1|Page

ICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE LA RAMA, and the HEIRS OF
MERCEDES DE LA RAMA-BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of Negros Occidental, Branch II,
BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES respondents.

Petition for certiorari to review the order of the respondent judge, dated January 2, 1975, denying the petitioners'
motion to dismiss the complaint filed in Civil Case No. 10257 of the Court of First Instance of Negros Occidental,
entitled, "Benjamin Lopue Sr., et al., plaintiffs, versus Ricardo Gamboa, et al., defendants," as well as the order
dated April 4, 1975, denying the motion for the reconsideration of Said order.

In the aforementioned Civil Case No. 10257 of the Court of First Instance of Negros Occidental, the herein
petitioners, Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Eduardo de la Rama, and the late Mercedes
de la Rama-Borromeo, now represented by her heirs, as well as Ramon de la Rama, Paz de la Rama-Battistuzzi, and
Enzo Battistuzzi, were sued by the herein private respondents, Benjamin Lopue, Sr., Benjamin Lopue, Jr., Leonito
Lopue, and Luisa U. Dacles to nullify the issuance of 823 shares of stock of the Inocentes de la Rama, Inc. in favor of
the said defendants. The gist of the complaint, filed on April 4, 1972, is that the plaintiffs, with the exception of
Anastacio Dacles who was joined as a formal party, are the owners of 1,328 shares of stock of the Inocentes de la
Rama, Inc., a domestic corporation, with an authorized capital stock of 3,000 shares, with a par value of P100.00
per share, 2,177 of which were subscribed and issued, thus leaving 823 shares unissued; that upon the plaintiffs'
acquisition of the shares of stock held by Rafael Ledesma and Jose Sicangco, Jr., then President and Vice-President
of the corporation, respectively, the defendants Mercedes R. Borromeo, Honorio de la Rama, and Ricardo
Gamboa, remaining members of the board of directors of the corporation, in order to forestall the takeover by the
plaintiffs of the afore-named corporation, surreptitiously met and elected Ricardo L. Gamboa and Honorio de la
Rama as president and vice-president of the corporation, respectively, and thereafter passed a resolution
authorizing the sale of the 823 unissued shares of the corporation to the defendants, Ricardo L. Gamboa, Lydia R.
Gamboa, Honorio de la Rama, Ramon de la Rama, Paz R. Battistuzzi Eduardo de la Rama, and Mercedes R.
Borromeo, at par value, after which the defendants Honorio de la Rama, Lydia de la Rama-Gamboa, and Enzo
Battistuzzi were elected to the board of directors of the corporation; that the sale of the unissued 823 shares of
stock of the corporation was in violation of the plaintiffs' and pre-emptive rights and made without the approval of
the board of directors representing 2/3 of the outstanding capital stock, and is in disregard of the strictest relation
of trust existing between the defendants, as stockholders thereof; and that the defendants Lydia de la Rama-
Gamboa, Honorio de la Rama, and Enzo Battistuzzi were not legally elected to the board of directors of the said
corporation and has unlawfully usurped or intruded into said office to the prejudice of the plaintiffs. Wherefore,
they prayed that a writ of preliminary injunction be issued restraining the defendants from committing, or
continuing the performance of an act tending to prejudice, diminish or otherwise injure the plaintiffs' rights in the
corporate properties and funds of the corporation, and from disposing, transferring, selling, or otherwise impairing
the value of the 823 shares of stock illegally issued by the defendants; that a receiver be appointed to preserve and
administer the property and funds of the corporation; that defendants Lydia de la Rama-Gamboa, Honorio de la
Rama, and Enzo Battistuzzi be declared as usurpers or intruders into the office of director in the corporation and,
consequently, ousting them therefrom and declare Luisa U. Dacles as a legally elected director of the corporation;
that the sale of 823 shares of stock of the corporation be declared null and void; and that the defendants be
ordered to pay damages and attorney's fees, as well as the costs of suit . 1

Acting upon the complaint, the respondent judge, after proper hearing, directed the clerk of court "to issue the
corresponding writ of preliminary injunction restraining the defendants and/or their representatives, agents, or
persons acting in their behalf from the commission or continuance of any act tending in any way to prejudice,
diminish or otherwise injure plaintiffs' rights in the corporate properties and funds of the corporation Inocentes de
la Rama, Inc.' and from disposing, transferring, selling or otherwise impairing the value of the certificates of stock
allegedly issued illegally in their names on February 11, 1972, or at any date thereafter, and ordering them to
deposit with the Clerk of Court the corresponding certificates of stock for the 823 shares issued to said defendants
on February 11, 1972, upon plaintiffs' posting a bond in the sum of P50,000.00, to answer for any damages and
2|Page

costs that may be sustained by the defendants by reason of the issuance of the writ, copy of the bond to be
furnished to the defendants. " 2 Pursuant thereto, the defendants deposited with the clerk of court the
corporation's certificates of stock Nos. 80 to 86, inclusive, representing the disputed 823 shares of stock of the
corporation. 3

On October 31, 1972, the plaintiffs therein, now private respondents, entered into a compromise agreement with
the defendants Ramon de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi , 4 whereby the contracting
parties withdrew their respective claims against each other and the aforenamed defendants waived and
transferred their rights and interests over the questioned 823 shares of stock in favor of the plaintiffs, as follows:

3. That the defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi will
waive, cede, transfer or other wise convey, as they hereby waive, cede, transfer and convey, free
from all liens and encumbrances unto the plaintiffs, in such proportion as the plaintiffs may
among themselves determine, all of the rights, interests, participations or title that the
defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi Enzo Battistuzzi now have or may
have in the eight hundred twenty-three (823) shares in the capital stock of the corporation
INOCENTES DELA RAMA, INC.' which were issued in the names of the defendants in the above-
entitled case on or about February 11, 1972, or at any date thereafter and which shares are the
subject-matter of the present suit.

The compromise agreement was approved by the trial court on December 4, 1972, 5 As a result, the defendants
filed a motion to dismiss the complaint, on November 19, 1974, upon the grounds: (1) that the plaintiffs' cause of
action had been waived or abandoned; and (2) that they were estopped from further prosecuting the case since
they have, in effect, acknowledged the validity of the issuance of the disputed 823 shares of stock. The motion was
denied on January 2, 1975. 6

The defendants also filed a motion to declare the defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi and
Enzo Battistuzzi in contempt of court, for having violated the writ of preliminary injunction when they entered into
the aforesaid compromise agreement with the plaintiffs, but the respondent judge denied the said motion for lack
of merit. 7

On February 10, 1975, the defendants filed a motion for the reconsideration of the order denying their motion to
dismiss the complaint' and subsequently, an Addendum thereto, claiming that the respondent court has no
jurisdiction to interfere with the management of the corporation by the board of directors, and the enactment of a
resolution by the defendants, as members of the board of directors of the corporation, allowing the sale of the 823
shares of stock to the defendants was purely a management concern which the courts could not interfere with.
When the trial court denied said motion and its addendum, the defendants filed the instant petition for certiorari
for the review of said orders.

The petition is without merit. The questioned order denying the petitioners' motion to dismiss the complaint is
merely interlocutory and cannot be the subject of a petition for certiorari. The proper procedure to be followed in
such a case is to continue with the trial of the case on the merits and, if the decision is adverse, to reiterate the
issue on appeal. It would be a breach of orderly procedure to allow a party to come before this Court every time an
order is issued with which he does not agree.

Besides, the order denying the petitioners' motion to dismiss the complaint was not capriciously, arbitrarily, or
whimsically issued, or that the respondent court lacked jurisdiction over the cause as to warrant the issuance of
the writ prayed for. As found by the respondent judge, the petitioners have not waived their cause of action
against the petitioners by entering into a compromise agreement with the other defendants in view of the express
provision of the compromise agreement that the same "shall not in any way constitute or be considered a waiver
or abandonment of any claim or cause of action against the other defendants." There is also no estoppel because
there is nothing in the agreement which could be construed as an affirmative admission by the plaintiff of the
3|Page

validity of the resolution of the defendants which is now sought to be judicially declared null and void. The
foregoing circumstances and the fact that no consideration was mentioned in the agreement for the transfer of
rights to the said shares of stock to the plaintiffs are sufficient to show that the agreement was merely an
admission by the defendants Ramon de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi of the validity of
the claim of the plaintiffs.

The claim of the petitioners, in their Addendum to the motion for reconsideration of the order denying the motion
to dismiss the complaint, questioning the trial court's jurisdiction on matters affecting the management of the
corporation, is without merit. The well-known rule is that courts cannot undertake to control the discretion of the
board of directors about administrative matters as to which they have legitimate power of, 10 action and
contracts intra vires entered into by the board of directors are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the
rights of the minority. 11 In the instant case, the plaintiffs aver that the defendants have concluded a transaction
among themselves as will result to serious injury to the interests of the plaintiffs, so that the trial court has
jurisdiction over the case.

The petitioners further contend that the proper remedy of the plaintiffs would be to institute a derivative suit
against the petitioners in the name of the corporation in order to secure a binding relief after exhausting all the
possible remedies available within the corporation.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or
are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as
a nominal party, with the corporation as the real party in interest. 12 In the case at bar, however, the plaintiffs are
alleging and vindicating their own individual interests or prejudice, and not that of the corporation. At any rate, it
is yet too early in the proceedings since the issues have not been joined. Besides, misjoinder of parties is not a
ground to dismiss an action. 13

WHEREFORE, the petition should be, as it is hereby DISMISSED for lack of merit. With costs against the petitioners.

SO ORDERED.
4|Page
5|Page

ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE
COMMISSION, petitioners,
vs.
COURT OF APPEALS and IGLESIA NI CRISTO, respondents.

HERMOSISIMA, JR., J.:

The subject of this petition for review is the Decision of the public respondent Court of Appeals, 1 dated October
28, 1994, setting aside the portion of the Decision of the Securities and Exchange Commission (SEC, for short) in
SEC Case No. 4012 which declared null and void the sale of two (2) parcels of land in Quezon City covered by the
Deed of Absolute Sale entered into by and between private respondent Iglesia Ni Cristo (INC, for short) and the
Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP, for short).

The following facts appear of record.

Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal groups in
the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF THE
PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic Center in Quezon City for the
construction of a "Mosque (prayer place), Madrasah (Arabic School), and other religious infrastructures" so as to
facilitate the effective practice of Islamic faith in the area. 2

Towards this end, that is, in the same year, the Libyan government donated money to the IDP to purchase land at
Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land, with an area of
49,652 square meters, was covered by two titles: Transfer Certificate of Title Nos. RT-26520 (176616) 3 and RT-
26521 (170567), 4 both registered in the name of IDP.

It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of its Articles
of Incorporation:

Senator Mamintal Tamano 5

Congressman Ali Dimaporo
Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar 6

According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name of IDP,
Martial Law was declared by the late President Ferdinand Marcos. Most of the members of the 1971 Board of
Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and Congressman Al-Rashid Lucman
flew to the Middle East to escape political persecution.

Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the Abbas
Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the legitimate IDP.
Significantly, on October 3, 1986, the SEC, in a suit between these two contending groups, came out with a
Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group and the Abbas Group as IDP board
members to be null and void. The dispositive portion of the SEC Decision reads:
6|Page

WHEREFORE, judgment is hereby rendered declaring the elections of both the petitioners 7 and
respondents 8 as null and void for being violative of the Articles of Incorporation of petitioner
corporation. With the nullification of the election of the respondents, the approved by-laws which
they certified to this Commission as members of the Board of Trustees must necessarily be
likewise declared null and void. However, before any election of the members of the Board of
Trustees could be conducted, there must be an approved by-laws to govern the internal
government of the association including the conduct of election. And since the election of both
petitioners and respondents have been declared null and void, a vacuum is created as to who
should adopt the by-laws and certify its adoption. To remedy this unfortunate situation that the
association has found itself in, the members of the petitioning corporation are hereby authorized
to prepare and adopt their by-laws for submission to the Commission. Once approved, an
election of the members of the Board of Trustees shall immediately be called pursuant to the
approved by-laws.

SO ORDERED. 9

Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision, and, thus,
no valid election of the members of the Board of Trustees of IDP was ever called. Although the Carpizo
Group 10attempted to submit a set of by-laws, the SEC found that, aside from Engineer Farouk Carpizo and Atty.
Musib Buat, those who prepared and adopted the by-laws were not bona fide members of the IDP, thus rendering
the adoption of the by-laws likewise null and void.

On April 20, 1989, without having been properly elected as new members of the Board of Trustee of IDP, the
Carpizo Group caused to be signed an alleged Board Resolution 11 of the IDP, authorizing the sale of the subject
two parcels of land to the private respondent INC for a consideration of P22,343,400.00, which sale was evidenced
by a Deed of Absolute Sale 12 dated April 20, 1989.

On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal Tamano, or the
Tamano Group, filed a petition before the SEC, docketed as SEC Case No. 4012, seeking to declare null and void the
Deed of Absolute Sale signed by the Carpizo Group and the INC since the group of Engineer Carpizo was not the
legitimate Board of Trustees of the IDP.

Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an action for
Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of the Regional Trial
Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to clear the property of
squatters and deliver complete and full physical possession thereof to INC. Likewise, INC filed a motion in the same
case to compel one Mrs. Leticia P. Ligon to produce and surrender to the Register of Deeds of Quezon City the
owner's duplicate copy of TCT Nos. RT-26521 and RT-26520 covering the aforementioned two parcels of land, so
that the sale in INC's favor may be registered and new titles issued in the name of INC. Mrs. Ligon was alleged to
be the mortgagee of the two parcels of land executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida
Busran-Sampaco claimed to be in behalf of the Carpizo Group.

The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring, inter alia:

xxx xxx xxx

2. That the Intervenor has filed a case before the Securities and Exchange Commission (SEC)
against Mr. Farouk Carpizo, et. al., who, through false schemes and machinations, succeeded in
executing the Deed of Sale between the IDP and the Iglesia Ni Kristo (plaintiff in the instant case)
and which Deed of Sale is the subject of the case at bar;
7|Page

3. That the said case before the SEC is docketed as Case No. 04012, the main issue of which is
whether or not the aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void,
hence, Intervenor's legal interest in the instant case. A copy of the said case is hereto attached as
Annex "A";

4. That, furthermore, Intervenor herein is the duly constituted body which can lawfully and
legally represent the Islamic Directorate of the Philippines;

xxx xxx xxx 13

Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by way of
intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC. 14

Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioner's motion to intervene
on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues being raised by way of
intervention are intra-corporate in nature, jurisdiction thereto properly pertaining to the SEC. 15

Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo Group but
without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered Partial Judgment in
Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its obligation under the Deed of Sale of
clearing the subject lots of squatters and of delivering the actual possession thereof to INC. 16

Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-90-6937,
treated INC as the rightful owner of the real properties and disposed as follows:

WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to plaintiff 17 the
owner's copy of RT-26521 (170567) and RT-26520 (176616) in open court for the registration of
the Deed of Absolute Sale in the latter's name and the annotation of the mortgage executed in
her favor by herein defendant Islamic Directorate of the Philippines on the new transfer
certificate of title to be issued to plaintiff.

SO ORDERED. 18

On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon "to deliver the owner's duplicate
copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City for the
purposes stated in the Order of March 2, 1992." 19

Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R No. SP-27973,
assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on October 28, 1992. 20

Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No. 107751.

In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this wise:

1. Declaring the by-laws submitted by the respondents 21 as unauthorized, and hence, null and
void.

2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of
Absolute Sale entered into by Iglesia ni Kristo and the Islamic Directorate of the Philippines,
Inc. 22 null and void;
8|Page

3. Declaring the election of the Board of Directors, 23 of the corporation from 1986 to 1991 as
null and void;

4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat, as
members of the IDP null and void.

No pronouncement as to cost.

SO ORDERED. 24

Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012, but the
same was denied on account of the fact that the decision of the case had become final and executory, no appeal
having been taken therefrom. 25

INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil action
for certiorari, docketed as CA-G.R SP No. 33295. On October 28, 1994, the court a quo promulgated a Decision in
CA-G.R. SP No. 33295 granting INC's petition. The portion of the SEC Decision in SEC Case No. 4012 which declared
the sale of the two (2) lots in question to INC as void was ordered set aside by the Court of Appeals.

Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994, submitting that
the Court of Appeals gravely erred in:

1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;

2) Encouraging multiplicity of suits; and

3) Not applying the principles of estoppel and laches. 26

While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No. 107751 on the
petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon petition and affirmed the
October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge
Reyes compelling mortgagee Ligon to surrender the owner's duplicate copies of TCT Nos. RT-26521 (170567) and
RT-26520 (176616) to the Register of Deeds of Quezon City so that the Deed of Absolute Sale in INC's favor may be
properly registered.

Before we rule upon the main issue posited in this petition, we would like to point out that our disposition in G.R.
No. 107751 entitled, "Ligon v. Court of Appeals," promulgated on June 1, 1995, in no wise constitutes res
judicata such that the petition under consideration would be barred if it were the ease. Quite the contrary, the
requisites or res judicata do not obtain in the case at bench.

Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in personam,
to wit:

Effect of judgment. — The effect of a judgment or final order rendered by a court or judge of the
Philippines, having jurisdiction to pronounce the judgment or order, may be as follows:

xxx xxx xxx

(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to
any other matter that could have been raised in relation thereto, conclusive between the parties
9|Page

and their successors in interest by title subsequent to the commencement of the action or
special proceeding, litigating for the same thing and under the same title and in the same
capacity;

(c) In any other litigation between the same parties or their successors in interest, that only is
deemed to have been adjudged in a former judgment which appears upon its face to have been
so adjudged, or which was actually and necessarily included therein or necessary thereto.

Section 49(b) enunciates the first concept of res judicata known as "bar by prior judgment," whereas, Section 49(c)
is referred to as "conclusiveness of judgment."

There is "bar by former judgment" when, between the first case where the judgment was rendered, and the
second case where such judgment is invoked, there is identity of parties, subject matter and cause of action. When
the three identities are present, the judgment on the merits rendered in the first constitutes an absolute bar to the
subsequent action. But where between the first case wherein judgment is rendered and the second case wherein
such judgment is invoked, there is only identity of parties but there is no identity of cause of action, the judgment
is conclusive in the second case, only as to those matters actually and directly controverted and determined, and
not as to matters merely involved therein. This is what is termed "conclusiveness of judgment." 27

Neither of these concepts of res judicata find relevant application in the case at bench. While there may be
identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal parties in G.R.
No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP,
as represented by the 1971 Board of Trustees or the Tamano Group, was only made an ancillary party in G.R. No.
107751 as intervenor. 28 It was never originally a principal party thereto. It must be noted that intervention is not
an independent action, but is merely collateral, accessory, or ancillary to the principal action. It is just an
interlocutory proceeding dependent on or subsidiary to the case between the original
parties. 29 Indeed, the IDP-Tamano Group cannot be considered a principal party in G.R. No. 107751 for purposes
of applying the principle of res judicata since the contrary goes against the true import of the action of
intervention as a mere subsidiary proceeding without an independent life apart from the principal action as well as
the intrinsic character of the intervenor as a mere subordinate party in the main case whose right may be said to
be only in aid of the right of the original party. 30 It is only in the present case, actually, where the IDP-Tamano
Group became a principal party, as petitioner, with the Iglesia Ni Cristo, as private respondent. Clearly, there is no
identity of parties in both cases.

In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751, was
entitled, "Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant," 31 the IDP can not be
considered essentially a formal party thereto for the simple reason that it was not duly represented by a legitimate
Board of Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a case for Specific
Performance with Damages, a mere action in personam, did not become final and executory insofar as the true IDP
is concerned since petitioner corporation, for want of legitimate representation, was effectively deprived of its day
in court in said case. Res inter alios judicatae nullum allis praejudicium faciunt. Matters adjudged in a cause do not
prejudice those who were not parties to it. 32 Elsewise put, no person (natural or juridical) shall be affected by a
proceeding to which he is a stranger. 33

Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a "bar by former
judgment" will still not set in on the ground that the cause of action in the two cases are different. The cause of
action in G.R. No. 107751 is the surrender of the owner's duplicate copy of the transfer certificates of title to the
rightful possessor thereof, whereas the cause of action in the present case is the validity of the Carpizo Group-INC
Deed of Absolute Sale.

Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the reason that any mention at
all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed incidental to the
10 | P a g e

resolution of the primary issue posed in said case which is: Who between Ligon and INC has the better right of
possession over the owner's duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be
considered determinative and conclusive on the matter of the validity of the sale for this particular issue was not
the principal thrust of Ligon. To rule otherwise would be to cause grave and irreparable injustice to IDP which
never gave its consent to the sale, thru a legitimate Board of Trustees.

In any case, while it is true that the principle of res judicata is a fundamental component of our judicial system, it
should be disregarded if its rigid application would involve the sacrifice of justice to technicality. 34

The main question though in this petition is: Did the Court of Appeals commit reversible error in setting aside that
portion of the SEC's Decision in SEC Case No. 4012 which declared the sale of two (2) parcels of land in Quezon City
between the IDP-Carpizo Group and private respondent INC null and void?

We rule in the affirmative.

There can be no question as to the authority of the SEC to pass upon the issue as to who among the different
contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly falling within the
original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A:

Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all
corporations, partnership or associations, who are the grantees of primary franchises and/or a
license or permit issued by the government to operate in the Philippines . . . .

xxx xxx xxx

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:

xxx xxx xxx

c) Controversies in the selection or appointment of directors, trustees, officers, or managers of

such corporations, partnerships or associations. . . . .

If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also declare who
is not the legitimate IDP Board. This is precisely what the SEC did in SEC Case No. 4012 when it adjudged
the election of the Carpizo Group to the IDP Board of Trustees to be null and
void. 35 By this ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo Group is a
bogus Board of Trustees. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind
IDP in any kind of transaction including the sale or disposition of ID property.

It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to pass upon the
status of the Carpizo Group. As far back as October 3, 1986, the SEC, in Case No. 2687, 36 in a suit between the
Carpizo Group and the Abbas Group, already declared the election of the Carpizo Group (as well as the Abbas
Group) to the IDP Board as null and void for being violative of the Articles of Incorporation. 37 Nothing thus
becomes more settled than that the IDP-Carpizo Group with whom private respondent INC contracted is a fake
Board.
11 | P a g e

Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora property,
allegedly in the name of the IDP, have to be struck down for having been done without the consent of the IDP thru
a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the essential requisites of contracts:

There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

All these elements must be present to constitute a valid contract. For, where even one is absent, the
contract is void. As succinctly put by Tolentino, consent is essential for the existence of a contract, and
where it is wanting, the contract is non-existent. 38 In this case, the IDP, owner of the subject parcels of
land, never gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale
executed in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent on
the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is void
and produces no effect whatsoever.

The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's failure to
comply with Section 40 of the Corporation Code pertaining to the disposition of all or substantially all assets of the
corporation:

Sec. 40. Sale or other disposition of assets. — Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of
its property and assets, including its goodwill, upon terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the payment of
money or other property or consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-
thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the purpose.
Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and
assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.

xxx xxx xxx

The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence, its sale to
a third-party is a sale or disposition of all the corporate property and assets of IDP falling squarely within the
contemplation of the foregoing section. For the sale to be valid, the majority vote of the legitimate Board of
Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the corporation should have been
obtained. These twin requirements were not met as the Carpizo Group which voted to sell the Tandang Sora
property was a fake Board of Trustees, and those whose names and signatures were affixed by the Carpizo Group
12 | P a g e

together with the sham Board Resolution authorizing the negotiation for the sale were, from all indications,
not bona fide members of the IDP as they were made to appear to be. Apparently, there are only fifteen (15)
official members of the petitioner corporation including the eight (8) members of the Board of Trustees. 39

All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent INC was
intrinsically void ab initio.

Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made outside
of its jurisdiction, the same not being an intra-corporate dispute.

The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale null and
void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack of consent of the
IDP, owner of the subject property. No end of substantial justice will be served if we reverse the SEC's conclusion
on the matter, and remand the case to the regular courts for further litigation over an issue which is already
determinable based on what we have in the records.

It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board of
Trustees in Civil Case. No. Q-90-6937, a case for Specific Performance with Damages between INC and the Carpizo
Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have been granted ample opportunity
before the regional trial court to shed light on the true status of the Carpizo Board and settled the matter as to the
validity of the sale then and there. But INC, wanting to acquire the property at all costs and threatened by the
participation of the legitimate IDP Board in the civil suit, argued for the denial of the motion averring, inter alia,
that the issue sought to be litigated by the movant is intra-corporate in nature and outside the jurisdiction of the
regional trial court. 40 As a result, the motion for intervention was denied. When the Decision in SEC Case No. 4012
came out nullifying the sale, INC came forward, this time, quibbling over the issue that it is the regional trial court,
and not the SEC, which has jurisdiction to rule on the validity of the sale. INC is here trifling with the courts. We
cannot put a premium on this clever legal maneuverings of private respondent which, if countenanced, would
result in a failure of justice.

Furthermore, the Court observes that the INC bought the questioned property from the Carpizo Group without
even seeing the owner's duplicate copy of the titles covering the property. This is very strange considering that the
subject lot is a large piece of real property in Quezon City worth millions, and that under the Torrens System of
Registration, the minimum requirement for one to be a good faith buyer for value is that the vendee at least sees
the owner's duplicate copy of the title and relies upon the same. 41 The private respondent, presumably
knowledgeable on the aforesaid workings of the Torrens System, did not take heed of this and nevertheless went
through with the sale with undue haste. The unexplained eagerness of INC to buy this valuable piece of land in
Quezon City without even being presented with the owner's copy of the titles casts very serious doubt on the
rightfulness of its position as vendee in the transaction.

WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated October 28,
1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange Commission dated July 5,
1993 in SEC Case No. 4012 is REINSTATED. The Register of Deeds of Quezon City is hereby ordered to cancel the
registration of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo, if one has already been made.
If new titles have been issued in the name of Iglesia Ni Cristo, the Register of Deeds is hereby ordered to cancel the
same, and issue new ones in the name of petitioner Islamic Directorate of the Philippines. Petitioner corporation is
ordered to return to private respondent whatever amount has been initially paid by INC as consideration for the
property with legal interest, if the same was actually received by IDP. Otherwise, INC may run after Engineer
Farouk Carpizo and his group for the amount of money paid.
13 | P a g e

J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.

