Republic of the Philippines

Supreme Court
Manila THIRD DIVISION PHILIP TURNER and ELNORA TURNER, G.R. No. 157479 Present: CARPIO MORALES, Chairperson , BRION, BERSAMIN, VILLARAMA, JR., and ARANALSERENO, JJ.

Petitioners,

corporation, the Regional Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation, herein respondent, to pay. Execution was partially carried out against the respondent. On the respondents petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed the petitioners suit on the ground that their cause of action for collection had not yet accrued due to the lack of unrestricted retained earnings in the books of the respondent. Thus, the petitioners are now before the Court to challenge the CAs decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al.[1]

versus -

LORENZO SHIPPING CORPORATI ON, Re

Promulgated: November 24, 2010

Antecedents spondent. x----------------------------------------------------------------------------------------x DECISION The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of incorporation to remove the stockholders pre-emptive rights to newly issued shares of stock. Feeling that the corporate move would be prejudicial to their interest as stockholders, the petitioners voted against the amendment and demanded payment of their shares at the rate of P2.276/share based on the book value of the shares, or a total of P2,298,760.00.

BERSAMIN, J.:

This case concerns the right of dissenting stockholders to demand payment of the value of their shareholdings. In the stockholders suit to recover the value of their shareholdings from the

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted that the market value on the date before the action to remove the pre-emptive right was taken should be the value, or P0.41/share (or a total of P414,100.00), considering that its shares were listed in the Philippine Stock Exchange, and that the payment could be made only if the respondent had unrestricted retained earnings in its books to cover the value of the shares, which was not the case. The disagreement on the valuation of the shares led the parties to constitute an appraisal committee pursuant to Section 82 of the Corporation Code, each of them nominating a representative, who together then nominated the third member who would be chairman of the appraisal committee. Thus, the appraisal committee came to be made up of Reynaldo Yatco, the petitioners nominee; Atty. Antonio Acyatan, the respondents nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third member/chairman. On October 27, 2000, the appraisal committee reported its valuation of P2.54/share, for an aggregate value of P2,565,400.00 for the petitioners.[2] Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee, plus 2%/month penalty from the date of their original demand for payment, as well as the reimbursement of the amounts advanced as professional fees to the appraisers.[3]

In its letter to the petitioners dated January 2, 2001,[4] the respondent refused the petitioners demand, explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal rights could be paid only when the corporation had unrestricted retained earnings to cover the fair value of the shares, but that it had no retained earnings at the time of the petitioners demand, as borne out by its Financial Statements for Fiscal Year 1999 showing a deficit of P72,973,114.00 as of December 31, 1999. Upon the respondents refusal to pay, the petitioners sued the respondent for collection and damages in the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086, was initially assigned to Branch 132.[5] On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN MILLION NINE HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS, Philippine Currency, evidenced by its Financial Statement as of the Quarter Ending March 31, 2002; xxx 8) xxx the fair value of the shares of the

petitioners as fixed by the Appraisal Committee is final, that the same cannot be disputed xxx 9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled, as a matter of right, to a summary judgment. xxx [6]

in the RTC exercising jurisdiction over the place where the principal office of the corporation was found. After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners counsel did not attend, Judge Tipon issued an order,[8] granting the petitioners motion for partial summary judgment, stating:
As to the motion for partial summary judgment, there is no question that the 3-man committee mandated to appraise the shareholdings of plaintiff submitted its recommendation on October 27, 2000fixing the fair value of the shares of stocks of the plaintiff at P2.54 per share. Under Section 82 of the Corporation Code: The findings of the majority of the appraisers shall be final, and the award shall be paid by the corporation within thirty (30) days after the award is made. The only restriction imposed by the Corporation Code is That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earning in its books to cover such payment. The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted to the Securities and Exchange Commission, the defendant has

The respondent opposed the motion for partial summary judgment, stating that the determination of the unrestricted retained earnings should be made at the end of the fiscal year of the respondent, and that the petitioners did not have a cause of action against the respondent. During the pendency of the motion for partial summary judgment, however, the Presiding Judge of Branch 133 transmitted the records to the Clerk of Court for reraffling to any of the RTCs special commercial courts in Makati City due to the case being an intra-corporate dispute. Hence, Civil Case No. 01086 was re-raffled to Branch 142. Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-086 was ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio Tipon,[7] pursuant to the Interim Rules of Procedure on IntraCorporate Controversies (Interim Rules) requiring intra-corporate cases to be brought

retained earnings of P11,975,490 as ofMarch 21, 2002. This is not disputed by the defendant. Its only argument against paying is that there must be unrestricted retained earning at the time the demand for payment is made. This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not say that the unrestricted retained earnings must exist at the time of the demand. Even if there are no retained earnings at the time the demand is made if there are retained earnings later, the fair value of such stocks must be paid. The only restriction is that there must be sufficient funds to cover the creditors after the dissenting stockholder is paid. No such allegations have been made by the defendant.[9]

Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge the two aforecited orders of Judge Tipon, claiming that:
A. JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT THE TIME THE COMPLAINT WAS FILED, LSC HAD NO RETAINED EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT VIOLATING ANY RIGHTS OF THE SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF THEIR LSC SHARES. ANY RETAINED EARNINGS MADE A YEAR AFTER THE COMPLAINT WAS FILED ARE IRRELEVANT TO THE SPOUSES TURNERS RIGHT TO RECOVER UNDER THE COMPLAINT, BECAUSE THE WELL-SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPONS ATTENTION, IS IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED THE SUIT CANNOT BE MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE ACCRUED THEREAFTER.

On November 12, 2002, the respondent filed a motion for reconsideration. On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners filed a motion for immediate execution and a motion to strike out motion for reconsideration. In the latter motion, they pointed out that the motion for reconsideration was prohibited by Section 8 of the Interim Rules. Thus, also on November 22, 2002, Judge Tipon denied the motion for reconsideration and granted the petitioners motion for immediate execution.[10] Subsequently, on November 28, 2002, the RTC issued a writ of execution.[11]

B. JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY ABUSED HIS DISCRETION, WHEN HE GRANTED AND ISSUED THE QUESTIONED WRIT OF EXECUTION DIRECTING THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN

FAVOR OF THE SPOUSES TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE 39 OF THE RULES OF COURT AND THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE SUPREME COURTS CATEGORICAL HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF APPEALS.

Upon the respondents application, the CA issued a temporary restraining order (TRO), enjoining the petitioners, and their agents and representatives from enforcing the writ of execution. By then, however, the writ of execution had been partially enforced. The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution. Thereupon, the sheriff resumed the enforcement of the writ of execution. The CA promulgated its assailed decision on March 4, 2003,[12] pertinently holding:
However, it is clear from the foregoing that the Turners appraisal right is subject to the legal condition that no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment. Thus, the Supreme Court held that: The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which

means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock. In the instant case, it was established that there were no unrestricted retained earnings when the Turners filed their Complaint. In a letter dated 20 August 2000, petitioner informed the Turners that payment of their shares could only be made if it had unrestricted earnings in its books to cover the same. Petitioner reiterated this in a letter dated 2 January 2001 which further informed the Turners that its Financial Statement for fiscal year 1999 shows that its retained earnings ending December 31, 1999 was at a deficit in the amount of P72,973,114.00, a matter which has not been disputed by private respondents. Hence, in accordance with the second paragraph of sec. 82, BP 68 supra, the Turners right to payment had not yet accrued when they filed their Complaint on January

22, 2001, albeit their appraisal right already existed. In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court declared that: Now, before an action can properly be commenced all the essential elements of the cause of action must be in existence, that is, the cause of action must be complete. All valid conditions precedent to the institution of the particular action, whether prescribed by statute, fixed by agreement of the parties or implied by law must be performed or complied with before commencing the action, unless the conduct of the adverse party has been such as to prevent or waive performance or excuse non-performance of the condition. It bears restating that a right of action is the right to presently enforce a cause of action, while a cause of action consists of the operative facts which give rise to such right of action. The right of action does not arise until the performance of all conditions precedent to the action and may be taken away by the running of the statute of limitations, through estoppel, or by other circumstances which do not affect the cause of action. Performance or fulfillment of all conditions precedent upon which a right of action depends must be sufficiently alleged, considering that

the burden of proof to show that a party has a right of action is upon the person initiating the suit. The Turners right of action arose only when petitioner had already retained earnings in the amount of P11,975,490.00 on March 21, 2002; such right of action was inexistent on January 22, 2001when they filed the Complaint. In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court ruled: Subject to certain qualifications, and except as otherwise provided by law, an action commenced before the cause of action has accrued is prematurely brought and should be dismissed. The fact that the cause of action accrues after the action is commenced and while it is pending is of no moment. It is a rule of law to which there is, perhaps, no exception, either at law or in equity, that to recover at all there must be some cause of action at the commencement of the suit. There are reasons of public policy why there should be no needless haste in bringing up litigation, and why people who are in no default and against whom there is as yet no cause of action should not be summoned before the public tribunals to answer complaints which are groundless. An action prematurely brought is a groundless suit. Unless the plaintiff has a valid and subsisting cause of action at

the time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or an amendment setting up such after-accrued cause of action is not permissible.

We find no necessity to discuss the second ground raised in this petition. WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the corresponding Writs of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby orderedDISMISSED without prejudice to refiling by the private respondents of the action for enforcement of their right to payment as withdrawing stockholders. SO ORDERED.

The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of Appeals. The Turners apprehension that their claim for payment may prescribe if they wait for the petitioner to have unrestricted retained earnings is misplaced. It is the legal possibility of bringing the action that determines the starting point for the computation of the period of prescription. Stated otherwise, the prescriptive period is to be reckoned from the accrual of their right of action. Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the herein Complaint and issued the assailed Orders. Excess of jurisdiction is the state of being beyond or outside the limits of jurisdiction, and as distinguished from the entire absence of jurisdiction, means that the act although within the general power of the judge, is not authorized and therefore void, with respect to the particular case, because the conditions which authorize the exercise of his general power in that particular case are wanting, and hence, the judicial power is not in fact lawfully invoked.

The petitioners now come to the Court for a review on certiorari of the CAs decision, submitting that:
I. THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED THE PETITION FOR CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT; II. THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED THE DISMISSAL OF THE CASE, WHEN THE PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF THE ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND OF

THE ORDER GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF THE JUDGMENT; III. THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE NOT THEREFORE DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH LAW OR WITH JURISPRUDENCE.

fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation. (n)

Ruling

The petition fails. The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the petitioners complaint in Civil Case No. 01-086, and in rendering the summary judgment and issuing writ of execution. A. Stockholders Right of Appraisal, In General

Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless objectionable corporate action is taken.[13] It serves the purpose of enabling the dissenting stockholder to have his interests purchased and to retire from the corporation.[14] Under the common law, there were originally conflicting views on whether a corporation had the power to acquire or purchase its own stocks. In England, it was held invalid for a corporation to purchase its issued stocks because such purchase was an indirect method of reducing capital (which was statutorily restricted), aside from being inconsistent with the privilege of limited liability to creditors.[15] Only a few American

A stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the

jurisdictions adopted by decision or statute the strict English rule forbidding a corporation from purchasing its own shares. In some American states where the English rule used to be adopted, statutes granting authority to purchase out of surplus funds were enacted, while in others, shares might be purchased even out of capital provided the rights of creditors were not prejudiced.[16] The reason underlying the limitation of share purchases sprang from the necessity of imposing safeguards against the depletion by a corporation of its assets and against the impairment of its capital needed for the protection of creditors.[17] Now, however, a corporation can purchase its own shares, provided payment is made out of surplus profits and the acquisition is for a legitimate corporate purpose.[18] In the Philippines, this new rule is embodied in Section 41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase

delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (n)

The Corporation Code defines how the right of appraisal is exercised, as well as the implications of the right of appraisal, as follows: 1. The appraisal right is exercised by any stockholder who has voted against the proposed corporate action by making a written demand on the corporation within 30 days after the date on which the vote was taken for the payment of the fair value of his shares. The failure to make the demand within the period is deemed a waiver of the appraisal right.[19] 2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares within a period of 60 days from the date the stockholders approved the corporate action, the fair value shall be determined and appraised by three disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings and award of the

majority of the appraisers shall be final, and the corporation shall pay their award within 30 days after the award is made. Upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his or her shares to the corporation.[20] 3. All rights accruing to the withdrawing stockholders shares, including voting and dividend rights, shall be suspended from the time of demand for the payment of the fair value of the shares until either the abandonment of the corporate action involved or the purchase of the shares by the corporation, except the right of such stockholder to receive payment of the fair value of the shares.[21] 4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall submit to the corporation the certificates of stock representing his shares for notation thereon that such shares are dissenting shares. A failure to do so shall, at the option of the corporation, terminate his rights under this Title X of the Corporation Code. If shares represented by the certificates bearing such notation are transferred, and

the certificates are consequently canceled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions that would have accrued on such shares shall be paid to the transferee.[22] 5. If the proposed corporate action is implemented or effected, the corporation shall pay to such stockholder, upon the surrender of the certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action.[23]

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets.[24] The creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities.[25] There can be no distribution of assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void.[26] B. Petitioners cause of action was premature

of action are: (a) the existence of a legal right in favor of the plaintiff; (b) a correlative legal duty of the defendant to respect such right; and (c) an act or omission by such defendant in violation of the right of the plaintiff with a resulting injury or damage to the plaintiff for which the latter may maintain an action for the recovery of relief from the defendant.[28] Although the first two elements may exist, a cause of action arises only upon the occurrence of the last element, giving the plaintiff the right to maintain an action in court for recovery of damages or other appropriate relief.[29] Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based on a cause of action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for being without any cause of action. The RTC concluded that the respondents obligation to pay had accrued by its having the unrestricted retained earnings after the making of the demand by the petitioners. It based its conclusion on the fact that the Corporation Code did not provide that the unrestricted retained earnings must already exist at the time of the demand. The RTCs construal of the Corporation Code was unsustainable, because it did not take into account the petitioners lack of a cause of action against the respondent. In order to give rise to any obligation to pay on the part of the respondent, the petitioners should first make a valid demand that the respondent refused

That the respondent had indisputably no unrestricted retained earnings in its books at the time the petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondents legal obligation to pay the value of the petitioners shares did not yet arise. Thus, the CA did not err in holding that the petitioners had no cause of action,and in ruling that the RTC did not validly render the partial summary judgment. A cause of action is the act or omission by which a party violates a right of another. The essential elements of a cause

to pay despite having unrestricted retained earnings. Otherwise, the respondent could not be said to be guilty of any actionable omission that could sustain their action to collect. Neither did the subsequent existence of unrestricted retained earnings after the filing of the complaint cure the lack of cause of action in Civil Case No. 01-086. The petitioners right of action could only spring from an existing cause of action. Thus, a complaint whose cause of action has not yet accrued cannot be cured by an amended or supplemental pleading alleging the existence or accrual of a cause of action during the pendency of the action.[30] For, only when there is an invasion of primary rights, not before, does the adjective or remedial law become operative.[31] Verily, a premature invocation of the courts intervention renders the complaint without a cause of action and dismissible on such ground.[32] In short, Civil Case No. 01-086, being a groundless suit, should be dismissed. Even the fact that the respondent already had unrestricted retained earnings more than sufficient to cover the petitioners claims on June 26, 2002 (when they filed theirmotion for partial summary judgment) did not rectify the absence of the cause of action at the time of the commencement of Civil Case No. 01-086. The motion for partial summary judgment, being a mere application for relief other than by a pleading,[33] was not the same as the complaint in Civil Case No. 01-086.

Thereby, the petitioners did not meet the requirement of the Rules of Court that a cause of action must exist at the commencement of an action, which is commenced by the filing of the original complaint in [34] court. The petitioners claim that the respondents petition for certiorari sought only the annulment of the assailed orders of the RTC (i.e., granting the motion for partial summary judgment and the motion for immediate execution); hence, the CA had no right to direct the dismissal of Civil Case No. 01-086. The claim of the petitioners cannot stand. Although the respondents petition for certiorari targeted only the RTCs orders granting the motion for partial summary judgment and the motion for immediate execution, the CAs directive for the dismissal of Civil Case No. 01-086 was not an abuse of discretion, least of all grave, because such dismissal was the only proper thing to be done under the circumstances. According to Surigao Mine Exploration Co., Inc. v. Harris:[35]
Subject to certain qualification, and except as otherwise provided by law, an action commenced before the cause of action has accrued is prematurely brought and should be dismissed. The fact that the cause of action accrues after the action is commenced and while the case is pending is of no moment. It is a rule of law to which there is, perhaps no

exception, either in law or in equity, that to recover at all there must be some cause of action at the commencement of the suit. There are reasons of public policy why there should be no needless haste in bringing up litigation, and why people who are in no default and against whom there is as yet no cause of action should not be summoned before the public tribunals to answer complaints which are groundless. An action prematurely brought is a groundless suit. Unless the plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or an amendment setting up such after-accrued cause of action is not permissible.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al. Costs of suit to be paid by the petitioners. SO ORDERED.

Lastly, the petitioners argue that the respondents recourse of a special action for certiorari was the wrong remedy, in view of the fact that the granting of the motion for partial summary judgment constituted only an error of law correctible by appeal, not of jurisdiction. The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it exceeded its jurisdiction by taking cognizance of the complaint that was not based on an existing cause of action. WHEREFORE, the petition for review on certiorari is denied for lack of merit.

[G.R. No. 138343. February 19, 2001]

Corporation (LIMPAN) approved a resolution of the following tenor: RESOLVED that the corporation make a partial payment [for] the legal services of Gilda C. Lim in the handling of various cases on behalf of, or involving the corporation in the amount of P1,551,500.00 to be paid in equivalent value in shares of stock of the corporation totaling 15,515 shares, the same being found to be reasonable, and there being no available funds to pay the same. RESOLVED FURTHER, that the Corporate Secretary be authorized, as he is hereby authorized, to secure and comply with necessary requirements of the law for the issuance of said shares. On 18 October 1994, the Corporate Secretary Jaime G. Manzano filed a request before the Corporate and Legal Affairs Department of the SEC asking for the exemption of the 15,515 shares from the registration requirements of the Revised Securities Act; the request was granted in a Resolution dated 14 November 1994. Due to the issuance of the unsubscribed shares to the petitioner GILDA C. LIM (LIM), all of LIMPANs authorized capital stock became fully subscribed, with LIM ending up controlling 62.5% of the shares. In July 1996, the private respondent PATRICIA LIM YU (YU), a sister of the petitioner, LIM, filed a complaint against the members of the Board of Directors of LIMPAN who approved the aforesaid resolution (GILDA C. LIM, WILHELMINA V. JOVEN, DITAS A. LERIOS, AUGUSTO R. BUNDANG, TERESITA C. VELEZ and JAIME MANZANO). The action was docketed as SEC Case No. 07-95-5114. BUNDANG, VELEZ, and MANZANO filed an Answer, asserting as affirmative defenses

GILDA C. LIM, WILHELMINA V. JOVEN and DITAS A. LERIOS, petitioners, vs. PATRICIA LIM-YU, in her capacity as a minority stockholder of LIMPAN INVESTMENT CORPORATION, respondent. DECISION
PANGANIBAN, J.:

A suit to enforce preemptive rights in a corporation is not a derivative suit. Thus, a temporary restraining order enjoining a person from representing the corporation will not bar such action, because it is instituted on behalf and for the benefit of the shareholder, not the corporation.
Statement of the Case

Petitioners seek the reversal,[1] under Rule 45 of the Rules of Court, of the July 31, 1998 Decision[2] of the Court of Appeals[3] (CA) in CAGR SP No. 46292 and of its March 25, 1999 Resolution[4] denying reconsideration. The decretal portion of the appealed Decision, which affirmed the Securities and Exchange Commission (SEC), reads as follows:

WHEREFORE, judgment is hereby rendered DISMISSING the Petition for lack of merit. The preliminary injunction previously issued is hereby LIFTED.[5]
The Facts

The undisputed facts are summarized by the Court of Appeals as follows:

"At a special meeting on 07 October 1994, the Board of Directors of Limpan Investment

that the complaint failed to state a cause of action against them; that YU had no legal capacity to sue; and that the issuance of the shares in LIMs favor was bona fide and valid pursuant to law and LIMPANs By-Laws. In turn, the herein petitioners LIM, JOVEN and LERIOS filed a Motion to Dismiss on the following grounds: that YU had no legal capacity to sue; that the complaint failed to state a cause of action against JOVEN and LERIOS, and that no earnest efforts were exerted towards a compromise, YU and LIM being siblings. In support of their ground that YU ha[d] no legal capacity to sue, the petitioners pointed out that LIM had previously filed a petition for guardianship before the Regional Trial Court of Manila, docketed as Special proceeding No. 94-71010, praying for the issuance of letters of guardianship over YU. On 14 July 1994, the Presiding Judge of Branch 48, the Hon. Demetrio M. Batario, Jr., issued an Order, the relevant portion of which enjoined YU from entering into, or signing, contracts or documents on her behalf or on behalf of others x x x. On 16 August 1994, LIM was appointed [as] YUs general guardian, and the former took her oath as such on the same day. YU appealed LIMs appointment to the Supreme Court (Patricia C. Lim-Yu, et al. v. Hon. Judge Demetrio M. Batario, Jr., et al., G.R. No. 116926). On 27 February 1994, the High Court issued a Resolution giving due course to YUs petition. It likewise issued a temporary restraining order, the pertinent portion of which is quoted hereunder: (b) to ISSUE the TEMPORARY RESTRAINING ORDER prayed for, limited however, to the Writ of Preliminary Injunction dated 22 August 1994 and the order dated 14 July 1994 both issued in SP Proceeding No. 94-71010 which in the opinion of the Court are all too encompassing

and should be limited in scope and subject to the conditions set forth in the resolution of September 28, 1994 that, (D)uring the effectivity of the temporary restraining order, petitioner Patricia C. Lim, her attorneys, representatives, agents and any other persons assisting petitioner Patricia C. Lim will be able to act, enter into or sign contracts or documents solely for and on behalf of Patricia C. Lim; said actions, contracts or documents should not in any way bind or affect the interests of her parents, Isabelo P. Lim and Purificacion C. Lim, her brothers and sisters and any family owned or controlled corporation in particular, the Limpan Investment Corporation. NOW THEREFORE, You (Respondent Hon. Judge Demetrio M. Batario, Jr.), your agents, representatives, and/or any person or persons, acting upon your orders or in your place or stead, are hereby RESTRAINED and ENJOINED from enforcing and carrying out the Writ of Preliminary Injunction dated 22 August 1994 and the Order dated 14 July 1994 both issued by respondent Judge In SP Proceeding No. 94-71010. (underscoring supplied) The petitioners argued that, under the aforesaid order, YU [was] incapacitated from filing a derivative suit. YU naturally espoused the opposite view. Acting on the petitioners Motion to Dismiss, the Hearing Officer, Atty. Manuel Perea, issued an Order dated 05 January 1996, holding in abeyance the resolution of the motion to dismiss, which reads as follows: Before this Commission is the motion to dismiss filed by respondents Gilda C. Lim, et al., as well as the opposition thereto. In view of the conflicting interpretation of the order issued by the Supreme Court in Sp.

Proc. No. 94-70010 regarding the legal capacity of the plaintiff [--] x x x who is allegedly under guardianship [-- to file the instant action] either or both parties are directed to file a motion for clarification of the orders invoked by respondent Gilda C. Lim, et al. The desired clarification is perceived to settle the issue of plaintiffs capacity to file the instant action. Meanwhile, resolution of the pending incident shall be held in abeyance until the parties shall have secured the desired interpretation/opinion of the Supreme Court on the matter. Yu filed a Motion for Reconsideration dated 08 April 1996, which was denied in an Order dated 25 April 1996, on the ground that it was filed beyond the ten-day period allowed for seeking reconsideration. Yu filed a Motion for Leave to Admit Second Motion for Reconsideration dated 02 July 1996 which the Hearing Officer also denied. From the denial of her second motion for reconsideration, Yu filed a petition for certiorari before the SEC En Banc seeking to set aside the Order of 05 January 1994. On 04 February 1994, the SEC En Banc issued the first assailed order granting the petition for certiorari, and ordering the Securities Investigation & Clearing Department (SICD) to hear the other grounds of the Motion to Dismiss and to continue the case until its final determination. A motion for reconsideration filed by L[im] having been denied, the instant petition for review was instituted before this Court. x x x.[6]
Ruling of the Court of Appeals

hearing officer to defer ruling on the Motion to Dismiss. The appellate court stated that the TRO did not prohibit herein Respondent Patricia Lim-Yu from acting or entering into contracts on her own behalf or from protecting her rights. The root of the present controversy -- the Complaint she filed before the SEC -- relates to a denial of her preemptive right as a shareholder. Thus, her capacity to file the suit must be sustained. Finally, on the question of the timeliness of respondents Petition for Certiorari before the SEC, the CA ruled that adherence to strict technical rules should be relaxed to prevent palpable injustice. Hence, this recourse.[7]
Issues

In their Memorandum,[8] petitioners raise the following issues:

I

The Honorable Court of Appeals erred in sustaining the respondents legal capacity to sue the petitioners by relying solely on the first half of this Honorable Courts TRO and without considering the second half of said TRO.
II

The Honorable Court of Appeals erred in disregarding the sole power/authority of the Supreme Court to enforce/clarify its own resolutions/orders under the Rules of Court.
III

Ruling that the Supreme Courts TRO was clear, the CA agreed with the SEC that, pending clarification thereof, there was no need for the

The Honorable Court of Appeals in effect allowed the Securities and Exchange Commission (SEC) to maintain two conflicting positions on similar matters before it (SEC) when it upheld the SECs position that clarification of this Honorable Courts TRO was not needed in SEC Case No. 07-955114.
IV.

The Honorable Court of Appeals failed to consider that herein respondent had been repeatedly and notoriously guilty of laches.
Simply put, the main issue is whether respondent had the legal capacity to file her Complaint before the SEC. The others are merely incidental to this main point.
The Courts Ruling

contracts or documents solely for and on behalf of Patricia C. Lim; said actions, contracts or documents should not in any way bind or affect the interests of her parents, Isabelo P. Lim and Purificacion C. Lim, her brothers and sisters and any family owned or controlled corporation in particular, the Limpan Investment Corporation.
Simply put, the TRO allows Respondent Patricia Lim-Yu to act for herself and to enter into any contract on her own behalf. However, she cannot transact in representation of or for the benefit of her parents, brothers or sisters, or the Limpan Investment Corporation. Contrary to what petitioners suggest, all that is prohibited is any action that will bind them. In short, she can act only on and in her own behalf, not that of petitioners or the Corporation. There appears to be a confusion on the nature of the suit initiated before the SEC. Petitioners describe it as a derivative suit, which has been defined as an action brought by minority shareholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority.[10]In a derivative action, the real party in interest is the corporation itself, not the shareholder(s) who actually instituted it. If the suit filed by respondent was indeed derivative in character, then respondent may not have the capacity to sue. The reason is that she would be acting in representation of the corporation, an act which the TRO enjoins her from doing. We hold, however, that the suit of respondent cannot be characterized as derivative, because she was complaining only of the violation of her preemptive right under Section 39 of the Corporation Code.[11] She was merely praying that she be allowed to subscribe to the additional issuances of stocks in proportion to her shareholdings to enable her to preserve her percentage of ownership in the corporation. She was therefore not acting for the benefit of the corporation. Quite the contrary, she was suing on her own behalf, out of a desire to protect and

The Petition has no merit.

First Issue: Legal Capacity to Sue

Petitioners point out that both the SEC and the Court of Appeals considered only the first part of the Supreme Court TRO and completely ignored the second part. Supposedly, the latter part barred respondent from entering into agreements that would affect her family and the corporation. Hence, they claim that the TRO, taken as a whole, proscribed respondents derivative suit, which sought to enjoin herein [P]etitioner Gilda C. Lim from further voting or exercising any and all rights arising from the issuance to her of 15,515 shares of stock of the corporation.[9] We do not agree. The pertinent portion of the TRO issued by this Court reads as follows:

(b) to ISSUE the TEMPORARY RESTRAINING ORDER prayed for, limited however, to the Writ of Preliminary Injunction dated 22 August 1994 and the Order dated 14 July 1994 both issued in SP Proceeding No. 94-71010 which in the opinion of the Court are all too encompassing and should be limited in scope and subject to the conditions set forth in the Resolution of September 28, 1994 that, (D)uring the effectivity of the Temporary Restraining Order, petitioner Patricia C. Lim, her attorneys, representatives, agents and any other persons assisting petitioner Patricia C. Lim will be able to act, enter into or sign

preserve her preemptive rights. Unquestionably, the TRO did not prevent her from pursuing that action. To repeat, the TRO issued by this Court had two components: (1) it allowed respondent to enter into agreements on her own behalf; and (2) it clarified that respondents acts could not bind or affect the interests of her parents, brothers or sisters, or Limpan. In other words, respondent was, as a rule, allowed to act; but, as an exception, was prohibited from doing anything that would bind the corporation or any of the above-named persons. In this light, the TRO did not prohibit respondent from filing, on and in her own behalf, a suit for the alleged violation of her preemptive rights to purchase additional stock subscriptions. In other words, it did not restrain respondent from acting and enforcing her own rights. It merely barred her from acting in representation of the corporation. Petitioners fail to appreciate the distinction between the act itself and its net result. The act of filing the suit did not in any way bind the corporation. The result of such act affected it, however. Similarly, respondent can sell her shares to the corporation or make a will and designate her parents, for example, as beneficiaries. It would be quite far-fetched to say that these acts are prohibited by the TRO, even if they will definitely affect the corporation and her parents. Section 2 of Rule 3 of the Rules of Court[12] defines a real party in interest as one who is entitled to the avails of any judgment rendered in a suit, or who stands to be benefited or injured by it. In the present case, it is clear that respondent was suing on her own behalf in order to enforce her preemptive rights. Nothing, not the TRO, barred her from filing that suit.
Incidental Issues

Section 5 (5) of Article VIII[13] of the Constitution and Section 5 of Rule 135,[14] petitioners contend that the ruling disregarded the Supreme Courts power to control and to clarify its own orders, as granted by the Constitution. The argument must be rejected outright. First, as stated earlier, the TRO was very clear. In such instances, it was axiomatic that there was no need for interpretation, only for application.[15] Hence, there was no reason for the SEC hearing officer to rely on the rules of statutory construction or for this Court to clarify its Order. Second, even assuming that there was a need to interpret the TRO, the hearing officer was duty-bound to do so. Indeed, the mandate to apply and interpret pertinent laws and rulings is necessarily included in the adjudicative functions[16] of the SEC or of any other quasi-judicial body for that matter.[17] Verily, the power of this Court to clarify its own orders does not divest the SEC of its function to apply those orders to cases before it. If parties disagree with the SEC, they can file the proper suit in a regular court in accordance with law. In any event, the seeming obscurity or ambiguity of a TRO is not an excuse for a quasi-judicial body, or any regular court or judge, to shirk from the responsibility of applying and interpreting it.[18]
Alleged Conflicting Positions of the SEC

Petitioners further contend that the CA effectively allowed the SEC to maintain contradictory positions on similar matters. They cite Philippine Commercial International Bank v. Aquaventures Corporation, docketed as SEC En Banc Case No. 455, in which the SEC referred a TRO to this Court for clarification.[19] This argument is untenable. The alleged contradictory SEC ruling in the said case is irrelevant and unnecessary to the resolution of the present one. Petitioners do not claim that the factual milieu of the former is similar to that of the latter. Moreover, the actions of the SEC in the above-mentioned case have not been put at issue by the proper parties in these proceedings. In any event, they are neither binding nor conclusive on appeal. They may be the subject of the Courts

Power to Clarify Own Resolutions

Petitioners also assail the ruling of the Court of Appeals that the SEC hearing officer was bound to interpret the Supreme Courts order instead of burdening [it] with the responsibility of clarifying what already appears to be a clear order. Citing

review in accordance with the applicable provisions of the Rules of Court.

Laches

[G.R. No. 131889. March 12, 2001]

Petitioners further contend that the CA failed to appreciate that respondent had been repeatedly and notoriously guilty of laches. They point out that she filed a Motion for Reconsideration of the SEC hearing officers Order almost four months late. They further allege that it took her another two and a half months to file a Motion for Leave to Admit Second Motion for Reconsideration.[20] We reject this argument. It has been held that it is the better rule that courts, under the principle of equity, shall not be bound strictly by the doctrine of laches, when a manifest wrong or injustice would result.[21] To rule that respondent can no longer question the hearing officer would deprive her of the opportunity to sue in order to enforce her preemptive rights, an act that is not proscribed by this Courts TRO. WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioners. SO ORDERED.

VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHANEFANN, LOUISE Y. GOCHAN, ESTEBAN Y. GOCHAN JR., DOMINIC Y. GOCHAN, FELIX O. GOCHAN III, MERCEDES R. GOCHAN, ALFREDO R. GOCHAN, ANGELINA R. GOCHAN-HERNAEZ, MARIA MERCED R. GOCHAN, CRISPO R. GOCHAN JR., MARION R. GOCHAN, MACTAN REALTY DEVELOPMENT CORPORATION and FELIX GOCHAN & SONS REALTY CORPORATION, petitioners, vs. RICHARD G. YOUNG, DAVID G. YOUNG, JANE G. YOUNGLLABAN, JOHN D. YOUNG JR., MARY G. YOUNG-HSU and ALEXANDER THOMAS G. YOUNG as heirs of Alice Gochan; the INTESTATE ESTATE OF JOHN D. YOUNG SR.; and CECILIA GOCHAN-UY and MIGUEL C. UY, for themselves and on behalf and for the benefit of FELIX GOCHAN & SONS REALTY CORPORATION, respondents. DECISION
PANGANIBAN, J.:

A court or tribunals jurisdiction over the subject matter is determined by the allegations in the complaint. The fact that certain persons are not registered as stockholders in the books of the corporation will not bar them from filing a derivative suit, if it is evident from the allegations in the complaint that they are bona fide stockholders. In view of RA 8799, intra-corporate

controversies are now within the jurisdiction of courts of general jurisdiction, no longer of the Securities and Exchange Commission.
The Case

Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr. In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children, herein [respondents] Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary Young Hsu and Alexander Thomas Young. Having earned dividends, these stocks numbered 179 by 20 September 1979. Five days later (25 September), at which time all the children had reached the age of majority, their father John Sr., requested Gochan Realty to partition the shares of his late wife by cancelling the stock certificates in his name and issuing in lieu thereof, new stock certificates in the names of [herein respondents]. On 17 October 1979, respondent Gochan Realty refused, citing as reason, the right of first refusal granted to the remaining stockholders by the Articles of Incorporation. On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents]. On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a complaint with the SEC for issuance of shares of stock to the rightful owners, nullification of shares of stock, reconveyance of property impressed with trust, accounting, removal of officers and directors and damages against respondents. A Notice of Lis Pendens was annotated as [sic] real properties of the corporation. On 16 March 1994, [herein petitioners] moved to dismiss the complaint alleging that: (1) the SEC ha[d] no jurisdiction over the nature of the action; (2) the [respondents] [were] not the real parties-in-interest and ha[d] no capacity to sue; and (3)

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. The Petition assails the February 28, 1996 Decision[1] of the Court of Appeals (CA), as well as its December 18, 1997 Resolution denying petitioners Motion for Reconsideration. The dispositive part of the CA Decision reads as follows:

WHEREFORE, the petition as far as the heirs of Alice Gochan, is DISMISSED, without prejudice to filing the same in the regular courts. SO ORDERED.[2]
In dismissing the Complaint before the SEC regarding only Alice Gochans heirs but not the other complainants, the CA effectively modified the December 9, 1994 Order of the hearing officer[3] of the Securities and Exchange Commission (SEC). The Order, which was affirmed in full by the SEC en banc, dismissed the entire case.
The Facts

The undisputed facts are summarized by the Court of Appeals as follows:

Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with the SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa Gochan, Esteban Gochan and Crispo Gochan as its incorporators. Felix Gochan Sr.s daughter, Alice, mother of [herein respondents], inherited 50 shares of stock in Gochan Realty from the former.

[respondents] causes of action [were] barred by the Statute of Limitations. The motion was opposed by herein [respondents]. On 29 March 1994, [petitioners] filed a Motion for cancellation of Notice of Lis Pendens. [Respondents] opposed the said motion. On 9 December 1994, the SEC, through its Hearing Officer, granted the motion to dismiss and ordered the cancellation of the notice of lis pendens annotated upon the titles of the corporate lands. In its order, the SEC opined: In the instant case, the complaint admits that complainants Richard G. Young, David G. Young, Jane G. Young Llaban, John D. Young, Jr., Mary G. Young Hsu and Alexander Thomas G. Young, who are the children of the late Alice T. Gochan and the late John D. Young, Sr. are suing in their own right and as heirs of and/or as the beneficial owners of the shares in the capital stock of FGSRC held in trust for them during his lifetime by the late John D. Young. Moreover, it has been shown that said complainants ha[d] never been x x x stockholder[s] of record of FGSRC to confer them with the legal capacity to bring and maintain their action. Conformably, the case cannot be considered as an intra-corporate controversy within the jurisdiction of this Commission. The complainant heirs base what they perceived to be their stockholders rights upon the fact of their succession to all the rights, property and interest of their father, John D. Young, Sr. While their heirship is not disputed, their right to compel the corporation to register John D. Youngs Sr. shares of stock in their names cannot go unchallenged

because the devolution of property to the heirs by operation of law in succession is subject to just obligations of the deceased before such property passes to the heirs. Conformably, until therefore the estate is settled and the payment of the debts of the deceased is accomplished, the heirs cannot as a matter of right compel the delivery of the shares of stock to them and register such transfer in the books of the corporation to recognize them as stockholders. The complainant heirs succeed to the estate of [the] deceased John D. Young, Sr. but they do not thereby become stockholders of the corporation. Moreover, John D. [Young Sr.s] shares of stocks form part of his estate which is the subject of Special Proceedings No. 3694-CEB in the Regional Trial Court of Cebu, Branch VIII, [par. 4 of the complaint]. As complainants clearly claim[,] the Intestate Estate of John D. Young, Sr. has an interest in the subject matter of the instant case. However, actions for the recovery or protection of the property [such as the shares of stock in question] may be brought or defended not by the heirs but by the executor or administrator thereof. Complainants further contend that the alleged wrongful acts of the corporation and its directors constitute fraudulent devices or schemes which may be detrimental to the stockholders. Again, the injury [is] perceived[,] as is alleged[,] to have been suffered by complainants as stockholders, which they are not. Admittedly, the SEC has no jurisdiction over a controversy wherein one of the parties involved is not or not yet a stockholder of the corporation. [SEC vs. CA, 201 SCRA 134]. Further, by the express allegation of the complaint, herein complainants bring this action as [a] derivative suit on their own behalf and on behalf of respondent FGSRC.

Section 5, Rule III of the Revised Rules of Procedure in the Securities and Exchange Commission provides: Section 5. Derivative Suit. No action shall be brought by stockholder in the right of a corporation unless the complainant was a stockholder at the time the questioned transaction occurred as well as at the time the action was filed and remains a stockholder during the pendency of the action. x x x. The rule is in accord with well settled jurisprudence holding that a stockholder bringing a derivative action must have been [so] at the time the transaction or act complained of [took] place. (Pascual vs. Orozco, 19 Phil. 82; Republic vs. Cuaderno, 19 SCRA 671; San Miguel Corporation vs. Khan, 176 SCRA 462-463) The language of the rule is mandatory, strict compliance with the terms thereof thus being a condition precedent, a jurisdictional requirement to the filing of the instant action. Otherwise stated, proof of compliance with the requirement must be sufficiently established for the action to be given due course by this Commission. The failure to comply with this jurisdictional requirement on derivative action must necessarily result in the dismissal of the instant complaint. (pp. 7779, Rollo) [Respondents] moved for a reconsideration but the same was denied for being pro-forma. [Respondents] appealed to the SEC en banc, contending, among others, that the SEC ha[d] jurisdiction over the case. [Petitioners], on the other hand, contend that the appeal was 97 days late, beyond the 30day period for appeals. On 3 March 1995, the SEC en banc ruled for the [petitioners,] holding that the

[respondents] motion for reconsideration did not interrupt the 30-day period for appeal because said motion was pro-forma.[4]
Aggrieved, herein respondents then filed a Petition for Review with the Court of Appeals.
Ruling of the Court of Appeals

The Court of Appeals ruled that the SEC had no jurisdiction over the case as far as the heirs of Alice Gochan were concerned, because they were not yet stockholders of the corporation. On the other hand, it upheld the capacity of Respondents Cecilia Gochan Uy and her spouse Miguel Uy. It also held that the intestate Estate of John Young Sr. was an indispensable party. The appellate court further ruled that the cancellation of the notice of lis pendens on the titles of the corporate real estate was not justified. Moreover, it declared that respondents Motion for Reconsideration before the SEC was not pro forma; thus, its filing tolled the appeal period. Hence, this Petition.[5]
The Issues

These are the issues presented before us:

A. Whether or not the Spouses Uy have the personality to file an action before the SEC against Gochan Realty Corporation. Whether or not the Spouses Uy could properly bring a derivative suit in the name of Gochan Realty to redress wrongs allegedly committed against it for which the directors refused to sue. Whether or not the intestate estate of John D. Young Sr. is an indispensable party in the SEC case considering that the individual heirs shares are still in the decedent stockholders name. Whether or not the cancellation of [the] notice of lis pendens was

B.

C.

D.

justified considering that the suit did not involve real properties owned by Gochan Realty.[6]

Action Has Not Prescribed

In addition, the Court will determine the effect of Republic Act No. 8799[7] on this case.
The Courts Ruling

The Petition has no merit. In view of the effectivity of RA 8799, however, the case should be remanded to the proper regional trial court, not to the Securities and Exchange Commission.
First Issue: Personality of the Spouses Uy to File a Suit Before the SEC

Petitioners contend that the statute of limitations already bars the Uy spouses action, be it one for annulment of a voidable contract or one based upon a written contract. The Complaint, however, contains respondents allegation that the sale of the shares of stock was not merely voidable, but was void ab initio. Below we quote its relevant portion:

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing to bring the suit before the SEC on February 8, 1994, because the latter were no longer stockholders at the time. Allegedly, the stocks had already been purchased by the corporation. Petitioners further assert that, being allegedly a simple contract of sale cognizable by the regular courts, the purchase by Gochan Realty of Cecilia Gochan Uys 210 shares does not come within the purview of an intracorporate controversy. As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint.[8] For purposes of resolving a motion to dismiss, Cecilia Uys averment in the Complaint -- that the purchase of her stocks by the corporation was null and void ab initio is deemed admitted. It is elementary that a void contract produces no effect either against or in favor of anyone; it cannot create, modify or extinguish the juridical relation to which it refers.[9] Thus, Cecilia remains a stockholder of the corporation in view of the nullity of the Contract of Sale. Although she was no longer registered as a stockholder in the corporate records as of the filing of the case before the SEC, the admitted allegations in the Complaint made her still a bona fide stockholder of Felix Gochan & Sons Realty Corporation (FGSRC), as between said parties. In any event, the present controversy, whether intra-corporate or not, is no longer cognizable by the SEC, in view of RA 8799, which transferred to regional trial courts the formers jurisdiction over cases involving intra-corporate disputes.

38. That on November 21, 1979, respondent Felix Gochan & Sons Realty Corporation did not have unrestricted retained earnings in its books to cover the purchase price of the 208 shares of stock it was then buying from complainant Cecilia Gochan Uy, thereby rendering said purchase null and void ab initio for being violative of the trust fund doctrine and contrary to law, morals good customs, public order and public policy;
Necessarily, petitioners contention that the action has prescribed cannot be sustained. Prescription cannot be invoked as a ground if the contract is alleged to be void ab initio.[10] It is axiomatic that the action or defense for the declaration of nullity of a contract does not prescribe.[11]
Second Issue: Derivative Suit and the Spouses Uy

Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit, because the spouses and not the corporation were the injured parties. The Court is not convinced. The following quoted portions of the Complaint readily shows allegations of injury to the corporation itself:

16. That on information and belief, in further pursuance of the said conspiracy and for the fraudulent purpose of depressing the value of the stock of the Corporation and to induce the minority stockholders to sell their shares of stock for an inadequate consideration as aforesaid, respondent Esteban T. Gochan . . ., in violation of their

duties as directors and officers of the Corporation . . ., unlawfully and fraudulently appropriated [for] themselves the funds of the Corporation by drawing excessive amounts in the form of salaries and cash advances. . . and by otherwise charging their purely personal expenses to the Corporation.
xxx xxx xxx

The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of the corporation. The reason is that, as earlier discussed, the allegations of the Complaint make them out as stockholders at the time the questioned transaction occurred, as well as at the time the action was filed and during the pendency of the action.
Third Issue: Capacity of the Intestate Estate of John D. Young Sr.

41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy for her shares of stock constituted an unlawful, premature and partial liquidation and distribution of assets to a stockholder, resulting in the impairment of the capital of the Corporation and prevented it from otherwise utilizing said amount for its regular and lawful business, to the damage and prejudice of the Corporation, its creditors, and of complainants as minority stockholders;[12]
As early as 1911, this Court has recognized the right of a single stockholder to file derivative suits. In its words:

Petitioners contend that the Intestate Estate of John D. Young Sr. is not an indispensable party, as there is no showing that it stands to be benefited or injured by any court judgment. It would be useful to point out at this juncture that one of the causes of action stated in the Complaint filed with the SEC refers to the registration, in the name of the other heirs of Alice Gochan Young, of 6/14th of the shares still registered under the name of John D. Young Sr. Since all the shares that belonged to Alice are still in his name, no final determination can be had without his estate being impleaded in the suit. His estate is thus an indispensable party with respect to the cause of action dealing with the registration of the shares in the names of the heirs of Alice. Petitioners further claim that the Estate of John Young Sr. was not properly represented. They claim that when the estate is under administration, suits for the recovery or protection of the property or rights of the deceased may be brought only by the administrator or executor as approved by the court.[14] The rules relative to this matter do not, however, make any such categorical and confining statement. Section 3 of Rule 3 of the Rules of Court, which is cited by petitioner in support of their position, reads:

[W]here corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single stockholder may institute that suit, suing on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders.[13]
In the present case, the Complaint alleges all the components of a derivative suit. The allegations of injury to the Spouses Uy can coexist with those pertaining to the corporation. The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. This cause of action is also included in the Complaint filed before the SEC.

Sec. 3. Representatives as parties. - Where the action is allowed to be prosecuted or defended by a representative or someone acting in a fiduciary capacity, the beneficiary shall be included in the title of the case and shall be deemed to be the real party in interest. A representative may be a trustee of an express trust, a guardian, an executor or

administrator, or a party authorized by law or these Rules. An agent acting in his own name and for the benefit of an undisclosed principal may sue or be sued without joining the principal except when the contract involves things belonging to the principal.
Section 2 of Rule 87 of the same Rules, which also deals with administrators, states:

prohibit them from representing the deceased, and since no administrator had as yet been appointed at the time of the institution of the Complaint with the SEC, we see nothing wrong with the fact that it was the heirs of John D. Young Sr. who represented his estate in the case filed before the SEC.
Fourth Issue Notice of Lis Pendens

Sec. 2. Executor or administrator may bring or defend actions which survive. - For the recovery or protection of the property or rights of the deceased, an executor or administrator may bring or defend, in the right of the deceased, actions for causes which survive.
The above-quoted rules, while permitting an executor or administrator to represent or to bring suits on behalf of the deceased, do not prohibit the heirs from representing the deceased. These rules are easily applicable to cases in which an administrator has already been appointed. But no rule categorically addresses the situation in which special proceedings for the settlement of an estate have already been instituted, yet no administrator has been appointed. In such instances, the heirs cannot be expected to wait for the appointment of an administrator; then wait further to see if the administrator appointed would care enough to file a suit to protect the rights and the interests of the deceased; and in the meantime do nothing while the rights and the properties of the decedent are violated or dissipated. The Rules are to be interpreted liberally in order to promote their objective of securing a just, speedy and inexpensive disposition of every action and proceeding.[15] They cannot be interpreted in such a way as to unnecessarily put undue hardships on litigants. For the protection of the interests of the decedent, this Court has in previous instances[16] recognized the heirs as proper representatives of the decedent, even when there is already an administrator appointed by the court. When no administrator has been appointed, as in this case, there is all the more reason to recognize the heirs as the proper representatives of the deceased. Since the Rules do not specifically

On the issue of the annotation of the Notice of Lis Pendens on the titles of the properties of the corporation and the other respondents, we still find no reason to disturb the ruling of the Court of Appeals. Under the third, fourth and fifth causes of action of the Complaint, there are allegations of breach of trust and confidence and usurpation of business opportunities in conflict with petitioners fiduciary duties to the corporation, resulting in damage to the Corporation. Under these causes of action, respondents are asking for the delivery to the Corporation of possession of the parcels of land and their corresponding certificates of title. Hence, the suit necessarily affects the title to or right of possession of the real property sought to be reconveyed. The Rules of Court[17] allows the annotation of a notice of lis pendens in actions affecting the title or right of possession of real property.[18] Thus, the Court of Appeals was correct in reversing the SEC Order for the cancellation of the notice of lis pendens. The fact that respondents are not stockholders of the Mactan Realty Development Corporation and the Lapu-Lapu Real Estate Corporation does not make them non-parties to this case. To repeat, the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the Complaint. In this case, it is alleged that the aforementioned corporations are mere alter egos of the directors-petitioners, and that the former acquired the properties sought to be reconveyed to FGSRC in violation of the directors-petitioners fiduciary duty to FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical[19] if, as alleged in the present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or

as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.
Effect of RA 8799

motion for reconsideration are REVERSED and SET ASIDE. Pursuant to AM No. 00-8-10-SC, the Office of the Court Administrator and the SEC are DIRECTED to cause the actual transfer of the records of SEC Case No. 02-94-4674 to the appropriate regional trial court. SO ORDERED. .

While we sustain the appellate court, the case can no longer be remanded to the SEC. As earlier stated, RA 8799, which became effective on August 8, 2000, transferred SECs jurisdiction over cases involving intra-corporate disputes to courts of general jurisdiction or to the regional trial courts.[20] Section 5.2 thereof reads as follows:

5.2. The Commissions jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.
In the light of the Resolution issued by this Court in AM No. 00-8-10-SC,[21] the Court Administrator and the Securities and Exchange Commission should be directed to cause the transfer of the records of SEC Case No. 02-94-4674 to the appropriate court of general jurisdiction. WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED, subject to the modification that the case be remanded to the proper regional trial court. The December 9, 1994 Order of Securities and Exchange Commission hearing officer dismissing the Complaint and directing the cancellation of the notice of lis pendens, as well as the March 3, 1995 Order denying complainants

SECOND DIVISION OSCAR C. REYES, Petitioner,

G.R. N

Present

versus

QU COR CA VEL BRI

HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH INSURANCE CORPORATION, and RODRIGO C. REYES, Respondents.

Promu

Augu

x ------------------------------------------------------------

DECISION BRION, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of

Court seeks to set aside the Decision of the Court of Appeals (CA)[1] promulgated on May 26, 2004 in CA-G.R. SP No. 74970. The CA Decision affirmed the Order of the Regional Trial Court (RTC), Branch 142, Makati City dated November 29, 2002[2] in Civil Case No. 00-1553 (entitled "Accounting of All Corporate Funds and Assets, and Damages") which denied petitioner Oscar C. Reyes (Oscar) Motion to Declare Complaint as Nuisance or Harassment Suit.

