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GRACE CHRISTIAN HIGH SCHOOL, petitioner,vs. THE COURT OF APPEALS,
GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO
L. GO, respondents.
G.R. No. 108905 October 23, 1997
MENDOZA, J.:
Petitioner Grace Christian High School is an educational institution located
at the Grace Village in Quezon City, while Private respondent Grace Village
Association, Inc. ["Association'] is an organization of lot and/or building
owners, lessees and residents at Grace Village.
The original 1968 by-laws provide that the Board of Directors, composed of
eleven (11) members, shall serve for one (1) year until their successors are
duly elected and have qualified.
On 20 December 1975, a committee of the board of directors prepared a
draft of an amendment to the
by-laws which provides that "GRACE CHRISTIAN HIGH SCHOOL
representative is a permanent
Director of the ASSOCIATION."
However, this draft was never presented to the general membership for
approval. Nevertheless, from 1975 to 1990, petitioner was given a
permanent seat in the board of directors of the association.
On 13 February 1990, the association's committee on election sought to
change the by-laws and informed the Petitioner's school principal "the
proposal to make the Grace Christian High School representative as a
permanent director of the association, although previously tolerated in the
past elections should be reexamined."
Following this advice, notices were sent to the members of the association
that the provision on election of directors of the 1968 by-laws of the
association would be observed. Petitioner requested the chairman of the
election committee to change the notice to honor the 1975 by-laws
provision, but was denied.
The school then brought suit for mandamus in the Home Insurance and
Guaranty Corporation (HIGC) to compel the board of directors to recognize
its right to a permanent seat in the board.
Meanwhile, the opinion of the SEC was sought by the association, and SEC
rendered an opinion to the effect that the practice of allowing unelected
members in the board was contrary to the existing by-laws of the
association and to §92 of the Corporation Code (B.P. Blg. 68). This was
adopted by the association in its Answer in the mandamus filed with the
HIGC.
The HIGC hearing officer ruled in favor of the association, which decision
was affirmed by the HIGC Appeals Board and the Court of Appeals.
Issue: W/N the 1975 provision giving the petitioner a permanent board seat
was valid.
Ruling: No.
Section 23 of the Corporation Code (and its predecessor Section 28 and 29
of the Corporation Law) leaves no room for doubt that the Board of
Directors of a Corporation must be elected from among the stockholders or
members.
There may be corporations in which there are unelected members in the
board but it is clear that in these instances, the unelected members sit as ex
officio members, i.e., by virtue of and for as long as they hold a particular
office (e.g. whoever is the Archbishop of Manila is considered a member of
the board of Cardinal Santos Memorial Hospital, Inc.)
But in the case of petitioner, there is no reason at all for its representative
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to be given a seat in the board. Nor does petitioner claim a right to such
seat by virtue of an office held. In fact it was not given such seat in the
beginning. It was only in 1975 that a proposed amendment to the by-laws
sought to give it one.

Since the provision in question is contrary to law, the fact that it has gone
unchallenged for fifteen years cannot forestall a later challenge to its
validity. Neither can it attain validity through acquiescence because, if it is
contrary to law, it is beyond the power of the members of the association to
waive its invalidity.

It is more accurate to say that the members merely tolerated petitioner's

representative and tolerance cannot be considered ratification.

Nor can petitioner claim a vested right to sit in the board on the basis of
"practice." Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law.

