

The aforecited law was expounded upon in Viray v. CA[22] and in the recent cases of Mainland Construction Co., Inc. v. Movilla[23] and Bernardo v. CA,[24] 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.

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

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.[25] 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 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 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 . . ."[26] 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 VGCCI's aforequoted by-laws, a subject which irrefutably calls for the special competence of the SEC.

We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz:[27]

6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and boards the power to resolve specialized disputes in the field of labor (as in corporations, public transportation and public utilities) ruled that Congress in requiring the Industrial Court's intervention in the resolution of labor-management controversies likely to cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in the law. The Court held that under the "sense-making and expeditious doctrine of primary jurisdiction . . . the courts cannot or will not determine a controversy involving a question which is within the jurisdiction of an administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the special knowledge, experience, and services of the administrative tribunal to determine technical and intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of the regulatory statute administered."

In this era of clogged court dockets, the need for specialized administrative boards or commissions with the special knowledge, experience and capability to hear and determine promptly disputes on technical matters or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been committed to the view that unless the law speaks clearly and unequivocably, the choice should fall on [an administrative agency.]'" The Court in the earlier case of Ebon v. De Guzman, noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D. amendment splitting their jurisdiction with the regular courts, "evidently,. . . had second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award damages in labor cases because that setup would mean duplicity of suits, splitting the cause of action and possible conflicting 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 as it does the meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable provisions of the Corporation Code in order to determine the validity of VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case.


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VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint 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,[28] 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 . . .

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

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

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

Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Gabriel-Almoradie v. Court of Appeals,[29] citing Escudero v. Dulay[30] and The Roman Catholic Archbishop of Manila v. Court of Appeals:[31]

In the interest of the public and for the expeditious administration of justice the issue on infringement shall be resolved by the court considering that this case has 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 entire controversy in a single proceeding leaving no root or branch to bear the seeds of future litigation. No useful purpose will be served if a case or the determination of an issue in a case is remanded to the trial court only to have its decision raised again to the Court of Appeals and from there to the Supreme Court.


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We have laid down the rule that the remand of the case or of an issue to the lower court for further reception of evidence is not necessary where the 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. 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 in arriving at a just disposition of the case.

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

At the outset, the Court's attention is drawn to the fact that that since the filing of this suit before the trial court, none of the substantial issues have been resolved. To avoid and gloss over the issues raised by the parties, as what the trial court and respondent Court of Appeals did, would unduly prolong this litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this will run counter to 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 courts below, should now be settled specially as they involved pure questions of law. Furthermore, the pleadings of the respective parties on file have amply ventilated their 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 before the SEC) sufficient to enable us to render a sound judgment and since only questions of law were raised (the proper jurisdiction for Supreme Court review), we can, therefore, unerringly take cognizance of and rule on the merits of the case.

The procedural niceties settled, we proceed to the merits.

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 pledge agreement was entered into on 21 August 1974[33] but the loan or promissory note which it secured was obtained by Calapatia much later or only on 3 August 1983.[34]

VGCCI's contention is unmeritorious.

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

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 other obligations of every kind


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which have heretofore been contracted, or which may hereafter be contracted, by the PLEDGOR(S) and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including discounts of Chinese drafts, bills of exchange, promissory notes, etc., without any further endorsement by the PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS, together with the accrued interest thereon, as hereinafter provided, plus the costs, losses, damages and expenses (including attorney's fees) which PLEDGEE may incur in connection with the collection thereof.[35] (Emphasis ours.)

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

VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right 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 began sending notices of delinquency to Calapatia after it was informed by petitioner (through its letter dated 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's share, was neither informed nor furnished copies of these letters of overdue accounts until VGCCI 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 auction sale. 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. It argues in this wise:

The general rule really is that third persons are not bound by the by-laws of a corporation 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 knowledge of the same. In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge made by Calapatia 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 petitioner even quoted a portion of private respondent's by-laws which is material to the issue 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 time when petitioner purchased the share. Since the by-laws was already binding upon petitioner when the latter purchased the share of Calapatia on September 17, 1985 then the petitioner purchased the said share subject to the right of the private respondent to sell the said share for reasons of delinquency and the right of private respondent


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to have a first lien on said shares as these rights are provided 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 the appellee. 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 was not a privy to the contract created by said by-law between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.

"An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-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, a purchaser 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 to an unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is not bound by such by-law by virtue of the assignment 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 valid unless approved by the board of directors, while it may be enforced as a reasonable 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.) (Underscoring ours.)

In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party and the shareholder was entered into, in this case, at the time the pledge agreement was executed. VGCCI could have easily informed petitioner of its by-laws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice. The ruling of the SEC en banc is particularly instructive:

By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and 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 the relatively permanent and continuing rules of action


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adopted by the corporation for its own government and that of the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management 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 the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. (Ibid.)

Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have knowledge of the provisions either actually or constructively. In the case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the transfer of shares cannot have any effect on the the transferee of the shares in question as 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 was not a privy to the contract created by the by-law between the shareholder x x x and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser." (Underscoring supplied.)

By analogy of the above-cited case, the Commission en banc is of the opinion that said case is applicable to the present controversy. Appellant-petitioner bank as a third party can not be bound by appellee-respondent's by-laws. It must be recalled that when appellee-respondent communicated to appellant-petitioner bank that the pledge agreement was duly noted in the club's books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript of stenographic notes of the June 25, 1991 Hearing reveals that the pledgor became delinquent only in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement was contracted.

The Commission en banc also believes that for the exception to the general accepted rule that third persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was contracted. Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of the Civil Code provides that it is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists maybe alienated for the payment to the creditor.

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

According to the weight of authority, the pledgee's right is entitled to full protection without surrender of the certificate, their cancellation, and the issuance to him of new ones, and when done, the pledgee will be fully protected against a subsequent purchaser who would be charged with constructive notice that the certificate is covered by the pledge. (12-A Fletcher 502)


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

To cancel the pledged certificate outright and the issuance of new certificate to a third person who purchased the same certificate covered by the pledge, will certainly defeat the right of the pledgee to resort to its collateral for the payment of the debt. The pledgor or his representative or registered stockholders has no right to require a return of the pledged stock until the debt for which it was given as security is paid and satisfied, regardless of the length of time which have elapsed since debt was created. (12-A Fletcher 409)

A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the corporation or of third persons, if he has no notice thereof, but not otherwise. He also takes it free of liens or claims that may subsequently arise in favor of the corporation if it has notice of the pledge, although no demand for a transfer 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 with the diligence of a good father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H . Lee,[39] 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 the thing 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 Calapatia' 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 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 "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction."[40] 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.[41] What Calapatia owed the corporation were merely the monthly dues. Hence, the aforequoted provision does not apply.