BACKGROUND FACTS

the funds and assets of ZENITH INSURANCE CORPORATION which are now or formerly in the control, custody, and/or possession of respondent [herein petitioner Oscar] and to determine the shares of stock of deceased spouses Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated [by Oscar] for himself [and] which were not collated and taken into account in the partition, distribution, and/or settlement of the estate of the deceased spouses, for which he should be ordered to account for all the income from the time he took these shares of stock, and should now deliver to his brothers and sisters their just and respective shares.[5] [Emphasis supplied.] In his Answer with [6] Counterclaim, Oscar denied the charge that he illegally acquired the shares of Anastacia Reyes. He asserted, as a defense, that he purchased the subject shares with his own funds from the unissued stocks of Zenith, and that the suit is not a bona fide derivative suit because the requisites therefor have not been complied with. He thus questioned the SECs jurisdiction to entertain the complaint because it pertains to the settlement of the estate of Anastacia Reyes. When Republic Act (R.A.) No. 8799 took effect, the SECs exclusive and original jurisdiction over cases enumerated in Section 5 of Presidential Decree (P.D.) No. 902-A was transferred to the RTC designated as a special commercial court.[8] The records of Rodrigos SEC case were thus turned over to the RTC, Branch 142, Makati, and docketed as Civil Case No. 00-1553.
[7]

Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the spouses Pedro and Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of stock of Zenith Insurance Corporation (Zenith), a domestic corporation established by their family. Pedro died in 1964, while Anastacia died in 1993. Although Pedros estate was judicially partitioned among his heirs sometime in the 1970s, no similar settlement and partition appear to have been made with Anastacias estate, which included her shareholdings in Zenith. As of June 30, 1990, Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250 shares, respectively.[3]

On May 9, 2000, Zenith and Rodrigo filed a complaint[4] with the Securities and Exchange Commission (SEC) against Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated that it is a derivative suit initiated and filed by the complainant Rodrigo C. Reyes to obtain an accounting of

On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment Suit.[9] He claimed that the complaint is a mere nuisance or harassment suit and should, according to the Interim Rules of Procedure for Intra-Corporate Controversies, be dismissed; and that it is not a bona fide derivative suit as it partakes of the nature of a petition for the settlement of estate of the deceased Anastacia that is outside the jurisdiction of a special commercial court. The RTC, in its Order dated November 29, 2002(RTC Order), denied the motion in part and declared:
A close reading of the Complaint disclosed the presence of two (2) causes of action, namely: a) a derivative suit for accounting of the funds and assets of the corporation which are in the control, custody, and/or possession of the respondent [herein petitioner Oscar] with prayer to appoint a management committee; and b) an action for determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the corresponding delivery of these shares to the parties brothers and sisters. The latter is not a derivative suit and should properly be threshed out in a petition for settlement of estate. Accordingly, the motion is denied. However, only the derivative suit consisting of the first cause of action will be taken cognizance of by this Court.[10]

with the proceedings. The appellate court affirmed the RTC Order and denied the petition in its Decision dated May 26, 2004. It likewise denied Oscars motion for reconsideration in a Resolution dated October 21, 2004. Petitioner now comes before us on appeal through a petition for review on certiorari under Rule 45 of the Rules of Court.

ASSIGNMENT OF ERRORS

Petitioner Oscar presents the following points as conclusions the CA should have made: 1. that the complaint is a mere nuisance or harassment suit that should be dismissed under the Interim Rules of Procedure of IntraCorporate Controversies; and 2. that the complaint is not a bona fide derivative suit but is in fact in the nature of a petition for settlement of estate; hence, it is outside the jurisdiction of the RTC acting as a special commercial court. Accordingly, he prays for the setting aside and annulment of the CA decision and resolution, and the dismissal of Rodrigos complaint before the RTC. THE COURTS RULING

Oscar thereupon went to the CA on a petition for certiorari, prohibition, [11] and mandamus and prayed that the RTC Order be annulled and set aside and that the trial court be prohibited from continuing

We find the petition meritorious. The core question for our determination is whether the trial court, sitting as a special commercial court, has jurisdiction over the subject matter of Rodrigos complaint. To resolve it, we rely on the judicial principle that jurisdiction over the subject matter of a case is conferred by law and is determined by the allegations of the complaint, irrespective of whether the plaintiff is entitled to all or some of the claims asserted therein.[12] JURISDICTION OF SPECIAL COMMERCIAL COURTS P.D. No. 902-A enumerates the cases over which the SEC (now the RTC acting as a special commercial court) exercises exclusive jurisdiction:
SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnership, 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) De vices or schemes employed by or any acts of the board of directors, business associates,

its officers or partners, amounting to fraud and misrepresent ation which may be detrimental to the interest of the public and/or of the stockholders , partners, members of associations or organization s registered with the Commission . b) Co ntroversies arising out of intracorporate 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; and c) Co ntroversies in the election or appointment of directors, trustees, officers, or managers of such corporations , partnerships, or associations.

circumstances constituting fraud or mistake must be stated with [14] particularity. These rules find specific application to Section 5(a) of P.D. No. 902A which speaks of corporate devices or schemes that amount to fraud or misrepresentation detrimental to the public and/or to the stockholders. In an attempt to hold Oscar responsible for corporate fraud, Rodrigo alleged in the complaint the following:
3. This is a complaintto determine the shares of stock of the deceased spouses Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated for himself [herein petitioner Oscar] which were not collated and taken into account in the partition, distribution, and/or settlement of the estate of the deceased Spouses Pedro and Anastacia Reyes, for which he should be ordered to account for all the income from the time he took these shares of stock, and should now deliver to his brothers and sisters their just and respective shares with the corresponding equivalent amount of P7,099,934.82 plus interest thereon from 1978 representing his obligations to the Associated Citizens Bank that was paid for his account by his late mother, Anastacia C. Reyes. This amount was

The allegations set forth in Rodrigos complaint principally invoke Section 5, paragraphs (a) and (b) above as basis for the exercise of the RTCs special court jurisdiction. Our focus in examining the allegations of the complaint shall therefore be on these two provisions. Fraudulent Devices and Schemes The rule is that a complaint must contain a plain, concise, and direct statement of the ultimate facts constituting the plaintiffs cause of action and must specify the relief sought.[13] Section 5, Rule 8 of the Revised Rules of Court provides that in all averments of fraud or mistake, the

not collated or taken into account in the partition or distribution of the estate of their late mother, Anastacia C. Reyes. 3.1. Respondent Oscar C. Reyes, through other schemes of fraud including misrepresentation, unilaterally, and for his own benefit, capriciously transferred and took possession and control of the management of Zenith Insurance Corporation which is considered as a family corporation, and other properties and businesses belonging to Spouses Pedro and Anastacia Reyes. xxxx 4.1. During the increase of capitalization of Zenith Insurance Corporation, sometime in 1968, the property covered by TCT No. 225324 was illegally and fraudulently used by respondent as a collateral. xxxx 5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the shareholdings of their deceased mother, Doa Anastacia C. Reyes, shares of stocks and [sic] valued in the corporate books at P7,699,934.28, more or less, excluding interest and/or

dividends, had been transferred solely in the name of respondent. By such fraudulent manipulations and misrepresentation, the shareholdings of said respondent Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith Insurance Corporation, which portion of said shares must be distributed equally amongst the brothers and sisters of the respondent Oscar C. Reyes including the complainant herein. xxxx 9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at P7,099,934.28 were illegally and fraudulently transferred solely to the respondents [herein petitioner Oscar] name and installed himself as a majority stockholder of Zenith Insurance Corporation [and] thereby deprived his brothers and sisters of their respective equal shares thereof including complainant hereto. xxxx 10.1 By refusal of the respondent to account of his [sic] shareholdings in the company, he illegally and fraudulently transferred solely in his

name wherein [sic] the shares of stock of the deceased Anastacia C. Reyes [which] must be properly collated and/or distributed equally amongst the children, including the complainant Rodrigo C. Reyes herein, to their damage and prejudice. xxxx 11.1 By continuous refusal of the respondent to account of his [sic] shareholding with Zenith Insurance Corporation[,] particularly the number of shares of stocks illegally and fraudulently transferred to him from their deceased parents Sps. Pedro and Anastacia Reyes[,] which are all subject for collation and/or partition in equal shares among their children. [Emphasis supplied.]

Tested against these standards, we find that the charges of fraud against Oscar were not properly supported by the required factual allegations. While the complaint contained allegations of fraud purportedly committed by him, these allegations are not particular enough to bring the controversy within the special commercial courts jurisdiction; they are not statements of ultimate facts, but are mere conclusions of law: how and why the alleged appropriation of shares can be characterized as illegal and fraudulent were not explained nor elaborated on. Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will bring the case within the special commercial courts jurisdiction. To fall within this jurisdiction, there must be sufficient nexus showing that the corporations nature, structure, or powers were used to facilitate the fraudulent device or scheme. Contrary to this concept, the complaint presented a reverse situation. No corporate power or office was alleged to have facilitated the transfer of the shares; rather, Oscar, as an individual and without reference to his corporate personality, was alleged to have transferred the shares of Anastacia to his name, allowing him to become the majority and controlling stockholder of Zenith, and eventually, the corporations President. This is the essence of the complaint read as a whole and is particularly demonstrated under the following allegations:
5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the shareholdings of their deceased mother,

Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely conclusions of law that, without supporting statements of the facts to which the allegations of fraud refer, do not sufficiently state an effective cause of action.[15] The late Justice Jose Feria, a noted authority in Remedial Law, declared that fraud and mistake are required to be averred with particularity in order to enable the opposing party to controvert the particular facts allegedly constituting such fraud or mistake.[16]

Doa Anastacia C. Reyes, shares of stocks and [sic] valued in the corporate books at P7,699,934.28, more or less, excluding interest and/or dividends, had been transferred solely in the name of respondent. By such fraudulent manipulations and misrepresentation, the shareholdings of said respondent Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith Insurance Corporation, which portion of said shares must be distributed equally amongst the brothers and sisters of the respondent Oscar C. Reyes including the complainant herein. xxxx 9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at P7,099,934.28 were illeg ally and fraudulently transferred solely to the respondents [herein petitioner Oscar] name and installed himself as a majority stockholder of Zenith Insurance Corporation [and] thereby deprived his brothers and sisters of their respective equal shares thereof including complainant hereto. [Emphasis supplied.]

In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground for dismissal since such defect can be cured by a bill of particulars. In cases governed by the Interim Rules of Procedure on IntraCorporate Controversies, however, a bill of particulars is a prohibited pleading.[17] It is essential, therefore, for the complaint to show on its face what are claimed to be the fraudulent corporate acts if the complainant wishes to invoke the courts special commercial jurisdiction. We note that twice in the course of this case, Rodrigo had been given the opportunity to study the propriety of amending or withdrawing the complaint, but he consistently refused. The courts function in resolving issues of jurisdiction is limited to the review of the allegations of the complaint and, on the basis of these allegations, to the determination of whether they are of such nature and subject that they fall within the terms of the law defining the courts jurisdiction. Regretfully, we cannot read into the complaint any specifically alleged corporate fraud that will call for the exercise of the courts special commercial jurisdiction. Thus, we cannot affirm the RTCs assumption of jurisdiction over Rodrigos complaint on the basis of Section 5(a) of P.D. No. 902-A.[18]

Intra-Corporate Controversy

A review of relevant jurisprudence shows a development in the Courts approach in classifying what constitutes an

intra-corporate controversy. Initially, the main consideration in determining whether a dispute constitutes an intra-corporate controversy was limited to a consideration of the intra-corporate relationship existing between or among the parties.[19] The types of relationships embraced under Section 5(b), as declared in the case of Union Glass & Container Corp. v. SEC,[20] were as follows:
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 as far as its franchise, permit or license to operate is concerned; and d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]

jurisdiction for the sole reason that the dispute involves a corporation, its directors, officers, or stockholders. We saw that there is no legal sense in disregarding or minimizing the value of the nature of the transactions which gives rise to the dispute. Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of ascertaining whether the controversy itself is intra-corporate.[22] The controversy must not only be rooted in the existence of an intracorporate relationship, but must as well pertain to the enforcement of the parties correlative rights and obligations under the Corporation Code and the internal and intracorporate regulatory rules of the corporation. If the relationship and its incidents are merely incidental to the controversy or if there will still be conflict even if the relationship does not exist, then no intra-corporate controversy exists. The Court then combined the two tests and declared that jurisdiction should be determined by considering not only the status or relationship of the parties, but also the nature of the question under controversy.[23] This two-tier test was adopted in the recent case of Speed Distribution, Inc. v. Court of Appeals:[24]
To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the branches of the RTC specifically designated by the Court to try and decide such cases, two elements must concur: (a) the status or relationship of the parties; and (2) the nature of the question that

The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC, regardless of the subject matter of the dispute. This came to be known as the relationship test. However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,[21] the Court introduced the nature of the controversy test. We declared in this case that it is not the mere existence of an intra-corporate relationship that gives rise to an intra-corporate controversy; to rely on the relationship test alone will divest the regular courts of their

is the subject of their controversy. The first element requires that the controversy must arise out of intra-corporate or partnership relations between any or all of the parties and the corporation, partnership, or association of which they are 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 franchises. The second element requires that the dispute among the parties be intrinsically connected with the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character, necessarily, the case does not involve an intracorporate controversy.

Is there an intra-corporate relationship between the parties that would characterize the case as an intra-corporate dispute? We point out at the outset that while Rodrigo holds shares of stock in Zenith, he holds them in two capacities: in his own right with respect to the 4,250 shares registered in his name, and as one of the heirs of Anastacia Reyes with respect to the 136,598 shares registered in her name. What is material in resolving the issues of this case under the allegations of the complaint is Rodrigos interest as an heir since the subject matter of the present controversy centers on the shares of stocks belonging to Anastacia, not on Rodrigos personally-owned shares nor on his personality as shareholder owning these shares. In this light, all reference to shares of stocks in this case shall pertain to the shareholdings of the deceased Anastacia and the parties interest therein as her heirs. Article 777 of the Civil Code declares that the successional rights are transmitted from the moment of death of the decedent. Accordingly, upon Anastacias death, her children acquired legal title to her estate (which title includes her shareholdings in Zenith), and they are, prior to the estates partition, deemed co-owners thereof.[25] This status as co-owners, however, does not immediately and necessarily make them stockholders of the corporation. Unless and until there is compliance with Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered stockholders of the corporation. Section 63 provides:

Given these standards, we now tackle the question posed for our determination under the specific circumstances of this case:

Application of the Relationship Test

Section 63. Certificate of stock and transfer of shares. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vicepresident, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorneyin-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates, and the number of shares transferred. [Emphasis supplied.] No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

between the decedents estate and her heirs), does not bind the corporation and third parties. The transfer must be registered in the books of the corporation to make the transferee-heir a stockholder entitled to recognition as such both by the corporation and by third parties.[26] We note, in relation with the above statement, that in Abejo v. Dela [27] Cruz and TCL Sales Corporation v. Court of Appeals[28] we did not require the registration of the transfer before considering the transferee a stockholder of the corporation (in effect upholding the existence of an intra-corporate relation between the parties and bringing the case within the jurisdiction of the SEC as an intra-corporate controversy). A marked difference, however, exists between these cases and the present one. In Abejo and TCL Sales, the transferees held definite and uncontested titles to a specific number of shares of the corporation; after the transferee had establishedprima facie ownership over the shares of stocks in question, registration became a mere formality in confirming their status as stockholders. In the present case, each of Anastacias heirs holds only an undivided interest in the shares. This interest, at this point, is still inchoate and subject to the outcome of a settlement proceeding; the right of the heirs to specific, distributive shares of inheritance will not be determined until all the debts of the estate of the decedent are paid. In short, the heirs are only entitled to what remains after payment of the decedents debts;[29] whether there will be residue remains to be seen. Justice Jurado aptly puts it as follows:

Simply stated, the transfer of title by means of succession, though effective and valid between the parties involved (i.e.,

No succession shall be declared unless and until a liquidation of the assets and debts left by the decedent shall have been made and all his creditors are fully paid. Until a final liquidation is made and all the debts are paid, the right of the heirs to inherit remains inchoate. This is so because under our rules of procedure, liquidation is necessary in order to determine whether or not the decedent has left any liquid assets which may be transmitted to his heirs.[30] [Emphasis supplied.]

for an intra-corporate controversy within the jurisdiction of a special commercial court. In sum, we find that insofar as the subject shares of stock (i.e., Anastacias shares) are concerned Rodrigo cannot be considered a stockholder of Zenith. Consequently, we cannot declare that an intra-corporate relationship exists that would serve as basis to bring this case within the special commercial courts jurisdiction under Section 5(b) of PD 902-A, as amended. Rodrigos complaint, therefore, fails the relationship test.

Application of the Nature of Controversy Test

Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of Zenith with respect to the shareholdings originally belonging to Anastacia. First, he must prove that there are shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement of the decedents estate. No such proceeding has been commenced to date. Second, he must register the transfer of the shares allotted to him to make it binding against the corporation. He cannot demand that this be done unless and until he has established his specific allotment (and prima facie ownership) of the shares. Without the settlement of Anastacias estate, there can be no definite partition and distribution of the estate to the heirs. Without the partition and distribution, there can be no registration of the transfer. And without the registration, we cannot consider the transferee-heir a stockholder who may invoke the existence of an intra-corporate relationship as premise

The body rather than the title of the complaint determines the nature of an action.[31] Our examination of the complaint yields the conclusion that, more than anything else, the complaint is about the protection and enforcement of successional rights. The controversy it presents is purely civil rather than corporate, although it is denominated as a complaint for accounting of all corporate funds and assets. Contrary to the findings of both the trial and appellate courts, we read only one cause of action alleged in the complaint. The derivative suit for accounting of the funds and assets of the corporation which are in the control, custody, and/or possession of the respondent [herein petitioner Oscar] does not constitute a separate cause of action but is, as correctly claimed by Oscar, only an incident to the action for determination of

the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the corresponding delivery of these shares to the parties brothers and sisters. There can be no mistake of the relationship between the accounting mentioned in the complaint and the objective of partition and distribution when Rodrigo claimed in paragraph 10.1 of the complaint that:
10.1 By refusal of the respondent to account of [sic] his shareholdings in the company, he illegally and fraudulently transferred solely in his name wherein [sic] the shares of stock of the deceased Anastacia C. Reyes [which] must be properly collated and/or distributed equally amongst the children including the complainant Rodrigo C. Reyes herein to their damage and prejudice.

heirs of Anastacia and not as shareholders of Zenith. Rodrigo, in filing the complaint, is enforcing his rights as a co-heir and not as a stockholder of Zenith. The injury he seeks to remedy is one suffered by an heir (for the impairment of his successional rights) and not by the corporation nor by Rodrigo as a shareholder on record. More than the matters of injury and redress, what Rodrigo clearly aims to accomplish through his allegations of illegal acquisition by Oscar is the distribution of Anastacias shareholdings without a prior settlement of her estate an objective that, by law and established jurisprudence, cannot be done. The RTC of Makati, acting as a special commercial court, has no jurisdiction to settle, partition, and distribute the estate of a deceased. A relevant provision Section 2 of Rule 90 of the Revised Rules of Court that contemplates properties of the decedent held by one of the heirs declares:
Questions as to advancement made or alleged to have been made by the deceased to any heir may be heard and determined by the court having jurisdiction of the estate proceedings; and the final order of the court thereon shall be binding on the person raising the questions and on the heir. [Emphasis supplied.]

We particularly note that the complaint contained no sufficient allegation that justified the need for an accounting other than to determine the extent of Anastacias shareholdings for purposes of distribution. Another significant indicator that points us to the real nature of the complaint are Rodrigos repeated claims of illegal and fraudulent transfers of Anastacias shares by Oscar to the prejudice of the other heirs of the decedent; he cited these allegedly fraudulent acts as basis for his demand for the collation and distribution of Anastacias shares to the heirs. These claims tell us unequivocally that the present controversy arose from the parties relationship as

Worth noting are this Courts statements in the case of Natcher v. Court of Appeals:[32]

Matters which involve settlement and

distribution of the estate of the decedent fall within the exclusive province of the probate court in the exercise of its limited jurisdiction. xxxx It is clear that trial courts trying an ordinary action cannot resolve to perform acts pertaining to a special proceeding because it is subject to specific prescribed rules. [Emphasis supplied.]

jurisdiction is in reality not a jurisdictional question. In essence, it is a procedural question involving a mode of practice "which may be waived." As a general rule, the question as to title to property should not be passed upon in the testate or intestate proceeding. That question should be ventilated in a separate action. That general rule has qualifications or exceptions justified by expediency and convenience. Thus, the probate court may provisionally pass upon in an intestate or testate proceeding the question of inclusion in, or exclusion from, the inventory of a piece of property without prejudice to its final determination in a separate action. Although generally, a probate court may not decide a question of title or ownership, yet if the interested parties are all heirs, or the question is one of collation or advancement, or the parties consent to the assumption of jurisdiction by the probate court and the rights of third parties are not impaired, the probate court is competent to decide the question of ownership. [Citations omitted. Emphasis supplied.]

That an accounting of the funds and assets of Zenith to determine the extent and value of Anastacias shareholdings will be undertaken by a probate court and not by a special commercial court is completely consistent with the probate courts limited jurisdiction. It has the power to enforce an accounting as a necessary means to its authority to determine the properties included in the inventory of the estate to be administered, divided up, and distributed. Beyond this, the determination of title or ownership over the subject shares (whether belonging to Anastacia or Oscar) may be conclusively settled by the probate court as a question of collation or advancement. We had occasion to recognize the courts authority to act on questions of title or ownership in a collation or advancement situation in Coca v. Pangilinan[33] where we ruled:
It should be clarified that whether a particular matter should be resolved by the Court of First Instance in the exercise of its general jurisdiction or of its limited probate

In sum, we hold that the nature of the present controversy is not one which may be classified as an intra-corporate dispute and is beyond the jurisdiction of the special commercial court to resolve. In short, Rodrigos complaint also fails the nature of the controversy test.

DERIVATIVE SUIT

Rodrigos bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction on the RTC (as a special commercial court) if he cannot comply with the requisites for the existence of a derivative suit. These requisites are:
a. the party bringing suit should be a shareholder during the time of the act or transaction complained of, the number of shares not being material; b. the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief, but the latter has failed or refused to heed his plea; and c. the cause of action actually devolves on the corporation; the wrongdoing or harm having been or being caused to the corporation and not to the particular stockholder bringing the suit.[34]

Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must allege with some particularity in his complaint that he has exhausted his remedies within the corporation by making a sufficient demand upon the directors or other officers for appropriate relief with the expressed intent to sue if relief is denied.[35]Paragraph 8 of the complaint hardly satisfies this requirement since what the rule contemplates is the exhaustion of remedies within the corporate setting:
8. As members of the same family, complainant Rodrigo C. Reyes has resorted [to] and exhausted all legal means of resolving the dispute with the end view of amicably settling the case, but the dispute between them ensued.

Based on these standards, we hold that the allegations of the present complaint do not amount to a derivative suit. First, as already discussed above, Rodrigo is not a shareholder with respect to the shareholdings originally belonging to Anastacia; he only stands as a transfereeheir whose rights to the share are inchoate and unrecorded. With respect to his own individually-held shareholdings, Rodrigo has not alleged any individual cause or basis as a shareholder on record to proceed against Oscar.

Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation due to Oscars acts. If indeed he illegally and fraudulently transferred Anastacias shares in his own name, then the damage is not to the corporation but to his co-heirs; the wrongful transfer did not affect the capital stock or the assets of Zenith. As already mentioned, neither has Rodrigo alleged any particular cause or wrongdoing against the corporation that he can champion in his capacity as a shareholder on record.[36] In summary, whether as an individual or as a derivative suit, the RTC sitting as special commercial court has no jurisdiction to hear Rodrigos complaint since what is involved is the determination and distribution of successional rights to the

shareholdings of Anastacia Reyes. Rodrigos proper remedy, under the circumstances, is to institute a special proceeding for the settlement of the estate of the deceased Anastacia Reyes, a move that is not foreclosed by the dismissal of his present complaint. WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the Court of Appeals dated May 26, 2004 in CA-G.R. SP No. 74970. The complaint before the Regional Trial Court, Branch 142, Makati, docketed as Civil Case No. 00-1553, is ordered DISMISSED for lack of jurisdiction.

G.R. No. 177549

June 18, 2009

ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners, vs. JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf and on behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC., Respondents. DECISION CHICO-NAZARIO, J.: Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, which seeks to reverse and set aside the Resolutions dated 18 July 20062 and 19 April 20073 of the Court of Appeals in CA-G.R. SP No. 00185. Upon herein respondents motion, the Court of Appeals rendered the assailed Resolution dated 18 July 2006, reconsidering its Decision4 dated 15 February 2006; and remanding the case to the Regional Trial Court (RTC) of Cebu City, Branch 11, for necessary proceedings, in effect, reversing the Decision5 dated 10 November 2004 of the RTC which dismissed respondents Complaint in SRC Case No. 022-CEB. Herein petitioners Motion for Reconsideration of the Resolution dated 18 July 2006 was denied by the appellate court in the other assailed Resolution dated 19 April 2007. Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu (Anthony); the wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason). Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan (Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill). Petitioner Anthony is the older half-brother of respondent Joseph. Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. (Winchester, Inc.), a domestic corporation engaged in the operation of a general hardware and industrial supply and equipment business. On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting, Inspection of Corporate Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts6 before the RTC of Cebu. The said Complaint was filed by respondents, in their own behalf

SO ORDERED.

and as a derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual background of the Complaint was stated in the attached Affidavit executed by respondent Joseph. According to respondents,7 Winchester, Inc. was established and incorporated on 12 September 1977, with petitioner Anthony as one of the incorporators, holding 1,000 shares of stock worth P100,000.00.8 Petitioner Anthony paid for the said shares of stock with respondent Josephs money, thus, making the former a mere trustee of the shares for the latter. On 14 November 1984, petitioner Anthony ceded 800 of his 1,000 shares of stock in Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan,9 Siao So Lan, and John S. Yu.10 Petitioner Anthony remained as trustee for respondent Joseph of the 200 shares of stock in Winchester, Inc., still in petitioner Anthonys name. Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its incorporators, excluding petitioner Anthony, their accumulated 8,500 shares in the corporation.11 Subsequently, on 7 November 1995, Winchester, Inc. sold the same 8,500 shares to other persons, who included respondents Nancy, Jerald, and Jill; and petitioners Rosita and Jason.12 Respondents further averred that although respondent Joseph appeared as the Secretary and Treasurer in the corporate records of Winchester, Inc., petitioners actually controlled and ran the said corporation as if it were their own family business. Petitioner Rosita handled the money market placements of the corporation to the exclusion of respondent Joseph, the designated Treasurer of Winchester, Inc. Petitioners were also misappropriating the funds and properties of Winchester, Inc. by understating the sales, charging their personal and family expenses to the said corporation, and withdrawing stocks for their personal use without paying for the same. Respondents attached to the Complaint various receipts13 to prove the personal and family expenses charged by petitioners to Winchester, Inc. Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200 shares of stock in petitioner Anthonys name. Respondents also prayed that petitioners be ordered to: (1) deposit the corporate books and records of Winchester, Inc. with the Branch Clerk of Court of the RTC for respondents inspection; (2) render an accounting of all the funds of Winchester, Inc. which petitioners misappropriated; (3) reimburse the personal and family expenses which petitioners charged to Winchester, Inc., as well as the properties of the corporation which petitioners withheld without payment; and (4) pay respondents attorneys fees and litigation expenses. In the meantime, respondents sought the appointment of a Management Committee and the freezing of all corporate funds by the trial court.

On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim,14 attached to which was petitioner Anthonys Affidavit.15 Petitioners vehemently denied the allegation that petitioner Anthony was a mere trustee for respondent Joseph of the 1,000 shares of stock in Winchester, Inc. in petitioner Anthonys name. For the incorporation of Winchester, Inc., petitioner Anthony contributed P25,000.00 paid-up capital, representing 25% of the total par value of the 1,000 shares he subscribed to, the said amount being paid out of petitioner Anthonys personal savings and petitioners Anthony and Rositas conjugal funds. Winchester, Inc. was being co-managed by petitioners and respondents, and the attached receipts, allegedly evidencing petitioners use of corporate funds for personal and family expenses, were in fact signed and approved by respondent Joseph. By way of special and affirmative defenses, petitioners contended in their Answer with Compulsory Counterclaim that respondents had no cause of action against them. Respondents Complaint was purely intended for harassment. It should be dismissed under Section 1(j), Rule 1616 of the Rules of Court for failure to comply with conditions precedent before its filing. First, there was no allegation in respondents Complaint that earnest efforts were exerted to settle the dispute between the parties. Second, since respondents Complaint purportedly constituted a derivative suit, it noticeably failed to allege that respondents exerted effort to exhaust all available remedies in the Articles of Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation Code. And third, given that respondents Complaint was also for inspection of corporate books, it lacked the allegation that respondents made a previous demand upon petitioners to inspect the corporate books but petitioners refused. Prayed for by petitioners, in addition to the dismissal of respondents Complaint, was payment of moral and exemplary damages, attorneys fees, litigation expenses, and cost of suit. On 30 October 2002, the hearing on the application for the appointment of a Management Committee was commenced. Respondent Joseph submitted therein, as his direct testimony, the same Affidavit that he executed, which was attached to the respondents Complaint. On 4 November 2002, respondent Joseph was crossexamined by the counsel for petitioners. Thereafter, the continuation of the hearing was set for 29 November 2002, in order for petitioners to adduce evidence in support of their opposition to the application for the appointment of a Management Committee.17 During the hearing on 29 November 2002, the parties manifested before the RTC that there was an ongoing mediation between them, and so the hearing on the appointment of a Management Committee was reset to another date.

In amicable settlement of their dispute, the petitioners and respondents agreed to a division of the stocks in trade,18 the real properties, and the other assets of Winchester, Inc. In partial implementation of the aforementioned amicable settlement, the stocks in trade and real properties in the name of Winchester, Inc. were equally distributed among petitioners and respondents. As a result, the stockholders and members of the Board of Directors of Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution19 dissolving the corporation as of said date. On 22 February 2004, respondents filed their pre-trial brief.20 On 25 June 2004, petitioners filed a Manifestation21 informing the RTC of the existence of their amicable settlement with respondents. Respondents, however, made their own manifestation before the RTC that they were repudiating said settlement, in view of the failure of the parties thereto to divide the remaining assets of Winchester, Inc. Consequently, respondents moved to have SRC Case No. 022-CEB set for pre-trial. On 23 August 2004, petitioners filed their pre-trial brief.22 On 26 August 2004, instead of holding a formal pre-trial conference and resuming the hearing on the application for the appointment of a Management Committee, petitioners and respondents agreed that the RTC may already render a judgment based on the pleadings. In accordance with the agreement of the parties, the RTC issued, on even date, an Order23 which stated:

Petitioners and respondents duly filed their respective Memoranda,24 discussing the arguments already set forth in the pleadings they had previously submitted to the RTC. Respondents, though, attached to their Memorandum a Supplemental Affidavit25 of respondent Joseph, containing assertions that refuted the allegations in petitioner Anthonys Affidavit, which was earlier submitted with petitioners Answer with Compulsory Counterclaim. Respondents also appended to their Memorandum additional documentary evidence,26 consisting of original and duplicate cash invoices and cash disbursement receipts issued by Winchester, Inc., to further substantiate their claim that petitioners were understating sales and charging their personal expenses to the corporate funds. The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC Case No. 022-CEB. The dispositive portion of said Decision reads: WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby renders judgment in this case DISMISSING the complaint filed by the [herein respondents]. The Court also hereby dismisses the [herein petitioners] counterclaim because it has not been indubitably shown that the filing by the [respondents] of the latters complaint was done in bad faith and with malice.27 The RTC declared that respondents failed to show that they had complied with the essential requisites for filing a derivative suit as set forth in Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:

ORDER During the pre-trial conference held on August 26, 2004, counsels of the parties manifested, agreed and suggested that a judgment may be rendered by the Court in this case based on the pleadings, affidavits, and other evidences on record, or to be submitted by them, pursuant to the provision of Rule 4, Section 4 of the Rule on Intra-Corporate Controversies. The suggestion of counsels was approved by the Court. Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from notice hereof. Thereafter, the instant case will be deemed submitted for resolution. xxxx Cebu City, August 26, 2004. (signed) SILVESTRE A. MAAMO, JR. Acting Presiding Judge (1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit.
As to respondents prayer for the inspection of corporate books and records, the RTC adjudged that they had likewise failed to comply with the requisites entitling them to the same. Section 2, Rule 7 of the Interim Rules of Procedure Governing Intra-Corporate Controversies

requires that the complaint for inspection of corporate books or records must state that:

(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records and/or to be furnished with financial statements under Sections 74 and 75 of the Corporation Code of the Philippines; (2) A demand for inspection and copying of books and records and/or to be furnished with financial statements made by the plaintiff upon defendant; (3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusals, if any; and (4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof.
The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as such, he was supposed to be the custodian of the corporate books and records; therefore, a court order for respondents inspection of the same was no longer necessary. The RTC similarly denied respondents demand for accounting as it was clear that Winchester, Inc. had been engaging the services of an audit firm. Respondent Joseph himself described the audit firm as competent and independent, and believed that the audited financial statements the said audit firm prepared were true, faithful, and correct. Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC thereby dismissed the same. Respondents challenged the foregoing RTC Decision before the Court of Appeals via a Petition for Review under Rule 43 of the Rules of Court, docketed as CAG.R. SP No. 00185. On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10 December 2004 Decision of the RTC. Said the appellate court: After a careful and judicious scrutiny of the extant records of the case, together with the applicable laws and jurisprudence, WE see no reason or justification for granting the present appeal. xxxx x x x [T]his Court sees that the instant petition would still fail taking into consideration all the pleadings and evidence of the parties except the supplemental affidavit

of [herein respondent] Joseph and its corresponding annexes appended in [respondents] memorandum before the Court a quo. The Court a quo have (sic) outrightly dismissed the complaint for its failure to comply with the mandatory provisions of the Interim Rules of Procedure for Intra-Corporate Controversies particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and Rule 7, Section 2 thereof, which reads as follows: RULE 2 COMMENCEMENT OF ACTION AND PLEADINGS Sec. 4. Complaint. The complaint shall state or contain: xxxx (3) the law, rule, or regulation relied upon, violated, or sought to be enforced; xxxx RULE 8 DERIVATIVE SUITS Sec. 1. Derivative action. x x x xxxx (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires. xxxx RULE 7 INSPECTION OF CORPORATE BOOKS AND RECORDS Sec. 2. Complaint In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state the following:

(1) The case is set (sic) for the enforcement of plaintiffs right of inspection of corporate orders or records and/or to be furnished with financial statements under Section 74 and 75 of the Corporation Code of the Philippines; (2) A demand for inspection and copying of books [and/or] to be furnished with financial statements made by the plaintiffs upon defendant;

(3) The refusal of the defendant to grant the demands of the plaintiff and the reasons given for such refusal, if any; and (4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof.
xxxx A perusal of the extant record shows that [herein respondents] have not complied with the above quoted provisions. [Respondents] should be mindful that in filing their complaint which, as admitted by them, is a derivative suit, should have first exhausted all available remedies under its (sic) Articles of Incorporation, or its by-laws, or any laws or rules governing the corporation. The contention of [respondent Joseph] that he had indeed made several talks to (sic) his brother [herein petitioner Anthony] to settle their differences is not tantamount to exhaustion of remedies. What the law requires is to bring the grievance to the Board of Directors or Stockholders for the latter to take the opportunity to settle whatever problem in its regular meeting or special meeting called for that purpose which [respondents] failed to do. x x x The requirements laid down by the Interim Rules of Procedure for IntraCorporate Controversies are mandatory which cannot be dispensed with by any stockholder of a corporation before filing a derivative suit.28 (Emphasis ours.) The Court of Appeals likewise sustained the refusal by the RTC to consider respondent Josephs Supplemental Affidavit and other additional evidence, which respondents belatedly submitted with their Memorandum to the said trial court. The appellate court ratiocinated that: With regard to the claim of [herein respondents] that the supplemental affidavit of [respondent] Joseph and its annexes appended to their memorandum should have been taken into consideration by the Court a quo to support the reliefs prayed [for] in their complaint. (sic) This Court rules that said supplemental affidavit and its annexes is (sic) inadmissible. A second hard look of (sic) the extant records show that during the pre-trial conference conducted on August 26, 2004, the parties through their respective counsels had come up with an agreement that the lower court would render judgment based on the pleadings and evidence submitted. This agreement is in accordance with Rule 4, Sec. 4 of the Interim Rules of Procedure for IntraCorporate Controversies which explicitly states: SECTION. 4. Judgment before pre-trial. If, after submission of the pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment

may be rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda. xxxx Clearly, the supplemental affidavit and its appended documents which were submitted only upon the filing of the memorandum for the [respondents] were not submitted in the pre-trial briefs for the stipulation of the parties during the pre-trial, hence, it cannot be accepted pursuant to Rule 2, Sec. 8 of the same rules which reads as follows: SEC. 8. Affidavits, documentary and other evidence. Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on admissibility of evidence. Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading; Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases:

(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor; (2) If the failure to submit the evidence is for meritorious and compelling reasons; and (3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence. There is no showing in the case at bench that the supplemental affidavit and its annexes falls (sic) within one of the exceptions of the above quoted proviso, hence, inadmissible. It must be noted that in the case at bench, like any other civil cases, "the party making an allegation in a civil case has the burden of proving it by preponderance of evidence." Differently stated, upon the plaintiff in [a] civil case, the burden of proof never parts. That is, appellants must adduce evidence that has greater weight or is more convincing that (sic) which is offered to oppose it. In the case at bar, no one should be blamed for the dismissal

of the complaint but the [respondents] themselves for their lackadaisical attitude in setting forth and appending their defences belatedly. To admit them would be a denial of due process for the opposite party which this Court cannot allow.29 Ultimately, the Court of Appeals decreed: WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the assailed Decision of the Regional Trial Court (RTC), 7th Judicial Region, Branch II, Cebu City, dated November 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in toto. Cost against the [herein respondents].30 Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion for Reconsideration and Motion to Set for Oral Arguments the Motion for Reconsideration,31 invoking the following grounds:

On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper,36 stating that the parties did not reach an amicable settlement. Respondents informed the appellate court that prior to the filing with the Securities and Exchange Commission (SEC) of a petition for dissolution of Winchester, Inc., the parties already divided the stocks in trade and the real assets of the corporation among themselves. Respondents posited, though, that the afore-mentioned distribution of the assets of Winchester, Inc. among the parties was null and void, as it violated the last paragraph of Section 122 of the Corporation Code, which provides that, "[e]xcept by a decrease of capital stock and as otherwise allowed by the Corporation Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities." At the same time, however, respondents brought to the attention of the Court of Appeals that the parties did eventually file with the SEC a petition for dissolution of Winchester, Inc., which the SEC approved.37 Respondents no longer discussed in their Position Paper the grounds they previously invoked in their Motion for Reconsideration of the Court of Appeals Decision dated 15 February 2006, affirming in toto the RTC Decision dated 10 November 2004. They instead argued that the RTC Decision in question was null and void as it did not clearly state the facts and the law on which it was based. Respondents sought the remand of the case to the RTC for further proceedings on their derivative suit and completion of the dissolution of Winchester, Inc., including the legalization of the prior partial distribution among the parties of the assets of said corporation. Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused respondents of attempting to incorporate extraneous matters into the latters Motion for Reconsideration. Petitioners pointed out that the issue before the Court of Appeals was not the dissolution and division of assets of Winchester, Inc., thus, a remand of the case to the RTC was not necessary. On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting respondents Motion for Reconsideration. The Court of Appeals reasoned in this wise: After a second look and appreciation of the facts of the case, vis--vis the issues raised by the [herein respondents] motion for reconsideration and in view of the formal dissolution of the corporation which leaves unresolved up to the present the settlement of the properties and assets which are now in danger of dissipation due to the unending litigation, this Court finds the need to remand the instant case to the lower court (commercial court) as the proper forum for the adjudication, disposition, conveyance and distribution of said properties and assets between and amongst its stockholders as final settlement pursuant to Sec. 122 of

(1) The [herein respondents] have sufficiently exhausted all remedies before filing the present action; and (2) [The] Honorable Court erred in holding that the supplemental affidavit and its annexes is (sic) inadmissible because the rules and the lower court expressly allowed the submission of the same in its order dated August 26, 2004 x x x.32
In a Resolution33 dated 8 March 2006, the Court of Appeals granted respondents Motion to Set for Oral Arguments the Motion for Reconsideration. On 4 April 2006, the Court of Appeals issued a Resolution34 setting forth the events that transpired during the oral arguments, which took place on 30 March 2006. Counsels for the parties manifested before the appellate court that they were submitting respondents Motion for Reconsideration for resolution. Justice Magpale, however, still called on the parties to talk about the possible settlement of the case considering their familial relationship. Independent of the resolution of respondents Motion for Reconsideration, the parties were agreeable to pursue a settlement for the dissolution of the corporation, which they had actually already started. In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the parties to submit, within 10 days from notice, their intended amicable settlement, since the same would undeniably affect the resolution of respondents pending Motion for Reconsideration. If the said period should lapse without the parties submitting an amicable settlement, then they were directed by the appellate court to file within 10 days thereafter their position papers instead.

the Corporation Code after payment of all its debts and liabilities as provided for under the same proviso. This is in accord with the pronouncement of the Supreme Court in the case of Clemente et. al. vs. Court of Appeals, et. al. where the high court ruled and which WE quote, viz: "the corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity x x x nor those of its owners and creditors. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustees) xxx may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representation with the Securities and Exchange Commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns." In the absence of a trustee or board of director in the case at bar for purposes above mentioned, the lower court under Republic Act No. [8799] (otherwise known as the Securities and Exchange Commission) as implemented by A.M. No. 00-8-10-SC (Transfer of Cases from the Securities and Exchange Commission to the Regional Trial Courts) which took effect on October 1, 2001, is the proper forum for working out the final settlement of the corporate concern.39 Hence, the Court of Appeals ruled: WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The order dated February 15, 2006 is hereby SET ASIDE and the instant case is REMANDED to the lower court to take the necessary proceedings in resolving with deliberate dispatch any and all corporate concerns towards final settlement.40 Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution, but it was denied by the Court of Appeals in its other assailed Resolution dated 19 April 2007. In the Petition at bar, petitioners raise the following issues:

WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.] II. WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT JURISDICTION[.] III. WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN REMANDING THIS CASE TO THE LOWER COURT FOR THE REASON CITED IN THE ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS FOR THE [RESPONDENTS] MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE] REASON CITED WAS A NON-ISSUE IN THE CASE. IV. WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT VIOLATES THE SUMMARY PROCEDURE FOR INTRACORPORATE CASES.42
The crux of petitioners contention is that the Court of Appeals committed grievous error in reconsidering its Decision dated 15 February 2006 on the basis of extraneous matters, which had not been previously raised in respondents Complaint before the RTC, or in their Petition for Review and Motion for Reconsideration before the appellate court; i.e., the adjudication, disposition, conveyance, and distribution of the properties and assets of Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of the parties. The fact that the parties were able to agree before the Court of Appeals to submit for resolution respondents Motion for Reconsideration of the 15 February 2006 Decision of the same court, independently of any intended settlement between the parties as regards the dissolution of the corporation and distribution of its assets, only proves the distinction and independence of these matters from one another. Petitioners also contend that the assailed Resolution dated 18 July 2006 of the Court of Appeals, granting respondents Motion for Reconsideration, failed to clearly and distinctly state the facts and the law on which it was based. Remanding the case to the RTC, petitioners maintain, will violate the very essence of the summary nature of the Interim Rules of Procedure Governing Intra-Corporate Controversies, as this will just entail delay, protract litigation, and revert the case to square one.

I.

The Court finds the instant Petition meritorious. To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to compel petitioners to account for and reimburse to the said corporation the corporate assets and funds which the latter allegedly misappropriated for their personal benefit. During the pendency of the proceedings before the court a quo, the parties were able to reach an amicable settlement wherein they agreed to divide the assets of Winchester, Inc. among themselves. This amicable settlement was already partially implemented by the parties, when respondents repudiated the same, for which reason the RTC proceeded with the case on its merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents Complaint for failure to comply with essential pre-requisites before they could avail themselves of the remedies under the Interim Rules of Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of respondents allegations in said Complaint after consideration of the pleadings and evidence on record. In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings of the RTC that respondents did not abide by the requirements for a derivative suit, nor were they able to prove their case by a preponderance of evidence. Respondents filed a Motion for Reconsideration of said judgment of the appellate court, insisting that they were able to meet all the conditions for filing a derivative suit. Pending resolution of respondents Motion for Reconsideration, the Court of Appeals urged the parties to again strive to reach an amicable settlement of their dispute, but the parties were unable to do so. The parties were not able to submit to the appellate court, within the given period, any amicable settlement; and filed, instead, their Position Papers. This effectively meant that the parties opted to submit respondents Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, and petitioners opposition to the same, for resolution by the appellate court on the merits. It was at this point that the case took an unexpected turn. In accordance with respondents allegation in their Position Paper that the parties subsequently filed with the SEC, and the SEC already approved, a petition for dissolution of Winchester, Inc., the Court of Appeals remanded the case to the RTC so that all the corporate concerns between the parties regarding Winchester, Inc. could be resolved towards final settlement. In one stroke, with the use of sweeping language, which utterly lacked support, the Court of Appeals converted the derivative suit between the parties into liquidation proceedings.

The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation.43 By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the Regional Trial Courts designated by this Court pursuant to A.M. No. 0011-03-SC promulgated on 21 November 2000. In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is specifically governed by Section 122 of the Corporation Code, which reads: SEC. 122. Corporate liquidation. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any

of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.44 More particularly, it entails the following: Winding up the affairs of the corporation means the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if any among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests. The manner of liquidation or winding up may be provided for in the corporate by-laws and this would prevail unless it is inconsistent with law.45 It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to whom all corporate assets are conveyed for liquidation; or by a receiver appointed by the SEC upon its decree dissolving the corporation.46
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respondents must, therefore, prove it.47 This respondents failed to do. Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester, Inc. and the same was approved by the SEC, the Court of Appeals was still without jurisdiction to order the final settlement by the RTC of the remaining corporate concerns. It must be remembered that the Complaint filed by respondents before the RTC essentially prayed for the accounting and reimbursement by petitioners of the corporate funds and assets which they purportedly misappropriated for their personal use; surrender by the petitioners of the corporate books for the inspection of respondents; and payment by petitioners to respondents of damages. There was nothing in respondents Complaint which sought the dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution of Winchester, Inc. could not have resulted in the conversion of respondents derivative suit to a proceeding for the liquidation of said corporation, but only in the dismissal of the derivative suit based on either compromise agreement or mootness of the issues. Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of Appeals already went beyond the issues raised in respondents Motion for Reconsideration. Instead of focusing on whether it erred in affirming, in its 15 February 2006 Decision, the dismissal by the RTC of respondents Complaint due to respondents failure to comply with the requirements for a derivative suit and submit evidence to support their allegations, the Court of Appeals unduly concentrated on respondents unsubstantiated allegation that Winchester, Inc. was already dissolved and speciously ordered the remand of the case to the RTC for proceedings so vitally different from that originally instituted by respondents. Despite the foregoing, the Court still deems it appropriate to already look into the merits of respondents Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, for the sake of finally putting an end to the case at bar. In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently exhausted all remedies before filing the derivative suit; and (2) respondent Josephs Supplemental Affidavit and its annexes should have been taken into consideration, since the submission thereof was allowed by the rules of procedure, as well as by the RTC in its Order dated 26 August 2004. As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a derivative suit, the Court subscribes to the ruling to the contrary of the Court of Appeals in its Decision dated 16 February 2006.
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Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are neither part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc. While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents themselves repudiated said amicable settlement before the RTC, even after the same had been partially implemented; and moved that their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties before the Court of Appeals were unsuccessful. Moreover, the decree of the Court of Appeals to remand the case to the RTC for the "final settlement of corporate concerns" was solely grounded on respondents allegation in its Position Paper that the parties had already filed before the SEC, and the SEC approved, the petition to dissolve Winchester, Inc. The Court notes, however, that there is absolute lack of evidence on record to prove said allegation. Respondents failed to submit copies of such petition for dissolution of Winchester, Inc. and the SEC Certification approving the same. It is a basic rule in evidence that each party must prove his affirmative allegation. Since it was respondents who alleged the voluntary dissolution of Winchester, Inc.,

The Court has recognized that a stockholders right to institute a derivative suit is not based on any express

provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection. The basis of a stockholders suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution.48 Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following requirements which a stockholder must comply with in filing a derivative suit: Sec. 1. Derivative action. A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that:

family corporation and it was impossible to expect petitioners to take action against themselves who were the ones accused of wrongdoing. The Court is not persuaded. The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do not leave room for statutory construction. The second paragraph thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; and to allege such fact with particularity in the complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed. The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony regarding their dispute hardly constitutes "all reasonable efforts to exhaust all remedies available." Respondents did not refer to or mention at all any other remedy under the articles of incorporation or by-laws of Winchester, Inc., available for dispute resolution among stockholders, which respondents unsuccessfully availed themselves of. And the Court is not prepared to conclude that the articles of incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such remedies. Neither can this Court accept the reasons proffered by respondents to excuse themselves from complying with the second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies. They are flimsy and insufficient, compared to the seriousness of respondents accusations of fraud, misappropriation, and falsification of corporate records against the petitioners. The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules supporting the distinction between, and the difference in the requirements for, family corporations vis--vis other types of corporations, in the institution by a stockholder of a derivative suit. The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the respondents Complaint failed to allege, explicitly or otherwise, the fact that there were no appraisal rights available for the acts of petitioners complained of, as well as a categorical statement that the suit was not a nuisance or a harassment suit. As to respondents second ground in their Motion for Reconsideration, the Court agrees with the ruling of the Court of Appeals, in its 15 February 2006 Decision, that

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit.
A perusal of respondents Complaint before the RTC would reveal that the same did not allege with particularity that respondents exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing Winchester, Inc. to obtain the relief they desire. Respondents assert that their compliance with said requirement was contained in respondent Josephs Affidavit, which was attached to respondents Complaint. Respondent Joseph averred in his Affidavit that he tried for a number of times to talk to petitioner Anthony to settle their differences, but the latter would not listen. Respondents additionally claimed that taking further remedies within the corporation would have been idle ceremony, considering that Winchester, Inc. was a

respondent Josephs Supplemental Affidavit and additional evidence were inadmissible since they were only appended by respondents to their Memorandum before the RTC. Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies is crystal clear that: Sec. 8. Affidavits, documentary and other evidence. Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on admissibility of evidence. Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading, Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases:

file with the court and furnish each other copies of their respective pre-trial brief in such manner as to ensure its receipt by the court and the other party at least five (5) days before the date set for the pre-trial. The parties shall set forth in their pre-trial briefs, among other matters, the following: xxxx (4) Documents not specifically denied under oath by either or both parties; xxxx (7) Names of witnesses to be presented and the summary of their testimony as contained in their affidavits supporting their positions on each of the issues; (8) All other pieces of evidence, whether documentary or otherwise and their respective purposes. Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies,49 it is the duty of the court to ensure during the pre-trial conference that the parties consider in detail, among other things, objections to the admissibility of testimonial, documentary, and other evidence, as well as objections to the form or substance of any affidavit, or part thereof. Obviously, affidavits of witnesses and other documentary evidence are required to be attached to a partys pre-trial brief, at the very last instance, so that the opposite party is given the opportunity to object to the form and substance, or the admissibility thereof. This is, of course, to prevent unfair surprises and/or to avoid the granting of any undue advantage to the other party to the case. True, the parties in the present case agreed to submit the case for judgment by the RTC, even before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies: Sec. 4. Judgment before pre-trial. If after submission of the pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda. Even then, the afore-quoted provision still requires, before the court makes a determination that it can render judgment before pre-trial, that the parties had submitted

(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor; (2) If the failure to submit the evidence is for meritorious and compelling reasons; and (3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence. (Emphasis ours.) According to the afore-quoted provision, the parties should attach the affidavits of witnesses and other documentary evidence to the appropriate pleading, which generally should mean the complaint for the plaintiff and the answer for the respondent. Affidavits and documentary evidence not so submitted must already be attached to the respective pre-trial briefs of the parties. That the parties should have already identified and submitted to the trial court the affidavits of their witnesses and documentary evidence by the time of pre-trial is strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure Governing IntraCorporate Controversies require that the following matters should already be set forth in the parties pretrial briefs: Section 1. Pre-trial conference, mandatory nature. Within five (5) days after the period for availment of, and compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the court shall issue and serve an order immediately setting the case for pre-trial conference, and directing the parties to submit their respective pre-trial briefs. The parties shall

their pre-trial briefs and the court took into consideration the pleadings, affidavits and other evidence submitted by the parties. Hence, cases wherein the court can render judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that affidavits of witnesses and documentary evidence should be submitted, at the latest, with the parties pre-trial briefs. Taking further into account that under Section 4, Rule 4 of the Interim Rules of Procedure Governing IntraCorporate Controversies parties are required to file their memoranda simultaneously, the same would mean that a party would no longer have any opportunity to dispute or rebut any new affidavit or evidence attached by the other party to its memorandum. To violate the abovequoted provision would, thus, irrefragably run afoul the former partys constitutional right to due process. In the instant case, therefore, respondent Josephs Supplemental Affidavit and the additional documentary evidence, appended by respondents only to their Memorandum submitted to the RTC, were correctly adjudged as inadmissible by the Court of Appeals in its 15 February 2006 Decision for having been belatedly submitted. Respondents neither alleged nor proved that the documents in question fall under any of the three exceptions to the requirement that affidavits and documentary evidence should be attached to the appropriate pleading or pre-trial brief of the party, which is particularly recognized under Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies. WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is hereby GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April 2007 of the Court of Appeals in CAG.R. SP No. 00185 are hereby REVERSED AND SET ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is hereby AFFIRMED. No costs. SO ORDERED.

