Case Digest in Corporation Law

CORPORATION - An artificial being created by operation of law having the right of succession,
and the powers, attributes and properties expressly authorized by law and incident to its
existence (Sec. 2).
1. G.R. No. L-23145

November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary

administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.

FACTS:
In March 1960, Idonah Perkins died in New York. She left behind properties here and abroad.
One property she left behind were two stock certificates covering 33,002 shares of stocks of
the Benguet Consolidated, Inc (BCI). Said stock certificates were in the possession of the
Country Trust Company of New York (CTC-NY). CTC-NY was the domiciliary administrator of the
estate of Perkins (obviously in the USA). Meanwhile, in 1963, Renato Tayag was appointed as
the ancillary administrator (of the properties of Perkins she left behind in the Philippines).
A dispute arose between CTC-NY and Tayag as to who between them is entitled to possess the
stock certificates. A case ensued and eventually, the trial court ordered CTC-NY to turn over
the stock certificates to Tayag. CTC-NY refused. Tayag then filed with the court a petition to
have said stock certificates be declared lost and to compel BCI to issue new stock certificates
in replacement thereof. The trial court granted Tayags petition.
BCI assailed said order as it averred that it cannot possibly issue new stock certificates
because the two stock certificates declared lost are not actually lost; that the trial court as
well Tayag acknowledged that the stock certificates exists and that they are with CTC-NY; that
according to BCIs by laws, it can only issue new stock certificates, in lieu of lost, stolen, or
destroyed certificates of stocks, only after court of law has issued a final and executory order
as to who really owns a certificate of stock.

ISSUE:
Whether or not the arguments of Benguet Consolidated, Inc. are correct?

HELD:
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No. Benguet Consolidated is a corporation who owes its existence to Philippine laws. It has
been given rights and privileges under the law. Corollary, it also has obligations under the law
and one of those is to follow valid legal court orders. It is not immune from judicial control
because it is domiciled here in the Philippines. BCI is a Philippine corporation owing full
allegiance and subject to the unrestricted jurisdiction of local courts. Its shares of stock
cannot therefore be considered in any wise as immune from lawful court orders. Further, to
allow BCIs opposition is to render the court order against CTC-NY a mere scrap of paper. It
will leave Tayag without any remedy simply because CTC-NY, a foreign entity refuses to
comply with a valid court order. The final recourse then is for our local courts to create a legal
fiction such that the stock certificates in issue be declared lost even though in reality they
exist in the hands of CTC-NY. This is valid. As held time and again, fictions which the law may
rely upon in the pursuit of legitimate ends have played an important part in its development.

Further still, the argument invoked by BCI that it can only issue new stock certificates in
accordance with its bylaws is misplaced. It is worth noting that CTC-NY did not appeal the
order of the court it simply refused to turn over the stock certificates hence ownership can
be said to have been settled in favor of estate of Perkins here. Also, assuming that there
really is a conflict between BCIs bylaws and the court order, what should prevail is the lawful
court order. It would be highly irregular if court orders would yield to the bylaws of a
corporation. Again, a corporation is not immune from judicial orders.

2. G.R. No. L-17295

July 30, 1962

ANG PUE & COMPANY, ET AL., plaintiffs-appellants,

vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.