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


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[G.R. No. 123793. June 29, 1998]ASSOCIATED BANK, petitioner, vs. COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.

In a merger, does the surviving corporation have a right to enforce a contract entered into by the absorbed company subsequent to the date of the merger agreement, but prior to the issuance of a certificate of merger by the Securities and Exchange Commission?

The Case

This is a petition for review under Rule 45 of the Rules of Court seeking to set aside the Decision[1] of the Court of Appeals[2] in CA-GR CV No. 26465 promulgated on January 30, 1996, which answered the above question in the negative. The challenged Decision reversed and set aside the October 17, 1986 Decision[3] in Civil Case No. 85-32243, promulgated by the Regional Trial Court of Manila, Branch 48, which disposed of the controversy in favor of herein petitioner as follows:[4]

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Associated Bank. The defendant Lorenzo Sarmiento, Jr. is ordered to pay plaintiff:

1. The amount of P4,689,413.63 with interest thereon at 14% per annum until fully paid;

2. The amount of P200,000.00 as and for attorneys fees; and

3. The costs of suit.

On the other hand, the Court of Appeals resolved the case in this wise:[5]

WHEREFORE, premises considered, the decision appealed from, dated October 17, 1986 is REVERSED and SET ASIDE and another judgment rendered DISMISSING plaintiff-appellees complaint, docketed as Civil Case No. 85-32243. There is no pronouncement as to costs.

The Facts

The undisputed factual antecedents, as narrated by the trial court and adopted by public respondent, are as follows:[6]

x x x [O]n or about September 16, 1975 Associated Banking Corporation and Citizens Bank and Trust Company merged to form just one banking corporation known as Associated Citizens


71

Bank, the surviving bank. On or about March 10, 1981, the Associated Citizens Bank changed its corporate name to Associated Bank by virtue of the Amended Articles of Incorporation. On September 7, 1977, the defendant executed in favor of Associated Bank a promissory note whereby the former undertook to pay the latter the sum of P2,500,000.00 payable on or before March 6, 1978. As per said promissory note, the defendant agreed to pay interest at 14% per annum, 3% per annum in the form of liquidated damages, compounded interests, and attorneys fees, in case of litigation equivalent to 10% of the amount due. The defendant, to date, still owes plaintiff bank the amount of P2,250,000.00 exclusive of interest and other charges. Despite repeated demands the defendant failed to pay the amount due.

xxx xxx xxx

x x x [T]he defendant denied all the pertinent allegations in the complaint and alleged as affirmative and[/]or special defenses that the complaint states no valid cause of action; that the plaintiff is not the proper party in interest because the promissory note was executed in favor of Citizens Bank and Trust Company; that the promissory note does not accurately reflect the true intention and agreement of the parties; that terms and conditions of the promissory note are onerous and must be construed against the creditor-payee bank; that several partial payments made in the promissory note are not properly applied; that the present action is premature; that as compulsory counterclaim the defendant prays for attorneys fees, moral damages and expenses of litigation.

On May 22, 1986, the defendant was declared as if in default for failure to appear at the Pre-Trial Conference despite due notice.

A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22, 1986 was filed by defendants counsel which was denied by the Court in [an] order dated September 16, 1986 and the plaintiff was allowed to present its evidence before the Court ex-parte on October 16, 1986.

At the hearing before the Court ex-parte, Esteban C. Ocampo testified that x x x he is an accountant of the Loans and Discount Department of the plaintiff bank; that as such, he supervises the accounting section of the bank, he counterchecks all the transactions that transpired during the day and is responsible for all the accounts and records and other things that may[ ]be assigned to the Loans and Discount Department; that he knows the [D]efendant Lorenzo Sarmiento, Jr. because he has an outstanding loan with them as per their records; that Lorenzo Sarmiento, Jr. executed a promissory note No. TL-2649-77 dated September 7, 1977 in the amount of P2,500,000.00 (Exhibit A); that Associated Banking Corporation and the Citizens Bank and Trust Company merged to form one banking corporation known as the Associated Citizens Bank and is now known as Associated Bank by virtue of its Amended Articles of Incorporation; that there were partial payments made but not full; that the defendant has not paid his obligation as evidenced by the latest statement of account (Exh. B); that as per statement of account the outstanding obligation of the defendant is P5,689,413.63 less


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P1,000,000.00 or P4,689,413.63 (Exh. B, B-1); that a demand letter dated June 6, 1985 was sent by the bank thru its counsel (Exh. C) which was received by the defendant on November 12, 1985 (Exh. C, C-1, C-2, C-3); that the defendant paid only P1,000,000.00 which is reflected in the Exhibit C.

Based on the evidence presented by petitioner, the trial court ordered Respondent Sarmiento to pay the bank his remaining balance plus interests and attorneys fees. In his appeal, Sarmiento assigned to the trial court several errors, namely:[7]

I The [trial court] erred in denying appellants motion to dismiss appellee banks complaint on the ground of lack of cause of action and for being barred by prescription and laches.

II The same lower court erred in admitting plaintiff-appellee banks amended complaint while defendant-appellants motion to dismiss appellee banks original complaint and using/availing [itself of] the new additional allegations as bases in denial of said appellants motion and in the interpretation and application of the agreement of merger and Section 80 of BP Blg. 68, Corporation Code of the Philippines.

III The [trial court] erred and gravely abuse[d] its discretion in rendering the two as if in default orders dated May 22, 1986 and September 16, 1986 and in not reconsidering the same upon technical grounds which in effect subvert the best primordial interest of substantial justice and equity.

IV The court a quo erred in issuing the orders dated May 22, 1986 and September 16, 1986 declaring appellant as if in default due to non-appearance of appellants attending counsel who had resigned from the law firm and while the parties [were] negotiating for settlement of the case and after a one million peso payment had in fact been paid to appellee bank for appellants account at the start of such negotiation on February 18, 1986 as act of earnest desire to settle the obligation in good faith by the interested parties.

V The lower court erred in according credence to appellee banks Exhibit B statement of account which had been merely requested by its counsel during the trial and bearing date of September 30, 1986.

VI The lower court erred in accepting and giving credence to appellee banks 27-year-old witness Esteban C. Ocampo as of the date he testified on October 16, 1986, and therefore, he was merely an eighteen-year-old minor when appellant supposedly incurred the foisted obligation under the subject PN No. TL-2649-77 dated September 7, 1977, Exhibit A of appellee bank.

