Corpo Code Cases

8/12/2019 Corpo Code Cases

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SECOND DIVISION

[G.R. No. 125469. October 27, 1997]

PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE HONORABLE COURT OF

APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND,

INC., respondents.

D E C I S I O N

TORRES, JR., J.:

The Securities and Exchange Commission is the government agency, under the

direct general supervision of the Office of the President,[1] with the immense task

of enforcing the Revised Securities Act, and all other duties assigned to it bypertinent laws. Among its innumerable functions, and one of the most important,

is the supervision of all corporations, partnerships or associations, who are

grantees or primary franchise and/or a license or permit issued by the


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Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange

an application to list its shares, with supporting documents attached.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALIs

application, recommended to the PSEs Board of Governors the approval of PALIs

listing application.

On February 14, 1996, before it could act upon PALIs application, the Board of

Governors of PSE received a letter from the heirs of Ferdinand E. Marcos, claiming

that the late President Marcos was the legal and beneficial owner of certain

properties forming part of the Puerto Azul Beach Hotel and Resort Complex which

PALI claims to be among its assets and that the Ternate Development

Corporation, which is among the stockholders of PALI, likewise appears to have

been held and continue to be held in trust by one Rebecco Panlilio for then

President Marcos and now, effectively for his estate, and requested PALIsapplication to be deferred. PALI was requested to comment upon the said letter.

PALIs answer stated that the properties forming part of Puerto Azul Beach Hotel

and Resort Complex were not claimed by PALI as its assets. On the contrary, the


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resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul

Country Club, entities distinct from PALI. Furthermore, the Ternate Development

Corporation owns only 1.20% of PALI. The Marcoses responded that their claim is

not confined to the facilities forming part of the Puerto Azul Hotel and Resort

Complex, thereby implying that they are also asserting legal and beneficial

ownership of other properties titled under the name of PALI.

On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the

Presidential Commission on Good Government (PCGG) requesting for comments

on the letter of the PALI and the Marcoses. On March 4, 1996, the PSE was

informed that the Marcoses received a Temporary Restraining Order on the same

date, enjoining the Marcoses from, among others, further impeding, obstructing,

delaying or interfering in any manner by or any means with the consideration,

processing and approval by the PSE of the initial public offering of PALI. The TROwas issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City

in Civil Case No. 65561, pending in Branch 69 thereof.


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In its regular meeting held on March 27, 1996, the Board of Governors of the PSE

reached its decision to reject PALIs application, citing the existence of serious

claims, issues and circumstances surrounding PALIs ownership over its assets that

adversely affect the suitability of listing PALIs shares in the stock exchange.

On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting

Chairman, Perfecto R. Yasay, Jr., bringing to the SECs attention the action taken

by the PSE in the application of PALI for the listing of its shares with the PSE, and

requesting that the SEC, in the exercise of its supervisory and regulatory powers

over stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSEs action

on PALIs listing application and institute such measures as are just and proper

and under the circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching

thereto the letter of PALI and directing the PSE to file its comments thereto withinfive days from its receipt and for its authorized representative to appear for an

inquiry on the matter. On April 22, 1996, the PSE submitted a letter to the SEC

containing its comments to the April 11, 1996 letter of PALI.


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on the adverse claim against the PALI properties, PSE should require PALI to

submit full disclosure of material facts and information to protect the investing

public. In this regard, PALI is hereby ordered to amend its registration statements

filed with the Commission to incorporate the full disclosure of these material facts

and information.

Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17,

1996 a Petition for Review (with application for Writ of Preliminary Injunction and

Temporary Restraining Order), assailing the above mentioned orders of the SEC,submitting the following as errors of the SEC:

I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN

ISSUING THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR

AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF SHARES

OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE

DECISIONS OF PSE ON LISTING APPLICATIONS;


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II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN

FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN

DISAPPROVING PALISLISTING APPLICATION;

III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING

FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM

PART OF NAVAL/MILITARY RESERVATION; AND

IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED ANDITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE DUE

PROCESS CLAUSE OF THE CONSTITUTION.

On June 4, 1996, PALI filed its Comment to the Petition for Review and

subsequently, a Comment and Motion to Dismiss. On June 10, 1996, PSE filed its

Reply to Comment and Opposition to Motion to Dismiss.

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the

PSEs Petition for Review. Hence, this Petition by the PSE.


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The appellate court had ruled that the SEC had both jurisdiction and authority to

look into the decision of the petitioner PSE, pursuant to Section 3[3] of the

Revised Securities Act in relation to Section 6(j) and 6(m)[4] of P.D. No. 902-A, and

Section 38(b)[5] of the Revised Securities Act, and for the purpose of ensuring fair

administration of the exchange. Both as a corporation and as a stock exchange,

the petitioner is subject to public respondents jurisdiction, regulation and

control. Accepting the argument that the public respondent has the authority

merely to supervise or regulate, would amount to serious consequences,considering that the petitioner is a stock exchange whose business is impressed

with public interest. Abuse is not remote if the public respondent is left without

any system of control. If the securities act vested the public respondent with

jurisdiction and control over all corporations; the power to authorize the

establishment of stock exchanges; the right to supervise and regulate the same;

and the power to alter and supplement rules of the exchange in the listing or

delisting of securities, then the law certainly granted to the public respondent the


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plenary authority over the petitioner; and the power of review necessarily comes

within its authority.

All in all, the court held that PALI complied with all the requirements for

public listing, affirming the SECs ruling to the effect that:

x x x the Philippine Stock Exchange has acted in an arbitrary and abusive manner

in disapproving the application of PALI for listing of its shares in the face of the

following considerations:

1. PALI has clearly and admittedly complied with the Listing Rules and full

disclosure requirements of the Exchange;

2. In applying its clear and reasonable standards on the suitability for listing

of shares, PSE has failed to justify why it acted differently on the application of

PALI, as compared to the IPOs of other companies similarly that were allowed

listing in the Exchange;

3. It appears that the claims and issues on the title to PALIs properties

were even less serious than the claims against the assets of the other companies


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in that, the assertions of the Marcoses that they are owners of the disputed

properties were not substantiated enough to overcome the strength of a title to

properties issued under the Torrens System as evidence of ownership thereof;

4. No action has been filed in any court of competent jurisdiction seeking

to nullify PALIs ownership over the disputed properties, neither has the

government instituted recovery proceedings against these properties. Yet the

import of PSEs decision in denying PALIs application is that it would be PALI, not

the Marcoses, that must go to court to prove the legality of its ownership onthese properties before its shares can be listed.

In addition, the argument that the PALI properties belong to the

Military/Naval Reservation does not inspire belief. The point is, the PALI

properties are now titled. A property losses its public character the moment it is

covered by a title. As a matter of fact, the titles have long been settled by a final

judgment; and the final decree having been registered, they can no longer be re-

opened considering that the one year period has already passed. Lastly, the


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determination of what standard to apply in allowing PALIs application for listing,

whether the discretion method or the system of public disclosure adhered to by

the SEC, should be addressed to the Securities Commission, it being the

government agency that exercises both supervisory and regulatory authority over

all corporations.

