GONZALES VS.
PNB writing, for a copy of excerpts from said records or minutes, at
FACTS: Petitioner Ramon A. Gonzales instituted in the
erstwhile Court of First Instance of Manila a special civil action
for mandamus against the herein respondent praying that the
latter be ordered to allow him to look into the books and
records of the respondent bank in order to satisfy himself as to
the truth of the published reports that the respondent has
guaranteed the obligation of Southern Negros Development
Corporation in the purchase of a US$ 23 million sugar-mill to
be financed by Japanese suppliers and financiers; that the
respondent is financing the construction of the P 21 million
Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and
the construction of Passi Sugar Mill at Iloilo by the Honiron
Philippines, Inc., as well as to inquire into the validity of Id
transactions. The petitioner has alleged hat his written request
for such examination was denied by the respondent. The trial
court having dismissed the petition for mandamus, the instant
appeal to review the said dismissal was filed.
The court a quo denied the prayer of the petitioner that he be
allowed to examine and inspect the books and records of the
respondent bank regarding the transactions mentioned on the
grounds that the right of a stockholder to inspect the record of
the business transactions of a corporation granted under
Section 51 of the former Corporation Law (Act No. 1459, as
amended) is not absolute, but is limited to purposes
reasonably related to the interest of the stockholder, must be
asked for in good faith for a specific and honest purpose and
not gratify curiosity or for speculative or vicious purposes; that
such examination would violate the confidentiality of the
records of the respondent bank as provided in Section 16 of its
charter, Republic Act No. 1300, as amended; and that the
petitioner has not exhausted his administrative remedies.
ISSUE: Whether Gonzales' can ask for an examination of the
books and records of PNB, in light of his ownership of one
share in the bank.
HELD: Petitioner may no longer insist on his interpretation of
Section 51 of Act No. 1459, as amended, regarding the right of
a stockholder to inspect and examine the books and records of
a corporation. The former Corporation Law (Act No. 1459, as
amended) has been replaced by Batas Pambansa Blg. 68,
otherwise known as the "Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section
51 of Act No. 1459 has been retained, but with some
modifications. The second and third paragraphs of Section 74
of Batas Pambansa Blg. 68 provide the following:
The records of all business transactions of the corporation and
the minutes of any meeting shag be open to inspection by any
director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in
1
his expense.
Any officer or agent of the corporation who shall refuse to
allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code, shall
be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense which
shall be punishable under Section 144 of this Code: Provided,
That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this
section for such action shall be imposed upon the directors or
trustees who voted for such refusal; and Provided, further,
That it shall be a defense to any action under this section that
the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any
information secured through any prior examination of the
records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate
purpose in making his demand.
As may be noted from the above-quoted provisions, among
the changes introduced in the new Code with respect to the
right of inspection granted to a stockholder are the following
the records must be kept at the principal office of the
corporation; the inspection must be made on business days;
the stockholder may demand a copy of the excerpts of the
records or minutes; and the refusal to allow such inspection
shall subject the erring officer or agent of the corporation to
civil and criminal liabilities. However, while seemingly
enlarging the right of inspection, the new Code has prescribed
limitations to the same. It is now expressly required as a
condition for such examination that the one requesting it must
not have been guilty of using improperly any information
through a prior examination, and that the person asking for
such examination must be "acting in good faith and for a
legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously
contained in Section 51, Act No. 1459, as amended, no longer
holds true under the provisions of the present law. The
argument of the petitioner that the right granted to him under
Section 51 of the former Corporation Law should not be
dependent on the propriety of his motive or purpose in asking
for the inspection of the books of the respondent bank loses
whatever validity it might have had before the amendment of
the law. If there is any doubt in the correctness of the ruling of
the trial court that the right of inspection granted under
Section 51 of the old Corporation Law must be dependent on
a showing of proper motive on the part of the stockholder
demanding the same, it is now dissipated by the clear language
of the pertinent provision contained in Section 74 of Batas
Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable
motives in seeking the inspection of the books of the
respondent bank, he has not set forth the reasons and the
purposes for which he desires such inspection, except to
satisfy himself as to the truth of published reports regarding
certain transactions entered into by the respondent bank and
to inquire into their validity. The circumstances under which
he acquired one share of stock in the respondent bank
purposely to exercise the right of inspection do not argue in
favor of his good faith and proper motivation. Admittedly he
sought to be a stockholder in order to pry into transactions
entered into by the respondent bank even before he became
a stockholder. His obvious purpose was to arm himself with
materials which he can use against the respondent bank for
acts done by the latter when the petitioner was a total stranger
to the same. He could have been impelled by a laudable sense
of civic consciousness, but it could not be said that his purpose
is germane to his interest as a stockholder.
