Corporation Code 3

G.R. No. L-42780

January 17, 1936

MANILA GAS CORPORATION, plaintiff-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendantappellee.
DeWitt, Perkins and Ponce Enrile for appellant.
Office of the Solicitor-General Hilado for appellee.
MALCOLM, J.:
This is an action brought by the Manila Gas Corporation against the
Collector of Internal Revenue for the recovery of P56,757.37, which
the plaintiff was required by the defendant to deduct and withhold
from the various sums paid it to foreign corporations as dividends and
interest on bonds and other indebtedness and which the plaintiff paid
under protest. On the trial court dismissing the complaint, with costs,
the plaintiff appealed assigning as the principal errors alleged to have
been committed the following:
1. The trial court erred in holding that the dividends paid by
the plaintiff corporation were subject to income tax in the
hands of its stockholders, because to impose the tax thereon
would be to impose a tax on the plaintiff, in violation of the
terms of its franchise, and would, moreover, be oppressive
and inequitable.
2. The trial court erred in not holding that the interest on
bonds and other indebtedness of the plaintiff corporation,
paid by it outside of the Philippine Islands to corporations
not residing therein, were not, on the part of the recipients
thereof, income from Philippine sources, and hence not
subject to Philippine income tax.
The facts, as stated by the appellant and as accepted by the appellee,
may be summarized as follows: The plaintiff is a corporation
organized under the laws of the Philippine Islands. It operates a gas
plant in the City of Manila and furnishes gas service to the people of
the metropolis and surrounding municipalities by virtue of a franchise
granted to it by the Philippine Government. Associated with the
plaintiff are the Islands Gas and Electric Company domiciled in New
York, United States, and the General Finance Company domiciled in
Zurich, Switzerland. Neither of these last mentioned corporations is
resident in the Philippines.
For the years 1930, 1931, and 1932, dividends in the sum of
P1,348,847.50 were paid by the plaintiff to the Islands Gas and
Electric Company in the capacity of stockholders upon which
withholding income taxes were paid to the defendant totalling
P40,460.03 For the same years interest on bonds in the sum of
P411,600 was paid by the plaintiff to the Islands Gas and Electric
Company upon which withholding income taxes were paid to the
defendant totalling P12,348. Finally for the stated time period,
interest on other indebtedness in the sum of P131,644,90 was paid by
the plaintiff to the Islands Gas and Electric Company and the General
Finance Company respectively upon which withholding income taxes
were paid to the defendant totalling P3,949.34.
Some uncertainty existing regarding the place of payment, we will
not go into this factor of the case at this point, except to remark that

the bonds and other tokens of indebtedness are not to be found in the
record. However, Exhibits E, F, and G, certified correct by the
Treasurer of the Manila Gas Corporation, purport to prove that the
place of payment was the United States and Switzerland.
The appeal naturally divides into two subjects, one covered by the
first assigned error, and the other by the second assigned error. We
shall discuss these subjects and errors in order.
1. Appellant first contends that the dividends paid by it to its
stockholders, the Islands Gas and Electric Company , were
not subject to tax because to impose a tax thereon would be
to do so on the plaintiff corporation, in violation of the terms
of its franchise and would, moreover, be oppressive and
inequitable. This argument is predicated on the constitutional
provision that no law impairing the obligation of contracts
shall be enacted. The particular portion of the franchise
which is invoked provides:
The grantee shall annually on the fifth day of
January of each year pay to the City of Manila and
the municipalities in the Province of Rizal in which
gas is sold, two and one half per centum of the
gross receipts within said city and municipalities,
respectively, during the preceding year. Said
payment shall be in lieu of all taxes, Insular,
provincial and municipal, except taxes on the real
estate, buildings, plant, machinery, and other
personal property belonging to the grantee.
The trial judge was of the opinion that the instant case was
governed by our previous decision in the case of Philippine
Telephone and Telegraph Co., vs. Collector of Internal
Revenue ([1933], 58 Phil. 639). In this view we concur. It is
true that the tax exemption provision relating to the Manila
Gas Corporation hereinbefore quoted differs in phraseology
from the tax exemption provision to be found in the
franchise of the Telephone and Telegraph Company, but
the ratio decidendi of the two cases is substantially the same.
As there held and as now confirmed, a corporation has a
personality distinct from that of its stockholders, enabling
the taxing power to reach the latter when they receive
dividends from the corporation. It must be considered as
settled in this jurisdiction that dividends of a domestic
corporation, which are paid and delivered in cash to foreign
corporations as stockholders, are subject to the payment in
the income tax, the exemption clause in the charter of the
corporation notwithstanding.
For the foreign reasons, we are led to sustain the decision of
the trial court and to overrule appellant's first assigned error.
2. In support of its second assignment of error, appellant
contends that, as the Islands Gas and Electric Company and
the General Finance Company are domiciled in the United
States and Switzerland respectively, and as the interest on
the bonds and other indebtedness earned by said
corporations has been paid in their respective domiciles, this
is not income from Philippine sources within the meaning of
the Philippine Income Tax Law. Citing sections 10 (a) and
13 (e) of Act No. 2833, the Income Tax Law, appellant
asserts that their applicability has been squarely determined

Corporation Code 3
by decisions of this court in the cases of Manila Railroad
Co. vs. Collector of Internal Revenue (No. 31196,
promulgated December 2, 1929, nor reported),
and Philippine Railway Co. vs. Posadas (No. 38766,
promulgated October 30, 1933 [58 Phil., 968]) wherein it
was held that interest paid to non-resident individuals or
corporations is not income from Philippine sources, and
hence not subject to the Philippine Income Tax. The
Solicitor-General answers with the observation that the cited
decisions interpreted the Income Tax Law before it was
amended by Act No. 3761 to cover the interest on bonds and
other obligations or securities paid "within or without the
Philippine Islands." Appellant rebuts this argument by
"assuming, for the sake of the argument, that by the
amendment introduced to section 13 of Act No. 2833 by Act
No. 3761 the Legislature intended the interest from
Philippine sources and so is subject to tax," but with the
necessary sequel that the amendatory statute is invalid and
unconstitutional as being the power of the Legislature to
enact.
Taking first under observation that last point, it is to be observed that
neither in the pleadings, the decision of the trial court, nor the
assignment of errors, was the question of the validity of Act No. 3761
raised. Under such circumstances, and no jurisdictional issue being
involved, we do not feel that it is the duty of the court to pass on the
constitutional question, and accordingly will refrain from doing so.
(Cadwaller-Gibson Lumber Co. vs. Del Rosario [1913], 26 Phil., 192;
Macondray and Co. vs. Benito and Ocampo, P. 137, ante;
State vs. Burke [1912], 175 Ala., 561.)
As to the applicability of the local cases cited and of the Porto Rican
case of Domenech vs. United Porto Rican Sugar co. ([1932], 62 F.
[2d], 552), we need only observe that these cases announced good
law, but that each he must be decided on its particular facts. In other
words, in the opinion of the majority of the court, the facts at bar and
the facts in those cases can be clearly differentiated. Also, in the case
at bar there is some uncertainty concerning the place of payment,
which under one view could be considered the Philippines and under
another view the United States and Switzerland, but which cannot be
definitely determined without the necessary documentary evidence
before, us.
The approved doctrine is that no state may tax anything not within its
jurisdiction without violating the due process clause of the
constitution. The taxing power of a state does not extend beyond its
territorial limits, but within such it may tax persons, property, income,
or business. If an interest in property is taxed, the situs of either the
property or interest must be found within the state. If an income is
taxed, the recipient thereof must have a domicile within the state or
the property or business out of which the income issues must be
situated within the state so that the income may be said to have a situs
therein. Personal property may be separated from its owner, and he
may be taxed on its account at the place where the property is
although it is not the place of his own domicile and even though he is
not a citizen or resident of the state which imposes the tax. But debts
owing by corporations are obligations of the debtors, and only
possess value in the hands of the creditors. (Farmers Loan
Co. vs. Minnesota [1930], 280 U.S., 204; Union Refrigerator Transit
Co. vs. Kentucky [1905], 199 U.S., 194 State Tax on Foreign held
Bonds [1873, 15 Wall., 300; Bick vs. Beach [1907], 206 U. S., 392;
State ex rel. Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161
Wis., 111; United States Revenue Act of 1932, sec. 143.)

These views concerning situs for taxation purposes apply as well to

an organized, unincorporated territory or to a Commonwealth having
the status of the Philippines.
Pushing to one side that portion of Act No. 3761 which permits
taxation of interest on bonds and other indebtedness paid without the
Philippine Islands, the question is if the income was derived from
sources within the Philippine Islands.
In the judgment of the majority of the court, the question should be
answered in the affirmative. The Manila Gas Corporation operates its
business entirely within the Philippines. Its earnings, therefore come
from local sources. The place of material delivery of the interest to
the foreign corporations paid out of the revenue of the domestic
corporation is of no particular moment. The place of payment even if
conceded to be outside of tho country cannot alter the fact that the
income was derived from the Philippines. The word "source" conveys
only one idea, that of origin, and the origin of the income was the
Philippines.
In synthesis, therefore, we hold that conditions have not been
provided which justify the court in passing on the constitutional
question suggested; that the facts while somewhat obscure differ from
the facts to be found in the cases relied upon, and that the Collector of
Internal Revenue was justified in withholding income taxes on
interest on bonds and other indebtedness paid to non-resident
corporations because this income was received from sources within
the Philippine Islands as authorized by the Income Tax Law. For the
foregoing reasons, the second assigned error will be overruled.
Before concluding, it is but fair to state that the writer's opinion on
the first subject and the first assigned error herein discussed is
accurately set forth, but that his opinion on the second subject and the
second assigned error is not accurately reflected, because on this last
division his views coincide with those of the appellant. However, in
the interest of the prompt disposition of this case, the decision has
been written up in accordance with instructions received from the
court.
Judgment affirmed, with the cost of this instance assessed against the
appellant.
Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.

Separate Opinions
VILLA-REAL, J., concurring and dissenting:
I concur with the majority decision regarding the disposition of the
second error, but dissent as to its disposition of the first error. In my
opinion, the exemption clause to be found in the charter of the
plaintiff is broader in scope than that to be found in the charter of the
Philippine Telephone and Telegraph Company, thus making
inapplicable the decision of this court in the case of Philippine
Telephone and Telegraph Co. vs. Collector of Internal Revenue (58
Phil., 639).
ABAD SANTOS, J., concurring in part and dissenting in part:

Corporation Code 3
I am of opinion that the first assignment of error should be sustained
and the judgment below reversed in that respect.
The franchise held by the appellant corporation contains a stipulation
by the Government to the effect that the payment by the corporation
to the entities named in the franchise of two and one-half per centum
of its gross receipts, shall be in lieu of all taxes, except taxes on the
real estate, buildings, plant, machinery and other personal property
belonging to the corporation. The dividends paid by the appellant
corporation to its stockholders were a part of its earnings and as such
not subject to tax under the terms of the franchise. The franchise in
this case is a contract, the obligation of which can not be impaired.

GODDARD, J., dissenting:

The tax exemption and commutation clause in the plaintiffs franchise
provides that:
The grantee shall annually on the 5th day of January of each year pay
to the City of Manila and to the municipalities in the Province of
Rizal in which gas is sold, two and one half per centum of the gross
receipts within said city and municipalities, respectively, during the
preceding year. Said payment shall be in lieu of all tax, Insular,
provincial and municipal, except taxes on the real estate, buildings,
plant, machinery, and other personal property belonging to the
grantee.

I agree with the majority of the court that the second assignment of
error should be overruled, and the judgment affirmed in that
particular.

This franchise is a contract between the Government and the grantees

thereof, whose rights have been acquired by the plaintiff corporation.
In Manila Railroad Co. vs. Rafferty (40 Phil., 224, 230), this court
Section 13 (e) of Act No. 2833, as amended by Act No. 3761,
held that "... Once granted, a charter becomes a private contract ...."
expressly provides for the imposition of a tax "... upon the income
Article 1091 of the Civil Code provides that "Obligations arising
derived from interest upon bonds and mortgages, or deeds of trust,
from contract shall have the force of law between the contracting
notes, or other interest-bearing obligations of a domestic or resident
parties and must be performed in accordance with their stipulations."
foreign corporation, ..." The income derived from the interest on
It follows that as the plaintiff corporation has paid to the City of
bonds and other indebtedness of the appellant corporation, is clearly
Manila and to the municipalities of Rizal, where gas is sold by it, the
within the purview of the statute. The power of the legislature to
franchise tax stipulated in the contract, the Government has no legal
impose such a tax must be recognized. As stated by Justice Bradley in right to impose another tax on its earnings.
United States vs. Erie R. Co. (106 U.S., 327; 27 Law. ed., 151, 153) :
"... The tax laid upon their bonds was intended to affect the owners of The case of Farrington vs. Tennessee (95 U.S., 679; 24 Law. ed.,
the bonds, and whilst the companies were directed to pay it, they
558), is almost in exact parallel with the case at bar. The facts of that
were authorized to retain the amount from the installments due to the case were as follows: The Union and Planters' Bank of Memphis was
bondholders, whether citizens or aliens. The objection that Congress duly organized under the charter granted by the Legislature of
had no power to tax non-resident aliens, is met by the fact that the tax Tennessee, by two Acts, respectively dated March 20, 1858, and
was not assessed against them personally, but against the rem, the
February 12, 1869. Since its organization it continued doing a regular
credit, the debt due to them. Congress has the right to tax all property banking business. Its capital subscribed and paid in amounted to
within the jurisdiction of the United States, with certain exceptions
$675,000, divided into 6,750 shares of $100 each. Farrington, the
not necessary to be noted. The money due to non-resident
plaintiff in error, was the owner of 150 shares, of the value of
bondholders in this case was in the United States in the hands of the
$15,000.
company before it could be transmitted to London, or other place
where the bondholders resided. Whilst here it was liable to taxation.
The tenth section of the charter of the bank declared:
Congress, by the internal revenue law, by way of tax., stopped a part
of the money before its transmission, namely; 5 per cent of it.
That said Company shall pay to the State an annual tax of
Plausible grounds for levying such a tax might be assigned. It might
one-half of one per cent on each share of the capital stock
be said that the creditor is protected by our laws in the enjoyment of
subscribe, which shall be in lieu of all other taxes.
the debt; that the whole machinery of our courts and the physical
power of the government are placed at his disposal for its security and
The State of Tennessee and the County of Shelby, claiming the right
collection."
under the Revenue Law of the State, to tax the stock of the plaintiff in
error, a stockholder of the bank, assessed and taxed it for the year
AVANCEA, C.J., dissenting:
1872. It was assessed at its per value. The tax imposed by the State
was forty cents on the $100, making the state tax $60. The county tax
I do not agree with the majority opinion with respect to the appellant's was $1.20 on the $100, making the county tax $180.
second assignment of error, which in my opinion should be sustained.
The question involved in this error has been clearly decided by this
The plaintiff in error denied the right of the State and County to
court in the case of Manila Railroad Co. vs. Collector of Internal
impose these taxes. He claimed;
Revenue (G.R. No. 31196, promulgated December 2, 1929, not
reported). In said case it was held that interest on bonds purchased
(1) That the 10th section of the charter was a contract
outside the Philippine Islands by non-residents of the Islands cannot
between the State and the bank;
be considered derived from sources within the Islands. The
amendment of the law introduced by Act no. 3761 as to the place of
payment of interest does not affect the aspect of the question raised in
(2) That any other tax than that therein specified was
this error if the interest on which the tax in the present case has been
expressly forbidden, and.
collected is not derived from sources within the Islands, as it is not so
in fact, in accordance with the doctrine laid down in said case
(3) That the revenue laws imposing the taxes in question
of Manila Railroad Co. vs. Collector of Internal Revenue.
impaired the obligation of the contract.

Corporation Code 3
The Supreme Court of Tennessee adjudge the taxes to be valid and
the plaintiff in error thereupon removed the case to the Federal
Supreme Court for review.

stockholders. In the case at bar, while the plaintiff the present owner
of the franchise. is a corporation, the original grantees were natural
persons; hence there is more reason for holding in the present case
that the mutation provision in the franchise granted by the Philippine
Government should extend to the stockholders of plaintiff
corporation.

In upholding all of the contentions of the plaintiff in error, and

pronouncing invalid the taxes involved as impairing the obligation of
the contract created by the franchise, the United States Supreme court
said:
The Farrington Case, decided in 1878, was by a divided court.
Eighteen years later in 1896 the State of Tennessee sought to
This case turns upon the construction to be given to the 10th have the decision in that case reviewed, on the ground that the court
did not consider the other portions of the charter which, according to
section of the charter of the bank. . . .
the State, were material. The Supreme Court this time
unanimously declined to reverse its view as expressed in the
xxx
xxx
xxx
Farrington decision, saying.
When this charter was granted, the State might have been
silent as to taxation. In that case, the power would have been
unfettered. (Bk. vs. Billings, 4 Pet., 514.) It might have
reserved the power as to some things, and yielded it as to
others. It had the power to make its own terms or to refuse
the charter. It chose to stipulate for a specified tax on the and
declared and bound itself that this tax should be "in lieu of
all other taxes."
There is no question before us as to the tax imposed on the
shares by the charter. But the State has by her revenue
imposed another and an additional tax on these same shares.
This is one of those "other taxes" which it had stipulated to
forego. The identity of the thing doubly taxed is not affected
by the fact that in one case the tax is to be paid vicariously
by the bank, and in the other by the owner of the share
himself. The thing thus taxed is to the same, and the second
tax is expressly forbidden by the contract of the parties.
After the most careful consideration, we can come to no
other conclusion. Such, we think, must have been the
understanding and intent of the parties when the charter was
granted and the bank was organized. Any other view would
ignore the covenant that the tax specified should be "in lieu
of all other taxes." It would blot those terms from the
context, and construe it as if they were not a part of it. . . .
xxx

xxx

xxx

The decree of the Supreme Court of Tennessee is reversed

and the case will be remanded, with directions to enter a
decree in favor of the plaintiff in error.
(Farrington vs. Tennessee, 95 U.S., 679; 24 Law. ed., 560,
561.)

We do not think under the circumstances that we ought now

to come to a different conclusion upon the question of
exemption from that which was arrived at by this court in
the Farrington Case. As the whole charter was then before
the court, we are not prepared to say that its force was
misunderstood, or that there was an omission by the court to
consider all the language of the exemption clause simply
because a portion of its omitted in the quotation from the
record made in the opinion therein delivered. We are not
inclined, therefore, to overrule or distinguish the Farrington
Case, and we must now told that the charter clause of
exemption limits the amount of tax on each share of stock in
the hands of the shareholder, and that any subsequent
revenue law of the state which imposes an additional tax on
such shares in the hands or shareholders, impairs the
obligation of the contract, and is void. This compels us to
reverse the judgments herein against the shareholders. (Bank
of Commerce vs. Tennessee, 16 U.S. 134; 40 Law. ed., 645,
648.)
The doctrine of the Farrington Case is now the settled rule of the
highest court of the United States. The first assignment of error
should therefore be sustained.
As to the second assignment of error I concur with the dissenting
opinion of the Chief Justice for the reasons set forth therein.
Consequently that assignment of error should also be sustained.
The trial court erred in not holding that interest received by a nonresident corporation, outside the Philippine Islands, is not income
from Philippine sources and so not subject to income tax.

In view of the above I am of the opinion that the appealed decision

That case, it will be observed, is almost in exact parallel with the case should be reversed and another entered by this courts ordering the
defendant to pay the plaintiff the sum of P40,460.03, the amount of
at bar. Both cases deal with tax commutation provided for in a
franchise granted by the State. In both cases the State covenanted that withholding taxes paid on account of interest on bonds and other
indebtedness, or a total of P56,757.37.
the tax specified in the franchise should be in lieu of all other taxes.
In both cases the additional tax which the tax authorities sought to
impose was a revenue tax. In both cases the tax provided for in the
franchise was paid by the corporation, and the tax which the
authorities attempted to collect were imposed on the stockholders. In
theFarrington case the provision in the Federal Constitution that "No
State shall ... pass any ... law impairing the obligation of contracts"
was applied; in this case the provision of our Organic Law that "no
law impairing the obligation of contracts shall be enacted" is
involved. It will be observed further, that in the Farrington case the
franchise was granted to a corporation, yet the court held that the
court mutation provision of the franchise extended to the individual

Corporation Code 3
G.R. No. 58168 December 19, 1989
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD
MAGSAYSAY-CABRERA, LUISA MAGSAYSAY-CORPUZ,
assisted be her husband, Dr. Jose Corpuz, FELICIDAD P.
MAGSAYSAY, and MERCEDES MAGSAYSAYDIAZ, petitioners,
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZMAGSAYSAY, Special Administratrix of the Estate of the late
Genaro F. Magsaysay respondents.

consequently null and void. She prayed that the Deed of Assignment
and the Deed of Mortgage be annulled and that the Register of Deeds
be ordered to cancel TCT No. 22431 and to issue a new title in her
favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed
a motion for intervention on the ground that on June 20, 1978, their
brother conveyed to them one-half (1/2 ) of his shareholdings in
SUBIC or a total of 416,566.6 shares and as assignees of around 41
% of the total outstanding shares of such stocks of SUBIC, they have
a substantial and legal interest in the subject matter of litigation and
that they have a legal interest in the success of the suit with respect to
SUBIC.

On July 26, 1979, the court denied the motion for intervention, and
ruled that petitioners have no legal interest whatsoever in the matter
In this petition for review on certiorari, petitioners seek to reverse and in litigation and their being alleged assignees or transferees of certain
shares in SUBIC cannot legally entitle them to intervene because
set aside [1] the decision of the Court of Appeals dated July l3,
SUBIC has a personality separate and distinct from its stockholders.
1981, 1 affirming that of the Court of First Instance of Zambales and
Olongapo City which denied petitioners' motion to intervene in an
On appeal, respondent Court of Appeals found no factual or legal
annulment suit filed by herein private respondent, and [2] its
justification to disturb the findings of the lower court. The appellate
resolution dated September 7, 1981, denying their motion for
court further stated that whatever claims the petitioners have against
reconsideration.
the late Senator or against SUBIC for that matter can be ventilated in
a separate proceeding, such that with the denial of the motion for
Petitioners are raising a purely legal question; whether or not
intervention, they are not left without any remedy or judicial relief
respondent Court of Appeals correctly denied their motion for
under existing law.
intervention.
FERNAN, C.J.:

The facts are not controverted.

On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and
special administratix of the estate of the late Senator Genaro
Magsaysay, brought before the then Court of First Instance of
Olongapo an action against Artemio Panganiban, Subic Land
Corporation (SUBIC), Filipinas Manufacturer's Bank
(FILMANBANK) and the Register of Deeds of Zambales. In her
complaint, she alleged that in 1958, she and her husband acquired,
thru conjugal funds, a parcel of land with improvements, known as
"Pequena Island", covered by TCT No. 3258; that after the death of
her husband, she discovered [a] an annotation at the back of TCT No.
3258 that "the land was acquired by her husband from his separate
capital;" [b] the registration of a Deed of Assignment dated June 25,
1976 purportedly executed by the late Senator in favor of SUBIC, as
a result of which TCT No. 3258 was cancelled and TCT No. 22431
issued in the name of SUBIC; and [c] the registration of Deed of
Mortgage dated April 28, 1977 in the amount of P 2,700,000.00
executed by SUBIC in favor of FILMANBANK; that the foregoing
acts were void and done in an attempt to defraud the conjugal
partnership considering that the land is conjugal, her marital consent
to the annotation on TCT No. 3258 was not obtained, the change
made by the Register of Deeds of the titleholders was effected
without the approval of the Commissioner of Land Registration and
that the late Senator did not execute the purported Deed of
Assignment or his consent thereto, if obtained, was secured by
mistake, violence and intimidation. She further alleged that the
assignment in favor of SUBIC was without consideration and

Petitioners' motion for reconsideration was denied. Hence, the instant

recourse.
Petitioners anchor their right to intervene on the purported assignment
made by the late Senator of a certain portion of his shareholdings to
them as evidenced by a Deed of Sale dated June 20, 1978. 2 Such
transfer, petitioners posit, clothes them with an interest, protected by
law, in the matter of litigation.
Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil
Co., 49 Phil. 857,862 & 853 (1927), 3petitioners strongly argue that
their ownership of 41.66% of the entire outstanding capital stock of
SUBIC entitles them to a significant vote in the corporate affairs; that
they are affected by the action of the widow of their late brother for it
concerns the only tangible asset of the corporation and that it appears
that they are more vitally interested in the outcome of the case than
SUBIC.
Viewed in the light of Section 2, Rule 12 of the Revised Rules of
Court, this Court affirms the respondent court's holding that
petitioners herein have no legal interest in the subject matter in
litigation so as to entitle them to intervene in the proceedings below.
In the case of Batama Farmers' Cooperative Marketing Association,
Inc. v. Rosal, 4 we held: "As clearly stated in Section 2 of Rule 12 of
the Rules of Court, to be permitted to intervene in a pending action,
the party must have a legal interest in the matter in litigation, or in the
success of either of the parties or an interest against both, or he must
be so situated as to be adversely affected by a distribution or other

Corporation Code 3
disposition of the property in the custody of the court or an officer
thereof ."

deceased husband; [3] SEC Case No. 001770, filed by respondent

praying, among other things that she be declared in her capacity as
the surviving spouse and administratrix of the estate of Genaro
To allow intervention, [a] it must be shown that the movant has legal Magsaysay as the sole subscriber and stockholder of SUBIC. There,
petitioners, by motion, sought to intervene. Their motion to
interest in the matter in litigation, or otherwise qualified; and [b]
reconsider the denial of their motion to intervene was granted; [4] SP
consideration must be given as to whether the adjudication of the
rights of the original parties may be delayed or prejudiced, or whether No. Q-26739 before the CFI of Rizal, Branch IV, petitioners herein
filing a contingent claim pursuant to Section 5, Rule 86, Revised
the intervenor's rights may be protected in a separate proceeding or
not. Both requirements must concur as the first is not more important Rules of Court. 9 Petitioners' interests are no doubt amply protected in
these cases.
than the second. 5
The interest which entitles a person to intervene in a suit between
other parties must be in the matter in litigation and of such direct and
immediate character that the intervenor will either gain or lose by the
direct legal operation and effect of the judgment. Otherwise, if
persons not parties of the action could be allowed to intervene,
proceedings will become unnecessarily complicated, expensive and
interminable. And this is not the policy of the law. 6

Neither do we lend credence to petitioners' argument that they are

more interested in the outcome of the case than the corporationassignee, owing to the fact that the latter is willing to compromise
with widow-respondent and since a compromise involves the giving
of reciprocal concessions, the only conceivable concession the
corporation may give is a total or partial relinquishment of the
corporate assets. 10

The words "an interest in the subject" mean a direct interest in the
cause of action as pleaded, and which would put the intervenor in a
legal position to litigate a fact alleged in the complaint, without the
establishment of which plaintiff could not recover. 7

Such claim all the more bolsters the contingent nature of petitioners'
interest in the subject of litigation.

The factual findings of the trial court are clear on this point. The
petitioners cannot claim the right to intervene on the strength of the
Here, the interest, if it exists at all, of petitioners-movants is indirect, transfer of shares allegedly executed by the late Senator. The
corporation did not keep books and records. 11 Perforce, no transfer
contingent, remote, conjectural, consequential and collateral. At the
very least, their interest is purely inchoate, or in sheer expectancy of a was ever recorded, much less effected as to prejudice third parties.
right in the management of the corporation and to share in the profits The transfer must be registered in the books of the corporation to
affect third persons. The law on corporations is explicit. Section 63 of
thereof and in the properties and assets thereof on dissolution, after
the Corporation Code provides, thus: "No transfer, however, shall be
payment of the corporate debts and obligations.
valid, except as between the parties, until the transfer is recorded in
While a share of stock represents a proportionate or aliquot interest in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or
the property of the corporation, it does not vest the owner thereof
certificates and the number of shares transferred."
with any legal right or title to any of the property, his interest in the
corporate property being equitable or beneficial in nature.
And even assuming arguendo that there was a valid transfer,
Shareholders are in no legal sense the owners of corporate property,
petitioners are nonetheless barred from intervening inasmuch as their
which is owned by the corporation as a distinct legal person. 8
rights can be ventilated and amply protected in another proceeding.
Petitioners further contend that the availability of other remedies, as
WHEREFORE, the instant petition is hereby DENIED. Costs against
declared by the Court of appeals, is totally immaterial to the
petitioners.
availability of the remedy of intervention.
SO ORDERED.
We cannot give credit to such averment. As earlier stated, that the
movant's interest may be protected in a separate proceeding is a factor
to be considered in allowing or disallowing a motion for intervention.
It is significant to note at this juncture that as per records, there are
four pending cases involving the parties herein, enumerated as
follows: [1] Special Proceedings No. 122122 before the CFI of
Manila, Branch XXII, entitled "Concepcion Magsaysay-Labrador, et
al. v. Subic Land Corp., et al.", involving the validity of the transfer
by the late Genaro Magsaysay of one-half of his shareholdings in
Subic Land Corporation; [2] Civil Case No. 2577-0 before the CFI of
Zambales, Branch III, "Adelaida Rodriguez-Magsaysay v.
Panganiban, etc.; Concepcion Labrador, et al. Intervenors", seeking to
annul the purported Deed of Assignment in favor of SUBIC and its
annotation at the back of TCT No. 3258 in the name of respondent's

Corporation Code 3
G.R. No. L-30188

October 2, 1928

FELIPE TAYKO, EDUARDO BUENO, BAUTISTA TAYKO,

BERNARDO SOLDE and VICENTE ELUM,petitioners,
vs.
NICOLAS CAPISTRANO, acting as Judge of First Instance of
Oriental Negros. ALFREDO B. CACNIO, as Provincial Fiscal of
Oriental Negros, and JUAN GADIANI, respondents.
Abad Santos, Camus and Delgado and Teopisto Guingona for
petitioners.
Araneta and Zaragoza for respondents.
The respondent Judge in his own behalf.

then filed the proper informations, when the provincial fiscal refused
to file criminal charges against the petitioners for violation of the
election law for lack of sufficient evidence to sustain the same; that
said respondent is neither a judge de jure nor de facto, but that,
notwithstanding this fact, he continues to hold the office of judge of
the Court of First Instance of Oriental Negros and pretends to be duly
qualified and acting judge of the said province; and that he has tried,
and continues to try, to act as such judge and that there is reasonable
ground to believe that he will take cognizance of the cases in question
unless he be restrained by order of this court; that in acting as a duly
qualified judge notwithstanding the facts alleged in the fifth, sixth,
and seventh paragraphs hereof, the respondent judge acted and is
about to act without and in excess of jurisdiction and also after the
loss of jurisdiction.

To this petition the respondents demur on the ground that the facts
stated in that (1) none of the facts alleged in the petition divest the
OSTRAND, J.:
respondent judge of his jurisdiction to take cognizance of the cases
referred to in the complaint, and (2) even admitting as true, for the
This is a petition for a writ of prohibition enjoining the respondent
sake of this demurrer, the facts alleged in paragraph 7 of the petition,
judge from making cognizance of certain civil and criminal election
the respondent judge is still a de facto judge and his title to the office
cases in which the petitioners are parties.
and his jurisdiction to hear the cases referred to in the petition cannot
The petitioners allege that the respondent judge, previous to this date, be questioned by prohibition, as this writ, even when directed against
was appointed judge of the Court of First Instance of Oriental Negros, persons acting as judges, cannot be treated as a substitute for quo
to hold office during good behavior and until he should reach the age warranto, or be rightfully called upon to perform any of the functions
of 65 years; that he now has reached that age and, therefore, under the of that writ.
provisions of section 148 of the Administrative Code as amended, is
disqualified from acting as a judge of the Court of First Instance. The The ground upon which the petition rests may be reduced to three
propositions. (1) That the assignment of the Auxiliary Judge, Sixto de
petitioners further allege that in view of the many election protests
and criminal cases for violation of the election law filed in the Court la Costa, to Dumaguete was made with the understanding that the he
was to hear and take cognizance of all election contests and criminal
of First Instance of Oriental Negros arising in the Court of First
causes for violation of the election law and that the respondent judge
Instance of Oriental Negros arising from the last election of June 5,
1928, the Honorable Sixto de la Costa was duly designated and acted was to take cognizance of the ordinary cases and that there was an
understanding between them that this arrangement was to be
as auxiliary judge of the Province of Oriental Negros; that between
followed.
the auxiliary judge and the respondent judge herein there was an
understanding, and the assignment of the said auxiliary judge was
made with this understanding, that the said auxiliary judge so
designated would hear and take cognizance of all election protests
and criminal actions then pending or to filed arising from the said last
general election, and that the respondent Honorable Nicolas
Capistrano would try and hear the ordinary cases pending in the said
court, but, notwithstanding this understanding or agreement, the
respondent judge tried and is still trying to take cognizance of the
election protests an criminal actions in said court; that the respondent
judge declared in open court that he will try the criminal cases herein
mentioned for the reason that the auxiliary judge refused to try the
same on the ground that the preliminary investigations were held
before him, when, in truth and in fact, the said auxiliary judge did not
make the statement imputed to him and was and is still willing to try
the election protests and criminal cases for violation of the election
law pending in the court of the Province of Oriental Negros; that the
respondent Honorable Nicolas Capistrano, in spite of the fact that he
was holding and is now pretending to hold the office of judge of the
Court of First Instance of Oriental Negros, took great interest and
active part in the filing of criminal charges against the petitioners
herein to the unjustifiable extent of appointing a deputy fiscal, who

(2) That the respondent judge took great interest and an

active part in the filing of the criminal charges against the
petitioners herein to the unjustifiable extent of appointing a
deputy fiscal who filed the proper informations when the
regular provincial fiscal refused to file them for lack of
sufficient evidence.
(3) That the respondent judge is already over 65 years of age
and has, therefore, automatically ceased as judge of the
Court of First Instance of Oriental Negros and that he is
neither a judge de jure nor de facto.
(a) But little need be said as to the first proposition.
A writ of prohibition to a judge of an interior court
will only lie in cases where he acts without or in
excess of his jurisdiction (section 226, Code of
Civil Procedure), and it is obvious that a mere
"understanding" as to the distribution of cases for
trial did not deprive the respondent judge of the
jurisdiction conferred upon him by law. It may be

Corporation Code 3
noted that it is not alleged that another judge had
taken cognizance of the cases in question or that
they had been definitely assigned to trial before
such other judge.

Briefly defined, a de facto judge is one who exercises the duties of a

judicial office under color of an appointment or election thereto
(Brown vs. O'Connell, 36 Conn., 432). He differs, on the one hand,
from a mere usurper who undertakes to act officially without any
color of right, and on the other hand, from a judge de jure who is in
all respects legally appointed and qualified and whose term of office
has not expired (State vs. Carroll, 38 Conn., 449; Denny vs. Matton, 2
Allen [Mass.], 361; Van Slyke vs. Farmers' Mut. Fire Ins. Co., 39
Wis., 390).

(b) The second proposition is equally

untenable.1awph!l.net That the respondent judge
took great interest and an active part in the filing of
the criminal charges against the petitioners to the
extent of appointing a deputy fiscal when the
regular provincial fiscal refused to file the proper
Apart from any constitutional or statutory regulation on the
informations, did not disqualify him from trying the
subject there seems to be a general rule of law that an
case in question. Section 1679 of the
incumbent of an office will hold over after the conclusion of
Administrative Code provides that "when a
his term until the elction and qualification of a successor (22
provincial fiscal shall be disqualified by personal
R. C. L., pp. 554-5). When a judge in good faith remains in
interest to act in a particular case or when for any
office after his title has ended, he is a de facto officer
reason he shall be unable, or shall fail, to discharge
(Sheehan's Case, 122 Mass., 445).
any of the duties of his position, the judge of the
Court of First Instance of the province shall appoint Applying the principles stated to the facts set forth in the petition
an acting provincial fiscal, . . . ." (Emphasis ours.)
before us, we cannot escape the conclusion that, on the assumption
that said facts are true, the respondent judge must be considered a
The determination of the question as to whether the judge de facto. His term of office may have expired, but his successor
fiscal has failed to discharge his duty in the
has not been appointed, and as good faith is presumed, he must be
prosecution of a crime must necessarily, to a large
regarded as holding over in good faith. The contention of counsel for
extent, lie within the sound discretion of the
the petitioners that the auxiliary judge present in the district must be
presiding judge, and there is no allegation in the
considered the regular judge seems obviously erroneous.
petition that such discretion was abused in the
present instance. It is true that it is stated that the
In these circumstances the remedy prayed for cannot be granted. "The
appointment of the acting fiscal was "unjustifiable," rightful authority of a judge, in the full exercise of his public judicial
but that is only a conclusion of law and not an
function, cannot be questioned by any merely private suitor, nor by
allegation of facts upon which such a conclusion
any other, excepting in the form especially provided by law. A
can be formed and may, therefore, be disregarded.
judge de facto assumes the exercise of a part of the prerogative of
It follows that in appointing an acting fiscal, the
sovereignty, and the legality of that assumption is open to the attack
respondent judge was well within his jurisdiction.
of the sovereign power alone. Accordingly, it is a well established
principle, dating from the earliest period and repeatedly confirmed by
(c) The third ground upon which the petition is
an unbroken current of decisions, that the official acts of a de
based is the most important and merits some
facto judge are just as valid for all purposes as those of a de
consideration. It is well settled that the title to the
jure judge, so far as the public or third persons who are interested
office of a judge, whether de jure or de facto, can
therein are concerned. The rule is the same in civil criminal cases.
only be determined in a proceeding in the nature
The principle is one founded in policy and convenience, for the right
of quo warranto and cannot be tested by
of no one claiming a title or interest under or through the proceedings
prohibition. But counsel for the petitioners
of an officer having an apparent authority to act would be safe, if it
maintains that the respondent judge is neither a
were necessary in every case to examine the legality of the title of
judge de jure nor de facto and that, therefore,
such officer up to its original source, and the title or interest of such
prohibition will lie. In this, counsel is undoubtedly person were held to be invalidated by some accidental defect or flaw
mistaken.
in the appointment, election or qualification of such officer, or in the
rights of those from whom his appointment or election emanated; nor
The respondent judge has been duly appointed to the office of Judge could the supremacy of the laws be maintained, or their execution
enforced, if the acts of the judge having a colorable, but not a legal
of the Court of First Instance of Oriental Negros, but section 148 of
title, were to be deemed invalid. As in the case of judges of courts of
the Administrative Code, as amended, provides that "Judges of the
record, the acts of a justice de facto cannot be called in question in
Court of First Instance and auxiliary judges shall be appointed to
serve until they shall reach the age of sixty-five years." In view of this any suit to which he is not a party. The official acts of a de
facto justice cannot b attacked collaterally. An exception to the
provision and assuming, as we must, that the allegations of the
general rule that the title of a person assuming to act as judge cannot
petition are true, it is evident that the respondent is no longer a
judge de jure, but we do not think that it can be successfully disputed be questioned in a suit before him is generally recognized in the case
of a special judge, and it is held that a party to an action before a
that he is still a judge de facto.

Corporation Code 3
special judge may question his title to the office of a judge on the
proceedings before him, and that the judgment will be reversed on
appeal, where proper exceptions are taken, if the person assuming to
act as special judge is not a judge de jure. The title of a de
facto officer cannot be indirectly questioned in a proceeding to obtain
a writ of prohibition to prevent him from doing an official act nor in a
suit to enjoin the collection of a judgment rendered by him. Having at
least colorable right to the office his title can be determined only in a
quo warranto proceeding or information in the nature of a quo
warranto at suit of the sovereign." (15 R. C. L., pp. 519-521.)
The demurrer to the petition is sustained, and inasmuch as it is
evident that the weakness of the petition cannot be cured by
amendment the present proceedings are hereby dismissed with the
costs against the petitioners jointly and severally. The preliminary
injunction hereinbefore issued is dissolved. So ordered.

Corporation Code 3
G.R. No. L-21114

November 28, 1967

FEDERICO FERNANDEZ, plaintiff-appellant,

vs.
P. CUERVA and CO., defendant-appellee.
Gerardo P. Moreno, Jr. for plaintiff-appellant.
N.O. Bueno for defendant-appellee.
ZALDIVAR, J.:
This is an appeal from the order of the Court of First Instance of
Manila, dated January 29, 1963, in its Civil Case No. 52946,
dismissing the complaint upon the ground that the action in the first
two causes of action had prescribed and that it had no jurisdiction
over the third cause of action.
It appears that plaintiff Federico Fernandez was employed as
salesman by defendant P. Cuerva & Co. from March, 1949 to
October, 1959. After his separation from the service, plaintiff filed a
claim, on July 26, 1960, before Regional Office No. 4 of the
Department of Labor,1 docketed as L. S. Case No. 2940, to recover
unpaid salaries and commissions, and separation pay.
During the pendency of said case, or on December 17, 1962, plaintiff
again instituted a similar complaint against the same defendant with
the Court of First Instance of Manila (Civil Case No. 52946) alleging,
among others, that he was employed by defendant company as
salesman in March, 1949 with a salary of P200.00 per month that
beginning June, 1955 until the termination of his services in October,
1959, his salary was increased to, P300.00 monthly and was given, in
addition, a commission of 10% on his sales; that the increase of
P100.00 a month and the 10% commission were not actually received
by him as there was a verbal understanding between him and
defendant company that the same would be retained by the latter as
bond or deposit for the goods being handled by the former; and that
because plaintiff was separated from the service in October, 1959, he
sought to recover the sum of P5,300.00 representing the P100.00
monthly deductions from his salary; P4,770.00 corresponding to his
10% commissions that were withheld, and P1,500.00 as separation
pay, or the total sum of P11,570.00. These three items were
respectively the subject matter of the first, second and third causes of
action of the complaint.
On January 2, 1963, defendant filed a motion to dismiss the
complaint upon the grounds that the actions had prescribed and that
the court had no jurisdiction over the case. The court below, after
allowing the parties to submit their respective memorandum on the
questions of prescription and jurisdiction, dismissed the case, in an
order issued on January 29, 1963, holding that because the claim of
plaintiff in the first two causes of action amounting to P10,070.00
represented the sum total of unauthorized deductions from his salaries
and withheld commissions, under Section 10, paragraph (f) of
Republic Act No. 602, otherwise known as the Minimum Wage Law,
the action to recover the same was already barred under Section 17 of
said Act inasmuch as it was not brought within three years from the
time the right of action accrued; and that because the remaining claim
of plaintiff was limited to his separation pay amounting only to
P1,500.00, the action to collect the same was not within the original
jurisdiction of the court.

On February 1, 1963, plaintiff moved to reconsider the abovementioned order, advancing as his main argument the fact that his
having filed a similar claim with Regional Office No. 4 of the
Department of Labor had suspended the running of the prescriptive
period insofar as his claim for refund of unauthorized deductions and
withheld commissions was concerned which were the subject
matters of the first and second causes of action that were dismissed
by the court. The defendant filed an opposition to the motion for
reconsideration. In an order dated February 15, 1963, the court denied
plaintiff's motion for reconsideration. Hence this appeal by the
plaintiff direct to this Court on purely questions of law.
We are in accord with the court a quo that the law applicable to the
case at bar is Republic Act 602 because the bond or deposit sought to
be recovered by appellant was actually the sum total of the
unauthorized deductions from his salaries and withheld commissions
under Section 10 thereof. Under Section 17 of said law, "any action . .
. to enforce any cause of action under this Act may be commenced
within three years after the cause of action accrued, and every such
action shall be forever barred unless commenced within three years
after the cause of action accrued." Since a right of action accrues only
from the moment the right to commence the action comes into
existence, and prescription begins to run from that time,2 the question
to be resolved is: When did the right of action of plaintiff accrue?
To answer the foregoing query, it is meet to recall that while the
amounts withheld by defendant were actually deductions from
plaintiff's salaries and unpaid commissions, they were, however,
constituted as a bond or a deposit to answer for any liability that he
might incur in connection with the goods handled by him. The bond
and/or deposit was thus answerable for merchandise entrusted to
plaintiff during the period of his employment with defendant. It was,
therefore, not feasible for plaintiff to demand every month or every
payday, or during the period of his employment with the company the
return or refund of those amounts withheld as contended by
defendant, because the undertaking for which the bond or deposit was
constituted was still subsisting. And so the right of plaintiff to
commence an action for the return or refund of the amounts
representing such bond or deposit would accrue only when the same
was no longer needed, and the time when it was no longer needed
only came in October 1959 when plaintiff was separated from the
service. Having ceased to be employed by the defendant, the bond put
up by plaintiff thereby became unnecessary or useless.
It would seem, however, that even if We count from October, 1959 in
computing the prescriptive period, plaintiff's action to recover the
amount held by defendant as bond is already barred because more
than three years had elapsed by the time plaintiff instituted the present
case in the court below on December 17, 1962. The record, however,
shows that on July 26, 1960, plaintiff filed a similar claim against the
defendant with Regional Office No. 4 of the Department of Labor.
At this juncture, the question posed is: Did the filing by plaintiff of
that claim with the regional office of the Department of Labor
suspend the running of the period of prescription?
Defendant answers the question in the negative. While defendant
does not question the applicability to the case at bar of Article 1155 of
the Civil Code, which provides that the "prescription of actions is
interrupted when they are filed before the Court," nevertheless, it
contends that inasmuch as plaintiff's claim was lodged with the
regional office of the Department of Labor, which is not a court, the

10

Corporation Code 3
same could not be considered a judicial demand that would suspend
the running of the prescriptive period.
We do not agree with defendant. It is true that the claim filed by
plaintiff with the regional office of the Department of Labor is not a
judicial demand in the same sense of the term "judicial demand"
because the same was not instituted in a court of justice. Judicial
notice, however, should be taken that on December 10, 1956,
Reorganization Plan No. 20-A was promulgated pursuant to Republic
Act 997, and under Section 25 of said reorganization plan each
regional office of the Department of Labor was vested with original
and exclusive jurisdiction over all cases affecting all money claims
arising from violations of labor standards on working conditions such
as unpaid wages, underpayment, overtime and separation pay, etc., to
the exclusion of courts.3Consequently, when plaintiff wanted to
enforce his claim after his dismissal from the service in October,
1959, he had no choice but to file the same with Regional Office No.
4 of the Department of Labor which was the agency then empowered
to take cognizance of the claim. He could not institute the action to
recover his claim in the court of justice because of the provisions of
Reorganization Plan No. 20-A. At least it may be said that on July 26,
1960, when plaintiff filed his claim with Regional Office. No. 4 of the
Department of Labor, he acted in accordance with the procedure that
was then prescribed under authority of law. Under the circumstances,
We believe that the filing by plaintiff of his claim before the regional
office of the Department of Labor had the attributes of a judicial
demand. And We say this because under the provisions of Section 25
of Reorganization Plan No. 20-A each regional office of the
Department of Labor was invested with jurisdiction, similar to that of
a court, to receive, determine, and adjudicate claims arising out of
employer-employee relations as specified in said section. We quote
Section 25 of Reorganization Plan No. 20-A:
Each Regional Office shall
have original and exclusive jurisdiction over all cases
affecting all money claims arising from violations of labor
standards on working conditions, including but not
restrictive to: unpaid wages, underpayment, overtime,
separation pay, and maternity leave of employees/laborers
and unpaid wages, overtime, separation pay, vacation pay,
and payment for medical services of domestic held.
(Emphasis supplied)

this Court in the case of Corominas, et al. v. The Labor Standards

Commission, et al., supra. It appears, however, that the plaintiff had
filed his claim before Regional Office No. 4 of the Department of
Labor on July 26, 1960, or about one year before said Section 25 had
been declared unconstitutional. The circumstance that Section 25 of
Reorganization Plan No. 20-A had been declared unconstitutional
should not be counted against the defendant in the present case. In the
case of Manila Motor Co., Inc. v. Flores, 99 Phil., 738, this Court
upheld the right of a party under the Moratorium Law which had
accrued in his favor before said law was declared unconstitutional by
this Court in the case of Rutter v. Esteban, 93 Phil., 68. This Court, in
its decision in the Manila Motor case, quoted the following doctrine:
[t]here are several instances wherein courts, out of equity,
have relaxed its operation (cf. note in Cooley's
Constitutional Limitations 8th ed., p. 383 and Notes 53
A.L.R., 273) or qualified its effects "since the actual
existence of a statute prior to such declaration is an operative
fact, and may have consequences which cannot justly be
ignored" (Chicot County vs. Baster, 308 U.S., 371) and a
realistic approach is eroding the general doctrine (Warring
vs. Colpoys 136 Am. Law Rep., 1025, 1030).
We believe that it is only fair and just that the foregoing doctrine
should be applied in favor of the plaintiff in the present case.
We have noted in the record that it was precisely because Section 25
of Reorganization Plan No. 20-A was declared unconstitutional by
this Court on June 30, 1961 that the plaintiff, without awaiting the
action of Regional Office No. 4 of the Department of Labor on the
claim that he filed on July 26, 1960, instituted his action in the
present case in the court below on December 17, 1962. The move of
plaintiff was precisely intended to protect his right of action from the
adverse effect of the decision of this Court. The Regional Office No.
4 of the Department of Labor dismissed plaintiff's claim on January
16, 1963 upon the ground that it had no more jurisdiction to pass
upon the claim as a result of the ruling of this Court in the Corominas
case.

Considering that from October, 1959 when plaintiff was separated

from the service up to July 26, 1960 when he filed his claim with
Regional Office No. 4 of the Department of Labor only eight months
had elapsed, and that since July 26, 1960 until the filing of the
It can be gathered from a reading of the above-quoted Section 25 of
complaint in the court below on December 17, 1962 the running of
Reorganization Plan No. 20-A that some sort of judicial powers was
prescriptive period was deemed interrupted, it is clear that plaintiff's
conferred upon the regional offices of the Department of Labor over
action to enforce his claim was not yet barred by the statute of
money claims mentioned in said section. Certainly, it can be
limitations when he filed his complaint in the court below. Plaintiff's
considered that filing a money claim before a regional office of the
action may be considered as brought before the court still within the
Department of Labor pursuant to Section 25 of Reorganization Plan
period of three years from the time his right of action accrued in
No. 20-A is like filing a complaint in court to enforce said money
accordance with the provisions of Section 17 of Republic Act 602
claim. We believe that the filing of a claim before an administrative
(Minimum Wage Law). Only about nine months of the three-year
agency which is vested with authority to decide said claim would
period provided in Section 17 of Republic Act 602 may be considered
produce the effect of a judicial demand for the purpose of interrupting as having lapsed when plaintiff commenced his action in the court
the running of the period of prescription. The purpose of the law on
below. And considering further that the amount sought to be
prescription and the statute of limitations is to protect the person who recovered in the complaint is more than P10,000.00, it follows that
is diligent and vigilant in asserting his right, and conversely to punish the court a quo has the exclusive and original jurisdiction to entertain
the person who sleeps on his right.4 Indeed, it cannot be said that in
the action of the plaintiff. The lower court, therefore, erred when it
the case before Us the plaintiff had slept on his right, because shortly dismissed plaintiff's complaint.
after he was separated from the service by the defendant he filed his
claim before the agency of the government that was at the time
WHEREFORE, the order appealed from is set aside, and this case is
clothed with exclusive authority to pass upon his claim.
remanded to the court below for further proceedings, with costs
We have taken note of the fact that on June 30, 1961, Section 25 of
Reorganization Plan No. 20-A had been declared unconstitutional by

against the defendant-appellee. It is so ordered.

11

Corporation Code 3
Dizon, Makalintal, Bengzon, J.P., Sanchez, Castro and Angeles, JJ.,
concur.
Concepcion, C.J., and Reyes, J.B.L., J., took no part.

Separate Opinions
FERNANDO, J., concurring:

for being unconstitutional. it is far from realistic, to say the least, to

disregard completely its existence. More specifically, as the then
Justice, now Chief Justice, Concepcion noted, while the validity of
Reorganization Plan No. 20-A was debatable, it was nevertheless
"presumed valid until otherwise held by final judgment of a
competent court." Both reason and authority thus concur in the view
that to treat the matter as if such an executive regulation had never
been would be far from satisfying the ends of justice, not to say
common sense.7 To repeat, the opinion of the Court commends itself
for full and unqualified approval.

The opinion of the Court penned by Justice Zaldivar, notable for its
thorough and comprehensive character, deserves full concurrence.
That I readily give.1 In view however of what for me is the full
acceptance by this Court that a legislative or executive measure
subsequently annulled on constitutional grounds, while necessarily
devoid as a source of legal right, should be considered as a fact from
which legal consequences may attach, I would like to add a few,
words.
Where the assailed legislative or executive act is found by the
judiciary to be contrary to the Constitution, it is null and void. As the
new Civil Code puts it: "When the courts declare a law to be
inconsistent with the Constitution, the former shall be void and the
latter shall govern. Administrative or executive acts, orders and
regulations shall be valid only when they are not contrary to the laws
or the Constitution."2 The above provision of the Civil Code reflects
the orthodox view that an unconstitutional act, whether legislative or
executive, is not a law, confers no rights, imposes no duties, and
affords no protection.3 This doctrine admits of qualifications,
however. As the American Supreme Court stated: "The actual
existence of a statue prior to such a determination [of
constitutionality], is an operative fact and may have consequences
which cannot always be erased by a new judicial declaration. The
effect of the subsequent ruling as to invalidity may have to be
considered in various aspects, with respect to particular
regulations, individual and corporate, and particular conduct, private
and official."4
The orthodox view finds support in the well-settled doctrine that the
Constitution is supreme and provides the measure for the validity of
legislative or executive acts. Clearly then, neither the legislative nor
the executive branch, and for that matter, much less, this Court, has
power under the Constitution to act contrary to its terms. Any
attempted exercise of power in violation of its provisions is to that
extent unwarranted and null.
The growing awareness of the role of the judiciary as the
governmental organ which has the final say on whether or not a
legislative or executive measure is valid leads to a more appreciative
attitude of the emerging concept that a declaration of nullity may
have legal consequences which the more orthodox view would deny.
That for a period of time such a statute, treaty, executive order, or
ordinance was in "actual existence" appears to be indisputable. What
is more appropriate and logical then than to consider it as "an
operative fact." With Araneta v. Hill,5 Manila Motor Co. v.
Flores,6 and now this decision, such a view has much more than
propriety and logic in its favor. It is now settled law. That is as it
ought to be.
Considering that it is one of the basic presuppositions of our
constitutional polity, that the act of any branch of the government is
subject to judicial scrutiny, the effect of which maybe to invalidate it

12

Corporation Code 3
G.R. No. L-2598

June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,

vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of
Leyte, FRED BROWN, EMMA BROWN, HIPOLITA
CAPUCIONG, in his capacity as receiver of the Far Eastern
Lumber and Commercial Co., Inc.,respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:

(7) The defendants therein (petitioners herein) offered to file a

counter-bond for the discharge of the receiver, but the respondent
judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this
court. It is based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the
dissolution of the company, because it being ade facto corporation,
dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the
Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had
signed the article of incorporation but only a partnership.

This is petition to set aside all the proceedings had in civil case No.
381 of the Court of First Instance of Leyte and to enjoin the
respondent judge from further acting upon the same.

Discussion: The second proposition may at once be dismissed. All the

parties are informed that the Securities and Exchange Commission
has not, so far, issued the corresponding certificate of incorporation.
All of them know, or sought to know, that the personality of a
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and
corporation begins to exist only from the moment such certificate is
Bradley P. Hall, and the respondents Fred Brown, Emma Brown,
issued not before (sec. 11, Corporation Law). The complaining
Hipolita D. Chapman and Ceferino S. Abella, signed and
acknowledged in Leyte, the article of incorporation of the Far Eastern associates have not represented to the others that they were
incorporated any more than the latter had made similar
Lumber and Commercial Co., Inc., organized to engage in a general
representations to them. And as nobody was led to believe anything to
lumber business to carry on as general contractors, operators and
managers, etc. Attached to the article was an affidavit of the treasurer his prejudice and damage, the principle of estoppel does not apply.
stating that 23,428 shares of stock had been subscribed and fully paid Obviously this is not an instance requiring the enforcement of
contracts with the corporation through the rule of estoppel.
with certain properties transferred to the corporation described in a
list appended thereto.
The first proposition above stated is premised on the theory that,
inasmuch as the Far Eastern Lumber and Commercial Co., is a de
(2) Immediately after the execution of said articles of incorporation,
facto corporation, section 19 of the Corporation Law applies, and
the corporation proceeded to do business with the adoption of bytherefore the court had not jurisdiction to take cognizance of said civil
laws and the election of its officers.
case number 381. Section 19 reads as follows:
(3) On December 2, 1947, the said articles of incorporation were filed
in the office of the Securities and Exchange Commissioner, for the
issuance of the corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of
incorporation by the aforesaid governmental office, the respondents
Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S.
Abella filed before the Court of First Instance of Leyte the civil case
numbered 381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.",
alleging among other things that the Far Eastern Lumber and
Commercial Co. was an unregistered partnership; that they wished to
have it dissolved because of bitter dissension among the members,
mismanagement and fraud by the managers and heavy financial
losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P.
Hall, filed a motion to dismiss, contesting the court's jurisdiction and
the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the
dissolution of the company; and at the request of plaintiffs, appointed
of the properties thereof, upon the filing of a P20,000 bond.

. . . The due incorporation of any corporations claiming in

good faith to be a corporation under this Act and its right to
exercise corporate powers shall not be inquired into
collaterally in any private suit to which the corporation may
be a party, but such inquiry may be had at the suit of the
Insular Government on information of the Attorney-General.
There are least two reasons why this section does not govern the
situation. Not having obtained the certificate of incorporation, the Far
Eastern Lumber and Commercial Co. even its stockholders may
not probably claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11)
that it is the issuance of a certificate of incorporation by the
Director of the Bureau of Commerce and Industry which
calls a corporation into being. The immunity if collateral
attack is granted to corporations "claiming in good faith to
be a corporation under this act." Such a claim is compatible
with the existence of errors and irregularities; but not with a
total or substantial disregard of the law. Unless there has
been an evident attempt to comply with the law the claim to
be a corporation "under this act" could not be made "in good

13

Corporation Code 3
faith." (Fisher on the Philippine Law of Stock Corporations,
p. 75. See also Humphreys vs. Drew, 59 Fla., 295; 52 So.,
362.)
Second, this is not a suit in which the corporation is a party. This is a
litigation between stockholders of the alleged corporation, for the
purpose of obtaining its dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for its dissolution
between stockholders, without the intervention of the state.
There might be room for argument on the right of minority
stockholders to sue for dissolution;1 but that question does not affect
the court's jurisdiction, and is a matter for decision by the judge,
subject to review on appeal. Whkch brings us to one principal reason
why this petition may not prosper, namely: the petitioners have their
remedy by appealing the order of dissolution at the proper time.
There is a secondary issue in connection with the appointment of a
receiver. But it must be admitted that receivership is proper in
proceedings for dissolution of a company or corporation, and it was
no error to reject the counter-bond, the court having declared the
dissolution. As to the amount of the bond to be demanded of the
receiver, much depends upon the discretion of the trial court, which in
this instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The
preliminary injunction heretofore issued will be dissolved.

14

Corporation Code 3
[G.R. No. L-7231. March 28, 1956.]
BENGUET CONSOLIDATED MINING CO., Petitioner, vs.
MARIANO PINEDA, in his capacity as Securities and Exchange
Commissioner, Respondent. CONSOLIDATED MINES,
INC., Intervenor.
DECISION
REYES, J. B. L., J.:
Appeal under Rule 43 from a decision of the Securities and Exchange
Commissioner, denying the right of a sociedad anonima to extend its
corporate existence by amendment of its original articles of
association, or alternatively, to reform and continue existing under the
Corporation Law (Act 1459) beyond the original period.
The Petitioner, the Benguet Consolidated Mining Co. (hereafter
termed Benguet for short), was organized on June 24,1903, as a
sociedad anonima regulated by Articles 151 et seq., of the Spanish
Code of Commerce of 1886, then in force in the Philippines. The
articles of association expressly provided that it was organized for a
term of fifty (50) years. In 1906, the governing Philippine
Commission enacted Act 1459, commonly known as the Corporation
Law, establishing in the islands the American type of juridical entities
known as corporation, to take effect on April 1, 1906. Of its
enactment, this Court said in its decision in Harden vs. Benguet
Consolidated Mining Co., 58 Phil., 141, at pp. 145-146, and
147:chanroblesvirtuallawlibrary
When the Philippine Islands passed to the sovereignty of the United
States, the attention of the Philippine Commission was early drawn to
the fact there is no entity in Spanish law exactly corresponding to the
motion of the corporation in English and American law; chan
roblesvirtualawlibraryand in the Philippine Bill, approved July 1,
1906, the Congress of the United States inserted certain provisions,
under the head of Franchises, which were intended to control the
lawmaking power in the Philippine Islands in the matter of granting
of franchises, privileges and concessions. These provisions are found
in sections 74 and 75 of the Act. The provisions of section 74 have
been superseded by section 28 of the Act of Congress of August 29,
1916, but in section 75 there is a provision referring to mining
corporations, which still remains the law, as amended. This provision,
in
its
original
form,
reads
as
follows:chanroblesvirtuallawlibrary cralaw it shall be unlawful for
any member of a corporation engaged in agriculture or mining and for
any corporation organized for any purpose except irrigation to be in
any wise interested in any other corporation engaged in agriculture or
in mining.
Under the guidance of this and certain other provisions thus enacted
by Congress, the Philippine Commission entered upon the enactment
of a general law authorizing the creation of corporations in the
Philippine Islands. This rather elaborate piece of legislation is
embodied in what is called our Corporation Law (Act No. 1459 of the
Philippine Commission). The evident purpose of the commission was
to introduce the American corporation into the Philippine Islands as
the standard commercial entity and to hasten the day when the
sociedad anonima of the Spanish law would be obsolete. That statute
is a sort of codification of American corporate law.

the Corporation Law, a provision is found making the sociedad

anonima subject to the provisions of the Corporation Law so far as
such provisions may be applicable and giving to the sociedades
anonimas previously created in the Islands the option to continue
business as such or to reform and organize under the provisions of the
Corporation Law. Again, in section 191 of the Corporation Law, the
Code of Commerce is repealed in so far as it relates to sociedades
anonimas. The purpose of the commission in repealing this part of the
Code of Commerce was to compel commercial entities thereafter
organized to incorporate under the Corporation Law, unless they
should prefer to adopt some form or other of the partnership. To this
provision was added another to the effect that existing sociedades
anonimas, which elected to continue their business as such, instead of
reforming and reorganizing under the Corporation Law, should
continue to be governed by the laws that were in force prior to the
passage of this Act in relation to their organization and method of
transacting business and to the rights of members thereof as between
themselves, but their relations to the public and public officials shall
be governed by the provisions of this Act.
Specifically, the two sections of Act No. 1459 referring to sociedades
anonimas
then
already
existing,
provide
as
follows:chanroblesvirtuallawlibrary
SEC. 75. Any corporation or a sociedad anonima formed,
organized, and existing under the laws of the Philippines on the date
of the passage of this Act, shall be subject to the provisions hereof so
far as such provisions may be applicable and shall be entitled at its
option either to continue business as such corporation or to reform
and organize under and by virtue of the provisions of this Act,
transferring all corporate interests to the new corporation which, if a
stock corporation, is authorized to issue its shares of stock at par to
the stockholders or members of the old corporation according to their
interests.
SEC. 191. The Code of Commerce, in so far as it relates to
corporation or sociedades anonimas, and all other Acts or parts of
Acts in conflict or inconsistent with this Act, are hereby repealed with
the exception of Act Numbered fifty-two, entitled An Act providing
for examinations of banking institutions in the Philippines, and for
reports by their officers, as amended, and Act Numbered Six hundred
sixty-seven, entitled An Act prescribing the method of applying to
governments of municipalities, except the city of Manila and of
provinces for franchises to contract and operate street railway, electric
light and power and telephone lines, the conditions upon which the
same may be granted, certain powers of the grantee of said franchises,
and of grantees of similar franchises under special Act of the
Commission, and for other purposes. Provided, however, That
nothing in this Act contained shall be deemed to repeal the existing
law relating to those classes of associations which are termed
sociedades colectivas, and sociedades de cuentas en participacion, as
to which association the existing law shall be deemed to be still in
force; chan roblesvirtualawlibraryAnd provided, further, That existing
corporations or sociedades anonimas, lawfully organized as such,
which elect to continue their business as such sociedades anonimas
instead of reforming and reorganizing under and by virtue of the
provisions of this Act, shall continue to be governed by the laws that
were in force prior to the passage of this Act in relation to their
organization and method of transacting business and to the rights of
members thereof as between themselves, but their relations to the
public and public officials shall be governed by the provisions of this
Act.