VII The [trial court] erred in adopting appellee banks Exhibit B dated September 30, 1986 in its decision given in open court on October 17, 1986 which exacted eighteen percent (18%) per annum on the foisted principal amount of P2.5 million when the subject PN, Exhibit A,


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stipulated only fourteen percent (14%) per annum and which was actually prayed for in appellee banks original and amended complaints.

VIII The appealed decision of the lower court erred in not considering at all appellants affirmative defenses that (1) the subject PN No. TL-2649-77 for P2.5 million dated September 7, 1977, is merely an accommodation pour autrui bereft of any actual consideration to appellant himself and (2) the subject PN is a contract of adhesion, hence, [it] needs [to] be strictly construed against appellee bank -- assuming for granted that it has the right to enforce and seek collection thereof.

IX The lower court should have at least allowed appellant the opportunity to present countervailing evidence considering the huge amounts claimed by appellee bank (principal sum of P2.5 million which including accrued interests, penalties and cost of litigation totaled P4,689,413.63) and appellants affirmative defenses -- pursuant to substantial justice and equity.

The appellate court, however, found no need to tackle all the assigned errors and limited itself to the question of whether [herein petitioner had] established or proven a cause of action against [herein private respondent]. Accordingly, Respondent Court held that the Associated Bank had no cause of action against Lorenzo Sarmiento Jr., since said bank was not privy to the promissory note executed by Sarmiento in favor of Citizens Bank and Trust Company (CBTC). The court ruled that the earlier merger between the two banks could not have vested Associated Bank with any interest arising from the promissory note executed in favor of CBTC after such merger.

Thus, as earlier stated, Respondent Court set aside the decision of the trial court and dismissed the complaint. Petitioner now comes to us for a reversal of this ruling.[8]

Issues

In its petition, petitioner cites the following reasons:[9]

I The Court of Appeals erred in reversing the decision of the trial court and in declaring that petitioner has no cause of action against respondent over the promissory note.

II The Court of Appeals also erred in declaring that, since the promissory note was executed in favor of Citizens Bank and Trust Company two years after the merger between Associated Banking Corporation and Citizens Bank and Trust Company, respondent is not liable to petitioner because there is no privity of contract between respondent and Associated Bank.

III The Court of Appeals erred when it ruled that petitioner, despite the merger between petitioner and Citizens Bank and Trust Company, is not a real party in interest insofar as the promissory note executed in favor of the merger.


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In a nutshell, the main issue is whether Associated Bank, the surviving corporation, may enforce the promissory note made by private respondent in favor of CBTC, the absorbed company, after the merger agreement had been signed.

The Courts Ruling

The petition is impressed with merit.The Main Issue:Associated Bank AssumedAll Rights of CBTC

Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation.[10] Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities.[11]

The merger, however, does not become effective upon the mere agreement of the constituent corporations. The procedure to be followed is prescribed under the Corporation Code.[12] Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation.

Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of Merger,[13] which Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into, provided that its effectivity shall, for all intents and purposes, be the date when the necessary papers to carry out this [m]erger shall have been approved by the Securities and Exchange Commission.[14] As to the transfer of the properties of CBTC to ABC, the agreement provides:

10. Upon effective date of the Merger, all rights, privileges, powers, immunities, franchises, assets and property of [CBTC], whether real, personal or mixed, and including [CBTCs] goodwill and tradename, and all debts due to [CBTC] on whatever act, and all other things in action belonging to [CBTC] as of the effective date of the [m]erger shall be vested in [ABC], the SURVIVING BANK, without need of further act or deed, unless by express requirements of law or of a government agency, any separate or specific deed of conveyance to legally effect the transfer or assignment of any kind of property [or] asset is required, in which case such document or deed shall be executed accordingly; and all property, rights, privileges, powers,


75

immunities, franchises and all appointments, designations and nominations, and all other rights and interests of [CBTC] as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, trustee of estates of persons mentally ill and in every other fiduciary capacity, and all and every other interest of [CBTC] shall thereafter be effectually the property of [ABC] as they were of [CBTC], and title to any real estate, whether by deed or otherwise, vested in [CBTC] shall not revert or be in any way impaired by reason thereof; provided, however, that all rights of creditors and all liens upon any property of [CBTC] shall be preserved and unimpaired and all debts, liabilities, obligations, duties and undertakings of [CBTC], whether contractual or otherwise, expressed or implied, actual or contingent, shall henceforth attach to [ABC] which shall be responsible therefor and may be enforced against [ABC] to the same extent as if the same debts, liabilities, obligations, duties and undertakings have been originally incurred or contracted by [ABC], subject, however, to all rights, privileges, defenses, set-offs and counterclaims which [CBTC] has or might have and which shall pertain to [ABC].[15]

The records do not show when the SEC approved the merger. Private respondents theory is that it took effect on the date of the execution of the agreement itself, which was September 16, 1975. Private respondent contends that, since he issued the promissory note to CBTC on September 7, 1977 -- two years after the merger agreement had been executed -- CBTC could not have conveyed or transferred to petitioner its interest in the said note, which was not yet in existence at the time of the merger. Therefore, petitioner, the surviving bank, has no right to enforce the promissory note on private respondent; such right properly pertains only to CBTC.

Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that petitioner no longer has any interest in the promissory note. A closer perusal of the merger agreement leads to a different conclusion. The provision quoted earlier has this other clause:

Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents, or other papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes, references to [ABC], the SURVIVING BANK, as if such references were direct references to [ABC]. x x x[16] (Underscoring supplied)

Thus, the fact that the promissory note was executed after the effectivity date of the merger does not militate against petitioner. The agreement itself clearly provides that all contracts -- irrespective of the date of execution -- entered into in the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner. Since, in contrast to the earlier aforequoted provision, the latter clause no longer specifically refers only to contracts existing at the time of the merger, no distinction should be made. The clause must have been deliberately included in the agreement in order to protect the interests of the combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation.


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Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the note shall be construed, under the very provisions of the merger agreement, as a reference to petitioner bank, as if such reference [was a] direct reference to the latter for all intents and purposes.

No other construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity, the provision must be given its literal meaning[17] and applied without a convoluted interpretation. Verba legis non est recedendum.[18]

In light of the foregoing, the Court holds that petitioner has a valid cause of action against private respondent. Clearly, the failure of private respondent to honor his obligation under the promissory note constitutes a violation of petitioners right to collect the proceeds of the loan it extended to the former.