We also find merit in the contention of the respondent bank
that the inspection sought to be exercised by the petitioner
would be violative of the provisions of its charter. (Republic Act
No. 1300, as amended.) Sections 15, 16 and 30 of the said
charter provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and
Examination of the Central Bank. — The National Bank shall be
subject to inspection by the Department of Supervision and
Examination of the Central Bank'
Sec. 16. Confidential information. —The Superintendent of
Banks and the Auditor General, or other officers designated by
law to inspect or investigate the condition of the National
Bank, shall not reveal to any person other than the President
of the Philippines, the Secretary of Finance, and the Board of
Directors the details of the inspection or investigation, nor
shall they give any information relative to the funds in its
custody, its current accounts or deposits belonging to private
individuals, corporations, or any other entity, except by order
of a Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act.—
Any director, officer, employee, or agent of the Bank, who
violates or permits the violation of any of the provisions of this
Act, or any person aiding or abetting the violations of any of
the provisions of this Act, shall be punished by a fine not to
exceed ten thousand pesos or by imprisonment of not more
than five years, or both such fine and imprisonment.
The Philippine National Bank is not an ordinary corporation.
Having a charter of its own, it is not governed, as a rule, by the
2
Corporation Code of the Philippines. Section 4 of the said Code
provides:
SEC. 4. Corporations created by special laws or charters. —
Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or
charter creating them or applicable to them. Supplemented by
the provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the
new Corporation Code with respect to the right of a
stockholder to demand an inspection or examination of the
books of the corporation may not be reconciled with the
abovequoted provisions of the charter of the respondent bank.
It is not correct to claim, therefore, that the right of inspection
under Section 74 of the new Corporation Code may apply in a
supplementary capacity to the charter of the respondent bank.
ASSOCIATED BANK, petitioner, vs. COURT OF APPEALS and
LORENZO SARMIENTO JR., respondents.
FACTS: On or about September 16, 1975 Associated Banking
Corporation and Citizens Bank and Trust Company merged to
form just one banking corporation known as Associated
Citizens Bank, the surviving bank. On or about March 10, 1981,
the Associated Citizens Bank changed its corporate name to
Associated Bank by virtue of the Amended Articles of
Incorporation. On September 7, 1977, the defendant executed
in favor of Associated Bank a promissory note whereby the
former undertook to pay the latter the sum of P2,500,000.00
payable on or before March 6, 1978. As per said promissory
note, the defendant agreed to pay interest at 14% per annum,
3% per annum in the form of liquidated damages,
compounded interests, and attorneys fees, in case of litigation
equivalent to 10% of the amount due. The defendant, to date,
still owes plaintiff bank the amount of P2,250,000.00 exclusive
of interest and other charges. Despite repeated demands the
defendant failed to pay the amount due.
[T]he defendant denied all the pertinent allegations in the
complaint and alleged as affirmative and[/]or special defenses
that the complaint states no valid cause of action; that the
plaintiff is not the proper party in interest because the
promissory note was executed in favor of Citizens Bank and
Trust Company; that the promissory note does not accurately
reflect the true intention and agreement of the parties; that
terms and conditions of the promissory note are onerous and
must be construed against the creditor-payee bank; that
several partial payments made in the promissory note are not
properly applied; that the present action is premature; that as
compulsory counterclaim the defendant prays for attorneys
fees, moral damages and expenses of litigation.
On May 22, 1986, the defendant was declared as if in default
for failure to appear at the Pre-Trial Conference despite due
notice.
the trial court ordered Respondent Sarmiento to pay the bank
his remaining balance plus interests and attorneys fees.
ISSUE: Whether Associated Bank, the surviving corporation,
may enforce the promissory note made by private
respondent in favor of CBTC, the absorbed company, after
the merger agreement had been signed.