On August 15, 1996, the PSE, after it was granted an extension, filed an

instant Petition for Review on Certiorari, taking exception to the rulings of the SEC

and the Court of Appeals. Respondent PALI filed its Comment to the petition onOctober 17, 1996. On the same date, the PCGG filed a Motion for Leave to file a

Petition for Intervention. This was followed up by the PCGGs Petition for

Intervention on October 21, 1996. A supplemental Comment was filed by PALI on

October 25, 1997. The Office of the Solicitor General, representing the SEC and

the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer

to the PCGGs motion for leave to file petition for intervention, PALI filed its

Comment thereto on January 17, 1997, whereas the PSE filed its own Comment

on January 20, 1997.


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On February 25, 1996, the PSE filed its Consolidated Reply to the comments

of respondent PALI (October 17, 1996) and the Solicitor General (December 26,

1996). On may 16, 1997, PALI filed its Rejoinder to the said consolidated reply of

PSE.

PSE submits that the Court of Appeals erred in ruling that the SEC had

authority to order the PSE to list the shares of PALI in the stock exchange. Under

presidential decree No. 902-A, the powers of the SEC over stock exchanges aremore limited as compared to its authority over ordinary corporations. In

connection with this, the powers of the SEC over stock exchanges under the

Revised Securities Act are specifically enumerated, and these do not include the

power to reverse the decisions of the stock exchange. Authorities are in

abundance even in the United States, from which the countrys security policies

are patterned, to the effect of giving the Securities Commission less control over

stock exchanges, which in turn are given more lee-way in making the decision

whether or not to allow corporations to offer their stock to the public through the


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stock exchange. This is in accord with the business judgment rule whereby the

SEC and the courts are barred from intruding into business judgments of

corporations, when the same are made in good faith. The said rule precludes the

reversal of the decision of the PSE to deny PALIs listing application, absent a

showing a bad faith on the part of the PSE. Under the listing rule of the PSE, to

which PALI had previously agreed to comply, the PSE retains the discretion to

accept or reject applications for listing. Thus, even if an issuer has complied with

the PSE listing rules and requirements, PSE retains the discretion to accept orreject the issuers listing application if the PSE determines that the listing shall not

serve the interests of the investing public.

Moreover, PSE argues that the SEC has no jurisdiction over sequestered

corporations, nor with corporations whose properties are under sequestration. A

reading of Republic of the Philippines vs. Sandiganbayan, G.R. No. 105205, 240

SCRA 376, would reveal that the properties of PALI, which were derived from the

Ternate Development Corporation (TDC) and the Monte del Sol Development

Corporation (MSDC), are under sequestration by the PCGG, and the subject of


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forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the law

of the case between the Republic and the TDC and MSDC. It categorically

declares that the assets of these corporations were sequestered by the PCGG on

March 10, 1986 and April 4, 1988.

It is, likewise, intimidated that the Court of Appeals sanction that PALIs

ownership over its properties can no longer be questioned, since certificates of

title have been issued to PALI and more than one year has since lapsed, is

erroneous and ignores well settled jurisprudence on land titles. That a certificateof title issued under the Torrens System is a conclusive evidence of ownership is

not an absolute rule and admits certain exceptions. It is fundamental that forest

lands or military reservations are non-alienable. Thus, when a title covers a forest

reserve or a government reservation, such title is void.

PSE, likewise, assails the SECs and the Court of Appeals reliance on the

alleged policy of full disclosure to uphold the listing of the PALIs shares with the

PSE, in the absence of a clear mandate for the effectivity of such policy. As it is,

the case records reveal the truth that PALI did not comply with the listing rules


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and disclosure requirements. In fact, PALIs documents supporting its application

contained misrepresentations and misleading statements, and concealed material

information. The matter of sequestration of PALIs properties and the fact that

the same form part of military/naval/forest reservations were not reflected in

PALIs application.

It is undeniable that the petitioner PSE is not an ordinary corporation, in

that although it is clothed with the marking of a corporate entity, its functions as

the primary channel through which the vessels of capital trade ply. The PSEsrelevance to the continued operation and filtration of the securities transactions

in the country gives it a distinct color of importance such that government

intervention in its affairs becomes justified, if not necessary. Indeed, as the only

operational stock exchange in the country today, the PSE enjoys a monopoly of

securities transactions, and as such, it yields an immense influence upon the

countrys economy. Due to this special nature of stock exchanges, the countrys

lawmakers has seen it wise to give special treatment to the administration and

regulation of stock exchanges.[6]


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These provisions, read together with the general grant of jurisdiction, and

right of supervision and control over all corporations under Sec. 3 of P.D. 902-A,

give the SEC the special mandate to be vigilant in the supervision of the affairs of

stock exchanges so that the interests of the investing public may be fully

safeguarded.

Section 3 of Presidential Decree 902-A, standing alone, is enough authority

to uphold the SECs challenged control authority over the petitioner PSE even as it

provides that the Commission shall have absolute jurisdiction, supervision, andcontrol 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 The SECs regulatory authority over private

corporations encompasses a wide margin of areas, touching nearly all of a

corporations concerns. This authority springs from the fact that a corporation

owes its existence to the concession of its corporate franchise from the state.

The SECs power to look into the subject ruling of the PSE, therefore, may

be implied from or be considered as necessary or incidental to the carrying out of


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the SECs express power to insure fair dealing in securities traded upon a stock

exchange or to ensure the fair administration of such exchange.[7] It is, likewise,

observed that the principal function of the SEC is the supervision and control over

corporations, partnerships and associations with the end in view that investment

in these entities may be encouraged and protected, and their activities pursued

for the promotion of economic development.[8]

Thus, it was in the alleged exercise of this authority that the SEC reversed

the decision of the PSE to deny the application for listing in the stock exchange ofthe private respondent PALI. The SECs action was affirmed by the Court of

Appeals.

We affirm that the SEC is the entity with the primary say as to whether or

not securities, including shares of stock of a corporation, may be traded or not in

the stock exchange. This is in line with the SECs mission to ensure proper

compliance with the laws, such as the Revised Securities Act and to regulate the

sale and disposition of securities in the country.[9] As the appellate court

explains:


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This is not to say, however, that the PSEs management prerogatives are

under the absolute control of the SEC. The PSE is, after all, a corporation

authorized by its corporate franchise to engage in its proposed and duly approved

business. One of the PSEs main concerns, as such, is still the generation of profit

for its stockholders. Moreover, the PSE has all the rights pertaining to

corporations, including the right to sue and be sued, to hold property in its own

name, to enter (or not to enter) into contracts with third persons, and to perform

all other legal acts within its allocated express or implied powers.A corporation is but an association of individuals, allowed to transact under

an assumed corporate name, and with a distinct legal personality. In organizing

itself as a collective body, it waives no constitutional immunities and perquisites

appropriate to such body.[11] As to its corporate and management decisions,

therefore, the state will generally not interfere with the same. Questions of

policy and of management are left to the honest decision of the officers and

directors of a corporation, and the courts are without authority to substitute their

judgment for the judgment of the board of directors. The board is the business


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manager of the corporation, and so long as it acts in good faith, its orders are not

reviewable by the courts.[12]

Thus, notwithstanding the regulatory power of the SEC over the PSE, and

the resultant authority to reverse the PSEs decision in matters of application for

listing in the market, the SEC may exercise such power only if the PSEs judgment

is attended by bad faith. In board of Liquidators vs. Kalaw,[13] it was held that

bad faith does not simply connote bad judgment or negligence. It imports a

dishonest purpose or some moral obliquity and conscious doing of wrong. Itmeans a breach of a known duty through some motive or interest of ill will,

partaking of the nature of fraud.