As it was the intention of our lawmakers to stimulate the

introduction of the American corporation into the Philippine law in
the place of the sociedad anonima, it was necessary to make certain As the expiration of its original 50 year term of existence approached,
adjustment resulting from the continued co-existence, for a time, of the Board of Directors of Benguet adopted in 1946 a resolution to
the two forms of commercial entities. Accordingly, in section 75 of extend its life for another 50 years from July 3, 1946 and submitted it

15

Corporation Code 3
for registration to the Respondent Securities and Exchange
Commissioner. Upon advice of the Secretary of Justice (Op. No. 45,
Ser. 1917) that such extension was contrary to law, the registration
was denied. The matter was dropped, allegedly because the
stockholders of Benguet did not approve of the Directors action.
Some six years later in 1953, the shareholders of Benguet adopted a
resolution empowering the Director to effectuate the extension of the
Companys business life for not less than 20 and not more than 50
years, and this by either (1) an amendment to the Articles of
Association or Charter of this Company or (2) by reforming and
reorganizing the Company as a Philippine Corporation, or (3) by both
or (4) by any other means. Accordingly, the Board of Directors on
May 27, 1953, adopted a resolution to the following effect

Petitioner Benguet contends:chanroblesvirtuallawlibrary

(1) That the proviso of section 18 of the Corporation Law to the
effect
that the life of said corporation shall not be extended by amendment
beyond the time fixed in the original articles.
does not apply to sociedades anonimas already in existence at the
passage of the law, likePetitioner herein;
(2) That to apply the said restriction imposed by section 18 of the
Corporation Law to sociedades anonimas already functioning when
the said law was enacted would be in violation of constitutional
inhibitions;

(3) That even assuming that said restriction was applicable to it,
Benguet could still exercise the option of reforming and reorganizing
Resolved, that the Company be reformed, reorganized and organized under section 75 of the Corporation Law, thereby prolonging its
under the provisions of section 75 and other provisions of the corporate existence, since the law is silent as to the time when such
Philippine Corporation Law as a Philippine corporation with a option may be exercised or availed of.
corporate life and corporate powers as set forth in the Articles of
Incorporation attached hereto as Schedule I and made a part hereof The first issue arises because the Code of Commerce of 1886 under
which Benguet was organized, contains no prohibition (to extend the
by this reference; chan roblesvirtualawlibraryand
period of corporate existence), equivalent to that set forth in section
Be It
18 of the Corporation Law. Neither does it expressly authorize the
extension.
But
the
text
of
Article
223,
FURTHER RESOLVED, that any five or more of the following
reading:chanroblesvirtuallawlibrary
shareholders of the Company be and they hereby are authorized as
instructed to act for and in behalf of the share holders of the Company ART. 223. After the termination of the period for which commercial
and of the Company as Incorporators in the reformation, associations are constituted, it shall not be understood as extended by
reorganization and organization of the Company under and in the implied or presumed will of the members; chan
accordance with the provisions aforesaid of said Philippine roblesvirtualawlibraryand if the members desire to continue in
Corporation Law, and in such capacity, they are hereby authorized association, they shall draw up new articles, subject to all the
and instructed to execute the aforesaid Articles of Incorporation formalities prescribed for their creation as provided in Article 119.
attached to these Minutes as Schedule I hereof, with such (Code of Commerce.)
amendments, deletion and additions thereto as any five or more of
those so acting shall deem necessary, proper, advisable or convenient would seem to imply that the period of existence of the sociedad
to effect prompt registration of said Articles under Philippine anonimas (or of any other commercial association for that matter)
Law; chan roblesvirtualawlibraryand five or more of said may be extended if the partners or members so agree before the
Incorporators are hereby further authorized and directed to do all expiration of the original period.
things necessary, proper, advisable or convenient to effect such While the Code of Commerce, in so far as sociedades anonimas are
registration.
concerned, was repealed by Act No 1459, Benguet claims that article
In pursuance of such resolution, Benguet submitted in June, 1953, to 223 is still operative in its favor under the last proviso of section 191
the Securities and Exchange Commissioner, for alternative of the Corporation law (ante, p. 4 to the effect that existing
registration,
two
documents:chanroblesvirtuallawlibrary (1) sociedades anonimas would continue to be governed by the law in
Certification as to the Modification of (the articles of association of) force before Act 1459,
Be It

the Benguet Consolidated Mining Company, extending the term of its

existence to another fifty years from June 15, 1953; chan
roblesvirtualawlibraryand (2) articles of incorporation, covering its
reformation or reorganization as a corporation in accordance with
section 75 of the Philippine Corporation Law.

in relation to their organization and method of transacting business

and to the rights of members among themselves, but their relations to
the public and public officials shall be governed by the provisions of
this Act.

Benguet contends that the period of corporate life relates to its

Relying mainly upon the adverse opinion of the Secretary of Justice organization and the rights of its members inter se, and not to its
(Op. No. 180, s. 1953), the Securities and Exchange Commissioner relations to the public or public officials.
denied the registration and ruled:chanroblesvirtuallawlibrary
We find this contention untenable.
(1) That the Benguet, as sociedad anonima, had no right to extend the
original term of corporate existence stated in its Articles of The term of existence of association (partnership or sociedad
Association, by subsequent amendment thereof adopted after anonima) is coterminous with their possession of an independent
enactment of the Corporation Law (Act No. 1459); chan legal personality, distinct from that of their component members.
When the period expires, the sociedad anonima loses the power to
roblesvirtualawlibraryand
deal and enter into further legal relations with other persons; chan
(2) That Benguet, by its conduct, had chosen to continue as sociedad roblesvirtualawlibraryit is no longer possible for it to acquire new
anonima, under section 75 of Act No. 1459, and could no longer rights or incur new obligations, have only as may be required by the
exercise the option to reform into a corporation, specially since it process of liquidating and winding up its affairs. By the same token,
would indirectly produce the effect of extending its life.
its officers and agents can no longer represent it after the expiration
of the life term prescribed, save for settling its business. Necessarily,
This ruling is the subject of the present appeal.
therefore, third persons or strangers have an interest in knowing the

16

Corporation Code 3
duration of the juridical personality of the sociedad anonima, since
the latter cannot be dealt with after that period; chan
roblesvirtualawlibrarywherefore its prolongation or cessation is a
matter directly involving the companys relations to the public at
large.

adoption of by-laws, and such other steps as are necessary to endow

the legal entity with the capacity to transact the legitimate business
for which it was created. Waltson vs. Oliver, 30 P. 172, 173, 49 Kan.
107, 33 Am. St. Rep. 355; chan roblesvirtualawlibraryTopeka Bridge
Co. vs. Cummings, 3 Kan. 55, 77; chan roblesvirtualawlibraryHunt
vs. Kansas & M. Bridge Co., 11 Kan. 412, 439; chan
On the importance of the term of existence set in the articles of
roblesvirtualawlibraryAspen Water & Light Co., vs. City of Aspen,
association of commercial companies under the Spanish Code of
37 P. 728, 730, 6 Colo. App. 12; chan roblesvirtualawlibraryNemaha
Commerce, D. Lorenzo Benito y Endar, professor of mercantile law
Coal & Mining Co., vs. Settle 38 P. 483, 484, 54 Kan. 424.
in the Universidad Central de Madrid, has this to
say:chanroblesvirtuallawlibrary
Under a statute providing that, until articles of incorporation should
be recorded, the corporation should transact no business except its
La duracion de la Sociedad. La necesidad de consignar este
own organization, it is held that the term organization means
requisito en el contrato social tiene un valor analogo al que dijimos
simply the process of forming and arranging into suitable disposition
tenia el mismo al tratar de las compaias colectivas, aun cuando
the parties who are to act together in, and defining the objects of, the
respecto de las anonimas no haya de tenerse en cuenta para nada lo
compound body, and that this process, even when complete in all its
que dijimos entonces acerca de la trascendencia que ello tiene para
parts, does not confer a franchise either valid or defective, but, on the
los socios; chan roblesvirtualawlibraryporque no existiendo en las
contrary, it is only the act of the individuals, and something else must
anonimas la serie de responsibilidades de caracter personal que
be done to secure the corporate franchise. Abbott vs. Omaha Smelting
afectan a los socios colectivos, es claro que la duracion de la sociedad
& Refining Co. 4 Neb. 416, 421. (30 Words and Phrases, p. 282.)
importa conocerla a los socios y los terceros, porque ella marca al
limite natural del desenvolvimiento de la empresa constituida y el It is apparent from the foregoing definitions that the term
comienzo de la liquidacion de la sociedad. (3 Benito, Derecho organization relates merely to the systematization and orderly
Mercantil, 292-293.)
arrangement of the internal and managerial affairs and organs of
thePetitioner Benguet, and has nothing to do with the prorogation of
Interesa, pues, la fijacion de la vida de la compaia,
its corporate life.
desenvolviendose con normalidad y regularidad, tanto a los asociados
como a los terceros. A aquellos, porque su libertad economica, en From the double fact that the duration of its corporate life (and
cierto modo limitada por la existencia del contrato de compaia, se juridical personality) has evident connection with the Petitioners
recobra despues de realizada, mas o menos cumplidamente, la relations to the public, and that it bears none to the Petitioners
finalidad comun perseguida; chan roblesvirtualawlibraryy a los organization and method of transacting business, we derive the
terceros, porque les advierte el momento en que, extinguida la conclusion that the prohibition contained in section 18 of the
compaia, no cabe y a la creacion con ella de nuevas relaciones Corporation Law (Act No. 1459) against extension of corporate life
juridicas, de que nazcan reciprocamente derechos y obligaciones, sino by amendment of the original articles was designed and intended to
solo la liquidacion de los negocios hasta entonces convenidos, sin apply to compaias anonimas that, like Petitioner Benguet, were
otra excepcion que la que luego mas adelante habremos de sealar. already existing at the passage of said law. This conclusion is
(3 Benito, Derecho Mercantil, p. 245.)
reinforced by the avowed policy of the law to hasten the day when
compaias anonimas would be extinct, and replace them with the
The State and its officers also have an obvious interest in the term of
American type of corporation (Harden vs. Benguet Consolidated
life of associations, since the conferment of juridical capacity upon
Mining Co., supra), for the indefinite prorogation of the corporation
them during such period is a privilege that is derived from statute. It
life of sociedades anonimas would maintain the unnecessary duality
is obvious that no agreement between associates can result in giving
of organizational types instead of reducing them to a single one; chan
rise to a new and distinct personality, possessing independent rights
roblesvirtualawlibraryand what is more, it would confer upon these
and obligations, unless the law itself shall decree such result. And the
sociedades anonimas, whose obsolescence was sought, the
State is naturally interested that this privilege be enjoyed only under
advantageous privilege of perpetual existence that the new
the conditions and not beyond the period that it sees fit to grant; chan
corporation could not possess.
roblesvirtualawlibraryand, particularly, that it be not abused in fraud
and to the detriment of other parties; chan roblesvirtualawlibraryand Of course, the retroactive application of the limitations on the terms
for this reason it has been ruled that the limitation (of corporate of corporate existence could not be made in violation of constitutional
existence) to a definite period is an exercise of control in the interest inhibitions specially those securing equal protection of the laws and
of the public (Smith vs. Eastwood Wire Manufacturing Co., 43 Atl. prohibiting impairment of the obligation of contracts. It needs no
568).
argument to show that if Act No. 1459 allowed existing compaias
anonimas to be governed by the old law in respect to their
We cannot assent to the thesis of Benguet that its period of corporate
organization, methods of transacting business and the rights of the
existence has relation to its organization. The latter term is defined
members among themselves, it was precisely in deference to the
in Websters International Dictionary as:chanroblesvirtuallawlibrary
vested rights already acquired by the entity and its members at the
The executive structure of a business; chan roblesvirtualawlibrarythe time the Corporation Law was enacted. But we do not agree
personnel of management, with its several duties and places in withPetitioner Benguet (and here lies the second issue in this appeal)
administration; chan roblesvirtualawlibrarythe various persons who that the possibility to extend its corporate life under the Code of
Commerce constituted a right already vested when Act No. 1459 was
conduct a business, considered as a unit.
adopted. At that time, Benguets existence was well within the 50
The legal definitions of the term organization are concordant with years period set in its articles of association; chan
that given above:chanroblesvirtuallawlibrary
roblesvirtualawlibraryand its members had not entered into any
Organize or organization, as used in reference to corporations, has agreement that such period should be extended. It is safe to say that
a well-understood meaning, which is the election of officers, none of the members of Benguet anticipated in 1906 any need to
providing for the subscription and payment of the capital stock, the reach an agreement to increase the term of its corporate life, barely
three years after it had started. The prorogation was purely

17

Corporation Code 3
speculative; chan roblesvirtualawlibrarya mere possibility that could
not be taken for granted. It was as yet conditional, depending upon
the ultimate decision of the members and directors. They might agree
to extend Benguets existence beyond the original 50 years; chan
roblesvirtualawlibraryor again they might not. It must be remembered
that in 1906, the success of Benguet in its mining ventures was by no
means so certain as to warrant continuation of its operations beyond
the 50 years set in its articles. The records of this Court show that
Benguet ran into financial difficulties in the early part of its existence,
to the extent that, as late as 1913, ten years after it was found,
301,100 shares of its capital stock (with a par value of $1 per share)
were being offered for sale at 25 centavos per share in order to raise
the sum of P75,000 that was needed to rehabilitate the company
(Hanlon vs. Hausermann and Beam, 40 Phil., 796). Certainly the
prolongation of the corporate existence of Benguet in 1906 was
merely a possibility in futuro, a contingency that did not fulfill the
requirements of a vested right entitled to constitutional protection,
defined by this Court in Balboa vs. Farrales, 51 Phil., 498, 502, as
follows:chanroblesvirtuallawlibrary

ordinance which created the right does not and cannot affect much
right. (16 C.J. S. 222-223.)
It is a general rule of constitutional law that a person has no vested
right in statutory privileges and exemptions (Brearly School vs.
Ward,
201
NY.
358,
40
LRA
NS.
1215; chan
roblesvirtualawlibraryalso, Cooley, Constitutional Limitations, 7th
ed., p. 546).

It is not amiss to recall here that after Act No. 1459 the Legislature
found it advisable to impress further restrictions upon the power of
corporations to deal in public lands, or to hold real estate beyond a
maximum area; chan roblesvirtualawlibraryand to prohibit any
corporation from endeavouring to control or hold more than 15 per
cent of the voting stock of an agricultural or mining corporation (Act
No. 3518). These prohibitions are so closely integrated with our
public policy that Commonwealth Act No. 219 sought to extend such
restrictions to associations of all kinds. It would be subversive of that
policy to enable Benguet to prolong its peculiar status of sociedad
anonimas, and enable it to cast doubt and uncertainty on whether it is,
or not, subject to those restrictions on corporate power, as it once
Vested right is some right or interest in the property which has
endeavoured to do in the previous case of Harden vs. Benguet Mining
become fixed and established, and is no longer open to doubt or
Corp. 58 Phil., 149.
controversy,
Stress has been laid upon the fact that the Compaia Maritima (like
A vested right is defined to be an immediate fixed right of present
Benguet, a sociedad anonima established before the enactment of the
or future enjoyment, and rights are vested in contradistinction to
Corporation Law) has been twice permitted to extend its corporate
being expectant or contingent (Pearsall vs. Great Northern R. Co.,
existence by amendment of its articles of association, without
161 U. S. 646, 40 L. Ed. 838).
objection from the officers of the defunct Bureau of Commerce and
In Corpus Juris Secundum we find:chanroblesvirtuallawlibrary
Industry, then in charge of the enforcement of the Corporation Laws,
although the exact question was never raised then. Be that as it may, it
Rights are vested when the right to enjoyment, present or
is a well established rule in this jurisdiction that the government is
prospective, has become the property of some particular person or
never estopped by mistake or error on the part of its agents (Pineda
persons as a present interest. The right must be absolute, complete,
vs. Court of First Instance of Tayabas, 52 Phil., 803, 807), and that
and unconditional, independent of a contingency, and a mere
estopped cannot give validity to an act that is prohibited by law or is
expectancy of future benefit, or a contingent interest in property
against public policy (Eugenio vs. Perdido, (97 Phil., 41, May 19,
founded on anticipated continuance of existing laws, does not
1955; chan
roblesvirtualawlibrary19
Am.
Jur.
802); chan
constitute a vested right. So, inchoate rights which have not been
roblesvirtualawlibraryso that the Respondent, Securities and
acted on are not vested. (16C.J. S. 214-215.)
Exchange Commissioner, was not bound by the rulings of his
Since there was no agreement as yet to extend the period of Benguets predecessor if they be inconsistent with law. Much less could
corporate existence (beyond the original 50 years) when the erroneous decisions of executive officers bind this Court and induce it
Corporation Law was adopted in 1906, neither Benguet nor its to sanction an unwarranted interpretation or application of legal
members had any actual or vested right to such extension at that time. principles.
Therefore, when the Corporation Law, by section 18, forbade
We now turn to the third and last issue of this appeal, concerning the
extensions of corporate life, neither Benguet nor its members were
exercise of the option granted by section 75 of the Corporation Law
deprived of any actual or fixed right constitutionally protected.
to every sociedad anonima formed, organized and existing under the
To hold, as Petitioner Benguet asks, that the legislative power could laws of the Philippines on the date of the passage of this Act to
not deprive Benguet or its members of the possibility to enter at some either continue business as such sociedad anonima or to reform and
indefinite future time into an agreement to extend Benguets organize under the provisions of the Corporation Law. Petitionercorporate life, solely because such agreements were authorized by the Appellant Benguet contends that as the law does not determine the
Code of Commerce, would be tantamount to saying that the said period within which such option may be exercised, Benguet may
Code was irrepealable on that point. It is a well settled rule that no exercise it at any time during its corporate existence; chan
person has a vested interest in any rule of law entitling him to insist roblesvirtualawlibraryand that in fact on June 22, 1953, it chose to
that it shall remain unchanged for his benefit. (New York C. R. Co. reform itself into a corporation for a period of 50 years from that date,
the
corresponding
papers
and
by-laws
with
vs. White, 61 L. Ed (U.S.) 667; chan roblesvirtualawlibraryMondou filing
vs. New York N. H. & H. R. Co., 56 L. Ed. 327; chan the Respondent Commissioner of Securities and Exchange
roblesvirtualawlibraryRainey vs. U. S., 58 L. Ed. 617; chan registration; chan roblesvirtualawlibrarybut the latter refused to
roblesvirtualawlibraryLilly Co. vs. Saunders, 125 ALR. 1308; chan accept them as belatedly made.
roblesvirtualawlibraryShea vs. Olson, 111 ALR. 998).
The Petitioners argument proceeds from the unexpressed assumption
There can be no vested right in the continued existence of a statute that Benguet, as sociedad anonima, had not exercised the option
or rule of the common law which precludes its change or repeal, nor given by section 75 of the Corporation Law until 1953. This we find
in any omission to legislate on a particular matter or subject. Any to be incorrect. Under that section, by continuing to do business as
right conferred by statute may be taken away by statute before it has sociedad anonima, Benguet in fact rejected the alternative to reform
become vested, but after a right has vested, repeal of the statute or as a corporation under Act No. 1459. It will be noted from the text of
section 75 (quoted earlier in this opinion) that no special act or

18

Corporation Code 3
manifestation is required by the law from the existing sociedades
anonimas that prefer to remain and continue as such. It is when they
choose to reform and organize under the Corporation Law that they
must, in the words of the section, transfer all corporate interests to
the new corporation. Hence if they do not so transfer, the sociedades
anonimas affected are to be understood to have elected the alternative
to continue business as such corporation (sociedad anonima) 2
The election of Benguet to remain a sociedad anonima after the
enactment of the Corporation Law is evidence, not only by its failure,
from 1906 to 1953, to adopt the alternative to transfer its corporate
interests to a new corporation, as required by section 75; chan
roblesvirtualawlibraryit also appears from positive acts. Thus around
1933, Benguet claimed and defended in court its acquisition of shares
of the capital stock of the Balatoc Mining Company, on the ground
that as a sociedad anonima it (Benguet) was not a corporation within
the purview of the laws prohibiting a mining corporation from
becoming interested in another mining corporation (Harden vs.
Benguet Mining Corp., 58 Phil., p. 149). Even in the present
proceedings, Benguet has urged its right to amend its original articles
of association as sociedad anonima and extend its life as such under
the provisions of the Spanish Code of Commerce. Such appeals to
privileges as sociedad anonima under the Code of 1886 necessarily
imply that Benguet has rejected the alternative of reforming under the
Corporation Law. As Respondent Commissioners order, now under
appeal, has stated
A sociedad anonima could not claim the benefit of both, but must
have to choose one and discard the other. If it elected to become a
corporation it could not continue as a sociedad anonima; chan
roblesvirtualawlibraryand if it choose to remain as a sociedad
anonima, it could not become a corporation.

appealed from, on the ground that intervenor seeks to terminate

Benguets operating contract and appropriate the profits that are the
result of Benguets efforts in developing the mines of the intervenor.
Suffice it to say that whatever such motives should be, they are
wholly irrelevant to the issues in this appeal, that exclusively concern
the legal soundness of the order of the Respondent Securities and
Exchange Commissioner rejecting the claims of the Benguet
Consolidated Mining Company to extend its corporate life.
Neither are we impressed by the prophesies of economic chaos that
would allegedly ensure with the cessation of Benguets activities. If
its mining properties are really susceptible of profitable operation,
inexorable economic laws will ensure their exploitation; chan
roblesvirtualawlibraryif, on the other hand, they can no longer be
worked at a profit, then catastrophe becomes inevitable, whether or
notPetitioner Benguet retains corporate existence.
Sustaining the opinions of the Respondent Securities and Exchange
Commissioner and of the Secretary of Justice, we rule
that:chanroblesvirtuallawlibrary
(1) The prohibition contained in section 18 of Act No. 1459, against
extending the period of corporate existence by amendment of the
original articles, was intended to apply, and does apply, to sociedades
anonimas already formed, organized and existing at the time of the
effectivity of the Corporation Law (Act No. 1459) in 1906;
(2) The statutory prohibition is valid and impairs no vested rights or
constitutional inhibition where no agreement to extend the original
period of corporate life was perfected before the enactment of the
Corporation Law;

(3) A sociedad anonima, existing before the Corporation Law, that

continues to do business as such for a reasonable time after its
Having thus made its choice, Benguet may not now go back and seek enactments, is deemed to have made its election and may not
to change its position and adopt the reformation that it had formerly subsequently claim to reform into a corporation under section 75 of
repudiated. The election of one of several alternatives is irrevocable Act No. 1459.
once made (as now expressly recognized in article 940 of the new
Civil Code of the Philippines):chanroblesvirtuallawlibrary such rule In view of the foregoing, the order appealed from is affirmed. Costs
is inherent in the nature of the choice, its purpose being to clarify and against Petitioner-AppellantBenguet Consolidated Mining Company.
render definite the rights of the one exercising the option, so that Padilla, Montemayor, Reyes, A. Labrador, Concepcion and
other persons may act in consequence. While successive choices may Endencia, JJ., concur.
be provided there is nothing in section 75 of the Corporation Law to
show or hint that a sociedad anonima may make more than one
choice thereunder, since only one option is provided for.
Separate Opinions
While no express period of time is fixed by the law within which
sociedades anonimas may elect under section 75 of Act No. 1459
either to reform or to retain their status quo, there are powerful
reasons to conclude that the legislature intended such choice to be
made within a reasonable time from the effectivity of the Act. To
enable a sociedad anonima to choose reformation when its stipulated
period of existence is nearly ended, would be to allow it to enjoy a
term of existence far longer than that granted to corporations
organized under the Corporation Law; chan roblesvirtualawlibraryin
Benguets case, 50 years as sociedad anonima, and another 50 years
as an American type of corporation under Act 1459; chan
roblesvirtualawlibrarya result incompatible with the avowed purpose
of the Act to hasten the disappearance of the sociedades anonimas.
Moreover, such belated election, if permitted, would enable
sociedades anonimas to reap the full advantage of both types of
organization. Finally, it would permit sociedades anonimas to prolong
their corporate existence indirectly by belated reformation into
corporations under Act No. 1459, when they could not do so directly
by amending their articles of association.

PARAS, C.J., dissenting:chanroblesvirtuallawlibrary

The Petitioner, Benguet Consolidated Mining Company, was
organized as a sociedad anonima on June 24, 1903, under the
provisions of the Code of Commerce, and its term as fixed in the
articles of association was fifty years. It has been a leading enterprise,
long and widely reputed to have pioneered in and boosted the mining
industry, distributed profits among its shareholders, and given
employment to thousands. To be more approximately exact,
the Petitioner has kept on its payrolls over four thousand Filipino
employees who have about twenty thousand dependents. The taxes
and other dues paid by it to the Government have been in enormous
amounts. It has always been subject to such supervision and control
of Government officials as are prescribed by law.

When, therefore, the Petitioner on June 3, 1953, presented all

necessary documents to theRespondent, the Securities and Exchange
Commissioner, with a view to the extension of its term as a sociedad
anonima for a period of fifty years from June 15, 1953; chan
roblesvirtualawlibrarywhen on June 22, 1953, it filed with
Much stress is laid upon allegedly improper motives on the part of the said Respondent the necessary articles of incorporation and other
intervenor, Consolidated Mines, Inc., in supporting the orders documents, with a view to reforming itself as a corporation under the

19

Corporation Code 3
Corporation Law for a period of fifty years from June 22, 1953,
followed by the filing on July 22, 1953, of the corresponding bylaws; chan roblesvirtualawlibraryand when on October 27, 1953,
the Respondent issued an order denying the registration of the
instruments as well for extension as for reformation, Petitioners
corporate life was being snapped out with such lightning abruptness
as undoubtedly to spell damage and prejudice not so much to its
shareholders as to its beneficiaries thousands of employees and
their dependents and even to the Government which stands to lose
a good source of revenue.
The Petitioner contends (1) that the Respondent had the ministerial
duty of registering the documents presented either for extension
of Petitioners term as a sociedad anonima or for its reformation
under the Corporation Law, in the absence (as in this case) of any
pretense that said documents are formally defective or
that Petitioners
purposes
are
unlawful; chan
roblesvirtualawlibraryand (2) that as thePetitioner had organized as a
sociedad anonima under the Code of Commerce, it has acquired a
vested right which cannot subsequently be affected or taken away by
the Corporation Law enacted on April 1, 1906. I would not dwell
upon these contentions, because I hold that, even under the provisions
of the Corporation Law, the Petitioner may either extend its life as a
sociedad anonima or reform as a corporation.
Section
75
of
the
provides:chanroblesvirtuallawlibrary

Corporation

Law

Any corporation or sociedad anonima formed, organized and

existing under the laws of the Philippine Islands and lawfully
transacting business in the Philippine Islands on the date of the
passage of this Act, shall be subject to the provisions hereof so far as
such provisions may be applicable and shall be entitled at its option
either to continue business as such corporation or to reform and
organize under, and by virtue of the provisions of this Act,
transferring all corporate interests to the new corporation which, if a
stock corporation, is authorized to issue its shares of stock at par to
the stockholders or members of the old corporation according to their
interests.
Upon
the
other
hand,
section
follows:chanroblesvirtuallawlibrary

191

reads

as

The Code of Commerce, in so far as it relates to corporations or

sociedades anonimas, and all other or parts of Acts in conflict or
inconsistent with this Act, are hereby repealed cralaw And provided,
further, That existing corporations or sociedades anonimas lawfully
organized as such, which elect to continue their business as such
sociedades anonimas instead of reforming and reorganizing under and
by virtue of the provisions of this Act, shall continue to be governed
by the laws that were in force prior to the passage of this Act in
relation to their organization and method of transacting business and
to the rights of members thereof as between themselves, but their
relations to the public and public officials shall be governed by the
provisions of this Act.
It is noteworthy that section 75 has not limited the optional
continuance of a sociedad anonima to its unexpired term, and section
191 expressly allows a sociedad anonima which has elected to
continue its business as such to be governed by the laws in force prior
to the enactment of the Corporation Law in relation to its organization
and method of transacting business and to the rights of members as
between themselves. It is admitted that the Code of Commerce, while
containing no express provision allowing it, does not prohibit a
sociedad
anonima
from
extending
its
term; chan
roblesvirtualawlibraryand commentators Gay de Montella (Tratado
Practico de Sociedad Marcantiles Compaias Anonimas, Tomo II,

p. 285) and Cesar Vivante (Tratado de Derecho Mercantil, pp. 254,

258) have observed that a sociedad anonima may prolong its
corporate duration by amendment of its articles of association before
the expiration of the term.
When a business or commercial association is organized, the
members are naturally interested in knowing not only their rights and
obligations but also the duration of their legal relations. While
organization in a strict sense may refer to formalities like election
of officers, adoption of by-laws, and subscription and payment of
capital stock, it cannot be spoken of or conceived in a wider sense
without necessarily involving the specification of the term of the
entity formed. Extension of corporation life is thus essentially an
incident of organization and, in any event, a matter directly
affecting or in relation to the rights of the shareholders as between
themselves, within the contemplation of section 191, and should
accordingly be governed by the Code of Commerce. As pointed out
by the Supreme Court of Wyoming in the case of Drew vs. Beckwith,
(114 P. 2d. 98), extension merely involves an additional privilege to
carry out the business of enterprise undertaken by the corporation,
and is but an enlargement of the enterprise undertaken by the
corporation. It is true that the duration of a sociedad anonima is of
some concern to the public and public officials who ought to know
the time when it will cease to exist and its business will be wound up.
Notice to the world is however served by the registration
ofPetitioners articles of association as a sociedad anonima or articles
of incorporation as a reformed corporation with the Securities and
Exchange Commission.
When section 191 mentions relations to the public and public
officials as being governed by the provisions of the Corporation
Law, the idea is obviously more to enable the Government to enforce
its powers of supervision, inspection and investigation, than to restrict
the freedom of the corporate entity as to organizational or substantive
rights of members as between themselves. In one of the public
hearings conducted by the Philippine Commission before the
enactment of the Corporation Law, Commissioner Ide pertinently
expressed, Of course, whether they (sociedades) come under the
new law or not they would be subject to inspection, regulations, and
examination for the purpose of protecting the community. The
Attorney General in turn held that sociedades anonimas, although
governed by the Code of Commerce, are subject to the examination
provided in section 54 of the Corporation Law (5 Op. Atty. Gen. 442).
In this connection, the Petitioner has admittedly subjected itself to the
provisions of the Corporation Law.
In Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141, it was
remarked:chanroblesvirtuallawlibrary The
purpose
of
the
commission in repealing this part of the Code of Commerce was to
compel commercial entities thereafter organized to incorporate under
the Corporation Law, unless they should prefer to adopt some form or
other of the partnership. This Court already indicated that the
commercial entities compelled to incorporate under the Corporation
Law were those organized after its enactment.
Section 6, subsection 4, of the Corporation Law provides that the
term for which corporations shall exist shall not exceed fifty
years; chan roblesvirtualawlibrarysection 18 provides that the life of a
corporation shall not be extended by amendment beyond the time
fixed in the original articles; chan roblesvirtualawlibraryand section
11 provides that upon the issuance by the Securities and Exchange
Commissioner of the certificate of incorporation, the persons
organizing the corporation shall constitute a body politic and
corporate for the term specified in the articles of incorporation, not
exceeding fifty years. The corporations contemplated are those
defined in section 22 corporations organized under the
Corporation Law. They cannot be sociedades anonimas formed under

20

Corporation Code 3
the Code of Commerce and licensed to continue as such in virtue of
sections 75 and 191. Otherwise the words or sociedad anonima
would have been added to the term corporation in section 18, as
was done in sections 75 and 191. A similar observation was made in
Harden
vs.
Benguet
Consolidated
Mining
Co.,
supra:chanroblesvirtuallawlibrary But when the word corporation is
used in the sense of sociedad anonima and close discrimination is
necessary, it should be associated with the Spanish expression
sociedad anonima either in parenthesis or connected by the word or.
This latter device was adopted in sections 75 and 191 of the
Corporation Law.

corporate interests to the new corporation. This new corporation

should have the advantage of the prescribed maximum duration,
regardless of the original term of the old or substituted entity. There is
no basis for the criticism that, if the Petitioner were allowed to
exhaust its full term as a sociedad anonima, and afterwards to reform
as a regular corporation for another fifty years, it would have a span
of life twice as long as that granted to corporations organized under
the Corporation Law. The simple reason is that the Petitioner was
already a corporate entity before the enactment of the Corporation
Law, with a fixed duration under its original articles of association. It
was clearly not in parity with any corporation organized under and
coming into existence after the effectivity of the Corporation Law
The citation from 3 Benito, Derecho Mercantil, p. 245, invoked in the
which has no choice on the matter and can therefore have only the
majority decision, to the effect that the duration of a sociedad
prerogative granted by said law, no more no less.
anonima is of interest both to its members and to third persons, is
clearly an authority for our conclusions that the extension The Respondent has suggested that the Petitioner, if desirous of
of Petitioners term is in relation to the rights of members thereof as continuing its business, may organize a new corporation a
between themselves. Section 191 does not say that a sociedad suggestion which need not be made because no one would probably
anonima shall be governed by the provisions of the Corporation Law think of denying it that right. But we cannot see any cogent reason or
when the matter involved affects not only the rights of members practical purpose for the suggestion. In the first place, the filing
thereof as between themselves but also the public and public of Petitioners articles of incorporation and by-laws in July, 1953, in
officials.
effect amounted to the formation of a new corporation. To require
more is to give greater importance to form than to substance. In the
We are also of the opinion that alternatively, under section 75,
second place, the public and public officials may not as a matter of
the Petitioner may elect to reform and organize under the Corporation
fact be adversely affected by allowing the Petitioner to reform,
Law, transferring all its corporate interests to the new corporation.
instead of requiring it technically to form a new corporation. It will
Contrary to the ruling of the Respondent, we are convinced that, as no
acquire no greater rights or obligations by simple reformation than by
period was fixed within which it should exercise the option either of
newly organizing another corporation. Conversely, the public and
continuing as a sociedad anonima or reforming and organizing under
public officials will acquire no greater benefit or control by requiring
the Corporation Law, the Petitioner was entitled to have its articles of
the Petitioner to form a new corporation, than by allowing it to
incorporation and by-laws presented respectively on June 22 and July
reform. And as already stated, whatever interest the public and public
22, 1953, registered by the Respondent. Section 75 did not take
officials may have in determining the duration of a sociedad anonima
away Petitioners right to exhaust its term as a sociedad anonima,
or any corporation for that matter, is amply protected by registration
already vested before the enactment of the Corporation Law, but
in the Securities and Exchange Commission.
merely granted it the choice to organize as a regular corporation,
instead of extending its life as a sociedad anonima. The only The Respondent and the intervenor, Consolidated Mines, Inc., have
limitation imposed is that prescribed in section 191, namely, that if a tried to show that thePetitioner holds or owns interests in eight
sociedad anonima elects to continue its business as such, it shall be mining companies, in violation of section 13, subsection 5 of the
governed by the prior law in relation to its organization and method Corporation Law, in that it has operating contracts with the intervenor
of transacting business and to the rights of its members as between and seven other mining companies, besides owning the majority
themselves, and by the provisions of the Corporation Law as to its shares in Balatoc Mining Co. This matter has not merited any
relations to the public and public officials. If the intention were to fix attention or favorable comment in the majority decision, and rightly
a period for reformation, the law would have expressly so provided, of course. Even so, we may observe that the alleged violation was not
in the same way that section 19 fixes two years during which a the subject of any finding by theRespondent, nor relied upon in his
corporation should formally organize and commence the transaction order of denial; chan roblesvirtualawlibrarythat the Petitioner has
of its business, otherwise its corporate powers would cease; chan denied the charge; chan roblesvirtualawlibrarythat the holding by
roblesvirtualawlibrarysection 77 fixes three years from the the Petitioner of shares of stock in Balatoc Mining Co., if really
dissolution of a corporation within which it may clear and settle its illegal, may look into only in a quo warranto proceeding instituted by
affairs; chan roblesvirtualawlibraryand section 78 fixes the same the Government; chan roblesvirtualawlibrarythat at any rate
period of three years within which a corporation may convey its thePetitioner has always been ready and willing to dispose of said
properties to a trustee for the benefit of its stockholders and other shares and, in a proper proceeding, it should be given reasonable time
interested persons.
to do so, as this Court gave the Philippine Sugar Estates a period of
six months after final decision within which to liquidate, dissolve
It is not correct to argue that the Petitioner is not entitled to elect to
and separate absolutely in every respect and in all of its relations,
continue as a sociedad anonima and at the same time reform and
complained of in the petition, with the Tayabas Land Company
organize as a regular corporation, because when it continued as a
(Government vs. Philippine Sugar Estates Co., 38 Phil., 15).
sociedad anonima after the passage of the Corporation Law and
during its full term of fifty years, it merely exercised a right it With special reference to the intervenor, it may be of some moment to
theretofore had; chan roblesvirtualawlibraryand the Petitioner can be know the antecedents and nature of business relations existing
said properly to have availed itself of the other option only when in between it and the Petitioner, at least to demonstrate the
June 1953 it filed the necessary papers of incorporation under the righteousness of the position of one or the other even from a factual
Corporation Law. It is likewise not accurate to contend that, as point of view. The following excerpts from Petitioners Reply to a
the Respondent ruled, the Petitioner could reform as and be a regular portion of Intervenors Brief are in point:chanroblesvirtuallawlibrary
corporation at most only for the remainder of its term as a sociedad
What has happened in our case is that prior to the execution of the
anonima. Section 75, in allowing a sociedad anonima to reform and
Operating Agreement of July 9, 1934, the stockholders, directors, and
organize under the Corporation Law, also authorizes the transfer of its
officers of the intervenor, Consolidated Mines, Inc., did not want to

21

Corporation Code 3
risk one centavo of their own funds for the development of their
chrome ore mining claims in Zambales province, and proposed to
the Petitioner herein, Benguet Consolidated Mining Company, to
explore, develop and operate their mining claims, Benguet to furnish
all the funds that might be necessary, and to explore, develop, mine
and concentrate and market all the pay are found on or within paid
claims or properties, the intervenor, Consolidated Mines, Inc., and
the Petitioner, Benguet Consolidated Mining Company, after the
latter had reimbursed itself for all its advances, to divide half and half
the excess of receipts over disbursements. Benguet agreed to it, and
advanced approximately three million pesos, one-half thereof before
the war, and the other half after the war (the intervenors properties
having been destroyed during the war). Paragraph XII of the
intervenors complaint in the civil action instituted by it against
Benguet in the Court of First Instance of Manila, No. 18938, and to
which counsel for the intervenor refer in page 5 of their brief, makes
mention of the large sums of money that Benguet advanced, as
follows:chanroblesvirtuallawlibrary
Initial advances amounting to approximately P1,500,000 made
by Defendant during the first phases of said Operating Agreement
which had been fully reimbursed to it before the war, end of the
amounts likewise advanced by it (Benguet) for rehabilitation
amounting to close P1,500,000.00.
While Benguet risked and poured approximately three million pesos
(P3,000,000) into the venture, and while Benguet was looking for,
and establishing, a market for intervenors chrome ore, the intervenor,
Consolidated Mines, Inc., considered the said Operating Agreement
of July 9, 1934, as valid. Now that Benguets efforts have been
crowned with success, and Benguet has established a market for
intervenors chrome ore, the intervenor claims that its said operating
Agreement of July 9, 1934, with the Petitioner, Benguet, is contrary
to law because Benguet has become interested in intervenors chrome
ore mining claims (although the agreement expressly states that
Benguet has no interest therein), and objects to the registration of the
documents which Benguet filed with the Respondent Securities and
Exchange Commissioner, extending its life as a sociedad anonima,
and reforming itself s a corporation, in accordance with the provisions
of section 75 of the Corporation Law.

2. Losses of direct and indirect taxes to the Philippine Government

in an extremely large yearly amount.
3. No one would be able to continue the Benguet and Balatoc mines
in operation should a liquidation of Benguet take place because the
net profits after labor and material costs and taxes in the last two
years or more from the gold mining operations have not warranted
their continued operation as independent units. The profits in 1953
certainly do not warrant it. It is merely a case of taking gold out of the
ground in order to pay for labor, materials and taxes with very little
return to the stockholders and on the huge investment made in the
reconstruction since 1946.
(a) The relief provided by the elimination of the 17 per cent Excise
Tax, the 7 per cent Compensating Tax and the lowering of the
Extraction Tax, when counter-balanced against consistently
increasing costs from month to month up to this very month, is now
nothing but an offsetting item against constantly increasing costs.
For whatever persuasive effect it may have, we cannot help calling
attention to the fact that there are only about nine sociedades
anonimas in the country, foremost among them being Compaia
Maritima, which have existed for years and along with
the Petitioner figured prominently in our economic development.
Compaia Maritima, in particular, has been twice allowed to extend
its life by amendment of its articles of incorporation. It may be argued
that if there was an official mistake in acceding to the extension of the
term of Compaia Maritima, the same should not warrant the
commission of another mistake. But it will go to show that sections
75 and 191 of the Corporation Law are, on the points herein involved,
of doubtful construction; chan roblesvirtualawlibraryand it is for this
reason that we had to advert hereinabove to the somewhat
unequitable position of the intervenor and to the possible adverse
effect on Philippine economy of the abrupt termination ofPetitioners
corporate existence.

By and large, it is my considered opinion that the Respondents order

of denial dated October 27, 1953, should be reversed and
the Respondent ordered to register at least the documents presented
by the Petitioner, reforming and organizing itself as a corporation
under the provisions of the Corporation Law. This would be in line
with the policy of doing away with sociedad anonimas, at the same
Under the foregoing facts, the intervenor, Consolidated Mines, Inc.,
time saving the goose that lays the golden egg.
cannot be heard to complain against Benguet. No court can give now
a helping hand to the intervenor, which claims that Benguet no longer
lives, and wants to keep for itself all the products of Benguets efforts
after the latter risked into the venture approximately three million
pesos (P3,000,000).
The foregoing considerations may not constitute a legal justification
for ruling that the Petitionershould be allowed either to extend its life
as a sociedad anonima or to reform and organize under the provisions
of the Corporation Law, but they may aid in resolving in Petitioners
favor and doubt as to the clarity or definiteness of sections 75 and 191
of the Corporation Law regarding its right to exercise either option in
the manner claimed by it.
The same result may be arrived at if, in addition, we bear in mind the
possible economic harm that may be brought about by the affirmance
of the order complained of. This aspect is adequately touched
in Petitioners brief, as follows:chanroblesvirtuallawlibrary
1. A loss of employment in the Baguio district by about 4,000
Filipino and a loss of direct living from the Benguet operation
supplied to 20,000, that is, the 4,000 employed and their dependents.
(a) This would be calamity to the district of the highest order which
could very well produce a snow balling depression which could react
all over the Philippine Islands.

22

Corporation Code 3
G.R. No. 22106

September 11, 1924

ASIA BANKING CORPORATION, plaintiff-appellee,

vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant.
Charles C. De Selms for appellant.
Gibbs & McDonough and Roman Ozaeta for appellee.
OSTRAND, J.:
This action is brought to recover the sum of P24,736.47, the balance
due on the following promissory note:

dealing relied on as an estoppel and this applies to foreign as well as

to domestic corporations. (14 C. J., 227; Chinese Chamber of
Commerce vs. Pua Te Ching, 14 Phil., 222.)
The defendant having recognized the corporate existence of the
plaintiff by making a promissory note in its favor and making partial
payments on the same is therefore estopped to deny said plaintiff's
corporate existence. It is, of course, also estopped from denying its
own corporate existence. Under these circumstances it was
unnecessary for the plaintiff to present other evidence of the
corporate existence of either of the parties. It may be noted that there
is no evidence showing circumstances taking the case out of the rules
stated.
The judgment appealed from is affirmed, with the costs against the
appellant. So ordered.

P37,757.22

MANILA, P. I.,

Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia
Banking Corporation, or order, the sum of thirty-seven
thousand seven hundred fifty-seven and 22/100 pesos at
their office in Manila, for value received, together with
interest at the rate of ten per cent per annum.
No. ________ Due __________

THE STANDARD PRODUCTS CO., INC.

By (Sgd.) GEORGE H. SEAVER

By

President

The court below rendered judgment in favor of the plaintiff for the
sum demanded in the complaint, with interest on the sum of
P24,147.34 from November 1, 1923, at the rate of 10 per cent per
annum, and the costs. From this judgment the defendant appeals to
this court.
At the trial of the case the plaintiff failed to prove affirmatively the
corporate existence of the parties and the appellant insists that under
these circumstances the court erred in finding that the parties were
corporations with juridical personality and assigns same as reversible
error.
There is no merit whatever in the appellant's contention. The general
rule is that in the absence of fraud a person who has contracted or
otherwise dealt with an association in such a way as to recognize and
in effect admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of
or involving such contract or dealing, unless its existence is attacked
for cause which have arisen since making the contract or other

23

Corporation Code 3
G.R. No. L-11442

May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the
Court of First Instance of Leyte, Branch II, and SEGUNDINO
REFUERZO, respondents.
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.

and required defendants to render a complete accounting of the

harvest of the land subject of the proceeding within 15 days from
receipt of the decision and to deliver 30 per cent of the net income
realized from the last harvest to plaintiff, with legal interest from the
date defendants received payment for said crop. It was further provide
that upon defendants' failure to abide by the said requirement, the
gross income would be fixed at P4,200 or a net income of P3,200
after deducting the expenses for production, 30 per cent of which or
P960 was held to be due the plaintiff pursuant to the aforementioned
contract of lease, which was declared rescinded.

No appeal therefrom having been perfected within the reglementary

period, the Court, upon motion of plaintiff, issued a writ of execution,
in virtue of which the Provincial Sheriff of Leyte caused the
This is a petition for certiorari filed by Manuela T. Vda. de
attachment of 3 parcels of land registered in the name of Segundino
Salvatierra seeking to nullify the order of the Court of First Instance
Refuerzo. No property of the Philippine Fibers Producers Co., Inc.,
of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract entered into between was found available for attachment. On January 31, 1956, defendant
Segundino Refuerzo filed a motion claiming that the decision
the former and the Philippine Fibers Producers Co., Inc., of which
rendered in said Civil Case No. 1912 was null and void with respect
Refuerzo is the president. The facts of the case are as follows:
to him, there being no allegation in the complaint pointing to his
personal liability and thus prayed that an order be issued limiting such
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel
of land located at Maghobas, Poblacion, Burauen, Teyte. On March 7, liability to defendant corporation. Over plaintiff's opposition, the
Court a quo granted the same and ordered the Provincial Sheriff of
1954, said landholder entered into a contract of lease with the
Leyte to release all properties belonging to the movant that might
Philippine Fibers Producers Co., Inc., allegedly a corporation "duly
organized and existing under the laws of the Philippines, domiciled at have already been attached, after finding that the evidence on record
made no mention or referred to any fact which might hold movant
Burauen, Leyte, Philippines, and with business address therein,
personally liable therein. As plaintiff's petition for relief from said
represented in this instance by Mr. Segundino Q. Refuerzo, the
President". It was provided in said contract, among other things, that order was denied, Manuela T. Vda. de Salvatierra instituted the
instant action asserting that the trial Judge in issuing the order
the lifetime of the lease would be for a period of 10 years; that the
complained of, acted with grave abuse of discretion and prayed that
land would be planted to kenaf, ramie or other crops suitable to the
soil; that the lessor would be entitled to 30 per cent of the net income same be declared a nullity.
accruing from the harvest of any, crop without being responsible for
the cost of production thereof; and that after every harvest, the lessee From the foregoing narration of facts, it is clear that the order sought
was bound to declare at the earliest possible time the income derived to be nullified was issued by tile respondent Judge upon motion of
defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of
therefrom and to deliver the corresponding share due the lessor.
Court. Section 3 of said Rule, however, in providing for the period
within which such a motion may be filed, prescribes that:
Apparently, the aforementioned obligations imposed on the alleged
FELIX, J.:

corporation were not complied with because on April 5, 1955,

Alanuela T. Vda, de Salvatierra filed with the Court of First Instance
of Leyte a complaint against the Philippine Fibers Producers Co.,
Inc., and Segundino Q. Refuerzo, for accounting, rescission and
damages (Civil Case No. 1912). She averred that sometime in April,
1954, defendants planted kenaf on 3 hectares of the leased property
which crop was, at the time of the commencement of the action,
already harvested, processed and sold by defendants; that
notwithstanding that fact, defendants refused to render an accounting
of the income derived therefrom and to deliver the lessor's share; that
the estimated gross income was P4,500, and the deductible expenses
amounted to P1,000; that as defendants' refusal to undertake such task
was in violation of the terms of the covenant entered into between the
plaintiff and defendant corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint,
of which they were allegedly notified, the Court declared them in
default and proceeded to receive plaintiff's evidence. On June 8,
1955, the lower Court rendered judgment granting plaintiff's prayer,

SEC. 3. WHEN PETITION FILED; CONTENTS AND

VERIFICATION. A petition provided for in either of the
preceding sections of this rule must be verified, filed within
sixty days after the petitioner learns of the judgment, order,
or other proceeding to be set aside, and not more than six
months after such judgment or order was entered, or such
proceeding was taken; and must be must be accompanied
with affidavit showing the fraud, accident, mistake, or
excusable negligence relied upon, and the facts constituting
the petitioner is good and substantial cause of action or
defense, as the case may be, which he may prove if his
petition be granted". (Rule 38)
The aforequoted provision treats of 2 periods, i.e., 60 days after
petitioner learns of the judgment, and not more than 6 months after
the judgment or order was rendered, both of which must be satisfied.
As the decision in the case at bar was under date of June 8, 1955,
whereas the motion filed by respondent Refuerzo was dated January

24

Corporation Code 3
31, 1956, or after the lapse of 7 months and 23 days, the filing of the
aforementioned motion was clearly made beyond the prescriptive
period provided for by the rules. The remedy allowed by Rule 38 to a
party adversely affected by a decision or order is certainly an alert of
grace or benevolence intended to afford said litigant a penultimate
opportunity to protect his interest. Considering the nature of such
relief and the purpose behind it, the periods fixed by said rule are
non-extendible and never interrupted; nor could it be subjected to any
condition or contingency because it is of itself devised to meet a
condition or contingency (Palomares vs. Jimenez,* G.R. No. L-4513,
January 31, 1952). On this score alone, therefore, the petition for a
writ of certiorari filed herein may be granted. However, taking note
of the question presented by the motion for relief involved herein, We
deem it wise to delve in and pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any liability resulting
from the non-fulfillment of the obligation imposed on defendant
Philippine Fibers Producers Co., Inc., interposed the defense that the
complaint filed with the lower court contained no allegation which
would hold him liable personally, for while it was stated therein that
he was a signatory to the lease contract, he did so in his capacity as
president of the corporation. And this allegation was found by the
Court a quo to be supported by the records. Plaintiff on the other hand
tried to refute this averment by contending that her failure to specify
defendant's personal liability was due to the fact that all the time she
was under the impression that the Philippine Fibers Producers Co.,
Inc., represented by Refuerzo was a duly registered corporation as
appearing in the contract, but a subsequent inquiry from the Securities
and Exchange Commission yielded otherwise. While as a general rule
a person who has contracted or dealt with an association in such a
way as to recognize its existence as a corporate body is estopped from
denying the same in an action arising out of such transaction or
dealing, (Asia Banking Corporation vs. Standard Products Co., 46
Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta
Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this
doctrine may not be held to be applicable where fraud takes a part in
the said transaction. In the instant case, on plaintiff's charge that she
was unaware of the fact that the Philippine Fibers Producers Co., Inc.,
had no juridical personality, defendant Refuerzo gave no confirmation
or denial and the circumstances surrounding the execution of the
contract lead to the inescapable conclusion that plaintiff Manuela T.
Vda. de Salvatierra was really made to believe that such corporation
was duly organized in accordance with law.

act and appropriate for itself the powers and attribute of a corporation
as provided by law; it cannot create agents or confer authority on
another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own
risk. And as it is an elementary principle of law that a person who acts
as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the rights and subject to all
the liabilities of a principal, a person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such
privileges and obligations and comes personally liable for contracts
entered into or for other acts performed as such, agent (Fay vs. Noble,
7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of
the Philippines, Fifth Ed., P. 689-690). Considering that defendant
Refuerzo, as president of the unregistered corporation Philippine
Fibers Producers Co., Inc., was the moving spirit behind the
consummation of the lease agreement by acting as its representative,
his liability cannot be limited or restricted that imposed upon
corporate shareholders. In acting on behalf of a corporation which he
knew to be unregistered, he assumed the risk of reaping the
consequential damages or resultant rights, if any, arising out of such
transaction.
Wherefore, the order of the lower Court of March 21, 1956,
amending its previous decision on this matter and ordering the
Provincial Sheriff of Leyte to release any and all properties of movant
therein which might have been attached in the execution of such
judgment, is hereby set aside and nullified as if it had never been
issued. With costs against respondent Segundino Refuerzo. It is so
ordered.

There can be no question that a corporation with registered has a

juridical personality separate and distinct from its component
members or stockholders and officers such that a corporation cannot
be held liable for the personal indebtedness of a stockholder even if
he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R. No.
42420) and conversely, a stockholder or member cannot be held
personally liable for any financial obligation be, the corporation in
excess of his unpaid subscription. But this rule is understood to refer
merely to registered corporations and cannot be made applicable to
the liability of members of an unincorporated association. The reason
behind this doctrine is obvious-since an organization which before the
law is non-existent has no personality and would be incompetent to

25

Corporation Code 3
G.R. No. L-19118

January 30, 1965

MARIANO A. ALBERT, plaintiff-appellant,

vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
Aruego, Mamaril & Associates for defendant-appellees.
BENGZON, J.P., J.:
No less than three times have the parties here appealed to this Court.
In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958,
we found plaintiff entitled to damages (for breach of contract) but
reduced the amount from P23,000.00 to P15,000.00.
Then in Albert vs. University Publishing Co., Inc., L-15275, October
24, 1960, we held that the judgment for P15,000.00 which had
become final and executory, should be executed to its full amount,
since in fixing it, payment already made had been considered.
Now we are asked whether the judgment may be executed against
Jose M. Aruego, supposed President of University Publishing Co.,
Inc., as the real defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued
University Publishing Co., Inc. Plaintiff allegedinter alia that
defendant was a corporation duly organized and existing under the
laws of the Philippines; that on July 19, 1948, defendant, through
Jose M. Aruego, its President, entered into a contract with plaintifif;
that defendant had thereby agreed to pay plaintiff P30,000.00 for the
exclusive right to publish his revised Commentaries on the Revised
Penal Code and for his share in previous sales of the book's first
edition; that defendant had undertaken to pay in eight quarterly
installments of P3,750.00 starting July 15, 1948; that per contract
failure to pay one installment would render the rest due; and that
defendant had failed to pay the second installment.

filing of this complaint until the whole amount shall have

been fully paid. The defendant shall also pay the costs. The
counterclaim of the defendant is hereby dismissed for lack of
evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be
executed in full. Thereafter, on July 22, 1961, the court a quo ordered
issuance of an execution writ against University Publishing Co., Inc.
Plaintiff, however, on August 10, 1961, petitioned for a writ of
execution against Jose M. Aruego, as the real defendant, stating,
"plaintiff's counsel and the Sheriff of Manila discovered that there is
no such entity as University Publishing Co., Inc." Plaintiff annexed to
his petition a certification from the securities and Exchange
Commission dated July 31, 1961, attesting: "The records of this
Commission do not show the registration of UNIVERSITY
PUBLISHING CO., INC., either as a corporation or partnership."
"University Publishing Co., Inc." countered by filing, through counsel
(Jose M. Aruego's own law firm), a "manifestation" stating that "Jose
M. Aruego is not a party to this case," and that, therefore, plaintiff's
petition should be denied.
Parenthetically, it is not hard to decipher why "University Publishing
Co., Inc.," through counsel, would not want Jose M. Aruego to be
considered a party to the present case: should a separate action be
now instituted against Jose M. Aruego, the plaintiff will have to
reckon with the statute of limitations.
The court a quo denied the petition by order of September 9, 1961,
and from this, plaintiff has appealed.
The fact of non-registration of University Publishing Co., Inc. in the
Securities and Exchange Commission has not been disputed.
Defendant would only raise the point that "University Publishing Co.,
Inc.," and not Jose M. Aruego, is the party defendant; thereby
assuming that "University Publishing Co., Inc." is an existing
corporation with an independent juridical personality. Precisely,
however, on account of the non-registration it cannot be considered a
corporation, not even a corporation de facto (Hall vs. Piccio, 86 Phil.
603). It has therefore no personality separate from Jose M. Aruego; it
cannot be sued independently.

Defendant admitted plaintiff's allegation of defendant's corporate

existence; admitted the execution and terms of the contract dated July
19, 1948; but alleged that it was plaintiff who breached their contract The corporation-by-estoppel doctrine has not been invoked. At any
rate, the same is inapplicable here. Aruego represented a non-existent
by failing to deliver his manuscript. Furthermore, defendant
entity and induced not only the plaintiff but even the court to believe
counterclaimed for damages.1wph1.t
in such representation. He signed the contract as "President" of
"University Publishing Co., Inc.," stating that this was "a corporation
Plaintiff died before trial and Justo R. Albert, his estate's
duly organized and existing under the laws of the Philippines," and
administrator, was substituted for him.
obviously misled plaintiff (Mariano A. Albert) into believing the
The Court of First Instance of Manila, after trial, rendered decision on same. One who has induced another to act upon his wilful
misrepresentation that a corporation was duly organized and existing
April 26, 1954, stating in the dispositive portion
under the law, cannot thereafter set up against his victim the principle
of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
IN VIEW OF ALL THE FOREGOING, the Court renders
judgment in favor of the plaintiff and against the defendant
"University Publishing Co., Inc." purported to come to court,
the University Publishing Co., Inc., ordering the defendant
answering the complaint and litigating upon the merits. But as stated,
to pay the administrator Justo R. Albert, the sum of
"University Publishing Co., Inc." has no independent personality; it is
P23,000.00 with legal [rate] of interest from the date of the

26

Corporation Code 3
just a name. Jose M. Aruego was, in reality, the one who answered
and litigated, through his own law firm as counsel. He was in fact, if
not, in name, the defendant.

precipitating the suit in question; and that in the litigation he was the
real defendant. Perforce, in line with the ends of justice, responsibility
under the judgment falls on him.

Even with regard to corporations duly organized and existing under

the law, we have in many a case pierced the veil of corporate fiction
to administer the ends of justice. * And in Salvatiera vs.
Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to
act on behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent." Had
Jose M. Aruego been named as party defendant instead of, or together
with, "University Publishing Co., Inc.," there would be no room for
debate as to his personal liability. Since he was not so named, the
matters of "day in court" and "due process" have arisen.

We need hardly state that should there be persons who under the law
are liable to Aruego for reimbursement or contribution with respect to
the payment he makes under the judgment in question, he may, of
course, proceed against them through proper remedial measures.
PREMISES CONSIDERED, the order appealed from is hereby set
aside and the case remanded ordering the lower court to hold
supplementary proceedings for the purpose of carrying the judgment
into effect against University Publishing Co., Inc. and/or Jose M.
Aruego. So ordered.