Jose Moreno Lacalle for appellant Fernandez.

Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.

STREET, J.:

The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands, and in 1913 and
1914, the time of the occurrences which gave rise to this lawsuit, was engaged in the business of maintaining and
conducting a theatre in the city of Manila for the exhibition of cinematographic films. Under the articles of
incorporation the company is authorized to manufacture, buy, or otherwise obtain all accessories necessary for
conducting such a business. The plaintiff J. F. Ramirez was, at the same time, a resident of the city of Paris, France,
and was engaged in the business of marketing films for a manufacturer or manufacturers, there engaged in the
production or distribution of cinematographic material. In this enterprise the plaintiff was represented in the city
of Manila by his son, Jose Ramirez.

In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila, became apprised of the
fact that the plaintiff in Paris had control of the agencies for two different marks of films, namely, the "Eclair Films"
and the "Milano Films;" and negotiations were begun with said officials of the Orientalist Company by Jose
Ramirez, as agent of the plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the
Orientalist Company. The defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and also
its treasure, was chiefly active in this matter, being moved by the suggestions and representations of Vicente
Ocampo, manage of the Oriental Theater, to the effect that the securing of the said films was necessary to the
success of the corporation.

Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father, placed in the hands of
Ramon J. Fernandez an offer, dated July 4, 1913, stating detail the terms upon which the plaintiff would undertake
to supply from Paris the aforesaid films. This officer was declared to be good until the end of July; and as only
about for the Orientalist Company to act on the matter speedily, if it desired to take advantage of said offer.
Accordingly, Ramon J. Fernandez, on July 30, had an informal conference with all the members of the company's
board of directors except one, and with approval of those with whom he had communicated, addressed a letter to
Jose Ramirez, in Manila, accepting the offer contained in the memorandum of July 4th for the exclusive agency of
the Eclair films. A few days later, on August 5, he addressed another letter couched in the same terms, likewise
accepting the office of the exclusive agency for the Milano Films.

The memorandum offer contained a statement of the price at which the films would be sold, the quantity which
the representative of each was required to take and information concerning the manner and intervals of time for
the respective shipments. The expenses of packing, transportation and other incidentals were to be at the cost of
the purchaser. There was added a clause in which J. F. Ramirez described his function in such transactions as that
of a commission agent and stated that he would see to the prompt shipment of the films, would pay the
manufacturer, and take care that the films were insured — his commission for such services being fixed at 5 per
cent.

What we consider to be the most portion of the two letters of acceptance written by R. J. Fernandez to Jose
Ramirez is in the following terms:

We willingly accepted the officer under the terms communicated by your father in his letter dated at Paris
on July 4th of the present year.
14 | P a g e

These communications were signed in the following form, in which it will be noted the separate signature of R. J.
Fernandez, as an individual, is placed somewhat below and to the left of the signature of the Orientalist Company
as singed by R. J. Fernandez, in the capacity of treasurer:

THE ORIENTALIST COMPANY,

By R. J. FERNANDEZ,
Treasurer,

R. J. FERNANDEZ.

Both of these letters also contained a request that Jose Ramirez should at once telegraph to his father in Paris that
his offer had been accepted by the Orientalist Company and instruct him to make a contract with the film
companies, according to the tenor of the offer, and in the capacity of attorney-in-fact for the Orientalist Company.
The idea behind the latter suggestion apparently was that the contract for the films would have to be made
directly between the film-producing companies and the Orientalist Company; and it seemed convenient, in order
to save time, that the Orientalist Company should clothed J. F. Ramirez with full authority as its attorney-in-fact.
This idea was never given effect; and so far as the record shows, J. F. Ramirez himself procured the films upon his
own responsibility, as he indicated in the officer of July 4 that he would do, with the result that the only
contracting parties in this case are J. F. Ramirez of the one part, and the Orientalist Company, with Ramon J.
Fernandez of the other.

In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each shipment being
attached to the proper bill of lading. It appears that the Orientalist Company was without funds to meet these
obligations and the first few drafts were dealt with in the following manner: The drafts, upon presented through
the bank, were accepted in the name of the Orientalist Company by its president B. Hernandez, and were taken up
by the latter with his own funds. As the drafts had thus been paid by B. Hernandez, the films which had been
procured by he payment of said drafts were treated by him as his own property; and they in fact never came into
the actual possession of the Orientalist Company as owner at all, though it is true Hernandez rented the films to
the Orientalist Company and they were exhibited by it in the Oriental Theater under an arrangement which was
made between him and the theater's manager.

During the period between February 27, 1914, and April 30, 1914, there arrived in the city of Manila several
remittances of films from Paris, and it is these shipments which have given occasion for the present action. All of
the drafts accompanying these films were drawn, as on former occasions, upon the Orientalist Company; and all
were accepted in the name of B. Hernandez, except the last, which was accepted by B. Hernandez individually.
None of the drafts thus accepted were taken up by the drawee or by B. Hernandez when they fell due; and it was
finally necessary for the plaintiff himself to take them up as dishonored by non-payment.

Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist Company, and Ramon
J. Fernandez. As the films which accompanied the dishonored were liable to deteriorate, the court, upon
application of the plaintiff, and apparently without opposition on the part of the defendants, appointed a receiver
who took charge of the films and sold them. The amount realized from this sale was applied to the satisfaction of
the plaintiff's claim and was accordingly delivered to him in part payment thereof. At trial judgment was given for
the balance due to the plaintiff, namely P6,018.93, with interest from May 19, 1914, the date of the institution of
the action. In the judgment of the trial court the Orientalist Company was declared to be a principal debtor and
Ramon J. Fernandez was declared to be liable subsidiarily as guarantor. From this judgment both of the parties
defendant appealed.

In this Court neither of the parties appellant make any question with respect to the right of the plaintiff to recover
from somebody the amount awarded by the lower court; but each of the defendants insists the other is liable for
the whole. It results that the real contention upon this appeal is between the two defendants.
15 | P a g e

It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not challenged by the Orientalist
Company that the judgment has already been executed as against the company is exclusively and primarily liable
the entire indebtedness, the question as to the liability of Ramon J. Fernandez would be academic. But if the latter
is liable as principal obligor for the whole or any part of the debt, it will be necessary to modify the judgment in
order to adjust the rights of the defendants in accordance with such finding.

It will be noted that the action is primarily founded upon the liability created by the letters dated July 30th and
August 5, 1913, in connection with the plaintiff's offer of July 4, 1913; and both of the letters mentioned are copied
into the complaint as the foundation of the action. The action is not based upon the dishonored drafts which were
accepted by B. Hernandez in the name of the Orientalist Company; and although these drafts, as well as the last
draft, which was accepted by B. Hernandez individually, have been introduced in evidence, this was evidently done
for the purpose of proving the amount of damages which the plaintiff was entitled to recover.

In the discussion which is to follow we shall consider, first, the question of the liability of the corporation upon the
contracts contained in the letters of July 30 and August 5, 1913, and, secondly the question of the liability of
Ramon J. Fernandez, based upon his personal signature to the same documents.

As to the liability of the corporation a preliminary point of importance arises upon the pleadings. The action, as
already stated, is based upon documents purporting to be signed by the Orientalist Company, and copies of the
documents are set out in the complaint. It was therefore incumbent upon the corporation, if it desired to question
the authority of Fernandez to bind it, to deny the due execution of said contracts under oath, as prescribed in
section 103 of the Code of Civil procedure. Said section, in the part pertinent to the situation now under
consideration, reads as follows:

When an action is brought upon a written instrument and the complaint contains or has annexed or has
annexed a copy of such instrument, the genuineness and due execution of the instrument shall be
deemed admitted, unless specifically denied under oath in the answer.

No sworn answer denying the genuineness and due execution of the contracts in question or questioning the
authority of Ramon J. Fernandez to bind the Orientalist Company was filed in this case; but evidence was admitted
without objection from the plaintiff, tending to show that Ramon J. Fernandez had no such authority. This
evidence consisted of extracts from the minutes of the proceedings of the company's board of directors and also
of extracts from the minutes of the proceedings of the company's stockholders, showing that the making of this
contract had been under consideration in both bodies and that the authority to make the same had been withheld
by the stockholders. It therefore becomes necessary for us to consider whether the administration resulting from
the failure of the defendant company to deny the execution of the contracts under oath is binding upon it for all
purposes of this lawsuit, or whether such failure should be considered a mere irregularity of procedure which was
waived when the evidence referred to was admitted without objection from the plaintiff. The proper solution of
this problem makes it necessary to consider carefully the principle underlying the provision above quoted.

That the situation was one in which an answer under oath denying the authority of the agent should have been
interposed, supposing that the company desired to contest this point, is not open to question. In the case of
Merchant vs. International Banking Corporation, (6 Phil. Rep., 314), it appeared that one Brown has signed the
name of the defendant bank as guarantor of a promissory note. The bank was sued upon this guaranty and at the
hearing attempted to prove that Brown had no authority to bind the bank by such contract. It was held that buy
failing to deny the contract under oath, the bank had admitted the genuineness and due execution thereof, and
that this admission extended not only to the authenticity of the signature of Brown but also to his authority. Said
Justice Willard: "The failure of the defendant to deny the genuineness and due execution of this guaranty under
oath was an admission not only of the signature of Brown, but also his authority to make the contract in behalf of
the defendant and of the power the contract in behalf of the defendant and of the power of the defendant to
enter into such a contract.
16 | P a g e

The rule thus stated is in entire accord with the doctrine prevailing in the United States, as will be seen by
reference to the following, among other authorities:

The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining corporation upon an appeal
bond. The name of the company had been affixed to the obligation by an agent, and no sufficient affidavit was
filed by the corporation questioning its signature or the authority of the agent to bind the company. It was held
that the plaintiff did not have to prove the due execution of the bond and that the corporation as to be taken as
admitting the authority of the agent to make the signature. Among other things the court said: "But it is said that
the authority of Barrett to execute the bond is distinguishable from the signing and, although the signature must
be denied under oath, the authority of the agent need not be. Upon this we observe that the statute manifestly
refers to the legal effect of the signature, rather than the manual act of singing. If the name of the obligor, in a
bond, is subscribed by one in his presence, and by his direction, the effect is the same as if his name should be
signed with his own hand, and under such circumstances we do not doubt that the obligor must deny his signature
under oath, in order to put the obligee to proof of the fact. Quit facit per aliam facit per se, and when the name is
signed by one thereunto authorized, it is as much as the signature of the principal as if written with his own hand.
Therefore, if the principal would deny the authority of the agent, as the validity of the signature is thereby directly
attacked, the denial must be under oath.

In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note purporting to have
been given by on A. B., as the treasurer of the defendant company. Said the court: "Under the Judiciary Act of
1799, requiring the defendant to deny on oath an instrument of writing, upon which he is sued, the plea in this
case should have been verified.

If the person who signed this note for the company, and upon which they are sued, was not authorized to make it,
let them say so upon oath, and the onus is then on the plaintiff to overcome the plea."

It should be noted that the provision contained in section 103 of our Code of Civil Procedure is embodied in some
form or other in the statutes of probably all of the American States, and it is not by any means peculiar to the laws
of California, though it appears to have been taken immediately from the statutes of that State. (Secs. 447, 448,
California Code of Civil Procedure.)

There is really a broader question here involved than that which relates merely to the formality of verifying the
answer with an affidavit. This question arises from the circumstance that the answer of the corporation does not in
any was challenge the authority of Ramon J. Fernandez to bind it by the contracts in question and does not set
forth, as a special defense, any such lack of authority in him. Upon well-established principles of pleading lack of
authority in an officer of a corporation to bind it by a contract executed by him in its name is a defense which
should be specially pleaded — and this quite apart from the requirement, contained in section 103, that the
answer setting up such defense should be verified by oath. But is should not here escape observation that section
103 also requires — in denial contemplated in that section shall be specific. An attack on the instrument in general
terms is insufficient, even though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)

In the first edition of a well-known treatise on the laws of corporations we find the following proposition:

If an action is brought against a corporation upon a contract alleged to be its contract, if it desires to set
up the defense that the contract was executed by one not authorized as its agent, it must plead non est
factum. (Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)

Again, says the same author:

A corporation can not avail itself of the defense that it had no power to enter into the obligation to
enforce which the suit is brought, unless it pleads that defense. This principle applies equally where the
17 | P a g e

defendant intends to challenge the power of its officer or agent to execute in its behalf the contract upon
which the action brought and where it intends to defend on the ground of total want of power in the
corporation to make such a contract. (Opus citat. sec. 7619.)

In Simon vs. Calfee (80 Ark., 65), it was said:

Though the power of the officers of a business corporation to issue negotiable paper in its name is not
presumed, such corporation can not avail itself of a want of power in its officers to bind it unless the
defense was made on such ground.

The rule has been applied where the question was whether corporate officer, having admitted power to make a
contract, had in the particular instance exceeded that authority, (Merill vs. Consumers' Coal Co., 114 N.Y., 216);
and it has been held that where the answer in a suit against a corporation on its note relies simply on the want of
power of the corporation to issue notes, the defendant can not afterwards object that the plaintiff has not shown
that the officer executing the note were empowered to do so. (Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)

The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing
with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is
found acting for a corporation with the external indicia of authority, any person, not having notice of want of
authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent
to exercise that authority and thereby held him out as a person competent to bind the corporation, or had
acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be
bound, notwithstanding the actual authority may never have been granted. The public is not supposed nor
required to know the transactions which happen around the table where the corporate board of directors or the
stockholders are from time to time convoked. Whether a particular officer actually possesses the authority which
he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the
stranger who deals with the corporation on the faith of the ostensible authority exercised by some of the
corporate officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its
name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this
means the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to
adduce evidence showing either that the authority existed or that the contract was ratified and approved.

We are of the opinion that the failure of the defendant corporation to make any issue in its answer with regard to
the authority of Ramon J. Fernandez to bind it, and particularly its failure to deny specifically under oath the
genuineness and due execution of the contracts sued upon, have the effect of elimination the question of his
authority from the case, considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a
written instrument, the foundation of the suit, is not denied upon oath, it shall be deemed to be admitted. It is
familiar doctrine that an admission made in a pleading can not be controverted by the party making such
admission; and all proof submitted by him contrary thereto or inconsistent therewith should simply be ignored by
the court, whether objection is interposed by the opposite party or not. We can see no reason why a constructive
admission, created by the express words of the statute, should be considered to have less effect than any other
admission.

The parties to an action are required to submit their respective contentions to the court in their complaint and
answer. These documents supply the materials which the court must use in order to discover the points of
contention between the parties; and where the statute says that the due execution of a document which supplies
the foundation of an action is to be taken as admitted unless denied under oath, the failure of the defendant to
make such denial must be taken to operate as a conclusive admission, so long as the pleadings remain that form.

It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial variances between the
allegations of a pleading and the proof shall be disregarded and the facts shall be found according to the evidence.
The same section, however, recognizes the necessity for an amendment of the pleadings. And judgment must be in
18 | P a g e

conformity with the case made in conformity with the case made in the pleadings and established by the proof,
and relief can not be granted that is substantially inconsistent with either. A party can no more succeed upon a
case proved but not alleged than upon a case alleged but nor proved. This rule of course operates with like effect
upon both parties, and applies equality to the defendants special defense as to the plaintiffs cause of action.

Of course this Court, under section 109 of the Code of Civil Procedure, has authority even now to permit the
answer of the defendant to be amended; and if we believed that the interests of justice so required, we would
either exercise that authority or remand the cause for a new trial in court below. As will appear further on in this
opinion, however, we think that the interests of justice will best be promoted by deciding the case, without more
ado, upon the issues presented in the record as it now stands.

That we may not appear to have overlooked the matter, we will observe that two cases are cited from California in
which the Supreme Court of the State has held that where a release is pleaded by way of defense and evidence
tending to destroy its effect is introduced without objection, the circumstance that it was not denied under oath is
immaterial. In the earlier of these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a
railroad company to recover damages for the death of the plaintiff's minor son, alleged to have been killed by the
negligence of the defendant. The defendant company pleaded by way of defense a release purporting to be signed
by the plaintiff, and in its answer inserted a copy of the release. The execution of the release was not denied under
oath; but at the trial evidence was submitted on behalf of the plaintiff tending to show that at the time he signed
the release, he was incompetent by reason of drunkenness to bind himself thereby. It was held that inasmuch as
this evidence had been submitted by the plaintiff without objection, it was proper for the court to consider it. We
do not question the propriety of that decision, especially as the issue had been passed upon by a jury; but we
believe that the decision would have been more soundly planted if it had been said that the incapacity of the
plaintiff, due to his drunken condition, was a matter which did not involve either the genuineness or due execution
of the release. Like the defenses of fraud, coercion, imbecility, and mistake, it was a matter which could be proved
under the general issue and did not have to be set up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432,
433.) A somewhat similar explanation can, we think, be given of the case of Clark vs. Child in which the rule
declared in the earlier case was followed. With respect to both decisions which we merely observe that upon point
of procedure which they are supposed to maintain, the reasoning of the court is in our opinion unconvincing.

We shall now consider the liability of the defendant company on the merits just as if that liability had been
properly put in issue by a specific answer under oath denying the authority of Fernandez go to bind it. Upon this
question it must at the outset be premised that Ramon J. Fernandez, as treasurer, had no independent authority to
bind the company by signing its name to the letters in question. It is declared by signing its name to the letters in
question. It is declared in section 28 of the Corporation Law that corporate power shall be exercised, and all
corporate business conducted by the board of directors; and this principle is recognized in the by-laws of the
corporation in question which contain a provision declaring that the power to make contracts shall be vested in
the board of directors. It is true that it is also declared in the same by-laws that the president shall have the power,
and it shall be his duty, to sign contract; but this has reference rather to the formality of reducing to proper form
the contract which are authorized by the board and is not intended to confer an independent power to make
contract binding on the corporation.

The fact that the power to make corporate contract is thus vested in the board of directors does not signify that a
formal vote of the board must always be taken before contractual liability can be fixed upon a corporation; for the
board can create liability, like an individual, by other means than by a formal expression of its will. In this
connection the case of Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. If there appeared
that the secretary of the defendant corporation had signed an obligation on its behalf binding it as guarantor of
the performance of an important contract upon which the name of another corporation appeared as principal. The
defendant company set up by way of defense that is secretary had no authority to bind it by such an engagement.
The court found that the guaranty was given with the knowledge and consent of the president and directors, and
that this consent of the president and directors, and that this consent was given with as much observance of
formality as was customary in the transaction of the business of the company. It was held that, so far as the
19 | P a g e

authority of the secretary was concerned, the contract was binding. In discussing this point, the court quoted with
approval the following language form one of its prior decisions:

The authority of the subordinate agent of a corporation often depends upon the course of dealings which
the company or its director have sanctioned. It may be established sometimes without reference to
official record of the proceedings of the board, by proof of the usage which the company had permitted
to grow up in business, and of the acquiescence of the board charged with the duty of supervising and
controlling the company's business.

It appears in evidence, in the case now before us, that on July 30, the date upon which the letter accepting the
offer of the Eclair films was dispatched the board of directors of the Orientalist Company convened in special
session in the office of Ramon J. Fernandez at the request of the latter. There were present the four members,
including the president, who had already signified their consent to the making of the contract. At this meeting, as
appears from the minutes, Fernandez informed the board of the offer which had been received from the plaintiff
with reference to the importation of films. The minutes add that terms of this offer were approved; but at the
suggestion of Fernandez it was decided to call a special meeting of the stockholders to consider the matter and
definite action was postponed.

The stockholders meeting was convoked upon September 18, 1913, upon which occasion Fernandez informed
those present of the offer in question and of the terms upon which the films could be procured. He estimated that
the company would have to make an outlay of about P5,500 per month, if the offer for the two films should be
accepted by it.

The following extracts from the minutes of this meeting are here pertinent:

Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for the purpose
of avoiding that other importers should get ahead of the corporation in this regard, he and Messrs. B.
Hernandez, Leon Monroy, and Dr. Papa met for the purpose of considering the acceptance of the offer
together with the responsibilities attached thereto, made to the corporation by the film manufacturers
of Eclair and Milano of Paris and Italy respectively, inasmuch as the first shipment of films was then
expected to arrive.

At the same time he informed the said stockholders that he had already made arrangements with respect
to renting said films after they have been once exhibited in the Cine Oriental, and that the corporation
could very well meet the expenditure involved and net a certain profit, but that, if we could enter into a
contract with about nine cinematographs, big gains would be obtained through such a step.

The possibility that the corporation might not see fit to authorize the contract, or might for lack of funds be unable
to make the necessary outlay, was foreseen; and in such contingency the stockholders were informed, that the
four gentlemen above mentioned (Hernandez, Fernandez, Monroy, and Papa) "would continue importing said
films at their own account and risk, and shall be entitled only to a compensation of 10 per cent of their outlay in
importing the films, said payment to be made in shares of said corporation, inasmuch as the corporation is lacking
available funds for the purpose, and also because there are 88 shares of stock remaining still unsold."

In view of this statement, the stockholders adopted a resolution to the effect that the agencies of the Eclair and
Milano films should be accepted, if the corporation could obtain the money with which to meet the expenditure
involved, and to this end appointed a committee to apply to the bank for a credit. The evidence shows that an
attempt was made, on behalf of the corporation, to obtain a credit of P10,000 from the Bank of the Philippine
Islands for the purpose indicated, but the bank declined to grant his credit. Thereafter another special meeting of
the shareholders of the defendant corporation was called at which the failure of their committee to obtain a credit
from the bank was made known. A resolution was thereupon passed to the effect that the company should pay to
20 | P a g e

Hernandez, Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay in importing the films,
said payment to be made in shares of the company in accordance with the suggestion made at the previous
meeting. At the time this meeting was held three shipment of the films had already been received in Manila.

We believe it is a fair inference from the recitals of the minutes of the stockholders meeting of September 18, and
especially from the first paragraph above quoted, that this body was then cognizant that the officer had already
been accepted in the name of the Orientalist Company and that the films which were then expected to arrive were
being imported by virtue of such acceptance. Certainly four members of the board of directors there present were
aware of this fact, as the letter accepting the offer had been sent with their knowledge and consent. In view of this
circumstance, a certain doubt arises whether they meant to utilize the financial assistance of the four so-called
importers in order that the corporation might bet the benefit of the contract for the films, just as it would have
utilized the credit of the bank if such credit had been extended. If such was the intention of the stockholders their
action amounted to a virtual, though indirect, approval of the contract. It is not however, necessary to found the
judgment on this interpretation of the stockholders proceedings, inasmuch as we think for reasons presently to be
stated, that the corporation is bound, and we will here assume that in the end the contract were not approved by
the stockholders.

It will be observed that Ramon J. Fernandez was the particular officer and member of the board of directors who
was most active in the effort to secure the films for the corporation. The negotiations were conducted by him with
the knowledge and consent of other members of the board; and the contract was made with their prior approval.
As appears from the papers in this record, Fernandez was the person to who keeping was confided the printed
stationery bearing the official style of the corporation, as well as rubber stencil with which the name of the
corporation could be signed to documents bearing its name.

Ignoring now, for a moment, the transactions of the stockholders, and reverting to the proceedings of the board of
directors of the Orientalist Company, we find that upon October 27, 1913, after Fernandez had departed from the
Philippine Islands, to be absent for many months, said board adopted a resolution conferring the following among
other powers on Vicente Ocampo, the manager of the Oriental theater, namely:

(1) To rent a box for the films in the "Kneeler Building."

(4) To be in charge of the films and of the renting of the same.

(5) To advertise in the different newspapers that we are importing films to be exhibited in the Cine
Oriental.

(6) Not to deliver any film for rent without first receiving the rental therefor or the guaranty for the
payment thereof.

(7) To buy a book and cards for indexing the names of the films.

(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the Hon. R. Acuña to enter
into agreements with cinematograph proprietors in the provinces for the purpose of renting films from
us.

It thus appears that the board of directors, before the financial inability of the corporation to proceed with the
project was revealed, had already recognized the contract as being in existence and had proceeded to take the
steps necessary to utilize the films. Particularly suggestive is the direction given at this meeting for the publication
of announcements in the newspapers to the effect that the company was engaged in importing films. In the light
of all the circumstances of the case, we are of the opinion that the contracts in question were thus inferentially
21 | P a g e

approved by the company's board of directors and that the company is bound unless the subsequent failure of the
stockholders to approve said contracts had the effect of abrogating the liability thus created.

Both upon principle and authority it is clear that the action of the stockholders, whatever its character, must be
ignored. The functions of the stockholders of a corporation are, it must be remembered, of a limited nature. The
theory of a corporation is that the stockholders may have all the profits but shall turn over the complete
management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for
the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers
defined by-law. In conformity with this idea it is settled that contract between a corporation and third person must
be made by the director and not by the stockholders. The corporation, in such matters, is represented by the
former and not by the latter. (Cook on Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely accordant
with the provisions of section 28 of our Corporation Law already referred to. It results that where a meeting of the
stockholders is called for the purpose of passing on the propriety of making a corporate contract, its resolutions
are at most advisory and not in any wise binding on the board.

In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is made. Naturally he can have little or no information as
to what occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law, and we would be sorry to announce a doctrine which
would permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote
quarter of the earth without recourse against the corporations whose name and authority had been used in the
manner disclosed in this case. As already observed, it is familiar doctrine that if a corporation knowingly permits
one of its officer, or any other agent, to do acts within the scope of an apparent authority, and thus hold him out
to the public as possessing power to do those acts, the corporation will as against any one who has in good faith
dealt with the corporation through such agent, be estopped from denying his authority; and where it is said "if the
corporation permits" this means the same as "if the thing is permitted by the directing power of the corporation."

It being determined that the corporation is bound by the contract in question, it remains to consider the character
of the liability assumed by R. J. Fernandez, in affixing his personal signature to said contract. The question here is
whether Fernandez is liable jointly with the Orientalists Company as a principal obligor, or whether his liability is
that of a guarantor merely.

