G.R. No.

L-39861

March 21, 1934

BONIFACIO
vs.
JACINTO
R.
DIZON & CO., INC., ETC., appellant.
Leoncio
M.
Aranda
Lagman and Santos for appellee.

LUMANLAN, plaintiff-appellee,
CURA,

and

Gregorio

ET

M.

AL., defendants.

Baaga

for

appellant.

GODDARD, J.:.
This is an appeal from a decision of the Court of First Instance of Tarlac, the dispositive part of which
reads as follows:
Por las consideraciones expuestas, el Juzgado falla este asunto condenando a Dizon y Cia., Inc.,
a acreditar en sus libros como pago de las obligaciones de Bonifacio Lumanlan la suma de
P11,840, ordenando a la misma entidad que inmediatamente expida los certificados de accion
equivalente a la mencionada suma; declarando perpetuo y absoluto el interdicto prohibitorio
expedido contra los demandados; condenando a la Dizon y Cia,. Inc., al pago de la suma de
P2,000 a favor del demandante, y se condena a los demandados al pago de las costas del juicio.
En cuanto a los daos y perjuicios reclamados por el demandante, no habiendo este probado los
mismos, el Juzgado no puede accederlos.
The appellant, Dizon & co., Inc., assigns twenty-three errors as having been committed by the trial court.
The appellant is a corporation duly organized under the laws of the Philippine Islands with its central
office in the City of Manila. The plaintiff-appellee Bonifacio Lumanlan, on July 31, 1922, subscribed for
300 shares of stock of said corporation at a par value of P50 or a total of P15,000. Julio Valenzuela,
Pedro Santos and Francisco Escoto, creditors of this corporation, filed suit against it in the Court of First
Instance of Manila, case No. 37007, praying that a receiver be appointed, as it appeared that the
corporation at that time had no assets except credits against those who had subscribed for shares of
stock. The court named Tayag as receiver for the purpose of collecting, said subscriptions. As Bonifacio
Lumanlan had only paid P1,500 of the P15,000, par value of the stock for which he subscribed, the
receiver on August 30, 1930, filed a suit against him in the Court of First Instance of Manila, civil case No.
37492, for the collection of P15,109, P13,500 of which was the amount he owed for unpaid stock and
P1,609 for loans and advances by the corporation to Lumanlan. In that case Lumanlan was sentenced to
pay the corporation the above-mentioned sum of P15,109 with legal interest thereon from August 30,
1930, and costs. Lumanlan appealed from this decision.
Pending this appeal, with the permission of the court, the creditors, some of the directors and the majority
of the stockholders held several meetings in which it was agreed in substance that subscribers for the
capital stock who were in default should pay the creditors; Lumanlan was designated to pay the debt of
the corporation to Julio Valenzuela, one of the petitioners in case No. 37007; at that time the corporation
owed Valenzuela the sum of P8,000 plus interest thereon at the rate of 12 per cent per annum from
March 17, 1928. Lumanlan agreed to assume this obligation and in turn the corporation agreed that if
Lumanlan would dismiss his appeal in case No. 37492 the corporation would collect only 50 per cent of
the amount subscribed by him for stock, provided that in case the 50 percent was insufficient to pay
Valenzuela he should pay an additional amount which should not exceed the amount of the judgment
against him in that case. In view of this agreement Lumanlan withdrew his appeal and paid Valenzuela
the sum of P11,840 including interest and thereby was subrogated in place of Valenzuela. The petitioning
creditors having been paid the amounts owed to them by the corporation asked that the receiver be
dismissed and the court granted this. Disregarding this agreement and notwithstanding the payment
made by Lumanlan to Valenzuela, the corporation on May 5, 1932, asked for the execution of the
sentence in case No. 37492 and by virtue of an order of execution the provincial sheriff levied upon two
parcels of land belonging to Lumanlan described in certificate of title No. 901 of the Province of Tarlac.
Lumanlan brought this case to collect from Dizon & Co., Inc., and to prevent the sheriff from selling the
two parcels of land. Pending the result of this case the sheriff was enjoined from proceeding with the
sale.1vvphi1.ne+

In the promissory note given by the corporation to Valenzuela the former obligated itself to pay Valenzuela
the sum of P8,000 with interest at 12 per cent per annum and, upon failure to pay said sum and interest
when due, 25 per cent of the principal as expenses of collection and judicial costs in case of litigation.
By virtue of these facts Lumanlan is entitled to a credit against the judgment in case No. 37492 for
P11,840 and an additional sum of P2,000, which is 25 per cent on the principal debt, as he had to file this
suit to collect, or receive credit for the sum which he had paid Valenzuela for and in place of the
corporation, or a total of P13,840. This leaves a balance due Dizon & co., Inc., of P1,269 on that
judgment with interest thereon at 6 per cent per annum from August 30, 1930.
It appears from the record that during the trial of the case now under consideration, the Bank of the
Philippine Islands appeared in this case as assignee in the "Involuntary Insolvency of Dizon & Co., Inc.
That bank was appointed assignee in case No. 43065 of the Court of First Instance of the City of Manila
on November 28, 1932. It is therefore evident that there are still other creditors of Dizon & Co., Inc. This
being the case that corporation has a right to collect all unpaid stock subscriptions and any other amounts
which may be due it.
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to
which the 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 debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.)
. . . the Corporation Law clearly recognizes that a stock subscription is a subsisting liability from
the time the subscription is made, since it requires the subscriber to pay interest quarterly from
that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber
is as much bound to pay the amount of the share subscribed by him as he would be to pay any
other debt, and the right of the company to demand payment is no less incontestable.
(Velasco vs. Poizat, 37 Phil., 802, 805.)
In view of the above conclusions it is not necessary to discuss the other questions raised by the parties in
this case.
The judgment of the trial court is modified in accordance with the above and Dizon & Co., Inc., is ordered
to credit Bonifacio Lumanlan with the sum of P13,840 against the judgment for P15,109, in case No.
37492 of the Court of First Instance of Manila; to issue to Bonifacio Lumanlan 300 shares of its capital
stock upon payment by him of the sum of P1,269 with interest thereon at 6 per cent per annum from
August 30, 1930. The preliminary injunction issued in this case is hereby dissolved for the purpose of
enabling Dizon & Co., Inc., to ask for a new order of execution in case No. 37492, Court of First Instance
of Manila, for the sum of P1,269 with interest thereon as stated above. Without pronouncement as to
costs.