In this connection, it must be realized that parties to a suit are

"persons who have a right to control the proceedings, to make
defense, to adduce and cross-examine witnesses, and to appeal from a
decision" (67 C.J.S. 887) and Aruego was, in reality, the person
who had and exercised these rights. Clearly, then, Aruego had his day
in court as the real defendant; and due process of law has been
substantially observed.
By "due process of law" we mean " "a law which hears before it
condemns; which proceeds upon inquiry, and renders judgment only
after trial. ... ." (4 Wheaton, U.S. 518, 581.)"; or, as this Court has
said, " "Due process of law" contemplates notice and opportunity to
be heard before judgment is rendered, affecting one's person or
property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." (Sicat vs.
Reyes, L-11023, Dec. 14, 1956.) And it may not be amiss to mention
here also that the "due process" clause of the Constitution is designed
to secure justice as a living reality; not to sacrifice it by paying undue
homage to formality. For substance must prevail over form. It may
now be trite, but none the less apt, to quote what long ago we said
in Alonso vs. Villamor, 16 Phil. 315, 321-322:
A litigation is not a game of technicalities in which one,
more deeply schooled and skilled in the subtle art of
movement and position, entraps and destroys the other. It is,
rather, a contest in which each contending party fully and
fairly lays before the court the facts in issue and then,
brushing side as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks
that Justice be done upon the merits. Lawsuits, unlike duels,
are not to be won by a rapier's thrust. Technicality, when it
deserts its proper office as an aid to justice and becomes its
great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights
in technicalities.
The evidence is patently clear that Jose M. Aruego, acting as
representative of a non-existent principal, was the real party to the
contract sued upon; that he was the one who reaped the benefits
resulting from it, so much so that partial payments of the
consideration were made by him; that he violated its terms, thereby

27

Corporation Code 3
G.R. No. 136448 November 3, 1999
LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

b. 12% interest per

annum counted from date of
plaintiff's invoices and computed
on their respective amounts as
follows:
i. Accrued
interest of
P73,221.00 on
Invoice No.
14407 for
P385,377.80
dated February
9, 1990;

PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to
borrow money to pursue a business and to divide the profits or losses
that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a "common fund." Their
contribution may be in the form of credit or industry, not necessarily
cash or fixed assets. Being partner, they are all liable for debts
incurred by or on behalf of the partnership. The liability for a contract
entered into on behalf of an unincorporated association or ostensible
corporation may lie in a person who may not have directly transacted
on its behalf, but reaped benefits from that contract.

ii. Accrued
interest for
P27,904.02 on
Invoice No.
14413 for
P146,868.00
dated February
13, 1990;

The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim
assails the November 26, 1998 Decision of the Court of Appeals in
CA-GR CV
41477, 1 which disposed as follows:

iii. Accrued
interest of
P12,920.00 on
Invoice No.
14426 for
P68,000.00
dated February
19, 1990;

WHEREFORE, [there being] no reversible error in

the appealed decision, the same is hereby
affirmed. 2
The decretal portion of the Quezon City Regional Trial Court (RTC)
ruling, which was affirmed by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary
attachment issued by this Court on September 20,
1990;
2. That defendants are jointly liable to plaintiff for
the following amounts, subject to the modifications
as hereinafter made by reason of the special and
unique facts and circumstances and the proceedings
that transpired during the trial of this case;
a. P532,045.00 representing [the]
unpaid purchase price of the
fishing nets covered by the
Agreement plus P68,000.00
representing the unpaid price of
the floats not covered by said
Agreement;

c. P50,000.00 as and for

attorney's fees, plus P8,500.00
representing P500.00 per
appearance in court;
d. P65,000.00 representing
P5,000.00 monthly rental for
storage charges on the nets
counted from September 20, 1990
(date of attachment) to September
12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of
defendants for the principal obligation or
for the unpaid price of nets and floats in
the amount of P532,045.00 and
P68,000.00, respectively, or for the total
amount P600,045.00, this Court noted that
these items were attached to guarantee any
judgment that may be rendered in favor of
the plaintiff but, upon agreement of the

28

Corporation Code 3
parties, and, to avoid further deterioration
of the nets during the pendency of this
case, it was ordered sold at public auction
for not less than P900,000.00 for which
the plaintiff was the sole and winning
bidder. The proceeds of the sale paid for
by plaintiff was deposited in court. In
effect, the amount of P900,000.00 replaced
the attached property as a guaranty for any
judgment that plaintiff may be able to
secure in this case with the ownership and
possession of the nets and floats awarded
and delivered by the sheriff to plaintiff as
the highest bidder in the public auction
sale. It has also been noted that ownership
of the nets [was] retained by the plaintiff
until full payment [was] made as stipulated
in the invoices; hence, in effect, the
plaintiff attached its own properties. It
[was] for this reason also that this Court
earlier ordered the attachment bond filed
by plaintiff to guaranty damages to
defendants to be cancelled and for the
P900,000.00 cash bidded and paid for by
plaintiff to serve as its bond in favor of
defendants.

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and

Peter Yao entered into a Contract dated February 7, 1990, for the
purchase of fishing nets of various sizes from the Philippine Fishing
Gear Industries, Inc. (herein respondent). They claimed that they
were engaged in a business venture with Petitioner Lim Tong Lim,
who however was not a signatory to the agreement. The total price of
the nets amounted to P532,045. Four hundred pieces of floats worth
P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats;
hence, private respondents filed a collection suit against Chua, Yao
and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities
as general partners, on the allegation that "Ocean Quest Fishing
Corporation" was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission. 5 On
September 20, 1990, the lower court issued a Writ of Preliminary
Attachment, which the sheriff enforced by attaching the fishing nets
on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation

admitting his liability and requesting a reasonable time within which
to pay. He also turned over to respondent some of the nets which
were in his possession. Peter Yao filed an Answer, after which he was
deemed to have waived his right to cross-examine witnesses and to
present evidence on his behalf, because of his failure to appear in
From the foregoing, it would appear
subsequent hearings. Lim Tong Lim, on the other hand, filed an
therefore that whatever judgment the
Answer with Counterclaim and Crossclaim and moved for the lifting
plaintiff may be entitled to in this case will of the Writ of Attachment.6 The trial court maintained the Writ, and
have to be satisfied from the amount of
upon motion of private respondent, ordered the sale of the fishing
P900,000.00 as this amount replaced the
nets at a public auction. Philippine Fishing Gear Industries won the
attached nets and floats. Considering,
bidding and deposited with the said court the sales proceeds of
however, that the total judgment obligation P900,000. 7
as computed above would amount to only
P840,216.92, it would be inequitable,
On November 18, 1992, the trial court rendered its Decision, ruling
unfair and unjust to award the excess to
that Philippine Fishing Gear Industries was entitled to the Writ of
the defendants who are not entitled to
Attachment and that Chua, Yao and Lim, as general partners, were
damages and who did not put up a single
jointly liable to pay respondent. 8
centavo to raise the amount of
P900,000.00 aside from the fact that they
The trial court ruled that a partnership among Lim, Chua and Yao
are not the owners of the nets and floats.
existed based (1) on the testimonies of the witnesses presented and
For this reason, the defendants are hereby (2) on a Compromise Agreement executed by the three 9 in Civil Case
relieved from any and all liabilities arising No. 1492-MN which Chua and Yao had brought against Lim in the
from the monetary judgment obligation
RTC of Malabon, Branch 72, for (a) a declaration of nullity of
enumerated above and for plaintiff to
commercial documents; (b) a reformation of contracts; (c) a
retain possession and ownership of the
declaration of ownership of fishing boats; (d) an injunction and (e)
nets and floats and for the reimbursement damages. 10 The Compromise Agreement provided:
of the P900,000.00 deposited by it with the
Clerk of Court.
a) That the parties plaintiffs &
SO ORDERED. 3
The Facts

Lim Tong Lim agree to have the

four (4) vessels sold in the
amount of P5,750,000.00
including the fishing net. This
P5,750,000.00 shall be applied as
full payment for P3,250,000.00 in

29

Corporation Code 3
favor of JL Holdings Corporation
and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the
fishing net will be sold at a higher
price than P5,750,000.00
whatever will be the excess will
be divided into 3: 1/3 Lim Tong
Lim; 1/3 Antonio Chua; 1/3 Peter
Yao;

AGREEMENT THAT CHUA, YAO AND

PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP
AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO
REPRESENTED THAT HE WAS ACTING FOR
OCEAN QUEST FISHING CORPORATION
WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF
APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.

c) If the proceeds of the sale the

vessels will be less than
P5,750,000.00 whatever the
III THE TRIAL COURT IMPROPERLY
deficiency shall be shouldered
ORDERED THE SEIZURE AND ATTACHMENT
and paid to JL Holding
OF PETITIONER LIM'S GOODS.
Corporation by 1/3 Lim Tong
Lim; 1/3 Antonio Chua; 1/3 Peter In determining whether petitioner may be held liable for the fishing
Yao. 11
nets and floats from respondent, the Court must resolve this key
issue: whether by their acts, Lim, Chua and Yao could be deemed to
The trial court noted that the Compromise Agreement was silent as to have entered into a partnership.
the nature of their obligations, but that joint liability could be
presumed from the equal distribution of the profit and loss. 21
This Court's Ruling
Lim appealed to the Court of Appeals (CA) which, as already stated,
affirmed the RTC.

The Petition is devoid of merit.

First and Second Issues:

Ruling of the Court of Appeals

Existence of a Partnership
In affirming the trial court, the CA held that petitioner was a partner
of Chua and Yao in a fishing business and may thus be held liable as a
and Petitioner's Liability
such for the fishing nets and floats purchased by and for the use of the
partnership. The appellate court ruled:
In arguing that he should not be held liable for the equipment
purchased from respondent, petitioner controverts the CA finding that
The evidence establishes that all the defendants
a partnership existed between him, Peter Yao and Antonio Chua. He
including herein appellant Lim Tong Lim undertook asserts that the CA based its finding on the Compromise Agreement
a partnership for a specific undertaking, that is for
alone. Furthermore, he disclaims any direct participation in the
commercial fishing . . . . Oviously, the ultimate
purchase of the nets, alleging that the negotiations were conducted by
undertaking of the defendants was to divide the
Chua and Yao only, and that he has not even met the representatives
profits among themselves which is what a
of the respondent company. Petitioner further argues that he was a
partnership essentially is . . . . By a contract of
lessor, not a partner, of Chua and Yao, for the "Contract of Lease "
partnership, two or more persons bind themselves
dated February 1, 1990, showed that he had merely leased to the two
to contribute money, property or industry to a
the main asset of the purported partnership the fishing boat F/B
common fund with the intention of dividing the
Lourdes. The lease was for six months, with a monthly rental of
profits among themselves (Article 1767, New Civil P37,500 plus 25 percent of the gross catch of the boat.
Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the
assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN
HOLDING, BASED ON A COMPROMISE

We are not persuaded by the arguments of petitioner. The facts as

found by the two lower courts clearly showed that there existed a
partnership among Chua, Yao and him, pursuant to Article 1767 of
the Civil Code which provides:
Art. 1767 By the contract of partnership, two or
more persons bind themselves to contribute money,
property, or industry to a common fund, with the
intention of dividing the profits among themselves.

30

Corporation Code 3
Specifically, both lower courts ruled that a partnership among the
three existed based on the following factual findings: 15

started by buying boats worth P3.35 million, financed by a loan

secured from Jesus Lim who was petitioner's brother. In their
Compromise Agreement, they subsequently revealed their intention to
pay the loan with the proceeds of the sale of the boats, and to divide
(1) That Petitioner Lim Tong Lim requested Peter
Yao who was engaged in commercial fishing to join equally among them the excess or loss. These boats, the purchase and
him, while Antonio Chua was already Yao's partner; the repair of which were financed with borrowed money, fell under
the term "common fund" under Article 1767. The contribution to such
fund need not be cash or fixed assets; it could be an intangible like
(2) That after convening for a few times, Lim,
credit or industry. That the parties agreed that any loss or profit from
Chua, and Yao verbally agreed to acquire two
the sale and operation of the boats would be divided equally among
fishing boats, the FB Lourdes and the FB
them also shows that they had indeed formed a partnership.
Nelson for the sum of P3.35 million;
Moreover, it is clear that the partnership extended not only to the
(3) That they borrowed P3.25 million from Jesus
Lim, brother of Petitioner Lim Tong Lim, to finance purchase of the boat, but also to that of the nets and the floats. The
fishing nets and the floats, both essential to fishing, were obviously
the venture.
acquired in furtherance of their business. It would have been
inconceivable for Lim to involve himself so much in buying the boat
(4) That they bought the boats from CMF Fishing
but not in the acquisition of the aforesaid equipment, without which
Corporation, which executed a Deed of Sale over
these two (2) boats in favor of Petitioner Lim Tong the business could not have proceeded.
Lim only to serve as security for the loan extended
by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the
refurbishing, re-equipping, repairing, dry docking
and other expenses for the boats would be
shouldered by Chua and Yao;
(6) That because of the "unavailability of funds,"
Jesus Lim again extended a loan to the partnership
in the amount of P1 million secured by a check,
because of which, Yao and Chua entrusted the
ownership papers of two other boats, Chua's FB
Lady Anne Mel and Yao's FB Tracy to Lim Tong
Lim.

Given the preceding facts, it is clear that there was, among petitioner,
Chua and Yao, a partnership engaged in the fishing business. They
purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and
operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present
case should involve only questions of law. Thus, the foregoing factual
findings of the RTC and the CA are binding on this Court, absent any
cogent proof that the present action is embraced by one of the
exceptions to the rule. 16 In assailing the factual findings of the two
lower courts, petitioner effectively goes beyond the bounds of a
petition for review under Rule 45.
Compromise Agreement

(7) That in pursuance of the business agreement,

Not the Sole Basis of Partnership
Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of
"Ocean Quest Fishing Corporation," their purported Petitioner argues that the appellate court's sole basis for assuming the
existence of a partnership was the Compromise Agreement. He also
business name.
claims that the settlement was entered into only to end the dispute
among them, but not to adjudicate their preexisting rights and
(8) That subsequently, Civil Case No. 1492-MN
obligations. His arguments are baseless. The Agreement was but an
was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim Tong Lim embodiment of the relationship extant among the parties prior to its
execution.
for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c)
A proper adjudication of claimants' rights mandates that courts must
declaration of ownership of fishing boats; (4)
review and thoroughly appraise all relevant facts. Both lower courts
injunction; and (e) damages.
have done so and have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts have decided on
(9) That the case was amicably settled through a
the basis of one piece of document alone, petitioner fails to appreciate
Compromise Agreement executed between the
that the CA and the RTC delved into the history of the document and
parties-litigants the terms of which are already
explored all the possible consequential combinations in harmony with
enumerated above.
law, logic and fairness. Verily, the two lower courts' factual findings
mentioned above nullified petitioner's argument that the existence of
From the factual findings of both lower courts, it is clear that Chua,
Yao and Lim had decided to engage in a fishing business, which they a partnership was based only on the Compromise Agreement.

31

Corporation Code 3
Petitioner Was a Partner,

thereof on the ground that there was in fact no

corporation.

Not a Lessor
Thus, even if the ostensible corporate entity is proven to be legally
We are not convinced by petitioner's argument that he was merely the nonexistent, a party may be estopped from denying its corporate
existence. "The reason behind this doctrine is obvious an
lessor of the boats to Chua and Yao, not a partner in the fishing
unincorporated association has no personality and would be
venture. His argument allegedly finds support in the Contract of
incompetent to act and appropriate for itself the power and attributes
Lease and the registration papers showing that he was the owner of
of a corporation as provided by law; it cannot create agents or confer
the boats, including F/B Lourdes where the nets were found.
authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at
His allegation defies logic. In effect, he would like this Court to
their own risk. And as it is an elementary principle of law that a
believe that he consented to the sale of his own boats to pay a debt
person who acts as an agent without authority or without a principal
of Chua and Yao, with the excess of the proceeds to be divided
is himself regarded as the principal, possessed of all the right and
among the three of them. No lessor would do what petitioner did.
subject to all the liabilities of a principal, a person acting or
Indeed, his consent to the sale proved that there was a preexisting
purporting to act on behalf of a corporation which has no valid
partnership among all three.
existence assumes such privileges and obligations and becomes
Verily, as found by the lower courts, petitioner entered into a business personally liable for contracts entered into or for other acts performed
as such agent. 17
agreement with Chua and Yao, in which debts were undertaken in
order to finance the acquisition and the upgrading of the vessels
The doctrine of corporation by estoppel may apply to the alleged
which would be used in their fishing business. The sale of the boats,
as well as the division among the three of the balance remaining after corporation and to a third party. In the first instance, an
unincorporated association, which represented itself to be a
the payment of their loans, proves beyond cavil that F/B Lourdes,
though registered in his name, was not his own property but an asset corporation, will be estopped from denying its corporate capacity in a
suit against it by a third person who relied in good faith on such
of the partnership. It is not uncommon to register the properties
acquired from a loan in the name of the person the lender trusts, who representation. It cannot allege lack of personality to be sued to evade
in this case is the petitioner himself. After all, he is the brother of the its responsibility for a contract it entered into and by virtue of which
it received advantages and benefits.
creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd for
petitioner to sell his property to pay a debt he did not incur, if the
relationship among the three of them was merely that of lessor-lessee,
instead of partners.
Corporation by Estoppel

On the other hand, a third party who, knowing an association to be

unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence
in a suit brought against the alleged corporation. In such case, all
those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable
for contracts they impliedly assented to or took advantage of.

Petitioner argues that under the doctrine of corporation by estoppel,

liability can be imputed only to Chua and Yao, and not to him. Again,
we disagree.

There is no dispute that the respondent, Philippine Fishing Gear

Industries, is entitled to be paid for the nets it sold. The only question
here is whether petitioner should be held jointly 18 liable with Chua
and Yao. Petitioner contests such liability, insisting that only those
Sec. 21 of the Corporation Code of the Philippines provides:
who dealt in the name of the ostensible corporation should be held
liable. Since his name does not appear on any of the contracts and
Sec. 21. Corporation by estoppel. All persons
who assume to act as a corporation knowing it to be since he never directly transacted with the respondent corporation,
without authority to do so shall be liable as general ergo, he cannot be held liable.
partners for all debts, liabilities and damages
Unquestionably, petitioner benefited from the use of the nets found
incurred or arising as a result thereof: Provided
inside F/B Lourdes, the boat which has earlier been proven to be an
however, That when any such ostensible
corporation is sued on any transaction entered by it asset of the partnership. He in fact questions the attachment of the
nets, because the Writ has effectively stopped his use of the fishing
as a corporation or on any tort committed by it as
vessel.
such, it shall not be allowed to use as a defense its
lack of corporate personality.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance

It is difficult to disagree with the RTC and the CA that Lim, Chua and
Yao decided to form a corporation. Although it was never legally
formed for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation of it.

32

Corporation Code 3
Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid
existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of
the corporation. However, having reaped the benefits of the contract
entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is
covered by the scope of the doctrine of corporation by estoppel. We
reiterate the ruling of the Court in Alonso v. Villamor: 19
A litigation is not a game of technicalities in which
one, more deeply schooled and skilled in the subtle
art of movement and position, entraps and destroys
the other. It is, rather, a contest in which each
contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as
wholly trivial and indecisive all imperfections of
form and technicalities of procedure, asks that
justice be done upon the merits. Lawsuits, unlike
duels, are not to be won by a rapier's thrust.
Technicality, when it deserts its proper office as an
aid to justice and becomes its great hindrance and
chief enemy, deserves scant consideration from
courts. There should be no vested rights in
technicalities.
Third Issue:
Validity of Attachment

I share the views expressed in the ponencia of an esteemed colleague,

Mr. Justice Artemio V. Panganiban, particularly the finding that
Antonio Chua, Peter Yao and petitioner Lim Tong Lim have incurred
the liabilities of general partners. I merely would wish to elucidate a
bit, albeit briefly, the liability of partners in a general partnership.
When a person by his act or deed represents himself as a partner in an
existing partnership or with one or more persons not actual partners,
he is deemed an agent of such persons consenting to such
representation and in the same manner, if he were a partner, with
respect to persons who rely upon the representation. 1 The association
formed by Chua, Yao and Lim, should be, as it has been deemed, a de
facto partnership with all the consequent obligations for the purpose
of enforcing the rights of third persons. The liability of general
partners (in a general partnership as so opposed to a limited
partnership) is laid down in Article 1816 2 which posits that all
partners shall be liable pro rata beyond the partnership assets for all
the contracts which may have been entered into in its name, under its
signature, and by a person authorized to act for the partnership. This
rule is to be construed along with other provisions of the Civil Code
which postulate that the partners can be held solidarily liable with the
partnership specifically in these instances (1) where, by any
wrongful act or omission of any partner acting in the ordinary course
of the business of the partnership or with the authority of his copartners, loss or injury is caused to any person, not being a partner in
the partnership, or any penalty is incurred, the partnership is liable
therefor to the same extent as the partner so acting or omitting to act;
(2) where one partner acting within the scope of his apparent
authority receives money or property of a third person and misapplies
it; and (3) where the partnership in the course of its business receives
money or property of a third person and the money or property so
received is misapplied by any partner while it is in the custody of the
partnership 3 consistently with the rules on the nature of civil
liability in delicts and quasi-delicts.

Finally, petitioner claims that the Writ of Attachment was improperly

issued against the nets. We agree with the Court of Appeals that this
issue is now moot and academic. As previously discussed, F/B
Lourdes was an asset of the partnership and that it was placed in the
Footnotes
name of petitioner, only to assure payment of the debt he and his
partners owed. The nets and the floats were specifically manufactured
and tailor-made according to their own design, and were bought and
used in the fishing venture they agreed upon. Hence, the issuance of
the Writ to assure the payment of the price stipulated in the invoices
is proper. Besides, by specific agreement, ownership of the nets
remained with Respondent Philippine Fishing Gear, until full
payment thereof.

1 Penned by J. Portia AlinoHormachuelos; with the concurrence of JJ.

Buenaventura J. Guerrero, Division
chairman, and Presbitero J. Velasco Jr.,
member.
2 CA Decision, p. 12; rollo, p. 36.

WHEREFORE, the Petition is DENIED and the assailed Decision

AFFIRMED. Costs against petitioner.
SO ORDERED.

3 RTC Decision penned by Judge

Maximiano C. Asuncion. pp. 11-12; rollo,
pp. 48-49.

Melo, Purisima and Gonzaga-Reyes, JJ., concur.

4 CA Decision, pp. 1-2; rollo, pp. 25-26.

Vitug, J., pls. see concurring opinion.

5 Ibid., p. 2; rollo, p. 26.

Separate Opinions

6 RTC Decision, p. 2; Rollo, p. 39.

VITUG, J., concurring opinion;

7 Petition, p. 4; rollo, p. 11.

33

Corporation Code 3
8 Ibid.
9 RTC Decision, pp. 6-7; rollo, pp. 43-44.
10 Respondent's Memorandum, pp. 5,
8; rollo, pp. 107, 109.
11 CA Decision, pp. 9-10; rollo, pp. 33-34.
12 RTC Decision, p. 10; rollo, p. 47.
13 Ibid.
14 This case was deemed submitted for
resolution on August 10, 1999, when this
Court received petitioner's Memorandum
signed by Atty. Roberto A. Abad.
Respondent's Memorandum signed by
Atty. Benjamin S. Benito was filed earlier
on July 27, 1999.
15 Nos. 1-7 are from CA Decision p. 9
(rollo, p. 33); No. 8 is from RTC Decision,
p. 5 (rollo, p. 42); and No. 9 is from CA
Decision, pp. 9-10 (rollo, pp. 33-34).
16 See Fuentes v. Court of Appeals, 268
SCRA 703, February 26, 1997.
17 Salvatierra v. Garlitos, 103 SCRA 757,
May 23, 1958, per Felix J.; citing Fay v.
Noble, 7 Cushing [Mass.] 188.
18 The liability is joint if it is not
specifically stated that it is solidary,"
Maramba v. Lozano, 126 Phil 833, June
29, 1967, per Makalintal, J. See
also Article 1207 of the Civil Code, which
provides: "The concurrence of two or
more creditors or of two or more debtors
in one [and] the same obligation does not
imply that each one of the former has a
right to demand, or that each one of the
latter is bound to render, entire compliance
with the prestation. There is a solidary
liability only when the obligation
expressly so states, or when the law or the
nature of the obligation requires solidarity.
19 16 Phil. 315, July 26, 1910, per
Moreland, J.
VITUG, J., concurring opinion;

represents himself, or consents to another

representing him to anyone, as a partner in
an existing partnership or with one or
more persons not actual partners, he is
liable to any such persons to whom such
representation has been made, who has, on
the faith of such representation, given
credit to the actual or apparent partnership,
and if he has made such representation or
consented to its being made in a public
manner he is liable to such person,
whether the representation has or has not
been made or communicated to such
person so giving credit by or with the
knowledge of the apparent partner making
the representation or consenting to its
being made:
(1) When a partnership liability results, he
is liable as though he were an actual
member of the partnership;
(2) When no partnership liability results,
he is liable pro rata with the other persons,
if any, so consenting to the contract or
representation as to incur liability,
otherwise separately.
When a person has been thus represented
to be a partner in an existing partnership,
or with one or more persons not actual
partners, he is an agent of the persons
consenting to such representation to bind
them to the same extent and in the same
manner as though he were a partner in
fact, with respect to persons who rely upon
the representation. When all the members
of the existing partnership consent to the
representation, a partnership act or
obligation results; but in all other cases it
is the joint act or obligation of the person
acting and the persons consenting to the
representation.
2 All partners, including industrial ones,
shall be liable pro rata with all their
property and after all the partnership assets
have been exhausted, for the contracts
which may be entered into in the name and
for the account of the partnership, under its
signature and by a person authorized to act
for the partnership. However, any partner
may enter into a separate obligation to
perform a partnership contract.

1 Art. 1825. When a person, by words

spoken or written or by conduct,

34

Corporation Code 3
3 Art. 1824 in relation to Article 1822 and
Article 1823, New Civil Code.

35

Corporation Code 3
G.R. No. 89561 September 13, 1990
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE
CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA,
MARIETTA C. ABAEZ, LEOVINA C. JALBUENA and
SANTIAGO M. RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE
MACHINERY PARTS MANUFACTURING CO.,
INC., respondents.
Edmundo T. Zepeda for petitioners.
Martin M. De Guzman for respondent BORMAHECO, Inc.
Renato J. Robles for P.M. Parts Manufacturing Co., Inc.

REGALADO, J.:
This is a petition to review the decision of respondent Court of
Appeals, dated August 3, 1989, in CA-GR CV No. 15412,
entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine
Machinery Parts Manufacturing Co., Inc., et al.,"1 the dispositive
portion whereof provides:
WHEREFORE, viewed in the light of the entire
record, the judgment appealed from must be, as it is
hereby REVERSED. In lieu thereof, a judgment is
hereby rendered1) Dismissing the complaint, with cost against
plaintiffs;
2) Ordering plaintiffs-appellees to vacate the
subject properties; and
3) Ordering plaintiffs-appellees to pay upon
defendants' counterclaims:
a) To defendant-appellant PM
Parts: (i) damages consisting of
the value of the fruits in the
subject parcels of land of which
they were deprived in the sum of
P26,000.00 and (ii) attorney's fees
of P15,000.00
b) To defendant-appellant
Bormaheco: (i) expenses of
litigation in the amount of
P5,000.00 and (ii) attorney's fees
of P15,000.00.
SO ORDERED.

The original complaint for annulment of title filed in the court a

quo by herein petitioners included as party defendants the Philippine
Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance
Corporation of the Philippines (ICP), Bormaheco, Inc., (Bormaheco)
and Santiago M. Rivera (Rivera). A Second Amended Complaint was
filed, this time impleading Santiago M. Rivera as party plaintiff.
During the pre-trial conference, the parties entered into the following
stipulation of facts:
As between all parties: Plaintiff
Buenaflor M. Castillo is the
judicial administratrix of the
estate of Felipe Castillo in
Special Proceeding No. 4053,
pending before Branch IX, CFI of
Quezon (per Exhibit A) which
intestate proceedings was
instituted by Mauricia Meer Vda.
de Castillo, the previous
administratrix of the said
proceedings prior to 1970 (per
exhibits A-1 and A-2) which case
was filed in Court way back in
1964;
b) The four (4) parcels of land
described in paragraph 3 of the
Complaint were originally
covered by TCT No. T-42104 and
Tax Dec. No. 14134 with
assessed value of P3,100.00; TCT
No. T 32227 and Tax Dec. No.
14132, with assessed value of
P5,130,00; TCT No. T-31762 and
Tax Dec. No. 14135, with
assessed value of P6,150.00; and
TCT No. T-42103 with Tax Dec.
No. 14133, with assessed value of
P3,580.00 (per Exhibits A-2 and
B, B-1 to B-3 C, C-1 -to C3
c) That the above-enumerated
four (4) parcels of land were the
subject of the Deed of ExtraJudicial Partition executed by the
heirs of Felipe Castillo (per
Exhibit D) and by virtue thereof
the titles thereto has (sic) been
cancelled and in lieu thereof, new
titles in the name of Mauricia
Meer Vda. de Castillo and of her
children, namely: Buenaflor,
Bertilla, Victoria, Marietta and
Leovina, all surnamed Castillo
has (sic) been issued, namely:

36

Corporation Code 3
TCT No. T-12113 (Exhibit E );
TCT No. T-13113 (Exhibit F);
TCT No. T-13116 (Exhibit G )
and TCT No. T13117 (Exhibit H )
d) That mentioned parcels of land
were submitted as guaranty in the
Agreement of Counter-Guaranty
with Chattel-Real Estate
Mortgage executed on 24 October
1970 between Insurance
Corporation of the Philippines
and Slobec Realty Corporation
represented by Santiago Rivera
(Exhibit 1);
e) That based on the Certificate of
Sale issued by the Sheriff of the
Province of Quezon in favor of
Insurance Corporation of the
Philippines it was able to transfer
to itself the titles over the lots in
question, namely: TCT No. T23705 (Exhibit M), TCT No. T
23706 (Exhibit N ), TCT No. T23707 (Exhibit 0) and TCT No. T
23708 (Exhibit P);
f) That on 10 April 1975, the
Insurance Corporation of the
Philippines sold to PM Parts the
immovables in question (per
Exhibit 6 for PM Parts) and by
reason thereof, succeeded in
transferring unto itself the titles
over the lots in dispute, namely:
per TCT No. T-24846 (Exhibit
Q ), per TCT No. T-24847
(Exhibit R ), TCT No. T-24848
(Exhibit), TCT No. T-24849
(Exhibit T );
g) On 26 August l976, Mauricia
Meer Vda. de Castillo' genther
letter to Modesto N. Cervantes
stating that she and her children
refused to comply with his
demands (Exhibit V-2);
h) That from at least the months
of October, November and
December 1970 and January
1971, Modesto N. Cervantes was
the Vice-President of Bormaheco,
Inc. later President thereof, and
also he is one of the Board of

Directors of PM Parts; on the

other hand, Atty. Martin M. De
Guzman was the legal counsel of
Bormaheco, Inc., later Executive
Vice-President thereof, and who
also is the legal counsel of
Insurance Corporation of the
Philippines and PM Parts; that
Modesto N. Cervantes served
later on as President of PM Parts,
and that Atty. de Guzman was
retained by Insurance
Corporation of the Philippines
specifically for foreclosure
purposes only;
i) Defendant Bormaheco, Inc. on
November 25, 1970 sold to
Slobec Realty and Development,
Inc., represented by Santiago
Rivera, President, one (1) unit
Caterpillar Tractor D-7 with
Serial No. 281114 evidenced by a
contract marked Exhibit J and
Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No.
14010 issued by co-defendant
ICP was likewise secured by an
Agreement with CounterGuaranty with Real Estate
Mortgage executed by Slobec
Realty & Development, Inc.,
Mauricia Castillo Meer,
Buenaflor Castillo, Bertilla
Castillo, Victoria Castillo,
Marietta Castillo and Leovina
Castillo, as mortgagors in favor
of ICP which document was
executed and ratified before
notary public Alberto R. Navoa of
the City of Manila on October
24,1970;
k) That the property mortgaged
consisted of four (4) parcels of
land situated in Lucena City and
covered by TCT Nos. T-13114,
T13115,
T-13116 and T-13117 of the
Register of Deeds of Lucena
City;
l) That the tractor sold by
defendant Bormaheco, Inc. to
Slobec Realty & Development,

37

Corporation Code 3
Inc. was delivered to Bormaheco,
Inc. on or about October 2,1973,
by Mr. Menandro Umali for
purposes of repair;
m) That in August 1976, PM
Parts notified Mrs. Mauricia
Meer about its ownership and the
assignment of Mr. Petronilo
Roque as caretaker of the subject
property;
n) That plaintiff and other heirs
are harvest fruits of the property
(daranghita) which is worth no
less than Pl,000.00 per harvest.
As between plaintiffs and
defendant Bormaheco, Inc
o) That on 25 November 1970, at
Makati, Rizal, Same Rivera, in
representation of the Slobec
Realty & Development
Corporation executed in favor of
Bormaheco, Inc., represented by
its Vice-President Modesto N.
Cervantes a Chattel Mortgage
concerning one unit model CAT
D7 Caterpillar Crawler Tractor as
described therein as security for
the payment in favor of the
mortgagee of the amount of
P180,000.00 (per Exhibit K) that
Id document was superseded by
another chattel mortgage dated
January 23, 1971 (Exhibit 15);
p) On 18 December 1970, at
Makati, Rizal, the Bormaheco,
Inc., represented by its VicePresident Modesto Cervantes and
Slobec Realty Corporation
represented by Santiago Rivera
executed the sales agreement
concerning the sale of one (1)
unit Model CAT D7 Caterpillar
Crawler Tractor as described
therein for the amount of
P230,000.00 (per Exhibit J)
which document was superseded
by the Sales Agreement dated
January 23,1971 (Exhibit 16);
q) Although it appears on the
document entitled Chattel

Mortgage (per Exhibit K) that it

was executed on 25 November
1970, and in the document
entitled Sales Agreement (per
Exhibit J) that it was executed on
18 December 1970, it appears in
the notarial register of the notary
public who notarized them that
those two documents were
executed on 11 December 1970.
The certified xerox copy of the
notarial register of Notary Public
Guillermo Aragones issued by the
Bureau of Records Management
is hereto submitted as Exhibit BB
That said chattel mortgage was
superseded by another document
dated January 23, 1971;
r) That on 23 January 1971,
Slobec Realty Development
Corporation, represented by
Santiago Rivera, received from
Bormaheco, Inc. one (1) tractor
Caterpillar Model D-7 pursuant to
Invoice No. 33234 (Exhibits 9
and 9-A, Bormaheco, Inc.) and
delivery receipt No. 10368 (per
Exhibits 10 and 10-A for
Bormaheco, Inc
s) That on 28 September 1973,
Atty. Martin M. de Guzman, as
counsel of Insurance Corporation
of the Philippines purchased at
public auction for said
corporation the four (4) parcels of
land subject of tills case (per
Exhibit L), and which document
was presented to the Register of
Deeds on 1 October 1973;
t) Although it appears that the
realties in issue has (sic) been
sold by Insurance Corporation of
the Philippines in favor of PM
Parts on 1 0 April 1975, Modesto
N. Cervantes, formerly VicePresident and now President of
Bormaheco, Inc., sent his letter
dated 9 August 1976 to Mauricia
Meer Vda. de Castillo (Exhibit
V), demanding that she and her
children should vacate the
premises;

38

Corporation Code 3
u) That the Caterpillar Crawler
Tractor Model CAT D-7 which
was received by Slobec Realty
Development Corporation was
actually reconditioned and
repainted. " 2
We cull the following antecedents from the decision of respondent
Court of Appeals:
Plaintiff Santiago Rivera is the nephew of plaintiff
Mauricia Meer Vda. de Castillo. The Castillo
family are the owners of a parcel of land located in
Lucena City which was given as security for a loan
from the Development Bank of the Philippines. For
their failure to pay the amortization, foreclosure of
the said property was about to be initiated. This
problem was made known to Santiago Rivera, who
proposed to them the conversion into subdivision of
the four (4) parcels of land adjacent to the
mortgaged property to raise the necessary fund. The
Idea was accepted by the Castillo family and to
carry out the project, a Memorandum of Agreement
(Exh. U p. 127, Record) was executed by and
between Slobec Realty and Development, Inc.,
represented by its President Santiago Rivera and the
Castillo family. In this agreement, Santiago Rivera
obliged himself to pay the Castillo family the sum
of P70,000.00 immediately after the execution of
the agreement and to pay the additional amount of
P400,000.00 after the property has been converted
into a subdivision. Rivera, armed with the
agreement, Exhibit U , approached Mr. Modesto
Cervantes, President of defendant Bormaheco, and
proposed to purchase from Bormaheco two (2)
tractors Model D-7 and D-8 Subsequently, a Sales
Agreement was executed on December 28,1970
(Exh. J, p. 22, Record).
On January 23, 1971, Bormaheco, Inc. and Slobec
Realty and Development, Inc., represented by its
President, Santiago Rivera, executed a Sales
Agreement over one unit of Caterpillar Tractor D-7
with Serial No. 281114, as evidenced by the
contract marked Exhibit '16'. As shown by the
contract, the price was P230,000.00 of which
P50,000.00 was to constitute a down payment, and
the balance of P180,000.00 payable in eighteen
monthly installments. On the same date, Slobec,
through Rivera, executed in favor of Bormaheco a
Chattel Mortgage (Exh. K, p. 29, Record) over the
said equipment as security for the payment of the
aforesaid balance of P180,000.00. As further
security of the aforementioned unpaid balance,
Slobec obtained from Insurance Corporation of the
Phil. a Surety Bond, with ICP (Insurance

Corporation of the Phil.) as surety and Slobec as

principal, in favor of Bormaheco, as borne out by
Exhibit '8' (p. 111, Record). The aforesaid surety
bond was in turn secured by an Agreement of
Counter-Guaranty with Real Estate Mortgage
(Exhibit I, p. 24, Record) executed by Rivera as
president of Slobec and Mauricia Meer Vda. de
Castillo, Buenaflor Castillo Umali, Bertilla
Castillo-Rada, Victoria Castillo, Marietta Castillo
and Leovina Castillo Jalbuena, as mortgagors and
Insurance Corporation of the Philippines (ICP) as
mortgagee. In this agreement, ICP guaranteed the
obligation of Slobec with Bormaheco in the amount
of P180,000.00. In giving the bond, ICP required
that the Castillos mortgage to them the properties in
question, namely, four parcels of land covered by
TCTs in the name of the aforementioned
mortgagors, namely TCT Nos. 13114, 13115, 13116
and 13117 all of the Register of Deeds for Lucena
City.
On the occasion of the execution on January 23,
1971, of the Sales Agreement Exhibit '16', Slobec,
represented by Rivera received from Bormaheco
the subject matter of the said Sales Agreement,
namely, the aforementioned tractor Caterpillar
Model D-7 as evidenced by Invoice No. 33234
(Exhs. 9 and 9-A, p. 112, Record) and Delivery
Receipt No. 10368 (Exhs. 10 and 10-A, p. 113).
This tractor was known by Rivera to be a
reconditioned and repainted one [Stipulation of
Facts, Pre-trial Order, par. (u)].
Meanwhile, for violation of the terms and
conditions of the Counter-Guaranty Agreement
(Exh. 1), the properties of the Castillos were
foreclosed by ICP As the highest bidder with a bid
of P285,212.00, a Certificate of Sale was issued by
the Provincial Sheriff of Lucena City and Transfer
Certificates of Title over the subject parcels of land
were issued by the Register of Deeds of Lucena
City in favor of ICP namely, TCT Nos. T-23705, T
23706, T-23707 and T-23708 (Exhs. M to P, pp. 3845). The mortgagors had one (1) year from the date
of the registration of the certificate of sale, that is,
until October 1, 1974, to redeem the property, but
they failed to do so. Consequently, ICP
consolidated its ownership over the subject parcels
of land through the requisite affidavit of
consolidation of ownership dated October 29, 1974,
as shown in Exh. '22'(p. 138, Rec.). Pursuant
thereto, a Deed of Sale of Real Estate covering the
subject properties was issued in favor of ICP (Exh.
23, p. 139, Rec.).

39

Corporation Code 3
On April 10, 1975, Insurance Corporation of the
Phil. ICP sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts) the four (4) parcels
of land and by virtue of said conveyance, PM Parts
transferred unto itself the titles over the lots in
dispute so that said parcels of land are now covered
by TCT Nos. T-24846, T-24847, T-24848 and T24849 (Exhs. Q-T, pp. 46-49, Rec.).
Thereafter, PM Parts, through its President, Mr.
Modesto Cervantes, sent a letter dated August
9,1976 addressed to plaintiff Mrs. Mauricia Meer
Castillo requesting her and her children to vacate
the subject property, who (Mrs. Castillo) in turn
sent her reply expressing her refusal to comply with
his demands.
On September 29, 1976, the heirs of the late Felipe
Castillo, particularly plaintiff Buenaflor M. Castillo
Umali as the appointed administratrix of the
properties in question filed an action for annulment
of title before the then Court of First Instance of
Quezon and docketed thereat as Civil Case No.
8085. Thereafter, they filed an Amended Complaint
on January 10, 1980 (p. 444, Record). On July 20,
1983, plaintiffs filed their Second Amended
Complaint, impleading Santiago M. Rivera as a
party plaintiff (p. 706, Record). They contended
that all the aforementioned transactions starting
with the Agreement of Counter-Guaranty with Real
Estate Mortgage (Exh. I), Certificate of Sale (Exh.
L) and the Deeds of Authority to Sell, Sale and the
Affidavit of Consolidation of Ownership (Annexes
F, G, H, I) as well as the Deed of Sale (Annexes J,
K, L and M) are void for being entered into in fraud
and without the consent and approval of the Court
of First Instance of Quezon, (Branch IX) before
whom the administration proceedings has been
pending. Plaintiffs pray that the four (4) parcels of
land subject hereof be declared as owned by the
estate of the late Felipe Castillo and that all
Transfer Certificates of Title Nos.
13114,13115,13116,13117, 23705, 23706, 23707,
23708, 24846, 24847, 24848 and 24849 as well as
those appearing as encumbrances at the back of the
certificates of title mentioned be declared as a
nullity and defendants to pay damages and
attorney's fees (pp. 71071 1, Record).
In their amended answer, the defendants
controverted the complaint and alleged, by way of
affirmative and special defenses that the complaint
did not state facts sufficient to state a cause of
action against defendants; that plaintiffs are not
entitled to the reliefs demanded; that plaintiffs are
estopped or precluded from asserting the matters set

forth in the Complaint; that plaintiffs are guilty of

laches in not asserting their alleged right in due
time; that defendant PM Parts is an innocent
purchaser for value and relied on the face of the
title before it bought the subject property (p. 744,
Record). 3
After trial, the court a quo rendered judgment, with
the following decretal portion:
WHEREFORE, judgment is hereby rendered in
favor of the plaintiffs and against the defendants,
declaring the following documents:
Agreement of Counter-Guaranty
with Chattel-Real Estate
Mortgage dated October 24,1970
(Exhibit 1);
Sales Agreement dated December
28, 1970 (Exhibit J)
Chattel Mortgage dated
November 25, 1970 (Exhibit K)
Sales Agreement dated January
23, 1971 (Exhibit 16);
Chattel Mortgage dated January
23, 1971 (Exhibit 17);
Certificate of Sale dated
September 28, 1973 executed by
the Provincial Sheriff of Quezon
in favor of Insurance Corporation
of the Philippines (Exhibit L);
null and void for being fictitious, spurious and
without consideration. Consequently, Transfer
Certificates of Title Nos. T 23705, T-23706,
T23707 and T-23708 (Exhibits M, N, O and P)
issued in the name of Insurance Corporation of the
Philippines, are likewise null and void.
The sale by Insurance Corporation of thePhilippines in favor of defendant Philippine
Machinery Parts Manufacturing Co., Inc., over Id
four (4) parcels of land and Transfer Certificates of
Title Nos. T 24846, T-24847, T-24848 and T-24849
subsequently issued by virtue of said sale in the
name of Philippine Machinery Parts Manufacturing
Co., Inc., are similarly declared null and void, and
the Register of Deeds of Lucena City is hereby
directed to issue, in lieu thereof, transfer certificates
of title in the names of the plaintiffs, except
Santiago Rivera.

40

Corporation Code 3
Orders the defendants jointly and severally to pay
the plaintiffs moral damages in the sum of
P10,000.00, exemplary damages in the amount of
P5,000.00, and actual litigation expenses in the sum
of P6,500.00.
Defendants are likewise ordered to pay the
plaintiffs, jointly and severally, the sum of
P10,000.00 for and as attomey's fees. With costs
against the defendants.
SO ORDERED. 4
As earlier stated, respondent court reversed the aforequoted decision
of the trial court and rendered the judgment subject of this petitionPetitioners contend that respondent Court of
Appeals erred:
1. In holding and finding that the actions entered
into between petitioner Rivera with Cervantes are
all fair and regular and therefore binding between
the parties thereto;
2. In reversing the decision of the lower court, not
only based on erroneous conclusions of facts,
erroneous presumptions not supported by the
evidence on record but also, holding valid and
binding the supposed payment by ICP of its
obligation to Bormaheco, despite the fact that the
surety bond issued it had already expired when it
opted to foreclose extrajudically the mortgage
executed by the petitioners;
3. In aside the finding of the lower court that there
was necessity to pierce the veil of corporate
existence; and
4. In reversing the decision of the lower court of
affirming the same 5
I. Petitioners aver that the transactions entered into between Santiago
M. Rivera, as President of Slobec Realty and Development Company
(Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such
as the Sales Agreement, 6 Chattel Mortgage 7 and the Agreement of
Counter-Guaranty with Chattel/Real Estate Mortgage, 8 are all
fraudulent and simulated and should, therefore, be declared nun and
void. Such allegation is premised primarily on the fact that contrary
to the stipulations agreed upon in the Sales Agreement (Exhibit J),
Rivera never made any advance payment, in the alleged amount of
P50,000.00, to Bormaheco; that the tractor was received by Rivera
only on January 23, 1971 and not in 1970 as stated in the Chattel
Mortgage (Exhibit K); and that when the Agreement of CounterGuaranty with Chattel/Real Estate Mortgage was executed on
October 24, 1970, to secure the obligation of ICP under its surety
bond, the Sales Agreement and Chattel Mortgage had not as yet been

executed, aside from the fact that it was Bormaheco, and not Rivera,
which paid the premium for the surety bond issued by ICP
At the outset, it will be noted that petitioners submission under the
first assigned error hinges purely on questions of fact. Respondent
Court of Appeals made several findings to the effect that the
questioned documents are valid and binding upon the parties, that
there was no fraud employed by private respondents in the execution
thereof, and that, contrary to petitioners' allegation, the evidence on
record reveals that petitioners had every intention to be bound by
their undertakings in the various transactions had with private
respondents. It is a general rule in this jurisdiction that findings of
fact of said appellate court are final and conclusive and, thus, binding
on this Court in the absence of sufficient and convincing proof, inter
alia, that the former acted with grave abuse of discretion. Under the
circumstances, we find no compelling reason to deviate from this
long-standing jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration
agreed upon in the Sales Agreement, which clearly constitutes a
breach of the contract, cannot be availed of by the guilty party to
justify and support an action for the declaration of nullity of the
contract. Equity and fair play dictates that one who commits a breach
of his contract may not seek refuge under the protective mantle of the
law.
The evidence of record, on an overall calibration, does not convince
us of the validity of petitioners' contention that the contracts entered
into by the parties are either absolutely simulated or downright
fraudulent.
There is absolute simulation, which renders the contract null and
void, when the parties do not intend to be bound at all by the
same. 9 The basic characteristic of this type of simulation of contract
is the fact that the apparent contract is not really desired or intended
to either produce legal effects or in any way alter the juridical
situation of the parties. The subsequent act of Rivera in receiving and
making use of the tractor subject matter of the Sales Agreement and
Chattel Mortgage, and the simultaneous issuance of a surety bond in
favor of Bormaheco, concomitant with the execution of the
Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage,
conduce to the conclusion that petitioners had every intention to be
bound by these contracts. The occurrence of these series of
transactions between petitioners and private respondents is a strong
indication that the parties actually intended, or at least expected, to
exact fulfillment of their respective obligations from one another.
Neither will an allegation of fraud prosper in this case where
petitioners failed to show that they were induced to enter into a
contract through the insidious words and machinations of private
respondents without which the former would not have executed such
contract. To set aside a document solemnly executed and voluntarily
delivered, the proof of fraud must be clear and convincing. 10 We are
not persuaded that such quantum of proof exists in the case at bar.

41

Corporation Code 3
The fact that it was Bormaheco which paid the premium for the
surety bond issued by ICP does not per se affect the validity of the
bond. Petitioners themselves admit in their present petition that
Rivera executed a Deed of Sale with Right of Repurchase of his car in
favor of Bormaheco and agreed that a part of the proceeds thereof
shall be used to pay the premium for the bond. 11 In effect,
Bormaheco accepted the payment of the premium as an agent of ICP
The execution of the deed of sale with a right of repurchase in favor
of Bormaheco under such circumstances sufficiently establishes the
fact that Rivera recognized Bormaheco as an agent of ICP Such
payment to the agent of ICP is, therefore, binding on Rivera. He is
now estopped from questioning the validity of the suretyship contract.

and operated, and thereafter transacted with petitioners, with the sole
intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more
corporations are interrelated is not a justification for disregarding
their separate personalities, 16 absent sufficient showing that the
corporate entity was purposely used as a shield to defraud creditors
and third persons of their rights.
III. The main issue for resolution is whether there was a valid
foreclosure of the mortgaged properties by ICP Petitioners argue that
the foreclosure proceedings should be declared null and void for two
reasons, viz.: (1) no written notice was furnished by Bormaheco to
ICP anent the failure of Slobec in paying its obligation with the
former, plus the fact that no receipt was presented to show the amount
allegedly paid by ICP to Bormaheco; and (b) at the time of the
foreclosure of the mortgage, the liability of ICP under the surety bond
had already expired.

II. Under the doctrine of piercing the veil of corporate entity, when
valid grounds therefore exist, the legal fiction that a corporation is an
entity with a juridical personality separate and distinct from its
members or stockholders may be disregarded. In such cases, the
corporation will be considered as a mere association of persons. The
members or stockholders of the corporation will be considered as the
corporation, that is, liability will attach directly to the officers and
Respondent court, in finding for the validity of the foreclosure sale,
stockholders. 12 The doctrine applies when the corporate fiction is
declared:
used to defeat public convenience, justify wrong, protect fraud, or
defend crime, 13 or when it is made as a shield to confuse the
Now to the question of whether or not the
legitimate issues 14 or where a corporation is the mere alter ego or
foreclosure by the ICP of the real estate mortgage
business conduit of a person, or where the corporation is so organized
was in the exercise of a legal right, We agree with
and controlled and its affairs are so conducted as to make it merely an
the appellants that the foreclosure proceedings
instrumentality, agency, conduit or adjunct of another corporation. 15
instituted by the ICP was in the exercise of a legal
In the case at bar, petitioners seek to pierce the V621 Of corporate
entity of Bormaheco, ICP and PM Parts, alleging that these
corporations employed fraud in causing the foreclosure and
subsequent sale of the real properties belonging to petitioners While
we do not discount the possibility of the existence of fraud in the
foreclosure proceeding, neither are we inclined to apply the doctrine
invoked by petitioners in granting the relief sought. It is our
considered opinion that piercing the veil of corporate entity is not the
proper remedy in order that the foreclosure proceeding may be
declared a nullity under the circumstances obtaining in the legal case
at bar.
In the first place, the legal corporate entity is disregarded only if it is
sought to hold the officers and stockholders directly liable for a
corporate debt or obligation. In the instant case, petitioners do not
seek to impose a claim against the individual members of the three
corporations involved; on the contrary, it is these corporations which
desire to enforce an alleged right against petitioners. Assuming that
petitioners were indeed defrauded by private respondents in the
foreclosure of the mortgaged properties, this fact alone is not, under
the circumstances, sufficient to justify the piercing of the corporate
fiction, since petitioners do not intend to hold the officers and/or
members of respondent corporations personally liable therefor.
Petitioners are merely seeking the declaration of the nullity of the
foreclosure sale, which relief may be obtained without having to
disregard the aforesaid corporate fiction attaching to respondent
corporations. Secondly, petitioners failed to establish by clear and
convincing evidence that private respondents were purposely formed

right. First, ICP has in its favor the legal

presumption that it had indemnified Bormaheco by
reason of Slobec's default in the payment of its
obligation under the Sales Agreement, especially
because Bormaheco consented to ICPs foreclosure
of the mortgage. This presumption is in consonance
with pars. R and Q Section 5, Rule 5, * New Rules
of Court which provides that it is disputably
presumed that private transactions have been fair
and regular. likewise, it is disputably presumed that
the ordinary course of business has been followed:
Second, ICP had the right to proceed at once to the
foreclosure of the mortgage as mandated by the
provisions of Art. 2071 Civil Code for these further
reasons: Slobec, the principal debtor, was
admittedly insolvent; Slobec's obligation becomes
demandable by reason of the expiration of the
period of payment; and its authorization to
foreclose the mortgage upon Slobec's default,
which resulted in the accrual of ICPS liability to
Bormaheco. Third, the Agreement of CounterGuaranty with Real Estate Mortgage (Exh. 1)
expressly grants to ICP the right to foreclose the
real estate mortgage in the event of 'non-payment or
non-liquidation of the entire indebtedness or
fraction thereof upon maturity as stipulated in the
contract'. This is a valid and binding stipulation in
the absence of showing that it is contrary to law,

42

Corporation Code 3
morals, good customs, public order or public policy. provision in the suretyship contract exempting the surety for liability
(Art. 1306, New Civil Code). 17
therefor, or where the surety already has knowledge or is chargeable
with knowledge of the default. 24
1. Petitioners asseverate that there was no notice of default issued by
Bormaheco to ICP which would have entitled Bormaheco to demand In the case at bar, the suretyship contract expressly provides that ICP
payment from ICP under the suretyship contract.
shag not be liable for any claim not filed in writing within thirty (30)
days from the expiration of the bond. In its decision dated May 25
1987, the court a quocategorically stated that '(n)o evidence was
Surety Bond No. B-1401 0 which was issued by ICP in favor of
presented to show that Bormaheco demanded payment from ICP nor
Bormaheco, wherein ICP and Slobec undertook to guarantee the
was there any action taken by Bormaheco on the bond posted by ICP
payment of the balance of P180,000.00 payable in eighteen (18)
to guarantee the payment of plaintiffs obligation. There is nothing in
monthly installments on one unit of Model CAT D-7 Caterpillar
the records of the proceedings to show that ICP indemnified
Crawler Tractor, pertinently provides in part as follows:
Bormaheco for the failure of the plaintiffs to pay their obligation.
25
1. The liability of INSURANCE CORPORATION " The failure, therefore, of Bormaheco to notify ICP in writing
about Slobec's supposed default released ICP from liability under its
OF THE PHILIPPINES, under this BOND will
surety bond. Consequently, ICP could not validly foreclose that real
expire Twelve (I 2) months from date hereof.
estate mortgage executed by petitioners in its favor since it never
Furthermore, it is hereby agreed and understood
incurred any liability under the surety bond. It cannot claim
that the INSURANCE CORPORATION OF THE
exemption from the required written notice since its case does not fall
PHILIPPINES will not be liable for any claim not
under any of the exceptions hereinbefore enumerated.
presented in writing to the Corporation within
THIRTY (30) DAYS from the expiration of this
BOND, and that the obligee hereby waives his right Furthermore, the allegation of ICP that it has paid Bormaheco is not
to bring claim or file any action against Surety and supported by any documentary evidence. Section 1, Rule 131 of the
Rules of Court provides that the burden of evidence lies with the
after the termination of one (1) year from the time
party who asserts an affirmative allegation. Since ICP failed to duly
his cause of action accrues. 18
prove the fact of payment, the disputable presumption that private
transactions have been fair and regular, as erroneously relied upon by
The surety bond was dated October 24, 1970. However, an
respondent Court of Appeals, finds no application to the case at bar.
annotation on the upper part thereof states: "NOTE:
EFFECTIVITY DATE OF THIS BOND SHALL BE ON
2. The liability of a surety is measured by the terms of his contract,
JANUARY 22, 1971." 19
and, while he is liable to the full extent thereof, such liability is
strictly limited to that assumed by its terms. 26 While ordinarily the
On the other hand, the Sales Agreement dated January 23, 1971
provides that the balance of P180,000.00 shall be payable in eighteen termination of a surety's liability is governed by the provisions of the
contract of suretyship, where the obligation of a surety is, under the
(18) monthly installments. 20 The Promissory Note executed by
terms of the bond, to terminate at a specified time, his obligation
Slobec on even date in favor of Bormaheco further provides that the
27
obligation shall be payable on or before February 23, 1971 up to July cannot be enlarged by an unauthorized extension thereof. This is an
exception to the general rule that the obligation of the surety
23, 1972, and that non-payment of any of the installments when due
28
shall make the entire obligation immediately due and demandable. 21 continues for the same period as that of the principal debtor.
It is possible that the period of suretyship may be shorter than that of
the principal obligation, as where the principal debtor is required to
make payment by installments. 29 In the case at bar, the surety bond
issued by ICP was to expire on January 22, 1972, twelve (1 2) months
from its effectivity date, whereas Slobec's installment payment was to
end on July 23, 1972. Therefore, while ICP guaranteed the payment
by Slobec of the balance of P180,000.00, such guaranty was valid
only for and within twelve (1 2) months from the date of effectivity of
Fundamental likewise is the rule that, except where required by the
the surety bond, or until January 22, 1972. Thereafter, from January
provisions of the contract, a demand or notice of default is not
23
23, 1972 up to July 23, 1972, the liability of Slobec became an
required to fix the surety's liability. Hence, where the contract of
unsecured obligation. The default of Slobec during this period cannot
suretyship stipulates that notice of the principal's default be given to
be a valid basis for the exercise of the right to foreclose by ICP since
the surety, generally the failure to comply with the condition will
its surety contract had already been terminated. Besides, the liability
prevent recovery from the surety. There are certain instances,
of ICP was extinguished when Bormaheco failed to file a written
however, when failure to comply with the condition will not
claim against it within thirty (30) days from the expiration of the
extinguish the surety's liability, such as a failure to give notice of
slight defaults, which are waived by the obligee; or on mere suspicion surety bond. Consequently, the foreclosure of the mortgage, after the
of possible default; or where, if a default exists, there is excuse or
It is basic that liability on a bond is contractual in nature and is
ordinarily restricted to the obligation expressly assumed therein. We
have repeatedly held that the extent of a surety's liability is
determined only by the clause of the contract of suretyship as well as
the conditions stated in the bond. It cannot be extended by
implication beyond the terms the contract. 22

43

Corporation Code 3
expiration of the surety bond under which ICP as surety has not
incurred any liability, should be declared null and void.
3. Lastly, it has been held that where The guarantor holds property of
the principal as collateral surety for his personal indemnity, to which
he may resort only after payment by himself, until he has paid
something as such guarantor neither he nor the creditor can resort to
such collaterals. 30
The Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage states that it is being issued for and in consideration of the
obligations assumed by the Mortgagee-Surety Company under the
terms and conditions of ICP Bond No. 14010 in behalf of Slobec
Realty Development Corporation and in favor of Bormaheco,
Inc. 31 There is no doubt that said Agreement of Counter-Guaranty is
issued for the personal indemnity of ICP Considering that the fact of
payment by ICP has never been established, it follows, pursuant to
the doctrine above adverted to, that ICP cannot foreclose on the
subject properties,

The Register of Deeds of Lucena City is hereby directed to cancel

Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and T24849 in the name of Philippine Machinery Parts Manufacturing Co.,
Inc. and to issue in lieu thereof the corresponding transfer certificates
of title in the name of herein petitioners, except Santiago Rivera.
The foregoing dispositions are without prejudice to such other and
proper legal remedies as may be available to respondent Bormaheco,
Inc. against herein petitioners.
SO ORDERED.

IV. Private respondent PM Parts posits that it is a buyer in good faith

and, therefore, it acquired a valid title over the subject properties. The
submission is without merit and the conclusion is specious
We have stated earlier that the doctrine of piercing the veil of
corporate fiction is not applicable in this case. However, its
inapplicability has no bearing on the good faith or bad faith of private
respondent PM Parts. It must be noted that Modesto N. Cervantes
served as Vice-President of Bormaheco and, later, as President of PM
Parts. On this fact alone, it cannot be said that PM Parts had no
knowledge of the aforesaid several transactions executed between
Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who
is the Executive Vice-President of Bormaheco, was also the legal
counsel of ICP and PM Parts. These facts were admitted without
qualification in the stipulation of facts submitted by the parties before
the trial court. Hence, the defense of good faith may not be resorted to
by private respondent PM Parts which is charged with knowledge of
the true relations existing between Bormaheco, ICP and herein
petitioners. Accordingly, the transfer certificates of title issued in its
name, as well as the certificate of sale, must be declared null and void
since they cannot be considered altogether free of the taint of bad
faith.
WHEREFORE, the decision of respondent Court of Appeals is
hereby REVERSED and SET ASIDE, and judgment is hereby
rendered declaring the following as null and void: (1) Certificate of
Sale, dated September 28,1973, executed by the Provincial Sheriff of
Quezon in favor of the Insurance Corporation of the Philippines; (2)
Transfer Certificates of Title Nos. T-23705, T-23706, T-23707 and T23708 issued in the name of the Insurance Corporation of the
Philippines; (3) the sale by Insurance Corporation of the Philippines
in favor of Philippine Machinery Parts Manufacturing Co., Inc. of the
four (4) parcels of land covered by the aforesaid certificates of title;
and (4) Transfer Certificates of Title Nos. T-24846, T-24847, T-24848
and T24849 subsequently issued by virtue of said sale in the name of
the latter corporation.

44

Corporation Code 3
G.R. No. L-47673

October 10, 1946

KOPPEL (PHILIPPINES), INC., plaintiff-appellant,

vs.
ALFREDO L. YATCO, Collector of Internal Revenue, defendantappellee.
Padilla, Carlos and Fernando for appellant.
Office of the Solicitor General Ozaeta, First Assistant Solicitor
General Reyes and.
Office of the Solicitor General Reyes and Solicitor Caizanes for
appellee.

HILADO, J.:
This is an appeal by Koppel (Philippines), Inc., from the judgment of
the Court of First Instance of Manila in civil case No. 51218 of said
court dismissing said corporation's complaint for the recovery of the
sum of P64,122.51 which it had paid under protest to the Collector of
Internal Revenue on October 30, 1936, as merchant sales tax. The
main facts of the case were stipulated in the court below as follows:
AGREED STATEMENT OF FACTS
Now come the plaintiff by attorney Eulogio P. Revilla and
the defendant by the Solicitor General and undersigned
Assistant Attorney of the Bureau of Justice and, with leave
of this Honorable Court, hereby respectfully stipulated and
agree to the following facts, to wit:
I. That plaintiff is a corporation duly organized and existing
under and by virtue of the laws of the Philippines, with
principal office therein at the City of Manila, the capital
stock of which is divided into thousand (1,000) shares of
P100 each. The Koppel Industrial Car and Equipment
company, a corporation organized and existing under the
laws of the State of Pennsylvania, United States of America,
and not licensed to do business in the Philippines, owned
nine hundred and ninety-five (995) shares out of the total
capital stock of the plaintiff from the year 1928 up to and
including the year 1936, and the remaining five (5) shares
only were and are owned one each by officers of the plaintiff
corporation.
II. That plaintiff, at all times material to this case, was and
now is duly licensed to engage in business as a merchant and
commercial broker in the Philippines; and was and is the
holder of the corresponding merchant's and commercial
broker's privilege tax receipts.
III. That the defendant Collector of Internal revenue is now
Mr. Bibiano L. Meer in lieu of Mr. Alfredo L. Yatco.