HELD: Ordinarily, in the merger of two or more existing
corporations, one of the combining corporations survives and
continues the combined business, while the rest are dissolved
and all their rights, properties and liabilities are acquired by the
surviving corporation.[10] Although there is a dissolution of the
absorbed corporations, there is no winding up of their affairs
or liquidation of their assets, because the surviving corporation
automatically acquires all their rights, privileges and powers,
as well as their liabilities.[11]
The merger, however, does not become effective upon the
mere agreement of the constituent corporations. The
procedure to be followed is prescribed under the Corporation
Code.[12]Section 79 of said Code requires the approval by the
Securities and Exchange Commission (SEC) of the articles of
merger which, in turn, must have been duly approved by a
majority of the respective stockholders
of the constituent corporations. The same provision further
states that the merger shall be effective only upon the issuance
by the SEC of a certificate of merger.The effectivity date of the
merger is crucial for determining when the merged or
absorbed corporation ceases to exist; and when its rights,
privileges, properties as well as liabilities pass on to the
surviving corporation.
Consistent with the aforementioned Section 79, the
September 16, 1975 Agreement of Merger,[13] which
Associated Banking Corporation (ABC) and Citizens Bank and
Trust Company (CBTC) entered into, provided that its
effectivity shall, for all intents and purposes, be the date when
the necessary papers to carry out this [m]erger shall have been
approved by the Securities and Exchange Commission.[14]
The records do not show when the SEC approved the
merger. Private respondents theory is that it took effect on the
date of the execution of the agreement itself, which was
September 16, 1975. Private respondent contends that, since
he issued the promissory note to CBTC on September 7, 1977
-- two years after the merger agreement had been executed --
CBTC could not have conveyed or transferred to petitioner its
interest in the said note, which was not yet in existence at the
time of the merger. Therefore, petitioner, the surviving bank,
3
has no right to enforce the promissory note on private
respondent; such right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date
of its execution, we still cannot agree that petitioner no longer
has any interest in the promissory note. A closer perusal of the
merger agreement leads to a different conclusion. The
provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to
[CBTC] in any deed, documents, or other papers of whatever
kind or nature and wherever found shall be deemed for all
intents and purposes, references to [ABC], the SURVIVING
BANK, as if such references were direct references to [ABC]. x
x x[16] (Underscoring supplied)
Thus, the fact that the promissory note was executed after the
effectivity date of the merger does not militate against
petitioner. The agreement itself clearly provides
that all contracts -- irrespective of the date of execution --
entered into in the name of CBTC shall be understood as
pertaining to the surviving bank, herein petitioner. Since, in
contrast to the earlier aforequoted provision, the latter clause
no longer specifically refers only to contracts existing at the
time of the merger, no distinction should be made. The clause
must have been deliberately included in the agreement in
order to protect the interests of the combining banks;
specifically, to avoid giving the merger agreement a farcical
interpretation aimed at evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the
payee, the reference to CBTC in the note shall be construed,
under the very provisions of the merger agreement, as a
reference to petitioner bank, as if such reference [was a] direct
reference to the latter for all intents and purposes.
No other construction can be given to the unequivocal
stipulation. Being clear, plain and free of ambiguity, the
provision must be given its literal meaning[17] and applied
without a convoluted interpretation. Verba legis non est
recedendum.[18]
In light of the foregoing, the Court holds that petitioner has a
valid cause of action against private respondent. Clearly, the
failure of private respondent to honor his obligation under the
promissory note constitutes a violation of petitioner’s right to
collect the proceeds of the loan it extended to the former.
MINDANAO SAVINGS VS. CA
FACTS: The First Iligan Savings and Loan Association, Inc.
(FISLAI) and the Davao Savings and Loan Association, Inc.
(DSLAI) are entities duly registered with the Securities and
Exchange Commission (SEC) under Registry Nos. 34869 and
32388, respectively, primarily engaged in the business of
granting loans and receiving deposits from the general public,
and treated as banks.
Sometime in 1985, FISLAI and DSLAI entered into a merger,
with DSLAI as the surviving corporation.5 The articles of merger
were not registered with the SEC due to incomplete
documentation.6 On August 12, 1985, DSLAI changed its
corporate name to MSLAI by way of an amendment to Article
1 of its Articles of Incorporation, but the amendment was
approved by the SEC only on April 3, 1987.