Secondary Issues:Prescription, Laches, ContractPour Autrui, Lack of Consideration

No Prescriptionor Laches

Private respondents claim that the action has prescribed, pursuant to Article 1149 of the Civil Code, is legally untenable. Petitioners suit for collection of a sum of money was based on a written contract and prescribes after ten years from the time its right of action arose.[19] Sarmientos obligation under the promissory note became due and demandable on March 6, 1978. Petitioners complaint was instituted on August 22, 1985, before the lapse of the ten-year prescriptive period. Definitely, petitioner still had every right to commence suit against the payor/obligor, the private respondent herein.

Neither is petitioners action barred by laches. The principle of laches is a creation of equity, which is applied not to penalize neglect or failure to assert a right within a reasonable time, but rather to avoid recognizing a right when to do so would result in a clearly inequitable situation[20] or in an injustice.[21] To require private respondent to pay the remaining balance of his loan is certainly not inequitable or unjust. What would be manifestly unjust and inequitable is his contention that CBTC is the proper party to proceed against him despite the fact, which he himself asserts, that CBTCs corporate personality has been dissolved by virtue of its merger with petitioner. To hold that no payee/obligee exists and to let private respondent enjoy the fruits of his loan without liability is surely most unfair and unconscionable, amounting to unjust enrichment at the expense of petitioner. Besides, this Court has held that the doctrine of laches is inapplicable where the claim was filed within the prescriptive period set forth under the law.[22]

No Contract


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Pour Autrui

Private respondent, while not denying that he executed the promissory note in the amount of P2,500,000 in favor of CBTC, offers the alternative defense that said note was a contract pour autrui.

A stipulation pour autrui is one in favor of a third person who may demand its fulfillment, provided he communicated his acceptance to the obligor before its revocation. An incidental benefit or interest, which another person gains, is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.[23]

Florentino vs. Encarnacion Sr.[24] enumerates the requisites for such contract: (1) the stipulation in favor of a third person must be a part of the contract, and not the contract itself; (2) the favorable stipulation should not be conditioned or compensated by any kind of obligation; and (3) neither of the contracting parties bears the legal representation or authorization of the third party. The fairest test in determining whether the third persons interest in a contract is a stipulation pour autrui or merely an incidental interest is to examine the intention of the parties as disclosed by their contract.[25]

We carefully and thoroughly perused the promissory note, but found no stipulation at all that would even resemble a provision in consideration of a third person. The instrument itself does not disclose the purpose of the loan contract. It merely lays down the terms of payment and the penalties incurred for failure to pay upon maturity. It is patently devoid of any indication that a benefit or interest was thereby created in favor of a person other than the contracting parties. In fact, in no part of the instrument is there any mention of a third party at all. Except for his barefaced statement, no evidence was proffered by private respondent to support his argument. Accordingly, his contention cannot be sustained. At any rate, if indeed the loan actually benefited a third person who undertook to repay the bank, private respondent could have availed himself of the legal remedy of a third-party complaint.[26] That he made no effort to implead such third person proves the hollowness of his arguments.

Consideration

Private respondent also claims that he received no consideration for the promissory note and, in support thereof, cites petitioners failure to submit any proof of his loan application and of his actual receipt of the amount loaned. These arguments deserve no merit. Res ipsa loquitur. The instrument, bearing the signature of private respondent, speaks for itself. Respondent Sarmiento has not questioned the genuineness and due execution thereof. No further proof is necessary to show that he undertook to pay P2,500,000, plus interest, to petitioner bank on or before March 6, 1978. This he failed to do, as testified to by petitioners accountant. The latter presented before the trial court private respondents statement of account[27] as of September 30, 1986, showing an outstanding balance of P4,689,413.63 after deducting P1,000,000.00 paid seven months earlier. Furthermore, such partial payment is equivalent to an express acknowledgment


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of his obligation. Private respondent can no longer backtrack and deny his liability to petitioner bank. A person cannot accept and reject the same instrument.[28]

WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the Decision of RTC-Manila, Branch 48, in Civil Case No. 26465 is hereby REINSTATED.

G.R. No. 99398 & 104625 January 26, 2001CHESTER BABST, petitioner, vs.COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, ELIZALDE STEEL CONSOLIDATED, INC., and PACIFIC MULTI-COMMERCIAL CORPORATION, respondents.

ELIZALDE STEEL CONSOLIDATED, INC., petitioner, vs.COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, PACIFIC MULTI-COMMERCIAL CORPORATION and CHESTER BABST, respondents.

These consolidated petitions seek the review of the Decision dated April 29, 1991 of the Court of Appeals in CA-G.R. CV No. 172821 entitled, "Bank of the Philippine Islands, Plaintiff-Appellee versus Elizalde Steel Consolidated, Inc., Pacific Multi-Commercial Corporation, and Chester G. Babst, Defendants-Appellants."

The complaint was commenced principally to enforce payment of a promissory note and three domestic letters of credit which Elizalde Steel Consolidated, Inc. (ELISCON) executed and opened with the Commercial Bank and Trust Company (CBTC).

On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P 8,015,900.84, with interest at the rate of 14% per annum, evidenced by a promissory note.2 ELISCON defaulted in its payments, leaving an outstanding indebtedness in the amount of P2,795,240.67 as of October 31, 1982.3

The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board of Directors of MULTI adopted on August 31, 1977 which reads:

WHEREAS, at least 90% of the Company's gross sales is generated by the sale of tin-plates manufactured by Elizalde Steel Consolidated, Inc.;

WHEREAS, it is to the best interests of the Company to continue handling said tin-plate line;


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WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the Company in obtaining credit facilities to enable it to maintain the present level of its tin-plate manufacturing output and the Company is willing to extend said requested assistance;

NOW, THEREFORE, for and in consideration of the foregoing premises ---

BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and authorize ELIZALDE STEEL CONSOLIDATED, INC. to avail and make use of the Credit Line of PACIFIC MULTI-COMMERCIAL CORPORATION with the COMMERCIAL BANK & TRUST COMPANY OF THE PHILIPPINES, Makati, Metro Manila;

RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it does hereby guarantee, solidarily, the payment of the corresponding Letters of Credit upon maturity of the same;

RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank & Trust Company of the Philippines, Makati, Metro Manila, for their information.4

Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a Continuing Suretyship,5 whereby they bound themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each.1âwphi1.nêt

Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation three (3) domestic letters of credit in the amounts of P1,946,805.73,6 P1,702,869.327 and P200,307.72,8 respectively, which ELISCON used to purchase tin black plates from National Steel Corporation. ELISCON defaulted in its obligation to pay the amounts of the letters of credit, leaving an outstanding account, as of October 31, 1982, in the total amount of P3,963,372.08.9

On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC.10

Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development Bank of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness in the amount of P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of Cession of Property in Payment of Debt.11

In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets.