IV. That during the period from January 1, 1929, up to and

including December 31, 1932, plaintiff transacted business
in the Philippines in the following manner, with the
exception of the transactions which are described in
paragraphs V and VI of this stipulation:
When a local buyer was interested in the purchase of railway
materials, machinery, and supplies, it asked for price
quotations from plaintiff. Atypical form of such request is
attached hereto and made a part hereof as Exhibit A. (Exhibit
A represents typical transactions arising from written
requests for quotations, while Exhibits B to G, inclusive, are
typical transactions arising from verbal requests for
quotation.) Plaintiff then cabled for the quotation desired for
Koppel Industrial Car and Equipment Company. A sample of
the pertinent cable is hereto attached and made a part hereof
as Exhibit B. Koppel Industrial Car and Equipment
Company answered by cable quoting its cost price, usually
A. C. I. F. Manila cost price, which was later followed by a
letter of confirmation. A sample of the said cable quotation
and of the letter of confirmation are hereto attached and
made a part hereof as Exhibits C and C-1. Plaintiff, however,
quoted by Koppel Industrial Car and Equipment Company.
Copy of the plaintiff's letter to purchaser is hereto attached
and made a part hereof as Exhibit D. On the basis of these
quotations, orders were placed by the local purchasers,
copies of which orders are hereto attached as Exhibits E and
E-1.
A cable was then sent to Koppel Industrial Car and
Equipment company giving instructions to ship the
merchandise to Manila forwarding the customer's order.
Sample of said cable is hereto attached as Exhibit F. The
bills of lading were usually made to "order" and indorsed in
blank with notation to the effect that the buyer be notified of
the shipment of the goods covered in the bills of lading;
commercial invoices were issued by Koppel Industrial Car
and Equipment Company in the names of the purchasers and
certificates of insurance were likewise issued in their names,
or in the name of Koppel Industrial Car and Equipment
Company but indorsed in blank and attached to drafts drawn
by Koppel Industrial Car and Equipment Company on the
purchasers, which were forwarded through foreign banks to
local banks. Samples of the bills of lading are hereto
attached as Exhibits F-1, I-1, I-2 and I-3. Bills of ladings,
Exhibits I-1, I-2 and I-3, may equally have been employed,
but said Exhibits I-1, I-2 and I-3 have no connection with the
transaction covered by Exhibits B to G, inclusive. The
purchasers secured the shipping papers by arrangement with
the banks, and thereupon received and cleared the
shipments. If the merchandise were of European origin, and
if there was not sufficient time to forward the documents
necessary for clearance, through foreign banks to local
banks, to the purchasers, the Koppel Industrial Car and
Equipment company did, in many cases, send the documents
directly from Europe to plaintiff with instructions to turn

45

Corporation Code 3
these documents over to the purchasers. In many cases,
where sales was effected on the basis of C. I. F. Manila, duty
paid, plaintiff advanced the sums required for the payment of
the duty, and these sums, so advanced, were in every case
reimbursed to plaintiff by Koppel Industrial Car and
Equipment Company. The price were payable by drafts
agreed upon in each case and drawn by Koppel Industrial
Car and Equipment Company on respective purchasers
through local banks, and payments were made to the banks
by the purchasers on presentation and delivery to them of the
above-mentioned shipping documents or copies thereof. A
sample of said drafts is hereto attached as Exhibit G.
Plaintiff received by way of compensation a percentage of
the profits realized on the above transactions as fixed in
paragraph 6 of the plaintiff's contract with Koppel Industrial
Car and Equipment Company, which contract is hereto
attached as Exhibit H, and suffered its corresponding share
in the losses resulting from some of the transactions.
That the total gross sales from January 1, 1929, up to and
including December 31, 1932, effected in the foregoing
manner and under the above specified conditions, amount to
P3, 596,438.84.
V. That when a local sugar central was interested in the
purchase of railway materials, machinery and supplies, it
secured quotations from, and placed the corresponding
orders with, the plaintiff in substantially the same manner as
outlined in paragraph IV of this stipulation, with the only
difference that the purchase orders which were agreed to by
the central and the plaintiff are similar to the sample hereto
attached and made a part hereof as Exhibit I. Typical
samples of the bills of lading covering the herein transaction
are hereto attached and made a part hereto as Exhibits I-1, I2 and I-3. The value of the sales carried out in the manner
mentioned in this paragraph is P133,964.98.
VI. That sometime in February, 1929, Miguel J. Ossorio, of
Manila, Philippines, placed an option with Koppel Industrial
Car and Equipment Company, through plaintiff, to purchase
within three months a pair of Atlas-Diesel Marine Engines.
Koppel Industrial Car and Equipment Company purchased
said Diesel Engines in Stockholm, Sweden, for $16,508.32.
The suppliers drew a draft for the amount of $16,508.32 on
the Koppel Industrial Car and Equipment Company, which
paid the amount covered by the draft. Later, Miguel J.
Ossorio definitely called the deal off, and as Koppel
Industrial Car and Equipment Company could not ship to or
draw on said Mr. Miguel J. Ossorio, it in turn drew another
draft on plaintiff for the same amount at six months sight,
with the understanding that Koppel Industrial Car and
Equipment Company would reimburse plaintiff when said
engines were disposed of. Plaintiff honored the draft and
debited the said sum of $16,508.32 to merchandise account.
The engines were left stored at Stockholm, Sweden. On
April 1, 1930, a new local buyer, Mr. Cesar Barrios, of

Iloilo, Philippines, was found and the same engines were

sold to him for $21,000 (P42,000) C. I. F. Hongkong. The
engines were shipped to Hongkong and a draft for $21,000
was drawn by Koppel Industrial Car and Equipment
Company on Mr. Cesar Barrios. After the draft was fully
paid by Mr. Barrios, Koppel Industrial Car and Equipment
Company reimbursed plaintiff with cost price of $16,508.32
and credited it with $1,152.95 as its share of the profit on the
transaction. Exhibits J and J-1 are herewith attached and
made integral parts of this stipulation with particular
reference to paragraph VI hereof.
VII. That plaintiff's share in the profits realized out of these
transactions described in paragraphs IV, V and VI hereof
totaling P3,772,403.82, amounts to P132,201.30; and that
plaintiff within the time provided by law returned the
aforesaid amount P132,201.30 for the purpose of the
commercial broker's 4 per cent tax and paid thereon the sum
P5,288.05 as such tax.
VIII. That defendant demanded of the plaintiff the sum of
P64,122.51 as the merchants' sales tax of 1% per cent on the
amount of P3,772,403.82, representing the total gross value
of the sales mentioned in paragraphs IV, V and VI hereof,
including the 25 per cent surcharge for the late payment of
the said tax, which tax and surcharge were determined after
the amount of P5,288.05 mentioned in paragraph VI hereof
was deducted.
IX. That plaintiff, on October 30, 1936, paid under protest
said sum of P64,122.51 in order to avoid further penalties,
levy and distraint proceedings.
X. That defendant, on November 10, 1936, overruled
plaintiff's protest, and defendant has failed and refused and
still fails and refuses, notwithstanding demands by plaintiff,
to return to the plaintiff said sum of P64,122.51 or any part
thereof.
xxx

xxx

xxx

That the parties hereby reserve the right to present

additional evidence in support of their respective
contentions.
Manila, Philippines, December 26, 1939
(Sgd.) ROMAN OZAETA
Solicitor General
(Sgd.) ANTONIO CAIZARES
Assistant Attorney
(Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila

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Corporation Code 3
Both parties adduced some oral evidence in clarification of
or addition to their agreed statement of facts. A
preponderance of evidence has established, besides the facts
thus stipulated, the following:
(a) The shares of stock of plaintiff corporation were
and are all owned by Koppel Industries Car and
Equipment Company of Pennsylvania, U. S. A.,
exceptive which were necessary to qualify the
Board of Directors of said plaintiff corporation;
(b) In the transactions involved herein the plaintiff
corporation acted as the representative of Koppel
Industrial Car and Equipment Company only, and
not as the agent of both the latter company and the
respective local purchasers plaintiff's principal
witness, A.H. Bishop, its resident Vice-President, in
his testimony invariably referred to Koppel
Industrial Car and Equipment Co. as "our principal"
9 t. s. n., pp. 10, 11, 12, 19, 75), except that at the
bottom of page 10 to the top of page 11, the witness
stated that they had "several principal" abroad but
that "our principal abroad was, for the years in
question, Koppel Industrial Car and Equipment
Company," and on page 68, he testified that what he
actually said was ". . . but our principal abroad" and
not "our principal abroad" as to which it is very
significant that neither this witness nor any other
gave the name of even a single other principal
abroad of the plaintiff corporation;
(c) The plaintiff corporation bore alone incidental
expenses as, for instance, cable expenses-not
only those of its own cables but also those of its
"principal" (t.s.n., pp. 52, 53);
(d) the plaintiff's "share in the profits" realized from
the transactions in which it intervened was left
virtually in the hands of Koppel Industrial Car and
Equipment Company (t.s.n., p. 51);
(e) Where drafts were not paid by the purchasers,
the local banks were instructed not to protest them
but to refer them to plaintiff which was fully
empowered by Koppel Industrial Car and
Equipment company to instruct the banks with
regards to disposition of the drafts and documents
(t.s.n., p. 50; Exhibit G);lawphil.net

orders of such local buyers and made delivery in

the Philippines without the necessity of cabling its
principal in America either for price quotations or
confirmation or rejection of that agreed upon
between it and the buyer (t.s.n., pp. 39-43);
(h) Whenever the deliveries made by Koppel
Industrial Car and Equipment Company were
incomplete or insufficient to fill the local buyer's
orders, plaintiff used to make good the deficiencies
by deliveries from its own local stock, but in such
cases it charged its principal only the actual cost of
the merchandise thus delivered by it from its stock
and in such transactions plaintiff did not realize any
profit (t.s.n., pp. 53-54);
(i) The contract of sale involved herein were all
perfected in the Philippines.
Those described in paragraph IV of the agreed statement of
facts went through the following process: (1) "When a local
buyer was interested in the purchase of railway materials,
machinery, and supplies, it asked for price quotations from
plaintiff"; (2) "Plaintiff then cabled for the quotation desired
from Koppel Industrial Car and Equipment Company"; (3)
"Plaintiff, however, quoted to the purchaser a selling price
above the figures quoted by Koppel Industrial Car and
Equipment Company"; (4) "On the basis of these quotations,
orders were placed by the local purchasers . . ."
Those described in paragraph V of said agreed statement of
facts were transacted "in substantially the same manner as
outlined in paragraph IV."
As to the single transaction described in paragraph VI of the
same agreed statement of facts, discarding the Ossorio
option which anyway was called off, "On April 1, 1930, a
new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for
$21,000(P42,000) C.I.F. Hongkong." (Emphasis supplied.).
(j) Exhibit H contains the following paragraph:
It is clearly understood that the intent of this contract is that
the broker shall perform only the functions of a broker as set
forth above, and shall not take possession of any of the
materials or equipment applying to said orders or perform
any acts or duties outside the scope of a broker; and in no
sense shall this contract be construed as granting to the
broker the power to represent the principal as its agent or to
make commitments on its behalf.

(f) Where the goods were European origin, consular

invoices, bill of lading, and, in general, the
documents necessary for clearance were sent
directly to plaintiff (t.s.n., p. 14);
The Court of First Instance held for the defendant and dismissed
plaintiff's complaint with costs to it.
(g) If the plaintiff had in stock the merchandise
desired by local buyers, it immediately filled the

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Corporation Code 3
Upon this appeal, seven errors are assigned to said judgment as
follows:.
1. That the court a quo erred in not holding that appellant is
a domestic corporation distinct and separate from, and not a
mere branch of Koppel Industrial Car and Equipment Co.;
2. the court a quo erred in ignoring the ruling of the
Secretary of Finance, dated January 31, 1931, Exhibit M;

Car and Equipment Co. The court did not hold that the corporate
personality of Koppel (Philippines), Inc., would also be disregarded
in other cases or for other purposes. It would have had no power to so
hold. The courts' action in this regard must be confined to the
transactions involved in the case at bar "for the purpose of adjudging
the rights and liabilities of the parties in the case. They have no
jurisdiction to do more." (1 Flethcer, Cyclopedia of Corporation,
Permanent ed., p. 124, section 41.)
A leading and much cited case puts it as follows:

3. the court a quo erred in not holding that a character of a

broker is determined by the nature of the transaction and not
by the basis or measure of his compensation;
4. The court a quo erred in not holding that appellant acted
as a commercial broker in the transactions covered under
paragraph VI of the agreed statement of facts;
5. The court a quo erred in not holding that appellant acted
as a commercial broker in the transactions covered under
paragraph v of the agreed statement of facts;

If any general rule can be laid down, in the present state of

authority, it is that a corporation will be looked upon as a
legal entity as a general rule, and until sufficient reason to
the contrary appears; but, when the notion of legal entity is
used to defeat public convinience, justify wrong, protect
fraud, or defend crime, the law will regard the corporation as
an association of persons. (1 Fletcher Cyclopedia of
Corporation [Permanent Edition], pp. 135, 136; United
States vs. Milwaukee Refrigeration Transit Co., 142 Fed.,
247, 255, per Sanborn, J.)

In his second special defense appellee alleges "that the plaintiff was
6. The court a quo erred in not holding that appellant acted
as a commercial broker in the sole transaction covered under and is in fact a branch or subsidiary of Koppel Industrial Car and
Equipment Co., a Pennsylvania corporation not licensed to do
paragraph VI of the agreed statement of facts;
business in the Philippines but actually doing business here through
7. the court a quo erred in dismissing appellant's complaint. the plaintiff; that the said foreign corporation holds 995 of the 1,000
shares of the plaintiff's capital stock, the remaining five shares being
held by the officers of the plaintiff herein in order to permit the
The lower court found and held that Koppel (Philippines), Inc. is a
incorporation thereof and to enable its aforesaid officers to act as
mere dummy or brach ("hechura") of Koppel industrial Car and
Equipment Company. The lower court did not deny legal personality directors of the plaintiff corporation; and that plaintiff was organized
to Koppel (Philippines), Inc. for any and all purposes, but in effect its as a Philippine corporation for the purpose of evading the payment by
its parent foreign corporation of merchants' sales tax on the
conclusion was that, in the transactions involved herein, the public
interest and convenience would be defeated and what would amount transactions involved in this case and others of similar nature."
to a tax evasion perpetrated, unless resort is had to the doctrine of
"disregard of the corporate fiction."

By most courts the entity is normally regarded but is

disregarded to prevent injustice, or the distortion or hiding of
the truth, or to let in a just defense. (1 Fletcher, Cyclopedia
of Corporation, Permanent Edition, pp. 139,140; emphasis
supplied.)

I. In its first assignment of error appellant submits that the trial court
erred in not holding that it is a domestic corporation distinct and
separate from and not a mere branch of Koppel Industrial Car and
Equipment Company. It contends that its corporate existence as
Another rule is that, when the corporation is the mere alter
Philippine corporation can not be collaterally attacked and that the
ego, or business conduit of a person, it may de disregarded."
Government is estopped from so doing. As stated above, the lower
(1 Fletcher, Cyclopedia of Corporation, Permanent Edition,
court did not deny legal personality to appellant for any and all
p. 136.)
purposes, but held in effect that in the transaction involved in this
case the public interest and convenience would be defeated and what
would amount to a tax evasion perpetrated, unless resort is had to the Manifestly, the principle is the same whether the "person" be natural
or artificial.
doctrine of "disregard of the corporate fiction." In other words, in
looking through the corporate form to the ultimate person or
A very numerous and growing class of cases wherein the
corporation behind that form, in the particular transactions which
corporate entity is disregarded is that (it is so organized and
were involved in the case submitted to its determination and
controlled, and its affairs are so conducted, as to make it
judgment, the court did so in order to prevent the contravention of the
merely an instrumentality, agency, conduit or adjunct of
local internal revenue laws, and the perpetration of what would
another corporation)." (1 Fletcher, Cyclopedia of
amount to a tax evasion, inasmuch as it considered and in our
Corporation, Permanent ed., pp. 154, 155.)
opinion, correctly that appellant Koppel (Philippines), Inc. was a
mere branch or agency or dummy ("hechura") of Koppel Industrial

48

Corporation Code 3
While we recognize the legal principle that a corporation
does not lose its entity by the ownership of the bulk or even
the whole of its stock, by another corporation (Monongahela
Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79 Am. St.
Rep., 685) yet it is equally well settled and ignore corporate
forms." (Colonial Trust Co. vs. Montello Brick Works, 172
Fed., 310.)
Where it appears that two business enterprises are owned,
conducted and controlled by the same parties, both law and
equity will, when necessary to protect the rights of third
persons, disregard the legal fiction that two corporations are
distinct entities, and treat them as identical. (Abney vs.
Belmont Country Club Properties, Inc., 279 Pac., 829.)
. . . the legal fiction of distinct corporate existence will be
disregarded in a case where a corporation is so organized
and controlled and its affairs are so conducted, as to make it
merely an instrumentality or adjunct of another corporation.
(Hanter vs. Baker Motor Vehicle Co., 190 Fed., 665.)
In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law.
ed., 458, 464), the Supreme Court of the United States disregarded
the artificial personality of the subsidiary coal company in order to
avoid that the parent corporation, the Lehigh Valley R. Co., should be
able, through the fiction of that personality, to evade the prohibition
of the Hepburn Act against the transportation by railroad companies
of the articles and commodities described therein.
Chief Justice White, speaking for the court, said:
. . . Coming to discharge this duty it follows, in view of the
express prohibitions of the commodities clause, it must be
held that while the right of a railroad company as a
stockholder to use its stock ownership for the purpose of
a bona fide separate administration of the affairs of a
corporation in which it has a stock interest may not be
denied, the use of such stock ownership in substance for the
purpose of destroying the entity of a producing, etc.,
corporation, and commingling its affairs in administration
with the affairs of the railroad company, so as to make the
two corporations virtually one, brings the railroad company
so voluntarily acting as to such producing, etc., corporation
within the prohibitions of the commodities clause. In other
words, that by operation and effect of the commodities
clause there is duty cast upon a railroad company proposing
to carry in interstate commerce the product of a producing,
etc., corporation in which it has a stock interest, not to abuse
such power so as virtually to do by indirection that which the
commodities clause prohibits, a duty which plainly would
be violated by the unnecessary commingling of the affairs of
the producing company with its own, so as to cause them to
be one and inseparable.

From the facts hereinabove stated, as established by a preponderance

of the evidence , particularly those narrated in paragraph (a), (b), (c),
(d), (e),(f), (h), (i), and (j) after the agreed statement of facts, we find
that, in so far as the sales involved herein are concerned, Koppel
(Philippines), Inc., and Koppel Industrial Car and Equipment
company are to all intents and purposes one and the same; or, to use
another mode of expression, that, as regards those transactions, the
former corporation is a mere branch, subsidiary or agency of the
latter. To our mind, this is conclusively borne out by the fact, among
others, that the amount of he so-called "share in the profits" of
Koppel (Philippines), Inc., was ultimately left to the sole, unbridled
control of Koppel Industrial Car and Equipment Company. If, in their
relations with each other, Koppel (Philippines), Inc., was considered
and intended to function as a bona fide separate corporation, we can
not conceive how this arrangement could have been adopted, for if
there was any factor in its business as to which it would in that case
naturally have been opposed to being thus controlled, it must have
been precisely the amount of profit which it could endeavor and hope
to earn. No group of businessmen could be expected to organize a
mercantile corporation the ultimate end of which could only be
profit if the amount of that profit were to be subjected to such a
unilateral control of another corporation, unless indeed the former has
previously been designed by the incorporators to serve as a mere
subsidiary, branch or agency of the latter. Evidently, Koppel
Industrial Car and Equipment Company made us of its ownership of
the overwhelming majority 99.5% of the capital stock of the
local corporation to control the operations of the latter to such an
extent that it had the final say even as to how much should be allotted
to said local entity in the so-called sharing in the profits. We can not
overlook the fact that in the practical working of corporate
organizations of the class to which these two entities belong, the
holder or holders of the controlling part of the capital stock of the
corporation, particularly where the control is determined by the
virtual ownership of the totality of the shares, dominate not only the
selection of the Board of Directors but, more often than not, also the
action of that Board. Applying this to the instant case, we can not
conceive how the Philippine corporation could effectively go against
the policies, decisions, and desires of the American corporation with
regards to the scheme which was devised through the instrumentality
of the contract Exhibit H, as well as all the other details of the system
which was adopted in order to avoid paying the 1 per cent
merchants sales tax. Neither can we conceive how the Philippine
corporation could avoid following the directions of the American
corporation held 99.5 per cent of the capital stock of the Philippine
corporation. In the present instance, we note that Koppel
(Philippines), Inc., was represented in the Philippines by its "resident
Vice-President." This fact necessarily leads to the inference that the
corporation had at least a Vice-President, and presumably also a
President, who were not resident in the Philippines but in America,
where the parent corporation is domiciled. If Koppel (Philippines),
Inc., had been intended to operate as a regular domestic corporation
in the Philippines, where it was formed, the record and the evidence
do not disclose any reason why all its officers should not reside and
perform their functions in the Philippines.

Corrobarative authorities can be cited in support of the same

proposition, which we deem unnecessary to mention here.

49

Corporation Code 3
Other facts appearing from the evidence, and presently to be stated,
strengthen our conclusion, because they can only be explained if the
local entity is considered as a mere subsidiary, branch or agency of
the parent organization. Plaintiff charged the parent corporation no
more than actual cost without profit whatsoever for
merchandise allegedly of its own to complete deficiencies of
shipments made by said parent corporation (t.s.n., pp. 53, 54) a
fact which could not conceivably have been the case if plaintiff had
acted in such transactions as an entirely independent entity doing
business for profit, of course with the American concern. There
has been no attempt even to explain, if the latter situation really
obtained, why these two corporations should have thus departed from
the ordinary course of business. Plaintiff was charged by the
American corporation with the cost even of the latter's cable
quotations from ought that appears from the evidence, this can
only be comprehended by considering plaintiff as such a subsidiary,
branch or agency of the parent entity, in which case it would be
perfectly understandable that for convenient accounting purposes and
the easy determination of the profits or losses of the parent
corporation's Philippines should be charged against the Philippine
office and set off against its receipts, thus separating the accounts of
said branch from those which the central organization might have in
other countries. The reference to plaintiff by local banks, under a
standing instruction of the parent corporation, of unpaid drafts drawn
on Philippine customers by said parent corporation, whenever said
customers dishonored the drafts, and the fact that the American
corporation had previously advised said banks that plaintiff in those
cases was "fully empowered to instruct (the banks) with regard to the
disposition of the drafts and documents" (t.s.n., p. 50), in the absence
of any other satisfactory explanation naturally give rise to the
inference that plaintiff was a subsidiary, branch or agency of the
American concern, rather than an independent corporation acting as a
broker. For, without such positive explanation, this delegation of
power is indicative of the relations between central and branch offices
of the same business enterprise, with the latter acting under
instructions already given by the former. Far from disclosing a real
separation between the two entities, particularly in regard to the
transactions in question, the evidence reveals such commongling and
interlacing of their activities as to render even incomprehensible
certain accounting operations between them, except upon the basis
that the Philippine corporation was to all intents and purposes a mere
subsidiary, branch, or agency of the American parent entity. Only
upon this basis can it be comprehended why it seems not to matter at
all how much profit would be allocated to plaintiff, or even that no
profit at all be so allocated to it, at any given time or after any given
period.

as we can discover, there would be only one, but very important,

difference between the two schemes a difference in tax liability on
the ground that the sales were made through another and distinct
corporation, as alleged broker, when we have seen that this latter
corporation isvirtually owned by the former, or that they practically
one and the same, is to sanction a circumvention of our tax laws, and
permit a tax evasion of no mean proportions and the consequent
commission of a grave injustice to the Government. Not only this; it
would allow the taxpayer to do by indirection what the tax laws
prohibited to be done directly (non-payment of legitimate taxes),
paraphrasing the United States Supreme Court in United States vs.
Lehigh Valley R. Co., supra.
The act of one corporation crediting or debiting the other for certain
items, expenses or even merchandise sold or disposed of, is perfectly
compatible with the idea of the domestic entity being or acting as a
mere branch, agency or subsidiary of the parent organization. Such
operations were called for any way by the exigencies or convenience
of the entire business. Indeed, accounting operation such as these are
invitable, and have to be effected in the ordinary course of business
enterprise extends its trade to another land through a branch office, or
through another scheme amounting to the same thing.
If plaintiff were to act as broker in the Philippines for any other
corporation, entity or person, distinct from Koppel Industrial Car and
Equipment company, an entirely different question will arise, which,
however, we are not called upon, nor in a position, to decide.
As stated above, Exhibit H contains to the following paragraph:
It is clearly understood that the intent of this contract is that
the broker shall perform only the functions of a broker as set
forth above, and shall not take possession of any of the
materials or equipment applying to said orders or perform
any acts or duties outside the scope of a broker; and in no
sense shall this contract be construed as granting to the
broker the power to represent the principal as its agent or to
make commitments on its behalf.

The foregoing paragraph, construed in the light of other facts noted

elsewhere in this decision, betrays, we think a deliberate intent,
through the medium of a scheme devised with great care, to avoid the
payment of precisely the 1 per cent merchants' sales tax in force in
the Philippines before, at the time of, and after, the making of the said
contract Exhibit H. If this were to be allowed, the payment of a tax,
which directly could not have been avoided, could be evaded by
indirection, consideration being had of the aforementioned peculiar
As already stated above, under the evidence the sales in the
relations between the said American and local corporations. Such
Philippines of the railway materials, machinery and supplies imported evasion, involving as it would, a violation of the former Internal
here by Koppel Industrial Car and Equipment Company could have
Revenue Law, would even fall within the penal sanction of section
been as conviniently and efficiently transacted and handled if not
2741 of the Revised Administrative Code. Which only goes to show
more so had said corporation merely established a branch or
the illegality of the whole scheme. We are not here concerned with
agency in the Philippines and obtained license to do business locally; the impossibility of collecting the merchants' sales tax, as a mere
and if it had done so and said sales had been effected by such branch incidental consequence of transactions legal in themselves and
or agency, there seems to be no dispute that the 1 per cent
innocent in their purpose. We are dealing with a scheme the primary,
merchants' sales tax then in force would have been collectible. So far

50

Corporation Code 3
not to say the sole, object of which the evasion of the payment of
such tax. It is this aim of the scheme that makes it illegal.

they could not rationally be taken to have bound themselves to

buy before knowing the prices. And even if we should take into
consideration the fact that the american corporation contracted, at
We have said above that the contracts of sale involved herein were all least partly, through correspondence, according to article 54 of the
perfected in the Philippines. From the facts stipulated in paragraph IV Code of Commerce, the respective contracts were completed from the
of the agreed statement of facts, it clearly appears that the Philippine time of the acceptance by the local buyers, which happened in the
Philippines.
purchasers had to wait for Koppel Industrial Car and Equipment
Company to communicate its cost prices to Koppel (Philippines),
Inc., were perfected in the Philippines. In those cases where no such
Contracts executed through correspondence shall be
price quotations from the American corporation were needed, of
completed from the time an answer is made accepting the
course, the sales effected in those cases described in paragraph V of
proposition or the conditions by which the latter may be
the agreed statement of facts were, as expressed therein, transacted
modified." (Code of Commerce, article 54; emphasis
"in substantially the same manner as outlined in paragraph VI." Even
supplied.)
the single transaction described in paragraph VI of the agreed
statement of facts was also perfected in the Philippines, because the
A contract is as a rule considered as entered into at the place
contracting parties were here and the consent of each was given here.
where the place it is performed. So where delivery is
While it is true that when the contract was thus perfected in the
regarded as made at the place of delivery." (13 C. J., 580-81,
Philippines the pair of Atlas-Diesel Marine Engines were in Sweden
section 581.)
and the agreement was to deliver them C.I.F. Hongkong, the contract
of sale being consensual perfected by mere consent (Civil
(In the consensual contract of sale delivery is not needed for
Code, article 1445; 10 Manresa, 4th ed., p. 11), the location of the
its perfection.)
property and the place of delivery did not matter in the question of
where the agreement was perfected.
II. Appellant's second assignment of error can be summarily disposed
In said paragraph VI, we read the following, as indicating where the
contract was perfected, considering beforehand that one party, Koppel
(Philippines),Inc., which in contemplation of law, as to that
transaction, was the same Koppel Industrial Car Equipment Co., was
in the Philippines:
. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios,
of Iloilo, Philippines, was found and the same engines were
sold to him for $21,000 (P42,000) C.I.F. Hongkong . . .
(Emphasis supplied.)
Under the revenue law in force when the sales in question took place,
the merchants' sales tax attached upon the happening of the respective
sales of the "commodities, goods, wares, and merchandise" involved,
and we are clearly of opinion that such "sales" took place upon the
perfection of the corresponding contracts. If such perfection took
place in the Philippines, the merchants' sales tax then in force here
attached to the transactions.
Even if we should consider that the Philippine buyers in the cases
covered by paragraph IV and V of the agreed statement of facts,
contracted with Koppel Industrial Car and Equipment company, we
will arrive at the same final result. It can not be denied in that case
that said American corporation contracted through Koppel
(Philippines), Inc., which was in the Philippines. The real transaction
in each case of sale, in final effect, began with an offer of sale from
the seller, said American corporation, through its agent, the local
corporation, of the railway materials, machinery, and supplies at the
prices quoted, and perfected or completed by the acceptance of that
offer by the local buyers when the latter, accepting those prices,
placed their orders. The offer could not correctly be said to have been
made by the local buyers when they asked for price quotations, for

of. It is clear that the ruling of the Secretary of Finance, Exhibit M,

was not binding upon the trial court, much less upon this tribunal,
since the duty and power of interpreting the laws is primarily a
function of the judiciary. (Ortua vs. Singson Encarnacion, 59 Phil.,
440, 444.) Plaintiff cannot be excused from abiding by this legal
principle, nor can it properly be heard to say that it relied on the
Secretary's ruling and that, therefore, the courts should not now apply
an interpretation at variance therewith. The rule of stare decisis is
undoubtedly entitled to more respect in the construction of statutes
than the interpretations given by officers of the administrative
branches of the government, even those entrusted with the
administration of particular laws. But this court, in Philippine Trust
Company and Smith, Bell and Co. vs. Mitchell(59 Phil., 30, 36), said:
. . . The rule of stare decisis is entitled to respect. Stability in
the law, particularly in the business field, is desirable. But
idolatrous reverence for precedent, simply as precedent, no
longer rules. More important than anything else is that court
should be right. . . .
III. In the view we take of the case, and after the disposition made
above of the first assignment of error, it becomes unnecessary to
make any specific ruling on the third, fourth, fifth, sixth, and seventh
assignments of error, all of which are necessarily disposed of
adversely to appellant's contention.
Wherefore, he judgment appealed from is affirmed, with costs of both
instances against appellant. So ordered.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones, and Tuason, JJ.,
concur.

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Corporation Code 3
Separate Opinions
PERFECTO, J., concurring:
We fully agree with the well-written decision penned by Mr. Justice
Hilado in this case. We only wish to add that the ingenious device of
evading the payment of taxes, is not a new one. It is only one of the
manifold manifestations of the shrewdness of the masterminds behind
some powerful corporations who, without ay compunction, do not
stop at adopting any scheme by which the controlling capitalists may
get even richer and richer, sometimes at government expense,
sometimes by squeezing credulous or ignorant small shareholders,
sometimes with the exploitation of the helpless public at large, and
sometimes at great sacrifice of all the three entities.
The system of corporation combines, of holding and subsidiary
corporations, of spreading and interlocking companies, has no well
developed and has grown so powerful that even the wisest
government had been unable to defend itself and protect the people
from the crushing tentacles of the moneyed octopuses. It is true that
in the United States of America anti trusts laws were enacted but,
notwithstanding their ability and wisdom, the Americans were unable
to stave off the effects of the bankruptcy of the pyramid of holding
and interlocking companies built around the tragic figure of Samuel
Insull.
That Philippine Government, that Filipino consumers, that Filipino
public at large, had already been victims of the evil effects of such a
system has been conclusively proved in the scandalous illegalities and
irregularities disclosed in the investigation made by the first National
Assembly, through its Committee on Rate Reducing of Public
Utilities. In said investigation, it was revealed that, by a system of
holding and interlocking companies, by their manipulation of books
of accounts, our government was defrauded of enormous amounts in
taxes and millions of pesos were unjustly squeezed from the public.
It is high time that alarm be sounded so that our government and our
public may avoid being further victimized and this country turned
into a puppet at the mercy of moneyed tycoons who are not stopped
by any scruple to attain their unquenchable thristiness for more
money and for power and domination. All liberal-minded people must
fight not only against political imperialism, but also against economic
or financial imperialism, in fact, against any kind of imperialism. The
call for eternal vigilance must be heeded by all, including tribunals, if
the survival of our people must not be jeopardized by artful
corporations and unscrupulous financiers.

52

Corporation Code 3
G.R. No. L-13119

September 22, 1959

RICARDO TANTONGCO, petitioner,

vs.
KAISAHAN NG MGA MANGGAGAWA SA LA CAMPAN
(KKM) AND THE HONORABLE COURT OF INDUSTRIAL
RELATIONS, respondents.
Ernesto C. Estrella for petition for petitioner.
Carlos E. Santiago for respondent Union.
Pedro M. Ligaya for respondent CIR.
MONTEMAYOR, J.:
This is a petition for certiorari and prohibition with prayer for
issuance of a writ of preliminary injunction to prohibit respondent
Court of Industrial Relations from proceeding with the hearing of the
contempt proceedings for which petitioner Ricardo Tantongco was
cited to appear the present his evidence. The contempt proceedings
which petitioner seeks to stop are based on the order of the Court of
Industrial Relations, dated September 30, 1957, which reads as
follows:
It appearing that the Order of this Court, in the aboveentitled case, dated February 18, 1957 (folios 134-166), has
become final and executory and the respondents have failed
to comply with the same, the said respondents, namely, the
La Campana Starch and Coffee Factory or its manager or the
person who has charge of the management, and the
administrator of the Estate of Ramon Tantongco are hereby
ordered to comply with said order, within five days from
receipt hereof, particularly the following, to wit:
(a) To reinstate the persons named in the said Order
of February 18, 1957;
(b) To deposit the amount of P65,534.01 with this
Court.
With respect to possible back wages from August 28, 1957
as mentioned in the petition for contempt of August 30,
1957, the same shall first be determined.
Failure to comply with this Order shall be directly dealt with
accordingly.
It would appear that petitioner Ricardo Tantongco failed to comply
with said order and so, as already stated, he was cited to appear and to
adduce evidence on his behalf to show why he should not be
punished for indirect contempt.

for higher wages, and more privileges and benefits in connection with
their work. When the management failed and refused to grant the
demands, the Department of Labor intervened; but failing to settle the
controversy, it certified the dispute to the Court of Industrial
Relations on July 17, 1951, where it was docketed as Case No. 584
V. On the theory that the laborers presenting the demands were only
the ones working in the coffee factory, said company filed through
the management a motion to dismiss claiming that inasmuch as there
were only 14 of them in said factory, the Court of Industrial Relations
had no jurisdiction to entertain and decide the case. The motion was
denied by the Court of Industrial Relations, which said:
. . . There was only management for the business of gawgaw
and coffee with whom the laborers are dealing regarding
their work. Hence, the filing of action against the La
Campana Starch and Coffee Factory is proper and
justified.1wphl.nt
The order of denial was appealed to this Tribunal
through certiorari under G.R. No. L-5677. In disposing of the case,
we held:
As to the first ground, petitioners obviously do not question
the fact that the number of employees of the La Campana
Gaugau Packing involved in the case is more than the
jurisdictional number (31) required by law, but they contend
that the industrial court has no jurisdiction to try case against
La Campana Coffee Factory Co. Inc. because the latter has
allegedly only 14 laborers and only five of these are
members of respondent Kaisahan. This contention loses
force when it is noted that, as found by the industrial court
and this finding is conclusive upon us La Campana
Gaugau Packing and La Campana Coffee Factory Co. Inc.,
are operating under one single management, that is, one
business though with two trade names. True, the coffee
factory is a corporation , and, by legal fiction, an entity
existing separate and part from the persons composing it,
that is, Tan Tong and his family. But is settled this fiction of
law, which has been introduced as a matter of convenience
and to subserve the ends of justice cannot be invoke to
further an end subversive of that purpose.
... The attempt to make the two factories appear as two
separate business, when in reality, they are but one is but a
device to defeat the ends of the law (the Act governing
capital and labor relations) and should not be permitted to
prevail. (La Campana Coffee Factory, et al., vs. Kaisahan ng
mga Manggagawa, etc. et al., 93 Phil., 160; 49 Off. Gaz., [6]
2300.)

Upon the return of the case to the Court of Industrial Relations, the
The facts in this case may be briefly narrated thus: Sometime in June, latter proceeded with the hearing. In the meantime incidental cases
involving the same parties came up and were filed before the Court of
1951, members of the Kaisahan ng mga Manggagawa sa La
Industrial Relations in the following cases:1wphl.nt
Campana, a labor union to which were affiliated workers in the La
Campana Starch Factory and La Campana Coffee Factory, two
separate entities but under the one management, presented demands

53

Corporation Code 3
Case No. 584-V(1) petition for contempt against the La
Campana Starch and Coffee Factory for having employed 21
new laborers in violation of the order of July 21, 1951, filed
on July 25, 1951;
Case No. 584-V(2) petition of La Campana for authority
for authority to dismiss Loreto Bernabe, filed on July 25,
19651;

This Court, deliberating upon the allegations of the petition

filed in case l-12355 (La Campana Starch Coffee Factory et
al. vs. Kaisahan ng Mga Manggagawa sa la Campana, KKM,
et al) for review, on certiorari of the decision of the Court of
Industrial Relations referred to therein, and finding that there
is no merit in the petition, RESOLVE TO DISMISS the
same.

The CIR order of February 18, ,1957, in the incidental cases Nos.
584-V to V(6), having become final and executory , the laborers
involved reported for work on August 28, 1957, but they were not
admitted by the management. Consequently, the union filed a petition
Case No. 584-V(5) petition of Union to reinstate Marcelo dated August 30, 1957, to hold respondents in said cases for
contempt. After hearing the CIR issued the order of September 30,
Estrada and Exequiel Rapiz with back pay and to punish
officials of the company for contempt, filed on February 13, 1957, subject of this petition, ordering "the La Campana Starch and
Coffee Factory or its manager or the person who has charge of its
1952; and
management and the administrator of the estate of Ramon Tantongco"
Case No. 584-V(6) petition of union for reinstatement of to "reinstate the persons named in the order of February 18, 1957"
and "to deposit the amount of P65,534.01." For refusal or failure to
Ibardolaza and seven other member-laborers and to punish
comply with said order, petitioner Ricardo Tantongco was required to
the officers of the company for contempt, filed on July 15,
appear before the attorney of the CIR in contempt proceedings.
1953.
Petitioner now seeks to prohibit the CIR from proceeding with the
trial for contempt and to enjoin respondent CIR from enforcing its
These five cases were heard jointly. In the meantime Ramon
Tantongco supposed to be the owner and manager of the La Campana order of September 30, 1957.
Starch Factory and the person in charge of the La Campana Coffee
Petitioner contends that upon the death of Ramon Tantongco, the
Factory died on May 16, 1956. On motion of the labor union, the
claims of the laborers should have been dismissed and that said
Court of Industrial Relations order the inclusion as party respondent
claims should have been filed with the probate court having
of the administrator of the estate of Ramon Tantongco who was
jurisdiction over the administration proceedings of the estate of
Ricardo Tantongco.
Ramon Tantongco, pursuant to the provisions of Rule 3, Section 21 of
Ricardo Tantongco, as administrator, under a special appearance filed the Rules of Court and that the failure to file claims with the
administrator forever barred said claims as provided in Rule 87,
a motion to dismiss all the cases including the main case, that is to
Section 5 of the Rules of Court, especially after the assets of the
say, Cases No. 584-(V) to 584-V(6), on the ground that said cases
involved claims for sums of money and consequently should be filed estate had been distributed among the heirs, and petitioner had ceased
before the probate court having jurisdiction over the estate, pursuant to be the administrator of the estate. As already stated this same
to the provisions of Rule 3, Section 21, and Rule 88, Section 1 of the question was raised by petitioner in G.R. No. L-12355, entitled "La
Rules of Court. On August 23, 1956, the Court of Industrial Relations Campana Starch and Coffee Factory and Ricardo Tantongco, etc. vs.
denied the motion to dismiss and proceed to hear the incidental cases Kaisahan ng mga Manggagawa sa La Campana (KKM)," which, as
already stated, was summarily dismissed by this Court in a resolution
against the La Campana entities.
dated June 12, 1957. Consequently, said question may not again be
raised in the present case. Furthermore, it may be recalled that both in
On June 12, 1956, a partial decision was rendered in the main case
the main case in the incidental cases No. 584-V to 584-V(6), Ramon
No. 584-V, which partial decision was elevated to us and is still
Tantongco was never a party. The party there was the La Campana
pending appeal. On February 18, 1957, the Court of Industrial
Starch and Coffee Factory by which name it was sought to designate
Relations issued an order in incidental Cases No. 584-V(1), V(2),
the two entities La Campana Starch Packing and the La Campana
V(5) and V(6), directing the "management of the respondent
company and or the administrator of the Estate of Ramon Tantongco", Coffee Factory. Naturally, the claims contained in said cases were not
the claims contemplated by law to be submitted before the
to reinstate the dismissed laborers mentioned therein with back
wages. This order of February 18, 1957, as well as the order directing administrator. In other words the death of Ramon Tantongco did not
deprive the CIR of its jurisdiction over the cases aforementioned.
the inclusion of the administrator of the estate of Ramon Tantongco
as additional respondent in the incidental cases, and the order denying Moreover, the money claims of the laborers were merely incidental to
the petition of the administrator to dismiss said incidental cases were their demands for reinstatement for having been unjustly dismissed,
appealed to this tribunal though certiorari. The appeal, however, was and for better working conditions.
Case No. 584-V(3) petition of Union to reinstate
Bonifacio Calderon with backpay, filed on August 3, 1951;

summarily dismissed by this Court in its resolution of June 12, 1957,

as follows:

Petitioner, however, contends that in G.R. No. L-5677, we "pierced

the veil of corporate existence", and held that the La Campana Starch
and Coffee Factory and its owner, Ramon Tantongco, were one; so

54

Corporation Code 3
that with the death of Ramon, the La Campana entities ceased to
exist, resulting in the loss of jurisdiction of the CIR to enforce its
order against said entities. The reason we applied the so-called
"piercing the veil of corporate existence" in G.R. No. L-5677 was to
avoid the technicality therein advanced in order to defeat the
jurisdiction of the CIR. We there found that although there were
ostensibly two separate companies or entities, they were managed by
the same person or persons and the workers in both were used
interchangeably so that in order to determine whether or not the CIR
had jurisdiction, the number of workers in both entitles, not in only
one, was to be considered. However, we still believe that although the
family of Ramon Tantongco was practically the owner of both the
coffee factory and the starch factory, nevertheless these entities are
separate from the personality of Ramon. The coffee factory is a stock
corporation and the shares are owned not only by Ramon but also by
others, such as petitioner Ricardo who not only is a stockholder and
director and treasurer but also the management of the same
Furthermore, petitioner is now estopped from claiming that the two
entities in question and Ramon are one. Thus in Annex 3-CIR (par. 1
thereof) which is a complaint for injunction filed by La Campana
Food Products, et al and La Campana Starch Packing against the
consolidated Labor Organization of the Philippines, in civil Case No.
P-25482 in the Court of First Instance of Rizal, petitioner admitted
the existence and operation of said entities; in Annex 4CIR where
petitioner appeared as General Manager representing the two entities
in its agreement with the La Campana Workers Union to resolve the
dispute between the two entities and the laborers in case Nos. 1072-V
and 1371-ULP, the existence of the two entities appears to have been
admitted; and in Annex 5-A-CIR, an answer to the complaint of La
Campana Workers Union in case No. 1471-ULP (Annex 5-CIR),
petitioner admitted the allegation that said two factories were in
existence and doing business with petitioner as manager of the same.

management of the business of the association or

corporation and the officers of directors thereof who have
ordered or authorized the violation of contempt shall be
liable. . . .
In conclusion, we find and hold that the La Campana Starch and Food
Products Company which stands for the La Campana Starch and
Coffee Factory are entities distinct from the personality of Ramon
Tantongco; that after the death of Ramon these two entities continued
to exist and to operate under the management of petitioner and that
consequently he is the proper person and official to which the orders
of the CIR are addressed and who is in duty bound to comply with the
same. We further find that the CIR acted with in its jurisdiction in
issuing its order of September 30, 1957 and in requiring petitioner to
appear to give his evidence if any in relation with the contempt
proceedings instituted against him.1wphl.nt
In view of the foregoing, the petition for certiorari is .hereby denied
and the writ of preliminary injunction dissolved, with costs.

In relation to the order of the CIR requiring petitioner to appear in the

contempt proceedings instituted against him, petitioner contends that
after he ceased to be the administrator of the estate of Ramon
Tantongco, he may not now be compelled to comply with the order of
the court. In answer, it is enough to bear in mind the jurisdiction and
authority of the CIR as to compliance with and violations of its orders
under section 6, Commonwealth Act No. 143, which we quote below:
. . . The Court or any Judge thereof shall have furthermore,
all the inherent powers of a court of justice provided in
paragraph 5 of Rule 124 of the Supreme Court, as well as the
power to punish direct and indirect contempt as provided in
Rule 64 of the same Court, under the same procedure and
penalties provided therein.
Any violation of any order, award, or decision of the Court
of Industrial Relations shall, after such order, award or
decision has become final, conclusive, and executory,
constitute contempt of court: . . .
In case the employer (or landlord) committing any such
violation or contempt is an association or corporation, the
manager or the person who has the charge of the

55

Corporation Code 3
G.R. No. 110358 November 9, 1994
QUINTIN ROBLEDO, MARIO SINLAO, LEONARDO
SAAVEDRA, VICENTE SECAPURI, DANIEL AUSTRIA, ET
AL., petitioners,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION,
BACANI SECURITY AND ALLIED SERVICES CO., INC.,
AND BACANI SECURITY AND PROTECTIVE AGENCY
AND/OR ALICIA BACANI, respondents.
Benjamin C. Pineda for petitioners.
Villanueva, Ebora & Caa for private respondents.

MENDOZA, J.:
This is a petition for review of the decision of the First Division 1 of
the National Labor Relations Commission, setting aside the decision
of the Labor Arbiter which held private respondents jointly and
severally liable to the petitioners for overtime and legal holiday pay.
The facts of this case are as follows:
Petitioners were former employees of Bacani Security and Protective
Agency (BSPA, for brevity). They were employed as security guards
at different times during the period 1969 to December 1989 when
BSPA ceased to operate.
BSPA was a single proprietorship owned, managed and operated by
the late Felipe Bacani. It was registered with the Bureau of Trade and
Industry as a business name in 1957. Upon its expiration, the
registration was renewed on July 1, 1987 for a term of five (5) years
ending 1992.
On December 31, 1989, Felipe Bacani retired the business name and
BSPA ceased to operate effective on that day. At that time, respondent
Alicia Bacani, daughter of Felipe Bacani, was BSPA's Executive
Directress.

AMADO P. ELEDA 25,250

shares
VICTORIA B. AURIGUE
25,250 shares
FELIPE BACANI 20,000
shares
The primary purpose of the corporation was to "engage in the
business of providing security" to persons and entities. This was the
same line of business that BSPA was engaged in. Most of the
petitioners, after losing their jobs in BSPA, were employed in
BASEC.
On July 5, 1990, some of the petitioners filed a complaint with
the Department of Labor and Employment, National Capital Region,
for underpayment of wages and nonpayment of overtime pay, legal
holiday pay, separation pay and/or retirement/resignation benefits,
and for the return of their cash bond which they posted with BSPA.
Made respondents were BSPA and BASEC. Petitioners were
subsequently joined by the rest of the petitioners herein who filed
supplementary complaints.
On March 1, 1992, the Labor Arbiter rendered a decision upholding
the right of the petitioners. The dispositive portion of his decision
reads:
CONFORMABLY WITH THE FOREGOING, the
judgment is hereby rendered finding complainants
entitled to their money claims as herein above
computed and to be paid by all the respondents
hereinin solidum except BSPA which has already
been retired from business.
Respondents are further ordered to pay attorney's
fees equivalent to five (5) percent of the awarded
money claims.
All other claims are hereby dismissed for lack of
merit.
SO ORDERED.

On January 15, 1990 Felipe Bacani died. An intestate proceeding was On appeal the National Labor Relations Commission reversed. In a
decision dated March 30, 1993, the NLRC's First Division declared
instituted for the settlement of his estate before the Regional Trial
the Labor Arbiter without jurisdiction and instead suggested that
Court, National Capital Region, Branch 155, Pasig, Metro Manila.
petitioners file their claims with the Regional Trial Court, Branch
155, Pasig, Metro Manila, where an intestate proceeding for the
Earlier, on October 26, 1989, respondent Bacani Security and Allied
settlement of Bacani's estate was pending. Petitioners moved for a
Services Co., Inc. (BASEC, for brevity) had been organized and
reconsideration but their motion was denied for lack of merit. Hence
registered as a corporation with the Securities and Exchange
this petition for review.
Commission. The following were the incorporators with their
respective shareholdings:
ALICIA BACANI 25,250
shares
LYDIA BACANI 25,250
shares

No appeal lies to review decisions of the NLRC. Nonetheless the

petition in this case was treated as a special civil action
of certiorari to determine whether the NLRC did not commit a grave
abuse of its discretion in reversing the Labor Arbiter's decision.

56

Corporation Code 3
The issues in this case are two fold: first, whether Bacani Security
and Allied Services Co. Inc. (BASEC) and Alicia Bacani can be held
liable for claims of petitioners against Bacani Security and Protective
Agency (BSPA) and,second, if the claims were the personal liability
of the late Felipe Bacani, as owner of BSPA, whether the Labor
Arbiter had jurisdiction to decide the claims.
Petitioners contend that public respondent erred in setting aside the
Labor Arbiter's judgment on the ground that BASEC is the same
entity as BSPA the latter being owned and controlled by one and the
same family, namely the Bacani family. For this reason they urge that
the corporate fiction should be disregarded and BASEC should be
held liable for the obligations of the defunct BSPA.

is no question that petitioners' claims, assuming them to be valid, are

the personal liability of the late Felipe Bacani. It is immaterial that he
was also a stockholder of BASEC.
Indeed, the doctrine is stood on its head when what is sought is to
make a corporation liable for the obligations of a stockholder. But
there are several reasons why BASEC is not liable for the personal
obligations of Felipe Bacani. For one, BASEC came into existence
before BSPA was retired as a business concern. BASEC was
incorporated on October 26, 1989 and its license to operate was
released on May 28, 1990, while BSPA ceased to operate on
December 31, 1989. Before, BSPA was retired, BASEC was already
existing. It is, therefore, not true that BASEC is a mere continuity of
BSPA.

We find the petition to be without merit.

As correctly found by the NLRC, BASEC is an entity separate and
distinct from that of BSPA. BSPA is a single proprietorship owned
and operated by Felipe Bacani. Hence its debts and obligations were
the personal obligations of its owner. Petitioners' claim which are
based on these debts and personal obligations, did not survive the
death of Felipe Bacani on January 15, 1990 and should have been
filed instead in the intestate proceedings involving his estate.
Indeed, the rule is settled that unless expressly assumed labor
contracts are not enforceable against the transferee of an enterprise.
The reason for this is that labor contracts are in
personam. 2 Consequently, it has been held that claims for backwages
earned from the former employer cannot be filed against the new
owners of an enterprise. 3 Nor is the new operator of a business liable
for claims for retirement pay of employees. 4
Petitioners claim, however, that BSPA was intentionally retired in
order to allow expansion of its business and even perhaps an increase
in its capitalization for credit purpose. According to them, the Bacani
family merely continued the operation of BSPA by creating BASEC
in order to avoid the obligations of the former. Petitioners anchor
their claim on the fact that Felipe Bacani, after having ceased to
operate BSPA, became an incorporator of BASEC together with his
wife and daughter. Petitioners urge piercing the veil of corporate
entity in order to hold BASEC liable for BSPA's obligations.
The doctrine of piercing the veil of corporate entity is used whenever
a court finds that the corporate fiction is being used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or to
confuse legitimate issues, or that a corporation is the mere alter ego or
business conduit of a person or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. 5 It
is apparent, therefore, that the doctrine has no application to this case
where the purpose is not to hold the individual stockholders liable for
the obligations of the corporation but, on the contrary, to hold the
corporation liable for the obligations of a stockholder or stockholders.
Piercing the veil of corporate entity means looking through the
corporate form to the individual stockholders composing it. Here
there is no reason to pierce the veil of corporate entity because there

Second, Felipe Bacani was only one of the five (5) incorporators of
BASEC. He owned the least number of shares in BASEC, which
included among its incorporators persons who are not members of his
family. That his wife Lydia and daughter Alicia were also
incorporators of the same company is not sufficient to warrant the
conclusion that they hold their shares in his behalf.
Third, there is no evidence to show that the assets of BSPA were
transferred to BASEC. If BASEC was a mere continuation of BSPA,
all or at least a substantial part of the latter's assets should have found
their way to BASEC.
Neither can respondent Alicia Bacani be held liable for BSPA's
obligations. Although she was Executive Directress of BSPA, she was
merely an employee of the BSPA, which was a single proprietorship.
Now, the claims of petitioners are actually money claims against the
estate of Felipe Bacani. They must be filed against his estate in
accordance with Sec. 5 of Rule 86 which provides in part:
Sec. 5. Claims which must be filed under the
notice. If not filed, barred; exceptions. All claims
for money against the decedent, arising from
contract, express or implied, whether the same be
due, not due, or contingent, all claims for funeral
expenses and expenses for the last sickness of the
decedent, and judgment for money against the
decedent, must be filed within the time limited in
the notice; otherwise they are barred forever, except
that they may be set forth as counterclaims in any
action that the executor or administrator may bring
against the claimants . . .
The rationale for the rule is that upon the death of the defendant, a
testate or intestate proceeding shall be instituted in the proper court
wherein all his creditors must appear and file their claims which shall
be paid proportionately out of the property left by the deceased. The
objective is to avoid duplicity of procedure. Hence the ordinary
actions must be taken out from the ordinary courts. 6 Under Art. 110
of the Labor Code, money claims of laborers enjoy preference over

57

Corporation Code 3
claims of other creditors in case of bankruptcy or liquidation of the
employer's business.
WHEREFORE, the petition for certiorari is DISMISSED.
SO ORDERED.

58

Corporation Code 3
G.R. No. L-2886

August 22, 1952

GREGORIO ARANETA, INC., plaintiff-appellant,

vs.
PAZ TUASON DE PATERNO and JOSE VIDAL, defendantsappellants.
Araneta and Araneta for appellant.
Ramirez and Ortigas for defendants-appellants.
Perkins, Ponce Enrile and Contreras And La O and Feria for
appellee.
TUASON, J.:
This is a three-cornered contest between the purchasers, the seller,
and the mortgagee of certain portions (approximately 40,703 square
meters) of a big block of residential land in the district of Santa Mesa,
Manila. The plaintiff, which is the purchaser, and the mortgagee
elevated this appeal. Though not an appellant, the seller and
mortgagor has made assignments of error in her brief, some to
strengthen the judgment and others for the purpose of new trial.
The case is extremely complicated and multiple issues were raised.
The salient facts in so far as they are not controverted are these. Paz
Tuason de Paterno is the registered owner of the aforesaid land,
which was subdivided into city lots. Most of these lots were occupied
by lessees who had contracts of lease which were to expire on
December 31,1952, and carried a stipulation to the effect that in the
event the owner and lessor should decide to sell the property the
lessees were to be given priority over other buyers if they should
desire to buy their leaseholds, all things being equal. Smaller lots
were occupied by tenants without formal contract.

the latter would buy for the said amount of P400,000 the entire estate
under these terms.
El precio sera pagado como sigue: un 40 por ciento
juntamente con la carta de aceptacion del arrendatario, un 20
por ciento delprecio al otorgarse la escritura de compromiso
de venta, y el remanente 40 por ciento al otorgarse la
escritura de venta definitiva, la cual sera otorgada despues de
que se habiese canceladola hipoteca a favor de Jose Vidal
que pesa sobre dichos lotes. Lacomision del 5 por ciento que
corresponde a Jose Araneta serapagada al otorgarse la
escritura de compromiso de venta.
Paz Tuason se obliga a entregar mediante un propio las
cartasque dirigira a este efecto a los arrendatarios, de
conformidad con el formulario adjunto, que se marca como
Apendice A.
Expirado el plazo arriba mencionado, Paz Tuason otorgara
las escrituras correspondientes de venta a los arrendatarios
que hayan decidido comprar sus respectivos lotes.
9. Los alquieres correspondientes a este ao se prorratearan
entre la vendedora y el comprador, correspondiendo al
comprador los alquileres correspondientes a Noviembre y
Diciembre de este ao y asimismo sera por cuenta del
comprador el amillaramiento correspondiente a dichos
meses.
10. Paz Tuason, reconoce haver recibido en este acto de
Gregorio Araneta, Inc., la suma de Ciento Noventa Mil
Pesos (P190,000)como adelanto del precio de venta que
Gregorio Araneta, Inc., tuviere que pagar a Paz Tuason.

In 1940 and 1941 Paz Tuason obtained from Jose Vidal several loans
totalling P90,098 and constituted a first mortgage on the aforesaid
property to secure the debt. In January and April, 1943, she obtained
additional loans of P30,000 and P20,000 upon the same security. On
each of the last-mentioned occasions the previous contract of
mortgage was renewed and the amounts received were consolidated.
In the first novated contract the time of payment was fixed at two
years and in the second and last at four years. New conditions not
relevant here were also incorporated into the new contracts.

La cantidad que Paz Tuason recibe en este acto sera

aplicadapor ella a saldar su deuda con Jose Vidal, los
amillaramientos, sobre el utilizado por Paz Tuason para otros
fines.

There was, besides, a separate written agreement entitled "Penalidad

del Documento de Novacion de Esta Fecha" which, unlike the
principal contracts, was not registered. The tenor of this separate
agreement, all copies, of which were alleged to have been destroyed
or lost, was in dispute and became the subject of conflicting evidence.
The lower court did not make categorical findings on this point,
however, and it will be our task to do so at the appropriate place in
this decision.

Gregorio Araneta, Inc., pagara el precio de venta como

sigue: 90 por ciento del mismo al otorgarse la escritura de
venta definitiva descontandose de la cantidad que entonces
se tenga que pagar de adelanto de P190,000 que se entrega
en virtud de esta escritura. El 10 por ciento remanente se
pagara a Paz Tuazon, una vez se haya cancelado la hipoteca
que pesa actualmente sobre el terreno.

In 1943 Paz Tuason decided to sell the entire property for the net
amount of P400,000 and entered into negotiations with Gregorio
Araneta, Inc. for this purpose. The result of the negotiations was the
execution on October 19, 1943, of a contract called "Promesa de
Compra y Venta" and identified as Exhibit "1." This contract provided
that subject to the preferred right of the lessees and that of Jose Vidal
as mortgagee, Paz Tuason would sell to Gregorio Araneta, Inc. and

11. Una vez determinados los lotes que Paz Tuason podra
vendera Gregorio Araneta, Inc., Paz Tuason otorgara una
escritura deventa definitiva sobre dichos lotes a favor de
Gregorio Araneta, Inc.

No obstante la dispuesto en el parrafo 8, cualquier

arrendatario que decida comprar el lote que occupa con
contrato de arrendamiento podra optar por pedir el
otorgamiento inmediato a su favor el acto de la escritura de
venta definitiva pagando en el acto el 50 por ciento del
precio (ademas del 40 por ciento que debio incluir en su
carta de aceptacion) y el remanente de 10 por ciento
inmediatemente despues de cancelarse la hipoteca que pesa
sobre el terreno.

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Corporation Code 3
12. Si la mencionada cantidad de P190,000 excediere del 90
por ciento de la cantidad que Gregorio Araneta, Inc., tuviere
que vender a dicho comprador, el saldo sera pagado
inmediatamente por Paz Tuazon, tomandolo de las
cantidades que reciba de los arrendatarios como precio de
venta.
In furtherance of this promise to buy and sell, letters were sent the
lessees giving them until August 31, 1943, an option to buy the lots
they occupied at the price and terms stated in said letters. Most of the
tenants who held contracts of lease took advantage of the opportunity
thus extended and after making the stipulated payments were giving
their deeds of conveyance. These sales, as far as the record would
show, have been respected by the seller.
With the elimination of the lots sold or be sold to the tenants there
remained unencumbered, except for the mortgage to Jose Vidal, Lots
1, 8-16 and 18 which have an aggregate area of 14,810.20 square
meters; and on December 2, 1943, Paz Tuason and Gregorio Araneta,
Inc. executed with regard to these lots an absolute deed of sale, the
terms of which, except in two respects, were similar to those of the
sale to the lessees. This deed, copy of which is attached to the
plaintiff's complaint as Exhibit A, provided, among other things, as
follows:
The aforesaid lots are being sold by he Vendor to the Vendee
separately at the prices mentioned in paragraph (6) of the
aforesaid contract entitled "Promesa de Compra y Venta,"
making a total sum of One Hundred Thirty-Nine Thousand
Eighty-three pesos and Thirty-two centavos (P139,083.32),
ninety (90%) per cent of which amount, i.e., the sum of One
Hundred Twenty-five Thousand One Hundred Seventy-four
Pesos and Ninety-nine centavos (P125,174.99), the Vendor
acknowledges to have received by virtue of the advance of
One Hundred Ninety Thousand (P190,000) Pesos made by
the Vendee to the Vendor upon the execution of the aforesaid
contract entitled "Promesa de Compra y Venta". The balance
of Sixty-Four Thousand Eight Hundred Twenty-five Pesos
and One centavo (P64,825.01) between the sum of
P125,174.99, has been returned by the Vendor to the Vendee,
which amount the Vendee acknowledges to have received by
these presents;

Total

The return of the sum of P64,825.01 was made by the

Vendor to the Vendee in a liquidation which reads as
follows:

Hemos recibido de Da. Paz Tuason de Paterno la cantidad

Sesenta y Cuatro mil Ochocientos Veinticinco Pesos y un
centimo (P64,825.01) enconcepto de devolucion que nos h
excesode lo pagadoa ella de

Menos el 90% de P139,083.32, importe de los lotes que v

comprar

Exceso

Cheque BIF No. D-442988 de Simplicio del Rosario

Cheque PNB No. 177863-K de L.E. Dumas

Cheque PNB No. 267682-K de Alfonso Sycip

Cheque PNB No. 83940 de Josefina de Pabalan

Billetes recibidos de Alfonso Sycip

The aforesaid sum of P190,000 was delivered by the Vendee
to the Vendor by virtue of four checks issued by the Vendee
against the Bank of the Philippine Islands, as follows:

No. C-286445 in favor of Paz Tuason de Paterno

No. C-286444 in favor of the City Treasurer, Manila

Menos las comisiones de 5 % recibidas de Josefina

de Pabalan

No. C-286443 in favor of Jose Vidal

L.E. Dumas

No. C-286442 in favor of Jose Vidal

Angela S. Tuason

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Corporation Code 3
entitled "Promesa de Compara y Venta" will be adjusted
between the parties in a separate document.

Menos cheque BIF No. C-288642 a favor de Da. Paz

Tuason de Paterno que le entregamos como exceso

Manila, Noviembre 2, 1943

GREGORIO ARANETA, INCORPORATED

Por;
(Fdo.) "JOSE ARANETA
Presidente

Recibido cheque No. C-288642 BIF-P493.23

Por:
(Fdo.) "M.J. GONZALEZ

In view of the foregoing liquidation, the vendor

acknowledges fully and unconditionally, having received the
sum of P125,174.99 of the present legal currency and hereby
expressly declares that she will not hold the Vendee
responsible for any loss that she might suffer due to the fact
that two of the checks paid to her by the Vendee were issued
in favor of Jose Vidal and the latter has, up to the present
time, not yet collected the same.