FACTS:
Ang Pue and Tan Siong organized a partnership for a term of 5 years. Their agreement
provides that they can extend the partnership for another 5 years by mutual consent. In
1954, RA 1180 was enacted to regulate the retail business. Said law provided that, after its
enactment, a partnership not wholly formed by Filipinos could continue to engage in the retail
business until the expiration of its term so registration of said Ang was refused on the ground
that the extension was in violation of the aforesaid Act.
Plaintiff Company filed a petition for declaratory relief contending their original articles of
partnership provided that they could extend the term of their partnership; that it constitutes a
property right of which the partners cannot be deprived without due process or without their
consent; and that the provisions of RA 1180 cannot adversely affect them. Lower court
dismissed their petition. Plaintiff Co. interposed an appeal.
ISSUE:
WON extension of the partnership established before the enactment of RA 1180, is in violation
of the said act.
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HELD:
The SC ruled that organizing a corporation is not a matter of right but a mere privilege which
may be enjoyed under the terms provided by state / law. When the partners amended the
articles of partnership, the provisions of RA 1180 were already in force, and so the right
claimed by plaintiff-appellants to extend the original term of their partnership to another five
years would be in violation of the clear intent and purpose of the said law.
To organize a corporation or a partnership that could claim a juridical personality of its own
and transact business as such, is not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the State may deem necessary to impose. That the State,
through Congress, and in the manner provided by law, had the right to enact Republic Act No.
1180 and to provide therein that only Filipinos and concerns wholly owned by Filipinos may
engage in the retail business cannot be seriously disputed. That this provision was clearly
intended to apply to partnership already existing at the time of the enactment of the law is
clearly showing by its provision giving them the right to continue engaging in their retail
business until the expiration of their term or life.

To argue that because the original articles of partnership provided that the partners could
extend the term of the partnership, the provisions of Republic Act 1180 cannot be adversely
affect appellants herein, is to erroneously assume that the aforesaid provision constitute a
property right of which the partners can not be deprived without due process or without their
consent. The agreement contain therein must be deemed subject to the law existing at the
time when the partners came to agree regarding the extension. In the present case, as
already stated, when the partners amended the articles of partnership, the provisions of
Republic Act 1180 were already in force, and there can be not the slightest doubt that the
right claimed by appellants to extend the original term of their partnership to another five
years would be in violation of the clear intent and purpose of the law aforesaid.

THEORIES ON FORMATION OF A CORPORATION

1. Concession Theory
A corporation is an artificial creature without any existence until it has received the
imprimatur of the state acting according to law, through the SEC (Tayag vs. Benguet
Consolidated, Inc., 26 SCRA 242). Tayag rejects the Genossenschaft Theory which treats a
corporation as the reality of the group as a social and legal entity, independent of state
recognition and concession.
2. Theory of corporate enterprise or economic unit
The corporation is not merely an artificial being, but more of an aggregation of persons
doing business, or an underlying business unit (Philippine Corporate Law, Cesar
Villanueva, 2001 ed.). The theory draws its vitality from the fact that it is not legal fiction
alone that creates a corporate entity but also the consent of those who will form the
corporation to engage in a common venture or business for profit.
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CREATURE OF THE LAW

Section 16, Art. XII of the 1987 Philippine Constitution
The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled corporations may be
created or established by special charters in the interest of the common good and subject to
the test of economic viability.

3. G.R. Nos. 84132-33 : December 10, 1990

192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC.,
Petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO SHERIFF and
GODOFREDO QUILING, in his capacity as Deputy Sheriff of Calamba, Laguna,
Respondents.
FACTS:
Agrix Marketing executed in favor of respondent a real estate mortgage overthree parcels of
land. Agrix later on went bankrupt. In order to rehabilitate the company, then President
Marcos issued Presidential Decree No. 1717 which mandated, among others, the
extinguishment of all the mortgages and liens attaching to the property of AGRIX, and
creating Claims Committee to process claims against the company to administered by NDC.
Respondent thereon filed claims against the company to be administered mainly by NDC.
Respondent thereon filed a claim against the company before the Committee. Petitioners
however filed a petition with the RTC of Calamba, Laguna invoking the provision of the law
which cancels all mortgage liens against it. Respondent took measures to extra-judicially
foreclose which the petitioners opposed by filing another case inthe same court. These cases
were consolidated. The RTC held in favor of the respondent on the ground of
unconstitutionality of the decree; mainly violation of the separation of powers, impairment of
obligation of contracts, and violation of the equal protection clause.
Hence this petition.
ISSUE:
WON the respondent estopped from questioning the constitutionality of the lawsince they
first abided by it by filing a claim with the Committee?
WON PD 1717 unconstitutional?
HELD:
On the issue of estoppel, the Court held that it could not apply in the present case since when
the respondent filed his claim, President Marcos was the supreme ruler of the country and
they could not question his acts even before the courts because of his absolute power over all
government institutions when he was the President. The creation of New Agrix as mandated
by the decree was also ruled as unconstitutional since it violated the prohibition that the
Batasang Pambansa (Congress) shall not provide for the formation, organization, or regulation
of private corporations unless such corporations are owned and controlled by the
government.
PD 1717 was held as unconstitutional on the other grounds that it was an invalid exercise of
police power, It had no lawful subject and no lawful method. It violated due process by
extinguishing all mortgages and liens and interests which are property rights unjustly taken. It
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also violated the equal protection clause