LEGASPI TOWERS 300, INC., LILIA MARQUINEZ PALANCA, ROSANNA D. IMAI, GLORIA DOMINGO and RAY VINCENT, Petitioners, - versus -

G.R.

Prese

AMELIA P. MUER, SAMUEL M. TANCHOCO, ROMEO TANKIANG, RUDEL PANGANIBAN, DOLORES Prom AGBAYANI, ARLENEDAL A. YASUMA, GODOFREDO M. June CAGUIOA and EDGARDO M. SALANDANAN, Respondents. x----------------------------------------------------------------------------------------x

PERA BERS ABA VILL PERL

DECISION

PERALTA, J.:

This is a petition for review on certiorari of the Court of Appeals Decision[1] dated July 22, 2005 in CA-G.R. CV No. 87684, and its Resolution[2] dated November 24, 2005, denying petitioners motion for reconsideration. The Court of Appeals held that Judge Antonio I. De Castro of the Regional Trial Court (RTC) of Manila, Branch 3, did not commit grave abuse of discretion in issuing the Orders dated July 21, 2004 and September 24, 2004 in Civil Case No. 04109655, denying petitioners Motion to Admit Second Amended Complaint.

The facts, as stated by the Court of Appeals, are as follows: Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners Lilia Marquinez Palanca, Rosanna D. Imai, Gloria Domingo and Ray Vincent, the incumbent Board of Directors, set the annual meeting of the members of the condominium corporation and the election of the new Board of Directors for the years 2004-2005 on April 2, 2004 at 5:00 p.m. at the lobby of Legaspi Towers 300, Inc. Out of a total number of 5,723 members who were entitled to vote, 1,358 were supposed to vote through their respective proxies and their votes were critical in determining the existence of a quorum, which was at least 2,863 (50% plus 1). The Committee on Elections of Legaspi Towers 300, Inc., however, found most of the proxy votes, at its face value, irregular, thus, questionable; and for lack of time to authenticate the same, petitioners adjourned the meeting for lack of quorum. However, the group of respondents challenged the adjournment of the meeting. Despite petitioners' insistence that no quorum was obtained during the annual meeting held on April 2, 2004, respondents pushed through with the scheduled election and were elected as the new Board of Directors and officers of Legaspi Towers 300, Inc. Subsequently, they submitted a General Information Sheet to the Securities and Exchange Commission (SEC) with the following new set of officers: Amelia P. Muer, President; Samuel M. Tanchoco, Internal Vice President;

Romeo V. Tankiang, External VicePresident; Rudel H. Panganiban, Secretary; Dolores B. Agbayani, Assistant Secretary; Arlenedal A. Yasuma, Treasurer; Godofredo M. Caguioa, Assistant Treasurer; and Edgardo M. Salandanan, Internal Auditor. On April 13, 2004, petitioners filed a Complaint for the Declaration of Nullity of Elections with Prayers for the lssuance of Temporary Restraining Orders and Writ of Preliminary Injunction and Damages against respondents with the RTC of Manila. Before respondents could file an Answer to the original Complaint, petitioners filed anAmended Complaint, which was admitted by the RTC in an Order dated April 14, 2004. On April 20, 2004, before respondents could submit an Answer to the Amended Complaint, petitioners again filed an Urgent Ex-Parte Motion to Admit Second Amended Complaint and for the lssuance of Ex-Parte Temporary Restraining Order Effective only for Seventy-Two (72) Hours. It was stated in the said pleading that the case was raffled to Branch 24, but Presiding Judge Antonio Eugenio, Jr. inhibited himself from handling the case; and when the case was assigned to Branch 46, Presiding Judge Artemio S. Tipon also inhibited himself from the case. On April 21, 2004, Executive Judge Enrico A. Lanzanas of the RTC of Manila acted on the Motion for the Issuance of an Ex Parte Temporary Restraining Order, and issued an Order disposing, thus:

WHEREFORE, pursuant to administrative Circular No. 2095 of the Supreme Court, a seventytwo (72) hour Temporary Restraining Order is hereby issued, enjoining defendants from taking over management, or to maintain a status quo, in order to prevent further irreparable damages and prejudice to the corporation, as dayto-day activities will be disrupted and will be paralyzed due to the legal controversy.[3]

On the same date, April 21, 2004, respondents filed their Answer[4] to the Amended Complaint, alleging that the election on April 2, 2004 was lawfully conducted. Respondents cited the [5] Report of SEC Counsel Nicanor P. Patricio, who was ordered by the SEC to attend the annual meeting of Legaspi Towers 300, Inc. on April 2, 2004. Atty. Patricio stated in his Report that at 5:40 p.m. of April 2, 2004, a representative of the Board of the condominium corporation stated that the scheduled elections could not proceed because the Election Committee was not able to validate the authenticity of the proxies prior to the election due to limited time available as the submission was made only the day before. Atty. Patricio noted that the Board itself fixed the deadline for submission of proxies at 5:00 p.m. of April 1, 2004. One holder of proxy stood up and questioned the motives of the Board in postponing the elections. The Board objected to this and moved for a declaration of adjournment. There was an

objection to the adjournment, which was ignored by the Board. When the Board adjourned the meeting despite the objections of the unit owners, the unit owners who objected to the adjournment gathered themselves at the same place of the meeting and proceeded with the meeting. The attendance was checked from among the members who stayed at the meeting. Proxies were counted and recorded, and there was a declaration of a quorum out of a total of 5,721 votes, 2,938 were present either in person or proxy. Thereafter, ballots were prepared, proxies were counterchecked with the number of votes entitled to each unit owner, and then votes were cast. At about 9:30 p.m., canvassing started, and by 11:30 p.m., the newly-elected members of the Board of Directors for the years 2004-2005 were named. Respondents contended that from the proceedings of the election reported by SEC representative, Atty. Patricio, it was clear that the election held on April 2, 2004 was legitimate and lawful; thus, they prayed for the dismissal of the complaint for lack cause of action against them. This case was scheduled to be reraffled to regular courts on April 22, 2004, and was assigned to Judge Antonio I. De Castro of the RTC of Manila, Branch 3 (trial court). On April 26, 2004, the trial court conducted a hearing on the injunction sought by petitioners, and issued an Order

clarifying that the TRO issued by Executive Judge Enrico A. Lanzanas, enjoining respondents from taking over management, was not applicable as the current Board of Directors (respondents) had actually assumed management of the corporation. The trial court stated that the status quo mentioned in the said TRO shall mean that the current board of directors shall continue to manage the affairs of the condominium corporation, but the court shall monitor all income earned and expenses incurred by the corporation. The trial court stated:
Precisely this complaint seeks to annul the election of the Board due to alleged questionable proxy votes which could not have produced a quorum. As such, there is nothing to enjoin and so injunction shall fail. As an answer has been filed, the case is ripe for pre-trial and the parties are directed to file their pre-trial briefs by May 3, 2004. As plaintiffs second amended complaint is admitted by the Court, defendants are given up to May 3, 2004 to file a comment thereto. In the meantime, the banks and other persons & entities are advised to recognize the Board headed by its president, Amelia Muer. All transactions made by the Board and its officers for the corporation are considered legal for all intents and purposes.[6]

the said inclusion by petitioners was made without the authority of the current Board

On May 3, 2004, respondents filed a Comment on the Motion to Amend Complaint, praying that the name of Legaspi Towers 300, Inc., as party-plaintiff in the Second Amended Complaint, be deleted as

of Directors, which had been recognized by the trial court in its Order dated April 26, 2004. During the pre-trial conference held on July 21, 2004, the trial court resolved various incidents in the case and other issues raised by the contending parties. One of the incidents acted upon by the trial court was petitioners' motion to amend complaint to implead Legaspi Towers 300, Inc. as plaintiff, which motion was denied with the issuance of two Orders both dated July 21, 2004. The first Order[7] held that the said motion could not be admitted for being improper, thus:
xxxx On plaintiffs motion to admit amended complaint (to include Legaspi Towers 300, Inc. as plaintiff), the Court rules to deny the motion for being improper. (A separate Order of even date is issued.) As prayed for, movants are given 10 days from today to file a motion for reconsideration thereof, while defendants are given 10 days from receipt thereof to reply.[8]

Petitioners filed a Motion for Reconsideration of the Orders dated July 21, 2004. In the Order[10] dated September 24, 2004, the trial court denied the motion for reconsideration for lack of merit. Petitioners filed a petition for certiorari with the Court of Appeals alleging that the trial court gravely abused its discretion amounting to lack or excess of jurisdiction in issuing the Orders dated July 21, 2004 and September 24, 2004, and praying that judgment be rendered annulling the said Orders and directing RTC Judge De Castro to admit their Second Amended Complaint. In a Decision dated July 22, 2005, the Court of Appeals dismissed the petition for lack of merit. It held that RTC Judge De Castro did not commit grave abuse of discretion in denying petitioners' Motion To Admit Second Amended Complaint. The Court of Appeals stated that petitioners complaint sought to nullify the election of the Board of Directors held on April 2, 2004, and to protect and enforce their individual right to vote. The appellate court held that as the right to vote is a personal right of a stockholder of a corporation, such right can only be enforced through a direct action; hence, Legaspi Towers 300, Inc. cannot be impleaded as plaintiff in this case. Petitioners motion for reconsideration was denied by the Court of

The second separate [9] Order, also dated July 21, 2004, reads:
This resolves plaintiffs motion to amend complaint to include Legaspi Towers 300, Inc. as party-plaintiff and defendants comment thereto. Finding no merit therein and for the reasons stated in the comment, the motion is hereby DENIED.

Appeals in a Resolution dated November 24, 2005. Petitioners filed this petition raising the following issues:
I THE HONORABLE COURT OF APPEALS ERRED IN RESOLVING THAT PUBLIC RESPONDENT-APPELLEE DID NOT COMMIT ANY WHIMSICAL, ARBITRARY AND OPPRESSIVE EXERCISE OF JUDICIAL AUTHORITY WHEN THE LATTER REVERSED HIS EARLIER RULING ALREADY ADMITTING THE SECOND AMENDED COMPLAINT OF PETITIONERS-APPELLANTS.

Petitioners contend that the Court of Appeals erred in not finding that RTC Judge Antonio I. De Castro committed grave abuse of discretion amounting to lack or excess of jurisdiction in denying the admission of the Second Amended Complaint in the Orders dated July 21, 2004 and September 24, 2004, despite the fact that he had already ordered its admission in a previous Order dated April 26, 2004. Petitioners unmeritorious. contention is

II THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF APPEALS TO RESOLVE THAT PETITIONERSAPPELLANTS HAVE NO RIGHT AS BOARD OF DIRECTORS TO BRING AN ACTION IN BEHALF OF LEGASPI TOWERS 300, INC.

It is clear that in the Orders dated July 21, 2004, the trial court did not admit the Second Amended Complaint wherein petitioners made the condominium corporation, Legaspi Towers 300, Inc., the party-plaintiff. In the Order dated September 24, 2004, denying petitioners motion for reconsideration of the Orders dated July 21, 2004, the RTC explained its action, thus:
x x x The word admitted in the 3rd paragraph of the Order dated April 26, 2004 should read received for which defendants were told to comment thereon as an answer has been filed. It was an oversight of the clerical error in said Order. The Order of July 21, 2004 states amended complaint in the 3rd paragraph thereof and so it does not refer to the second amended complaint. The amended complaint was admitted by the court of origin Br. 24 in its Order of April 14, 2004 as there was no responsive pleading yet.

III THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF APPEALS TO RESOLVE THAT THE ELECTIONS CONDUCTED IN LEGASPI TOWERS 300, INC. FOR THE PERIOD OF 2005 TO 2006 HAVE RENDERED THE ISSUE IN CIVIL CASE NO. 0410655 MOOT AND ACADEMIC.[11]

Nonetheless, admission of the second amended complaint is improper. Why should Legaspi Towers 300, Inc. x x x be included as party-plaintiff when defendants are members thereof too like plaintiffs. Both parties are deemed to be acting in their personal capacities as they both claim to be the lawful board of directors. The motion for reconsideration for the admission of the second amended complaint is hereby DENIED.[12]

succeeding term. By so doing, petitioners had the right as the rightful Board of Directors to bring the action in representation of Legaspi Towers 300, Inc. Thus, the Second Amended Complaint was intended by the petitioners as a direct suit by the corporation joined in by the petitioners to protect and enforce their common rights. Petitioners contend that Legaspi Towers 300, Inc. is a real party-in- interest as it stands to be affected the most by the controversy, because it involves the determination of whether or not the corporations by-laws was properly carried out in the meeting held on April 2, 2004, when despite the adjournment of the meeting for lack of quorum, the elections were still conducted. Although petitioners admit that the action involves their right to vote, they argue that it also involves the right of the condominium corporation to be managed and run by the duly-elected Board of Directors, and to seek redress against those who wrongfully occupy positions of the corporation and who may mismanage the corporation. Petitioners unmeritorious. argument is

The courts have the inherent power to amend and control their processes and orders so as to make them conformable to law and justice.[13] A judge has an inherent right, while his judgment is still under his control, to correct errors, mistakes, or injustices.[14] Next, petitioners state that the Court of Appeals seems to be under the impression that the action instituted by them is one brought forth solely by way of a derivative suit. They clarified that the inclusion of Legaspi Towers 300, Inc. as a party-plaintiff in the Second Amended Complaint was, first and foremost, intended as a direct action by the corporation acting through them (petitioners) as the reconstituted Board of Directors of Legaspi Towers 300, Inc. Petitioners allege that their act of including the corporation as party-plaintiff is consistent with their position that the election conducted by respondents was invalid; hence, petitioners, under their bylaws, could reconstitute themselves as the Board of Directors of Legaspi Towers 300, Inc. in a hold-over capacity for the

The Court notes that in the Amended Complaint, petitioners as plaintiffs stated that they are the incumbent reconstituted Board of Directors of Legaspi Towers 300, Inc., and that defendants, herein respondents, are the newly-elected members of the Board of Directors; while in the Second Amended Complaint, the plaintiff is Legaspi Towers 300, Inc., represented by

petitioners as the allegedly incumbent reconstituted Board of Directors of Legaspi Towers 300, Inc. The Second Amended Complaint states who the plaintiffs are, thus:
1. That the plaintiffs are: LEGASPI TOWERS 300, INC., non-stock corporation xxx duly represented by the incumbent reconstituted Board of Directors of Legaspi Towers 300, Inc., namely: ELIADORA FE BOTE VERA xxx, as President; BRUNO C. HAMAN xxx, as Director; LILY MARQUINEZ PALANCA xxx, as Secretary; ROSANNA DAVID IMAI xxx, as Treasurer; and members of the Board of Directors, namely: ELIZABETH GUERRERO xxx, GLORIA DOMINGO xxx, and RAY VINCENT.[15]

plaintiff. This is because every resolution passed by private respondents sitting as a board result[s] in violation of Legaspi Towers 300, Inc.s right to be managed and represented by herein petitioners. In short, the amendment of the complaint [to include] Legaspi Towers 300, Inc. was done in order to protect the interest and enforce the right of the Legaspi [Towers 300,] Inc. to be administered and managed [by petitioners] as the duly constituted Board of Directors. This is no different from and may in fact be considered as a DERIVATIVE SUIT instituted by an individual stockholder against those controlling the corporation but is being instituted in the name of and for the benefit of the corporation whose right/s are being violated.[16]

Is a derivative suit proper in this case? The Court agrees with the Court of Appeals that the Second Amended Complaint is meant to be a derivative suit filed by petitioners in behalf of the corporation. The Court of Appeals stated in its Decision that petitioners justified the inclusion of Legaspi Towers 300, Inc. as plaintiff in Civil Case No. 0410655 by invoking the doctrine of derivative suit, as petitioners specifically argued, thus:
xxxx

Cua, Jr. v. Tan[17] differentiates a derivative suit and an individual/class suit as follows:
A derivative suit must be differentiated from individual and representative or class suits, thus: Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other persons may be classified into individual suits, class suits, and derivative suits. Where a stockholder or

x x x [T]he sudden takeover by private respondents of the management of Legaspi Towers 300, Inc. has only proven the rightfulness of petitioners move to include Legaspi Towers 300, Inc. as party-

member is denied the right of inspection, his suit would be individual becaus e the wrong is done to him personally and not to the other stockholders or the corporation. Where the wrong is done to a group of stockholders, as where preferred stockholders' rights are violated, a class or representative suit will be proper for the protection of all stockholders belonging to the same group. But where the acts complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to the individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is necessarily affected because the value of his interest therein would be impaired, this fact of itself is not sufficient to give him an individual cause of action since the corporation is a person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of

separate entity be violated, but there would be multiplicity of suits as well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount of damages that should be paid to each individual stockholder. However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves, a stockholder or member may find that he has no redress because the former are vested by law with the right to decide whether or not the corporation should sue, and they will never be willing to sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on behalf of a corporation in what eventually became known as a "derivative suit." It has been proven to be an effective remedy of

the minority against the abuses of management. Thus, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as thenominal party, with the corporation as the party-ininterest.[18]

relief but the latter has failed or refused to heed his plea; and c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.[21]

In this case, petitioners, as members of the Board of Directors of the condominium corporation before the election in question, filed a complaint against the newly-elected members of the Board of Directors for the years 20042005, questioning the validity of the election held on April 2, 2004, as it was allegedly marred by lack of quorum, and praying for the nullification of the said election. As stated by the Court of Appeals, petitioners complaint seek to nullify the said election, and to protect and enforce their individual right to vote. Petitioners seek the nullification of the election of the Board of Directors for the years 2004-2005, composed of herein respondents, who pushed through with the election even if petitioners had adjourned the meeting allegedly due to lack of quorum. Petitioners are the injured party, whose rights to vote and to be voted upon were directly affected by the election of the new set of board of directors. The party-ininterest are the petitioners as stockholders, who wield such right to vote. The cause of action devolves on petitioners, not the condominium corporation, which did not have the right to vote. Hence, the complaint for nullification of the election is a direct action by petitioners, who were the

Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for must be for the benefit or interest of the [19] corporation. When the reliefs prayed for do not pertain to the corporation, then it is an improper derivative suit.[20] The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; b) he has tried to exhaust intracorporate remedies, i.e., has made a demand on the board of directors for the appropriate

members of the Board of Directors of the corporation before the election, against respondents, who are the newly-elected Board of Directors. Under the circumstances, the derivative suit filed by petitioners in behalf of the condominium corporation in the Second Amended Complaint is improper. The stockholders right to file a derivative suit is not based on any express provision of The Corporation Code, but is impliedly recognized when the law makes corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties,[22] which is not the issue in this case.

the issue raised viathe special civil action for certiorari before the appellate court moot and academic. The Court of Appeals, in its Resolution dated November 24, 2005, stated:
x x x [T]he election of the corporations new set of directors for the years 2005-2006 has, finally, rendered the petition at bench moot and academic. As correctly argued by private respondents, the nullification of the orders assailed by petitioners would, therefore, be of little or no practical and legal purpose.[24]

The statement of the Court of Appeals is correct. Further, petitioners change of argument before this Court, asserting that the Second Amended Complaint is a direct action filed by the corporation, represented by the petitioners as the incumbent Board of Directors, is an afterthought, and lacks merit, considering that the newly-elected Board of Directors had assumed their function to manage corporate affairs.[23] In fine, the Court of Appeals correctly upheld the Orders of the trial court dated July 21, 2004 and September 24, 2004 denying petitioners Motion to Admit Second Amended Complaint. Lastly, petitioners contend that the Court of Appeals erred in resolving that the recent elections conducted by Legaspi Towers, 300, Inc. have rendered Petitioners question the validity of the election of the Board of Directors for the years 2004-2005, which election they seek to nullify in Civil Case No. 04109655. However, the valid election of a new set of Board of Directors for the years 2005-2006 would, indeed, render this petition moot and academic. WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 87684, dated July 22, 2005, and its Resolution dated November 24, 2005 are AFFIRMED. Costs against petitioners. SO ORDERED.

[G.R. No. 144476. April 8, 2003]

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES AND EXCHANGE COMMISSION, respondents.

(2) motion for partial reconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking a reversal of this Courts Decision,[1] dated February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the decision[2] of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise with modification, the decision of the SEC en banc,dated September 11, 1998; and (3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision. A brief recapitulation of the facts shows that: In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value ofP100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and the Treasurer plus five directors while the Ongs were entitled to nominate the President, the Secretary and six directors (including the chairman) to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall. Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at P20

[G.R. No. 144629. April 8, 2003]

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG ALONZO, respondents. RESOLUTION
CORONA, J.:

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the Ongs);

million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongs paid in another P70 million[3] to FLADC and P20 million to the Tius over and above their P100 million investment, the total sum of which (P190 million) was used to settle the P190 million mortgage indebtedness of FLADC to PNB. The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC shares covering their real property contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as Vice-President and Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon. According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the positions and perform the duties of VicePresident and Treasurer, respectively, but the Ongs prevented them from doing so. Furthermore, the Ongs refused to provide them the space for their executive offices as Vice-President and Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares corresponding to their property contributions of a four-story building, a 1,902.30 square-meter lot and a 151 squaremeter lot. Hence, they felt they were justified in setting aside their Pre-Subscription Agreement with the Ongs who allegedly refused to comply with their undertakings. In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of Vice-President and Treasurer of FLADC but that it was they who refused to comply with the corporate duties assigned to them. It was the contention of the Ongs that they wanted the Tius to sign the checks of the corporation and undertake their management duties but that the Tius shied away from helping them manage the corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact already have existing executive offices in the mall since they owned

it 100% before the Ongs came in. What the Tius really wanted were new offices which were anyway subsequently provided to them. On the most important issue of their alleged failure to credit the Tius with the FLADC shares commensurate to the Tius property contributions, the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital gains tax and documentary stamp tax. Without the payment thereof, the SEC would not approve the valuation of the Tius property contribution (as opposed to cash contribution). This, in turn, would make it impossible to secure a new Transfer Certificate of Title (TCT) over the property in FLADCs name. In any event, it was easy for the Tius to simply pay the said transfer taxes and, after the new TCT was issued in FLADCs name, they could then be given the corresponding shares of stocks. On the 151 square-meter property, the Tius never executed a deed of assignment in favor of FLADC. The Tius initially claimed that they could not as yet surrender the TCT because it was still being reconstituted by the Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC had in reality owned the property all along, even before their PreSubscription Agreement was executed in 1994. This meant that the 151 square-meter property was at that time already the corporate property of FLADC for which the Tius were not entitled to the issuance of new shares of stock. The controversy finally came to a head when this case was commenced[4] by the Tius on February 27, 1996 at the Securities and Exchange Commission (SEC), seeking confirmation of their rescission of the PreSubscription Agreement. After hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19, 1997 confirming the rescission sought by the Tius, as follows:

WHEREFORE, judgment is hereby rendered confirming the rescission of the PreSubscription Agreement, and consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC; (b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the return of their contribution for 1,000,000 shares of FLADC;

insofar as the Ongs P70 million was declared not as a premium on capital stock but an advance (loan) by the Ongs to FLADC and that the imposition of interest on it was correct.[6] Both parties appealed[7] to the SEC en banc which rendered a decision on September 11, 1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission of the PreSubscription Agreement but reverted to classifying the P70 million paid by the Ongs as premium on capital and not as a loan or advance to FLADC, hence, not entitled to earn interest.[8] On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

( c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended articles of incorporation of FLADC to conform with this decision; (d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly 15587), 135325 and 134204 and any other title or deed in the name of FLADC, failing in which said titles are declared void; (e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel the annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No. 134066 (formerly 15587); (f) The individual defendants, individually and collectively, their agents and representatives, to desist from exercising or performing any and all acts pertaining to stockholder, director or officer of FLADC or in any manner intervene in the management and affairs of FLADC; (g) The individual defendants, jointly and severally, to return to FLADC interest payment in the amount of P8,866,669.00 and all interest payments as well as any payments on principal received from the P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of their receipt of such payment until fully paid; (h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing his loan from said defendants plus legal interest from the date of receipt of such amount.

WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the following MODIFICATIONS: 1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation in accordance with the following cash and property contributions of the parties therein. (a) Ong Group P100,000,000.00 cash contribution for one (1) million shares in First Landlink Asia Development Corporation at a par value of P100.00 per share; (b) Tiu Group: 1) P45,020,000.00 original cash contribution for 450,200 shares in First

SO ORDERED.

[5]

On motion of both parties, the above decision was partially reconsidered but only

Landlink Asia Development Corporation at a par value of P100.00 per share; 2) A four-storey building described in Transfer Certificate of Title No. 15587 in the name of Intraland Resources and Development Corporation valued at P20,000,000.00 for 200,000 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share; 3) A 1,902.30 square-meter parcel of land covered by Transfer Certificate of Title No. 15587 in the name of Masagana Telamart, Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share. 2) Whatever remains of the assets of the First Landlink Asia Development Corporation and the management thereof is (sic) hereby ordered transferred to the Tiu Group. 3) First Landlink Asia Development Corporation is hereby ordered to pay the amount of P70,000,000.00 that was advanced to it by the Ong

Group upon the finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code. 4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the Ongs upon the finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code. SO ORDERED.
[9]

An interesting sidelight of the CA decision was its description of the rescission made by the Tius as the height of ingratitude and as pulling a fast one on the Ongs. The CA moreover found the Tius guilty of withholding FLADC funds from the Ongs and diverting corporate income to their own MATTERCO account.[10] These were findings later on affirmed in our own February 1, 2002 Decision which is the subject of the instant motion for reconsideration.[11] But there was also a strange aspect of the CA decision. The CA concluded that both the Ongs and the Tius were in pari delicto (which would not have legally entitled them to rescission) but, for practical considerations, that is, their inability to work together, it was best to separate the two groups by rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs and awarding practically everything else to the Tius. Their motions for reconsideration having been denied, both parties filed separate petitions for review before this Court. In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that the Tius may not properly avail of

rescission under Article 1191 of the Civil Code considering that the Pre-Subscription Agreement did not provide for reciprocity of obligations; that the rights over the subject matter of the rescission (capital assets and properties) had been acquired by a third party (FLADC); that they did not commit a substantial and fundamental breach of their agreement since they did not prevent the Tius from assuming the positions of Vice-President and Treasurer of FLADC, and that the failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay the required transfer taxes to secure the approval of the SEC for the property contribution and, thereafter, the issuance of title in FLADCs name. They also argued that the liquidation of FLADC may not legally be ordered by the appellate court even for so called practical considerations or even to prevent further squabbles and numerous litigations, since the same are not valid grounds under the Corporation Code. Moreover, the Ongs bewailed the failure of the CA to grant interest on their P70 million and P20 million advances to FLADC and David S. Tiu, respectively, and to award costs and damages. In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other hand, contended that the rescission should have been limited to the restitution of the parties respective investments and not the liquidation of FLADC based on the erroneous perception by the court that: the Masagana Citimall was threatened with incompletion since FLADC was in financial distress; that the Tius invited the Ongs to invest in FLADC to settle its P190 million loan from PNB; that they violated the PreSubscription Agreement when it was the Lichaucos and not the Tius who executed the deed of assignment over the 151 square-meter property commensurate to 49,800 shares in FLADC thereby failing to pay the price for the said shares; that they did not turn over to the Ongs the entire amount of FLADC funds; that they were diverting rentals from lease contracts due to FLADC to their own MATTERCO account; that the P70 million paid by the Ongs

was an advance and not a premium on capital; and that, by rescinding the PreSubscription Agreement, they wanted to wrestle away the management of the mall and prevent the Ongs from enjoying the profits of their P190 million investment in FLADC. On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions), affirming the assailed decision of the Court of Appeals but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent (12%) per annum to be computed from the time of judicial demand which is from April 23, 1996; 2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%) per annum to be computed from the date of the FLADC Board Resolution which is June 19, 1996; and 3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution, specifically, the 151 sq. m. parcel of land.

This Court affirmed the fact that both the Ongs and the Tius violated their respective obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from assuming the positions of Vice-President and Treasurer of the corporation. On the other hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to their MATTERCO account. Consequently, it held that rescission was not possible since both parties were in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of specific performance, as espoused by the Ongs, was not practical and sound either and would only lead to further squabbles and numerous litigations between the parties. On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on the grounds that: (a) the SEC order had become executory as early as September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any

further delay would be injurious to the rights of the Tius since the case had been pending for more than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that the Decision dated February 1, 2002 was not yet final and executory; that no good reason existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC retained jurisdiction over pending cases involving intra-corporate disputes already submitted for final resolution upon the effectivity of the said law. Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the Ongs filed their own Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002 Decision) on March 15, 2002, raising two main points: (a) that specific performance and not rescission was the proper remedy under the premises; and (b) that, assuming rescission to be proper, the subject decision of this Court should be modified to entitle movants to their proportionate share in the mall. On their first point (specific performance and not rescission was the proper remedy), movants Ong argue that their alleged breach of the Pre-Subscription Agreement was, at most, casual which did not justify the rescission of the contract. They stress that providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on their obligations under the Pre-Subscription Agreement since the said obligation (to provide executive offices) pertained to FLADC itself. Such obligation arose from the relations between the said officers and the corporation and not any of the individual parties such as the Ongs. Likewise, the alleged failure of the Ongs to credit shares of stock in favor of the Tius for their property contributions also pertained to the corporation and not to the Ongs. Just the same, it could not be done in view of the Tius refusal to pay the necessary transfer taxes which in turn resulted in the inability to secure SEC approval for the property contributions and the issuance of a new TCT in the name of FLADC.

Besides, according to the Ongs, the principal objective of both parties in entering into the Pre-Subscription Agreement in 1994 was to raise the P190 million desperately needed for the payment of FLADCs loan to PNB. Hence, in this light, the alleged failure to provide office space for the two corporate officers was no more than an inconsequential infringement. For rescission to be justified, the law requires that the breach of contract should be so substantial or fundamental as to defeat the primary objective of the parties in making the agreement. At any rate, the Ongs claim that it was the Tius who were guilty of fundamental violations in failing to remit funds due to FLADC and diverting the same to their MATTERCO account. The Ongs also allege that, in view of the findings of the Court that both parties were guilty of violating the Pre-Subscription Agreement, neither of them could resort to rescission under the principle of pari delicto. In addition, since the cash and other contributions now sought to be returned already belong to FLADC, an innocent third party, said remedy may no longer be availed of under the law. On their second point (assuming rescission to be proper, the Ongs should be given their proportionate share of the mall), movants Ong vehemently take exception to the second item in the dispositive portion of the questioned Decision insofar as it decreed that whatever remains of the assets of FLADC and the management thereof (after liquidation) shall be transferred to the Tius. They point out that the mall itself, which would have been foreclosed by PNB if not for their timely investment of P190 million in 1994 and which is now worth about P1 billion mainly because of their efforts, should be included in any partition and distribution. They (the Ongs) should not merely be given interest on their capital investments. The said portion of our Decision, according to them, amounted to the unjust enrichment of the Tius and ran contrary to our own pronouncement that the act of the Tius in unilaterally rescinding the agreement was the height of ingratitude and an attempt to pull a fast one as it would prevent the Ongs from enjoying the fruits of their P190 million investment in FLADC. It also contravenes this

Courts assurance in the questioned Decision that the Ongs and Tius will have a bountiful return of their respective investments derived from the profits of the corporation. Willie Ong filed a separate Motion for Partial Reconsideration dated March 8, 2002, pointing out that there was no violation of the Pre-Subscription Agreement on the part of the Ongs; that, after more than seven years since the mall began its operations, rescission had become not only impractical but would also adversely affect the rights of innocent parties; and that it would behighly inequitable and unfair to simply return the P100 million investment of the Ongs and give the remaining assets now amounting to about P1 billion to the Tius. The Tius, in their opposition to the Ongs motion for reconsideration, counter that the arguments therein are a mere re-hash of the contentions in the Ongs petition for review and previous motion for reconsideration of the Court of Appeals decision. The Tius compare the arguments in said pleadings to prove that the Ongs do not raise new issues, and, based on well-settled jurisprudence,[12] the Ongs present motion is therefore pro-forma and did not prevent the Decision of this Court from attaining finality. On January 29, 2003, the Special Second Division of this Court held oral arguments on the respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong filed their respective memoranda. On February 28, 2003, the Tius submitted their memorandum. We grant reconsideration. the Ongs motions for

overlooked certain aspects which, if not corrected, will cause extreme and irreparable damage and prejudice to the Ongs, FLADC and its creditors. The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to meritorious motions for reconsideration. As long as the same adequately raises a valid ground[15] (i.e., the decision or final order is contrary to law), this Court has to evaluate the merits of the arguments to prevent an unjust decision from attaining finality. In Security Bank and Trust Company vs. Cuenca,[16] we ruled that a motion for reconsideration is not pro-forma for the reason alone that it reiterates the arguments earlier passed upon and rejected by the appellate court. We explained there that a movant may raise the same arguments, if only to convince this Court that its ruling was erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the arguments in the previous pleadings) will not apply if said arguments were not squarely passed upon and answered in the decision sought to be reconsidered. In the case at bar, no ruling was made on some of the petitioner Ongs arguments. For instance, no clear ruling was made on why an order distributing corporate assets and property to the stockholders would not violate the statutory preconditions for corporate dissolution or decrease of authorized capital stock. Thus, it would serve the ends of justice to entertain the subject motion for reconsideration since some important issues therein, although mere repetitions, were not considered or clearly resolved by this Court. Going now to the merits, we resolve whether the Tius could legally rescind the PreSubscription Agreement. We rule that they could not. FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius owning 450,200 shares representing the paid-up capital. When the Tius invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital stock became necessary to give each group equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized

This is not the first time that this Court has reversed itself on a motion for reconsideration. In Philippine Consumers Foundation, Inc. vs. National Telecommunications Commission,[13] this Court, through then Chief Justice Felix V. Makasiar, said that its members may and do change their minds, after a re-study of the facts and the law, illuminated by a mutual exchange of views.[14]After a thorough re-examination of the case, we find that our Decision of February 1, 2002

capital stock was thus increased from 500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares, the parties Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60, Title VII of the Corporation Code:

and heirs Therefore, a party who has not taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless he shows that he has a real interest affected thereby. [17] In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the Pre-Subscription Agreement: a shareholders agreement between the Tius and the Ongs defining and governing their relationship and a subscription contract between the Tius, the Ongs and FLADC regarding the subscription of the parties to the corporation. They point out that these two component parts form one whole agreement and that their terms and conditions are intrinsically related and dependent on each other. Thus, the breach of the shareholders agreement, which was allegedly the consideration for the subscription contract, was also a breach of the latter. Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until after the oral arguments on January 29, 2003, we find this argument too strained for comfort. It is obviously intended to remedy and cover up the Tius lack of legal personality to rescind an agreement in which they were personally not parties-in-interest. Assuming arguendo that there were two subagreements embodied in the Pre-Subscription Agreement, this Court fails to see how the shareholders agreement between the Ongs and Tius can, within the bounds of reason, be interpreted as the consideration of the subscription contract between FLADC and the Ongs. There was nothing in the PreSubscription Agreement even remotely suggesting such alleged interdependence. Be that as it may, however, the Tius are nevertheless not the proper parties to raise this point because they were not parties to the subscription contract between FLADC and the Ongs. Thus, they are not in a position to claim that the shareholders agreement between them and the Ongs was what induced FLADC and the Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though FLADC was represented by the Tius in the subscription contract, FLADC had a separate juridical personality from the Tius.

Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract (Italics supplied).
A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal capacities with the Ongs since they were not selling any of their own shares to them. It was FLADC that did. Considering therefore that the real contracting parties to the subscription agreement were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius in their personal capacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the real party in interest therein. Article 1311 of the Civil Code provides that contracts take effect only between the parties, their assigns

The case before us does not warrant piercing the veil of corporate fiction since there is no proof that the corporation is being used as a cloak or cover for fraud or illegality, or to work injustice.[18] The Tius also argue that, since the Ongs represent FLADC as its management, breach by the Ongs is breach by FLADC. This must also fail because such an argument disregards the separate juridical personality of FLADC. The Tius allege that they were prevented from participating in the management of the corporation. There is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu, from exercising her function as such. The records show that the President, Wilson Ong, supervised the collection and receipt of rentals in the Masagana Citimall;[19] that he ordered the same to be deposited in the bank;[20] and that he held on to the cash and properties of the corporation.[21] Section 25 of the Corporation Code prohibits the President from acting concurrently as Treasurer of the corporation. The rationale behind the provision is to ensure the effective monitoring of each officers separate functions. However, although the Tius were adversely affected by the Ongs unwillingness to let them assume their positions, rescission due to breach of contract is definitely the wrong remedy for their personal grievances. The Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code. Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of rescission of the

subject agreement based on a less than substantial breach of subscription contract. Not only are they not parties to the subscription contract between the Ongs and FLADC; they also have other available and effective remedies under the law. All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for rescission based on breach of contract, said action will nevertheless still not prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code. The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera,[22] provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims.[23] This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock,[24] (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings,[25] and (3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares[26] and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with.[27] The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo to prevent further squabbles and future litigations unless the indispensable conditions and procedures for the protection of corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors turn

to engage in squabbles and litigations should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine. In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed. Contrary to the Tius allegation, rescission will, in the final analysis, result in the premature liquidation of the corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and 120 of the Corporation Code.[28] The Tius maintain that rescinding the subscription contract is not synonymous to corporate liquidation because all rescission will entail would be the simple restoration of the status quo ante and a return to the two groups of their cash and property contributions. We wish it were that simple. Very noticeable is the fact that the Tius do not explain why rescission in the instant case will not effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-result of rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable and disastrous effect on the corporation, its creditors and the Ongs. In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will not result in an unauthorized liquidation of the corporation because their case is actually a petition to decrease capital stock pursuant to Section 38 of the Corporation Code. Section 122 of the law provides that (e)xcept by decrease of capital stock, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. The Tius claim that their case for rescission, being a petition to decrease capital stock, does not violate the liquidation procedures under our laws. All that needs to be done, according to them, is for this Court to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to

approve said decrease. This new argument has no merit. The Tius case for rescission cannot validly be deemed a petition to decrease capital stock because such action never complied with the formal requirements for decrease of capital stock under Section 33 of the Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any stockholders meeting at which the approval of stockholders owning at least twothirds of the outstanding capital stock was secured. There was no revised treasurers affidavit and no proof that said decrease will not prejudice the creditors rights. On the contrary, all their pleadings contained were alleged acts of violations by the Ongs to justify an order of rescission. Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a corporations authorized capital stock is an amendment of the Articles of Incorporation. It is a decision that only the stockholders and the directors can make, considering that they are the contracting parties thereto. In this case, the Tius are actually not just asking for a review of the legality and fairness of a corporate decision. They want this Court to make a corporate decision for FLADC. We decline to intervene and order corporate structural changes not voluntarily agreed upon by its stockholders and directors. Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs directors and stockholders is a violation of the business judgment rule which states that:

xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded a

transaction among themselves as will result in serious injury to the plaintiffs stockholders.
[29]

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts.
[30]

Apparently, the Tius do not realize the illegal consequences of seeking rescission and control of the corporation to the exclusion of the Ongs. Such an act infringes on the law on reduction of capital stock. Ordering the return and distribution of the Ongs capital contribution without dissolving the corporation or decreasing its authorized capital stock is not only against the law but is also prejudicial to corporate creditors who enjoy absolute priority of payment over and above any individual stockholder thereof. Stripped to its barest essentials, the issue of rescission in this case is not difficult to understand. If rescission is denied, will injustice be inflicted on any of the parties? The answer is no because the financial interests of both the Tius and the Ongs will remain intact and safe within FLADC. On the other hand, if rescission is granted, will any of the parties suffer an injustice? Definitely yes because the Ongs will find themselves out in the streets with nothing but the money they had in 1994 while the Tius will not only enjoy a windfall estimated to be anywhere from P450 million to P900 million[31] but will also take over an extremely profitable business without much effort at all.

Another very important point follows. The Court of Appeals and, later on, our Decision dated February 1, 2002, stated that both groups were in pari delicto, meaning, that both the Tius and the Ongs committed breaches of the Pre-Subscription Agreement. This may be true to a certain extent but, judging from the comparative gravity of the acts separately committed by each group, we find that the Ongs acts were relatively tame vis--vis those committed by the Tius in not surrendering FLADC funds to the corporation and diverting corporate income to their own MATTERCO account. The Ongs were right in not issuing to the Tius the shares corresponding to the fourstory building and the 1,902.30 square-meter lot because no title for it could be issued in FLADCs name, owing to the Tius refusal to pay the transfer taxes. And as far as the 151 square-meter lot was concerned, why should FLADC issue additional shares to the Tius for property already owned by the corporation and which, in the final analysis, was already factored into the shareholdings of the Tius before the Ongs came in? We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to pull a fast one on the Ongs because that was where the problem precisely started. It is clear that, when the finances of FLADC improved considerably after the equity infusion of the Ongs, the Tius started planning to take over the corporation again and exclude the Ongs from it. It appears that the Tius refusal to pay transfer taxes might not have really been at all unintentional because, by failing to pay that relatively small amount which they could easily afford, the Tius should have expected that they were not going to be given the corresponding shares. It was, from every angle, the perfect excuse for blackballing the Ongs. In other words, the Tius created a problem then used that same problem as their pretext for showing their partners the door. In the process, they stood to be rewarded with a bonanza of anywhere between P450 million to P900 million in assets (from an investment of only P45 million which was nearly foreclosed by PNB), to the extreme and irreparable damage of the Ongs, FLADC and its creditors.

After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not be what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. There are no ifs or buts about it. Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for this and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their investments assuming good faith and honest intentions we cannot allow the rescission of the subject subscription agreement. The Ongs shortcomings were far from serious and certainly less than substantial; they were in fact remediable and correctable under the law. It would be totally against all rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds. WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration, dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The Petition for Confirmation of the Rescission of the Pre-Subscription Agreement docketed as SEC Case No. 02-965269 is hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject Pre-Subscription Agreement, dated August 15, 1994, is hereby declared as null and void. The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being moot. Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the decision of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September 11, 1998, is hereby REVERSED. Costs against the petitioner Tius.
SO ORDERED.

G.R. No. 74306 March 16, 1992 ENRIQUE RAZON, petitioner, vs. INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his capacity as Administrator of the Estate of the Deceased JUAN T. CHUIDIAN, respondents. G.R. No. 74315 March 16, 1992 VICENTE B. CHUIDIAN, petitioner, vs. INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON, INC., respondents.

GUTIERREZ, JR., J.: The main issue in these consolidated petitions centers on the ownership of 1,500 shares of stock in E. Razon, Inc. covered by Stock Certificate No. 003 issued on April 23, 1966 and registered under the name of Juan T. Chuidian in the books of the corporation. The then Court of First Instance of Manila, now Regional Trial Court of Manila, declared that Enrique Razon, the petitioner in G.R. No. 74306 is the owner of the said shares of stock. The then Intermediate Appellate Court, now Court of Appeals, however, reversed the trial court's decision and ruled that Juan T. Chuidian, the deceased father of petitioner Vicente B. Chuidian in G.R. No. 74315 is the owner of the shares of stock. Both parties filed separate motions for reconsideration. Enrique Razon wanted the appellate court's decision reversed and the trial court's decision affirmed while Vicente Chuidian asked that all cash and stock dividends and all the pre-emptive rights accruing to the 1,500 shares of stock be ordered delivered to him. The appellate court denied both motions. Hence, these petitions. The relevant Antecedent facts are as follows: In his complaint filed on June 29, 1971, and amended on November 16, 1971, Vicente B. Chuidian prayed that defendants Enrique B. Razon, E. Razon, Inc., Geronimo Velasco, Francisco de Borja, Jose Francisco, Alfredo B. de Leon, Jr., Gabriel Llamas and Luis M. de Razon be ordered to deliver certificates of stocks representing the shareholdings of the deceased Juan T. Chuidian in the E. Razon, Inc. with a prayer for an order to restrain the defendants from disposing of the said shares of stock,

for a writ of preliminary attachment v. properties of defendants having possession of shares of stock and for receivership of the properties of defendant corporation . . . xxx xxx xxx In their answer filed on June 18, 1973, defendants alleged that all the shares of stock in the name of stockholders of record of the corporation were fully paid for by defendant, Razon; that said shares are subject to the agreement between defendants and incorporators; that the shares of stock were actually owned and remained in the possession of Razon. Appellees also alleged . . . that neither the late Juan T. Chuidian nor the appellant had paid any amount whatsoever for the 1,500 shares of stock in question . .. xxx xxx xxx The evidence of the plaintiff shown that he is the administrator of the intestate estate of Juan Telesforo Chuidian in Special Proceedings No. 71054, Court of First Instance of Manila. Sometime in 1962, Enrique Razon organized the E. Razon, Inc. for the purpose of bidding for the arrastre services in South Harbor, Manila. The incorporators consisted of Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose Tuason, Jr., Victor Lim, Jose F. Castro and Salvador Perez de Tagle. On April 23, 1966, stock certificate No. 003 for 1,500 shares of stock of defendant corporation was issued in the name of Juan T. Chuidian. On the basis of the 1,500 shares of stock, the late Juan T. Chuidian and after him, the plaintiff-appellant, were elected as directors of E. Razon, Inc. Both of them actually served and were paid compensation as directors of E. Razon, Inc. From the time the certificate of stock was issued on April 1966 up to April

1971, Enrique Razon had not questioned the ownership by Juan T. Chuidian of the shares of stock in question and had not brought any action to have the certificate of stock over the said shares cancelled. The certificate of stock was in the possession of defendant Razon who refused to deliver said shares to the plaintiff, until the same was surrendered by defendant Razon and deposited in a safety box in Philippine Bank of Commerce. Defendants allege that after organizing the E. Razon, Inc., Enrique Razon distributed shares of stock previously placed in the names of the withdrawing nominal incorporators to some friends including Juan T. Chuidian Stock Certificate No. 003 covering 1,500 shares of stock upon instruction of the late Chuidian on April 23, 1986 was personally delivered by Chuidian on July 1, 1966 to the Corporate Secretary of Attorney Silverio B. de Leon who was himself an associate of the Chuidian Law Office (Exhs. C & 11). Since then, Enrique Razon was in possession of said stock certificate even during the lifetime of the late Chuidian, from the time the late Chuidian delivered the said stock certificate to defendant Razon until the time (sic) of defendant Razon. By agreement of the parties (sic) delivered it for deposit with the bank under the joint custody of the parties as confirmed by the trial court in its order of August 7, 1971. Thus, the 1,500 shares of stook under Stock Certificate No. 003 were delivered by the late Chuidian to Enrique because it was the latter who paid for all the subscription on the shares of stock in the defendant corporation and the understanding was that he (defendant Razon) was the owner of the said shares of stock and was to have possession thereof until such time as he was paid therefor by the other nominal incorporators/stockholders (TSN., pp. 4, 8, 10, 24-25, 25-26, 28-31, 31-32,

60, 66-68, July 22, 1980, Exhs. "C", "11", "13" "14"). (Ro11o 74306, pp. 66-68) In G.R. No. 74306, petitioner Enrique Razon assails the appellate court's decision on its alleged misapplication of the dead man's statute rule under Section 20(a) Rule 130 of the Rules of Court. According to him, the "dead man's statute" rule is not applicable to the instant case. Moreover, the private respondent, as plaintiff in the case did not object to his oral testimony regarding the oral agreement between him and the deceased Juan T. Chuidian that the ownership of the shares of stock was actually vested in the petitioner unless the deceased opted to pay the same; and that the petitioner was subjected to a rigid cross examination regarding such testimony. Section 20(a) Rule 130 of the Rules of Court (Section 23 of the Revised Rules on Evidence) States: Sec. 20. Disqualification by reason of interest or relationship The following persons cannot testify as to matters in which they are interested directly or indirectly, as herein enumerated. (a) Parties or assignors of parties to a case, or persons in whose behalf a case is prosecuted, against an executor or administrator or other representative of a deceased person, or against a person of unsound mind, upon a claim or demand against the estate of such deceased person or against such person of unsound mind, cannot testify as to any matter of fact accruing before the death of such deceased person or before such person became of unsound mind." (Emphasis supplied) xxx xxx xxx The purpose of the rule has been explained by this Court in this wise: The reason for the rule is that if persons having a claim against the estate of the deceased or his properties were allowed to testify as to the supposed statements made by him (deceased person), many would be tempted to falsely impute statements to deceased persons as the latter can no longer deny or refute them, thus unjustly subjecting their

properties or rights to false or unscrupulous claims or demands. The purpose of the law is to "guard against the temptation to give false testimony in regard to the transaction in question on the part of the surviving party." (Tongco v. Vianzon, 50 Phil. 698; Go Chi Gun, et al. v. Co Cho, et al., 622 [1955]) The rule, however, delimits the prohibition it contemplates in that it is applicable to a case against the administrator or its representative of an estate upon a claim against the estate of the deceased person. (See Tongco v. Vianzon, 50 Phil. 698 [1927]) In the instant case, the testimony excluded by the appellate court is that of the defendant (petitioner herein) to the affect that the late Juan Chuidian, (the father of private respondent Vicente Chuidian, the administrator of the estate of Juan Chuidian) and the defendant agreed in the lifetime of Juan Chuidian that the 1,500 shares of stock in E. Razon, Inc. are actually owned by the defendant unless the deceased Juan Chuidian opted to pay the same which never happened. The case was filed by the administrator of the estate of the late Juan Chuidian to recover shares of stock in E. Razon, Inc. allegedly owned by the late Juan T. Chuidian. It is clear, therefore, that the testimony of the petitioner is not within the prohibition of the rule. The case was not filedagainst the administrator of the estate, nor was it filed upon claims against the estate. Furthermore, the records show that the private respondent never objected to the testimony of the petitioner as regards the true nature of his transaction with the late elder Chuidian. The petitioner's testimony was subject to cross-examination by the private respondent's counsel. Hence, granting that the petitioner's testimony is within the prohibition of Section 20(a), Rule 130 of the Rules of Court, the private respondent is deemed to have waived the rule. We ruled in the case of Cruz v. Court of Appeals (192 SCRA 209 [1990]): It is also settled that the court cannot disregard evidence which would ordinarily be incompetent under the rules but has been rendered admissible by the failure of a party to object thereto. Thus: . . . The acceptance of an incompetent witness to testify in a civil suit, as well as the allowance of improper

questions that may be put to him while on the stand is a matter resting in the discretion of the litigant. He may assert his right by timely objection or he may waive it, expressly or by silence. In any case the option rests with him. Once admitted, the testimony is in the case for what it is worth and the judge has no power to disregard it for the sole reason that it could have been excluded, if it had been objected to, nor to strike it out on its own motion (Emphasis supplied). (Marella v. Reyes, 12 Phil. 1.) The issue as to whether or not the petitioner's testimony is admissible having been settled, we now proceed to discuss the fundamental issue on the ownership of the 1,500 shares of stock in E. Razon, Inc. E. Razon, Inc. was organized in 1962 by petitioner Enrique Razon for the purpose of participating in the bidding for the arrastre services in South Harbor, Manila. The incorporators were Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose Tuazon, Jr., Victor L. Lim, Jose F. Castro and Salvador Perez de Tagle. The business, however, did not start operations until 1966. According to the petitioner, some of the incorporators withdrew from the said corporation. The petitioner then distributed the stocks previously placed in the names of the withdrawing nominal incorporators to some friends, among them the late Juan T. Chuidian to whom he gave 1,500 shares of stock. The shares of stock were registered in the name of Chuidian only as nominal stockholder and with the agreement that the said shares of stock were owned and held by the petitioner but Chuidian was given the option to buy the same. In view of this arrangement, Chuidian in 1966 delivered to the petitioner the stock certificate covering the 1,500 shares of stock of E. Razon, Inc. Since then, the Petitioner had in his possession the certificate of stock until the time, he delivered it for deposit with the Philippine Bank of Commerce under the parties' joint custody pursuant to their agreement as embodied in the trial court's order. The petitioner maintains that his aforesaid oral testimony as regards the true nature of his agreement with the late Juan Chuidian on the 1,500 shares of stock of E. Razon, Inc. is sufficient to prove his ownership over the said 1,500 shares of stock. The petitioner's contention is not correct. In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492 [1990]) we ruled:

. . . For an effective, transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Bilang, 68 otherwise known as the Corporation Code of the Philippines, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation (Sec. 63, Corporation Code of the Philippines; Section 35 of the Corporation Law) In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records show that during his lifetime Chuidian was ellected member of the Board of Directors of the corporation which clearly shows that he was a stockholder of the corporation. (See Section 30, Corporation Code) From the point of view of the corporation, therefore, Chuidian was the owner of the 1,500 shares of stock. In such a case, the petitioner who claims ownership over the questioned shares of stock must show that the same were transferred to him by proving that all the requirements for the effective transfer of shares of stock in accordance with the corporation's by laws, if any, were followed (See Nava v. Peers Marketing Corporation, 74 SCRA 65 [1976]) or in accordance with the provisions of law. The petitioner failed in both instances. The petitioner did not present any by-laws which could show that the 1,500 shares of stock were effectively transferred to him. In the absence of the corporation's by-laws or rules governing effective transfer of shares of stock, the provisions of the Corporation Law are made applicable to the instant case. The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the certificate of stock covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed to the petitioner, the inevitable

conclusion is that the questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian can not overcome the failure to follow the procedure required by law or the proper conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. Moreover, the preponderance of evidence supports the appellate court's factual findings that the shares of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel who handled the legal affairs of the corporation. We give credence to the testimony of the private respondent that the shares of stock were given to Juan T. Chuidian in payment of his legal services to the corporation. Petitioner Razon failed to overcome this testimony. In G.R. No. 74315, petitioner Vicente B. Chuidian insists that the appellate court's decision declaring his deceased father Juan T. Chuidian as owner of the 1,500 shares of stock of E. Razon, Inc. should have included all cash and stock dividends and all the preemptive rights accruing to the said 1,500 shares of stock. The petition is impressed with merit. The cash and stock dividends and all the pre-emptive rights are all incidents of stock ownership. The rights of stockholders are generally enumerated as follows: xxx xxx xxx . . . [F]irst, to have a certificate or other evidence of his status as stockholder issued to him; second, to vote at meetings of the corporation; third, to receive his proportionate share of the profits of the corporation; and lastly, to participate proportionately in the distribution of the corporate assets upon the dissolution or winding up. (Purdy's Beach on Private Corporations, sec. 554) (Pascual v. Del Saz Orozco, 19 Phil. 82, 87) WHEREFORE, judgment is rendered as follows: a) In G.R. No. 74306, the petition is DISMISSED. The questioned decision and resolution of the then Intermediate Appellate Court, now the Court of Appeals, are AFFIRMED. Costs against the petitioner.

b) In G.R. No. 74315, the petition is GRANTED. The questioned Resolution insofar as it denied the petitioner's motion to clarify the dispositive portion of the decision of the then Intermediate Appellate Court, now Court of Appeals is REVERSED and SET ASIDE. The decision of the appellate court is MODIFIED in that all cash and stock dividends as, well as all pre-emptive rights that have accrued and attached to the 1,500 shares in E. Razon, Inc., since 1966 are declared to belong to the estate of Juan T. Chuidian. SO ORDERED.