Should any of the aforesaid lessees of lots Nos. 2, 3, 4, 5, 6,

7, 9 and 17 fail to carry out their respective obligations
under the option to purchase exercised by them so that the
rights of the lessee to purchase the respective property leased
by him is cancelled, the Vendor shall be bound to sell the
same to the herein Vendee, Gregorio Araneta, Incorporated,
in conformity with the terms and conditions provided in the
aforesaid contract of "Promesa de Compra y Venta";
The documentary stamps to be affixed to this deed will be
for the account of the Vendor while the expenses for the
registration of this document will be for the account of the
Vendee.
The remaining area of the property of the Vendor subject to
Transfer Certificates of Title Nos. 60471 and 60472, are lots
Nos. 2, 3, 4, 5, 6, 7, 9, and 17, all of the Consolidation of
lots Nos. 20 and 117 of plan II-4755, G.L.R.O. Record No.
7680.
Before the execution of the above deed, that is, on October 20, 1943,
the day immediately following the signing of the agreement to buy
and sell, Paz Tuason had offered to Vidal the check for P143,150
mentioned in Exhibit A, in full settlement of her mortgage obligation,
but the mortgagee had refused to receive that check or to cancel the
mortgage, contending that by the separate agreement before
mentioned payment of the mortgage was not to be effected totally or
partially before the end of four years from April, 1943.
Because of this refusal of Vidal's Paz Tuason, through Atty. Alfonso
Ponce Enrile, commenced an action against the mortgagee in October
or the early paret of November 1943. the record of that case was
destroyed and no copy of the complaint was presented in evidence.
Attached to the complaint or deposited with the clerk of court by
Attorney Ponce Enrile simultaneously with the docketing of the suit
were the check for P143,150 previously turned down by Vidal,
another certified check for P12,932.61, also drawn by Gregorio
Araneta, Inc., in favor of Vidal, and one ordinary check for P30,000
issued by Paz Tuazon. These three checks were supposed to cover the
whole indebtedness to Vidal including the principal and interest up to
that time and the penalty provided in the separate agreement.

The ten (10%) per cent balance of the purchase price not yet
paid in the total sum of P13,908.33 will be paid by the
Vendee to the Vendor when the existing mortgage over the
property sold by the Vendor to the Vendee is duly cancelled
in the office of the Register of Deeds, or sooner at the option But the action against Vidal never came on for trial and the record
and the checks were destroyed during the war operations in January
of the Vendee.
or February, 1945; and neither was the case reconstituted afterward.
This failure of the suit for the cancellation of Vidal's mortgage,
This Deed of Sale is executed by the Vendor free from all
coupled with the destruction of the checks tendered to the mortgagee,
liens and encumbrances, with the only exception of the
the nullification of the bank deposit on which those checks had been
existing lease contracts on parcels Nos. 1, 10, 11, and 16,
drawn, and the tremendous rise of real estate value following the
which lease contracts will expire on December 31, 1953,
termination of the war, gave occasion to the breaking off the schemes
with the understanding, however, that this sale is being
outlined in Exhibits 1 and A; Paz Tuason after liberation repudiated
executed free from any option or right on the part of the
them for the reasons to be hereafter set forth. The instant action was
lessees to purchase the lots respectively leased by them.
the offshoot, begun by Gregorio Araneta, Inc. to compel Paz Tuason
to deliver to the plaintiff a clear title to the lots described in Exhibit A
It is therefore clearly understood that the Vendor will pay the free from all liens and encumbrances, and a deed of cancellation of
existing mortgage on her property in favor of Jose Vidal.
the mortgage to Vidal. Vidal came into the case in virtue of a summon
issued by order of the court, and filed a cross-claim against Paz
The liquidation of the amounts respectively due between the Tuazon to foreclose his mortgage.
Vendor and the Vendee in connection with the rents and real
estate taxes as stipulated in paragraph (9) of the contract

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Corporation Code 3
It should be stated that the outset that all the parties are in agreement
that Vidal's loans are still outstanding. Paz Tuason's counsel concede
that the tender of payment to Vidal was legally defective and did not
operate to discharge the mortgage, while the plaintiff is apparently
uninterested in this feature of the case considering the matter one
largely between the mortgagor and the mortgagee, although to a
certain degree this notion is incorrect. At any rate, the points of
discord between Paz Tuason and Vidal concern only the accrual of
interest on the loans, Vidal's claim to attorney's fees, and the
application of the debt moratorium law which the debtor now
invokes. These matters will be taken up in the discussion of the
controversy between Paz Tuason and Jose Vidal.

Whatever the terms of Exhibit 1, the plaintiff and the defendant were
at perfect liberty to make a new agreement different from or even
contrary to the provisions of that document. The validity of the
subsequent sale must of necessity depend on what it said and not on
the provisions of the promise to buy and sell.

It is as possible proof or fraud that the discrepancies between the two

documents bear some attention. It was alleged that Attorneys
Salvador Araneta and J. Antonio Araneta who the defendant said had
been her attorneys and had drawn Exhibit A, and not informed or had
misinformed her about its contents; that being English, she had not
read the deed of sale; that if she had not trusted the said attorneys she
would not have been so foolish as to affix her signature to a contract
The principal bone of contention between Gregorio Araneta, Inc., and so one-sided.
Paz Tuason was the validity of the deed of sale of Exhibit A on which
the suit was predicated. The lower court's judgment was that this
The evidence does not support the defendant. Except in two
contract was invalid and was so declared, "sin per juicio de que la
particulars, Exhibit A was a substantial compliance with Exhibit 1 in
demandada Paz Tuason de Paterno pague a la entidad demandante
furtherance of which Exhibit A was made. One departure was the
todas las cantidades que habia estado recibiendo de lareferida entidad proviso that 10 per cent of the purchase price should be paid only
demandante, en concepto de pago de losterrenos, en moneda
after Vidal's mortgage should have been cancelled. This provisional
corriente, segun el cambio que debiaregir al tiempo de otorgarse la
deduction was not onerous or unusual. It was not onerous or unusual
escritura segun la escalade "Ballentine", descontando, sin embargo,
that the vendee should withhold a relatively small portion of the
de dichas cantidades cualesquiera que la demandante haya
purchase price before all the impediments to the final consummation
estadorecibiendo como alquileres de los terrenos
of the sale had been removed. The tenants who had bought their lots
supuestamentevendidos a ella." The court based its opinion that
had been granted the privilege to deduct as much as 40 per cent of the
Exhibit 1. His Honor, Judge Sotero Rodas, agreedwith the defendant stipulated price pending discharge of the mortgage, although his
that under paragraph 8 of Exhibit 1 there was to be no absolute sale to percentage was later reduced to 10 as in the case of Gregorio Araneta,
Gregorio Araneta, Inc., unless Vidal's mortgage was cancelled.
Inc. It has also been that the validity of the sales to the tenants has not
been contested; that these sales embraced in the aggregate 24,245.40
In our opinion the trial court was in error in its interpretation of
square meters for P260,916.68 as compared to 14,811.20 square
Exhibit 1. The contemplated execution of an absolute deed of sale
meters sold to Gregorio Araneta, Inc. for P139,083.32; that the seller
was not contingent on the cancellation of Vidal's mortgage. What
has already received from the tenant purchasers 90 per cent of the
Exhibit 1 did provide (eleventh paragraph) was that such deed of
purchase money.
absolute sale should be executed "una vez determinado los lotes que
Paz Tuason podra vender a Gregorio Araneta, Inc." The lots which
There is good reason to believe that had Gregorio Araneta, Inc. not
could be sold to Gregorio Araneta, Inc. were definitely known by
insisted on charging to the defendant the loss of the checks deposited
October 31, 1943, which was the expiry of the tenants' option to buy, with the court, the sale in question would have gone the smooth way
and the lots included in the absolute of which the occupants' option to of the sales to the tenants. Thus Dindo Gonzales, defendant's son,
buy lapsed unconditionally. Such deed as Exhibit A was then in a
declared:
condition to be made.
Vidal's mortgage was not an obstacle to the sale. An amount had been
set aside to take care of it, and the parties, it would appear, were
confident that the suit against the mortgagee would succeed. The only
doubt in their minds was in the amount to which Vidal was entitled.
The failure of the court to try and decide that the case was not
foreseen either.
This refutes, were think, the charge that there was undue rush on the
part of the plaintiff to push across the sale. The fact that
simultaneously with Exhibit A similar deeds were given the lessees
who had elected to buy their leaseholds, which comprise an area
about twice as big as the lots described in Exhibit A, and the further
fact that the sale to the lessees have never been questioned and the
proceeds thereof have been received by the defendant, should add to
dispel any suspicion of bad faith on the part of the plaintiff. If anyone
was in a hurry it could have been the defendant. The clear
preponderance of the evidence that Paz Tuason was pressed for cash
and that the payment of the mortgage was only an incident, or a
necessary means to effectuate the sale. Otherwise she could have
settled her mortgage obligation merely by selling a portion of her
estate, say, some of the lots leased to tenants who, except two who
were in concentration camps, were only too anxious to buy and own
the lots on which their houses were built.

P. Despues de haberse presentado esta demanda, recuerda

usted haber tenido conversacion con Salvador Araneta
acerca de este asunto?
R. Si Seor.
P. Usted fue quien se acerco al seor Salvador Araneta?
R. Si, seor.
P. Quiero usted decir al Honorable Juzgado que era lo que
usted dijo al seor Salvador Araneta?
R. No creo que es propio que yo diga, por tratarse de mi
madre.
P. En otras palabras, usted quiere decir que no quiere usted
que se vuelva decir o repetir ante este Honorable Juzgado lo
que usted dijo al seor Salvador Araneta, pues, se trata de su
madre?
R. No, seor.

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Corporation Code 3
P. Puede usted decirnos que quiso usted decir cuando que no
quisiera decir?

property then already worth a fortune and now assessed by the

defendant at several times higher. Doubts in defendant's veracity are
enhanced by the fact that she denied or at least pretended in her
answer to be ignorant of the existence of Exhibit A, and that only
R. Voy a decir lo que Salvador Araneta, yo me acerque a
Don Salvador Araneta, y yo le dije que es una verguenza de after she was confronted with the signed copy of the document on the
witness did she spring up the defense of fraud. It would look as if she
que nosotros, en la familia tengamos que ir a la Corte por
este, y tambien dije que mi madre de por si quiere vender el gambled on the chance that no signed copy of the deed had been
terreno a ellos, porque mi madre quiere pagar al seor Vidal, saved from the war. She could not have forgotten having signed so
important a document even if she had not understood some of its
y que es una verguenza, siendo entre parientes, tener que
venir por este; era lo que yo dije al seor Salvador Araneta. provisions.
xxx

xxx

xxx

P. No recuerda usted tambien dijo al seor Salvador Araneta

que usted no comulgaba con ella (su madre) en este asunto?

From the unreasonableness and inequity of the aforequoted Exhibit A

it is not to be presumed that the defendant did not understand it. It
was highly possible that she did not attach much importance to it,
convinced that Vidal could be forced to accept the checks and not
foreseeing the fate that lay in store for the case against the mortgagee.

R. Si, Seor; porque yo creia que mi madre solamente queria

Technical objections are made against the deed of sale.
anular esta venta, pero cuando me dijo el seor La O y sus
abogados que, encima de quitar la propiedad, todavia
First of these is that Jose Araneta, since deceased, was defendant's
tendria ella que pagar al seor Vidal, este no veso claro.
agent and at the same time the president of Gregorio Araneta, Inc.
xxx

xxx

xxx

P. Ahora bien; de tal suerte que, tal como nosotros

desperendemos de su testimonio, tanto, usted como, su
madre, esteban muy conformes en la venta, es asi?

The trial court found that Jose Araneta was not Paz Tuason's agent or
broker. This finding is contrary to the clear weight of the evidence,
although the point would be irrelevant, if the court were right in its
holding that Exhibit A was void on another ground, i.e., it was
inconsistent with Exhibit 1.

R. Si, seor.

Without taking into account defendant's Exhibit 7 and 8, which the

court rejected and which, in our opinion, should have been admitted,
The other stipulation embodied in Exhibit A which had no counterpart Exhibit 1 is decisive of the defendant's assertion. In paragraph 8 of
in Exhibit 1 was that by which Gregorio Araneta Inc. would hold Paz Exhibit 1 Jose Araneta was referred to as defendant's agent or broker
Tuason liable for the lost checks and which, as stated, appeared to be "who acts in this transaction" and who as such was to receive a
at the root of the whole trouble between the plaintiff and the
commission of 5 per cent, although the commission was to be
defendant.
charged to the purchasers, while in paragraph 13 the defendant
promised, in consideration of Jose Araneta's services rendered to her,
The stipulation reads:
to assign to him all her right, title and interest to and in certain lots
not embraced in the sales to Gregorio Araneta, Inc. or the tenants.
In view of the foregoing liquidation, the Vendor
acknowledges fully and unconditionally, having received the However, the trial court hypothetically admitting the existence of the
sum of P125,174.99 of the present legal currency and hereby relation of principal and agent between Paz Tuason and Jose Araneta,
expressly declares that she will not hold the Vendee
pointed out that not Jose Araneta but Gregorio Araneta, Inc. was the
responsible for any loss that she might suffer due to the fact purchaser, and cited the well-known distinction between the
that two of the checks paid to her by the Vendee were used
corporation and its stockholders. In other words, the court opined that
in favor of Jose Vidal and the latter has, up to the present
the sale to Gregorio Araneta, Inc. was not a sale to Jose Araneta the
time, not yet collected the same.
agent or broker.
It was argued that no person in his or her right senses would
knowingly have agreed to a covenant so iniquitous and unreasonable.
In the light of all the circumstances, it is difficult to believe that the
defendant was deceived into signing Exhibit A, in spite of the
provision of which she and her son complaint. Intelligent and well
educated who had been managing her affairs, she had an able attorney
who was assisting her in the suit against Vidal, a case which was
instituted precisely to carry into effect Exhibit A or Exhibit 1, and a
son who is leading citizen and a business-man and knew the English
language very well if she did not. Dindo Gonzalez took active part in,
if he was not the initiator of the negotiations that led to the execution
of Exhibit 1, of which he was an attesting witness besides. If the
defendant signed Exhibit A without being apprised of its import, it
can hardly be conceived that she did not have her attorney or her son
read it to her afterward. The transaction involved the alienation of

The defendant would have the court ignore this distinction and apply
to this case the other well-known principle which is thus stated in 18
C.J.S. 380: "The courts, at law and in equity, will disregard the fiction
of corporate entity apart from the members of the corporation when it
is attempted to be used as a means of accomplishing a fraud or an
illegal act.".
It will at once be noted that this principle does not fit in with the facts
of the case at bar. Gregorio Araneta, Inc. had long been organized and
engaged in real estate business. The corporate entity was not used to
circumvent the law or perpetrate deception. There is no denying that
Gregorio Araneta, Inc. entered into the contract for itself and for its
benefit as a corporation. The contract and the roles of the parties who
participated therein were exactly as they purported to be and were
fully revealed to the seller. There is no pretense, nor is there reason to
suppose, that if Paz Tuason had known Jose Araneta to Gregorio

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Corporation Code 3
Araneta, Inc's president, which she knew, she would not have gone
ahead with the deal. From her point of view and from the point of
view of public interest, it would have made no difference, except for
the brokerage fee, whether Gregorio Araneta, Inc. or Jose Araneta
was the purchaser. Under these circumstances the result of the
suggested disregard of a technicality would be, not to stop the
commission of deceit by the purchaser but to pave the way for the
evasion of a legitimate and binding commitment buy the seller. The
principle invoked by the defendant is resorted to by the courts as a
measure or protection against deceit and not to open the door to
deceit. "The courts," it has been said, "will not ignore the corporate
entity in order to further the perpetration of a fraud." (18 C.J.S. 381.)

Araneta and J. Antonio Araneta as her attorneys in her dealings with

Gregorio Araneta, Inc., knowing, as she did, their identity with the
buyer. If she had needed legal counsels, in this transaction it seems
certain that she would have availed herself of the services of Mr.
Ponce Enrile who was allegedly representing her in another case to
pave the way for the sale.

Agency is defined in article 1709 in broad term, and we have not

come across any commentary or decision dealing directly with the
precise meaning of agency as employed in article 1459. But in the
opinion of Manresa(10 Manresa 4th ed. 100), agent in the sense there
used is one who accepts another's representation to perform in his
name certain acts of more or less transcendency, while Scaevola (Vol.
23, p. 403) says that the agent's in capacity to buy his principal's
property rests in the fact that the agent and the principal form one
juridicial person. In this connection Scaevola observes that the fear
that greed might get the better of the sentiments of loyalty and
disinterestedness which should animate an administrator or agent, is
the reason underlying various classes of incapacity enumerated in
article 1459. And as American courts commenting on similar
prohibition at common law put it, the law does not trust human nature
to resist the temptations likely to arise of antogonism between the
interest of the seller and the buyer.

Granting that Attorney Araneta and Araneta were attorneys for the
defendant, yet they were not forbidden to buy the property in
question. Attorneys are only prohibited from buying their client's
property which is the subject of litigation. (Art. 1459, No. 5, Spanish
Civil Code.) The questioned sale was effected before the subject
thereof became involved in the present action. There was already at
the time of the sale a litigation over this property between the
defendant and Vidal, but Attys. Salvador Araneta and J. Antonio
Araneta were not her attorneys in that case.

The fact that Attys. Salvador and Araneta and J. Antonio Araneta
drew Exhibits 1 and A, undertook to write the letters to the tenants
and the deeds of sale to the latter, and charged the defendant the
corresponding fees for all this work, did not themselves prove that
they were the seller's attorneys. These letters and documents were
wrapped up with the contemplated sale in which Gregorio Araneta,
The corporate theory aside, and granting for the nonce that Jose
Inc. was interested, and could very well have been written by
Araneta and Gregorio Araneta, Inc. were identical and that the acts of Attorneys Araneta and Araneta in furtherance of Gregorio Araneta's
one where the acts of the other, the relation between the defendant
own interest. In collecting the fees from the defendant they did what
and Jose Araneta did not fall within the purview of article 1459 of the any other buyer could have appropriately done since all such
Spanish Civil Code.1
expenses normally were to be defrayed by the seller.

So the ban of paragraph 2 of article 1459 connotes the idea of trust

and confidence; and so where the relationship does not involve
considerations of good faith and integrity the prohibition should not
and does not apply. To come under the prohibition, the agent must be
in a fiduciary with his principal.

From the pronouncement that Exhibit A is valid, however, it does not

follow that the defendant should be held liable for the loss of the
certified checks attached to the complaint against Vidal or deposited
with the court, or of the funds against which they had been issued.
The matter of who should bear this loss does not depend upon the
validity of the sale but on the extent and scope of the clause
hereinbefore quoted as applied to the facts of the present case.
The law and the evidence on this branch of the case revealed these
facts, of some of which passing mention has already been made.

The aforesaid checks, one for P143,150 and one for P12,932.61, were
issued by Gregorio Araneta, Inc. and payable to Vidal, and were
Tested by this standard, Jose Araneta was not an agent within the
drawn against the Bank of the Philippines with which Gregorio
meaning of article 1459. By Exhibits 7 and 8 he was to be nothing
Araneta, Inc. had a deposit in the certification stated that they were to
more than a go-between or middleman between the defendant and the be "void if not presented for payment date of acceptance" office
purchaser, bringing them together to make the contract themselves.
(Bank) within 90 days from date of acceptance."
There was no confidence to be betrayed. Jose Araneta was not
authorize to make a binding contract for the defendant. He was not to Under banking laws and practice, by the clarification" the funds
sell and he did not sell the defendant's property. He was to look for a represented by the check were transferred from the credit of the
buyer and the owner herself was to make, and did make, the sale. He maker to that of the payee or holder, and, for all intents and purposes,
was not to fix the price of the sale because the price had been already the latter became the depositor of the drawee bank, with rights and
fixed in his commission. He was not to make the terms of payment
duties of one such relation." But the transfer of the corresponding
because these, too, were clearly specified in his commission. In fine, funds from the credit of the depositor to that of that of the payee had
Jose Araneta was left no power or discretion whatsoever, which he
to be co-extensive with the life of the checks, which in the case was
could abuse to his advantage and to the owner's prejudice.
90 days. If the checks were not presented for payment within that
period they became invalid and the funds were automatically restored
Defendant's other ground for repudiating Exhibit A is that the law
to the credit of the drawer though not as a current deposit but as
firm of Araneta & Araneta who handled the preparation of that deed
special deposit. This is the consensus of the evidence for both parties
and represented by Gregorio Araneta, Inc. were her attorneys also. On which does not materially differ on this proposition.
this point the trial court's opinion is likewise against the defendant.
Since attorney Ponce Enrile was the defendant's lawyer in the suit
against Vidal, it was not likely that she employed Atty. Salvador

The checks were never collected and the account against which they
were drawn was not used or claimed by Gregorio Araneta, Inc.; and
since that account "was opened during the Japanese occupation and in

64

Corporation Code 3
Japanese currency," the checks "became obsolete as the account
subject thereto is considered null and void in accordance with
Executive Order No. 49 of the President of the Philippines",
according to the Bank.
Whether the Bank of the Philippines could lawfully limit the
negotiability of certified checks to a period less than the period
provided by the Statute of Limitations does not seem material. The
limitation imposed by the Bank as to time would adversely affect the
payee, Jose Vidal, who is not trying to recover on the instruments but
on the contrary rejected them from the outset, insisting that the
payment was premature. As far as Vidal was concerned, it was of no
importance whether the certification was or was not restricted. On the
other hand, neither the plaintiff nor the defendant now insists that
Vidal should present, or should have presented, the checks for
collection. They in fact agree that the offer of those checks to Vidal
did not, for technical reason, work to wipe out the mortgage.

Let it be remembered that the idea of certifying the lost checks was
all the plaintiff's. The plaintiff would not trust the defendant and
studiously so arranged matters that she could not by any possibility
put a finger on the money. For all the practical intents and purposes
the plaintiff dealt directly with the mortgagee and excluded the
defendant from meddling in the manner of payment to Vidal. And let
it also be kept in mind that Gregorio Araneta, Inc. was not a mere
accommodator in writing these checks. It was as much interested in
the cancellation of the mortgage as Paz Tuason.

Coming down to Vidal's cross-claim Judge Rodas rendered no

judgment other than declaring that the mortgage remained intact and
subsisting. The amount to be paid Vidal was not named and the
question whether interest and attorney's fees were due was not passed
upon. The motion for reconsideration of the decision by Vidal's
attorney's praying that Paz Tuason be sentenced to pay the creditor
P244,917.90 plus interest at the rate of 1 percent monthly from
September 10, 1948 and that the mortgaged property be ordered sold
in case of default within 90 days, and another motion by the
But as to Gregorio Araneta and Paz Tuason, the conditions specified
in the certification and the prevailing regulations of the Bank were the defendant seeking specification of the amount she had to pay the
mortgagee were summarily denied by Judge Potenciano Pecson, to
law of the case. Not only this, but they were aware of and abided by
those regulations and practice, as instanced by the fact that the parties whom the motions were submitted, Judge Rodas by that time having
presented testimony to prove those regulations and practice. And that been appointed to the Court of Appeals.
Gregorio Araneta, Inc. knew that Vidal had not cashed the checks
within 90 days is not, and could not successfully be denied.
All the facts and evidence on this subject are on the record, however,
and we may just as well determine from these facts and evidence the
In these circumstances, the stipulation in Exhibit A that the defendant amount to which the mortgagee is entitled, instead of remanding the
case for new trial, if only to avoid further delay if the disposition of
or seller "shall not hold the vendee responsible for any loss of these
checks" was unconscionable, void and unenforceable in so far as the this case.
said stipulation would stretch the defendant's liability for this checks
beyond 90 days. It was not in accord with law, equity or good
It is obvious that Vidal had a right to judgment for his credit and to
conscience to hold a party responsible for something he or she had no foreclose the mortgage if the credit was not paid.
access to and could not make use of but which was under the absolute
control and disposition of the other party. To make Paz Tuason
There is no dispute as to the amount of the principal and there is
responsible for those checks after they expired and when they were
agreement that the loans made in 1943, in Japanese war notes, should
absolutely useless would be like holding an obligor to answer for the be computed under the Ballantyne conversion table. As has been said,
loss or destruction of something which the obligee kept in its safe
where the parties do not see eye-to-eye was in regard to the
with no power given the obligor to protect it or interfere with the
mortgagee's claim to attorney's fees and interest from October, 1943,
obligee's possession.
which was reached a considerable amount. It was contended that,
having offered to pay Vidal her debt in that month, the defendant was
To the extent that the contract Exhibit A would hold the vendor
relieved thereafter from paying such interest.
responsible for those checks after they had lapsed, the said contract
was without consideration. The checks having become obsolete, the
It is to be recalled that Paz Tuason deposited with the court three
benefit in exchange for which the defendant had consented to be
checks which were intended to cover the principal and interest up to
responsible for them had vanished. The sole motivation on her part
October, 1943, plus the penalty provided in the instrument "Penalidad
for the stipulation was the fact that by the checks the mortgage might del Documento de Novacion de Esta Fecha." The mortgagor
or was to be released. After 90 days the defendant stood to gain
maintains that although these checks may not have constituted a valid
absolutely nothing by them, which had become veritable scraps of
payment for the purpose of discharging the debt, yet they did for the
paper, while the ownership of the deposit had reverted to the plaintiff purpose of stopping the running of interest. The defendant draws
which alone could withdraw and make use of it.
attention to the following citations:
What the plaintiff could and should have done if the disputed
stipulation was to be kept alive was to keep the funds accessible for
the purpose of paying the mortgage, by writing new checks either to
Vidal or to the defendant, as was done with the check for P30,000, or
placing the deposit at the defendant's disposal. The check for P30,000
intended for the penalty previously had been issued in the name of
Vidal and certified, too, but by mutual agreement it was changed to
an ordinary check payable to Paz Tuason. Although that check was
also deposited with the court and lost, its loss undoubtedly was
imputable to the defendant's account, and she did not seem to disown
her liability for it.

An offer in writing to pay a particular sum of money or to

deliver a written instrument or specific personal property is,
if rejected, equivalent to the actual production and tender of
the money, instrument or property. (Sec. 24, Rule 123.)
It is not accord with either the letter or the spirit of the law to
impose upon the person affecting a redemption of property,
in addition to 12 per cent interest per annum up to the time
of the offer to redeem, a further payment of 6 per cent per
annum from the date of the officer to redeem. (Fabros vs.
Villa Agustin, 18 Phil., 336.)

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Corporation Code 3
A tender by the debtor of the amount of this debt, if made in
the proper manner, will suspend the running of interest on
the debt for the time of such tender. (30 Am. Jur., 42.)
In the case of Fabrosa vs. Villa Agustin, supra, a parcel of land had
been sold on execution to one Tabliga. Within the period of
redemption Fabros, to whom the land had been mortgaged by the
execution debtor, had offered to redeem the land from the execution
creditor and purchaser at public auction. The trial court ruled that the
redemptioner was not obliged to pay the stipulated interest of 12 per
cent after he offered to redeem the property; nevertheless he was
sentenced to pay 6 per cent interest from the date of the offer.

reminded Vidal that the recital in the "Penalidad del Documento de

Novacion de Esta Fecha" was "to the effect that should the debtor
wish to pay the debt before the expiration of the period the reinstated
(two years) such debtor would have to pay, in addition to interest due,
the penalty of P30,000 this is in addition to the penalty clause of
10 per cent of the total amount due inserted in the document of
mortgage of January 20, 1943."

Atty. Ponce Enrile's concept of the agreement, formed after mature

and careful reading of it, jibes with the only possible reason for the
insertion of the penalty provision. There was no reason for the
penalty unless it was for defendant's paying her debt before the end of
the agreed period. It was to Vidal's interest that the mortgage be not
This court on appeal held that "there is no reason for this other (6 per settled in the near future, first, because his money was earning good
interest and was guaranteed by a solid security, and second, which
cent) interest, which appears to be a penalty for delinquency while
was more important, he, in all probability, shared the common belief
there was no delinquency." The court cited an earlier
that Japanese war notes were headed for a crash and that four years
decision, Martinez vs. Campbell, 10 Phil., 626, where this doctrine
was laid down: "When the right of redemption is exercised within the thence, judging by the trends of the war, the hostilities would be over.
term fixed by section 465 of the Code of Civil Procedure, and an
offer is made of the amount due for the repurchase of the property to To say, as Vidal says, that the debtor could not pay the mortgage
which said right refers, it is neither reasonable nor just that the
within four years and, at the same time, that there would be penalty if
repurchaser should pay interest on the redemption money after the
she paid after that period, would be a contradiction. Moreover,
time when he offered to repurchase and tendered the money therefor." adequate remedy was provided for failure to pay or after the
expiration of the mortgage: increased rate or interest, foreclosure of
the mortgage, and attorney's fees.
In the light of these decisions and law, the next query is; Did the
mortgagor have the right under the contract to pay the mortgage on
October 20, 1943? The answer to this question requires an inquiry
It is therefore to be concluded that the defendant's offer to pay Vidal
into the provision of the "Penalidad del Documento de Novacion de
in October, 1943, was in accordance with the parties' contract and
Esta Fecha."
terminated the debtor's obligation to pay interest. The technical
defects of the consignation had to do with the discharge of the
mortgage, which is conceded on all sides to be still in force because
Vidal introduced oral evidence to the effect that he reserved unto
of the defects. But the matter of the suspension of the running of
himself in that agreement the right "to accept or refuse the total
interest on the loan stands of a different footing and is governed by
payment of the loan outstanding . . ., if at the time of such offer of
payment he considered it advantageous to his interest." This was gist different principles. These principles regard reality rather than
technicality, substance rather than form. Good faith of the offer or and
of Vidal's testimony and that of Lucio M. Tiangco, one of Vidal's
ability to make good the offer should in simple justice excuse the
former attorneys who, as notary public, had authenticated the
debtor from paying interest after the offer was rejected. A debtor can
document. Vidal's above testimony was ordered stricken out as
hearsay, for Vidal was blind and, according to him, only had his other not be considered delinquent who offered checks backed by sufficient
deposit or ready to pay cash if the creditor chose that means of
lawyer read the document to him.
payment. Technical defects of the offer cannot be adduced to destroy
its effects when the objection to accept the payment was based on
We are of the opinion that the court erred in excluding Vidal's
entirely different grounds. If the creditor had told the debtor that he
statement. There is no reason to suspect that Vidal's attorney did not
correctly read the paper to him. The reading was a contemporaneous wanted cash or an ordinary check, which Vidal now seems to think
Paz Tuason should have tendered, certainly Vidal's wishes would
incident of the writing and the circumstances under which the
have been fulfilled, gladly.
document was read precluded every possibility of design,
premeditation, or fabrication.

The plain truth was that the mortgagee bent all his efforts to put off
the payment, and thanks to the defects which he now, with obvious
Nevertheless, Vidal's testimony, like the testimony of Lucio M.
inconsistency, points out, the mortgage has not perished with the
Tiangco's, was based on recollection which, with the lapse of time,
was for from infallible. By contrast, the testimony of Attorneys Ponce checks.
Enrile, Salvador Araneta, and J. Antonio Araneta does not suffer from
Falling within the reasons for the stoppage of interest are attorney's
such weakness and is entitled to full faith and credit. The document
fees. In fact there is less merit in the claim for attorney's fees than in
was the subject of a close and concerted study on their part with the
the claim for interest; for the creditor it was who by his refusal
object of finding the rights and obligations of the mortgagee and the
mortgagor in the premises and mapping out the course to be pursued. brought upon himself this litigation, refusal which, as just shown,
resulted greatly to his benefit.
And the results of their study and deliberation were translated into
concrete action and embodied in a letter which has been preserved. In
line with the results of their study, action was instituted in court to
Vidal, however, is entitled to the penalty, a point which the debtor
compel acceptance by Vidal of the checks consigned with the
seems to a grant. The suspension of the running of the interest is
complaint, and before the suit was commenced, and with the
premised on the thesis that the debt was considered paid as of the date
document before him, Atty. Ponce Enrile, in behalf of his client,
the offer to pay the principal was made. It is precisely the mortgagor's
wrote Vidal demanding that he accept the payment and execute a
contention that he was to pay said penalty if and when she paid the
deed of cancellation of the mortgage. In his letter Atty. Ponce Enrile
mortgage before the expiration of the four-year period provided in the

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Corporation Code 3
mortgage contract. This penalty was designed to take the place of the
interest which the creditor would be entitled to collect if the duration
of the mortgage had not been cut short and from which interest the
debtor has been relieved. "In obligations with a penalty clause the
penalty shall substitute indemnity for damages and the payment of
interest. . ." (Art. 1152, Civil Code of Spain.).

R ES OLUTION

To summarize, the following are our findings and decision:

The contract of sale Exhibit A was valid and enforceable, but the loss
of the checks for P143,150 and P12,932.61 and invalidation of the
corresponding deposit is to be borne by the buyer. Gregorio Araneta,
Inc. the value of these checks as well as the several payments made
by Paz Tuason to Gregorio Araneta, Inc. shall be deducted from the
sum of P190,000 which the buyer advanced to the seller on the
execution of Exhibit 1.
The buyer shall be entitled to the rents on the land which was the
subject of the sale, rents which may have been collected by Paz
Tuason after the date of the sale.
Paz Tuason shall pay Jose Vidal the amount of the mortgage and the
stipulated interest up to October 20,1943, plus the penalty of P30,000,
provided that the loans obtained during the Japanese occupation shall
be reduced according to the Ballantyne scale of payment, and
provided that the date basis of the computation as to the penalty is the
date of the filing of the suit against Vidal.
Paz Tuason shall pay the amount that shall have been found due
under the contracts of mortgage within 90 days from the time the
court's judgment upon the liquidation shall have become final,
otherwise the property mortgaged shall be ordered sold provided by
law.
Vidal's mortgage is superior to the purchaser's right under Exhibit A,
which is hereby declared subject to said mortgage. Should Gregorio
Araneta, Inc. be forced to pay the mortgage, it will be subrogated to
the right of the mortgagee.
This case will be remanded to the court of origin with instruction to
hold a rehearing for the purpose of liquidation as herein provided.
The court also shall hear and decide all other controversies relative to
the liquidation which may have been overlooked at this decision, in a
manner not inconsistent with the above findings and judgment.

December 22, 1952

TUASON, J.:
The motion for reconsideration of the plaintiff, Gregorio Araneta,
Inc., and the defendant, Paz Tuason de Paterno, are in large part
devoted to the question, extensively discussed in the decision, of the
validity of the contract of sale Exhibit A. The arguments are not new
and at least were given due consideration in the deliberation and
study of the case. We find no reason for disturbing our decision on
this phase of the case.
The plaintiff-appellant's alternative proposition to wit: "Should
this Honorable Court declare that the purchase price was not paid and
that plaintiff has to bear the loss due to the invalidation of the
occupation currency, its loss should be limited to: (a) the purchase
price of P139,083.32 less P47,825.70 which plaintiff paid and the
defendant actually collected during the occupation, or the sum of
P92,233.32, or at most, (b) the purchase price of the lot in the sum of
P139,083.32," as well as the alleged over-payment by the
defendant-appellee, may be taken up in the liquidation under the
reservation in the judgment that "the court (below) shall hold a
rehearing for the purpose of liquidation as herein provided" and "shall
also hear and decide all other controversies relative to the liquidation
which may have been overlooked in this decision, in the manner not
inconsistent with the above findings and judgment."
These payments and disbursement are matters of accounting which,
not having been put directly in issue or given due attention at the trial
and in the appealed decision, can better be treshed out in the proposed
rehearing where each party will have an opportunity to put forward
his views and reasons, with supporting evidence if necessary, on how
the various items in question should be regarded and credited, in the
light of our decision.

As to Jose Vidal's motion: There is nothing to add to or detract from

what has been said in the decision relative to the interest on the loans
The mortgagor is not entitled to suspension of payment under the debt and attorney's fees. There are no substantial features of the case that
moratorium law or orders. Among other reasons: the bulk of the debt have not been weighed carefully in arriving at our conclusions. It is
was a pre-war obligation and the moratorium as to such obligations
our considered opinion that the decision is in accord with law, reason
has been abrogated unless the debtor has suffered war damages and
and equity.
has filed claim for them; there is no allegation or proof that she has.
In the second place, the debtor herself caused her creditor to be
The vehement protest that this court should not modify the conclusion
brought into the case which resulted in the filing of the cross-claim to
of the lower court on interest and attorney's fees is actually and
foreclose the mortgage. In the third place, prompt settlement of the
entirely contrary to the cross-claimant's own suggestion in his brief.
mortgage is necessary to the settlement of the dispute and liquidation
From page 20 of his brief, we copy these passages:
between Gregorio Araneta, Inc. and Paz Tuason. If for no other
reason, Paz Tuason would do well to forego the benefits of the
We submit that this Honorable Court is in a position now to
moratorium law.
render judgment in the foreclosure of mortgage suit as no
further issue of fact need be acted upon by the trial court.
There shall be no special judgments as to costs of either instance.
Defendant Paz Tuason has admitted the amount of capital
due. That is a fact. She only requests that interest be granted
Paras, C.J., Pablo, Bengzon, Padilla, Bautista Angelo and Labrador,
up to October 20,1943, and that the moratorium law be
JJ., concur.
applied. Whether this is possible or not is a legal question,

67

Corporation Code 3
which can be decided by this court. Unnecessary loss of time of the contract, but only for such breaches as are so substantial and
and expenses to the parties herein will be avoided by this
fundamental as to defeat the object of the parties." (Song Fo & Co.
Honorable Court by rendering judgment in the foreclosure of vs. Hawaiian-Philippine Co., 47 Phil., 821, 827.)
mortgage suit as follows:
In the present case, the vendee did not fail or refuse to pay by plan or
xxx
xxx
xxx
design, granting there was failure or refusal to pay. As a matter of
fact, the portion of the purchase price which is said not to have been
satisfied until now was actually received by checks by the vendor and
In reality, the judgment did not adjudicate the foreclosure of the
deposited by her with the court in the suit against Vidal, in
mortgage nor did it fix the amount due on the mortgage. The
accordance with the understanding if not express agreement between
pronouncement that the mortgage was in full force and effect was a
vendor and vendee. The question of who should bear the loss of this
conclusion which the mortgagor did not and does not now question.
amount, the checks having been destroyed and the funds against
There was therefore virtually no decision that could be executed.
which they were drawn having become of no value, was one of the
Vidal himself moved in the Court of First Instance for amendment of most bitterly debated issues, and in adjudging the vendee to be the
party to shoulder the said loss and ordering the said vendee to pay the
the decision alleging, correctly, that "the court failed to act on the
amount to the vendor, this Court's judgment was not, and was not
cross-claim of Jose Vidal dated April 22, 1947, where he demanded
intended to be, in the nature of an extension of time of payment. In
foreclosure of the mortgage . . . ." That motion like Paz Tuason's
contemplation of the Civil Code there was no default, except possibly
motion to complete the judgment, was summarily denied.
in connection with the alleged overcharges by the vendee arising
from honest mistakes of accounting, mistakes which, by our decision,
In strict accordance with the procedure, the case should have been
are to be corrected in a new trial thereby ordered.
remanded to the court of origin for further proceedings in the form
stated by Paz Tuason's counsel. Both the mortgagor and the
The second motion for reconsideration is, therefore, denied.
mortgagee agree on this. We did not follow the above course
believing it best, in the interest of the parties themselves and
following Vidal's attorney's own suggestion, to decide the
controversies between Vidal and Paz Tuason upon the records and the
briefs already submitted.
The three motions for reconsideration are denied.
Paras, C.J., Pablo, Bengzon, Padilla, Montemayor, Jugo, Bautista
Angelo and Labrador, JJ., concur.

R ES OLUTION

January 26, 1953

TUASON, J.:
In the second motion for reconsideration by defendant-appellee it is
urged that the sale be resolved for failure of plaintiff-appellant to pay
the entire purchase price of the property sold.
Rescission of the contract, it is true, was alternative prayer in the
cross-complaint, but the trial court declared the sale void in
accordance with the main contention of the defendant, and passed no
judgment on the matter of rescission. For this reason, and because
rescission was not pressed on appeal, we deemed unnecessary, if not
uncalled for, any pronouncement touching this point.
In the second place, the nonpayment of a portion, albeit big portion,
of the price was not, in our opinion, such failure as would justify
recission under Articles 1124 and 1505 et seq. of the Civil Code of
Spain, which was still in force when this case was tried. "The general
rule is that recission will not be permitted for a slight or casual breach

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Corporation Code 3
G.R. No. L-15121

August 31, 1962

GREGORIO PALACIO, in his own behalf and in behalf of his

minor child,
MARIO PALACIO, plaintiffs-appellants,
vs.
FELY TRANSPORTATION COMPANY, defendant-appellee.
Antonio A. Saba for plaintiffs-appellants.
Mercado, Ver and Reyes for defendant-appellee.
REGALA, J.:
This is an appeal by the plaintiffs from the decision of the Court of
First Instance of Manila which dismissed their complaint.
Originally taken to the Court of Appeals, this appeal was certified to
this Court on the ground that it raises purely questions of law.
The parties in this case adopt the following findings of fact of the
lower court:
In their complaint filed with this Court on May 15, 1954,
plaintiffs allege, among other things, "that about December,
1952, the defendant company hired Alfredo Carillo as driver
of AC-787 (687) (a registration for 1952) owned and
operated by the said defendant company; that on December
24, 1952, at about 11:30 a.m., while the driver Alfonso
(Alfredo) Carillo was driving AC-687 at Halcon Street,
Quezon City, wilfully, unlawfully and feloniously and in a
negligent, reckless and imprudent manner, run over a child
Mario Palacio of the herein plaintiff Gregorio Palacio; that
on account of the aforesaid injuries, Mario Palacio suffered a
simple fracture of the right tenor (sic), complete third,
thereby hospitalizing him at the Philippine Orthopedic
Hospital from December 24, 1952, up to January 8, 1953,
and continued to be treated for a period of five months
thereafter; that the plaintiff Gregorio Palacio herein is a
welder by occupation and owner of a small welding shop
and because of the injuries of his child he has abandoned his
shop where he derives income of P10.00 a day for the
support of his big family; that during the period that the
plaintiff's (Gregorio Palacio's) child was in the hospital and
who said child was under treatment for five months in order
to meet the needs of his big family, he was forced to sell one
air compressor (heavy duty) and one heavy duty electric
drill, for a sacrifice sale of P150.00 which could easily sell at
P350.00; that as a consequence of the negligent and reckless
act of the driver Alfredo Carillo of the herein defendant
company, the herein plaintiffs were forced to litigate this
case in Court for an agreed amount of P300.00 for attorney's
fee; that the herein plaintiffs have now incurred the amount
of P500.00 actual expenses for transportation, representation
and similar expenses for gathering evidence and witnesses;
and that because of the nature of the injuries of plaintiff
Mario Palacio and the fear that the child might become a

useless invalid, the herein plaintiff Gregorio Palacio has

suffered moral damages which could be conservatively
estimated at P1,200.00.
On May 23, 1956, defendant Fely Transportation Co., filed a
Motion to Dismiss on the grounds (1) that there is no cause
of action against the defendant company, and (2) that the
cause of action is barred by prior judgment..
In its Order, dated June 8, 1956, this Court deferred the
determination of the grounds alleged in the Motion to
Dismiss until the trial of this case.
On June 20, 1956, defendant filed its answer. By way of
affirmative defenses, it alleges (1) that complaint states no
cause of action against defendant, and (2) that the sale and
transfer of the jeep AC-687 by Isabelo Calingasan to the
Fely Transportation was made on December 24, 1955, long
after the driver Alfredo Carillo of said jeep had been
convicted and had served his sentence in Criminal Case No.
Q-1084 of the Court of First Instance of Quezon City, in
which both the civil and criminal cases were simultaneously
tried by agreement of the parties in said case. In the
Counterclaim of the Answer, defendant alleges that in view
of the filing of this complaint which is a clearly unfounded
civil action merely to harass the defendant, it was compelled
to engage the services of a lawyer for an agreed amount of
P500.00.
During the trial, plaintiffs presented the transcript of the
stenographic notes of the trial of the case of "People of the
Philippines vs. Alfredo Carillo, Criminal Case No. Q-1084,"
in the Court of First Instance of Rizal, Quezon City (Branch
IV), as Exhibit "A".1wph1.t
It appears from Exhibit "A" that Gregorio Palacio, one of the
herein plaintiffs, testified that Mario Palacio, the other
plaintiff, is his son; that as a result of the reckless driving of
accused Alfredo Carillo, his child Mario was injured and
hospitalized from December 24, 1952, to January 8, 1953;
that during all the time that his child was in the hospital, he
watched him during the night and his wife during the day;
that during that period of time he could not work as he slept
during the day; that before his child was injured, he used to
earn P10.00 a day on ordinary days and on Sundays from
P20 to P50 a Sunday; that to meet his expenses he had to sell
his compressor and electric drill for P150 only; and that they
could have been sold for P300 at the lowest price.
During the trial of the criminal case against the driver of the
jeep in the Court of First Instance of Quezon City (Criminal
Case No. Q-1084) an attempt was unsuccessfully made by
the prosecution to prove moral damages allegedly suffered
by herein plaintiff Gregorio Palacio. Likewise an attempt
was made in vain by the private prosecutor in that case to
prove the agreed attorney's fees between him and plaintiff

69

Corporation Code 3
Gregorio Palacio and the expenses allegedly incurred by the merely an attempt on the part of Isabelo Calingasan its president and
herein plaintiffs in connection with that case. During the trial general manager, to evade his subsidiary civil liability.
of this case, plaintiff Gregorio Palacio testified substantially
to the same facts.
The Court agrees with this contention of the plaintiffs. Isabelo
Calingasan and defendant Fely Transportation may be regarded as
The Court of First Instance of Quezon City in its decision in one and the same person. It is evident that Isabelo Calingasan's main
Criminal Case No. 1084 (Exhibit "2") determined and
purpose in forming the corporation was to evade his subsidiary civil
thoroughly discussed the civil liability of the accused in that liability1 resulting from the conviction of his driver, Alfredo Carillo.
case. The dispositive part thereof reads as follows:
This conclusion is borne out by the fact that the incorporators of the
Fely Transportation are Isabelo Calingasan, his wife, his son, Dr.
Calingasan, and his two daughters. We believe that this is one case
IN VIEW OF THE FOREGOING, the Court finds the
accused Alfredo Carillo y Damaso guilty beyond reasonable where the defendant corporation should not be heard to say that it has
a personality separate and distinct from its members when to allow it
doubt of the crime charged in the information and he is
hereby sentenced to suffer imprisonment for a period of Two to do so would be to sanction the use of the fiction of corporate entity
as a shield to further an end subversive of justice. (La Campana
Months & One Day of Arresto Mayor; to indemnify the
offended party, by way of consequential damages, in the sum Coffee Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al.,
G.R. No. L-5677, May 25, 1953) Furthermore, the failure of the
of P500.00 which the Court deems reasonable; with
defendant corporation to prove that it has other property than the jeep
subsidiary imprisonment in case of insolvency but not to
(AC-687) strengthens the conviction that its formation was for the
exceed /3 of the principal penalty imposed; and to pay the
purpose above indicated.
costs.
On the basis of these facts, the lower court held action is barred by
the judgment in the criminal case and, that under Article 103 of the
Revised Penal Code, the person subsidiarily liable to pay damages is
Isabel Calingasan, the employer, and not the defendant corporation.
Against that decision the plaintiffs appealed, contending that:
THE LOWER COURT ERRED IN NOT SUSTAINING
THAT THE DEFENDANT-APPELLEE IS SUBSIDIARILY
LIABLE FOR DAMAGES AS A RESULT OF CRIMINAL
CASE NO. Q-1084 OF THE COURT OF FIRST
INSTANCE OF QUEZON CITY FOR THE REASON
THAT THE INCORPORATORS OF THE FELY
TRANSPORTATION COMPANY, THE DEFENDANTAPPELLEE HEREIN, ARE ISABELO CALINGASAN
HIMSELF, HIS SON AND DAUGHTERS;

And while it is true that Isabelo Calingasan is not a party in this case,
yet, is held in the case of Alonso v. Villamor, 16 Phil. 315, this Court
can substitute him in place of the defendant corporation as to the real
party in interest. This is so in order to avoid multiplicity of suits and
thereby save the parties unnecessary expenses and delay. (Sec. 2,
Rule 17, Rules of Court; Cuyugan v. Dizon. 79 Phil. 80; Quison v.
Salud, 12 Phil. 109.)
Accordingly, defendants Fely Transportation and Isabelo Calingasan
should be held subsidiarily liable for P500.00 which Alfredo Carillo
was ordered to pay in the criminal case and which amount he could
not pay on account of insolvency.

We also sustain plaintiffs' third assignment of error and hold that the
present action is not barred by the judgment of the Court of First
Instance of Quezon City in the criminal case. While there seems to be
some confusion on part of the plaintiffs as to the theory on which the
is based whether ex-delito or quasi ex-delito (culpa aquiliana)
THE LOWER COURT ERRED IN NOT CONSIDERING
THAT THE INTENTION OF ISABELO CALINGASAN IN We are convinced, from the discussion prayer in the brief on appeal,
that they are insisting the subsidiary civil liability of the defendant.
INCORPORATING THE FELY TRANSPORTATION
As a matter of fact, the record shows that plaintiffs merely presented
COMPANY, THE DEFENDANT-APPELLEE HEREIN,
the transcript of the stenographic notes (Exhibit "A") taken at the
WAS TO EVADE HIS CIVIL LIABILITY AS A RESULT
hearing of the criminal case, which Gregorio Palacio corroborated, in
OF THE CONVICTION OF HIS DRIVER OF VEHICLE
support of their claim for damages. This rules out the defense of res
AC-687 THEN OWNED BY HIM:
judicata, because such liability proceeds precisely from the judgment
THE LOWER COURT ERRED IN HOLDING THAT THE in the criminal action, where the accused was found guilty and
ordered to pay an indemnity in the sum P500.00.
CAUSE OF ACTION OF THE PLAINTIFFSAPPELLANTS IS BARRED BY PRIOR JUDGMENT.
WHEREFORE, the decision of the lower court is hereby reversed and
defendants Fely Transportation and Isabelo Calingasan are ordered to
With respect to the first and second assignments of errors, plaintiffs
pay, jointly and severally, the plaintiffs the amount of P500.00 and the
contend that the defendant corporate should be made subsidiarily
costs.
liable for damages in the criminal case because the sale to it of the
jeep in question, after the conviction of Alfred Carillo in Criminal
Case No. Q-1084 of the Court of First Instance of Quezon City was

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Corporation Code 3
G.R. No. L-56076 September 21, 1983
PALAY, INC. and ALBERT ONSTOTT, petitioner,
vs.
JACOBO C. CLAVE, Presidential Executive Assistant
NATIONAL HOUSING AUTHORITY and NAZARIO
DUMPIT respondents.
Santos, Calcetas-Santos & Geronimo Law Office for petitioner.
Wilfredo E. Dizon for private respondent.

MELENCIO-HERRERA, J.:

rescission void in the absence of either judicial or notarial demand,

ordered Palay, Inc. and Alberto Onstott in his capacity as President of
the corporation, jointly and severally, to refund immediately to
Nazario Dumpit the amount of P13,722.50 with 12% interest from the
filing of the complaint on November 8, 1974. Petitioners' Motion for
Reconsideration of said Resolution was denied by the NHA in its
Order dated October 23, 1979. 1
On appeal to the Office of the President, upon the allegation that the
NHA Resolution was contrary to law (O.P. Case No. 1459),
respondent Presidential Executive Assistant, on May 2, 1980,
affirmed the Resolution of the NHA. Reconsideration sought by
petitioners was denied for lack of merit. Thus, the present petition
wherein the following issues are raised:
I

The Resolution, dated May 2, 1980, issued by Presidential Executive

Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners
Palay, Inc. and Alberto Onstott jointly and severally, to refund to
private respondent, Nazario Dumpit, the amount of P13,722.50 with
12% interest per annum, as resolved by the National Housing
Authority in its Resolution of July 10, 1979 in Case No. 2167, as well II
as the Resolution of October 28, 1980 denying petitioners' Motion for
Reconsideration of said Resolution of May 2, 1980, are being assailed
in this petition.
On March 28, 1965, petitioner Palay, Inc., through its President,
III
Albert Onstott executed in favor of private respondent, Nazario
Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of
the Crestview Heights Subdivision in Antipolo, Rizal, with an area of
1,165 square meters, - covered by TCT No. 90454, and owned by said
corporation. The sale price was P23,300.00 with 9% interest per
annum, payable with a downpayment of P4,660.00 and monthly
IV
installments of P246.42 until fully paid. Paragraph 6 of the contract
provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from
the expiration of the grace period of one month, without need of
notice and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments
amounting to P13,722.50. The last payment was made on December
5, 1967 for installments up to September 1967.
On May 10, 1973, or almost six (6) years later, private respondent
wrote petitioner offering to update all his overdue accounts with
interest, and seeking its written consent to the assignment of his rights
to a certain Lourdes Dizon. He followed this up with another letter
dated June 20, 1973 reiterating the same request. Replying petitioners
informed respondent that his Contract to Sell had long been rescinded
pursuant to paragraph 6 of the contract, and that the lot had already
been resold.
Questioning the validity of the rescission of the contract, respondent
filed a letter complaint with the National Housing Authority (NHA)
for reconveyance with an altenative prayer for refund (Case No.
2167). In a Resolution, dated July 10, 1979, the NHA, finding the

Whether notice or demand is not mandatory under

the circumstances and, therefore, may be dispensed
with by stipulation in a contract to sell.

Whether petitioners may be held liable for the

refund of the installment payments made by
respondent Nazario M. Dumpit.

Whether the doctrine of piercing the veil of

corporate fiction has application to the case at bar.

Whether respondent Presidential Executive

Assistant committed grave abuse of discretion in
upholding the decision of respondent NHA holding
petitioners solidarily liable for the refund of the
installment payments made by respondent Nazario
M. Dumpit thereby denying substantial justice to
the petitioners, particularly petitioner Onstott

We issued a Temporary Restraining Order on Feb 11, 1981 enjoining

the enforcement of the questioned Resolutions and of the Writ of
Execution that had been issued on December 2, 1980. On October 28,
1981, we dismissed the petition but upon petitioners' motion,
reconsidered the dismissal and gave due course to the petition on
March 15, 1982.
On the first issue, petitioners maintain that it was justified in
cancelling the contract to sell without prior notice or demand upon
respondent in view of paragraph 6 thereof which provides6. That in case the BUYER falls to satisfy any
monthly installment or any other payments herein
agreed upon, the BUYER shall be granted a month

71

Corporation Code 3
of grace within which to make the payment of the t
in arrears together with the one corresponding to
the said month of grace. -It shall be understood,
however, that should the month of grace herein
granted to the BUYER expire, without the payment
& corresponding to both months having been
satisfied, an interest of ten (10%) per cent per
annum shall be charged on the amounts the
BUYER should have paid; it is understood further,
that should a period of NINETY (90) DAYS elapse
to begin from the expiration of the month of grace
hereinbefore mentioned, and the BUYER shall not
have paid all the amounts that the BUYER should
have paid with the corresponding interest up to the
date, the SELLER shall have the right to declare
this contract cancelled and of no effect without
notice, and as a consequence thereof, the SELLER
may dispose of the lot/lots covered by this Contract
in favor of other persons, as if this contract had
never been entered into. In case of such
cancellation of this Contract, all the amounts which
may have been paid by the BUYER in accordance
with the agreement, together with all the
improvements made on the premises, shall be
considered as rents paid for the use and occupation
of the above mentioned premises and for liquidated
damages suffered by virtue of the failure of the
BUYER to fulfill his part of this agreement : and
the BUYER hereby renounces his right to demand
or reclaim the return of the same and further
obligates peacefully to vacate the premises and
deliver the same to the SELLER.
Well settled is the rule, as held in previous jurisprudence, 2 that
judicial action for the rescission of a contract is not necessary where
the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions. However, even in the
cited cases, there was at least a written notice sent to the defaulter
informing him of the rescission. As stressed in University of the
Philippines vs. Walfrido de los Angeles 3 the act of a party in treating
a contract as cancelled should be made known to the other. We quote
the pertinent excerpt:
Of course, it must be understood that the act of a
party in treating a contract as cancelled or resolved
in account of infractions by the other contracting
party must be made known to the other and is
always provisional being ever subject to scrutiny
and review by the proper court. If the other party
denies that rescission is justified it is free to resort
to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due
hearing, decide that the resolution of the contract
was not warranted, the responsible party will be
sentenced to damages; in the contrary case, the

resolution will be affirmed, and the consequent

indemnity awarded to the party prejudiced.
In other words, the party who deems the contract
violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will
conclusively and finally settle whether the action
taken was or was not correct in law. But the law
definitely does not require that the contracting party
who believes itself injured must first file suit and
wait for a judgment before taking extrajudicial
steps to protect its interest. Otherwise, the party
injured by the other's breach will have to passively
sit and watch its damages accumulate during the
pendency of the suit until the final judgment of
rescission is rendered when the law itself requires
that he should exercise due diligence to minimize
its own damages (Civil Code, Article 2203).
We see no conflict between this ruling and the
previous jurisprudence of this Court invoked by
respondent declaring that judicial action is
necessary for the resolution of a reciprocal
obligation (Ocejo Perez & Co., vs. International
Banking Corp., 37 Phil. 631; Republic vs. Hospital
de San Juan De Dios, et al., 84 Phil 820) since in
every case where the extrajudicial resolution is
contested only the final award of the court of
competent jurisdiction can conclusively settle
whether the resolution was proper or not. It is in
this sense that judicial action win be necessary, as
without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation
unless attack thereon should become barred by
acquiescense, estoppel or prescription.
Fears have been expressed that a stipulation
providing for a unilateral rescission in case of
breach of contract may render nugatory the general
rule requiring judicial action (v. Footnote, Padilla
Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page
140) but, as already observed, in case of abuse or
error by the rescinder the other party is not barred
from questioning in court such abuse or error, the
practical effect of the stipulation being merely to
transfer to the defaulter the initiative of instituting
suit, instead of the rescinder (Emphasis supplied).
Of similar import is the ruling in Nera vs. Vacante 4, reading:
A stipulation entitling one party to take possession
of the land and building if the other party violates
the contract does not ex propio vigore confer upon
the former the right to take possession thereof if

72

Corporation Code 3
objected to without judicial intervention and
determination.
This was reiterated in Zulueta vs. Mariano 5 where we held that
extrajudicial rescission has legal effect where the other party does not
oppose it. 6 Where it is objected to, a judicial determination of the
issue is still necessary.
In other words, resolution of reciprocal contracts may be made
extrajudicially unless successfully impugned in Court. If the debtor
impugns the declaration, it shall be subject to judicial determination. 7
In this case, private respondent has denied that rescission is justified
and has resorted to judicial action. It is now for the Court to
determine whether resolution of the contract by petitioners was
warranted.
We hold that resolution by petitioners of the contract was ineffective
and inoperative against private respondent for lack of notice of
resolution, as held in the U.P. vs. Angeles case, supra
Petitioner relies on Torralba vs. De los Angeles 8 where it was held
that "there was no contract to rescind in court because from the
moment the petitioner defaulted in the timely payment of the
installments, the contract between the parties was deemed ipso
facto rescinded." However, it should be noted that even in that case
notice in writing was made to the vendee of the cancellation and
annulment of the contract although the contract entitled the seller to
immediate repossessing of the land upon default by the buyer.

Regarding the second issue on refund of the

installment payments made by private respondent.
Article 1385 of the Civil Code provides:
ART. 1385. Rescission creates the obligation to
return the things which were the object of the
contract, together with their fruits, and the price
with its interest; consequently, it can be carried out
only when he who demands rescission can return
whatever he may be obliged to restore.
Neither sham rescission take place when the things
which are the object of the contract are legally in
the possession of third persons who did not act in
bad faith.
In this case, indemnity for damages may be
demanded from the person causing the loss.
As a consequence of the resolution by petitioners, rights to the lot
should be restored to private respondent or the same should be
replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no
evidence on record that other lots are still available, private
respondent is entitled to the refund of installments paid plus interest
at the legal rate of 12% computed from the date of the institution of
the action. 10 It would be most inequitable if petitioners were to be
allowed to retain private respondent's payments and at the same time
appropriate the proceeds of the second sale to another.

We come now to the third and fourth issues regarding the personal
liability of petitioner Onstott who was made jointly and severally
liable with petitioner corporation for refund to private respondent of
the total amount the latter had paid to petitioner company. It is basic
that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as wen as from that of
any other legal entity to which it may be related. 11 As a general rule,
Sec. 3(b) ... the actual cancellation of the contract
shall take place after thirty days from receipt by the a corporation may not be made to answer for acts or liabilities of its
stockholders or those of the legal entities to which it may be
buyer of the notice of cancellation or the demand
connected and vice versa. However, the veil of corporate fiction may
for rescission of the contract by a notarial act and
upon full payment of the cash surrender value to the be pierced when it is used as a shield to further an end subversive of
justice 12 ; or for purposes that could not have been intended by the
buyer. (Emphasis supplied).
law that created it 13 ; or to defeat public convenience, justify wrong,
protect fraud, or defend crime. 14 ; or to perpetuate fraud or confuse
The contention that private respondent had waived his right to be
legitimate issues 15 ; or to circumvent the law or perpetuate
notified under paragraph 6 of the contract is neither meritorious
deception 16 ; or as an alter ego, adjunct or business conduit for the
because it was a contract of adhesion, a standard form of petitioner
sole benefit of the stockholders. 17
corporation, and private respondent had no freedom to stipulate. A
waiver must be certain and unequivocal, and intelligently made; such
We find no badges of fraud on petitioners' part. They had literally
waiver follows only where liberty of choice has been fully
9
accorded. Moreover, it is a matter of public policy to protect buyers relied, albeit mistakenly, on paragraph 6 (supra) of its contract with
of real estate on installment payments against onerous and oppressive private respondent when it rescinded the contract to sell
extrajudicially and had sold it to a third person.
conditions. Waiver of notice is one such onerous and oppressive
condition to buyers of real estate on installment payments.
In this case, petitioner Onstott was made liable because he was then
the President of the corporation and he a to be the controlling
stockholder. No sufficient proof exists on record that said petitioner
The indispensability of notice of cancellation to the buyer was to be
later underscored in Republic Act No. 6551 entitled "An Act to
Provide Protection to Buyers of Real Estate on Installment
Payments." which took effect on September 14, 1972, when it
specifically provided:

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Corporation Code 3
used the corporation to defraud private respondent. He cannot,
therefore, be made personally liable just because he "appears to be the
controlling stockholder". Mere ownership by a single stockholder or
by another corporation is not of itself sufficient ground for
disregarding the separate corporate personality. 18 In this respect then,
a modification of the Resolution under review is called for.
WHEREFORE, the questioned Resolution of respondent public
official, dated May 2, 1980, is hereby modified. Petitioner Palay, Inc.
is directed to refund to respondent Nazario M. Dumpit the amount of
P13,722.50, with interest at twelve (12%) percent per annum from
November 8, 1974, the date of the filing of the Complaint. The
temporary Restraining Order heretofore issued is hereby lifted.
No costs.
SO ORDERED.