MARC II MARKETING, INC. VS. JOSON FACTS
Before petitioner corporation was officially incorporated, respondent has
already been engaged by petitioner Lucila, in her capacity as President of
Marc Marketing, Inc., to work as the General Manager of petitioner
corporation. It was formalized through the execution of a Management
Contract under the letterhead of Marc Marketing, Inc. as petitioner
corporation is yet to be incorporated at the time of its execution. It was
explicitly provided therein that respondent shall be entitled to 30% of its net
income for his work as General Manager. Respondent will also be granted
30% of its net profit to compensate for the possible loss of opportunity to
work overseas. On 15 August 1994, petitioner corporation was officially
incorporated and registered with the SEC. Accordingly, Marc Marketing, Inc.
was made non-operational. Respondent continued to discharge his duties as
General Manager under petitioner corporation. Pursuant to Section 1,
Article IV of petitioner corporation’s by-laws, its corporate officers are as
follows: Chairman, President, one or more Vice-President(s), Treasurer and
Secretary. Its Board of Directors, however, may, from time to time, appoint
such other officers as it may determine to be necessary or proper. Per an
undated Secretary’s Certificate, petitioner corporation’s Board of Directors
conducted a meeting on 29 August 1994 where respondent was appointed
as one of its corporate officers with the designation or title of General
Manager to function as a managing director with other duties and
responsibilities that the Board of Directors may provide and authorized.
Nevertheless, on 30 June 1997, petitioner corporation decided to stop and
cease its operations due to poor sales collection aggravated by the
inefficient management of its affairs. On the same date, it formally informed
respondent of the cessation of its business operation. Concomitantly,
respondent was apprised of the termination of his services as General
Manager since his services as such would no longer be necessary for the
winding up of its affairs. Feeling aggrieved, respondent filed a Complaint for
Reinstatement and Money Claim against petitioners before the Labor
Arbiter. On 1 October 2001, the Labor Arbiter rendered his Decision in favor
of respondent. Aggrieved, petitioners appealed the aforesaid Labor Arbiters
Decision to the NLRC. In its Resolution dated 15 October 2002, the NLRC
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ruled in favor of petitioners by giving credence to the Secretary’s Certificate,
which evidenced petitioner corporations Board of Directors meeting in
which a resolution was approved appointing respondent as its corporate
officer with
designation as General Manager. Therefrom, the NLRC reversed and set
aside the Labor Arbiters Decision dated 1 October 2001 and dismissed
respondents Complaint for want of jurisdiction. When respondents Motion
for Reconsideration was denied in another Resolution dated 23 January
2003, he filed a Petition for Certiorari with the Court of Appeals ascribing
grave abuse of discretion on the part of the NLRC. On 20 June 2005, the
Court of Appeals rendered its Decision declaring that the Labor Arbiter has
jurisdiction over the present controversy. It upheld the finding of the Labor
Arbiter that respondent was a mere employee of petitioner corporation,
who has been illegally dismissed from employment without valid cause and
without due process. Nevertheless, it ordered the records of the case
remanded to the NLRC for the determination of the appropriate amount of
monetary awards to be given to respondent. Hence, this Petition.
Petitioners fault the Court of Appeals for having sustained the Labor
Arbiters finding that respondent was not a corporate officer under
petitioner corporations by-laws. They insist that there is no need to amend
the corporate by-laws to specify who its corporate officers are. The
resolution issued by petitioner corporations Board of Directors appointing
respondent as General Manager, coupled with his assumption of the said
position, positively made him its corporate officer. More so, respondents
position, being a creation of petitioner corporations Board of Directors
pursuant to its by-laws, is a corporate office sanctioned by the Corporation
Code and the doctrines previously laid down by this Court. Thus,
respondents removal as petitioner corporations General Manager involved
a purely intra-corporate controversy over which the RTC has jurisdiction.
ISSUE Whether the respondent, as the General Manager of petitioner
corporation, is a corporate officer or a mere employee. RULING The
respondent is a mere employee of the respondent corporation. In Easycall
Communications Phils., Inc. v. King, this Court held that in the context of