In reaching its decision to deny the application for listing of PALI, the PSE

considered important facts, which in the general scheme, brings to serious

question the qualification of PALI to sell its shares to the public through the stock

exchange. During the time for receiving objections to the application, the PSE

heard from the representative of the late President Ferdinand E. Marcos and his

family who claim the properties of the private respondent to be part of the


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Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of

sequestration has been issued covering the properties of PALI, and suit for

reconveyance to the state has been filed in the Sandiganbayan Court. How the

properties were effectively transferred, despite the sequestration order, from the

TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in only a

short span of time, are not yet explained to the Court, but it is clear that such

circumstances give rise to serious doubt as to the integrity of PALI as a stock

issuer. The petitioner was in the right when it refused application of PALI, for acontrary ruling was not to the best interest of the general public. The purpose of

the Revised Securities Act, after all, is to give adequate and effective protection to

the investing public against fraudulent representations, or false promises, and the

imposition of worthless ventures.[14]

It is to be observed that the U.S. Securities Act emphasized its avowed

protection to acts detrimental to legitimate business, thus:

The Securities Act, often referred to as the truth in securities Act, was designed

not only to provide investors with adequate information upon which to base their


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decisions to buy and sell securities, but also to protect legitimate business seeking

to obtain capital through honest presentation against competition form crooked

promoters and to prevent fraud in the sale of securities. (Tenth Annual Report,

U.S. Securities and Exchange Commission, p. 14).

As has been pointed out, the effects of such an act are chiefly (1)

prevention of excesses and fraudulent transactions, merely by requirement of

that details be revealed; (2) placing the market during the early stages of the

offering of a security a body of information, which operating indirectly throughinvestment services and expert investors, will tend to produce a more accurate

appraisal of a security. x x x. Thus, the Commission may refuse to permit a

registration statement to become effective if it appears on its face to be

incomplete or inaccurate in any material respect, and empower the Commission

to issue a stop order suspending the effectiveness of any registration statement

which is found to include any untrue statement of a material fact or to omit to

state any material fact required to be stated therein or necessary to make the

statements therein not misleading. (Idem).


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Also, as the primary market for securities, the PSE has established its name

and goodwill, and it has the right to protect such goodwill by maintaining a

reasonable standard of propriety in the entities who choose to transact through

its facilities. It was reasonable for PSE, therefore, to exercise its judgment in the

manner it deems appropriate for its business identity, as long as no rights are

trampled upon, and public welfare is safeguarded.

In this connection, it is proper to observe that the concept of government

absolutism in a thing of the past, and should remain so.The observation that the title of PALI over its properties is absolute and can

no longer be assailed is of no moment. At this juncture, there is the claim that the

properties were owned by the TDC and MSDC and were transferred in violation of

sequestration orders, to Rebecco Panlilio and later on to PALI, besides the claim

of the Marcoses that such properties belong to Marcos estate, and were held only

in trust by Rebecco Panlilio. It is also alleged by the petitioner that these

properties belong to naval and forest reserves, and therefore beyond private

dominion. If any of these claims is established to be true, the certificates of title


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over the subject properties now held by PALI may be disregarded, as it is an

established rule that a registration of a certificate of title does not confer

ownership over the properties described therein to the person named as owner.

The inscription in the registry, to be effective, must be made in good faith. The

defense of indefeasibility of a Torrens Title does not extend to a transferee who

takes the certificate of title with notice of a flaw.

In any case, for the purpose of determining whether PSE acted correctly in

refusing the application of PALI, the true ownership of the properties of PALI neednot be determined as an absolute fact. What is material is that the uncertainty of

the properties ownership and alienability exists, and this puts to question the

qualification of PALIs public offering. In sum, the Court finds that the SEC had

acted arbitrarily in arrogating unto itself the discretion of approving the

application for listing in the PSE of the private respondent PALI, since this is a

matter addressed to the sound discretion of the PSE, a corporate entity, whose

business judgments are respected in the absence of bad faith. The question as to

what policy is, or should be relied upon in approving the registration and sale of


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securities in the SEC is not for the Court to determine, but is left to the sound

discretion of the Securities and Exchange Commission. In mandating the SEC to

administer the Revised Securities Act, and in performing its other functions under

pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC

the power to promulgate such rules and regulations as it may consider

appropriate in the public interest for the enforcement of the said laws. The

second paragraph of Section 4 of the said law, on the other hand, provides that

no security, unless exempt by law, shall be issued, endorsed, sold, transferred orin any other manner conveyed to the public, unless registered in accordance with

the rules and regulations that shall be promulgated in the public interest and for

the protection of investors by the Commission. Presidential Decree No. 902-A, on

the other hand, provides that the SEC, as regulatory agency, has supervision and

control over all corporations and over the securities market as a whole, and as

such, is given ample authority in determining appropriate policies. Pursuant to

this regulatory authority, the SEC has manifested that it has adopted the policy of

full material disclosure where all companies, listed or applying for listing, are


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required to divulge truthfully and accurately, all material information about

themselves and the securities they sell, for the protection of the investing public,

and under pain of administrative, criminal and civil sanctions. In connection with

this, a fact is deemed material if it tends to induce or otherwise effect the sale or

purchase of its securities.[15] While the employment of this policy is recognized

and sanctioned by laws, nonetheless, the Revised Securities Act sets substantial

and procedural standards which a proposed issuer of securities must satisfy.[16]

Pertinently, Section 9 of the Revised Securities Act sets forth the possible Groundsfor the Rejection of the registration of a security:

- - The Commission may reject a registration statement and refuse to issue a

permit to sell the securities included in such registration statement if it finds that -

-

(1) The registration statement is on its face incomplete or inaccurate in any

material respect or includes any untrue statement of a material fact or omits to

state a material facts required to be stated therein or necessary to make the

statements therein not misleading; or


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(2) The issuer or registrant - -

(i) is not solvent or not is sound financial condition;

(ii) has violated or has not complied with the provisions of this Act, or the rules

promulgated pursuant thereto, or any order of the Commission;

(iii) has failed to comply with any of the applicable requirements and conditions

that the Commission may, in the public interest and for the protection of

investors, impose before the security can be registered;

(iv) had been engaged or is engaged or is about to engaged in fraudulenttransactions;

(v) is in any was dishonest of is not of good repute; or

(vi) does not conduct its business in accordance with law or is engaged in a

business that is illegal or contrary or government rules and regulations.

(3) The enterprise or the business of the issuer is not shown to be sound or

to be based on sound business principles;

(4) An officer, member of the board of directors, or principal stockholder of

the issuer is disqualified to such officer, director or principal stockholder; or


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(5) The issuer or registrant has not shown to the satisfaction of the

Commission that the sale of its security would not work to the prejudice to the

public interest or as a fraud upon the purchaser or investors. (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to

make the registration and issuance of securities dependent, to a certain extent,

on the merits of the securities themselves, and of the issuer, to be determined by

the Securities and Exchange Commission. This measure was meant to protect the

interest of the investing public against fraudulent and worthless securities, andthe SEC is mandated by law to safeguard these interests, following the policies

and rules therefore provided. The absolute reliance on the full disclosure method

in the registration of securities is, therefore, untenable. At it is, the Court finds

that the private respondent PALI, on at least two points (nos. 1 and 5) has failed

to support the propriety of the issue of its shares with unfailing clarity, thereby

lending support to the conclusion that the PSE acted correctly in refusing the

listing of PALI in its stock exchange. This does not discount the effectivity of

whatever method the SEC, in the exercise of its vested authority, chooses in


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setting the standard for public offerings of corporations wishing to do so.