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Corporation Code 3
G.R. No. 89879

April 20, 1990

JAIME PABALAN AND EDUARDO LAGDAMEO, petitioners,

vs.
NATIONAL LABOR RELATIONS COMMISSION, LABOR
ARBITER AMBROSIO B. SISON, ELIZABETH RODEROS,
ET AL., and THE SHERIFF OF THE NATIONAL LABOR
RELATIONS COMMISSION, respondents.
Sofronio A. Larcia and Conrado Abriol Padilla for petitioners.
Apolinario N. Lomabao, Jr. for private respondents.

GANCAYCO, J.:
Once again the parameters of the liability of the officers of a
corporation as to unpaid wages and other claims of the employees of
a corporation which has a separate and distinct personality are
brought to fore in this case.
On October 20, 1987, eighty-four (84) workers of the Philippine
Inter-Fashion, Inc. (PIF) filed a complaint against the latter for illegal
transfer simultaneous with illegal dismissal without justifiable cause
and in violation of the provision of the Labor Code on security of
tenure as well as the provisions of Batas Pambansa Blg. 130.
Complainants demanded reinstatement with full backwages, living
allowance, 13th month pay and other benefits under existing laws
and/or separation pay.

IN VIEW OF THE FOREGOING CONSIDERATION,

respondent Philippine Inter-Fashion and its officers Mr.
Jaime Pabalan and Mr. Eduardo Lagdameo are hereby
ordered to:
1. reinstate the sixty two (62) complainants to their former or
equivalent position without loss of seniority rights and
privileges;
2. to pay, jointly and severally, their backwages and other
benefits from the time they were dismissed up to the time
they are actually reinstated, the computation to be based
from the latest minimum wage law at the time of their
dismissal. (See attached Annex "A" of complainants'
position paper.)
SO ORDERED. 1
Not satisfied therewith petitioners filed a motion for reconsideration
in the First Division of the public respondent, National Labor
Relations Commission (NLRC), which nevertheless, affirmed the
appealed decision and dismissed the appeal for lack of merit in a
resolution dated June 30, 1989. Petitioners were ordered to pay the
appeal fee in accordance with law.
Hence the herein petition for certiorari with prayer for the issuance of
a temporary restraining order wherein the petitioners raised the
following issues:
A

On October 21, 1987, PIF, through its General Manager, was notified
about the complaint and summons for the hearing set for November
6, 1987. The hearing was re-set for November 27, 1987 for failure of
respondents to appear. On November 30, 1987 respondents
(petitioners herein) moved for the cancellation of the hearing
scheduled on November 6, 1987 so that they could engage a counsel
to properly represent them preferably on November 17, 1987.

THE ARBITER AND THE NLRC DID NOT ACQUIRE

JURISDICTION OVER THE PERSONS OF THE
PETITIONERS AND, THEREFORE, THE DECISION
AND THE RESOLUTION, UNDER DISPUTE, ARE
NULL AND VOID.

On December 10, 1987 both parties were directed to submit their

respective position papers within ten (10) days. By mutual agreement
the hearing was re-set on December 21, 1987 but on said date
respondents and/or counsel failed to appear. The hearing was re-set
on January 14, 1988 on which date respondents were given a deadline
to submit their position paper.

THE DECISION AND THE NLRC RESOLUTION

SUFFER FROM A LEGAL AND CONSTITUTIONAL
INFIRMITY BECAUSE THEY SANCTION A
DEPRIVATION OF PETITIONERS' PROPERTIES
WITHOUT DUE PROCESS OF LAW.

On January 4, 1988 complainants filed their position paper. On

January 14, 1988 counsel for respondents moved that he be given
until January 22, 1988 to file their position paper. The labor arbiter
granted the motion. The PIF filed its position paper on January 22,
1988. The heating for February 17, 1988 was re-set to March 9, 1988
and on March 29, 1988 on which dates respondents failed to appear.
On May 5, 1988, with leave of the labor arbiter, complainants filed
their supplemental position paper impleading the petitioners as
officers of the PIF in the complaint for their illegal transfer to a new
firm.
On July 13, 1988 a decision was rendered by the labor arbiter the
dispositive part of which reads as follows:

C
THE ARBITER AND THE NLRC COMMITTED A
GRAVE ABUSE OF DISCRETION IN ADJUDGING
PETITIONERS HEREIN AS JOINTLY AND SEVERALLY
LIABLE WITH PHILIPPINE INTER-FASHION, INC. TO
PAY THE JUDGMENT DEBT.
On September 25, 1989 this Court dismissed the petition for
insufficiency in form and substance, having failed to comply with the
Rules of Court and Administrative Circular No. 1-88 requiting the
verification of the petition. A motion for reconsideration filed by the
petitioners of the said resolution was denied on October 16, 1989 for
failure to raise any substantial arguments to warrant a modification
thereof. However, acting on an urgent motion to include the motion
for reconsideration of the resolution of September 25, 1989 in the

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Corporation Code 3
court's calendar which the Court granted, on November 30, 1989 the
To the same effect . . . (are) this Court's rulings in still other
Court resolved to set aside said resolutions of September 25, 1989
cases:
and October 16, 1989, and to require respondents to comment thereon
within ten (10) days from notice thereof. A temporary restraining
When the notion of legal entity is used as a means to
order was issued enjoining respondents from enforcing or
perpetrate fraud or an illegal act or as a vehicle for the
implementing the questioned decision of the labor arbiter affirmed by
evasion of an existing obligation, the circumvention of
the NLRC upon a bond to be filed by petitioners in the amount of
statutes, and or (to) confuse legitimate issues the veil which
P100,000.00. However, on February 7, 1990 for failure of petitioner
protects the corporation will be lifted. 5
to file the required bond despite extensions of time granted them, the
Court resolved to lift the temporary restraining order issued on
In this particular case complainants did not allege or show that
November 13, 1989.
petitioners, as officers of the corporation deliberately and maliciously
designed to evade the financial obligation of the corporation to its
Now to the merit of the petition.
employees, or used the transfer of the employees as a means to
perpetrate an illegal act or as a vehicle for the evasion of existing
Petitioners do not question the merits of the decision insofar as PIF is obligations, the circumvention of statutes, or to confuse the legitimate
concerned in this proceeding.1wphi1 The first two issues they raised issues.
are to the effect that the public respondents never acquired
jurisdiction over them as they have not been served with summons
Indeed, in the questioned resolution of the NLRC dated June 30, 1989
and thus they were deprived due process.
there is no finding as to why petitioners were being held jointly and
severally liable for the liability and obligation of the corporation
The Court finds these grounds to be devoid of merit. As the record
except as to invocation of the ruling of this Court in A.C. Ransom
shows while originally it was PIF which was impleaded as respondent Labor Union-CCLU vs. NLRC 6 in that the liability in the cases of
before the labor arbiter, petitioners also appeared in their behalf
illegal termination of employees extends not only to the corporation
through counsel. Thereafter when the supplemental position paper
as a corporate entity but also to its responsible officers acting in the
was filed by complainants, petitioners were impleaded as respondents interest of the corporation or employer.
to which they filed an opposition inasmuch as they filed their own
supplemental position papers. They were therefore properly served
It must be noted, however, that A.C. Ransom Labor Union-CCLU
with summons and they were not deprived of due process.
vs. NLRC the corporation was a family corporation and that during
the strike the members of the family organized another corporation
Petitioners contend however that under the circumstances of the case which was the Rosario Industrial Corporation to which all the assets
as officers of the corporation PIF they could not be jointly and
of the A.C. Ransom Corporation were transferred to continue its
severally held liable with the corporation for its liability in this case. business which acts of such officers and agents of A.C. Ransom
Corporation were intended to avoid payment of its obligations to its
employees. In such case this Court considered the president of the
The settled rule is that the corporation is vested by law with a
corporation to be personally liable together with the corporation for
personality separate and distinct from the persons composing it,
the satisfaction of the claim of the employees. 7
including its officers as well as from that of any other legal entity to
which it may be related. Thus, a company manager acting in good
faith within the scope of his authority in terminating the services of
Not one of the above circumstances has been shown to be present.
certain employees cannot be held personally liable for
Hence petitioners can not be held jointly and severally liable with the
damages. 2 Mere ownership by a single stockholder or by another
PIF corporation under the questioned decision and resolution of the
corporation of all or nearly all capital stocks of the corporation is not public respondent.
by itself sufficient ground for disregarding the separate corporate
personality. 3
WHEREFORE, the petition is GRANTED and the questioned
resolution of the public respondent dated June 30, 1989 is hereby
As a general rule, officers of a corporation are not personally liable
modified by relieving petitioners of any liability as officers of the PIF
for their official acts unless it is shown that they have exceeded their and holding that the liability shall be solely that of Philippine Interauthority. 4 However, the legal fiction that a corporation has a
Fashion, Inc. No costs.
personality separate and distinct from stockholders and members may
be disregarded as follows:
SO ORDERED.
This finding does not ignore the legal fiction that a
corporation has a personality separate and distinct from its
stockholders and members, for, as this Court had held
"where the incorporators and directors belong to a single
family, the corporation and its members can be considered as
one in order to avoid its being used as an instrument to
commit injustice," or to further an end subversive of justice.
In the case of Claparols vs. CIR involving almost similar
facts as in this case, it was also held that the shield of
corporate fiction should be pierced when it is deliberately
and maliciously designed to evade financial obligations to
employees.

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Corporation Code 3
G.R. No. 85416 July 24, 1990
FRANCISCO V. DEL ROSARIO, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and
LEONARDO V. ATIENZA, respondents.
Jardeleza, Sobrevias, Diaz, Hayudini & Bodegon Law Offices for
petitioner.
Lourdes T. Pagayatan for private respondent.

dated October 21, 1988. The petition was given due course on June
14, 1989.
After considering the undisputed facts and the arguments raised in the
pleadings, the Court finds grave abuse of discretion on the part of the
NLRC.
The action of the NLRC affirming the issuance of an alias writ of
execution against petitioner, on the theory that the corporate
personality of Philsa should be disregarded, was founded primarily on
the following findings of the POEA
xxx xxx xxx

CORTES, J.:
In POEA Case No. 85-06-0394, the Philippine Overseas Employment
Administration (POEA) promulgated a decision on February 4, 1986
dismissing the complaint for money claims for lack of merit. The
decision was appealed to the National Labor Relations Commission
(NLRC), which on April 30, 1987 reversed the POEA decision and
ordered Philsa Construction and Trading Co., Inc. (the recruiter) and
Arieb Enterprises (the foreign employer) to jointly and severally pay
private respondent the peso equivalent of $16,039.00, as salary
differentials, and $2,420.03, as vacation leave benefits. The case was
elevated to the Supreme Court, but the petition was dismissed on
August 31, 1987 and entry of judgment was made on September 24,
1987.
A writ of execution was issued by the POEA but it was returned
unsatisfied as Philsa was no longer operating and was financially
incapable of satisfying the judgment. Private respondent moved for
the issuance of an alias writ against the officers of Philsa. This motion
was opposed by the officers, led by petitioner, the president and
general manager of the corporation.
On February 12, 1988, the POEA issued a resolution, the dispositive
portion of which read:
WHEREFORE, premises considered, let an alias
writ of Execution be issued and the handling sheriff
is ordered to execute against the properties of Mr.
Francisco V. del -Rosario and if insufficient, against
the cash and/or surety bond of Bonding Company
concerned for the full satisfaction of the judgment
awarded.
Petitioner appealed to the NLRC. On September 23, 1988, the NLRC
dismissed the appeal. On October 21, 1988, petitioner's motion for
reconsideration was denied.
Thus, this petition was filed on October 28, 1988, alleging that the
NLRC gravely abused its discretion. On November 10, 1988 the
Court issued a temporary restraining order enjoining the enforcement
of the NLRC's decision dated September 23, 1988 and resolution

6. Per the certification issued by the Licensing

Division of this Office, it appears that Philsa
Construction & Trading Co., Inc., with office
address at 126 Pioneer St., Mandaluyong, Metro
Manila, represented by Mr. Francisco V. del
Rosario, President and General Manager, was
formerly a registered construction contractor whose
authority was originally issued on July 21, 1978 but
was already delisted from the list of
agencies/entities on August 15, 1986 for inactivity;
7. Per another certification issued by the Licensing
Division of this Office, it also appears that another
corporation, Philsa International Placement &
Services Corp., composed of practically the same
set of incorporators/stockholders, was registered as
a licensed private employment agency whose
license was issued on November 5, 1981,
represented by the same Mr. Francisco V. del
Rosario as its President/ General Manager.
and an application of the ruling of the Court in A.C. Ransom Labor
Union-CCLU v. NLRC, G.R. No. 69494, June 10, 1986, 142 SCRA
269.
However, we find that the NLRC's reliance on the findings of the
POEA and the ruling in A. C. Ransom is totally misplaced.
1. Under the law a corporation is bestowed juridical personality,
separate and distinct from its stockholders [Civil Code, Art. 44;
Corporation Code, sec. 2]. But when the juridical personality of the
corporation is used to defeat public convenience, justify wrong,
protect fraud or defend crime, the corporation shall be considered as a
mere association of persons [Koppel (Phil.), Inc. v. Yatco, 77 Phil.
496 (1946), citing 1 Fletcher, Cyclopedia of Corporations, 135136; see also Palay, Inc. v. Clave, G.R. No. 56076, September 21,
1983, 124 SCRA 638], and its responsible officers and/or
stockholders shall be held individually liable [Namarco v. Associated
Finance Co., Inc., G.R. No. L-20886, April 27, 1967, 19 SCRA 962].
For the same reasons, a corporation shall be liable for the obligations
of a stockholder [Palacio v. Fely Transportation Company, G.R. No.
L-15121, August 31, 1962, 5 SCRA 1011; Emilio Cano Enterprises,

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Corporation Code 3
Inc. v. Court of Industrial Relations, G.R. No. L-20502, February 26,
1965, 13 SCRA 290], or a corporation and its successor-in-interest
shall be considered as one and the liability of the former shall attach
to the latter [Koppel v. Yatco, supra; Liddell & Co. v. Collector of
Internal Revenue, G.R. No. L-9687, June 30, 1961, 2 SCRA 632].
But for the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed.
In this regard we find the NLRC's decision wanting. The conclusion
that Philsa allowed its license to expire so as to evade payment of
private respondent's claim is not supported by the facts. Philsa's
corporate personality therefore remains inviolable.
Consider the following undisputed facts:
(1) Private respondent filed his complaint with the
POEA on June 4, 1985;
(2) The last renewal of Philsa's license expired on
October 12, 1985;
(3) The POEA dismissed private respondent's
complaint on February 4, 1986;
(4) Philsa was delisted for inactivity on August 15,
1986; *
(5) The dismissal of the complaint was appealed to
the NLRC and it was only on April 30, 1987 that
the judgment awarding differentials and benefits to
private respondent was rendered.

In La Campana Coffee Factory, Inc. v. Kaisahan ng Manggagawa sa

La Campana (KKM) 93 Phil. 160 (1953), La Campana Coffee
Factory, Inc. and La Campana Gaugau Packing were substantially
owned by the same person. They had one office, one management,
and a single payroll for both businesses. The laborers of
the gaugaufactory and the coffee factory were also interchangeable,
i.e., the workers in one factory worked also in the other factory.
In Claparols v. Court of Industrial Relations, G.R. No. L-30822, July
31, 1975, 65 SCRA 613, the Claparols Steel and Nail Plant, which
was ordered to pay its workers backwages, ceased operations on June
30, 1957 and was succeeded on the next day, July 1, 1957 by the
Claparols Steel Corporation. Both corporations were substantially
owned and controlled by the same person and there was no break or
cessation in operations. Moreover, all the assets of the steel and nail
plant were transferred to the new corporation.
2. As earlier stated, we also find that, contrary to the NLRC'S
holding, the ruling in A. C. Ransom is inapplicable to this case. In A.
C. Ransom, the Court said:
... In the instant case, it would appear that
RANSOM, in 1969, foreseeing the possibility or
probability of payment of back wages to the 22
strikers, organized ROSARIO to replace
RANSOM, with the latter to be eventually phased
out if the 22 strikers win their case. RANSOM
actually ceased operations on May 1, 1973, after
the December 19, 1972 Decision of the Court of
Industrial Relations was promulgated against
RANSOM. [At p. 274.]

The distinguishing marks of fraud were therefore clearly apparent

in A. C. Ransom. A new corporation was created, owned by the same
Thus, at the time Philsa allowed its license to lapse in 1985 and even family, engaging in the same business and operating in the same
at the time it was delisted in 1986, there was yet no judgment in favor compound.
of private respondent. An intent to evade payment of his claims
cannot therefore be implied from the expiration of Philsa's license and Thus, considering that the non-payment of the workers was a
continuing situation, the Court adjudged its President, the
its delisting.
"responsible officer" of the corporation, personally liable for the
backwages awarded, he being the chief operation officer or
Neither will the organization of Philsa International Placement and
"manager" who could be held criminally liable for violations of
Services Corp. and its registration with the POEA as a private
employment agency imply fraud since it was organized and registered Republic Act No. 602 (the old Minimum Wage Law.)
in 1981, several years before private respondent filed his complaint
with the POEA in 1985. The creation of the second corporation could
not therefore have been in anticipation of private respondent's money
claims and the consequent adverse judgment against Philsa
Likewise, substantial identity of the incorporators of the two
corporations does not necessarily imply fraud.
The circumstances of this case distinguish it from those in earlier
decisions of the Court in labor cases where the veil of corporate
fiction was pierced.

In the case now before us, not only has there been a failure to
establish fraud, but it has also not been shown that petitioner is the
corporate officer responsible for private respondent's predicament. It
must be emphasized that the claim for differentials and benefits was
actually directed against the foreign employer. Philsa became liable
only because of its undertaking to be jointly and severally bound with
the foreign employer, an undertaking required by the rules of the
POEA [Rule II, sec. 1(d) (3)], together with the filing of cash and
surety bonds [Rule 11, sec. 4], in order to ensure that overseas
workers shall find satisfaction for awards in their favor.

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Corporation Code 3
At this juncture, the Court finds it appropriate to point out that a
judgment against a recruiter should initially be enforced against the
cash and surety bonds filed with the POEA. As provided in the POEA
Rules and Regulations
... The bonds shall answer for all valid and legal
claims arising from violations of the conditions for
the grant and use of the license or authority and
contracts of employment. The bonds shall likewise
guarantee compliance with the provisions of the
Labor Code and its implementing rules and
regulations relating to recruitment and placement,
the rules of the Administration and relevant
issuances of the Ministry and all liabilities which
the Administration may impose. ... [Rule II, see. 4.]
Quite evidently, these bonds do not answer for a single specific
liability, but for all sorts of liabilities of the recruiter to the worker
and to the POEA. Moreover, the obligations guaranteed by the bonds
are continuing. Thus, the bonds are subject to replenishment when
they are garnished, and failure to replenish shall cause the suspension
or cancellation of the recruiter's license [Rule II, sec. 19].
Furthermore, a cash bond shall be refunded to a recruiter who
surrenders his license only upon posting of a surety bond of similar
amount valid for three (3) years [Rule II, sec. 20]. All these, to ensure
recovery from the recruiter.
It is therefore surprising why the POEA ordered execution "against
the properties of Mr. Francisco V. del Rosarioand if insufficient,
against the cash and/or surety bond of Bonding Company
concerned for the till satisfaction of the judgment awarded" in
complete disregard of the scheme outlined in the POEA Rules and
Regulations. On this score alone, the NLRC should not have affirmed
the POEA.
WHEREFORE, the petition is GRANTED and the decision and
resolution of the NLRC, dated September 23, 1988 and October 21,
1988, respectively, in POEA Case No. 85-06-0394 are SET ASIDE.
The temporary restraining order issued by the Court on November 10,
1988 is MADE PERMANENT.
SO ORDERED.

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Corporation Code 3
G.R. No. L-23893

October 29, 1968

VILLA REY TRANSIT, INC., plaintiff-appellant,

vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION
CO., INC. and PUBLIC SERVICE COMMISSION,defendants.
EUSEBIO E. FERRER and PANGASINAN
TRANSPORTATION CO., INC., defendants-appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party
plaintiff-appellant,
vs.
JOSE M. VILLARAMA, third-party defendant-appellee.

subscribed capital stock, P105,000.00 was paid to the treasurer of the

corporation, who was Natividad R. Villarama.
In less than a month after its registration with the Securities and
Exchange Commission (March 10, 1959), the Corporation, on April
7, 1959, bought five certificates of public convenience, forty-nine
buses, tools and equipment from one Valentin Fernando, for the sum
of P249,000.00, of which P100,000.00 was paid upon the signing of
the contract; P50,000.00 was payable upon the final approval of the
sale by the PSC; P49,500.00 one year after the final approval of the
sale; and the balance of P50,000.00 "shall be paid by the BUYER to
the different suppliers of the SELLER."

The very same day that the aforementioned contract of sale was
executed, the parties thereto immediately applied with the PSC for its
approval, with a prayer for the issuance of a provisional authority in
favor of the vendee Corporation to operate the service therein
involved.1 On May 19, 1959, the PSC granted the provisional permit
prayed for, upon the condition that "it may be modified or revoked by
the Commission at any time, shall be subject to whatever action that
ANGELES, J.:
may be taken on the basic application and shall be valid only during
the pendency of said application." Before the PSC could take final
This is a tri-party appeal from the decision of the Court of First
Instance of Manila, Civil Case No. 41845, declaring null and void the action on said application for approval of sale, however, the Sheriff of
Manila, on July 7, 1959, levied on two of the five certificates of
sheriff's sale of two certificates of public convenience in favor of
public convenience involved therein, namely, those issued under PSC
defendant Eusebio E. Ferrer and the subsequent sale thereof by the
latter to defendant Pangasinan Transportation Co., Inc.; declaring the cases Nos. 59494 and 63780, pursuant to a writ of execution issued
by the Court of First Instance of Pangasinan in Civil Case No. 13798,
plaintiff Villa Rey Transit, Inc., to be the lawful owner of the said
in favor of Eusebio Ferrer, plaintiff, judgment creditor, against
certificates of public convenience; and ordering the private
Valentin Fernando, defendant, judgment debtor. The Sheriff made and
defendants, jointly and severally, to pay to the plaintiff, the sum of
entered the levy in the records of the PSC. On July 16, 1959, a public
P5,000.00 as and for attorney's fees. The case against the PSC was
sale was conducted by the Sheriff of the said two certificates of public
dismissed.
convenience. Ferrer was the highest bidder, and a certificate of sale
was issued in his name.
The rather ramified circumstances of the instant case can best be
understood by a chronological narration of the essential facts, to wit:
Thereafter, Ferrer sold the two certificates of public convenience to
Pantranco, and jointly submitted for approval their corresponding
Prior to 1959, Jose M. Villarama was an operator of a bus
2
transportation, under the business name of Villa Rey Transit, pursuant contract of sale to the PSC. Pantranco therein prayed that it be
authorized provisionally to operate the service involved in the
to certificates of public convenience granted him by the Public
said two certificates.
Service Commission (PSC, for short) in Cases Nos. 44213 and
Chuidian Law Office for plaintiff-appellant.
Bengzon, Zarraga & Villegas for defendant-appellant / third-party
plaintiff-appellant.
Laurea & Pison for third-party defendant-appellee.

104651, which authorized him to operate a total of thirty-two (32)

units on various routes or lines from Pangasinan to Manila, and viceversa. On January 8, 1959, he sold the aforementioned two
certificates of public convenience to the Pangasinan Transportation
Company, Inc. (otherwise known as Pantranco), for P350,000.00 with
the condition, among others, that the seller (Villarama) "shall not for
a period of 10 years from the date of this sale, apply for any TPU
service identical or competing with the buyer."
Barely three months thereafter, or on March 6, 1959: a corporation
called Villa Rey Transit, Inc. (which shall be referred to hereafter as
the Corporation) was organized with a capital stock of P500,000.00
divided into 5,000 shares of the par value of P100.00 each;
P200,000.00 was the subscribed stock; Natividad R. Villarama (wife
of Jose M. Villarama) was one of the incorporators, and she
subscribed for P1,000.00; the balance of P199,000.00 was subscribed
by the brother and sister-in-law of Jose M. Villarama; of the

The applications for approval of sale, filed before the PSC, by

Fernando and the Corporation, Case No. 124057, and that of Ferrer
and Pantranco, Case No. 126278, were scheduled for a joint hearing.
In the meantime, to wit, on July 22, 1959, the PSC issued an order
disposing that during the pendency of the cases and before a final
resolution on the aforesaid applications, the Pantranco shall be the
one to operate provisionally the service under the two certificates
embraced in the contract between Ferrer and Pantranco. The
Corporation took issue with this particular ruling of the PSC and
elevated the matter to the Supreme Court,3 which decreed, after
deliberation, that until the issue on the ownership of the disputed
certificates shall have been finally settled by the proper court, the
Corporation should be the one to operate the lines provisionally.
On November 4, 1959, the Corporation filed in the Court of First
Instance of Manila, a complaint for the annulment of the sheriff's sale

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Corporation Code 3
of the aforesaid two certificates of public convenience (PSC Cases
Nos. 59494 and 63780) in favor of the defendant Ferrer, and the
subsequent sale thereof by the latter to Pantranco, against Ferrer,
Pantranco and the PSC. The plaintiff Corporation prayed therein that
all the orders of the PSC relative to the parties' dispute over the said
certificates be annulled.

NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS

SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR
COMPETING WITH THE BUYER," apply to new lines only or does
it include existing lines?; (2) Assuming that said stipulation covers all
kinds of lines, is such stipulation valid and enforceable?; (3) In the
affirmative, that said stipulation is valid, did it bind the Corporation?

In separate answers, the defendants Ferrer and Pantranco averred that

the plaintiff Corporation had no valid title to the certificates in
question because the contract pursuant to which it acquired them
from Fernando was subject to a suspensive condition the approval
of the PSC which has not yet been fulfilled, and, therefore, the
Sheriff's levy and the consequent sale at public auction of the
certificates referred to, as well as the sale of the same by Ferrer to
Pantranco, were valid and regular, and vested unto Pantranco, a
superior right thereto.

For convenience, We propose to discuss the foregoing issues by

starting with the last proposition.

The evidence has disclosed that Villarama, albeit was not an

incorporator or stockholder of the Corporation, alleging that he did
not become such, because he did not have sufficient funds to invest,
his wife, however, was an incorporator with the least subscribed
number of shares, and was elected treasurer of the Corporation. The
finances of the Corporation which, under all concepts in the law, are
supposed to be under the control and administration of the treasurer
Pantranco, on its part, filed a third-party complaint against Jose M.
keeping them as trust fund for the Corporation, were, nonetheless,
Villarama, alleging that Villarama and the Corporation, are one and
manipulated and disbursed as if they were the private funds of
the same; that Villarama and/or the Corporation was disqualified from Villarama, in such a way and extent that Villarama appeared to be the
operating the two certificates in question by virtue of the
actual owner-treasurer of the business without regard to the rights of
aforementioned agreement between said Villarama and Pantranco,
the stockholders. The following testimony of Villarama,4 together
which stipulated that Villarama "shall not for a period of 10 years
with the other evidence on record, attests to that effect:
from the date of this sale, apply for any TPU service identical or
competing with the buyer."
Q.
Doctor, I want to go back again to the incorporation
of the Villa Rey Transit, Inc. You heard the testimony
Upon the joinder of the issues in both the complaint and third-party
presented here by the bank regarding the initial opening
complaint, the case was tried, and thereafter decision was rendered in
deposit of ONE HUNDRED FIVE THOUSAND PESOS, of
the terms, as above stated.
which amount Eighty-Five Thousand Pesos was a check
drawn by yourself personally. In the direct examination you
told the Court that the reason you drew a check for EightyAs stated at the beginning, all the parties involved have appealed
Five Thousand Pesos was because you and your wife, or
from the decision. They submitted a joint record on appeal.
your wife, had spent the money of the stockholders given to
her for incorporation. Will you please tell the Honorable
Pantranco disputes the correctness of the decision insofar as it holds
Court if you knew at the time your wife was spending the
that Villa Rey Transit, Inc. (Corporation) is a distinct and separate
money to pay debts, you personally knew she was spending
entity from Jose M. Villarama; that the restriction clause in the
the money of the incorporators?
contract of January 8, 1959 between Pantranco and Villarama is null
and void; that the Sheriff's sale of July 16, 1959, is likewise null and
A.
You know my money and my wife's money are one.
void; and the failure to award damages in its favor and against
We never talk about those things.
Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the
sheriff's sale is null and void; and the sale of the two certificates in
question by Valentin Fernando to the Corporation, is valid. He also
assails the award of P5,000.00 as attorney's fees in favor of the
Corporation, and the failure to award moral damages to him as prayed
for in his counterclaim.
The Corporation, on the other hand, prays for a review of that portion
of the decision awarding only P5,000.00 as attorney's fees, and
insisting that it is entitled to an award of P100,000.00 by way of
exemplary damages.

Q.
Doctor, your answer then is that since your money
and your wife's money are one money and you did not know
when your wife was paying debts with the incorporator's
money?
A.
Because sometimes she uses my money, and
sometimes the money given to her she gives to me and I
deposit the money.
Q.
Actually, aside from your wife, you were also the
custodian of some of the incorporators here, in the
beginning?

After a careful study of the facts obtaining in the case, the vital issues
to be resolved are: (1) Does the stipulation between Villarama and
Pantranco, as contained in the deed of sale, that the former "SHALL

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Corporation Code 3
A.
Not necessarily, they give to my wife and when my
wife hands to me I did not know it belonged to the
incorporators.
Q.
It supposes then your wife gives you some of the
money received by her in her capacity as treasurer of the
corporation?
A.

Maybe.

Q.
What did you do with the money, deposit in a regular
account?
A.

Deposit in my account.

testified that he was not aware of any amount of money that had
actually passed hands among the parties involved,8 and actually the
only money of the corporation was the P105,000.00 covered by the
deposit slip Exh. 23, of which as mentioned above, P85,000.00 was
paid by Villarama's personal check.
Further, the evidence shows that when the Corporation was in its
initial months of operation, Villarama purchased and paid with his
personal checks Ford trucks for the Corporation. Exhibits 20 and 21
disclose that the said purchases were paid by Philippine Bank of
Commerce Checks Nos. 992618-B and 993621-B, respectively. These
checks have been sufficiently established by Fausto Abad, Assistant
Accountant of Manila Trading & Supply Co., from which the trucks
were purchased9 and Aristedes Solano, an employee of the Philippine
Bank of Commerce,10as having been drawn by Villarama.

Q.
Of all the money given to your wife, she did not
receive any check?

Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger

entries and vouchers showing that Villarama had co-mingled his
personal funds and transactions with those made in the name of the
A.
I do not remember.
Corporation, are very illuminating evidence. Villarama has assailed
Q.
Is it usual for you, Doctor, to be given Fifty Thousand the admissibility of these exhibits, contending that no evidentiary
value whatsoever should be given to them since "they were merely
Pesos without even asking what is this?
photostatic copies of the originals, the best evidence being the
originals themselves." According to him, at the time Pantranco
xxx
xxx
xxx
offered the said exhibits, it was the most likely possessor of the
originals thereof because they were stolen from the files of the
JUDGE: Reform the question.
Corporation and only Pantranco was able to produce the alleged
photostat copies thereof.
Q.
The subscription of your brother-in-law, Mr. Reyes, is
Fifty-Two Thousand Pesos, did your wife give you Fifty-two
Section 5 of Rule 130 of the Rules of Court provides for the requisites
Thousand Pesos?
for the admissibility of secondary evidence when the original is in the
custody of the adverse party, thus: (1) opponent's possession of the
A.
I have testified before that sometimes my wife gives
original; (2) reasonable notice to opponent to produce the original; (3)
me money and I do not know exactly for what.
satisfactory proof of its existence; and (4) failure or refusal of
opponent to produce the original in court.11 Villarama has practically
The evidence further shows that the initial cash capitalization of the
admitted the second and fourth requisites.12 As to the third, he
corporation of P105,000.00 was mostly financed by Villarama. Of the
admitted their previous existence in the files of the Corporation and
P105,000.00 deposited in the First National City Bank of New York,
also that he had seen some of them.13 Regarding the first element,
representing the initial paid-up capital of the Corporation, P85,000.00
Villarama's theory is that since even at the time of the issuance of
was covered by Villarama's personal check. The deposit slip for the
the subpoena duces tecum, the originals were already missing,
said amount of P105,000.00 was admitted in evidence as Exh. 23,
therefore, the Corporation was no longer in possession of the same.
which shows on its face that P20,000.00 was paid in cash and
However, it is not necessary for a party seeking to introduce
P85,000.00 thereof was covered by Check No. F-50271 of the First
secondary evidence to show that the original is in the actual
National City Bank of New York. The testimonies of Alfonso
possession of his adversary. It is enough that the circumstances are
Sancho5 and Joaquin Amansec,6 both employees of said bank, have
such as to indicate that the writing is in his possession or under his
proved that the drawer of the check was Jose Villarama himself.
control. Neither is it required that the party entitled to the custody of
the instrument should, on being notified to produce it, admit having it
Another witness, Celso Rivera, accountant of the Corporation,
in his possession.14Hence, secondary evidence is admissible where he
testified that while in the books of the corporation there appears an
denies having it in his possession. The party calling for such evidence
entry that the treasurer received P95,000.00 as second installment of
may introduce a copy thereof as in the case of loss. For, among the
the paid-in subscriptions, and, subsequently, also P100,000.00 as the
exceptions to the best evidence rule is "when the original has been
first installment of the offer for second subscriptions worth
lost, destroyed, or cannot be produced in court."15 The originals of the
P200,000.00 from the original subscribers, yet Villarama directed him
vouchers in question must be deemed to have been lost, as even the
(Rivera) to make vouchers liquidating the sums.7 Thus, it was made
Corporation admits such loss. Viewed upon this light, there can be no
to appear that the P95,000.00 was delivered to Villarama in payment
doubt as to the admissibility in evidence of Exhibits 6 to 19 and 22.
for equipment purchased from him, and the P100,000.00 was loaned
as advances to the stockholders. The said accountant, however,

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Corporation Code 3
Taking account of the foregoing evidence, together with Celso
Rivera's testimony,16 it would appear that: Villarama supplied the
organization expenses and the assets of the Corporation, such as
trucks and equipment;17there was no actual payment by the original
subscribers of the amounts of P95,000.00 and P100,000.00 as
appearing in the books;18 Villarama made use of the money of the
Corporation and deposited them to his private accounts;19 and the
Corporation paid his personal accounts.20

possession were not only for registration fees but for other important
obligations which were not specified.26

Villarama himself admitted that he mingled the corporate funds with

his own money.21 He also admitted that gasoline purchases of the
Corporation were made in his name22 because "he had existing
account with Stanvac which was properly secured and he wanted the
Corporation to benefit from the rebates that he received."23

Villarama's explanation on the matter of his involvement with the

corporate affairs of the Corporation only renders more credible
Pantranco's claim that his control over the corporation, especially in
the management and disposition of its funds, was so extensive and
intimate that it is impossible to segregate and identify which money
belonged to whom. The interference of Villarama in the complex
affairs of the corporation, and particularly its finances, are much too
inconsistent with the ends and purposes of the Corporation law,
which, precisely, seeks to separate personal responsibilities from
corporate undertakings. It is the very essence of incorporation that the
acts and conduct of the corporation be carried out in its own corporate
name because it has its own personality.

The foregoing circumstances are strong persuasive evidence showing

that Villarama has been too much involved in the affairs of the
Corporation to altogether negative the claim that he was only a parttime general manager. They show beyond doubt that the Corporation
is his alter ego.

Indeed, while Villarama was not the Treasurer of the Corporation but
was, allegedly, only a part-time manager,27he admitted not only
having held the corporate money but that he advanced and lent funds
for the Corporation, and yet there was no Board Resolution allowing
it.28

It is significant that not a single one of the acts enumerated above as

proof of Villarama's oneness with the Corporation has been denied by The doctrine that a corporation is a legal entity distinct and separate
him. On the contrary, he has admitted them with offered excuses.
from the members and stockholders who compose it is recognized
and respected in all cases which are within reason and the
law.29 When the fiction is urged as a means of perpetrating a fraud or
Villarama has admitted, for instance, having paid P85,000.00 of the
an illegal act or as a vehicle for the evasion of an existing obligation,
initial capital of the Corporation with the lame excuse that "his wife
the circumvention of statutes, the achievement or perfection of a
had requested him to reimburse the amount entrusted to her by the
monopoly or generally the perpetration of knavery or crime,30 the veil
incorporators and which she had used to pay the obligations of Dr.
Villarama (her husband) incurred while he was still the owner of Villa with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for
Rey Transit, a single proprietorship." But with his admission that he
its consideration merely as an aggregation of individuals.
had received P350,000.00 from Pantranco for the sale of
24
the two certificates and one unit, it becomes difficult to accept
Villarama's explanation that he and his wife, after
Upon the foregoing considerations, We are of the opinion, and so
consultation,25 spent the money of their relatives (the stockholders)
hold, that the preponderance of evidence have shown that the Villa
when they were supposed to have their own money. Even if
Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the
Pantranco paid the P350,000.00 in check to him, as claimed, it could restrictive clause in the contract entered into by the latter and
have been easy for Villarama to have deposited said check in his
Pantranco is also enforceable and binding against the said
account and issued his own check to pay his obligations. And there is Corporation. For the rule is that a seller or promisor may not make
no evidence adduced that the said amount of P350,000.00 was all
use of a corporate entity as a means of evading the obligation of his
spent or was insufficient to settle his prior obligations in his business, covenant.31 Where the Corporation is substantially the alter ego of the
and in the light of the stipulation in the deed of sale between
covenantor to the restrictive agreement, it can be enjoined from
Villarama and Pantranco that P50,000.00 of the selling price was
competing with the covenantee.32
earmarked for the payments of accounts due to his creditors, the
excuse appears unbelievable.
The Corporation contends that even on the supposition that Villa Rey
Transit, Inc. and Villarama are one and the same, the restrictive clause
On his having paid for purchases by the Corporation of trucks from
in the contract between Villarama and Pantranco does not include the
the Manila Trading & Supply Co. with his personal checks, his reason purchase of existing lines but it only applies to application for the
was that he was only sharing with the Corporation his credit with
new lines. The clause in dispute reads thus:
some companies. And his main reason for mingling his funds with
that of the Corporation and for the latter's paying his private bills is
(4) The SELLER shall not, for a period of ten (10) years
that it would be more convenient that he kept the money to be used in
from the date of this sale apply for any TPU service
paying the registration fees on time, and since he had loaned money
identical or competing with the BUYER. (Emphasis
to the Corporation, this would be set off by the latter's paying his
supplied)
bills. Villarama admitted, however, that the corporate funds in his

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Corporation Code 3
As We read the disputed clause, it is evident from the context thereof
... In order to be well assured of this, he obtains and pays for
that the intention of the parties was to eliminate the seller as a
the seller's promise not to reopen business in competition
competitor of the buyer for ten years along the lines of operation
with the business sold.
covered by the certificates of public convenience subject of their
transaction. The word "apply" as broadly used has for frame of
As to whether or not such a stipulation in restraint of trade is valid,
reference, a service by the seller on lines or routes that would
our jurisprudence on the matter37says:
compete with the buyer along the routes acquired by the latter. In this
jurisdiction, prior authorization is needed before anyone can operate a
The law concerning contracts which tend to restrain business
TPU service,33whether the service consists in a new line or an old one
or trade has gone through a long series of changes from time
acquired from a previous operator. The clear intention of the parties
to time with the changing condition of trade and commerce.
was to prevent the seller from conducting any competitive line for 10
With trifling exceptions, said changes have been a
years since, anyway, he has bound himself not to apply for
continuous development of a general rule. The early cases
authorization to operate along such lines for the duration of such
show plainly a disposition to avoid and annul all contract
period.34
which prohibited or restrained any one from using a lawful
trade "at any time or at any place," as being against the
If the prohibition is to be applied only to the acquisition of new
benefit of the state. Later, however, the rule became well
certificates of public convenience thru an application with the Public
established that if the restraint was limited to "a certain
Service Commission, this would, in effect, allow the seller just the
time" and within "a certain place," such contracts were
same to compete with the buyer as long as his authority to operate is
valid and not "against the benefit of the state." Later cases,
only acquired thru transfer or sale from a previous operator, thus
and we think the rule is now well established, have held that
defeating the intention of the parties. For what would prevent the
a contract in restraint of trade is valid providing there is a
seller, under the circumstances, from having a representative or
limitation upon either time or place. A contract, however,
dummy apply in the latter's name and then later on transferring the
which restrains a man from entering into business or trade
same by sale to the seller? Since stipulations in a contract is the law
without either a limitation as to time or place, will be held
between the contracting parties,
invalid.
Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith. (Art. 19, New Civil
Code.)

The public welfare of course must always be considered and

if it be not involved and the restraint upon one party is not
greater than protection to the other requires, contracts like
the one we are discussing will be sustained. The general
tendency, we believe, of modern authority, is to make the
test whether the restraint is reasonably necessary for the
protection of the contracting parties. If the contract is
reasonably necessary to protect the interest of the parties, it
will be upheld. (Emphasis supplied.)

We are not impressed of Villarama's contention that the re-wording of

the two previous drafts of the contract of sale between Villarama and
Pantranco is significant in that as it now appears, the parties intended
to effect the least restriction. We are persuaded, after an examination
of the supposed drafts, that the scope of the final stipulation, while
not as long and prolix as those in the drafts, is just as broad and
Analyzing the characteristics of the questioned stipulation, We find
comprehensive. At most, it can be said that the re-wording was done that although it is in the nature of an agreement suppressing
merely for brevity and simplicity.
competition, it is, however, merely ancillary or incidental to the main
agreement which is that of sale. The suppression or restraint is only
The evident intention behind the restriction was to eliminate the
partial or limited: first, in scope, it refers only to application for TPU
sellers as a competitor, and this must be, considering such factors as
by the seller in competition with the lines sold to the buyer;
35
the good will that the seller had already gained from the riding
second, in duration, it is only for ten (10) years; and third, with
public and his adeptness and proficiency in the trade. On this matter, respect to situs or territory, the restraint is only along the lines
Corbin, an authority on Contracts has this to say.36
covered by the certificates sold. In view of these limitations, coupled
with the consideration of P350,000.00 for just two certificates of
public convenience, and considering, furthermore, that the disputed
When one buys the business of another as a going concern,
stipulation is only incidental to a main agreement, the same is
he usually wishes to keep it going; he wishes to get the
location, the building, the stock in trade, and the customers. reasonable and it is not harmful nor obnoxious to public service. 38 It
does not appear that the ultimate result of the clause or stipulation
He wishes to step into the seller's shoes and to enjoy the
same business relations with other men. He is willing to pay would be to leave solely to Pantranco the right to operate along the
lines in question, thereby establishing monopoly or predominance
much more if he can get the "good will" of the business,
approximating thereto. We believe the main purpose of the restraint
meaning by this the good will of the customers, that they
was to protect for a limited time the business of the buyer.
may continue to tread the old footpath to his door and
maintain with him the business relations enjoyed by the
seller.

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Corporation Code 3
Indeed, the evils of monopoly are farfetched here. There can be no
danger of price controls or deterioration of the service because of the
close supervision of the Public Service Commission.39 This Court had
stated long ago,40that "when one devotes his property to a use in
which the public has an interest, he virtually grants to the public an
interest in that use and submits it to such public use under reasonable
rules and regulations to be fixed by the Public Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or
incidental to a lawful agreement, the underlying reason sustaining its
validity is well explained in 36 Am. Jur. 537-539, to wit:
... Numerous authorities hold that a covenant which is
incidental to the sale and transfer of a trade or business, and
which purports to bind the seller not to engage in the same
business in competition with the purchaser, is lawful and
enforceable. While such covenants are designed to prevent
competition on the part of the seller, it is ordinarily neither
their purpose nor effect to stifle competition generally in the
locality, nor to prevent it at all in a way or to an extent
injurious to the public. The business in the hands of the
purchaser is carried on just as it was in the hands of the
seller; the former merely takes the place of the latter; the
commodities of the trade are as open to the public as they
were before; the same competition exists as existed before;
there is the same employment furnished to others after as
before; the profits of the business go as they did before to
swell the sum of public wealth; the public has the same
opportunities of purchasing, if it is a mercantile business;
and production is not lessened if it is a manufacturing plant.
The reliance by the lower court on tile case of Red Line
Transportation Co. v. Bachrach41 and finding that the stipulation is
illegal and void seems misplaced. In the said Red Line case, the
agreement therein sought to be enforced was virtually a division of
territory between two operators, each company imposing upon itself
an obligation not to operate in any territory covered by the routes of
the other. Restraints of this type, among common carriers have
always been covered by the general rule invalidating agreements in
restraint of trade. 42
Neither are the other cases relied upon by the plaintiff-appellee
applicable to the instant case. In Pampanga Bus Co., Inc. v.
Enriquez,43the undertaking of the applicant therein not to apply for
the lifting of restrictions imposed on his certificates of public
convenience was not an ancillary or incidental agreement. The
restraint was the principal objective. On the other hand, in Red Line
Transportation Co., Inc. v. Gonzaga,44 the restraint there in question
not to ask for extension of the line, or trips, or increase of equipment
was not an agreement between the parties but a condition imposed
in the certificate of public convenience itself.

arrived at this conclusion, and considering that the preponderance of

the evidence have shown that Villa Rey Transit, Inc. is itself the alter
ego of Villarama, We hold, as prayed for in Pantranco's third party
complaint, that the said Corporation should, until the expiration of the
1-year period abovementioned, be enjoined from operating the line
subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized that the
10-year prohibition upon Villarama is not against his application for,
or purchase of, certificates of public convenience, but merely the
operation of TPU along the lines covered by the certificates sold by
him to Pantranco. Consequently, the sale between Fernando and the
Corporation is valid, such that the rightful ownership of the disputed
certificates still belongs to the plaintiff being the prior purchaser in
good faith and for value thereof. In view of the ancient rule of caveat
emptorprevailing in this jurisdiction, what was acquired by Ferrer in
the sheriff's sale was only the right which Fernando, judgment debtor,
had in the certificates of public convenience on the day of the sale.45
Accordingly, by the "Notice of Levy Upon Personalty" the
Commissioner of Public Service was notified that "by virtue of an
Order of Execution issued by the Court of First Instance of
Pangasinan, the rights, interests, or participation which the defendant,
VALENTIN A. FERNANDO in the above entitled case may have
in the following realty/personalty is attached or levied upon, to wit:
The rights, interests and participation on the Certificates of Public
Convenience issued to Valentin A. Fernando, in Cases Nos. 59494,
etc. ... Lines Manila to Lingayen, Dagupan, etc. vice versa." Such
notice of levy only shows that Ferrer, the vendee at auction of said
certificates, merely stepped into the shoes of the judgment debtor. Of
the same principle is the provision of Article 1544 of the Civil Code,
that "If the same thing should have been sold to different vendees, the
ownership shall be transferred to the person who may have first taken
possession thereof in good faith, if it should be movable property."
There is no merit in Pantranco and Ferrer's theory that the sale of the
certificates of public convenience in question, between the
Corporation and Fernando, was not consummated, it being only a
conditional sale subject to the suspensive condition of its approval by
the Public Service Commission. While section 20(g) of the Public
Service Act provides that "subject to established limitation and
exceptions and saving provisions to the contrary, it shall be unlawful
for any public service or for the owner, lessee or operator thereof,
without the approval and authorization of the Commission previously
had ... to sell, alienate, mortgage, encumber or lease its property,
franchise, certificates, privileges, or rights or any part thereof, ...," the
same section also provides:
... Provided, however, That nothing herein contained shall be
construed to prevent the transaction from being negotiated or
completed before its approval or to prevent the sale,
alienation, or lease by any public service of any of its
property in the ordinary course of its business.

Upon the foregoing considerations, Our conclusion is that the

stipulation prohibiting Villarama for a period of 10 years to "apply"
for TPU service along the lines covered by the certificates of public
It is clear, therefore, that the requisite approval of the PSC is not a
convenience sold by him to Pantranco is valid and reasonable. Having condition precedent for the validity and consummation of the sale.

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Corporation Code 3
Anent the question of damages allegedly suffered by the parties, each
of the appellants has its or his own version to allege.
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of
defendants (Pantranco and Ferrer) in acquiring the certificates of
public convenience in question, despite constructive and actual
knowledge on their part of a prior sale executed by Fernando in favor
of the said corporation, which necessitated the latter to file the action
to annul the sheriff's sale to Ferrer and the subsequent transfer to
Pantranco, it is entitled to collect actual and compensatory damages,
and attorney's fees in the amount of P25,000.00. The evidence on
record, however, does not clearly show that said defendants acted in
bad faith in their acquisition of the certificates in question. They
believed that because the bill of sale has yet to be approved by the
Public Service Commission, the transaction was not a consummated
sale, and, therefore, the title to or ownership of the certificates was
still with the seller. The award by the lower court of attorney's fees of
P5,000.00 in favor of Villa Rey Transit, Inc. is, therefore, without
basis and should be set aside.

3. The case is remanded to the trial court for the reception of evidence
in consonance with the above findings as regards the amount of
damages suffered by Pantranco; and
4. On equitable considerations, without costs. So ordered.

Eusebio Ferrer's charge that by reason of the filing of the action to

annul the sheriff's sale, he had suffered and should be awarded moral,
exemplary damages and attorney's fees, cannot be entertained, in
view of the conclusion herein reached that the sale by Fernando to the
Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with the
allegation that when it purchased ViIlarama's business for
P350,000.00, it intended to build up the traffic along the lines covered
by the certificates but it was rot afforded an opportunity to do so since
barely three months had elapsed when the contract was violated by
Villarama operating along the same lines in the name of Villa Rey
Transit, Inc. It is further claimed by Pantranco that the underhanded
manner in which Villarama violated the contract is pertinent in
establishing punitive or moral damages. Its contention as to the
proper measure of damages is that it should be the purchase price of
P350,000.00 that it paid to Villarama. While We are fully in accord
with Pantranco's claim of entitlement to damages it suffered as a
result of Villarama's breach of his contract with it, the record does not
sufficiently supply the necessary evidentiary materials upon which to
base the award and there is need for further proceedings in the lower
court to ascertain the proper amount.
PREMISES CONSIDERED, the judgment appealed from is hereby
modified as follows:
1. The sale of the two certificates of public convenience in question
by Valentin Fernando to Villa Rey Transit, Inc. is declared preferred
over that made by the Sheriff at public auction of the aforesaid
certificate of public convenience in favor of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed by
Pangasinan Transportation Co. against Jose M. Villarama, holding
that Villa Rey Transit, Inc. is an entity distinct and separate from the
personality of Jose M. Villarama, and insofar as it awards the sum of
P5,000.00 as attorney's fees in favor of Villa Rey Transit, Inc.;

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Corporation Code 3
G.R. No. L-20214

March 17, 1923

G. C. ARNOLD, plaintiff-appellant,
vs.
WILLITS & PATTERSON, LTD., defendant-appellee.
Fisher, DeWitt, Perkins and Brady for appellant.
Ross and Lawrence for appellee.

"creditors' committee." When this statement was received, the

"creditors' committee" immediately protested its allowance. An
attempt was made without success to adjust the matter on a friendly
basis and without litigation. January 10, 1922, the plaintiff brought
this action to recover from the defendant the sum of P106,277.50 with
legal interest and costs, and written instruments known in the record
as Exhibits A and B were attached to, and made a part of, the
complaint.

For answer, the defendant admits the formal parts of the complaint,
the execution of Exhibit A and denies each and every other allegation,
except as specifically admitted, and alleges that what is known as
For a number of years prior to the times alleged in the complaint, the Exhibit B was signed by Willits without the authority of the defendant
plaintiff was in the employ of the International Banking Corporation corporation or the firm of Willits & Patterson, and that it is not an
of Manila, and it is conceded that he is a competent and experienced agreement which was ever entered into with the plaintiff by the
business man. July 31, 1916, C. D. Willits and I. L. Patterson were
defendant or the firm, and, as a separate defense and counterclaim, it
partners doing business in San Francisco, California, under the name alleges that on the 30th of June, 1920, there was a balance due and
of Willits & Patterson. The plaintiff was then in San Francisco, and as owing the plaintiff from the defendant under the contract Exhibit A of
a result of negotiations the plaintiff and the firm entered into a written the sum of P8,741.05. That his salary from June 30, 1920, to July 31,
contract, known in the record as Exhibit A, by which the plaintiff was 1921, under Exhibit A was $400 per month, or a total of P10,400.
employed as the agent of the firm in the Philippine Islands for certain That about July 6, 1921, the plaintiff wrongfully took P30,000 from
purposes for the period of five years at a minimum salary of $200 per the assets of the firm, and that he is now indebted to the firm in the
month and travelling expenses. The plaintiff returned to Manila and
sum of P10,858.95, with interest and costs, from which it prays
entered on the discharge of his duties under the contract. As a result
judgement.
of plaintiff's employment and the world war conditions, the business
of the firm in the Philippines very rapidly increased and grew beyond
the fondest hopes of either party. A dispute arose between the plaintiff The plaintiff admits that he withdrew the P30,000, but alleges that it
was with the consent and authority of the defendant, and denies all
and the firm as to the construction of Exhibit A as to the amount
other new matter in the answer.
which plaintiff should receive for his services. Meanwhile Patterson
retired from the firm and Willits became the sole owner of its assets.
Upon such issues a trial was had, and the lower court rendered
For convenience of operation and to serve his own purpose, Willits
organized a corporation under the laws of California with its principal judgment in favor of the defendant as prayed for in its counterclaim,
from which the plaintiff appeals, contending that the trial court erred
office at San Francisco, in and by which he subscribed for, and
in not holding that the contract between the parties is that which is
became the exclusive owner of all the capital stock except a few
embodied in Exhibits A and B, and that the defendant assumed all
shares for organization purposes only, and the name of the firm was
partnership obligations, and in failing to render judgment for the
used as the name of the corporation. A short time after that Willits
came to Manila and organized a corporation here known as Willits & plaintiff, as prayed for, and in dismissing his complaint, and denying
plaintiff's motion for a new trial.
Patterson, Ltd., in and to which he again subscribed for all of the
capital stock except the nominal shares necessary to qualify the
directors. In legal effect, the San Francisco corporation took over and
acquired all of the assets and liabilities of the Manila corporation. At
the time that Willits was in Manila and while to all intents and
purposes he was the sole owner of the stock of corporations, there
JOHNS, J.:
was a conference between him and the plaintiff over the disputed
construction of Exhibit A. As a result of which another instrument,
In their respective briefs opposing counsel agree that the important
known in the record as Exhibit B, was prepared in the form of a letter
questions involved are "what was the contract under which the
which the plaintiff addressed to Willits at Manila on November 10,
plaintiff rendered services for five years ending July 31, 1921," and
1919, the purpose of which was to more clearly define and specify
"what is due the plaintiff under that contract." Plaintiff contends that
the compensation which the plaintiff was to receive for his services.
his services were performed under Exhibits A and B, and that the
Willits received and confirmed this letter by signing the name of
defendant assumed all of the obligations of the original partnership
Willits & Patterson, By C.d. Willits. At the time both corporations
under Exhibit A, and is now seeking to deny its liability under, and
were legally organized, and there is nothing in the corporate minutes
repudiate, Exhibit B. The defendant admits that Exhibit A was the
to show that Exhibit B was ever formally ratified or approved by
original contract between Arnold and the firm of Willits & Patterson
either corporation. After its organization, the Manila corporation
by which he came to the Philippine Islands, and that it was therein
employed a regular accountant whose duty it was to audit the
agreed that he was to be employed for a period of five years as the
accounts of the company and render financial statements both for the
agent of Willits & Patterson in the Philippine Islands to operate a
use of the local banks and the local and parent corporations at San
certain oil mill, and to do such other business as might be deemed
Francisco. From time to time and in the ordinary course of business
advisable for which he was to receive, first, the travelling expenses of
such statements of account were prepared by the accountant and duly
his wife and self from San Francisco to Manila, second, the minimum
forwarded to the home office, and among other things was a
salary of $200 per month, third, a brokerage of 1 per cent upon all
statement of July 31, 1921, showing that there was due and owing the
purchases and sales of merchandise, except for the account of the
plaintiff under Exhibit B the sum of P106,277.50. A short time
coconut oil mill, fourth, one-half of the profits on any transaction in
previous to that date, the San Francisco corporation became involved
the name of the firm or himself not provided for in the agreement.
in financial trouble, and all of its assets were turned over to a
STATEMENT

87

Corporation Code 3
That the agreement also provided that if it be found that the business
was operated at a loss, Arnold should receive a monthly salary of
$400 during such period. That the business was operated at a loss
from June 30, 1920, to July 31, 1921, and that for such reason, he was
entitled to nothing more than a salary of $400 per month, or for that
period P10,400. Adding this amount to the P8,741.05, which the
defendant admits he owed Arnold on June 30, 1920, makes a total of
P19,141.05, leaving a balance due the defendant as set out in the
counterclaim. In other words, that the plaintiff's compensation was
measured by, and limited to, the above specified provisions in the
contract Exhibit A, and that the defendant corporation is not bound by
the terms or provisions of Exhibit B, which is as follows:

If the foregoing conforms to your understanding of

our agreement, please confirm below.
Yours faithfully,
(Sgd.) G. C. ARNOLD
Confirmed:
WILLITS & PATTERSON
By (Sgd.) CHAS. D. WILLITS

WILLITS & PATTERSON, LTD.

There is no dispute about any of the following facts: That at the
inception C.D. Willits and I. L. Patterson constituted the firm of
MANILA, P. I., Nov. 10, 1919.
Willits & Patterson doing business in the City of San Francisco; that
later Patterson retired from the firm, and Willits acquired all of his
CHAS. D. WILLITS, Esq.,
interests and thereafter continued the business under the name and
style of Willits & Patterson; that the original contract Exhibit A was
Present.
made between the plaintiff and the old firm at San Francisco on July
31, 1916, to cover a period of five years from that date; that plaintiff
DEAR MR. WILLITS: My understanding of the
entered upon the discharged of his duties and continued his services
intent of my agreement with Willits & Patterson is in the Philippine Islands to someone for the period of five years; that
as under:
on November 10, 1919, and as a result of conferences between Willits
and the plaintiff, Exhibit B was addressed and signed in the manner
Commissions. Willits & Patterson, San Francisco,
and form above stated in the City of Manila. A short time prior to that
pay me a commission of one per cent on all
date Willits organized a corporation in San Francisco, in the State of
purchases made for them in the Philippines or sales California, which took over and acquired all of the assets of the firm's
made to them by Manila and one per cent on all
business in California then being conducted under the name and style
sales made for them in the Philippines, or purchases of Willits & Patterson; that he subscribed for all of the capital stock of
made from them by Manila. If such purchases or
the corporation, and that in truth and in fact he was the owner of all of
sales are on an f. o. b. basis the commission is on
its capital stock. After this was done he caused a new corporation to
the f. o. b. price; if on a c. i. f. basis the commission be organized under the laws of the Philippine Islands with principal
is computed on the c. i. f. price
office at Manila, which took over and acquired all the business and
assets of the firm of Willits & Patterson in the Philippine Islands, in
and to which, in legal effect, he subscribed for all of its capital stock,
These commissions are credited to me in San
and was the owner of all of its stock. After both corporations were
Francisco.
organized the above letter was drafted and signed. The plaintiff
contends that the signing of Exhibit B in the manner and under the
I do not participate in any profits on business
conditions in which it was signed, and through the subsequent acts
transacted between Willits & Patterson, San
and conduct of the parties, was ratified and, in legal effect, became
Francisco, and Willits & Patterson, Ltd., Manila.
and is now binding upon the defendant.
Profits. On all business transacted between Willits
& Patterson, Ltd. and others than Willits &
Patterson, San Francisco, half the profits are to be
credited to my account and half to the Profit & Loss
account of Willits & Patterson, Ltd., Manila.

It will be noted that Exhibit B was executed in Manila, and that at the
time it was signed by Willits, he was to all intents and purposes the
legal owner of all the stock in both corporations. It also appears from
the evidence that the parent corporation at San Francisco took over
and acquired all of the assets and liabilities of the local corporation at
Manila. That after it was organized the Manila corporation kept
On all other business, such as the Cooperative
separate records and account books of its own, and that from time to
Coconut Products Co. account, or any other
time financial statements were made and forwarded to the home
business we may undertake as agents or managers, office, from which it conclusively appears that plaintiff was basing
half the profits are to be credited to my account and his claim for services upon Exhibit A, as it was modified by Exhibit
half to the Profit & Loss account of Willits &
B. That at no time after Exhibit B was signed was there ever any
Patterson, Ltd., Manila.
dispute between plaintiff and Willits as to the compensation for
plaintiff's services. That is to say, as between the plaintiff and Willits,
Where Willits & Patterson, San Francisco, or
Exhibit B was approved, followed and at all times in force and effect,
Willits & Patterson, Ltd., Manila, have their own
after it was signed November 10, 1919. It appears from an analysis of
funds invested in the capital stock or a corporation, Exhibit B that it was for the mutual interest of both parties. From a
I of course do not participate in the earnings of such small beginning, the business was then in a very flourishing
stock, any more than Willits & Patterson would
conditions and growing fast, and the profits were very large and were
participate in the earnings of stock held by me on
running into big money.
my account.