Meanwhile, on May 26, 1986, the Board of Directors of FISLAI
passed and approved Board Resolution No. 86-002, assigning
its assets in favor of DSLAI which in turn assumed the former’s
liabilities.
The business of MSLAI, however, failed. Hence, the Monetary
Board of the Central Bank of the Philippines ordered its closure
and placed it under receivership per Monetary Board
Resolution No. 922 dated August 31, 1990. The Monetary
Board found that MSLAI’s financial condition was one of
insolvency, and for it to continue in business would involve
probable loss to its depositors and creditors. On May 24, 1991,
the Monetary Board ordered the liquidation of MSLAI, with
PDIC as its liquidator.
It appears that prior to the closure of MSLAI, Uy filed with the
RTC, Branch 3 of Iligan City, an action for collection of sum of
money against FISLAI, docketed as Civil Case No. 111-697. On
October 19, 1989, the RTC issued a summary decision in favor
of Uy, directing defendants therein (which included FISLAI) to
pay the former the sum of ₱136,801.70, plus interest until full
payment, 25% as attorney’s fees, and the costs of suit. The
decision was modified by the CA by further ordering the third-
party defendant therein to reimburse the payments that
would be made by the defendants.
On April 28, 1993, sheriff Bantuas levied on six (6) parcels of
land owned by FISLAI located in Cagayan de Oro City, and the
notice of sale was subsequently published. During the public
auction on May 17, 1993, Willkom was the highest bidder. A
certificate of sale was issued and eventually registered with
the Register of Deeds of Cagayan de Oro City. Upon the
expiration of the redemption period, sheriff Bantuas issued the
sheriff’s definite deed of sale. New certificates of title covering
the subject properties were issued in favor of Willkom. On
September 20, 1994, Willkom sold one of the subject parcels
of land to Go.
On June 14, 1995, MSLAI, represented by PDIC, filed before the
RTC, Branch 41 of Cagayan de Oro City, a complaint for
Annulment of Sheriff’s Sale, Cancellation of Title and
Reconveyance of Properties against respondents.
4
MSLAI alleged that the sale on execution of the subject
properties was conducted without notice to it and PDIC; that
PDIC only came to know about the sale for the first time in
February 1995 while discharging its mandate of liquidating
MSLAI’s assets; that the execution of the RTC decision in Civil
Case No. 111-697 was illegal and contrary to law and
jurisprudence, not only because PDIC was not notified of the
execution sale, but also because the assets of an institution
placed under receivership or liquidation such as MSLAI should
be deemed in custodia legis and should be exempt from any
order of garnishment, levy, attachment, or execution.13
In answer, respondents averred that MSLAI had no cause of
action against them or the right to recover the subject
properties because MSLAI is a separate and distinct entity from
FISLAI. They further contended that the "unofficial merger"
between FISLAI and DSLAI (now MSLAI) did not take effect
considering that the merging companies did not comply with
the formalities and procedure for merger or consolidation as
prescribed by the Corporation Code of the Philippines. Finally,
they claimed that FISLAI is still a SEC registered corporation
and could not have been absorbed by petitioner.14
On March 13, 1997, the RTC issued a resolution dismissing the
case for lack of jurisdiction. The RTC declared that it could not
annul the decision in Civil Case No. 111-697, having been
rendered by a court of coordinate jurisdiction. On appeal,
MSLAI failed to obtain a favorable decision when the CA
affirmed the RTC resolution.
ISSUE: Whether or not the merger between FISLAI and DSLAI
(now MSLAI) valid and effective.
HELD: YES. Ordinarily, in the merger of two or more existing
corporations, one of the corporations survives and continues
the combined business, while the rest are dissolved and all
their rights, properties, and liabilities are acquired by the
surviving corporation.20 Although there is a dissolution of the
absorbed or merged corporations, there is no winding up of
their affairs or liquidation of their assets because the surviving
corporation automatically acquires all their rights, privileges,
and powers, as well as their liabilities.21
The merger, however, does not become effective upon the
mere agreement of the constituent corporations.22 Since a
merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and
creditors, there must be an express provision of law
authorizing them.23
The steps necessary to accomplish a merger or consolidation,
as provided for in Sections 76,77, 78,and 79 of the Corporation
Code, are:
(1) The board of each corporation draws up a plan of merger
or consolidation. Such plan must include any amendment, if
necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements
required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each
corporation for approval. A meeting must be called and at least
two (2) weeks’ notice must be sent to all stockholders or
members, personally or by registered mail. A summary of the
plan must be attached to the notice. Vote of two-thirds of the
members or of stockholders representing two-thirds of the
outstanding capital stock will be needed. Appraisal rights,
when proper, must be respected.