Presidential Decree No. 902-A, corporate officers are those officers of a
corporation who are given that character either by the Corporation Code or
by the corporations by-laws. Section 25 of the Corporation Code specifically
enumerated who are these corporate officers, to wit: (1) president; (2)
secretary; (3) treasurer; and (4) such other officers as may be provided for
in the by-laws.
The aforesaid Section 25 of the Corporation Code, particularly the phrase
such other officers as may be provided for in the by-laws, has been clarified
and elaborated in this Courts recent pronouncement in Matling Industrial
and Commercial Corporation v. Coros, where it held that a position must be
expressly mentioned in the [b]y-[l]aws in order to be considered as a
corporate office. Thus, the creation of an office pursuant to or under a [b]y-
[l]aw enabling provision is not enough to make a position a corporate office.
Thus, pursuant to the above provision (Section 25 of the Corporation Code),
whoever are the corporate officers enumerated in the by-laws are the
exclusive Officers of the corporation and the Board has no power to create
other Offices without amending first the corporate [b]y-laws. However, the
Board may create appointive positions other than the positions of corporate
Officers, but the persons occupying such positions are not considered as
corporate officers within the meaning of Section 25 of the Corporation Code
and are not empowered to exercise the functions of the corporate Officers,
except those functions lawfully delegated to them. Their functions and
duties are to be determined by the Board of Directors/Trustees. A careful
perusal of petitioner corporations by-laws would explicitly reveal that its
corporate officers are composed only of: (1) Chairman; (2) President; (3)
one or more VicePresident; (4) Treasurer; and (5) Secretary. The position of
General Manager was not among those enumerated. Paragraph 2, Section
1, Article IV of petitioner corporations by-laws, empowered its Board of
Directors to appoint such other officers as it may determine necessary or
proper. It is by virtue of this enabling provision that petitioner corporations
Board of Directors allegedly approved a resolution to make the position of
General Manager a corporate office, and, thereafter, appointed respondent
thereto making him one of its corporate officers. All of these acts were done
without first amending its by-laws so as to include the General Manager in
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its roster of corporate officers. With the given circumstances and in
conformity with Matling Industrial and Commercial Corporation v. Coros,
this Court rules that respondent was not a corporate officer of petitioner
corporation because his position as General Manager was not specifically
mentioned in the roster of corporate officers in its corporate by-laws. The
enabling clause in petitioner corporations bylaws empowering its Board of
Directors to create additional officers, i.e., General Manager, and the
alleged subsequent passage of a board resolution to that effect cannot
make such position a corporate office. Matling clearly enunciated that the
board of directors has no power to create other corporate offices without
first amending the corporate by-laws so as to include therein the newly
created corporate office. Though the board of directors may create
appointive positions other than the positions of corporate officers, the
persons occupying such positions cannot be viewed as corporate officers
under Section 25 of the Corporation Code. In view thereof, this
Court holds that unless and until petitioner corporations by-laws is
amended for the inclusion of General Manager in the list of its corporate
officers, such position cannot be considered as a corporate office within the
realm of Section 25 of the Corporation Code. Definition of Intra-Corporate
Disputes Under Section 5 of Presidential Decree No. 902-A, intra-corporate
controversies are those controversies arising out of intra-corporate or
partnership relations, between and among stockholders, members or
associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and
the State insofar as it concerns their individual franchise or right to exist as
such entity. It also includes controversies in the election or appointments of
directors, trustees, officers or managers of such corporations, partnerships
or associations. Accordingly, in determining whether the SEC (now the RTC)
has jurisdiction over the controversy, the status or relationship of the
parties and the nature of the question that is the subject of their
controversy must be taken into consideration.

LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC.,
petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCE AND
GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO,
respondents.
G.R. No. 117188 August 7, 1997
ROMERO, J.:
Loyola Grand Villas Homeowners Association, Inc. (LGVHAI) was organized
on 8 February 1983 as the homeoenwers' association for Loyola Grand
Villas. It was also registered as the sole homeowners' association in the said
village with the Home Financing Corporation (which eventually became
Home Insurance Guarantee Corporation ["HIGC"]). However, the association
was not able file its corporate by-laws.
The LGVHAI officers then tried to registered its By-Laws in 1988, but they
failed to do so. They then discovered that there were two other
homeowners' organizations within the subdivision - the Loyola Grand Villas
Homeowners (North) Association, Inc. [North Association] and herein
Petitioner Loyola Grand Villas Homeowners (South) Association, Inc.["South
Association].
Upon inquiry by the LGVHAI to HIGC, it was discovered that LGVHAI was
dissolved for its failure to submit its by-laws within the period required by
the Corporation Code and for its non-user of corporate charter because
HIGC had not received any report on the association's activities. These
paved the way for the formation of the North and South Associations.
LGVHAI then lodged a complaint with HIGC Hearing Officer Danilo Javier,
and questioned the revocation of its registration. Hearing Officer Javier
ruled in favor of LGVHAI, revoking the registration of the North and South
Associations.
Petitioner South Association appealed the ruling, contending that LGVHAI's
failure to file its by-laws within the period prescribed by Section 46 of the
Corporation Code effectively automatically dissolved the corporation. The
Appeals Board of the HIGC and the Court of Appeals both rejected the
contention of the Petitioner affirmed the decision of Hearing Officer Javier.
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Issue: W/N LGVHAI's failure to file its by-laws within the period prescribed
by Section 46 of the Corporation Code had the effect of automatically
dissolving the said corporation.
Ruling: No.
The pertinent provision of the Corporation Code that is the focal point of
controversy in this case states:
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code,
must within one (1) month after receipt of official notice of the issuance of
its certificate of incorporation by the Securities and Exchange Commission,
adopt a code of by-laws for its government not inconsistent with this Code.
Ordinarily, the word "must" connotes an imposition of duty which must be
enforced. However, the word "must" in a statute, like "shall," is not always
imperative. It may be consistent with an ecercise of discretion. If the
language of a statute, considered as a whole with due regard to its nature
and object, reveals that the legislature intended to use the words "shall"
and "must" to be directory, they should be given that meaning.
The legislative deliberations of the Corporation Code reveals that it was not
the intention of Congress to automatically dissolve a corporation for failure
to file the By-Laws on time.
Moreover, By-Laws may be necessary to govern the corporation, but By-
Laws are still subordinate to the Articles of Incorporation and the
Corporation Code. In fact, there are cases where By-Laws are unnecessary
to the corporate existence and to the valid exercise of corporate powers.
The Corporation Code does not expressly provide for the effects of non-
filing of By-Laws. However, these have been rectified by Section 6 of PD
902-A which provides that SEC shall possess the power to suspend or
revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations upon failure to file By-Laws within the required
period.
This shows that there must be notice and hearing before a corporation is
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dissolved for failure to file its By-Laws. Even assuming that the existence of a
ground, the penalty is not necessarily revocation, but may only be
suspension.