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In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement of all of ELISCON's obligations to its creditors, but BPI expressly rejected the formula submitted to it for not being acceptable.12

Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional Trial Court of Makati, Branch 147, a complaint13 for sum of money against ELISCON, MULTI and Babst, which was docketed as Civil Case No. 49226.

ELISCON, in its Answer,14 argued that the complaint was premature since DBP had made serious efforts to settle its obligations with BPI.

Babst also filed his Answer alleging that he signed the Continuing Suretyship on the understanding that it covers only obligations which MULTI incurred solely for its benefit and not for any third party liability, and he had no knowledge or information of any transaction between MULTI and ELISCON.15

MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and averred that the guaranty under its board resolution did not cover purchases made by ELISCON in the form of trust receipts. It set up a cross-claim against ELISCON alleging that the latter should be held liable for any judgment which the court may render against it in favor of BPI.16

On February 20, 1987, the trial court rendered its Decision,17 the dispositive portion of which reads:

WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor of the plaintiff and against all the defendants:

1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67 due on the promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;

2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the principal of said promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982 until full payment thereof, and on the principal of the three (3) domestic letters of credit of P3,564,349.25 interests and related charges at the rates provided in said letters of credit, from and after 31 October 1982 until full payment;

3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and related charges but unpaid as of the filing of this complaint, until full payment thereof;

4) Ordering defendant ELISCON to pay attorney's fees equivalent to 10% of the total amount due under the preceding paragraphs;


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5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally with defendant ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic letters of credit as of 31 October 1982 with interests and related charges on the principal amount of P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the case of defendant Chester Babst;

6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally plaintiff interests at the legal rate on all interests and related charges already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full payment thereof;

7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally, attorney's fees of not less than 10% of the total amount due under paragraphs 5 and 6 hereof. With costs.

SO ORDERED.

In due time, ELISCON, MULTI and Babst filed their respective notices of appeal.18

On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:

WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the underlining to show the principal changes from the decision of the lower court) thus:

1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2,731,005.60 due on the promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;

2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the principal of said promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982 until full payment thereof, and on the principal of the three (3) domestic letters of credit of P3,564,349.25 interests and related charges at the rates provided in said letters of credit, from and after 31 October 1982 until full payment;

3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests and related charges but unpaid as of the filing of this complaint, until full payment thereof;

4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G. Babst to pay appellee BPI, jointly and severally with appellant ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic letters of credit as of 31 October 1982 with interest and .related charges on the principal amount of P3,963,372.08 at the rates provided in said


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letters of credit from 30 October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the case of defendant Chester Babst;

5) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally, appellee BPI interests at the legal rate on all interests and related charges already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full payment thereof and the plaintiff's lawyer's fees in the nominal amount of P200.000.00;

6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial Corporation and Chester Babst whatever amount they shall have paid in said Eliscon's behalf particularly referring to the three (3) letters of credit as of 31 October 1982 and other related charges.

No costs.

SO ORDERED.19

ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was, however, denied in a Resolution dated March 9, 1992.20 Subsequently, ELISCON filed a petition for review on certiorari, docketed as G.R. No. 104625, on the following grounds:

A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER FROM PETITIONER ELISCON THE LATTER'S OBLIGATION WITH COMMERCIAL BANK AND TRUST COMPANY (CBTC)

B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND BPI THERE BEING A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE SUBSTITUTION BY DBP AS DEBTOR IN LIEU OF THE ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING ELISCON FROM ITS OBLIGATION TO BPI.

C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT LAWFULLY RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED TO PAY TO BPI AS SURETIES OF ELISCON'S OBLIGATION TO BPI; THEIR CAUSE OF ACTION MUST BE DIRECTED AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF ELISCON.

D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF GOVERNMENT WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON FROM FURTHER LIABILITIES TO RESPONDENT BPI.

E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT BPI THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF RESPONDENT COURT OF APPEALS' DECISION:21


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BPI filed its Comment22 raising the following arguments, to wit:

1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst the past due obligations with CBTC prior to the merger of BPI with CBTC.

2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid novation has been effected.

3. Express consent of creditor to substitution should be recorded in the books.

4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily liable to BPI for the unpaid letters of credit of ELISCON.

5. The question of the liability of ELISCON to BPI has been clearly established.

6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by ELISCON, they may recover from the latter what they may have paid for on account of that guaranty.

Chester Babst filed a Comment with Manifestation,23 wherein he contends that the suretyship agreement he executed with Antonio Roxas Chua was in favor of MULTI; and that there is nothing therein which authorizes MULTI, in turn, to guarantee the obligations of ELISCON.

In its Comment,24 MULTI maintained that inasmuch as BPI had full knowledge of the purpose of the meeting in June 1981, wherein the takeover by DBP of ELISCON was announced, it was incumbent upon the said bank to formally communicate its objection to the assumption of ELISCON's liabilities by DBP in answer to the call for the meeting. Moreover, there was no showing that the availment by ELISCON of MULTI's credit facilities with CBTC, which was supposedly guaranteed by Antonio Roxas Chua, was indeed authorized by the latter pursuant to the resolution of the Board of Directors of MULTI.

In compliance with this Court's Resolution dated March 17, 1993,25 the parties submitted their respective memoranda.

Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No. 99398, Chester Babst alleged that the Court of Appeals acted without jurisdiction and/or with grave abuse of discretion when:

1. IT AFFIRMED THE LOWER COURT'S HOLDING THAT THERE WAS NO NOVATION INASMUCH AS RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE DEVELOPMENT BANK OF THE PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE


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STEEL CONSOLIDATED, INC. (OR ELISCON) IN THE LATTER 'S OBLIGATION TO BPI.

2. IT CONFIRMED THE LOWER COURT'S CONCLUSION THAT THERE WAS NO IMPLIED CONSENT OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE SUBSTITUTION BY DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL DEBTOR ELIZALDE STEEL CONSOLIDATED, INC.

3. IT AFFIRMED THE LOWER COURT'S FINDING OF LACK OF MERIT OF THE CONTENTION OF ELISCON THAT THE FAILURE OF THE OFFICER OF BPI, WHO WAS PRESENT DURING THE MEETING OF ELISCON'S CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION TO THE ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF ELISCON AND ASSUMPTION OF ITS LIABILITIES, CONSTITUTED AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF THE OBLIGATIONS OF ELISCON TO BPI.