bylumping together all secured and unsecured creditors. It also impaired theobligation of
contracts, even though it only involved purely private interests.
4. G.R. No. 147402

January 14, 2004

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

Metropolitan Water District (LMWD), Tacloban City, petitioner,
vs.
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C.
FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region
VIII, respondents.

FACTS:
A Special Audit Team from COA Regional Office No. VIII audited the accounts of Leyte
Metropolitan Water District (LMWD). For its auditing services, COA requested payment but
was denied by Petitioner Feliciano as General Manager of LMWD, citing PD198 and Section 18
of RA 6758. He further requested that COA cease all audit services, stop charging auditing
fees and refund all auditing fees previously paid by LMWD.

On March 16, 2000, petitioner received the Resolution of COA Chairman Celso Gangan,
holding that local water districts are not private corporations, and are therefore under its
audit jurisdiction, as pronounced by the Supreme Court in the case of Davao City Water
District vs. CSC and COA.

ISSUES:

Whether or not a local water district created under PD198, as amended, is a governmentowned or controlled corporation subject to the audit jurisdiction of COA;

Whether or not Section 20 of PD 198, as amended, prohibits COAs certified public

accountants from auditing local water districts; and

Whether or not Section 18 of RA 6758 prohibits COA from charging government-owned

and controlled corporations auditing fees.

HELD:
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The petition lacks merit. A local water district is considered a GOCC with an original charter. It
exists as a corporation only by virtue of PD198, which expressly confers on LWDs corporate
powers. Without PD198, LWDs would have no corporate powers. PD 198 constitutes the
special enabling charter of LWDs. Thus, LWDs are government-owned and controlled
corporations with a special charter, and not private corporations created under the
Corporation Code.

LWDs, therefore, are subject to the audit jurisdiction of COA, as provided under Section 2(1),
Article IX-D of the Constitution, which mandates the latter to audit all government agencies or
instrumentalities, including government-owned and controlled corporations (GOCCs) with
original charters, as well as other government-owned or controlled corporations without
original charters.

As regards the second issue, the petitioner argues that PD 198 expressly prohibits COA
auditors, or any government auditor for that matter, from auditing LWDs, as stated in Section
18 of the aforementioned law, which provides in part that auditing shall be performed by a
certified public accountant not in the government service.

The Supreme Court however ruled that PD 198 cannot prevail over the Constitution, as it
provides in Section 3, Article IX-C that no law shall be passed exempting any entity of the
government or its subsidiary in any guise whatever, or any investment of public funds, from
the jurisdiction of the Commission on Audit. And since there is an irreconcilable conflict
between Section 20 of PD 198, prohibiting COA auditors from auditing LWDs, and Sections
2(1) and 3, Article IX-D of the Constitution, vesting in COA the power to audit all GOCCs, it is
ruled that the second sentence of Section 20 of PD 198 is unconstitutional since it violates the
aforementioned section of the Constitution.