88

Corporation Code 3
Among other things, Exhibit A provided: "(a) That the net profits
from said coconut oil business shall be divided in equal shares
between the said parties hereto; (b) that Arnold should receive a
brokerage of 1 per cent from all purchases and sales of merchandise,
except for the account of the coconut mills; (c) that the net profits
from all other business should be divided in equal half shares between
the parties hereto."

never made or asserted at any previous time by the defendant, and

that it never was made by Willits, and it is very apparent that if he had
remained in control of the corporation, it would never have made the
defense which is now made by the creditors' committee. The record is
conclusive that at the time he signed Exhibit B, Willits was, in legal
effect, the owner and holder of all the stock in both corporations, and
that he approved it in their interest, and to protect them from the
plaintiff having and making a much larger claim under Exhibit A. As
a matter of fact, it appears from the statement of Mr. Larkin, the
Under the above provisions, the plaintiff might well contend that he
was entitled to one-half of all the profits and a brokerage of 1 per cent accountant, in the record that if plaintiff's cause of action was now
founded upon Exhibit A, he would have a claim for more than
from all purchases and sales, except those for the account of the
P160,000.
coconut oil mills, which under the volume of business then existing
would run into a very large sum of money. It was for such reason and
after personal conferences between them, and to settle all disputed
Thompson on Corporations, 2d ed., vol. I, section 10, says:
questions, that Exhibit B was prepared and signed.
The proposition that a corporation has an existence separate
The record recites that "the defendant admits that from July 31, 1916
and distinct from its membership has its limitations. It must
to July 31, 1921, the plaintiff faithfully performed all the duties
be noted that this separate existence is for particular
incumbent upon him under his contract of employment, it being
purposes. It must also be remembered that there can be no
understood, however, that this admission does not include an
corporate existence without persons to compose it; there can
admission that the plaintiff placed a proper interpretation upon his
be no association without associates. This separate existence
right to remuneration under said contract of employment."
is to a certain extent a legal fiction. Whenever necessary for
the interests of the public or for the protection or
enforcement of the rights of the membership, courts will
It being admitted that the plaintiff worked "under his contract of
disregard this legal fiction and operate upon both the
employment" for the period of five years, the question naturally
corporation and the persons composing it.
arises, for whom was he working? His contract was made with the
original firm of Willits & Patterson, and that firm was dissolved and it
ceased to exist, and all of its assets were merged in, and taken over
In the same section, the author quotes from a decision in 49 Ohio
by, the parent corporation at San Francisco. In the very nature of
State, 1371; 15 L. R. A., 145, in which the Supreme Court of Ohio
things, after the corporation was formed, the plaintiff could not and
says:
did not continue to work for the firm, and, yet, he continued his
employment for the full period of five years. For whom did he work
"So long as a proper use is made of the fiction that a
after the partnership was merged in the corporation and ceased to
corporation is an entity apart from its shareholders, it is
exist?
harmless, and, because convenient, should not be called in
question; but where it is urged to an end subversive of its
It is very apparent that, under the conditions then existing, the signing
policy, or such is the issue, the fiction must be ignored, and
of Exhibit B was for the mutual interests of both parties, and that if
the question determined whether the act in question, though
the contract Exhibit A was to be enforced according to its terms, that
done by shareholders, that is to say, by the persons
Arnold might well contend for a much larger sum of money for his
uniting in one body, was done simply as individuals, and
services. In truth and in fact Willits and both corporations recognized
with respect to their individual interest as shareholders, or
his employment and accepted the benefits of his services. He
was done ostensibly as such, but, as a matter of fact, to
continued his employment and rendered his services after the
control the corporation, and affect the transaction of its
corporation were organized and Exhibit B was signed just the same as
business, in the same manner as if the act had been clothed
he did before, and both corporations recognized and accepted his
with all the formalities of a corporate act. This must be so,
services. Although the plaintiff was president of the local corporation,
because, the stockholders having a dual capacity, and
the testimony is conclusive that both of them were what is known as a
capable of acting in either, and a possible interest to conceal
one man corporation, and Willits, as the owner of all of the stock, was
their character when acting in their corporate capacity, the
the force and dominant power which controlled them. After Exhibit B
absence of the formal evidence of the character of the act
was signed it was recognized by Willits that the plaintiff's services
cannot preclude judicial inquiry on the subject. If it were
were to be performed and measured by its term and provisions, and
otherwise, then in that department of the law fraud would
there never was any dispute between plaintiff and Willits upon that
enjoy an immunity awarded to it in no other."
question.
Where the stock of a corporation is owned by one person
The controversy first arose after the corporation was in financial
whereby the corporation functions only for the benefit of
trouble and the appointment of what is known in the record as a
such individual owner, the corporation and the individual
"creditors' committee." There is no claim or pretense that there was
should be deemed to be the same. (U. S. Gypsum Co. vs.
any fraud or collusion between plaintiff and Willits, and it is very
Mackay Wall Plaster Co., 199 Pac., 249.)
apparent that Exhibit B was to the mutual interest of both parties. It is
elementary law that if Exhibit B is a binding contract between the
Ruling Case Law, vol. 7, section 663, says:
plaintiff and Willits and the corporations, it is equally binding upon
the creditors' committee. It would not have any higher or better legal
While of course a corporation cannot ratify a contract which
right than the corporation itself, and could not make any defense
is strictly ultra vires, and which it in the first instance could
which it could not make. It is very significant that the claim or
not have made, it may by ratification render binding on it a
defense which is now interposed by the creditors' committee was

89

Corporation Code 3
contract, entered into on its behalf by its officers or agents
without authority. As a general rule such ratification need
not be manifested by any voted or formal resolution of the
corporation or be authenticated by the corporate seal; no
higher degree of evidence is requisite in establishing
ratification on the part of a corporation, than is requisite in
showing an antecedent authorization.
xxx

xxx

xxx

SEC. 666. The assent or approval of a corporation to acts

done on its account may be inferred in the same manner that
the absent of a natural person may be, and it is well settled
that where a corporation with full knowledge of the
unauthorized act of its officer or agents acquiesces in and
consents to such acts, it thereby ratifies them, especially
where the acquiescence results in prejudice to a third person.
xxx

xxx

xxx

SEC. 669. So, when, in the usual course of business of a

corporation, an officer has been allowed in his official
capacity to manage its affair, his authority to represent the
corporation may be inferred from the manner in which he
has been permitted by the directors to transact its business.
SEC. 656. In accordance with a well-known rule of the law
of agency, notice to corporate officers or agents within the
scope or apparent scope of their authority is attributed to the
corporation.

defendant. In the course of business in the early part of 1920,

plaintiff, as manager of the defendant, sold 500 tons of oil for future
delivery at P740 per ton. Due to break in the market, plaintiff was
able to purchase the oil at P380 per ton or a profit of P180,000.
It appears from Exhibit B under the heading of "Profits" that:
On all the business transacted between Willits & Patterson,
Ltd. and others than Willits & Patterson, San Francisco, half
the profit are to be credited to may account and half to the
Profit & Loss account Willits & Patterson, Ltd., Manila.
The purchasers paid P105,000 on the contracts and gave their notes
for P75,000, and it was agreed that all of the oil purchased should be
held as security for the full payment of the purchase price. As a result,
the defendant itself received the P105,000 in cash, P75,000 in notes,
and still holds the 500 tons of oil as security for the balance of the
purchase price. This transaction was shown in the semi-annual
financial statement for the period ending December 31, 1920. That is
to say, the business was transacted by and through the plaintiff, and
the defendant received and accepted all of the profits on the deal, and
the statement which was rendered gave him a credit for P90,737.88,
or half the profit as provided in the contract Exhibit B, with interest.
Although the previous financial statements show upon their face that
the account of plaintiff was credit with several small items on the
same basis, it was not until the 23d of March, 1921, that any
objection was ever made by anyone, and objection was made for the
first time by the creditors' committee in a cable of that date.

As we analyze the facts Exhibit B was, in legal effect, ratified and

SEC. 667. As a general rule, if a corporation with knowledge approved and is now binding upon the defendant corporation, and the
plaintiff is entitled to recover for his services on that writing as it
of its agents unauthorized act received and enjoys the
benefits thereof, it impliedly ratifies the unauthorized act if it modified the original contract Exhibit A.
is one capable of ratification by parol.
It appears from the statement prepared by accountant Larkin founded
upon Exhibit B that the plaintiff is entitled to recover P106,277.50. It
In its article on corporations, Corpus Juris, in section 2241 says:
is very apparent that his statement was based upon the assumption
Ratification by a corporation of a transaction not previously that there was a net profit of P180,000 on the 500 tons of oil, of
which the plaintiff was entitled to one-half.
authorized is more easily inferred where the corporation
receives and retains property under it, and as a general rule
where a corporation, through its proper officers or board,
takes and retains the benefits of the unauthorized act or
contract of an officer or agent, with full knowledge of all the
material facts, it thereby ratifies and becomes bound by such
act of contract, together with all the liabilities and burdens
resulting therefrom, and in some jurisdiction this rule is, in
effect, declared by statute. Thus the corporation is liable on
the ground of ratification where, with knowledge of the
facts, it accepts the benefit of services rendered under an
unauthorized contract of employment . . . .
Applying the law to the facts.
Mr. Larkin, an experienced accountant, was employed by the local
corporation, and from time to time and in the ordinary course of
business made and prepared financial statements showing its assets
and liabilities, true copies of which were sent to the home office in
San Francisco. It appears upon their face that plaintiff's compensation
was made and founded on Exhibit B, and that such statements were
made and prepared by the accountant on the assumption that Exhibit
B was in full force and effect as between the plaintiff and the

In the absence of any other proof, we have the right to assume that the
500 tons of oil was worth the amount which the defendant paid for
them at the time of the purchase or P380 per ton, and the record
shows that the defendant took and now has the possession of all of the
oil secure the payment of the price at which it was sold. Hence, the
profit on the deal to the defendant at the time of the sale would
amount to the difference between what the defendant paid for the oil
and the amount which it received for the oil at the time it sold the oil.
It appears that at the time of the sale the defendant only received
P105,000 in cash, and that it took and accepted the promissory notes
of Cruz & Tan Chong Say, the purchasers, for P75,000 more which
have been collected and may never be. Hence, it must follow that the
amount evidence by the notes cannot now be deemed or treated as
profits on the deal and cannot be until such times as the notes are
paid.
The judgment of the lower court is reversed, and a money judgment
will be entered here in favor of the plaintiff and against the defendant
for the sum of P68,527.50, with thereon at the rate of 6 per cent per
annum from the 10th day of January, 1922. In addition thereto,
judgment will be rendered against the defendant in substance and to
the effect that the plaintiff is the owner of an undivided one-half

90

Corporation Code 3
interest in the promissory notes for P75,000 which were executed by
Cruz & Tan Chong Say, as a part of the purchase price of the oil, and
that he is entitled to have and receive one-half of all the proceeds
from the notes or either of them, and that also he have judgment
against the defendant for costs. So ordered.

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Corporation Code 3
G.R. No. L-5677

May 25, 1953

LA CAMPANA FACTORY, INC., and TAN TONG doing

business under the trial name "LA CAMPANA GAUGAU
PACKING", petitioners,
vs.
KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA
(KKM) and THE COURT OF INDUSTRIAL
RELATIONS, respondents.
Ceferino de los Santos, R., Ceferino de los Santos, Jr. and Manuel V.
Roxas for petitioners.
Carlos E. Santiago for respondent union.
REYES, J.:
Tan Tong, one of the herein petitioners, has since 1932 been engaged
in the business of buying and selling gaugau under the trade name La
Campana Gaugau Packing with an establishment in Binondo, Manila,
which was later transferred to Espaa Extension, Quezon City. But on
July 6, 1950, Tan Tong, with himself and members of his family
corporation known as La Campana Factory Co., Inc., with its
principal office located in the same place as that of La Campana
Gaugau Packing.
About a year before the formation of the corporation, or on July 11,
1949, Tan Tong had entered into a collective bargaining agreement
with the Philippine Legion of Organized Workers, known as PLOW
for short, to which the union of Tan Tong's employees headed by
Manuel E. Sadde was then affiliated. Seceding, however, from the
PLOW, Tan Tong's employees later formed their own organization
known as Kaisahan Ng Mga Manggagawa Sa La Campana, one of
the herein respondents, and applied for registration in the Department
of Labor as an independent entity. Pending consideration of this
application, the Department gave the new organization legal standing
by issuing it a permit as an affiliate to the Kalipunan Ng Mga
Manggagawa.
On July 19, 1951, the Kaisahan Ng Mga Manggagawa Sa La
Campana, hereinafter to be referred to as the respondent Kaisahan,
which, as of that date, counted with 66 members workers all of
them of both La Campana Gaugau Packing and La Campana Coffee
Factory Co., Inc. presented a demand for higher wages and more
privileges, the demand being addressed to La Campana Starch and
Coffee Factory, by which name they sought to designate, so it
appears, the La Campana Gaugau Packing and the La Campana
Coffee Factory Co., Inc. As the demand was not granted and an
attempt at settlement through the mediation of the Conciliation
Service of the Department of Labor had given no result, the said
Department certified the dispute to the Court of Industrial Relations
on July 17, 1951, the case being there docketed as Case No. 584-V.
With the case already pending in the industrial court, the Secretary of
Labor, on September 5, 1951, revoked theKalipunan Ng Mga
Kaisahang Manggagawa's permit as a labor union on the strength of
information received that it was dominated by subversive elements,

and, in consequence, on the 20th of the same month, also suspended

the permit of its affiliate, the respondent Kaisahan.
We have it from the court's order of January 15, 1952, which forms
one of the annexes to the present petition, that following the
revocation of the Kaisahan's permit, "La Campana Gaugau and
Coffee Factory" (obviously the combined name of La Campana
Gaugau Packing and La Campana Coffee Factory Co., Inc,) and the
PLOW, which had been allowed to intervene as a party having an
interest in the dispute, filed separate motions for the dismissal of the
case on the following grounds:
1. That the action is directed against two different entities
with distinct personalities, with "La Campana Starch
Factory" and the "La Campana Coffee Factory, Inc.";
2. That the workers of the "La Campana Coffee Factory,
Inc." are less than thirty-one;
3. That the petitioning union has no legal capacity to sue,
because its registration as an organized union has been
revoked by the Department of Labor on September 5, 1951;
and
4. That there is an existing valid contract between the
respondent "La Campana Gaugau Packing" and the
intervenor PLOW, where-in the petitioner's members are
contracting parties bound by said contract.
Several hearings were held on the above motions, in the course of
which ocular inspections were also made, and on the basis of the
evidence received and the facts observed in the ocular inspections, the
Court of Industrial Relations denied the said motions in its order of
January 14, 1952, because if found as a fact that:
A. While the coffee corporation is a family corporation with
Mr. Tan Tong, his wife, and children as the incorporations
and stockhelders (Exhibit 1), the La Campana Gaugau
Packing is merely a business name (Exhibit 4).
B. According to the contract of lease (Exhibit 23), Mr. Tan
Tong., propriety and manager of the Ka Campana Gaugau
Factory, leased a space of 200 square meters in the bodega
housing the gaugau factory to his son Tan Keng Lim,
manager of the La Campana Coffee Factory. But the lease
was executed only on September 1, 1951, while the dispute
between the parties was pending before the Court.
C. There is only one entity La Campana Starch and Coffee
Factory, as shown by the signboard (Exhibit 1), the
advertisement in the delivery trucks (Exhibit I-1), the
packages of gaugau(Exhibit K), and delivery forms (Exhibits
J, J-1, and J-2).
D. All the laborers working in the gaugau or in the coffee
factory receive their pay from the same person, the cashier,

92

Corporation Code 3
Miss Natividad Garcia, secretary of Mr. Tan Tong; and they
are transferred from the gaugau to the coffee and vice-versa
as the management so requires.

Campana Coffee Factory Co., Inc.), later joined by the PLOW, filed
the present petition for certiorari on the grounds that the Court of
Industrial Relations had no jurisdiction to take cognizance of the case,
for the reason, according to them, "(1) that the petitioner La Campana
Coffee Factory, Inc. has only 14 employees, only 5 of whom are
members of the respondent union and therefore the absence of the
jurisdictional number (30) as provided by sections 1 and 4 of
Commonwealth Act No. 103; and, (2) that the suspension of
respondent union's permit by the Secretary of Labor has the effect of
taking away the union's right to collective bargaining under section 2
of Commonwealth Act No. 213 and consequently, its personality to
sue for ad in behalf of its members."

E. There has been only one payroll for the entire La

Campana personnel and only one person preparing the same
Miss Natividad Garcia, secretary of Mr. Tan Tong. But
after the case at bar was certified to this Court on July 17,
1951, the company began making separate payrolls for the
coffee factory (Exhibits M-2 and M-3, and for the gaugau
factory (Exhibits O-2, O-3 and O-4). It is to be noted that
before July 21, 1951, the coffee payrolls all began with
number "41-Maria Villanueva" with 24 or more laborers
(Exhibits M and M-1), whereas beginning July 21, 1951, the As to the first ground, petitioners obviously do not question the fact
payrolls for the coffee factory began with No. 1-Loreta
that the number of employees of the La Campana Gaugau Packing
Bernabe with only 14 laborers (Exhibits M-2 and M-3).
involved in the case is more than the jurisdictional number (31)
required bylaw, but they do contend that the industrial court has no
jurisdiction to try the case as against La Campana Coffee Factory,
F. During the ocular inspection made in the factory on
Inc. because the latter has allegedly only 14 laborers and only of
August 26, 1951 the Court has found the following:
these are members of the respondent Kaisahan. This contention loses
force when it is noted that, as found by the industrial court and this
In the ground floor and second floor of the gaugau factory
there were hundreds of bags of raw coffee behind the pile of finding is conclusive upon us La Campana Gaugau Packing and
La Campana Coffee Factory Co. Inc., are operating under one single
gaugau sacks. There were also women employees working
management, that is, as one business though with two trade names.
paper wrappers for gaugau, and, in the same place there
True, the coffee factory is a corporation and, by legal fiction, an
were about 3,000 cans to be used as containers for coffee.
entity existing separate and apart fro the persons composing it, that is,
The Court found out also that there were 16 trucks used both Tan Tong and his family. But it is settled that this fiction of law,
which has been introduced as a matter of convenience and to subserve
for the delivery of coffee and gaugau. To show that those
the ends of justice cannot be invoked to further an end subversive of
trucks carried both coffee and gaugau, the union president
that purpose.
invited the Court to examine the contents of delivery truck
No. T-582 parked in a garage between the gaugau building
and the coffee factory, and upon examination, there were
found inside the said truck boxes of gaugau and cans of
coffee,
and held that:
. . . there is only one management for the business of gaugau
and coffee with whom the laborers are dealing regarding
their work. Hence, the filing of action against the Ka
Campana Starch and Coffee Factory is proper and justified.

Disregarding Corporate Entity. The doctrine that a

corporation is a legal entity existing separate and apart from
the person composing it is a legal theory introduced for
purposes of convenience and to subserve the ends of justice.
The concept cannot, therefore, be extended to a point beyond
its reason and policy, and when invoked in support of an end
subversive of this policy, will be disregarded by the courts.
Thus, in an appropriate case and in furtherance of the ends
of justice, a corporation and the individual or individuals
owning all its stocks and assets will be treated as identical,
the corporate entity being disregarded where used as a cloak
or cover for fraud or illegality. (13 Am. Jur., 160-161.)

With regards to the alleged lack of personality, it is to be

noted that before the certification of the case to this Court on
. . . A subsidiary or auxiliary corporation which is created by
July 17, 1951, the petitioner Kaisahan Ng Mga
a parent corporation merely as an agency for the latter may
Manggagawa Sa La Campana, had a separate permit from
sometimes be regarded as identical with the parent
the Department of Labor. This permit was suspended on
corporation, especially if the stockholders or officers of the
September 30, 1951. (Exhibit M-Intervenor, page 55, of the
two corporations are substantially the same or their system
record). It is not true that, on July 17, 1951, when this case
of operation unified. (Ibid. 162; see Annotation 1 A. L. R.
forwarded to this Court, the petitioner's permit, as an
612, s. 34 A. L. R. 599.)
independent union, had not yet been issued, for the very
Exhibit MM-Intervenor regarding the permit, conclusively
In the present case Tan Tong appears to be the owner of
shows the preexistence of said permit. (Annex G.)
the gaugau factory. And the coffee factory, though an incorporated
business, is in reality owned exclusively by Tan Tong and his family.
Their motion for reconsideration of the above order having been
As found by the Court of industrial Relations, the two factories have
denied, Tan Tong and La Campana Coffee Factory, Inc. (same as La

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Corporation Code 3
but one office, one management and one payroll, except after July 17,
the day the case was certified to the Court of Industrial Relations,
when the person who was discharging the office of cashier for both
branches of the business began preparing separate payrolls for the
two. And above all, it should not be overlooked that, as also found by
the industrial court, the laborers of the gaugau factory and the coffee
factory were interchangeable, that is, the laborers from the gaugau
factory were sometimes transferred to the coffee factory and viceversa. In view of all these, the attempt to make the two factories
appears as two separate businesses, when in reality they are but one,
is but a device to defeat the ends of the law (the Act governing capital
and labor relations) and should not be permitted to prevail.
The second point raised by petitioners is likewise with-out merit. In
the first place, there being more than 30 laborers involved and the
Secretary of Labor having certified the dispute to the Court of
Industrial Relations, that court duly acquired jurisdiction over the
case (International Oil Factory vs. NLU, Inc. 73 Phil., 401; section 4,
C. A. 103). This jurisdiction was not when the Department of Labor
suspended the permit of the respondent Kaisahan as a labor
organization. For once jurisdiction is acquired by the Court of
Industrial Relations it is retained until the case is completely decided.
(Manila Hotel Employees Association vs. Manila Hotel Co. et al., 73
Phil., 374.)
In view of the foregoing, the petition is denied, with costs against the
petitioner.

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Corporation Code 3
G.R. No. L-13203

January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner,

vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL
REVENUE, respondents.
Sycip, Quisumbing, Salazar & Associates for petitioner.
Office of the Solicitor General for respondents.

On November 7, 1950, after several months of investigation by

revenue officers started in July, 1948, the Collector of Internal
Revenue made an assessment upon Yutivo and demanded from the
latter P1,804,769.85 as deficiency sales tax plus surcharge covering
the period from the third quarter of 1947 to the fourth quarter of
1949; or from July 1, 1947 to December 31, 1949, claiming that the
taxable sales were the retail sales by SM to the public and not the
sales at wholesale made by, Yutivo to the latter inasmuch as SM and
Yutivo were one and the same corporation, the former being the
subsidiary of the latter.

GUTIERREZ DAVID, J.:

The assessment was disputed by the petitioner, and a reinvestigation

of the case having been made by the agents of the Bureau of Internal
This is a petition for review of a decision of the Court of Tax Appeals Revenue, the respondent Collector in his letter dated November 15,
ordering petitioner to pay to respondent Collector of Internal Revenue 1952 countermanded his demand for sales tax deficiency on the
the sum of P1,266,176.73 as sales tax deficiency for the third quarter ground that "after several investigations conducted into the matter no
of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge
sufficient evidence could be gathered to sustain the assessment of this
thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27, Office based on the theory that Southern Motors is a mere
plus costs of the suit.
instrumentality or subsidiary of Yutivo." The withdrawal was subject,
however, to the general power of review by the now defunct Board of
From the stipulation of facts and the evidence adduced by both
Tax Appeals. The Secretary of Finance to whom the papers relative to
parties, it appears that petitioner Yutivo Sons Hardware Co. (hereafter the case were endorsed, apparently not agreeing with the withdrawal
referred to as Yutivo) is a domestic corporation, organized under the
of the assessment, returned them to the respondent Collector for
laws of the Philippines, with principal office at 404 Dasmarias St.,
reinvestigation.
Manila. Incorporated in 1916, it was engaged, prior to the last world
war, in the importation and sale of hardware supplies and equipment. After another investigation, the respondent Collector, in a letter to
After the liberation, it resumed its business and until June of 1946
petitioner dated December 16, 1954, redetermined that the
bought a number of cars and trucks from General Motors Overseas
aforementioned tax assessment was lawfully due the government and
Corporation (hereafter referred to as GM for short), an American
in addition assessed deficiency sales tax due from petitioner for the
corporation licensed to do business in the Philippines. As importer,
four quarters of 1950; the respondents' last demand was in the total
GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax sum of P2,215,809.27 detailed as follows:
Code on the basis of its selling price to Yutivo. Said tax being
collected only once on original sales, Yutivo paid no further sales tax
on its sales to the public.
Deficiency
Sales Tax
On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as
SM) was organized to engage in the business of selling cars, trucks
and spare parts. Its original authorized capital stock was P1,000,000
divided into 10,000 shares with a par value of P100 each.
Assessment (First) of November 7, 1950 for
deficiency sales Tax for the period from 3rd Qrtr
At the time of its incorporation 2,500 shares worth P250,000 appear
1947 to 4th Qrtr 1949 inclusive
P1,031,296.60
to have been subscribed into equal proportions by Yu Khe Thai, Yu
Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first
three named subscribers are brothers, being sons of Yu Tiong Yee, one
of Yutivo's founders. The latter two are respectively sons of Yu Tiong
Additional Assessment for period from 1st to 4th
Sin and Albino Sycip, who are among the founders of Yutivo.
Qrtr 1950, inclusive
234,880.13
After the incorporation of SM and until the withdrawal of GM from
the Philippines in the middle of 1947, the cars and tracks purchased
by Yutivo from GM were sold by Yutivo to SM which, in turn, sold
them to the public in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of
1947, the U.S. manufacturer of GM cars and trucks appointed Yutivo
as importer for the Visayas and Mindanao, and Yutivo continued its
previous arrangement of selling exclusively to SM. In the same way
that GM used to pay sales taxes based on its sales to Yutivo, the latter,
as importer, paid sales tax prescribed on the basis of its selling price
to SM, and since such sales tax, as already stated, is collected only
once on original sales, SM paid no sales tax on its sales to the public.

Total amount demanded per letter of December

16, 1954

P1,266,176.73

This second assessment was contested by the petitioner Yutivo before

the Court of Tax Appeals, alleging that there is no valid ground to
disregard the corporate personality of SM and to hold that it is an
adjunct of petitioner Yutivo; (2) that assuming the separate
personality of SM may be disregarded, the sales tax already paid by
Yutivo should first be deducted from the selling price of SM in
computing the sales tax due on each vehicle; and (3) that the
surcharge has been erroneously imposed by respondent. Finding
against Yutivo and sustaining the respondent Collector's theory that

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Corporation Code 3
there was no legitimate or bona fide purpose in the organization of
SM the apparent objective of its organization being to evade the
payment of taxes and that it was owned (or the majority of the
stocks thereof are owned) and controlled by Yutivo and is a mere
subsidiary, branch, adjunct, conduit, instrumentality or alter ego of
the latter, the Court of Tax Appeals with Judge Roman Umali not
taking part disregarded its separate corporate existence and on
April 27, 1957, rendered the decision now complained of. Of the two
Judges who signed the decision, one voted for the modification of the
computation of the sales tax as determined by the respondent
Collector in his decision so as to give allowance for the reduction of
the tax already paid (resulting in the reduction of the assessment to
P820,509.91 exclusive of surcharges), while the other voted for
affirmance. The dispositive part of the decision, however, affirmed
the assessment made by the Collector. Reconsideration of this
decision having been denied, Yutivo brought the case to this Court
thru the present petition for review.

must not be confused with the abandonment of the assembly plant

project. Even as respect the assembly plant, the newspaper clipping
was quite explicit in saying that the Acting Manager refused to
confirm that rumor as late as March 24, 1947, almost a year after SM
was organized.

At this juncture, it should be stated that the intention to minimize

taxes, when used in the context of fraud, must be proved to exist by
clear and convincing evidence amounting to more than mere
preponderance, and cannot be justified by a mere speculation. This is
because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S
250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43
F (2d) 509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d)
374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss
vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749;
Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA
378; National City Bank of New York vs. Commr., 98 (2d) 93;
Richard vs. Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA
It is an elementary and fundamental principle of corporation law that 518). (See also Balter, Fraud Under Federal Law, pp. 301-302, citing
a corporation is an entity separate and distinct from its stockholders
numerous authorities: Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud
and from other corporation petitions to which it may be connected.
is never imputed and the courts never sustain findings of fraud upon
However, "when the notion of legal entity is used to defeat public
circumstances which, at the most, create only suspicion. (Haygood
convenience, justify wrong, protect fraud, or defend crime," the law
Lumber & Mining Co. vs. Commr., 178 F (2d) 769; Dalone vs.
will regard the corporation as an association of persons, or in the case Commr., 100 F (2d) 507).
of two corporations merge them into one. (Koppel [Phil.], Inc. vs.
Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of Corporation,
In the second place, SM was organized and it operated, under
Perm Ed., pp. 135 136; United States vs. Milwaukee Refrigeration
circumstance that belied any intention to evade sales taxes. "Tax
Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule is that,
evasion" is a term that connotes fraud thru the use of pretenses and
when the corporation is the "mere alter ego or business conduit of a
forbidden devices to lessen or defeat taxes. The transactions between
person, it may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.) Yutivo and SM, however, have always been in the open, embodied in
private and public documents, constantly subject to inspection by the
After going over the voluminous record of the present case, we are
tax authorities. As a matter of fact, after Yutivo became the importer
inclined to rule that the Court of Tax Appeals was not justified in
of GM cars and trucks for Visayas and Mindanao, it merely continued
finding that SM was organized for no other purpose than to defraud
the method of distribution that it had initiated long before GM
the Government of its lawful revenues. In the first place, this
withdrew from the Philippines.
corporation was organized in June, 1946 when it could not have
caused Yutivo any tax savings. From that date up to June 30, 1947, or On the other hand, if tax saving was the only justification for the
a period of more than one year, GM was the importer of the cars and organization of SM, such justification certainly ceased with the
trucks sold to Yutivo, which, in turn resold them to SM. During that
passage of Republic Act No. 594 on February 16, 1951, governing
period, it is not disputed that GM as importer, was the one solely
payment of advance sales tax by the importer based on the landed
liable for sales taxes. Neither Yutivo or SM was subject to the sales
cost of the imported article, increased by mark-ups of 25%, 50%, and
taxes on their sales of cars and trucks. The sales tax liability of Yutivo 100%, depending on whether the imported article is taxed under
did not arise until July 1, 1947 when it became the importer and
sections 186, 185 and 184, respectively, of the Tax Code. Under
simply continued its practice of selling to SM. The decision,
Republic Act No. 594, the amount at which the article is sold is
therefore, of the Tax Court that SM was organized purposely as a tax immaterial to the amount of the sales tax. And yet after the passage of
evasion device runs counter to the fact that there was no tax to evade. that Act, SM continued to exist up to the present and operates as it did
many years past in the promotion and pursuit of the business
Making the observation from a newspaper clipping (Exh. "T") that
purposes for which it was organized.
"as early as 1945 it was known that GM was preparing to leave the
Philippines and terminate its business of importing vehicles," the
In the third place, sections 184 to 186 of the said Code provides that
court below speculated that Yutivo anticipated the withdrawal of GM the sales tax shall be collected "once only on every original sale,
from business in the Philippines in June, 1947. This observation,
barter, exchange . . , to be paid by the manufacturer, producer or
which was made only in the resolution on the motion for
importer." The use of the word "original" and the express provision
reconsideration, however, finds no basis in the record. On the other
that the tax was collectible "once only" evidently has made the
hand, GM had been an importer of cars in the Philippines even before provisions susceptible of different interpretations. In this connection,
the war and had but recently resumed its operation in the Philippines it should be stated that a taxpayer has the legal right to decrease the
in 1946 under an ambitious plan to expand its operation by
amount of what otherwise would be his taxes or altogether avoid
establishing an assembly plant here, so that it could not have been
them by means which the law permits. (U.S. vs. Isham 17 Wall. 496,
expected to make so drastic a turnabout of not merely abandoning the 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower,
assembly plant project but also totally ceasing to do business as an
327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means
importer. Moreover, the newspaper clipping, Exh. "T", was published by the taxpayer to reduce taxes are all right Benry vs. Commr. 25 T.
on March 24, 1947, and clipping, merely reported a rumored plan that Cl. 78). A man may, therefore, perform an act that he honestly
GM would abandon the assembly plant project in the Philippines.
believes to be sufficient to exempt him from taxes. He does not incur
There was no mention of the cessation of business by GM which
fraud thereby even if the act is thereafter found to be insufficient.

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Corporation Code 3
Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was
held that though an incorrect position in law had been taken by the
corporation there was no suppression of the facts, and a fraud penalty
was not justified.

Sycip are respectively sons of Yu Tiong Sing and Alberto Sycip who
are co-founders of Yutivo. According to the Articles of Incorporation
of the said subscriptions, the amount of P62,500 was paid by the
aforenamed subscribers, but actually the said sum was advanced by
Yutivo. The additional subscriptions to the capital stock of SM and
subsequent transfers thereof were paid by Yutivo itself. The payments
The evidence for the Collector, in our opinion, falls short of the
were made, however, without any transfer of funds from Yutivo to
standard of clear and convincing proof of fraud. As a matter of fact,
SM. Yutivo simply charged the accounts of the subscribers for the
the respondent Collector himself showed a great deal of doubt or
hesitancy as to the existence of fraud. He even doubted the validity of amount allegedly advanced by Yutivo in payment of the shares.
his first assessment dated November 7, 1959. It must be remembered Whether a charge was to be made against the accounts of the
that the fraud which respondent Collector imputed to Yutivo must be subscribers or said subscribers were to subscribe shares appears to
related to its filing of sales tax returns of less taxes than were legally constitute a unilateral act on the part of Yutivo, there being no
showing that the former initiated the subscription.
due. The allegation of fraud, however, cannot be sustained without
the showing that Yutivo, in filing said returns, did so fully knowing
that the taxes called for therein called for therein were less than what The transactions were made solely by and between SM and Yutivo. In
were legally due. Considering that respondent Collector himself with effect, it was Yutivo who undertook the subscription of shares,
the aid of his legal staff, and after some two years of investigation
employing the persons named or "charged" with corresponding
and duty of investigation and study concluded in 1952 that Yutivo's
account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe
sales tax returns were correct only to reverse himself after another Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these
two years it would seem harsh and unfair for him to say in 1954
subscriptions, but considering that they were the principal officers
that Yutivo fully knew in October 1947 that its sales tax returns were and constituted the majority of the Board of Directors of both Yutivo
inaccurate.
and SM, their subscriptions could readily or easily be that of Yutivo's
Moreover, these persons were related to death other as brothers or
first cousins. There was every reason for them to agree in order to
On this point, one other consideration would show that the intent to
protect their common interest in Yutivo and SM.
save taxes could not have existed in the minds of the organizers of
SM. The sales tax imposed, in theory and in practice, is passed on to
the vendee, and is usually billed separately as such in the sales
The issued capital stock of SM was increased by additional
invoice. As pointed out by petitioner Yutivo, had not SM handled the subscriptions made by various person's but except Ng Sam Bak and
retail, the additional tax that would have been payable by it, could
David Sycip, "payments" thereof were effected by merely debiting 'or
have been easily passed off to the consumer, especially since the
charging the accounts of said stockholders and crediting the
period covered by the assessment was a "seller's market" due to the
corresponding amounts in favor of SM, without actually transferring
post-war scarcity up to late 1948, and the imposition of controls in the cash from Yutivo. Again, in this instance, the "payments" were
late 1949.
Yutivo, by effected by the mere unilateral act of Yutivo a accounts of
the virtue of its control over the individual persons charged, would
It is true that the arrastre charges constitute expenses of Yutivo and its necessarily exercise preferential rights and control directly or
indirectly, over the shares, it being the party which really undertook
non-inclusion in the selling price by Yutivo cost the Government
P4.00 per vehicle, but said non-inclusion was explained to have been to pay or underwrite payment thereof.
due to an inadvertent accounting omission, and could hardly be
considered as proof of willful channelling and fraudulent evasion of
The shareholders in SM are mere nominal stockholders holding the
sales tax. Mere understatement of tax in itself does not prove fraud.
shares for and in behalf of Yutivo, so even conceding that the original
(James Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in
subscribers were stockholders bona fide Yutivo was at all times in
Merten's Sec. 55.11 p. 21) The amount involved, moreover, is
control of the majority of the stock of SM and that the latter was a
extremely small inducement for Yutivo to go thru all the trouble of
mere subsidiary of the former.
organizing SM. Besides, the non-inclusion of these small arrastre
charges in the sales tax returns of Yutivo is clearly shown in the
True, petitioner and other recorded stockholders transferred their
records of Yutivo, which is uncharacteristic of fraud (See Insular
shareholdings, but the transfers were made to their immediate
Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)
relatives, either to their respective spouses and children or sometimes
brothers or sisters. Yutivo's shares in SM were transferred to
We are, however, inclined to agree with the court below that SM was immediate relatives of persons who constituted its controlling
actually owned and controlled by petitioner as to make it a mere
stockholders, directors and officers. Despite these purported changes
subsidiary or branch of the latter created for the purpose of selling the in stock ownership in both corporations, the Board of Directors and
vehicles at retail and maintaining stores for spare parts as well as
officers of both corporations remained unchanged and Messrs. Yu
service repair shops. It is not disputed that the petitioner, which is
Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or
engaged principally in hardware supplies and equipment, is
Young family) continued to constitute the majority in both boards. All
completely controlled by the Yutivo, Young or Yu family. The
these, as observed by the Court of Tax Appeals, merely serve to
founders of the corporation are closely related to each other either by corroborate the fact that there was a common ownership and interest
blood or affinity, and most of its stockholders are members of the Yu in the two corporations.
(Yutivo or Young) family. It is, likewise, admitted that SM was
organized by the leading stockholders of Yutivo headed by Yu Khe
SM is under the management and control of Yutivo by virtue of a
Thai. At the time of its incorporation 2,500 shares worth P250,000.00 management contract entered into between the two parties. In fact,
appear to have been subscribed in five equal proportions by Yu Khe
the controlling majority of the Board of Directors of Yutivo is also the
Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. controlling majority of the Board of Directors of SM. At the same
The first three named subscribers are brothers, being the sons of Yu
time the principal officers of both corporations are identical. In
Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington
addition both corporations have a common comptroller in the person

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Corporation Code 3
of Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe
Thai. There is therefore no doubt that by virtue of such control, the
business, financial and management policies of both corporations
could be directed towards common ends.

Proceeding to another aspect of the relation of the parties, the

management fees due from SM to Yutivo were taken up as expenses
of SM and credited to the account of Yutivo. If it were to be assumed
that the two organizations are separate juridical entities, the
corresponding receipts or receivables should have been treated as
Another aspect relative to Yutivo's control over SM operations relates income on the part of Yutivo. But such management fees were
to its cash transactions. All cash assets of SM were handled by Yutivo recorded as "Reserve for Bonus" and were therefore a liability reserve
and all cash transactions of SM were actually maintained thru Yutivo. and not an income account. This reserve for bonus were subsequently
distributed directly to and credited in favor of the employees and
Any and all receipts of cash by SM including its branches were
directors of Yutivo, thereby clearly showing that the management fees
transmitted or transferred immediately and directly to Yutivo in
were paid directly to Yutivo officers and employees.
Manila upon receipt thereof. Likewise, all expenses, purchases or
other obligations incurred by SM are referred to Yutivo which in turn
prepares the corresponding disbursement vouchers and payments in
Briefly stated, Yutivo financed principally, if not wholly, the business
relation there, the payment being made out of the cash deposits of SM of SM and actually extended all the credit to the latter not only in the
with Yutivo, if any, or in the absence thereof which occurs generally, form of starting capital but also in the form of credits extended for the
a corresponding charge is made against the account of SM in Yutivo's cars and vehicles allegedly sold by Yutivo to SM as well as advances
books. The payments for and charges against SM are made by Yutivo or loans for the expenses of the latter when the capital had been
as a matter of course and without need of any further request, the
exhausted. Thus, the increases in the capital stock were made in
latter would advance all such cash requirements for the benefit of
advances or "Guarantee" payments by Yutivo and credited in favor of
SM. Any and all payments and cash vouchers are made on Yutivo
SM. The funds of SM were all merged in the cash fund of Yutivo. At
stationery and made under authority of Yutivo's corporate officers,
all times Yutivo thru officers and directors common to it and SM,
without any copy thereof being furnished to SM. All detailed records exercised full control over the cash funds, policies, expenditures and
such as cash disbursements, such as expenses, purchases, etc. for the obligations of the latter.
account of SM, are kept by Yutivo and SM merely keeps a summary
record thereof on the basis of information received from Yutivo.
Southern Motors being but a mere instrumentality, or adjunct of
Yutivo, the Court of Tax Appeals correctly disregarded the technical
All the above plainly show that cash or funds of SM, including those defense of separate corporate entity in order to arrive at the true tax
of its branches which are directly remitted to Yutivo, are placed in the liability of Yutivo.
custody and control of Yutivo, resources and subject to withdrawal
only by Yutivo. SM's being under Yutivo's control, the former's
Petitioner contends that the respondent Collector had lost his right or
operations and existence became dependent upon the latter.
authority to issue the disputed assessment by reason of prescription.
The contention, in our opinion, cannot be sustained. It will be noted
Consideration of various other circumstances, especially when taken that the first assessment was made on November 7, 1950 for
together, indicates that Yutivo treated SM merely as its department or deficiency sales tax from 1947 to 1949. The corresponding returns
adjunct. For one thing, the accounting system maintained by Yutivo
filed by petitioner covering the said period was made at the earliest
shows that it maintained a high degree of control over SM accounts.
on October 1, as regards the third quarter of 1947, so that it cannot be
All transactions between Yutivo and SM are recorded and effected by claimed that the assessment was not made within the five-year period
mere debit or credit entries against the reciprocal account maintained prescribed in section 331 of the Tax Code invoked by petitioner. The
in their respective books of accounts and indicate the dependency of assessment, it is admitted, was withdrawn by the Collector on
SM as branch upon Yutivo.
insufficiency of evidence, but November 15, 1952 due to
insufficiency of evidence, but the withdrawal was made subject to the
approval of the Secretary of Finance and the Board of Tax Appeals,
Apart from the accounting system, other facts corroborate or
pursuant to the provisions of section 9 of Executive Order No. 401-A,
independently show that SM is a branch or department of Yutivo.
series of 1951. The decision of the previous assessment of November
Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat
Yutivo Manila as their "Head Office" or "Home Office" as shown 7, Collector countermanding the as 1950 was forwarded to the Board
of Tax Appeals through the Secretary of Finance but that official,
by their letters of remittances or other correspondences. These
apparently disagreeing with the decision, sent it back for recorrespondences were actually received by Yutivo and the reference
investigation. Consequently, the assessment of November 7, 1950
to Yutivo as the head or home office is obvious from the fact that all
cash collections of the SM's branches are remitted directly to Yutivo. cannot be considered to have been finally withdrawn. That the
assessment was subsequently reiterated in the decision of respondent
Added to this fact, is that SM may freely use forms or stationery of
Collector on December 16, 1954 did not alter the fact that it was
Yutivo
made seasonably. In this connection, it would appear that a warrant of
distraint and levy had been issued on March 28, 1951 in relation with
The fact that SM is a mere department or adjunct of Yutivo is made
this case and by virtue thereof the properties of Yutivo were placed
more patent by the fact that arrastre conveying, and charges paid for
under constructive distraint. Said warrant and constructive distraint
the "operation of receiving, loading or unloading" of imported cars
and trucks on piers and wharves, were charged against SM. Overtime have not been lifted up to the present, which shows that the
assessment of November 7, 1950 has always been valid and
charges for the unloading of cars and trucks as requested by Yutivo
subsisting.
and incurred as part of its acquisition cost thereof, were likewise
charged against and treated as expenses of SM. If Yutivo were the
importer, these arrastre and overtime charges were Yutivo's expenses
in importing goods and not SM's. But since those charges were made
against SM, it plainly appears that Yutivo had sole authority to
allocate its expenses even as against SM in the sense that the latter is
a mere adjunct, branch or department of the former.

Anent the deficiency sale tax for 1950, considering that the
assessment thereof was made on December 16, 1954, the same was
assessed well within the prescribed five-year period.

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Corporation Code 3
Petitioner argues that the original assessment of November 7, 1950
did not extend the prescriptive period on assessment. The argument is
untenable, for, as already seen, the assessment was never finally
withdrawn, since it was not approved by the Secretary of Finance or
of the Board of Tax Appeals. The authority of the Secretary to act
upon the assessment cannot be questioned, for he is expressly granted
such authority under section 9 of Executive Order No. 401-And under
section 79 (c) of the Revised Administrative Code, he has "direct
control, direction and supervision over all bureaus and offices under
his jurisdiction and may, any provision of existing law to the contrary
not withstanding, repeal or modify the decision of the chief of said
Bureaus or offices when advisable in public interest."

Pursuant to Section 183 of the National Internal Revenue Code the

50% surcharge should be added to the deficiency sales tax "in case a
false or fraudulent return is willfully made." Although the sales made
by SM are in substance by Yutivo this does not necessarily establish
fraud nor the willful filing of a false or fraudulent return.

The case of Court Holding Co. v. Commissioner of Internal

Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The
petitioner Court Holding Co. was a corporation consisting of only
two stockholders, to wit: Minnie Miller and her husband Louis Miller.
The only assets of third husband and wife corporation consisted of an
apartment building which had been acquired for a very low price at a
judicial sale. Louis Miller, the husband, who directed the company's
It should here also be stated that the assessment in question was
business, verbally agreed to sell this property to Abe C. Fine and
consistently protested by petitioner, making several requests for
Margaret Fine, husband and wife, for the sum of $54,000.00, payable
reinvestigation thereof. Under the circumstances, petitioner may be
in various installments. He received $1,000.00 as down payment. The
considered to have waived the defense of prescription.
sale of this property for the price mentioned would have netted the
corporation a handsome profit on which a large corporate income tax
would have to be paid. On the afternoon of February 23, 1940, when
"Estoppel has been employed to prevent the application of
the Millers and the Fines got together for the execution of the
the statute of limitations against the government in certain
document of sale, the Millers announced that their attorney had called
instances in which the taxpayer has taken some affirmative
action to prevent the collection of the tax within the statutory their attention to the large corporate tax which would have to be paid
if the sale was made by the corporation itself. So instead of
period. It is generally held that a taxpayer is estopped to
proceeding with the sale as planned, the Millers approved a resolution
repudiate waivers of the statute of limitations upon which
to declare a dividend to themselves "payable in the assets of the
the government relied. The cases frequently involve
corporation, in complete liquidation and surrender of all the
dissolved corporations. If no waiver has been given, the
outstanding corporate stock." The building, which as above stated
cases usually show come conduct directed to a
was the only property of the corporation, was then transferred to Mr.
postponement of collection, such, for example, as some
variety of request to apply an overassessment. The taxpayer and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly
the same price and under the same terms as had been previously
has 'benefited' and 'is not in a position to contest' his tax
agreed upon between the corporation and the Fines.
liability. A definite representation of implied authority may
be involved, and in many cases the taxpayer has received the
'benefit' of being saved from the inconvenience, if not
The return filed by the Court Holding Co. with the respondent
hardship of immediate collection. "
Commissioner of Internal Revenue reported no taxable gain as having
been received from the sale of its assets. The Millers, of course,
reported a long term capital gain on the exchange of their corporate
Conceivably even in these cases a fully informed
stock with the corporate property. The Commissioner of Internal
Commissioner may err to the sorrow of the revenues, but
Revenue contended that the liquidating dividend to stockholders had
generally speaking, the cases present a strong combination
no purpose other than that of tax avoidance and that, therefore, the
of equities against the taxpayer, and few will seriously
sale by the Millers to the Fines of the corporation's property was in
quarrel with their application of the doctrine of estoppel."
substance a sale by the corporation itself, for which the corporation is
(Mertens Law of Federal Income Taxation, Vol. 10-A, pp.
subject to the taxable profit thereon. In requiring the corporation to
159-160.)
pay the taxable profit on account of the sale, the Commissioner of
It is also claimed that section 9 of Executive Order No. 401-A, series Internal Revenue, imposed a surcharge of 25% for delinquency, plus
an additional surcharge as fraud penalties.
of 1951 es involving an original assessment of more than P5,000
refers only to compromises and refunds of taxes, but not to total
withdrawal of the assessment. The contention is without merit. A
careful examination of the provisions of both sections 8 and 9 of
Executive Order No. 401-A, series of 1951, reveals the procedure
prescribed therein is intended as a check or control upon the powers
of the Collector of Internal Revenue in respect to assessment and
refunds of taxes. If it be conceded that a decision of the Collector of
Internal Revenue on partial remission of taxes is subject to review by
the Secretary of Finance and the Board of Tax Appeals, then with
more reason should the power of the Collector to withdraw totally an
assessment be subject to such review.

The U. S. Court of Tax Appeals held that the sale by the Millers was
for no other purpose than to avoid the tax and was, in substance, a
sale by the Court Holding Co., and that, therefore, the said
corporation should be liable for the assessed taxable profit thereon.
The Court of Tax Appeals also sustained the Commissioner of
Internal Revenue on the delinquency penalty of 25%. However, the
Court of Tax Appeals disapproved the fraud penalties, holding that an
attempt to avoid a tax does not necessarily establish fraud; that it is a
settled principle that a taxpayer may diminish his tax liability by
means which the law permits; that if the petitioner, the Court Holding
Co., was of the opinion that the method by which it attempted to
effect the sale in question was legally sufficient to avoid the
We find merit, however, in petitioner's contention that the Court of
imposition of a tax upon it, its adoption of that methods not subject to
Tax Appeals erred in the imposition of the 5% fraud surcharge. As
already shown in the early part of this decision, no element of fraud is censure; and that in taking a position with respect to a question of
law, the substance of which was disclosed by the statement indorsed
present.
on it return, it may not be said that that position was taken
fraudulently. We quote in full the pertinent portion of the decision of
the Court of Tax Appeals: .

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Corporation Code 3
". . . The respondent's answer alleges that the petitioner's
failure to report as income the taxable profit on the real
estate sale was fraudulent and with intent to evade the tax.
The petitioner filed a reply denying fraud and averring that
the loss reported on its return was correct to the best of its
knowledge and belief. We think the respondent has not
sustained the burden of proving a fraudulent intent. We have
concluded that the sale of the petitioner's property was in
substance a sale by the petitioner, and that the liquidating
dividend to stockholders had no purpose other than that of
tax avoidance. But the attempt to avoid tax does not
necessarily establish fraud. It is a settled principle that a
taxpayer may diminish his liability by any means which the
law permits. United States v. Isham, 17 Wall. 496; Gregory
v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed.
(2d) 14. If the petitioner here was of the opinion that the
method by which it attempted to effect the sale in question
was legally sufficient to avoid the imposition of tax upon it,
its adoption of that method is not subject to censure.
Petitioner took a position with respect to a question of law,
the substance of which was disclosed by the statement
endorsed on its return. We can not say, under the record
before us, that that position was taken fraudulently. The
determination of the fraud penalties is reversed."
When GM was the importer and Yutivo, the wholesaler, of the cars
and trucks, the sales tax was paid only once and on the original sales
by the former and neither the latter nor SM paid taxes on their
subsequent sales. Yutivo might have, therefore, honestly believed that
the payment by it, as importer, of the sales tax was enough as in the
case of GM Consequently, in filing its return on the basis of its sales
to SM and not on those by the latter to the public, it cannot be said
that Yutivo deliberately made a false return for the purpose of
defrauding the government of its revenues which will justify the
imposition of the surcharge penalty.
We likewise find meritorious the contention that the Tax Court erred
in computing the alleged deficiency sales tax on the selling price of
SM without previously deducting therefrom the sales tax due thereon.
The sales tax provisions (sees. 184.186, Tax Code) impose a tax on
original sales measured by "gross selling price" or "gross value in
money". These terms, as interpreted by the respondent Collector, do
not include the amount of the sales tax, if invoiced separately. Thus,
General Circular No. 431 of the Bureau of Internal Revenue dated
July 29, 1939, which implements sections 184.186 of the Tax Code
provides: "
. . .'Gross selling price' or gross value in money' of the
articles sold, bartered, exchanged, transferred as the term is
used in the aforecited sections (sections 184, 185 and 186) of
the National Internal Revenue Code, is the total amount of
money or its equivalent which the purchaser pays to the
vendor to receive or get the goods. However, if a
manufacturer, producer, or importer, in fixing the gross
selling price of an article sold by him has included an
amount intended to cover the sales tax in the gross selling
price of the articles, the sales tax shall be based on the gross
selling price less the amount intended to cover the tax, if the
same is billed to the purchaser as a separate item.
General Circular No. 440 of the same Bureau reads:

made after he third quarter of 1939, the amount intended to

cover the sales tax must be billed to the purchaser as
separate items in the, invoices in order that the reduction
thereof from the gross ailing price may be allowed in the
computation of the merchants' percentage tax on the sales.
Unless billed to the purchaser as a separate item in the
invoice, the amounts intended to cover the sales tax shall be
considered as part of the gross selling price of the articles
sold, and deductions thereof will not be allowed, (Cited in
Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its sales to SM, and as
separately billed, the sales taxes did not form part of the "gross
selling price" as the measure of the tax. Since Yutivo had previously
billed the sales tax separately in its sales invoices to SM General
Circulars Nos. 431 and 440 should be deemed to have been complied.
Respondent Collector's method of computation, as opined by Judge
Nable in the decision complained of
. . . is unfair, because . . .(it is) practically imposing tax on a
tax already paid. Besides, the adoption of the procedure
would in certain cases elevate the bracket under which the
tax is based. The late payment is already penalized, thru the
imposition of surcharges, by adopting the theory of the
Collector, we will be creating an additional penalty not
contemplated by law."
If the taxes based on the sales of SM are computed in accordance
with Gen. Circulars Nos. 431 and 440 the total deficiency sales taxes,
exclusive of the 25% and 50% surcharges for late payment and for
fraud, would amount only to P820,549.91 as shown in the following
computation:

Rates of
Sales Tax

Gross Sales of
Vehicles Exclusive
of Sales Tax

Sales Taxes Due and

Total Gro
Computed under
Price Cha
Gen. Cir Nos. 431 &
Public
400

5%

P11,912,219.57

P595,610.98

7%

909,559.50

63,669.16

10%

2,618,695.28

261,869.53

15%

3,602,397.65

540,359.65

20%

267,150.50

53,430.10

30%

837,146.97

251,114.09

Amount intended to cover the tax must be billed as a

separate em so as not to pay a tax on the tax. On sales

100

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Corporation Code 3
50%

74,244.30

37,122.16

75%

8,000.00

6,000.00

TOTAL

P20,220,413.77

P1,809,205.67

Less Taxes Paid by Yutivo

Deficiency Tax still due

988,655.76

P820,549.91

This is the exact amount which, according to Presiding Judge Nable

of the Court of Tax Appeals, Yutivo would pay, exclusive of the
surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or
acted in excess of its jurisdiction in promulgating judgment for the
affirmance of the decision of respondent Collector by less than the
statutory requirement of at least two votes of its judges. Anent this
contention, section 2 of Republic Act No. 1125, creating the Court of
Tax Appeals, provides that "Any two judges of the Court of Tax
Appeals shall constitute a quorum, and the concurrence of two judges
shall be necessary to promulgate decision thereof. . . . " It is on record
that the present case was heard by two judges of the lower court. And
while Judge Nable expressed his opinion on the issue of whether or
not the amount of the sales tax should be excluded from the gross
selling price in computing the deficiency sales tax due from the
petitioner, the opinion, apparently, is merely an expression of his
general or "private sentiment" on the particular issue, for he
concurred the dispositive part of the decision. At any rate, assuming
that there is no valid decision for lack of concurrence of two judges,
the case was submitted for decision of the court below on March 28,
1957 and under section 13 of Republic Act 1125, cases brought
before said court hall be decided within 30 days after submission
thereof. "If no decision is rendered by the Court within thirty days
from the date a case is submitted for decision, the party adversely
affected by said ruling, order or decision, may file with said Court a
notice of his intention to appeal to the Supreme Court, and if no
decision has as yet been rendered by the Court, the aggrieved party
may file directly with the Supreme Court an appeal from said ruling,
order or decision, notwithstanding the foregoing provisions of this
section." The case having been brought before us on appeal, the
question raised by petitioner as become purely academic.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax
Appeals under review is hereby modified in that petitioner shall be
ordered to pay to respondent the sum of P820,549.91, plus 25%
surcharge thereon for late payment.
So ordered without costs.

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Corporation Code 3
G.R. No. L-9687

June 30, 1961

LIDDELL & CO., INC., petitioner-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondentappellee.
Ozaeta, Lichauco and Picazo for petitioner-appellant.
Office of the Solicitor General for respondent-appellee.
BENGZON, C.J.:
Statement. This is an appeal from the decision of the Court of Tax
Appeals imposing a tax deficiency liability of P1,317,629.61 on
Liddell & Co., Inc.
Said Company lists down several issues which may be boiled to the
following:
(a) Whether or not Judge Umali of the Tax Court below
could validly participate in the making of the decision;
(b) Whether or not Liddell & Co. Inc., and the Liddell
Motors, Inc. are (practically) identical corporations, the
latter being merely .the alter ego of the former;
(c) Whether or not, granting the identical nature of the
corporations, the assessment of tax liability, including the
surcharge thereon by the Court of Tax Appeals, is correct.
Undisputed Facts. The parties submitted a partial stipulation of facts,
each reserving the right to present additional evidence.
Said undisputed facts are substantially as follows:
The petitioner, Liddell & Co. Inc., (Liddell & Co. for short)
is a domestic corporation establish in the Philippines on
February 1, 1946, with an authorized capital of P100,000
divided into 1000 share at P100 each. Of this authorized
capital, 196 shares valued at P19,600 were subscribed and
paid by Frank Liddell while the other four shares were in the
name of Charles Kurz, E.J. Darras, Angel Manzano and
Julian Serrano at one shares each. Its purpose was to engage
in the business of importing and retailing Oldsmobile and
Chevrolet passenger cars and GMC and Chevrolet trucks..
On January 31, 1947, with the limited paid-in capital of
P20,000, Liddell & Co. was able to declare a 90% stock
dividend after which declaration on, Frank Liddells holding
in the Company increased to 1,960 shares and the
employees, Charles Kurz E.J. Darras, Angel Manzano and
Julian Serrano at 10 share each. The declaration of stock
dividend was followed by a resolution increasing the
authorized capital of the company to P1,000.000 which the
Securities & Exchange Commission approved on March 3,
1947. Upon such approval, Frank Liddell subscribed to
3,000 additional shares, for which he paid into the
corporation P300,000 so that he had in his own name 4,960
shares.
On May 24, 1957, Frank Liddell, on one hand and Messrs.
Kurz, Darras, Manzano and Serrano on the other, executed

102

Corporation Code 3
an agreement (Exhibit A) which was further supplemented
by two other agreements (Exhibits B and C) dated May 24,
1947 and June 3, 1948, wherein Frank Liddell transferred
(On June 7, 1948) to various employees of Liddell & Co.
shares of stock.
At the annual meeting of stockholders of Liddell & Co. held
on March 9, 1948, a 100% stock dividend was declared,
thereby increasing the issued capital stock of aid corporation
from P1,000.000 to P 3,000,000 which increase was duly
approved by the Securities and Exchange Commission on
June 7, 1948. Frank Liddell subscribed to and paid 20% of
the increase of P400,000. He paid 25% thereof in the amount
of P100,000 and the balance of P3,000,000 was merely
debited to Frank Liddell-Drawing Account and credited to
Subscribed Capital Stock on December 11, 1948.

On November 15, 1948, in accordance with a resolution of a special

meeting of the Board of Directors of Liddell & Co., stock dividends
were again declared. As a result of said declaration and in accordance
with the agreements, Exhibits, A, B, and C, the stockholdings in the
company appeared to be:

On March 8, 1949, stock dividends were again issued by

Liddell & Co. and in accordance with the agreements,
Exhibits A, B, and C, the stocks of said company stood as
follows:

Name

Frank Liddell

No. of
Shares

Amount

13,688 P1,368,800

Name

Frank Liddell

Per Cent

72.00%

No. of
Shares

Amount

19,738 P1,973,800

Per Cent

65.791%

Irene Liddell

100

.003%

Mercedes Vecin

100

.003%

Charles Kurz

2,215

221,500

7.381%

Irene Liddell

100

.01%

E.J. Darras

2,215

221,500

7.381%

Mercedes Vecin

100

.01%

Angel Manzano

1,810

181,000

6.031%

Charles Kurz

1,225

122,500

6.45%

Julian Serrano

1,700

170,000

5.670%

E.J. Darras

1,225

122,500

6.45%

E. Hasim

830

83,000

2.770%

Angel Manzano

1,150

115,000

6.06%

G. W. Kernot

1,490

149,000

4.970%

Julian Serrano

710

71,000

3.74%

30,000 P3,000,000

100.000%

E. Hasim

500

50,000

G. W. Kernot

500

50,000

19,000 P1,900,000

2.64%
On the basis of the agreement Exhibit A, (May, 1947) "40%" of the
earnings available for dividends accrued to Frank Liddell although at
the time of the execution of aid instrument, Frank Liddell owned all
of the shares in said corporation. 45% accrued to the employees,
2.64%
parties thereto; Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-1/2%
and Julian Serrano 7-1/2%. The agreement Exhibit A was also made
retroactive to 1946. Frank Liddell reserved the right to reapportion
the 45% dividends pertaining to the employees in the future for the
100.00%
purpose of including such other faithful and efficient employees as he

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Corporation Code 3
may subsequently designate. (As a matter of fact, Frank Liddell did
so designate two additional employees namely: E. Hasim and G. W.
Kernot). It was for such inclusion of future faithful employees that
Exhibits B-1 and C were executed. As per Exhibit C, dated May 13,
1948, the 45% given by Frank Liddell to his employees was
reapportioned as follows: C. Kurz 12,%; E. J. Darras 12%; A.
Manzano l2%; J. Serrano 3-1/2%; G. W. Kernot 2%.

raised by the parties when this case was presented for resolution
before the said bureau. Furthermore, after careful inspection of the
records of the Bureau, he (Judge Umali as well as the other members
of the court below), had not found any indication that he had
expressed any opinion or made any decision that would tend to
disqualify him from participating in the consideration of the case in
the Tax Court.

Exhibit B contains the employees' definition in detail of the manner

by which they sought to prevent their share-holdings from being
transferred to others who may be complete strangers to the business
on Liddell & Co.

At this juncture, it is well to consider that petitioner did not question

the truth of Judge Umali's statements. In view thereof, this Tribunal is
not inclined to disqualify said judge. Moreover, in furtherance of the
presumption of the judge's moral sense of responsibility this Court
has adopted, and now here repeats, the ruling that the mere
participation of a judge in prior proceedings relating to the subject in
the capacity of an administrative official does not necessarily
disqualify him from acting as judge.2

From 1946 until November 22, 1948 when the purpose clause of the
Articles of Incorporation of Liddell & Co. Inc., was amended so as to
limit its business activities to importations of automobiles and trucks,
Liddell & Co. was engaged in business as an importer and at the same
time retailer of Oldsmobile and Chevrolet passenger cars and GMC
Appellant also contends that Judge Umali signed the said decision
and Chevrolet trucks.
contrary to the provision of Section 13, Republic Act No. 1125;3 that
whereas the case was submitted for decision of the Court of Tax
Appeals on July 12, 1955, and the decision of Associate Judge
On December 20, 1948, the Liddell Motors, Inc. was organized and
Luciano and Judge Nable were both signed on August 11, 1955 (that
registered with the Securities and Exchange Commission with an
is, on the last day of the 30-day period provided for in Section 13,
authorized capital stock of P100,000 of which P20,000 was
Republic Act No. 1125), Judge Umali signed the decision August 31,
subscribed and paid for as follows: Irene Liddell wife of Frank
1955 or 20 days after the lapse of the 30-day period allotted by law.
Liddell 19,996 shares and Messrs. Marcial P. Lichauco, E. K.
Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each.
By analogy it may be said that inasmuch as in Republic Act No. 1125
(law creating the Court of Tax Appeals) like the law governing the
At about the end of the year 1948, Messrs. Manzano, Kurz and
Kernot resigned from their respective positions in the Retail Dept. of procedure in the court of Industrial Relations, there is no provision
invalidating decisions rendered after the lapse of 30 days, the
Liddell & Co. and they were taken in and employed by Liddell
Motors, Inc.: Kurz as Manager-Treasurer, Manzano as General Sales requirement of Section 13, Republic Act No. 1125 should be
construed as directory.4
Manager for cars and Kernot as General Sales Manager for trucks.
Beginning January, 1949, Liddell & Co. stopped retailing cars and
trucks; it conveyed them instead to Liddell Motors, Inc. which in turn
sold the vehicles to the public with a steep mark-up. Since then,
Liddell & Co. paid sales taxes on the basis of its sales to Liddell
Motors Inc. considering said sales as its original sales.