However, the SEC must recognize and implement the mandate of the law,

particularly the Revised Securities Act, the provisions of which cannot be

amended or supplanted my mere administrative issuance.

In resum, the Court finds that the PSE has acted with justified circumspection,

discounting, therefore, any imputation of arbitrariness and whimsical animation

on its part. Its action in refusing to allow the listing of PALI in the stock exchange

is justified by the law and by the circumstances attendant to this case.ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS

the Petition for Review on Certiorari. The decisions of the Court of Appeals and

the Securities and Exchage Commission dated July 27, 1996 and April 24, 1996,

respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby

ENTERED, affirming the decision of the Philippine Stock Exchange to deny the

application for listing of the private respondent Puerto Azul Land, Inc.

SO ORDERED.


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EN BANC

[G.R. No. 147402. January 14, 2004]

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte

Metropolitan Water District (LMWD), Tacloban City, petitioner, vs.

COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C.

FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region VIII,respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a petition for certiorari*1+ to annul the Commission on Audits (COA)

Resolution dated 3 January 2000 and the Decision dated 30 January 2001 denying

the Motion for Reconsideration. The COA denied petitioner Ranulfo C. Felicianos


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request for COA to cease all audit services, and to stop charging auditing fees, to

Leyte Metropolitan Water District (LMWD). The COA also denied petitioners

request for COA to refund all auditing fees previously paid by LMWD.

Antecedent Facts

A Special Audit Team from COA Regional Office No. VIII audited the accounts of

LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999

requesting payment of auditing fees. As General Manager of LMWD, petitioner

sent a reply dated 12 October 1999 informing COAs Regional Director that thewater district could not pay the auditing fees. Petitioner cited as basis for his

action Sections 6 and 20 of Presidential Decree 198 (PD 198)*2+, as well as

Section 18 of Republic Act No. 6758 (RA 6758). The Regional Director referred

petitioners reply to the COA Chairman on 18 October 1999.

On 19 October 1999, petitioner wrote COA through the Regional Director asking

for refund of all auditing fees LMWD previously paid to COA.


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On 16 March 2000, petitioner received COA Chairman Celso D. Gangans

Resolution dated 3 January 2000 denying his requests. Petitioner filed a motion

for reconsideration on 31 March 2000, which COA denied on 30 January 2001.

On 13 March 2001, petitioner filed this instant petition. Attached to the petition

were resolutions of the Visayas Association of Water Districts (VAWD) and the

Philippine Association of Water Districts (PAWD) supporting the petition.

The Ruling of the Commission on AuditThe COA ruled that this Court has already settled COAs audit jurisdiction over

local water districts in Davao City Water District v. Civil Service Commission and

Commission on Audit,[3] as follows:

The above-quoted provision [referring to Section 3(b) PD 198] definitely

sets to naught petitioners contention that they are private corporations. It is

clear therefrom that the power to appoint the members who will comprise the

members of the Board of Directors belong to the local executives of the local


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subdivision unit where such districts are located. In contrast, the members of the

Board of Directors or the trustees of a private corporation are elected from

among members or stockholders thereof. It would not be amiss at this point to

emphasize that a private corporation is created for the private purpose, benefit,

aim and end of its members or stockholders. Necessarily, said members or

stockholders should be given a free hand to choose who will compose the

governing body of their corporation. But this is not the case here and this clearly

indicates that petitioners are not private corporations.The COA also denied petitioners request for COA to stop charging auditing

fees as well as petitioners request for COA to refund all auditing fees already

paid.

The Issues

Petitioner contends that COA committed grave abuse of discretion amounting

to lack or excess of jurisdiction by auditing LMWD and requiring it to pay

auditing fees. Petitioner raises the following issues for resolution:


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1. Whether a Local Water District (LWD) created under PD 198, as

amended, is a government-owned or controlled corporation subject to the audit

jurisdiction of COA;

2. Whether Section 20 of PD 198, as amended, prohibits COAs certified

public accountants from auditing local water districts; and

3. Whether Section 18 of RA 6758 prohibits the COA from charging

government-owned and controlled corporations auditing fees.

The Ruling of the Court

The petition lacks merit.

The Constitution and existing laws[4] mandate COA to audit all government

agencies, including government-owned and controlled corporations (GOCCs)

with original charters. An LWD is a GOCC with an original charter. Section 2(1),

Article IX-D of the Constitution provides for COAs audit jurisdiction, as follows:

SECTION 2. (1) The Commission on Audit shall have the power, authority and duty

to examine, audit, and settle all accounts pertaining to the revenue and receipts


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of, and expenditures or uses of funds and property, owned or held in trust by, or

pertaining to, the Government, or any of its subdivisions, agencies, or

instrumentalities, including government-owned and controlled corporations with

original charters, and on a post-audit basis: (a) constitutional bodies, commissions

and offices that have been granted fiscal autonomy under this Constitution; (b)

autonomous state colleges and universities; (c) other government-owned or

controlled corporations and their subsidiaries; and (d) such non-governmental

entities receiving subsidy or equity, directly or indirectly, from or through thegovernment, which are required by law or the granting institution to submit to

such audit as a condition of subsidy or equity. However, where the internal

control system of the audited agencies is inadequate, the Commission may adopt

such measures, including temporary or special pre-audit, as are necessary and

appropriate to correct the deficiencies. It shall keep the general accounts of the

Government and, for such period as may be provided by law, preserve the

vouchers and other supporting papers pertaining thereto. (Emphasis supplied)


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The COAs audit jurisdiction extends not only to government agencies or

instrumentalities, but also to government-owned and controlled corporations

with original charters as well as other government-owned or controlled

corporations without original charters.

Whether LWDs are Private or Government-Owned

and Controlled Corporations with Original Charters

Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-

examination of a doctrine backed by a long line of cases culminating in Davao CityWater District v. Civil Service Commission[5] and just recently reiterated in De

Jesus v. Commission on Audit.[6] Petitioner maintains that LWDs are not

government-owned and controlled corporations with original charters. Petitioner

even argues that LWDs are private corporations. Petitioner asks the Court to

consider certain interpretations of the applicable laws, which would give a new

perspective to the issue of the true character of water districts.*7+

Petitioner theorizes that what PD 198 created was the Local Waters Utilities

Administration (LWUA) and not the LWDs. Petitioner claims that LWDs are


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created pursuant to and not created directly by PD 198. Thus, petitioner

concludes that PD 198 is not an original charter that would place LWDs within

the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the

Constitution. Petitioner elaborates that PD 198 does not create LWDs since it

does not expressly direct the creation of such entities, but only provides for their

formation on an optional or voluntary basis.[8] Petitioner adds that the operative

act that creates an LWD is the approval of the Sanggunian Resolution as specified

in PD 198.Petitioners contention deserves scant consideration.

We begin by explaining the general framework under the fundamental law. The

Constitution recognizes two classes of corporations. The first refers to private

corporations created under a general law. The second refers to government-

owned or controlled corporations created by special charters. Section 16, Article

XII of the Constitution provides:

Sec. 16. The Congress shall not, except by general law, provide for the formation,

organization, or regulation of private corporations. Government-owned or


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controlled corporations may be created or established by special charters in the

interest of the common good and subject to the test of economic viability.