By-Laws are indispensable to corporations, since they are required by law

for an orderly management of corporations. However, failure to file them
within the period prescribed does not equate to the automatic dissolution
of a corporation.

hina Banking Corporation vs CA Case Digest
China Banking Corporation vs. Court of Appeals
[GR 117604, 26 March 1997]
Facts: On 21 August 1974, Galicano Calapatia, Jr., a stockholder of Valley
Golf & Country Club, Inc. (VGCCI), pledged his Stock Certificate 1219 to
China Banking Corporation (CBC). On 16 September 1974, CBC wrote VGCCI
requesting that the pledge agreement be recorded in its books. In a letter
dated 27 September 1974, VGCCI replied that the deed of pledge executed
by Calapatia in CBC's favor was duly noted in its corporate books. On 3
August 1983, Calapatia obtained a loan of P20,000.00 from CBC, payment of
which was secured by the pledge agreement still existing between Calapatia
and CBC. Due to Calapatia's failure to pay his obligation, CBC, on 12 April
1985, filed a petition for extrajudicial foreclosure before Notary Public
Antonio T. de Vera of Manila, requesting the latter to conduct a public
auction sale of the pledged stock. On 14 May 1985, CBC informed VGCCI of
the foreclosure proceedings and requested that the pledged stock be
transferred to its name and the same be recorded in the corporate books.
However, on 15 July 1985, VGCCI wrote CBC expressing its inability to
accede to CBC's request in view of Calapatia's unsettled accounts with the
club. Despite the foregoing, Notary Public de Vera held a public auction on
17 September 1985 and CBC emerged as the highest bidder at P20,000.00
for the pledged stock. Consequently, CBC was issued the corresponding
certificate of sale.
On 21 November 1985, VGCCI sent Calapatia a notice demanding full
payment of his overdue account in the amount of P18,783.24. Said notice
was followed by a demand letter dated 12 December 1985 for the same
amount and another notice dated 22 November 1986 for P23,483.24. On 4
December 1986, VGCCI caused to be published in the newspaper Daily
Express a notice of auction sale of a number of its stock certificates, to be
held on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's
own share of stock (Stock Certificate 1219). Through a letter dated 15
December 1986, VGCCI informed Calapatia of the termination of his
membership due to the sale of his share of stock in the 10 December 1986
auction. On 5 May 1989, CBC advised VGCCI that it is the new owner of
Calapatia's Stock Certificate 1219 by virtue of being the highest bidder in the
17 September 1985 auction and requested that a new certificate of stock be
issued in its name. On 2 March 1990, VGCCI replied that "for reason of
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delinquency" Calapatia's stock was sold at the public auction held on 10
December 1986 for P25,000.00. On 9 March 1990, CBC protested the sale by
VGCCI of the subject share of stock and thereafter filed a case with the
Regional Trial Court of Makati for the nullification of the 10 December 1986
auction and for the issuance of a new stock certificate in its name. On 18
June 1990, the Regional Trial Court of Makati dismissed the complaint for
lack of jurisdiction over the subject matter on the theory that it involves an
intra-corporate dispute and on 27 August 1990 denied CBC's motion for
reconsideration. On 20 September 1990, CBC filed a complaint with the
Securities and Exchange Commission (SEC) for the nullification of the sale of
Calapatia's stock by VGCCI; the cancellation of any new stock certificate
issued pursuant thereto; for the issuance of a new certificate in petitioner's
name; and for damages, attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision
in favor of VGCCI, stating in the main that considering that the said share is
delinquent, VGCCI had valid reason not to transfer the share in the name of
CBC in the books of VGCCI until liquidation of delinquency. Consequently,
the case was dismissed. On 14 April 1992, Hearing Officer Perea denied
CBC's motion for reconsideration. CBC appealed to the SEC en banc and on 4
June 1993, the Commission issued an order reversing the decision of its