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 preemptive 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 filed against 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
properlyindorsed and that title to such certificate of stock is vested in the transferee by the delivery of
the duly indorsedcertificate 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 pre-emptive 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.

Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION

G.R. No. 96674 June 26, 1992

RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and FRANCISCO
TRIAS, petitioners,
vs.

COURT OF APPEALS*, SECURITIES AND EXCHANGE COMMISSION, MELANIA A. GUERRERO,

LUZ ANDICO, WILHEMINA G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO
GUERRERO , SR.,respondents.

PARAS, J.:
The basic controversy in this case is whether or not the respondent court erred in sustaining the
Securities and Exchange Commission when it compelled by Mandamus the Rural Bank of Salinas to
register in its stock and transfer book the transfer of 473 shares of stock to private respondents.
Petitioners maintain that the Petition forMandamus should have been denied upon the following grounds.
(1) Mandamus cannot be a remedy cognizable by the Securities and Exchange Commission when the
purpose is to register certificates of stock in the names of claimants who are not yet stockholders of a
corporation:
(2) There exist valid reasons for refusing to register the transfer of the subject of stock, namely:
(a) a pending controversy over the ownership of the certificates of stock with the Regional
Trial Court;
(b) claims that the Deeds of Assignment covering the subject certificates of stock were
fictitious and antedated; and
(c) claims on a resultant possible deprivation of inheritance share in relation with a
conflicting claim over the subject certificates of stock.
The facts are not disputed.
On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed
a Special Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting
the latter full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of
the Bank registered in his name (represented by the Bank's stock certificates nos. 26, 49 and 65), to
execute the proper documents therefor, and to receive and sign receipts for the dispositions.
On February 27, 1980, and pursuant to said Special Power of Attorney, private respondent Melania
Guerrero, as Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in
favor of private respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco
Guerrero, Jr. (5 shares).
Almost four months later, or two (2) days before the death of Clemente Guerrero on June 24, 1980,
private respondent Melania Guerrero, pursuant to the same Special Power of Attorney, executed a Deed
of Assignmentfor the remaining one (1) share of stock in favor of private respondent Francisco Guerrero,
Sr.
Subsequently, private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the two
(2) Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer
book of the 473 shares of stock so assigned, the cancellation of stock certificates in the name of
Clemente G. Guerrero, and the issuance of new stock certificates covering the transferred shares of
stocks in the name of the new owners thereof. However, petitioner Bank denied the request of respondent
Melania Guerrero.
On December 5, 1980, private respondent Melania Guerrero filed with the Securities and Exchange
Commission" (SEC) an action for mandamus against petitioners Rural Bank of Salinas, its President and
Corporate Secretary. The case was docketed as SEC Case No. 1979.
Petitioners filed their Answer with counterclaim on December 19, 1980 alleging the upon the death of
Clemente G. Guerrero, his 473 shares of stock became the property of his estate, and his property and

that of his widow should first be settled and liquidated in accordance with law before any distribution can
be effected so that petitioners may not be a party to any scheme to evade payment of estate or
inheritance tax and in order to avoid liability to any third persons or creditors of the late Clemente G.
Guerrero.
On January 29, 1981, a motion for intervention was filed by Maripol Guerrero, a legally adopted daughter
of the late Clemente G. Guerrero and private respondent Melania Guerrero, who stated therein that on
November 26, 1980 (almost two weeks before the filing of the petition for Mandamus) a Petition for the
administration of the estate of the late Clemente G. Guerrero had been filed with the Regional Trial Court,
Pasig, Branch XI, docketed as Special Proceedings No. 9400. Maripol Guerrero further claimed that the
Deeds of Assignment for the subject shares of stock are fictitious and antedated; that said conveyances
are donations since the considerations therefor are below the book value of the shares, the
assignees/private respondents being close relatives of private respondent Melania Guerrero; and that the
transfer of the shares in question to assignees/private respondents, other than private respondent
Melania Guerrero, would deprive her (Maripol Guerrero) of her rightful share in the inheritance. The SEC
hearing officer denied the Motion for Intervention for lack of merit. On appeal, the SEC En Banc affirmed
the decision of the hearing officer.
Intervenor Guerrero filed a complaint before the then Court of First Instance of Rizal, Quezon City Branch,
against private respondents for the annulment of the Deeds of Assignment, docketed as Civil Case No. Q32050. Petitioners, on the other hand, filed a Motion to Dismiss and/or to Suspend Hearing of SEC Case
No. 1979 until after the question of whether the subject Deeds of Assignment are fictitious, void or
simulated is resolved in Civil Case No. Q-32050. The SEC Hearing Officer denied said motion.
On December 10, 1984, the SEC Hearing Officer rendered a Decision granting the writ
of Mandamus prayed for by the private respondents and directing petitioners to cancel stock certificates
nos. 26, 49 and 65 of the Bank, all in the name of Clemente G. Guerrero, and to issue new certificates in
the names of private respondents, except Melania Guerrero. The dispositive, portion of the decision
reads:
WHEREFORE, judgment is hereby rendered in favor of the petitioners and against the
respondents, directing the latter, particularly the corporate secretary of respondent Rural
Bank of Salinas, Inc., to register in the latter's Stock and Transfer Book the transfer of
473 shares of stock of respondent Bank and to cancel Stock Certificates Nos. 26, 45 and
65 and issue new Stock Certificates covering the transferred shares in favor of
petitioners, as follows:
1. Luz Andico 457 shares
2. Wilhelmina Rosales 10 shares
3. Francisco Guerrero, Jr. 5 shares
4. Francisco Guerrero, Sr. 1 share
and to pay to the above-named petitioners, the dividends for said shares corresponding
to the years 1981, 1982, 1983 and 1984 without interest.
No pronouncement as to costs.
SO ORDERED. (p. 88, Rollo)
On appeal, the SEC En Banc affirmed the decision of the Hearing Officer. Petitioner filed a petition for
review with the Court of Appeals but said Court likewise affirmed the decision of the SEC.
We rule in favor of the respondents.
Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and
decide cases involving intracorporate controversies. An intracorporate controversy has been defined as