(3) Execution of the formal agreement, referred to as the
articles of merger o[r] consolidation, by the corporate officers
of each constituent corporation. These take the place of the
articles of incorporation of the consolidated corporation, or
amend the articles of incorporation of the surviving
corporation.
(4) Submission of said articles of merger or consolidation to the
SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all
corporations concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.
Clearly, the merger shall only be effective upon the issuance of
a certificate of merger by the SEC, subject to its prior
determination that the merger is not inconsistent with the
Corporation Code or existing laws. Where a party to the
merger is a special corporation governed by its own charter,
the Code particularly mandates that a favorable
recommendation of the appropriate government agency
should first be obtained.30
In this case, it is undisputed that the articles of merger
between FISLAI and DSLAI were not registered with the SEC
due to incomplete documentation. Consequently, the SEC did
not issue the required certificate of merger. Even if it is true
that the Monetary Board of the Central Bank of the Philippines
recognized such merger, the fact remains that no certificate
was issued by the SEC. Such merger is still incomplete without
the certification.
The issuance of the certificate of merger is crucial because not
only does it bear out SEC’s approval but it also marks the
moment when the consequences of a merger take place. By
operation of law, upon the effectivity of the merger, the
absorbed corporation ceases to exist but its rights and
properties, as well as liabilities, shall be taken and deemed
transferred to and vested in the surviving corporation.31
5
The same rule applies to consolidation which becomes
effective not upon mere agreement of the members but only
upon issuance of the certificate of consolidation by the
SEC.32 When the SEC, upon processing and examining the
articles of consolidation, is satisfied that the consolidation of
the corporations is not inconsistent with the provisions of the
Corporation Code and existing laws, it issues a certificate of
consolidation which makes the reorganization official.33 The
new consolidated corporation comes into existence and the
constituent corporations are dissolved and cease to exist.34
There being no merger between FISLAI and DSLAI (now MSLAI),
for third parties such as respondents, the two corporations
shall not be considered as one but two separate corporations.
A corporation is an artificial being created by operation of law.
It possesses the right of succession and such powers,
attributes, and properties expressly authorized by law or
incident to its existence.35 It has a personality separate and
distinct from the persons composing it, as well as from any
other legal entity to which it may be related.36 Being separate
entities, the property of one cannot be considered the
property of the other.
BABST VS. COURT OF APPEALS
FACTS: : On 8 June 1973, ELISCON obtained from Commercial
Bank and Trust Company (CBTC) a loan in the amount of
P8,015,900.84, with interest at the rate of 14% per annum,
evidenced by a promissory note. Elizalde Steel Consolidated,
Inc. (ELISCON) defaulted in its payments, leaving an
outstanding indebtedness in the amount of P2,795,240.67 as
of 31 October 1982. The letters of credit, on the other hand,
were opened for ELISCON by CBTC using the credit facilities of
Pacific Multi-Commercial Corporation (MULTI) with the said
bank, pursuant to the Resolution of the Board of Directors of
MULTI adopted on 31 August 1977. Subsequently, on 26
September 1978, Antonio Roxas Chua and Chester G. Babst
executed a Continuing Suretyship, whereby they bound
themselves jointly and severally liable to pay any existing
indebtedness of MULTI to CBTC to the extent of P8,000,000.00
each. Sometime in October 1978, CBTC opened for ELISCON in
favor of National Steel Corporation (NSC) 3 domestic letters of
credit in the amounts of P1,946,805.73, P1,702,869.32 and
P200,307.72, respectively, which ELISCON used to purchase tin
black plates from NSC. ELISCON defaulted in its obligation to
pay the amounts of the letters of credit, leaving an outstanding
account, as of 31 October 1982, in the total amount of
P3,963,372.08. On 22 December 1980, the Bank of the
Philippine Islands (BPI) and CBTC entered into a merger,
wherein BPI, as the surviving corporation, acquired all the
assets and assumed all the liabilities of CBTC. Meanwhile,
ELISCON encountered financial difficulties and became heavily
indebted to the Development Bank of the Philippines (DBP). In
order to settle its obligations, ELISCON proposed to convey to
DBP by way of dacion en pago all its fixed assets mortgaged
with DBP, as payment for its total indebtedness in the amount
of P201,181,833.16. On 28 December 1978, ELISCON and DBP
executed a Deed of Cession of Property in Payment of Debt. In
June 1981, ELISCON called its creditors to a meeting to
announce the take-over by DBP of its assets. In October 1981,
DBP formally took over the assets of ELISCON, including its
indebtedness to BPI. Thereafter, DBP proposed formulas for
the settlement of all of ELISCON's obligations to its creditors,
but BPI expressly rejected the formula submitted to it for not