[G.R. No. 133969. January 26, 2000]

NEMESIO GARCIA, petitioner, vs. NICOLAS JOMOUAD, Ex-Officio Provincial Sheriff of Cebu, and SPOUSES JOSE ATINON & SALLY ATINON, respondents. DECISION
KAPUNAN, J.: In this petition for review on certiorari, Nemesio Garcia (herein petitioner) seeks the reversal of the Decision, dated 27 October 1997, of the Court of Appeals in CA G.R. CV No. 52255 and its Resolution, dated 22 Apri11998, denying petitioner's motion for reconsideration of said decision. Petitioner filed with the Regional Trial Court, Branch 23 of Cebu, an action for injunction with prayer for preliminary injunction against respondents spouses Jose and Sally Atinon and Nicolas Jomouad, e.x-oficio sheriff of Cebu. Said action stemmed from an earlier case for collection of sum of money, docketed as Civil Case No. CEB10433, before the RTC, Branch 10 of Cebu, filed by the spouses Atinon against Jaime Dico. In that case (collection of sum of money), the trial court rendered judgment ordering Dico to pay the spouses Atinon the sum of P900,000.00 plus interests. After said judgment became final and executory, respondent sheriff proceeded with its execution. In the course thereof, the Proprietary Ownership Certificate (POC) No. 0668 in the Cebu Country Club, which was in the name of Dico, was levied on and scheduled for public auction. Claiming ownership over the subject certificate, petitioner filed the aforesaid action for injunction with prayer for preliminary injunction to enjoin respondents from proceeding with the auction. After trial, the lower court rendered its Decision, dated 28 July 1995, dismissing petitioner's complaint for injunction for lack of merit. On appeal, the CA affirmed in toto the decision of the RTC upon finding that it committed no reversible error in rendering the same. Hence, this petition.

Petitioner avers that Dico, the judgment debtor of the spouses Atinon, was employed as manager of his (petitioner's) Young Auto Supply. In order to assist him in entertaining clients, petitioner "lent" his POC, then bearing the number 1459, in the Cebu Country Club to Dico so the latter could enjoy the "signing" privileges of its members. The Club issued POC No. 0668 in the name of Dico. Thereafter, Dico resigned as manager of petitioner's business. Upon demand of petitioner, Dico returned POC No. 0668 to him. Dico then executed a Deed of Transfer, dated 18 November 1992, covering the subject certificate in favor of petitioner. The Club was furnished with a copy of said deed but the transfer was not recorded in the books of the Club because petitioner failed to present proof of payment of the requisite capital gains tax. In assailing the decision of the CA, petitioner mainly argues that the appellate court erroneously relied on Section 63 of the Corporation Code in upholding the levy on the subject certificate to satisfy the judgment debt of Dico in Civil Case No. CEB-14033. Petitioner contends that the subject stock certificate, albeit in the name of Dico, cannot be levied upon on execution to satisfy his judgment debt because even prior to the institution of the case for collection of sum of money against him: 1. The spouses Atinon had knowledge that Dico already conveyed back the ownership of the subject certificate to petitioner; 2. Dico executed a deed of transfer, dated 18 November 1992, covering the subject certificate in favor of petitioner and the Club was furnished with a copy thereof; and 3. Dico resigned as a proprietary member of the Club and his resignation was accepted by the board of directors at their meeting on 4 May 1993. The petition is without merit. Section 63 of the Corporation Code reads: "Sec. 63 Certificate of stock and transfer of shares. - The capital stock

of corporations shall be divided into shares for which certificates signed by the president or vice- president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the bylaws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation." The sole issue in this case is similar to that raised in Uson vs. Diosomito,[1] i.e., "whether a bona fide transfer of the shares of a corporation, not registered or noted in the books of the corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not."[2] In that case, we held that the attachment prevails over the unrecorded transfer stating thus "[w]e think that the true meaning of the language is, and the obvious intention of the legislature in using it was, that all transfers of shares should be entered, as here required, on the books of the corporation. And it is equally clear to us that all transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and, indeed, as to all persons

interested, except the parties to such transfers. All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute."[3] Applying the foregoing jurisprudence in this case, we hold that the transfer of the subject certificate made by Dico to petitioner was not valid as to the spouses Atinon, the judgment creditors, as the same still stood in the name of Dico, the judgment debtor, at the time of the levy on execution. In addition, as correctly ruled by the CA, the entry in the minutes of the meeting of the Club's board of directors noting the resignation of Dico as proprietary member thereof does not constitute compliance with Section 63 of the Corporation Code. Said provision of law strictly requires the recording of the transfer in the books of the corporation, and not elsewhere, to be valid as against third parties. Accordingly, the CA committed no reversible error in rendering the assailed decision. IN VIEW OF THE FOREGOING, the Court RESOLVED to DENY the petition. SO ORDERED.

assigning/endorsing the same to the plaintiff. A copy of the said deed/indorsement is attached as Annex A.
[G.R. NO. 139802. December 10, 2002]

7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity). 8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as shown by the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex B. 9. From the time of incorporation of VCC up to the present, no certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid and/or the plaintiff. 10. Despite repeated demands, the defendants refused and continue to refuse without any justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239,500 shares of Gaid, in violation of plaintiffs right to secure the corresponding certificate of stock in his name.
[6]

VICENTE C. PONCE, petitioner, vs. ALSONS CEMENT CORPORATION, and FRANCISCO M. GIRON, JR., respondents. DECISION
QUISUMBING, J.:

This petition for review seeks to annul the decision[1] of the Court of Appeals, in CA-G.R. SP No. 46692, which set aside the decision[2] of the Securities and Exchange Commission (SEC) En Banc in SEC-AC No. 545 and reinstated the order[3] of the Hearing Officer dismissing herein petitioners complaint. Also assailed is the CAs resolution[4] of August 10, 1999, denying petitioners motion for reconsideration. On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a complaint[5] with the SEC for mandamus and damages against defendants (now respondents) Alsons Cement Corporation and its corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that:

Attached to the complaint was the Deed of Undertaking and Indorsement[7] upon which petitioner based his petition for mandamus. Said deed and indorsement read as follows:

DEED OF UNDERTAKING KNOW ALL MEN BY THESE PRESENTS: I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory Cement Corporation in the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (P239,500.00) PESOS and that Fausto Gaid does not have any liability whatsoever on the subscription agreement in favor of Victory Cement Corporation.

xxx 5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having subscribed to and fully paid 239,500 shares of said corporation. 6. On February 8, 1968, plaintiff and Fausto Gaid executed a Deed of Undertaking and Indorsement whereby the latter acknowledges that the former is the owner of said shares and he was therefore

(SGD.) VICENTE C. PONCE February 8, 1968 CONFORME: (SGD.) FAUSTO GAID INDORSEMENT I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE. (SGD.) FAUSTO GAID
With these allegations, petitioner prayed that judgment be rendered ordering respondents (a) to issue in his name certificates of stocks covering the 239,500 shares of stocks and its legal increments and (b) to pay him damages.[8] Instead of filing an answer, respondents moved to dismiss the complaint on the grounds that: (a) the complaint states no cause of action; mandamus is improper and not available to petitioner; (b) the petitioner is not the real party in interest; (c) the cause of action is barred by the statute of limitations; and (d) in any case, the petitioners cause of action is barred by laches.[9] They argued, inter alia, that there being no allegation that the alleged INDORSEMENT was recorded in the books of the corporation, said indorsement by Gaid to the plaintiff of the shares of stock in question assuming that the indorsement was in fact a transfer of stockswas not valid against third persons such as ALSONS under Section 63 of the Corporation Code.[10] There was, therefore, no specific legal duty on the part of the respondents to issue the corresponding certificates of stock, and mandamus will not lie.[11] Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that: (1) mandamus is the proper remedy when a corporation and its corporate secretary

wrongfully refuse to record a transfer of shares and issue the corresponding certificates of stocks; (2) he is the proper party in interest since he stands to be benefited or injured by a judgment in the case; (3) the statute of limitations did not begin to run until defendant refused to issue the certificates of stock in favor of the plaintiff on April 13, 1992. After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr. granted the motion to dismiss in an Order dated February 29, 1996, which held that:

x x x Insofar as the issuance of certificates of stock is concerned, the real party in interest is Fausto G. Gaid, or his estate or his heirs. Gaid was an incorporator and an original stockholder of the defendant corporation who subscribed and fully paid for 239,500 shares of stock (Annex "B"). In accordance with Section 37 of the old Corporation Law (Act No. 1459) obtaining in 1968 when the defendant corporation was incorporated, as well as Section 64 of the present Corporation Code (Batas Pambansa Blg. 68), a stockholder who has fully paid for his subscription together with interest and expenses in case of delinquent shares, is entitled to the issuance of a certificate of stock for his shares. According to paragraph 9 of the Complaint, no stock certificate was issued to Gaid. Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a stockholder of the defendant corporation by demanding issuance of the certificates of stock in his name. This he cannot do, for two reasons: there is no record of any assignment or transfer in the books of the defendant corporation, and there is no instruction or authority from the transferor (Gaid) for such assignment or transfer. Indeed, nothing is alleged in the complaint on these two points.

x x x In the present case, there is not even any indorsement of any stock certificate to speak of. What the plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Assuming the document has this effect, nevertheless there is neither any allegation nor any showing that it is recorded in the books of the defendant corporation, such recording being a prerequisite to the issuance of a stock certificate in favor of the transferee.
[12]

Applying this principle in the case on hand, a transfer or assignment of stocks need not be registered first before the Commission can take cognizance of the case to enforce his rights as a stockholder. Also, the problem encountered in securing the certificates of stock made by the buyer must be expeditiously taken up through the so-called administrative mandamus proceedings with the SEC than in the regular courts.
[13]

The Commission En Banc also found that the Hearing Officer erred in holding that petitioner is not the real party in interest.

Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc reversed the appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a transfer or assignment of stocks need not be registered first before it can take cognizance of the case to enforce the petitioners rights as a stockholder, the Commission En Banc cited our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987) to the effect that:

x x x As appearing in the allegations of the complaint, plaintiff-appellant is the transferee of the shares of stock of Gaid and is therefore entitled to avail of the suit to obtain the proper remedy to make him the rightful owner and holder of a stock certificate to be issued in his name. Moreover, defendant-appellees failed to show that the transferor nor his heirs have refuted the ownership of the transferee. Assuming these allegations to be true, the corporation has a mere ministerial duty to register in its stock and transfer book the shares of stock in the name of the plaintiff-appellant subject to the determination of the validity of the deed of assignment in the proper tribunal.
[14]

xxx As the SEC maintains, There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder. This is because the SEC by express mandate has absolute jurisdiction, supervision and control over all corporations and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchasers right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in securing the certificates of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the SEC, rather than through the usual tedious regular court procedure. xxx

Their motion for reconsideration having been denied, herein respondents appealed the decision[15] of the SEC En Banc and the resolution[16] denying their motion for reconsideration to the Court of Appeals. In its decision, the Court of Appeals held that in the absence of any allegation that the transfer of the shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of ALSONS, Ponce failed to state a cause of action. Thus, said the CA, the complaint for mandamus should be dismissed for failure to state a cause of action.[17] petitioners motion for reconsideration

was likewise denied in a resolution[18] dated August 10, 1999. Hence, the instant petition for review on certiorari alleging that:

I. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK FILED BY PETITIONER FAILED TO STATE A CAUSE OF ACTION BECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT MATTER OF THE COMPLAINT) WAS REGISTERED IN THE STOCK AND TRANSFER BOOK OF THE CORPORATION, CITING SECTION 63 OF THE CORPORATION CODE. II. THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE CASES OF ABEJO VS. DE LA CRUZ, 149 SCRA 654 AND RURAL BANK OF SALINAS, INC., ET AL VS. COURT OF APPEALS, ET AL., G.R. NO. 96674, JUNE 26, 1992. III. THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911 CASE, HAGER VS. BRYAN, 19 PHIL. 138, TO DISMISS THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK.
[19]

requests for the issuance of a stock certificate need not spell out each and every act that needs to be done by the corporate secretary, as a request for issuance of stock certificates necessarily includes a request for the recording of the transfer. Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the issuance of stock certificates. Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of shares of stock to first issue express instructions or execute a power of attorney for the transfer of said shares before a certificate of stock is issued in the name of the transferee and the transfer registered in the books of the corporation. He contends that Hager vs. Bryan, 19 Phil. 138 (1911), and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by respondents, do not apply to this case. These cases contemplate a situation where a certificate of stock has been issued by the company whereas in this case at bar, no stock certificates have been issued even in the name of the original stockholder, Fausto Gaid. Finally, petitioner maintains that since he is under no compulsion to register the transfer or to secure stock certificates in his name, his cause of action is deemed not to have accrued until respondent ALSONS denied his request. Respondents, in their comment, maintain that the transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent insofar as the corporation is concerned and no certificate of stock can be issued in the name of the transferee. Until the recording is made, the transfer cannot be the basis of issuance of a certificate of stock. They add that petitioner is not the real party in interest, the real party in interest being Fausto Gaid since it is his name that appears in the records of the corporation. They conclude that petitioners cause of action is barred by prescription and laches since 24 years elapsed before he made any demand upon ALSONS. We find the instant petition without merit. The Court of Appeals did not err in ruling that petitioner had no cause of action,

At issue is whether the Court of Appeals erred in holding that herein petitioner has no cause of action for a writ of mandamus. Petitioner first contends that the act of recording the transfer of shares in the stock and transfer book and that of issuing a certificate of stock for the transferred shares involves only one continuous process. Thus, when a corporate secretary is presented with a document of transfer of fully paid shares, it is his duty to record the transfer in the stock and transfer book of the corporation, issue a new stock certificate in the name of the transferee, and cancel the old one. A transferee who

and that his petition for mandamus was properly dismissed. There is no question that Fausto Gaid was an original subscriber of respondent corporations 239,500 shares. This is clear from the numerous pleadings filed by either party. It is also clear from the Amended Articles of Incorporation[20] approved on August 9, 1995[21] that each share had a par value of P1.00 per share. And, it is undisputed that petitioner had not made a previous request upon the corporate secretary of ALSONS, respondent Francisco M. Giron Jr., to record the alleged transfer of stocks. The Corporation Code states that:

only to its books for the purpose of determining who its shareholders are.[23] It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64[24] of the Corporation Code. This is the import of Section 63 which states that No transfer, however, shall be valid, except between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. The situation would be different if the petitioner was himself the registered owner of the stock which he sought to transfer to a third party, for then he would be entitled to the remedy of mandamus.[25] From the corporations point of view, the transfer is not effective until it is recorded. Unless and until such recording is made the demand for the issuance of stock certificates to the alleged transferee has no legal basis. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.[26] In other words, the stock and transfer book is the basis for ascertaining the persons entitled to the rights and subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a stockholder, the corporation is under no specific legal duty to issue stock certificates in the transferees name. It follows that, as held by the Court of Appeals:

SEC. 63. Certificate of stock and transfer of shares.The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.
Pursuant to the foregoing provision, a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned.[22] As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks

x x x until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, in the absence of any allegation that the transfer of the shares between Gaid and the private respondent [herein petitioner] was registered in the stock and transfer book of the petitioner corporation, the private respondent has failed to state a cause of action.
[27]

Petitioner insists that it is precisely the duty of the corporate secretary, when presented with the document of fully paid shares, to effect the transfer by recording the transfer in the stock and transfer book of the corporation and to issue stock certificates in the name of the transferee. On this point, the SEC En Banc cited Rural Bank of Salinas, Inc. vs. Court of Appeals, [28] where we held that:

covering the assigned shares. Melania Guerrero prayed for the transfer of the stocks in the stock and transfer book and the issuance of stock certificates in the name of the new owners thereof. Based on those circumstances, there was a clear duty on the part of the corporate secretary to register the 473 shares in favor of the new owners, since the person who sought the transfer of shares had express instructions from and specific authority given by the registered stockholder to cause the disposition of stocks registered in his name. That cannot be said of this case. The deed of undertaking with indorsement presented by petitioner does not establish, on its face, his right to demand for the registration of the transfer and the issuance of certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus fails to state a cause of action where it appears that the petitioner is not the registered stockholder and there is no allegation that he holds any power of attorney from the registered stockholder, from whom he obtained the stocks, to make the transfer, thus:

For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in upholding the decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of the 473 shares in the stock and transfer book in the names of private respondents. At all events, the registration is without prejudice to the proceedings in court to determine the validity of the Deeds of Assignment of the shares of stock in question.
In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero had a Special Power of Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It gave Guerrero full authority to sell or otherwise dispose of the 473 shares of stock registered in Clementes name and to execute the proper documents therefor. Pursuant to the authority so given, Melania assigned the 473 shares of stock owned by Guerrero and presented to the Rural Bank of Salinas the deeds of assignment

It appears, however, from the original as well as the amended petition, that this petitioner is not the registered owner of the stock which he seeks to have transferred, and except in so far as he alleges that he is the owner of the stock and that it was "indorsed" to him on February 5 by the Bryan-Landon Company, in whose name it is registered on the books of the Visayan Electric Company, there is no allegation that the petitioner holds any power of attorney from the Bryan-Landon Company authorizing him to make demand on the secretary of the Visayan Electric Company to make the transfer which petitioner seeks to have made through the medium of the mandamus of this court. Without discussing or deciding the respective rights of the parties which might be properly asserted in an ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case such as that at bar, a

mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do, upon the demand either of the person in whose name the stock is registered, or of some person holding a power of attorney for that purpose from the registered owner of the stock. There is no allegation in the petition that the petitioner or anyone else holds a power of attorney from the Bryan-Landon Company authorizing a demand for the transfer of the stock, or that the Bryan-Landon Company has ever itself made such demand upon the Visayan Electric Company, and in the absence of such allegation we are not able to say that there was such a clear indisputable duty, such a clear legal obligation upon the respondent, as to justify the issuance of the writ to compel him to perform it. Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No. 1459), the mere indorsement of stock certificates does not in itself give to the indorsee such a right to have a transfer of the shares of stock on the books of the company as will entitle him to the writ of mandamus to compel the company and its officers to make such transfer at his demand, because, under such circumstances the duty, the legal obligation, is not so clear and indisputable as to justify the issuance of the writ. As a general rule and especially under the abovecited statute, as between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a stock certificate, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in the absence of express instructions of the registered owner to make such transfer
[29]

to the indorsee, or a power of attorney authorizing such transfer.

[30]

In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that a mere indorsement by the supposed owners of the stock, in the absence of express instructions from them, cannot be the basis of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. That Hager and Rivera involved petitions for mandamus to compel the registration of the transfer, while this case is one for issuance of stock, is of no moment. It has been made clear, thus far, that before a transferee may ask for the issuance of stock certificates, he must first cause the registration of the transfer and thereby enjoy the status of a stockholder insofar as the corporation is concerned. A corporate secretary may not be compelled to register transfers of shares on the basis merely of an indorsement of stock certificates. With more reason, in our view, a corporate secretary may not be compelled to issue stock certificates without such registration.[31] Petitioners reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to registration is misplaced. In this case there is no allegation in the complaint that petitioner ever gave notice to respondents of the alleged transfer in his favor. Moreover, that case arose between and among the principal stockholders of the corporation, Pocket Bell, due to the refusal of the corporate secretary to record the transfers in favor of Telectronics of the corporations controlling 56% shares of stock which were covered by duly endorsed stock certificates. As aforesaid, the request for the recording of a transfer is different from the request for the issuance of stock certificates in the transferees name. Finally, in Abejo we did not say that transfer of shares need not be recorded in the books of the corporation before the transferee may ask for the issuance of stock certificates. The Courts statement, that there is no requirement that a stockholder of a corporation must be a registered one in order

that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder among which is the stock purchasers right to secure the corresponding certificate in his [32] name, was addressed to the issue of jurisdiction, which is not pertinent to the issue at hand. Absent an allegation that the transfer of shares is recorded in the stock and transfer book of respondent ALSONS, there appears no basis for a clear and indisputable duty or clear legal obligation that can be imposed upon the respondent corporate secretary, so as to justify the issuance of the writ of mandamus to compel him to perform the transfer of the shares to petitioner. The test of sufficiency of the facts alleged in a petition is whether or not, admitting the facts alleged, the court could render a valid judgment thereon in accordance with the prayer of the petition.[33] This test would not be satisfied if, as in this case, not all the elements of a cause of action are alleged in the complaint.[34] Where the corporate secretary is under no clear legal duty to issue stock certificates because of the petitioners failure to record earlier the transfer of shares, one of the elements of the cause of action for mandamus is clearly missing. That petitioner was under no obligation to request for the registration of the transfer is not in issue. It has no pertinence in this controversy. One may own shares of corporate stock without possessing a stock certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is not necessary to render one a stockholder in a corporation. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. The certificate is the evidence of the holders interest and status in the corporation, his ownership of the share represented thereby. The certificate is in law, so to speak, an equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the [35] corporation. In fact, it rests on the will of the stockholder whether he wants to be issued

stock certificates, and a stockholder may opt not to be issued a certificate. In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466 (1958), we held that considering that the law does not prescribe a period within which the registration should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer. In the present case, petitioners complaint for mandamus must fail, not because of laches or estoppel, but because he had alleged no cause of action sufficient for the issuance of the writ. WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court of Appeals, in CA-G.R. SP No. 46692, which set aside that of the Securities and Exchange Commission En Banc in SEC-AC No. 545 and reinstated the order of the Hearing Officer, is hereby AFFIRMED. No pronouncement as to costs. SO ORDERED.

JOSELITO MUSNI PUNO (as heir of the late Carlos Puno), Petitioner,

October 11, 2006 and Resolution dated March 6, 2007 in CA-G.R. CV No. 86137. G.R. No. 177066 Present: The facts of the case follow: YNARES-SANTIAGO, J., who died on June 25, Carlos L. Puno, 1963, was an incorporator of respondent Chairperson, Puno Enterprises, Inc. On March 14, 2003, CHICO-NAZARIO, petitioner Joselito Musni Puno, claiming to be an JR., heir of Carlos L. Puno, initiated a VELASCO, complaint for specific performance against NACHURA, and Petitioner averred that he is respondent. the son PERALTA, JJ. of the deceased with the latters common-law wife, Amelia Puno. As surviving heir, he claimed entitlement to the rights and privileges of his late father as stockholder of respondent. The complaint Promulgated: thus prayed that respondent allow petitioner to inspect its corporate book, render an accounting of all the transactions September 11, 2009 it entered into from 1962, and give petitioner all the profits, earnings, dividends, or income pertaining to the shares of Carlos L. Puno.[2]

- versus -

PUNO ENTERPRISES, INC., represented by JESUSA PUNO, Respondent.

DECISION

NACHURA, J.:

Upon the death of a stockholder, the heirs do not automatically become stockholders of the corporation; neither are they mandatorily entitled to the rights and privileges of a stockholder. This, we declare in this petition for review on certiorari of the Court of Appeals (CA) Decision[1] dated

Respondent filed a motion to dismiss on the ground that petitioner did not have the legal personality to sue because his birth certificate names him as Joselito Musni Muno. Apropos, there was yet a need for a judicial declaration that Joselito Musni Puno and Joselito Musni Muno were one and the same.

The court proceedings be

ordered held in

that the abeyance,

ratiocinating that petitioners certificate of live birth was no proof of his paternity and relation to Carlos L. Puno.

Petitioner submitted the corrected birth certificate with the name Joselito M. Puno, certified by the Civil Registrar of the City of Manila, and the Certificate of Finality thereof. To hasten the disposition of the case, the court conditionally admitted the corrected birth certificate as genuine and authentic and ordered respondent to file its answer within fifteen days from the order and set the case for pretrial.[3]

On October 11, 2005, the court rendered a Decision, the dispositive portion of which reads:

On appeal, the CA ordered the dismissal of the complaint in its Decision dated October 11, 2006. According to the CA, petitioner was not able to establish the paternity of and his filiation to Carlos L. Puno since his birth certificate was prepared without the intervention of and the participatory acknowledgment of paternity by Carlos L. Puno. Accordingly, the CA said that petitioner had no right to demand that he be allowed to examine respondents books. Moreover, petitioner was not a stockholder of the corporation but was merely claiming rights as an heir of Carlos L. Puno, an incorporator of the corporation. His action for specific performance therefore appeared to be premature; the proper action to be taken was to prove the paternity of and his filiation to Carlos L. Puno in a petition for the settlement of the estate of the latter.[5]

WHEREFORE, judgment is hereby rendered ordering Jesusa Puno and/or Felicidad Fermin to allow the plaintiff to inspect the corporate books and records of the company from 1962 up to the present including the financial statements of the corporation.

Petitioners motion for reconsideration was denied by the CA in its Resolution[6] dated March 6, 2007.

The costs of copying shall be shouldered by the plaintiff. Any expenses to be incurred by the defendant to be able to comply with this order shall be the subject of a bill of costs.

In this petition, petitioner raises the following issues:

I. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THE JOSELITO PUNO IS ENTITLED TO THE RELIEFS DEMANDED HE BEING THE HEIR OF THE LATE CARLOS PUNO, ONE OF THE INCORPORATORS [OF] RESPONDENT CORPORATION.

SO ORDERED.[4]

II.

HONORABLE COURT OF APPEALS ERRED IN RULING THAT FILIATION OF JOSELITO PUNO, THE PETITIONER[,] IS NOT DULY PROVEN OR ESTABLISHED.

III.

THE HONORABLE COURT ERRED IN NOT RULING THAT JOSELITO MUNO AND JOSELITO PUNO REFERS TO THE ONE AND THE SAME PERSON.

Petitioner anchors his claim on his being an heir of the deceased stockholder. However, we agree with the appellate court that petitioner was not able to prove satisfactorily his filiation to the deceased stockholder; thus, the former cannot claim to be an heir of the latter.

IV.

THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT WHAT RESPONDENT MERELY DISPUTES IS THE SURNAME OF THE PETITIONER WHICH WAS MISSPELLED AND THE FACTUAL ALLEGATION E.G. RIGHTS OF PETITIONER AS HEIR OF CARLOS PUNO ARE DEEMED ADMITTED HYPOTHETICALLY IN THE RESPONDENT[S] MOTION TO DISMISS.

Incessantly, we have declared that factual findings of the CA supported by substantial evidence, are conclusive and binding.[8] In an appeal via certiorari, the Court may not review the factual findings of the CA. It is not the Courts function under Rule 45 of the Rules of Court to review, examine, and evaluate or weigh the probative value of the evidence [9] presented.

V.

THE HONORABLE COURT OF APPEALS THEREFORE ERRED I[N] DECREEING THAT PETITIONER IS NOT ENTITLED TO INSPECT THE CORPORATE BOOKS OF DEFENDANT [7] CORPORATION.

The petition is without merit. Petitioner failed to establish the right to inspect respondent corporations books and receive dividends on the stocks owned by Carlos L. Puno.

A certificate of live birth purportedly identifying the putative father is not competent evidence of paternity when there is no showing that the putative father had a hand in the preparation of the certificate. The local civil registrar has no authority to record the paternity of an illegitimate child on the information of a third person.[10] As correctly observed by the CA, only petitioners mother supplied the data in the birth certificate and signed the same. There was no evidence that Carlos L. Puno acknowledged petitioner as his son.

As for the baptismal certificate, we have already decreed that it can only serve as evidence of the administration of the

sacrament on the date specified but not of the veracity of the entries with respect to the childs paternity.[11]

In any case, Sections 74 and 75 of the Corporation Code enumerate the persons who are entitled to the inspection of corporate books, thus

The stockholders right of inspection of the corporations books and records is based upon his ownership of shares in the corporation and the necessity for selfprotection. After all, a shareholder has the right to be intelligently informed about corporate affairs.[13] Such right rests upon the stockholders underlying ownership of the corporations assets and property.[14]

Sec. 74. Books to be kept; stock transfer agent. x x x.

The records of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

Similarly, only stockholders of record are entitled to receive dividends declared by the corporation, a right inherent in the ownership of the shares.[15]

xxxx

Sec. 75. Right to financial statements. Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss of statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations.[12]

Upon the death of a shareholder, the heirs do not automatically become stockholders of the corporation and acquire the rights and privileges of the deceased as shareholder of the corporation. The stocks must be distributed first to the heirs in estate proceedings, and the transfer of the stocks must be recorded in the books of the corporation. Section 63 of the Corporation Code provides that no transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation.[16] During such interim period, the heirs stand as the equitable owners of the stocks, the executor or administrator duly appointed by the court being vested with the legal title to the stock.[17] Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or [18] executor. Consequently, during such time, it is the administrator or executor

who is entitled to exercise the rights of the deceased as stockholder.

and Resolution dated March 6, 2007 areAFFIRMED.

Thus, even if petitioner presents sufficient evidence in this case to establish that he is the son of Carlos L. Puno, he would still not be allowed to inspect respondents books and be entitled to receive dividends from respondent, absent any showing in its transfer book that some of the shares owned by Carlos L. Puno were transferred to him. This would only be possible if petitioner has been recognized as an heir and has participated in the settlement of the estate of the deceased.

SO ORDERED.

[G.R. No. 120138. September 5, 1997]

Corollary to this is the doctrine that a determination of whether a person, claiming proprietary rights over the estate of a deceased person, is an heir of the deceased must be ventilated in a special proceeding instituted precisely for the purpose of settling the estate of the latter. The status of an illegitimate child who claims to be an heir to a decedents estate cannot be adjudicated in an ordinary civil action, as in a case for the recovery of property.[19] The doctrine applies to the instant case, which is one for specific performance to direct respondent corporation to allow petitioner to exercise rights that pertain only to the deceased and his representatives.

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L. JOCSON, JR., MELVIN S. JURISPRUDENCIA, AUGUSTUS CESAR AZURA and EDGARDO D. PABALAN, petitioners, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, TORMIL REALTY & DEVELOPMENT CORPORATION, ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T. MORALES, and DANTE D. MORALES,respondents. DECISION
KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioners seek to annul the decision of the Court of Appeals in CA-G.R. SP. No. 31748 dated 23 May 1994 and its subsequent resolution dated 10 May 1995 denying petitioners motion for reconsideration. The present case involves two separate but interrelated conflicts. The facts leading to the first controversy are as follows:

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated October 11, 2006

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of Tormil Realty & Development Corporation while private respondents who are the children of Judge Torres deceased brother Antonio A. Torres, constituted the minority stockholders. In particular, their respective shareholdings and positions in the corporation were as follows: Name of Stockholder Number of Percentage Position(s) Shares Manuel A. Torres, Jr. 100,120 57.21 Dir./Pre s./Chair Milagros P. Torres 33,430 1 9.10 Dir./Treasurer Josefina P. Torres 8,290 4.73 Dir./Ass. CorSec. Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec. Antonio P. Torres, Jr. 8,290 4.73 Director Ma. Jacinta P. Torres 8,290 4.7 3 Director Ma. Luisa T. Morales 7,790 4. 45 Director Dante D. Morales 500 .28 Director
[1]

Tormil Realty shares. Hence, on various dates in July and August of 1984, ten (10) deeds of assignment were executed by the late Judge Torres:

ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES TO BE ISSUED 1. July 13, 1984 81834 TCT Quezon City 13,252 TCT 144240 Quezon City 2. July 13, 1984 TCT 77008 Manila TCT 65689 Manila 78,49 3 TCT 109200 Manila 3. July 13, 1984 TCT 374079 Makati 8,3 07 4. July 24, 1984 TCT 41527 Pasay TCT 41528 Pasay 9,855 TCT 41529 Pasay 5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000 6, Aug. 06, 1984 Manila Jockey Club Stocks 48,737 7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283 8. Aug. 07, 1984 China Banking Corp. Stocks 6,300 9. Aug. 20, 1984 Ayala Corp. Stocks 7,468

In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an estate planning scheme under which he assigned to Tormil Realty & Development Corporation (Tormil for brevity) various real properties he owned and his shares of stock in other corporations in exchange for 225,972

10. Aug. 29, 1984 Fund Stocks 225,972

[2]

Ayala 1,322

Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil Realty and the revenues generated by the said properties were correspondingly entered in the corporations books of account and financial records. Likewise, all the assigned parcels of land were duly registered with the respective Register of Deeds in the name of Tormil Realty, except for the ones located in Makati and Pasay City. At the time of the assignments and exchange, however, only 225,000 Tormil Realty shares remained unsubscribed, all of which were duly issued to and received by Judge Torres (as evidenced by stock certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25).[3] Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal of private respondents to approve the needed increase in the corporations authorized capital stock (to cover the shortage of 972 shares due to Judge Torres under the estate planning scheme), on 11 September 1986, Judge Torres revoked the two (2) deeds of assignment covering the properties in Makati and Pasay City.[4] Noting the disappearance of the Makati and Pasay City properties from the corporations inventory of assets and financial records private respondents, on 31 March 1987, were constrained to file a complaint with the Securities and Exchange Commission (SEC) docketed as SEC Case No. 3153 to compel Judge Torres to deliver to Tormil Corporation the two (2) deeds of assignment covering the aforementioned Makati and Pasay City properties which he had unilaterally revoked and to cause the registration of the corresponding titles in the name of Tormil. Private respondents alleged that following the disappearance of the properties

from the corporations inventory of assets, they found that on October 24, 1986, Judge Torres, together with Edgardo Pabalan and Graciano Tobias, then General Manager and legal counsel, respectively, of Tormil, formed and organized a corporation named TorresPabalan Realty and Development Corporation and that as part of Judge Torres contribution to the new corporation, he executed in its favor a Deed of Assignment conveying the same Makati and Pasay City properties he had earlier transferred to Tormil. The second controversy--involving the same parties--concerned the election of the 1987 corporate board of directors. The 1987 annual stockholders meeting and election of directors of Tormil corporation was scheduled on 25 March 1987 in compliance with the provisions of its by-laws. Pursuant thereto, Judge Torres assigned from his own shares, one (1) share each to petitioners Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares were in the nature of qualifying shares, for the sole purpose of meeting the legal requirement to be able to elect them (Tobias and company) to the Board of Directors as Torres nominees. The assigned shares were covered by corresponding Tormil Stock Certificates Nos. 030, 029, 028, 027, 026 and at the back of each certificate the following inscription is found:

The present certificate and/or the one share it represents, conformably to the purpose and intention of the Deed of Assignment dated March 6, 1987, is not held by me under any claim of ownership and I acknowledge that I hold the same merely as trustee of Judge Manuel A. Torres, Jr. and for the sole purpose of qualifying me as Director; (Signature of Assignee)
[5]

The reason behind the aforestated action was to remedy the inequitable lopsided set-up obtaining in the corporation, where, notwithstanding his controlling interest in the

corporation, the late Judge held only a single seat in the nine-member Board of Directors and was, therefore, at the mercy of the minority, a combination of any two (2) of whom would suffice to overrule the majority stockholder in the Boards decision making functions. [6] On 25 March 1987, the annual stockholders meeting was held as scheduled. What transpired therein was ably narrated by Attys. Benito Cataran and Bayani De los Reyes, the official representatives dispatched by the SEC to observe the proceedings (upon request of the late Judge Torres) in their report dated 27 March 1987: xxx.

authorized by Manuel Torres, Jr., the President and Chairman of the Board. The secretary when asked about the quorum, said that there was more than a quorum. Mr. Pabalan distributed copies of the presidents report and the financial statements. Antonio Torres, Jr. requested time to study the said reports and brought out the question of auditing the finances of the corporation which he claimed was approved previously by the board. Heated arguments ensued which also touched on family matters. Antonio Torres, Jr. moved for the suspension of the meeting but Manuel Torres, Jr. voted for the continuation of the proceedings. Mr. Pabalan suggested that the opinion of the SEC representatives be asked on the propriety of suspending the meeting but Antonio Torres, Jr. objected reasoning out that we were just observers. When the Chairman called for the election of directors, the Secretary refused to write down the names of nominees prompting Atty. Azura to initiate the appointment of Atty. Jocson, Jr. as Acting Secretary. Antonio Torres, Jr. nominated the present members of the Board. At this juncture, Milagros Torres cried out and told the group of Manuel Torres, Jr. to leave the house. Manuel Torres, Jr., together with his lawyersstockholders went to the residence of Ma. Jacinta Torres in San Miguel Village, Makati, Metro Manila. The undersigned joined them since the group with Manuel Torres, Jr. the one who requested for S.E.C. observers, represented the majority of the outstanding capital stock and still constituted a quorum. At the resumption of the meeting, the following were nominated and elected as directors for the year 1987-1988:

The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential bungalow in Urdaneta Village, Makati, Metro Manila. Upon arrival, Josefina Torres introduced us to the stockholders namely: Milagros Torres, Antonio Torres, Jr., Ma. Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta Torres. Antonio Torres, Jr. questioned our authority and personality to appear in the meeting claiming subject corporation is a family and private firm. We explained that our appearance there was merely in response to the request of Manuel Torres, Jr. and that SEC has jurisdiction over all registered corporations. Manuel Torres, Jr., a septuagenarian, argued that as holder of the major and controlling shares, he approved of our attendance in the meeting. At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano Tobias, Atty. Rodolfo Jocson, Jr., Atty. Melvin Jurisprudencia, and Atty. Augustus Cesar Azura arrived. Atty. Azura told the body that they came as counsels of Manuel Torres, Jr. and as stockholders having assigned qualifying shares by Manuel Torres, Jr. The stockholders meeting started at 2:45 p.m. with Mr. Pabalan presiding after verbally

1.

9.

Manuel Torres, Jr. 2. Ma. Jacinta Torres 3. Edgardo Pabalan 4. Graciano Tobias 5. Rodolfo Jocson, Jr. 6. Melvin Jurisprudencia 7. Augustus Cesar Azura 8. Josefina Torres Dante Morales

After the election, it was resolved that after the meeting, the new board of directors shall convene for the election of officers.
xxx. [7] Consequently, on 10 April 1987, private respondents instituted a complaint with the SEC (SEC Case No. 3161) praying in the main, that the election of petitioners to the Board of Directors be annulled. Private respondents alleged that the petitioners-nominees were not legitimate stockholders of Tormil because the assignment of shares to them violated the minority stockholders right of pre-emption as provided in the corporations articles and by-laws. Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint hearing and adjudication. On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in favor of private respondents. The dispositive portion thereof states, thus:

Transfer Certificates of Title Nos. 374079 of the Registry of Deeds for Makati, and 41527, 41528 and 41529 of the Registry of Deeds for Pasay City and/or to cause the formal registration and transfer of title in and over such real properties in favor of TORMIL with the proper government agency; (b) all corporate books of account, records and papers as may be necessary for the conduct of a comprehensive audit examination, and to allow the examination and inspection of such accounting books, papers and records by any or all of the corporate directors, officers and stockholders and/or their duly authorized representatives or auditors; 2. Declaring as permanent and final the writ of preliminary injunction issued by the Hearing Panel on February 13, 1989; 3. Declaring as null and void the election and appointment of respondents to the Board of Directors and executive positions of TORMIL held on March 25, 1987, and all their acts and resolutions made for and in behalf of TORMIL by authority of and pursuant to such invalid appointment & election held on March 25, 1987; 4. Ordering the respondents jointly and severally, to pay the complainants the sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) and by way of attorneys fees.
[8]

WHEREFORE, premises considered, judgment is hereby rendered as follows: 1. Ordering and directing the respondents, particularly respondent Manuel A. Torres, Jr., to turn over and deliver to TORMIL through its Corporate Secretary, Ma. Cristina T. Carlos: (a) the originals of the Deeds of Assignment dated July 13 and 24, 1984 together with the owners duplicates of

Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339). Thereafter, on 3 April 1991, during the pendency of said appeal, petitioner Manuel A. Torres, Jr. died. However, notice thereof was brought to the attention of the SEC not by petitioners counsel but by private respondents in a Manifestation dated 24 April 1991.[9] On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no administrator or legal representative of the late Judge Torres estate has yet been appointed

by the Regional Trial Court of Makati where Sp. Proc. No. M-1768 (In Matter of the Issuance of the Last Will and Testament of Manuel A. Torres, Jr.) was pending. Two similar motions for suspension were filed by petitioners on 28 June 1993 and 9 July 1993. On 19 July 1993, the SEC en banc issued an Order denying petitioners aforecited motions on the following ground:

Insisting on their cause, petitioners filed the present petition for review alleging that the Court of Appeals committed the following errors in its decision:

(1) WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A FULL LENGTH DECISION, WITHOUT THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. - AC NO. 339 BEING PROPERLY BROUGHT BEFORE IT FOR REVIEW AND RE-EXAMINATION, AN OMISSION RESULTING IN A CLEAR TRANSGRESSION OR CURTAILMENT OF THE RIGHTS OF THE HEREIN PETITIONERS TO PROCEDURAL DUE PROCESS; (2) WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE RESPONDENT S.E.C., WHICH IS VOID FOR HAVING BEEN RENDERED WITHOUT THE PROPER SUBSTITUTION OF THE DECEASED PRINCIPAL PARTYRESPONDENT IN S.E.C.-AC NO. 339 AND CONSEQUENTLY, FOR WANT OF JURISDICTION OVER THE SAID DECEASEDS TESTATE ESTATE, AND MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NON-SUBSTITUTION BY ITS APPLICATION OF THE CIVIL LAW CONCEPT OF NEGOTIORUM GESTIO; (3) WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. -AC NO. 339 NOT HAVING ACTUALLY BEEN RE-EXAMINED, THAT S.E.C. CASE NO. 3153 INVOLVED A SITUATION WHERE PERFORMANCE WAS IMPOSSIBLE (AS CONTEMPLATED

Before the filing of these motions, the Commission en banc had already completed all proceedings and had likewise ruled on the merits of the appealed cases. Viewed in this light, we thus feel that there is nothing left to be done except to deny these motions to suspend proceedings.
[10]

On the same date, the SEC en banc rendered a decision, the dispositive portion of which reads, thus:

WHEREFORE, premises considered, the appealed decision of the hearing panel is hereby affirmed and all motions pending before us incident to this appealed case are necessarily DISMISSED. SO ORDERED.
[11]

Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court of Appeals by way of a petition for review (docketed as CA-G.R. SP No. 31748). On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of which states:

WHEREFORE, the petition for review is DISMISSED and the appealed decision is accordingly affirmed. SO ORDERED.
[12]

From the said decision, petitioners filed a motion for reconsideration which was denied in a resolution issued by the Court of Appeals dated 10 May 1995. [13]

UNDER ARTICLE 1191 OF THE CIVIL CODE) AND WAS NOT A MERE CASE OF LESION OR INADEQUACY OF CAUSE (UNDER ARTICLE 1355 OF THE CIVIL CODE) AS SO ERRONEOUSLY CHARACTERIZED BY THE RESPONDENT S.E.C.; and, (4) WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C.AC NO. 339 NOT HAVING ACTUALLY BEEN EXAMINED, THAT THE RECORDING BY THE LATE JUDGE MANUEL A. TORRES, JR. OF THE QUESTIONED ASSIGNMENT OF QUALIFYING SHARES TO HIS NOMINEES, WAS AFFIRMED IN THE STOCK AND TRANSFER BOOK BY AN ACTING CORPORATE SECRETARY AND MOREOVER, THAT ACTUAL NOTICE OF SAID ASSIGNMENT WAS TIMELY MADE TO THE OTHER STOCKHOLDERS.
[14]

8. WHEN PETITION GIVEN DUE COURSE.-The Court of Appeals shall give due course to the petition only when it shows prima facie that the court, commission, board, office or agency concerned has committed errors of fact or law that would warrant reversal or modification of the order, ruling or decision sought to be reviewed. The findings of fact of the court commission, board, office or agency concerned when supported by substantial evidence shall be final.
xxx.

11. TRANSMITTAL OF RECORD.Within fifteen (15) days from notice that the petition has been given due course, the court, commission, board, office or agency concerned shall transmit to the Court of Appeals the original or a certified copy of the entire record of the proceeding under review. The record to be transmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals may require or permit subsequent correction or addition to the record.
Petitioners contend that the Court of Appeals had given due course to their petition as allegedly indicated by the following acts:

We shall resolve the issues in seriatim.