one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any
exception whatsoever (Rivera vs. Florendo, 144 SCRA 643 [1986]). The case at bar involves shares of
stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is
therefore within the power of respondent SEC to adjudicate.
Respondent SEC correctly ruled in favor of the registering of the shares of stock in question in private
respondent's names. Such ruling finds support under Section 63 of the Corporation Code, to wit:
Sec. 63. . . . 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 . . .
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court interpreted Sec. 63 in his wise:
Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates
no restriction as to whom the stocks may be transferred. It does not suggest that any
discrimination may be created by the corporation in favor of, or against a certain
purchaser. The owner of shares, as owner of personal property, is at liberty, under said
section to dispose them in favor of whomever he pleases, without limitation in this
respect, than the general provisions of law. . . .
The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds
any unpaid claim against the shares intended to be transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock
transfers, because:
. . . Restrictions in the traffic of stock must have their source in legislative enactment, as
the corporation itself cannot create such impediment. By-laws are intended merely for the
protection of the corporation, and prescribe regulation, not restriction; they are always
subject to the charter of the corporation. The corporation, in the absence of such power,
cannot ordinarily inquire into or pass upon the legality of the transactions by which its
stock passes from one person to another, nor can it question the consideration upon
which a sale is based. . . . (Tomson on Corporation Sec. 4137, citedin Fleisher vs.
Nolasco, Supra).
The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from
his ownership of the stocks. Thus:
Whenever a corporation refuses to transfer and register stock in cases like the
present, mandamuswill lie to compel the officers of the corporation to transfer said stock
in the books of the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher vs.
Botica Nolasco, 47 Phil. 583, 594).
The corporation's obligation to register is ministerial.
In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and
does not try to decide the question of ownership. (Fletcher, Sec. 5528, page 434).
The duty of the corporation to transfer is a ministerial one and if it refuses to make such
transaction without good cause, it may be compelled to do so by mandamus. (See. 5518,
12 Fletcher 394)
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.
WHEREFORE, the petition is DISMISSED for lack of merit.
SO ORDERED.

G.R. No. L-33320 May 30, 1983

RAMON
A.
vs.
THE PHILIPPINE NATIONAL BANK, respondent.

GONZALES, petitioner,

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 Cebu-Mactan 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.

FIRST DIVISION

[G.R. No. 123793. June 29, 1998]

ASSOCIATED BANK, petitioner, vs. COURT

JR., respondents.

OF

APPEALS

and

LORENZO

SARMIENTO

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

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

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

2.

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

3.

The costs of suit.

On the other hand, the Court of Appeals resolved the case in this wise: [5]
WHEREFORE, premises considered, the decision appealed from, dated October 17, 1986 is
REVERSED and SET ASIDE and another judgment rendered DISMISSING plaintiff-appellees
complaint, docketed as Civil Case No. 85-32243. There is no pronouncement as to costs.

The Facts
The undisputed factual antecedents, as narrated by the trial court and adopted by public respondent,
are as follows:[6]
x x x [O]n or about September 16, 1975 Associated Banking Corporation and Citizens Bank
and Trust Company merged to form just one banking corporation known as Associated Citizens
Bank, the surviving bank. On or about March 10, 1981, the Associated Citizens Bank changed
its corporate name to Associated Bank by virtue of the Amended Articles of Incorporation. On
September 7, 1977, the defendant executed in favor of Associated Bank a promissory note
whereby the former undertook to pay the latter the sum of P2,500,000.00 payable on or before
March 6, 1978. As per said promissory note, the defendant agreed to pay interest at 14% per
annum, 3% per annum in the form of liquidated damages, compounded interests, and attorneys
fees, in case of litigation equivalent to 10% of the amount due. The defendant, to date, still owes
plaintiff bank the amount ofP2,250,000.00 exclusive of interest and other charges. Despite
repeated demands the defendant failed to pay the amount due.
xxx xxx

xxx

x x x [T]he defendant denied all the pertinent allegations in the complaint and alleged as
affirmative and[/]or special defenses that the complaint states no valid cause of action; that the
plaintiff is not the proper party in interest because the promissory note was executed in favor of