being acceptable. Consequently, on 17 January 1983, BPI, as
successor-in-interest of CBTC, instituted with the Regional Trial
Court of Makati, Branch 147, a complaint for sum of money
against ELISCON, MULTI and Babst (Civil Case 49226). On 20
February 1987, the trial court rendered its Decision in favor of
BPI. In due time, ELISCON, MULTI and Babst filed their
respective notices of appeal. On 29 April 1991, the Court of
Appeals rendered a Decision modifying the judgment of the
trial court. ELISCON filed a Motion for Reconsideration of the
Decision of the Court of Appeals which was, however, denied
in a Resolution dated 9 March 1992. Subsequently, ELISCON
filed a petition for review on certiorari (GR. 104625).
Meanwhile, Babst also filed a petition for review with the Court
(GR 99398).
ISSUE: Whether or not BPI consented to the assumption by
DBP of the obligations of ELISCON.
HELD: Article 1293 of the Civil Code provides: Novation which
consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in
articles 1236 and 1237.
BPI contends that in order to have a valid novation, there must
be an express consent of the creditor. In the case of Testate
Estate of Mota, et al. v. Serra,[31] this Court held: It should be
noted that in order to give novation its legal effect, the law
requires that the creditor should consent to the substitution of
a new debtor. This consent must be given expressly for the
reason that, since novation extinguishes the personality of the
first debtor who is to be substituted by a new one, it implies
on the part of the creditor a waiver of the right that he had
before the novation, which waiver must be express under the
principle of renuntiatio non prsumitur, recognized by the law
in declaring that a waiver of right may not be performed
[should read: presumed] unless the will to waive is
indisputably shown by him who holds the right.[32]
The import of the foregoing ruling, however, was explained
and clarified by this Court in the later case of Asia Banking
Corporation v. Elser[33] in this wise:
6
The aforecited article 1205 [now 1293] of the Civil Code does
not state that the creditors consent to the substitution of the
new debtor for the old be express, or given at the time of the
substitution, and the Supreme Court of Spain, in its judgment
of June 16, 1908, construing said article, laid down the doctrine
that article 1205 of the Civil Code does not mean or require
that the creditors consent to the change of debtors must be
given simultaneously with the debtors consent to the
substitution, its evident purpose being to preserve the
creditors full right, it is sufficient that the latters consent be
given at any time and in any form whatever, while the
agreement of the debtors subsists. The same rule is stated in
the Enciclopedia Jurdica Espaola, volume 23, page 503, which
reads: The rule that this kind of novation, like all others, must
be express, is not absolute; for the existence of the consent
may well be inferred from the acts of the creditor, since
volition may as well be expressed by deeds as by words. The
understanding between Henry W. Elser and the principal
director of Yangco, Rosenstock & Co., Inc., with respect to Luis
R. Yangcos stock in said corporation, and the acts of the board
of directors after Henry W. Elser had acquired said shares, in
substituting the latter for Luis R. Yangco, are a clear and
unmistakable expression of its consent. When this court said
in the case of Estate of Mota vs. Serra (47 Phil., 464), that the
creditors express consent is necessary in order that there may
be a novation of a contract by the substitution of debtors, it
did not wish to convey the impression that the word express
was to be given an unqualified meaning, as indicated in the
authorities or cases, both Spanish and American, cited in said
decision.[34]
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Ca.,
Inc. v. Albo & Sevilla, Inc., et al.,[35] this Court reiterated the rule
that there can be implied consent of the creditor to the
substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that
due to the failure of BPI to register its objection to the take-
over by DBP of ELISCONs assets, at the creditors meeting held
in June 1981 and thereafter, it is deemed to have consented to
the substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear
indications that BPI was aware of the assumption by DBP of the
obligations of ELISCON. In fact, BPI admits that ---
the Development Bank of the Philippines (DBP), for a time, had
proposed a formula for the settlement of Eliscons past
obligations to its creditors, including the plaintiff [BPI], but the
formula was expressly rejected by the plaintiff as not
acceptable (long before the filing of the complaint at bar).[36]
The Court of Appeals held that even if the account officer who
attended the June 1981 creditors meeting had expressed
consent to the assumption by DBP of ELISCONs debts, such
consent would not bind BPI for lack of a specific authority
therefor. In its petition, ELISCON counters that the mere
presence of the account officer at the meeting necessarily
meant that he was authorized to represent BPI in that creditors
meeting. Moreover, BPI did not object to the substitution of
debtors, although it objected to the payment formula
submitted by DBP.