As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is not in line with
the signature of the Orientalist Company, but is set off to the left of the company's signature and somewhat who
sign contracts in some capacity other than that of principal obligor to place their signature alone would justify a
court in holding that Fernandez here took upon himself the responsibility of a guarantor rather than that of a
principal obligor. We do, however, think, that the form in which the contract is signed raises a doubt as to what the
real intention was; and we feel justified, in looking to the evidence to discover that intention. In this connection it
is entirely clear, from the testimony of both Ramirez and Ramon J. Fernandez, that the responsibility of the latter
was intended to be that of guarantor. There is, to be sure, a certain difference between these witnesses as to the
nature of this guaranty, inasmuch as Fernandez would have us believe that his name was signed as a guaranty that
the contract would be approved by the corporation, while Ramirez says that the name was put on the contract for
the purpose of guaranteeing, not the approval of the contract, but its performance. We are convinced that the
latter was the real intention of the contracting parties.

We are not unmindful of the force of that rule of law which declares that oral evidence is admissible to show the
character in which the signature was affixed. This conclusion is perhaps supported by the language of the second
paragraph of article 1281 of the Civil Code, which declares that if the words of a contract should appear contrary to
the evident intention of the parties, the intention shall prevail. But the conclusion reached is, we think, deducible
from the general principle that in case of ambiguity parol evidence is admissible to show the intention of the
contracting parties.
22 | P a g e

It should be stated in conclusion that as the issues in this case have been framed, the only question presented to
this court is: To what extent are the signatory parties to the contract liable to the plaintiff J. F. Ramirez? No
contentious issue is raised directly between the defendants, the Orientalist Company and Ramon H. Fernandez;
nor does the present the present action involve any question as to the undertaking of Fernandez and his three
associates to effect the importation of the films upon their own account and risk. Whether they may be bound to
hold the company harmless is a matter upon which we express no opinion.
23 | P a g e

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES,plaintiff-
appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO GARCIA,3 and LEONOR
MOLL, defendants-appellees.

Simeon M. Gopengco and Solicitor General for plaintiff-appellant.

L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion Reyna, Montecillo and
Belo for defendants-appellees.

SANCHEZ, J.:

The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental organization
on May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation and development of the
coconut industry in the Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant
that corporation the express power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra,
and dessicated coconut, as well as their by-products, and to act as agent, broker or commission merchant of the
producers, dealers or merchants" thereof. The charter amendment was enacted to stabilize copra prices, to serve
coconut producers by securing advantageous prices for them, to cut down to a minimum, if not altogether
eliminate, the margin of middlemen, mostly aliens.4

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia were
members of the Board; defendant Leonor Moll became director only on December 22, 1947.

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the scores of
contracts executed by general manager Kalaw are the disputed contracts, for the delivery of copra, viz:

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b., delivery: August
and September, 1947. This contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.

(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton, f.o.b., Philippine
ports, to be shipped: September-October, 1947. This contract was also assigned to Louis Dreyfus & Co.
(Overseas) Ltd.

(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery: September, 1947.

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los Angeles,
California, delivery: November, 1947.

(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long tons, $164,00
per ton, c.i.f., New York, to be shipped in November, 1947.

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00 per ton, f.o.b., 3
Philippine ports, delivery: November, 1947.

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery: November and
December, 1947. This contract was assigned to Pacific Vegetable Co.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery:
December, 1947 and January, 1948. This contract was assigned to Pacific Vegetable Co.
24 | P a g e

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery:
January, 1948. This contract was assigned to Pacific Vegetable Co.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature supervened. Four
devastating typhoons visited the Philippines: the first in October, the second and third in November, and the
fourth in December, 1947. Coconut trees throughout the country suffered extensive damage. Copra production
decreased. Prices spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export
facilities increased the time necessary to accumulate shiploads of copra. Quick turnovers became impossible,
financing a problem.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval.
It was not until December 22, 1947 when the membership was completed. Defendant Moll took her oath on that
date. A meeting was then held. Kalaw made a full disclosure of the situation, apprised the board of the impending
heavy losses. No action was taken on the contracts. Neither did the board vote thereon at the meeting of January
7, 1948 following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO head did his
best to avert the losses, emphasized that government concerns faced the same risks that confronted private
companies, that NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereafter,
that is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They
unanimously approved the contracts hereinbefore enumerated.

As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers Tons Delivered Undelivered

Pacific Vegetable Oil 2,386.45 4,613.55

Spencer Kellog None 1,000

Franklin Baker 1,000 500

Louis Dreyfus 800 2,200

Louis Dreyfus (Adamson contract of July 30, 1947) 1,150 850

Louis Dreyfus (Adamson Contract of August 14, 1947) 1,755 245

TOTALS 7,091.45 9,408.55

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil Co., in copra
delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons, P159,040.00.

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance of Manila,
upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case 4459); P287,028.00; for the
balance on the August 14 contract (Civil Case 4398), P75,098.63; for that per the September 12 contract reduced
to judgment (Civil Case 4322, appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-of-
court amicable settlement when the Kalaw management was already out. The corporation thereunder paid
Dreyfus P567,024.52 representing 70% of the total claims. With particular reference to the Dreyfus claims,
NACOCO put up the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not
have license to do business here; and (2) failure to deliver was due to force majeure, the typhoons. To project the
utter unreasonableness of this compromise, we reproduce in haec verba this finding below:
25 | P a g e

x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas) Ltd.] against
Santiago Syjuco for non-delivery of copra also involving a claim of P345,654.68 wherein defendant set
up same defenses as above, plaintiff accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following
the same proportion, the claim of Dreyfus against NACOCO should have been compromised for only
P10,000.00, if at all. Now, why should defendants be held liable for the large sum paid as compromise by
the Board of Liquidators? This is just a sample to show how unjust it would be to hold defendants liable for
the readiness with which the Board of Liquidators disposed of the NACOCO funds, although there was
much possibility of successfully resisting the claims, or at least settlement for nominal sums like what
happened in the Syjuco case.5

All the settlements sum up to P1,343,274.52.

In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52 from general
manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It
charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and
defendant board members, including Kalaw, with bad faith and/or breach of trust for having approved the
contracts. The fifth amended complaint, on which this case was tried, was filed on July 2, 1959. Defendants
resisted the action upon defenses hereinafter in this opinion to be discussed.

The lower court came out with a judgment dismissing the complaint without costs as well as defendants'
counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid
salaries and cash deposit due the deceased Kalaw from NACOCO.

Plaintiff appealed direct to this Court.

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.

Right at the outset, two preliminary questions raised before, but adversely decided by, the court below, arrest our
attention. On appeal, defendants renew their bid. And this, upon established jurisprudence that an appellate court
may base its decision of affirmance of the judgment below on a point or points ignored by the trial court or in
which said court was in error.6

1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators has lost its
legal personality to continue with this suit.

Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) under Section 3,
Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation Law]7 whereby, upon voluntary
dissolution of a corporation, the court may direct "such disposition of its assets as justice requires, and may
appoint a receiver to collect such assets and pay the debts of the corporation;" (2) under Section 77 of the
Corporation Law, whereby a corporation whose corporate existence is terminated, "shall nevertheless be
continued as a body corporate for three years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its
affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing
the business for which it was established;" and (3) under Section 78 of the Corporation Law, by virtue of which the
corporation, within the three year period just mentioned, "is authorized and empowered to convey all of its
property to trustees for the benefit of members, stockholders, creditors, and others interested."8

It is defendants' pose that their case comes within the coverage of the second method. They reason out that suit
was commenced in February, 1949; that by Executive Order 372, dated November 24, 1950, NACOCO, together
with other government-owned corporations, was abolished, and the Board of Liquidators was entrusted with the
function of settling and closing its affairs; and that, since the three year period has elapsed, the Board of
26 | P a g e

Liquidators may not now continue with, and prosecute, the present case to its conclusion, because Executive Order
372 provides in Section 1 thereof that —

Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation, the National
Tobacco Corporation, the National Food Producer Corporation and the former enemy-owned or
controlled corporations or associations, . . . are hereby abolished. The said corporations shall be
liquidated in accordance with law, the provisions of this Order, and/or in such manner as the President of
the Philippines may direct; Provided, however, That each of the said corporations shall nevertheless be
continued as a body corporate for a period of three (3) years from the effective date of this Executive
Order for the purpose of prosecuting and defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose of and, convey its property in the manner
hereinafter provided.

Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible within the 3
year period to reduce disputed claims to judgment, nonetheless, "suits by or against a corporation abate when it
ceases to be an entity capable of suing or being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-
391). Corpus Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its
existence so that there must be statutory authority for prolongation of its life even for purposes of pending
litigation"9and that suit "cannot be continued or revived; nor can a valid judgment be rendered therein, and a
judgment, if rendered, is not only erroneous, but void and subject to collateral attack." 10 So it is, that abatement
of pending actions follows as a matter of course upon the expiration of the legal period for liquidation, 11 unless
the statute merely requires a commencement of suit within the added time. 12 For, the court cannot extend the
time alloted by statute. 13

We, however, express the view that the executive order abolishing NACOCO and creating the Board of Liquidators
should be examined in context. The proviso in Section 1 of Executive Order 372, whereby the corporate existence
of NACOCO was continued for a period of three years from the effectivity of the order for "the purpose of
prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and
close its affairs, to dispose of and convey its property in the manner hereinafter provided", is to be read not as an
isolated provision but in conjunction with the whole. So reading, it will be readily observed that no time limit has
been tacked to the existence of the Board of Liquidators and its function of closing the affairs of the various
government owned corporations, including NACOCO.

By Section 2 of the executive order, while the boards of directors of the various corporations were abolished, their
powers and functions and duties under existing laws were to be assumed and exercised by the Board of
Liquidators. The President thought it best to do away with the boards of directors of the defunct corporations; at
the same time, however, the President had chosen to see to it that the Board of Liquidators step into the vacuum.
And nowhere in the executive order was there any mention of the lifespan of the Board of Liquidators. A glance at
the other provisions of the executive order buttresses our conclusion. Thus, liquidation by the Board of Liquidators
may, under section 1, proceed in accordance with law, the provisions of the executive order, "and/or in such
manner as the President of the Philippines may direct." By Section 4, when any property, fund, or project is
transferred to any governmental instrumentality "for administration or continuance of any project," the necessary
funds therefor shall be taken from the corresponding special fund created in Section 5. Section 5, in turn, talks of
special funds established from the "net proceeds of the liquidation" of the various corporations abolished. And by
Section, 7, fifty per centum of the fees collected from the copra standardization and inspection service shall accrue
"to the special fund created in section 5 hereof for the rehabilitation and development of the coconut industry."
Implicit in all these, is that the term of life of the Board of Liquidators is without time limit. Contemporary history
gives us the fact that the Board of Liquidators still exists as an office with officials and numerous employees
continuing the job of liquidation and prosecution of several court actions.

Not that our views on the power of the Board of Liquidators to proceed to the final determination of the present
case is without jurisprudential support. The first judicial test before this Court is National Abaca and Other Fibers
27 | P a g e

Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already dissolved, commenced suit
within the three-year extended period for liquidation. That suit was for recovery of money advanced to defendant
for the purchase of hemp in behalf of the corporation. She failed to account for that money. Defendant moved to
dismiss, questioned the corporation's capacity to sue. The lower court ordered plaintiff to include as co-party
plaintiff, The Board of Liquidators, to which the corporation's liquidation was entrusted by Executive Order 372.
Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider. Ground:
excusable negligence, in that its counsel prepared the amended complaint, as directed, and instructed the board's
incoming and outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the
court and a copy of the same to defendant's counsel. She mailed the copy to the latter but failed to send the
original to the court. This motion was rejected below. Plaintiff came to this Court on appeal. We there said that
"the rule appears to be well settled that, in the absence of statutory provision to the contrary, pending actions by
or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs."
We there said that "[o]ur Corporation Law contains no provision authorizing a corporation, after three (3) years
from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of
three (3) years." 14 However, these precepts notwithstanding, we, in effect, held in that case that the Board of
Liquidators escapes from the operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's
corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is what
impelled the President to create a Board of Liquidators, to continue the management of such matters as may then
be pending." 15 We accordingly directed the record of said case to be returned to the lower court, with instructions
to admit plaintiff's amended complaint to include, as party plaintiff, the Board of Liquidators.

Defendants' position is vulnerable to attack from another direction.

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its assets in the
hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of the government.
It was an express trust. The legal interest became vested in the trustee — the Board of Liquidators. The beneficial
interest remained with the sole stockholder — the government. At no time had the government withdrawn the
property, or the authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we
cannot stay the hand of the Board of Liquidators from prosecuting this case to its final conclusion. 16 The provisions
of Section 78 of the Corporation Law — the third method of winding up corporate affairs — find application.

We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in this case.

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their nineteenth special
defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and may not be deemed to have
survived after his death.18 They say that the controlling statute is Section 5, Rule 87, of the 1940 Rules of
Court.19which provides that "[a]ll claims for money against the decedent, arising from contract, express or
implied", must be filed in the estate proceedings of the deceased. We disagree.

The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned contracts
without prior approval of the board of directors, to the damage and prejudice of plaintiff; and is against Kalaw and
the other directors for having subsequently approved the said contracts in bad faith and/or breach of trust."
Clearly then, the present case is not a mere action for the recovery of money nor a claim for money arising from
contract. The suit involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for
an injury to person or property, real or personal", which survive. 20

The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There, plaintiffs
sought to recover damages from defendant Llemos. The complaint averred that Llemos had served plaintiff by
registered mail with a copy of a petition for a writ of possession in Civil Case 4824 of the Court of First Instance at
Catbalogan, Samar, with notice that the same would be submitted to the Samar court on February 23, 1960 at 8:00
28 | P a g e

a.m.; that in view of the copy and notice served, plaintiffs proceeded to the said court of Samar from their
residence in Manila accompanied by their lawyers, only to discover that no such petition had been filed; and that
defendant Llemos maliciously failed to appear in court, so that plaintiffs' expenditure and trouble turned out to be
in vain, causing them mental anguish and undue embarrassment. Defendant died before he could answer the
complaint. Upon leave of court, plaintiffs amended their complaint to include the heirs of the deceased. The heirs
moved to dismiss. The court dismissed the complaint on the ground that the legal representative, and not the
heirs, should have been made the party defendant; and that, anyway, the action being for recovery of money,
testate or intestate proceedings should be initiated and the claim filed therein. This Court, thru Mr. Justice Jose B.
L. Reyes, there declared:

Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the Rules of Court,
those concerning claims that are barred if not filed in the estate settlement proceedings (Rule 87, sec. 5)
and those defining actions that survive and may be prosecuted against the executor or administrator
(Rule 88, sec. 1), it is apparent that actions for damages caused by tortious conduct of a defendant (as in
the case at bar) survive the death of the latter. Under Rule 87, section 5, the actions that are abated by
death are: (1) claims for funeral expenses and those for the last sickness of the decedent; (2) judgments
for money; and (3) "all claims for money against the decedent, arising from contract express or implied."
None of these includes that of the plaintiffs-appellants; for it is not enough that the claim against the
deceased party be for money, but it must arise from "contract express or implied", and these words (also
used by the Rules in connection with attachments and derived from the common law) were construed
in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,

"to include all purely personal obligations other than those which have their source
in delict or tort."

Upon the other hand, Rule 88, section 1, enumerates actions that survive against a decedent's executors
or administrators, and they are: (1) actions to recover real and personal property from the estate; (2)
actions to enforce a lien thereon; and (3) actions to recover damages for an injury to person or property.
The present suit is one for damages under the last class, it having been held that "injury to property" is
not limited to injuries to specific property, but extends to other wrongs by which personal estate is
injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause a
party to incur unnecessary expenses, as charged in this case, is certainly injury to that party's property
(Javier vs. Araneta, L-4369, Aug. 31, 1953).

The ruling in the preceding case was hammered out of facts comparable to those of the present. No cogent reason
exists why we should break away from the views just expressed. And, the conclusion remains: Action against the
Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia survives.

The preliminaries out of the way, we now go to the core of the controversy.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the controverted
contracts without the prior approval of the corporation's directorate. Plaintiff leans heavily on NACOCO's
corporate by-laws. Article IV (b), Chapter III thereof, recites, as amongst the duties of the general manager, the
obligation: "(b) To perform or execute on behalf of the Corporation upon prior approval of the Board, all contracts
necessary and essential to the proper accomplishment for which the Corporation was organized."

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general manager's
position in the corporate structure. A rule that has gained acceptance through the years is that a corporate officer
"intrusted with the general management and control of its business, has implied authority to make any contract or
do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. 21 As
such officer, "he may, without any special authority from the Board of Directors perform all acts of an ordinary
29 | P a g e

nature, which by usage or necessity are incident to his office, and may bind the corporation by contracts in matters
arising in the usual course of business. 22

The problem, therefore, is whether the case at bar is to be taken out of the general concept of the powers of a
general manager, given the cited provision of the NACOCO by-laws requiring prior directorate approval of NACOCO
contracts.

The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this enterprise are
copra sales for future delivery. The movement of the market requires that sales agreements be entered into, even
though the goods are not yet in the hands of the seller. Known in business parlance as forward sales, it is
concededly the practice of the trade. A certain amount of speculation is inherent in the undertaking. NACOCO was
much more conservative than the exporters with big capital. This short-selling was inevitable at the time in the
light of other factors such as availability of vessels, the quantity required before being accepted for loading, the
labor needed to prepare and sack the copra for market. To NACOCO, forward sales were a necessity. Copra could
not stay long in its hands; it would lose weight, its value decrease. Above all, NACOCO's limited funds necessitated
a quick turnover. Copra contracts then had to be executed on short notice — at times within twenty-four hours. To
be appreciated then is the difficulty of calling a formal meeting of the board.

Such were the environmental circumstances when Kalaw went into copra trading.

Long before the disputed contracts came into being, Kalaw contracted — by himself alone as general manager —
for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts for the
sale of copra to divers parties. During that period, from those copra sales, NACOCO reaped a gross profit of
P3,631,181.48. So pleased was NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it
voted to grant him a special bonus "in recognition of the signal achievement rendered by him in putting the
Corporation's business on a self-sufficient basis within a few months after assuming office, despite numerous
handicaps and difficulties."

These previous contract it should be stressed, were signed by Kalaw without prior authority from the board. Said
contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to
prove one thing: Obviously, NACOCO board met the difficulties attendant to forward sales by leaving the adoption
of means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.

Liberally spread on the record are instances of contracts executed by NACOCO's general manager and submitted to
the board after their consummation, not before. These agreements were not Kalaw's alone. One at least was
executed by a predecessor way back in 1940, soon after NACOCO was chartered. It was a contract of lease
executed on November 16, 1940 by the then general manager and board chairman, Maximo Rodriguez, and A.
Soriano y Cia., for the lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its general
manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca. On December 22,
1947, when the controversy over the present contract cropped up, the board voted to approve a lease contract
previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On
the same date, the board gave its nod to a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also
on that date, the board requested Kalaw to report for action all copra contracts signed by him "at the meeting
immediately following the signing of the contracts." This practice was observed in a later instance when, on
January 7, 1948, the board approved two previous contracts for the sale of 1,000 tons of copra each to a certain
"SCAP" and a certain "GNAPO".

And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of Smith, Bell and
Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such ratification was necessary
because, as stated by Kalaw in that same meeting, "under an existing resolution he is authorized to give a
brokerage fee of only 1% on sales of copra made through brokers." On January 15, 1947, the brokerage fee
agreements of 1-1/2% on three export contracts, and 2% on three others, for the sale of copra were approved by
30 | P a g e

the board with a proviso authorizing the general manager to pay a commission up to the amount of 1-1/2%
"without further action by the Board." On February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the
sale of 2,000 tons of copra was favorably acted upon by the board. On March 19, 1947, a 2% brokerage
commission was similarly approved by the board for Pacific Trading Corporation on the sale of 2,000 tons of copra.

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by the
board, not the sales contracts themselves. And even those fee agreements were submitted only when the
commission exceeded the ceiling fixed by the board.

Knowledge by the board is also discernible from other recorded instances.1äwphï1.ñët

When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow downward
trend but belief was entertained that the nadir might have already been reached and an improvement in prices
was expected. In view thereof, Kalaw informed the board that "he intends to wait until he has signed contracts to
sell before starting to buy copra."23

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current: The copra
market appeared to have become fairly steady; it was not expected that copra prices would again rise very high as
in the unprecedented boom during January-April, 1947; the prices seemed to oscillate between $140 to $150 per
ton; a radical rise or decrease was not indicated by the trends. Kalaw continued to say that "the Corporation has
been closing contracts for the sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24

We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:

521. In connection with the buying and selling of copra the Board inquired whether it is the practice of the
management to close contracts of sale first before buying. The General Manager replied that this practice
is generally followed but that it is not always possible to do so for two reasons:

(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease buying even
when it does not have actual contracts of sale since the suspension of buying by the Nacoco will result in
middlemen taking advantage of the temporary inactivity of the Corporation to lower the prices to the
detriment of the producers.

(2) The movement of the market is such that it may not be practical always to wait for the consummation
of contracts of sale before beginning to buy copra.

The General Manager explained that in this connection a certain amount of speculation is unavoidable.
However, he said that the Nacoco is much more conservative than the other big exporters in this
respect.25

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the company without formal authorization of the
board of directors. 26 In varying language, existence of such authority is established, by proof of the course of
business, the usage and practices of the company and by the knowledge which the board of directors has, or must
bepresumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. 27 So also,

x x x authority to act for and bind a corporation may be presumed from acts of recognition in other
instances where the power was in fact exercised. 28
31 | P a g e

x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in his
official capacity to manage its affairs, his authority to represent the corporation may be implied from the
manner in which he has been permitted by the directors to manage its business.29

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute
contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws
were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that
board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on January 30,
1948, though it is our (and the lower court's) belief that ratification here is nothing more than a mere formality.

Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or
contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original
authority;" and that " [t]he corporation and the other party to the transaction are in precisely the same position as
if the act or contract had been authorized at the time." 30 The language of one case is expressive: "The adoption or
ratification of a contract by a corporation is nothing more or less than the making of an original contract. The
theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or
adoption is equivalent to a grant of prior authority." 31

Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the moment it was
constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus purged of whatever vice or
defect they may have. 33

In sum, a case is here presented whereunder, even in the face of an express by-law requirement of prior approval,
the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations.
And, the conclusion inevitably is that the embattled contracts remain valid.

5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach of trust" in
the board's ratification of the contracts without prior approval of the board. For, in reality, all that we have on the
government's side of the scale is that the board knew that the contracts so confirmed would cause heavy losses.

As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior approval.
Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first thrown on the way only
when the contracts turned out to be unprofitable for NACOCO.

Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru
some motive or interest or ill will; it partakes of the nature of fraud. 34 Applying this precept to the given facts
herein, we find that there was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong,"
or "breach of a known duty," or "Some motive or interest or ill will" that "partakes of the nature of fraud."

Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve their own
private interests, or to pocket money at the expense of the corporation. 35 We have had occasion to affirm that
bad faith contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-
interest or ill will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes
with approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close examination of all
the reported cases, although there are many dicta not easily reconcilable, yet I have found no judgment or decree
which has held directors to account, except when they have themselves been personally guilty of some fraud on
32 | P a g e

the corporation, or have known and connived at some fraud in others, or where such fraud might have been
prevented had they given ordinary attention to their duties. . . ." Plaintiff did not even dare charge its defendant-
directors with any of these malevolent acts.

Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates of fairness. They
did not think of raising their voice in protest against past contracts which brought in enormous profits to the
corporation. By the same token, fair dealing disagrees with the idea that similar contracts, when unprofitable,
should not merit the same treatment. Profit or loss resulting from business ventures is no justification for turning
one's back on contracts entered into. The truth, then, of the matter is that — in the words of the trial court — the
ratification of the contracts was "an act of simple justice and fairness to the general manager and the best interest
of the corporation whose prestige would have been seriously impaired by a rejection by the board of those
contracts which proved disadvantageous." 37

The directors are not liable." 38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions. Result: Copra
production was impaired, prices spiralled, warehouses destroyed. Quick turnovers could not be expected. NACOCO
was not alone in this misfortune. The record discloses that private traders, old, experienced, with bigger facilities,
were not spared; also suffered tremendous losses. Roughly estimated, eleven principal trading concerns did run
losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department of
NACOCO, observed that from late 1947 to early 1948 "there were many who lost money in the trade." 39 NACOCO
was not immune from such usual business risk.

The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus & Co. by pleading in
its answers force majeure as an affirmative defense and there vehemently asserted that "as a result of the said
typhoons, extensive damage was caused to the coconut trees in the copra producing regions of the Philippines and
according to estimates of competent authorities, it will take about one year until the coconut producing regions
will be able to produce their normal coconut yield and it will take some time until the price of copra will reach
normal levels;" and that "it had never been the intention of the contracting parties in entering into the contract in
question that, in the event of a sharp rise in the price of copra in the Philippine market produce by force
majeure or by caused beyond defendant's control, the defendant should buy the copra contracted for at
exorbitant prices far beyond the buying price of the plaintiff under the contract." 40

A high regard for formal judicial admissions made in court pleadings would suffice to deter us from permitting
plaintiff to stray away therefrom, to charge now that the damage suffered was because of Kalaw's negligence, or
for that matter, by reason of the board's ratification of the contracts. 41

Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual obligations. Stock
accessibility was no problem. NACOCO had 90 buying agencies spread throughout the islands. It could purchase
2,000 tons of copra a day. The various contracts involved delivery of but 16,500 tons over a five-month period.
Despite the typhoons, NACOCO was still able to deliver a little short of 50% of the tonnage required under the
contracts.

As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of damage and wrong is
here absent. There cannot be an actionable wrong if either one or the other is wanting. 43

7. On top of all these, is that no assertion is made and no proof is presented which would link Kalaw's acts —
ratified by the board — to a matrix for defraudation of the government. Kalaw is clear of the stigma of bad faith.
Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that he had authority to enter into the
33 | P a g e

contracts, that he did so in the best interests of the corporation; that he entered into the contracts in pursuance of
an overall policy to stabilize prices, to free the producers from the clutches of the middlemen. The prices for which
NACOCO contracted in the disputed agreements, were at a level calculated to produce profits and higher than
those prevailing in the local market. Plaintiff's witness, Barretto, categorically stated that "it would be foolish to
think that one would sign (a) contract when you are going to lose money" and that no contract was executed "at a
price unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO envisioned a profit of
around P752,440.00. 46

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with NACOCO's Chief
Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and quotations from abroad were
guideposts to him.

Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the coming of
unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty. He exerted efforts
to stave off losses. He asked the Philippine National Bank to implement its commitment to extend a P400,000.00
loan. The bank did not release the loan, not even the sum of P200,000.00, which, in October, 1947, was approved
by the bank's board of directors. In frustration, on December 12, 1947, Kalaw turned to the President, complained
about the bank's short-sighted policy. In the end, nothing came out of the negotiations with the bank. NACOCO
eventually faltered in its contractual obligations.

That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem to be
supported by the fact that even as the contracts were being questioned in Congress and in the NACOCO board
itself, President Roxas defended the actuations of Kalaw. On December 27, 1947, President Roxas expressed his
desire "that the Board of Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National
Coconut Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly disputed,
the board, at its regular meeting, appointed Maximo M. Kalaw as acting general manager of the corporation.

Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-15092,
May 18, 1962:

"They (the directors) hold such office charged with the duty to act for the corporation according to their best
judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss during a business depression, or closed down
at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation,
and not by the court. It is a well known rule of law that questions of policy of management are left solely to the
honest decision of officers and directors of a corporation, and the court is without authority to substitute its
judgment for the judgment of the board of directors; the board is the business manager of the corporation,
and so long as it acts in good faith its orders are not reviewable by the courts." (Fletcher on Corporations, Vol. 2, p.
390.) 48

Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49

Viewed in the light of the entire record, the judgment under review must be, as it is hereby, affirmed.

Without costs. So ordered.

34 | P a g e
35 | P a g e

G.R. No. L-20333 June 30, 1967

EMILIANO ACUÑA, plaintiff-appellant,

vs.
BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION, INC., JUSTINO GALANO, TEODORO NARCISO,
PABLO BACTIN, (DR.) EMMANUEL BUMANGLAG, VENANCIO DIRIC, MARCOS ESQUIVEL, EVARISTO CAOILI, FIDEL
BATTULAYAN, DAMIAN ROSSINI, RAYMUNDO BATALLONES, PLACIDO QUIAOIT, and LEON Q.
VERANO defendants-appellees.

Marquez and Marquez for plaintiff-appellant.

Estanislao A. Fernandez for defendants-appellees.

MAKALINTAL, J.:

Appeal taken from the order dated September 10, 1962 of the Court of First Instance of Rizal, Branch V (Quezon
City) dismissing plaintiff's complaint on the ground that it states no cause of action, and discharging the writ of
preliminary attachment issued therein.

On August 9, 1962, plaintiff Emiliano Acuña filed a complaint, which was later amended on August 13, against the
defendant Batac Producers Cooperative Marketing Association, Inc., hereinafter called the Batac Procoma, Inc., or
alternatively, against all the other defendants named in the caption. The complaint alleged, inter alia, that on or
about May 5, 1962 it was tentatively agreed upon between plaintiff and defendant Leon Q. Verano, as Manager of
the defendant Batac Procoma, Inc., that the former would seek and obtain the sum of not less, than P20,000.00 to
be advanced to the defendant Batac Procoma, Inc., to be utilized by it as additional funds for its Virginia tobacco
buying operations during the current redrying season; that plaintiff would be constituted as the corporation's
representative in Manila to assist in handling and facilitating its continuous shipments of tobacco and their delivery
to the redrying plants and in speeding up the prompt payment and collection of all amounts due to the
corporation for such shipments; that for his services plaintiff would be paid a remuneration at the rate of P0.50 per
kilo of tobacco; that said tentative agreement was favorably received by the Board of Directors of the defendant
Batac Procoma Inc., and on May 6, 1962 all the defendants named above, who constituted the entire Board of
Directors of said corporation (except Leon Q. Verano, who was its Manager), together with defendants Justino
Galano and Teodoro Narciso, as President and Vice-President, respectively, unanimously authorized defendant
Leon Q. Verano, by a formal resolution, "to execute any agreement with any person or entity, on behalf of the
corporation, for the purpose of securing additional funds for the corporation, as well as to secure the services of
such person or entity, in the collection of all payments due to the corporation from the PVTA for any tobacco sold
and delivered to said administration; giving and conferring upon the Manager, full and complete authority to bind
the corporation with such person or entity in any agreement, and under such considerations, which the said
Manager may deem expedient and necessary for that purpose; that plaintiff was made to understand by all of said
defendants that the original understanding between him and defendant Leon Q. Verano was acceptable to the
corporation, except that the remuneration for the plaintiff's services would be P0.30 per kilo of tobacco; that on
May 10, 1962, the formal "Agreement" was executed between plaintiff and defendant Leon Q. Verano, as Manager
of the defendant corporation, duly authorized by its Board of Directors for such purpose, and signed by defendants
Justino Galano and Dr. Emmanuel Bumanglag as instrumental witnesses and acknowledged by Atty. Fernando
Alcantara, the Secretary and Legal Counsel of the defendant corporation; that upon plaintiff's inquiry, he was
assured by these defendants that a formal approval of said "Agreement" by the Board was no longer necessary, as
it was a mere "formality" appended to its authorizing resolution and as all the members of the Board had already
agreed to the same; that on the same date, May 10, 1962, plaintiff gave and turned over to the defendant
corporation, thru its treasurer, Dominador T. Cocson the sum of P20,000.00, in the presence of defendants Leon Q.
Verano, Justino Galano, Dr. Emmanuel Bumanglag and Atty. Fernando Alcantara, for which said treasurer issued to
plaintiff its corresponding Official Receipt No. 130852; that from then on, plaintiff diligently and religiously kept his
part of the "Agreement;" that plaintiff even furnished the defendant corporation, upon request of its Manager
Leon Q. Verano three thousand (3,000) sacks which it utilized in the shipment of its tobacco costing P6,000.00 and
36 | P a g e

that plaintiff had personally advanced out of his own personal funds the total sum of P5,000.00 with the full
knowledge, acquiescence and consent of all the individual defendants; that after the defendant corporation was
enabled to replenish its funds with continuous collections from the PVTA for tobacco delivered due to the help,
assistance and intervention of plaintiff, for which the said corporation collected from the PVTA the total sum of
P381,495.00, the "Agreement" was disapproved by its Board of Directors on June 6, 1962. Upon the foregoing
allegations plaintiff prays: (a) that an order of attachment be issued against the properties of defendant
corporation; (b) that after due trial, judgment be rendered condemning defendant corporation, or alternatively, all
the other individual defendants, jointly and severally, to comply with their contractual obligations and to pay
plaintiff the sum of P300,000.00 for his services, plus P31,000.00 for cash advances made by him and P25,000.00
for attorney's fees.

On August 14, 1962, the lower court ordered the issuance of a writ of preliminary attachment against the
properties of the defendants and on the following day, after the plaintiff had posted the required bond, the writ
was accordingly issued by the Clerk of Court.1äwphï1.ñët

On August 22, 1962, the defendants filed a motion to dismiss the complaint on the ground that it stated no cause
of action and to discharge the preliminary attachment on the ground that it was improperly or irregularly issued. In
support of the motion defendants alleged that the contract for services was never perfected because it was not
approved or ratified but was instead disapproved by the Board of Directors of defendant Batac Procoma, Inc., and
that on the basis of plaintiff's pleadings the contract is void and unenforceable. Defendants further denied the fact
that plaintiff had performed his part of the contract, alleging that he had not in any manner intervened in the
delivery and payment of tobacco pertaining to the defendant corporation.

On August 25, 1962, plaintiff filed a written opposition to the motion to dismiss and to discharge the preliminary
attachment.

On September 10, 1962, the trial court sustained defendants' motion and issued the following order:

In resume the Court believes that the complaint states no cause of action and that contract in question is
void ab initio.

IN VIEW OF THE FOREGOING, the amended complaint filed in this case is hereby ordered DISMISSED,
without special pronouncement as to costs. Consequently, the writ of preliminary attachment issued
herein is ordered discharged. However, it is of record that the defendants has (sic) deposited the Court
the amount of P20,400.00 representing the amount of money invested by the plaintiff plus the
corresponding interest thereon. Plaintiff, by virtue of this order, may withdraw the same in due time, if he
so desires, upon proper receipt therefor.

From the foregoing order plaintiff interposed the present appeal.

Appellant has assigned four errors, which we shall consider seriatim:

The first assignment reads: "As the defendants' motion to dismiss the complaint and to discharge the preliminary
attachment was based on the specific ground that the complaint states no cause of action (Sec. 1 [f], Rule 8, Rules
of Court), the lower court should not have gone beyond, and it should have limited itself, to the facts alleged in the
complaint in considering and resolving said motion to dismiss.

It is a settled principle that when a motion to dismiss is based on the ground that the complaint does not state a
cause of action (Rule 8, Section 1, par. 7 of the old Rules; Rule 16, Section 1., par. [g] of the Revised Rules) the
averments in the complaint are deemed hypothetically admitted and the inquiry is limited to whether or not they
make out a case on which relief can be granted. If said motion assails directly or indirectly the veracity of the
37 | P a g e

allegations, it is improper to grant the motion upon the assumption that the averments therein are true and those
of the complaint are not (Carreon vs. Prov. Board of Pampanga, 52 O.G. 6557.) The sufficiency of the motion
should be tested on the strength of the allegations of facts contained in the complaint, and no other. If these
allegations show a cause of action, or furnish sufficient basis by which the complaint can be maintained, the
complaint should not be dismissed regardless of the defenses that may be averred by the defendants. (Josefa de
Jesus, et al. vs. Santos Belarmino, 50 O.G. 3004-3068; Verzosa vs. Rigonan, G.R. No. L-6459, April 23, 1954;
Dimayuga vs. Dimayuga, 51 O.G. 2397-2400.)

The first ground upon which the order of dismissal issued by the lower court is predicated is that the Board of
Directors of defendant corporation did not approve, the agreement in question — in fact disapproved it by a
resolution passed on June 6, 1962 — and that as a consequence the "suspensive condition" attached to the
agreement was never fulfilled. The specific stipulation referred to by the Court as a suspensive condition states:
"provided, however that the contract entered into by said manager to carry out the purposes above-mentioned
shall be subject to the approve by the Board."

A perusal of the complaint reveals that it contains sufficient allegations indicating such approval or at least
subsequent ratification. On the first point we note the following averments: that on May 9th the plaintiff met with
each and all of the individual defendants (who constituted the entire Board of Directors) and discussed with them
extensively the tentative agreement and he was made to understand that it was acceptable to them, except as to
plaintiff's remuneration; that it was finally agreed between plaintiff and all said Directors that his remuneration
would be P0.30 per kilo (of tobacco); and that after the agreement was formally executed he was assured by said
Directors that there would be no need of formal approval by the Board. It should be noted in this connection that
although the contract required such approval it did not specify just in what manner the same should be given.

On the question of ratification the complaint alleges that plaintiff delivered to the defendant corporation the sum
of P20,000.00 as called for in the contract; that he rendered the services he was required to do; that he furnished
said defendant 3,000 sacks at a cost of P6,000.00 and advanced to it the further sum of P5,000.00; and that he did
all of these things with the full knowledge, acquiescence and consent of each and all of the individual defendants
who constitute the Board of Directors of the defendant corporation. There is abundant authority in support of the
proposition that ratification may be express or implied, and that implied ratification may take diverse forms, such
as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and
retention of benefits flowing therefrom.

Significantly the very resolution of the Board of Directors relied upon by defendants appears to militate against
their contention. It refers to plaintiff's failure to comply with certain promises he had made, as well as to his
interpretation of the contract with respect to his remuneration which, according to the Board, was contrary to the
intention of the parties. The resolution then proceeds to "disapprove and/or rescind" the said contract. The idea of
conflicting interpretation, or rescission on the ground that one of the parties has failed to fulfill his obligation
under the contract, is certainly incompatible with defendants' theory here that no contract had yet been perfected
for lack of approval by the Board of Directors.

Appellants' second assignment of error reads: "Assuming that in resolving the defendants' motion to dismiss the
lower court could consider the new facts alleged therein and the documents annexed thereto it committed an
error in extending such consideration beyond ascertaining only if an issue of fact has been presented and in
actually deciding instead such fact in issue."

The assignment is well taken, and is the logical corollary of the rule that a motion to dismiss on the ground that the
complaint fails to state a cause of action addresses itself to the averments in the complaint and, admitting their
veracity, merely questions their sufficiency to make out a case on which the court can grant relief. Affidavits, such
as those presented by defendants in support of the motion, can only be considered for the purpose of ascertaining
whether an issue of fact is presented, but not as a basis for deciding the factual issue itself. This should await the
trial on the merits.
38 | P a g e

The third assignment of error assails the lower court's ruling that even assuming that a contract had been
perfected no action can be maintained thereon because its object was illegal and therefore void. Specific reference
was made by said court to an affidavit executed by appellant on May 10, 1962 which reads:

That I, EMILIANO ACUA, the party of the Second Part in the contract entered into with the Batac Procoma,
Inc., the party of the First Part in same contract declares that the amount of P0.30 per kilo is referred to
upgraded tobacco only as delivered. This supplements paragraph three of the contract referred to.
Deliveries downgraded or maintained at the redrying plant are deemed not included.

The lower court, in its order of dismissal, held that "the upgrading of tobaccos is clearly prohibited under our
laws," and hence the contract cannot be validly ratified. Evidently the court had in mind a fraudulent upgrading of
tobacco by appellant as part of the services called for under the contract. This conclusion, however, is squarely
traversed by appellant in another affidavit attached to his reply and opposition to the motion to dismiss, in which
he explained the circumstances which led to the execution of the one relied upon by the court, and the real
meaning of the word "upgraded" therein. It is therein stated:

That after the execution of the agreement (Annex "B" to the amended complaint in said Civil Case No. Q-6547),
Messrs. Verano, Galano and Dr. Bumanglag of the defendant Corporation indicated to me that if the price of P0.30
per kilo stipulated there to be paid to me were to be indiscriminately applied to all deliveries of tobaccos, the
Corporation would be placed in a disadvantageous and losing position, and they proceeded to explain to me the
following, —

(a) that when the farmers sell their tobaccos to the Facoma, they do so in bunches of assorted qualities
which may belong either to Class A, B, C, D and E, and upon such purchase they are initially given an
arbitrary classification of any of such classes as the case may be, the tendency generally being to give
them a lower classification to equalize or average the assorted qualities as much as possible, and this is
what is termed "downgrading;"

(b) that after the tobaccos have been purchased by the Facoma from the farmers, they are then
reassorted and re-classified in accordance with their actual quality or grade as found by the officials of the
Facoma, — thus in a bunch which are purchased as Class C, D or E, upon reclassification those found to
belong to Class A are separated from Class B, those belonging to Class B are separated from Class C, and
so on, and these bunches so reclassified necessarily have a higher grade than the farmers, and this is what
is termed "upgrading" upon delivery original arbitrary classification given when purchased from the which
was used in the addendum;

(c) the Facoma, in turn, delivers these properly re-classified tobaccos to the redrying plant, and there, a
group of officials composed of a representative of the redrying plant, the Bureau of Internal Revenue, the
General Auditing Office, the PVTA and the Facoma representative, then examines and grades the
tobaccos, and if the classification given by the Facoma is found correct and not changed, then and only
then would or should be entitled to collect the P0.30 per kilo, and this they said is what is termed "grade
maintained" — on the other hand, if these officials found the classification incorrect and lowers the
classification given by the Facoma, thus class A to B, or from B to C, then the tobaccos are considered or
said to be "downgraded" and in that event I should not receive any centavo for such deliveries, and it is in
this sense that I was made to understand the term;

Believing implicitly in the foregoing explanations of the defendants and in the reasonableness of their proposal, I
agreed readily and Atty. Fernando Alcantara, Legal Counsel and Secretary of the defendant Corporation forthwith
prepared, drafted and typed the "addendum" in question in their own typewriter of the Corporation; and as I am
not a lawyer and was not well versed with the usage, customs and phraseology usually used in tobacco trading, I
relied in absolute good faith that, as explained by the defendants, there was nothing wrong nor illegal in the use of
39 | P a g e

the words "upgrading" and "downgrading" used in said addendum, which Atty. Alcantara unfortunately used in the
same;

Apart from the above, defendants knew the physical impossibility of "upgrading" the tobaccos at the redrying
plant, because at the time of the transaction, only the PTFC & RC was allowed to accept tobacco for redrying and
under the existing regulations and practices the delivery area for tobaccos at the redrying plant is enclosed by a
high wire fence inaccessible to the general public and the only ones who actually make the grading of tobaccos
delivered, are the (1) American representative of the redrying plant (PTFC & RC), (2) the PVTA, (3) the BIR, and (4)
the General Auditing Office in the presence of the representative of the FACOMA, and since the redrying plant is
compelled to purchase 41% of all tobaccos delivered and redried under their negotiated management contract, it
is highly improbable that the representative of the redrying plant (PTFC & RC) whose conformity to the actual
grading done must appear in the corresponding "guia" or tally sheet, would allow the "upgrading" of tobaccos,
aside from the fact that stringent measures had been devised under the present administration to prevent the
"upgrading" of tobaccos by any party. Certainly, an impossible condition could not have been contemplated by me
and the defendants; (Record on Appeal, pp. 171-175).

The foregoing explanation, on its face, is satisfactory and deprives the term "upgraded" of the sinister and illegal
connotation attributed to it by the lower court. To be sure, whether the allegations in this subsequent affidavit are
true or not is a question of fact; but it is precisely for this reason that they can neither be summarily admitted nor
rejected for purposes of a motion to dismiss. Due process demands that they be the subject of proof and
considered only after trial on the merits.

The other errors assigned by appellant are merely incidental to those already discussed, and require no separate
treatment.

Wherefore, the order appealed from is set aside and the case is remanded to the court a quo for further
proceedings, without prejudice to, the right of plaintiff-appellant to ask for another writ of attachment in said
court, as the circumstances may warrant. Costs against defendants-appellees.
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41 | P a g e

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all other stockholders of
the Balatoc Mining Company, etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN W.
JAUSSERMANN, and A. W. BEAM, defendants-appellees.

Gibbs and McDonough and Roman Ozaeta for appellants.

DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.

STREET, J.:

This action was originally instituted in the Court of First Instance of the City of Manila by F. M. Harden, acting in his
own behalf and that of all other stockholders of the Balatoc Mining Co. who might join in the action and contribute
to the expense of the suit. With the plaintiff Harden two others, J. D. Highsmith and John C. Hart, subsequently
associated themselves. The defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co., H. E.
Renz, John W. Haussermann, and A. W. Beam. The principal purpose of the original action was to annul a
certificate covering 600,000 shares of the stock of the Balatoc Mining Co., which have been issued to the Benguet
Consolidated Mining Co., and to secure to the Balatoc Mining Co., the restoration of a large sum of money alleged
to have been unlawfully collected by the Benguet Consolidated Mining Co., with legal interest, after deduction
therefrom of the amount expended by the latter company under a contract between the two companies, bearing
date of March 9, 1927. The complaint was afterwards amended so as to include a prayer for the annulment of this
contract. Shortly prior to the institution of this lawsuit, the Benguet Consolidated Mining Co., transferred to H. E.
Renz, as trustee, the certificate for 600,000 shares of the Balatoc Mining Co. which constitute the principal subject
matter of the action. This was done apparently to facilitate the splitting up to the shares in the course of the sale
or distribution. To prevent this the plaintiffs, upon filing their original complaint, procured a preliminary injunction
restraining the defendants, their agents and servants, from selling, assigning or transferring the 600,000 shares of
the Balatoc Mining Co., or any part thereof, and from removing said shares from the Philippine Islands. This
explains the connection of Renz with the case. The other individual defendants are made merely as officials of the
Benguet Consolidated Mining Co. Upon hearing the cause the trial court dismissed the complaint and dissolved the
preliminary injunction, with costs against the plaintiffs. From this judgment the plaintiffs appealed.

The facts which have given rise this lawsuit are simple, as the financial interests involve are immense. Briefly told
these facts are as follows: The Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad
anonima in conformity with the provisions of Spanish law; while the Balatoc Mining Co. was organized in
December 1925, as a corporation, in conformity with the provisions of the Corporation Law (Act No. 1459). Both
entities were organized for the purpose of engaging in the mining of gold in the Philippine Islands, and their
respective properties are located only a few miles apart in the subprovince of Benguet. The capital stock of the
Balatoc Mining Co. consists of one million shares of the par value of one peso (P1) each.

When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped; and the
original stockholders were unable to supply the means needed for profitable operation. For this reason, the board
of directors of the corporation ordered a suspension of all work, effective July 31, 1926. In November of the same
year a general meeting of the company's stockholders appointed a committee for the purpose of interesting
outside capital in the mine. Under the authority of this resolution the committee approached A. W. Beam, then
president and general manager of the Benguet Company, to secure the capital necessary to the development of
the Balatoc property. As a result of the negotiations thus begun, a contract, formally authorized by the
management of both companies, was executed on March 9, 1927, the principal features of which were that the
42 | P a g e

Benguet Company was to proceed with the development and construct a milling plant for the Balatoc mine, of a
capacity of 100 tons of ore per day, and with an extraction of at least 85 per cent of the gold content. The Benguet
Company also agreed to erect an appropriate power plant, with the aerial tramlines and such other surface
buildings as might be needed to operate the mine. In return for this it was agreed that the Benguet Company
should receive from the treasurer of the Balatoc Company shares of a par value of P600,000, in payment for the
first P600,000 be thus advanced to it by the Benguet Company.

The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had spent upon
the development the sum of P1,417,952.15. In compensation for this work a certificate for six hundred thousand
shares of the stock of the Balatoc Company has been delivered to the Benguet Company, and the excess value of
the work in the amount of P817,952.15 has been returned to the Benguet Company in cash. Meanwhile dividends
of the Balatoc Company have been enriching its stockholders, and at the time of the filing of the complaint the
value of its shares had increased in the market from a nominal valuation to more than eleven pesos per share.
While the Benguet Company was pouring its million and a half into the Balatoc property, the arrangements made
between the two companies appear to have been viewed by the plaintiff Harden with complacency, he being the
owner of many thousands of the shares of the Balatoc Company. But as soon as the success of the development
had become apparent, he began this litigation in which he has been joined by two others of the eighty
shareholders of the Balatoc Company.

Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to hold any
interest in a mining corporation and that the contract by which the interest here in question was acquired must be
annulled, with the consequent obliteration of the certificate issued to the Benguet Company and the
corresponding enrichment of the shareholders of the Balatoc Company.

When the Philippine Islands passed to the sovereignty of the United States, in the attention of the Philippine
Commission was early drawn to the fact that there is no entity in Spanish law exactly corresponding to the notion
of the corporation in English and American law; and in the Philippine Bill, approved July 1, 1902, 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 section 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 provisions, in its original form, reads as follows: "... 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.

For the purposes general description only, it may be stated that the sociedad anonima is something very much like
the English joint stock company, with features resembling those of both the partnership is shown in the fact that
sociedad, the generic component of its name in Spanish, is the same word that is used in that language to
designate other forms of partnership, and in its organization it is constructed along the same general lines as the
ordinary partnership. It is therefore not surprising that for purposes of loose translation the expression sociedad
anonima has not infrequently the other hand, the affinity of this entity to the American corporation has not
escaped notice, and the expression sociedad anonima is now generally translated by the word corporation. But
when the word corporation is used in the sense of sociedad anonima and close discrimination is necessary, it
43 | P a g e

should be associated with the Spanish expression sociedad anonima either in a parenthesis or connected by the
word "or". This latter device was adopted in sections 75 and 191 of the Corporation Law.

In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section 13 of that
Act (No. 1459) the words which we have already quoted from section 75 of the Act of Congress of July 1, 1902
(Philippine Bill); and it is of course obvious that whatever meaning originally attached to this provision in the Act of
Congress, the same significance should be attached to it in section 13 of our Corporation Law.

As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into Philippine
law in the place of the sociedad anonima, it was necessary to make certain adjustments resulting from the
continued co-existence, for a time, of the two forms of commercial entities. Accordingly, in section 75 of 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."

As already observed, the provision above quoted from section 75 of the Act Congress of July 1, 1902 (Philippine
Bill), generally prohibiting corporations engaged in mining and members of such from being interested in any other
corporation engaged in mining, was amended by section 7 of Act No. 3518 of the Philippine Legislature, approved
by Congress March 1, 1929. The change in the law effected by this amendment was in the direction of
liberalization. Thus, the inhibition contained in the original provision against members of a corporation engaged in
agriculture or mining from being interested in other corporations engaged in agriculture or in mining was so
modified as merely to prohibit any such member from holding more than fifteen per centum of the outstanding
capital stock of another such corporation. Moreover, the explicit prohibition against the holding
by any corporation (except for irrigation) of an interest in any other corporation engaged in agriculture or in
mining was so modified as to limit the restriction to corporations organized for the purpose of engaging in
agriculture or in mining.

As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly penalizing
the act of a corporation, a member of a corporation , in acquiring an interest contrary to paragraph (5) of section
13 of the Act. The Philippine Legislature undertook to remedy this situation in section 3 of Act No. 2792 of the
Philippine Legislature, approved on February 18, 1919, but this provision was declared invalid by this court
in Government of the Philippine Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the Act.
Subsequently the Legislature reenacted substantially the same penal provision in section 21 of Act No. 3518, under
a title sufficiently broad to comprehend the subject matter. This part of Act No. 3518 became effective upon
approval by the Governor-General, on December 3, 1928, and it was therefore in full force when the contract now
in question was made.

This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said Act as it now
stands. Omitting the proviso, which seems not to be pertinent to the present controversy, said provision reads as
follows:

SEC. 190 (A). Penalties. — The violation of any of the provisions of this Act and its amendments not
otherwise penalized therein, shall be punished by a fine of not more than five thousand pesos and by
44 | P a g e

imprisonment for not more than five years, in the discretion of the court. If the violation is committed by
a corporation, the same shall, upon such violation being proved, be dissolved by quo
warranto proceedings instituted by the Attorney-General or by any provincial fiscal by order of said
Attorney-General: . . . .