Citizens Bank and Trust Company; that the promissory note does not accurately reflect the true
intention and agreement of the parties; that terms and conditions of the promissory note are
onerous and must be construed against the creditor-payee bank; that several partial payments
made in the promissory note are not properly applied; that the present action is premature; that
as compulsory counterclaim the defendant prays for attorneys fees, moral damages and
expenses of litigation.
On May 22, 1986, the defendant was declared as if in default for failure to appear at the Pre-Trial
Conference despite due notice.
A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22, 1986 was filed
by defendants counsel which was denied by the Court in [an] order dated September 16, 1986
and the plaintiff was allowed to present its evidence before the Court ex-parte on October 16,
1986.
At the hearing before the Court ex-parte, Esteban C. Ocampo testified that x x x he is an
accountant of the Loans and Discount Department of the plaintiff bank; that as such, he
supervises the accounting section of the bank, he counterchecks all the transactions that
transpired during the day and is responsible for all the accounts and records and other things
that may[ ]be assigned to the Loans and Discount Department; that he knows the [D]efendant
Lorenzo Sarmiento, Jr. because he has an outstanding loan with them as per their records; that
Lorenzo Sarmiento, Jr. executed a promissory note No. TL-2649-77 dated September 7, 1977 in
the amount of P2,500,000.00 (Exhibit A); that Associated Banking Corporation and the Citizens
Bank and Trust Company merged to form one banking corporation known as the Associated
Citizens Bank and is now known as Associated Bank by virtue of its Amended Articles of
Incorporation; that there were partial payments made but not full; that the defendant has not paid
his obligation as evidenced by the latest statement of account (Exh. B); that as per statement of
account the outstanding obligation of the defendant isP5,689,413.63 less P1,000,000.00
or P4,689,413.63 (Exh. B, B-1); that a demand letter dated June 6, 1985 was sent by the bank
thru its counsel (Exh. C) which was received by the defendant on November 12, 1985 (Exh. C,
C-1, C-2, C-3); that the defendant paid only P1,000,000.00 which is reflected in the Exhibit C.
Based on the evidence presented by petitioner, the trial court ordered Respondent Sarmiento to pay
the bank his remaining balance plus interests and attorneys fees. In his appeal, Sarmiento assigned to
the trial court several errors, namely: [7]
I
The [trial court] erred in denying appellants motion to dismiss appellee banks
complaint on the ground of lack of cause of action and for being barred by prescription and
laches.
II
The same lower court erred in admitting plaintiff-appellee banks amended complaint
while defendant-appellants motion to dismiss appellee banks original complaint and
using/availing [itself of] the new additional allegations as bases in denial of said appellants
motion and in the interpretation and application of the agreement of merger and Section 80
of BP Blg. 68, Corporation Code of the Philippines.
III
The [trial court] erred and gravely abuse[d] its discretion in rendering the two as if in
default orders dated May 22, 1986 and September 16, 1986 and in not reconsidering the
same upon technical grounds which in effect subvert the best primordial interest of
substantial justice and equity.
IV
The court a quo erred in issuing the orders dated May 22, 1986 and September 16,
1986 declaring appellant as if in default due to non-appearance of appellants attending
counsel who had resigned from the law firm and while the parties [were] negotiating for
settlement of the case and after a one million peso payment had in fact been paid to
appellee bank for appellants account at the start of such negotiation on February 18, 1986
as act of earnest desire to settle the obligation in good faith by the interested parties.
V
The lower court erred in according credence to appellee banks Exhibit B statement
of account which had been merely requested by its counsel during the trial and bearing
date of September 30, 1986.
VI
The lower court erred in accepting and giving credence to appellee banks 27-yearold witness Esteban C. Ocampo as of the date he testified on October 16, 1986, and
therefore, he was merely an eighteen-year-old minor when appellant supposedly incurred
the foisted obligation under the subject PN No. TL-2649-77 dated September 7, 1977,
Exhibit A of appellee bank.
VII
The [trial court] erred in adopting appellee banks Exhibit B dated September 30,
1986 in its decision given in open court on October 17, 1986 which exacted eighteen
percent (18%) per annum on the foisted principal amount of P2.5 million when the subject

PN, Exhibit A, stipulated only fourteen percent (14%) per annum and which was actually
prayed for in appellee banks original and amended complaints.
VIII
The appealed decision of the lower court erred in not considering at all appellants
affirmative defenses that (1) the subject PN No. TL-2649-77 for P2.5 million dated
September 7, 1977, is merely an accommodation pour autrui bereft of any actual
consideration to appellant himself and (2) the subject PN is a contract of adhesion, hence,
[it] needs [to] be strictly construed against appellee bank -- assuming for granted that it has
the right to enforce and seek collection thereof.
IX
The lower court should have at least allowed appellant the opportunity to present
countervailing evidence considering the huge amounts claimed by appellee bank (principal
sum of P2.5 million which including accrued interests, penalties and cost of litigation
totaled P4,689,413.63) and appellants affirmative defenses -- pursuant to substantial
justice and equity.
The appellate court, however, found no need to tackle all the assigned errors and limited itself to the
question of whether [herein petitioner had] established or proven a cause of action against [herein private
respondent]. Accordingly, Respondent Court held that the Associated Bank had no cause of action
against Lorenzo Sarmiento Jr., since said bank was not privy to the promissory note executed by
Sarmiento in favor of Citizens Bank and Trust Company (CBTC). The court ruled that the earlier merger
between the two banks could not have vested Associated Bank with any interest arising from the
promissory note executed in favor of CBTC after such merger.
Thus, as earlier stated, Respondent Court set aside the decision of the trial court and dismissed the
complaint. Petitioner now comes to us for a reversal of this ruling. [8]

Issues
In its petition, petitioner cites the following reasons: [9]
I The Court of Appeals erred in reversing the decision of the trial court and in declaring that
petitioner has no cause of action against respondent over the promissory note.
II The Court of Appeals also erred in declaring that, since the promissory note was executed in
favor of Citizens Bank and Trust Company two years after the merger between Associated
Banking Corporation and Citizens Bank and Trust Company, respondent is not liable to petitioner
because there is no privity of contract between respondent and Associated Bank.
III The Court of Appeals erred when it ruled that petitioner, despite the merger between
petitioner and Citizens Bank and Trust Company, is not a real party in interest insofar as the
promissory note executed in favor of the merger.
In a nutshell, the main issue is whether Associated Bank, the surviving corporation, may enforce the
promissory note made by private respondent in favor of CBTC, the absorbed company, after the merger
agreement had been signed.