4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE ELISCON WAS AN ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT EXCULPATING ELISCON FROM ANY LIABILITY TO BPI.

5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED ELISCON, MULTI AND BABST OF ANY LIABILITY TO BPI.

6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH ELISCON WITH RESPECT TO THE OBLIGATION INVOLVED HERE.

7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING THE LATTER TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE DECISION; AND ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY AND SEVERALLY WITH ELISCON.26

Petitioner Babst alleged that DBP sold all of ELISCON's assets to the National Development Company, for the latter to take over and continue the operation of its business. On September 11, 1981, the Board of Governors of the DBP adopted Resolution No. 2817 which states that DBP shall enter into a contractual arrangement with NDC for the latter to pay ELISCON's creditors, including BPI in the amount of P4,015,534.54. This was followed by a Memorandum of Agreement executed on May 4,1983 by and between DBP and NDC, wherein they stipulated, inter alia, that NDC shall pay to ELISCON's creditors, through DBP, the amount of P299,524,700.00. Among the creditors mentioned in the agreement was BPI, with a listed credit of P4,015,534.54.


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Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired by the DBP, and later transferred to the NDC, were placed under the Asset Privatization Trust pursuant to Proclamation No. 50, issued by then President Corazon C. Aquino on December 8, 1986.

In its Comment,27 BPI countered that by virtue of its merger with CBTC, it acquired all the latter's rights and interest including all receivables; that in order to effect a valid novation by substitution of debtors, the consent of the creditor must be express; that in addition, the consent of BPI must appear in its books, it being a private corporation; that BPI intentionally did not consent to the assumption by DBP of the obligations of ELISCON because it wanted to preserve intact its causes of action and legal recourse against Pacific Multi-Commercial Corporation and Babst as sureties of ELISCON and not of DBP; that MULTI expressly bound itself solidarily for ELISCON's obligations to CBTC in its Resolution wherein it allowed the latter to use its credit facilities; and that the suretyship agreement executed by Babst does not exclude liabilities incurred by MULTI on behalf of third parties, such as ELISCON.

ELISCON likewise filed a Comment,28 wherein it manifested that of the seven errors raised by Babst in his petition, six are arguments which ELISCON itself raised in its previous pleadings. It is only the sixth assigned error --- that the Court of Appeals erred in finding that MULTI and Babst bound themselves solidarily with ELISCON --- that ELISCON takes exception to. More particularly, ELISCON pointed out the contradictory positions taken by Babst in admitting that he bound himself to pay the indebtedness of MULTI, while at the same time completely disavowing and denying any such obligation. It stressed that should MULTI or Babst be finally adjudged liable under the suretyship agreement, they cannot lawfully recover from ELISCON, but from the DBP which had been substituted as the new debtor.

MULTI filed its Comrnent,29 admitting the correctness of the petition and adopting the Comment of ELISCON insofar as it is not inconsistent with the positions of Babst and MULTI.

At the outset, the preliminary issue of BPI's right of action must first be addressed. ELISCON and MULTI assail BPI's legal capacity to recover their obligation to CBTC. However, there is no question that there was a valid merger between BPI and CBTC. It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation.30 Hence, BPI has a right to institute the case a quo.

We now come to the primordial issue in this case — whether or not BPI consented to the assumption by DBP of the obligations of ELISCON.

Article 1293 of the Civil Code provides:

Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of


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the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.

BPI contends that in order to have a valid novation, there must be an express consent of the creditor. In the case of Testate Estate of Mota, et al. v. Serra,31 this Court held:

It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by a new one, it implies on the part of the creditor a waiver of the right that he had before the novation, which waiver must be express under the principle of renuntiatio non proesumitur, recognized by the law in declaring that a waiver of right may not be performed [should read: presumed] unless the will to waive is indisputably shown by him who holds the right.32

The import of the foregoing ruling, however, was explained and clarified by this Court in the later case of Asia Banking Corporation v. EIser33 in this wise:

The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditor's consent to the substitution of the new debtor for the old be express, or given at the time of the substitution, and the Supreme Court of Spain, in its judgment of June 16, 1908, construing said article, laid down the doctrine that "article 1205 of the Civil Code does not mean or require that the creditor's consent to the change of debtors must be given simultaneously with the debtor's consent to the substitution, its evident purpose being to preserve the creditor's full right, it is sufficient that the latter's consent be given at any time and in any form whatever, while the agreement of the debtors subsists." The same rule is stated in the Enciclopedia Juridica Española, volume 23, page 503, which reads: "'The rule that this kind of novation, like all others, must be express, is not absolute; for the existence of the consent may well be inferred from the act of the creditor, since volition may as well be expressed by deeds as by words." The understanding between Henry W. Elser and the principal director of Yangco, Rosenstock & Co., Inc., with respect to Luis R. Yangco's stock in said corporation, and the acts of the board of directors after Henry W. Elser had acquired said shares, in substituting the latter for Luis R. Yangco, are a clear and unmistakable expression of its consent. When this court said in the case of Estate of Mota vs. Serra (47 Phil. 464), that the creditor's express consent is necessary in order that there may be a novation of a contract by the substitution of debtors, it did not wish to convey the impression that the word "express" was to be given an unqualified meaning. as indicated in the authorities or cases. both Spanish and American, cited in said decision.34

Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v. Albo & Sevilla, Inc., et al.,35 this Court reiterated the rule that there can be implied consent of the creditor to the substitution of debtors.


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In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register its objection to the take-over by DBP of ELISCON's assets, at the creditors' meeting held in June 1981 and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor.

We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the assumption by DBP of the obligations of ELISCON. In fact, BPI admits that ---

"the Development Bank of the Philippines (DBP), for a time, had .proposed a formula for the settlement of Eliscon's past obligations to its creditors, including the plaintiff [BPI], but the formula was expressly rejected by the plaintiff as not acceptable (long before the filing of the complaint at bar)."36

The Court of Appeals held that even if the account officer who attended the June 1981 creditors' meeting had expressed consent to the assumption by DBP of ELISCON' s debts, such consent would not bind BPI for lack of a specific authority therefor. In its petition, ELISCON counters that the mere presence of the account officer at the meeting necessarily meant that he was authorized to represent BPI in that creditors' meeting. Moreover, BPI did not object to the substitution of debtors, although it objected to the payment formula submitted by DBP.