The third issue is likewise bereft of merit. COA is not prohibited from charging GOCCs auditing
fees. As opposed to petitioners contention, COA may charge GOCCs actual audit cost, but the
same must be paid directly to COA and not to COA auditors. What Section 18 of RA 6758
prohibits is the receiving of COA personnel of any kind of compensation from any government
entity except compensation paid directly by COA out of its appropriations and contributions.
Petitioner has not alleged that COA charges LWDs auditing fees in excess of COAs actual
audit cost. Neither has he alleged that the auditing fees are paid by LWDs directly to
individual COA auditors.

5. G.R. No. L-19891

July 31, 1964

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J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J. BELTRAN, petitioners,

vs.
IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila and
HON. AGUSTIN MONTESA, Judge of the Court of First Instance of
Manila, respondents.
Felipe N. Aurea for petitioners.
Taada, Teehankee and Carreon for respondent Imperial Insurance, Inc.
PAREDES, J.:
Petitioner J. R. Da Silva, is the President of the J.R.S. Business Corporation, an establishment
duly franchised by the Congress of the Philippines, to conduct a messenger and delivery
express service. On July 12, 1961, the respondent Imperial Insurance, Inc., presented with the
CFI of Manila a complaint (Civ. Case No. 47520), for sum of money against the petitioner
corporation. After the defendants therein have submitted their Answer, the parties entered
into a Compromise Agreement, assisted by their respective counsels, the pertinent portions of
which recite:
1) WHEREAS, the DEFENDANTS admit and confess their joint and solidary indebtedness
to the PLAINTIFF in the full sum of PESOS SIXTY ONE THOUSAND ONE HUNDRED
SEVENTY-TWO & 32/100 (P61,172.32), Philippine Currency, itemized as follows:
a) Principal