The Courts Ruling

The petition is impressed with merit.

The Main Issue:

Associated Bank Assumed
All Rights of CBTC
Ordinarily, in the merger of two or more existing corporations, one of the combining corporations
survives and continues the combined business, while the rest are dissolved and all their rights, properties
and liabilities are acquired by the surviving corporation. [10] Although there is a dissolution of the absorbed
corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving
corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. [11]
The merger, however, does not become effective upon the mere agreement of the constituent
corporations. The procedure to be followed is prescribed under the Corporation Code. [12] Section 79 of
said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of
merger which, in turn, must have been duly approved by a majority of the respective stockholders

of the constituent corporations. The same provision further states that the merger shall be effective only
upon the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for
determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges,
properties as well as liabilities pass on to the surviving corporation.
Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of Merger,
which Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered
into, provided that its effectivity shall, for all intents and purposes, be the date when the necessary
papers to carry out this [m]erger shall have been approved by the Securities and Exchange
Commission.[14] As to the transfer of the properties of CBTC to ABC, the agreement provides:
[13]

10. Upon effective date of the Merger, all rights, privileges, powers, immunities,
franchises, assets and property of [CBTC], whether real, personal or mixed, and
including [CBTCs] goodwill and tradename, and all debts due to [CBTC] on whatever
act, and all other things in action belonging to [CBTC] as of the effective date of the
[m]erger shall be vested in [ABC], the SURVIVING BANK, without need of further act
or deed, unless by express requirements of law or of a government agency, any
separate or specific deed of conveyance to legally effect the transfer or assignment of
any kind of property [or] asset is required, in which case such document or deed shall
be executed accordingly; and all property, rights, privileges, powers, immunities,
franchises and all appointments, designations and nominations, and all other rights
and interests of [CBTC] as trustee, executor, administrator, registrar of stocks and
bonds, guardian of estates, assignee, receiver, trustee of estates of persons mentally
ill and in every other fiduciary capacity, and all and every other interest of [CBTC]
shall thereafter be effectually the property of [ABC] as they were of [CBTC], and title
to any real estate, whether by deed or otherwise, vested in [CBTC] shall not revert or
be in any way impaired by reason thereof; provided, however, that all rights of
creditors and all liens upon any property of [CBTC] shall be preserved and
unimpaired and all debts, liabilities, obligations, duties and undertakings of [CBTC],
whether contractual or otherwise, expressed or implied, actual or contingent, shall
henceforth attach to [ABC] which shall be responsible therefor and may be enforced
against [ABC] to the same extent as if the same debts, liabilities, obligations, duties
and undertakings have been originally incurred or contracted by [ABC], subject,
however, to all rights, privileges, defenses, set-offs and counterclaims which [CBTC]
has or might have and which shall pertain to [ABC].[15]
The records do not show when the SEC approved the merger. Private respondents theory is that it
took effect on the date of the execution of the agreement itself, which was September 16, 1975. Private
respondent contends that, since he issued the promissory note to CBTC on September 7, 1977 -- two
years after the merger agreement had been executed -- CBTC could not have conveyed or transferred to
petitioner its interest in the said note, which was not yet in existence at the time of the merger. Therefore,
petitioner, the surviving bank, has no right to enforce the promissory note on private respondent; such
right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree
that petitioner no longer has any interest in the promissory note. A closer perusal of the merger
agreement leads to a different conclusion. The provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents, or
other papers of whatever kind or nature and wherever found shall be deemed for all intents and
purposes, references to [ABC], the SURVIVING BANK, as if such references were direct
references to [ABC]. x x x[16] (Underscoring supplied)
Thus, the fact that the promissory note was executed after the effectivity date of the merger does not
militate against petitioner. The agreement itself clearly provides that all contracts -- irrespective of the
date of execution -- entered into in the name of CBTC shall be understood as pertaining to the surviving
bank, herein petitioner. Since, in contrast to the earlier aforequoted provision, the latter clause no longer
specifically refers only to contracts existing at the time of the merger, no distinction should be made. The
clause must have been deliberately included in the agreement in order to protect the interests of the
combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at
evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in
the note shall be construed, under the very provisions of the merger agreement, as a reference to
petitioner bank, as if such reference [was a] direct reference to the latter for all intents and purposes.
No other construction can be given to the unequivocal stipulation. Being clear, plain and free of
ambiguity, the provision must be given its literal meaning [17] and applied without a convoluted
interpretation. Verba legis non est recedendum.[18]

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

Secondary Issues:
Prescription, Laches, Contract
Pour Autrui, Lack of Consideration