The Constitution emphatically prohibits the creation of private corporations

except by a general law applicable to all citizens.[9] The purpose of this

constitutional provision is to ban private corporations created by special charters,

which historically gave certain individuals, families or groups special privileges

denied to other citizens.[10]

In short, Congress cannot enact a law creating a private corporation with a specialcharter. Such legislation would be unconstitutional. Private corporations may

exist only under a general law. If the corporation is private, it must necessarily

exist under a general law. Stated differently, only corporations created under a

general law can qualify as private corporations. Under existing laws, that general

law is the Corporation Code,[11] except that the Cooperative Code governs the

incorporation of cooperatives.[12]

The Constitution authorizes Congress to create government-owned or controlled

corporations through special charters. Since private corporations cannot have


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but on the contrary, they were created pursuant to a special law and are

governed primarily by its provision.[13] (Emphasis supplied)

LWDs exist by virtue of PD 198, which constitutes their special charter. Sinceunder the Constitution only government-owned or controlled corporations may

have special charters, LWDs can validly exist only if they are government-owned

or controlled. To claim that LWDs are private corporations with a special charter

is to admit that their existence is constitutionally infirm.

Unlike private corporations, which derive their legal existence and power from

the Corporation Code, LWDs derive their legal existence and power from PD 198.

Sections 6 and 25 of PD 198[14] provide:

Section 6.Formation of District. This Act is the source of authorization and

power to form and maintain a district. For purposes of this Act, a district shall be

considered as a quasi-public corporation performing public service and supplying

public wants. As such, a district shall exercise the powers, rights and privileges

given to private corporations under existing laws, in addition to the powers

granted in, and subject to such restrictions imposed, under this Act.


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(a) The name of the local water district, which shall include the name of the

city, municipality, or province, or region thereof, served by said system, followed

by the words Water District.

(b) A description of the boundary of the district. In the case of a city or

municipality, such boundary may include all lands within the city or municipality.

A district may include one or more municipalities, cities or provinces, or portions

thereof.

(c) A statement completely transferring any and all waterworks and/or

sewerage facilities managed, operated by or under the control of such city,

municipality or province to such district upon the filing of resolution forming the

district.

(d) A statement identifying the purpose for which the district is formed,

which shall include those purposes outlined in Section 5 above.

(e) The names of the initial directors of the district with the date of

expiration of term of office for each.


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(f) A statement that the district may only be dissolved on the grounds and

under the conditions set forth in Section 44 of this Title.

(g) A statement acknowledging the powers, rights and obligations as setforth in Section 36 of this Title.

Nothing in the resolution of formation shall state or infer that the local legislative

body has the power to dissolve, alter or affect the district beyond that specifically

provided for in this Act.

If two or more cities, municipalities or provinces, or any combination thereof,

desire to form a single district, a similar resolution shall be adopted in each city,

municipality and province.

x x x

Sec. 25.Authorization. The district may exercise all the powers which are

expressly granted by this Title or which are necessarily implied from or incidental

to the powers and purposes herein stated. For the purpose of carrying out the

objectives of this Act, a district is hereby granted the power of eminent domain,


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the exercise thereof shall, however, be subject to review by the Administration.

(Emphasis supplied)

Clearly, LWDs exist as corporations only by virtue of PD 198, which expresslyconfers on LWDs corporate powers. Section 6 of PD 198 provides that LWDs

shall exercise the powers, rights and privileges given to private corporations

under existing laws. Without PD 198, LWDs would have no corporate powers.

Thus, PD 198 constitutes the special enabling charter of LWDs. The ineluctable

conclusion is that LWDs are government-owned and controlled corporations with

a special charter.

The phrase government-owned and controlled corporations with original

charters means GOCCs created under special laws and not under the general

incorporation law. There is no difference between the term original charters

and special charters. The Court clarified this in National Service Corporation v.

NLRC[15] by citing the deliberations in the Constitutional Commission, as follows:

THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.

Commissioner Romulo is recognized.


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MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed

amendment to now read as follows: including government-owned or controlled

corporations WITH ORIGINAL CHARTERS. The purpose of this amendment is toindicate that government corporations such as the GSIS and SSS, which have

original charters, fall within the ambit of the civil service. However, corporations

which are subsidiaries of these chartered agencies such as the Philippine Airlines,

Manila Hotel and Hyatt are excluded from the coverage of the civil service.

THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?

MR. FOZ. Just one question, Mr. Presiding Officer. By the term original

charters, what exactly do we mean?

MR. ROMULO. We mean that they were created by law, by an act of Congress,

or by special law.

MR. FOZ. And not under the general corporation law.

MR. ROMULO. That is correct. Mr. Presiding Officer.MR. FOZ. With that understanding and clarification, the Committee accepts the

amendment.


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corporations organized under our general incorporation statute the

Corporation Code. In NASECO, the company involved had been organized under

the general incorporation statute and was a subsidiary of the National InvestmentDevelopment Corporation (NIDC) which in turn was a subsidiary of the Philippine

National Bank, a bank chartered by a special statute. Thus, government-owned or

controlled corporations like NASECO are effectively, excluded from the scope of

the Civil Service. (Emphasis supplied)

Petitioners contention that the Sangguniang Bayan resolution creates the LWDs

assumes that the Sangguniang Bayan has the power to create corporations. This

is a patently baseless assumption. The Local Government Code[17] does not vest

in the Sangguniang Bayan the power to create corporations.[18] What the Local

Government Code empowers the Sangguniang Bayan to do is to provide for the

establishment of a waterworks system subject to existing laws. Thus, Section

447(5)(vii) of the Local Government Code provides:


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SECTION 447.Powers, Duties, Functions and Compensation. (a) The

sangguniang bayan, as the legislative body of the municipality, shall enact

ordinances, approve resolutions and appropriate funds for the general welfare ofthe municipality and its inhabitants pursuant to Section 16 of this Code and in the

proper exercise of the corporate powers of the municipality as provided for under

Section 22 of this Code, and shall:

x x x

(vii) Subject to existing laws, provide for the establishment, operation,

maintenance, and repair of an efficient waterworks system to supply water for

the inhabitants; regulate the construction, maintenance, repair and use of

hydrants, pumps, cisterns and reservoirs; protect the purity and quantity of the

water supply of the municipality and, for this purpose, extend the coverage of

appropriate ordinances over all territory within the drainage area of said water

supply and within one hundred (100) meters of the reservoir, conduit, canal,aqueduct, pumping station, or watershed used in connection with the water

service; and regulate the consumption, use or wastage of water;


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x x x. (Emphasis supplied)

The Sangguniang Bayan may establish a waterworks system only in accordance

with the provisions of PD 198. The Sangguniang Bayan has no power to create acorporate entity that will operate its waterworks system. However, the

Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and

incorporate a water district. Besides, even assuming for the sake of argument

that the Sangguniang Bayan has the power to create corporations, the LWDs

would remain government-owned or controlled corporations subject to COAs

audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an

LWDs special charter, making the LWD a government-owned and controlled

corporation with an original charter. In any event, the Court has already ruled in

Baguio Water District v. Trajano[19] that the Sangguniang Bayan resolution is not

the special charter of LWDs, thus:

While it is true that a resolution of a local sanggunian is still necessary for the finalcreation of a district, this Court is of the opinion that said resolution cannot be


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considered as its charter, the same being intended only to implement the

provisions of said decree.