I

Petitioners insist that the failure to transmit the original records to the Court of Appeals deprived them of procedural due process. Without the evidence and the original records of the proceedings before the SEC, the Court of Appeals, petitioners adamantly state, could not have possibly made a proper appreciation and correct determination of the issues, particularly the factual issues they had raised on appeal. Petitioners also assert that since the Court of Appeals allegedly gave due course to their petition, the original records should have been forwarded to said court. Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27 February 1991) which provides that:

a) it granted the restraining order applied for by the herein petitioners, and after hearing, also the writ of preliminary injunction sought by them; under the original SC Circular No. 1-91, a petition for review may be given due course at the onset (paragraph 8) upon a mere prima facie finding of errors of fact or law having been committed, and such prima facie finding is but consistent with the grant of the extra-ordinary writ of preliminary injunction; b) it required the parties to submit simultaneous memoranda in its resolution dated October 15, 1993 (this is in addition to the comment required to be filed by the

respondents) and furthermore declared in the same resolution that the petition will be decided on the merits, instead of outrightly dismissing the same; c) it rendered a full length decision, wherein: (aa) it expressly declared the respondent S.E.C. as having erred in denying the pertinent motions to suspend proceedings; (bb) it declared the supposed error as having become a non-issue when the respondent C.A. proceeded to hear (the) appeal; (cc) it formulated and applied its own theory of negotiorum gestio in justifying the non-substitution of the deceased principal party in S.E C. -AC No. 339 and moreover, its theory of di minimis non curat lex (this, without first determining the true extent of and the correct legal characterization of the so-called shortage of Tormil shares; and, (dd) it expressly affirmed the assailed decision of respondent S.E.C .
[15]

10. Due course.-- If upon the filing of the comment or such other pleadings or documents as may be required or allowed by the Court of Appeals or upon the expiration of the period for the filing thereof, and on the bases of the petition or the record the Court of Appeals finds prima facie that the court or agency concerned has committed errors of fact or law that would warrant reversal or modification of the award, judgment, final order or resolution sought to be reviewed, it may give due course to the petition; otherwise, it shall dismiss the same. The findings of fact of the court or agency concerned, when supported by substantial evidence, shall be binding on the Court of Appeals. 11. Transmittal of record.-- Within fifteen (15) days from notice that the petition has been given due course, the Court of Appeals may require the court or agency concerned to transmit the original or a legible certified true copy of the entire record of the proceeding under review. The record to be transmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals may require or permit subsequent correction of or addition to the record. (Underscoring ours.)
The aforecited circular now formalizes the correct practice and clearly states that in resolving appeals from quasi judicial agencies, it is within the discretion of the Court of Appeals to have the original records of the proceedings under review be transmitted to it. In this connection, petitioners claim that the Court of Appeals could not have decided the case on the merits without the records being brought before it is patently lame. Indubitably, the Court of Appeals decided the case on the basis of the uncontroverted facts and admissions contained in the pleadings, that is, the petition, comment, reply, rejoinder, memoranda, etc. filed by the parties.
II

Petitioners contention is unmeritorious. There is nothing on record to show that the Court of Appeals gave due course to the petition. The fact alone that the Court of Appeals issued a restraining order and a writ of preliminary injunction and required the parties to submit their respective memoranda does not indicate that the petition was given due course. The office of an injunction is merely to preserve the status quopending the disposition of the case. The court can require the submission of memoranda in support of the respective claims and positions of the parties without necessarily giving due course to the petition. The matter of whether or not to give due course to a petition lies in the discretion of the court. It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised Administrative Circular No. 1-95 (which took effect on 1 June 1995) wherein the procedure for appeals from quasi-judicial agencies to the Court of Appeals was clarified thus:

Petitioners contend that the decisions of the SEC and the Court of Appeals are null and void for being rendered without the necessary substitution of parties (for the deceased petitioner Manuel A. Torres, Jr.) as mandated by Sec. 17, Rule 3 of the Revised Rules of Court, which provides as follows:

been effected, the trial held by the court without such legal representative or heirs, and the judgment rendered after such trial, are null and void because the court acquired no jurisdiction over the persons of the legal representative or of the heirs upon whom the trial and the judgment are not binding.
[16]

SEC. 17. Death of party.--After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted. If the legal representative fails to appear within said time, the court may order the opposing party to procure the appointment of a legal representative of the deceased within a time to be specified by the court, and the representative shall immediately appear for and on behalf of the interest of the deceased. The court charges involved in procuring such appointment, if defrayed by the opposing party, may be recovered as costs. The heirs of the deceased may be allowed to be substituted for the deceased, without requiring the appointment of an executor or administrator and the court may appoint guardian ad litem for the minor heirs.
Petitioners insist that the SEC en banc should have granted the motions to suspend they filed based as they were on the ground that the Regional Trial Court of Makati, where the probate of the late Judge Torres will was pending, had yet to appoint an administrator or legal representative of his estate. We are not unaware of the principle underlying the aforequoted provision:

As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768 before the Regional Trial Court of Makati for the ante-mortem probate of his holographic will which he had executed on 31 October 1986. Testifying in the said proceedings, Judge Torres confirmed his appointment of petitioner Edgardo D. Pabalan as the sole executor of his will and administrator of his estate. The proceedings, however, were opposed by the same parties, herein private respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma. Cristina T. Carlos, [17] who are nephew and nieces of Judge Torres, being the children of his late brother Antonio A. Torres. It can readily be observed therefore that the parties involved in the present controversy are virtually the same parties fighting over the representation of the late Judge Torres estate. It should be recalled that the purpose behind the rule on substitution of parties is the protection of the right of every party to due process. It is to ensure that the deceased party would continue to be properly represented in the suit through the duly appointed legal representative of his estate. In the present case, this purpose has been substantially fulfilled (despite the lack of formal substitution) in view of the peculiar fact that both proceedings involve practically the same parties. Both parties have been fiercely fighting in the probate proceedings of Judge Torres holographic will for appointment as legal representative of his estate. Since both parties claim interests over the estate, the rights of the estate were expected to be fully protected in the proceedings before the SEC en banc and the Court of Appeals. In either case, whoever shall be appointed legal representative of Judge Torres estate (petitioner Pabalan or private respondents)

It has been held that when a party dies in an action that survives, and no order is issued by the Court for the appearance of the legal representative or of the heirs of the deceased to be substituted for the deceased, and as a matter of fact no such substitution has ever

would no longer be a stranger to the present case, the said parties having voluntarily submitted to the jurisdiction of the SEC and the Court of Appeals and having thoroughly participated in the proceedings. The foregoing rationale finds support in the recent case of Vda. de Salazar v. CA, [18] wherein the Court expounded thus:

The need for substitution of heirs is based on the right to due process accruing to every party in any proceeding. The rationale underlying this requirement in case a party dies during the pendency of proceedings of a nature not extinguished by such death, is that xxx the exercise of judicial power to hear and determine a cause implicitly presupposes in the trial court, amongst other essentials, jurisdiction over the persons of the parties. That jurisdiction was inevitably impaired upon the death of the protestee pending the proceedings below such that unless and until a legal representative is for him duly named and within the jurisdiction of the trial court, no adjudication in the cause could have been accorded any validity or binding effect upon any party, in representation of the deceased, without trenching upon the fundamental right to a day in court which is the very essence of the constitutionally enshrined guarantee of due process. We are not unaware of several cases where we have ruled that a party having died in an action that survives, the trial held by the court without appearance of the deceaseds legal representative or substitution of heirs and the judgment rendered after such trial, are null and void because the court acquired no jurisdiction over the persons of the legal representatives or of the heirs upon whom the trial and the judgment would be binding. This general rule notwithstanding, in denying petitioners motion for reconsideration, the Court of Appeals correctly ruled that formal substitution of heirs is not necessary when the

heirs themselves voluntarily appeared, participated in the case and presented evidence in defense of deceased defendant. Attending the case at bench, after all, are these particular circumstances which negate petitioners belated and seemingly ostensible claim of violation of her rights to due process. We should not lose sight of the principle underlying the general rule that formal substitution of heirs must be effectuated for them to be bound by a subsequent judgment. Such had been the general rule established not because the rule on substitution of heirs and that on appointment of a legal representative are jurisdictional requirements per se but because non-compliance therewith results in the undeniable violation of the right to due process of those who, though not duly notified of the proceedings, are substantially affected by the decision rendered therein. xxx.
It is appropriate to mention here that when Judge Torres died on April 3, 1991, the SEC en banc had already fully heard the parties and what remained was the evaluation of the evidence and rendition of the judgment. Further, petitioners filed their motions to suspend proceedings only after more than two (2) years from the death of Judge Torres. Petitioners counsel was even remiss in his duty under Sec. 16, Rule 3 of the Revised Rules of Court.[19] Instead, it was private respondents who informed the SEC of Judge Torres death through a manifestation dated 24 April 1991. For the SEC en banc to have suspended the proceedings to await the appointment of the legal representatives by the estate was impractical and would have caused undue delay in the proceedings and a denial of justice. There is no telling when the probate court will decide the issue, which may still be appealed to the higher courts. In any case, there has been no final disposition of the properties of the late Judge Torres before the SEC. On the contrary, the

decision of the SEC en banc as affirmed by the Court of Appeals served to protect and preserve his estate. Consequently, the rule that when a party dies, he should be substituted by his legal representative to protect the interest of his estate in observance of due process was not violated in this case in view of its peculiar situation where the estate was fully protected by the presence of the parties who claim interest thereto either as directors, stockholders or heirs. Finally, we agree with petitioners contention that the principle of negotiorum gestio [20] does not apply in the present case. Said principle explicitly covers abandoned or neglected property or business.
III

We sustain the ruling of respondent SEC in the decision appealed from (Rollo, pp. 45-46) that x x x the shortage of 972 shares would not be valid ground for respondent Torres to unilaterally revoke the deeds of assignment he had executed on July 13, 1984 and July 24, 1984 wherein he voluntarily assigned to TORMIL real properties covered by TCT No. 374079 (Makati) and TCT No. 41527, 41528 and 41529 (Pasay) respectively. A comparison of the number of shares that respondent Torres received from TORMIL by virtue of the deeds of assignment and the stock certificates issued by the latter to the former readily shows that TORMIL had substantially performed what was expected of it. In fact, the first two issuances were in satisfaction to the properties being revoked by respondent Torres. Hence, the shortage of 972 shares would never be a valid ground for the revocation of the deeds covering Pasay and Quezon City properties. In Universal Food Corp. vs. CA, the Supreme Court held: The general rule is that rescission of a contract will not be permitted for a slight or carnal breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. The shortage of 972 shares definitely is not substantial and fundamental breach as would defeat the very object of the parties in entering into contract. Art. 1355 of the Civil Code also provides: Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influences. There being no fraud, mistake or undue influence exerted on respondent Torres by TORMIL and the latter having already issued to the

Petitioners find legal basis for Judge Torres act of revoking the assignment of his properties in Makati and Pasay City to Tormil corporation by relying on Art. 1191 of the Civil Code which provides that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
Petitioners contentions cannot be sustained. We see no justifiable reason to disturb the findings of SEC, as affirmed by the Court of Appeals:

former of its 225,000 unissued shares, the most logical course of action is to declare as null and void the deed of revocation executed by respondent Torres. (Rollo, pp. 45-46.)
[21]

The aforequoted Civil Code provision does not apply in this particular situation for the obvious reason that a specific number of shares of stock (as evidenced by stock certificates) had already been issued to the late Judge Torres in exchange for his Makati and Pasay City properties. The records thus disclose:

DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF ASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE 1. July 13, 1984 City) 13,252 TCT 81834 Quezon 3rd TCT 144240 Quezon City) 2. July 13, 1984 TCT 77008 Manila) TCT 65689 Manila) 78,493 2nd TCT 102200 Manila) 3. July 13, 1984 TCT 374079 Makati 8,307 1st 4. July 24, 1984 TCT 41527 Pasay) TCT 41528 Pasay) 9,855 4th TCT 41529 Pasay) 5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th

6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th 7. August 7, 1984 San Miguel Corp. Stocks 50,238 8 th 8. August 7, 1984 China Banking Corp. Stocks 6,300 6th 9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th 10. August 29, 1984 Ayala Fund Stocks 1,322.1) TOTAL 225,972.3
* Order of stock certificate issuances by TORMIL to respondent Torres relative to the Deeds of Assignment he executed sometime in July and August, 1984. [22] (Emphasis ours.) Moreover, we agree with the contention of the Solicitor General that the shortage of shares should not have affected the assignment of the Makati and Pasay City properties which were executed in 13 and 24 July 1984 and the consideration for which have been duly paid or fulfilled but should have been applied logically to the last assignment of property -- Judge Torres Ayala Fund shares-which was executed on 29 August 1984.[23]
IV

Petitioners insist that the assignment of qualifying shares to the nominees of the late Judge Torres (herein petitioners) does not partake of the real nature of a transfer or conveyance of shares of stock as would call for the imposition of stringent requirements (with respect to the) recording of the transfer of said shares. Anyway, petitioners add, there was substantial compliance with the above-stated requirement since said assignments were entered by the late Judge Torres himself in the corporations stock and transfer book on 6 March 1987, prior to the 25 March 1987 annual stockholders meeting and which entries were confirmed on 8 March 1987 by petitioner Azura

who was appointed Assistant Secretary by Judge Torres. Petitioners further argue that:

Corporate

10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to penalize the late Judge Torres by invalidating the questioned entries in the stock and transfer book, simply because he initially made those entries (they were later affirmed by an acting corporate secretary) and because the stock and transfer book was in his possession instead of the elected corporate secretary, if the background facts herein-before narrated and the serious animosities that then reigned between the deceased Judge and his relatives are to be taken into account;
xxx.

It is precisely the brewing family discord between Judge Torres and private respondents--his nephew and nieces that should have placed Judge Torres on his guard. He should have been more careful in ensuring that his actions (particularly the assignment of qualifying shares to his nominees) comply with the requirements of the law. Petitioners cannot use the flimsy excuse that it would have been a vain attempt to force the incumbent corporate secretary to register the aforestated assignments in the stock and transfer book because the latter belonged to the opposite faction. It is the corporate secretarys duty and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance.[25] In other words, there are remedies within the law that petitioners could have availed of, instead of taking the law in their own hands, as the cliche goes. Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of Appeals:

10.12. Indeed it was a practice in the corporate respondent, a family corporation with only a measly number of stockholders, for the late judge to have personal custody of corporate records; as president, chairman and majority stockholder, he had the prerogative of designating an acting corporate secretary or to himself make the needed entries, in instances where the regular secretary, who is a mere subordinate, is unavailable or intentionally defaults, which was the situation that obtained immediately prior to the 1987 annual stockholders meeting of Tormil, as the late Judge Torres had so indicated in the stock and transfer book in the form of the entries now in question; 10.13. Surely, it would have been futile nay foolish for him to have insisted under those circumstances, for the regular secretary, who was then part of a group ranged against him, to make the entries of the assignments in favor of his nominees;
[24]

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the Corporation Code, as follows (Rollo, p. 45): In the absence of (any) provision to the contrary, the corporate secretary is the custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes proper and necessary entries therein. Contrary to the generally accepted corporate practice, the stock and transfer book of TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by respondent Torres, the President and Chairman of the Board of Directors of TORMIL. In contravention to the above cited provision, the stock and transfer book was not kept at the principal office of the corporation either but at the place of respondent Torres. These being the obtaining circumstances, any entries made in the stock and transfer book on

Petitioners contentions lack merit.

March 8, 1987 by respondent Torres of an alleged transfer of nominal shares to Pabalan and Co. cannot therefore be given any valid effect. Where the entries made are not valid, Pabalan and Co. cannot therefore be considered stockholders of record of TORMIL. Because they are not stockholders, they cannot therefore be elected as directors of TORMIL. To rule otherwise would not only encourage violation of clear mandate of Sec. 74 of the Corporation Code that stock and transfer book shall be kept in the principal office of the corporation but would likewise open the flood gates of confusion in the corporation as to who has the proper custody of the stock and transfer book and who are the real stockholders of records of a certain corporation as any holder of the stock and transfer book, though not the corporate secretary, at pleasure would make entries therein. The fact that respondent Torres holds 81.28% of the outstanding capital stock of TORMIL is of no moment and is not a license for him to arrogate unto himself a duty lodged to (sic) the corporate secretary.
[26]

G.R. No. L-16236

June 30, 1965

IRINEO S. BALTAZAR, plaintiff-appellee, vs. LINGAYEN GULF ELECTRIC POWER, CO., INC., DOMINADOR C. UNGSON, BRIGIDO G. ESTRADA, MANUEL L. FERNANDEZ, BENEDICTO C. YUSON and BERNARDO ACENA, defendants-appellants. ----------------------------G.R. No. L-16237 June 30, 1965

MARVIN O. ROSE, plaintiff-appellee, vs. LINGAYEN GULF ELECTRIC CO., INC., DOMINADOR, C. UNGSON, BRIGIDO G. ESTRADA, MANTEL L. FERNANDEZ, BENEDICTO C. YUSON and BERNARDO C. ACENA, defendants-appellants. ----------------------------G.R. No. L-16238 June 30, 1965.

IRINEO S. BALTAZAR and MARVIN O. ROSE, plaintiffs-appellees, vs. BERNARDO ACENA, defendant-appellant. Primicias and Del Castillo for plaintiffs-appellees. Manuel L. Fernandez and Brigido G. Estrada for and in their own behalf as defendants-appellants. PAREDES, J.: In Civil Case G.R. No. L-16236 (CFI No. 13211), Irineo S. Baltazar, filed the complaint against Lingayen Gulf Electric Power Co., Inc., Dominador C. Ungson, Brigido G. Estrada, Manuel L. Fernandez, Benedicto C. Yuson and Bernardo Acena. In Civil Case G.R. No. L-16237 (CFI No. 13212), Marvin O. Rose filed the complaint against the same defendants. In Civil Case G.R. No. L-16238 (CFI No. 13340), Baltazar and Rose filed their complaint against Bernardo Acena alone. The Lingayen Gulf Electric Power Co., Inc., hereinafter referred to as Corporation, was doing business in the Philippines, with principal offices at Lingayen, Pangasinan, and with an authorized capital stock of P300.000.00 divided into 3,000 shares of voting stock at P100.00 par value, per share. Plaintiffs Baltazar and Rose were among the incorporators, having subscribed to 600 and 400 shares of the capital stock, or a total par value of P60,000.00 and P40.000.00, respectively. It is alleged that it has always been the practice and

All corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family corporation is not an exemption. Such corporations cannot have rules and practices other than those established by law. WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED. SO ORDERED.

procedure of the Corporation to issue certificates of stock to its individual subscribers for unpaid shares of stock. Of the 600 shares of capital stock subscribed by Baltazar, he had fully paid 535 shares of stock, and the Corporation issued to him several fully paid up and nonassessable certificates of stock, corresponding to the 535 shares. After having made transfers to third persons and acquired new ones, Baltazar had to his credit, on the filing of the complaint 341 shares fully paid and nonassessable. He had also 65 shares with par value of P6,500.00, for which no certificate was issued to him. Of the 400 shares of stock subscribed by Rose, he had 375 shares of fully paid stock, duly covered by certificates of stock issued to him. The respondents Ungson, Estrada, Fernandez and Yuson were small stockholders of the Corporation, all holding a total number of fully paid-up shares of stock, of not more than 100 shares, with a par value of P10,000.00 and the defendant Acena, was likewise an incorporator and stockholder, holding 600 shares of stock, for which certificate of stock were issued to him and as such, was the largest individual stockholder thereof. Defendants Ungson, Estrada, Fernandez and Yuzon, constituted the majority of the holdover sevenmember Board of Directors of the Corporation, in 1955, two (2) of said defendants having been elected as members of the Board in the annual stockholders' meeting held in May 1954, largely on the vote of their codefendant Acena, while the other two (2) were elected mainly on the vote of the plaintiffs and their group of stockholders. Let the first group be called the Ungson group and the second, the Baltazar group. The date of the annual stockholders' meeting of the Corporation had been fixed, under its by-laws, on the first Tuesday of February of every year, but for one reason or another, the meeting was to be held on May 1, 1955, principally for the purpose of electing new officers and Board of Directors for the calendar year 1955. In connection with said meeting since January 1, 1955, there was a realignment effected, and the fight for control of the management and property of the corporation was close and keen. The total number of fully paid-up shares held by stockholders of one group, was almost equal the number of fully paid-up shares held by the other group. The Ungson group (specially defendant Acena), which had been in complete control of the management and property of the Corporation since January 1, 1955, in order to continue retaining such control, over the objection oil three majority members of the Board, in the regular meeting of the Board of Directors, held on January 30, 1955, passed three (3) resolutions (Exhs. A, B, C).

consequently cancelled from the books of the Corporation. Resolution No. 3 (Exh. B) resolved that "... all unpaid subscriptions should bear interest annually from the year of subscription on the basis of quarterly payment, and any or all payments already made on said unpaid subscriptions should be credited to pay interest first, then the capital debt after all interest is fully paid. All shares of stock issued to and in favor of any stockholder or stockholders of the Lingayen Gulf Electric Power Co., Inc., on account of payments on unpaid subscriptions without the interest thereon accrued and collectible having been fully paid from the date of subscription as required by the Corporation Law, shall be declared of no value and cancelled from its books, and if the payments already made exceeded the interest accrued and collectible by virtue of the provision of law and the previous resolution of its board of directors, the excess should be applied to the payment of the unpaid subscription. For this purpose, the accountant of the corporation is directed to make and report the proper computation of the interest. Resolution No. 4 (Exh. C) resolved that "any and all shares of stock of the Lingayen Gulf Electric Power Co., Inc., issued as fully paidup to stockholders whose subscription to a number of shares have been declared delinquent with the accrued interest on the unpaid thereof per Resolution No. 42, S. 1954, of the Board of Directors which has been duly published in the "Manila Chronicle," are hereby incapacitated to utilize or avail of the voting power until such delinquency with the accrued interest is fully paid up as indicated in Resolution No. 3, S. 1955.
On the authority of these resolutions, the Ungson group was threatening and procuring to expel and oust the plaintiffs and their companion stockholders, for the ultimate purpose of depriving them of their right to vote in the said annual stockholders' meeting scheduled for May 1, 1955. In their complaint, Baltazar and Rose prayed that a writ of preliminary injunction be issued against the defendants, enjoining them to desist and refrain from carrying out the objects and purposes of the three resolutions aforestated, and commanding them to allow plaintiffs and companions to vote in the stockholders' meeting, on May 1, 1955, their fully paid up shares of stocks, as evidenced by stock certificates issued to them

Resolution No. 2 (Exh. A), declared all watered stocks issued to Acena, Baltazar, Rose and Jubenville, "of no value and

and outstanding on the stock book of the defendant Corporation, on or before January 30, 1955, to declare said three resolutions illegal and invalid, and to pay plaintiffs the sum of P10,000.00 each, as damages. On April 29, 1955, the trial court, after due hearing, issued Preliminary Injunction, as prayed for. The defendants, in their answers, allege that during the years that plaintiffs and their allies were in control of the Corporation, no serious effort was attempted to retrieve it from its financial collapse, caused by accumulated indebtedness and by poor and inefficient management, resulting in losses of big sums of money from vicious manipulation of funds, nepotism, unconscionable grant of big salaries and allowances, illegal payments, unaccounted funds of Caltex business and sales department store, etc.; that during the time the management was in the hands of plaintiffs (Rose, as manager); attempts were made to release themselves from liability of their unpaid subscriptions; that the three resolutions were merely functional instruments to bolster the faith in the assets of the defendant Corporation and did not deprive the plaintiffs of their property without due process of law; that the issuance of a writ of injunction for the purpose of arresting the holding of the election of the Board, was beyond the jurisdiction of the court. They set up counterclaims. They prayed that the resolutions be declared legal and valid, thus invalidating the "watered stocks" of plaintiffs, if not paid, and disqualifying the delinquent subscribers, among whom were the plaintiffs, from voting totally or partially, their subscriptions; to order plaintiffs to pay the defendant Corporation first, the interest due and payable quarterly at 6% per annum from January 11, 1946 to December 31, 1954, on their liability under their delinquent subscriptions, out of the installment made therein; to pay defendant entity damages under the counterclaims and expenses for the enforcement of the collection; and that after complete payment of the interests and the balance of their unpaid subscriptions, the defendant Corporation should issue the shares of stock to plaintiffs for their full subscription. Plaintiffs filed their answer to defendants' counterclaims, with counterclaims against defendants. On August 8, 1955, the lower court issued an order dismissing plaintiffs' counterclaims against Acena, Ungson and Fernandez "without prejudice to filing the proper separate actions therefor by the parties." Consequently, and as heretofore mentioned, Baltazar and Rose filed Case No. 13340 (supra). The following tentative amicable settlement, dated September 13, 1958, formulated and entered into by some of the parties and their respective attorneys, before presiding Judge Jesus P. Morfe, in the three cases, was submitted:

worth of stocks to be considered as valid for each under this compromise; 2. With respect to Dr. Bernardo Acena, of the certificates of stock allegedly representing, his profit, he will return to the corporation P3,500 of said share of stock and retain P7,500 worth thereof ; 3. With respect to the interest on unpaid balance of subscription it is agreed that the subscribers with unpaid subscription be given the opportunity to pay in two installments, the first installment to cover one-half of the unpaid balance to be paid in three months, and the second installment will be for the remaining unpaid half payable in another three months, from the time of the approval of this agreements, with the understanding that those who comply with this arrangement will not pay interest on the balance of their subscription, for the date of incorporation up to the grant of franchise on February 24, 1948, which shall be deemed as condoned, and from 1948 they will pay only as interest 3% compounded annually, it being understood that failure of any subscriber to pay any of the installment here provided will subject the stockholders concerned to the provision of the corporation law of the payment of 6% interest compounded quarterly. 4. All claims and counterclaims other than those covered by the preceding paragraph of stipulation will be deemed dismissed without prejudice, in all these three cases; 5. All the resolutions of the Board and the stockholders involved in these instant cases will be deemed modified in accordance with this agreement.
On February 20, 1959, the lower court rendered a decision, approving the agreement and requiring the parties to comply with the same, and dissolved the writ of preliminary injunction, with costs. The pertinent portions of the decision are:

1. As to the so-called water stocks P30,000.00 each of the holders of said stock, namely, Irineo Baltazar, Marvin Rose, and Bernardo Acena, will return to the corporation P3,500 each of said stocks, thereby retaining P6,500

In view of the agreement of the parties transcribed above, this Court is called upon to decide whether or not any of the agreements of the parties as above transcribed is contrary to law or public policy. First, as regards pars. 1 and 2, of said agreement, the legal capacity of the parties to sue and be sued carries with it the power to enter into an amicable settlement of pending litigations and to expressly or impliedly make admissions of

facts; and they could, therefore, agree and recognize as fully paid for and valid the shares of stocks mentioned in said paragraphs of their agreement, which agreement must be held valid and binding among the parties, and even as against their persons who have no proof that said agreement was entered into in fraud of creditors. The next question for decision is whether or not a corporation may validly condone interest on unpaid subscriptions to its capital stock. The fact that our Corporation Law authorizes provisions in the by-laws of a corporation different from that set out in Sec. 37 of said law, shows that the provision of said law is to interest of unpaid stock subscriptions is merely directory, so that a corporation may fix a different interest rate, or condone the payment of interest altogether if such condonation would, as in the instant cases, serve as inducement for early payment of stock subscriptions. The condonation and reduction of interest agreed upon in par. 3 of the aforequoted agreement is, therefore, valid in the absence of proof that said agreement was entered into in fraud of creditors. In connection with par. 5 of the aforequoted agreement, in relation to par. 3 thereof, this, Court is of the opinion, and so holds, that the periods of time allowed for making payments under par. 3 of said agreement, must be counted from date of receipt of a copy of this decision by counsel of the parties, this decision constituting the final approval of said agreement, and as to stockholders who are not parties to these cases, from date of notice of the said time extension. The extension of time to pay, as granted in par. 3 of the repealing previous declaration of delinquency of the corresponding shares of stock, and all subscribed shares of stock, except those ordered to be returned as provided in pars. 1 and 2 of said agreement, will therefore be entitled to vote until once again declared delinquent after the expiration of the periods of time set out in par. 3 of said agreement.
Defendants on March 14, 1959 filed a motion for reconsideration, alleging that the decision was partly against the spirit and intention of the parties to the agreement and portions of the decision, carried "prejudicial eventualities," and asking that the same be amended in the sense that "the payment of obligations of delinquent incorporators has been reduced by the agreement as stated in paragraphs 3 and 5" of said agreement; that delinquent stocks cannot be voted until fully paid in accordance with the agreement and that if

the plaintiffs in the above entitled cases could not pay in full their obligations within the periods stated in the agreement, the resolutions of delinquency would automatically stand. On March 18, 1959, plaintiffs, in cases Nos. 13211 and 13212, filed a petition for immediate execution and for preliminary injunction and/or mandamus, praying that a writ be issued, ordering the defendants, as controlling majority of hold-over board of directors, to hold immediately the long delayed stockholders' meeting, and to allow the plaintiffs and all the stockholders, with still unpaid subscriptions, to vote all their stocks and subscriptions at said stockholders' meeting, as directed in the decision. On March 25, 1959, the Court issued an amending decision, pertinent portions of which are hereunder reproduced

... . After hearing the parties in extensive oral argument, this Court agrees with the defendants that par. 5 of the compromise agreement of the parties, dated September 13, 1958, contemplates a modification and not a repeal of the resolutions of the Board of Directors and of the Stockholders referred to in said agreement. The question is, therefore, to what extent has said resolutions been modified? Considering that the primary intention of each of said resolutions was to effect an early collection of unpaid balance of stock subscriptions and interest thereon, and the moving consideration for a compromise settlement of the instant cases is likewise the early collection of the obligations of stockholders of the defendant corporation, the extension of time to pay, as granted in par. 3 of said agreement, was clearly intended to cover not only the accrued interest but also the unpaid stock subscription of the stockholders, for to hold otherwise would be to defeat the primary purpose of early collection of said obligations. Considering the same paramount intention of said resolution, and of the aforesaid compromise agreement, it likewise follows that the extension of time to pay and the reduction of interest embodied in the said agreement must apply to all stockholders similarly situated. Regarding the right to vote, this Court likewise agrees with the defends its that the facts considered during the negotiations for settlement effected by the parties in the Chambers of the presiding judge do not warrant repeal of the declaration of delinquency and complete restoration of voting rights until full payment of the unpaid

stock subscriptions and interest within the time and to the extent mentioned in par. 3 of the aforesaid compromise agreement. To rule otherwise would be to encourage nonpayment of the balance of stock subscriptions and thus defeat the paramount intention of the compromise agreement. Stated differently, this Court now holds that the extension of time to pay, as granted in par. 3 of the aforesaid compromise agreement, has the effect of lifting the previous declaration of delinquency effective as of full payment of the balance of said stock subscriptions and interest within the periods of time mentioned in par. 3 of said compromise agreement. In view of the uncertainty brought about by the motion for reconsideration and the motion for execution aforementioned, it would be unjust to count the periods of time mentioned in the aforesaid compromise agreement from the date of receipt of the original decision of this Court in these cases. The extension of time to pay should, therefore, be counted from receipt by counsel for the parties of a copy of this amending decision, and from receipt by the other stockholders of notice of said extension of time; and the injunction in the instant case should be deemed in force for the duration of said extension of time to pay. WHEREFORE, the decision of this Court rendered in these cases on February 20, 1959 is hereby modified in the manner set out above, maintaining said decision in all other respects.
On April 4, 1959 , plaintiffs filed a motion for reconsideration and/or new trial, praying that the amending decision dated March 25, 1959, be reconsidered and/or further clarified. On July 16, 1959, the trial court reversed its amending decision in an order, the relevant parts thereof follow:

parties, will start to run from the date of receipt by counsel for the parties of a copy of this Order, and from receipt by the other stockholders of notice of said extension of time. The injunction granted in the instant case is hereby dissolved, and the injunction bond filed by the plaintiffs is hereby cancelled and released.
Defendants on August 14, 1959 perfected their appeal against the above ruling, on purely questions of law. Plaintiffs-appellees did not file any brief, manifesting that they were relying on their arguments contained in their motion for reconsideration, dated April 4, 1959 filed with the trial court. (pp. 213 to 218, rec. on appeal) and on the reasons set forth in the trial court's order, dated July 16, 1959, third decision (pp. 219 to 230 R.A.). Pending decision, the parties were required to show cause why the cases should not be dismissed for having become moot or academic, in view of the fact that the appellees, taking advantage of the decision of the trial court, "had paid all other delinquencies and interest thereon," but the appellants manifested that these cases should be decided on the issues raised, to determine, once and for all, the voting rights of the other delinquent subscribers, in the election of the company's Board of Directors which had been suspended since May 1, 1955, because of the litigation. The questions posted in the appeal, in view of the above facts would, therefore, be:

1. If a stockholder, in a stock corporation, subscribes to a certain number of shares of stock, and he pays only partially, for which he is issued certificates of stock, is he entitled to vote the latter, notwithstanding the fact that he has not paid the balance of his subscription, which has been called for payment or declared delinquent? 2. If a stockholder subscribes to a certain number of shares of stock and makes partial payment only and declared delinquent as to the rest, with interest, should previous payments on account of the capital, be first applied to interest, thus diminishing the voting power of the shares of stock already paid? In other words, if the entire subscribed shares of stock are not paid, will the paid shares of stock be deprived of the right to vote, until the entire subscribed shares of stock are fully paid, including interest? 3. Has estoppel or waiver, by virtue of the settlement agreement, set in?

WHEREFORE, by way of amendment to both the original and amending decisions of this Court in the instant case,this Court hereby expressly rules that all shares of the capital stock of the defendant corporation covered by fully paid capital stock shares certificates are entitled to vote in all meetings of the stockholders of this corporation, and Resolutions Nos. 2, 3 and 4 (Exhs. C, C-1 and C-2) of defendant's corporation's Board of Directors are hereby nullified insofar as they are inconsistent the this ruling. The extensions of time to pay, referred to in par. 3 of the settlement agreement of the

Defendants-appellants claim that resolution No. 4 (Exh. C-2), withdrawing or nullifying the voting power of all the aforesaid shares of stock is valid, notwithstanding the existence of partial payments, evidenced by certificates duly issued therefor. They invoke the ruling laid down by the Court in the Fua Cun v. Summers case (44 Phil, 705, March 27, 1923) pertinent portion of which states:

years after the promulgation of the Fua-Summers case (decided in 1923), provides:

In the absence of special agreement to the contrary, a subscriber for a certain number of shares of stock does not, upon payment of one-half of the subscription price, become entitled to the issuance of certificates for onehalf of the number of shares subscribed for; the subscriber's right consists only in equity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price.
The cited case connotes the principle that a partial payment of a subscription does not entitle the stockholder to a certificate for the total number of shares subscribed by him; his right consists only in equity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion of the subscription price. In other words, it is contended, as in the present case, that if Baltazar subscribed to 600 shares of stock in a single subscription, and he merely paid for 300 shares, for which he was given fully paid certificates for 300 shares, he cannot vote said 300 shares, in any meeting of the Corporation, until he shall have paid the remaining 300 shares of stock. The saving clause in the quoted pronouncement, "in the absence of special agreement to the contrary," reveals that the doctrine is not mandatory, but merely directory, which is not violative of law, the rigor of the pronouncement may be relaxed. The plaintiffs-appellees seem to sustain an adverse concept, postulating that once a stockholder has subscribed to a certain number of shares, although he has made partial payments only, but is issued a certificate for the paid-up shares of stock, he is entitled to vote the whole number of shares subscribed by him, paid or not, until the said unpaid shares shall have been called for payment or declared delinquent. The cases at bar do not come under the aegis of the principle enunciated in the Fua Cun v. Summers case, because it was the practice and procedure, since the inception of the corporation, to issue certificates of stock to its individual subscribers for unpaid shares of stock and gave voting power to shares of stock fully paid. And even though no agreement existed, the ruling in said case, does not now reflect the correct view on the matter, for better than an agreement or practice, there is the law, which renders the said case of Fua CunSummers, obsolescent. Section 37 of the Corporation Law, as amended by Act No. 3518, approved on March 1, 1929, six (6)

SEC. 37. ... . No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full subscription in the case of no par stock, has been paid by him to the corporation. Subscribed shares not fully paid up may be voted provided no subscription is unpaid and delinquent.
The law just quoted was originally section 36 of the Corporation Law of 1906, which reads as follows:

SEC. 36. ... . No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof has been paid by him to the corporation. Subscribed shares not fully paid up may be voted provided no subscription is unpaid and delinquent.
As may readily be seen, said Section 37 makes payment of the "par value" as prerequisite for the issuance of certificates of par value stocks, and makes payment of the "full subscription" as prerequisite for the issuance of certificates of no par value stocks. No such distinction was contained in section 36 of our Corporation Law of 1906, corresponding to section 37 now. The present law could have simply provided that no certificate of par value and no par value stock shall be issued to a subscriber, as fully paid up, until the full subscription has been paid by him to the corporation, if full payment of subscription were intended is the criterion in the issuance of certificates, for both the par value and no par value stocks. Stated in another way, the present law requires as a condition before a share holder can vote his shares, that his full subscription be paid in the case of no par value stock; and in case of stock corporation with par value, the stockholder can vote the shares fully paid by him only, irrespective of the unpaid delinquent shares. As well-observed by the trial court, a corporation may now, in the absence of provisions in their by-laws to the contrary, apply payment made by , subscribersstockholders, either as: "(a) full payment for the corresponding number of shares of stock, the par value of each of which is covered by such payment; or (b) as payment pro-rata to each and all the entire number of shares subscribed for" (amended decision). In the cases at bar, the defendant-corporation had chosen to apply payments by its stockholders to definite shares of the capital stock of the corporation and had fully paid capital stock shares certificates for said payments; its call for payment of unpaid subscription and its declaration of delinquency for non-payment of said call affecting only the remaining number of shares of its capital stock for which no fully paid capital stock shares certificates have been issued, "and only these have been legally shorn of their voting rights by said declaration of delinquency" (amended decision).

The third paragraph of the settlement agreement relates to interest on the unpaid balance of subscription to the capital stock. The second paragraph of resolution No. 3 (Exh. C-1), unilaterally declared as of no value and cancelled all capital stock shares certificates issued as fully paid up, upon payments made by stockholders, when interests on unpaid subscription from date of subscription were not previously and/or then and there paid. Defendants-appellants, invoking Art. 1253 NCC (Art. 1173 of the Old Civil Code) which provides that "if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered," and relying on an opinion of the Securities and Exchange Commission, claim that said unilateral nullification and/or cancellation of previously issued capital stock shares certificates was valid. This provision of law only applies in the absence of verbal or written agreement, to the contrary (8 Manresa, p. 317); it is likewise merely directory, and not mandatory. (Art. 1252 NCC). In the present case, the defendantcorporation had applied the payments made by the stockholders to the full par value of the shares of stock subscribed by them, instead of the accepted interest, as shown by the capital stock shares certificate issued for the payments made, and the stockholders had accepted such certificates issued for such payments. This being the case, the said application of payments must be deemed to have been agreed upon by the Corporation and the stockholders, and the same cannot now be changed without the consent of the stockholders concerned. The Corporation Law and the by-laws of the defendant Corporation do not contain any provision, prohibiting the application of stockholders' payments to the full par value of a corporation's capital stock, ahead of the payment of accrued interest for unpaid subscriptions. It would, therefore, result that a corporation may, upon request of an interested stockholder, as his option, apply payment by them to the full par value of shares of capital leaving its collection later of the accrued interest on unpaid subscriptions, and that once such option has been exercised and the corresponding stock certificates have been issued, the corporation cannot, by a unilateral act, legally nullify and cancel the capital stock certificates so issued. It is finally argued by defendants-appellants that the plaintiffs-appellees waived, under the agreement heretofore quoted, the right to enforce the voting power they were claiming to exercise, and upon the principle of estoppel, they are now prohibited from insisting on the existence of such power, ending with the exhortation, that "they should lie upon the bed they helped built, for a lasting peace in the interest of the corporation." It should, however, be stated as heretofore exposed, that certain clauses of the agreement are contrary to law and public policy and would cause injury to plaintiffsappellees and other stockholders similarly situated. Estoppel cannot be predicated on acts which are prohibited by law or are against public policy (Benguet Cons. Mining Co. v. Pineda, 52 Off. Gaz. 1961, L-7231, March 28, 1956; Eugenio v. Perdido L-7083, May 19, 1955; III Rep. of the Philippines Digest, p. 269-270).

WHEREFORE, the order of the trial court of July 16, 1959, (1) Expressly ruling "that all shares of the capital stocks of the defendant corporation covered by fully paid capital stock shares of certificates are entitled to vote in all meetings of the stockholders of this corporation and resolutions Nos. 2, 3 and 4 (Exhs. C, C-1 and C-2) of defendant corporation's Board of Directors are hereby nullified insofar as they are inconsistent with this ruling"; and (2) Dissolving the injunction granted in the cases and releasing the injunction bond filed by the plaintiffsappellees, is correct and the same should be, as it is hereby affirmed. Costs taxed against the defendantsappellants.

G.R. No. L-33320 May 30, 1983 RAMON A. GONZALES, petitioner, vs. THE PHILIPPINE NATIONAL BANK, respondent. Ramon A. Gonzales in his own behalf. Juan Diaz for respondent.

VASQUEZ, J.: Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil action for mandamus against the herein respondent praying that the latter be ordered to allow him to look into the books and records of the respondent bank in order to satisfy himself as to the truth of the published reports that the respondent has guaranteed the obligation of Southern Negros Development Corporation in the purchase of a US$ 23 million sugar-mill to be financed by Japanese suppliers and financiers; that the respondent is financing the construction of the P 21 million CebuMactan Bridge to be constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as well as to inquire into the validity of Id transactions. The petitioner has alleged hat his written request for such examination was denied by the respondent. The trial court having dismissed the petition for mandamus, the instant appeal to review the said dismissal was filed.

The facts that gave rise to the subject controversy have been set forth by the trial court in the decision herein sought to be reviewed, as follows: Briefly stated, the following facts gathered from the stipulation of the parties served as the backdrop of this proceeding. Previous to the present action, the petitioner instituted several cases in this Court questioning different transactions entered into by the Bark with other parties. First among them is Civil Case No. 69345 filed on April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza of Public Works and Communications, the Commissioner of Public Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation, Allis Chalmers and General Motors Corporation In the course of the hearing of said case on August 3, 1967, the personality of herein petitioner to sue the bank and question the letters of credit it has extended for the importation by the Republic of the Philippines of public works equipment intended for the massive development program of the President was raised. In view thereof, he expressed and made known his intention to acquire one share of stock from Congressman Justiniano Montano which, on the following day, August 30, 1967, was transferred in his name in the books of the Bank. Subsequent to his aforementioned acquisition of one share of stock of the Bank, petitioner, in his dual capacity as a taxpayer and stockholder, filed the following cases involving the bank or the members of its Board of Directors to wit: l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the Bank; the National Investment and Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia; 2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-

Lambunao Sugar Mill Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and Batangas Sugar Central Inc.; 3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the Directors of both the PNB and DBP; On January 11, 1969, however, petitioner addressed a letter to the President of the Bank (Annex A, Pet.), requesting submission to look into the records of its transactions covering the purchase of a sugar central by the Southern Negros Development Corp. to be financed by Japanese suppliers and financiers; its financing of the Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar Mills in Iloilo. On January 23, 1969, the Asst. Vice-President and Legal Counsel of the Bank answered petitioner's letter denying his request for being not germane to his interest as a one-share stockholder and for the cloud of doubt as to his real intention and purpose in acquiring said share. (Annex B, Pet.) In view of the Bank's refusal the petitioner instituted this action.' (Rollo, pp. 16-18.) The petitioner has adopted the above finding of facts made by the trial court in its brief which he characterized as having been "correctly stated." (Petitioner-Appellant"s Brief, pp. 57.) The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the books and records of the respondent bank regarding the transactions mentioned on the grounds that the right of a stockholder to inspect the record of the business transactions of a corporation granted under Section 51 of the former Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to purposes reasonably related to the interest of the stockholder, must be asked for in good faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes; that such examination would violate the confidentiality of the records of the respondent bank as provided in Section 16 of its charter, Republic Act No. 1300, as amended; and that the petitioner has not exhausted his administrative remedies.

Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower court of having ruled that his alleged improper motive in asking for an examination of the books and records of the respondent bank disqualifies him to exercise the right of a stockholder to such inspection under Section 51 of Act No. 1459, as amended. Said provision reads in part as follows: Sec. 51. ... The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours. Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower court that the inspection of corporate records may be denied on the ground that it is intended for an improper motive or purpose, the law having granted such right to a stockholder in clear and unconditional terms. He further argues that, assuming that a proper motive or purpose for the desired examination is necessary for its exercise, there is nothing improper in his purpose for asking for the examination and inspection herein involved. Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, regarding the right of a stockholder to inspect and examine the books and records of a corporation. The former Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of the Philippines." The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained, but with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following: The records of all business transactions of the corporation and the minutes of any meeting shag be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes,

in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal; and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. As may be noted from the above-quoted provisions, among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following the records must be kept at the principal office of the corporation; the inspection must be made on business days; the stockholder may demand a copy of the excerpts of the records or minutes; and the refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information through a prior examination, and that the person asking for such examination must be "acting in good faith and for a legitimate purpose in making his demand." The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as amended, no longer holds true under the provisions of the present law. The argument of the petitioner that the right granted to him under Section 51 of the former Corporation Law should not be dependent on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses whatever validity it might have had before the amendment of the law. If there is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the part of the stockholder

demanding the same, it is now dissipated by the clear language of the pertinent provision contained in Section 74 of Batas Pambansa Blg. 68. Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection, except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. The circumstances under which he acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. His obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest as a stockholder. We also find merit in the contention of the respondent bank that the inspection sought to be exercised by the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter provide respectively as follows: Sec. 15. Inspection by Department of Supervision and Examination of the Central Bank. The National Bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank' Sec. 16. Confidential information. The Superintendent of Banks and the Auditor General, or other officers designated by law to inspect or investigate the condition of the National Bank, shall not reveal to any person other than the President of the Philippines, the Secretary of Finance, and the Board of Directors the details of the inspection or investigation, nor shall they give any information relative to the funds in its custody, its current accounts or deposits belonging to private individuals, corporations, or any other entity, except by order of a Court of competent jurisdiction,'

Sec. 30. Penalties for violation of the provisions of this Act. Any director, officer, employee, or agent of the Bank, who violates or permits the violation of any of the provisions of this Act, or any person aiding or abetting the violations of any of the provisions of this Act, shall be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment. The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides: SEC. 4. Corporations created by special laws or charters. Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them. supplemented by the provisions of this Code, insofar as they are applicable. The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not be reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank. WHEREFORE, the petition is hereby DISMISSED, without costs.

G.R. No. L-56655 July 25, 1983 DATU TAGORANAO BENITO, petitioner, vs. SECURITIES AND EXCHANGE COMMISSION and JAMIATUL PHILIPPINE-AL ISLAMIA, INC., respondents. The Solicitor General for respondent. Tacod D. Macaraya for private respondent.

acquired by him (petitioner) from Domocao Alonto and Moki-in Alonto; and that the corporation be ordered to render an accounting of funds to the stockholders. In their answer, respondents denied the material allegations of the petition and, by way of special defense, claimed that petitioner has no cause of action and that the stock certificates covering the shares alleged to have been sold to petitioner were only given to him as collateral for the loan of Domocao Alonto and Moki-in Alonto. On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities and Exchange Commission, after due proceedings, rendered a decision which was affirmed by the Commission En Banc during its executive session held on March 9, 1981, as follows: RESOLVED, That the decision of the hearing Officer in SEC Case No. 1392, dated July 11, 1980, the dispositive portion of which reads as follows: WHEREFORE, in view of the foregoing considerations, this Commission hereby rules: (a) That the issuance by the corporation of its unissued shares was validly made and was not subject to the preemptive rights of stockholders, including the petitioner, herein; (b) That there is no sufficient legal basis to set aside the certificate issued by this Commission authorizing the increase in capital stock of respondent corporation from P200,000.00 to Pl,000,000.00. Considering, however, that petitioner has not waived his pre-emptive right to subscribe to the increased capitalization, respondent corporation is hereby directed to allow petitioner to

RELOVA, J.: On February 6, 1959, the Articles of Incorporation of respondent Jamiatul Philippine-Al Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed with the Securities and Exchange Commission (SEC) and were approved on December 14, 1962. The corporation had an authorized capital stock of P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of the authorized capital stock, 8,058 shares worth P80,580.00 were subscribed and fully paid for. Herein petitioner Datu Tagoranao Benito subscribed to 460 shares worth P4,600.00. On October 28, 1975, the respondent corporation filed a certificate of increase of its capital stock from P200,000.00 to P1,000,000.00. It was shown in said certificate that P191,560.00 worth of shares were represented in the stockholders' meeting held on November 25, 1975 at which time the increase was approved. Thus, P110,980.00 worth of shares were subsequently issued by the corporation from the unissued portion of the authorized capital stock of P200,000.00. Of the increased capital stock of P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto. On November 18, 1976, petitioner Datu Tagoranao filed with respondent Securities and Exchange Commission a petition alleging that the additional issue (worth P110,980.00) of previously subscribed shares of the corporation was made in violation of his pre-emptive right to said additional issue and that the increase in the authorized capital stock of the corporation from P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record were not notified of the meeting wherein the proposed increase was in the agenda. Petitioner prayed that the additional issue of shares of previously authorized capital stock as well as the shares issued from the increase in capital stock of respondent corporation be cancelled; that the secretary of respondent corporation be ordered to register the 2,540 shares

subscribe thereto, at par value, proportionate to his present shareholdings, adding thereto the 2,540 shares transferred to him by Mr. Domocao Alonto and Mrs. Moki-in Alonto; (c) To direct as it hereby directs, the respondent corporation to immediately cancel Certificates of Stock Nos. 216, 223, 302, all in the name of Domocao Alonto, and Certificate of Stock No. 217, in the name of Moki-in Alonto, upon their presentation by the petitioner and to issue new certificates corresponding thereto in the name of petitioner herein; (d) To direct, as it hereby directs, respondent corporation to religiously comply with the requirement of filing annual financial statements under pain of a more drastic action; (e) To declare, as it hereby declares, as irregular, the election of the nine (9) members of the Board of Trustees of respondent corporation on October 30, 1976, for which reason, respondent corporation is hereby ordered to call a stockholders' meeting to elect a new set of five (5) members of the Board of Trustees, unless in the meantime the said number is accordingly increased and the requirement of law to make such increase effective have been complied with. It is understood that the said stockholders'

meeting be called within thirty (30) days from the time petitioner shall have subscribed to the increased capitalization.' be, as the same is hereby AFFIRMED, the same being in accordance with law and the facts of the case. (pp. 2829, Reno) Hence, this petition for review by way of appeal from the aforementioned decision of the Securities and Exchange Commission, petitioner contending that (1) the issuance of the 11,098 shares without the consent of the stockholders or of the Board of Directors, and in the absence of consideration, is null and void; (2) the increase in the authorized capital stock from P200,000.00 to P1,000,000.00 without the consent or express waiver of the stockholders, is null and void; (3) he is entitled to attorneys' fees, damages and expenses of litigation in filing this suit against the directors of respondent corporation. We are not persuaded. As aptly stated by the Securities and Exchange Commission in its decision: xxx xxx xxx ... the questioned issuance of the unsubscribed portion of the capital stock worth P110,980.00 is ' not invalid even if assuming that it was made without notice to the stockholders as claimed by petitioner. The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders' meeting is necessary to consider it because additional issuance of shares of stocks does not need approval of the stockholders. The by-laws of the corporation itself states that 'the Board of Trustees shall, in accordance with law, provide for the issue and transfer of shares of stock of the Institute and shall prescribe the form of the certificate of stock of the Institute. (Art. V, Sec. 1). Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance, he was not able to exercise his right of pre-emption over the unissued shares. However, the general rule is that pre-emptive right is recognized only with respect to

new issue of shares, and not with respect to additional issues of originally authorized shares. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later re-offered, he cannot therefore claim a dilution of interest. (Campos and Lopez-Campos Selected Notes and Cases on Corporation Law, p. 855, citing Yasik V. Wachtel 25 Del. Ch. 247,17A. 2d 308 (1941). (pp. 33-34, Rollo) With respect to the claim that the increase in the authorized capital stock was without the consent, expressed or implied, of the stockholders, it was the finding of the Securities and Exchange Commission that a stockholders' meeting was held on November 25,1975, presided over by Mr. Ahmad Domocao Alonto, Chairman of the Board of Trustees and, among the many items taken up then were the change of name of the corporation from Kamilol Islam Institute Inc. to Jamiatul Philippine-Al Islamia, Inc., the increase of its capital stock from P200,000.00 to P1,000,000.00, and the increase of the number of its Board of Trustees from five to nine. "Despite the insistence of petitioner, this Commission is inclined to believe that there was a stockholders' meeting on November 25, 1975 which approved the increase. The petitioner had not sufficiently overcome the evidence of respondents that such meeting was in fact held. What petitioner successfully proved, however, was the fact that he was not notified of said meeting and that he never attended the same as he was out of the country at the time. The documentary evidence of petitioner conclusively proved that he was attending the Mecca pilgrimage when the meeting was held on November 25, 1975. (Exhs. 'Q', 'Q-14', 'R', 'S' and 'S-l'). While petitioner doubts the authenticity of the alleged minutes of the proceedings (Exh. '4'), the Commission notes with significance that said minutes contain numerous details of various items taken up therein that would negate any claim that it was not authentic. Another thing that petitioner was able to disprove was the allegation in the certificate of increase (Exh. 'E-l') that all stockholders who did not subscribe to the increase of capital stock have waived their pre-emptive right to do so. As far as the petitioner is concerned, he had not waived his pre-emptive right to subscribe as he could not have done so for the reason that he was not present at the meeting and had not executed a waiver, thereof. Not

having waived such right and for reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to his present shareholdings." (pp. 36-37, Rollo) Well-settled is the rule that the findings of facts of administrative bodies will not be interfered with by the courts in the absence of grave abuse of discretion on the part of said agencies, or unless the aforementioned findings are not supported by substantial evidence. (Gokongwei, Jr. vs. SEC, 97 SCRA 78). In a long string of cases, the Supreme Court has consistently adhered to the rule that decisions of administrative officers are not to be disturbed by the courts except when the former have acted without or in excess of their jurisdiction or with grave abuse of discretion (Sichangco vs. Board of Commissioners of Immigration, 94 SCRA 61). Thus, in the case of Deluao vs. Casteel ( L-21906, Dec. 24, 1968, 26 SCRA 475, 496, citing Pajo vs. Ago, et al., L-15414, June 30, 1960) and Genitano vs. Secretary of Agriculture and Natural Resources, et al. (L-2ll67, March 31, 1966), the Supreme Court held that: ... Findings of fact by an administrative board or official, following a hearing, are binding upon the courts and win not be disturbed except where the board or official has gone beyond his statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to his duty or with grave abuse of discretion. ... ACCORDINGLY, this petition is hereby dismissed for lack of merit. SO ORDERED.

G.R. No. L-68097 January 16, 1986

EDWARD A. KELLER & CO., LTD., petitionerappellant, vs. COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOEZ, TRINIDAD C. ORDOEZ, MAGNO C. ORDOEZ, ADORACION C. ORDOEZ, TOMAS C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION MANAHAN and INTERMEDIATE APPELLATE COURT,respondents-appellees.

and his father Tomas, Sr. (now deceased) executed a mortgage on their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily liable with COB Group Marketing for its obligations under the sales agreement (Exh. E). The credit purchases of COB Group Marketing, which started on October 15, 1969, limited up to January 22, 1971. On May 8, the board of directors of COB Group Marketing were apprised by Jose E. Bax the firm's president and general manager,that the firm owed Keller about P179,000. Bax was authorized to negotiate with Keller for the settlement of his firm's liability (Exh. 1, minutes of the meeting). On the same day, May 8, Bax and R. Oefeli of Keller signed the conditions for the settlement of COB Group Marketing's liability, Exhibit J, reproduced as follows:

Sycip, Salazar, Feliciano & Hernandez Law Office for petitioner. Vicente G. Gregorio for private respondents. Roberto P. Vega for respondent Asuncion Manahan.