Upon a survey of the facts sketched above it is obvious that there are two fundamental questions involved in this
controversy. The first is whether the plaintiffs can maintain an action based upon the violation of law supposedly
committed by the Benguet Company in this case. The second is whether, assuming the first question to be
answered in the affirmative, the Benguet Company, which was organized as a sociedad anonima, is a corporation
within the meaning of the language used by the Congress of the United States, and later by the Philippine
Legislature, prohibiting a mining corporation from becoming interested in another mining corporation. It is obvious
that, if the first question be answered in the negative, it will be unnecessary to consider the second question in this
lawsuit.

Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers with a sole
view to the public policy that should control in the granting of mining rights. Furthermore, the penalties imposed in
what is now section 190 (A) of the Corporation Law for the violation of the prohibition in question are of such
nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. But these
proceedings can be maintained only by the Attorney-General in representation of the Government.

What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant
Benguet Company has committed no civil wrong against the plaintiffs, and if a public wrong has been committed,
the directors of the Balatoc Company, and the plaintiff Harden himself, were the active inducers of the commission
of that wrong. The contract, supposing it to have been unlawful in fact, has been performed on both sides, by the
building of the Balatoc plant by the Benguet Company and the delivery to the latter of the certificate of 600,000
shares of the Balatoc Company. There is no possibility of really undoing what has been done. Nobody would
suggest the demolition of the mill. The Balatoc Company is secure in the possession of that improvement, and talk
about putting the parties in status quo ante by restoring the consideration with interest, while the Balatoc
Company remains in possession of what it obtained by the use of that money, does not quite meet the case. Also,
to mulct the Benguet Company in many millions of dollars in favor of individuals who have not the slightest
equitable right to that money in a proposition to which no court can give a ready assent.

The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of the
contracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the other party, the
Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would then have us apply the
second paragraph of article 1305 of the Civil Code which declares that an innocent party to an illegal contract may
recover anything he may have given, while he is not bound to fulfill any promise he may have made. But,
supposing that the first hurdle can be safely vaulted, the general remedy supplied in article 1305 of the Civil Code
cannot be invoked where an adequate special remedy is supplied in a special law. It has been so held by this court
in Go Chioco vs. Martinez (45 Phil., 256, 280), where we refused to apply that article to a case of nullity arising
upon a usurious loan. The reason given for the decision on this point was that the Usury Act, as amended, contains
all the provisions necessary for the effectuation of its purposes, with the result that the remedy given in article
1305 of the Civil Code is unnecessary. Much more is that idea applicable to the situation now before us, where the
special provisions give ample remedies for the enforcement of the law by action in the name of the Government,
and where no civil wrong has been done to the party here seeking redress.

The view of the case presented above rest upon considerations arising upon our own statutes; and it would seem
to be unnecessary to ransack the American decisions for analogies pertinent to the case. We may observe,
however, that the situation involved is not unlike that which has frequently arisen in the United States under
provisions of the National Bank Act prohibiting banks organized under that law from holding real property. It has
been uniformly held that a trust deed or mortgaged conveying property of this kind to a bank, by way of security, is
valid until the transaction is assailed in a direct proceeding instituted by the Government against the bank, and the
45 | P a g e

illegality of such tenure supplies no basis for an action by the former private owner, or his creditor, to annul the
conveyance. (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other
analogies point in the same direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428;
Holmes & Griggs Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77
Hun., 332.)

Most suggestive perhaps of all the cases in Compañia Azucarera de Carolina vs. Registrar (19 Porto Rico, 143), for
the reason that this case arose under a provision of the Foraker Act, a law analogous to our Philippine Bill. It
appears that the registrar had refused to register two deeds in favor of the Compañia Azucarera on the ground
that the land thereby conveyed was in excess of the area permitted by law to the company. The Porto Rican court
reversed the ruling of the registrar and ordered the registration of the deeds, saying:

Thus it may be seen that a corporation limited by the law or by its charter has until the State acts every
power and capacity that any other individual capable of acquiring lands, possesses. The corporation may
exercise every act of ownership over such lands; it may sue in ejectment or unlawful detainer and it may
demand specific performance. It has an absolute title against all the world except the State after a proper
proceeding is begun in a court of law. ... The Attorney General is the exclusive officer in whom is confided
the right to initiate proceedings for escheat or attack the right of a corporation to hold land.

Having shown that the plaintiffs in this case have no right of action against the Benguet Company for the infraction
of law supposed to have been committed, we forego cny discussion of the further question whether a sociedad
anonima created under Spanish law, such as the Benguet Company, is a corporation within the meaning of the
prohibitory provision already so many times mentioned. That important question should, in our opinion, be left
until it is raised in an action brought by the Government
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47 | P a g e

W. S. PRICE and THE SULU DEVELOPMENT COMPANY, plaintiffs-appellants,

vs.
H. MARTIN, defendant-appellant.
THE AGUSAN COCONUT COMPANY, defendant-appellee.

J.W. Ferrier for plaintiff-appellants.

G.E. Campbell and W.A. Caldwell for defendant-appellant.
DeWitt, Perkins and Brady for appellee.

HULL, J.:

Plaintiffs brought suit in the Court of First Instance of Manila praying that a mortgage executed by the Sulu
Development Company on its properties in favor of the Agusan Coconut Company be dissolved and declared null
and void, the principal contentions being that at the stockholders' meeting in which the officers of the Sulu
Development Company were elected and at which the proposed mortgage was approved of, 97 shares of stock of
the Sulu Development Company were voted by the proxy of Mrs. Worcester, in whose name the stock at that time
stood upon the books of the company, whereas defendant Martin claimed that he was the true owner and that he
should have voted the stock.

From the records of the Sulu Development Company it appears that at the meeting of November 12, 1925, Martin
presented evidence to the effect that he, and not Mrs. Worcester, was the owner of the 97 shares of stock. Copies
of the documents relied upon by Martin were made a part of the record, but apparently no action was taken by
the stockholders or by the directors, and at the meetings of November 12, 17, and 19, Mrs. Worcester's proxy
apparently voted the stock without protest on the part of Martin or any other stockholder.

As far as the record shows, every formal action taken at those three meetings was unanimous, and Martin at the
last two meetings was accompanied by two members of the Bar of the Philippine Islands as his counsel.

The Sulu Development Company from its inception up to the time of executing the contract was virtually owned
and controlled by Martin. Prince purchased one share of stock about a month before the called meeting but was
not present at the meetings in question.

Another ground relied upon by plaintiffs is a claim that the mortgage was without consideration. The evidence
shows that for years the Agusan Coconut Company, through its general manager, had been advancing sums
through Martin in order that the Sulu Development Company might secure good and sufficient title to a large tract
of land situated near Siasi and thereon develop a coconut plantation. The amount of money so advanced was in
dispute, but between the meeting on November 12 and the final action on November 19, the attorney of the Sulu
Development Company, one of whom was also an accountant, and the attorneys of the Agusan Coconut Company
went over the mutual accounts with care and arrived at the sum set forth in the mortgaged. Had there been no
agreement, suit would have been instituted by the Agusan Company against the Sulu Development Company.

There is also a claim that there was a parol agreement between Martin and Worcester, representing the two
companies, that after the death of Mr. Worcester on May 2, 1924, the Agusan Coconut Company failed to comply
with the terms and conditions of the so-called cultivation agreement, and Martin prayed in his special cross-
complaint and counter-claim that the Defendant Agusan Coconut Company be required to make such further cash
48 | P a g e

advances to "carry out the full scale development of the tract of land in the cultivation agreement and as
contemplated therein."

The trial court, on timely objection, refused to receive the parol evidence as to the cultivation agreement, and
after trial and a lengthy opinion, held that the mortgage in question was valid and refused to order its cancellation.

From that decision plaintiff appeal and make the following assignments of error:

The trial court erred:

1. In refusing appellants the right to introduce evidence as to the "cultivation agreement" extensively
referred to by the parties herein.

2. In refusing to reopen the case on motion filed in due form and manner by the plaintiffs and appellants
herein, on the ground of newly discovered evidence, such motion having been filed the rendition of the
judgment herein.

3. In finding that the plaintiff, W.S. Price, did not appear here as a plaintiff to depend his own right but for
the purpose of giving aid to the defendant, Harry Martin.

4. In ruling that although the 97 shares voted by Mrs. Nanon L. Worcester at the meetings in question
thru her proxy belonged to Harry Martin and were only held in trust by her late husband, Dean C.
Worcester, yet such trusteeship was for the benefit of the Agusan Coconut Company, and that such
company is the actual cestui que trust thereunder, in violation of the express terms of the trust
agreement.

5. In holding that Mrs. Nanon L. Worcester could legally vote the said 97 shares she actually voted at the
meeting in question, notwithstanding the facts as found by said court, that said shares belonged to H.
Martin and were merely held in trust by her deceased husband.

6. In finding that the 97 shares of stock in question had been adjudicated to Mrs. Nanon L. Worcester by
the commissioners on claims against the estate of her deceased husband; that such adjudication had been
approved by the Court of First Instance of the City of Manila, and that the said Nanon L. Worcester had
inherited said shares by virtue of the will of her deceased husband.

7. In holding the effect that there was a quorum in the pretended meetings of the stockholders of the Sulu
Development Company alleged to have taken place on November 12, 17 and 19, 1925, particularly that
one asserted to have been held on November 19, 1925, when in law and in fact there was no
such quorum.

8. In finding in effect that the meetings pretended to be held by Sulu Development on the dates
aforementioned were validly and legally held and that the action taken and proceedings had thereat were
valid and effective.

9. In finding that if the defendant H. Martin had had the 97 shares in question in his own name at the
alleged meetings of the Sulu Development Company, he would have voted them in the same way and to
the same effect as the said Nanon L. Worcester voted them.

10. In not finding that there was attendant fraud, misrepresentation and deceit in the execution and
issuance of the mortgage contract, Exhibit U.
49 | P a g e

11. In not holding that said mortgage is null and void for want of legal consideration.

12. In finding that the plaintiffs and appellants herein are legally bound by the said mortgage contract
Exhibit U.

13. In holding that the plaintiffs and appellants herein are legally estopped to contest the efficacy and
validity of the mortgage contract, Exhibit, U.

14. In dismissing plaintiffs' complaint herein.

15. In denying plaintiffs' motion for a new trial.

While defendant Martin appeals and assigns the following errors:

1. The trial court erred in refusing to find that the one hundred shares of the capital stock of the
appellant, the Sulu Development Company, delivered on November 23, 1922, by the appellant, H. Martin,
to the late Dean C. Worcester, were so delivered in trust to be held and used for the benefit of the said H.
Martin.

2. The trial court erred in finding that the voting by Mrs. Nanon L. Worcester, in the meeting held by the
stockholders of the appellant, the Sulu Development Company, on November 12, 17, and 19, 1925, was
legal.

3. The trial court erred in refusing to find that the mortgage involved in this litigation, purported to have
been executed by the appellant, the Sulu Development Company, in favor of the appellee, the Agusan
Coconut Company, is null and void.

4. The trial court erred in excluding, as being within the statute of frauds, testimony regarding a certain
verbal agreement entered into by and between the appellee, the Agusan Coconut Company, and the
appellant, H. Martin, which agreement had been fully performed by the latter.

5. The trial court erred in excluding as "Hearsay Evidence", testimony regarding statements made by
certain officials of the appellee, the Agusan Company.

6. The trial court erred in excluding the testimony of the appellant, H. Martin, regarding matters of fact
which occurred between him and certain officials of the appellee, the Agusan Coconut Company, who had
died prior to the trial of this action.

An examination of the assignments of error will show that although this case in its main aspects is a simple one
and confined to the questions, first, as to whether the mortgage was duly executed by the Sulu Development
Company and, second, whether it was given for a valuable consideration, many side issues of no moment were
urged upon the trial court, which probably accounts for the voluminous record with which we are confronted and
numerous assignments of error which we do not deem it necessary to discuss in detail.

Plaintiffs contend that the transference on the books of the company of 97 shares of stock in the name of Mrs.
Worcester was fraudulent and illegal. The evidence of record, however, under all the circumstances of the case,
fails to demonstrate the allegation of fraud, and this court believes that she acted in good faith and in the honest
belief that she had not only a legal right but a duty to participate in the stockholders meeting.

As to whether the stock was rightfully the property of Martin, that is a question for the courts and for a
stockholder's meeting. Until challenged in a proper proceeding, a stockholder according to the books of the
50 | P a g e

company has a right to participate in that meeting, and in the absence of fraud the action of the stockholders'
meeting cannot be collaterally attacked on account of such participation. "A person who has purchased stock, and
who desires to be recognized as a stockholder, for the purpose of voting, must secure such a standing by having
the transfer recorder upon the books. If the transfer is not duly made upon request, he has, as his remedy, to
compel it to be made." (Morrill vs. Little Falls Mfg. Co., 53 Minn., 371; 21 L.R.A., 175-178, citing Cook, Stock &
Stockholders, par. 611; People vs. Robinson, 64 Cal., 373; Downing vs. Potts, 23 N.J.L., 66; State vs. Ferris, 42 Conn.,
560; New York & N.H.R. Co. vs. Schuyler, 34 N.Y., 80; Bank of Commerce's App., 73 Pa., 59; Hoppin vs. Buffum, 9
R.I., 513; 11 Am. Rep., 219; Re St. Lawrence S.R. Co., 44 N. J. L., 529.)

As to the question of lack of consideration for the mortgage, throughout the brief for appellants it appears by the
constant reiteration of the phrase that all the advances were made "by the Agusan Coconut Company and/or its
then General Manager, the late Dean C. Worcester, to H. Martin and/or the Sulu Development Company."

It must be remembered that there is no dispute between the Worcester interests and the Agusan Coconut
Company as to who advanced the money, namely, the Agusan Coconut Company, nor is there any difficulty in
determining to whom the money was advanced. Although Martin was virtually the owner of all the capital stock of
the Sulu Development Company, business was carried on in the name of the company, and the land and properties
were secured in the name of the company, and up to the time of the execution of the mortgage and some time
thereafter there was no claim from anybody the money had been advanced to Martin instead of the company.
Even a repeated use of the questionable phrase "and/or" as to the grantor "and/or" as to the grantee, will not
fabricate a life-raft on which a recalcitrant debtor can reach a safe harbor of repudiation.lawphil.net

We are therefore convinced that the contention that the mortgage was made without consideration was a
afterthought without foundation in fact and in a vain attempt to avoid a legal and binding obligation.

We find no merit in the contention that the trial court should have concerned itself with an alleged parol contract
between Martin and Dean C. Worcester, deceased. The alleged contract not being in writing or to be executed
within a year, it is within the statute of frauds. The value of the rule is shown in this case as it was some time after
Mr. Worcester's death before anything was heard of such an alleged agreement. Even if such an agreement had
been made and it had been proper to receive proof thereof, it would not benefit plaintiffs as the mortgage was
executed pursuant to a compromise agreement to settle the affairs between the two companies, and all the
transactions between the two companies were merged and settle by that compromise.

The contention that a new trial should have been granted in order that plaintiffs could present in evidence a letter
from Mr. Worcester to the late Governor-General Wood, is likewise without merit. The letter, even if admitted,
would not have changed the result of these proceedings, as a fair reading of the letter is not repugnant to a single
contention of defendant-appellee.
51 | P a g e

G.R. Nos. 163356-57 July 10, 2015

JOSE A. BERNAS, CECILE H. CHENG, VICTOR AFRICA, JESUS B. MARAMARA, JOSE T. FRONDOSO, IGNACIO T.
MACROHON, JR., AND PAULINO T. LIM, ACTING IN THEIR CAP A CITY AS INDIVIDUAL DIRECTORS OF MAKATI
SPORTS CLUB, INC., AND ON BEHALF OF THE BOARD OF DIRECTORS OF MAKATI SPORTS CLUB, Petitioners,
vs.
JOVENCIO F. CINCO, VICENTE R. AYLLON, RICARDO G. LIBREA, SAMUEL L. ESGUERRA, ROLANDO P. DELA CUESTA,
RUBEN L. TORRES, ALEX Y. PARDO, MA. CRISTINA SIM, ROGER T. AGUILING, JOSE B. QUIMSON, CELESTINO L.
ANG, ELISEO V. VILLAMOR, FELIPE L. GOZON, CLAUDIO B. ALTURA, ROGELIO G. VILLAROSA, MANUEL R.
SANTIAGO, BENJAMIN A. CARANDANG, REGINA DE LEON-HERLIHY, CARLOS Y. RAMOS, JR., ALEJANDRO Z.
BARIN, EFRENILO M. CAYANGA AND JOHN DOES, Respondents.

Before us are two consolidated Petitions for Review on Certiorari1 assailing the 28 April 2003 Decision and the 27
April 2004 Resolution of the Court of Appeals in CA-G.R. SP No. 62683,2 which declared the 17 December 1997
Special Stockholders' Meeting of the Makati Sports Club invalid for having been improperly called but affirmed the
actions taken during the Annual Stockholders' Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000. The
dispositive portion of the assailed decision reads:

WHEREFORE, foregoing considered, the instant petition for review is hereby GRANTED. The appealed Decision
dated December 12, 2000 of the SEC en bane is SET ASIDE and the Decision dated April 20, 1998 of the Hearing
Officer is REINSTATED and AMENDED as follows:

1. The supposed Special Stockholders' Meeting of December 17, 1997 was prematurely or invalidly called
by the [Cinco Group]. It therefore failed to produce any legal effects and did not effectively remove [the
Bernas Group] as directors of the Makati Sports Club, Inc.;

2. The expulsion of petitioner Jose A. Bernas as well as the public auction of his share[s] is hereby declared
void and without legal effect;

3. The ratification of the removal of [the Bernas Group] as directors, the expulsion of petitioner Bernas
and the sale of his share by the defendants and by the stockholders held in their Regular Stockholders'
Meeting held in April of 1998, 1999 and 2000, is void and produces no effects as they were not the proper
party to cause the ratification;

4. All other actions of the [Cinco Group] and stockholders taken during the Regular Stockholders'
Meetings held in April 1998, 1999 and 2000, including the election of the [Cinco Group] as directors after
the expiration of the term of office of petitioners as directors, are hereby declared valid;

5. No awards for damages and attorney's fees.3

The Facts

Makati Sports Club (MSC) is a domestic corporation duly organized and existing under Philippine laws for the
primary purpose of establishing, maintaining, and providing social, cultural, recreational and athletic . activities
among its members.

Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T.
Frondoso, Ignacio T. Macrohon and Paulino T. Lim (Bernas Group) were among the Members of the Board of
Directors and Officers of the corporation whose terms were to expire either in 1998 or 1999.
52 | P a g e

Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea · and Alex Y. Pardo (Cinco Group) are the
members and stockholders of the corporation who were elected Members of the Board of Directors and Officers
of the club during the 17 December 1997 Special Stockholders Meeting.

The antecedent events of the meeting and its results, follow:

Alarmed with the rumored anomalies in handling the corporate funds, the MSC Oversight Committee (MSCOC),
composed of the past presidents of the club, demanded from the Bernas Group, who were then incumbent
officers of the corporation, to resign from their respective positions to pave the way for the election of new set of
officers.4Resonating this clamor were the stockholders of the corporation representing at least 100 shares who
sought the assistance of the MSCOC to call for a special stockholders meeting for the purpose of removing the
sitting officers and electing new ones.5 Pursuant to such request, the MSCOC called a Special Stockholders'
Meeting and sent out notices6 to all stockholders and members stating therein the time, place and purpose of the
meeting. For failure of the Bernas Group to secure an injunction before the Securities Commission (SEC), the
meeting proceeded wherein Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso,
Ignacio T. Macrohon, Jr. and Paulino T. Lim were removed from office and, in their place and stead, Jovencio F.
Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger T. Aguiling, Rogelio G. · Villarosa, Armando David, Norberto
Maronilla, Regina de Leon-Herlihy and Claudio B. Altura, were elected.7

Aggrieved by the turn of events, the Bernas Group initiated an action before the Securities Investigation and
Clearing Department (SICD) of the SEC docketed as SEC Case No. 5840 seeking for the nullification of the 17
December 1997 Special Stockholders Meeting on the ground that it was improperly called. Citing Section 28 of the
Corporation Code, the Bernas Group argued that the authority to call a meeting lies with the Corporate . Secretary
and not with the MSCOC which functions merely as an oversight body and is not vested with the power to call
corporate meetings. For being called by the persons not authorized to do so, the Bernas Group urged the SEC. to
declare the 17 December 1997 Special Stockholders' Meeting, including the removal of the sitting officers and the
election of new ones, be nullified.

For their part, the Cinco Group insisted that the 17 December 1997 Special Stockholders' Meeting is sanctioned by
the Corporation Code and the MSC by-laws. In justifying the call effected by the MSCOC, they reasoned that
Section 258 of the MSC by-laws merely authorized the Corporate Secretary to issue notices of meetings and
nowhere does it state that such authority solely belongs to him. It was further asseverated by the Cinco Group that
it would be useless to course the request to call a meeting thru the Corporate Secretary because he repeatedly
refused to call a special stockholders' meeting despite demands and even "filed a suit to restrain the holding of a
special meeting.9

Meanwhile, the newly elected directors initiated an investigation on the alleged anomalies in administering the
corporate affairs and after finding Bernas guilty of irregularities,10 the Board resolved to expel him from the club by
selling his shares at public auction.11 After the notice12 requirement was complied with, Bernas' shares was
accordingly sold for ₱902,000.00 to the highest bidder:

Prior to the resolution of SEC Case No. 5840, an Annual Stockholders' Meeting was held on 20 April 1998 pursuant
to Section 8 of the MSC bylaws.13 During the said meeting, which was attended by 1,017 stockholders representing
2/3 of the outstanding shares, the majority resolved to approve, confirm and ratify, among others, the calling and ·
holding of 17 December 1997 Special Stockholders' Meeting, the acts and resolutions adopted therein including
the removal of Bernas Group from the Board and the election of their replacements.14

Due to the filing of several petitions for and against the removal of the Bernas Group from the Board pending
before the SEC resulting in the piling up of legal controversies involving MSC, the SEC En Banc, in its
Decision15 dated 30 March 1999, resolved to supervise the holding of the 1999 Annual Stockholders' Meeting.
During the said meeting, the stockholders once again approved, ratified and confirmed the holding of the 17
December 1997 Special Stockholders' Meeting.
53 | P a g e

The conduct of the 17 December 1997 Special Stockholders' Meeting was likewise ratified by the stockholders
during the 2000 Annual Stockholders' Meeting which was held on 17 April 2000. 16

On 9 May 2000, the SICD rendered a Decision17 in SEC Case No. 12-. 97-5840 finding, among others, that the 17
December 1997 Special Stockholders' Meeting and the Annual Stockholders' Meeting conducted on 20 April 1998
and 19 April 1999 are invalid. The SICD likewise nullified the expulsion of Bernas from the corporation and the sale
of his share at the public auction. The dispositive portion of the said decision reads:

WHEREFORE, in view of the foregoing considerations this Office, through the undersigned Hearing Officer, hereby
declares as follows:

(1) The supposed Special Stockholders' Meeting of December 17, 1997 was prematurely or invalidly called
by the [the Cinco Group]. It therefore failed to produce any legal effects and did not effectively remove
[the Bernas Group] as directors of the Makati Sports Club, Inc.

(2) The April 20, 1998 meeting was not attended by a sufficient number of valid proxies. No quorum could
have been present at the said meeting. No corporate business could have been validly completed and/or
transacted during the said meeting. Further, it was not called by the validly elected Corporate Secretary
Victor Africa nor presided over by the validly elected president Jose A. Bernas. Even if the April 20, 1998
meeting was valid, it could not ratify the December 17, 1997 meeting because being a void meeting, the
December 1 7, 1997 meeting may not be ratified.

(3) The April 1998 meeting was null and void and therefore produced no legal effect.

(4) The April 1999 meeting has not been raised as a defense in the Answer nor assailed in a supplemental
complaint. However, it has been raised by [the Cinco Group] in a manifestation dated April 21, 1999 and
in their position paper dated April 8, 2000. Its legal effects must be the subject of this Decision in order to
put an end to the controversy at hand. In the first place, by [the Cinco Group's] own admission, the
alleged attendance at the April 1999 meeting amounted to less than 2/3 of the stockholders entitled to
vote, the minimum number required to effect a removal. No removal or ratification of a removal may be
effected by less than 2/3 vote of the stockholders. Further, it cannot ratify the December 1997 meeting
for failure to adhere to the requirement of the By-laws on notice as explained in paragraph (2) above,
even if it was accompanied by valid proxies, which it was not.

(5) The [the Cinco Group], their agents, representatives and all persons acting for and conspiring on their
behalf, are hereby permanently enjoined from carrying into effect the resolutions and actions adopted
during the 17 December 1997 and April 20, 1998 meetings and of the Board of Directors and/or other
stockholders' meetings resulting therefrom, and from performing acts of control and management of the
club.

(6) The expulsion of complainant Jose A. Bernas as well as the public auction of his share is hereby
declared void and without legal effect, as prayed for. While it is true that [the Cinco Group] were no.t
restrained from acting as directors during the pendency of this case, their tenure as directors prior to this
Decision is in the nature of de facto directors of a de facto Board. Only the ordinary acts of administration
which [the Cinco Group] carried out de facto in good faith are valid. Other acts, such as political acts and
the expulsion or other disciplinary acts imposed on the [the Bernas Group] may not be appropriately
taken by de facto officers because the legality of their tenure as directors is not complete and subject to
the outcome of this case. (7) No awards for damages and attorney's fees.18
54 | P a g e

On appeal, the SEC En Banc, in its 12 December 2000 Decision 19 reversed the findings of the SICD and validated the
holding of the 17 December 1997 Special Stockholders' Meeting as well as the Annual Stockholders' Meeting held
on 20 April 1998 and 19 April 1999.