Indeed, the authority granted by BPI to its account officer to attend the creditors' meeting was an authority to represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf of and for the bank. Even granting arguendo that the said account officer was not so empowered, BPI could have subsequently registered its objection to the substitution, especially after it had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON. Its failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON's obligations. As repeatedly pointed out by ELISCON and MULTI, BPI's objection was to the proposed payment formula, not to the substitution itself.

BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve its causes of action and legal recourse against the sureties of ELISCON. It must be remembered, however, that while a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal debtor's failure or refusal to pay. A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.37 A surety is an insurer of the debt; he promises to pay the principal's debt if the principal will not pay.38

In the case at bar, there was no indication that the principal debtor will default in payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was increased by the government.39 More importantly, the National Development Company took over the business of ELISCON and undertook to pay ELISCON's creditors, and earmarked for that purpose the amount of P4,015,534.54 for payment to BPI.40


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Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCON's debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to itself, insisted in going after the sureties. The course of action chosen taxes the credulity of this Court. At the very least, suffice it to state that BPI's actuation in this regard runs counter to the good faith covenant in contractual relations, provided for by the Civil Code, to wit:

ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.1âwphi1.nêt

ART. 1159. Obligations arising from contract have the force of law between the contracting parties and should be complied with in good faith.

BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor. Hence, there was a valid novation which resulted in the release of ELISCON from its obligation to BPI, whose cause of action should be directed against DBP as the new debtor.

Novation, in its broad concept, may either be extinctive or modificatory .It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have dual functions — one to extinguish an existing obligation, the other to substitute a new one in its place — requiring a conflux of four essential requisites, (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.41

The original obligation having been extinguished, the contracts of suretyship executed separately by Babst and MULTI, being accessory obligations, are likewise extinguished.42

Hence, BPI should enforce its cause of action against DBP. It should be stressed that notwithstanding the lapse of time within which these cases have remained pending, the prescriptive period for BPI to file its action was interrupted when it filed Civil Case No. 49226.43

WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the Court of Appeals, which held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the promissory note and letters of credit, is REVERSED and SET ASIDE. BPI's complaint against ELISCON, MULTI and Babst is DISMISSED.


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MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by its Liquidator, THE PHILIPPINE DEPOSIT INSURANCE CORPORATION,Petitioner,- versus - EDWARD WILLKOM; GILDA GO; REMEDIOS UY; MALAYO BANTUAS, in his capacity as the Deputy Sheriff of Regional Trial Court, Branch 3, Iligan City; and the REGISTER OF DEEDS of Cagayan de Oro City,Respondent. G.R. No. 178618 This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao Savings and Loan Association, Inc. (MSLAI), represented by its liquidator, Philippine Deposit Insurance Corporation (PDIC), against respondents Edward R. Willkom (Willkom); Gilda Go (Go); Remedios Uy (Uy); Malayo Bantuas (sheriff Bantuas), in his capacity as sheriff of the Regional Trial Court (RTC), Branch 3 of Iligan City; and the Register of Deeds of Cagayan de Oro City. MSLAI seeks the reversal and setting aside of the Court of Appeals[1] (CA) Decision[2] dated March 21, 2007 and Resolution[3] dated June 1, 2007 in CA-G.R. CV No. 58337. The controversy stemmed from the following facts: The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan Association, Inc. (DSLAI) are entities duly registered with the Securities and Exchange Commission (SEC) under Registry Nos. 34869 and 32388, respectively, primarily engaged in the business of granting loans and receiving deposits from the general public, and treated as banks.[4] Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation.[5] The articles of merger were not registered with the SEC due to incomplete documentation.[6] On August 12, 1985, DSLAI changed its corporate name to MSLAI by way of an amendment to Article 1 of its Articles of Incorporation, but the amendment was approved by the SEC only on April 3, 1987.[7] Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved Board Resolution No. 86-002, assigning its assets in favor of DSLAI which in turn assumed the formers liabilities.[8] The business of MSLAI, however, failed. Hence, the Monetary Board of the Central Bank of the Philippines ordered its closure and placed it under receivership per Monetary Board Resolution No. 922 dated August 31, 1990. The Monetary Board found that MSLAIs financial condition was one of insolvency, and for it to continue in business would involve probable loss


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to its depositors and creditors. On May 24, 1991, the Monetary Board ordered the liquidation of MSLAI, with PDIC as its liquidator.[9] It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan City, an action for collection of sum of money against FISLAI, docketed as Civil Case No. 111-697. On October 19, 1989, the RTC issued a summary decision in favor of Uy, directing defendants therein (which included FISLAI) to pay the former the sum of P136,801.70, plus interest until full payment, 25% as attorneys fees, and the costs of suit. The decision was modified by the CA by further ordering the third-party defendant therein to reimburse the payments that would be made by the defendants. The decision became final and executory on February 21, 1992. A writ of execution was thereafter issued.[10] On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in Cagayan de Oro City, and the notice of sale was subsequently published. During the public auction on May 17, 1993, Willkom was the highest bidder. A certificate of sale was issued and eventually registered with the Register of Deeds of Cagayan de Oro City. Upon the expiration of the redemption period, sheriff Bantuas issued the sheriffs definite deed of sale. New certificates of title covering the subject properties were issued in favor of Willkom. On September 20, 1994, Willkom sold one of the subject parcels of land to Go.[11] On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of Cagayan de Oro City, a complaint for Annulment of Sheriffs Sale, Cancellation of Title and Reconveyance of Properties against respondents.[12] MSLAI alleged that the sale on execution of the subject properties was conducted without notice to it and PDIC; that PDIC only came to know about the sale for the first time in February 1995 while discharging its mandate of liquidating MSLAIs assets; that the execution of the RTC decision in Civil Case No. 111-697 was illegal and contrary to law and jurisprudence, not only because PDIC was not notified of the execution sale, but also because the assets of an institution placed under receivership or liquidation such as MSLAI should be deemed in custodia legis and should be exempt from any order of garnishment, levy, attachment, or execution.[13] In answer, respondents averred that MSLAI had no cause of action against them or the right to recover the subject properties because MSLAI is a separate and distinct entity from FISLAI. They further contended that the unofficial merger between FISLAI and DSLAI (now MSLAI) did not take effect considering that the merging companies did not comply with the formalities and procedure for merger or consolidation as prescribed by the Corporation Code of the Philippines. Finally, they claimed that FISLAI is still a SEC registered corporation and could not have been absorbed by petitioner.[14] On March 13, 1997, the RTC issued a resolution dismissing the case for lack of jurisdiction. The RTC declared that it could not annul the decision in Civil Case No. 111-697, having been rendered by a court of coordinate jurisdiction.[15]