Petitioner further contends that a law must create directly and explicitly a GOCC

in order that it may have an original charter. In short, petitioner argues that one

special law cannot serve as enabling law for several GOCCs but only for one

GOCC. Section 16, Article XII of the Constitution mandates that Congress shall

not, except by general law,*20+ provide for the creation of private corporations.

Thus, the Constitution prohibits one special law to create one private corporation,

requiring instead a general law to create private corporations. In contrast, the

same Section 16 states that Government-owned or controlled corporations may

be created or established by special charters. Thus, the Constitution permits

Congress to create a GOCC with a special charter. There is, however, no

prohibition on Congress to create several GOCCs of the same class under onespecial enabling charter.


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The rationale behind the prohibition on private corporations having special

charters does not apply to GOCCs. There is no danger of creating special

privileges to certain individuals, families or groups if there is one special lawcreating each GOCC. Certainly, such danger will not exist whether one special law

creates one GOCC, or one special enabling law creates several GOCCs. Thus,

Congress may create GOCCs either by special charters specific to each GOCC, or

by one special enabling charter applicable to a class of GOCCs, like PD 198 which

applies only to LWDs.

Petitioner also contends that LWDs are private corporations because Section 6 of

PD 198*21+ declares that LWDs shall be considered quasi-public in nature.

Petitioners rationale is that only private corporations may be deemed quasi-

public and not public corporations. Put differently, petitioner rationalizes that a

public corporation cannot be deemed quasi-public because such corporation is

already public. Petitioner concludes that the term quasi-public can only applyto private corporations. Petitioners argument is inconsequential.


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Petitioner forgets that the constitutional criterion on the exercise of COAs audit

jurisdiction depends on the governments ownership or control of a corporation.

The nature of the corporation, whether it is private, quasi-public, or public isimmaterial.

The Constitution vests in the COA audit jurisdiction over government-owned and

controlled corporations with original charters, as well as government-owned or

controlled corporations without original charters. GOCCs with original charters

are subject to COA pre-audit, while GOCCs without original charters are subject to

COA post-audit. GOCCs without original charters refer to corporations created

under the Corporation Code but are owned or controlled by the government. The

nature or purpose of the corporation is not material in determining COAs audit

jurisdiction. Neither is the manner of creation of a corporation, whether under a

general or special law.

The determining factor of COAs audit jurisdiction is government ownership orcontrol of the corporation. In Philippine Veterans Bank Employees Union-NUBE v.


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Philippine Veterans Bank,[22] the Court even ruled that the criterion of ownership

and control is more important than the issue of original charter, thus:

This point is important because the Constitution provides in its Article IX-B,Section 2(1) that the Civil Service embraces all branches, subdivisions,

instrumentalities, and agencies of the Government, including government-owned

or controlled corporations with original charters. As the Bank is not owned or

controlled by the Government although it does have an original charter in the

form of R.A. No. 3518,[23] it clearly does not fall under the Civil Service and

should be regarded as an ordinary commercial corporation. Section 28 of the said

law so provides. The consequence is that the relations of the Bank with its

employees should be governed by the labor laws, under which in fact they have

already been paid some of their claims. (Emphasis supplied)

Certainly, the government owns and controls LWDs. The government organizes

LWDs in accordance with a specific law, PD 198. There is no private partyinvolved as co-owner in the creation of an LWD. Just prior to the creation of

LWDs, the national or local government owns and controls all their assets. The


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facilities or operations.[31] This element of government control subjects LWDs to

COAs audit jurisdiction.

Petitioner argues that upon the enactment of PD 198, LWDs became privateentities through the transfer of ownership of water facilities from local

government units to their respective water districts as mandated by PD 198.

Petitioner is grasping at straws. Privatization involves the transfer of government

assets to a private entity. Petitioner concedes that the owner of the assets

transferred under Section 6 (c) of PD 198 is no other than the LWD itself.[32] The

transfer of assets mandated by PD 198 is a transfer of the water systems facilities

managed, operated by or under the control of such city, municipality or province

to such (water) district.*33+ In short, the transfer is from one government entity

to another government entity. PD 198 is bereft of any indication that the transfer

is to privatize the operation and control of water systems.

Finally, petitioner claims that even on the assumption that the government ownsand controls LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. [34]

Section 20 of PD 198 provides:


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Sec. 20.System of Business Administration. The Board shall, as soon as

practicable, prescribe and define by resolution a system of business

administration and accounting for the district, which shall be patterned upon andconform to the standards established by the Administration. Auditing shall be

performed by a certified public accountant not in the government service. The

Administration may, however, conduct annual audits of the fiscal operations of

the district to be performed by an auditor retained by the Administration.

Expenses incurred in connection therewith shall be borne equally by the water

district concerned and the Administration.[35] (Emphasis supplied)

Petitioner argues that PD 198 expressly prohibits COA auditors, or any

government auditor for that matter, from auditing LWDs. Petitioner asserts that

this is the import of the second sentence of Section 20 of PD 198 when it states

that *A+uditing shall be performed by a certified public accountant not in the

government service.*36+PD 198 cannot prevail over the Constitution. No amount of clever legislation can

exclude GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C of


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the Constitution outlaws any scheme or devise to escape COAs audit jurisdiction,

thus:

Sec. 3. No law shall be passed exempting any entity of the Government or itssubsidiary in any guise whatever, or any investment of public funds, from the

jurisdiction of the Commission on Audit. (Emphasis supplied)

The framers of the Constitution added Section 3, Article IX-D of the Constitution

precisely to annul provisions of Presidential Decrees, like that of Section 20 of PD

198, that exempt GOCCs from COA audit. The following exchange in the

deliberations of the Constitutional Commission elucidates this intent of the

framers:

MR. OPLE: I propose to add a new section on line 9, page 2 of the amended

committee report which reads: NO LAW SHALL BE PASSED EXEMPTING ANY

ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, ORANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE

COMMISSION ON AUDIT.


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May I explain my reasons on record.

We know that a number of entities of the government took advantage of the

absence of a legislature in the past to obtain presidential decrees exemptingthemselves from the jurisdiction of the Commission on Audit, one notable

example of which is the Philippine National Oil Company which is really an empty

shell. It is a holding corporation by itself, and strictly on its own account. Its

funds were not very impressive in quantity but underneath that shell there were

billions of pesos in a multiplicity of companies. The PNOC the empty shell

under a presidential decree was covered by the jurisdiction of the Commission on

Audit, but the billions of pesos invested in different corporations underneath it

were exempted from the coverage of the Commission on Audit.

Another example is the United Coconut Planters Bank. The Commission on Audit

has determined that the coconut levy is a form of taxation; and that, therefore,

these funds attributed to the shares of 1,400,000 coconut farmers are, in effect,public funds. And that was, I think, the basis of the PCGG in undertaking that last

major sequestration of up to 94 percent of all the shares in the United Coconut


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corporations, and government financial institutions, except those compensation

paid directly by COA out of its appropriations and contributions.

Government entities, including government-owned or controlled corporationsincluding financial institutions and local government units are hereby prohibited

from assessing or billing other government entities, including government-owned

or controlled corporations including financial institutions or local government

units for services rendered by its officials and employees as part of their regular

functions for purposes of paying additional compensation to said officials and

employees. (Emphasis supplied)

Claiming that Section 18 is absolute and leaves no doubt,*39+ petitioner asks

COA to discontinue its practice of charging auditing fees to LWDs since such

practice allegedly violates the law.