hearing officer; holding that CBC has a prior right over the pledged share
and because of pledgor's failure to pay the principal debt upon maturity,
CBC can proceed with the foreclosure of the pledged share; declaring that
the auction sale conducted by VGCCI on 10 December 1986 is declared NULL
and VOID; and ordering VGCCI to issue another membership certificate in
the name of CBC. VGCCI sought reconsideration of the order. However, the
SEC denied the same in its resolution dated 7 December 1993. The sudden
turn of events sent VGCCI to seek redress from the Court of Appeals. On 15
August 1994, the Court of Appeals rendered its decision nullifying and
setting aside the orders of the SEC and its hearing officer on ground of lack
of jurisdiction over the subject matter and, consequently, dismissed CBC's
original complaint. The Court of Appeals declared that the controversy
between CBC and VGCCI is not intra-corporate; nullifying the SEC orders and
dismissing CBC’s complaint. CBC moved for reconsideration but the same
was denied by the Court of Appeals in its resolution dated 5 October 1994.
CBC filed the petition for review on certiorari.
Issue: Whether CBC is bound by VGCCI's by-laws.
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Held: In order to be bound, the third party must have acquired knowledge Herein, the subscription for the share in question has been fully paid as
of the pertinent by-laws at the time the transaction or agreement between evidenced by the issuance of Membership Certificate 1219. What Calapatia
said third party and the shareholder was entered into. Herein, at the time owed the corporation were merely the monthly dues. Hence, Section 63
the pledge agreement was executed. VGCCI could have easily informed CBC does not apply.
of its by-laws when it sent notice formally recognizing CBC as pledgee of one
of its shares registered in Calapatia's name. CBC's belated notice of said by-
laws at the time of foreclosure will not suffice. By-laws signifies the rules
and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its stockholders
or members and directors and officers with relation thereto and among
themselves in their relation to it. In other words, by-laws are the relatively
permanent and continuing rules of action adopted by the corporation for its
own government and that of the individuals composing it and having the
direction, management and control of its affairs, in whole or in part, in the
management and control of its affairs and activities. The purpose of a by-
law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and,
although adopted pursuant to statutory authority, have no status as public
law. Therefore, it is the generally accepted rule that third persons are not
bound by by-laws, except when they have knowledge of the provisions
either actually or constructively. For the exception to the general accepted
rule that third persons are not bound by by-laws to be applicable and
binding upon the pledgee, knowledge of the provisions of the VGCCI By-laws
must be acquired at the time the pledge agreement was contracted.
Knowledge of said provisions, either actual or constructive, at the time of
foreclosure will not affect pledgee's right over the pledged share. Article
2087 of the Civil Code provides that it is also of the essence of these
contracts that when the principal obligation becomes due, the things in
which the pledge or mortgage consists maybe alienated for the payment to
the creditor. Further, VGCCI's contention that CBC is duty-bound to know its
by-laws because of Article 2099 of the Civil Code which stipulates that the
creditor must take care of the thing pledged with the diligence of a good
father of a family, fails to convince. CBC was never informed of Calapatia's
unpaid accounts and the restrictive provisions in VGCCI's by-laws.
Furthermore, Section 63 of the Corporation Code which provides that "no
shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation" cannot be utilized by
VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from
unpaid subscription, and not to any indebtedness which a subscriber or
stockholder may owe the corporation arising from any other transaction."
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