No Prescription
or Laches
Private respondents claim that the action has prescribed, pursuant to Article 1149 of the Civil Code,
is legally untenable. Petitioners suit for collection of a sum of money was based on a written contract
and prescribes after ten years from the time its right of action arose. [19] Sarmientos obligation under the
promissory note became due and demandable on March 6, 1978. Petitioners complaint was instituted on
August 22, 1985, before the lapse of the ten-year prescriptive period. Definitely, petitioner still had every
right to commence suit against the payor/obligor, the private respondent herein.
Neither is petitioners action barred by laches. The principle of laches is a creation of equity, which is
applied not to penalize neglect or failure to assert a right within a reasonable time, but rather to avoid
recognizing a right when to do so would result in a clearly inequitable situation [20] or in an injustice.[21] To
require private respondent to pay the remaining balance of his loan is certainly not inequitable or
unjust. What would be manifestly unjust and inequitable is his contention that CBTC is the proper party to
proceed against him despite the fact, which he himself asserts, that CBTCs corporate personality has
been dissolved by virtue of its merger with petitioner. To hold that no payee/obligee exists and to let
private respondent enjoy the fruits of his loan without liability is surely most unfair and unconscionable,
amounting to unjust enrichment at the expense of petitioner. Besides, this Court has held that the
doctrine of laches is inapplicable where the claim was filed within the prescriptive period set forth under
the law.[22]

No Contract
Pour Autrui
Private respondent, while not denying that he executed the promissory note in the amount
of P2,500,000 in favor of CBTC, offers the alternative defense that said note was a contract pour autrui.
A stipulation pour autrui is one in favor of a third person who may demand its fulfillment, provided he
communicated his acceptance to the obligor before its revocation. An incidental benefit or interest, which
another person gains, is not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person.[23]
Florentino vs. Encarnacion Sr.[24] enumerates the requisites for such contract: (1) the stipulation in
favor of a third person must be a part of the contract, and not the contract itself; (2) the favorable
stipulation should not be conditioned or compensated by any kind of obligation; and (3) neither of the
contracting parties bears the legal representation or authorization of the third party. The fairest test in
determining whether the third persons interest in a contract is a stipulation pour autrui or merely an
incidental interest is to examine the intention of the parties as disclosed by their contract. [25]
We carefully and thoroughly perused the promissory note, but found no stipulation at all that would
even resemble a provision in consideration of a third person. The instrument itself does not disclose the
purpose of the loan contract. It merely lays down the terms of payment and the penalties incurred for
failure to pay upon maturity. It is patently devoid of any indication that a benefit or interest was thereby
created in favor of a person other than the contracting parties. In fact, in no part of the instrument is there
any mention of a third party at all. Except for his barefaced statement, no evidence was proffered by
private respondent to support his argument. Accordingly, his contention cannot be sustained. At any
rate, if indeed the loan actually benefited a third person who undertook to repay the bank, private
respondent could have availed himself of the legal remedy of a third-party complaint. [26] That he made no
effort to implead such third person proves the hollowness of his arguments.

Consideration

Private respondent also claims that he received no consideration for the promissory note and, in
support thereof, cites petitioners failure to submit any proof of his loan application and of his actual
receipt of the amount loaned. These arguments deserve no merit. Res ipsa loquitur. The instrument,
bearing the signature of private respondent, speaks for itself. Respondent Sarmiento has not questioned
the genuineness and due execution thereof. No further proof is necessary to show that he undertook to
pay P2,500,000, plus interest, to petitioner bank on or before March 6, 1978. This he failed to do, as
testified to by petitioners accountant. The latter presented before the trial court private respondents
statement of account[27] as of September 30, 1986, showing an outstanding balance of P4,689,413.63
after deducting P1,000,000.00 paid seven months earlier. Furthermore, such partial payment is
equivalent to an express acknowledgment of his obligation. Private respondent can no longer backtrack
and deny his liability to petitioner bank. A person cannot accept and reject the same instrument. [28]
WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the Decision of
RTC-Manila, Branch 48, in Civil Case No. 26465 is hereby REINSTATED.
SO ORDERED.
Davide Jr. (Chairman), Bellosillo, Vitug, and Quisumbing, JJ., concur.

G.R. No. 93695 February 4, 1992

RAMON
C.
LEE
and
ANTONIO
DM.
LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and
THOMAS GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this case? Who owns
the stocks of the corporation under the terms of the voting trust agreement? How long can a voting trust
agreement remain valid and effective? Did a director of the corporation cease to be such upon the
creation of the voting trust agreement? These are the questions the answers to which are necessary in
resolving the principal issue in this petition for certiorari whether or not there was proper service of
summons on Alfa Integrated Textile Mills (ALFA, for short) through the petitioners as president and vicepresident, allegedly, of the subject corporation after the execution of a voting trust agreement between
ALFA and the Development Bank of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the International Corporate Bank,
Inc. against the private respondents who, in turn, filed a third party complaint against ALFA and the
petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the
Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of an alias summons
upon ALFA through the DBP as a consequence of the petitioner's letter informing the court that the
summons for ALFA was erroneously served upon them considering that the management of ALFA had
been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive summons
on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct
corporate personality and existence.
On August 4, 1988, the trial court issued an order advising the private respondents to take the appropriate
steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of
Proper Service of Summons which the trial court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14, section
13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the
private respondents should have availed of another mode of service under Rule 14, Section 16 of the said
Rules, i.e.,through publication to effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988, the private respondents
argued that the voting trust agreement dated March 11, 1981 did not divest the petitioners of their
positions as president and executive vice-president of ALFA so that service of summons upon ALFA
through the petitioners as corporate officers was proper.