Petitioners claim has no basis.Section 18 of RA 6758 prohibits COA personnel from receiving any kind of

compensation from any government entity except compensation paid directly by


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The first aspect of the strategy is directed to the COA itself, while the second

aspect is addressed directly against the GOCCs and government financial

institutions. Under the first, COA personnel assigned to auditing units of GOCCsor government financial institutions can receive only such salaries, allowances or

fringe benefits paid directly by the COA out of its appropriations and

contributions. The contributions referred to are the cost of audit services earlier

mentioned which cannot include the extra emoluments or benefits now claimed

by petitioners. The COA is further barred from assessing or billing GOCCs and

government financial institutions for services rendered by its personnel as part of

their regular audit functions for purposes of paying additional compensation to

such personnel. x x x. (Emphasis supplied)

In Tejada, the Court explained the meaning of the word contributions in Section

18 of RA 6758, which allows COA to charge GOCCs the cost of its audit services:

x x x the contributions from the GOCCs are limited to the cost of audit serviceswhich are based on the actual cost of the audit function in the corporation

concerned plus a reasonable rate to cover overhead expenses. The actual audit


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vs.

BF CORPORATION, respondent.

D E C I S I O N

VELASCO, JR., J.:Before us are these two (2) consolidated petitions for review under Rule 45 to nullify certain issuances

of the Court of Appeals (CA).

In the first petition, docketed as G.R. No. 145842, petitioners Edsa Shangri-la Hotel and Resort, Inc.

(ESHRI), Rufo B. Colayco, Rufino L. Samaniego, Kuok Khoon Chen, and Kuok Khoon Tsen assail the

Decision1 dated November 12, 1999 of the CA in CA-G.R. CV No. 57399, affirming the Decision2 dated

September 23, 1996 of the Regional Trial Court (RTC), Branch 162 in Pasig City in Civil Case No. 63435

that ordered them to pay jointly and severally respondent BF Corporation (BF) a sum of money withinterests and damages. They also assail the CA Resolution dated October 25, 2000 which, apart from

setting aside an earlier Resolution3 of August 13, 1999 granting ESHRI's application for restitution and

damages against bond, affirmed the aforesaid September 23, 1996 RTC Decision.

In the second petition, docketed as G.R. No. 145873, petitioner Cynthia Roxas-del Castillo also assails the

aforementioned CA Decision of November 12, 1999 insofar at it adjudged her jointly and severally liable

with ESHRI, et al. to pay the monetary award decreed in the RTC Decision.Both petitions stemmed from a construction contract denominated as Agreement for the Execution of

Builder's Work for the EDSA Shangri-la Hotel Project4 that ESHRI and BF executed for the construction of

the EDSA Shangri-la Hotel starting May 1, 1991. Among other things, the contract stipulated for the

payment of the contract price on the basis of the work accomplished as described in the monthly


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payment of the contract price on the basis of the work accomplished as described in the monthly

progress billings. Under this arrangement, BF shall submit a monthly progress billing to ESHRI which

would then re-measure the work accomplished and prepare a Progress Payment Certificate for that

month's progress billing.5In a memorandum-letter dated August 16, 1991 to BF, ESHRI laid out the collection procedure BF was to

follow, to wit: (1) submission of the progress billing to ESHRI's Engineering Department; (2) following-up

of the preparation of the Progress Payment Certificate with the Head of the Quantity Surveying

Department; and (3) following-up of the release of the payment with one Evelyn San Pascual. BF

adhered to the procedures agreed upon in all its billings for the period from May 1, 1991 to June 30,

1992, submitting for the purpose the required Builders Work Summary, the monthly progress billings,

including an evaluation of the work in accordance with the Project Manager's Instructions (PMIs) andthe detailed valuations contained in the Work Variation Orders (WVOs) for final re-measurement under

the PMIs. BF said that the values of the WVOs were contained in the progress billings under the section

"Change Orders."6

From May 1, 1991 to June 30, 1992, BF submitted a total of 19 progress billings following the procedure

agreed upon. Based on Progress Billing Nos. 1 to 13, ESHRI paid BF PhP 86,501,834.05.7

According to BF, however, ESHRI, for Progress Billing Nos. 14 to 19, did not re-measure the work done,

did not prepare the Progress Payment Certificates, let alone remit payment for the inclusive periodscovered. In this regard, BF claimed having been misled into working continuously on the project by

ESHRI which gave the assurance about the Progress Payment Certificates already being processed.


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Petitioners fault the CA, and necessarily the trial court, on the matter of the admission in evidence of


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the photocopies of Progress Billing Nos. 14 to 19 and the complementing PMIs and the WVOs. According

to petitioners, BF, before being allowed to adduce in evidence the photocopies adverted to, ought to

have laid the basis for the presentation of the photocopies as secondary evidence, conformably to thebest evidence rule.

Respondent BF, on the other hand, avers having complied with the laying-the-basis requirement.

Defending the action of the courts below in admitting into evidence the photocopies of the documents

aforementioned, BF explained that it could not present the original of the documents since they were in

the possession of ESHRI which refused to hand them over to BF despite requests.

We agree with BF. The only actual rule that the term "best evidence" denotes is the rule requiring that

the original of a writing must, as a general proposition, be produced17 and secondary evidence of itscontents is not admissible except where the original cannot be had. Rule 130, Section 3 of the Rules of

Court enunciates the best evidence rule:

SEC. 3. Original document must be produced; exceptions. - When the subject of inquiry is the contents

of a document, no evidence shall be admissible other than the original document itself, except in the

following cases:

(a) When the original has been lost or destroyed, or cannot be produced in court, without bad faith on

the part of the offeror;(b) When the original is in the custody or under the control of the party against whom the evidence is

offered, and the latter fails to produce it after reasonable notice; (Emphasis added.)

Complementing the above provision is Sec. 6 of Rule 130, which reads:


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have brought the originals and whether they will present the originals in court, Your Honor. (Emphasis


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added.)

ATTY. AUTEA:

We have already informed our client about the situation, your Honor, that it has been claimed byplaintiff that some of the originals are in their possession and our client assured that, they will try to

check. Unfortunately, we have not heard from our client, Your Honor.

Four factual premises are readily deducible from the above exchanges, to wit: (1) the existence of the

original documents which ESHRI had possession of; (2) a request was made on ESHRI to produce the

documents; (3) ESHRI was afforded sufficient time to produce them; and (4) ESHRI was not inclined to

produce them.

Clearly, the circumstances obtaining in this case fall under the exception under Sec. 3(b) of Rule 130. Inother words, the conditions sine qua non for the presentation and reception of the photocopies of the

original document as secondary evidence have been met. These are: (1) there is proof of the original

document's execution or existence; (2) there is proof of the cause of the original document's

unavailability; and (3) the offeror is in good faith.19 While perhaps not on all fours because it involved a

check, what the Court said in Magdayao v. People, is very much apt, thus:

x x x To warrant the admissibility of secondary evidence when the original of a writing is in the custody

or control of the adverse party, Section 6 of Rule 130 provides that the adverse party must be givenreasonable notice, that he fails or refuses to produce the same in court and that the offeror offers

satisfactory proof of its existence.

x x x x


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Decision in Civil Case No. 63435. This CA Decision on the original and main case effectively rendered our

d i i th i id t l d l tt tit ti t d d i All i tit ti t


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decision on the incidental procedural matter on restitution moot and academic. Allowing restitution at

this point would not serve any purpose, but only prolong an already protracted litigation.