On 28 April 2003, the Court of Appeals rendered a Decision 20 declaring the 17 December 1997 Special
Stockholders' Meeting invalid for being improperly called but affirmed the actions taken during the Annual
Stockholders' Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000.

In a Resolution21 dated 27 April 2004, the appellate court refused to reconsider its earlier decision.

Aggrieved by the disquisition of the Court of Appeals, both parties elevated the case before this Court by filing
their respective Petitions for Review on Certiorari. While the Bernas Group agrees with the disquisition of the
appellate court that the Special Stockholders' Meeting is invalid for being called by the persons not authorized to
do so, they urge the Court to likewise invalidate the holding of the subsequent Annual Stockholders' Meetings
invoking the application of the holdover principle. The Cinco Group, for its part, insists that the holding. of 17
December 1997 Special Stockholders' Meeting is valid and binding underscoring the overwhelming ratification
made by the stockholders during the subsequent annual stockholders' meetings and the previous refusal of the
Corporate Secretary to call a special stockholders' meeting despite demand. For the resolution of the Court are the
following issues:

The Issues

I.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE 17 DECEMBER 1997 SPECIAL
STOCKHOLDERS' MEETING IS INVALID; AND

II.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO NULLIFY THE HOLDING OF THE
ANNUAL STOCKHOLDERS' MEETING ON 20 APRIL 1998, 19 APRIL 1999 AND 17 APRIL 2000.

The Court's Ruling

The Corporation Code laid down the rules on the removal of the Directors of the corporation by providing, inter
alia, the persons authorized to call the meeting and the number of votes required for the purpose of removal,
thus:

Sec. 28. Removal of directors or trustees. -Any director or trustee of a corporation may be removed from office by
a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if
the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting
called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of
the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on
order of the president or on the written demand of the stockholders representing or holding at least a majority of
the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail
or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the
stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the
time and place of such meeting, as well as of the intention to propose such removal, must be given by publication
55 | P a g e

or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal
without cause may not be used to deprive minority stockholders or members of the right of representation to
which they may be entitled under Section 24 of this Code. (Emphasis supplied)

Corollarily, the pertinent provisions of MSC by-laws which govern the manner of calling and sending of notices of
the annual stockholders' meeting and the special stockholders' meeting provide:

SEC. 8. Annual Meetings. The annual meeting of stockholders shall be held at the Clubhouse on the third Monday
of April of every year unless such day be a holiday in which case the annual meeting shall be held on the next
succeeding business day. At such meeting, the President shall render a report to the stockholders of the clubs.

xxxx

SEC. 10. Special Meetings. Special meetings of stockholders shall be held at the Clubhouse when called by the
President or by the Board of Directors or upon written request of the stockholders representing not less than one
hundred (100) shares. Only matters specified in the notice and call will be taken up at special meetings.

xxxx

SEC. 25. Secretary. The Secretary shall keep the stock and transfer book and the corporate seal, which he shall
stamp on all documents requiring such seal, fill and sign together with the President, all the certificates of stocks
issued, give or caused to be given all notices required by law of these By-laws as well as notices of all meeting of
the Board and of the stockholders; shall certify as to quorum at meetings; shall approve and sign all
correspondence pertaining to the Office of the Secretary; shall keep the minutes of all meetings of the
stockholders, the Board of Directors and of all committees in a book or books kept for that purpose; and shall be
acting President in the absence of the President and Vice-:President. The Secretary must be a citizen and a resident
of the Philippines. The Secretary shall keep a record of all the addresses and telephone numbers of all
stockholders.22

Textually, only the President and the Board of Directors are authorized by the by-laws to call a special meeting. In
cases where the person authorized to call a meeting refuses, fails or neglects to call a meeting, then the
stockholders representing at least 100 shares, upon written request, may file a petition to call a special
stockholder's meeting.

In the instant case, there is no dispute that the 17 December 1997 Special Stockholders' Meeting was called
neither by the President nor by the Board of Directors but by the MSCOC. While the MSCOC, as its name suggests,
is created for the purpose of overseeing the affairs of the corporation, nowhere in the by-laws does it state that it
is authorized to exercise corporate powers, such as the power to call a special meeting, solely vested by law and
the MSC by-laws on the President or the Board of Directors.

The board of directors is the directing and controlling body of the corporation. It is a creation of the stockholders
and derives its power to control and direct the affairs of the corporation from them. The board of directors, in
drawing to itself the power of the corporation, occupies a position of trusteeship in relation to the stockholders, in
the sense that the board should exercise not only care and diligence, but utmost good faith in the management of
the corporate affairs.23

The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed
by a board of directors whose members have stood for election, and who have actually been elected by the
stockholders, on an annual basis. Only in that way can the continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders, be assured. The shareholder vote is critical to
56 | P a g e

the theory that legitimizes the exercise of power by the directors or officers over the properties that they do not
own.24

Even the Corporation Code is categorical in stating that a corporation exercises its powers through its board of
directors and/or its duly authorized officers and agents, except in instances where the Corporation Code requires
stockholders' approval for certain specific acts:

SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all
the corporations formed under this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors and trustees x x x.

A corporation's board of directors is understood to be that body which (1) exercises all powers provided for under
the Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all the property of
the corporation. Its members have been characterized as trustees or directors clothed with fiduciary character. 25

It is ineluctably clear that the fiduciary relation is between the stockholders and the board of directors and who are
vested with the power to manage the affairs of the corporation. The ordinary trust relationship of · directors of a
corporation and stockholders is not a matter of statutory or technical law. 26 It springs from the fact that directors
have the control and guidance of corporate affairs and property and hence of the property interests of the
stockholders.27 Equity recognizes that stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof.28 Should the board fail to perform its fiduciary duty to safeguard the
interest of the stockholders or commit acts prejudicial to their interest, the law and the by-laws provide
mechanisms to remove and replace the erring director.29

Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in the MSC by-laws can it be
gathered that the Oversight Committee is authorized to step in wherever there is breach of fiduciary duty and call
a special meeting for the purpose of removing the existing officers and electing their replacements even if such call
was made upon the request of shareholders. Needless to say, the MSCOC is neither · empowered by law nor the
MSC by-laws to call a meeting and the subsequent ratification made by the stockholders did not cure the
substantive infirmity, the defect having set in at the time the void act was done. The defect goes into the very
authority of the persons who made the call for the meeting. It is apt to recall that illegal acts of a corporation
which contemplate the doing of an act which is contrary to law, morals or public order, or contravenes some rules
of public policy or public duty, are, like similar transactions between individuals, void. 30 They cannot serve as basis
for a court action, nor acquire validity by performance, ratification or estoppel.31 The same principle can apply in
the present case. The void election of 17 December 1997 cannot be ratified by the subsequent Annual
Stockholders' Meeting.

A distinction should be made between corporate acts or contracts which are illegal and those which are merely
ultra vires. The former contemplates the doing of an act which are contrary to law, morals or public policy or public
duty, and are, like similar transactions between individuals, void: They cannot serve as basis of a court action nor
acquire validity by performance, ratification or estoppel. Mere ultra vires acts, on the other hand, or those which
are not illegal or void ab initio, but are not merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by the stockholders. 32 The 1 7 December 1997
Meeting belongs to the category of the latter, that is, it is void ab initio and cannot be validated.

Consequently, such Special Stockholders' Meeting called by the Oversight Committee cannot have any legal effect.
The removal of the Bernas Group, as well as the election of the Cinco Group, effected by the assembly in that
improperly called meeting is void, and since the Cinco Group has no legal right to sit in the board, their subsequent
acts of expelling Bernas from the club and the selling of his shares. at the public auction, are likewise invalid.
57 | P a g e

The Cinco Group cannot invoke the application of de facto officership doctrine to justify the actions taken after the
invalid election since the operation of the principle is limited to third persons who were originally not part of the
corporation but became such by reason of voting of government-sequestered shares.33 In Cojuangco v.
Roxas,34 the Court deemed the directors who were elected through the voting of government of sequestered
shares who assumed office in good faith as de facto officers, viz:

In the light of the foregoing discussion, the Court finds and so holds that the PCGG has no right to vote the
sequestered shares of petitioners including the sequestered corporate shares. Only their owners, duly authorized
representatives or proxies may vote the said shares. Consequently, the election of private respondents Adolfo
Azcuna, Edison Coseteng and Patricio Pineda as members of the board of directors of SMC for 1990-1991 should
be set aside. However, petitioners cannot be declared as duly elected members of the board of directors thereby.
An election for the purpose should be held where the questioned shares may be voted by their owners and/or
their proxies. Such election may be held at the next shareholders' meeting in April 1991 or at such date as may be
set under the by-laws of SMC.

Private respondents in both cases are hereby declared to be de facto officers who in good faith assumed their
duties and responsibilities as duly elected members of the board of directors of the SMC. They are thereby legally
entitled to emoluments of the office including salary, fees and other compensation attached to the office until they
vacate the same. (Emphasis supplied)

Apparently, the assumption of office of the Cinco Group did not bear parallelism with the factual milieu in
Cojuangco and as such they cannot be considered as de facto officers and thus, they are without colorable
authority to authorize the removal of Bernas and the sale of his shares at the public auction. They cannot bind the
corporation to third persons who acquired the shares of Bernas and such third persons cannot be deemed as buyer
in good faith.35

The case would have been different if the petitioning stockholders went directly to the SEC and sought its
assistance to call a special stockholders' meeting citing the previous refusal of the Corporate Secretary to call a
meeting. Where there is an officer authorized to call a meeting and that officer refuses, fails, or neglects to call a
meeting, the SEC can assume jurisdiction and issue an order to the petitioning stockholder to call a meeting
pursuant to its regulatory and administrative powers to implement the Corporation Code.36 This is clearly provided
for by Section 50 of the Corporation Code which we quote:

Sec. 50. Regular and special meetings of stockholders or members. - x x x

xxxx

Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission,
upon petition of a stockholder or member, and on a showing of good cause therefore, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice
required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least
majority of the stockholders or members present have chosen one of their member[s] as presiding officer.

As early as Ponce v. Encarnacion, etc. and Gapol,37 the Court of First Instance (now the SEC)38 is empowered to call
a meeting upon petition of the stockholder or member and upon showing of good cause, thus:

On the showing of good cause therefore, the court may authorize a stockholder to call a meeting and to preside
thereat until the majority stockholders representing a majority of the stock present and permitted to be voted
shall have chosen one among them to preside it. And this showing of good cause therefor exists when the court is
apprised of the fact that the by-laws of the corporation require the calling of a general meeting of the stockholders
to elect the board of directors but the call for such meeting has not been done. 39
58 | P a g e

The same jurisprudential rule resonates in Philippine National Construction Corporation v. Pabion, 40 where the
Court validated the order of the SEC to compel the corporation to conduct a stockholders' meeting in the exercise
of its regulatory and administrative powers to implement the Corporation Code:

SEC's assumption of jurisdiction over this case is proper, as the controversy involves the election of PNCC's
directors. Petitioner does not really contradict the nature of the question presented and agrees that there is an
intra-corporate question involved.

xxxx

Prescinding from the above premises, it necessarily follows that SEC can compel PNCC to hold a stockholders'
meeting for the purpose of electing members of the latter's board of directors.

xxxx

As respondents point out, the SEC's action is also justified by its regulatory and administrative powers to
implement the Corporation Code, specifically to compel the PNCC to hold a stockholders' meeting for election
purposes.41

Given the broad administrative and regulatory powers of the SEC outlined under Section 50 of the Corporation
Code and Section 6 of Presidential Decree (PD) No. 902-A, the Cinco Group cannot claim that if was left without
recourse after the Corporate Secretary previously refused to heed its demand to call a special stockholders'
meeting. If it be true that the Corporate Secretary refused to call a meeting despite fervent demand from the
MSCOC, the remedy of the stockholders would have been to file a petition to the SEC to direct him to call a
meeting by giving proper notice required under the Code. To rule otherwise would open the floodgates to abuse
where any stockholder, who consider himself aggrieved by certain corporate actions, could call a special
stockholders' meeting for the purpose of removing the sitting officers in direct violation of the rules pertaining to
the call of meeting laid down in the by-laws.

Every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to
the management of its affairs.42 The by-laws of a corporation are its own private laws which substantially have the
same effect as the laws of the corporation. They are in effect written into the charter. In this sense they become
part of the fundamental law of the corporation with which the corporation and its directors and officers must
comply.43 The general rule is that a corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed in its charter or by the general law. Thus, directors must act as a body in a
meeting called pursuant to the law or the corporation's by-laws, otherwise, any action taken therein may be
questioned by the objecting director or shareholder.44

Certainly, the rules set in the by-laws are mandatory for every member of the corporation to respect.1âwphi1 They
are the fundamental law of the corporation with which the corporation and its officers and members must comply.
It is on this score that we cannot upon the other hand sustain the Bernas Group's stance that the subsequent
annual stockholders' meetings were invalid.

First, the 20 April 1998 Annual Stockholders Meeting was valid because it was sanctioned by Section 8 45 of the MSC
bylaws. Unlike in Special Stockholders Meeting46 wherein the bylaws mandated that such meeting shall be called
by specific persons only, no such specific requirement can be obtained under Section 8.

Second, the 19 April 1999 Annual Stockholders Meeting is likewise valid because in addition to the fact that it was
conducted in accordance to Section 8 of the MSC bylaws, such meeting was supervised by the SEC in the exercise
of its regulatory and administrative powers to implement the Corporation Code.47
59 | P a g e

Needless to say, the conduct of SEC supervised Annual Stockholders Meeting gave rise to the presumption that the
corporate officers who won the election were duly elected to their positions and therefore can be rightfully
considered as de jure officers. As de jure officials, they can lawfully exercise functions and legally perform such acts
that are within the scope of the business of the corporation except ratification of actions that are deemed void
from the beginning.

Considering that a new set of officers were already duly elected in 1998 and 1999 Annual Stockholders Meetings,
the Bernas Group cannot be permitted to use the holdover principle as a shield to perpetuate in office. Members
of the group had no right to continue as directors of the corporation unless reelected by the stockholders in a
meeting called for that purpose every year.48 They had no right to hold-over brought about by the failure to
perform the duty incumbent upon them.49 If they were sure to be reelected, why did they fail, neglect, or refuse to
call the meeting to elect the members of the board?50

Moreover, it is fundamental rule that factual findings of quasi-judicial agencies like the SEC, if supported by
substantial evidence, are generally accorded not only great respect but even finality, and are binding upon this
Court unless it was shown that the quasi-judicial agencies had arbitrarily disregarded evidence before it had
misapprehended evidence to such an extent as to compel a contrary conclusion if such evidence had been properly
appreciated.51 It is not the function of this Court to analyze or weigh all over again the evidence and credibility of
witnesses presented before the lower court, tribunal, or office, as we are not trier of facts. 52 Our jurisdiction is
limited to reviewing and revising errors of law imputed to the lower court, the latter's finding of facts being
conclusive and not reviewable by this Court.53 However, when it can be shown that administrative bodies grossly
misappreciated evidence of such nature as to compel a contrary conclusion, the Court will not hesitate to reverse
its factual findings.54 In the case at bar, the incongruent findings of the SEC on the one hand, and the Court of
Appeals on the other, constrained the Court to review the records to ascertain which body correctly appreciated
the facts vis-a-vis the standing statutory and jurisprudential principles.

After finding that the ruling of the appellate court was in accordance with the existing laws and jurisprudence as
exhaustively discussed above, we hereby quote with approval its disquisition: (1) The supposed Special
Stockholders' Meeting of 1 7 December 1997 was prematurely or invalidly called by the [Cinco Group]. It therefore
failed to produce any legal effects and did not effectively remove [the Bernas Group] as directors of the Makati
Sports Club, Inc.;

(2) The expulsion of [Bernas] as well as the public auction of his shares is hereby declared void and
without legal effect;

(3) The ratification of the removal of [the Bernas Group] as directors, the expulsion of Bernas and the sale
of his share by the [Cinco Group] and by the stockholders held in their Regular Stockholders' Meeting held
in April of 1998, 1999 and 2000, is void and produces no effects as they were not the proper party to
cause the ratification;

(4) All other actions of the [Cinco Group] and stockholders taken during the Regular Stockholders'
Meetings held in April 1998, 1999 and 2000, including the election of the [Cinco Group] as directors after
the expiration of the term of office of [Bernas Group] as directors, are hereby declared valid. 55

In fine, we hold that 17 December 1997 Special Stockholders' Meeting is null and void and produces no effect; the
resolution expelling the Bernas Group from the corporation and authorizing the sale of Bernas' shares at the public
auction is likewise null and void. The subsequent Annual Stockholders' Meeting held on 20 April 1998, 19 April
1999 and 17 April 2000 are valid and binding except the ratification of the removal of the Bernas Group and the
sale of Bernas' shares at the public auction effected by the body during the said meetings. The expulsion of the
Bernas Group and the subsequent auction of Bernas' shares are void from the very beginning and therefore the
ratifications effected during the subsequent meetings cannot be sustained. A void act cannot be the subject of
ratification.56
60 | P a g e

WHEREFORE, premises considered, the petitions of Jose A. Bernas, Cecile. H. Cheng, Victor Africa, Jesus B.
Maramara, Jose T. Frondoso, Ignacio A. Macrohon and Paulino T. Lim in G.R. Nos. 163356-57 and of Jovencio
Cinco, Ricardo Librea and Alex Y. Pardo in G.R. Nos. 163368-69 are hereby DEN~ED. The assailed Decision dated 28
April 2003 and Resolution dated 27 April 2004 of the Court of Appeals are hereby AFFIRMED.

SO ORDERED.
61 | P a g e

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, Petitioner,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN
O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL,
INC., Respondents.

Presented in the case at bar is the apparently straight-forward but complicated question: What should be the basis
of quorum for a stockholders’ meeting—the outstanding capital stock as indicated in the articles of incorporation
or that contained in the company’s stock and transfer book?

Petitioners seek to nullify the Court of Appeals’ Decision in CA–G.R. SP No. 414731 promulgated on 18 August 1997,
affirming the SEC Order dated 20 June 1996, and the Resolution2 of the Court of Appeals dated 31 October 1997
which denied petitioners’ motion for reconsideration.

The antecedents are not disputed.

In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred (700)
founders’ shares and seventy-six (76) common shares as its initial capital stock subscription reflected in the articles
of incorporation. However, private respondents and their predecessors who were in control of PMMSI registered
the company’s stock and transfer book for the first time in 1978, recording thirty-three (33) common shares as the
only issued and outstanding shares of PMMSI. Sometime in 1979, a special stockholders’ meeting was called and
held on the basis of what was considered as a quorum of twenty-seven (27) common shares, representing more
than two-thirds (2/3) of the common shares issued and outstanding.

In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and
Exchange Commission (SEC) for the registration of their property rights over one hundred (120) founders’ shares
and twelve (12) common shares owned by their father. The SEC hearing officer held that the heirs of Acayan were
entitled to the claimed shares and called for a special stockholders’ meeting to elect a new set of officers. 3 The
SEC En Bancaffirmed the decision. As a result, the shares of Acayan were recorded in the stock and transfer book.

On 06 May 1992, a special stockholders’ meeting was held to elect a new set of directors. Private respondents
thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders’ meeting, alleging
that the quorum for the said meeting should not be based on the 165 issued and outstanding shares as per the
stock and transfer book, but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as
reflected in the 1952 Articles of Incorporation. The petition was dismissed. 4 Appeal was made to the SEC En Banc,
which granted said appeal, holding that the shares of the deceased incorporators should be duly represented by
their respective administrators or heirs concerned. The SEC directed the parties to call for a stockholders meeting
on the basis of the stockholdings reflected in the articles of incorporation for the purpose of electing a new set of
officers for the corporation.5

Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of Appeals. 6 Rebecca Acayan,
Jayne O. Abuid, Willie O. Abuid and Renato Cervantes, stockholders and directors of PMMSI, earlier filed another
petition for review of the same SEC En Banc’s orders. The petitions were thereafter consolidated.7 The
consolidated petitions essentially raised the following issues, viz: (a) whether the basis the outstanding capital
stock and accordingly also for determining the quorum at stockholders’ meetings it should be the 1978 stock and
transfer book or if it should be the 1952 articles of incorporation; and (b) whether the Court of Appeals "gravely
erred in applying the Espejo Decision to the benefit of respondents." 8 The "Espejo Decision" is the decision of the
SEC en banc in SEC Case No. 2289 which ordered the recording of the shares of Jose Acayan in the stock and
transfer book.
62 | P a g e

The Court of Appeals held that for purposes of transacting business, the quorum should be based on the
outstanding capital stock as found in the articles of incorporation. 9 As to the second issue, the Court of Appeals
held that the ruling in the Acayan case would ipso facto benefit the private respondents, since to require a
separate judicial declaration to recognize the shares of the original incorporators would entail unnecessary delay
and expense. Besides, the Court of Appeals added, the incorporators have already proved their stockholdings
through the provisions of the articles of incorporation.10

In the instant petition, petitioners claim that the 1992 stockholders’ meeting was valid and legal. They submit that
reliance on the 1952 articles of incorporation for determining the quorum negates the existence and validity of the
stock and transfer book which private respondents themselves prepared. In addition, they posit that private
respondents cannot avail of the benefits secured by the heirs of Acayan, as private respondents must show and
prove entitlement to the founders and common shares in a separate and independent action/proceeding.

In private respondents’ Memorandum11 dated 08 March 2000, they point out that the instant petition raises the
same facts and issues as those raised in G.R. No. 13131512, which was denied by the First Division of this Court on
18 January 1999 for failure to show that the Court of Appeals committed any reversible error. They add that as a
logical consequence, the instant petition should be dismissed on the ground of res judicata. Furthermore, private
respondents claim that in view of the applicability of the rule on res judicata, petitioners’ counsel should be cited
for contempt for violating the rule against forum-shopping.13

For their part, petitioners claim that the principle of res judicata does not apply to the instant case. They argue that
the instant petition is separate and distinct from G.R. No. 131315, there being no identity of parties, and more
importantly, the parties in the two petitions have their own distinct rights and interests in relation to the subject
matter in litigation. For the same reasons, they claim that counsel for petitioners cannot be found guilty of forum-
shopping.14

In their Manifestation and Motion15 dated 22 September 2004, private respondents moved for the dismissal of the
instant petition in view of the dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of
the Entry of Judgment16 issued by the First Division dated 01 December 1999.

The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No. 131315 it fails
to impute reversible error to the challenged Court of Appeals’ Decision.

Res judicata does not apply in

the case at bar.

Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled by
judgment.17 The doctrine of res judicata provides that a final judgment, on the merits rendered by a court of
competent jurisdiction is conclusive as to the rights of the parties and their privies and constitutes an absolute bar
to subsequent actions involving the same claim, demand, or cause of action. 18 The elements of res judicata are (a)
identity of parties or at least such as representing the same interest in both actions; (b) identity of rights asserted
and relief prayed for, the relief being founded on the same facts; and (c) the identity in the two (2) particulars is
such that any judgment which may be rendered in the other action will, regardless of which party is successful,
amount to res judicata in the action under consideration.19

There is no dispute as to the identity of subject matter since the crucial point in both cases is the propriety of
including the still unproven shares of respondents for purposes of determining the quorum. Petitioners, however,
deny that there is identity of parties and causes of actions between the two petitions.

The test often used in determining whether causes of action are identical is to ascertain whether the same facts or
evidence would support and establish the former and present causes of action. 20 More significantly, there is
63 | P a g e

identity of causes of action when the judgment sought will be inconsistent with the prior judgment.21 In both
petitions, petitioners assert that the Court of Appeals’ Decision effectively negates the existence and validity of the
stock and transfer book, as well as automatically grants private respondents’ shares of stocks which they do not
own, or the ownership of which remains to be unproved. Petitioners in the two petitions rely on the entries in the
stock and transfer book as the proper basis for computing the quorum, and consequently determine the degree of
control one has over the company. Essentially, the affirmance of the SEC Order had the effect of diminishing their
control and interests in the company, as it allowed the participation of the individual private respondents in the
election of officers of the corporation.

Absolute identity of parties is not a condition sine qua non for res judicata to apply—a shared identity of interest is
sufficient to invoke the coverage of the principle.22 However, there is no identity of parties between the two cases.
The parties in the two petitions have their own rights and interests in relation to the subject matter in litigation. As
stated by petitioners in their Reply to Respondents’ Memorandum,23 there are no two separate actions filed, but
rather, two separate petitions for review on certiorari filed by two distinct parties with the Court and represented
by their own counsels, arising from an adverse consolidated decision promulgated by the Court of Appeals in one
action or proceeding.24 As such, res judicata is not present in the instant case.

Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules against forum-
shopping. In the Verification/Certification25 portion of the petition, petitioners clearly stated that there was then a
pending motion for reconsideration of the 18 August 1997 Decision of the Court of Appeals in the consolidated
cases (CA-G.R. SP No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as well as a motion for clarification.
Moreover, the records indicate that petitioners filed their Manifestation26 dated 20 January 1998, informing the
Court of their receipt of the petition in G.R. No. 131315 in compliance with their duty to inform the Court of the
pendency of another similar petition. The Court finds that petitioners substantially complied with the rules against
forum-shopping.

The Decision of the Court of

Appeals must be upheld.

The petition in this case involves the same facts and substantially the same issues and arguments as those in G.R.
No. 131315 which the First Division has long denied with finality. The First Division found the petition before it
inadequate in failing to raise any reversible error on the part of the Court of Appeals. We reach a similar conclusion
as regards the present petition.

The crucial issue in this case is whether it is the company’s stock and transfer book, or its 1952 Articles of
Incorporation, which determines stockholders’ shareholdings, and provides the basis for computing the quorum.

We agree with the Court of Appeals.

The articles of incorporation has been described as one that defines the charter of the corporation and the
contractual relationships between the State and the corporation, the stockholders and the State, and between the
corporation and its stockholders. 27 When PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise
known as "The Corporation Law." Section 6 thereof states:

Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippines,
may form a private corporation for any lawful purpose or purposes by filing with the Securities and
Exchange Commission articles of incorporation duly executed and acknowledged before a notary public,
setting forth:

....
64 | P a g e

(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the
number of shares into which it is divided, and if such stock be in whole or in part without par value then
such fact shall be stated; Provided, however, That as to stock without par value the articles of
incorporation need only state the number of shares into which said capital stock is divided.