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On appeal, MSLAI failed to obtain a favorable decision when the CA affirmed the RTC resolution. The dispositive portion of the assailed CA Decision reads: WHEREFORE, premises considered, the instant appeal is DENIED. The decision assailed is AFFIRMED. We REFER Sheriff Malayo B. Bantuas violation of the Supreme Court Administrative Circular No. 12 to the Office of the Court Administrator for appropriate action. The Division Clerk of Court is hereby DIRECTED to furnish the Office of the Court Administrator a copy of this decision. SO ORDERED.[16] The appellate court sustained the dismissal of petitioners complaint not because it had no jurisdiction over the case, as held by the RTC, but on a different ground. Citing Associated Bank v. CA,[17] the CA ruled that there was no merger between FISLAI and MSLAI (formerly DSLAI) for their failure to follow the procedure laid down by the Corporation Code for a valid merger or consolidation. The CA then concluded that the two corporations retained their separate personalities; consequently, the claim against FISLAI is warranted, and the subsequent sale of the levied properties at public auction is valid. The CA went on to say that even if there had been a de facto merger between FISLAI and MSLAI (formerly DSLAI), Willkom, having relied on the clean certificates of title, was an innocent purchaser for value, whose right is superior to that of MSLAI. Furthermore, the alleged assignment of assets and liabilities executed by FISLAI in favor of MSLAI was not binding on third parties because it was not registered. Finally, the CA said that the validity of the auction sale could not be invalidated by the fact that the sheriff had no authority to conduct the execution sale.[18] Petitioners motion for reconsideration was denied in a Resolution dated June 1, 2007. Hence, the instant petition anchored on the following grounds: THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO COMMITTED GRAVE AND REVERSIBLE ERROR WHEN: (1) IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE SURVIVING ENTITY IN THE MERGER BETWEEN DSLAI AND FISLAI AS A DEFENSE IN AN ACTION OTHER THAN IN A QUO WARRANTO PROCEEDING UPON THE INSTITUTION OF THE SOLICITOR GENERAL AS MANDATED UNDER SECTION 20 OF BATAS PAMBANSA BLG. 68. (2)


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IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH DSLAI AS THE SURVIVING CORPORATION. (3) IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN CUSTODIA LEGIS AND THEREFORE, EXEMPT FROM GARNISHMENT, LEVY, ATTACHMENT OR EXECUTION.[19] To resolve this petition, we must address two basic questions: (1) Was the merger between FISLAI and DSLAI (now MSLAI) valid and effective; and (2) Was there novation of the obligation by substituting the person of the debtor? We answer both questions in the negative. Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties, and liabilities are acquired by the surviving corporation.[20] Although there is a dissolution of the absorbed or merged corporations, there is no winding up of their affairs or liquidation of their assets because the surviving corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities.[21] The merger, however, does not become effective upon the mere agreement of the constituent corporations.[22] Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them.[23] The steps necessary to accomplish a merger or consolidation, as provided for in Sections 76,[24] 77,[25] 78,[26] and 79[27] of the Corporation Code, are: (1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of consolidation, all the statements required in the articles of incorporation of a corporation. (2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be called and at least two (2) weeks notice must be sent to all stockholders or members, personally or by registered mail. A summary of the plan must be attached to the notice. Vote of two-thirds of the members or of stockholders representing two-thirds of the outstanding capital stock will be needed. Appraisal rights, when proper, must be respected. (3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the corporate officers of each constituent corporation. These take the place of the articles of


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incorporation of the consolidated corporation, or amend the articles of incorporation of the surviving corporation. (4) Submission of said articles of merger or consolidation to the SEC for approval. (5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks before. (6) Issuance of certificate of merger or consolidation.[28] Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the SEC, subject to its prior determination that the merger is not inconsistent with the Corporation Code or existing laws.[29] Where a party to the merger is a special corporation governed by its own charter, the Code particularly mandates that a favorable recommendation of the appropriate government agency should first be obtained.[30] In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered with the SEC due to incomplete documentation. Consequently, the SEC did not issue the required certificate of merger. Even if it is true that the Monetary Board of the Central Bank of the Philippines recognized such merger, the fact remains that no certificate was issued by the SEC. Such merger is still incomplete without the certification.The issuance of the certificate of merger is crucial because not only does it bear out SECs approval but it also marks the moment when the consequences of a merger take place. By operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights and properties, as well as liabilities, shall be taken and deemed transferred to and vested in the surviving corporation.[31] The same rule applies to consolidation which becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the SEC.[32] When the SEC, upon processing and examining the articles of consolidation, is satisfied that the consolidation of the corporations is not inconsistent with the provisions of the Corporation Code and existing laws, it issues a certificate of consolidation which makes the reorganization official.[33] The new consolidated corporation comes into existence and the constituent corporations are dissolved and cease to exist.[34] There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as respondents, the two corporations shall not be considered as one but two separate corporations. A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence.[35] It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related.[36] Being separate entities, the property of one cannot be considered the property of the other.


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Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as its assets and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the Deed of Assignment wherein FISLAI assigned its assets and properties to DSLAI, and the latter assumed all the liabilities of the former. As provided in Article 1625 of the Civil Code, an assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. The certificates of title of the subject properties were clean and contained no annotation of the fact of assignment. Respondents cannot, therefore, be faulted for enforcing their claim against FISLAI on the properties registered under its name. Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the execution sale over the properties of FISLAI. With more reason can it not cause the cancellation of the title to the subject properties of Willkom and Go. Petitioner cannot also anchor its right to annul the execution sale on the principle of novation. While it is true that DSLAI (now MSLAI) assumed all the liabilities of FISLAI, such assumption did not result in novation as would release the latter from liability, thereby exempting its properties from execution. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor.[37] It is a rule that novation by substitution of debtor must always be made with the consent of the creditor.[38] Article 1293 of the Civil Code is explicit, thus: Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that DSLAI (now MSLAI) would assume the liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the assets that FISLAI transferred to DSLAI remained subject to execution to satisfy the judgment claim of Uy against FISLAI. The subsequent sale of the properties by Uy to Willkom, and of one of the properties by Willkom to Go, cannot, therefore, be questioned by MSLAI. The consent of the creditor to a novation by change of debtor is as indispensable as the creditors consent in conventional subrogation in order that a novation shall legally take place.[39] Since novation implies a waiver of the right which the creditor had before the novation, such waiver must be express.[40]


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WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated March 21, 2007 and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337 are AFFIRMED.

Documents

CORPO CASES v. Corporate Powers