G.R. No. 145873Petitioner Roxas-del Castillo, in her separate petition, excepts from the CA Decision affirming, in its

entirety, the RTC Decision holding her, with the other individual petitioners in G.R. No. 145842, who

were members of the Board of Directors of ESHRI, jointly and severally liable with ESHRI for the

judgment award. She presently contends:

I. The [CA] erred in not declaring that the decision of the trial court adjudging petitioner personally liable

to respondent void for not stating the factual and legal basis for such award.

II. The [CA] erred in not ruling that as former Director, Petitioner cannot be held personally liable for anyalleged breach of a contract entered into by the corporation.

III. The [cA] erred in not ruling that respondent is not entitled to an award of moral damages.

IV. The [CA] erred in holding petitioner personally liable to respondent for exemplary damages.

V. The [CA] erred in not ruling that respondent is not entitled to any award of attorney's fees.22

First off, Roxas-del Castillo submits that the RTC decision in question violated the requirements of due

process and of Sec. 14, Article VII of the Constitution that states, "No decision shall be rendered by any

court without expressing therein clearly and distinctly the facts and the law on which it is based."

Roxas-del Castillo's threshold posture is correct. Indeed, the RTC decision in question, as couched, does

not provide the factual or legal basis for holding her personally liable under the premises. In fact, only in

the dispositive portion of the decision did her solidary liability crop up. And save for her inclusion as

party defendant in the underlying complaint no reference is made in other pleadings thus filed as to her


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party defendant in the underlying complaint, no reference is made in other pleadings thus filed as to her

liability.

The Court notes that the appellate court, by its affirmatory ruling, effectively recognized the applicabilityof the doctrine on piercing the veil of the separate corporate identity. Under the circumstances of this

case, we cannot allow such application. A corporation, upon coming to existence, is invested by law with

a personality separate and distinct from those of the persons composing it. Ownership by a single or a

small group of stockholders of nearly all of the capital stock of the corporation is not, without more,

sufficient to disregard the fiction of separate corporate personality.23 Thus, obligations incurred by

corporate officers, acting as corporate agents, are not theirs but direct accountabilities of the

corporation they represent. Solidary liability on the part of corporate officers may at times attach, butonly under exceptional circumstances, such as when they act with malice or in bad faith.24 Also, in

appropriate cases, the veil of corporate fiction shall be disregarded when the separate juridical

personality of a corporation is abused or used to commit fraud and perpetrate a social injustice, or used

as a vehicle to evade obligations.25 In this case, no act of malice or like dishonest purpose is ascribed on

petitioner Roxas-del Castillo as to warrant the lifting of the corporate veil.

The above conclusion would still hold even if petitioner Roxas-del Castillo, at the time ESHRI defaulted in

paying BF's monthly progress bill, was still a director, for, before she could be held personally liable ascorporate director, it must be shown that she acted in a manner and under the circumstances

contemplated in Sec. 31 of the Corporation Code, which reads:


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INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT OF APPEALS,

HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.


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HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.

D E C I S I O N

KAPUNAN, J.:On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing

director, wrote a letter to the Philippine Football Federation (Federation), through its president private

respondent Henri Kahn, wherein the former offered its services as a travel agency to the latter.[1] The

offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the

South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China

and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received, theFederation made two partial payments, both in September of 1989, in the total amount of

P176,467.50.[2]

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter

requesting for the amount of P265,894.33.[3] On 30 October 1989, the Federation, through the Project

Gintong Alay, paid the amount of P31,603.00.[4]

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment

for the outstanding balance of the Federation.[5] Thereafter, no further payments were made despiterepeated demands.

This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued

Henri Kahn in his personal capacity and as President of the Federation and impleaded the Federation as

an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the

tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said


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p y g g y g

obligation.[6]

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federationowed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that

the petitioner has no cause of action against him either in his personal capacity or in his official capacity

as president of the Federation. He maintained that he did not guarantee payment but merely acted as

an agent of the Federation which has a separate and distinct juridical personality.[7]

On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial

court.[8]In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri

Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial

court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly established that

defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the

defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant

Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine FootballFederation is a sports association xxx." This has not been denied by defendant Henri Kahn in his Answer.

Being the President of defendant Federation, its corporate existence is within the personal knowledge of

defendant Henri Kahn. He could have easily denied specifically the assertion of the plaintiff that it is a

mere sports association, if it were a domestic corporation. But he did not.


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p p

x x x

A voluntary unincorporated association, like defendant Federation has no power to enter into, or toratify, a contract. The contract entered into by its officers or agents on behalf of such association is not

binding on, or enforceable against it. The officers or agents are themselves personally liable.

x x x[9]

The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum

of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the

complaint was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00 forattorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the

defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.[10]

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the

respondent court rendered a decision reversing the trial court, the decretal portion of said decisionreads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE and

another one is rendered dismissing the complaint against defendant Henri S. Kahn.[11]


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about the corporate existence or non-existence of the Federation. We cannot subscribe to the position

taken by the appellate court that even assuming that the Federation was defectively incorporated, the

titi t d th t i t f th F d ti b it h d t t d d d lt


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petitioner cannot deny the corporate existence of the Federation because it had contracted and dealt

with the Federation in such a manner as to recognize and in effect admit its existence.[15] The doctrine

of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The

application of the doctrine applies to a third party only when he tries to escape liability on a contract

from which he has benefited on the irrelevant ground of defective incorporation.[16] In the case at bar,

the petitioner is not trying to escape liability from the contract but rather is the one claiming from the

contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional Trial

Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

SO ORDERED.


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month. She did so and returned on September 10, 2004. Upon her return, Xu and his wife asked her to

resign from Wensha because, according to the Feng Shui master, her aura did not match that of Xu.

Loreta refused but was informed that she could no longer continue working at Wensha That same


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Loreta refused but was informed that she could no longer continue working at Wensha. That same

afternoon, Loreta went to the NLRC and filed a case for illegal dismissal against Xu and Wensha.

Wensha and Xu denied illegally terminating Loretas employment. They claimed that two months after

Loreta was hired, they received various complaints against her from the employees so that on August

10, 2004, they advised her to take a leave of absence for one month while they conducted an

investigation on the matter. Based on the results of the investigation, they terminated Loretas

employment on August 31, 2004 for loss of trust and confidence.[6]

The Labor Arbiter (LA) Francisco Robles dismissed Loretas complaint for lack of merit. He found it more

probable that Loreta was dismissed from her employment due to Wenshas loss of trust and confidence

in her. The LAs decision[7] partly reads:

However, this office has found it dubious and hard to believe the contentions made by the complainant

that she was dismissed by the respondents on the sole ground that she is a mismatch in respondents'

business as advised by an alleged Feng Shui Master. The complainant herself alleged in her position

paper that she has done several improvements in respondents business such as uplifting the morale

and efficiency of its employees and increasing respondents clientele, and that respondent Co was very

much pleased with the improvements made by the complainant that she was offered twice a promotion

but she nevertheless declined. It would be against human experience and contrary to business acumen

to let go of someone, who was an asset and has done so much for the company merely on the ground


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attached to Delos Reyes affidavit were all dated November 19, 2004 indica

Documents

Corpo Code Cases