This formalizes our conditions for the settlement of C.O.B.'s account with Edward Keller Ltd. 1. Increase of mortgaged collaterals to the full market value (estimated by Edak at P90,000.00). 2. Turn-over of receivables (estimated outstandings P70,000.00 to P80,000.00). 3. Turn-over of 4 (four) trucks for outright sale to Edak, to be credited against C.0.B.'s account. 4. Remaining 8 (eight) trucks to be assigned to Edak, C.O.B will continue operation with these 8 trucks. They win be returned to COB after settlement of full account. 5. C.O.B has to put up securities totalling P200,000.00. P100,000.00 has to be liquidated within one year. The remaining P100,000.00 has to be settled within the second year. 6. Edak wig agree to allow C.O.B. to buy goods to the value of the difference between P200,000.00 and their outstandings, provided C.O.B. is in a position to put up securities amounting to P200,000.00. Discussion held on May 8, 1971.
Twelve days later, or on May 20, COB Group Marketing, through Bax executed two second chattel mortgages

AQUINO, C.J.: This case is about the liability of a marketing distributor under its sales agreements with the owner of the products. The petitioner presented its evidence before Judges Castro Bartolome and Benipayo. Respondents presented their evidence before Judge Tamayo who decided the case. A review of the record shows that Judge Tamayo acted under a misapprehension of facts and his findings are contradicted by the evidence. The Appellate Court adopted the findings of Judge Tamayo. This is a case where this Court is not bound by the factual findings of the Appellate Court. (See Director of Lands vs. Zartiga, L-46068-69, September 30, 1982, 117 SCRA 346, 355). Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive distributor of its household products, Brite and Nuvan in Panay and Negros, as shown in the sales agreement dated March 14, 1970 (32-33 RA). Under that agreement Keller sold on credit its products to COB Group Marketing. As security for COB Group Marketing's credit purchases up to the amount of P35,000, one Asuncion Manahan mortgaged her land to Keller. Manahan assumed solidarily with COB Group Marketing the faithful performance of all the terms and conditions of the sales agreement (Exh. D). In July, 1970 the parties executed a second sales agreement whereby COB Group Marketing's territory was extended to Northern and Southern Luzon. As security for the credit purchases up to P25,000 of COB Group Marketing for that area, Tomas C. Lorenzo, Jr.

over its 12 trucks (already mortgaged to Northern Motors, Inc.) as security for its obligation to Keller amounting to P179,185.16 as of April 30, 1971 (Exh. PP and QQ). However, the second mortgages did not become effective because the first mortgagee, Northern Motors, did not give its consent. But the second mortgages served the purpose of being admissions of the liability COB Group Marketing to Keller. The stockholders of COB Group Marketing, Moises P. Adao and Tomas C. Lorenzo, Jr., in a letter dated July 24, 1971 to Keller's counsel, proposed to pay Keller P5,000 on November 30, 1971 and thereafter every thirtieth day of the month for three years until COB Group Marketing's mortgage obligation had been fully satisfied. They also proposed to substitute the Manahan mortgage with a mortgage on Adao's lot at 72 7th Avenue, Cubao, Quezon City (Exh. L). These pieces of documentary evidence are sufficient to prove the liability of COB Group Marketing and to justify the foreclosure of the two mortgages executed by Manahan and Lorenzo (Exh. D and E). Section 22, Rule 130 of the Rules of Court provides that the act, declaration or omission of a party as to a relevant fact may be given in evidence against him "as admissions of a party". The admissions of Bax are supported by the documentary evidence. It is noteworthy that all the invoices, with delivery receipts, were presented in evidence by Keller, Exhibits KK-1 to KK-277-a and N to N-149-a, together with a tabulation thereof, Exhibit KK, covering the period from October 15, 1969 to January 22, 1971. Victor A. Mayo, Keller's finance manager, submitted a statement of account showing that COB Group Marketing owed Keller P184,509.60 as of July 31, 1971 (Exh. JJ). That amount is reflected in the customer's ledger, Exhibit M. On the other hand, Bax although not an accountant, presented his own reconciliation statements wherein he showed that COB Group Marketing overpaid Keller P100,596.72 (Exh. 7 and 8). He claimed overpayment although in his answer he did not allege at all that there was an overpayment to Keller. The statement of the Appellate Court that COB Group Marketing alleged in its answer that it overpaid Keller P100,596.72 is manifestly erroneous first, because COB Group Marketing did not file any answer, having been declared in default, and second, because Bax and the other stockholders, who filed an answer, did not allege any overpayment. As already stated, even before they filed their answer, Bax admitted that COB Group Marketing owed Keller around P179,000 (Exh. 1). Keller sued on September 16, 1971 COB Group Marketing, its stockholders and the mortgagors, Manahan and Lorenzo.

COB Group Marketing, Trinidad C. Ordonez and Johnny de la Fuente were declared in default (290 Record on Appeal). After trial, the lower court (1) dismissed the complaint; (2) ordered Keller to pay COB Group Marketing the sum of P100,596.72 with 6% interest a year from August 1, 1971 until the amount is fully paid: (3) ordered Keller to pay P100,000 as moral damages to be allocated among the stockholders of COB Group Marketing in proportion to their unpaid capital subscriptions; (4) ordered the petitioner to pay Manahan P20,000 as moral damages; (5) ordered the petitioner to pay P20,000 as attomey's fees to be divided among the lawyers of all the answering defendants and to pay the costs of the suit; (6) declared void the mortgages executed by Manahan and Lorenzo and the cancellation of the annotation of said mortgages on the Torrens titles thereof, and (7) dismissed Manahan's cross-claim for lack of merit. The petitioner appealed. The Appellate Court affirmed said judgment except the award of P20,000 as moral damages which it eliminated. The petitioner appealed to this Court. Bax and the other respondents quoted the six assignments of error made by the petitioner in the Appellate Court, not the four assignments of error in its brief herein. Manahan did not file any appellee's brief. We find that the lower courts erred in nullifying the admissions of liability made in 1971 by Bax as president and general manager of COB Group Marketing and in giving credence to the alleged overpayment computed by Bax . The lower courts not only allowed Bax to nullify his admissions as to the liability of COB Group Marketing but they also erroneously rendered judgment in its favor in the amount of its supposed overpayment in the sum of P100,596.72 (Exh. 8-A), in spite of the fact that COB Group Marketing was declared in default and did not file any counterclaim for the supposed overpayment. The lower courts harped on Keller's alleged failure to thresh out with representatives of COB Group Marketing their "diverse statements of credits and payments". This contention has no factual basis. In Exhibit J, quoted above, it is stated by Bax and Keller's Oefeli that "discussion (was) held on May 8, 1971." That means that there was a conference on the COB Group Marketing's liability. Bax in that discussion did not present his reconciliation statements to show overpayment. His Exhibits 7 and 8 were an afterthought. He presented them long after the case was filed. The petitioner regards them as "fabricated" (p. 28, Appellant's Brief).

Bax admitted that Keller sent his company monthly statements of accounts (20-21 tsn, September 2, 1976) but he could not produce any formal protest against the supposed inaccuracy of the said statements (22). He lamely explained that he would have to dig up his company's records for the formal protest (23-24). He did not make any written demand for reconciliation of accounts (27-28). As to the liability of the stockholders, it is settled that a stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311-2). While the evidence shows that the amount due from COB Group Marketing is P184,509.60 as of July 31, 1971 or P186,354.70 as of August 31, 1971 (Exh. JJ), the amount prayed for in Keller's complaint is P182,994.60 as of July 31, 1971 (18-19 Record on Appeal). This latter amount should be the one awarded to Keller because a judgment entered against a party in default cannot exceed the amount prayed for (Sec. 5, Rule 18, Rules of Court). WHEREFORE, the decisions of the trial court and the Appellate Court are reversed and set aside. COB Group marketing, Inc. is ordered to pay Edward A. Keller & Co., Ltd. the sum of P182,994.60 with 12% interest per annum from August 1, 1971 up to the date of payment plus P20,000 as attorney's fees. Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay solidarity with COB Group Marketing the sums of P35,000 and P25,000, respectively. The following respondents are solidarity liable with COB Group Marketing up to the amounts of their unpaid subscription to be applied to the company's liability herein: Jose E. Bax P36,000; Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000; Sergio C. Ordonez, P12,000; Trinidad C. Ordonez, P3,000; Magno C. Ordonez, P3,000; Adoracion C. Ordonez P3,000; Tomas C. Lorenzo, Jr., P3,000 and Luz M. Aguilar-Adao, P6,000. If after ninety (90) days from notice of the finality of the judgment in this case the judgment against COB Group Marketing has not been satisfied fully, then the mortgages executed by Manahan and Lorenzo should be foreclosed and the proceeds of the sales applied to the obligation of COB Group Marketing. Said mortgage obligations should bear six percent legal interest per annum after the expiration of the said 90-day period. Costs against the private respondents. SO ORDERED.

G.R. No. L-67626 April 18, 1989 JOSE REMO, JR., petitioner, vs. THE HON. INTERMEDIATE APPELLATE COURT and E.B. MARCHA TRANSPORT COMPANY, INC., represented by APIFANIO B. MARCHA, respondents. Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.

GANCAYCO, J.: A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person, the law treats a corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. 1 However, the corporate fiction or the notion of legal entity may be disregarded when it "is used to defeat public convenience, justify wrong, protect fraud, or defend crime" in which instances "the law will regard the corporation as an association of persons, or in case of two corporations, will merge them into one." The corporate fiction may also be disregarded when it is the "mere alter ego or business conduit of a person." 2 There are many occasions when this Court pierced the
corporate veil because of its use to protect fraud and to justify wrong. 3 The herein petition for review of a. resolution of the Intermediate Appellate Court dated February 8, 1984 seeking the reversal thereof and the reinstatement of its earlier decision dated June 30, 1983 in AC-G.R. No. 68496-R 4 calls for the application of the foregoing principles.

In the latter part of December, 1977 the board of directors of Akron Customs Brokerage Corporation (hereinafter referred to as Akron), composed of petitioner Jose Remo, Jr., Ernesto Baares, Feliciano Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as Secretary, adopted a resolution authorizing the purchase of thirteen (13) trucks for use in its business to be paid out of a loan the corporation may secure from any lending institution. 5 Feliciano Coprada, as President and Chairman of Akron, purchased thirteen trucks from private respondent on January 25, 1978 for and in consideration of P525,000.00 as evidenced by a deed of absolute sale. 6 In a side agreement of the same date, the parties
agreed on a downpayment in the amount of P50,000.00 and that the balance of P475,000.00 shall be paid within sixty (60) days from the date of the execution of the agreement. The parties also agreed that until said balance is fully paid, the down payment of P50,000.00 shall accrue as rentals of the 13 trucks; and that if Akron fails to pay the balance within the period of 60 days, then the balance shall constitute as a chattel mortgage lien covering said cargo trucks and the parties may allow an extension of 30 days and thereafter private respondent may ask for a revocation of the contract and the reconveyance of all said trucks. 7

The obligation is further secured by a promissory note executed by Coprada in favor of Akron. It is stated in the promissory note that the balance shall be paid from the proceeds of a loan obtained from the Development Bank of the Philippines (DBP) within sixty (60) days. 8 After the lapse of 90 days, private respondent tried
to collect from Coprada but the latter promised to pay only upon the release of the DBP loan. Private respondent sent Coprada a letter of demand dated May 10, 1978. 9 In his reply to the said letter, Coprada reiterated that he was applying for a loan from the DBP from the proceeds of which payment of the obligation shall be made. 10

In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended its articles of incorporation thereby changing its name to Akron Transport International, Inc. which assumed the liability of Akron to private respondent. After an ex parte reception of the evidence of the private respondent, a decision was rendered on October 28, 1980, the dispositive part of which reads as follows: Finding the evidence sufficient to prove the case of the plaintiff, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering them jointly and severally to pay; a the purchase price of the trucks in the amount of P525,000.00 with ... legal rate (of interest) from the filing of the complaint until the full amount is paid; b rentals of Bagbag property at P1,000.00 a month from August 1978 until the premises is cleared of the said trucks; c attorneys fees of P10,000.00, and d costs of suit. The P50,000.00 given as down payment shall pertain as rentals of the trucks from June 1 to August 1, 1978 which is P25,000.00 (see demand letter of Atty. Aniano Exhibit "T") and the remaining P25,000.00 shall be from August 1, 1978 until the trucks are removed totally from the place." 17 A motion for new trial filed by petitioner was denied so he appealed to the then Intermediate Appellate Court (IAC) wherein in due course a decision was rendered on June 30, 1 983 setting aside the said decision as far as petitioner is concemed. However, upon a motion for reconsideration filed by private respondent dent, the IAC, in a resolution dated February 8,1984, set aside the decision dated June 30, 1983. The appellate court entered another decision affirming the appealed decision of the trial court, with costs against petitioner. Hence, this petition for review wherein petitioner raises the following issues: I. The Intermediate Appellate Court (IAC) erred in disregarding the corporate fiction and in holding the petitioner personally liable for the

Meanwhile, two of the trucks were sold under a pacto de retro sale to a certain Mr. Bais of the Perpetual Loans and Savings Bank at Baclaran. The sale was authorized by a board resolution made in a meeting held on March 15, 1978. 11 Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. 12 In the meantime, Akron paid rentals of P500.00 a day pursuant to a subsequent agreement, from April 27, 1978 (the end of the 90-day period to pay the balance) to May 31, 1978. Thereafter, no more rental payments were made. On June 17, 1978, Coprada wrote private respondent begging for a grace period of until the end of the month to pay the balance of the purchase price; that he will update the rentals within the week; and in case he fails, then he will return the 13 units should private respondent elect to get back the same. 13 Private
respondent, through counsel, wrote Akron on August 1, 1978 demanding the return of the 13 trucks and the payment of P25,000.00 back rentals covering the period from June 1 to August 1, 1978. 14

Again, Coprada wrote private respondent on August 8, 1978 asking for another grace period of up to August 31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan application from a certain financing company, and that ten (10) trucks have been returned to Bagbag, Novaliches. 15 On December 9, 1978, Coprada informed private
respondent anew that he had returned ten (10) trucks to Bagbag and that a resolution was passed by the board of directors confirming the deed of assignment to private respondent of P475,000 from the proceeds of a loan obtained by Akron from the State Investment House, Inc. 16

In due time, private respondent filed a compliant for the recovery of P525,000.00 or the return of the 13 trucks with damages against Akron and its officers and directors, Feliciano Coprada, Dario D. Punzalan, Jemina Coprada, Lucia Lacaste, Wilfredo Layug, Arcadio de la Cruz, Francisco Clave, Vicente Martinez, Pacifico Dollario and petitioner with the then Court of First Instance of Rizal. Only petitioner answered the complaint denying any participation in the transaction and alleging that Akron has a distinct corporate personality. He was, however, declared in default for his failure to attend the pre-trial.

obligation of the Corporation which decision is patently contrary to law and the applicable decision thereon. II. The Intermediate Appellate Court (IAC) committed grave error of law in its decision by sanctioning the merger of the personality of the corporation with that of the petitioner when the latter was held liable for the corporate debts. 18 We reverse. The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of Akron and hold petitioner personally liable for its obligation to private respondent. While it is true that in December, 1977 petitioner was still a member of the board of directors of Akron and that he participated in the adoption of a resolution authorizing the purchase of 13 trucks for the use in the brokerage business of Akron to be paid out of a loan to be secured from a lending institution, it does not appear that said resolution was intended to defraud anyone and more particularly private respondent. It was Coprada, President and Chairman of Akron, who negotiated with said respondent for the purchase of 13 cargo trucks on January 25, 1978. It was Coprada who signed a promissory note to guarantee the payment of the unpaid balance of the purchase price out of the proceeds of a loan he supposedly sought from the DBP. The word "WE' in the said promissory note must refer to the corporation which Coprada represented in the execution of the note and not its stockholders or directors. Petitioner did not sign the said promissory note so he cannot be personally bound thereby. Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was a forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for the same and not petitioner. As to the sale through pacto de retro of the two units to a third person by the corporation by virtue of a board resolution, petitioner asserts that he never signed said resolution. Be that as it may, the sale is not inherently fraudulent as the 13 units were sold through a deed of absolute sale to Akron so that the corporation is free to dispose of the same. Of course, it was stipulated that in case of default in payment to private respondent of the balance of the consideration, a chattel mortgage lien shag be constituted on the 13 units. Nevertheless, said mortgage is a prior lien as against the pacto de retrosale of the 2 units.

As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron Transport International, Inc., petitioner alleges that the change of corporate name was in order to include trucking and container yard operations in its customs brokerage of which private respondent was duly informed in a letter. 19 Indeed, the new corporation confirmed and
assumed the obligation of the old corporation. There is no indication of an attempt on the part of Akron to evade payment of its obligation to private respondent.

There is the fact that petitioner sold his shares in Akron to Coprada during the pendency of the case. Since petitioner has no personal obligation to private respondent, it is his inherent right as a stockholder to dispose of his shares of stock anytime he so desires. Mention is also made of the alleged "dumping" of 10 units in the premises of private respondent at Bagbag, Novaliches which to the mind of the Court does not prove fraud and instead appears to be an attempt on the part of Akron to attend to its obligations as regards the said trucks. Again petitioner has no part in this. If the private respondent is the victim of fraud in this transaction, it has not been clearly shown that petitioner had any part or participation in the perpetration of the same. Fraud must be established by clear and convincing evidence. If at all, the principal character on whom fault should be attributed is Feliciano Coprada, the President of Akron, whom private respondent dealt with personally all through out. Fortunately, private respondent obtained a judgment against him from the trial court and the said judgment has long been final and executory. WHEREFORE, the petition is GRANTED. The questioned resolution of the Intermediate Appellate Court dated February 8,1984 is hereby set aside and its decision dated June 30,1983 setting aside the decision of the trial court dated October 28, 1980 insofar as petitioner is concemed is hereby reinstated and affirmed, without costs. SO ORDERED.

G.R. No. 80039 April 18, 1989 ERNESTO M. APODACA, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and INTRANS PHILS., INC., respondents. Diego O. Untalan for petitioner. The Solicitor General for public respondent. Barcelona, Perlas, Joven & Academia Law Offices for private respondents.

the amount of P95,439.93. Petitioner questioned the set-off alleging that there was no call or notice for the payment of the unpaid subscription and that, accordingly, the alleged obligation is not enforceable. In a decision dated April 28, 1987, the labor arbiter sustained the claim of petitioner for P17,060.07 on the ground that the employer has no right to withhold payment of wages already earned under Article 103 of the Labor Code. Upon the appeal of the private respondents to public respondent NLRC, the decision of the labor arbiter was reversed in a decision dated September 18, 1987. The NLRC held that a stockholder who fails to pay his unpaid subscription on call becomes a debtor of the corporation and that the set-off of said obligation against the wages and others due to petitioner is not contrary to law, morals and public policy. Hence, the instant petition. The petition is impressed with merit. Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute between the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is within the exclusive jurisdiction of the Securities and Exchange Commission. 1 Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter under the circumstances of this case, the unpaid subscriptions are not due and payable until a call is made by the corporation for payment. 2 Private
respondents have not presented a resolution of the board of directors of respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear that a notice of such call has been sent to petitioner by the respondent corporation.

GANCAYCO, J.: Does the National Labor Relations Commission (NLRC) have jurisdiction to resolve a claim for nonpayment of stock subscriptions to a corporation? Assuming that it has, can an obligation arising therefrom be offset against a money claim of an employee against the employer? These are the issues brought to this court through this petition for review of a decision of the NLRC dated September 18, 1987. The only remedy provided for by law from such a decision is a special civil action for certiorari under Rule 65 of the Rules of Court based on jurisdictional grounds or on alleged grave abuse of discretion amounting to lack or excess of jurisdiction, not by way of an appeal by certiorari. Nevertheless, in the interest of justice, this petition is treated as a special civil action for certiorari. Petitioner was employed in respondent corporation. On August 28, 1985, respondent Jose M. Mirasol persuaded petitioner to subscribe to 1,500 shares of respondent corporation at P100.00 per share or a total of P150,000.00. He made an initial payment of P37,500.00. On September 1, 1975, petitioner was appointed President and General Manager of the respondent corporation. However, on January 2, 1986, he resigned. On December 19, 1986, petitioner instituted with the NLRC a complaint against private respondents for the payment of his unpaid wages, his cost of living allowance, the balance of his gasoline and representation expenses and his bonus compensation for 1986. Petitioner and private respondents submitted their position papers to the labor arbiter. Private respondents admitted that there is due to petitioner the amount of P17,060.07 but this was applied to the unpaid balance of his subscription in

What the records show is that the respondent corporation deducted the amount due to petitioner from the amount receivable from him for the unpaid subscriptions. 3 No doubt such set-off was without lawful
basis, if not premature. As there was no notice or call for the payment of unpaid subscriptions, the same is not yet due and payable.

Lastly, assuming further that there was a call for payment of the unpaid subscription, the NLRC cannot validly set it off against the wages and other benefits due petitioner. Article 113 of the Labor Code allows such a deduction from the wages of the employees by the employer, only in three instances, to wit: ART. 113. Wage Deduction. No employer, in his own behalf or in

behalf of any person, shall make any deduction from the wages of his employees, except: (a) In cases where the worker is insured with his consent by the employer, and the deduction is to recompense the employer for the amount paid by him as premium on the insurance; (b) For union dues, in cases where the right of the worker or his union to checkoff has been recognized by the employer or authorized in writing by the individual worker concerned; and (c) In cases where the employer is authorized by law or regulations issued by the Secretary of Labor. 4 WHEREFORE, the petition is GRANTED and the questioned decision of the NLRC dated September 18, 1987 is hereby set aside and another judgment is hereby rendered ordering private respondents to pay petitioner the amount of P17,060.07 plus legal interest computed from the time of the filing of the complaint on December 19, 1986, with costs against private respondents. SO ORDERED.

G.R. No. 90580 April 8, 1991 RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S. RUSTE AND EVELYN SAW, petitioners, vs. HON. COURT OF APPEALS, HON. BERNARDO P. PARDO, Presiding Judge of Branch 43, (Regional Trial Court of Manila), FREEMAN MANAGEMENT AND DEVELOPMENT CORPORATION, EQUITABLE BANKING CORPORATION, FREEMAN INCORPORATED, SAW CHIAO LIAN, THE REGISTER OF DEEDS OF CALOOCAN CITY, and DEPUTY SHERIFF ROSALIO G. SIGUA, respondents. Benito O. Ching, Jr. for petitioners. William R. Vetor for Equitable Banking Corp. Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao.

CRUZ, J.:p A collection suit with preliminary attachment was filed by Equitable Banking Corporation against Freeman, Inc. and Saw Chiao Lian, its President and General Manager. The petitioners moved to intervene, alleging that (1) the loan transactions between Saw Chiao Lian and Equitable Banking Corp. were not approved by the stockholders representing at least 2/3 of corporate capital; (2) Saw Chiao Lian had no authority to contract such loans; and (3) there was collusion between the officials of Freeman, Inc. and Equitable Banking Corp. in securing the loans. The motion to intervene was denied, and the petitioners appealed to the Court of Appeals. Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement which they submitted to and was approved by the lower court. But because it was not complied with, Equitable secured a writ of execution, and two lots owned by Freeman, Inc. were levied upon and sold at public auction to Freeman Management and Development Corp. The Court of Appeals 1 sustained the denial of the
petitioners' motion for intervention, holding that "the compromise agreement between Freeman, Inc., through its President, and Equitable Banking Corp. will not necessarily prejudice petitioners whose rights to corporate assets are at most inchoate, prior to the dissolution of Freeman, Inc. . . . And intervention under Sec. 2, Rule 12 of the Revised Rules of Court is proper only when one's right is actual, material, direct and immediate and not simply contingent or expectant."

It also ruled against the petitioners' argument that because they had already filed a notice of appeal, the trial judge had lost jurisdiction over the case and could no longer issue the writ of execution. The petitioners are now before this Court, contending that: 1. The Honorable Court of Appeals erred in holding that the petitioners cannot intervene in Civil Case No. 8844404 because their rights as stockholders of Freeman are merely inchoate and not actual, material, direct and immediate prior to the dissolution of the corporation; 2. The Honorable Court of Appeals erred in holding that the appeal of the petitioners in said Civil Case No. 8844404 was confined only to the order denying their motion to intervene and did not divest the trial court of its jurisdiction over the whole case. The petitioners base their right to intervene for the protection of their interests as stockholders on Everett v. Asia Banking Corp. 2 where it was held: The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that the action must be brought by the Board of Directors, . . . has its exceptions. (If the corporation [were] under the complete control of the principal defendants, . . . it is obvious that a demand upon the Board of Directors to institute action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts. Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao Lian is essentially in personamand, as an action against defendants in their personal capacities, will not prejudice the petitioners as stockholders of the corporation. The Everett case is not applicable because it involved an action filed by the minority stockholders where the board of directors refused to bring an action in behalf of the corporation. In the case at bar, it was Freeman, Inc. that was being sued by the creditor bank. Equitable also argues that the subject matter of the intervention falls properly within the original and

exclusive jurisdiction of the Securities and Exchange Commission under P.D. No. 902-A. In fact, at the time the motion for intervention was filed, there was pending between Freeman, Inc. and the petitioners SEC Case No. 03577 entitled "Dissolution, Accounting, Cancellation of Certificate of Registration with Restraining Order or Preliminary Injunction and Appointment of Receiver." It also avers in its Comment that the intervention of the petitioners could have only caused delay and prejudice to the principal parties. On the second assignment of error, Equitable maintains that the petitioners' appeal could only apply to the denial of their motion for intervention and not to the main case because their personality as party litigants had not been recognized by the trial court. After examining the issues and arguments of the parties, the Court finds that the respondent court committed no reversible error in sustaining the denial by the trial court of the petitioners' motion for intervention. In the case of Magsaysay-Labrador v. Court of Appeals, 3 we ruled as follows: Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the respondent court's holding that petitioners herein have no legal interest in the subject matter in litigation so as to entitle them to intervene in the proceedings below. In the case of Batama Farmers' Cooperative Marketing Association, Inc. v. Rosal, we held: "As clearly stated in Section 2 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action, the party must have a legal interest in the matter in litigation, or in the success of either of the parties or an interest against both, or he must be so situated as to be adversely affected by a distribution or other disposition of the property in the custody of the court or an officer thereof." To allow intervention, [a] it must be shown that the movant has legal interest in the matter in litigation, or otherwise qualified; and [b] consideration must be given as to whether the adjudication of the rights of the original parties may be delayed or prejudiced, or whether the intervenor's rights may be protected in

a separate proceeding or not. Both requirements must concur as the first is not more important than the second. The interest which entitles a person to intervene in a suit between other parties must be in the matter in litigation and of such direct and immediate character that the intervenor will either gain or lose by the direct legal operation and effect of the judgment. Otherwise, if persons not parties of the action could be allowed to intervene, proceedings will become unnecessarily complicated, expensive and interminable. And this is not the policy of the law. The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person. On the second assignment of error, the respondent court correctly noted that the notice of appeal was filed by the petitioners on October 24, 1988, upon the denial of their motion to intervene, and the writ of execution was issued by the lower court on January 30, 1989. The petitioners' appeal could not have concerned the "whole" case (referring to the decision)

because the petitioners "did not appeal the decision as indeed they cannot because they are not parties to the case despite their being stockholders of respondent Freeman, Inc." They could only appeal the denial of their motion for intervention as they were never recognized by the trial court as party litigants in the main case. Intervention is "an act or proceeding by which a third person is permitted to become a party to an action or proceeding between other persons, and which results merely in the addition of a new party or parties to an original action, for the purpose of hearing and determining at the same time all conflicting claims which may be made to the subject matter in litigation. 4 It is not an independent proceeding, but an
ancillary and supplemental one which, in the nature of things, unless otherwise provided for by the statute or Rules of Court, must be in subordination to the main proceeding. 5 It may be laid down as a general rule that an intervenor is limited to the field of litigation open to the original parties. 6

In the case at bar, there is no more principal action to be resolved as a writ of execution had already been issued by the lower court and the claim of Equitable had already been satisfied. The decision of the lower court had already become final and in fact had already been enforced. There is therefore no more principal proceeding in which the petitioners may intervene. As we held in the case of Barangay Matictic v. Elbinias: 7 An intervention has been regarded, as merely "collateral or accessory or ancillary to the principal action and not an independent proceedings; and interlocutory proceeding dependent on and subsidiary to, the case between the original parties." (Fransisco, Rules of Court, Vol. 1, p. 721). With the final dismissal of the original action, the complaint in intervention can no longer be acted upon. In the case of Clareza v. Resales, 2 SCRA 455, 457-458, it was stated that: That right of the intervenor should merely be in aid of the right of the original party, like the plaintiffs in this case. As this right of the plaintiffs had ceased to exist, there is nothing to aid or fight for. So the right

of intervention has ceased to exist. Consequently, it will be illogical and of no useful purpose to grant or even consider further herein petitioner's prayer for the issuance of a writ of mandamus to compel the lower court to allow and admit the petitioner's complaint in intervention. The dismissal of the expropriation case has no less the inherent effect of also dismissing the motion for intervention which is but the unavoidable consequence. The Court observes that even with the denial of the petitioners' motion to intervene, nothing is really lost to them. The denial did not necessarily prejudice them as their rights are being litigated in the case now before the Securities and Exchange Commission and may be fully asserted and protected in that separate proceeding. WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so ordered.

G.R. No. 85597 January 9, 1992 REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT), petitioner, vs. THE HONORABLE SANDIGANBAYAN (THIRD DIVISION), JOSE L. AFRICA, MANUEL H. NIETO and RAFAEL VALDEZ, respondents. G.R. No. 85621 January 9, 1992 EDUARDO M. VILLANUEVA, petitioner, vs. THE HONORABLE SANDIGANBAYAN (THIRD DIVISION), JOSE L. AFRICA, MANUEL NIETO, RAFAEL C. VALDEZ and PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT,* respondents. Victor Africa for petitioner in G.R. No. 83831 Jose L. Africa and Manuel H. Nieto for respondents in G.R. No. 85594 and 85597. Arthur D. Lim Law Office for petitioner in G.R. No. 85621. Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for respondents Mabanta & de los Angeles in 83831 & 85594.

G.R. No. 83831 January 9, 1992 VICTOR AFRICA, petitioner, vs. PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, JOSE LAURETA, MELQUIADES GUTIERREZ, EDUARDO M. VILLANUEVA, EDUARDO DE LOS ANGELES and ROMAN MABANTA, JR., respondents. G.R. No. 85594 January 9, 1992 PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT and PCGG-Nominees/Designees: MELQUIADES GUTIERREZ, EDUARDO M. VILLANUEVA, RAMON DESUASIDO, ALMARIO P. VELASCO, RANULFO P. PAYOS and JOSE P. ROXAS, petitioners. vs. THE HONORABLE SANDIGANBAYAN (THIRD DIVISION), JOSE L. AFRICA, MANUEL H. NIETO, JR., RAFAEL VALDEZ and VICTOR AFRICA, respondents.

REGALADO, J.: These four cases separately filed before this Court were consolidated pursuant to our resolution of November 22, 1988 1since they involve issues arising
from, incidental or related to the sequestration of Eastern Telecommunications Philippines, Inc. (ETPI) by the Presidential Commission on Good Government (PCGG) on March 14, 1986 and the consequent filing by the PCGG on July 22, 1987 of an action for reconveyance, reversion, accounting and restitution of the alleged illgotten ETPI shares and damages, docketed as Civil Case No. 0009 in the Sandiganbayan.

Shortly after the PCGG sequestered ETPI on March 14, 1986, the sequestration order was partially lifted in May, 1986 when 40% of the shares of stock (Class "B") owned by Cable and Wireless, Ltd. were freed from the effects of sequestration. The remaining 60% of the shares (Class "A"), however, remained under sequestration. Thereafter, on July 22, 1987, the PCGG filed with the Sandiganbayan the aforesaid Civil Case No. 0009.

Subsequently, during the annual stockholders meeting convened on January 29, 1988 pursuant to a PCGG Resolution dated January 28, 1988 which called for the resumption of the stockholders meeting originally scheduled on January 4, 1988, Eduardo M. Villanueva, as PCGG nominee, Roman Mabanta, Jr. and Eduardo de los Angeles as nominees of the foreign investors, Cable and Wireless Ltd., and Jose L. Africa (who was absent) were elected as members of the board of directors. An organizational meeting was later held where Eduardo Villanueva was elected as president and general manager, while Ramon Desuasido, Almario Velasco and Ranulfo Payos were elected as acting corporate secretary, acting treasurer, and acting assistant corporate secretary, respectively. The nomination and election of PCGG nominees/designees to the ETPI Board of Directors, as well as the election of its new officers, triggered a chain of contentious proceedings before the Sandiganbayan and this Court between the members of the ETPI Board and its stockholders, on the one hand, and the PCGG's nominees/designees elected ETPI Board, on the other hand, in the cases hereinunder discussed. G.R. No. 83831 Victor Africa, who claims to be an employee of ETPI holding the positions of vice-president, general counsel (on official leave without pay), corporate secretary and special assistant to the chairman (and president), filed directly with this Court on June 30, 1988 a petition for injunction docketed as G.R. No. 83831, seeking to enjoin the PCGG and its nominees/designees to the board of directors and the newly-installed officers of ETPI from implementing their alleged illegal, invalid and immoral act of ousting him from his offices and positions at the ETPI pending the determination of whether they have validly, legally and morally assumed their supposed positions and offices as "directors" and/or "officers" of ETPI. He contends that the reasons advanced by the PCGG-sponsored board of directors for ousting him from his offices (redundancy, need to conserve company funds and loss of confidence) are flimsy, whimsical and arbitrary, evidencing not only the PCGG-sponsored board's discriminatory and oppressive attitude towards him but, more importantly, its clear intent to harass him into refraining from questioning before several tribunals all the invalid, illegal and immoral acts of said PCGGsponsored board which have caused and are still causing ETPI damages because they constitute dissipation of assets.

Further claiming that the acts of respondents will work injustice, unfairness and inequity to him as they will invalidly, illegally and immorally deprive him of his principal means of livelihood to the detriment of his spouse and three children, petitioner sought the issuance of a writ of preliminary injunction or a temporary restraining order to enjoin the PCGG from ousting him from his positions and offices effective June 30, 1988. On July 8, 1988, petitioner informed the Court that while a verbal agreement to maintain the status quo was reached between petitioner's lawyers, Attys. Juan de Ocampo and Antonio Africa, and Messrs. Orlando Romero and Serafin Rivera of the PCGG, respondent Eduardo M. Villanueva circulated on July 5, 1988 an inter-office memorandum easing out the legitimate members of the board from their rooms in the executive offices for the benefit of the newlyinstalled members of the questioned PCGG board; and that Ildefonso Reynoso, vice-president for administration, issued a memorandum to the Nival Security and Protective Agency informing them that they were being relieved of their duty to provide security services at the 7th Floor of Telecoms Plaza where the executive offices are located, which services would then be handled by the FCA Security Agency. 2 On July 15, 1988, petitioner was allegedly forcibly taken out of his office on the basis of a PCGG order which petitioner claimed was addressed not to then PCGG Commissioner Laureta but to three other PCGG officials, namely, Esteban B. Conejos, Jr., Serafin P. Rivera and Orlando Z. Romero. As a consequence, petitioner Africa sought to have then Commissioner Laureta declared in contempt of court for having committed "improper conduct tending directly or indirectly, to impede, obstruct or degrade the administration of justice." 3 He likewise sought the
issuance of a writ of preliminary mandatory injunction ordering respondents to open his office and allow him access to and use of the same.

G.R. Nos. 85597 and 85621 Jose L. Africa, Manuel Nieto and Rafael Valdez, allegedly the registered stockholders of ETPI, instituted on September 6, 1988 before the Sandiganbayan Civil Case No. 0048, 4 a complaint for
injunction and damages with prayer for a temporary restraining order seeking to enjoin Eduardo M. Villanueva from acting as "Director, President and/or General Manager" of ETPI and from exercising the powers and functions of said positions, as well as to stop the PCGG from directly or indirectly interfering with the management of ETPI. They contend that the assumption of Villanueva to said positions was effected without due

process of law through the PCGG using and voting the sequestered shares without legal justification.

On November 15, 1988, the Court issued a temporary restraining order 8 in G.R. No. 85597 directing the Sandiganbayan to
cease and desist from proceeding with its hearing in Civil Case No. 0048 scheduled on November 18, 1988 at 2:00 p.m. In the resolution of November 22, 1988, the case was ordered consolidated with the other ETPI cases (G.R. Nos. 83831, 85594 and 85621).

Eduardo M. Villanueva filed a motion to dismiss/opposition to the issuance of a restraining order on the grounds of lack of jurisdiction, because the complaint partakes of the nature of a suit against the State without its consent; that plaintiffs are not the real parties in interest in the action, which is actually a quo warranto proceeding; that the complaint is premature for failure to exhaust administrative remedies; and that the issues raised have already been passed upon by the Supreme Court in G.R. No. 82188, a recourse against the Securities and Exchange Commission (SEC), entitled "PCGG, et al. vs. SEC, et al." 5 The PCGG, on the other hand, opposed the issuance of a writ of preliminary injunction, contending that the issues raised in Civil Case No. 0048 have already been passed upon by the Supreme Court in its aforesaid decision in G.R. No. 82188 promulgated on June 30, 1988. 6 In the proceedings on September 13, 1988, the PCGG, through Solicitor Ramolete, moved to defer the hearing until after the motion to dismiss of Villanueva and the objection raised by PCGG shall have been resolved. However, the Sandiganbayan resolved to hear the evidence on the application for preliminary injunction with the understanding that the incident shall not be resolved earlier than the resolution of the motion to dismiss and the issue raised by Solicitor Ramolete. 7 At the scheduled hearing on October 12, 1988, Villanueva objected to further proceedings without his motion to dismiss being first resolved, contending that since the action is for injunction and damages, the reception of evidence on the application for preliminary injunction was tantamount to a hearing on the merits. In open court, he was overruled and his motion to have the proceedings suspended pending resolution of his motion to dismiss was denied. From the denial of PCGG's motion to defer hearing and Villanueva's motion to suspend proceedings in Civil Case No. 0048, the PCGG filed on November 12, 1988 a petition for prohibition with prayer for a writ of preliminary injunction and/or restraining order with this Court, docketed as G.R. No. 85597, while Villanueva filed on November 16, 1988 a separate petition for prohibition with preliminary injunction and/or restraining order docketed as G.R. No. 85621. Both petitions assail the orders issued by the Sandiganbayan, dated September 13, 1988 and October 12, 1988, as having been issued with grave abuse of discretion amounting to lack of jurisdiction.

G.R. No. 85594 The same plaintiffs in Civil Case No. 0048, now in their capacity as erstwhile members of the Board of Directors of ETPI, instituted before the Sandiganbayan on September 23, 1988 Civil Case No. 0050, another action for injunction and damages with prayer for a writ of preliminary injunction and/or temporary restraining order. In their complaint, plaintiffs questioned the acts and orders of the PCGG leading to the election of therein defendants Melquiades Gutierrez, Mark Javier, Ranulfo P. Payos, Jose P. Roxas and Almario Velasco, and Cable and Wireless representatives Roman Mabanta, Jr. and Eduardo de los Angeles to the ETPI Board of Directors. Claiming to be the duly elected members of the ETPI Board of Directors during the January 4, 1988 special stockholders meeting, plaintiffs prayed that defendants be removed from their ETPI positions, and that an injunction be issued perpetually restraining the PCGG from electing, designating and supporting the defendants in their ETPI roles. 9 The PCGG 10 and its nominees/designees to the ETPI
Board, 11 Roman Mabanta, Jr. and Eduardo de los Angeles, 12separately filed their respective motions to dismiss and opposed the issuance of writ of preliminary injunction/restraining order invoking substantially the same grounds proffered in Civil Case No. 0048, as follows: (1) the court lacks jurisdiction because plaintiffs may not sue the State without its consent; (2) the filing of the complaint is improper because the cause(s) of action alleged and the reliefs sought therein constitute an action for quo warranto, hence plaintiffs are not the proper and real parties in interest to oust or unseat defendants; and (3) the filing of the complaint is barred by lis pendens, as plaintiffs should have contested PCGG's acts in Civil Case No. 0009 (Republic vs. Jose L. Africa, et al.). Roman Mabanta, Jr. and Eduardo de los Angeles further maintained that respondent court has no jurisdiction over the nature and subject matter of the complaint insofar as they are concerned, they being Class B Directors; and that the complaint is barred by the decision of the Supreme Court in G.R. No. 82188.

On October 21, 1988, or while the motions to dismiss remained pending and prior to the hearing set on November 3, 1988 for the issuance of a writ of preliminary injunction/temporary restraining order, the Clerk of Court of the Sandiganbayan issued, upon request of the counsel for Jose L. Africa, et al. dated

October 18, 1988, a subpoena duces tecum and adtestificandum ordering the PCGG or its representatives to appear and testify before the Sandiganbayan during the hearing on November 3, 1988 at 2:00 p.m. and to produce the stock and transfer book and all stubs of the outstanding stock certificates of ETPI. Three days thereafter, or on October 24, 1988, another subpoena duces tecum was issued upon an amended request for subpoena by the same counsel, ordering Assistant Solicitor General Ramon Desuasido or his representative to appear before the Sandiganbayan at the 2:00 p.m. hearing on November 3, 1988 and to produce the "minutes of all meetings of the Board of Directors and Stockholders of ETPI held from January 29, 1988 to date." The PCGG and its nominee/designee, Ramon Desuasido, moved to quash both subpoenae, but the motion was denied by the Sandiganbayan in an order 13 dated November 3, 1988. The hearing was reset
to November 15, 1988 at 2:00 o'clock in the afternoon.

decision in G.R. No. 82188; that the respondent court lacks jurisdiction over the case; that private respondents have no legal capacity to sue and institute a separate action; and that they are not the real parties in interest.

Recapping, therefore, from the foregoing narration it appears that the injunction suits filed and docketed as Civil Cases Nos. 0048 and 0050 in the Sandiganbayan and the petition for injunction filed directly with this Court as G.R. No. 83831 are substantially identical in the reliefs sought therein, that is, to nullify the acts and orders of the PCGG which led to the nomination and election of the new members of the board of directors and officers of the ETPI and to enjoin said directors and officers from exercising the powers and functions of said positions. Civil Cases Nos. 0048 and 0050 were elevated to this Court on some incidental matters relating to the propriety of hearing the cases on the merits without the motions to dismiss filed therein having been first resolved; and in Civil Case No. 0050, on the additional issue of the legality of the subpoena duces tecum and ad testificandum issued by the Sandiganbayan ordering the PCGG or its representatives to testify and produce the stock and transfer book, all stubs of the outstanding stock certificates of ETPI and the minutes of all meetings of the board of directors and stockholders held from January 29, 1988. The issue in Civil Case No. 0050 as to the propriety of hearing the main action for injunction before resolving the motions to dismiss has been mooted when the Sandiganbayan denied said motions to dismiss on December 13, 1988. We are, however, constrained to go deeper into the issue since the denial of said motions was the subject matter of a supplemental petition in G.R. No. 85594. With respect to G.R. Nos. 85597 and 85621, we find that the deferment of the resolution of the motions to dismiss Civil Case No. 0048 was tainted with grave abuse of discretion. It is well-settled that while the court has the discretion to defer the hearing and determination of a motion to dismiss if the ground therefor is not indubitable, 18 such deferment is in
excess of jurisdiction if the ground for the motion to dismiss is lack of jurisdiction or lack of cause of action, since the allegations of the complaint are deemed admitted and the motion to dismiss can be resolved without waiting for trial on the merits. 19Clearly, on the face of the complaint, the issue of lack of jurisdiction invoked in the motion to dismiss can be resolved without waiting for trial on the merits as will be shown hereunder. Thus, petitioner Villanueva is correct in his assertion that his motion to dismiss must first be resolved before trial on the merits may be had.

On November 15, 1988, an urgent petition for certiorari, docketed as G.R. No. 85594, was filed by the PCGG and its nominees/designees before this Court, assailing as having been issued with grave abuse of discretion the incidental orders dated October 24, 1988 and November 3, 1988 on the principal contention that the Sandiganbayan has no jurisdiction over the main action for damages since Civil Case No. 0050 is in truth a suit against the State without its consent. The PCGG also prayed for the issuance of a temporary restraining order to enjoin the respondents from enforcing and/or executing the subpoenas dated October 21, 1988 and October 24, 1988. On the same date, or on November 15, 1988, the Court issued a temporary restraining order. 14 The Sandiganbayan, in the meantime, proceeded with the main case and, thereafter, on December 13, 1988 promulgated a resolution 15 denying the motions to
dismiss separately filed by the PCGG and the individual defendants.

On February 23, 1989, the Sandiganbayan denied the motion for reconsideration filed by the representatives of Cable and Wireless, Ltd. 16 The PCGG and its
nominees opted not to file a motion for reconsideration apparently in the belief that the same would be merely repetitive, if not futile.

From the denial of the motion to dismiss, the PCGG and its nominees/designees filed on March 27, 1989 an Urgent Supplemental Petition in G.R. No. 85594 17 assailing the denial by the Sandiganbayan of
their motions to dismiss on the grounds that the core subject matter and issue are res judicata by virtue of the

Be that as it may, this finding merely constitutes a technical victory for said petitioner as it will be rendered moot and academic by the following ruling on the merits of the grounds raised in his motion to dismiss. In G.R. No. 85621, petitioner Villanueva imputes grave abuse of discretion to the Sandiganbayan in proceeding with the hearing of Civil Case No. 0048. To his mind, the injunction suit filed by Africa, Nieto and Valdez is in effect a suit against the State and, since there is no waiver of immunity by the State, respondent court cannot acquire jurisdiction over the same. Along the same vein, the PCGG elevated to this Court in G.R. No. 85594 the denial of its motion to dismiss Civil Case No. 0050 contending that the Sandiganbayan has no jurisdiction to entertain an independent suit against the Republic of the Philippines (PCGG) not only because it is only the Republic, without consenting to be sued or countersued, that is allowed to file civil or criminal cases with said court pursuant to Executive Order No. 14, but also because the cause of action, if any, or the subject matter or nature of the complaint for injunction are not within the limited or special jurisdiction of the Sandiganbayan as defined by Section 4, Presidential Decree No. 1606, as amended by Presidential Decree No. 1891, even as such jurisdiction has been enlarged by Executive Order No. 14. The law and jurisprudence on the jurisdiction of the Sandiganbayan over cases for the recovery of "illgotten wealth" are now settled. In PCGG vs. Hon. Emmanuel G. Pea, etc., et al., 20 this Court
held:

The aforequoted ruling was reiterated in PCGG vs. Hon. Aquino, Jr., etc., et al. and Marcelo Fiberglass Corporation vs.PCGG, 21 which were jointly
decided by the Court on June 30, 1988.

In six (6) subsequent cases 22 likewise jointly decided

on August 10, 1988, the Court pointed out that:

. . . (the) exclusive jurisdiction conferred on the Sandiganbayan would evidently extend not only to the principal causes of action, i.e., the recovery of alleged ill-gotten wealth, but also to "all incidents arising from, incidental to, or related to, such cases," such as the dispute over the sale of shares, the propriety of the issuance of ancillary writs or provisional remedies relative thereto, the sequestration thereof, which may not be made the subject of separate actions or proceedings in another forum. A careful examination of the records of these cases reveals that the complaints instituted by Jose L. Africa, et al. in Civil Cases Nos. 0048 and 0050 before the Sandiganbayan are in the nature of special and original civil actions for injunction 23directed
against the defendants therein and specially seeking to restrain them from representing and acting as officers and members of the Board of Directors of ETPI and to prevent the PCGG from exercising acts of ownership and/or management over ETPI.

. . . Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all cases of the Commission regarding "the Funds, Moneys, Assets, and Properties Illegally Acquired or Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their Close Relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees" whether civil or criminal, are lodged within the "exclusive and original jurisdiction of the Sandiganbayan" and all incidents arising from, incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court.

Moreover, in claiming as illegal the acts or orders of the PCGG issued in pursuance of the exercise of its powers and functions under Executive Orders Nos. 1, 2 and 14, which resulted in the installation of defendants to the Board of Directors of ETPI and to their corporate offices, plaintiffs Jose L. Africa, et al. merely sought to preserve the status quo, that is, the last actual, peaceable, uncontested status which preceded the pending controversy. The status quo to the plaintiffs was the fact of their election to the Board of Directors of ETPI during the special stockholders meeting on January 4, 1988 allegedly pursuant to a valid call, notice and assembly in accordance with law. The issue of jurisdiction of the Sandiganbayan over original special civil actions involving the powers and functions of the PCGG has been raised in and resolved by this Court. In the consolidated cases of PCGG vs. Hon. Aquino, Jr., etc., et al.and Marcelo Fiberglass Corporation vs. PCGG, supra, therein private respondent Marcelo Fiberglass Corporation contested the jurisdiction of the Sandiganbayan over special civil actions claiming that Section 2 of

Executive Order No. 14 vested the Sandiganbayan with Jurisdiction over civil and criminal cases filed by the PCGG but not over special civil actions filed by private parties; that Section 2 did not limit the filing of special civil actions by private persons exclusively with the Sandiganbayan; and that Presidential Decree No. 1606 which created the Sandiganbayan did not vest such court with jurisdiction over special civil actions such as those involved therein and as enumerated in Section 4 of Presidential Decree No. 1606. The Court rejected such contention, declaring that the attempt to remove special civil actions from the Sandiganbayan's exclusive jurisdiction is of no avail if they similarly involve the powers and functions of the PCGG. The Court reiterated the pronouncement in PCGG vs. Pea, etc., et al., supra, that the Sandiganbayan has exclusive and original jurisdiction in civil or criminal cases involving ill-gotten wealth under Executive Order No. 14, as well as incidents arising from, incidental or related to such cases, subject to review on certiorari exclusively by the Supreme Court. Since the injunctive suits filed by Jose L. Africa, et al. before the Sandiganbayan stemmed from incidents arising from, incidental and related to the partial sequestration of ETPI, the directive enunciated in the Pea case that "those who wish to question or challenge the Commission's acts or orders in such cases must seek recourse in the same court, the Sandiganbayan, which is vested with exclusive and original jurisdiction," applies to the instant case. Neither would the principle of immunity of the State from suit invoked by the PCGG divest the Sandiganbayan of its jurisdiction over the complaints for injunction in both Civil Cases Nos. 0048 and 0050. While there were claims for damages alleged in the complaints in both cases, the same are, however, directed against the individual defendants in their personal capacities for having allegedly acted without legal authority and in a manner adverse to the interests of ETPI.24 Incorporating a monetary claim in the complaint will not convert the special civil action for injunction into a mere claim for damages which would otherwise call for the application of the rule on non-suability of the State. 25 The complaints for injunction do not seek
money judgments from nor do they demand any affirmative performance by the State in its political capacity which would call for immunity from suit. The doctrine of state immunity from suit applies only in actions resulting in adverse consequences on the public treasury, whether in the disbursement of funds or loss of property. 26

Plaintiffs in both cases sought the intervention of the Sandiganbayan to obtain redress for what they perceived to be an arbitrary and illegal deprivation of their proprietary rights in the ETPI by the individual defendants resulting from the latter being installed as directors or officers of ETPI by virtue of the questioned acts or orders of the PCGG. Plaintiffs do not seek to impose pecuniary liabilities against the PCGG as a government entity. Verily, the PCGG cannot hide behind the aforestated doctrine of immunity of the State from suit to bar plaintiffs from going to the courts to seek affirmative reliefs in these actions. Seeking further to divest the Sandiganbayan of its jurisdiction over the actions for injunction in Civil Cases Nos. 0048 and 0050, the PCGG argues that the said actions are barred by res judicata because of the prior judgment in PCGG, et al. vs.SEC, et al. and its companion case, PCGG vs. Sandiganbayan, et pl., supra. It is the contention of the PCGG that the subject matter and issues in both Civil Cases Nos. 0048 and 0050 are the very same subject matter and issues raised by Africa, et al. in SEC Case No. 3297 and in their motion for injunction in Civil Case No. 0009, both of which were elevated by the PCGG to this Court in G.R. No. 82186. The doctrine of res judicata or bar by prior judgment does not apply in the instant cases. The two issues raised in G.R. No. 82188 related principally to the issue of jurisdiction, namely: (1) whether or not the Securities and Exchange Commission gravely abused its discretion and acted in excess of jurisdiction in SEC Case No. 3297 when it restrained the PCGG from holding the special stockholders meeting of the ETPI on March 4, 1988; and (2) whether or not the Sandiganbayan gravely abused its discretion and acted in excess of jurisdiction when it restrained the PCGG, its nominated directors and/or corporate officers, employees, nominees, agents and/or representatives at ETPI from calling and/or holding a stockholders meeting and voting the sequestered shares thereat for the purpose of amending the articles of incorporation or by-laws of ETPI, or otherwise effecting substantial changes in policy, programs or practices of said corporation. In brief, what was obviously raised and resolved by the Court was the scope and extent of the authority of the Sandiganbayan to issue injunctive writs on matters involving the exercise and performance of the powers and functions of the PCGG as conservator in accordance with the ruling in BASECO vs. PCGG, et al. 27 to prevent the disposal and dissipation of the
assets of sequestered companies or businesses.