P50

b) Interest at 12% per annum

c) Liquidated damages at 7% per annum

d) Costs of suit
e) Attorney's fees
2) WHEREAS, the DEFENDANTS bind themselves, jointly and severally, and hereby
promise to pay their aforementioned obligation to the PLAINTIFF at its business address
at 301-305 Banquero St., (Ground Floor), Regina Building, Escolta, Manila, within sixty
(60) days from March 16, 1962 or on or before May 14, 1962;
3) WHEREAS, in the event the DEFENDANTS FAIL to pay in full the total amount of
PESOS SIXTY ONE THOUSAND ONE HUNDRED SEVENTY TWO & 32/100 (P61,172.32),
Philippine Currency, for any reason whatsoever, on May 14, 1962, the PLAINTIFF shall
be entitled, as a matter of right, to move for the execution of the decision to be
rendered in the above-entitled case by this Honorable Court based on this
COMPROMISE AGREEMENT.
On March 17, 1962, the lower court rendered judgment embodying the contents of the said
compromise agreement, the dispositive portion of which reads
WHEREFORE, the Court hereby approves the above-quoted compromise agreement and
renders judgment in accordance therewith, enjoining the parties to comply faithfully
and strictly with the terms and conditions thereof, without special pronouncement as to
costs.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of facts.
On May 15, 1962, one day after the date fixed in the compromise agreement, within which
the judgment debt would be paid, but was not, respondent Imperial Insurance Inc., filed a
"Motion for the Insurance of a Writ of Execution". On May 23, 1962, a Writ of Execution was
issued by respondent Sheriff of Manila and on May 26, 1962, Notices of Sale were sent out for
the auction of the personal properties of the petitioner J.R.S. Business Corporation. On June 2,
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1962, a Notice of Sale of the "whole capital stocks of the defendants JRS Business
Corporation, the business name, right of operation, the whole assets, furnitures and
equipments, the total liabilities, and Net Worth, books of accounts, etc., etc." of the petitioner
corporation was, handed down. On June 9, the petitioner, thru counsel, presented an "Urgent
Petition for Postponement of Auction Sale and for Release of Levy on the Business Name and
Right to Operate of Defendant JRS Business Corporation", stating that petitioners were busy
negotiating for a loan with which to pay the judgment debt; that the judgment was for money
only and, therefore, plaintiff (respondent Insurance Company) was not authorized to take over
and appropriate for its own use, the business name of the defendants; that the right to
operate under the franchise, was not transferable and could not be considered a personal or
immovable, property, subject to levy and sale. On June 10, 1962, a Supplemental Motion for
Release of Execution, was filed by counsel of petitioner JRS Business Corporation, claiming
that the capital stocks thereof, could not be levied upon and sold under execution. Under date
of June 20, 1962, petitioner's counsel presented a pleading captioned "Very Urgent Motion for
Postponement of Public Auction Sale and for Ruling on Motion for Release of Levy on
the Business Name, Right to Operate and Capital Stocks of JRS Business Corporation". The
auction sale was set for June 21, 1962. In said motion, petitioners alleged that the loan they
had applied for, was to be secured within the next ten (10) days, and they would be able to
discharge the judgment debt. Respondents opposed the said motion and on June 21, 1962,
the lower court denied the motion for postponement of the auction sale.
In the sale which was conducted in the premises of the JRS Business Corporation at 1341
Perez St., Paco, Manila, all the properties of said corporation contained in the Notices of Sale
dated May 26, 1962, and June 2, 1962 (the latter notice being for the whole capital stocks of
the defendant, JRS Business Corporation, the business name, right of operation, the whole
assets, furnitures and equipments, the total liabilities and Net Worth, books of accounts, etc.,
etc.), were bought by respondent Imperial Insurance, Inc., for P10,000.00, which was the
highest bid offered. Immediately after the sale, respondent Insurance Company took
possession of the proper ties and started running the affairs and operating the business of the
JRS Business Corporation. Hence, the present appeal.
It would seem that the matters which need determination are (1) whether the respondent
Judge acted without or in excess of his jurisdiction or with grave abuse of discretion in
promulgating the Order of June 21, 1962, denying the motion for postponement of the
scheduled sale at public auction, of the properties of petitioner; and (2) whether the business
name or trade name, franchise (right to operate) and capital stocks of the petitioner are
properties or property rights which could be the subject of levy, execution and sale.
The respondent Court's act of postponing the scheduled sale was within the discretion of
respondent Judge, the exercise of which, one way or the other, did not constitute grave abuse
of discretion and/or excess of jurisdiction. There was a decision rendered and the
corresponding writ of execution was issued. Respondent Judge had jurisdiction over the
matter and erroneous conclusions of law or fact, if any, committed in the exercise of such
jurisdiction are merely errors of judgment, not correctible by certiorari (Villa Rey Transit v.
Bello, et al., L-18957, April 23, 1963, and cases cited therein.)
The corporation law, on forced sale of franchises, provides
Any franchise granted to a corporation to collect tolls or to occupy, enjoy, or use public
property or any portion of the public domain or any right of way over public property or