(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually
subscribed, the amount or number of shares of no-par stock subscribed by each and the sum paid by each
on his subscription. . . .28

A review of PMMSI’s articles of incorporation29 shows that the corporation complied with the requirements laid
down by Act No. 1459. It provides in part:

7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided into
two classes, namely:

FOUNDERS’ STOCK - 1,000 shares at P20 par value- P 20,000.00

COMMON STOCK- 700 shares at P 100 par value – P 70,000.00

TOTAL ---------------------1,700 shares----------------------------P 90,000.00

....

8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE
THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the number
of shares and amount of capital stock set out after their respective names:

SUBSCRIBER SUBSCRIBED AMOUNT SUBSCRIBED

No. of Shares Par Value

Crispulo J. Onrubia 120 Founders P 2,400.00

Juan H. Acayan 120 " 2, 400.00

Martin P. Sagarbarria 100 " 2, 000.00

Mauricio G. Gallaga 50 " 1, 000.00

Luis Renteria 50 " 1, 000.00

Faustina M. de Onrubia 140 " 2, 800.00

Mrs. Ramon Araneta 40 " 800.00

Carlos M. Onrubia 80 " 1,600.00

700 P 14,000.00
65 | P a g e

SUBSCRIBER SUBSCRIBED AMOUNT

SUBSCRIBED
No. of Shares
Par Value

Crispulo J. Onrubia 12 Common P 1,200.00

Juan H. Acayan 12 " 1,200.00

Martin P. Sagarbarria 8" 800.00

Mauricio G. Gallaga 8" 800.00

Luis Renteria 8" 800.00

Faustina M. de Onrubia 12 " 1,200.00

Mrs. Ramon Araneta 8" 800.00

Carlos M. Onrubia 8" 800.00

76 P7,600.0030

There is no gainsaying that the contents of the articles of incorporation are binding, not only on the corporation,
but also on its shareholders. In the instant case, the articles of incorporation indicate that at the time of
incorporation, the incorporators were bona fide stockholders of seven hundred (700) founders’ shares and
seventy-six (76) common shares. Hence, at that time, the corporation had 776 issued and outstanding shares.

On the other hand, a stock and transfer book is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been
made, and the date of payment thereof; a statement of every alienation, sale or transfer of stock made, the date
thereof and by and to whom made; and such other entries as may be prescribed by law. 31 A stock and transfer
book is necessary as a measure of precaution, expediency and convenience since it provides the only certain and
accurate method of establishing the various corporate acts and transactions and of showing the ownership of
stock and like matters.32 However, a stock and transfer book, like other corporate books and records, is not in any
sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should
be written therein.33 In fact, it is generally held that the records and minutes of a corporation are not conclusive
even against the corporation but are prima facie evidence only,34 and may be impeached or even contradicted by
other competent evidence.35 Thus, parol evidence may be admitted to supply omissions in the records or explain
ambiguities, or to contradict such records.36

In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines" supplanted Act
No. 1459. BP Blg. 68 provides:

Sec. 24. Election of directors or trustees.—At all elections of directors or trustees, there must be present,
either in person or by representative authorized to act by written proxy, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. . . .
66 | P a g e

Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the by-laws, a quorum
shall consist of the stockholders representing a majority of the outstanding capital stock or majority of the
members in the case of non-stock corporation.

Outstanding capital stock, on the other hand, is defined by the Code as:

Sec. 137. Outstanding capital stock defined.— The term "outstanding capital stock" as used in this code,
means the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid
(as long as there is binding subscription agreement) except treasury shares.

Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be
founders’ shares or common shares. 37 In the instant case, two figures are being pitted against each other— those
contained in the articles of incorporation, and those listed in the stock and transfer book.

To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book,
and completely disregarding the issued and outstanding shares as indicated in the articles of incorporation would
work injustice to the owners and/or successors in interest of the said shares. This case is one instance where resort
to documents other than the stock and transfer books is necessary. The stock and transfer book of PMMSI cannot
be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been
subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book. As aptly stated by the SEC in its Order dated
15 July 1996:38

It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the
Stock and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of
the company of its own shares, in which it becomes treasury shares, would not affect the total number of
shares in the Stock and Transfer Book. All that will change are the entries as to the owners of the shares
but not as to the amount of shares already subscribed.

This is precisely the reason why the Stock and Transfer Book was not given probative value. Did the
shares, which were not recorded in the Stock and Transfer Book, but were recorded in the Articles of
Iincorporation just vanish into thin air? . . . .39

As shown above, at the time the corporation was set-up, there were already seven hundred seventy-six (776)
issued and outstanding shares as reflected in the articles of incorporation. No proof was adduced as to any
transaction effected on these shares from the time PMMSI was incorporated up to the time the instant petition
was filed, except for the thirty-three (33) shares which were recorded in the stock and transfer book in 1978, and
the additional one hundred thirty-two (132) in 1982. But obviously, the shares so ordered recorded in the stock
and transfer book are among the shares reflected in the articles of incorporation as the shares subscribed to by the
incorporators named therein.

One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the
corporate officers failed to keep its records accurately.40 A corporation’s records are not the only evidence of the
ownership of stock in a corporation.41 In an American case,42 persons claiming shareholders status in a professional
corporation were listed as stockholders in the amendment to the articles of incorporation. On that basis, they
were in all respects treated as shareholders. In fact, the acts and conduct of the parties may even constitute
sufficient evidence of one’s status as a shareholder or member. 43 In the instant case, no less than the articles of
incorporation declare the incorporators to have in their name the founders and several common shares. Thus, to
disregard the contents of the articles of incorporation would be to pretend that the basic document which legally
triggered the creation of the corporation does not exist and accordingly to allow great injustice to be caused to the
incorporators and their heirs.
67 | P a g e

Petitioners argue that the Court of Appeals "gravely erred in applying the Espejo decision to the benefit of
respondents." The Court believes that the more precise statement of the issue is whether in its assailed Decision,
the Court of Appeals can declare private respondents as the heirs of the incorporators, and consequently register
the founders shares in their name. However, this issue as recast is not actually determinative of the present
controversy as explained below.

Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares in PMMSI as
recorded in the stock and transfer book and instantly created inexistent shares in favor of private respondents. We
do not agree.

The assailed Decision merely declared that a separate judicial declaration to recognize the shares of the original
incorporators would entail unnecessary delay and expense on the part of the litigants, considering that the
incorporators had already proved ownership of such shares as shown in the articles of incorporation.44 There was
no declaration of who the individual owners of these shares were on the date of the promulgation of the Decision.
As properly stated by the SEC in its Order dated 20 June 1996, to which the appellate court’s Decision should be
related, "if at all, the ownership of these shares should only be subjected to the proper judicial (probate) or
extrajudicial proceedings in order to determine the respective shares of the legal heirs of the deceased
incorporators."45
68 | P a g e
69 | P a g e

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,

vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS
GONZALES, respondents.

What is the nature of the voting trust agreement executed between two parties in this case? Who owns the stocks
of the corporation under the terms of the voting trust agreement? How long can a voting trust agreement remain
valid and effective? Did a director of the corporation cease to be such upon the creation of the voting trust
agreement? These are the questions the answers to which are necessary in resolving the principal issue in this
petition forcertiorari — whether or not there was proper service of summons on Alfa Integrated Textile Mills
(ALFA, for short) through the petitioners as president and vice-president, allegedly, of the subject corporation after
the execution of a voting trust agreement between ALFA and the Development Bank of the Philippines (DBP, for
short).

From the records of the instant case, the following antecedent facts appear:

On November 15, 1985, a complaint for a sum of money was filed by the International Corporate Bank, Inc. against
the private respondents who, in turn, filed a third party complaint against ALFA and the petitioners on March 17,
1986.

On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the Regional Trial
Court of Makati, Branch 58 denied in an Order dated June 27, 1988.

On July 18, 1988, the petitioners filed their answer to the third party complaint.

Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of an alias summons upon ALFA
through the DBP as a consequence of the petitioner's letter informing the court that the summons for ALFA was
erroneously served upon them considering that the management of ALFA had been transferred to the DBP.

In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive summons on behalf
of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality
and existence.

On August 4, 1988, the trial court issued an order advising the private respondents to take the appropriate steps to
serve the summons to ALFA.

On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of Proper
Service of Summons which the trial court granted on August 17, 1988.

On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14, section 13 of
the Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private
respondents should have availed of another mode of service under Rule 14, Section 16 of the said
Rules, i.e., through publication to effect proper service upon ALFA.

In their Comment to the Motion for Reconsideration dated September 27, 1988, the private respondents argued
that the voting trust agreement dated March 11, 1981 did not divest the petitioners of their positions as president
and executive vice-president of ALFA so that service of summons upon ALFA through the petitioners as corporate
officers was proper.
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On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the petitioners,
thus, denying the latter's motion for reconsideration and requiring ALFA to filed its answer through the petitioners
as its corporate officers.

On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their stand that
by virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence, they could no
longer receive summons or any court processes for or on behalf of ALFA. In support of their second motion for
reconsideration, the petitioners attached thereto a copy of the voting trust agreement between all the
stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the other hand, whereby the
management and control of ALFA became vested upon the DBP.

On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2, 1989 and
declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as
proper service of summons on ALFA.

On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was affirmed by
the court in its Order dated August 14, 1989 denying the private respondent's motion for reconsideration.

On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent before the
public respondent which, nonetheless, resolved to give due course thereto on September 21, 1989.

On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with public
respondent issued an Order declaring as final the Order dated April 25, 1989. The private respondents in the said
Order were required to take positive steps in prosecuting the third party complaint in order that the court would
not be constrained to dismiss the same for failure to prosecute. Subsequently, on October 25, 1989 the private
respondents filed a motion for reconsideration on which the trial court took no further action.

On March 19, 1990, after the petitioners filed their answer to the private respondents' petition for certiorari, the
public respondent rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25, 1989 and
August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered to file its answer
within the reglementary period. (CA Decision, p. 8; Rollo, p. 24)

On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public respondent which
resolved to deny the same on May 10, 1990. Hence, the petitioners filed this certiorari petition imputing grave
abuse of discretion amounting to lack of jurisdiction on the part of the public respondent in reversing the
questioned Orders dated April 25, 1989 and August 14, 1989 of the court a quo, thus, holding that there was
proper service of summons on ALFA through the petitioners.

In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990 erroneously
applying the rule that the period during which a motion for reconsideration has been pending must be deducted
from the 15-day period to appeal. However, in its Resolution dated January 3, 1991, the public respondent set
aside the aforestated entry of judgment after further considering that the rule it relied on applies to appeals from
decisions of the Regional Trial Courts to the Court of Appeals, not to appeals from its decision to us pursuant to our
ruling in the case of Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539
[1989]. (CA Rollo, pp. 249-250)

In their memorandum, the petitioners present the following arguments, to wit:

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(1) that the execution of the voting trust agreement by a stockholders whereby all his shares to
the corporation have been transferred to the trustee deprives the stockholders of his position as
director of the corporation; to rule otherwise, as the respondent Court of Appeals did, would be
violative of section 23 of the Corporation Code ( Rollo, pp. 270-3273); and

(2) that the petitioners were no longer acting or holding any of the positions provided under Rule
14, Section 13 of the Rules of Court authorized to receive service of summons for and in behalf of
the private domestic corporation so that the service of summons on ALFA effected through the
petitioners is not valid and ineffective; to maintain the respondent Court of Appeals' position
that ALFA was properly served its summons through the petitioners would be contrary to the
general principle that a corporation can only be bound by such acts which are within the scope of
its officers' or agents' authority (Rollo, pp. 273-275)

In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on the nature of
a voting trust agreement and the consequent effects upon its creation in the light of the provisions of the
Corporation Code.

A voting trust is defined in Ballentine's Law Dictionary as follows:

(a) trust created by an agreement between a group of the stockholders of a corporation and the
trustee or by a group of identical agreements between individual stockholders and a common
trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain
event, or until the agreement is terminated, control over the stock owned by such stockholders,
either for certain purposes or for all purposes, is to be lodged in the trustee, either with or
without a reservation to the owners, or persons designated by them, of the power to direct how
such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements, a more
definitive meaning may be gathered. The said provision partly reads:

Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting
trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights
pertaining to the share for a period rights pertaining to the shares for a period not exceeding five
(5) years at any one time: Provided, that in the case of a voting trust specifically required as a
condition in a loan agreement, said voting trust may be for a period exceeding (5) years but shall
automatically expire upon full payment of the loan. A voting trust agreement must be in writing
and notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of
stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in
the name of the trustee or trustees stating that they are issued pursuant to said agreement. In
the books of the corporation, it shall be noted that the transfer in the name of the trustee or
trustees is made pursuant to said voting trust agreement.

By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder from his
other rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell
certain interests in the assets of the corporation and other rights to which a stockholder may be entitled until the
liquidation of the corporation. However, in order to distinguish a voting trust agreement from proxies and other
voting pools and agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are
separated from the other attributes of ownership; (2) that the voting rights granted are intended to be irrevocable
for a definite period of time; and (3) that the principal purpose of the grant of voting rights is to acquire voting
72 | P a g e

control of the corporation. (5 Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p.
331 citingTankersly v. Albright, 374 F. Supp. 538)

Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not only the
stockholder's voting rights but also other rights pertaining to his shares as long as the voting trust agreement is not
entered "for the purpose of circumventing the law against monopolies and illegal combinations in restraint of
trade or used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code) Thus, the traditional
concept of a voting trust agreement primarily intended to single out a stockholder's right to vote from his other
rights as such and made irrevocable for a limited duration may in practice become a legal device whereby a
transfer of the stockholder's shares is effected subject to the specific provision of the voting trust agreement.

The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial
ownership of the corporate shares of a stockholders, on the one hand, and the legal title thereto on the other
hand.

The law simply provides that a voting trust agreement is an agreement in writing whereby one or more
stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting
or other rights pertaining to said shares for a period not exceeding five years upon the fulfillment of statutory
conditions and such other terms and conditions specified in the agreement. The five year-period may be extended
in cases where the voting trust is executed pursuant to a loan agreement whereby the period is made contingent
upon full payment of the loan.

In the instant case, the point of controversy arises from the effects of the creation of the voting trust agreement.
The petitioners maintain that with the execution of the voting trust agreement between them and the other
stockholders of ALFA, as one party, and the DBP, as the other party, the former assigned and transferred all their
shares in ALFA to DBP, as trustee. They argue that by virtue to of the voting trust agreement the petitioners can no
longer be considered directors of ALFA. In support of their contention, the petitioners invoke section 23 of the
Corporation Code which provides, in part, that:

Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director which share shall stand in his name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be director . . . (Rollo, p. 270)

The private respondents, on the contrary, insist that the voting trust agreement between ALFA and the DBP had all
the more safeguarded the petitioners' continuance as officers and directors of ALFA inasmuch as the general
object of voting trust is to insure permanency of the tenure of the directors of a corporation. They cited the
commentaries by Prof. Aguedo Agbayani on the right and status of the transferring stockholders, to wit:

The "transferring stockholder", also called the "depositing stockholder", is equitable owner for
the stocks represented by the voting trust certificates and the stock reversible on termination of
the trust by surrender. It is said that the voting trust agreement does not destroy the status of
the transferring stockholders as such, and thus render them ineligible as directors. But a more
accurate statement seems to be that for some purposes the depositing stockholder holding
voting trust certificates in lieu of his stock and being the beneficial owner thereof, remains and is
treated as a stockholder. It seems to be deducible from the case that he may sue as a
stockholder if the suit is in equity or is of an equitable nature, such as, a technical stockholders'
suit in right of the corporation. [Commercial Laws of the Philippines by Agbayani, Vol. 3 pp. 492-
493, citing 5 Fletcher 326, 327] (Rollo, p. 291)

We find the petitioners' position meritorious.

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Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of a voting
trust agreement on the status of a stockholder who is a party to its execution — from legal titleholder or owner of
the shares subject of the voting trust agreement, he becomes the equitable or beneficial owner.
(Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and Carlos, The Law on Private
Corporations and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code;
Comments, Notes & Selected Cases, 1981, ed., p. 386; Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines,Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is whether the
change in his status deprives the stockholder of the right to qualify as a director under section 23 of the present
Corporation Code which deletes the phrase "in his own right." Section 30 of the old Code states that:

Every director must own in his own right at least one share of the capital stock of the stock
corporation of which he is a director, which stock shall stand in his name on the books of the
corporation. A director who ceases to be the owner of at least one share of the capital stock of a
stock corporation of which is a director shall thereby cease to be a director . . . (Emphasis
supplied)

Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely affected by the
simple act of such director being a party to a voting trust agreement inasmuch as he remains owner (although
beneficial or equitable only) of the shares subject of the voting trust agreement pursuant to which a transfer of the
stockholder's shares in favor of the trustee is required (section 36 of the old Corporation Code). No disqualification
arises by virtue of the phrase "in his own right" provided under the old Corporation Code.

With the omission of the phrase "in his own right" the election of trustees and other persons who in fact are not
beneficial owners of the shares registered in their names on the books of the corporation becomes formally
legalized (see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear indication that in order to be eligible
as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books
of the corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92 [1969] citingPeople
v. Lihme, 269 Ill. 351, 109 N.E. 1051).

The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981 disposed
of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently, the petitioners
ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the
new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The
petitioners ceased to be directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in
their respective positions as directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is
the essence of the subject voting trust agreement as evident from the following stipulations:

1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the shares of the
stocks owned by them respectively and shall do all things necessary for the transfer of their
respective shares to the TRUSTEE on the books of ALFA.

2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number of shares
transferred, which shall be transferrable in the same manner and with the same effect as
certificates of stock subject to the provisions of this agreement;

3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or special,
upon any resolution, matter or business that may be submitted to any such meeting, and shall
possess in that respect the same powers as owners of the equitable as well as the legal title to the
stock;
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4. The TRUSTEE may cause to be transferred to any person one share of stock for the purpose of
qualifying such person as director of ALFA, and cause a certificate of stock evidencing the share
so transferred to be issued in the name of such person;

xxx xxx xxx

9. Any stockholder not entering into this agreement may transfer his shares to the same trustees
without the need of revising this agreement, and this agreement shall have the same force and
effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis supplied)

Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stock
covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the
said shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one
share of stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have
retained their status as officers of ALFA which was the case before the execution of the subject voting trust
agreement. There appears to be no dispute from the records that DBP has taken over full control and management
of the firm.

Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A. Guevarra, Vice-
President of its Special Accounts Department II, Remedial Management Group, the petitioners were no longer
included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-142)

Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting trust
agreement did not deprive the petitioners of their position as directors of ALFA, the public respondent committed
a reversible error when it ruled that:

. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be
president and vice-president, respectively, of the corporation at the time of service of summons
on them on August 21, 1987, they were at least up to that time, still directors . . .

The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of the subject
voting trust agreement. Both parties, ALFA and the DBP, were aware at the time of the execution of the agreement
that by virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA were stripped of their positions
as such.

There can be no reliance on the inference that the five-year period of the voting trust agreement in question had
lapsed in 1986 so that the legal title to the stocks covered by the said voting trust agreement ipso facto reverted to
the petitioners as beneficial owners pursuant to the 6th paragraph of section 59 of the new Corporation Code
which reads:

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificate as well as the certificates
of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors.

On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and the DBP
that the duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA with the DBP.
This is shown by the following portions of the agreement.

WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first
mortgage on the manufacturing plant of said company;
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WHEREAS, ALFA is also indebted to other creditors for various financial accomodations and
because of the burden of these obligations is encountering very serious difficulties in continuing
with its operations.

WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA had offered
and the TRUSTEE has accepted participation in the management and control of the company and
to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have agreed to execute a
voting trust covering their shareholding in ALFA in favor of the TRUSTEE;

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.

NOW, THEREFORE, it is hereby agreed as follows:

xxx xxx xxx

6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as the
obligations of ALFA with DBP, or any portion thereof, remains outstanding; (CA Rollo, pp. 137-
138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have transferred all its
rights, titles and interests in ALFA "effective June 30, 1986" to the national government through the Asset
Privatization Trust (APT) as attested to in a Certification dated January 24, 1989 of the Vice President of the DBP's
Special Accounts Department II. In the same certification, it is stated that the DBP, from 1987 until 1989, had
handled APT's account which included ALFA's assets pursuant to a management agreement by and between the
DBP and APT (CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on
ALFA through the petitioners on August 21, 1987, the voting trust agreement in question was not yet terminated
so that the legal title to the stocks of ALFA, then, still belonged to the DBP.

In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on ALFA
through the petitioners is readily answered in the negative.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a
corporation organized under the laws of the Philippines or a partnership duly registered, service
may be made on the president, manager, secretary, cashier, agent or any of its directors.

It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from the officers
or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v.
Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule on
service of processes of a corporation enumerates the representatives of a corporation who can validly receive
court processes on its behalf. Not every stockholder or officer can bind the corporation considering the existence
of a corporate entity separate from those who compose it.

The rationale of the aforecited rule is that service must be made on a representative so integrated with the
corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should
do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit,
Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated officers. The service of summons upon ALFA,
through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the petitioners, will
76 | P a g e

contravene the general principle that a corporation can only be bound by such acts which are within the scope of
the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).

WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated March 19, 1990
and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and
October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED.

SO ORDERED.
77 | P a g e

NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA MARIO Y. CONSING and
ROBERTO S. BENEDICTO, petitioners,
vs.
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of Branch VIII of the Court of First Instance of
Rizal, BATJAK INC., GRACIANO A. GARCIA and MARCELINO CALINAWAN JR., respondents.

G.R. No. L-34213 June 30, 1988

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch VIII
and BATJAK INCORPORATED, respondents.

Cruz, Palafox, Alfonso and Associates for petitioner NIDC in G.R. No. 34192.

The Chief Legal Counsel for petitioner PNB in G.R. No. 34213.

Reyes and Sundiam Law Office for respondent Batjak, Inc.

Duran, Chuanico Oebanda, Benemerito & Associates for private respondents in G.R. Nos. 34192 & 34213.

Tolentino, Garcia, Cruz & Reyes for movant in G.R. No. L-34192.

PADILLA, J.:

These two (2) separate petitions for certiorari and prohibition, with preliminary injunction, seek to annul and set
aside the orders of respondent judge, dated 16 August 1971 and 30 September 1971, in Civil Case No. 14452 of the
Court of First Instance of Rizal, entitled Batjak Inc. vs. NIDC et al." The order of 16 August 1971 1 granted the
alternative petition of private respondent Batjak, Inc. Batjak for short) for the appointment of receiver and denied
petitioners' motion to dismiss the complaint of said private respondent. The order dated 30 September
1971 2 denied petitioners' motion for reconsideration of the order dated 16 August 1971.

The herein petitions likewise seek to prohibit the respondent judge from hearing and/or conducting any further
proceedings in Civil Case No. 14452 of said court.

Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is a Filipino-American corporation organized
under the laws of the Philippines, primarily engaged in the manufacture of coconut oil and copra cake for export.
In 1965, Batjak's financial condition deteriorated to the point of bankruptcy. As of that year, Batjak's indebtedness
to some private banks and to the Philippine National Bank (PNB) amounted to P11,915,000.00, shown as follows:

Republic Bank P 2,324,000.00

Philippine Commercial and

Industrial Bank 1,346,000.00

Manila Banking Corporation 2,000,000.00

78 | P a g e

Manufacturers Bank 440,000.00

Hongkong and Shanghai

Banking Corporation 250,000.00

Foreign Export Advances

(against immediate shipment) 555,000.00

PNB export advance line

(against immediate shipment) 5,000,000.00

TOTAL 11,915,000.00

As security for the payment of its obligations and advances against shipments, Batjak mortgaged its three (3) coco-
processing oil mills in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte to Manila Banking
Corporation (Manila Bank), Republic Bank (RB), and Philippine Commercial and Industrial Bank (PCIB), respectively.
In need for additional operating capital to place the three (3) coco-processing mills at their optimum capacity and
maximum efficiency and to settle, pay or otherwise liquidate pending financial obligations with the different
private banks, Batjak applied to PNB for additional financial assistance. On 5 October 1965, a Financial Agreement
was submitted by PNB to Batjak for acceptance. The Financial Agreement reads:

PHILIPPINE NATIONAL BANK

Manila, Philippines

International Department

October 5, 1965

BATJAK, INCORPORATED

3rd Floor, G. Puyat Bldg.

Escolta, Manila

Attn.: Mr. CIRIACO B. MENDOZA

Vice-President & General Manager

Gentlemen:

We are pleased to advise that our Board of Directors approved for you the
following:

1) That NIDC shall invest P6,722,500.00 in the form of preferred shares of stocks at 9%
cumulative, participating and convertible within 5 years at par into common stocks to liquidate
your accounts with the Republic Bank, Manufacturers Bank & Trust Company and the PCIB
79 | P a g e

which, however, shall be applied to the latter three (3) banks accounts with the Loans &
Discounts Dept. NIDC shall match your P 10 million subscription by an additional investment of
P3,277,500 within a period of one to two years at NIDC's option;

2) That NIDC will guaranty for five (5) years your account with the Manila Banking Corporation;

3) That the above banks (Republic Bank, PCIB, MBTC and Manila Banking Corp.) shall release in
favor of PNB the first and any mortgage they hold on your properties;

4) That you shall exercise (execute) a first mortgage on all your properties located at Sasa, Davao
City; Jimenez, Misamis Occidental; and Tanauan, Leyte and assign leasehold rights on the
property on which your plant at Sasa, Davao City is erected in favor of PNB;

5) That a voting trust agreement for five (5) years over 60% of the oustanding paid up and
subscribed shares shall be executed by your stockholders in favor of NIDC;

6) That this accomodation shall be secured by the joint and several signatures of officers and
directors;

7) That the number of the Board of Directors shall be increased to seven (7), three (3) from your
firm and the other four (4) from the PNB-NIDC;

8) That a comptroller, at your expense, shall be appointed by PNB-NIDC to supervise the financial
management of your firm;

9) That the past due accounts of P 5 million with the International Department of the PNB shall
be transferred to the Loans & Discount Department and to be treated as a Demand Loan;

10) That any excess of NIDC investment as required in Condition 1 after payment of the
obligations to three (3) Banks (RB, MBTC, & PCIB) shall be applied to reduce the above Demand
Loan of P 5 million;

11) That we shall grant you an export advance of P3 million to be used for copra purchases,
subject to the following conditions:

a) That the line shall expire on September 30, 1966 but revocable at the Bank(s)
option;

b) That drawings against the line shall be allowed only when an irrevocable
export L/C for coconut products has been established or assigned in your favor
and you shall assign to us all proceeds of negotiations to be received from your
letters of credit;

c) That drawings against the line be limited to 60% of the peso value of the
export letters of credit computed at P3.50 per $1.00 but total drawings shall
not in any event exceed P3,000,000.00;

d) That release or releases against the line shall be covered by promissory note
or notes for 90 days but not beyond the expiry dates of the coveting L/C and
proceeds of said L/C shall first be applied to the correspondent drawings on the
line;
80 | P a g e

e) That drawings against the line shall be charged interest at the rate of 9% per
annum and subject to 1/2% penalty charge on all drawings not paid or
extended on maturity date; and

f) That within 90 days from date of release against the line, you shall negotiate
with us on equivalent amount in export bills, otherwise, the line shag be
temporarily suspended until the outstanding export advance is fully liquidated.