Although the challenge against the temporary restraining order issued by the Securities and

Exchange Commission in SEC Case No. 3297 became moot and academic by virtue of the expiration of its 20-day effectivity period, the Court nevertheless ruled that the issuance of the same was tainted with grave abuse of discretion considering that the SEC Hearing Panel should have then realized that there existed an element in the case which effectively removed it from the jurisdiction of the SEC, to wit, the presence of the PCGG which, as another quasijudicial body, is a co-equal entity over whose actions the SEC has no power of control. The Court, on the other hand, upheld the temporary restraining order issued by the Sandiganbayan insofar as it restrained the stockholders meeting specifically called for the purpose of ratifying the proposed amendment to delete from ETPI's articles of incorporation and by-laws the "right of first refusal" clause. Recognizing that the exercise of the "right of first refusal" is an act of strict ownership, the Court ruled that while there may be instances when only through an act of strict ownership can the PCGG be able to prevent the dissipation of assets of a sequestered corporation or business, the situation then presented was nevertheless not one of such instances. Significantly, however, the Court found the general injunction imposed by the Sandiganbayan on the PCGG to desist and refrain from calling a stockholders meeting for the purpose of electing a new board of directors or effecting substantial changes in the policy, program or practice of the corporation to be too broad as to thereby taint said order with grave abuse of discretion. On PCGG's insistence on the rule of bar by prior judgment, it is readily apparent that one fundamental requisite for the application of that doctrine of res judicata is absent in the instant case, that is, the prior judgment or order must be a judgment on the merits of the case. For a prior judgment to constitute a bar to a subsequent case, (1) it must be a final judgment or order, (2) the court rendering the same must have jurisdiction over the subject matter and over the parties, (3) it must be a judgment or order on the merits, and (4) there must be between the two cases identity of parties, subject matter, and causes of action. 28 There is no dispute that, substantially, the acts or orders of the PCGG which led to the election of the members of the board of directors and officers of ETPI, as well as all acts done thereafter by the said board, are the incidents which gave rise to the causes of action involved in the injunction suit in SEC Case No. 3297 and the motion for injunction in Civil Case No. 0009, both of which gave rise to G.R. No. 82188.

There is, accordingly, identity of the incidents upon which the causes of action in Civil Cases Nos. 0048 and 0050 are based and those of the two cases which gave rise to G.R. No. 82188. However, there is nothing, in the pronouncements of the Court in G.R. No. 82188 which finally resolved the merits of the factual issues raised therein by the opposing parties which included, among others, the alleged illegal manner by which the meeting to elect the new board of directors was called and held on January 29, 1988; the qualification, experience and probity of those elected to the board contrary to the caveat in BASECO vs. PCGG, et al., supra, on the substitution of directors of the board of sequestered corporations; and the alleged mismanagement of the operations of ETPI by those elected to the board and the corporate offices by the PCGG. A cursory reading of the decision would show that the Court merely ruled on the parameters of the jurisdiction of the Sandiganbayan to issue injunctive writs in cases involving the PCGG and PCGG-related matters. In fact, the Court stressed in G.R. No. 82188 that "the various motions filed by private respondents in this case involving matters which would require us to look into the facts of the case are better ventilated before the Sandiganbayan." Nothing final or definite was laid down by this Court in that case with respect to the legality or illegality of the questioned acts or orders of the PCGG leading to the election of its nominees/designees to the ETPI board of directors and corporate offices. The denial, therefore, of the motion to dismiss in Civil Case No. 0050 was not sullied by grave abuse of discretion. With this pronouncement, the denial of the motion to dismiss Civil Case No. 0048 would likewise be proper and necessarily called for. The issue raised in the original petition in G.R. No. 85594 relating to the validity of the issuance by the Sandiganbayan of the subpoena duces tecum and ad testificandum ordering the PCGG or its representative to testify and produce the stock and transfer book, all stubs of the outstanding stock certificates of ETPI and the minutes of all meetings of the board of directors and stockholders of ETPI held from January 29, 1988 to date was laid to rest by our joint resolution in two cases, both entitled Republic vs. Sandiganbayan and Eduardo Cojuangco, Jr., 29 which applies squarely in
the instant petitions.

In upholding therein the right of a stockholder of a sequestered company to inspect and/or examine the records of a corporation pursuant to Section 74 of the Corporation Code, the Court found nothing in Executive Orders Nos. 1, 2 and 14, as well as

in BASECO, to indicate an implied amendment of the Corporation Code, much less an implied modification of a stockholder's right of inspection as guaranteed by Section 74 thereof. The only express limitation on the right of inspection, according to the Court, is that (1) the right of inspection should be exercised at reasonable hours on business days; (2) the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of the records of such corporation; and (3) the demand is made in good faith or for a legitimate purpose. The issues raised in G.R. No. 83831, an original petition filed by Victor Africa with this Court, including the motion for contempt filed by Eduardo M. Villanueva against Jose L. Africa, Manuel Nieto and Victor Africa for having made unwarranted comments to the news media on matters involved in the pending petitions, are factual in nature and are best ventilated before the Sandiganbayan the proper forum where both parties can substantiate their respective claims. This Court is not a trier of facts. Considering that Civil Cases Nos. 0048 and 0050 arose from the partial sequestration of ETPI and the incidents raised before this Court in G.R. Nos. 85594, 85597 and 85621 are related to said partial sequestration of ETPI, all the factual matters alleged in these cases are best threshed out in the main case, Civil Case No. 0009, as incidents therein, to save time and efforts in the presentation of evidence and in order to avoid multiplicity of suits. IN VIEW OF THE FOREGOING, the petitions in G.R. Nos. 85594, 85597 and 85621 are hereby DISMISSED for lack of merit, and G.R. No. 83831 is REFERRED to the Sandiganbayan for appropriate proceedings. The Sandiganbayan is hereby ordered to consolidate G.R. No. 83831 and Civil Cases Nos. 0048 and 0050 with Civil Case No. 0009. The temporary restraining orders separately issued in G.R. No. 85594 and G.R. No. 85597 on November 15, 1988 are hereby LIFTED and SET ASIDE. SO ORDERED.

[G.R. No. 112941. February 18, 1999]

NEUGENE MARKETING INC., LEONCIO TAN, NICANOR MARTIN, SONNY MORENO, JOHNSON LEE and SECURITIES AND EXCHANGE COMMISSION, petitioners, vs. COURT OF APPEALS, ARSENIO YANG, JR., CHARLES O. SY, LOK CHUN SUEN, BAN HUA U. FLORES, BAN HA U. CHUA and ROGER REYES, respondents. DECISION
PURISIMA, J.:

At bar is a petition decision[1] of the Special Fifth of Appeals which reversed Securities and Exchange annulling the dissolution of Inc. (NEUGENE, for short).

for review of the Division of the Court the decision of the Commission (SEC) Neugene Marketing,

The SEC Hearing Panel gathered the fact, as follows:

"On January 27, 1978, NEUGENE was duly registered with this Commission to engage in trading business for a term of fifty (50) years with the following as incorporators/directors, namely:
1. Johnson Lee (one of the petitioners); 2. Lok Chun respondents); 3. Charles O. respondents); Suen Sy (one (one of of the the

4. Eugenio Flores, Jr. (husband of respondent Ban Hua U. Flores) 5. Arsenio Yang, respondents) Jr. (one of the

The authorized capital stock of NEUGENE is THREE MILLION PESOS (P3,000,000.00)

divided into THIRTY THOUSAND (30,000) shares with a par value of ONE HUNDRED PESOS (P100.00) each. Out of this authorized capital stock, SIX HUNDRED THOUSAND PESOS (P600,000.00) had been subscribed by the following subscribers, namely: OF NAME AMOUNT NO. SHARES UBSCRIBED Johnson Lee 00 Lok Chun Suen Charles O. Sy 600 P 60,000. S

Eugenio Flores, Jr. Arsenio Yang, Jr. TOTAL

52,500.00 7,500.00 P150,000.00 ==========

The original shareholdings of the incorporators/stockholders of NEUGENE were increased by ten percent (10%) each by virtue of stock dividend declaration in the amount of SIXTY THOUSAND PESOS (P60,000.00) made by its board of directors in a special meeting held on June 7, 1980. x x x Again, on May 2, 1981, the Board of directors of NEUGENE declared a stock dividend in the amount of FORTY THOUSAND PESOS (P40,000.00) in proportion to the shareholdings of the stockholders of record of NEUGENE as of April 30, 1981. x x x
xxx xx xxx x

1,200 1,800

120,000.00 180,000.00 210,000.00 30,000.00 6,000 ==== P =

Eugenio Flores, Jr. 2,100 Arsenio Yang, Jr. 300 TOTAL 600,000.00 ========

The outstanding capital stock of NEUGENE became SEVEN HUNDRED THOUSAND PESOS (P700,000.00) represented by SEVEN THOUSAND (7,000) shares. On May 15, 1986, Eugenio Flores, Jr. assigned, transferred and conveyed his entire shareholdings of TWO THOUSAND FOUR HUNDRED FIFTY (2,450) shares in NEUGENE to the following, to wit: Pet. Sonny Moreno (Exh. B) Resp. Arsenio Yang, Jr.. (Exh. C) Resp. Charles O. Sy (Exh. D) TOTAL 1,050 shares 700 shares 700 shares 2,450 ====

Out of the aforesaid subscription, ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00) had been paid by the following subscribers as follows: NAME T PAID UP Johnson Lee Lok Chun Suen Charles O. Sy AMOUN P15,000.00 30,000.00 45,000.00

Thus, immediately after the assignment of the entire shareholdings of Eugenio Flores, Jr. to petitioner Sonny Moreno and respondents Arsenio Yang, Jr., and Charles O. Sy, the stockholders of record of NEUGENE, as appearing in the Stock and Transfer Book (Exhibit A), particularly Exhibits A-8 to A-12 thereof, were as follows: NAME SHARES Johnson Lee Lok Chun Suen Sonny Moreno Charles O. Sy Arsenio Yang, Jr. 1,050 TOTAL NO. OF 700 1,400 1,050 2,800 __ 7,000[2] =====

On October 24, 1987, the private respondents, Charles O. Sy, Arsenio Yang, Jr. and Lok Chun Suen, holders of 5,250 shares of NEUGENE (representing at least two-thirds (2/3) of the outstanding capital stock of 7,000 shares) sent notice to the directors of NEUGENE for a board meeting to be held on November 30, 1987. They also sent notice for a special stockholders meeting on the same day, November 30, 1987, to consider the dissolution of NEUGENE. At the said meetings held on November 30, 1987, the private respondents, Charles O. Sy, Arsenio Yang, Jr. and Lok Chun Suen, the directors and stockholders then present, voted for and approved a resolution dissolving NEUGENE. On March 1, 1988, acting upon private respondentss Petition for Dissolution, SEC issued a Certificate of Dissolution of NEUGENE. On March 22, 1988, the petitioners brought an action to annul or set aside the said SEC Certification on the Dissolution of Neugene. In their Amended Petition, petitioners stated, among others, that they are the majority stockholders of NEUGENE, owning eighty percent (80%) of its outstanding capital stock, at the time of the adoption and approval of the Resolution for the Dissolution of NEUGENE, on November 30, 1987; that prior

thereto or on July 1, 1987, to be precise, the private respondents had divested themselves of their stockholdings when they endorsed their stock certificates in blank and delivered the same to the Uy Family, the beneficial owners of NEUGENE; that at the meetings held on February 11, 12 and 13, 1987, in order to settle family squabbles, the Uy family agreed to award NEUGENEs stock certificates to Johnny K. H. Uy, who, in turn, authorized Johnson Lee to dispose of the same; and that Johnson Lee sold the said shares of stock to the petitioners, Leoncio Tan and Nicanor Martin, such that, as reflected in the Stock and Transfer Book of NEUGENE, respondent Lok Chun Suen had assigned all of his 1,400 shares of stock to petitioner Nicanor Martin, respondents Charles O. Sy assigned 2,100 shares out of his 2,800 shares of stock to petitioner Leoncio Tan, and respondent Arsenio Yang, Jr. assigned 350 shares of his 1,050 shares of stock to petitioner Leoncio Tan; that in view of the said transfers of shares of stock, private respondents Arsenio Yang, Jr., and Charles O. Sy (each the holder of only 700 shares or 10% each of the outstanding capital stock of NEUGENE) and Lok Chun Suen (who had ceased to be a stockholder as of July 1, 1987) could no longer validly vote for the dissolution of NEUGENE on November 30, 1987, under Section 118 of the Corporation Code, and all the proceedings of the meetings held on November 30, 1987, which were improperly called and held without a quorum, are null and void.[3] On the other hand, the private respondents, Charles O. Sy, Arsenio Yang, Jr. and Lok Chun Suen, theorized that the alleged assignments of shares of stock in favor of petitioners were simulated and fraudulently effected, as there never was any agreement entered into by the Uy family to award NEUGENES stock certificates to Johnny K.H. Uy, because subject stock certificates of the private respondents covering their shares of stock were endorsed in blank by them and delivered to the Uy family, who were the beneficial owners of NEUGENE, for safe keeping and the said certificates of stock were kept inside the confidential vault of the Uy family at 225 D. Tuazon St., Quezon City, but the same were stolen by the spouses, Johnny K. H. Uy and Magdalena Go-Uy, without the knowledge and authority of the Uy family; that petitioner Sonny Moreno, a coconspirator in such fraudulent transfer of stocks in question, recorded the simulated and fraudulent

assignments in the Stock and Transfer Book of the corporation, which book he obtained from Johnny K.H. Uy and Magdalena Go-Uy, together with other corporate records of NEUGENE, including the stock certificates endorsed in blank by petitioner Johnson Lee and respondents Arsenio Yang, Jr., Charles O. Sy and Lok Chun Suen; that the petitioners, Nicanor Martin and Leoncio Tan, are co-conspirators of Johnson Lee and Sonny Moreno in effecting the said simulated and fraudulent transfer of sharesof stock; that the private respondents never sold their shares of stock in NEUGENE to any of the petitioners or other stockholders of record, prior to the dissolution of the corporation, so that they (private respondents) represented at least two-thirds (2/3) of the outstanding capital stock of NEUGENE when they voted to dissolve NEUGENE, on November 30, 1987.[4] In its decision of June 19, 1990, the SEC Panel of Hearing Officers nullified the Certification on the Dissolution of NEUGENE issued by SEC, holding that the private respondents were no longer holders of at least two-thirds (2/3) of the outstanding capital stock of NEUGENE at the time they presented the petition for dissolution, as required under Section 118 of the Corporation Code. (Annex O) The said decision of the SEC Panel of Hearing Officers was affirmed in toto by the SEC En Banc in a Decision promulgated on January 14, [5] 1993. Portions of the decision of the SEC Hearing Panel read:

Charles O. Sy and Arsenio Yang, Jr., who own 10% each of the stockholding of NEUGENE, could be considered officially present at said meeting. On this score alone, the case for the petitioners should be upheld.
xxx x xxx x xxx xxx xx xx

WHEREFORE, judgment is hereby rendered:

1. Declaring as null and void the Certificate of Filing of Resolution of Voluntary Dissolution of NEUGENE MARKETING, INC. issued by this Commission on March 1, 1988 for violation of Section 118 of the Corporation Code of the Philippines; 2. Ordering the respondents, particularly respondent Roger Z. Reyes or any other persons acting as trustees of NEUGENE from representing himself/themselves from acting as such; 3. Directing the respondents, particularly respondents Ban Ha U. Chua, Ban Hua U. Flores, Charles O. Sy and Arsenio Yang, Jr., or whoever is in possession of the corporate books and records of NEUGENE, to turn over the same to its Secretary, petitioner Sonny Moreno, within ten (10) days from the finality of this Decision; and to revert back to NEUGENE the Cash on Hand appearing in the Balance Sheet as of November 30, 1987 in the amount of P860,591.98; 4. Ordering the respondents to pay attorneys fees to the petitioners in the amount of FOUR HUNDRED THOUSAND PESOS (P400,000.00).[6]

The resolution to dissolve NEUGENE was adopted by only two (2) of its incumbent directors, namely: respondents Charles O. Sy and Arsenio Yang, Jr. Respondent Lok Chun Suen had already ceased to be a stockholder of NEUGENE as of July 1, 1987, by the endorsement and delivery and cancellation of his stock certificates (Exhs. E, F, and G) and the entries in the Stock and Transfer Book (Exhs. A, A-1, to A-24). Hence, there was no quorum at said board of directors meeting on November 30, 1987. There was no quorum also at the November 30, 1987 meeting of the stockholders of NEUGENE since only the following stockholders, namely: respondents

xxx x xxx

xx

On June 10, 1993, the aforesaid judgment of SEC was reversed by the Court of Appeals. Upholding the validity of NEUGENEs dissolution, the Court of Appeals found that at the time of dissolution of NEUGENE on November 30, 1987, the private respondents owned at least twothirds (2/3) of NEUGENEs stocks, it appearing that the certificates of stock of private respondents,

which were endorsed in blank, as earlier mentioned, were not validly transferred to petitioners herein. The Court concluded: x of Appeals ratiocinated xx xxx and

xxx xxx

xxx

xxx

To constitute a valid transfer, a stock certificate must be delivered and its delivery must be coupled with an intention of constituting the person to whom the stock is delivered the transferred (sic) thereof. (Fetcher Cyc Corp., Sec. 5484) Furthermore, in order that there is a valid transfer, the person to whom the stock certificates are endrosed (sic) must be a bona fide transferee and for value. In the case at bar, Nicanor Martin and Leoncio Tan were not bona fide transferees for value and in good faith. Private respondents alleged that petitioners Sy, Lok and Yang, Jr. indorsed and delivered their stock certificates to Nicanor Martin and Leoncio Tan. However, private respondents Johnson Lee testified that he acquired his shares of stock from Johnny Uy, who in turn sold them to Nicanor Martin and Leoncio Tan (tsn, pp., 49-50, July 18, 1989). Likewise, evidence shows that no consideration was paid by Leoncio Tan and Nicanor Martin when they allegedly acquired the stock certificates from the Uy Family. Johnson Lee failed to produce any document evidencing the transaction or a receipt showing his payment for the stocks. Therefore, it is clear that they were not bona fide transferees for value and in good faith. Consequently, they cannot be considered stockholders for the purpose of determining the 2/3 votes of the outstanding capital stock required to dissolve Neugene, in accordance with Sec. 118 of the Corporate Code.

After a careful examination of the documentary evidence, We find that the supposed document evidencing the partition and division of the properties of the Uy Family (Exh. A), is a mere xerox copy whose original copy was never produced before the hearing panel. Moreover, it contained erasures and/or insertions, and it is written in the Chinese language, with no official translation submitted. Consequently, We find no basis for the respondent Commissions finding that Neugene belongs to Johnny K. H. Uy. Considering the above findings, there is likewise no basis for the Commissions ruling that the amount of P860,591.98 should be returned by the petitioners to Neugene. Lastly, the award of attorneys fees has no basis, considering Our findings that private respondents have no cause of action against the petitioners, hence, they are not entitled to attorneys fees. WHEREFORE, the decision dated January 14, 1992 of the respondent Commission is hereby REVERSED and SET ASIDE. No costs.[7]
In its Resolution dated December 9, 1993, the Court of Appeals denied petitioners motion for reconsideration, and further ruled that the transfers of stock in question could not be valid and effective for the simple reason that there is a complete absence of proof that the alleged transfers were recorded in the books of the corporation. It relied on Section 63 of the Corporation Code of the Philippines which provides that no transfers shall be valid except as between the parties, until the transfer is recorded in the books of the corporation.[8] In the Petition under scrutiny, petitioners contend that the Court of Appeals: "(1) misapprehended the facts of the case and (2) failed to consider the evidence on record

showing that the private respondents were no longer holders of the necessary number of shares of stock at the time of the dissolution of NEUGENE.[9] The pivot of inquiry here is whether or not the private respondents lacked the requisite number of shares of stock or had divested themselves of their stockholdings as of November 30, 1987 when they voted for the resolution dissolving NEUGENE. After a careful study, a finding in favor of private respondents is indicated. In short, the Petition is barren of merit. Entries in the Stock and Transfer Book of NEUGENE, particularly on the right hand portion of Exhibits A-9, A-10 and A-12, support the disquisition and conclusion arrived at by the Court of Appeals that at the time of dissolution of NEUGENE on November 30, 1987, the private respondents, Lok Chun Suen, Charles O. Sy and Arsenio Yang, Jr., owned at least two-thirds (2/3) of NEUGENEs outstanding capital stock, in sufficient compliance with the germane provision of Section 118 of the Corporation Code of the Philippines. As shown in the Stock and Transfer Book of NEUGENE, the right hand portion of Exhibit A9, under the column Certificates Issued, private respondents Lok Chun Suen is the holder of a total of 1,400 shares of stock, issued on February 23, 1979, October 1, 1980 and May 2, 1981, respectively. (Records, p. 662) Exhibit A-10, on its right hand portion and under the column Certificates Issued reflects private respondents Charles O. Sy as the holder of a total of 2,800 shares of stock, issued on the abovementioned dates except those acquired from Eugenio Flores, Jr. which were issued on May 15, 1986. (Records, p. 663) While the right hand portion of Exhibit A12, under the column Certificates Issued, shows that private respondent Arsenio Yang, Jr. is the holder of 1,050 shares, issued on the abovementioned dates, except those acquired from Eugenio Flores, Jr. which were issued on May 15, 1986. (Records, p. 665) Therefore, the entries on the right hand portion of NEUGENES Stock and Transfer Book, under the column Certificates Issued, indubitably record the private respondents as the holders of 5,250 shares, constituting at least two-thirds (2/3) of NEUGENEs outstanding capital stock of 7,000 shares.

Petitioners introduced in evidence the very same exhibits pertaining to the Stock and Transfer Book of NEUGENE (more specifically Exhibits A-9, A-10, and A-12) to prove that the private respondents were no longer the majority stockholders at the time of the dissolution of NEUGENE. It should be noted, however, that on the left hand portion of the said exhibits, under the column Certificates Cancelled, entries on July 1, 1987 disclose that all of Lok Chun Suens 1,400 certificates of stock were cancelled, Charles O. Sys 2, 100 shares out of 2, 800 shares were cancelled, and Arsenio Yang, Jr.s 350 shares out of his 1, 050 shares were likewise cancelled, thereby leaving Arsenio Yang, Jr. and Charles O. Sy the holders of only 700 shares each or 10 % of the outstanding capital stock of NEUGENE when its dissolution was approved and voted for. In light of the foregoing and after a careful examination of the evidence on record, and a judicious study of the provisions of law and jurisprudence in point, we are with the Court of Appeals on the finding and conclusion that the certificates of stock of the private respondents were stolen and therefore not validly transferred, and the transfers of stock relied upon by petitioners were fraudulently recorded in the Stock and Transfer Book of NEUGENE under the column Certificates Cancelled. Although well-established is the rule that the appellate court will not generally disturb the factual findings by the trial court for the reason that the trial court heard the testimonies of the witnesses and observed their deportment and manner of testifying during the trial and was afforded the singular chance to assess the probative value of the evidence. The rule does not apply where, as in this case, the SEC overlooked certain facts of substance and value which if considered would affect the result of the case. (Tomas vs. CA, 185 SCRA 627 [1990]; People vs. Alforte, 219 SCRA 458 [1993]) In the case under consideration, records reveal that the SEC En Banc and its Panel Of Hearing Officers misappreciated the true nature of the relationship between the stockholders of NEUGENE and the Uy family, who had the understanding that the beneficial ownership of NEUGENE would remain with the Uy family, such that subject shares of stock were, immediately upon issuance, endorsed in blank by the shareholders and

entrusted to the Uy family, through Ban Ha Chua, for safekeeping. Such beneficial ownership of the Uy family is admitted not only in the testimonies of private respondents but also of the petitioners, Sonny Moreno and Johnson Lee.[10] Both the petitioners Johnson Lee (a member of the Uy family himself), and Sonny Moreno, the corporate secretary, were aware of the real import or significance of the indorsements in blank on the stock certificates of the private respondents. Obviously, then, they (Lee and Moreno) acted in bad faith in assigning subject certificates of stock to the petitioners, Nicanor Martin and Leoncio Tan, and in recording the said transfers in dispute in the Stock and Transfer Book of NEUGENE. Then, too, as nominees of the Uy family, the approval by the private respondents, Charles O. Sy, Lok Chun Suen and Arsenio Yang, Jr., Jr., was necessary for the validity and effectivity of the transfer of the stock certificates registered under their (private respondents) names. In the case under consideration, not only did the transfers of stock in question lack the requisite approval, the private respondents categorically declared under oath that subject certificates of stock of theirs were stolen from the confidential vault of the Uy family and illegally transferred to the names of petitioners in the Stock and Transfer Book of NEUGENE. As stressed by the Court of Appeals, there is no reliable showing of any valuable consideration for the supposed transfer of subject stocks to petitioners. Fundamental and crucial is the rule that if a contract has no cause, it does not produce any effect whatsoever and is inexistent or void from the beginning. The complete absence of a cause or consideration renders the contract absolutely void and inexistent. (Robleza vs. Court of Appeals, 174 SCRA 362 [1989]), citing Arts. 1352 and 1409 of the New Civil Code) All things studiedly evaluated in proper perspective, we are of the irresistible conclusion that the private respondents herein are the legitimate holders and owners of at least two-thirds (2/3) of the outstanding capital stock of NEUGENE, with the corresponding right to vote for its dissolution, in accordance with Section 118 of the Corporation Code of the Philippines.

WHEREFORE,the Petition is DISMISSED for lack of merit and the Decision of the Court of Appeals AFFIRMED, in its entirety. No pronouncement as to costs. SO ORDERED.

G.R. No. 128606. December 4, 2000]

REPUBLIC OF THE PHILIPPINES, petitioner, vs. SANDIGANBAYAN (3RD DIVISION), JOSE L. AFRICA, UNIMOLCO, ROBERTO BENEDICTO, ANDRES AFRICA and SMART COMMUNICATIONS, respondent s. DECISION
YNARES-SANTIAGO, J.: This is a petition for review assailing the Resolutions[1] of the Sandiganbayan dated December 6, 1996[2] and March 17, 1997[3] in Civil Case No. 0009, entitled "Republic of the Philippines, Plaintiff versus Jose L. Africa, et al., Defendants, which upheld the sale by Universal Molasses Corporation (UNIMOLCO) of its shares of stock in Eastern Telecommunications Philippines, Inc. (ETPI), to Smart Communications. Petitioner contends that the sale violated its preemptive right as stockholder of ETPI, which is guaranteed in the Articles of Incorporation. ETPI was one of the corporations sequestered by the Presidential Commission on Good Government (PCGG). Among its stockholders were Roberto S. Benedicto and UNIMOLCO. Sometime in 1990, PCGG and Benedicto entered into a compromise agreement whereby

Benedicto ceded to the government 204,000 shares of stock in ETPI, representing his fiftyone percent (51%) equity therein. The other forty-nine percent (49%), consisting of 196,000 shares of stock, were released from sequestration and adjudicated by final judgment to Benedicto and UNIMOLCO. Furthermore, the government agreed to withdraw the cases filed against Benedicto and free him from further criminal prosecution. In a written notice received on April 24, 1996 by Melquiades Gutierrez, the President and Chairman of the Board of ETPI, UNIMOLCO offered to sell to ETPI its 196,000 shares of stock therein. Meanwhile, on motion of petitioner, through the PCGG, the Sandiganbayan issued a Resolution, dated May 7, 1996, authorizing the entry in the Stock and Transfer Book of ETPI of the transfer of ownership of 204,000 shares of stock to petitioner, to be taken out of the shareholdings of UNIMOLCO. On June 5, 1996, Benedicto filed a Manifestation and Motion with the Sandiganbayan, praying that the Resolution dated May 7, 1996 be modified such that the entry of the 204,000 shares of stock of petitioner in ETPI be taken out of the shareholdings of UNIMOLCO and/or Roberto S. Benedicto. On June 21, 1996, PCGG issued Resolution No. 96-142 enjoining all stockholders of ETPI from selling shares of stock therein without the written conformity of the PCGG.[4] Subsequently, on July 24, 1996, UNIMOLCO and Smart Communications executed a Deed of Absolute Sale whereby UNIMOLCO sold its 196,000 shares of stock in ETPI to Smart.[5] Prior to the sale, Smart was not a stockholder of ETPI. Thus, on August 8, 1996, petitioner filed with the Sandiganbayan a Motion to Cite Defendant Benedicto and the Parties to the Sale of UNIMOLCO Shares in ETPI in Contempt of Court and to Rescind and/or Annul Said Sale. Petitioner alleged that the sale of the 196,000 shares of stock of UNIMOLCO to Smart was in defiance of the

May 7, 1996 Resolution of the Sandiganbayan, which provided that the 204,000 shares of the government shall come from the shareholdings of UNIMOLCO, and it interfered with the proceedings thereon. In support of its prayer for the rescission and annulment of the sale, petitioner argued that the same violated its right of first refusal to purchase shares of stock in ETPI. The right of first refusal is contained in Article 10 of the Articles of Incorporation of ETPI, which states:

ARTICLE TENTH: In the event any stockholder (hereinafter referred to as the Offeror) desires to dispose, transfer, sell or assign any shares of stock of the Corporation (hereinafter referred to as the Offered Stock), except in the case of any disposal, transfer, sale or assignment between or among the incorporators or to corporation controlled by the incorporators, the Offeror shall give a right of first refusal to the Corporation and, thereafter in the event that the Corporation shall refuse or fail to accept all of the Offered Stock to all then stockholders of record of the Corporation (except the Offeror) to purchase the Offered Stock pro rata, at a price and upon terms and conditions specified by the Offeror based upon a firm, bona fide, written cash offer from a bona fidepurchaser. The Corporation shall be entitled to exercise its right of first refusal with respect to all, but not less than all, of the Offered Stock for a period (hereinafter referred to as the First Period) of thirty (30) days, from the receipt by it of a written offer to sell from the Offeror. If the Corporation shall fail or refuse within the First Period to accept the offer for all of the Offered Stock, then on or before the end of such First Period, the

Secretary of the Corporation shall transmit by registered mail and by telegram or cable a copy of such offer to each stockholder of record (other than the Offeror) at his/its address appearing on the books of the Corporation and shall also notify each stockholder of the expiry date of such offer (such expiry date being thirty (30) days after the end of the First Period). All then stockholders of record of the Corporation, other than the Offeror, shall be entitled for a period (hereinafter referred to as the Second Period) ending thirty (30) days after the First Period to exercise their rights of first refusal with respect to all or any portion of the Offered Stock for which they have a right of first refusal and may in addition offer to purchase any shares thereof not subscribed for by the other stockholders pursuant to rights of first refusal. Such shares shall be allocated among stockholders offering to purchase such shares, pro rata, up to the limits, if any, specified by such purchasing stockholders. Each such purchasing stockholder shall transmit to the Corporation with his/its acceptance cash, or a certified check or checks drawn on a Philippine bank or banks, in an amount sufficient to meet the terms of the offer corresponding to such number of shares of Offered Stock specified in his/its acceptance.
In its Resolution dated December 6, 1996, the Sandiganbayan denied petitioners motion for contempt and to rescind or annul the sale of the 196,000 ETPI shares of stock to Smart.[6]Petitioner filed a motion for reconsideration but the same was denied in a Resolution dated March 17, 1997.[7] Hence, this petition for review raising the following grounds:

PCGGS EXERCISE OF ITS RIGHT OF FIRST REFUSAL AS STOCKHOLDER, TO PURCHASE THE 196,000 ETPI SHARES REGISTERED IN THE NAME OF UNIMOLCO. II. THE SANDIGANBAYAN ERRED IN APPROVING/RATIFYING THE SALE OF THE 196,000 SHARES BY PRIVATE RESPONDENTS UNIMOLCO, BENEDICTO AND AFRICA IN FAVOR OF SMART.
Petitioner argues that it received the notice of UNIMOLCOs offer to sell its shares of stock only on August 30, 1996. The written notice, issued by Atty. Bayani K. Tan, ETPI Corporate Secretary, gave the stockholders, including petitioner, until September 26, 1996 within which to exercise their preemptive right. On September 24, 1996, petitioner sent a letter to the Corporate Secretary stating that the government is exercising its right of first refusal and offering payment thereof in the form of compensation or set-off against the assets of respondent Benedicto still due to the Philippine government under the Compromise Agreement. Respondents UNIMOLCO, Benedicto and Andres L. Africa filed their Comment,[8] arguing that petitioners offer of payment by way of setoff was invalid, inasmuch as the Articles of Incorporation of ETPI specifically provided that tender of payment should be in cash, certified check or checks drawn on a Philippine bank. Respondent SMART filed its [9] Comment, likewise arguing that petitioners proposal to off-set the purchase price for the shares of stock with assets of Benedicto did not constitute a valid tender of payment. Moreover, petitioner cannot use assets recovered as ill-gotten wealth for the purchase of the shares of stock because under Section 63 of Republic Act No. 6657, any amounts derived therefrom shall be appropriated to fund the Comprehensive Agrarian Reform Program. On October 2, 1997, Victor Africa filed a Motion for Leave to Intervene and a Comment-

I. THE SANDIGANBAYAN ERRED IN NOT RECOGNIZING PETITIONER

in-Intervention.[10] He alleges that petitioners exercise of the right of first refusal is preconditioned on its being a stockholder of ETPI. However, intervenor has a pending motion before the Sandiganbayan precisely questioning petitioners right to become a transferee of ETPI shares and to enjoin the registration of petitioner as a legitimate stockholder in the Stock and Transfer Book of ETPI. On December 10, 1997, the motion for leave to intervene was granted and the Comment-in-Intervention was admitted.[11] The petition is without merit. The records of the case clearly show that the written notice by UNIMOLCO, the Offeror, of its intention to sell its 196,000 shares of stock was duly received on April 24, 1996 by the President and Chairman of the Board of ETPI. The Sandiganbayan correctly held that this was valid service of the written offer to the corporation, applying by analogy the Rules of Court provisions on service of summons. Petitioner does not dispute that the written notice to the President and Chairman of the Board of ETPI was service to the corporation. It merely argues that after receipt of the offer, ETPI did not act in accordance with the procedure laid down in the Articles of Incorporation. Thus, in its petition for review, petitioner states:

notice from ETPI about the said offer to sell the 196,000 share of stock.
[12]

Hence, the First Period of thirty days contemplated in the Articles of Incorporation commenced to run on April 24, 1996, giving the corporation until May 24, 1996 within which to exercise its right of first refusal. ETPIs inaction simply means that it did not desire to purchase the shares of stock. The stockholders right of first refusal, thus, accrued upon the expiration of the First Period and within the succeeding thirty days, known as the Second Period. The Sandiganbayan held that the First Period and the Second Period are continuous in character because the Second Period ends, in the very words of Article 10 of the ETPI Articles, thirty (30) days after the First Period, and the expiry date being thirty (30) days after the end of the First Period.[13] The Second Period, therefore, covered the period from May 24, 1996 to June 23, 1996. Petitioner maintains that under the Articles of Incorporation, the Corporate Secretary of ETPI should have given the stockholders written notice of the offer to sell on or before the expiration of the First Period. However, Resolution No. 96-142, adopted by PCGG on June 21, 1996, states among others:

The April 24, 1996 offer sent to ETPI Chairman and President Melquiades Gutierrez did not become valid and effective as it was not able to completely comply with the requirements of Article 10 of the ETPI Articles of Incorporation. Indeed, after receipt by ETPI of the April 24, 1996 offer, ETPI never acted on it. Assuming that ETPI, as a corporation did not exercise its right of first refusal within the first thirty day period pursuant to Article 10, it did not send notices to then stockholders of record of ETPI about the offered sale and their privilege to exercise their rights of first refusal. In other words, the ETPI stockholders were denied of its formal

WHEREAS, on 4 June 1996, the PCGG received copy of a letter of 29 May 1996 from Atty. Juan de Ocampo, alleging that he is the Corporate Secretary of ETPI, copy of which is hereto attached, stating that under Article Tenth of the ETPI articles of Incorporation, all stockholders of record have the right of first refusal to purchase pro rata to their holdings in ETPI to expire 20 days (supposed to be 30) from expiry date of ETPIs right of first refusal which was allegedly 24 May 1996, giving the Government up to 18 June 1996 to exercise the right of first refusal to purchase up to 22,148 shares of stock.
[14]

From the above, it clearly appears that, by petitioners own admission and contrary to its

belated protestation, the procedure outlined in the Articles of Incorporation relating to the right of first refusal was observed. But petitioner takes exception to Atty. De Ocampos authority to act as Corporate Secretary of ETPI. In this connection, the Sandiganbayan held:

checks drawn on a Philippine bank or banks. The set-off or compensation it proposed does not fall under any of the recognized modes of payment in the Articles. In order that compensation may be proper, Article 1279 of the Civil Code requires:

xxx. The question of who are the legitimate directors and officers of ETPI has been elevated to the Supreme Court but has not yet been finally resolved. This should not, however, detract from the fact that PCGG has actually been informed of the intended sale.
[15]

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things are consumable, they be of the same kind, and also of the same quality if the later has been stated; (3) That the two debts be due;

We agree with the Sandiganbayan. The purpose of the notice requirement in Article 10 of the ETPI Articles of Incorporation is to give the stockholders knowledge of the intended sale of shares of stock of the corporation, in order that they may exercise their preemptive right. Where it is shown that a stockholder had actual knowledge of the intended sale within the period prescribed to exercise the right, the notice requirement had been sufficiently met. In the case at bar, PCGG had actual knowledge of UNIMOLCOs offer to sell its shares of stock. In fact, it issued Resolution No. 96-142 enjoining the sale of the said shares of stock to Smart. Petitioner, thus, cannot feign lack of notice.[16] Parenthetically, PCGG had no more authority to enjoin the sale of UNIMOLCOs 196,000 shares of stock, as it endeavored to do in Resolution No. 96-142. As correctly found by the Sandiganbayan, since the 196,000 shares of stock had already been adjudicated by final judgment to Benedicto and UNIMOLCO, PCGG could no longer exercise power and authority over the same.[17] Therefore, we sustain the Sandiganbayans ruling that petitioners right of first refusal was not seasonably exercised.[18] Even on the assumption that petitioner exercised its right of first refusal on time, it nonetheless failed to follow the requirement in the Articles of Incorporation that payment must be tendered in cash or certified checks or

(4) That they be liquidated and demandable, and (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.
Petitioner sought the offsetting of the price of the shares of stock with assets of respondent Benedicto, whom it claimed was indebted to it for certain lands and dividends due to it under their Compromise Agreement. Benedicto was only a stockholder of UNIMOLCO, the Offeror. While he may be the majority stockholder, UNIMOLCO cannot be said to be liable for Benedictos supposed obligations to petitioner. To be sure, Benedicto and UNIMOLCO are separate and distinct persons. On the basis of this alone, there can be no valid set-off. Petitioner and UNIMOLCO are not principal debtors and creditors of each other. Petitioner counters that UNIMOLCOs corporate fiction should be pierced since it is also owned by Benedicto. However, mere majority ownership of the stocks of a corporation is not per se a cause for piercing the corporate veil. There was no evidence that

UNIMOLCOs corporate entity was used by respondent Benedicto to commit fraud or to do wrong on petitioner; neither was it shown that the corporate entity was merely a farce and that it was used as an alter ego, business conduit or instrumentality of a person or another entity or that piercing the corporation fiction is necessary to achieve justice or equity.[19] Only in these instances may the fiction be pierced and disregarded.[20] Being the party that invoked it, petitioner has the burden of substantiating by clear and convincing evidence that UNIMOLCOs corporate veil must be pierced. Besides, petitioners claims on the lands and dividends allegedly due it from respondent Benedictos other business holdings are not enforceable in court. Only liquidated debts are enforceable in court, there being no apparent defenses inherent in them.[21] For compensation to take place, a distinction must be made between a debt and a mere claim. A debt is a claim which has been formally passed upon by the highest authority to which it can in law be submitted and has been declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and must pass through the process prescribed by law before it develops into what is properly called a debt.[22] There being no two debts for which either party may be said as principally bound to each other, again, there can be no set-off. In the final analysis, the resolution of this case hinges on questions of fact. It is axiomatic that factual findings of the Sandiganbayan are conclusive on the Supreme Court.[23] None of the exceptions to this rule[24] is present in this case. WHEREFORE, the petition is DENIED. The Resolutions of the Sandiganbayan dated December 6, 1996 and March 17, 1997 in Civil Case No. 0009 are AFFIRMED. SO ORDERED.

G.R. No. L-22399

March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant, vs. MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN, THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendantsappellees. Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiff-appellant. N. M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary Board. Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees. REYES, J.B.L., J.: Direct appeal from an order of the Court of First Instance of Manila, in its civil case No. 53936, dismissing the petitioner's complaint on the ground of failure to state cause of action. In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine banking corporation domiciled in Manila, instituted a derivative suit for and in behalf of said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the Republic Bank, and the Monetary Board of the Central Bank of the Philippines. Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the following: .

6. That the relator herein filed the present derivative suit without any further demand on the Board of Directors of the Republic Bank for the reason that such formal demand to institute the present complaint would be a futile formality since the members of the board are personally chosen by defendant Pablo Roman himself.
For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to the Monetary Board of the Central Bank against certain frauds allegedly committed by defendant Pablo Roman, in that being chairman of the Board of Directors of the Republic Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse of his fiduciary duty and taking advantage of his said positions and in connivance with other officials of the Republic Bank", Roman had fraudulently granted or caused to be granted loans to fictitious and non-existing persons and to their close friends, relatives and/or employees, who were in reality their dummies, on the basis of fictitious and inflated appraised values of real estate properties; that said loans amounted to almost 4 million pesos; that acting upon the complaint, Miguel Cuaderno (then Governor of

the Central Bank) and the Monetary Board ordered an investigation, which was carried out by Bank Examiners; that they and the Superintendent of Banks of the Central Bank reported that certain mortgage loans amounting to P2,303,400.00 were granted in violation of sections 77, 78 and 88 of the General Banking Act; that acting on said reports, the Monetary Board, of which defendant Cuaderno was a member, ordered a new Board of Directors of the Republic Bank to be elected, which was done, and subsequently approved by the Monetary Board; that on January 5, 1960, the latter accepted the offer of Pablo Roman to put up adequate security for the questioned loans made by the Republic Bank, and such security was made a condition for the resumption of the Bank's normal operations; that subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred to special prosecutors of the Department of Justice on July 22, 1960, the banking frauds and violations of the Banking Act, reported by the Superintendent of Banks, for investigation and prosecution, but no information was filed up to the time of the retirement of Cuaderno in 1961; that other similar frauds were subsequently discovered; that to neutralize the impending action against him, Pablo Roman engaged Miguel Cuaderno as technical consultant at a compensation of P12,500.00 per month, and selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank; that the Board of Directors composed of individuals personally selected and chosen by Roman, connived and confederated in approving the appointment and selection of Cuaderno and Dizon; that such action was motivated by bad faith and without intention to protect the interest of the Republic Bank but were prompted to protect Pablo Roman from criminal prosecution; that the appointment of Cuaderno and his acceptance of the position of technical consultant are immoral, anomalous and illegal, and his compensation highly unconscionable, because court actions involving the actuations of Cuaderno as Governor and Member or Chairman of the Monetary Board are still pending in court; that as member of the Monetary Board from 1961 to 1962, Bienvenido Dizon exercised supervision over the Republic Bank; that the selection of Dizon as chairman of the Board of the Republic Bank after he was forced to resign from the presidency of the Philippine National Bank and from membership of the Monetary Board and within one year thereafter is in violation of option 3, sub-paragraph (d) of the Anti-Graft and Corrupt Practices Act; that both Cuaderno and Dizon were alter egos of Pablo Roman; that the Monetary Board was about to approve the appointment of Cuaderno and Dizon and would do so unless enjoined. The complaint, therefore, prayed for a writ of preliminary injunction against the Monetary Board to prevent its confirmation of the appointments of Dizon and Cuaderno; against the Board of Directors of the Republic Bank from recognizing Cuaderno as technical consultant and Dizon as Chairman of the Board; and against Pablo Roman from appointing or selecting officers or directors of the Republic Bank, and against the recognition of any such appointees until final determination of the action.

And concluded by praying that after due hearing, judgment be rendered,

a) making the writ of injunction permanent; b) declaring the appointment of defendant Miguel Cuaderno as technical consultant with monthly compensation of P12,500.00 unconscionable, immoral, illegal and null and void; c) declaring the selection of defendant Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank violative of Section 3, sub-paragraph (d) of Republic Act No. 5019, otherwise known as the Anti-Graft and Corrupt Practices Act, and therefore, illegal and null and void; d) declaring that defendant Pablo Roman, in view of his criminal liability for the fraudulent real estate mortgage loans in the Republic Bank amounting to P4 million, has no right to select or to be allowed to select person or persons who are his alter egos to manage the Republic Bank, and enjoining the defendant Board of Directors of the Republic Bank from recognizing any officers or directors appointed or selected by defendant Pablo Roman; e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the Republic Bank all amounts they may have received either in the form of compensation, remuneration or emolument, with an interest thereon at the rate of 6%; or to order defendant Pablo Roman to refund the amounts paid to said defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to pay such reasonable damages to the plaintiff Republic Bank; f) ordering all the defendants to pay the sum of P25,000.00 as attorney's fees, including all expenses of litigation and costs of this suit.
The Monetary Board filed an answer with denials, admissions and affirmative defenses; but the other defendants filed separate motions to dismiss on practically the same grounds: no valid cause of action against the individual movants; lack of legal capacity of plaintiff-relator to sue; and non-exhaustion of intracorporate remedies. These motions were duly opposed by plaintiff Damaso Perez.
1w ph1.t

On October 24, 1963, the court, "taking into consideration the grounds alleged in the motions to dismiss and the opposition for the issuance of a writ of preliminary injunction and the affirmative defenses filed

by the defendants and the arguments in support thereof", and "that there are already eight cases pending in the different branches of this court between practically the same parties", denied the petition for a writ of preliminary injunction and dismissed the case. The court in effect suggested that the matter at issue in the case may be presented in any of the pending eight cases by means of amended and supplemental pleadings. Plaintiff Damaso Perez thereupon appealed to this Court. The issue in this appeal, then, is whether or not the Court below erred in dismissing the complaint. In this connection, it should be remembered that the defenses of the Monetary Board of the Central Bank, being interposed in an answer and not in a motion to dismiss, are not here at issue. Our sole concern is with the motions to dismiss of the other defendants, Roman, Cuaderno, Dizon, and the Board of Directors of the Republic Bank. They mainly controvert the right of plaintiff to question the appointment and selection of defendants Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an individual stockholder is permitted to institute a derivative or representative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in conformity, with these principles. He is neither alleging nor vindicating his own individual interest or prejudice, but the interest of the Republic Bank and the damage caused to it. The action he has brought is a derivative one, expressly manifested to be for and in behalf of the Republic Bank, because it was futile to demand action by the corporation, since its Directors were nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds against the Bank that redounded to its prejudice. The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men are Roman's alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned appointments were made solely to protect Roman from criminal prosecution, by a Board composed by Roman's creatures and nominees, then

the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the Republic Bank would have no interest in shielding Roman, and the directors in approving the appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos,supra.). Facts pleaded in the complaint are to be deemed accepted by the defendants who file a motion to dismiss the complaint for failure to state a cause of action. This is the cardinal principle in the matter. And, it has been ruled that the test of sufficiency of the facts alleged is whether or not the Court could render a valid judgment as prayed for, accepting as true the exclusive facts set forth in the complaint.1So rigid is the norm prescribed that if the Court should doubt the truth of the facts averred it must not dismiss the complaint but require an answer and proceed to trial on the merits.2 Defendants urge that the action is improper because the plaintiff was not authorized by the corporation to bring suit in its behalf. Any such authority could not be expected as the suit is aimed to nullify the action taken by the manager and the board of directors of the Republic Bank; and any demand for intra-corporate remedy would be futile, as expressly pleaded in the complaint. These circumstances permit a stockholder to bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has chosen to make common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings is no ground for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings for the absence of other stockholders to be of any significance, no issues having even been joined. There remains the procedural question whether the corporation itself must be made party defendant. The English practice is to make the corporation a party plaintiff, while in the United States, the usage leans in favor of its being joined as party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be raised against either method. Absence of corporate authority would seem to militate against making the corporation a party plaintiff, while joining it as defendant places the entity in the awkward position of resisting an action instituted for its benefit. What is important is that the corporation' should be made a party, in order to make the Court's judgment binding upon it, and thus bar future relitigation of the issues. On what side the corporation appears loses importance when it is considered that it lay within the power of the trial court to direct the making of such amendments of the pleadings, by adding or dropping parties, as may be required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not a ground to dismiss an action. (Ibid.)

We see no reason to support the contention of defendant Bienvenido Dizon that the action of plaintiff amounts to a quo warranto proceeding. Plaintiff Perez is not claiming title to Dizon's position as head of the Republic Bank's board of directors. The suit is aimed at preventing the waste or diversion of corporate funds in paying officers appointed solely to protect Pablo Roman from criminal prosecution, and not to carry on the corporation's bank business. Whether the complaint's allegations to such effect are true or not must be determined after due hearing. Independently of the grounds advanced by the defendants in their motions to dismiss, the Court a quo gave as a further pretext for the dismissal of the action the pendency of eight other lawsuits between practically the same parties; reasoning that the question at issue in the present case could be incorporated in any one of the other actions by amended or supplemental pleading. We fail to see that this justifies the dismissal of the case under appeal. In the first place, there is no pretense that the cause of action here was already included in any of the other pending cases. As a matter of fact, dismissal of the present action was not sought on the ground of pendency of another action between the same parties. Secondly, the amendment of a complaint after a responsive pleading is filed, would rest upon the discretion of the party and the Court. Hence, this case cannot be dismissed simply because of the possibility that the cause of action here can be incorporated or introduced in any of those of the pending cases. In view of the foregoing, the order dismissing the complaint is reversed and set aside. The case is remanded to the court of origin with instructions to overrule the motions to dismiss and require the defendants to answer the complaint. Thereafter, the case shall be tried and decided on its merits. Costs against defendants-appellees. So ordered.

G.R. No. 85339 August 11, 1989 SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners, vs. ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR., respondents. Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner. Roco & Bunag Law Offices for respondent Ernest Kahn. Siguion Reyna, Montecillo and Ongsiako for other respondents.

NARVASA, J.: On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San Miguel Corporation were acquired 1by fourteen (14) other
corporations, 2 and were placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984 with power to delegate the trusteeship in writing to Andres Soriano III. 3 Shortly after the Revolution of February, 1986, Cojuangco left the country amid "persistent reports" that "huge and unusual cash disbursements from the funds of SMC" had been irregularly made, and the resources of the firm extensively used in support of the candidacy of Ferdinand Marcos during the snap elections in February, 1986 . 4

On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer," and the 14 corporations, as "Sellers," for the purchase by Soriano, "for himself and as agent of several persons," of the 33,133,266 shares of stock at the price of P100.00 per share, or "an aggregate sum of Three Billion Three Hundred Thirteen Million Three Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00) Pesos payable in specified installments. 5 The Agreement revoked the voting trust
above mentioned, and expressed the desire of the 14 corporations to sell the shares of stock "to pay certain outstanding and unpaid debts," and Soriano's own wish to purchase the same "in order to institutionalize and stabilize the management of the COMPANY in .. (himself) and the professional officer corps, mandated by the COMPANY's By- laws, and to direct the COMPANY towards giving the highest priority to its principal products and extensive support to agriculture

programme of' the Government ... 6 Actually, according to Soriano and the other private respondents, the buyer of the shares was a foreign company, Neptunia Corporation Limited (of Hongkong, a wholly owned subsidiary of San Miguel International which is, in turn, a wholly owned subsidiary of San Miguel Corporation; 7 and it was Neptunia which on or about April 1, 1986 had made the down payment of P500,000,000.00, "from the proceeds of certain loans". 8

were tax and other benefits which would redound to the SMC group of companies. 13 However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the PCGG representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it was ever adopted, and stating that what in truth was agreed upon at the meeting of December 4, 1986 was merely a "further study" by Director Ramon del Rosario of a plan presented by him for the assumption of the loan. De los Angeles also pointed out certain "deleterious effects" thereof. He was however overruled by private respondents. 14 When his efforts to obtain relief within
the corporation and later the PCGG proved futile, he repaired to the Securities and Exchange Commission (SEC).
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At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good Government (PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President Marcos, and the sale thereof was "in direct contravention of .. Executive Orders Numbered 1 and 2 (.. dated February 28, 1986 and March 12, 1986, respectively) which prohibit .. the transfer, conveyance, encumbrance, concealment or liquidation of assets and properties acquired by former President Ferdinand Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates. 9 The sequestration
was subsequently lifted, and the sale allowed to proceed, on representations by San Miguel Corporation x x that the shares were 'owned by 1.3 million coconut farmers;' the seller corporations were 'fully owned' by said farmers and Cojuangco owned only 2 shares in one of the companies, etc. However, the sequestration was soon re-imposed by Order of the PCGG dated May 19, 1986 .. The same order forbade the SMC corporate Secretary to register any transfer or encumbrance of any of the stock without the PCGG's prior written authority. 10

He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel Corporation, against ten (10) of the fifteen-member Board of Directors who had "either voted to approve and/or refused to reconsider and revoke Board Resolution No. 86-12-2." 15 His Amended Petition in the
SEC recited substantially the foregoing antecedents and the following additional facts, to wit:

San Miguel promptly suspended payment of the other installments of the price to the fourteen (14) seller corporations. The latter as promptly sued for rescission and damages. 11 On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares" in the corporation to seven (7) individuals, including Eduardo de los Angeles, "from the sequestered shares registered as street certificates under the control of Anscor- Hagedorn Securities, Inc.," to "be held in trust by .. (said seven [7] persons) for the benefit of Anscor-Hagedom Securities, Inc. and/or whoever shall finally be determined to be the owner/owners of said shares. 12 In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares." The Board opined that there was "nothing illegal in this assumption (of liability for the loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was no additional expense or exposure for the SMC Group, and there

a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia Corporation, Ltd., had met and passed a resolution authorizing the company to borrow up to US $26,500,000.00 from the Hongkong & Shanghai Banking Corporation, Hongkong "to enable the Soriano family to initiate steps and sign an agreement for the purchase of some 33,133,266 shares of San ,Miguel Corporation. 16 b) The loan of $26,500,000.00 was obtained on the same day, the corresponding loan agreement having been signed for Neptunia by Ralph Kahn and Carl Ottiger. At the latter's request, the proceeds of the loan were deposited in different banks 17 for the
account of "Eduardo J. Soriano".

c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the stockholders of San Miguel Corporation, 18 inter alia soliciting their
proxies and announcing that "the Soriano family, friends and affiliates acquired a considerable block of San Miguel Corporation shares only a few days ago .., the transaction .. (having been) made through the facilities of the Manila Stock Exchange, and 33,133,266

shares .. (having thereby been) purchased for the aggregate price of' P3,313,326,600.00." The letters also stated that the purchase was "an exercise of the Sorianos' right to buy back the same number of shares purchased in 1983 by the .. (14 seller corporations)."