On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the
petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to filed its answer
through the petitioners as its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their
stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence,
they could no longer receive summons or any court processes for or on behalf of ALFA. In support of their
second motion for reconsideration, the petitioners attached thereto a copy of the voting trust agreement
between all the stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the
other hand, whereby the management and control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2, 1989
and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be
considered as proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was
affirmed by the court in its Order dated August 14, 1989 denying the private respondent's motion for
reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent before
the public respondent which, nonetheless, resolved to give due course thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with
public respondent issued an Order declaring as final the Order dated April 25, 1989. The private
respondents in the said Order were required to take positive steps in prosecuting the third party complaint
in order that the court would not be constrained to dismiss the same for failure to prosecute.
Subsequently, on October 25, 1989 the private respondents filed a motion for reconsideration on which
the trial court took no further action.
On March 19, 1990, after the petitioners filed their answer to the private respondents' petition
for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25,
1989 and August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered
to file its answer within the reglementary period. (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public respondent
which resolved to deny the same on May 10, 1990. Hence, the petitioners filed this certiorari petition
imputing grave abuse of discretion amounting to lack of jurisdiction on the part of the public respondent in
reversing the questioned Orders dated April 25, 1989 and August 14, 1989 of the court a quo, thus,
holding that there was proper service of summons on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990
erroneously applying the rule that the period during which a motion for reconsideration has been pending
must be deducted from the 15-day period to appeal. However, in its Resolution dated January 3, 1991,
the public respondent set aside the aforestated entry of judgment after further considering that the rule it
relied on applies to appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to
appeals from its decision to us pursuant to our ruling in the case of Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments, to wit:
(1) that the execution of the voting trust agreement by a stockholders whereby all his
shares to the corporation have been transferred to the trustee deprives the stockholders
of his position as director of the corporation; to rule otherwise, as the respondent Court of
Appeals did, would be violative of section 23 of the Corporation Code ( Rollo, pp. 2703273); and

(2) that the petitioners were no longer acting or holding any of the positions provided
under Rule 14, Section 13 of the Rules of Court authorized to receive service of
summons for and in behalf of the private domestic corporation so that the service of
summons on ALFA effected through the petitioners is not valid and ineffective; to maintain
the respondent Court of Appeals' position that ALFA was properly served its summons
through the petitioners would be contrary to the general principle that a corporation can
only be bound by such acts which are within the scope of its officers' or agents' authority
(Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on the
nature of a voting trust agreement and the consequent effects upon its creation in the light of the
provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders of a corporation
and the trustee or by a group of identical agreements between individual stockholders
and a common trustee, whereby it is provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is terminated, control over the
stock owned by such stockholders, either for certain purposes or for all purposes, is to be
lodged in the trustee, either with or without a reservation to the owners, or persons
designated by them, of the power to direct how such control shall be used. (98 ALR 2d.
379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements, a
more definitive meaning may be gathered. The said provision partly reads:
Sec. 59. Voting Trusts One or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees the right to vote and
other rights pertaining to the share for a period rights pertaining to the shares for a period
not exceeding five (5) years at any one time: Provided, that in the case of a voting trust
specifically required as a condition in a loan agreement, said voting trust may be for a
period exceeding (5) years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and shall specify the terms and
conditions thereof. A certified copy of such agreement shall be filed with the corporation
and with the Securities and Exchange Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be issued in the name of the
trustee or trustees stating that they are issued pursuant to said agreement. In the books
of the corporation, it shall be noted that the transfer in the name of the trustee or trustees
is made pursuant to said voting trust agreement.
By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder
from his other rights such as the right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However, in order to distinguish a
voting trust agreement from proxies and other voting pools and agreements, it must pass three criteria or
tests, namely: (1) that the voting rights of the stock are separated from the other attributes of ownership;
(2) that the voting rights granted are intended to be irrevocable for a definite period of time; and (3) that
the principal purpose of the grant of voting rights is to acquire voting control of the corporation. (5
Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p. 331citing Tankersly v.
Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not
only the stockholder's voting rights but also other rights pertaining to his shares as long as the voting trust
agreement is not entered "for the purpose of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud." (section 59, 5th paragraph of the
Corporation Code) Thus, the traditional concept of a voting trust agreement primarily intended to single
out a stockholder's right to vote from his other rights as such and made irrevocable for a limited duration

may in practice become a legal device whereby a transfer of the stockholder's shares is effected subject
to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or
beneficial ownership of the corporate shares of a stockholders, on the one hand, and the legal title thereto
on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing whereby one or more
stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the
latter voting or other rights pertaining to said shares for a period not exceeding five years upon the
fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The five
year-period may be extended in cases where the voting trust is executed pursuant to a loan agreement
whereby the period is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of the creation of the voting trust
agreement. The petitioners maintain that with the execution of the voting trust agreement between them
and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former assigned
and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of the voting trust
agreement the petitioners can no longer be considered directors of ALFA. In support of their contention,
the petitioners invoke section 23 of the Corporation Code which provides, in part, that:
Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be director
. . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement between ALFA and the
DBP had all the more safeguarded the petitioners' continuance as officers and directors of ALFA
inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors of a
corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right and status of the
transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing stockholder", is equitable
owner for the stocks represented by the voting trust certificates and the stock reversible
on termination of the trust by surrender. It is said that the voting trust agreement does not
destroy the status of the transferring stockholders as such, and thus render them
ineligible as directors. But a more accurate statement seems to be that for some
purposes the depositing stockholder holding voting trust certificates in lieu of his stock
and being the beneficial owner thereof, remains and is treated as a stockholder. It seems
to be deducible from the case that he may sue as a stockholder if the suit is in equity or is
of an equitable nature, such as, a technical stockholders' suit in right of the corporation.
[Commercial Laws of the Philippines by Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher
326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of
a voting trust agreement on the status of a stockholder who is a party to its execution from legal
titleholder or owner of the shares subject of the voting trust agreement, he becomes the equitable or
beneficial owner. (Salonga,Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and
Carlos, The Law on Private Corporations and Corporate Practice, 1969 ed., p. 175; Campos and LopezCampos, The Corporation Code; Comments, Notes & Selected Cases, 1981, ed., p. 386;
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed.,
p. 536). The penultimate question, therefore, is whether the change in his status deprives the stockholder
of the right to qualify as a director under section 23 of the present Corporation Code which deletes the
phrase "in his own right." Section 30 of the old Code states that:

Every director must own in his own right at least one share of the capital stock of the
stock corporation of which he is a director, which stock shall stand in his name on the
books of the corporation. A director who ceases to be the owner of at least one share of
the capital stock of a stock corporation of which is a director shall thereby cease to be a
director . . . (Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely affected
by the simple act of such director being a party to a voting trust agreement inasmuch as he remains
owner (although beneficial or equitable only) of the shares subject of the voting trust agreement pursuant
to which a transfer of the stockholder's shares in favor of the trustee is required (section 36 of the old
Corporation Code). No disqualification arises by virtue of the phrase "in his own right" provided under the
old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other persons who in fact
are not beneficial owners of the shares registered in their names on the books of the corporation
becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear
indication that in order to be eligible as a director, what is material is the legal title to, not beneficial
ownership of, the stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law
of Private Corporations, section 300, p. 92 [1969]citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981
disposed of all their shares through assignment and delivery in favor of the DBP, as trustee.
Consequently, the petitioners ceased to own at least one share standing in their names on the books of
ALFA as required under Section 23 of the new Corporation Code. They also ceased to have anything to
do with the management of the enterprise. The petitioners ceased to be directors. Hence, the transfer of
the petitioners' shares to the DBP created vacancies in their respective positions as directors of ALFA.
The transfer of shares from the stockholder of ALFA to the DBP is the essence of the subject voting trust
agreement as evident from the following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the
shares of the stocks owned by them respectively and shall do all things necessary for the
transfer of their respective shares to the TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number
of shares transferred, which shall be transferrable in the same manner and with the same
effect as certificates of stock subject to the provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or
special, upon any resolution, matter or business that may be submitted to any such
meeting, and shall possess in that respect the same powers as owners of the equitable
as well as the legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one share of stock for the
purpose of qualifying such person as director of ALFA, and cause a certificate of stock
evidencing the share so transferred to be issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his shares to the same
trustees without the need of revising this agreement, and this agreement shall have the
same force and effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis
supplied)
Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of
the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of record
with respect to the said shares of stocks. In the absence of a showing that the DBP had caused to be
transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, the
petitioners can no longer be deemed to have retained their status as officers of ALFA which was the case

before the execution of the subject voting trust agreement. There appears to be no dispute from the
records that DBP has taken over full control and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A. Guevarra,
Vice-President of its Special Accounts Department II, Remedial Management Group, the petitioners were
no longer included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting
trust agreement did not deprive the petitioners of their position as directors of ALFA, the public respondent
committed a reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be
president and vice-president, respectively, of the corporation at the time of service of
summons on them on August 21, 1987, they were at least up to that time, still directors . .
.
The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of the
subject voting trust agreement. Both parties, ALFA and the DBP, were aware at the time of the execution
of the agreement that by virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA were
stripped of their positions as such.
There can be no reliance on the inference that the five-year period of the voting trust agreement in
question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the 6th paragraph of
section 59 of the new Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificate as
well as the certificates of stock in the name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall be reissued in the name of the
transferors.
On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and the
DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA
with the DBP. This is shown by the following portions of the agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a
first mortgage on the manufacturing plant of said company;
WHEREAS, ALFA is also indebted to other creditors for various financial accomodations
and because of the burden of these obligations is encountering very serious difficulties in
continuing with its operations.
WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA
had offered and the TRUSTEE has accepted participation in the management and control
of the company and to assure the aforesaid participation by the TRUSTEE, the
TRUSTORS have agreed to execute a voting trust covering their shareholding in ALFA in
favor of the TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as
the obligations of ALFA with DBP, or any portion thereof, remains outstanding; (CA Rollo,
pp. 137-138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have
transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national government
through the Asset Privatization Trust (APT) as attested to in a Certification dated January 24, 1989 of the
Vice President of the DBP's Special Accounts Department II. In the same certification, it is stated that the
DBP, from 1987 until 1989, had handled APT's account which included ALFA's assets pursuant to a
management agreement by and between the DBP and APT (CA Rollo, p. 142) Hence, there is evidence
on record that at the time of the service of summons on ALFA through the petitioners on August 21, 1987,
the voting trust agreement in question was not yet terminated so that the legal title to the stocks of ALFA,
then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on
ALFA through the petitioners is readily answered in the negative.
Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
Sec. 13. Service upon private domestic corporation or partnership. If the defendant is
a corporation organized under the laws of the Philippines or a partnership duly registered,
service may be made on the president, manager, secretary, cashier, agent or any of its
directors.
It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from
the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976];
Osias Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21,
1990). Thus, the above rule on service of processes of a corporation enumerates the representatives of a
corporation who can validly receive court processes on its behalf. Not every stockholder or officer can
bind the corporation considering the existence of a corporate entity separate from those who compose it.
The rationale of the aforecited rule is that service must be made on a representative so integrated with
the corporation sued as to make it a priori supposable that he will realize his responsibilities and know
what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197
[1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated officers. The service of summons
upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the
petitioners, will contravene the general principle that a corporation can only be bound by such acts which
are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated
March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders
dated April 25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are
REINSTATED. SO ORDERED.