the public domain, and any rights and privileges acquired under such franchise may be
levied upon and sold under execution, together with the property necessary for the
enjoyment, the exercise of the powers, and the receipt of the proceeds of such
franchise or right of way, in the same manner and with like effect as any other property
to satisfy any judgment against the corporation: Provided, That the sale of the
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franchise or right of way and the property necessary for the enjoyment, the exercise of
the powers, and the receipt of the proceeds of said franchise or right of way is
especially decreed and ordered in the judgment: And provided, further, That the sale
shall not become effective until confirmed by the court after due notice. (Sec. 56,
Corporation Law.)
In the case of Gulf Refining Co. v. Cleveland Trust Co., 108 So., 158, it was held
The first question then for decision is the meaning of the word "franchise" in the
statute.
"A franchise is a special privilege conferred by governmental authority, and
which does not belong to citizens of the country generally as a matter of
common right. ... Its meaning depends more or less upon the connection in
which the word is employed and the property and corporation to which it is
applied. It may have different significations.
"For practical purposes, franchises, so far as relating to corporations, are
divisible into (1) corporate or general franchises; and (2) special or secondary
franchises. The former is the franchise to exist as a corporation, while the latter
are certain rights and privileges conferred upon existing corporations, such as
the right to use the streets of a municipality to lay pipes or tracks, erect poles or
string wires." 2 Fletcher's Cyclopedia Corp. See. 1148; 14 C.J. p. 160; Adams v.
Yazon & M. V. R. Co., 24 So. 200, 317, 28 So. 956, 77 Miss. 253, 60 L.R.A. 33 et
seq.
The primary franchise of a corporation that is, the right to exist as such, is vested "in
the individuals who compose the corporation and not in the corporation itself" (14 C.J.
pp. 160, 161; Adams v. Railroad, supra; 2 Fletcher's Cyclopedia Corp. Secs. 1153, 1158;
3 Thompson on Corporations 2d Ed.] Secs. 2863, 2864), and cannot be conveyed in the
absence of a legislative authority so to do (14A CJ. 543, 577; 1 Fletcher's Cyc. Corp.
Sec. 1224; Memphis & L.R.R. Co. v. Berry 5 S. Ct. 299, 112 U.S. 609, 28 L.E.d. 837;
Vicksburg Waterworks Co. v. Vicksburg, 26 S. Ct. 660, 202 U.S. 453, 50 L.E.d. 1102, 6
Ann. Cas. 253; Arthur v. Commercial & Railroad Bank, 9 Smedes & M. 394, 48 Am. Dec.
719), but the specify or secondary franchises of a corporation are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power
granted to a corporation to dispose of its property (Adams v. Railroad, supra; 14A C.J.
542, 557; 3 Thompson on Corp. [2nd Ed.] Sec. 2909), except such special or secondary
franchises as are charged with a public use (2 Fletcher's Cyc. Corp. see. 1225; 14A C.J.
544; 3 Thompson on Corp. [2d Ed.] sec. 2908; Arthur v. Commercial & R.R. Bank, supra;
McAllister v. Plant, 54 Miss. 106).
The right to operate a messenger and express delivery service, by virtue of a legislative
enactment, is admittedly a secondary franchise (R.A. No. 3260, entitled "An Act granting the
JRS Business Corporation a franchise to conduct a messenger and express service)" and, as
such, under our corporation law, is subject to levy and sale on execution together and
including all the property necessary for the enjoyment thereof. The law, however, indicates
the procedure under which the same (secondary franchise and the properties necessary for
its enjoyment) may be sold under execution. Said franchise can be sold under execution,
when such sale is especially decreed and ordered in the judgment and it becomes effective
only when the sale is confirmed by the Court after due notice (Sec. 56, Corp. Law). The
compromise agreement and the judgment based thereon, do not contain any special decree
or order making the franchise answerable for the judgment debt. The same thing may be
stated with respect to petitioner's trade name or business name and its capital stock.
Incidentally, the trade name or business name corresponds to the initials of the President of
the petitioner corporation and there can be no serious dispute regarding the fact that a trade
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name or business name and capital stock are necessarily included in the enjoyment of the
franchise. Like that of a franchise, the law mandates, that property necessary for the
enjoyment of said franchise, can only be sold to satisfy a judgment debt if the decision
especially so provides. As We have stated heretofore, no such directive appears in the
decision. Moreover, a trade name or business name cannot be sold separately from the
franchise, and the capital stock of the petitioner corporation or any other corporation, for the
matter, represents the interest and is the property of stockholders in the corporation, who can
only be deprived thereof in the manner provided by law (Therbee v. Baker, 35 N.E. Eq. [8
Stew.] 501, 505; In re Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited in 6 Words and
Phrases, 109).
It, therefore, results that the inclusion of the franchise, the trade name and/or business name
and the capital stock of the petitioner corporation, in the sale of the properties of the JRS
Business Corporation, has no justification. The sale of the properties of petitioner corporation
is set aside, in so far as it authorizes the levy and sale of its franchise, trade name and capital
stocks. Without pronouncement as to costs.

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