1 De los Angeles has no legal capacity to sue because a) having been merely imposed by the PCGG as a director on San Miguel, he has no standing to bring a minority derivative suit; b) he personally holds only 20 shares and hence cannotfairly and adequately represent the minority stockholders of the corporation; c) he has not come to court with clean hands; and 2. The Securities & Exchange Commission has no jurisdiction over the controversy because the matters involved are exclusively within the business judgment of the Board of Directors. 19 Kahn's motion to dismiss was subsequently adopted by his correspondents . 20 The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by order dated September 4, 1987. 21 In her view 1) the fact that de los Angeles was a PCGG nominee was irrelevant because in law, ownership of even one share only, sufficed to qualify a person to bring a derivative suit; 2) it is indisputable that the action had been brought by de los Angeles for the benefit of the corporation and all the other stockholders; 3) he was a stockholder at the time of the commission of the acts complained of, the number of shares owned by him being to repeat, immaterial; 4) there is no merit in the assertion that he had come to Court with unclean hands, it not having been shown that he participated in the act complained of or ratified the same; and 5) where business judgment transgresses the law, the securities

d) In implementing the assumption of the Neptunia loan and the purchase agreement for which said loan was obtained, which assumption constituted an improper use of corporate funds to pay personal obligations of Andres Soriano III, enabling him; to purchase stock of the corporation using funds of' the corporation itself, the respondents, through various subsequent machinations and manipulations, for interior motives and in breach of fiduciary duty, compound the damages caused San Miguel Corporation by, among other things: (1) agreeing to pay a higher price for the shares than was originally covenanted in order to prevent a rescission of the purchase agreement by the sellers; (2) urging UCPB to accept San Miguel Corporation and Neptunia as buyers of the shares, thereby committing the former to the purchase of its own shares for at least 25% higher than the price at which they were fairly traded in the stock exchanges, and shifting to said corporations the personal obligations of Soriano III under the purchase agreement; and (3) causing to be applied to the part payment of P1,800,000.00 on said purchase, various assets and receivables of San Miguel Corporation. The complaint closed with a prayer for injunction against the execution or consummation of any agreement causing San Miguel Corporation to purchase the shares in question or entailing the use of its corporate funds or assets for said purchase, and against Andres Soriano III from further using or disposing of the funds or assets of the corporation for his obligations; for the nullification of the SMC Board's resolution of April 2, 1987 making San Miguel Corporation a party to the purchase agreement; and for damages. Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:

and Exchange Commission always has competence to inquire thereinto. Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the annulment of this adverse resolution of the SEC Hearing Officer and her perpetual inhibition from proceeding with SEC Case No. 3152. A Special Division of that Court sustained him, upon a vote of three-to-two. The majority 22 ruled that de los
Angeles had no egal capacity to institute the derivative suit, a conclusion founded on the following propositions:

1) the number of shares owned by him was immaterial, he being a stockholder in his own right; 2) he had not voted in favor of the resolution authorizing the purchase of the shares; and 3) even if PCGG was not the owner of the sequestered shares, it had the right to seek the protection of the interest of the corporation, it having been held that even an unregistered shareholder or an equitable owner of shares and pledgees of shares may be deemed a shareholder for purposes of instituting a derivative suit. De los Angeles has appealed to this Court. He prays for reversal of the judgment of the Court of Appeals, imputing to the latter the following errors: 1) having granted the writ of certiorari despite the fact that Kahn had not first resorted to the plain remedy available to him, i.e., appeal to the SEC en banc and despite the fact that no question of jurisdiction was involved; 2) having ruled on Kahn's petition on the basis merely of his factual allegations, although he (de los Angeles) had disputed them and there had been no trial in the SEC; and 3) having held that he (de los Angeles) could not file a derivative suit as stockholder and/or director of the San Miguel Corporation. For their part, and in this Court, the respondents make the following assertions: 1) SEC has no jurisdiction over the dispute at bar which involves the ownership of the 33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R. Nos. 74910, 5075, 75094, 76397, 79459 and 79520, promulgated on August 10, 1988; 25 2) de los Angeles was beholden to the controlling stockholder in the corporation (PCGG), which had "imposed" him on the corporation; since the PCGG had a clear conflict of

1) a party "who files a derivative suit should adequately represent the interests of the minority stockholders;" since "De los Angeles holds 20 shares of stock out of 121,645,860 or 0.00001644% (appearing to be undisputed), (he) cannot even be remotely said to adequately represent the interests of the minority stockholders, (e)specially so when .. de los Angeles was put by the PCGG to vote the majority stock," a situation generating "a genuine conflict of interest;" 2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position as PCGG-nominated director is inconsistent with his assumed role of representative of minority stockholders; not having been elected by the minority, his voting would expectedly consider the interest of the entity which placed him in the board of directors; 3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle
that the (a) PCGG cannot exercise acts of dominion over sequestered property, (b) it has only powers of administration, and (c) its voting of sequestered stock must be done only pursuant to its power of administration; and

4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought for the benefit of the corporation. The dissenting Justices, 24 on the other hand, were of
the opinion that the suit had been properly brought by de los Angeles because

interest with the minority, de los Angeles, as director of the former, had no legal capacity to sue on behalf of the latter; 3) even assuming absence of conflict of interest, de los Angeles does not fairly and adequately represent the interest of the minority stockholders; 4) the respondents had properly applied for certiorari with the Court of Appeals because a) that Court had, by law, exclusive appellate jurisdiction over officers and agencies exercising quasi-judicial functions, and hence file competence to issue the writ of certiorari; b) the principle of exhaustion of administrative remedies does not apply since the issue involved is one of law; c) said respondents had no plain, speedy and adequate remedy within SEC; d) the Order of the SEC Investigating Officer denying the motion to dismiss was issued without or in excess of jurisdiction, hence was correctly nullified by the Court of Appeals; and e) de los Angeles had not raised the issue of absence of a motion for reconsideration by respondents in the SEC case; in any event, such a motion was unnecessary in the premises. De los Angeles' Reply seeks to make the following points: 1) since the law lays down three (3) requisites for a derivative suit, viz: a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of,

b) he has exhausted intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and c) c)the cause of action actually devolves on the corporation, the ,wrongdoing or harm having been caused to the corporation and not to .the particular stockholder bringing the suit; and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having acquired those shares as early as 1977, (2) he had sought without success to have the board of' directors remedy with wrong, and (3) that wrong was in truth a 'wrong against the stockholders of the corporation, generally, ,and not against him individually and it was the corporation, and not he, particularly, that would be entitled to the appropriate' relief the propriety of his suit cannot be gainsaid; 2) Kahn had not limited himself to questions of law in the proceedings in the Court of Appeals and hence could not claim exclusion from the scope of the doctrine of exhaustion of remedies; moreover, Rule 65, invoked by him, bars a resort to certiorari. where a plain, speedy and accurate remedy was available to him in this case, to wit, a motion for reconsideration before the Sec en banc and, contrary to the respondent's claim, De Los Angeles had in fact asserted to this propositions before the Appellate Tribunal; and 3) the respondent had not raised the issue of jurisdiction before the Court of Appeals; indeed, they admit to their Comment that that issue has not yet been resolved by the SEC," be this as it may, the derivative suit does not fall within the BASECO doctrine since it does not involve any question of ownership of the

33,133,266 sequestered SMC shares but rather, the validity of the resolution of the board of directors for the assumption by the corporation, for the benefit of certain of its officers and stockholders, of liability for loans contracted by another corporation, which is an intra-corporate dispute within the exclusive jurisdiction of the SEC. 1. De los Angeles is not opposed to the asserted position of the PCGG that the sequestered SMC shares of stock belong to Ferdinand Marcos and/or his dummies and/or cronies. His consent to sit in the board as nominee of PCGG unquestionably indicates his advocacy of the PCGG position. He does not here seek, and his complaint in the SEC does not pray for, the annulment of the purchase by SMC of the stock in question, or even the subsequent purchase of the same stock by others 26 which proposition was
challenged by (1) one Evio, in SEC Case No. 3000; (2) by the 14 corporations which sold the stock to SMC, in Civil Case No. 13865 of the Manila RTC, said cases having later become subject of G.R. No. 74910 of this Court; (3) by Neptunia, SMC, and others, in G.R. No. 79520 of this Court; and (4) by Eduardo Cojuangco and others in Civil Case No. 16371 of the RTC, Makati, [on the theory that the sequestered stock in fact belonged to coconut planters and oil millers], said case later having become subject of G.R. No. 79459 of this court . 27 Neither does de los Angeles impugn, obviously, the right of the PCGG to vote the sequestered stock thru its nominee directors as was done by United Coconut Planters Bank and the 14 seller corporations (in SEC Case No. 3005, later consolidated with SEC Case No. 3000 above mentioned, these two (2) cases later having become subject of G.R.No. 76397) as well as by one Clifton Ganay, a UCPB stockholder (in G.R. No. 75094 of this Court). 28
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misappropriated by former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their close relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or criminal, are lodged within the exclusive and original jurisdiction of the Sandiganbayan,' and all incidents arising from, incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court." His complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or "any incidents arising from, incidental to, or related to" any case involving such property, but assets indisputably belonging to San Miguel Corporation which were, in his (de los Angeles') view, being illicitly committed by a majority of its board of directors to answer for loans assumed by a sister corporation, Neptunia Co., Ltd.

De los Angeles' complaint, in fine, is confined to the issue of the validity of the assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its officers and stockholders, an issue evidently distinct from, and not even remotely requiring inquiry into the matter of whether or not the 33,133,266 SMC shares sequestered by the PCGG belong to Marcos and his cronies or dummies (on which- issue, as already pointed out, de los Angeles, in common with the PCGG, had in fact espoused the affirmative). De los Angeles' dispute, as stockholder and director of SMC, with other SMC directors, an intra-corporate one, to be sure, is of no concern to the Sandiganbayan, having no relevance whatever to the ownership- of the sequestered stock. The contention, therefore, that in view of this Court's ruling as regards the sequestered SMC stock above adverted to, the SEC has no jurisdiction over the de los Angeles complaint, cannot be sustained and must be rejected. The dispute concerns acts of the board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest of the stockholders, or is one arising out of intra-corporate relations between and among stockholders, or between any or all of them and the corporation of which they are stockholders . 30 2. The theory that de los Angeles has no personality to bring suit in behalf of the corporation because his stockholding is minuscule, and there is a "conflict of interest" between him and the PCGG cannot be sustained, either. It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only. 00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately represent the interests of the minority

The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court's Resolution of August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pena, et al 29 an cases of the Commission regarding 'the funds,
moneys, assets, and properties illegally acquired or

stockholders. The implicit argument that a stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock finds no support whatever in the law. The requisites for a derivative suit 31 are as follows: a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; 32
b) he has tried to exhaust intracorporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; 33 and

any aspect be deemed to be "beholden" to the PCGG, his ownership of these shares being precisely what he invokes as the source of his authority to bring the derivative suit. 4. It is also theorized, on the authority of the BASECO decision, that the PCGG has no power to vote sequestered shares of stock as an act of dominion but only in pursuance to its power of administration. The inference is that the PCGG's act of voting the stock to elect de los Angeles to the SMC Board of Directors was unauthorized and void; hence, the latter could not bring suit in the corporation's behalf. The argument is strained and obviously of no merit. As already more than plainly indicated, it was not necessary for de los Angeles to be a director in order to bring a derivative action; all he had to be was a stockholder, and that he was owning in his own right 20 shares of stock, a fact not disputed by the respondents. Nor is there anything in the Baseco decision which can be interpreted as ruling that sequestered stock may not under any circumstances be voted by the PCGG to elect a director in the company in which such stock is held. On the contrary, that it held such act permissible is evident from the context of its reference to the Presidential Memorandum of June 26, 1986 authorizing the PCGG, "pending the outcome of proceedings to determine the ownership of .. sequestered shares of stock,"'to vote such shares .. at all stockholders' meetings called for the election of directors ..," the only caveat being that the stock is not to be voted simply because the power to do so exists, whether it be to oust and replace directors or to effect substantial changes in corporate policy, programs or practice, but only "for demonstrably weighty and defensible grounds" or "when essential to prevent disappearance or wastage of corporate property." The issues raised here do not peremptorily call for a determination of whether or not in voting petitioner de los Angeles to the San Miguel Board, the PCGG kept within the parameters announced in Baseco; and absent any showing to the contrary, consistently with the presumption that official duty is regularly performed, it must be assumed to have done so.

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. 34 The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the corporation. 3. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise that de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it does not follow that he is legally obliged to vote as the PCGG would have him do, that he cannot legitimately take a position inconsistent with that of the PCGG, or that, not having been elected by the minority stockholders, his vote would necessarily never consider the latter's interests. The proposition is not only logically indefensible, non sequitur, but also constitutes an erroneous conception of a director's role and function, it being plainly a director's duty to vote according to his own independent judgment and his own conscience as to what is in the best interests of the company. Moreover, it is undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as regards which he cannot from

WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in CA- G.R. SP No. 12857 setting aside the order of September 4, 1987 issued in SEC Case No. 3153 and dismissing said case is REVERSED AND SET ASIDE. The further disposition in the appealed decision for the issuance of a writ of preliminary injunction upon the filing and approval of a bond of P500,000.00 by respondent Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and any writ of injunction issued pursuant thereto is lifted. Costs against private respondents. SO ORDERED.

Jesus T. Maglutac (Jesus for short) ran the company as president, chairman of the board, and chairman of the executive committee, while Mariano T. Maglutac (Mariano for short) served as executive vice-president and vice-chairman of the executive committee until April 1984. Sometime in June 1984, the two brothers agreed to go their separate ways, with Mariano being persuaded to sell to Jesus his shareholdings in Commart amounting to 25% of the outstanding capital stock. As part of the deal, a "Cooperative Agreement" was signed, between Commart (represented by Jesus) and Mariano, in which, among others, Commart ceded to Mariano or to an "acceptable entity" he may create, a portion of its business, with a pledge of mutual cooperation for a certain period so as to enable Mariano to get his own corporation off the ground, so to speak. Mariano's wife, Alice M. Maglutac (private respondent herein) who has been for years a stockholder and director of Commart, did not dispose of her shareholdings, and thus continued as such even after the sale of Mariano's equity. As broker and indentor, Commart's principal income came from commissions paid to it in U.S. dollars by foreign suppliers of fertilizers and other commodities imported by Planters Products, Inc. and other local importers. Shortly after the sale of his equity in Commart to Jesus, Mariano allegedly discovered that for several years, Jesus and his wife Corazon (who was herself a director) had been siphoning and diverting to their private bank accounts in the United States and in Hongkong gargantuan amounts sliced off from commissions due Commart from some foreign suppliers. Consequently, on August 22, 1989, spouses Mariano and Alice Maglutac filed a complaint (SEC Case No. 2673) with the Securities & Exchange Commission (SEC for short) against Jesus T. Maglutac, Victor Cipriano, Clemente Ramos, Carolina de los Reyes, Corazon Maglutac, Alberto Maglutac and Bernardo Maglutac (Jesus as Chairman) and the rest as members of the Board of Directors of Commart). In their Complaint, Mariano and Alice Maglutac alleged, among others, that "Jesus T. Maglutac, by means of secret arrangements with foreign suppliers, embodied in and evidenced by, correspondences and other documents discovered just recently, has been diverting into his private bank accounts and converting to his own personal benefit and advantage substantial portions of the commission income of the corporation, to the prejudice of the corporation, its

G.R. No. 85318 June 3, 1991 COMMART (PHILS.) INC., JESUS, CORAZON, ALBERTO, AND BERNARD all surnamed MAGLUTAC, petitioners, vs. SECURITIES & EXCHANGE COMMISSION and ALICE MAGLUTAC, respondents. Monsod, Tamargo & Associates for petitioners. Panganiban, Benitez, Barinaga & Bautista Law Offices for private respondent.

PARAS, J.:p Petitioners, in the instant petition for review on certiorari, seek the reversal of the en banc Order of the respondent Securities & Exchange Commission dated September 12, 1988 denying the petition for certiorari (SEC-EB No. 115-117) filed by the petitioners herein and ordering that the original complaint (SEC Case No. 2673) be remanded to the Securities Investigation and Clearing Department for further proceeding, for having been rendered in grave abuse of discretion amounting to lack of or in excess of jurisdiction and in contravention of existing laws and jurisprudence. Commart (Phils.), Inc., (Command for short) is a corporation organized by two brothers, Jesus and Mariano Maglutac, to engage in the brokerage business for the importation of fertilizers and other products/commodities.

stockholders and its creditors." (Petition, Annex B, p. 2; Rollo, p. 20) Thus, complainants prayed, among others, that judgment be rendered as follows (a) Ordering respondents Jesus T. Maglutac, Corazon Maglutac, and Victor Cipriano to account for and to turn over or deliver to the Corporation the sum of US$2,539,918.97, or its equivalent in Philippine currency, with legal interest thereon from the respective dates of misappropriation or, at the very least, from date of filing of this suit, together with such other and further sums as may be proved to have likewise been misappropriated by them; (b) Ordering all the respondents, as members of the Board of Directors, to take such remedial steps as would protect the corporation from further depredation of its funds and property; (c) Declaring rescinded or annulled the disposition of complainant Mariano T. Maglutac's shares of stock to respondent Jesus T. Maglutac and ordering the restoration to the former of all his executive positions with all the rights and privileges thereunto appertaining; or, in the alternative, ordering that said complainant be paid the equivalent of one-fourth of the actual market value of COMMART's present assets including goodwill, taking into consideration also the total sums misappropriated by respondents Jesus T. Maglutac, Corazon Maglutac, and Victor Cipriano which rightfully belonged to COMMART; and (d) Ordering respondents to pay complainants attorney's fees equivalent to twenty (20%) per cent of the total amounts awarded and recovered, plus such further sums as may be proved to have been incurred as and by way of litigation expenses. (pp. 24-25, Rollo) In response to the aforementioned Complaint, two Motions to Dismiss were filed. The records reveal that: (a) On October 17, 1984, Albert and Bernard Maglutac moved to dismiss on the ground that Mariano Maglutac

has no capacity to sue and the complaint states no cause of action against them. (b) On October 20, 1984, Jesus & Corazon Maglutac likewise moved to dismiss on the ground that respondent Commission does not have jurisdiction over the nature of the suit. These motions were opposed by complainants Alice and Mariano Maglutac. While said incidents were pending, complainants filed an Amended Complaint hereby Commart was impleaded as party complainant and praying that Commart be placed under receivership and the properties of Jesus & Corazon Maglutac and Victor Cipriano be attached. It is alleged in the Amended Complaint that complainant Commart is the corporation in whose behalf and for whose benefit this derivative suit is brought; that complainant Alice M. Maglutac is a minority stockholder in good standing of Commart while her husband complainant Mariano T. Maglutac was, likewise, until June 25, 1984 or thereabouts, a stockholder of Commart. Motions to dismiss said Amended Complaint were also filed by present petitioners and were also duly opposed by complainants Mariano and his wife. On May 10, 1985 Commart filed a Manifestation/Notice of Dismissal, manifesting that "it withdraws and dismisses the action taken in its behalf by complainants Mariano T. Maglutac and Alice M. Maglutac against all respondents." (Petition, Annex E, p. 3; Rollo, pp. 42-44) This was opposed by complainants on the ground, among other doctrines, that in a derivative suit the corporation is not allowed to be an active participant and has no control over the suit against the real defendants; that the suing shareholder has the right of control. On May 27, 1985, the Hearing Panel issued an Order denying all the motions to dismiss as well as the so called manifestation/notice of dismissal on the finding inter alia that Respondents maintain that the present action is basically one for annulment/rescission of sale with alternative prayer for reinstatement of employment status; that the action is not a derivative suit considering that the nature of the action is one for annulment and the fact that complainant Mariano T. Maglutac being a non-stockholder is not

qualified to institute a derivative suit; that the action does not in any way make mention of an actionable wrong against respondents Albert and Bernard Maglutac, Clemente Ramos and Carolina de los Reyes. By way of opposition, complainants alleged that the instant action should be characterized as a minority stockholders' derivative suit; that complainant Alice Maglutac is not merely a nominal party but a real party in interest; that Mariano T. Maglutac's rights as a stockholder have been injured through the machinations and maneuvering of respondent Jesus Maglutac; that the prayer for rescission or annulment of contract is merely the logical consequence of the exercise of jurisdiction by this Commission. Respondents' contention that the Commission has no jurisdiction over the subject matter or the nature of the action is devoid of merit. It is a cardinal principle in legal procedure that what determined the subject matter or the nature of the action are the facts a complaint as constituting the cause of action. A perusal of the complaint, as well as, the amended complaint would show that the action is one for "mismanagement", for the complainants alleged, inter alia, that ". . . respondent Jesus T. Maglutac, by means of secret arrangements with foreign suppliers embodied in, and evidenced by, correspondences and other documents discovered just recently, has been diverting into his private bank accounts and to his own personal benefit and advantage substantial portions of the commission income of the corporation, to the prejudice of the corporation, its stockholders and its creditors and enumerated immediately thereafter the alleged specific acts of mismanagement. Viewed therefrom, the Commission has jurisdiction. (pp. 127-128, Rollo) On June 18, 1985 Commart filed a motion for reconsideration and on August 29, 1985, Jesus and Corazon Maglutac also filed a similar motion to have the Order of May 27, 1985 reconsidered and set

aside. These motions were duly opposed by Mariano and Alice Maglutac. Acting on the Motion for Reconsideration, the Hearing Panel issued on November 12, 1985, an Order modifying its previous order "by dismissing this case insofar as Mariano T. Maglutac is concerned" but affirming the said order "in all other respects." (Annex F to Petition, pp. 46, 49, Rollo) Not satisfied with such modification present petitioners as respondents in SEC Case No. 2673 went to the SEC en bancon a petition for certiorari, prohibition and mandamus with prayer for preliminary injunction. They contend (a) that the Hearing Panel acted with grave abuse of discretion in not dismissing the case for failure of Alice Maglutac to exhaust intracorporate remedies, and (b) that grave abuse was likewise committed in not dismissing the case on the ground that the complaint did not show clearly that Alice Maglutac was a stockholder at the time the questioned transaction occurred. On September 12, 1988, the Commission en banc issued an Order denying the aforesaid petition and remanding the case to the Securities Investigation and Clearing Department for further proceedings. It ruled (a) that exhaustion of intracorporate remedy before filing suit "may be dispensed with where it is clear that it is unavailable or futile" as was the case here. (p. 2, Order of Sept. 12, 1988, Annex A to Petition) citing Everett v. Asia Banking Corp., 49 Phil. 512, and Republic Bank v. Cuaderno, 19 SCRA 671, and (b) that the mere allegation in the complaint that complainant is still a stockholder of Commart "is sufficient to vest jurisdiction to this Commission" but complainant must prove at the time of reception of evidence that she was also a stockholder at the time the acts complained of occurred. (Id., p. 3) Although complainant Alice Maglutac failed to exhaust an intra-corporate remedy before filing this case, the said condition precedent may be dispensed with where it is clear that it is unavailable or futile. Thus it was held that: Where the board of directors in a corporation is under the complete control of the principal defendants in the case and it is obvious that a demand upon the board of directors to

institute an action and prosecute the same effectively would be useless, the action may be brought by one or more of the stockholders without such demand (Everett v. Asia Banking Corp., 49 Phil. 512; Republic Bank v. Cuaderno, et al., No. L-22399, March 30, 1967). A stockholder can file a derivative suit provided there is an allegation in the complaint that she is such at the time the acts complained of occurred, and at the time the suit is brought (Hawes v. Oakland, 14 Otto [104 U.S.], 450,456; S.C. 5972, 13 Fletcher 345, cited in Alvendia, The Law of Private Corporations in the Philippines, First Ed., p. 361). The requirement that said facts be pleaded is merely procedural although the necessity of the existence of these facts in order to give rise to the right of action is substantive (Pascual v. Del Saz Orozco, 19 Phil. 97). And equity considerations warrant the liberal interpretation of the rules of procedure to the end that technicalities should not stand in the way of equitable relief (Vol. I, Francisco, Civil Procedure, 2nd ed., p. 157, 1973 ed.) Mere allegation therefore that complainant is still a stockholder of Commart is sufficient to vest jurisdiction to this Commission. Complainant must however prove at the time of reception of evidence that she was also a stockholder at the time the acts complained of occurred. (pp. 10-11, Memorandum by public respondent) Hence, this petition. The petitioners invoke two grounds for reversal of the Order under review thereby raising these two issues, to wit: 1. Did the Securities and Exchange Commission err and/or commit "grave abuse of discretion" in denying the petition forcertiorari and remanding the case for further proceedings despite the so-called "notice of dismissal" filed by Commart?

2. Did the Securities and Exchange Commission err and/or commit "grave abuse of discretion" in its handling of the "conflict of interest issue?" (Petition, p. 6; Rollo, p. 81) We find the petition devoid of merit. The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9 under First Cause of Action, readily shows that it avers the diversion of corporate income into the private bank accounts of petitioner Jesus T. Maglutac and his wife. Likewise, the principal relief prayed for in the complaint is the recovery of a sum of money in favor of the corporation. This being the case, the complaint is definitely a derivative suit. Consequently, the SEC correctly held that the case was a minority stockholder's derivative suit and correctly sustained the hearing panel's denial insofar as Alice Maglutac was concerned of the motions to dismiss it. A derivative suit has been the principal defense of the minority shareholder against abuses by the majority. It is a remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the corporation's rights. Indeed, to grant to Commart the right of withdrawing or dismissing the suit, at the instance of majority stockholders and directors who themselves are the persons alleged to have committed breaches of trust against the interest of the corporation, would be to emasculate the right of minority stockholders to seek redress for the corporation. To consider the Notice of Dismissal filed by Commart as quashing the complaint filed by Alice Maglutac in favor of the corporation would be to defeat the very nature and function of a derivative suit and render the right to institute the action illusory. In any case, the suit is for the benefit of Commart itself, for a judgment in favor of the complainants will necessarily mean recovery by the corporation of the US$2.5 million alleged to have been diverted from its coffers to the private bank accounts of its top managers and directors. Thus, the prayer in the Amended Complaint is for judgment ordering respondents Jesus and Corazon Maglutac, as well as Victor Cipriano, "to account for and to turn over or deliver to the Corporation" the aforesaid sum, with legal interest, and "ordering all the respondent, as members of the Board of Directors to take such remedial steps as would protect the corporation from further depredation of the funds and property." (pars. [a] & [b], Annex 2, Comment)

On the "conflict of interest" issue, petitioners allege that private respondent Alice Maglutac "is a majority stockholder of M.M. International Sales, a business rival/competitor of Commart and holds only less than one percent (1%) of the entire shareholdings of Commart." According to petitioners, this being the case it is easier to believe that this so called derivative suit was filed because it is to the best interest of the company where she has a bigger and substantial interest, which in this case is M.M. International Sales, Inc. In disposing of this contention respondent SEC ruled that jurisdiction cannot be made to depend upon the pleas and defenses set up by a defendant in a motion to dismiss or answer, otherwise jurisdiction should become dependent almost entirely upon the defendant (citing Cardenas v. Camus, infra.) But it left the door open to a further consideration of the issue by stating that complainant's ownership of majority stocks of a rival corporation could not at this stage of the proceedings, defeat complainant's claims: Jurisdiction of the court cannot be made to depend upon the pleas or defenses pleaded by the defendant in his motion to dismiss or answer, for were we to be governed by such rule, the question of jurisdiction would depend almost entirely upon the defendant (Cardenas v. Camus, 5 SCRA 639). Respondents' assertion in their motion to dismiss of complainant's ownership of the majority stocks of a rival corporation, could not at this stage of the proceedings, defeat complainant's claim. (pp. 83-84, Rollo) In other words, no real prejudice has been inflicted upon petitioners' right to be heard on this matter raised by them, since the same can still be looked into during the hearing of a derivative suit on the merits. There was, therefore, neither error nor grave abuse of discretion in the decision of the Securities & Exchange Commission not to dismiss the case but to remand it instead to the Hearing Panel for further proceedings. WHEREFORE, for lack of merit, this Petition is DISMISSED. Costs against petitioners. SO ORDERED.

SECOND DIVISION
HI-YIELD REALTY, INCORPORATED, Petitioner,

G.R. N

Presen

QUISU - versus -

YNARE

CHICO

LEONA HON. COURT OF APPEALS, HON. CESAR O. UNTALAN, in his capacity as PRESIDING JUDGE OF RTC-MAKATI, BRANCH 142, HONORIO TORRES & SONS, INC., and ROBERTO H. TORRES, Respondents. x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

BRION

Prom

June 2

DECISION
QUISUMBING, J.: This is a special civil action for certiorari seeking to nullify and set aside the Decision[1] dated March 10, 2005 and Resolution[2] dated May 26, 2005 of the Court of Appeals in CA-G.R. SP. No. 83919. The appellate court had dismissed the petition for certiorari and prohibition filed by petitioner and denied its reconsideration.

The antecedent facts of the case are undisputed. On July 31, 2003, Roberto H. Torres (Roberto), for and on behalf of Honorio Torres & Sons, Inc. (HTSI), filed a Petition for Annulment of Real Estate Mortgage and Foreclosure Sale[3] over two parcels of land located in Marikina and Quezon City. The suit was filed against Leonora, Ma. Theresa, Glenn and Stephanie, all surnamed Torres, the Register of Deeds of Marikina and Quezon City, and petitioner Hi-Yield Realty, Inc. (Hi-Yield). It was docketed as Civil Case No. 03-892 with Branch 148 of the Regional Trial Court (RTC) of Makati City. On September 15, 2003, petitioner moved to dismiss the petition on grounds of improper venue and payment of insufficient docket fees. The RTC denied said motion in an Order[4] dated January 22, 2004. The trial court held that the case was, in nature, a real action in the form of a derivative suit cognizable by a special commercial court pursuant to Administrative Matter No. 0011-03-SC.[5] Petitioner sought reconsideration, but its motion was denied in an Order[6] dated April 27, 2004. Thereafter, petitioner filed a petition for certiorari and prohibition before the Court of Appeals. In a Decision dated March 10, 2005, the appellate court agreed with the RTC that the case was a derivative suit. It further ruled that the prayer for annulment of mortgage and foreclosure proceedings was merely incidental to the main action. The dispositive portion of said decision reads:

WHEREFORE, premises considered, this Petition is hereby DISMISSED. However, public respondent is hereby DIRECTED to instruct his Clerk of Court to compute the proper docket fees and thereafter, to order the private respondent to pay the same IMMEDIATELY. SO ORDERED.
[7]

Petitioners motion [8] reconsideration was denied Resolution dated May 26, 2005.

for in a

Hence, this petition which raises the following issues:

I. WHETHER THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN NOT DISMISSING THE CASE AGAINST HI-YIELD FOR IMPROPER VENUE DESPITE FINDINGS BY THE TRIAL COURT THAT THE ACTION IS A REAL ACTION. II. WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE COMPLAINT AS AGAINST HI-YIELD EVEN IF THE JOINDER OF PARTIES IN THE COMPLAINT VIOLATED THE RULES ON VENUE. III. WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE ANNULMENT OF REAL ESTATE MORTGAGE AND FORECLOSURE SALE IN THE COMPLAINT IS MERELY INCIDENTAL [TO] THE DERIVATIVE SUIT.
[9]

The pivotal issues for resolution are as follows: (1) whether venue was properly laid; (2) whether there was proper joinder of parties; and (3) whether the action to annul the real estate mortgage and foreclosure sale is a mere incident of the derivative suit. Petitioner imputes grave abuse of discretion on the Court of Appeals for not dismissing the case against it even as the trial court found the same to be a real action. It explains that the rule on venue under the Rules of Court prevails over the rule prescribing the venue for intracorporate controversies; hence, HTSI erred when it filed its suit only inMakati when the lands subjects of the case are in Marikina and Quezon City. Further, petitioner argues that the appellate court erred in ruling that the action is mainly a derivative suit and the annulment of real estate mortgage and foreclosure sale is merely incidental thereto. It points out that the caption of the case, substance of the allegations, and relief prayed for revealed that the main thrust of the action is to recover the lands. Lastly, petitioner asserts that it should be dropped as a party to the case for it has been wrongly impleaded as a non-stockholder defendant in the intracorporate dispute. On the other hand, respondents maintain that the action is primarily a derivative suit to redress the alleged unauthorized acts of its corporate officers and major stockholders in connection with the lands. They postulate that the nullification of the mortgage and foreclosure sale would just be a logical

consequence of a decision adverse to said officers and stockholders. After careful consideration, we are in agreement that the petition must be dismissed. A petition for certiorari is proper if a tribunal, board or officer exercising judicial or quasi-judicial functions acted without or in excess of jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction and there is no appeal, or any plain, speedy and adequate remedy in the ordinary course of law.[10] Petitioner sought a review of the trial courts Orders dated January 22, 2004 and April 27, 2004 via a petition for certiorari before the Court of Appeals. In rendering the assailed decision and resolution, the Court of Appeals was acting under its concurrent jurisdiction to entertain petitions for certiorari under paragraph 2,[11] Section 4 of Rule 65 of the Rules of Court. Thus, if erroneous, the decision and resolution of the appellate court should properly be assailed by means of a petition for review on certiorari under Rule 45 of the Rules of Court. The distinction is clear: a petition for certiorari seeks to correct errors of jurisdiction while a petition for review on certiorari seeks to correct errors of judgment committed by the court a quo.[12] Indeed, this Court has often reminded members of the bench and bar that a special civil action for certiorari under Rule 65 lies only when there is no appeal nor plain, speedy and adequate remedy in the ordinary course of law.[13] In the case at hand, petitioner impetuously filed a petition for certiorari before us when a petition for

review was available as a speedy and adequate remedy. Notably, petitioner filed the present petition 58[14] days after it received a copy of the assailed resolution dated May 26, 2005. To our mind, this belated action evidences petitioners effort to substitute for a lost appeal this petition for certiorari. For the extraordinary remedy of certiorari to lie by reason of grave abuse of discretion, the abuse of discretion must be so patent and gross as to amount to an evasion of positive duty, or a virtual refusal to perform the duty enjoined or to act in contemplation of law, or where the power is exercised in an arbitrary and despotic manner by reason of passion and personal hostility.[15] We find no grave abuse of discretion on the part of the appellate court in this case. Simply, the resolution of the issues posed by petitioner rests on a determination of the nature of the petition filed by respondents in the RTC. Both the RTC and Court of Appeals ruled that the action is in the form of a derivative suit although captioned as a petition for annulment of real estate mortgage and foreclosure sale. A derivative action is a suit by a shareholder to enforce a corporate cause of action.[16] Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit on behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or

are the ones to be sued, or hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal party.[17] In the case of Filipinas Port Services, Inc. v. Go,[18] we enumerated the foregoing requisites before a stockholder can file a derivative suit:
a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; b) he has tried to exhaust intracorporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.
[19]

Even then, not every suit filed on behalf of the corporation is a derivative suit. For a derivative suit to prosper, the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit.[20] The Court finds that Roberto had satisfied this requirement in paragraph five (5) of his petition which reads:
5. Individual petitioner, being a minority stockholder, is instituting the

instant proceeding by way of a derivative suit to redress wrongs done to petitioner corporation and vindicate corporate rights due to the mismanagement and abuses committed against it by its officers and controlling stockholders, especially by respondent Leonora H. Torres (Leonora, for brevity) who, without authority from the Board of Directors, arrogated upon herself the power to bind petitioner corporation from incurring loan obligations and later allow company properties to be foreclosed as hereinafter set forth;
[21]

Leonora. Clearly, Roberto could not expect relief from the board. Derivative suits are governed by a special set of rules under A.M. No. 01-2-04SC[23] otherwise known as the Interim Rules of Procedure Governing Intra-Corporate Controversies under Republic Act No. 8799.[24] Section 1,[25] Rule 1 thereof expressly lists derivative suits among the cases covered by it. As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04SC states:
SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the Regional Trial Court which has jurisdiction over the principal office of the corporation, partnership, or association concerned. Where the principal office of the corporation, partnership or association is registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in the city or municipality where the head office is located.

Further, while it is true that the complaining stockholder must satisfactorily show that he has exhausted all means to redress his grievances within the corporation; such remedy is no longer necessary where the corporation itself is under the complete control of the person against whom the suit is being filed. The reason is obvious: a demand upon the board to institute an action and prosecute the same effectively would have been useless and an exercise in futility.[22] Here, Roberto alleged in his petition that earnest efforts were made to reach a compromise among family members/stockholders before he filed the case. He also maintained that Leonora Torres held 55% of the outstanding shares while Ma. Theresa, Glenn and Stephanie excluded him from the affairs of the corporation. Even more glaring was the fact that from June 10, 1992, when the first mortgage deed was executed until July 23, 2002, when the properties mortgaged were foreclosed, the Board of Directors of HTSI did nothing to rectify the alleged unauthorized transactions of

Thus, the Court of Appeals did not commit grave abuse of discretion when it found that respondents correctly filed the derivative suit before the Makati RTC where HTSI had its principal office. There being no showing of any grave abuse of discretion on the part of the Court of Appeals the other alleged errors will no longer be passed upon as mere errors of judgment are not proper subjects of a petition for certiorari.

WHEREFORE, the instant petition is hereby DISMISSED. The Decision dated March 10, 2005 and the Resolution dated May 26, 2005 of the Court of Appeals in CA-G.R. SP. No. 83919 are AFFIRMED. No pronouncement as to costs. SO ORDERED.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied registration on seven grounds, of which the following were disputed by the stockholders: 3. The number of parcels not certified to in the acknowledgment; 5. P430.50 Reg. fees need be paid;

October 30, 1962 G.R. No. L-18216 STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants, vs. REGISTER OF DEEDS OF MANILA, respondent-appellee. Ramon C. Fernando for petitionersappellants. Office of the Solicitor General for respondentappellee. BAUTISTA ANGELO, J.: On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the assets of the corporation reciting, among other things, that by virtue of a resolution of the stockholders adopted on September 17, 1960, dissolving the corporation, they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said corporation, including real properties located in Manila.

6. P940.45 documentary stamps need be attached to the document; 7. The judgment of the Court approving the dissolution and directing the disposition of the assets of the corporation need be presented (Rules of Court, Rule 104, Sec. 3). Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6. The stockholders interposed the present appeal. As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of the three grounds on which the denial of the registration of the certificate of liquidation was predicated hinges on whether or not that certificate merely involves a distribution of the corporation's assets or should be considered a transfer or conveyance. Appellants contend that the certificate of liquidation is not a conveyance or transfer but

merely a distribution of the assets of the corporation which has ceased to exist for having been dissolved. This is apparent in the minutes for dissolution attached to the document. Not being a conveyance the certificate need not contain a statement of the number of parcel of land involved in the distribution in the acknowledgment appearing therein. Hence the amount of documentary stamps to be affixed thereon should only be P0.30 and not P940.45, as required by the register of deeds. Neither is it correct to require appellants to pay the amount of P430.50 as registration fee. The Commissioner of Land Registration, however, entertained a different opinion. He concurred in the view expressed by the register of deed to the effect that the certificate of liquidation in question, though it involves a distribution of the corporation's assets, in the last analysis represents a transfer of said assets from the corporation to the stockholders. Hence, in substance it is a transfer or conveyance. We agree with the opinion of these two officials. A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property they do not represent property of the corporation. The corporation has property of its own which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75;

Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part of the corporation's property, or the right to share in its proceeds to that extent when distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the owner of any part of the capital of the corporation (Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-owner or tenant in common of the corporate property (Halton v. Hohnston, 166 Ala 317, 51 So 992). On the basis of the foregoing authorities, it is clear that the act of liquidation made by the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Indeed, since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, and this is in effect the purpose which they seek to obtain from the Register of Deeds of Manila, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with costs against appellants.

G.R. Nos. L-24177-85

June 29, 1968

persuasiveness of the plea that defendants-appellees would "not have subscribed to [the] capital stock" of the Philippine Lumber Distributing Agency "were it not for the assurance of the [then] President of the Republic of the Philippines that the Government would back [it] up by investing P9.00 for every peso" 4 subscribed, a condition which was not fulfilled, such commitment not having been complied with, be justified? The answer must be in the negative. It cannot be otherwise even if an element of unfairness and injustice could be predicated, as the lower court, in a rather sympathetic mood, did find in the plaintiff bank, as creditor, compelling defendant lumber producers under the above circumstances to pay the balance of their subscriptions. For a plain and statutory command, if applicable, must be respected. The rule of law cannot be satisfied with anything less. The appeal must be sustained. In these various suits decided jointly, the Philippine National Bank, as creditor, and therefore the real party in interest, was allowed by the lower court to substitute the receiver of the Philippine Lumber Distributing Agency in these respective actions for the recovery from defendant lumber producers the balance of their stock subscriptions. The amount sought to be collected from defendants-appellees Bitulok Sawmill, Inc., Dingalan Lumber Co., Inc., and Sierra Madre Lumber Co., Inc., is P5,000.00, defendants-appellees having made a partial payment of P15,000.00 of their total subscription worth P20,000.00; from defendant-appellee Nasipit Lumber Co., Inc., the sum of P10,000.00, defendant-appellee having made a partial payment of P10,000.00 of its total subscription worth P20,000.00; from defendant-appellee Woodworks, Inc., the sum of P10,886.00, defendantappellee having made a partial payment of P9,114.00 of its total subscription worth P20,000.00; from defendantappellee Gonzalo Puyat the sum of P10,000.00, defendant-appellee having made a partial payment of P10,000.00 of his total subscription worth P20,000.00; from defendant-appellee Tomas Morato the sum of P10,000.00, defendant-appellee having made a partial payment of P10,000.00 of his total subscription worth P20,000.00; from defendant-appellee Findlay Millar Lumber Co., Inc., the sum of P10,000.00, defendantappellee having made a partial payment of P10,000.00 of its total subscription worth P20,000.00; from defendant-appellee Insular Lumber Co., Inc., the sum of P5,000.00, defendant-appellee having made a partial payment of P15,000.00 of its total subscription worth P20,000.00; from defendant-appellee Anakan Lumber Co., Inc., the sum of P15,000.00, defendant-appellee having made a partial payment of P5,000.00 of its total subscription worth P20,000.00; and from defendantappellee Cantilan Lumber Co., Inc., the sum of P7,500.00, defendant-appellee having made a partial payment of P2,500.00 of its total subscription worth P10,000.00, plus interest at the legal rate from the filing of the suits and the costs of the suits in all the nine (9) cases.

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE LUMBER CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS, INC., GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER CO., INC., ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN LUMBER CO., INC.,defendants-appellees. Tomas Besa, Simplicio N. Angeles and Jose B. Galang for plaintiff-appellee. Bausa, Ampil and Suarez for defendant-appellant Woodworks, Inc. Pacifico de Ocampo for defendant-appellant Anakan Lumber Co. Ross, Selph, Salcedo, Del Rosario, Bito and Misa for defendant-appellant Insular Lumber Co. Garin, Boquiren and Tamesis for defendant-appellant Nasipit Lumber Co., Inc. Feria, Manglapus and Associates for defendantappellant Gonzalo Puyat. Sycip, Salazar and Associates for defendant-appellant Cantilan Lumber Co., Inc. Ozaeta, Gibbs and Ozaeta for defendant-appellant Findlay Millar Lumber Co., Inc. Dominador Alafriz for defendant-appellant Bitulok Sawmill, Inc. De la Costa and De la Costa for defendant-appellant Tomas B. Morato. FERNANDO, J.: In the face of a statutory norm, which, as interpreted in a uniform line of decisions by this Court, speaks unequivocally and is free from doubt, the lower court with full recognition that the case for the plaintiff creditor, Philippine National Bank, "is meritorious strictly from the legal standpoint" 1 but apparently unable to "close its eyes to the equity of the case" 2dismissed nine (9) cases filed by it, seeking "to recover from the defendant lumber producers [Bitulok Sawmill, Inc.; Dingalan Lumber Co., Inc., Sierra Madre Lumber Co., Inc.; Nasipit Lumber Co., Inc.; Woodworks, Inc.; Gonzalo Puyat; Tomas B. Morato; Findlay Millar Lumber Co., Inc.; Insular Lumber Co., Inc.; Anakan Lumber Co., Inc.; and Cantilan Lumber Co., Inc.] the balance of their stock subscriptions to the Philippine Lumber Distributing Agency, Inc." 3 In essence then, the crucial question posed by this appeal from such a decision of the lower court is adherence to the rule of law. Otherwise stated, would non-compliance with a plain statutory command, considering the

The Philippine Lumber Distributing Agency, Inc., according to the lower court, "was organized sometime in the early part of 1947 upon the initiative and insistence of the late President Manuel Roxas of the Republic of the Philippines who for the purpose, had called several conferences between him and the subscribers and organizers of the Philippine Lumber Distributing Agency, Inc." 5 The purpose was praiseworthy, to insure a steady supply of lumber, which could be sold at reasonable prices to enable the war sufferers to rehabilitate their devastated homes. The decision continues: "He convinced the lumber producers to form a lumber cooperative and to pool their sources together in order to wrest, particularly, the retail trade from aliens who were acting as middlemen in the distribution of lumber. At the beginning, the lumber producers were reluctant to organize the cooperative agency as they believed that it would not be easy to eliminate from the retail trade the alien middlemen who had been in this business from time immemorial, but because the late President Roxas made it clear that such a cooperative agency would not be successful without a substantial working capital which the lumber producers could not entirely shoulder, and as an inducement he promised and agreed to finance the agency by making the Government invest P9.00 by way of counterpart for every peso that the members would invest therein,...." 6 This was the assurance relied upon according to the decision, which stated that the amount thus contributed by such lumber producers was not enough for the operation of its business especially having in mind the primary purpose of putting an end to alien domination in the retail trade of lumber products. Nor was there any appropriation by the legislature of the counterpart fund to be put up by the Government, namely, P9.00 for every peso invested by defendant lumber producers. Accordingly, "the late President Roxas instructed the Hon. Emilio Abello, then Executive Secretary and Chairman of the Board of Directors of the Philippine National Bank, for the latter to grant said agency an overdraft in the original sum of P250,000.00 which was later increased to P350,000.00, which was approved by said Board of Directors of the Philippine National Bank on July 28, 1947, payable on or before April 30, 1958, with interest at the rate of 6% per annum, and secured by the chattel mortgages on the stock of lumber of said agency." 7 The Philippine Government did not invest the P9.00 for every peso coming from defendant lumber producers. The loan extended to the Philippine Lumber Distributing Agency by the Philippine National Bank was not paid. Hence, these suits. For the lower court, the above facts sufficed for their dismissal. To its mind "it is grossly unfair and unjust for the plaintiff bank now to compel the lumber producers to pay the balance of their subscriptions .... Indeed, when the late President Roxas made representations to the plaintiff bank, thru the Hon. Emilio Abello, who was then the Executive Secretary and Chairman of its Board of Directors, to grant said overdraft to the agency, it was

the only way by which President Roxas could make good his commitment that the Government would invest in said agency to the extent already mentioned because, according to said late President Roxas, the legislature had not appropriated any amount for such counterpart. Consequently, viewing from all considerations of equity in the case, the Court finds that plaintiff bank should not collect any more from the defendants the balance of their subscriptions to the capital stock of the Philippine Lumber Distributing Agency, Inc." 8 Even with the case for defendant lumber producers being put forth in its strongest possible light in the appealed decision, the plaintiff creditor, the Philippine National Bank, should have been the prevailing party. On the law as it stands, the judgment reached by the lower court cannot be sustained. The appeal, as earlier made clear, possesses merit. In Philippine Trust Co. v. Rivera, 9 citing the leading case of Velasco v. Poizat, 10 this Court held: "It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debt.... A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary...." The Poizat doctrine found acceptance in later cases. 11 One of the latest cases, Lingayen Gulf Electric Power v. Baltazar, 12Speaks to this effect: "In the case of Velasco v. Poizat, 13 the corporation involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action instituted by the assignee." It would be unwarranted to ascribe to the late President Roxas the view that the payment of the stock subscriptions, as thus required by law, could be condoned in the event that the counterpart fund to be invested by the Government would not be available. Even if such were the case, however, and such a promise were in fact made, to further the laudable purpose to which the proposed corporation would be devoted and the possibility that the lumber producers would lose money in the process, still the plain and specific wording of the applicable legal provision as interpreted by this Court must be controlling. It is a wellsettled principle that with all the vast powers lodged in the Executive, he is still devoid of the prerogative of suspending the operation of any statute or any of its terms.

The emphatic and categorical language of an American decision cited by the late Justice Laurel, in People v. Vera, 14comes to mind: "By the twentieth article of the declaration of rights in the constitution of this commonwealth, it is declared that the power of suspending the laws, or the execution of the laws, ought never to be exercised but by the legislature, or by authority derived from it, to be exercised in such particular cases only as the legislature shall expressly provide for...." Nor could it be otherwise considering that the Constitution specifically enjoins the President to see to it that all laws be faithfully executed. 15 There may be a discretion as to what a particular legal provision requires; there can be none whatsoever as to the enforcement and application thereof once its meaning has been ascertained. What it decrees must be followed; what it commands must be obeyed. It must be respected, the wishes of the President, to the contrary notwithstanding, even if impelled by the most worthy of motives and the most persuasive equitable considerations. To repeat, such is not the case here. For at no time did President Roxas ever give defendant lumber producers to understand that the failure of the Government for any reason to put up the counterpart fund could terminate their statutory liability. Such is not the law. Unfortunately, the lower court was of a different mind. That is not to pay homage to the rule of law. Its decision then, one it is to be repeated influenced by what it considered to be the "equity of the case", is not legally impeccable. WHEREFORE, the decision of the lower court is reversed and the cases remanded to the lower court for judgment according to law, with full consideration of the legal defenses raised by defendants-appellees, Bitulok Sawmill, Inc.; Dingalan Lumber Co., Inc.; Sierra Madre Lumber Co., Inc.; Nasipit Lumber Co., Inc.; Woodworks, Inc.; Gonzalo Puyat; Tomas B. Morato; Findlay Millar Lumber Co., Inc.; Anakan Lumber Co., Inc.; and Cantilan Lumber Co., Inc. No pronouncement as to costs.