We are writing the National Investment & Development Corporation, the Republic Bank, the
Philippine Commercial & Industrial Bank and the Manufacturers Bank & Trust Company and the
Manila Banking Corporation regarding the above.

In connection with the above, kindly submit to us two (2) copies of your board resolution
certified to under oath by your corporate secretary accepting the conditions enumerated above
authorizing the above transactions and the officer or officers to sign on behalf of the corporation.

Thank you.

Very truly yours,

(SGD.) JOSE B. SAMSON 3

The terms and conditions of the Financial Agreement were duly accepted by Batjak. Under said Agreement, NIDC
would, as it actually did, invest P6,722,500.00 in Batjak in the form of preferred shares of stock convertible within
five (5) years at par into common stock, to liquidate Batjak's obligations to Republic Bank (RB), Manufacturers Bank
and Trust Company (MBTC) and Philippine Commercial & Industrial Bank (PCIB), and the balance of the investment
was to be applied to Batjak's past due account of P 5 million with the PNB.

Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and any mortgages they held on
the properties of Batjak.

As agreed, PNB also granted Batjak an export-advance line of P 3 million, later increased to P 5million, and a
standby letter of credit facility in the amount of P5,850,000.00. As of 29 September 1966, the financial
accomodation that had been extended by PNB to Batjak amounted to a total of P 14,207,859.51.

As likewise agreed, Batjak executed a first mortgage in favor of PNB on all its properties located at Jimenez,
Misamis Occidental and Tanauan, Leyte. Batjak's plant in Sasa, Davao City was mortgaged to the Manila Bank
which, in 1967, instituted foreclosure proceedings against the same but which were aborted by the payment by
Batjak of the sum of P2,400,000.00 to Manila Bank, and which amount was advanced to Batjak by NIDC, a wholly-
owned subsidiary of PNB. To secure the advance, Batjak mortgaged the oil mill in Sasa, Davao City to NIDC. 4

Next, a Voting Trust Agreement was executed on 26 October 1965 in favor of NIDC by the stockholders
representing 60% of the outstanding paid-up and subscribed shares of Batjak. This agreement was for a period of
five (5) years and, upon its expiration, was to be subject to negotiation between the parties. The voting Trust
Agreement reads:

VOTING TRUST AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

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This AGREEMENT made and executed by the undersigned stockholders of BATJAK, INC., a
corporation duly organized and existing under the laws of the Philippines, whose names are
hereinbelow subscribed hereinafter caged the SUBSCRIBERS, and the NATIONAL INVESTMENT
AND DEVELOPMENT CORPORATION, hereinafter referred to as the trustee.

WITNESSETH:

WHEREAS, the SUBSCRIBERS are owners respectively of the capital stock of the BATJAK, INC.
(hereinafter called the CORPORATION) in the amounts represented by the number of shares set
fort opposite their respective names hereunder;

AND WHEREAS, with a view or establishing a safe and competent management to operate the
corporation for the best interest of all the stockholders thereof, and as mutually agreed between
the SUBSCRIBERS and the TRUSTEE, this Voting Trust Agreement has been executed under the
following terms and conditions.

NOW THEREFORE, the undersigned stockholders, in consideration of the premises and of the
mutual covenants and agreements herein contained and to carry out the foregoing purposes in
order to vest in the TRUSTEE the voting rights of the shares of stock held by the undersigned in
the CORPORATION as hereinafter stated it is mutually agreed as follows:

1. PERIOD OF DESIGNATION — For a period of five (5) years from and after date hereof, without
power of revocation on the part of the SUBSCRIBERS, the TRUSTEE designated in the manner
herein provided is hereby made, constituted and appointed as a VOTING TRUSTEE to act for and
in the name of the SUBSCRIBERS, it being understood, however, that this Voting Trust Agreement
shall, upon its expiration be subject to a re-negotiation between the parties, as may be
warranted by the balance and attending circumstance of the loan investment of the TRUSTEE or
otherwise in the CORPORATION.

2. ASSIGNMENT OF STOCK CERTIFICATES UPON ISSUANCE — The undersigned stockholders

hereby transfer and assign their common shares to the capital stock of the CORPORATION to the
extent shown hereunder:

JAMES A. KEISTER 21,500 shares

JOHNNY LIEUSON 20,300 shares

CBM FINANCE & INVESTMENT

CORP. (C.B. Mendoza, Pres.) 5,000 shares

ALEJANDRO G. BELTRAN 4,000 shares

ESPERANZA A. ZAMORA 3,000 shares

CIRIACO B. MENDOZA 2,000 shares

FIDELA DE GUZMAN 2,000 shares

LLOYD D. COMBS 2,000 shares

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RENATO B. BEJAR 200 shares

TOTAL 60,000 shares

to the TRUSTEE by virtue of the provisions hereof and do hereby authorize the Secretary of the
CORPORATION to issue the corresponding certificate directly in the name of the TRUSTEE and on
which certificates it shall appear that they have been issued pursuant to this Voting Trust
Agreement and the said TRUSTEE shall hold in escrow all such certificates during the term of the
Agreement. In turn, the TRUSTEE shall deliver to the undersigned stockholders the corresponding
Voting Trust certificates provided for in Sec. 36 of Act No. 1459.

3. VOTING POWER OF TRUSTEE — The TRUSTEE and its successors in trust, if anym shall have the
power and it shall be its duty to vote the shares of the undersigned subject hereof and covered
by this Agreement at all annual, adjourned and special meetings of the CORPORATION on all
questions, motions, resolutions and matters including the election of directors and such matters
on which the stockholders, by virtue of the by-laws of the CORPORATION and of the existing
legislations are entitled to vote, which may be voted upon at any and all said meetings and shall
also have the power to execute and acknowledge any agreements or documents that may be
necessary in its opinion to express the consent or assent of all or any of the stockholders of the
CORPORATION with respect to any matter or thing to which any consent or assent of the
stockholders may be necessary, proper or convenient.

4. FILING of AGREEMENT — An executed copy of this Agreement shall be filed with the
CORPORATION at its office in the City of Manila wherever it may be transfered therefrom and
shall constitute irrevocable authority and absolute direction of the officers of the CORPORATION
whose duty is to sign and deliver stock certificates to make delivery only to said voting trustee of
the shares and certificates of stock subject to the provisions of this Agreement as aforesaid. Such
copy of this Agreement shall at all times be open to inspection by any stockholder, as provided
by law.

5. DIVIDEND — the full and absolute beneficial interest in the shares subject of this Agreement
shall remain with the stockholders executing the same and any all dividends which may be
declared by the CORPORATION shall belong and be paid to them exclusively in accordance with
their stockholdings after deducting therefrom or applying the same to whatever liabilities the
stockholders may have in favor of the TRUSTEE by virtue of any Agreement or Contract that may
have been or will be executed by and between the TRUSTEE and the CORPORATION or between
the former and the undersigned stockholders.

6 COMPENSATION; IMMUNITY — The TRUSTEE or its successor in trust shall not receive any
compensation for its serviceexcept perhaps that which the CORPORATION may grant to the
TRUSTEE's authorized representative, if any. Expenses costs, champs, and other liabilities
incurred in the carrying out of the but herein established or by reason thereof, shall be paid for
with the funds of the CORPORATION. The TRUSTEE or any of its duly authorized representative
shall incur no liability by reason of any error of law or of any matter or thing done or omitted
under this Agreement, except for his own individual malfeasance.

7. REPRESENTATION — The TRUSTEE, being a corporation and a juridical person shall accomplish
the foregoing objectives and perform its functions under this Agreement as well as enjoy and
exercise the powers, privileges, rights and interests herein established through its duly
authorized and accredited re resentatives . p with full authority under the specific appointment
or designation or Proxy.
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8. IRREVOCABILITY — This Agreement shall during its 5-year term or any extension thereof be
binding upon and inure to the benefit of the undersigned stockholders and their respective legal
representatives, pledges, transferees, and/or assigns and shall be irrevocable during the said
terms and/or its extension pursuant to the provisions of paragraph 1 hereof. It is hereby
understood and the undersigned stockholders have bound as they hereby bind themselves to
make a condition of every pledge, transfer of assignment of their interests in the CORPORATION
that the interests and participation so pledged, transferred or assigned is evidenced by
annotations in the certificates of stocks or in the books of the corporation, shall be subject to this
Agreement and the same shall be binding upon the pledgees, transferees and assigns while the
trust herein created still subsists.

9. TERMINATION — Upon termination of this Agreement as heretofore provided, the certificates

delivered to the TRUSTEE by virtue hereof shall be returned and delivered to the undersigned
stockholders as the absolute owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and terminate.

10. ACCEPTANCE OF TRUST — The TRUSTEE hereby accepts the trust created by this Agreement
under the signature of its duly authorized representative affixed hereinbelow and agrees to
perform the same in accordance with the term/s hereof.

IN WITNTESS HEREOF, the undersigned stockholders and the TRUSTEE by its representatives,
have hereunto affixed their signatures this 26 day of October, 1965 in the City of Manila,
Philippines.

(SGD) JAMES A. KEISER (SGD) JOHNNY LIEUSON

Stockholder Stockholder

CBM FINANCE & INVESTMENT CORPORATION

By: (SGD) C.B. MENDOZA

President

ESPERANZA A. ZAMORA (SGD) ALEJANDRO G. BELTRAN

By: (SGD) MARIANO ZAMORA Stockholder

ESPERANZA A. ZAMORA

(SGD) FIDELA DE GUZMAN (SGD) CIRIACO B. MENDOZA

Stockholder Stockholder

(SGD) RENATO B. BEJAR (SGD) LLOYD D. COMBS

Stockholder Stockholder

NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION

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By:

(SGD) IGNACIO DEBUQUE JR.

Vice-President 5

In July 1967, forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings against the oil
mills of Batjak located in Tanauan, Leyte and Jimenez, Misamis Occidental. The properties were sold to PNB as the
highest bidder. One year thereafter, or in September 1968, final Certificates of Sale were issued by the provincial
sheriffs of Leyte 6 and Misamis Occidental 7 for the two (2) oil mills in Tanauan and Jimenez in favor of PNB, after
Batjak failed to exercise its right to redeem the foreclosed properties within the allowable one year period of
redemption. Subsequently, PNB transferred the ownership of the two (2) oil mills to NIDC which, as aforestated,
was a wholly-owned PNB subsidiary.

As regards the oil mill located at Sasa, Davao City, the same was similarly foreclosed extrajudicial by NIDC. It was
sold to NIDC as the highest bidder. After Batjak failed to redeem the property, NIDC consolidated its ownership of
the oil mill. 8

Three (3) years thereafter, or on 31 August 1970, Batjak represented by majority stockholders, through Atty.
Amado Duran, legal counsel of private respondent Batjak, wrote a letter to NIDC inquiring if the latter was still
interested in negotiating the renewal of the Voting Trust Agreement. 9 On 22 September 1970, legal counsel of
Batjak wrote another letter to NIDC informing the latter that Batjak would now safely assume that NIDC was no
longer interested in the renewal of said Voting Trust Agreement and, in view thereof, requested for the turn-over
and transfer of all Batjak assets, properties, management and operations. 10

On 23 September 1970, legal counsel of Batjak sent stin another letter to NIDC, this time asking for a complete
accounting of the assets, properties, management and operation of Batjak, preparatory to their turn-over and
transfer to the stockholders of Batjak. 11

NIDC replied, confirming the fact that it had no intention whatsoever to comply with the demands of Batjak. 12

On 24 February 1971, Batjak filed before the Court of First Instance of Rizal a special civil action for mandamus
with preliminary injunction against herein petitioners docketed as Civil Case No. 14452. 13

On 14 April 1971, in said Civil Case No. 14452, Batjak filed an urgent ex parte motion for the issuance of a writ of
preliminary prohibitory and mandatory injunction. 14 On the same day, respondent judge issued a restraining order
"prohibiting defendants (herein petitioners) from removing any record, books, commercial papers or cash, and
leasing, renting out, disposing of or otherwise transferring any or all of the properties, machineries, raw materials
and finished products and/or by-products thereof now in the factory sites of the three (3) modem coco milling
plants situated in Jimenez, Misamis Occidental, Sasa, Davao City, and Tanauan, Leyte." 15

The order of 14 April 1971 was subsequently amended by respondent judge upon an ex parte motion of private
respondent Batjak so as to include the premises of NIDC in Makati and those of PNB in Manila, as among the
premises which private respondent Batjak was authorized to enter in order to conduct an inventory.

On 24 April 1971, NIDC and PNB filed an opposition to the ex parte application for the issuance of a writ of
preliminary prohibitory and mandatory injunction and a motion to set aside restraining order.

Before the court could act on the said motion, private respondent Batjak filed on 3 May 1971 a petition for
receivership as alternative to writ of preliminary prohibitory and mandatory injunction. 16 This was opposed by
PNB and NIDC . 17
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On 8 May 1971., NIDC and PNB filed a motion to dismiss Batjak's complaints. 18

On 16 August 1971, respondent judge issued the now assailed order denying petitioners' motion to dismiss and
appointing a set of three (3) receivers. 19 NIDC moved for reconsideration of the aforesaid order. 20 On 30
September 1971, respondent judge denied the motion for reconsideration. 21

Hence, these two (2) petitions, which have been consolidated, as they involve a resolution of the same issues. In
their manifestation with motion for early decision, dated 25 August 1986, private respondent, Batjak contends that
the NIDC has already been abolished or scrapped by its parent company, the PNB.

After a careful study and examination of the records of the case, the Court finds and holds for the petitioners.

1. On the denial of petitioners' motion to dismiss.

As a general rule, an order denying a motion to quash or to dismiss is interlocutory and cannot be the subject of a
petition for certiorari. The remedy of the aggrieved party in a denied motion to dismiss is to file an answer and
interpose, as defense or defenses, the objection or objections raised by him in said motion to dismiss, then
proceed to trial and, in case of adverse decision, to elevate the entire case by appeal in due course. However,
under certain situations, recourse to the extraordinary legal remedies of certiorari, prohibition and mandamus to
question the denial of a motion to dismiss or quash is considered proper, in the interest of more enlightened and
substantial justice. As the court said in Pineda and Ampil Manufacturing Co. vs. Bartolome, 95 Phil. 930,938

For analogous reasons it may be said that the petition for certiorari interposed by the accused
against the order of the court a quo denying the motion to quash may be entertained, not only
because it was rendered in a criminal case, but because it was rendered, as claimed, with grave
abuse of discretion, as found by the Court of Appeals. ..

and reiterated in Mead v. Argel 22 citing Yap v. Lutero (105 Phil. 1307):

However, were we to require adherence to this pretense, the case at bar would have to be
dismissed and petitioner required to go through the inconvenience, not to say the mental agony
and torture, of submitting himself to trial on the merits in Case No. 166443, apart from the
expenses incidental thereto, despite the fact that his trial and conviction therein would violate
one of this [sic] constitutional rights, and that, an appeal to this Court, we would, therefore, have
to set aside the judgment of conviction of the lower court. This would, obviously, be most unfair
and unjust. Under the circumstances obtaining the present case, the flaw in the procedure
followed by petitioner herein may be overlooked, in the interest of a more enlightened and
substantial justice.

Thus, where there is patent grave abuse of discretion, in denying the motion to dismiss, as in the present case, this
Court may entertain the petition for certiorari interposed by the party against whom the said order is issued.

In their motion to dismiss Batjaks complaint, in Civil Case No. 14452, NIDC and PNB raised common grounds for its
allowance, to wit:

1. This Honorable Court (the trial court) has no jurisdiction over the subject of the action or suit;

2. The venue is improperly laid; and

3. Plaintiff has no legal capacity to sue.

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In addition, PNB contended that the complaint states no cause of action (Rule 16, Sec. 1, Par. a, c, d & g, Rules of
Court).

Anent the first ground, it is a well-settled rule that the jurisdiction of a Court of First Instance to issue a writ of
preliminary or permanent injunction is confined within the boundaries of the province where the land in
controversy is situated. 23 The petition for mandamus of Batjak prayed that NIDC and PNB be ordered to surrender,
relinquish and turnover to Batjak the assets, management and operation of Batjak particularly the three (3) oil
mills located in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte.

Clearly, what Batjak asked of respondent court was the exercise of power or authority outside its jurisdiction.

On the matter of proper venue, Batjak's complaint should have been filed in the provinces where said oil mills are
located. Under Rule 4, Sec. 2, paragraph A of the Rules of Court, "actions affecting title to, or for recovery of
possession, or for partition or condemnation of, or foreclosure of mortgage on, real property, shall be commenced
and tried in the province where the property or any part thereof lies."

In support of the third ground of their motion to dismiss, PNB and NIDC contend that Batjak's complaint for
mandamus is based on its claim or right to recovery of possession of the three (3) oil mills, on the ground of an
alleged breach of fiduciary relationship. Noteworthy is the fact that, in the Voting Trust Agreement, the parties
thereto were NIDC and certain stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec. 2, Rule
3 of the Rules of Court, every action must be prosecuted and defended in the name of the real party in interest.
Applying the rule in the present case, the action should have been filed by the stockholders of Batjak, who
executed the Voting Trust Agreement with NIDC, and not by Batjak itself which is not a party to said agreement,
and therefore, not the real party in interest in the suit to enforce the same.

In addition, PNB claims that Batjak has no cause of action and prays that the petition for mandamus be dismissed.
A careful reading of the Voting Trust Agreement shows that PNB was really not a party thereto. Hence, mandamus
will not lie against PNB.

Moreover, the action instituted by Batjak before the respondent court was a special civil action for mandamus
with prayer for preliminary mandatory injunction. Generally, mandamus is not a writ of right and its allowance or
refusal is a matter of discretion to be exercised on equitable principles and in accordance with well-settled rules of
law, and that it should never be used to effectuate an injustice, but only to prevent a failure of justice. 24 The writ
does not issue as a matter of course. It will issue only where there is a clear legal right sought to be enforced. It will
not issue to enforce a doubtful right. A clear legal right within the meaning of Sec. 3, Rule 65 of the Rules of Court
means a right clearly founded in or granted by law, a right which is enforceable as a matter of law.

Applying the above-cited principles of law in the present case, the Court finds no clear right in Batjak to be entitled
to the writ prayed for. It should be noted that the petition for mandamus filed by it prayed that NIDC and PNB be
ordered to surrender, relinquish and turn-over to Batjak the assets, management, and operation of Batjak
particularly the three (3) oil mills and to make the order permanent, after trial, and ordering NIDC and PNB to
submit a complete accounting of the assets, management and operation of Batjak from 1965. In effect, what
Batjak seeks to recover is title to, or possession of, real property (the three (3) oil mills which really made up the
assets of Batjak) but which the records show already belong to NIDC. It is not disputed that the mortgages on the
three (3) oil mills were foreclosed by PNB and NIDC and acquired by them as the highest bidder in the appropriate
foreclosure sales. Ownership thereto was subsequently consolidated by PNB and NIDC, after Batjak failed to
exercise its right of redemption. The three (3) oil mills are now titled in the name of NIDC. From the foregoing, it is
evident that Batjak had no clear right to be entitled to the writ prayed for. In Lamb vs. Philippines (22 Phil. 456)
citing the case of Gonzales V. Salazar vs. The Board of Pharmacy, 20 Phil. 367, the Court said that the writ of
mandamus will not issue to give to the applicant anything to which he is not entitled by law.
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2. On the appointment of receiver.

A receiver of real or personal property, which is the subject of the action, may be appointed by the court when it
appears from the pleadings that the party applying for the appointment of receiver has an interest in said
property. 25The right, interest, or claim in property, to entitle one to a receiver over it, must be present and
existing.

As borne out by the records of the case, PNB acquired ownership of two (2) of the three (3) oil mills by virtue of
mortgage foreclosure sales. NIDC acquired ownership of the third oil mill also under a mortgage foreclosure sale.
Certificates of title were issued to PNB and NIDC after the lapse of the one (1) year redemption period.
Subsequently, PNB transferred the ownership of the two (2) oil mills to NIDC. There can be no doubt, therefore,
that NIDC not only has possession of, but also title to the three (3) oil mills formerly owned by Batjak. The interest
of Batjak over the three (3) oil mills ceased upon the issuance of the certificates of title to PNB and NIDC
confirming their ownership over the said properties. More so, where Batjak does not impugn the validity of the
foreclosure proceedings. Neither Batjak nor its stockholders have instituted any legal proceedings to annul the
mortgage foreclosure aforementioned.

Batjak premises its right to the possession of the three (3) off mills on the Voting Trust Agreement, claiming that
under said agreement, NIDC was constituted as trustee of the assets, management and operations of Batjak, that
due to the expiration of the Voting Trust Agreement, on 26 October 1970, NIDC should tum over the assets of the
three (3) oil mills to Batjak. The relevant provisions of the Voting Trust Agreement, particularly paragraph 4 & No. 1
thereof, are hereby reproduced:

NOW THEREFORE, the undersigned stockholders, in consideration of the premises and of the
mutual covenants and agreements herein contained and to carry out the foregoing purposes in
order to vest in the TRUSTEE the voting right.8 of the shares of stock held by the undersigned in
the CORPORATION as hereinafter stated it is mutually agreed as follows:

1. PERIOD OF DESIGNATION — For a period of five (5) years from and after date hereof, without
power of revocation on the part of the SUBSCRIBERS, the TRUSTEE designated in the manner
herein provided is hereby made, constituted and appointed as a VOTING TRUSTEE to act for and
in the name of the SUBSCRIBERS, it being understood, however, that this Voting Trust Agreement
shall, upon its expiration be subject to a re-negotiation between the parties, as may be
warranted by the balance and attending circumstance of the loan investment of the TRUSTEE or
otherwise in the CORPORATION.

and No. 3 thereof reads:

3. VOTING POWER OF TRUSTEE — The TRUSTEE and its successors in trust, if any, shall have the
power and it shall be its duty to vote the shares of the undersigned subject hereof and covered
by this Agreement at all annual, adjourned and special meetings of the CORPORATION on all
questions, motions, resolutions and matters including the election of directors and all such
matters on which the stockholders, by virtue of the by-laws of the CORPORATION and of the
existing legislations are entitled to vote, which may be voted upon at any and all said meetings
and shall also have the power to execute and acknowledge any agreements or documents that
may be necessary in its opinion to express the consent or assent of all or any of the stockholders
of the CORPORATION with respect to any matter or thing to which any consent or assent of the
stockholders may be necessary, proper or convenient.

From the foregoing provisions, it is clear that what was assigned to NIDC was the power to vote the shares of stock
of the stockholders of Batjak, representing 60% of Batjak's outstanding shares, and who are the signatories to the
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agreement. The power entrusted to NIDC also included the authority to execute any agreement or document that
may be necessary to express the consent or assent to any matter, by the stockholders. Nowhere in the said
provisions or in any other part of the Voting Trust Agreement is mention made of any transfer or assignment to
NIDC of Batjak's assets, operations, and management. NIDC was constituted as trustee only of the voting rights of
60% of the paid-up and outstanding shares of stock in Batjak. This is confirmed by paragraph No. 9 of the Voting
Trust Agreement, thus:

9. TERMINATION — Upon termination of this Agreement as heretofore provided, the certificates

delivered to the TRUSTEE by virtue hereof shall be returned and delivered to the undersigned
stockholders as the absolute owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and terminate.-

Under the aforecited provision, what was to be returned by NIDC as trustee to Batjak's stockholders, upon the
termination of the agreement, are the certificates of shares of stock belonging to Batjak's stockholders, not the
properties or assets of Batjak itself which were never delivered, in the first place to NIDC, under the terms of said
Voting Trust Agreement.

In any event, a voting trust transfers only voting or other rights pertaining to the shares subject of the agreement
or control over the stock. The law on the matter is Section 59, Paragraph 1 of the Corporation Code (BP 68) which
provides:

Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting
trust for the purpose of confering upon a trustee or trusties the right to vote and other rights
pertaining to the shares for a period not exceeding five (5) years at any one time: ... 26

The acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a
trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak.

Moreover, the prevention of imminent danger to property is the guiding principle that governs courts in the
matter of appointing receivers. Under Sec. 1 (b), Rule 59 of the Rules of Court, it is necessary in granting the relief
of receivership that the property or fired be in danger of loss, removal or material injury.

In the case at bar, Batjak in its petition for receivership, or in its amended petition therefor, failed to present any
evidence, to establish the requisite condition that the property is in danger of being lost, removed or materially
injured unless a receiver is appointed to guard and preserve it.

WHEREFORE, the petitions are GRANTED. The orders of the respondent judge, dated 16 August 1971 and 30
September 1971, are hereby ANNULLED and SET ASIDE. The respondent judge and/or his successors are ordered to
desist from hearing and/or conducting any further proceedings in Civil Case No. 14452, except to dismiss the same.
With costs against private respondents.

SO ORDERED.
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