Besides as pointed out by appellee, the third paragraph of Section 13

of Republic Act No. 1125 (quoted in the margin)5 confirms this view;
because in providing for two thirty-day periods, the law means that
decision may still be rendered within the second period of thirty days
(Judge Umali signed his decision within that period).

Upon review of the transactions between Liddell & Co. and Liddell
Motors, Inc. the Collector of Internal Revenue determined that the
latter was but an alter ego of Liddell & Co. Wherefore, he concluded,
that for sales tax purposes, those sales made by Liddell Motors, Inc.
to the public were considered as the original sales of Liddell & Co.
Accordingly, the Collector of Internal Revenue assessed against
Liddell & Co. a sales tax deficiency, including surcharges, in the
amount of P1,317,629.61. In the computation, the gross selling price
of Liddell Motors, Inc. to the general public from January 1, 1949 to
September 15, 1950, was made the basis without deducting from the
selling price, the taxes already paid by Liddell & Co. in its sales to
the Liddell Motors Inc.

B. Identity of the two corporations: On the question whether or not

Liddell Motors, Inc. is the alter ego of Liddell & Co. Inc., we are
fully convinced that Liddell & Co. is wholly owned by Frank Liddell.
As of the time of its organization, 98% of the capital stock belonged
to Frank Liddell. The 20% paid-up subscription with which the
company began its business was paid by him. The subsequent
subscriptions to the capital stock were made by him and paid with his
own money.

The Court of Tax Appeals upheld the position taken by the Collector
of Internal Revenue.
A. Judge Umali: Appellant urges the disqualification on of Judge
Roman M. Umali to participate in the decision of the instant case
because he was Chief of the Law Division, then Acting Deputy
Collector and later Chief Counsel of the Bureau of Internal Revenue
during the time when the assessment in question was made.1 In
refusing to disqualify himself despite admission that had held the
aforementioned offices, Judge Umali stated that he had not in any
way participated, nor expressed any definite opinion, on any question

These stipulations and conditions appear in Exhibit A: (1) that Frank

Liddell had the authority to designate in the future the employee who
could receive earnings of the corporation; to apportion among the
stock holders the share in the profits; (2) that all certificates of stock
in the names of the employees should be deposited with Frank Liddell
duly indorsed in blank by the employees concerned; (3) that each
employee was required to sign an agreement with the corporation to
the effect that, upon his death or upon his retirement or separation for
any cause whatsoever from the corporation, the said corporation
should, within a period of sixty days therefor, have the absolute and
exclusive option to purchase and acquire the whole of the stock
interest of the employees so dying, resigning, retiring or separating.

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Corporation Code 3
These stipulations in our opinion attest to the fact that Frank Liddell
also owned it. He supplied the original his complete control over the
corporation.

Under the law in force at the time of its incorporation the sales tax on
original sales of cars (sections 184, 185 and 186 of the National
Internal Revenue Code), was progressive, i.e. 10% of the selling price
of the car if it did not exceed P5000, and 15% of the price if more
than P5000 but not more than P7000, etc. This progressive rate of the
As to Liddell Motors, Inc. we are fully persuaded that Frank Liddell
also owned it. He supplied the original capital funds.6 It is not proven sales tax naturally would tempt the taxpayer to employ a way of
that his wife Irene, ostensibly the sole incorporator of Liddell Motors, reducing the price of the first sale. And Liddell Motors, Inc. was the
medium created by Liddell & Co. to reduce the price and the tax
Inc. had money of her own to pay for her P20,000 initial
7
liability.
subscription. Her income in the United States in the years 1943 and
1944 and the savings therefrom could not be enough to cover the
amount of subscription, much less to operate an expensive trade like Let us illustrate: a car with engine motor No. 212381 was sold by
the retail of motor vehicles. The alleged sale of her property in
Liddell & Co. Inc. to Liddell Motors, Inc. on January 17, 1948 for
Oregon might have been true, but the money received therefrom was P4,546,000.00 including tax; the price of the car was P4,133,000.23,
never shown to have been saved or deposited so as to be still
the tax paid being P413.22, at 10%. And when this car was later sold
available at the time of the organization of the Liddell Motors, Inc.
(on the same day) by Liddell Motors, Inc. to P.V. Luistro for P5500,
no more sales tax was paid.11 In this price of P5500 was included the
P413.32 representing taxes paid by Liddell & Co. Inc. in the sale to
The evidence at hand also shows that Irene Liddell had scant
participation in the affairs of Liddell Motors, Inc. She could hardly be Liddell Motors, Inc. Deducting P413.32 representing taxes paid by
said to possess business experience. The income tax forms record no Liddell & Co., Inc. the price of P5500, the balance of P5,087.68
would have been the net selling price of Liddell & Co., Inc. to the
independent income of her own. As a matter of fact, the checks that
general public (had Liddell Motors, Inc. not participated and
represented her salary and bonus from Liddell Motors, Inc. found
intervened in the sale), and 15% sales tax would have been due. In
their way into the personal account of Frank Liddell. Her frequent
this transaction, P349.68 in the form of taxes was evaded. All the
absences from the country negate any active participation in the
other transactions (numerous) examined in this light will inevitably
affairs of the Motors company.
reveal that the Government coffers had been deprived of a sizeable
amount of taxes.
There are quite a series of conspicuous circumstances that militate
against the separate and distinct personality of Liddell Motors, Inc.
from Liddell & Co.8 We notice that the bulk of the business of Liddell
& Co. was channeled through Liddell Motors, Inc. On the other hand,
Liddell Motors, Inc. pursued no activities except to secure cars,
trucks, and spare parts from Liddell & Co. Inc. and then sell them to
the general public. These sales of vehicles by Liddell & Co. to
Liddell Motors, Inc. for the most part were shown to have taken place
on the same day that Liddell Motors, Inc. sold such vehicles to the
public. We may even say that the cars and trucks merely touched the
hands of Liddell Motors, Inc. as a matter of formality.

As opined in the case of Gregory v. Helvering,12 "the legal right of a

taxpayer to decrease the amount of what otherwise would be his
taxes, or altogether avoid them by means which the law permits,
cannot be doubted." But, as held in another case,13 "where a
corporation is a dummy, is unreal or a sham and serves no business
purpose and is intended only as a blind, the corporate form may be
ignored for the law cannot countenance a form that is bald and a
mischievous fiction."
Consistently with this view, the United States Supreme Court14 held
that "a taxpayer may gain advantage of doing business thru a
corporation if he pleases, but the revenue officers in proper cases,
may disregard the separate corporate entity where it serves but as a
shield for tax evasion and treat the person who actually may take the
benefits of the transactions as the person accordingly taxable."

During the first six months of 1949, Liddell & Co. issued ten (10)
checks payable to Frank Liddell which were deposited by Frank
Liddell in his personal account with the Philippine National Bank.
During this time also, he issued in favor of Liddell Motors, Inc. six
(6) checks drawn against his personal account with the same bank.
The checks issued by Frank Liddell to the Liddell Motors, Inc. were
significantly for the most part issued on the same day when Liddell & Thus, we repeat: to allow a taxpayer to deny tax liability on the
Co. Inc. issued the checks for Frank Liddell9 and for the same
ground that the sales were made through an other and distinct
amounts.
corporation when it is proved that the latter is virtually owned by the
former or that they are practically one and the same is to sanction a
circumvention of our tax laws.15
It is of course accepted that the mere fact that one or more
corporations are owned and controlled by a single stockholder is not
of itself sufficient ground for disregarding separate corporate entities. C. Tax liability computation: In the Yutivo case16 the same question
Authorities10 support the rule that it is lawful to obtain a corporation
involving the computation of the alleged deficiency sales tax has been
charter, even with a single substantial stockholder, to engage in a
raised. In accordance with our ruling in said case we hold as correctly
specific activity, and such activity may co-exist with other private
stated by Judge Nable in his concurring and dissenting opinion on
activities of the stockholder. If the corporation is a substantial one,
this case, that the deficiency sales tax should be based on the selling
conducted lawfully and without fraud on another, its separate identity price obtained by Liddell Motors, Inc. to the public AFTER
is to be respected.
DEDUCTING THE TAX ALREADY PAID BY LIDDELL & CO.,
INC. in its sales to Liddell Motors, Inc.
Accordingly, the mere fact that Liddell & Co. and Liddell Motors,
Inc. are corporations owned and controlled by Frank Liddell directly On the imposition of the 50% surcharge by reason of fraud, we see
or indirectly is not by itself sufficient to justify the disregard of the
that the transactions between Liddell Motors Inc. and Liddell & Co.,
separate corporate identity of one from the other. There is, however,
Inc. have always been embodied in proper documents, constantly
in this instant case, a peculiar consequence of the organization and
subject to inspection by the tax authorities. Liddell & Co., Inc. have
activities of Liddell Motors, Inc.

105

Corporation Code 3
always made a full report of its income and receipts in its income tax
returns.
Paraphrasing our decision in the Yutivo case, we may now say, in
filing its return on the basis of its sales to Liddell Motors, Inc. and not
on those by the latter to the public, it cannot be held that the Liddell
& Co., Inc. deliberately made a false return for the purpose of
defrauding the government of its revenue, and should suffer a 50%
surcharge. But penalty for late payment (25%) should be imposed.
In view of the foregoing, the decision appealed from is hereby
modified: Liddell & Co., Inc. is declared liable only for the amount of
P426,811.67 with 25% surcharge for late payment and 6% interest
thereon from the time the judgment becomes final.
As it appears that, during the pendency of this litigation appellant
paid under protest to the Government the total amount assessed by the
Collector, the latter is hereby required to return the excess to the
petitioner. No costs.

106

Corporation Code 3
G.R. No. L-22614

August 29, 1969

RAMIREZ TELEPHONE CORPORATION, petitioner,

vs.
BANK OF AMERICA, E.F. HERBOSA, THE SHERIFF OF
MANILA and THE COURT OF APPEALS,respondents.

conseguir decision favorable alli el 14 de Octubre, 1950,

pero en la vispera de la promulgacion de la sentencia a su
favor habia ya conseguido mandamiento de embargo
preventivo contra Ramirez, Exh. A, y el mismo, servido al
Bank of America el 13 de Octubre, 1950, Exh. 2, lease como
sigue:

Quijano and Arroyo, for petitioner.

Lichauco, Picazo and Agcaoili for respondent Bank of America.
Vicente M. Magpoc for respondent E.F. Herbosa.
Fiscal Eulogio S. Serrano for respondent Sheriff of Manila.

Civil Case No. 10620

E.F. Herbosa, Plaintiff

CAPISTRANO, J.:

Ruben R. Ramirez, Defendant

This is a petition for review on certiorari of a decision of the Court of

Appeals of February 27, 1964, wherein the judgment of the lower
court was reversed and another entered dismissing the complaint of
plaintiff, now petitioner, Ramirez Telephone Corporation, and
ordering it to pay to defendant, now respondent, Bank of America, the
sum of P500.00 and to the third-party defendant E.F. Herbosa, now
likewise respondent, the same amount, both in the concept of
attorney's fees, the costs being adjudged likewise against petitioner.
The judgment of the Court of First Instance which was reversed by
the Court of Appeals reads as follows:1

To: Bank of America

Manila

In view of the foregoing considerations, judgment is hereby

rendered in favor of the plaintiff and against the defendant
Bank of America ordering the latter to pay the former the
sum of P3,000.00 in the form of actual damages, and to pay
the costs of these proceedings.
Likewise, judgment is hereby rendered sentencing the thirdparty defendant, E.F. Herbosa, to indemnify or reimburse the
third-party plaintiff, Bank of America, any sum or sums
which the latter may pay the plaintiff by virtue of this
judgment.
The third-party complaint against the Sheriff of Manila as
well as the counterclaim of defendant Bank of America and
third-party defendant E.F. Herbosa are hereby ordered
dismissed.
The facts as found by the Court of Appeals, which we cannot review
are set forth in its decision, thus:2
Resultando: Que los hechos al parecer, no son muy
embrollados; el demandado, Herbosa era y es dueno del
edificio No. 612, Int. 3 Sta. Mesa; se lo habia dado en
arrendamiento a Ruben R. Ramirez, y como este era el
presidente de la Ramirez Telephone Corporation, el taller de
la corporacion aunque su oficina central estaba en la Escolta,
Natividad Building, Exh. D. fue trasladado al local: pero
habiendose amontonado los alquilares sin pagar, Herbosa
presento demanda de desahucio contra Ramirez en el
Juzgado Municipal de Manila el 10 de Noviembre, 1949, y
elevada la causa al Juzgado del 1.a Instancia, Herbosa pudo

-- versus --

GARNISHMENT

Greetings:
You and each of you are hereby notified that, by virtue of an
order of attachment issued by the Court of First Instance of
Manila, copy of which is hereto attached, levy is hereby
made (or attachment is hereby levied) upon all the goods,
effects, interests, credits, money, stocks, shares, any interests
in stocks and shares and all debts owing by you to the
defendant, Ruben R. Ramirez ---------, in the above entitled
case, and any other personal property in your possession or
under your control, belonging to the said defendant --------on this date, to cover the amount of P2,400.00 and specially
the ... .
xxx

xxx

xxx

Manila, Philippines, October 13, 1950

MACARIO M. OFILADA
Sheriff of Manila
(Exh. 2);
y fue contestado por el banco el mismo dia de la siguiente
manera:
Dear Sir:
In reply to your Garnishment of October 13, 1950, issued
under the above-subject case, we wish to inform you that we
do not hold any fund in the name of the defendant, Ruben R.
Ramirez.
Yours very truly, (Exh. 3);
pero el Sheriff reitero el embargo el 17 de Octubre, 1950,
Exh. B, notificando al Bank of America de que quedaba
embargado,

107

Corporation Code 3
"... the interest or participation which the defendant
Ruben R. Ramirez may or might have in the deposit
of the Ramirez Telephone, Inc., with that Bank
sufficient to cover the said amount of P2,400.00";
Exh. B; y
la institucion bancaria en contestacion al Sheriff, de fecha 17
de Octubre, 1950 o sea el mismo dia, hizo constar que:
"... we are holding the amount of P2,400.00 in the
name of the Ramirez Telephone, Inc. subject to
your further orders," Exh. G;

no personal deposit in that bank and that the

Ramirez Telephone Corporation is entirely a
distinct and separate entity regardless of the fact
that Ruben R. Ramirez happens to be its President
and General Manager.' par. 4, demanda; y alegando
que con motivo de ello y la siguiente devolucion de
su cheque a favor de la Ray Electronics sin pagar,
esta habia cancelado su pedido para los equipos
necesarios en la construccion de sus lineas
telefonicas en la region bicolana, asi que todas sus
operaciones se habian quedado paralizadas, par.
5 id.; la demandada Bank of America, emplazada
de la demandada, presento mocion de
sobresimiento, que denegada, el 4 de Diciembre,
1950, el banco sometio su contestacion el 23 de
Diciembre, 1950 con reconvencion para despues
presentar demanda contra el Sheriff, el 25 de
Agosto, 1953, y Contra Herbosa, el 16 de Agosto,
1955; y este ultimo a su vez en contestacion,
presento contra reclamacion o mejor dicho,
reconvencion contra la misma demandante,
Ramirez Telephone, y tambien contra el Bank of
America, el 10 de Septiembre, 1955, y el Juzgado
Inferior, despues de la vista, como ya se ha dicho,
dictamino en favor de la demandante contra el
Bank of America en la contra-demanda de este
contra aquel; ... ."

es decir acato la notificacion del embargo de los fondos de la

Ramirez Telephone; ahora bien, recuerdase de que en
aquella fecha, 17 de Octubre, 1950, es Ramirez Telephone
tenia en deposito con el Bank of America, la suma de
P4,789.53, Exh. 9; de manera que con el embargo, se redujo
los fondos libres a la cantidad de P2,389.53; pero el dia
siguiente, el Ramirez Telephone retiro la suma de P1,500.00,
quedando por tanto como ultimo balance, nada mas que unos
P889.00; de esto surgio la presente contienda, pues, el 19 de
Octubre, 1950, la Ramirez Telephone por medio de su
presidente, el mismo demandado, Ruben Ramirez, ya
mencionado, habiendo expedido el 19 de Octubre, 1950, otro
cheque en la suma de P2,320.00 a favor de la Ray
Electronics, en pago de ciertos equipos vendidos por este
ultimo, Exhs. 15, 17, L, el cheque Exh. N, este cheque al ser
3
presentado a la Bank of America, fue rechazado por lo que el It was further found by the Court of Appeals:
abogado de la Ramirez Telephone el 23 de Octubre, 1950,
Considerando: Que el testimonio de Estanislao Herbosa al
envio carta de requerimiento al Bank of America, Exh. 14,
efecto de que; si bien Ruben R. Ramirez era su inquilino al
manifestando que su cliente habia sufrido "considerable
principio, pero es que mas tarde, este lo habia manifestado
damage and embarrassment," y advirtiendole que si no se le
que "the shop of company was established downstairs," e
diera completa satisfaccion el dia siguiente, el presentaria la
decir que la Ramirez Telephone Corporation a la verdad
demanda correspondiente, "without further notice," Exh. 14;
ocupaba el local alquilado, tanto que Ruben R. Ramirez solia
esta carta la contesto la institucion bancaria el 24 de
pagar el alquilar en cheques de la Ramirez Telephone
Octubre, 1950, alegando que,
Corporation, y esta declaracion, t.n. 10 y 11, 25 June 1956,
estando corroborada no solamente por el Exh. 12, en donde
"With reference to your letter dated October 23,
Ruben R. Ramirez, en papel con el embrete de la Ramirez
1950, in which you are writing in behalf of the
Telephone, habia enviado el abogado de Herbosa, el cheque
Ramirez Telephone Corporation, it is suggested that
No. C-78900, manifestando en la carta de que:
you obtain a release from the Court on Civil Case
No. 10620, Ruben E. Ramirez, defendant.
In accordance with your agreement yesterday with
my attorney, Mr. Jose L. de Leon, I am sending you
"This Bank is acting only in accordance with the
herewith check No. C-78900 for the amount of
garnishment and has no interest whatsoever in the
P812.60, rentals for the premises I am occupying at
funds held," Exh. 15;
the rate of P161.00 a month for the period from
February 1, 1949 to June 30, 1949, both dates,
pero conforme con su advertencia, el abogado dela Ramirez
inclusive, plus P7.00 for the court costs.' Exh. 12;
Telephone, Inc., incoo esta accion el 28 de Octubre, cuatro
dias despues; y el motivo deaccion se de hace consistir en
que el banco,
"... knows or should have known that Ruben N.
Ramirez the defendant in said Civil Case and
whose property or fund was ordered attached has

y esta carta, leida en relacion con el Exh. 3, en donde se ve

que Ruben R. Ramirez y tenia fondos depositados en el
banco mencionado, Bank of America, asi que resulta
evidente que lo fondos de la Ramirez Telephone los eran a la
verdad, fondos de que buenasanta podia disponer su

108

Corporation Code 3
Presidente, Ruben R. Ramirez, para el pago de los alquilares
por el debidos a Herbosa, y luego, tambien resulta evidente
de que la casa por el alquilada Ramirez Telephone, y estos
hechos agregados el otro hecho tambien probado, de que el
75% de las acciones de la compania pertenecia a Ruben
Ramirez y su esposa Rizalina P. de Ramirez, Exh. E, todos
estos no pueden menos de justificar la conclusion de que el
embargo de los fondos de la Ramirez Telephone por y en
virtud de un mandamiento judicial de embargo contra Ruben
R. Ramirez, especialmente teniendo en cuenta que el
embargo solo abarcaba,

an entity separate and distinct from its major stockholders, Ruben R.

Ramirez and his wife, was not to be disregarded even if they did own
75% of the stock of the corporation. 6 The conclusion that would thus
emerge, in petitioner's opinion, is that its funds as a corporation
cannot be garnished to satisfy the debts of a principal stockholder.

While respect for the corporate personality as such is the general rule,
there are exceptions. In appropriate cases, the veil of corporate fiction
may be pierced. From the facts as found which must remain
undisturbed, this is such a case. This assignment of error has no merit,
in view of a number of cases decided by this Court, the latest of
which is Albert v. Court of First Instance 7 reaffirming a 1965
"The interest or participation which the defendant
resolution in Albert v. University Publishing Co., Inc.8 In that
Ruben R. Ramirez may or might have in the deposit resolution, the principle is restated thus: "Even with regard to
of the Ramirez Telephone, Inc., in the amount of
corporations duly organized and existing under the law, we have in
P2,400.00" Exh. B;
many a case pierced the veil of corporate fiction to administer the
ends of justice." In support of the above principle, the following cases
cuando entonces estaba depositada la cantidad de P4,857.28, were cited: Arnold vs. Willits & Patterson, Ltd., 44 Phil. 634; Koppel
Exh. 9, era un acto de justicia a favor del acreedor Herbosa y (Phil.), Inc. vs. Yatco, 77 Phil. 496; La Campana Coffee Factory, Inc.
vs. Kaisahan ng mga Manggagawa sa La Campana, 93 Phil. 160;
a la verdad, de no haberse permitido el mencionado
Marvel Building Corporation vs. David, 94 Phil. 376; Madrigal
embargo, este se hubiera visto en igual situacion que aquel
Shipping Co., Inc. vs. Ogilvie, L-8431, Oct. 30, 1958; Laguna
pobre agraviado que como se dice vulgarmente, tras de
Transportation Co., Inc. vs. S.S.S., L-14606, April 28, 1960;
cornudo, fue apaleado; ... .
McConnel vs. C.A., L-10510, March 17, 1961; Liddel & Co., Inc. vs.
Collector of Internal Revenue, L-9687, June 30, 1961; Palacio vs.
The aforestated facts notwithstanding, which must be considered
Fely Transportation Co., L-15121, August 31, 1962. Hence, to repeat,
conclusive and binding on us, plaintiff in the lower court, now
the first assigned error cannot be sustained.
petitioner, Ramirez Telephone Corporation, as noted, appealed,
4
assigning the following alleged errors:
The next two errors assigned likewise fail to call for a reversal of the
judgment now on appeal. The second alleged error would find fault
I
with the decision because the Court of Appeals allegedly did not take
The Court of Appeals erred in not applying the settled legal into account a significant fact, namely, that only one lawyer
represented both the respondent Bank of America and respondent E.F.
principle that a corporation has a personality separate and
distinct from that of its stockholders and, therefore, the funds Herbosa. We are not called upon to consider this particular
assignment of error as it is essentially factual, which is a matter for
of a corporation cannot be reached to satisfy the debt of its
the Court of Appeals, not for us, to determine. The last assigned error
stockholders.
would in effect seek a restatement of the damages awarded petitioner
on the theory that the Court of Appeals decided the matter
II
erroneously. Since, as we made clear in the foregoing, the decision of
the Court of Appeals is in accordance with law on the facts as found,
The Court of Appeals erred in not taking into account the
this alleged error likewise is not meritorious.
significant fact that when the events that gave rise to this
case took place, the lawyer of both respondents, i.e., the
Bank of America and E.F. Herbosa, was one and the same.
III

PREMISES CONSIDERED, the judgment of the Court of Appeals of

February 27, 1964 is affirmed, with costs against petitioner Ramirez
Telephone Corporation.

The Court of Appeals erred in not granting petitioner

damages as awarded by the lower court; likewise, the Court
of Appeals erred in declaring instead that it is petitioner that
should pay respondents attorneys' fees.
Petitioner's main grievance in the first assigned error is that the Court
of Appeals disregarded its corporate personality; it relies on the
general principle "that the corporate entity will not be disregarded no
matter how large the holding a particular stockholder may have in the
corporation." 5 Petitioner would thus maintain that the personality as

109

Corporation Code 3
G.R. No. 100322 March 9, 1994

morning the reason why you don't

want to sell. 1

GUATSON INTERNATIONAL TRAVEL AND TOURS, INC.,

PHILIPPINE INTEGRATED LABOR ASSISTANCE
CORPORATION, MERCURY EXPRESS INTERNATIONAL
COURIER SERVICES, INC., petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION AND JOLLY
ALMORADIE, respondents.

IOM/88-71
Please explain in writing why did
you went (sic) to BEMIL and
who sent you there. 2
IOM-88

Generosa R. Jacinto for petitioners.

Donato H. De Castro and Rolando P. Rotairo for private respondent.

Explain in writing not later than

Monday the following:

NOCON, J.:

1. The reason why you want to be

a messenger and no more a sales
representative;

Petitioners Guatson Travel and Tours, Inc. (hereinafter referred to as

Guatson Travel), Philippine Integrated Labor Assistance Corp.
(Philac) and Mercury Express International Courier Services, Inc.
(MEREX) assail the Decision, rendered by the National Labor
Relations Commission in Case No. NLRC-NCR-00-11-0451-88
entitled "Jolly M. Almoradie v. Guatson's Travel Company, Philac
and MEREX," dated March 21, 1991 and its Resolution, dated May
31, 1991, denying the petitioners' Motion for Reconsideration.

2. That I'm always confronting

(sic) you, as what you've told me
personally;
3. Why you will not answer in
writing the memo issued to you
by Lou Cantara on 30 Apr;
xxx xxx xxx

In the questioned decision, the NLRC found that Mr. Henry Ocier's
(Vice-President and General Manager of petitioner Guatson Travel)
actuation of threatening and forcing private respondent, Jolly M.
Almoradie, to resign amounted to illegal dismissal and thus ordered
petitioners to pay private respondent backwages, computed from the
date of his dismissal on November 1988, until the decision was
rendered on February 28, 1991 or the amount of P50,328.00; and to
pay separation pay equivalent to one-half (1/2) month for every year
of service, for seven (7) years or the amount of P6,524.00.
From the records it appears that Jolly M. Almoradie was first
employed by Mercury Express International Courier Service, Inc.
(MEREX) in October, 1983 as Messenger receiving a monthly salary
of P800.00. When it closed its operations, Almoradie was absorbed
by MEREX's sister company Philippine Integrated Labor Assistance
Corp. (Philac), likewise as Messenger with an increased salary of
P1,200.00.

5. Why when you were asked last

Friday to join the Sales Blitz to
Sta. Ana you said yes and you
change (sic) your mind when you
were asked again last Saturday;
xxx xxx xxx
7. Why you have forgotten the
situation wherein you refuse (sic)
to sell a certain product
recommended by Myrna;
8. The meaning of "You pirated
me from Philac . . . 3

Within the time frame specified, Almoradie responded to each of the

In September, 1986, Almoradie was transferred to Guatson Travel,
charges, the essence of which are as follows:
allegedly also a sister company of MEREX and Philac, as Liaison
Officer with a salary of P1,864.00. Thereafter, he was promoted to the
1. It is not true that I do not want to sale (sic) the
position of Sales Representative sometime in April, 1988. On April
rates & package tour of Our Company as imputed
30, 1988, Almoradie was issued three separate memoranda as
and charge (sic), because since April, 1988 (sic)
follows:
when I was transferred from Accounting to sales
IOM/88-70
Please explain in writing within
24 hrs. or not later than Monday

department of our Company I was able to sale (sic)

almost 110 dollars to 21 passengers. The truth
however is that, I am hampered in my sales
promotion and solicitation of customer, due to
financial constraint considering that the kind and

110

Corporation Code 3
nature of work entails much expenses for which I
shouldered (sic) with my personal money. As a
matter of fact I have brought this matter to the Vice
President and General Manager if only an
appropriation be set aside for the expenses in going
around, meeting people and soliciting prospective
clients.
2. Bemil is a customer of our company. With
respect to the ticketing and booking of Bemil
passengers, undertaking (sic) by the sales
department of our company, I used to go Bemil
(sic) to inquire whether they have passengers for
booking and ticketing. As a matter of fact, I went to
Bemil to pick-up their ticketing and booking for
their passengers last Monday, April 29, 1988 (sic)
and then returned the following day, Saturday April
30, 1988, to deliver the ticket.
xxx xxx xxx
3.1. Considering that the job of sales representative
entails so much expense in the performance thereof
(sic), as I have stated in my number one (1)
explanation and I have to use my own personal
money to promote and solicit customer without any
funding of our company (sic), I have taught (sic) it
better that I like my position as messenger, that
(sic) as sales representative, although the later (sic)
position is more dignified, hence I prefer to be
entered to my messenger position.

xxx xxx xxx

3.7. I deny vehemently that I refuse to sale (sic) a
certain product recommended by Myrna de Vera
because the same is totally false. Since April 1,
1988 when I was transferred to the sales department
of our company where from the very beginning I
was briefed and taught and learned about the nature
of my job and the product to sale (sic) by Myrna
(sic) de Vera herself, I have ever since until now
ventured and performed the selling of rates and
package tour which are every products (sic) for
sales department of our company. If sometimes I
make no sales, which all sales representative suffer
and are beset such (sic), however, cannot be
considered as refusal to sale (sic). The only product
of our Company that Myrna briefed, taught and
required as to (sic) our rates and Package Tours
which I've been selling since April 1, 1988 up to
present. (sic)
xxx xxx xxx 4
On May 4, 1988, Almoradie was reverted to the position of
Messenger, yet sometime in September, 1988, he was again given the
position of Account Executive, the nature of work of which is similar
to that of a sales representative. Almoradie accepted the transfer with
the understanding that he will solely discharge the duties of an
account executive and will no longer be required to do messengerial
work.

In the morning of October 1, 1988, Almoradie was allegedly

3.2. That I admit of the often confrontation
summoned by Henry Ocier to his office and was there and then
conducted (sic) by Vice President/General Manager, forced by the latter to resign. Ocier taunted Almoradie with threats
even in the absence of my error or fault (sic) . . .
that it he will not resign, he will file charges against him which would
adversely affect his chances of getting employed in the future. Ocier
3.3. It is not true that I did not or fail to answer the allegedly even provided the pen and paper on which Almoradie wrote
and signed the resignation letter dictated by Ocier himself. 5
memo issued by Lou Cantara, since I was given
until May 2, 1988 to answer the same . . .
On that same day, Almoradie sought the help of a friend, Isagani
Mallari, who advised him to report the matter to the Barangay
xxx xxx xxx
Captain. 6 Subsequently, Almoradie filed a complaint for illegal
3.5. As scheduled, I said yes to the sales blitz to Sta. Dismissal on November 14, 1988. The Labor Arbiter, however
dismissed his case based on the following conclusions:
Ana, because in truth I am very interested in such
sales business attack since it is in connection with
In examining the facts and the arguments, it is
my function as a sales representative that will
difficult to abide by the impression that
surely enhance and sharpen my sales acumen, but if
complainant was forced to resign. Apart from the
I was not able to join it is not the reason my change
averment of respondent Guatson that Mr. Ocier was
of mind (sic), but because the Viceout of town when the resignation letter was
President/General Manager of Our Company,
executed that he just saw the resignation letter
Henry Ocier summoned me to his office and had a
when he arrived. 7There is reason to believe that
very lengthy confrontation of me (sic), and when I
complainant apparently defied the order for his
go out (sic) after the confrontation to join the sales
transfer or designation as account executive earlier
blitz-krieg to Sta. Ana last Saturday, April 30, 1988,
before he executed his resignation letter.
Mr. Oscar Vanderlipe who heads the sales Group
(sic) were (sic) already gone.

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Corporation Code 3
It must be concluded that his designation as account
executive is a management prerogative which under
the circumstance is untainted with any unfair labor
practice. Apparently, complainant resented his
resignation without any plausible or cogent reason
as he had earlier resented to be a sales
representative for which he was made to explain the
reasons why. The only graceful exit to the
complainant was to execute his letter of resignation.
As his letter of resignation shows, it was executed
in his own handwriting spontaneously out of his
own free will. 8
Upon Almoradie's appeal, the NLRC reversed the decision of the
Labor Arbiter on his finding that complainant was not forced to
resign, anchoring its conclusion to the fact that Almoradie was a
permanent employee who has been working for the Ocier's for five
long years; that he was receiving a fairly good salary considering that
he is single; that he had no potential employer at the time of his
resignation; that there was no evidence to show that Mr. Henry Ocier
was indeed not in town on October 1, 1988, when he allegedly forced
Almoradie to resign; and his reaction immediately after his forced
resignation by seeking the assistance of a friend who was placed in a
similar situation before and in reporting the incident to the Barangay
Chairman to seek redress.

Intimidation may vitiate consent when the following requisites are

present: (1) that the intimidation caused the consent to be given; 2)
that the threatened act be unjust or unlawful; 3) that the threat be real
or serious, there being evident disproportion between the evil and the
resistance which all man can offer, leading to the choice of doing that
act which is forced on the person to do as the lesser evil; and 4) that it
produces a well-grounded fear from the fact that the person from
whom it comes has the necessary means or ability to inflict the
threatened injury to his person or property. 9
The moment that a person by whom respect and reverence are due
should wrongly exert pressure upon his subordinates, amounting to
intimidation in the manner stated in the Lichauco de Leon
case, supra, in order to exact from said subordinates an act against
their will, the same is enough to vitiate consent.
Henry Ocier did not only say that he will file charges against
Almoradie and that he has a good lawyer but he even threatened to
block his future employment should the latter not file his resignation.
This threat is not farfetched. Almoradie is not even a college
graduate. 10 With his limited skills and the scarcity of employment
opportunities it would really be difficult for him to find a job.
Considering further the influence of Mr. Henry Ocier and his capacity
to make good his threat by refusing to give a favorable
recommendation on Almoradie's performance, the latter is helpless in
not complying with the former's demand for his resignation.

The issue therefore, boils down to the question of whether Jolly

Almoradie was indeed illegally dismissed by being forced to resign in Anent NLRC's grant of separation pay and backwages to private
the manner narrated by him.
respondent Jolly M. Almoradie, petitioners argues that the companies,
Guatson Travel Company, Philac Merex have separate and distinct
From a synthesis of the evidence on record, we fully agree with the
legal personalities such that the latter companies should not be held
finding of the NLRC that Jolly Almoradie's resignation was NOT
liable; assuming, for the sake of argument that private respondent was
voluntary. The NLRC did not err in disregarding the conclusions
illegally dismissed.
reached by the Labor Arbiter because the latter's findings are not
supported by substantial evidence.
We uphold the NLRC. The three companies are owned by one family,
such that majority of the officers of the companies are the same. The
It appears that as early as April, 1988, when Almoradie was promoted companies are located in one building and use the same messengerial
as Sales Representative he had caught the ire of management, so
service. Moreover, there was no showing that private respondent was
much so that he was issued no less than three memoranda on one day paid separation pay when he was absorbed by Philac upon closure of
ordering him to answer certain charges. Why he was again promoted Merex; nor was there evidence that he resigned from Philac when he
to the position of Account Executive after he was reverted back to the transferred to Guatson Travel. Under the doctrine of piercing the veil
rank of a messenger from being a Sales Representative is rather
of corporate fiction, when valid ground exists, the legal fiction that a
intriguing, unless it was a scheme of management to really rid him
corporation is an entity with a juridical personality separate and
from the company. Apparently, Almoradie is not cut out for a sales
distinct from its members or stockholders may be disregarded. We
job, and hence could be dismissed or forced to resign for failing to
have applied this doctrine in the case of "Philippine Scout Veterans
make good on his job on sales. On the other hand, it would be
Security and Investigation Agency (PSVSIA), et al. v. The Hon.
difficult to dismiss him while being a messenger since he is a
Secretary of Labor," G.R. No. 92357, July 21, 1993.
permanent employee and there would not be enough basis to make
him resign.
Where there is a finding of illegal dismissal, the employee is entitled
to both reinstatement and award of backwages from the time the
We do not agree with petitioners' proposition that Mr. Ocier's mere
compensation was withheld, in this case in 1988, up to a maximum of
utterances of the words "I will file charges against you," and "I have a three years, applying the Mercury Drug Rule. 11
very good lawyer," do not constitute force or coercion as to vitiate the
free will of Almoradie in writing his resignation letter.
Reinstatement, however, will not be required not only for the reason
that it was not prayed for by the respondent, but also because the
relationship between Almoradie and Ocier had become strained as to

112

Corporation Code 3
preclude a harmonious working relationship. In lieu of reinstatement,
separation pay is awarded. 12 As the term suggests, separation pay is
the amount that an employee receives at the time of his severance
from the service and is designed to provide the employee with the
wherewithal during the period that he is looking for another
employment. 13
However the award of separation pay should be, as we have
consistently ruled, equivalent to one (1) month for every year of
service, 14 instead of one-half (1/2) month as awarded by the NLRC.
In the computation of separation pay, the three (3) year period
wherein backwages are awarded, must be included. 15
WHEREFORE, the decision of the NLRC is hereby MODIFIED to
the extent that the award of backwages should be computed based on
a three-year period, while the separation pay of one month for every
year of service should be computed from the time petitioner was
employed by Merex and should include the three-year period as
backwages. The petition is hereby DISMISSED for lack of merit.
SO ORDERED.

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Corporation Code 3
G.R. No. 108734 May 29, 1996
CONCEPT BUILDERS, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First
Division); and Norberto Marabe; Rodolfo Raquel, Cristobal
Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr.,
Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut,
Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe
Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres,
Felipe Basilan, and Ruben Robalos, respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal,

unfair labor practice and non-payment of their legal holiday pay,
overtime pay and thirteenth-month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered
judgment 1 ordering petitioner to reinstate private respondents and to
pay them back wages equivalent to one year or three hundred
working days.
On November 27, 1985, the National Labor Relations Commission
(NLRC) dismissed the motion for reconsideration filed by petitioner
on the ground that the said decision had already become final and
executory. 2

HERMOSISIMA, JR., J.:p

On October 16, 1986, the NLRC Research and Information

Department made the finding that private respondents' back wages
amounted to P199,800.00. 3

The corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or of
another corporation. Where badges of fraud exist; where public
convenience is defeated; where a wrong is sought to be justified
thereby, the corporate fiction or the notion of legal entity should come
to naught. The law in these instances will regard the corporation as a
mere association of persons and, in case of two corporations, merge
them into one.

On October 29, 1986, the Labor Arbiter issued a writ of execution

directing the sheriff to execute the Decision, dated December 19,
1984. The writ was partially satisfied through garnishment of sums
from petitioner's debtor, the Metropolitan Waterworks and Sewerage
Authority, in the amount of P81,385.34. Said amount was turned over
to the cashier of the NLRC.

Thus, where a sister corporation is used as a shield to evade a

corporation's subsidiary liability for damages, the corporation may
not be heard to say that it has a personality separate and distinct from
the other corporation. The piercing of the corporate veil comes into
play.
This special civil action ostensibly raises the question of whether the
National Labor Relations Commission committed grave abuse of
discretion when it issued a "break-open order" to the sheriff to be
enforced against personal property found in the premises of
petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with
principal office at 355 Maysan Road, Valenzuela, Metro Manila, is
engaged in the construction business. Private respondents were
employed by said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual
written notices of termination of employment by petitioner, effective
on November 30, 1981. It was stated in the individual notices that
their contracts of employment had expired and the project in which
they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of
the termination of private respondent's employment, the project in
which they were hired had not yet been finished and completed.
Petitioner had to engage the services of sub-contractors whose
workers performed the functions of private respondents.

On February 1, 1989, an Alias Writ of Execution was issued by the

Labor Arbiter directing the sheriff to collect from herein petitioner the
sum of P117,414.76, representing the balance of the judgment award,
and to reinstate private respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to
serve the alias writ of execution on petitioner through the security
guard on duty but the service was refused on the ground that
petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the
Labor Arbiter issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as
stated in his progress report, dated November 2, 1989:
1. All the employees inside petitioner's premises at 355 Maysan Road,
Valenzuela, Metro Manila, claimed that they were employees of
Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from
removing the properties he had levied upon. 4
The said special sheriff recommended that a "break-open order" be
issued to enable him to enter petitioner's premises so that he could
proceed with the public auction sale of the aforesaid personal
properties on November 7, 1989.

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Corporation Code 3
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party
claim with the Labor Arbiter alleging that the properties sought to be
levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI)
of which he is the Vice-President.

Dennis S. Cuyegkeng Assistant to

the President

On November 23, 1989, private respondents filed a "Motion for

Issuance of a Break-Open Order," alleging that HPPI and petitioner
corporation were owned by the same incorporator/stockholders. They
also alleged that petitioner temporarily suspended its business
operations in order to evade its legal obligations to them and that
private respondents were willing to post an indemnity bond to answer
for any damages which petitioner and HPPI may suffer because of the
issuance of the break-open order.

Virgilio O. Casino Corporate

Secretary

In support of their claim against HPPI, private respondents presented

duly certified copies of the General Informations Sheet, dated May
15, 1987, submitted by petitioner to the Securities Exchange
Commission (SEC) and the General Information Sheet, dated May
25, 1987, submitted by HPPI to the Securities and Exchange
Commission.
The General Information Sheet submitted by the petitioner revealed
the following:

Elisa O. Lim Treasurer

4. Principal Office
355 Maysan Road
Valenzuela, Metro Manila. 5
On the other hand, the General Information Sheet of HPPI revealed
the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount
Subscribed
Antonio W. Lim P 400,000.00

1. Breakdown of Subscribed Capital

Elisa C. Lim 57,700.00

Name of Stockholder Amount Subscribed

AWL Trading 455,000.00

HPPI P 6,999,500.00

Dennis S. Cuyegkeng 40,100.00

Antonio W. Lim 2,900,000.00

Teodulo R. Dino 100.00

Dennis S. Cuyegkeng 300.00

Virgilio O. Casino 100.00

Elisa C. Lim 100,000.00

2. Board of Directors

Teodulo R. Dino 100.00

Antonio W. Lim Chairman

Virgilio O. Casino 100.00

Elisa C. Lim Member

2. Board of Directors

Dennis S. Cuyegkeng Member

Antonio W. Lim Chairman

Virgilio O. Casino Member

Dennis S. Cuyegkeng Member

Teodulo R. Dino Member

Elisa C. Lim Member

3. Corporate Officers

Teodulo R. Dino Member

Antonio W. Lim President

Virgilio O. Casino Member

Dennis S. Cuyegkeng Assistant to

the President

3. Corporate Officers
Antonio W. Lim President

Elisa C. Lim Treasurer

115

Corporation Code 3
Virgilio O. Casino Corporate
Secretary
4. Principal Office
355 Maysan Road, Valenzuela,
Metro Manila. 6
On February 1, 1990, HPPI filed an Opposition to private
respondents' motion for issuance of a break-open order, contending
that HPPI is a corporation which is separate and distinct from
petitioner. HPPI also alleged that the two corporations are engaged in
two different kinds of businesses, i.e., HPPI is a manufacturing firm
while petitioner was then engaged in construction.

The conditions under which the juridical entity may be disregarded

vary according to the peculiar facts and circumstances of each case.
No hard and fast rule can be accurately laid down, but certainly, there
are some probative factors of identity that will justify the application
of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership
of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and
records.
4. Methods of conducting the business. 13

On March 2, 1990, the Labor Arbiter issued an Order which denied

private respondents' motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992,
the NLRC set aside the order of the Labor Arbiter, issued a breakopen order and directed private respondents to file a bond. Thereafter,
it directed the sheriff to proceed with the auction sale of the
properties already levied upon. It dismissed the third-party claim for
lack of merit.
Petitioner moved for reconsideration but the motion was denied by
the NLRC in a Resolution, dated December 3, 1992.
Hence, the resort to the present petition.

The SEC en banc explained the "instrumentality rule" which the

courts have applied in disregarding the separate juridical personality
of corporations as follows:
Where one corporation is so organized and
controlled and its affairs are conducted so that it is,
in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the
"instrumentality" may be disregarded. The control
necessary to invoke the rule is not majority or even
complete stock control but such domination of
instances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will
or existence of its own, and is but a conduit for its
principal. It must be kept in mind that the control
must be shown to have been exercised at the time
the acts complained of took place. Moreover, the
control and breach of duty must proximately cause
the injury or unjust loss for which the complaint is
made.

Petitioner alleges that the NLRC committed grave abuse of discretion

when it ordered the execution of its decision despite a third-party
claim on the levied property. Petitioner further contends, that the
doctrine of piercing the corporate veil should not have been applied,
in this case, in the absence of any showing that it created HPPI in
order to evade its liability to private respondents. It also contends that
HPPI is engaged in the manufacture and sale of steel, concrete and
iron pipes, a business which is distinct and separate from petitioner's The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
construction business. Hence, it is of no consequence that petitioner
and HPPI shared the same premises, the same President and the same
set of officers and subscribers. 7
1. Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
We find petitioner's contention to be unmeritorious.
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
It is a fundamental principle of corporation law that a corporation is
time no separate mind, will or existence of its own;
an entity separate and distinct from its stockholders and from other
8
corporations to which it may be connected. But, this separate and
2. Such control must have been used by the
distinct personality of a corporation is merely a fiction created by law
9
defendant to commit fraud or wrong, to perpetuate
for convenience and to promote justice. So, when the notion of
the violation of a statutory or other positive legal
separate juridical personality is used to defeat public convenience,
duty or dishonest and unjust act in contravention of
justify wrong, protect fraud or defend crime, or is used as a device to
10
plaintiff's legal rights; and
defeat the labor laws, this separate personality of the corporation
11
may be disregarded or the veil of corporate fiction pierced. This is
true likewise when the corporation is merely an adjunct, a business
3. The aforesaid control and breach of duty must
conduit or an alter ego of another corporation. 12
proximately cause the injury or unjust loss
complained of.

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Corporation Code 3
The absence of any one of these elements prevents
"piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts
are concerned with reality and not form, with how
the corporation operated and the individual
defendant's relationship to that operation. 14
Thus the question of whether a corporation is a mere alter ego, a mere
sheet or paper corporation, a sham or a subterfuge is purely one of
fact. 15
In this case, the NLRC noted that, while petitioner claimed that it
ceased its business operations on April 29, 1986, it filed an
Information Sheet with the Securities and Exchange Commission on
May 15, 1987, stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet
stating that its office address is at 355 Maysan Road, Valenzuela,
Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by
the same Virgilio O. Casio as the corporate
secretary of both corporations. It would also not be
amiss to note that both corporations had
the same president, thesame board of directors,
the same corporate officers, and substantially
the same subscribers.

were owned and controlled by petitioner Eduardo

Claparols and there was no break in the succession
and continuity of the same business. This
"avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of
stock of the Claparols Steel Corporation (the
second corporation) was owned by respondent . . .
Claparols himself, and all the assets of the
dissolved Claparols Steel and Nail plant were
turned over to the emerging Claparols Steel
Corporation.
It is very obvious that the second corporation seeks
the protective shield of a corporate fiction whose
veil in the present case could, and should, be
pierced as it was deliberately and maliciously
designed to evade its financial obligation to its
employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy
upon the property subject of the execution, private respondents had
no other recourse but to apply for a break-open order after the thirdparty claim of HPPI was dismissed for lack of merit by the NLRC.
This is in consonance with Section 3, Rule VII of the NLRC Manual
of Execution of Judgment which provides that:
Should the losing party, his agent or representative,
refuse or prohibit the Sheriff or his representative
entry to the place where the property subject of
execution is located or kept, the judgment creditor
may apply to the Commission or Labor Arbiter
concerned for a break-open order.

From the foregoing, it appears that, among other

things, the respondent (herein petitioner) and the
third-party claimant shared the same address and/or
premises. Under this circumstances, (sic) it cannot Furthermore, our perusal of the records shows that the twin
be said that the property levied upon by the sheriff requirements of due notice and hearing were complied with.
Petitioner and the third-party claimant were given the opportunity to
were not of respondents. 16
submit evidence in support of their claim.
Clearly, petitioner ceased its business operations in order to evade the
Hence, the NLRC did not commit any grave abuse of discretion when
payment to private respondents of back wages and to bar their
reinstatement to their former positions. HPPI is obviously a business it affirmed the break-open order issued by the Labor Arbiter.
conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to
Finally, we do not find any reason to disturb the rule that factual
petitioner corporation.
findings of quasi-judicial agencies supported by substantial evidence
are binding on this Court and are entitled to great respect, in the
absence of showing of grave abuse of a discretion. 18
The facts in this case are analogous to Claparols v. Court of
1
Industrial Relations, 7 where we had the occasion to rule:
WHEREFORE, the petition is DISMISSED and the assailed
resolutions of the NLRC, dated April 23, 1992 and December 3,
Respondent court's findings that indeed the
1992, are AFFIRMED.
Claparols Steel and Nail Plant, which ceased
operation of June 30, 1957, was SUCCEEDED by
the Claparols Steel Corporation effective the next
SO ORDERED.
day, July 1, 1957, up to December 7, 1962, when
the latter finally ceased to operate, were not
disputed by petitioner. It is very clear that the latter
corporation was a continuation and successor of the
first entity . . . . Both predecessors and successor

117

Corporation Code 3
G.R. No. L-28694 May 13, 1981

On August 7, 1967, his widow, respondent Leonila S. Gatus, filed a

"Notice and Claim for Compensation" with Regional Office No. 4,
TELEPHONE ENGINEERING & SERVICE COMPANY, INC., Quezon City Sub-Regional Office, Workmen's Compensation
Section, alleging therein that her deceased husband was an employee
petitioner,
of TESCO, and that he died of liver cirrhosis. 1 On August 9, 1967,
vs.
and Office wrote petitioner transmitting the Notice and for
WORKMEN'S COMPENSATION COMMISSION,
Compensation, and requiring it to submit an Employer's Report of
PROVINCIAL SHERIFF OF RIZAL and LEONILA SANTOS
GATUS, for herself and in behalf of her minor children, Teresita, Accident or Sickness pursuant to Section 37 of the Workmen's
Compensation Act (Act No. 3428). 2 An "Employer's Report of
Antonina and Reynaldo, all surnamed GATUS, respondents.
Accident or Sickness" was thus submitted with UMACOR indicated
as the employer of the deceased. The Report was signed by Jose Luis
Santiago. In answer to questions Nos. 8 and 17, the employer stated
that it would not controvert the claim for compensation, and admitted
MELENCIO-HERRERA, J.:1wph1.t
that the deceased employee contracted illness "in regular
occupation." 3 On the basis of this Report, the Acting Referee
These certiorari proceedings stem from the award rendered against
petitioner Telephone Engineering and Services, Co., Inc. (TESCO) on awarded death benefits in the amount of P5,759.52 plus burial
expenses of P200.00 in favor of the heirs of Gatus in a letter-award
October 6, 1967 by the Acting Referee of Regional Office No. 4,
dated October 6, 1967 4 against TESCO.
Quezon City Sub-Regional Office, Workmen's Compensation
Section, in favor of respondent Leonila S. Gatus and her children,
dependents of the deceased employee Pacifico L. Gatus. The
principal contention is that the award was rendered without
jurisdiction as there was no employer-employee relationship between
petitioner and the deceased.
Petitioner is a domestic corporation engaged in the business of
manufacturing telephone equipment with offices at Sheridan Street,
Mandaluyong, Rizal. Its Executive Vice-President and General
Manager is Jose Luis Santiago. It has a sister company, the Utilities
Management Corporation (UMACOR), with offices in the same
location. UMACOR is also under the management of Jose Luis
Santiago.
On September 8, 1964, UMACOR employed the late Pacifica L.
Gatus as Purchasing Agent. On May 16, 1965, Pacifico L. Gatus was
detailed with petitioner company. He reported back to UMACOR on
August 1, 1965. On January 13, 1967, he contracted illness and
although he retained to work on May 10, 1967, he died nevertheless
on July 14, 1967 of "liver cirrhosis with malignant degeneration."

Replying on October 27, 1967, TESCO, through Jose Luis Santiago,

informed the Acting Referee that it would avail of the 15-days-notice
given to it to state its non-conformity to the award and contended that
the cause of the illness contracted by Gatus was in no way aggravated
by the nature of his work. 5
On November 6, 1967, TESCO requested for an extension of ten days
within which to file a Motion for Reconsideration, 6 and on
November 15, 1967, asked for an additional extension of five
days. 7 TESCO filed its "Motion for Reconsideration and/or Petition
to Set Aside Award" on November 18, 1967, alleging as grounds
therefor, that the admission made in the "Employer's Report of
Accident or Sickness" was due to honest mistake and/or excusable
negligence on its part, and that the illness for which compensation is
sought is not an occupational disease, hence, not compensable under
the law. 8 The extension requested was denied. The Motion for
Reconsideration was likewise denied in an Order issued by the Chief
of Section of the Regional Office dated December 28,
1967 9 predicated on two grounds: that the alleged mistake or
negligence was not excusable, and that the basis of the award was not
the theory of direct causation alone but also on that of aggravation.
On January 28, 1968, an Order of execution was issued by the same
Office.
On February 3, 1968, petitioner filed an "Urgent Motion to Compel
Referee to Elevate the Records to the Workmen's Compensation
Commission for Review." 10 Meanwhile, the Provincial Sheriff of
Rizal levied on and attached the properties of TESCO on February
17, 1968, and scheduled the sale of the same at public auction on
February 26, 1968. On February 28, 1968, the Commission issued an
Order requiring petitioner to submit verified or true copies of the
Motion for Reconsideration and/or Petition to Set Aside Award and
Order of December 28, 1967, and to show proof that said Motion for
Reconsideration was filed within the reglementary period, with the
warning that failure to comply would result in the dismissal of the
Motion. However, before this Order could be released, TESCO filed
with this Court, on February 22, 1968, The present petition for

118

Corporation Code 3
"Certiorari with Preliminary Injunction" seeking to annul the award
and to enjoin the Sheriff from levying and selling its properties at
public auction.

and/or Petition to Set Aside Award," and in its "Urgent Motion to

Compel the Referee to Elevate Records to the Commission for
Review," petitioner represented and defended itself as the employer
of the deceased. Nowhere in said documents did it allege that it was
On February 29, 1968, this Court required respondents to answer the not the employer. Petitioner even admitted that TESCO and
Petition but denied Injunction. 11 TESCO'S Urgent Motion dated April UMACOR are sister companies operating under one single
2, 1968, for the issuance of a temporary restraining order to enjoin the management and housed in the same building. Although respect for
the corporate personality as such, is the general rule, there are
Sheriff from proceeding with the auction sale of its properties was
exceptions. In appropriate cases, the veil of corporate fiction may be
denied in our Resolution dated May 8, 1968.
pierced as when the same is made as a shield to confuse the legitimate
issues. 16
TESCO asserts: 1wph1.t
I. That the respondent Workmen's Compensation
Commission has no jurisdiction nor authority to
render the award (Annex 'D', Petition) against your
petitioner there being no employer-employee
relationship between it and the deceased Gatus;
II. That petitioner can never be estopped from
questioning the jurisdiction of respondent
commission especially considering that jurisdiction
is never conferred by the acts or omission of the
parties;
III. That this Honorable Court has jurisdiction to
nullify the award of respondent commission.
TESCO takes the position that the Commission has no jurisdiction to
render a valid award in this suit as there was no employer-employee
relationship between them, the deceased having been an employee of
UMACOR and not of TESCO. In support of this contention,
petitioner submitted photostat copies of the payroll of UMACOR for
the periods May 16-31, 1967 and June 1-15, 1967 12 showing the
name of the deceased as one of the three employees listed under the
Purchasing Department of UMACOR. It also presented a photostat
copy of a check of UMACOR payable to the deceased representing
his salary for the period June 14 to July 13, 1967. 13

While, indeed, jurisdiction cannot be conferred by acts or omission of

the parties, TESCO'S denial at this stage that it is the employer of the
deceased is obviously an afterthought, a devise to defeat the law and
evade its obligations. 17 This denial also constitutes a change of theory
on appeal which is not allowed in this jurisdiction. 18Moreover, issues
not raised before the Workmen's Compensation Commission cannot
be raised for the first time on appeal. 19 For that matter, a factual
question may not be raised for the first time on appeal to the Supreme
Court. 20
This certiorari proceeding must also be held to have been prematurely
brought. Before a petition for certiorari can be instituted, all remedies
available in the trial Court must be exhausted first. 21 certiorari cannot
be resorted to when the remedy of appeal is present. 22 What is sought
to be annulled is the award made by the Referee. However, TESCO
did not pursue the remedies available to it under Rules 23, 24 and 25
of the Rules of the Workmen's Compensation Commission, namely,
an appeal from the award of the Referee, within fifteen days from
notice, to the Commission; a petition for reconsideration of the latter's
resolution, if adverse, to the Commission en banc; and within ten
days from receipt of an unfavorable decision by the latter, an appeal
to this Court. As petitioner had not utilized these remedies available
to it, certiorari win not he, it being prematurely filed. As this Court
ruled in the case of Manila Jockey Club, Inc. vs. Del Rosario, 2
SCRA 462 (1961). 1wph1.t
An aggrieved party by the decision of a
Commissioner should seek a reconsideration of the
decision by the Commission en banc. If the
decision is adverse to him, he may appeal to the
Supreme Court. An appeal brought to the Supreme
Court without first resorting to the remedy referred
to is premature and may be dismissed.

Both public and private respondents contend, on the other hand, that
TESCO is estopped from claiming lack of employer employee
relationship.
To start with, a few basic principles should be re-stated the existence
of employer-employee relationship is the jurisdictional foundation for
recovery of compensation under the Workmen's Compensation
Law. 14 The lack of employer-employee relationship, however, is a
matter of defense that the employer should properly raise in the
proceedings below. The determination of this relationship involves a
finding of fact, which is conclusive and binding and not subject to
review by this Court. 15
Viewed in the light of these criteria, we note that it is only in this
Petition before us that petitioner denied, for the first time, the
employer-employee relationship. In fact, in its letter dated October
27, 1967 to the Acting Referee, in its request for extension of time to
file Motion for Reconsideration, in its "Motion for Reconsideration

Although this rule admits of exceptions, as where public welfare and

the advancement of public policy so dictate, the broader interests of
justice so require, or where the Orders complained of were found to
be completely null and void or that the appeal was not considered the
appropriate remedy, 23 the case at bar does not fan within any of these
exceptions. WHEREFORE, this Petition is hereby dismissed.
SO ORDERED.

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Corporation Code 3
G.R. No. L-23586

March 20, 1968

A. D. SANTOS, INC., petitioner,

vs.
VENTURA VASQUEZ, respondent.
Emiliano S. Samson and R. Balderrama-Samson for petitioner.
Orlando L. Espinas for respondent.
SANCHEZ, J.:
Respondent Ventura Vasquez was petitioner's taxi driver.
Sometime on December 22 or 23, 1961, at about 11:00 a.m., while
driving petitioner's taxicab, he vomitted blood. Aside from his
hemoptysis, he suffered back pains, fever and headache. He reported
to petitioner the fact of his having vomitted blood. He was sent to
petitioner company's physician, Dr. Roman, who treated him and sent
him to Sto. Tomas Hospital where he was confined for six days.
Thereafter, he was admitted at the Quezon Institute. There he stayed
until March 19, 1962 under the medical care of Dr. Mario Lirag. Dr.
Lirag diagnosed his ailment as pulmonary tuberculosis, moderately
advanced in both lungs. Upon his discharge on March 19, 1962, he
was clinically improved. His X-ray examination, however, showed
the same finding, i.e., PTB, moderately advanced. He has not
resumed work.
Offshoot of the foregoing is respondent's claim filed on May 9,
1962 with the Workmen's Compensation Commission. 1 In affirming
the decision of the Hearing Officer, the Commission ordered
petitioner:
1. To pay the claimant, thru this Commission, the sum of
THREE THOUSAND SEVEN HUNDRED THIRTY-TWO
and 30/100 (P3,732.30) PESOS as compensation as of
August 11, 1964, and P27.30 thereafter up to a period of 208
weeks, but in no case said amount of compensation exceed
P4,000.00;
2. To reimburse the claimant, thru this Commission, the sum
of P53.60 which he had actually spent for his treatment;
3. To provide claimant continuous medical, surgical and
hospital services and supplies as his illness may warrant;
4. To pay the claimant, also thru this Commission, the sum
of P277.92 as Attorney's fees; and
5. To pay the Commission the sum of P43.00 as costs based
on the amount of compensation already due the claimant as
of August 11, 1964, and P1.00 for every hundred pesos
which may accrue in his favor as weekly compensation
pursuant to Section 55 of the Act.
The case is now before us on review.

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Corporation Code 3
Two questions are raised by petitioner: (1) respondent's claim
should have been dismissed for his failure to file the notice of injury
and claim for compensation required by Section 24 of the Workmen's
Compensation Act; and (2) the claim for compensation is directed
against Amador Santos, not against petitioner.

claimant was its taxi driver. Add to this is the fact that the claimant
contracted pulmonary tuberculosis by reason of his said employment.
And respondent's cause of action against petitioner is complete.

But petitioner, cites the fact that respondent driver, in the

course of his testimony, mentioned that he worked for the City Cab
1. Sickness manifested itself on December 22 or 23, 1961.
operated by Amador Santos. This will not detract from the validity of
Claim was filed on May 9, 1962. Petitioner argues that by Section 24 respondent's right to compensation. For, the truth is that really at one
of the Workmen's Compensation Act, the claim should be thrown out time Amador Santos was the sole owner and operator of the City Cab.
of court. Because, according to petitioner, such claim was not filed
It was subsequently transferred to petitioner A.D. Santos, Inc. in
within two months following illness.
which Amador Santos was an officer. The mention by respondent of
Amador Santos as his employer in the course of his testimony, in the
words of this Court in Sugay vs. Reyes, L-20451, December 28, 1964,
Petitioner's case must fail. Stabilized jurisprudence is that
"should not be allowed to confuse the facts relating to employerfailure of the employer to file with the Commission notice of
employee relationship" for "when the veil of corporate fiction is made
controversion set forth in the second paragraph of Section 45 of the
as a shield to perpetrate a fraud and/or confuse legitimate issues
Workmen's Compensation Act is a waiver of the defense that the
claim for compensation was not filed within the statutory period and a (here, the relation of employer-employee), the same should be
pierced."
forfeiture of the employer's right to controvert the claim. Petitioner
here knew of respondent's illness. Yet, it did not controvert
respondent's right to compensation. Constructively, such failure is an
For the reasons given, the decision under review is hereby
2
admission that the claim is compensable.
affirmed.1wph1.t
2. Petitioner's averment that respondent driver had no cause of
action against petitioner is equally without merit. Respondent's claim
for compensation herein is directed against petitioner A.D. Santos,
Inc. Petitioner, in answer to the claim, categorically admitted that

Costs against petitioner. So ordered.

121