Indeed, the authority granted by BPI to its account officer to
attend the creditors meeting was an authority to represent the
bank, such that when he failed to object to the substitution of
debtors, he did so on behalf of and for the bank. Even
granting arguendo that the said account officer was not so
empowered, BPI could have subsequently registered its
objection to the substitution, especially after it had already
learned that DBP had taken over the assets and assumed the
liabilities of ELISCON. Its failure to do so can only mean an
acquiescence in the assumption by DBP of ELISCONs
obligations. As repeatedly pointed out by ELISCON and MULTI,
BPIs objection was to the proposed payment formula, not to
the substitution itself.
BPI gives no cogent reason in withholding its consent to the
substitution, other than its desire to preserve its causes of
action and legal recourse against the sureties of ELISCON. It
must be remembered, however, that while a surety is solidarily
liable with the principal debtor, his obligation to pay only arises
upon the principal debtors failure or refusal to pay. A contract
of surety is an accessory promise by which a person binds
himself for another already bound, and agrees with the
creditor to satisfy the obligation if the debtor does not. [37] A
surety is an insurer of the debt; he promises to pay the
principals debt if the principal will not pay.
In the case at bar, there was no indication that the principal
debtor will default in payment. In fact, DBP, which had stepped
into the shoes of ELISCON, was capable of payment. Its
authorized capital stock was increased by the
government.[39] More importantly, the National Development
Company took over the business of ELISCON and undertook to
pay ELISCONs creditors, and earmarked for that purpose the
amount of P4,015,534.54 for payment to BPI.[40]
ART. 19. 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. 1159. Obligations arising from contract have the force of
law between the contracting parties and should be complied
with in good faith.
BPIs conduct evinced a clear and unmistakable consent to the
substitution of DBP for ELISCON as debtor. Hence, there was a
valid novation which resulted in the release of ELISCON from
its obligation to BPI, whose cause of action should be directed
against DBP as the new debtor.
Novation, in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old
obligation subsists to the extent it remains compatible with the
amendatory agreement. An extinctive novation results either
by changing the object or principal conditions (objective or
real), or by substituting the person of the debtor or
subrogating a third person in the rights of the creditor
(subjective or personal). Under this mode, novation would
have dual functions one to extinguish an existing obligation,
the other to substitute a new one in its place requiring a
conflux of four essential requisites, (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4)
the birth of a valid new obligation.[41]
The original obligation having been extinguished, the contracts
of suretyship executed separately by Babst and MULTI, being
accessory obligations, are likewise extinguished.[42]
Hence, BPI should enforce its cause of action against DBP. It
should be stressed that notwithstanding the lapse of time
within which these cases have remained pending, the
prescriptive period for BPI to file its action was interrupted
when it filed Civil Case No. 49226.

Notwithstanding the fact that a reliable institution backed by

government funds was offering to pay ELISCONs debts, not as
mere surety but as substitute principal debtor, BPI, for reasons
known only to itself, insisted in going after the sureties. The
course of action chosen taxes the credulity of this Court. At the
very least, suffice it to state that BPIs actuation in this regard
runs counter to the good faith covenant in contractual
relations, provided for by the Civil Code, to wit: