SECOND DIVISION

G.R. No. 151969               September 4, 2009

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA,

FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as members of the Board of Directors of Valle Verde Country Club, Inc., and JOSE RAMIREZ,

Petitioners, vs.

VICTOR AFRICA, Respondent.

D E C I S I O N

BRION, J.:

In this petition for review on certiorari,1 the parties raise a legal question on corporate governance: Can the members of a corporation’s board of directors elect another director to fill in a vacancy caused by the resignation of a hold-over director?

THE FACTUAL ANTECEDENTS

On February 27, 1996, during the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa.2 In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the holding of the stockholders’ meeting could not be obtained. Consequently, the above-named directors continued to serve in the VVCC Board in a hold-over capacity.

On September 1, 1998, Dinglasan resigned from his position as member of the VVCC Board. In a meeting held on October 6, 1998, the remaining directors, still constituting a quorum of VVCC’s nine-member board, elected Eric Roxas (Roxas) to fill in the vacancy created by the resignation of Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC Board. He was replaced by Jose Ramirez (Ramirez), who was elected by the remaining members of the VVCC Board on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of the VVCC Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court (RTC), respectively. The SEC case questioning the validity of Roxas’ appointment was docketed as SEC Case No. 01-99-6177. The RTC case questioning the validity of Ramirez’ appointment was docketed as Civil Case No. 68726.

In his nullification complaint3 before the RTC, Africa alleged that the election of Roxas was contrary to Section 29, in relation to Section 23, of the Corporation Code of the Philippines (Corporation Code). These provisions read:

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all 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 or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified.

x x x x

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office. xxx. [Emphasis supplied.]

Africa claimed that a year after Makalintal’s election as member of the VVCC Board in 1996, his [Makalintal’s] term – as well as those of the other members of the VVCC Board – should be considered to have already expired. Thus, according to Africa, the resulting vacancy should have been filled by the stockholders in a regular or special meeting called for that purpose, and not by the remaining members of the VVCC Board, as was done in this case.

Africa additionally contends that for the members to exercise the authority to fill in vacancies in the board of directors, Section 29 requires, among others, that there

should be an unexpired term during which the successor-member shall serve. Since Makalintal’s term had already expired with the lapse of the one-year term provided in Section 23, there is no more "unexpired term" during which Ramirez could serve.

Through a partial decision4 promulgated on January 23, 2002, the RTC ruled in favor of Africa and declared the election of Ramirez, as Makalintal’s replacement, to the VVCC Board as null and void.

Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas as member of the VVCC Board, vice hold-over director Dinglasan. While VVCC manifested its intent to appeal from the SEC’s ruling, no petition was actually filed with the Court of Appeals; thus, the appellate court considered the case closed and terminated and the SEC’s ruling final and executory.5

THE PETITION

VVCC now appeals to the Court to assail the RTC’s January 23, 2002 partial decision for being contrary to law and jurisprudence. VVCC made a direct resort to the Court via a petition for review on certiorari, claiming that the sole issue in the present case involves a purely legal question.

As framed by VVCC, the issue for resolution is whether the remaining directors of the corporation’s Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-over director.

Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the resignation of a hold-over director is expressly granted to the remaining members of the corporation’s board of directors.

Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the board of directors caused by the expiration of a member’s term shall be filled by the corporation’s stockholders. Correlating Section 29 with Section 23 of the same law, VVCC alleges that a member’s term shall be for one year and until his successor is elected and qualified; otherwise stated, a member’s term expires only when his successor to the Board is elected and qualified. Thus, "until such time as [a successor is] elected or qualified in an annual election where a quorum is present," VVCC contends that "the term of [a member] of the board of directors has yet not expired."

As the vacancy in this case was caused by Makalintal’s resignation, not by the expiration of his term, VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.

In support of its arguments, VVCC cites the Court’s ruling in the 1927 El Hogar6 case which states:

Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it has been the practice of the directors to fill in vacancies in the directorate by choosing suitable persons from among the stockholders. This custom finds its sanction in Article 71 of the By-Laws, which reads as follows:

Art. 71. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the board of directors until the election at the general meeting.

x x x x

Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly provides that an office shall become vacant at the expiration of the term of office for which the officer was elected, the general rule is to allow the officer to hold over until his successor is duly qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation. The doctrine above stated finds expression in article 66 of the by-laws of the respondent which declares in so many words that directors shall hold office "for the term of one year or until their successors shall have been elected and taken possession of their offices." xxx.

It results that the practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can any exception be taken to the personality of the individuals chosen by the directors to fill vacancies in the body. [Emphasis supplied.]

Africa, in opposing VVCC’s contentions, raises the same arguments that he did before the trial court.

THE COURT’S RULING

We are not persuaded by VVCC’s arguments and, thus, find its petition unmeritorious.

To repeat, the issue for the Court to resolve is whether the remaining directors of a corporation’s Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-over director. The resolution of this legal issue is significantly hinged on the determination of what constitutes a director’s term of office.

The holdover period is not part of the term of office of a member of the board of directors

The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have defined "term" as the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another.7 The term of office is not affected by the holdover.8 The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify.

Term is distinguished from tenure in that an officer’s "tenure" represents the term during which the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent.

Based on the above discussion, when Section 239 of the Corporation Code declares that "the board of directors…shall hold office for one (1) year until their successors are elected and qualified," we construe the provision to mean that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period – that time from the lapse of one year from a member’s election to the Board and until his successor’s election and qualification – is not part of the director’s original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term.10

After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintal’s term of office is deemed to have already expired. That he continued to serve

in the VVCC Board in a holdover capacity cannot be considered as extending his term. To be precise, Makalintal’s term of office began in 1996 and expired in 1997, but, by virtue of the holdover doctrine in Section 23 of the Corporation Code, he continued to hold office until his resignation on November 10, 1998. This holdover period, however, is not to be considered as part of his term, which, as declared, had already expired.

With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section 2911 of the Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting called for the purpose. To assume – as VVCC does – that the vacancy is caused by Makalintal’s resignation in 1998, not by the expiration of his term in 1997, is both illogical and unreasonable. His resignation as a holdover director did not change the nature of the vacancy; the vacancy due to the expiration of Makalintal’s term had been created long before his resignation.

The powers of the corporation’s board of directors emanate from its stockholders

VVCC’s construction of Section 29 of the Corporation Code on the authority to fill up vacancies in the board of directors, in relation to Section 23 thereof, effectively weakens the stockholders’ power to participate in the corporate governance by electing their representatives to 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 themselves the powers 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 corporate affairs.12

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 directors' continued accountability to shareholders, and the legitimacy of their decisions that bind the corporation's stockholders, be assured. The shareholder vote is critical to the theory

that legitimizes the exercise of power by the directors or officers over properties that they do not own.13

This theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation Code, in cases where the vacancy in the corporation’s board of directors is caused not by the expiration of a member’s term, the successor "so elected to fill in a vacancy shall be elected only for the unexpired term of the his predecessor in office." The law has authorized the remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporation’s operations; yet, in recognition of the stockholders’ right to elect the members of the board, it limited the period during which the successor shall serve only to the "unexpired term of his predecessor in office."

While the Court in El Hogar approved of the practice of the directors to fill vacancies in the directorate, we point out that this ruling was made before the present Corporation Code was enacted14 and before its Section 29 limited the instances when the remaining directors can fill in vacancies in the board, i.e., when the remaining directors still constitute a quorum and when the vacancy is caused for reasons other than by removal by the stockholders or by expiration of the term.1avvphi1

It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the director’s term of office. When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member’s term.

As correctly pointed out by the RTC, when remaining members of the VVCC Board elected Ramirez to replace Makalintal, there was no more unexpired term to speak of, as Makalintal’s one-year term had already expired. Pursuant to law, the authority to fill in the vacancy caused by Makalintal’s leaving lies with the VVCC’s stockholders, not the remaining members of its board of directors.

WHEREFORE, we DENY the petitioners’ petition for review on certiorari, and AFFIRM the partial decision of the Regional Trial Court, Branch 152, Manila, promulgated on January 23, 2002, in Civil Case No. 68726. Costs against the petitioners.

SO ORDERED.

SECOND DIVISION

G.R. No. 150694 March 13, 2009

ZOMER DEVELOPMENT COMPANY, INC., Petitioner,vs.

INTERNATIONAL EXCHANGE BANK and SHERIFF IV ARTHUR R. CABIGON, Respondents.

D E C I S I O N

CARPIO MORALES, J.:

On August 25, 1997, the Board of Directors of Zomer Development Company, Inc. (petitioner) approved a resolution authorizing it to apply for and obtain a credit line with respondent International Exchange Bank (IEB) in the amount of P60,000,000 as well as temporary excesses or permanent increases thereon as may be approved by IEB from time to time.[1] The Board of Directors also authorized petitioner to assign, pledge, or mortgage its properties as security for this credit line; and to secure and guarantee the term loan and other credit facility of IDHI Prime Aggregates Corporation (Prime Aggregates) with IEB.[2]

Prime Aggregates obtained on August 26, 1997 a term loan from IEB in the amount of P60,000,000.[3] On September 2, 1997, petitioner, through its Treasurer Amparo Zosa (Amparo) and its General Manager Manuel Zosa, Jr. (Zosa), executed a real estate mortgage covering three parcels of land (the real estate mortgage) in favor of IEB to secure

1. The payment of all loans, overdrafts, credit lines and other credit facilities or accommodations obtained or hereinafter obtained by the MORTGAGOR and/or by IDHI Prime Aggregates Corporation (hereinafter referred to as DEBTOR)

2. The payment of all interests, charges, penalties, reimbursements and other obligations owing by the MORTGAGOR and/or DEBTOR to the MORTGAGEE whether direct or indirect, principal or secondary; absolute or contingent as appearing in the accounts, books and records of the MORTGAGEE.

3. The payment of all obligations of the MORTGAGOR and/or DEBTOR of whatever kind or nature whether such obligations have been contracted before, during, or after the constitution of [the] MORTGAGE.

4. In case the MORTGAGOR and/or DEBTOR incurs subsequent obligations of whatever kind or nature whether such obligations, as extension thereof, or as new loans or is given any other kind of accommodations, the payment of said obligations, and/or accommodations without the necessity of executing new agreements.

5. The faithful and strict performance and compliance by the MORTGAGOR and/or DEBTOR of all the terms and conditions of the MORTGAGE, the credit agreements, promissory notes and other loan documents and agreements evidencing the loan, overdrafts, credit lines and other credit accommodations granted to the MORTGAGOR and/or DEBTOR; including all amendments thereon, such as but not limited to changes in the interest rates, penalties, charges, or fees; acceleration of payments; and the like.

x x x x[4] (Emphasis, italics and underscoring supplied)

Prime Aggregates subsequently obtained several loans from IEB from September 1997 until September 1998.[5]

Prime Aggregates failed to settle its outstanding obligation which stood at P90,267,854.96 and US$211,547.12[6] as of September 15, 2000, drawing IEB to file a petition for extra-judicial foreclosure of mortgage before the Regional Trial Court (RTC) of Cebu City.

Respondent Sheriff IV Arthur R. Cabigon (Cabigon) having issued on October 18, 2000 a Notice of Extra-Judicial Foreclosure and Sale[7] scheduled on November 28, 2000, petitioner filed a complaint[8] for Injunction with application for writ of preliminary injunction/temporary restraining order before the Cebu City RTC, alleging that the real estate mortgage was null and void because Amparo and Zosa were authorized to execute it to secure only one obligation of Prime Aggregates. Petitioner thus prayed

x x x that after due notice and hearing, judgment be rendered declaring the real estate mortgage and its extrajudicial foreclosure sale as null and void and that defendant bank be sentenced to pay plaintiff the sum of P100,000.00 as attorney’s fees and P100,000.00 as litigation expenses.

In the meantime, it is most respectfully prayed that a writ of preliminary injunction/TRO be issued enjoining the extrajudicial foreclosure sale of plaintiff’s properties scheduled on November 28, 2000 or December 5, 2000.

. . . that after trial, the writ of preliminary injunction be made permanent. x x x[9] (Emphasis and underscoring supplied)

The complaint, docketed as Civil Case No. CEB-25762, was amended on November 15, 2000.

Branch 9 of the Cebu City RTC denied petitioner’s prayer for a writ of preliminary injunction.[10] Petitioner filed a Motion for Reconsideration[11] and a Motion for Admission of a Second Amended Complaint,[12] albeit it later filed a Motion to Withdraw Second Amended Complaint and to admit Third Amended Complaint.[13] The trial court denied petitioner’s Motion for Reconsideration.[14]

Petitioner assailed the trial court’s orders denying its prayer for the issuance of a writ of preliminary injunction before the Court of Appeals via certiorari,[15] docketed as CA-G.R. SP No. 64390 (certiorari case), alleging, in the main, that the real estate mortgage it executed was null and void for being ultra vires[16] as it was not empowered to mortgage its properties as security for the payment of obligations of third parties; and that Amparo and Zosa were authorized to mortgage its properties to secure only a P60,000,000 term loan and one credit facility of Prime Aggregates.[17]

In the meantime, Branch 15 of the Cebu City RTC to which Civil Case No. CEB-25762 was re-raffled after the Presiding Judge of Branch 9 inhibited himself in the case, dismissed petitioner’s Third Amended Complaint[18] by Order of September 10, 2001. Petitioner appealed this Order to the Court of Appeals which docketed it as CA-G.R. CV No. 73063.

By Decision[19] of October 30, 2001, the appellate court, acting on the certiorari case filed by petitioners, denied it due course as it found that the trial court committed no grave abuse of discretion in denying petitioner’s prayer for preliminary injunction.[20] It brushed aside petitioner’s arguments that the real estate mortgage was ultra vires and that Amparo and Zosa were only authorized to mortgage petitioner’s properties to secure the P60,000,000 term loan and one credit facility of Prime Aggregates.

Hence, the present petition[21] for review faulting the Court of Appeals in

I – X X X NOT HOLDING THAT THE JUDGE WHO DENIED PETITIONER’S APPLICATION FOR INJUNCTION WAS A BIASED AND PARTIAL JUDGE AS RESPONDENTS WERE GIVEN A COPY OF THE ORDER ON MARCH 2, 2001 WHEN IT WAS SIGNED BY THE JUDGE BUT BEFORE ITS OFFICIAL RELEASE ON MARCH 5, 2001.

II – X X X USING THE DECISION OF THIS HONORABLE COURT IN THE CASE OF UNION BANK V. COURT OF APPEALS, ET. AL., 311 SCRA 795 IN SAYING THAT PETITIONER IS NOT ENTITLED TO A WRIT OF PRELIMINARY INJUNCTION INSTEAD OF USING THE CASE OF REPUBLIC V. COURT OF APPEALS, 324 SCRA 569 WHEREIN THIS HONORABLE COURT HELD THAT EVEN P.D. 385 CANNOT BE USED AS A SHIELD TO STOP BY INJUNCTION THE FORECLOSURE OF A MORTGAGE WHERE THE VERY PROPRIETY OF SAID FORECLOSURE IS IN SERIOUS DOUBT WHICH IS THE SAME ISSUE RAISED IN THE CASE AT BAR.

III – X X X HOLDING THAT [PRIME AGGREGATES] IS A SUBSIDIARY OF PETITIONER IN THE ABSENCE OF A FINDING THAT PETITIONER OWNS ANY SHARE IN [PRIME AGGREGATES].

IV – X X X NOT HOLDING THAT THE SECRETARY’S CERTIFICATE OF PETITIONER WAS NULL AND VOID FOR NOT PUTTING ANY LIMITATION OF THE AMOUNT OF THE OBLIGATION OF [PRIME AGGREGATES] TO BE SECURED BY A THIRD PARTY MORTGAGE OF ITS PROPERTIES

V – X X X NOT HOLDING THAT THE THIRD PARTY REAL ESTATE MORTGAGE EXECUTED BY THE AGENTS OF PETITIONER IN FAVOR OF PRIVATE RESPONDENT IS NULL AND VOID BECAUSE THEY EXCEEDED THEIR AUTHORITY IN SIGNING THE SAME.

VI – X X X NOT CONSTRUING STRICTLY AGAINST PRIVATE RESPONDENT THE SECRETARY’S CERTIFICATE AND THIRD PARTY REAL ESTATE MORTGAGE WHICH WERE ALL DOCUMENTS OF ADHESION AND ALL PREPARED BY IT AND TO EFFECT THE LEAST TRANSMISSION OF RIGHTS PURSUANT TO ARTICLE 1378 OF THE NEW CIVIL CODE SINCE THE THIRD PARTY REAL ESTATE MORTGAGE IS A GRATUITOUS CONTRACT WHICH WAS EXECUTED PURELY FOR ACCOMODATION OF [PRIME AGGREGATES].

VII – X X X NOT LAYING THE BLAME ON PRIVATE RESPONDENT IN MAKING THE AGENTS OF PETITIONER SIGN AN ILLEGAL CONTRACT SINCE IT WAS VERY WELL AWARE OF THEIR AUTHORITY AS ALL THE DOCUMENTS WERE ITS FORMS, PRE-PRINTED AND PREPARED BY IT.

VIII – X X X HOLDING THAT THE PETITIONER RATIFIED BY INACTION THE ILLEGAL CONTRACT EXECUTED BY ITS AGENTS SINCE THE PRIVATE RESPONDENT WAS VERY WELL AWARE OF THE EXTENT OF THEIR AUTHORITY.

IX – MAKING CONFLICTING FINDINGS OF FACTS.[22]

Respondents, in their Comment[23] dated February 27, 2002, move for the dismissal of the petition for being moot and academic, alleging that:

On October 8, 2001 [sic], [petitioner’s] principal action for annulment of real estate mortgage was dismissed by the trial court and that said action is now on appeal with the Court of Appeals x x x [.]

On November 19, 2001, [petitioner’s] mortgaged properties were foreclosed by [IEB]. In fact, as the highest bidder in the said foreclosure sale and in view of the passage of the new General Banking Law (which allows banks to consolidate its [sic] title within a shorter period if the mortgagor of a foreclosed property is a corporation), iBank had consolidated its title on the mortgaged properties.

[Petitioner’s] application for issuance of writ of preliminary injunction, the subject of the instant appeal purportedly under Rule 45 of the Rules of Court, cannot survive the dismissal of its principal action as well as the foreclosure and consolidation in [IEB] name of its mortgaged properties.[24] (Emphasis and underscoring supplied)

In its Reply,[25] petitioner argues that when Branch 15 of the Cebu City RTC dismissed the Third Amended Complaint in Civil Case No. CEB-25762 on September 10, 2001, it no longer had jurisdiction over it because said Branch had on August 14, 2001 been designated as a drug court.

Petitioner goes on to argue that even if the acts sought to be restrained have already been committed, since they are continuing in nature and in derogation of its rights at the outset, preliminary mandatory injunction may still be

availed of to restore the status quo, citing Manila Electric Railroad and Light Company v. del Rosario and Jose.[26]

Acting on petitioner’s appeal from the dismissal by Branch 15 of its Third Amended Complaint, the appellate court, by Decision of April 14, 2005, set aside the trial court’s order of dismissal and ordered the reinstatement of said complaint to the docket of Branch 15 of the Cebu City RTC.

The records show that, indeed, petitioner’s mortgaged properties were already foreclosed, as shown by the Certificate of Sale issued by Cabigon on November 19, 2001.[27] And they also show that ownership of the lands-subject of the real estate mortgage had been consolidated and transfer certificates of title had been issued in IEB’s name.[28] It is on this score that the Court finds petitioner’s prayer for a writ of preliminary injunction moot and academic. This leaves it unnecessary for the Court to still dwell on petitioner’s argument that it was not, under its By-Laws, empowered to mortgage its properties to secure the obligation of a third party. In any event, the Court finds well-taken the appellate court’s following disposition of such argument:

We do agree that the Petitioner, under its “By-Laws,” is not empowered to mortgage its properties as a security for the payment of the obligations of third parties. This is on the general premise that the properties of a corporation are regarded as held in trust for the payment of corporate creditors and not for the creditors of third parties. However, the Petitioner is not proscribed from mortgaging its properties as security for the payment of obligations of third parties. In an opinion of the Securities and Exchange Commission, dated April 15, 1987, it declared that a private corporation, by way of exceptions, may give a third party mortgage:

“1. When the mortgage of corporate assets/properties shall be done in the furtherance of the interest of the corporation and in the usual and regular course of its business; and

2. To secure the debt of a subsidiary.”

While admittedly, the “Opinion” of the Securities & Exchange Commission may not be conclusive on the Respondent Court, however, admittedly the same is of persuasive effect.

In the present recourse, the Respondent Court found that not only is Prime Aggregates a subsidiary of the Petitioenr but that the Petitioner appeared to be a “family” corporation:

“a. The plaintiff appears to be a family corporation. The incorporators and stockholders and the membership of the board of directors are Zosa family. x x x

b. Francis and Rolando Zosa are directors of [Prime Aggregates] and of plaintiff corporation x x x

c. The REM was executed by Amparo Zosa who was the treasurer of plaintiff and Manuel Zosa, the General Manager, both are directors/stockholders of the plaintiff. Amparo Zosa is the biggest stockholder and is the mother of practically all the other stockholders of plaintiff. Manuel Zosa, Jr. is the General Manager and a son of Amparo.

d. The Corporate Secretary of plaintiff and [Prime Aggregates] are members of the Zosa family. The Corporate Secretary of [Prime Aggregates] is also the daughter of Francis Zosa, president of plaintiff.

e. The President of plaintiff corporation, Francis Zosa and the president of [Prime Aggregates], Rolando Zosa, are brothers (aside from being common directors of both corporations.)

We agree with the Respondent Court.

The Petitioner’s shrill incantations that the “Resolution”, approved by its Board of Directors, authorizing its Treasurer and General Manager to execute a “Real Estate Mortgage” as security for the payment of the account of Prime Aggregates, a sister corporation, is not for its best interest, is a “puzzlement” xxx. Since when is a private corporation, going to the aid of a sister corporation, not for the best interest of both corporation? For in doing so, the two (2) corporations are enhancing, boosting and promoting a common interest, the interest of “family” having ownership of both corporations. In the second place, Courts are loathe to overturn decisions of the management of a corporation in the conduct of its business via its Board of Directors x x x.

x x x x

There is no evidence on record that the “Real Estate Mortgage” was executed by the Petitioner and the Private Respondent to prejudice corporate creditors of the Petitioner or will result in the infringement of the trust fund doctrine or hamper the continuous business operation of the Petitioner or that the Prime Aggregates was insolvent or incapable of paying the Private Respondent. Indeed, the latter approved Prime Aggregates’ loan availments and credit facilities after its investigation of the financial capability of Prime Aggregates and its capacity to pay its account to the Private respondent.[29]

x x x x

[U]nder the “Resolution” of the Board of Directors, it authorized its Treasurer and General Manager to execute a “Real Estate Mortgage” over its properties as security for the “term loan and credit facility” of Prime Aggregates. The maximum amounts of such term loan and credit facility were not fixed in the “Resolution”. The term “credit facility” is a broad term in credit business transactions to denote loans, pledges, mortgages, trust receipt transactions and credit agreements. And then, again, such term loan and/or credit facility may be granted, by the Private Respondent, in favor of Prime Aggregates, in trenches or in staggered basis, each disbursement evidenced by separate agreements depending upon the needs of Prime Aggregates for the establishment of its sand and gravel plant and port facilities and the purchase of equipments and machinery for said project. Hence, the “Long Term Agreements” and “Credit Agreements” executed by Prime Aggregates and the Private Respondent, with the Petitioner’s properties, as collateral therefore, were envisaged in the terms “term loan and credit facility” in the “Resolution” of the Board of Directors of the Petitioner.

The intention of the Members of the Board of Directors of the Petitioner, in approving the “Resolution,” may be ascertained xxx also from the contemporaneous and subsequent acts of the Petitioner, the Private Respondent and Prime Aggregates. Given the factual milieu in the present recourse, as found and declared by the Respondent Court, there can be no equivocation that, indeed the Petitioner conformed to and ratified, and hence, is bound by the execution, by its Treasurer and General Manager, of the “Real Estate Mortgage” in favor of the Private respondent, with its properties used as securities for the payment of the

credit and loan availments of Prime Aggregates from the Private Respondent on the basis of the “Resolution” approved by its Board of Directors. As our Supreme Court declared, ratification and/or approval by the corporation of the acts of its agents/officers may be ascertained through x x x the acquiescence in his acts of a particular nature, with actual or constructive thereof, whether within or beyond the scope of his ordinary powers.

As it was, the Petitioner finally awoke from its slumber when the Private Respondent filed its “Petition” for the extra-judicial foreclosure of the “Real Estate Mortgage”, with the Sheriff, and assailed the authority of its Board of Directors to approve the said “Resolution” and of its Treasurer and General Manager to execute the deed and brand the said “Resolution” and the said deed as “ultra vires” and hence, not binding on the Petitioner, and hurried off to the Respondent Court and prayed for injunctive relief. Before then, the Petitioner maintained a stoic silence and adopted a “hands off” stance. We find the Petitioner’s stance grossly inequitable. We must take heed and pay obeisance to the equity rule that if one maintains silence when, in conscience he ought to speak, equity will debar him from speaking when, in conscience, he ought to remain silent. He who remains silent when he ought to speak cannot be heard to speak when he ought to be silent. More, the transactions between the Petitioner and the Private Respondent over its properties are neither malum in se or malum prohibitum. Hence, the Petitioner cannot hide behind the cloak of “ultra vires” for a defense.

x x x x

The plea of “ultra vires” will not be allowed to prevail, whether interposed for or against a corporation, when it will not advance justice but, on the contrary, will accomplish a legal wrong to the prejudice of another who acted in good faith.[30] (Underscoring and emphasis in the original)

WHEREFORE, the petition is DISMISSED.

Costs against petitioner.

SO ORDERED. --------------------------------------------------------------------------------

[1] Exhibit “B,” records, p. 11.

[2] Ibid.

[3] Exhibit “3,” id. at 103-105.

[4] Exhibit “C,” id. at 13.

[5] CA rollo, pp. 105-159.

[6] Exhibit “62,” rollo, p. 255.

[7] Exhibit “A,” id. at 10.

[8] Id. at 1-9.

[9] Id. at 7-8.

[10] Id. at 348-357.

[11] Id. at 361-374.

[12] Id. at 378-385.

[13] Id. at 425-435.

[14] Id. at 418-421.

[15] CA rollo, pp. 2-28.

[16] Id. at 7-8.

[17] Ibid.

[18] Records, pp. 505-510.

[19] Penned by then-Court of Appeals Associate Justice Romeo J. Callejo, Sr. with the concurrence of Associate Justices Remedios Salazar-Fernando and Josefina Guevara-Salonga. Rollo, pp. 45-66.

[20] Id. at 53-54.

[21] Id. at 3-44.

[22] Id. at 11-12.

[23] Id. at 391-425.

[24] Id. at 405.

[25] Id. at 462-486.

[26] 22 Phil. 433 (1912).

[27] Rollo, p. 451.

[28] Id. at 452-454.

[29] Id. at 55-57.

[30] Id. at 61-63.

THIRD DIVISION

G.R. No. 177549 June 18, 2009

ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners,

vs.JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN,

JERALD NERWIN L. YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf and on behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC., Respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, which seeks to reverse and set aside the Resolutions dated 18 July 20062 and 19 April 20073

of the Court of Appeals in CA-G.R. SP No. 00185. Upon herein respondents’ motion, the Court of Appeals rendered the assailed Resolution dated 18 July 2006, reconsidering its Decision4 dated 15 February 2006; and remanding the case to the Regional Trial Court (RTC) of Cebu City, Branch 11, for necessary proceedings, in effect, reversing the Decision5

dated 10 November 2004 of the RTC which dismissed respondents’ Complaint in SRC Case No. 022-CEB. Herein petitioners’ Motion for Reconsideration of the Resolution dated 18 July 2006 was denied by the appellate court in the other assailed Resolution dated 19 April 2007.

Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu (Anthony); the wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).

Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan (Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).

Petitioner Anthony is the older half-brother of respondent Joseph.

Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. (Winchester, Inc.), a domestic corporation engaged in the operation of a general hardware and industrial supply and equipment business.

On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting, Inspection of Corporate

Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts6 before the RTC of Cebu. The said Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual background of the Complaint was stated in the attached Affidavit executed by respondent Joseph.

According to respondents,7 Winchester, Inc. was established and incorporated on 12 September 1977, with petitioner Anthony as one of the incorporators, holding 1,000 shares of stock worth P100,000.00.8 Petitioner Anthony paid for the said shares of stock with respondent Joseph’s money, thus, making the former a mere trustee of the shares for the latter. On 14 November 1984, petitioner Anthony ceded 800 of his 1,000 shares of stock in Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan,9 Siao So Lan, and John S. Yu.10 Petitioner Anthony remained as trustee for respondent Joseph of the 200 shares of stock in Winchester, Inc., still in petitioner Anthony’s name.

Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its incorporators, excluding petitioner Anthony, their accumulated 8,500 shares in the corporation.11 Subsequently, on 7 November 1995, Winchester, Inc. sold the same 8,500 shares to other persons, who included respondents Nancy, Jerald, and Jill; and petitioners Rosita and Jason.12

Respondents further averred that although respondent Joseph appeared as the Secretary and Treasurer in the corporate records of Winchester, Inc., petitioners actually controlled and ran the said corporation as if it were their own family business. Petitioner Rosita handled the money market placements of the corporation to the exclusion of respondent Joseph, the designated Treasurer of Winchester, Inc. Petitioners were also misappropriating the funds and properties of Winchester, Inc. by understating the sales, charging their personal and family expenses to the said corporation, and withdrawing stocks for their personal use without paying for the same. Respondents attached to the Complaint various receipts13 to prove the personal and family expenses charged by petitioners to Winchester, Inc.

Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200 shares of stock in petitioner Anthony’s name. Respondents also prayed that petitioners be ordered to: (1) deposit the corporate books and records

of Winchester, Inc. with the Branch Clerk of Court of the RTC for respondents’ inspection; (2) render an accounting of all the funds of Winchester, Inc. which petitioners misappropriated; (3) reimburse the personal and family expenses which petitioners charged to Winchester, Inc., as well as the properties of the corporation which petitioners withheld without payment; and (4) pay respondents’ attorney’s fees and litigation expenses. In the meantime, respondents sought the appointment of a Management Committee and the freezing of all corporate funds by the trial court.

On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim,14 attached to which was petitioner Anthony’s Affidavit.15 Petitioners vehemently denied the allegation that petitioner Anthony was a mere trustee for respondent Joseph of the 1,000 shares of stock in Winchester, Inc. in petitioner Anthony’s name. For the incorporation of Winchester, Inc., petitioner Anthony contributed P25,000.00 paid-up capital, representing 25% of the total par value of the 1,000 shares he subscribed to, the said amount being paid out of petitioner Anthony’s personal savings and petitioners Anthony and Rosita’s conjugal funds. Winchester, Inc. was being co-managed by petitioners and respondents, and the attached receipts, allegedly evidencing petitioners’ use of corporate funds for personal and family expenses, were in fact signed and approved by respondent Joseph.

By way of special and affirmative defenses, petitioners contended in their Answer with Compulsory Counterclaim that respondents had no cause of action against them. Respondents’ Complaint was purely intended for harassment. It should be dismissed under Section 1(j), Rule 1616 of the Rules of Court for failure to comply with conditions precedent before its filing. First, there was no allegation in respondents’ Complaint that earnest efforts were exerted to settle the dispute between the parties. Second, since respondents’ Complaint purportedly constituted a derivative suit, it noticeably failed to allege that respondents exerted effort to exhaust all available remedies in the Articles of Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation Code. And third, given that respondents’ Complaint was also for inspection of corporate books, it lacked the allegation that respondents made a previous demand upon petitioners to inspect the corporate books but petitioners refused. Prayed

for by petitioners, in addition to the dismissal of respondents’ Complaint, was payment of moral and exemplary damages, attorney’s fees, litigation expenses, and cost of suit.

On 30 October 2002, the hearing on the application for the appointment of a Management Committee was commenced. Respondent Joseph submitted therein, as his direct testimony, the same Affidavit that he executed, which was attached to the respondents’ Complaint. On 4 November 2002, respondent Joseph was cross-examined by the counsel for petitioners. Thereafter, the continuation of the hearing was set for 29 November 2002, in order for petitioners to adduce evidence in support of their opposition to the application for the appointment of a Management Committee.17

During the hearing on 29 November 2002, the parties manifested before the RTC that there was an ongoing mediation between them, and so the hearing on the appointment of a Management Committee was reset to another date.

In amicable settlement of their dispute, the petitioners and respondents agreed to a division of the stocks in trade,18 the real properties, and the other assets of Winchester, Inc. In partial implementation of the afore-mentioned amicable settlement, the stocks in trade and real properties in the name of Winchester, Inc. were equally distributed among petitioners and respondents. As a result, the stockholders and members of the Board of Directors of Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution19

dissolving the corporation as of said date.

On 22 February 2004, respondents filed their pre-trial brief.20

On 25 June 2004, petitioners filed a Manifestation21

informing the RTC of the existence of their amicable settlement with respondents. Respondents, however, made their own manifestation before the RTC that they were repudiating said settlement, in view of the failure of the parties thereto to divide the remaining assets of Winchester, Inc. Consequently, respondents moved to have SRC Case No. 022-CEB set for pre-trial.

On 23 August 2004, petitioners filed their pre-trial brief.22

On 26 August 2004, instead of holding a formal pre-trial conference and resuming the hearing on the application for the appointment of a Management Committee, petitioners and respondents agreed that the RTC may already render a judgment based on the pleadings. In accordance with the agreement of the parties, the RTC issued, on even date, an Order23 which stated:

O R D E R

During the pre-trial conference held on August 26, 2004, counsels of the parties manifested, agreed and suggested that a judgment may be rendered by the Court in this case based on the pleadings, affidavits, and other evidences on record, or to be submitted by them, pursuant to the provision of Rule 4, Section 4 of the Rule on Intra-Corporate Controversies. The suggestion of counsels was approved by the Court.

Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from notice hereof. Thereafter, the instant case will be deemed submitted for resolution.

x x x x

Cebu City, August 26, 2004.

(signed)SILVESTRE A. MAAMO, JR.Acting Presiding Judge

Petitioners and respondents duly filed their respective Memoranda,24 discussing the arguments already set forth in the pleadings they had previously submitted to the RTC. Respondents, though, attached to their Memorandum a Supplemental Affidavit25 of respondent Joseph, containing assertions that refuted the allegations in petitioner Anthony’s Affidavit, which was earlier submitted with petitioners’ Answer with Compulsory Counterclaim. Respondents also appended to their Memorandum additional documentary evidence,26 consisting of original and duplicate cash invoices and cash disbursement receipts issued by Winchester, Inc., to further substantiate their claim that petitioners were understating sales and charging their personal expenses to the corporate funds.

The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC Case No. 022-CEB. The dispositive portion of said Decision reads:

WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby renders judgment in this case DISMISSING the complaint filed by the [herein respondents].

The Court also hereby dismisses the [herein petitioners’] counterclaim because it has not been indubitably shown that the filing by the [respondents] of the latter’s complaint was done in bad faith and with malice.27

The RTC declared that respondents failed to show that they had complied with the essential requisites for filing a derivative suit as set forth in Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

As to respondents’ prayer for the inspection of corporate books and records, the RTC adjudged that they had likewise failed to comply with the requisites entitling them to the same. Section 2, Rule 7 of the Interim Rules of Procedure Governing Intra-Corporate Controversies requires that the complaint for inspection of corporate books or records must state that:

(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records and/or to be furnished with financial statements under Sections 74 and 75 of the Corporation Code of the Philippines;

(2) A demand for inspection and copying of books and records and/or to be furnished with financial statements made by the plaintiff upon defendant;

(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusals, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof.

The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as such, he was supposed to be the custodian of the corporate books and records; therefore, a court order for respondents’ inspection of the same was no longer necessary. The RTC similarly denied respondents’ demand for accounting as it was clear that Winchester, Inc. had been engaging the services of an audit firm. Respondent Joseph himself described the audit firm as competent and independent, and believed that the audited financial statements the said audit firm prepared were true, faithful, and correct.

Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC thereby dismissed the same.

Respondents challenged the foregoing RTC Decision before the Court of Appeals via a Petition for Review under Rule 43 of the Rules of Court, docketed as CA-G.R. SP No. 00185.

On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10 December 2004 Decision of the RTC. Said the appellate court:

After a careful and judicious scrutiny of the extant records of the case, together with the applicable laws and jurisprudence, WE see no reason or justification for granting the present appeal.

x x x x

x x x [T]his Court sees that the instant petition would still fail taking into consideration all the pleadings and evidence of the parties except the supplemental affidavit of [herein respondent] Joseph and its corresponding annexes appended in [respondents’] memorandum before the Court a quo. The Court a quo have (sic) outrightly dismissed the complaint for its failure to comply with the mandatory provisions of the Interim Rules of Procedure for Intra-Corporate Controversies particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and Rule 7, Section 2 thereof, which reads as follows:

RULE 2COMMENCEMENT OF ACTION AND PLEADINGS

Sec. 4. Complaint. – The complaint shall state or contain:

x x x x

(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;

x x x x

RULE 8DERIVATIVE SUITS

Sec. 1. Derivative action. – x x x

x x x x

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires.

x x x x

RULE 7INSPECTION OF CORPORATE BOOKS AND RECORDS

Sec. 2. Complaint – In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state the following:

(1) The case is set (sic) for the enforcement of plaintiff’s right of inspection of corporate orders or records and/or to be furnished with financial statements under Section 74 and 75 of the Corporation Code of the Philippines;

(2) A demand for inspection and copying of books [and/or] to be furnished with financial statements made by the plaintiffs upon defendant;

(3) The refusal of the defendant to grant the demands of the plaintiff and the reasons given for such refusal, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof.

x x x x

A perusal of the extant record shows that [herein respondents] have not complied with the above quoted provisions. [Respondents] should be mindful that in filing their complaint which, as admitted by them, is a derivative suit, should have first exhausted all available remedies under its (sic) Articles of Incorporation, or its by-laws, or any laws or rules governing the corporation. The contention of [respondent Joseph] that he had indeed made several talks to (sic) his brother [herein petitioner Anthony] to settle their differences is not tantamount to exhaustion of remedies. What the law requires is to bring the grievance to the Board of Directors or Stockholders for the latter to take the opportunity to settle whatever problem in its regular meeting or special meeting called for that purpose which [respondents] failed to do. x x x The requirements laid down by the Interim Rules of Procedure for Intra-Corporate Controversies are mandatory which cannot be dispensed

with by any stockholder of a corporation before filing a derivative suit.28 (Emphasis ours.)

The Court of Appeals likewise sustained the refusal by the RTC to consider respondent Joseph’s Supplemental Affidavit and other additional evidence, which respondents belatedly submitted with their Memorandum to the said trial court. The appellate court ratiocinated that:

With regard to the claim of [herein respondents] that the supplemental affidavit of [respondent] Joseph and its annexes appended to their memorandum should have been taken into consideration by the Court a quo to support the reliefs prayed [for] in their complaint. (sic) This Court rules that said supplemental affidavit and its annexes is (sic) inadmissible.

A second hard look of (sic) the extant records show that during the pre-trial conference conducted on August 26, 2004, the parties through their respective counsels had come up with an agreement that the lower court would render judgment based on the pleadings and evidence submitted. This agreement is in accordance with Rule 4, Sec. 4 of the Interim Rules of Procedure for Intra-Corporate Controversies which explicitly states:

SECTION. 4. Judgment before pre-trial. – If, after submission of the pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda.

x x x x

Clearly, the supplemental affidavit and its appended documents which were submitted only upon the filing of the memorandum for the [respondents] were not submitted in the pre-trial briefs for the stipulation of the parties during the pre-trial, hence, it cannot be accepted pursuant to Rule 2, Sec. 8 of the same rules which reads as follows:

SEC. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be

in question and answer form, and shall comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading; Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases:

(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor;

(2) If the failure to submit the evidence is for meritorious and compelling reasons; and

(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence.

There is no showing in the case at bench that the supplemental affidavit and its annexes falls (sic) within one of the exceptions of the above quoted proviso, hence, inadmissible.

It must be noted that in the case at bench, like any other civil cases, "the party making an allegation in a civil case has the burden of proving it by preponderance of evidence." Differently stated, upon the plaintiff in [a] civil case, the burden of proof never parts. That is, appellants must adduce evidence that has greater weight or is more convincing that (sic) which is offered to oppose it. In the case at bar, no one should be blamed for the dismissal of the complaint but the [respondents] themselves for their lackadaisical attitude in setting forth and appending their defences belatedly. To admit them would be a denial of due process for the opposite party which this Court cannot allow.29

Ultimately, the Court of Appeals decreed:

WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the assailed Decision of the Regional Trial Court (RTC), 7th Judicial Region, Branch II, Cebu City, dated November 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in toto. Cost against the [herein respondents].30

Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion for Reconsideration and Motion to Set for Oral Arguments the Motion for Reconsideration,31 invoking the following grounds:

(1) The [herein respondents] have sufficiently exhausted all remedies before filing the present action; and

(2) [The] Honorable Court erred in holding that the supplemental affidavit and its annexes is (sic) inadmissible because the rules and the lower court expressly allowed the submission of the same in its order dated August 26, 2004 x x x.32

In a Resolution33 dated 8 March 2006, the Court of Appeals granted respondents’ Motion to Set for Oral Arguments the Motion for Reconsideration.

On 4 April 2006, the Court of Appeals issued a Resolution34

setting forth the events that transpired during the oral arguments, which took place on 30 March 2006. Counsels for the parties manifested before the appellate court that they were submitting respondents’ Motion for Reconsideration for resolution. Justice Magpale, however, still called on the parties to talk about the possible settlement of the case considering their familial relationship. Independent of the resolution of respondents’ Motion for Reconsideration, the parties were agreeable to pursue a settlement for the dissolution of the corporation, which they had actually already started.

In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the parties to submit, within 10 days from notice, their intended amicable settlement, since the same would undeniably affect the resolution of respondents’ pending Motion for Reconsideration. If the said period should lapse without the parties submitting an amicable settlement, then they were directed by the appellate court to file within 10 days thereafter their position papers instead.

On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper,36 stating that the parties did not reach an amicable settlement. Respondents informed the appellate court that prior to the filing with the Securities and Exchange Commission (SEC) of a petition for dissolution of Winchester, Inc., the parties already divided the stocks in trade and the real assets of the corporation among themselves. Respondents posited, though, that the afore-

mentioned distribution of the assets of Winchester, Inc. among the parties was null and void, as it violated the last paragraph of Section 122 of the Corporation Code, which provides that, "[e]xcept by a decrease of capital stock and as otherwise allowed by the Corporation Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities." At the same time, however, respondents brought to the attention of the Court of Appeals that the parties did eventually file with the SEC a petition for dissolution of Winchester, Inc., which the SEC approved.37

Respondents no longer discussed in their Position Paper the grounds they previously invoked in their Motion for Reconsideration of the Court of Appeals Decision dated 15 February 2006, affirming in toto the RTC Decision dated 10 November 2004. They instead argued that the RTC Decision in question was null and void as it did not clearly state the facts and the law on which it was based. Respondents sought the remand of the case to the RTC for further proceedings on their derivative suit and completion of the dissolution of Winchester, Inc., including the legalization of the prior partial distribution among the parties of the assets of said corporation.

Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused respondents of attempting to incorporate extraneous matters into the latter’s Motion for Reconsideration. Petitioners pointed out that the issue before the Court of Appeals was not the dissolution and division of assets of Winchester, Inc., thus, a remand of the case to the RTC was not necessary.

On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting respondents’ Motion for Reconsideration. The Court of Appeals reasoned in this wise:

After a second look and appreciation of the facts of the case, vis-à-vis the issues raised by the [herein respondents’] motion for reconsideration and in view of the formal dissolution of the corporation which leaves unresolved up to the present the settlement of the properties and assets which are now in danger of dissipation due to the unending litigation, this Court finds the need to remand the instant case to the lower court (commercial court) as the proper forum for the adjudication, disposition, conveyance and distribution of said properties and assets between and amongst its stockholders as final settlement pursuant to

Sec. 122 of the Corporation Code after payment of all its debts and liabilities as provided for under the same proviso. This is in accord with the pronouncement of the Supreme Court in the case of Clemente et. al. vs. Court of Appeals, et. al. where the high court ruled and which WE quote, viz:

"the corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity x x x nor those of its owners and creditors. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustees) xxx may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representation with the Securities and Exchange Commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns."

In the absence of a trustee or board of director in the case at bar for purposes above mentioned, the lower court under Republic Act No. [8799] (otherwise known as the Securities and Exchange Commission) as implemented by A.M. No. 00-8-10-SC (Transfer of Cases from the Securities and Exchange Commission to the Regional Trial Courts) which took effect on October 1, 2001, is the proper forum for working out the final settlement of the corporate concern.39

Hence, the Court of Appeals ruled:

WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The order dated February 15, 2006 is hereby SET ASIDE and the instant case is REMANDED to the lower court to take the necessary proceedings in resolving with deliberate dispatch any and all corporate concerns towards final settlement.40

Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution, but it was denied by the Court of Appeals in its other assailed Resolution dated 19 April 2007.

In the Petition at bar, petitioners raise the following issues:

I.

WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.]

II.

WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT JURISDICTION[.]

III.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN REMANDING THIS CASE TO THE LOWER COURT FOR THE REASON CITED IN THE ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS FOR THE [RESPONDENTS’] MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE] REASON CITED WAS A NON-ISSUE IN THE CASE.

IV.

WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT VIOLATES THE SUMMARY PROCEDURE FOR INTRA-CORPORATE CASES.42

The crux of petitioners’ contention is that the Court of Appeals committed grievous error in reconsidering its Decision dated 15 February 2006 on the basis of extraneous matters, which had not been previously raised in respondents’ Complaint before the RTC, or in their Petition for Review and Motion for Reconsideration before the appellate court; i.e., the adjudication, disposition, conveyance, and distribution of the properties and assets of Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of the parties. The fact that the parties were able to agree before the Court of Appeals to submit for resolution respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the same court, independently of any intended settlement between the parties as regards the dissolution of the corporation and distribution of its assets, only proves the distinction and independence of these matters from one another. Petitioners also contend that the assailed

Resolution dated 18 July 2006 of the Court of Appeals, granting respondents’ Motion for Reconsideration, failed to clearly and distinctly state the facts and the law on which it was based. Remanding the case to the RTC, petitioners maintain, will violate the very essence of the summary nature of the Interim Rules of Procedure Governing Intra-Corporate Controversies, as this will just entail delay, protract litigation, and revert the case to square one.

The Court finds the instant Petition meritorious.

To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to compel petitioners to account for and reimburse to the said corporation the corporate assets and funds which the latter allegedly misappropriated for their personal benefit. During the pendency of the proceedings before the court a quo, the parties were able to reach an amicable settlement wherein they agreed to divide the assets of Winchester, Inc. among themselves. This amicable settlement was already partially implemented by the parties, when respondents repudiated the same, for which reason the RTC proceeded with the case on its merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents’ Complaint for failure to comply with essential pre-requisites before they could avail themselves of the remedies under the Interim Rules of Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of respondents’ allegations in said Complaint after consideration of the pleadings and evidence on record.

In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings of the RTC that respondents did not abide by the requirements for a derivative suit, nor were they able to prove their case by a preponderance of evidence. Respondents filed a Motion for Reconsideration of said judgment of the appellate court, insisting that they were able to meet all the conditions for filing a derivative suit. Pending resolution of respondents’ Motion for Reconsideration, the Court of Appeals urged the parties to again strive to reach an amicable settlement of their dispute, but the parties were unable to do so. The parties were not able to submit to the appellate court, within the given period, any amicable settlement; and filed, instead, their Position Papers. This effectively meant that the parties opted to submit respondents’ Motion for

Reconsideration of the 15 February 2006 Decision of the Court of Appeals, and petitioners’ opposition to the same, for resolution by the appellate court on the merits.

It was at this point that the case took an unexpected turn.

In accordance with respondents’ allegation in their Position Paper that the parties subsequently filed with the SEC, and the SEC already approved, a petition for dissolution of Winchester, Inc., the Court of Appeals remanded the case to the RTC so that all the corporate concerns between the parties regarding Winchester, Inc. could be resolved towards final settlement.

In one stroke, with the use of sweeping language, which utterly lacked support, the Court of Appeals converted the derivative suit between the parties into liquidation proceedings.

The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks 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. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation.43 By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.

In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is specifically governed by Section 122 of the Corporation Code, which reads:

SEC. 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for

other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest.

Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.44 More particularly, it entails the following:

Winding up the affairs of the corporation means the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if any among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests. The manner of liquidation or winding up may be provided for in the corporate by-laws and this would prevail unless it is inconsistent with law.45

It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to whom all corporate

assets are conveyed for liquidation; or by a receiver appointed by the SEC upon its decree dissolving the corporation.46

Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are neither part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc.

While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents themselves repudiated said amicable settlement before the RTC, even after the same had been partially implemented; and moved that their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties before the Court of Appeals were unsuccessful.

Moreover, the decree of the Court of Appeals to remand the case to the RTC for the "final settlement of corporate concerns" was solely grounded on respondents’ allegation in its Position Paper that the parties had already filed before the SEC, and the SEC approved, the petition to dissolve Winchester, Inc. The Court notes, however, that there is absolute lack of evidence on record to prove said allegation. Respondents failed to submit copies of such petition for dissolution of Winchester, Inc. and the SEC Certification approving the same. It is a basic rule in evidence that each party must prove his affirmative allegation. Since it was respondents who alleged the voluntary dissolution of Winchester, Inc., respondents must, therefore, prove it.47

This respondents failed to do.

Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester, Inc. and the same was approved by the SEC, the Court of Appeals was still without jurisdiction to order the final settlement by the RTC of the remaining corporate concerns. It must be remembered that the Complaint filed by respondents before the RTC essentially prayed for the accounting and reimbursement by petitioners of the corporate funds and assets which they purportedly misappropriated for their

personal use; surrender by the petitioners of the corporate books for the inspection of respondents; and payment by petitioners to respondents of damages. There was nothing in respondents’ Complaint which sought the dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution of Winchester, Inc. could not have resulted in the conversion of respondents’ derivative suit to a proceeding for the liquidation of said corporation, but only in the dismissal of the derivative suit based on either compromise agreement or mootness of the issues.

Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of Appeals already went beyond the issues raised in respondents’ Motion for Reconsideration. Instead of focusing on whether it erred in affirming, in its 15 February 2006 Decision, the dismissal by the RTC of respondents’ Complaint due to respondents’ failure to comply with the requirements for a derivative suit and submit evidence to support their allegations, the Court of Appeals unduly concentrated on respondents’ unsubstantiated allegation that Winchester, Inc. was already dissolved and speciously ordered the remand of the case to the RTC for proceedings so vitally different from that originally instituted by respondents.

Despite the foregoing, the Court still deems it appropriate to already look into the merits of respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, for the sake of finally putting an end to the case at bar.

In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently exhausted all remedies before filing the derivative suit; and (2) respondent Joseph’s Supplemental Affidavit and its annexes should have been taken into consideration, since the submission thereof was allowed by the rules of procedure, as well as by the RTC in its Order dated 26 August 2004.

As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a derivative suit, the Court subscribes to the ruling to the contrary of the Court of Appeals in its Decision dated 16 February 2006.1avvphi1

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities

Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection. The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution.48

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following requirements which a stockholder must comply with in filing a derivative suit:

Sec. 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

A perusal of respondents’ Complaint before the RTC would reveal that the same did not allege with particularity that respondents exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing Winchester, Inc. to obtain the relief they desire.

Respondents assert that their compliance with said requirement was contained in respondent Joseph’s Affidavit, which was attached to respondents’ Complaint. Respondent

Joseph averred in his Affidavit that he tried for a number of times to talk to petitioner Anthony to settle their differences, but the latter would not listen. Respondents additionally claimed that taking further remedies within the corporation would have been idle ceremony, considering that Winchester, Inc. was a family corporation and it was impossible to expect petitioners to take action against themselves who were the ones accused of wrongdoing.

The Court is not persuaded.

The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do not leave room for statutory construction. The second paragraph thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; and to allege such fact with particularity in the complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.

The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony regarding their dispute hardly constitutes "all reasonable efforts to exhaust all remedies available." Respondents did not refer to or mention at all any other remedy under the articles of incorporation or by-laws of Winchester, Inc., available for dispute resolution among stockholders, which respondents unsuccessfully availed themselves of. And the Court is not prepared to conclude that the articles of incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such remedies.

Neither can this Court accept the reasons proffered by respondents to excuse themselves from complying with the second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies. They are flimsy and insufficient, compared to the seriousness of respondents’ accusations of fraud, misappropriation, and falsification of corporate records against the petitioners. The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules supporting the

distinction between, and the difference in the requirements for, family corporations vis-à-vis other types of corporations, in the institution by a stockholder of a derivative suit.

The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the respondents’ Complaint failed to allege, explicitly or otherwise, the fact that there were no appraisal rights available for the acts of petitioners complained of, as well as a categorical statement that the suit was not a nuisance or a harassment suit.

As to respondents’ second ground in their Motion for Reconsideration, the Court agrees with the ruling of the Court of Appeals, in its 15 February 2006 Decision, that respondent Joseph’s Supplemental Affidavit and additional evidence were inadmissible since they were only appended by respondents to their Memorandum before the RTC. Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies is crystal clear that:

Sec. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading, Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases:

(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor;

(2) If the failure to submit the evidence is for meritorious and compelling reasons; and

(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence. (Emphasis ours.)

According to the afore-quoted provision, the parties should attach the affidavits of witnesses and other documentary evidence to the appropriate pleading, which generally should mean the complaint for the plaintiff and the answer

for the respondent. Affidavits and documentary evidence not so submitted must already be attached to the respective pre-trial briefs of the parties. That the parties should have already identified and submitted to the trial court the affidavits of their witnesses and documentary evidence by the time of pre-trial is strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies require that the following matters should already be set forth in the parties’ pre-trial briefs:

Section 1. Pre-trial conference, mandatory nature. – Within five (5) days after the period for availment of, and compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the court shall issue and serve an order immediately setting the case for pre-trial conference, and directing the parties to submit their respective pre-trial briefs. The parties shall file with the court and furnish each other copies of their respective pre-trial brief in such manner as to ensure its receipt by the court and the other party at least five (5) days before the date set for the pre-trial.

The parties shall set forth in their pre-trial briefs, among other matters, the following:

x x x x

(4) Documents not specifically denied under oath by either or both parties;

x x x x

(7) Names of witnesses to be presented and the summary of their testimony as contained in their affidavits supporting their positions on each of the issues;

(8) All other pieces of evidence, whether documentary or otherwise and their respective purposes.

Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies,49 it is the duty of the court to ensure during the pre-trial conference that the parties consider in detail, among other things, objections to the admissibility of testimonial, documentary, and other evidence, as well as objections to the form or substance of any affidavit, or part thereof.

Obviously, affidavits of witnesses and other documentary evidence are required to be attached to a party’s pre-trial brief, at the very last instance, so that the opposite party is

given the opportunity to object to the form and substance, or the admissibility thereof. This is, of course, to prevent unfair surprises and/or to avoid the granting of any undue advantage to the other party to the case.

True, the parties in the present case agreed to submit the case for judgment by the RTC, even before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:

Sec. 4. Judgment before pre-trial. – If after submission of the pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda.

Even then, the afore-quoted provision still requires, before the court makes a determination that it can render judgment before pre-trial, that the parties had submitted their pre-trial briefs and the court took into consideration the pleadings, affidavits and other evidence submitted by the parties. Hence, cases wherein the court can render judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that affidavits of witnesses and documentary evidence should be submitted, at the latest, with the parties’ pre-trial briefs. Taking further into account that under Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies parties are required to file their memoranda simultaneously, the same would mean that a party would no longer have any opportunity to dispute or rebut any new affidavit or evidence attached by the other party to its memorandum. To violate the above-quoted provision would, thus, irrefragably run afoul the former party’s constitutional right to due process.

In the instant case, therefore, respondent Joseph’s Supplemental Affidavit and the additional documentary evidence, appended by respondents only to their Memorandum submitted to the RTC, were correctly adjudged as inadmissible by the Court of Appeals in its 15 February 2006 Decision for having been belatedly submitted. Respondents neither alleged nor proved that the

documents in question fall under any of the three exceptions to the requirement that affidavits and documentary evidence should be attached to the appropriate pleading or pre-trial brief of the party, which is particularly recognized under Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies.

WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is hereby GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April 2007 of the Court of Appeals in CA-G.R. SP No. 00185 are hereby REVERSED AND SET ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is hereby AFFIRMED. No costs.

SO ORDERED.Footnotes

1 Rollo, pp. 2-18.2 Penned by Associate Justice Vicente L. Yap with Associate Justices Arsenio J. Magpale and Apolinario D. Bruselas, Jr., concurring; rollo, pp. 20-23.3 Penned by Associate Justice Arsenio J. Magpale with Associate Justices Agustin S. Dizon and Francisco P. Acosta, concurring; rollo, pp. 25-26.4 Rollo, pp. 32-43.5 Penned by Judge Silvestre A. Maamo, Jr.; rollo, pp. 27-30.6 CA rollo, pp. 39-45.7 Id. at 46-48.

8 The incorporators and their respective numbers of shares were as follows:

Name No. of shares Amount

Eugene Yutankin 3,000 P 300,000.00

Hao Bun Yam 3,000 P 300,000.00

Co To 2,000 P 200,000.00

Vicenta Lo Chiong 1,000 P 100,000.00

Anthony S. Yu 1,000 P 100,000.00

10,000 P1,000,000.00

(Records, p. 14.)9 Father of petitioner Anthony and respondent Joseph.10 CA rollo, p. 78.

11 In accordance with the recital of facts in the Complaint, if the 1,000 shares of Anthony Yu were to be subtracted from the total number of shares issued by Winchester, Inc., the other incorporators would have a total of 9,000 shares. However, according to the Deed of Sale dated 30 June 1985 (Records, p. 16), only 8,500 shares were sold to Winchester, Inc. by the following shareholders:

Name No. of shares

Irinea Yutankin 3,000

Hao Bun Yam 3,000

Yu Kim Sing 1,500

Vicenta Lo Chiong 1,000

8,500

12 CA rollo, pp. 56-57.13 Annexes E to Q; CA rollo, pp. 60-77.14 CA rollo, pp. 79-86.15 Id. at 87-91.16 Rule 16, Section 1(j) of the Rules of Court provides:

Section 1. Grounds. – Within the time for but before filing the answer to the complaint or pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:x x x x(j) That a condition precedent for filing the claim has not been complied with.

17 Records, p. 52.18 The Court understood this term to refer to the inventories of the general hardware and industrial supply and equipment business.19 CA rollo, p. 214.20 Records, pp. 225-231. 21 Rollo, pp. 55-56.22 Records, pp. 234-240.23 Rollo, p. 62.24 CA rollo, pp. 177-202, 94-106.25 Id. at 107-110.26 Id. at 111-128.27 Rollo, p. 30.28 Id. at 37-39.29 Id. at 39-42.30 Id. at 43.31 Id. at 57-61.32 Id. at 57.33 CA rollo, pp. 434-435.34 Rollo, pp. 65-66.35 Id. at 67-68.36 CA rollo, pp. 486-494.37 The certificate of dissolution of respondent Winchester, Inc. was not, however, made part of the records of the case before the Court of Appeals or this Court.38 CA rollo, pp. 497-504.39 Rollo, pp. 21-22.40 Id. at 22.41 CA rollo, pp. 512-519.42 Rollo, pp. 71-72.43 Chua v. Court of Appeals, G.R. No. 150793, 19 November 2004, 443 SCRA 259, 266-267.44 See China Banking Corp. v. M. Michelin & Cie, 58 Phil 261, 266 (1933).45 Campos, The Corporation Code: Comments, Notes and Selected Cases (Vol. 2, 1990 ed.), p. 415.46 Id. at 415-416.47 See Genuino Ice Co., Inc. v. Magpantay, G.R. No. 147790, 27 June 2006, 493 SCRA 195, 205.48 Bitong v. Court of Appeals, 354 Phil. 516, 545 (1998).49 Section 2, of Rule 4 provides:

Sec. 2. Nature and purpose of pre-trial conference. - During the pre-trial conference, the court shall, with its active participation, ensure that the parties consider in detail all of the following:x x x x(6) Objections to the admissibility of testimonial, documentary and other evidence; (7) Objections to the form or substance of any affidavit, or part thereof.

SECOND DIVISION

G.R. No. 165744 August 11, 2008

OSCAR C. REYES, petitioner, vs.

HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH INSURANCE CORPORATION, and

RODRIGO C. REYES, respondents.

D E C I S I O N

BRION, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the Decision of the Court of Appeals (CA)1 promulgated on May 26, 2004 in CA-G.R. SP No. 74970. The CA Decision affirmed the Order of the Regional Trial Court (RTC), Branch 142, Makati City dated November 29, 20022 in Civil Case No. 00-1553 (entitled "Accounting of All Corporate Funds and Assets, and Damages") which denied petitioner Oscar C. Reyes’ (Oscar) Motion to Declare Complaint as Nuisance or Harassment Suit.

BACKGROUND FACTS

Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the spouses Pedro and Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of stock of Zenith Insurance Corporation (Zenith), a domestic corporation established by their family. Pedro died in 1964, while Anastacia died in 1993. Although Pedro’s estate was judicially partitioned among his heirs sometime in the 1970s, no similar settlement and partition appear to have been made with Anastacia’s estate, which included her shareholdings in Zenith. As of June 30, 1990, Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250 shares, respectively.3

On May 9, 2000, Zenith and Rodrigo filed a complaint4 with the Securities and Exchange Commission (SEC) against Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated that it is "a derivative suit initiated and filed by the complainant Rodrigo C. Reyes to obtain an accounting of the funds and assets of ZENITH INSURANCE CORPORATION which are now or formerly in the control, custody, and/or possession of respondent [herein petitioner Oscar] and to determine the shares of stock of

deceased spouses Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated [by Oscar] for himself [and] which were not collated and taken into account in the partition, distribution, and/or settlement of the estate of the deceased spouses, for which he should be ordered to account for all the income from the time he took these shares of stock, and should now deliver to his brothers and sisters their just and respective shares."5 [Emphasis supplied.]

In his Answer with Counterclaim,6 Oscar denied the charge that he illegally acquired the shares of Anastacia Reyes. He asserted, as a defense, that he purchased the subject shares with his own funds from the unissued stocks of Zenith, and that the suit is not a bona fide derivative suit because the requisites therefor have not been complied with. He thus questioned the SEC’s jurisdiction to entertain the complaint because it pertains to the settlement of the estate of Anastacia Reyes.

When Republic Act (R.A.) No. 87997 took effect, the SEC’s exclusive and original jurisdiction over cases enumerated in Section 5 of Presidential Decree (P.D.) No. 902-A was transferred to the RTC designated as a special commercial court.8 The records of Rodrigo’s SEC case were thus turned over to the RTC, Branch 142, Makati, and docketed as Civil Case No. 00-1553.

On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment Suit.9 He claimed that the complaint is a mere nuisance or harassment suit and should, according to the Interim Rules of Procedure for Intra-Corporate Controversies, be dismissed; and that it is not a bona fide derivative suit as it partakes of the nature of a petition for the settlement of estate of the deceased Anastacia that is outside the jurisdiction of a special commercial court. The RTC, in its Order dated November 29, 2002 (RTC Order), denied the motion in part and declared:

A close reading of the Complaint disclosed the presence of two (2) causes of action, namely: a) a derivative suit for accounting of the funds and assets of the corporation which are in the control, custody, and/or possession of the respondent [herein petitioner Oscar] with prayer to appoint a management committee; and b) an action for determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken

by respondent, its accounting and the corresponding delivery of these shares to the parties’ brothers and sisters. The latter is not a derivative suit and should properly be threshed out in a petition for settlement of estate.

Accordingly, the motion is denied. However, only the derivative suit consisting of the first cause of action will be taken cognizance of by this Court.10

Oscar thereupon went to the CA on a petition for certiorari, prohibition, and mandamus11 and prayed that the RTC Order be annulled and set aside and that the trial court be prohibited from continuing with the proceedings. The appellate court affirmed the RTC Order and denied the petition in its Decision dated May 26, 2004. It likewise denied Oscar’s motion for reconsideration in a Resolution dated October 21, 2004.

Petitioner now comes before us on appeal through a petition for review on certiorari under Rule 45 of the Rules of Court.

ASSIGNMENT OF ERRORS

Petitioner Oscar presents the following points as conclusions the CA should have made:

1. that the complaint is a mere nuisance or harassment suit that should be dismissed under the Interim Rules of Procedure of Intra-Corporate Controversies; and

2. that the complaint is not a bona fide derivative suit but is in fact in the nature of a petition for settlement of estate; hence, it is outside the jurisdiction of the RTC acting as a special commercial court.

Accordingly, he prays for the setting aside and annulment of the CA decision and resolution, and the dismissal of Rodrigo’s complaint before the RTC.

THE COURT’S RULING

We find the petition meritorious.

The core question for our determination is whether the trial court, sitting as a special commercial court, has jurisdiction over the subject matter of Rodrigo’s complaint. To resolve it, we rely on the judicial principle that "jurisdiction over the subject matter of a case is conferred by law and is determined by the allegations of the complaint, irrespective

of whether the plaintiff is entitled to all or some of the claims asserted therein."12

JURISDICTION OF SPECIAL COMMERCIAL COURTS

P.D. No. 902-A enumerates the cases over which the SEC (now the RTC acting as a special commercial court) exercises exclusive jurisdiction:

SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnership, 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:

a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission.

b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members, or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity; and

c) Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations, partnerships, or associations.

The allegations set forth in Rodrigo’s complaint principally invoke Section 5, paragraphs (a) and (b) above as basis for the exercise of the RTC’s special court jurisdiction. Our focus in examining the allegations of the complaint shall therefore be on these two provisions.

Fraudulent Devices and Schemes

The rule is that a complaint must contain a plain, concise, and direct statement of the ultimate facts constituting the plaintiff’s cause of action and must specify the relief sought.13 Section 5, Rule 8 of the Revised Rules of Court provides that in all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated with particularity.14 These rules find specific application to Section 5(a) of P.D. No. 902-A which speaks of corporate devices or schemes that amount to fraud or misrepresentation detrimental to the public and/or to the stockholders.

In an attempt to hold Oscar responsible for corporate fraud, Rodrigo alleged in the complaint the following:

3. This is a complaint…to determine the shares of stock of the deceased spouses Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated for himself [herein petitioner Oscar] which were not collated and taken into account in the partition, distribution, and/or settlement of the estate of the deceased Spouses Pedro and Anastacia Reyes, for which he should be ordered to account for all the income from the time he took these shares of stock, and should now deliver to his brothers and sisters their just and respective shares with the corresponding equivalent amount of P7,099,934.82 plus interest thereon from 1978 representing his obligations to the Associated Citizens’ Bank that was paid for his account by his late mother, Anastacia C. Reyes. This amount was not collated or taken into account in the partition or distribution of the estate of their late mother, Anastacia C. Reyes.

3.1. Respondent Oscar C. Reyes, through other schemes of fraud including misrepresentation, unilaterally, and for his own benefit, capriciously transferred and took possession and control of the management of Zenith Insurance Corporation which is considered as a family corporation, and other properties and businesses belonging to Spouses Pedro and Anastacia Reyes.

x x x x

4.1. During the increase of capitalization of Zenith Insurance Corporation, sometime in 1968, the property covered by TCT No. 225324 was illegally and fraudulently used by respondent as a collateral.

x x x x

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the shareholdings of their deceased mother, Doña Anastacia C. Reyes, shares of stocks and [sic] valued in the corporate books at P7,699,934.28, more or less, excluding interest and/or dividends, had been transferred solely in the name of respondent. By such fraudulent manipulations and misrepresentation, the shareholdings of said respondent Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith Insurance Corporation, which portion of said shares must be distributed equally amongst the brothers and sisters of the respondent Oscar C. Reyes including the complainant herein.

x x x x

9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at P7,099,934.28 were illegally and fraudulently transferred solely to the respondent’s [herein petitioner Oscar] name and installed himself as a majority stockholder of Zenith Insurance Corporation [and] thereby deprived his brothers and sisters of their respective equal shares thereof including complainant hereto.

x x x x

10.1 By refusal of the respondent to account of his [sic] shareholdings in the company, he illegally and fraudulently transferred solely in his name wherein [sic] the shares of stock of the deceased Anastacia C. Reyes [which] must be properly collated and/or distributed equally amongst the children, including the complainant Rodrigo C. Reyes herein, to their damage and prejudice.

x x x x

11.1 By continuous refusal of the respondent to account of his [sic] shareholding with Zenith Insurance Corporation[,] particularly the number of shares of stocks illegally and fraudulently transferred to him from their deceased parents Sps. Pedro and Anastacia Reyes[,] which are all subject for collation and/or partition in equal shares among their children. [Emphasis supplied.]

Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely conclusions of law that, without supporting statements of the facts to which the allegations of fraud refer, do not sufficiently state an effective cause of action.15 The late Justice Jose Feria, a noted authority in Remedial Law, declared that fraud and mistake are required to be averred with particularity in order to enable the opposing party to controvert the particular facts allegedly constituting such fraud or mistake.16

Tested against these standards, we find that the charges of fraud against Oscar were not properly supported by the required factual allegations. While the complaint contained allegations of fraud purportedly committed by him, these allegations are not particular enough to bring the controversy within the special commercial court’s jurisdiction; they are not statements of ultimate facts, but are mere conclusions of law: how and why the alleged appropriation of shares can be characterized as "illegal and fraudulent" were not explained nor elaborated on.

Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will bring the case within the special commercial court’s jurisdiction. To fall within this jurisdiction, there must be sufficient nexus showing that the corporation’s nature, structure, or powers were used to facilitate the fraudulent device or scheme. Contrary to this concept, the complaint presented a reverse situation. No corporate power or office was alleged to have facilitated the transfer of the shares; rather, Oscar, as an individual and without reference to his corporate personality, was alleged to have transferred the shares of Anastacia to his name, allowing him to become the majority and controlling stockholder of Zenith, and eventually, the corporation’s President. This is the essence of the complaint read as a whole and is particularly demonstrated under the following allegations:

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the shareholdings of their deceased mother, Doña Anastacia C. Reyes, shares of stocks and [sic] valued in the corporate books at P7,699,934.28, more or less, excluding interest and/or dividends, had been transferred solely in the name of respondent. By such fraudulent manipulations and misrepresentation, the shareholdings of said respondent Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith Insurance Corporation, which portion of said shares must be distributed equally amongst the brothers and sisters of the respondent Oscar C. Reyes including the complainant herein.

x x x x

9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at P7,099,934.28 were illegally and fraudulently transferred solely to the respondent’s [herein petitioner Oscar] name and installed himself as a majority stockholder of Zenith Insurance Corporation [and] thereby deprived his brothers and sisters of their respective equal shares thereof including complainant hereto. [Emphasis supplied.]

In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground for dismissal since such defect can be cured by a bill of particulars. In cases governed by the Interim Rules of Procedure on Intra-Corporate Controversies, however, a bill of particulars is a prohibited pleading.17 It is essential, therefore, for the complaint to show on its face what are claimed to be the fraudulent corporate acts if the complainant wishes to invoke the court’s special commercial jurisdiction.

We note that twice in the course of this case, Rodrigo had been given the opportunity to study the propriety of amending or withdrawing the complaint, but he consistently refused. The court’s function in resolving issues of jurisdiction is limited to the review of the allegations of the complaint and, on the basis of these allegations, to the determination of whether they are of such nature and subject that they fall within the terms of the law defining the court’s jurisdiction. Regretfully, we cannot read into the

complaint any specifically alleged corporate fraud that will call for the exercise of the court’s special commercial jurisdiction. Thus, we cannot affirm the RTC’s assumption of jurisdiction over Rodrigo’s complaint on the basis of Section 5(a) of P.D. No. 902-A.18

Intra-Corporate Controversy

A review of relevant jurisprudence shows a development in the Court’s approach in classifying what constitutes an intra-corporate controversy. Initially, the main consideration in determining whether a dispute constitutes an intra-corporate controversy was limited to a consideration of the intra-corporate relationship existing between or among the parties.19 The types of relationships embraced under Section 5(b), as declared in the case of Union Glass & Container Corp. v. SEC,20 were as follows:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners, members, or officers;

c) between the corporation, partnership, or association and the State as far as its franchise, permit or license to operate is concerned; and

d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]

The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC, regardless of the subject matter of the dispute. This came to be known as the relationship test.

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,21 the Court introduced the nature of the controversy test. We declared in this case that it is not the mere existence of an intra-corporate relationship that gives rise to an intra-corporate controversy; to rely on the relationship test alone will divest the regular courts of their jurisdiction for the sole reason that the dispute involves a corporation, its directors, officers, or stockholders. We saw that there is no legal sense in disregarding or minimizing the value of the nature of the transactions which gives rise to the dispute.

Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of ascertaining whether the controversy itself is intra-corporate.22 The controversy must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties’ correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents are merely incidental to the controversy or if there will still be conflict even if the relationship does not exist, then no intra-corporate controversy exists.

The Court then combined the two tests and declared that jurisdiction should be determined by considering not only the status or relationship of the parties, but also the nature of the question under controversy.23 This two-tier test was adopted in the recent case of Speed Distribution, Inc. v. Court of Appeals:24

To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the branches of the RTC specifically designated by the Court to try and decide such cases, two elements must concur: (a) the status or relationship of the parties; and (2) the nature of the question that is the subject of their controversy.

The first element requires that the controversy must arise out of intra-corporate or partnership relations between any or all of the parties and the corporation, partnership, or association of which they are stockholders, members or associates; between any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; and between such corporation, partnership, or association and the State insofar as it concerns their individual franchises. The second element requires that the dispute among the parties be intrinsically connected with the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character, necessarily, the case does not involve an intra-corporate controversy.

Given these standards, we now tackle the question posed for our determination under the specific circumstances of this case:

Application of the Relationship Test

Is there an intra-corporate relationship between the parties that would characterize the case as an intra-corporate dispute?

We point out at the outset that while Rodrigo holds shares of stock in Zenith, he holds them in two capacities: in his own right with respect to the 4,250 shares registered in his name, and as one of the heirs of Anastacia Reyes with respect to the 136,598 shares registered in her name. What is material in resolving the issues of this case under the allegations of the complaint is Rodrigo’s interest as an heir since the subject matter of the present controversy centers on the shares of stocks belonging to Anastacia, not on Rodrigo’s personally-owned shares nor on his personality as shareholder owning these shares. In this light, all reference to shares of stocks in this case shall pertain to the shareholdings of the deceased Anastacia and the parties’ interest therein as her heirs.

Article 777 of the Civil Code declares that the successional rights are transmitted from the moment of death of the decedent. Accordingly, upon Anastacia’s death, her children acquired legal title to her estate (which title includes her shareholdings in Zenith), and they are, prior to the estate’s partition, deemed co-owners thereof.25 This status as co-owners, however, does not immediately and necessarily make them stockholders of the corporation. Unless and until there is compliance with Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered stockholders of the corporation. Section 63 provides:

Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as

to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates, and the number of shares transferred. [Emphasis supplied.]

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

Simply stated, the transfer of title by means of succession, though effective and valid between the parties involved (i.e., between the decedent’s estate and her heirs), does not bind the corporation and third parties. The transfer must be registered in the books of the corporation to make the transferee-heir a stockholder entitled to recognition as such both by the corporation and by third parties.26

We note, in relation with the above statement, that in Abejo v. Dela Cruz27 and TCL Sales Corporation v. Court of Appeals28 we did not require the registration of the transfer before considering the transferee a stockholder of the corporation (in effect upholding the existence of an intra-corporate relation between the parties and bringing the case within the jurisdiction of the SEC as an intra-corporate controversy). A marked difference, however, exists between these cases and the present one.

In Abejo and TCL Sales, the transferees held definite and uncontested titles to a specific number of shares of the corporation; after the transferee had established prima facie ownership over the shares of stocks in question, registration became a mere formality in confirming their status as stockholders. In the present case, each of Anastacia’s heirs holds only an undivided interest in the shares. This interest, at this point, is still inchoate and subject to the outcome of a settlement proceeding; the right of the heirs to specific, distributive shares of inheritance will not be determined until all the debts of the estate of the decedent are paid. In short, the heirs are only entitled to what remains after payment of the decedent’s debts;29

whether there will be residue remains to be seen. Justice Jurado aptly puts it as follows:

No succession shall be declared unless and until a liquidation of the assets and debts left by the decedent shall have been made and all his creditors are fully paid. Until a final liquidation is made and all

the debts are paid, the right of the heirs to inherit remains inchoate. This is so because under our rules of procedure, liquidation is necessary in order to determine whether or not the decedent has left any liquid assets which may be transmitted to his heirs.30 [Emphasis supplied.]

Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of Zenith with respect to the shareholdings originally belonging to Anastacia. First, he must prove that there are shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement of the decedent’s estate. No such proceeding has been commenced to date. Second, he must register the transfer of the shares allotted to him to make it binding against the corporation. He cannot demand that this be done unless and until he has established his specific allotment (and prima facie ownership) of the shares. Without the settlement of Anastacia’s estate, there can be no definite partition and distribution of the estate to the heirs. Without the partition and distribution, there can be no registration of the transfer. And without the registration, we cannot consider the transferee-heir a stockholder who may invoke the existence of an intra-corporate relationship as premise for an intra-corporate controversy within the jurisdiction of a special commercial court.

In sum, we find that – insofar as the subject shares of stock (i.e., Anastacia’s shares) are concerned – Rodrigo cannot be considered a stockholder of Zenith. Consequently, we cannot declare that an intra-corporate relationship exists that would serve as basis to bring this case within the special commercial court’s jurisdiction under Section 5(b) of PD 902-A, as amended. Rodrigo’s complaint, therefore, fails the relationship test.

Application of the Nature of Controversy Test

The body rather than the title of the complaint determines the nature of an action.31 Our examination of the complaint yields the conclusion that, more than anything else, the complaint is about the protection and enforcement of successional rights. The controversy it presents is purely civil rather than corporate, although it is denominated as a "complaint for accounting of all corporate funds and assets."

Contrary to the findings of both the trial and appellate courts, we read only one cause of action alleged in the

complaint. The "derivative suit for accounting of the funds and assets of the corporation which are in the control, custody, and/or possession of the respondent [herein petitioner Oscar]" does not constitute a separate cause of action but is, as correctly claimed by Oscar, only an incident to the "action for determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the corresponding delivery of these shares to the parties’ brothers and sisters." There can be no mistake of the relationship between the "accounting" mentioned in the complaint and the objective of partition and distribution when Rodrigo claimed in paragraph 10.1 of the complaint that:

10.1 By refusal of the respondent to account of [sic] his shareholdings in the company, he illegally and fraudulently transferred solely in his name wherein [sic] the shares of stock of the deceased Anastacia C. Reyes [which] must be properly collated and/or distributed equally amongst the children including the complainant Rodrigo C. Reyes herein to their damage and prejudice.

We particularly note that the complaint contained no sufficient allegation that justified the need for an accounting other than to determine the extent of Anastacia’s shareholdings for purposes of distribution.

Another significant indicator that points us to the real nature of the complaint are Rodrigo’s repeated claims of illegal and fraudulent transfers of Anastacia’s shares by Oscar to the prejudice of the other heirs of the decedent; he cited these allegedly fraudulent acts as basis for his demand for the collation and distribution of Anastacia’s shares to the heirs. These claims tell us unequivocally that the present controversy arose from the parties’ relationship as heirs of Anastacia and not as shareholders of Zenith. Rodrigo, in filing the complaint, is enforcing his rights as a co-heir and not as a stockholder of Zenith. The injury he seeks to remedy is one suffered by an heir (for the impairment of his successional rights) and not by the corporation nor by Rodrigo as a shareholder on record.

More than the matters of injury and redress, what Rodrigo clearly aims to accomplish through his allegations of illegal acquisition by Oscar is the distribution of Anastacia’s shareholdings without a prior settlement of her estate – an objective that, by law and established jurisprudence, cannot

be done. The RTC of Makati, acting as a special commercial court, has no jurisdiction to settle, partition, and distribute the estate of a deceased. A relevant provision – Section 2 of Rule 90 of the Revised Rules of Court – that contemplates properties of the decedent held by one of the heirs declares:

Questions as to advancement made or alleged to have been made by the deceased to any heir may be heard and determined by the court having jurisdiction of the estate proceedings; and the final order of the court thereon shall be binding on the person raising the questions and on the heir. [Emphasis supplied.]

Worth noting are this Court’s statements in the case of Natcher v. Court of Appeals:32

Matters which involve settlement and distribution of the estate of the decedent fall within the exclusive province of the probate court in the exercise of its limited jurisdiction.

x x x x

It is clear that trial courts trying an ordinary action cannot resolve to perform acts pertaining to a special proceeding because it is subject to specific prescribed rules. [Emphasis supplied.]

That an accounting of the funds and assets of Zenith to determine the extent and value of Anastacia’s shareholdings will be undertaken by a probate court and not by a special commercial court is completely consistent with the probate court’s limited jurisdiction. It has the power to enforce an accounting as a necessary means to its authority to determine the properties included in the inventory of the estate to be administered, divided up, and distributed. Beyond this, the determination of title or ownership over the subject shares (whether belonging to Anastacia or Oscar) may be conclusively settled by the probate court as a question of collation or advancement. We had occasion to recognize the court’s authority to act on questions of title or ownership in a collation or advancement situation in Coca v. Pangilinan33 where we ruled:

It should be clarified that whether a particular matter should be resolved by the Court of First Instance in the exercise of its general jurisdiction or of its limited

probate jurisdiction is in reality not a jurisdictional question. In essence, it is a procedural question involving a mode of practice "which may be waived."

As a general rule, the question as to title to property should not be passed upon in the testate or intestate proceeding. That question should be ventilated in a separate action. That general rule has qualifications or exceptions justified by expediency and convenience.

Thus, the probate court may provisionally pass upon in an intestate or testate proceeding the question of inclusion in, or exclusion from, the inventory of a piece of property without prejudice to its final determination in a separate action.

Although generally, a probate court may not decide a question of title or ownership, yet if the interested parties are all heirs, or the question is one of collation or advancement, or the parties consent to the assumption of jurisdiction by the probate court and the rights of third parties are not impaired, the probate court is competent to decide the question of ownership. [Citations omitted. Emphasis supplied.]

In sum, we hold that the nature of the present controversy is not one which may be classified as an intra-corporate dispute and is beyond the jurisdiction of the special commercial court to resolve. In short, Rodrigo’s complaint also fails the nature of the controversy test.

DERIVATIVE SUIT

Rodrigo’s bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction on the RTC (as a special commercial court) if he cannot comply with the requisites for the existence of a derivative suit. These requisites are:

a. the party bringing suit should be a shareholder during the time of the act or transaction complained of, the number of shares not being material;

b. the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief, but the latter has failed or refused to heed his plea; and

c. the cause of action actually devolves on the corporation; the wrongdoing or harm having been or being caused to the corporation and not to the particular stockholder bringing the suit.34

Based on these standards, we hold that the allegations of the present complaint do not amount to a derivative suit.

First, as already discussed above, Rodrigo is not a shareholder with respect to the shareholdings originally belonging to Anastacia; he only stands as a transferee-heir whose rights to the share are inchoate and unrecorded. With respect to his own individually-held shareholdings, Rodrigo has not alleged any individual cause or basis as a shareholder on record to proceed against Oscar.

Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must allege with some particularity in his complaint that he has exhausted his remedies within the corporation by making a sufficient demand upon the directors or other officers for appropriate relief with the expressed intent to sue if relief is denied.35

Paragraph 8 of the complaint hardly satisfies this requirement since what the rule contemplates is the exhaustion of remedies within the corporate setting:

8. As members of the same family, complainant Rodrigo C. Reyes has resorted [to] and exhausted all legal means of resolving the dispute with the end view of amicably settling the case, but the dispute between them ensued.

Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation due to Oscar’s acts. If indeed he illegally and fraudulently transferred Anastacia’s shares in his own name, then the damage is not to the corporation but to his co-heirs; the wrongful transfer did not affect the capital stock or the assets of Zenith. As already mentioned, neither has Rodrigo alleged any particular cause or wrongdoing against the corporation that he can champion in his capacity as a shareholder on record.36

In summary, whether as an individual or as a derivative suit, the RTC – sitting as special commercial court – has no jurisdiction to hear Rodrigo’s complaint since what is involved is the determination and distribution of successional rights to the shareholdings of Anastacia Reyes. Rodrigo’s proper remedy, under the circumstances, is to institute a special proceeding for the settlement of the

estate of the deceased Anastacia Reyes, a move that is not foreclosed by the dismissal of his present complaint.

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the Court of Appeals dated May 26, 2004 in CA-G.R. SP No. 74970. The complaint before the Regional Trial Court, Branch 142, Makati, docketed as Civil Case No. 00-1553, is ordered DISMISSED for lack of jurisdiction.

SO ORDERED.Footnotes

* Designated Additional Member of the Second Division per Special Order No. 512 dated July 16, 2008.1 Penned by Associate Justice Juan Q. Enriquez, Jr., with Associate Justice Romeo A. Brawner (deceased) and Associate Justice Aurora Santiago-Lagman, concurring; rollo, pp. 55-60.2 Quoted in full in Petition, id., p. 18.3 Id., p. 64.4 Id., pp. 63-74.5 Id., p. 65.6 Id., pp. 92-115.7 Section 5.2 thereof states: The Commission’s jurisdiction over all cases enumerated under Section 5 of P.D. No. 902-A is hereby transferred to the courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. x x x.8 Per A.M. No. 00-11-03 SC dated November 21, 2000.9 Rollo, pp. 119-132.10 Supra note 2. 11 Under Rule 65 of the Revised Rules of Court, rollo, pp. 11-49.12 Speed Distributing Corp. v. Court of Appeals, G.R. No. 149351, March 17, 2004, 425 SCRA 691; Intestate Estate of Alexander Ty v. Court of Appeals, G.R. No. 112872, April 19, 2001, 356 SCRA 661.13 See Revised Rules of Court, Rule 6, Section 1; Rule 7 Section 2(c); and Rule 8, Section 1.14 Abad v. CFI Pangasinan, G.R. No. 58507-08, February 26, 1992, 206 SCRA 567, 580.15 Santos v. Liwag, G.R. No. L-24238, November 28, 1980, 101 SCRA 327.16 Civil Procedure Annotated, Vol. 1 (2001 ed.), p. 303.17 Rule 1, Section 8(2). 18 Referring specifically to corporate fraud; see quoted provision at page 5 hereof. 19 See Sunset View Condominium Corp. v. Campos, Jr., 104 SCRA 295; Philex Mining Corp. v. Reyes, 118 SCRA 502; Desa Enterprises, Inc. v. SEC, 117 SCRA 321.20 G.R. No. 64013, November 28, 1983, 126 SCRA 31.21 G.R. No. 57936, September 28, 1984, 132 SCRA 293.22 PSBA v. Leaño, G.R. No. L-58468, February 24, 1984, 127 SCRA 778, 783.23 CMH Agricultural Corporation v. Court of Appeals, G.R. No. 112625, March 7, 2002, 378 SCRA 545.24 Speed Distributing Corp., v. Court of Appeals, supra note 12.25 Article 1078 of the Civil Code states: Where there are two or more heirs, the whole estate of the decedent is, before its partition, owned in common by such heirs, subject to the payment of debts of the deceased. 26 Additionally, Section 97 of the National Internal Revenue Code requires a certification from the Commissioner of Internal Revenue that the estate taxes have been paid before any shares in a domestic corporation is transferred in the name of the new owner. 27 G.R. No. L-63558, May 19, 1987, 149 SCRA 654. 28 G.R. No. 129777, January 5, 2001, 349 SCRA 35.29 Salvador v. Sta. Maria, G.R. No. L-25952, June 30, 1967, 20 SCRA 603.30 Comments and Jurisprudence on Succession (1991 ed.), p. 5.31 13 Fletcher §5912.32 G.R. 133000, October 2, 2001, 366 SCRA 385, 392.33 G.R. No. L-27082, January 21, 1978, 81 SCRA 278. 34 Villanueva, C., Philippine Corporate Law (1998 ed.), p. 370.35 13 Fletcher §5963.36 See 13 Fletcher §5915.

THIRD DIVISION

G.R. No. 178511 December 4, 2008

MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS JASON A. ANG, HANNAH ZORAYDA A. ANG, and

VICENTE G. GENATO, petitioners, vs.

EDUARDO G. ANG, respondent.

D E C I S I O N

YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the March 6, 2007 Decision2 of the Court of Appeals in CA-G.R. SP No. 94708, which nullified and set aside the July 26, 2005 and March 29, 2006 Resolutions3 of the Secretary of Justice in I.S. No. MAL-2004-1167 directing the withdrawal of the information filed against petitioners for violation of Section 74 of the Corporation Code. Also assailed is the June 19, 2007 Resolution4 denying the Motion for Reconsideration.

Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc. (Genato) (collectively referred to as "the corporations") are family-owned corporations, where petitioners Ma. Belen Flordeliza C. Ang-Abaya (Flordeliza), Francis Jason A. Ang (Jason), Vincent G. Genato (Vincent), Hanna Zorayda A. Ang (Hanna) and private respondent Eduardo G. Ang (Eduardo) are shareholders, officers and members of the board of directors.

Prior to the instant controversy, VMC, Genato, and Oriana Manufacturing Corporation (Oriana) filed Civil Case No. 4257-MC, which is a case for damages with prayer for issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction against herein respondent Eduardo, together with Michael Edward Chi Ang (Michael), and some other persons for allegedly conniving to fraudulently wrest control/management of the corporations.5 Eduardo allegedly borrowed substantial amounts of money from the said corporations without any intention to repay; that he repeatedly demanded for increases in his monthly allowance and for more cash advances contrary to existing corporate policies; that he harassed petitioner Flordeliza to transfer and/or sell certain corporate and personal properties in order to pay off his personal obligations; that he attempted to forcibly evict petitioner Jason from his office and claim it

as his own; that he interfered with and disrupted the daily business operations of the corporations; that Michael was placed on preventive suspension due to prolonged absence without leave and commission of acts of disloyalty such as carrying out orders of Eduardo which were detrimental to their business, using privileged information and confidential documents/data obtained in his capacity as Vice President of the corporations, and admitting to have sabotaged their distribution system and operations.

During the pendency of Civil Case No. 4257-MC, particularly in July, 2004, Eduardo sought permission to inspect the corporate books of VMC and Genato on account of petitioners’ alleged failure and/or refusal to update him on the financial and business activities of these family corporations.6 Petitioners denied the request claiming that Eduardo would use the information obtained from said inspection for purposes inimical to the corporations’ interests, considering that: "a) he is harassing and/or bullying the Corporation[s] into writing off P165,071,586.55 worth of personal advances which he had unlawfully obtained in the past; b) he is unjustly demanding that he be given the office currently occupied by Mr. Francis Jason Ang, the Vice-President for Finance and Corporate Secretary; c) he is usurping the rights belonging exclusively to the Corporation; and d) he is coercing and/or trying to inveigle the Directors and/or Officers of the Corporation to give in to his baseless demands involving specific corporate assets."7

Because of petitioners’ refusal to grant his request to inspect the corporate books of VMC and Genato, Eduardo filed an Affidavit-Complaint8 against petitioners Flordeliza and Jason, charging them with violation (two counts) of Section 74, in relation to Section 144, of the Corporation Code of the Philippines.9 Ma. Belinda G. Sandejas (Belinda), Vincent, and Hanna were subsequently impleaded for likewise denying respondent’s request to inspect the corporate books.

Petitioners filed a Joint Counter-Affidavit praying for the dismissal of the complaint for lack of factual and legal basis, or for the suspension of the same while Civil Case No. 4257-MC is still pending resolution.10 They denied violating Section 74 of the Corporation Code and reiterated the allegations contained in their complaint in Civil Case No. 4257-MC. Petitioners blamed Eduardo’s lavish lifestyle, which is funded by personal loans and cash advances from

the family corporations. They alleged that Eduardo consistently pressured petitioner Flordeliza, his daughter, to improperly transfer ownership of the corporations’ V.A.G. Building to him;11 to disregard the company policy prohibiting advances by shareholders; to unduly increase his corporate monthly allowance; and to sell her Wack-Wack Golf proprietary share and use the proceeds thereof to pay his personal financial obligations. When the proposed transfer of the V.A.G. Building did not materialize, petitioners claim that Eduardo instituted an action to compel the donation of said property to him.12 Furthermore, they claim that Eduardo attempted to forcibly evict petitioner Jason from his office at VMC so he can occupy the same; that Eduardo and his cohorts constantly created trouble by intervening in the daily operations of the corporations without the knowledge or consent of the board of directors.

Meanwhile, in Civil Case No. 4257-MC, the trial court rendered a Decision granting the permanent injunction applied for by the corporations.13 However, the Court of Appeals subsequently rendered a Decision14 declaring that Eduardo, his son Michael, and the other persons impleaded in Civil Case No. 4257-MC, were imprudently declared in default by the trial court. The appellate court thus annulled the permanent injunction issued by the trial court and remanded the case for further proceedings. VMC, Genato, and Oriana corporations filed a Petition for Review on Certiorari before this Court, but the same was denied for failure to sufficiently show any reversible error in the Decision of the Court of Appeals.15 The three corporations filed a Motion for Reconsideration, but the same was denied with finality on June 25, 2008.

Meanwhile, on February 3, 2005, the City Prosecutor’s Office of Malabon City issued a Resolution16 recommending that petitioners be charged with two counts of violation of Section 74 of the Corporation Code, but dismissed the complaint against Belinda for lack of evidence.17 Petitioners filed a Petition for Review18 before the Department of Justice (DOJ), which reversed the recommendation of the City Prosecutor of Malabon City.19 The dispositive portion of the DOJ Resolution dated July 26, 2005, reads:

Wherefore, premises considered, the assailed resolution is REVERSED and SET ASIDE. The City Prosecutor of Malabon City is hereby directed to cause the withdrawal of the corresponding

information filed against respondents [herein petitioners] for violation of Section 74 of the Corporation Code of the Philippines and to report the action taken thereon within ten (10) days from the receipt hereof.

SO ORDERED.20

The DOJ denied Eduardo’s Motion for Reconsideration21 in a Resolution22 dated March 29, 2006. On appeal, the Court of Appeals rendered the assailed Decision, the dispositive portion of which states:

WHEREFORE, the instant petition is partially GRANTED. The assailed Resolutions of public respondent dated July 26, 2005 and March 29, 2006 are hereby NULLIFIED and SET ASIDE. However, due to the present existence of a prejudicial question, the criminal case docketed I.S. No. MAL-2004-1167 is hereby SUSPENDED until Civil Case No. 4257-MC is decided on the merits with finality. 23

The appellate court ruled that the Secretary of Justice committed grave abuse of discretion amounting to lack or excess of jurisdiction in reversing the Resolutions of the Malabon City Prosecutor and in finding that Eduardo did not act in good faith when he demanded for the examination of VMC and Genato’s corporate books. It further held that Eduardo can demand said examination as a stockholder of both corporations; that Eduardo raised legitimate questions that necessitated inspection of the corporate books and records; and that petitioners’ refusal to allow inspection created probable cause to believe that they have committed a violation of Section 74 of the Corporation Code.

On June 19, 2007, the Court of Appeals denied the Motions for Reconsideration filed by petitioners and the Secretary of Justice.24 Hence, this petition raising the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS WAS CORRECT IN ITS FINDING THAT THE HONORABLE JUSTICE SECRETARY’S REVERSAL OF THE MALABON CITY PROSECUTOR’S RESOLUTION FINDING PROBABLE CAUSE AGAINST HEREIN PETITIONERS WAS DONE CONTRARY TO THE APPLICABLE LAW AND JURISPRUDENCE TANTAMOUNT TO GRAVE ABUSE OF DISCRETION.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN REVERSING THE RESOLUTION OF THE MALABON CITY PROSECUTOR FINDING PROBABLE CAUSE AGAINST PETITIONERS AFTER PRELIMINARY INVESTIGATION FOR VIOLATION OF SECTION 74 OF THE CORPORATION CODE OF THE PHILIPPINES.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN FINDING THAT PETITIONERS ACTED IN GOOD FAITH WHEN THEY DENIED PRIVATE RESPONDENT’S DEMAND FOR INSPECTION OF CORPORATE BOOKS.25

We grant the petition.

Probable cause, for purposes of filing a criminal information, has been defined as such facts as are sufficient to engender a well-founded belief that a crime has been committed and that respondent is probably guilty thereof. It is such a state of facts in the mind of the prosecutor as would lead a person of ordinary caution and prudence to believe or entertain an honest or strong suspicion that a thing is so. The term does not mean "actual or positive cause;" nor does it import absolute certainty. It is merely based on opinion and reasonable belief. Thus, a finding of probable cause does not require an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or omission complained of constitutes the offense charged. Precisely, there is a trial for the reception of prosecution’s evidence in support of the charge."26

The determination of the existence of probable cause lies within the discretion of the prosecuting officers after conducting a preliminary investigation upon complaint of an offended party. Their decisions are reviewable by the Secretary of Justice who may direct the filing of the corresponding information or to move for the dismissal of the case.27

In reversing the Resolutions of the Secretary of Justice directing the withdrawal of the information filed against petitioners for lack of probable cause, the Court of Appeals

held that it was beyond the Secretary of Justice’s authority to determine the motives of Eduardo in seeking an inspection of the corporations’ books and papers.

In order that probable cause to file a criminal case may be arrived at, or in order to engender the well-founded belief that a crime has been committed, the elements of the crime charged should be present.28 This is based on the principle that every crime is defined by its elements, without which there should be – at the most – no criminal offense.

In Gokongwei, Jr. v. Securities and Exchange Commission,29

this Court explained the rationale behind a stockholder's right to inspect corporate books, to wit:

The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation.30

In Republic v. Sandiganbayan,31 the Court declared that the right to inspect and/or examine the records of a corporation under Section 74 of the Corporation Code is circumscribed by the express limitation contained in the succeeding proviso, which states that:

[I]t shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith

or for a legitimate purpose in making his demand. (Emphasis supplied)

Thus, contrary to Eduardo’s insistence, the stockholder’s right to inspect corporate books is not without limitations. While the right of inspection was enlarged under the Corporation Code as opposed to the old Corporation Law (Act No. 1459, as amended),

It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information secured through a prior examination, or that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand.32 (Emphasis supplied)

In order therefore for the penal provision under Section 144 of the Corporation Code to apply in a case of violation of a stockholder or member’s right to inspect the corporate books/records as provided for under Section 74 of the Corporation Code, the following elements must be present:

First. A director, trustee, stockholder or member has made a prior demand in writing for a copy of excerpts from the corporation’s records or minutes;

Second. Any officer or agent of the concerned corporation shall refuse to allow the said director, trustee, stockholder or member of the corporation to examine and copy said excerpts;

Third. If such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal; and,

Fourth. Where the officer or agent of the corporation sets up the defense that the person demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand, the contrary must be shown or proved.

Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the

same. Accordingly, where the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation.33 This being the case, it would be improper for the prosecutor, during preliminary investigation, to refuse or fail to address the defense of improper use or motive, given its express statutory recognition. In the past we have declared that if justifying circumstances are claimed as a defense, they should have at least been raised during preliminary investigation;34 which settles the view that the consideration and determination of justifying circumstances as a defense is a relevant subject of preliminary investigation.

A preliminary investigation is in effect a realistic judicial appraisal of the merits of the case; sufficient proof of the guilt of the criminal respondent must be adduced so that when the case is tried, the trial court may not be bound, as a matter of law, to order an acquittal.35 Although a preliminary investigation is not a trial and is not intended to usurp the function of the trial court, it is not a casual affair; the officer conducting the same investigates or inquires into the facts concerning the commission of the crime with the end in view of determining whether or not an information may be prepared against the accused.36 After all, the purpose of preliminary investigation is not only to determine whether there is sufficient ground to engender a well-founded belief that a crime has been committed and the respondent therein is probably guilty thereof and should be held for trial; it is just as well for the purpose of securing the innocent against hasty, malicious and oppressive prosecution, and to protect him from an open and public accusation of a crime, from the trouble, expense and anxiety of a public trial.37 More importantly, in the appraisal of the case presented to him for resolution, the duty of a prosecutor is more to do justice and less to prosecute.38

If the prosecutor is convinced during preliminary investigation of the validity of the respondent’s claim of a justifying circumstance, then he must dismiss the complaint; if not, then he must file the requisite information. This is his discretion, the exercise of which we grant sufficient latitude.39

In the instant case, the Court finds that the Court of Appeals erred in declaring that the Secretary of Justice exceeded his authority when he conducted an inquiry on the petitioners’

defense of improper use and motive on Eduardo’s part. As a necessary element in the offense of refusal to honor a stockholder/member’s right to inspect the corporate books/records, it was incumbent upon the Secretary of Justice to determine that all the elements which constitute said offense are present, in line with our ruling in Duterte v. Sandiganbayan.

A preliminary investigation is the crucial sieve in the criminal justice system which spells for an individual the difference between months if not years of agonizing trial and possibly jail term, on the one hand, and peace of mind and liberty, on the other. Thus, we have characterized the right to a preliminary investigation as not a mere formal or technical right but a substantive one, forming part of due process in criminal justice.40 Due process, in the instant case, requires that an inquiry into the motive behind Eduardo’s attempt at inspection should have been made even during the preliminary investigation stage, just as soon as petitioners set up the defense of improper use and motive.

Petitioners argue that Eduardo’s demand for an inspection of the corporations’ books is based on the latter’s attempt in bad faith at having his more than P165 million advances from the corporations written off; that Eduardo is unjustly demanding that he be given the office of Jason, or the Vice Presidency for Finance and Corporate Secretary; that Eduardo is usurping rights belonging exclusively to the corporations; and Eduardo’s attempts at coercing the corporations, their directors and officers into giving in to his baseless demands involving specific corporate assets. Specifically, petitioners accuse Eduardo of the following:

1. He is a spendthrift, using the family corporations’ resources to sustain his extravagant lifestyle. During his incumbency as officer of VMC and Genato (from 1984 to 2000), he was able to obtain massive amounts by way of cash advances from these corporations, amounting to more than P165 million;

2. He is exercising undue pressure upon petitioners in order to acquire ownership, through the forced execution of a deed of donation, over the VAG Building in San Juan, which building belongs to Genato;

3. He is putting pressure on the corporations, through their directors and officers, for the latter to disregard their respective policies which prohibit the grant of cash advances to stockholders.

4. At one time, he coerced Flordeliza for the latter to sell her Wack-Wack Golf Proprietary Share;

5. In May 2003, without the requisite authority, he called a "stockholders’ meeting" to demand an increase in his P140,000.00 monthly allowance from the corporation to P250,000.00; demand a cash advance of US$10,000; and to demand that the corporations shoulder the medical and educational expenses of his family as well as those of the other stockholders;

6. In November 2003, he demanded that he be given an office within the corporations’ premises. In December 2003, he stormed the corporations’ common office, ordered the employees to vacate the premises, summoned the directors to a meeting, and there he berated them for not acting on his requests. In January 2004, he returned to the office, demanding the transfer of the Accounting Department and for Jason to vacate his office by the end of the month. He likewise left a letter which contained his demands. At the end of January 2004, he returned, ordered the employees to leave the premises and demanded that Jason surrender his office and vacate his desk. He did this no less than four (4) times. As a result, the respective boards of directors of the corporations resolved to ban him from the corporate premises;

7. He has been interfering in the everyday operations of VMC and Genato, usurping the duties, rights and authority of the directors and officers thereof. He attempted to lease out a warehouse within the VMC premises without the knowledge and consent of its directors and officers; during the wake of the former President of VMC and Genato, he issued instructions for the employees to close down operations for the whole duration of the wake, against the corporate officers’ instructions to attend the wake by batch, so as not to hamper business operations; he has caused chaos and confusion in VMC and Genato as a result;41

8. He is out to sabotage the family corporations.42

These serious allegations are supported by official and other documents, such as board resolutions, treasurer’s affidavits and written communication from the respondent Eduardo himself, who appears to have withheld his objections to these charges. His silence virtually amounts to an acquiescence.43 Taken together, all these serve to justify petitioners’ allegation that Eduardo was not acting in good faith and for a legitimate purpose in making his demand for inspection of the corporate books. Otherwise stated, there is lack of probable cause to support the allegation that petitioners violated Section 74 of the Corporation Code in refusing respondent’s request for examination of the corporation books.

WHEREFORE, the Petition for Review on Certiorari is GRANTED. The March 6, 2007 Decision and June 19, 2007 Resolution of the Court of Appeals in CA-G.R. SP No. 94708 are REVERSED and SET ASIDE. The July 26, 2005 and March 29, 2006 Resolutions of the Secretary of Justice directing the withdrawal of the information filed against petitioners for violation of Section 74 of the Corporation Code are accordingly REINSTATED and AFFIRMED.

SO ORDERED.Footnotes

* In lieu of Associate Justice Antonio Eduardo B. Nachura.

1 Rollo, pp. 3-46.

2 Id. at 51-63; penned by Associate Justice Ramon M. Bato, Jr. and concurred in by Associate Justices Remedios A. Salazar-Fernando and Jose C. Mendoza.

3 Id. at 249-252 and 253.

4 Id. at 65-66.

5 Id. at 134-162, entitled "Vibelle Manufacturing Corporation, Genato Investments, Incorporated, and Oriana Manufacturing Corporation v. Eduardo Genato Ang, Michael Edward Chi Ang, and John Does and Jane Does." The case was raffled to Branch 74 of the Regional Trial Court of Malabon City.

6 Id. at 124 and 125.

7 Id. at 221 and 223.

8 Id. at 117-121: I.S. No. Mal. 2004-1167.

9 Batas Pambansa Blg. 68 (1980),

Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record

thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; 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 the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable.

Sec. 144. Violations of the Code. - Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code.

10 Rollo, pp. 67-74.

11 The VAG Building was initially intended to be transferred or donated to Eduardo, subject to certain conditions pursuant to the request or suggestion of the late Belen K. Genato (Rollo, pp. 903-907); however, said transfer did not materialize (Rollo, pp. 190-191).

12 Civil Case No. Q-0453241 filed with the Regional Trial Court of Quezon City, Branch 100. The case was dismissed in an Order of the RTC-QC dated January 6, 2006.

13 Rollo, pp. 505-512, the dispostive portion of which, reads:

WHEREFORE, premises considered, judgment is hereby rendered:

1. Permanently enjoining defendants Eduardo Genato Ang and Michael Edward Chi Ang, and/or any of their agents, representatives, lawyers, assignees, heirs, or any other persons acting under their authority or instructions, from:

a. Occupying, demanding, claiming or otherwise attempting to occupy any position or office in Plaintiff corporations, (except those concomitant to their rights as stockholders, as the case may be), without the consent of the boards of directors of plaintiff corporations;

b. Entering the offices of plaintiff corporations located at 18 J.P. Bautista Ave., Malabon City, Metro Manila, or any of plaintiff corporations’ satellite offices, business centers, distribution offices, warehouses, or any other property belonging to plaintiff corporations or otherwise used by them, without consent of the boards of directors of plaintiff corporations;

c. Communicating with the officers and employees, clients, distributors, business associates of plaintiff corporations, as well as pertinent government agencies, for the purpose of sowing enmity between said persons and plaintiff corporations, or to otherwise disrupt the smooth operation and management of plaintiff corporations;

d. Usurping or exercising rights, privileges or property belonging to plaintiff corporations, or representing plaintiff corporations or acting for and in behalf of plaintiff corporations in any transactions or dealing with clients, distributors and banks of plaintiff corporations, or government agencies, or any other persons with business with plaintiff corporations;

e. Seizing, interfering with or otherwise disrupting the management, operations and/or business of plaintiff corporations, and other similar acts of harassment and extortion that would tend to cause damage to plaintiff corporations.

Further, defendants are hereby ordered to pay plaintiffs the amount of P500,000.00 for and as attorney’s fees and costs of the suit.

SO ORDERED.

14 CA-G.R. CV No. 84736, penned by Associate Justice Enrico A. Lanzanas and concurred in by Associate Justices Edgardo P. Cruz, and Jose C. Reyes, Jr.; Rollo, pp. 911-927.

15 In G.R. No. 178586.

16 Rollo, pp. 114-116; penned by 1st Assistant City Prosecutor Magno T. Pablo, Jr., as approved by Malabon City-Navotas Prosecutor Jorge G. Catalan, Jr.

17 Id. at 116 and 220: The City Prosecutor of Malabon found that Ma. Belinda G. Sandejas was not present during the board meeting on September 4, 2004 and did not vote on the Resolution denying Eduardo’s request to inspect the corporate books of VMC and GII;.

18 Id. at 423-438.

19 Id. at 249-252; penned by Undersecretary Ernesto L. Pineda.

20 Id. at 252.

21 Id. at 395-406.

22 Id. at 253.

23 Id. at 62-63.

24 CA rollo, pp. 513-532 and Rollo, pp. 672-683.

25 Rollo, pp. 24-25.

26 Villanueva v. Secretary of Justice, G.R. No. 162187, November 18, 2005, 475 SCRA 495, 511.

27 Advincula v. Court of Appeals, 397 Phil. 641, 650-651 (2000).

28 Duterte v. Sandiganbayan, G.R. No. 130191, April 27, 1998, 289 SCRA 721.

29 178 Phil. 266 (1979).

30 Id. at 314-315, citing Fletcher Cyc, Private Corporations, Vol. 5, 1976 Rev. Ed., §. 2213, 2218 & 2222, pp. 693, 709, 725. (Emphasis supplied)

31 G.R. Nos. 88809 and 88858, July 10, 1991, 199 SCRA 39.

32 Gonzales v. Philippine National Bank, 207 Phil. 425, 430.

33 5A Fletcher Cyc. Corp. §. 2220, 2008.

34 People v. Caratao, G.R. No. 126281, June 10, 2003, 403 SCRA 482; People v. Dorado, G.R. No. 122248, February 11, 1999, 303 SCRA 61; People v. Ronquillo, G.R. No. 96125, August 31, 1995, 247 SCRA 793; People v. Salazar, G.R. No. 84391, April 7, 1993, 221 SCRA 170; People v. Vicente, G.R. No. L-31725, February 18, 1986, 141 SCRA 347.

35 Perez v. Ombudsman, G.R. No. 131445, May 27, 2004, 429 SCRA 357.

36 Sales v. Sandiganbayan, G.R. No. 143802, November 16, 2001, 369 SCRA 293.

37 Okabe v. Judge Gutierrez, G.R. No. 150185, May 27, 2004, 429 SCRA 685, citing People v. Poculan, 167 SCRA 176 (1988).

38 Estrada v. Desierto, G.R. Nos. 146710-15, March 2, 2001, 356 SCRA 108.

39 Camanag v. Guerrero, G.R. No. 121017, February 17, 1997, 268 SCRA 473.

40 Maza v. Gonzalez, G.R. Nos. 172074-76, June 1, 2007, 523 SCRA 318.

41 Court of Appeals Rollo, pages omitted, Joint Counter-Affidavit of Flordeliza Ang-Abaya and Jason Ang.

42 Id., Joint Counter-Affidavit of Hannah Ang and Vincent Genato.

43 Lagon v. Hooven Comalco Industries, Inc., G.R. No. 135657, January 17, 2001, 349 SCRA 363.

SECOND DIVISION

G.R. No. 131394 March 28, 2005

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.

D E C I S I O N

TINGA, J.:

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 Banc affirmed 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.

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 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:

. . . .

(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

SUBSCRIBER SUBSCRIBED

No. of Shares

AMOUNT SUBSCRIBED

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. . . .

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.

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

WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.Footnotes1 Promulgated by the Special Third Division, Justice Gloria C. Paras, Presiding Justice, JJ. Eduardo G. Montenegro and Omar U. Amin, concurring; Rollo, pp.102-110.2 Id. at 123.3 Id. at 67-77.4 Id. at 78-84.5 Id. at 84-92.6 Id. at 15.7 Court of Appeals’ Decision, Id. at 102.8 Id. at 18.9 Id. at 109.10 Id. at 109-110.11 Id. at 221-259.12 Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and Renato Cervantes v. Court of Appeals, Securities and Exchange Commission, Dolores O. Onrubia, Elenita O. Nolasco, Juan O. Nolasco III, Estate of Faustina M. Onrubia and Philippine Merchant Marine School, Inc., filed on 24 December 1997.13 Rollo, p. 241.14 Id. at 355-358.15 Id. at 383-385.16 Id. at 387.17 Manila Electric Company v. Philippine Consumers Foundation, Inc., 425 Phil. 65, 78 (2002), citing 46 Am Jur. §514.18 Republic v. Court of Appeals, 381 Phil. 558, 564 (2000).19 Cruz v. Court of Appeals, 388 Phil. 550, 556 (2000).20 Cagayan de Oro Coliseum Inc. v. Court of Appeals, 378 Phil. 498, 520 (1999).21 Supra note 19 at 559.22 Id. at 557.23 Rollo, pp. 355-364.24 Id. at 357.25 Id. at 35.26 Id. at 130.27 Government of the Philippine Islands v. Manila Railroad Co., 52 Phil. 699, 763-764 (1929).28 The corresponding provision in B.P. Blg. 68, otherwise known as "The Corporation Code of the Philippines," reads:

Sec. 14. Contents of articles of incorporation.—All corporations organized under this Code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law:. . . 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the shares are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; . . . .

29 Rollo, pp. 37- 43.30 Id. at 40. Attached to the articles of incorporation was the Treasurer’s Affidavit, which stated the shares actually subscribed and the amount actually paid, and that at least 20 percent of the entire capital stock has been subscribed and 25 percent thereof had been actually paid.31 Sec. 74, B.P. Blg. 68.32 Hector S. De Leon, the Corporation Code of the Philippines Annotated, 1999 Edition, p. 606. citing SEC Opinion, 19 February 1975, citing 5 Fletcher, p. 509.33 18A Am Jur 2d §338.34 Bitong v. Court of Appeals, 354 Phil. 516, 536 (1998).35 5 Fletcher Cyc. Corp. §2202, p. 661.36 18A Am Jur 2d §338.37 Under Sec. 31 of the old Code, quorum for the election of directors was described as the majority of the subscribed capital stock entitled to vote.38 Rollo, pp. 94-100.39 Id. at 98. 40 18A Am Jur 2d §1032, p. 871.41 18A Am Jur 2d §738, p. 607.42 Krosnar v. Schmidt Krosnar McNaughton Garett Co., 282 Pa Super 526, 423 A2d 370, cited in 18 A Am Jur 2d §738, p. 608.43 18A Am Jur 2d §738, p. 608.

44 Rollo, pp. 109-110.45 Id. at 92.

G.R. No. L-26649 July 13, 1927

THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-General), plaintiff,

vs.

EL HOGAR FILIPINO, defendant.

Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff

Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and Antonio Sanz for defendant.

Street, J.:

This is a quo warranto proceeding instituted originally in this court by the Government of the Philippine Islands on the relation of the Attorney-General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise, excluding it from all corporate rights and privileges, and effecting a final dissolution of said corporation. The complaint enumerates seventeen distinct causes of action, to all of which the defendant has answered upon the merits, first admitting the averments of the first paragraph in the statement of the first cause of action, wherein it is alleged that the defendant was organized in the year 1911 as a building and loan association under the laws of the Philippine Islands, and that, since its organization, the corporation has been doing business in the Philippine Islands, with its principal office in the City of Manila. Other facts alleged in the various causes of action in the complaint are either denied in the answer or controverted in legal effect by other facts.

After issue had been thus joined upon the merits, the attorneys entered into an elaborate agreement as to the fact, thereby removing from the field of dispute such matters of fact as are necessary to the solution of the controversy. It follows that we are here confronted only with the legal questions arising upon the agreed statement.

On March 1, 1906, the Philippine Commission enacted what is known as the Corporation Law (Act No. 1459) effective upon April 1 of the same year. Section 171 to 190, inclusive, of this Act are devoted to the subject of building and loan associations, defining their objects making various provisions governing their organization and administration, and providing for the supervision to be exercised over them. These provisions appear to be adopted from American statutes governing building and loan associations and they of course reflect the ideals and principles found in American law relative to such associations. The respondent, El Hogar Filipino, was apparently the first corporation organized in the Philippine Islands under the provisions cited, and the association has been favored with extraordinary success. The articles of incorporation bear the date of December 28, 1910, at which time capital stock in the association had been subscribed to the amount of P150,000 of which the sum of P10,620 had been paid in. Under the law as it then stood, the capital of the Association was not permitted to exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount of ten millions. Soon thereafter the association took advantage of this enactment by amending its articles so as to provide that the capital should be in an amount not exceeding the then lawful limit. From the time of its first organization the number of shareholders has constantly increased, with the result that on December 31, 1925, the association had 5,826 shareholders

holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period of its existence prior to the date last above-mentioned the association paid to withdrawing stockholders the amount of P7,618,257,.72; and in the same period it distributed in the form of dividends among its stockholders the sum of P7,621,565.81.

First cause of action. — The first cause of action is based upon the alleged illegal holding by the respondent of the title to real property for a period in excess of five years after the property had been bought in by the respondent at one of its own foreclosure sales. The provision of law relevant to the matter is found in section 75 of Act of Congress of July 1, 1902 (repeated in subsection 5 of section 13 of the Corporation Law.) In both of these provisions it is in substance declared that while corporations may loan funds upon real estate security and purchase real estate when necessary for the collection of loans, they shall dispose of real estate so obtained within five years after receiving the title.

In this connection it appears that in the year 1920 El Hogar Filipino was the holder of a recorded mortgage upon a tract of land in the municipality of San Clemente, Province of Tarlac, as security for a loan of P24,000 to the shareholders of El Hogar Filipino who were the owners of said property. The borrowers having defaulted in their payments, El Hogar Filipino foreclosed the mortgage and purchased the land at the foreclosure sale for the net amount of the indebtedness, namely, the sum of P23,744.18. The auction sale of the mortgaged property took place November 18, 1920, and the deed conveying the property to El Hogar Filipino was executed and delivered December 22, 1920. On December 27, 1920, the deed conveying the property to El Hogar Filipino was sent to the register of deeds of the Province of Tarlac, with the request that the certificate of title then standing in the name of the former owners be cancelled and that a new certificate of title be issued in the name of El Hogar Filipino. Said deed was received in the office of the register of deeds of Tarlac on December 28, 1920, together with the old certificate of title, and thereupon the register made upon the said deed the following annotation:

The foregoing document was received in this office at 4.10 p. m., December 28, 1920, according to entry 1898, page 50 of Book One of the Day Book and registered on the back of certificate of title No. 2211 and its duplicate, folio 193 of Book A-10 of the register of original certificate. Tarlac, Tarlac, January 12, 1921. (Sgd.) SILVINO LOPEZ DE JESUS, Register of Deeds.

For months no reply was received by El Hogar Filipino from the register of deeds of Tarlac, and letters were written to him by El Hogar Filipino on the subject in March and April, 1921, requesting action. No answer having been received to these letters, a complaint was made by El Hogar Filipino to the Chief of the General Land Registration Office; and on May 7, 1921, the certificate of title to the San Clemente land was received by El Hogar Filipino from the register of deeds of Tarlac sROl.

On March 10, 1921, the board of directors of El Hogar Filipino adopted a resolution authorizing Vicente Bengzon, an agent of the corporation, to endeavor to find a buyer for the San Clemente land. On July 27, 1921, El Hogar Filipino authorized one Jose Laguardia to endeavor to find a purchaser for the San Clemente land for the sum of P23,000 undertaking to pay the said Laguardia a commission of 5 per centum of the selling price for his services, but no offers to purchase were obtained through this agent or through the agent Bengzon. In July, 1923, plans of the San Clemente land were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi, as prospective purchasers, but no offers were received from them.

In January, 1926, the agent not having succeeded in finding a buyer, the San Clemente land was advertised for sale by El Hogar Filipino in El Debate, La Vanguardia and Taliba, three newspapers of general circulation in the Philippine Islands published in the City of Manila. On March 16, 1926, the first offer for the purchase of the San Clemente land was received by El Hogar Filipino. This offer was made to it in writing by one Alcantara, who offered to buy it for the sum of P4,000, Philippine currency, payable P500 in cash, and the remainder within thirty days. Alcantara's offer having been reported by the manager of El Hogar Filipino to its board of directors, it was decided, by a resolution adopted at a meeting of the board held on March 25, 1926, to accept the offer, and this acceptance was communicated to the prospective buyer. Alcantara was given successive extensions of the time, the last of which expired April 30, 1926, within which to make the payment agreed upon; and upon his failure to do so El Hogar Filipino treated the contract with him as rescinded, and efforts were made at once to find another buyer. Finally the land was sold to Doña Felipa Alberto for P6,000 by a public instrument executed before a notary public at Manila, P. I., on July 30, 1926.

Upon consideration of the facts above set forth it is evident that the strict letter of the law was violated by the respondent; but it is equally obvious that its conduct has not been characterized by obduracy or pertinacity in contempt of the law. Moreover, several facts connected with the incident tend to mitigate the offense. The Attorney-General points out that the respondent acquired title on December 22, 1920, when the deed was executed and delivered, by which the property was conveyed to it as purchaser at its foreclosure sale, and this title remained in it until July 30, 1926, when the property was finally sold to Felipa Alberto. The interval between these two conveyances is thus more than five years; and it is contended that the five year period did not begin to run against the respondent until May 7, 1921, when the register of deeds of Tarlac delivered the new certificate of title to the respondent pursuant to the deed by which the property was acquired. As an equitable consideration affecting the case this contention, though not decisive, is in our opinion more than respectable. It has been held by this court that a purchaser of land registered under the Torrens system cannot acquire the status of an innocent purchaser for value unless his vendor is able to place in his hands an owner's duplicate showing the title of such land to be in the vendor (Director of Lands vs. Addison, 49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to May 7, 1921, El Hogar Filipino was not really in a position to pass an indefeasible title to any purchaser. In this connection it will be noted that section 75 of the Act of Congress of July 1, 1902, and the similar provision in section 13 of the Corporation Law, allow the corporation "five years after receiving the title," within which to dispose of the property. A fair interpretation of these provisions would seem to indicate that the date of the receiving of the title in this case was the date when the respondent received the owner's certificate, or May 7, 1921, for it was only after that date that the respondent had an unequivocal and unquestionable power to pass a complete title. The failure of the respondent to receive the certificate sooner was not due in any wise to its fault, but to unexplained delay on the part of the register of deeds. For this delay the respondent cannot be held accountable EpXyjG.

Again, it is urged for the respondent that the period between March 25, 1926, and April 30, 1926, should not be counted as part of the five-year period. This was the period during which the respondent was under obligation to sell the property to Alcantara, prior to the rescission of the contract by reason of Alcantara's failure to make the stipulated first

payment. Upon this point the contention of the respondent is, in our opinion, well founded. The acceptance by it of Alcantara's offer obligated the respondent to Alcantara; and if it had not been for the default of Alcantara, the effective sale of the property would have resulted. The respondent was not at all chargeable with the collapse of these negotiations; and hence in any equitable application of the law this period should be deducted from the five-year period within which the respondent ought to have made the sale. Another circumstance explanatory of the respondent's delay in selling the property is found in the fact that it purchased the property for the full amount of the indebtedness due to it from the former owner, which was nearly P24,000. It was subsequently found that the property was not salable for anything like that amount and in the end it had to be sold for P6,000, notwithstanding energetic efforts on the part of the respondent to find a purchaser upon better terms.

The question then arises whether the failure of the respondent to get rid of the San Clemente property within five years after it first acquired the deed thereto, even supposing the five-year period to be properly counted from that date, is such a violation of law as should work a forfeiture of its franchise and require a judgment to be entered for its dissolution in this action of quo warranto. Upon this point we do not hesitate to say that in our opinion the corporation has not been shown to have offended against the law in a manner that should entail a forfeiture of its charter. Certainly no court with any discretion to use in the matter would visit upon the respondent and its thousands of shareholders the extreme penalty of the law as a consequence of the delinquency here shown to have been committed.

The law applicable to the case is in our opinion found in section 212 of the Code of Civil Procedure, as applied by this court in Government of the Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15). This section (212), in prescribing the judgment to be rendered against a corporation in an action of quo warranto, among other things says:

. . . When it is found and adjudged that a corporation has offended in any matter or manner which does not by law work as a surrender or forfeiture, or has misused a franchise or exercised a power not conferred by law, but not of such a character as to work a surrender or forfeiture of its franchise, judgment shall be rendered that it be outset from the continuance of such offense or the exercise of such power w1sQ8.

This provision clearly shows that the court has a discretion with respect to the infliction of capital punishment upon corporation and that there are certain misdemeanors and misuses of franchises which should not be recognized as requiring their dissolution. In Government of the Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15), it was found that the offending corporation had been largely (though indirectly) engaged in the buying and holding or real property for speculative purposes in contravention of its charter and contrary to the express provisions of law. Moreover, in that case the offending corporation was found to be still interested in the properties so purchased for speculative at the time the action was brought. Nevertheless, instead of making an absolute and unconditional order for the dissolution of the corporation, the judgment of ouster was made conditional upon the failure of the corporation to discontinue its unlawful conduct within six months after final decision. In the case before us the respondent appears to have rid itself of the San Clemente property many months prior to the institution of this action. It is evident from this that the dissolution of the respondent would not be an appropriate remedy in this case. We do not of course undertake

to say that a corporation might not be dissolved for offenses of this nature perpetrated in the past, especially if its conduct had exhibited a willful obduracy and contempt of law. We content ourselves with holding that upon the facts here before us the penalty of dissolution would be excessively severe and fraught with consequences altogether disproportionate to the offense committed.

The evident purpose behind the law restricting the rights of corporations with respect to the tenure of land was to prevent the revival of the entail (mayorazgo) or other similar institution by which land could be fettered and its alienation hampered over long periods of time. In the case before us the respondent corporation has in good faith disposed of the piece of property which appears to have been in its hands at the expiration of the period fixed by law, and a fair explanation is given of its failure to dispose of it sooner. Under these circumstances the destruction of the corporation would bring irreparable loss upon the thousand of innocent shareholders of the corporation without any corresponding benefit to the public. The discretion permitted to this court in the application of the remedy of quo warranto forbids so radical a use of the remedy.

But the case for the plaintiff supposes that the discretion of this court in matters like that now before us has been expressly taken away by the third section of Act No. 2792, and that the dissolution of the corporation is obligatory upon the court a mere finding that the respondent has violated the provision of the Corporation Law in any respect. This makes necessary to examine the Act last above-mentioned with some care. Upon referring thereto, we find that it consists of three sections under the following style:

No. 2792. — An Act to amend certain sections of the Corporation Law, Act Numbered Fourteen hundred and fifty-nine, providing for the publication of the assets and liabilities of corporations registering in the Bureau of Commerce and Industry, determining the liability of the officers of corporations with regard to the issuance of stock or bonus, establishing penalties for certain things, and for other purposes.

The first two section contain amendments to the Corporation Law with respect to matters with which we are not here concurred. The third section contains anew enactment to be inserted as section 190 (A) in the corporation Law immediately following section 190. This new section 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 one thousand pesos, or by imprisonment for not more than five years, or both, in the discretion of the court. If the 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: Provided, That nothing in this section provided shall be construed to repeal the other causes for the dissolution of corporation prescribed by existing law, and the remedy provided for in this section shall be considered as additional to the remedies already existing.

The contention for the plaintiff is to the effect that the second sentence in this enactment has entirely abrogated the discretion of this court with respect to the application of the remedy of qou warranto, as expressed in section 212 of the Code of Civil Procedure, and that it is now mandatory upon us to dissolved any corporation whenever we find that it has committed any violation of the Corporation Law, however trivial. In our opinion in this radical view of the meaning of the enactment is untenable. When the statute says, "If the violation is committed by a corporation, the

same shall, upon such violation being proved, be dissolved by quo warranto proceedings . . .," the intention was to indicate that the remedy against the corporation shall be by action of quo warranto. There was no intention to define the principles governing said remedy, and it must be understood that in applying the remedy the court is still controlled by the principles established in immemorial jurisprudence. The interpretation placed upon this language in the brief of the Attorney-General would be dangerous in the extreme, since it would actually place the life of all corporate investments in the official. No corporate enterprise of any moment can be conducted perpetually without some trivial misdemeanor against corporate law being committed by someone or other of its numerous employees. As illustrations of the preposterous effects of the provision, in the sense contended for by the Attorney-General, the attorneys for the respondent have called attention to the fact that under section 52 of the Corporation Law, a business corporation is required to keep a stock book and a transfer book in which the names of stockholders shall kept in alphabetical order. Again, under section 94, railroad corporations are required to cause all employees working on passenger trains or at a station for passengers to wear a badge on his cap or hat which will indicate his office. Can it be supposed that the Legislature intended to penalize the violation of such provisions as these by dissolution of the corporation involved? Evidently such could not have been the intention; and the only way to avoid the consequence suggested is to hold, as we now hold, that the provision now under consideration has not impaired the discretion of this court in applying the writ of quo warranto.

Another way to put the same conclusion is to say that the expression "shall be dissolved by quo warranto proceedings" means in effect, "may be dissolved by quo warranto proceedings in the discretion of the court." The proposition that the word "shall" may be construed as "may", when addressed by the Legislature to the courts, is well supported in jurisprudence. In the case of Becker vs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the Supreme Court of Pennsylvania had under consideration a statute providing as follows:

It shall be the duty of the court . . . to examine, inquire and ascertain whether such corporation does in fact posses the right or franchise to do the act from which such alleged injury to private rights or to the rights and franchises of other corporations results; and if such rights or franchises have not been conferred upon such corporations, such courts, it exercising equitable power, shall, by injunction, at suit of the private parties or other corporations, restrain such injurious acts.

In an action based on this statute the plaintiff claimed injunctive relief as a matter of right. But this was denied the court saying:

Notwithstanding, therefore, the use of the imperative "shall" the injunction is not to be granted unless a proper case for injunction be made out, in accordance with the principles and practice of equity. The word "shall" when used by the legislature to a court, is usually a grant of authority and means "may", and even if it be intended to be mandatory it must be subject to the necessary limitation that a proper case has been made out for the exercise of the power.

Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y. Supp., 129, 133; West Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71; Clancy vs. McElroy, 30 Wash., 567; 70 Pac., 1095; State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570, 572; 16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1 Sothard], 387, 394;

Whipple vs. Eddy, 161 Ill., 114;43 N. E., 789, 790; Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505, 506; Beasley vs. People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).

But section 3 of Act No. 2792 is challenged by the respondent on the ground that the subject-matter of this section is not expressed in the title of the Act, with the result that the section is invalid. This criticism is in our opinion well founded. Section 3 of our organic law (Jones Bill) declares, among other things, that "No bill which may be enacted into law shall embrace more than one subject, and that subject shall be expressed in the title of the bill." Any law or part of a law passed by the Philippine Legislature since this provision went into effect and offending against its requirement is necessarily void UkSC.

Upon examining the entire Act (No. 2792), we find that it is directed to three ends which are successively dealt with in the first three sections of the Act. But it will be noted that these three matters all relate to the Corporation Law; and it is at once apparent that they might properly have been embodied in a single Act if a title of sufficient unity and generality had been prefixed thereto. Furthermore, it is obvious, even upon casual inspection, that the subject-matter of each of the first two sections is expressed and defined with sufficient precision in the title. With respect to the subject-matter of section 3 the only words in the title which can be taken to refer to the subject-matter of said section are these, "An Act . . . establishing penalties for certain things, and for other purposes." These words undoubtedly have sufficient generality to cover the subject-matter of section 3 of the Act. But this is not enough. The Jones Law requires that the subject-matter of the bill "shall be expressed in the title of the bill."

When reference is had to the expression "establishing penalties for certain things," it is obvious that these words express nothing. The constitutional provision was undoubtedly adopted in order that the public might be informed as to what the Legislature is about while bills are in process of passage. The expression "establishing penalties for certain things" would give no definite information to anybody as to the project of legislation intended under this expression. An examination of the decided cases shows that courts have always been indulgent of the practices of the Legislature with respect to the form and generality of title, for if extreme refinements were indulged by the courts, the work of legislation would be unnecessarily hampered. But, as has been observed by the California court, there must be some reasonable limit to the generality of titles that will be allowed. The measure of legality is whether the title is sufficient to give notice of the general subject of the proposed legislation to the persons and interests likely to be affected.

In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled "An Act to revise the Code of Civil Procedure of the State of California, by amending certain sections, repealing others, and adding certain new sections." This title was held to embrace more than one subject, which were not sufficiently expressed in the title. In discussing the question the court said:

* * * It is apparent that the language of the title of the act in question, in and of itself, express no subject whatever. No one could tell from the title alone what subject of legislation was dealt with in the body of the act; such subject so far as the title of the act informs us, might have been entirely different from anything to be found in the act itself.

We cannot agree with the contention of some of respondent's counsel — apparently to some extent countenanced by a few authorities — that the

provision of the constitution in question can be entirely avoided by the simple device of putting into the title of an act words which denote a subject "broad" enough to cover everything. Under that view, the title, "An act concerning the laws of the state," would be good, and the convention and people who framed and adopted the constitution would be convicted of the folly of elaborately constructing a grave constitutional limitation of legislative power upon a most important subject, which the legislature could at once circumvent by a mere verbal trick. The word "subject" is used in the constitution embrace but "one subject" it necessarily implies — what everybody knows — that there are numerous subjects of the legislation, and declares that only one of these subjects shall embraced in any one act. All subjects cannot be conjured into one subject by the mere magic of a word in a title.

In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court of New Jersey made the following observation:

* * * It is true, that it may be difficult to indicate, by a formula, how specialized the title of a statute must be; but it is not difficult to conclude that it must mean something in the way of being a notice of what is doing. Unless it does not enough that it embraces the legislative purpose — it must express it; and where the language is too general, it will accomplish the former, but not the latter. Thus, a law entitled "An act for a certain purpose," would embrace any subject, but would express none, and, consequently, it would not stand the constitutional test.

The doctrine properly applicable in matters of this kind is, we think, fairly summed up in a current repository of jurisprudence in the following language:

* * * While it may be difficult to formulate a rule by which to determine the extent to which the title of a bill must specialize its object, it may be safely assumed that the title must not only embrace the subject of proposed legislation, but also express it clearly and fully enough to give notice of the legislative purpose. (25 R. C. L., p. 853.)

In dealing with the problem now before us the words "and for other purposes "found at the end of the caption of Act No. 2792, must be laid completely out of consideration. They express nothing, and amount to nothing as a compliance with the constitutional requirement to which attention has been directed. This expression "(for other purposes") is frequently found in the title of acts adopted by the Philippine Legislature; and its presence in our laws is due to the adoption by our Legislature of the style used in Congression allegation. But it must be remembered that the legislation of Congress is subject to no constitutional restriction with respect to the title of bills. Consequently, in Congressional legislation the words "and for other purposes" at least serve the purpose of admonishing the public that the bill whose heading contains these words contains legislation upon other subjects than that expressed in the title. Now, so long as the Philippine Legislature was subject to no restriction with respect to the title of bills intended for enactment into general laws, the expression "for other purposes" could be appropriately used in titles, not precisely for the purpose of conveying information as to the matter legislated upon, but for the purpose ad admonishing the public that any bill containing such words in the title might contain other subjects than that expressed in the definitive part of the title. But, when congress adopted the Jones Law, the restriction with which we are now dealing became effective here and the words "for other purposes" could no longer be appropriately used in the title of legislative bills. Nevertheless, the custom of using these words has

still been followed, although they can no longer serve to cover matter not germane to the bill in the title of which they are used. But the futility of adding these words to the style of any act is now obvious (Cooley, Const. Lims., 8th ed., p. 302)

In the brief for the plaintiff it is intimated that the constitutional restriction which we have been discussing is more or less of a dead letter in this jurisdiction; and it seems to be taken for granted that no court would ever presume to hold a legislative act or part of a legislative act invalid for non-compliance with the requirement. This is a mistake; and no utterance of this court can be cited as giving currency to any such notion. On the contrary the discussion contained in Central Capiz vs. Ramirez (40 Phil., 883), shows that when a case arises where a violation of the restriction is apparent, the court has no alternative but to declare the legislation affected thereby to be invalid.

Second cause of action. — The second cause of action is based upon a charge that the respondent is owning and holding a business lot, with the structure thereon, in the financial district of the City of Manila is excess of its reasonable requirements and in contravention of subsection 5 of section 13 of the corporation Law. The facts on which this charge is based appear to be these:

On August 28, 1913, the respondent purchased 1,413 square meters of land at the corner of Juan Luna Street and the Muelle de la Industria, in the City of Manila, immediately adjacent to the building then occupied by the Hongkong and Shanghai Banking Corporation. At the time the respondent acquired this lot there stood upon it a building, then nearly fifty years old, which was occupied in part by the offices of an importing firm and in part by warehouses of the same firm. The material used in the construction was Guadalupe stone and hewn timber, and the building contained none of the facilities usually found in a modern office building.

In purchase of a design which had been formed prior to the purchase of the property, the directors of the El Hogar Filipino caused the old building to be demolished; and they erected thereon a modern reinforced concrete office building. As at first constructed the new building was three stories high in the main, but in 1920, in order to obtain greater advantage from the use of the land, an additional story was added to the building, making a structure of four stories except in one corner where an additional story was place, making it five stories high over an area of 117.52 square meters. It is admitted in the plaintiffs brief that this "noble and imposing structure" — to use the words of the Attorney-General — "has greatly improved the aspect of the banking and commercial district of Manila and has greatly contributed to the movement and campaign for the Manila Beautiful." It is also admitted that the competed building is reasonably proportionate in value and revenue producing capacity to the value of the land upon which it stands. The total outlay of the respondent for the land and the improvements thereon was P690,000 and at this valuation the property is carried on the books of the company, while the assessed valuation of the land and improvements is at P786,478.

Since the new building was completed the respondent has used about 324 square meters of floor space for its own offices and has rented the remainder of the office space in said building, consisting of about 3,175 square meters, to other persons and entities. In the second cause of action of the complaint it is supposed that the acquisition of this lot, the construction of the new office building thereon, and the subsequent renting of the same in great part to third persons, are ultra vires acts on the part of

the corporation, and that the proper penalty to be enforced against it in this action is that if dissolution.

With this contention we are unable to agree. Under subsection 5 of section 13 of the Corporation Law, every corporation has the power to purchase, hold and lease such real property as the transaction of the lawful business of the corporation may reasonably and necessarily require. When this property was acquired in 1916, the business of El Hogar Filipino had developed to such an extent, and its prospects for the future were such as to justify its directors in acquiring a lot in the financial district of the City of Manila and in constructing thereon a suitable building as the site of its offices; and it cannot be fairly said that the area of the lot — 1,413 square meters — was in excess of its reasonable requirements. The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created; and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was acquired. A different ruling on this point would compel important enterprises to conduct their business exclusively in leased offices — a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society.

We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered which would deny to one owner the right to enjoy his (or its) property to the same extent that is conceded to any other owner; and an intention to discriminate between owners in this respect is not lightly to be imputed to the Legislature. The point here involved has been the subject of consideration in many decisions of American courts under statutes even more restrictive than that which prevails in this jurisdiction; and the conclusion has uniformly been that a corporations whose business may properly be conducted in a populous center may acquire an appropriate lot and construct thereon an edifice with facilities in excess of its own immediate requirements.

Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366), it appeared that the respondent corporation owned and controlled a large ten-story business block in the City of Chicago, worth $2,000,000, and that it occupied only about one-fourth thereof for its own purposes, leasing the remainder to others at heavy rentals. The corporate charter merely permitted the holding of such real estate by the respondent as might be necessary for the successful prosecution of its business. An attempt was made to obtain the dissolution of the corporation in a quo warranto proceeding similar to that now before us, but the remedy was denied.

In Rector vs. Hartford Deposit Co., a question was raised as to the power of the Deposit Company to erect and own a fourteen-story building — containing eight storerooms, one hundred suites of offices, and one safety deposit vault, under a statute authorizing the corporation to possess so much real estate "as shall be necessary for the transaction of their business." The court said:

That the appellee company possessed ample power to acquire real property and construct a building thereon for the purpose of transacting therein the legitimate business of the corporation is beyond the range of debate. Nor is the contrary contended, but the insistence is that, under the guise of erecting a building for corporate purposes, the appellee company purposely constructed a much larger building than its business required,

containing many rooms intended to be rented to others for offices and business purposes, — among them, the basement rooms contracted to be leased to the appellant, — and that in so doing it designedly exceeded its corporate powers. The position off appellant therefore is that the appellee corporation has flagrantly abused its general power to acquire real estate and construct a building thereon . . . It was within the general scope of the express powers of the appellee corporation to own and possess a building necessary for its proper corporate purposes. In planning and constructing such a building, as was said in People vs. Pullman's Palace Car Co., supra, the corporation should not necessarily be restricted to a building containing the precise number of rooms its then business might require, and no more, but that the future probable growth and volume of its business might be considered and anticipated, and a larger building, and one containing more rooms than the present volume of business required be erected, and the rooms not needed might be rented by the corporation, — provided, of course, such course should be taken in good faith, and not as a mere evasion of the public law and the policy of the state relative to the ownership of real estate by corporations. In such state of case the question is whether the corporation has abused or excessively and unjustifiably used the power and authority granted it by the state to construct buildings and own real estate necessary for its corporate purposes EyJSn.

In Home savings building Association vs. Driver (129 Ky., 754), one of the questions before the court was precisely the same as that now before us. Upon this the Supreme Court of Kentucky said:

The third question is, has the association the right to erect, remodel, or own a building of more than sufficient capacity to accommodate its own business and to rent out the excess? There is nothing in the Constitution, charter of the association, or statutes placing any limitation upon the character of a building which a corporation may erect as a home in which to conduct its business. A corporation conducting a business of the character of that in which appellant is engaged naturally expects its business to grow and expand from time to time, and, in building a home it would be exercising but a short-sighted judgment if it did not make provision for the future by building a home large enough to take care of its expanding business, and hence, even if it should build a house larger and roomier than its present needs or interests require, it would be acting clearly with the exercise of its corporate right and power. The limitation which the statute imposes is that proper conduct of its business, but it does not attempt to place any restriction or limitation upon the right of the corporation or association as to the character of building it shall erect on said real estate; and, while the Constitution and the statutes provide that no corporation shall engage in any business other than that expressly authorized by its charter, we are of opinion that, in renting out the unoccupied and unused portions of the building so erected, the association could not be said to engaged in any other business than that authorized by its charter. The renting of the unused portions of the building is a mere incident in the conduct of its real business. We would not say that a building association might embark in the business of building houses and renting or leasing them, but there is quite a difference in building or renting a house in which to conduct its own business and leasing the unused portion thereof for the time being, or until such time as they may be needed by the association, and in building houses for the purpose of renting or leasing them. The one might properly be said to be the proper exercise of a power incident to the conduct of its legitimate business, whereas the other would be a clear violation of that provision of the statute which denies to any corporation the right to conduct any business other

than that authorized by its charter. To hold otherwise would be to charge most of the banking institutions, trust companies and other corporations, such as title guaranty companies, etc., doing with violating the law; for it is known that there are few of such institutions that do not, at times, rent out or lease the unneeded portions of the building occupied by them as homes. We do not think that in so doing they are violating any provisions of the law, but that the renting out of the unused or unoccupied portions of their buildings is but an incident in the conduct of their business.

In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741), a stockholder sought to enjoin the bank from building a six-story building owned by the bank in the commercial district of Hagerstown of which only the first story was to be used by the bank, the remaining stories to be rented out for offices and places of business, on the theory that such action was ultra vires and in violation of the provisions of the national banking act confining such corporations to the holding, only, of such real estate "as shall be necessary for its immediate accommodation in the transaction of its business."

The injunction was denied, the court adopting the opinion of the lower court in which the following was said:

'The other ground urged by the complainant is that the proposed action is violative of the restriction which permits a national bank to hold only such real estate as shall be necessary for its immediate accommodation in the transaction of its business, and that, therefore, the erection of a building which will contain offices not necessary for the business of the bank is not permitted by the law, although that method of improving the lot may be the most beneficial use that can be made of it. It is matter of common knowledge that the actual practice of national banks is to the contrary. Where ground is valuable, it may probably be truly said that the majority of national bank buildings are built with accommodations in excess of the needs of the bank for the purpose of lessening the bank's expense by renting out the unused portion. If that were not allowable, many smaller banks in cities would be driven to become tenants as the great cost of the lot would be prohibitive of using it exclusively for the banking accommodation of a single bank. As indicative of the interpretation of the law commonly received and acted upon, reference may be made to the reply of the Comptroller of the Currency to the injury by the bank in this case asking whether the law forbids the bank constructing such a building as was contemplated.

'The reply was follows: "Your letter of the 9th instant received, stating that the directors contemplate making improvements in the bank building and inquiring if there is anything in the national banking laws prohibiting the construction of a building which will contain floors for offices to be rented out by the bank as well as the banking room. Your attention is called to the case of Brown vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the court held that: 'If the land which a national bank purchases or leases for the accommodation of its business is very valuable it may exercise the same rights that belong to other landowners of improving it in a way that will yield the largest income, lessen its own rent, and render that part of its funds which are invested in realty most productive.'" This seems to be the common sense interpretation of the act of Congress and is the one which prevails.'

It would seem to be unnecessary to extend the opinion by lengthy citations upon the point under consideration, but Brown vs. Schleier (118 Fed., 981),

may be cited as being in harmony with the foregoing authorities. In dealing with the powers of a national bank the court, in this case, said:

When an occasion arises for an investment in real property for either of the purposes specified in the statute the national bank act permits banking associations to act as any prudent person would act in making an investment in real estate, and to exercise the same measure of judgment and discretion. The act ought not to be construed in such as way as to compel a national bank, when it acquires real property for a legitimate purpose, to deal with it otherwise than a prudent land owner would ordinarily deal with such property.

In the brief of the Attorney-General reliance is place almost entirely upon two Illinois cases, namely Africani Home Purchase and Loan Association vs. Carroll (267 Ill., 380), and First Methodist Episcopal Church of Chicago vs. Dixon (178 Ill., 260). In our opinion these cases are either distinguishable from that now before us, or they reflect a view of the law which is incorrect. At any rate the weight of judicial opinion is so overwhelmingly in favor of sustaining the validity of the acts alleged in the second cause of action to have been done by the respondent in excess of its powers that we refrain from commenting at any length upon said cases. The ground stated in the second cause of action is in our opinion without merit.

Third cause of action. — Under the third cause of action the respondent is charged with engaging in activities foreign to the purposes for which the corporation was created and not reasonable necessary to its legitimate ends. The specifications under this cause of action relate to three different sorts of activities. The first consist of the administration of the offices in the El Hogar building not used by the respondent itself and the renting of such offices to the public. As stated in the discussion connected with the second cause of action, the respondent uses only about ten per cent of the office space in the El Hogar building for its own purposes, and it leases the remainder to strangers. In the years 1924 and 1925 the respondent received as rent for the leased portions of the building the sums of P75,395.06 and P58,259.27, respectively. The activities here criticized clearly fall within the legitimate powers of the respondent, as shown in what we have said above relative to the second cause of action. This matter will therefore no longer detain us. If the respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided, the beneficial administration by it of such parts of the building as are let to others must necessarily be lawful.

The second specification under the third cause of action has reference to the administration and management of properties belonging to delinquent shareholders of the association. In this connection it appears that in case of delinquency on the part of its shareholders in the payment of interest, premium, and dues, the association has been accustomed (pursuant to clause 8 of its standard mortgage) to take over and manage the mortgaged property for the purpose of applying the income to the obligations of the debtor party. For these services the respondent charges a commission at the rate of 2½ per centum on sums collected. The case for the government supposes that the only remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in section 185 of the Corporation Law. It will be noted, however, that, according to said section, the association may treat the whole indebtedness as due, "at the option of the board of directors," and this remedy is not made exclusive. We see no reason to doubt the validity of the clause giving the association the right to take over the property which constitutes the security for the

delinquent debt and to manage it with a view to the satisfaction of the obligations due to the debtor than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be taken appears to us to be not open to doubt. The second specification under this cause of action is therefore without merit, as was true of the first.

The third specification under this cause of action relates to certain activities which are described in the following paragraphs contained in the agreed statements of facts:.

El Hogar Filipino has undertaken the management of some parcels of improved real estate situated in Manila not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so. The number of properties so managed during the years 1921 to 1925, inclusive, was as follows:

1921 eight properties

1922 six properties

1923 ten properties

1924 fourteen properties

1925 fourteen properties.

This service is limited to shareholders; but some of the persons whose properties are so managed for them became shareholders only to enable them to take advantage thereof.

The services rendered in the management of such improved real estate by El Hogar Filipino consist in the renting of the same, the payment of real estate taxes and insurance for the account of the owner, causing the necessary repairs for upkeep to be made, and collecting rents due from tenants. For the services so rendered in the management of such properties El Hogar Filipino receives compensation in the form of commissions upon the gross receipts from such properties at rates varying from two and one-half per centum to five per centum of the sums so collected, according to the location of the property and the effort involved in its management.

The work of managing real estate belonging to non-borrowing shareholders administered by El Hogar Filipino is carried on by the same members of the staff who attend to the details of the management of properties administered by the manager of El Hogar Filipino under the provisions of paragraph 8 of the standard mortgage form, and of properties bought in on foreclosure of mortgage.

The practice described in the passage above quoted from the agreed facts is in our opinion unauthorized by law. Such was the view taken by the bank examiner of the Treasury Bureau in his report to the Insular Treasurer on December 21, 1925, wherein the practice in question was criticized. The administration of property in the manner described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. The practice to which this criticism is directed relates of course solely to the management and administration of properties which are not mortgaged to the association. The circumstance that the owner of the property may have been required to subscribe to one or more shares of the association with a view to qualifying him to receive this service is of no significance. It is a general rule of law that corporations

possess only such express powers. The management and administration of the property of the shareholders of the corporation is not expressly authorized by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of any of the granted powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this sort.

Fourth cause of action. — It appears that among the by laws of the association there is an article (No. 10) which reads as follows:

The board of directors of the association, by the vote of an absolute majority of its members, is empowered to cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners of such shares is not desirable.

This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187 of the Corporation Law, which expressly declares that the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or of forfeiture of the stock for delinquency. It is agreed that this provision of the by-laws has never been enforced, and in fact no attempt has ever been made by the board of directors to make use of the power therein conferred. In November, 1923, the Acting Insular Treasurer addressed a letter to El Hogar Filipino, calling attention to article 10 of its by-laws and expressing the view that said article was invalid. It was therefore suggested that the article in question should be eliminated from the by-laws. At the next meeting of the board of directors the matter was called to their attention and it was resolved to recommend to the shareholders that in their next annual meeting the article in question be abrogated. It appears, however, that no annual meeting of the shareholders called since that date has been attended by a sufficient number of shareholders to constitute a quorum, with the result that the provision referred to has no been eliminated from the by-laws, and it still stands among the by-laws of the association, notwithstanding its patent conflict with the law.

It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of the association is a misdemeanor on the part of the respondent which justifies its dissolution. In this view we are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced even if the directors were to attempt to do so. There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws of a corporation; and if there were such, the hazards incident to corporate effort would certainly be largely increased. There is no merit in this cause of action.

Fifth cause of action. — In section 31 of the Corporation Law it is declared that, "at all elections of directors there must be present, either in person or by representative authorized to act by written proxy, the owners of the majority of the subscribed capital stock entitled to vote. . . ." Conformably with this requirement it is declared in article 61 of the by-laws of El Hogar Filipino that, "the attendance in person or by proxy of shareholders owning one-half plus one of the shareholders shall be necessary to constitute a quorum for the election of directors. At the general annual meetings of the El Hogar Filipino held in the years 1911 and 1912, there was a quorum of shares present or represented at the

meetings and directors were duly elected accordingly. As the corporation has grown, however, it has been fond increasingly difficult to get together a quorum of the shareholders, or their proxies, at the annual meetings; and with the exception of the annual meeting held in 1917, when a new directorate was elected, the meetings have failed for lack of quorum. It has been foreseen by the officials in charge of the respondent that this condition of affairs would lead to embarrassment, and a special effort was made by the management to induce a sufficient number of shareholders to attend the annual meeting for February, 1923. In addition to the publication of notices in the newspapers, as required by the by-laws, a letter of notification was sent to every shareholder at his last known address, together with a blank form of proxy to be used in the event the shareholder could not personally attend the meeting. Notwithstanding these special efforts the meeting was attended only by shareholders, in person and by proxy, representing 3,889 shares, out of a total of 106,491 then outstanding and entitled to vote.

Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it has been the practice of the directors to fill vacancies in the directorate by choosing suitable persons from among the stockholders. This custom finds its sanction in article 71 of the by-laws, which reads as follows:

ART. 71. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the board of directors until the election at the general meeting.

The person thus chosen to fill vacancies in the directorate have, it is admitted, uniformly been experienced and successful business and professional men of means, enjoying earned incomes of from P12,000 to P50,000 per annum, with an annual average of P30,000 in addition to such income as they derive from their properties. Moreover, it appears that several of the individuals constituting the original directorate and persons chosen to supply vacancies therein belong to prominent Filipino families, and that they are more or less related to each other by blood or marriage. In addition to this it appears that it has been the policy of the directorate to keep thereon some member or another of a single prominent American law firm in the city.

It is supposed in the statement of the fifth cause of action in the complaint that the failure of the corporation to hold annual meetings and the filling of vacancies in the directorate in the manner described constitute misdemeanors on the part of the respondent which justify the resumption of the franchise by the Government and dissolution of the corporation; and in this connection it is charge that the board of directors of the respondent has become a permanent and self perpetuating body composed of wealthy men instead of wage earners and persons of moderate means. We are unable to see the slightest merit in the charge. No fault can be imputed to the corporation on account of the failure of the shareholders to attend the annual meetings; and their non-attendance at such meetings is doubtless to be interpreted in part as expressing their satisfaction of the way in which things have been conducted. Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly provides that an office shall become vacant at the expiration of the term of office for which the officer was elected, the general rule is to allow the officer to holdover until his successor is duly qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation (Quitman Oil

Company vs. Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill Mining Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company, 180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R., 486). The doctrine above stated finds expressions in article 66 of the by-laws of the respondent which declares in so many words that directors shall hold office "for the term of one year on until their successors shall have been elected and taken possession of their offices."

It result that the practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can any exception be taken to then personality of the individuals chosen by the directors to fill vacancies in the body. Certainly it is no fair criticism to say that they have chosen competent businessmen of financial responsibility instead of electing poor persons to so responsible a position. The possession of means does not disqualify a man for filling positions of responsibility in corporate affairs.

Sixth cause of action. — Under the sixth cause of action it is alleged that the directors of El Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixed salary, — as the complaint supposes would be proper, — have been receiving large compensation, varying in amount from time to time, out of the profits of the respondent. The facts relating to this cause of action are in substance these:

Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the annual balance sheet is distributed to the directors in proportion to their attendance at meetings of the board. The compensation paid to the directors from time to time since the organization was organized in 1910 to the end of the year 1925, together with the number of meetings of the board held each year, is exhibited in the following table:

Year Compensation paid directors as a whole Number of meetings held Rate per meeting as a whole

1911..................................P 4,167.9625P 166.71

1912.................................. 10,511.8729 362.47

1913.................................. 15,479.2927 573.30

1914.................................. 19,164.7227 709.80

1915.................................. 24,032.8525 961.31

1916.................................. 27,539.5028 983.55

1917.................................. 31,327.0026 1,204.88

1918.................................. 32,858.3520 1,642.91

1919.................................. 36,318.7821 1,729.46

1920.................................. 63,517.0128 2,268.46

1921.................................. 36,815.3325 1,472.61

1922.................................. 43,133.7325 1,725.34

1923..................................39,773.6127 1,473.09

1924..................................38,651.9226 1,486.61

1925..................................35,719.2726 1,373.81

It will be note that the compensation above indicated as accruing to the directorate as a whole has been divided among the members actually present at the different meetings. As a result of this practice, and the liberal measure of compensation adopted, we find that the attendance of the membership at the board meetings has been extraordinarily good. Thus, during the years 1920 to 1925, inclusive, when the board was composed of nine members, the attendance has regularly been eight meeting with the exception of two years when the average attendance was seven. It is insisted in the brief for the Attorney-General that the payment of the compensation indicated is excessive and prejudicial to he interests of the shareholders at large. For the respondent, attention is directed to the fact that the liberal policy adopted by the association with respect to the compensation of the directors has had highly beneficial results, not only in securing a constant attendance on the part of the membership, but in obtaining their intelligent attention to the affairs of the association. Certainly, in this connection, the following words from the report of the government examiners for 1918 to the Insular Treasurer contain matter worthy of consideration:

The management of the association is entrusted to men of recognized ability in financial affairs and it is believed that they have long foreseen all possible future contingencies and that under such men the interests of the stockholders are duly protected. The steps taken by the directorate to curtail the influx of unnecessary capital into the association's coffers, as mentioned above, reveals how the men at grasp the situation and to apply the necessary remedy as the circumstances were found in the same excellent condition as in the previous examination.

In so far as this court is concerned the question here before us is not one concerning the propriety and wisdom of the measure of compensation adopted by the respondent but rather the question of the validity of the measure. Upon this point there can, it seems to us, be no difference of intelligent opinion. The Corporation Law does not undertake to prescribe the rate of compensation for the directors of corporations. The power to fixed the compensation they shall receive, if any, is left to the corporation, to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of its by-laws, as already stated. The justice and property of this provision was a proper matter for the shareholders when the by-laws were framed; and the circumstance that, with the growth of the corporation, the amount paid as compensation to the directors has increased beyond what would probably be necessary to secure adequate service from them is matter that cannot be corrected in this action; nor can it properly be made a basis for depriving the respondent of its franchise, or even for enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made, or the rule adopted in the by-laws meeting to change the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than in a court proceeding. The sixth cause of action is in our opinion without merit.

Seventh cause of action. — It appears that the promoter and organizer of El Hogar Filipino was Mr. Antonio Melian, and in the early stages of the organization of the association the board of directors authorized the association to make a contract with him with regard to the services him

therefor. Pursuant to this authority the president of the corporation, on January 11, 1911, entered into a written agreement with Mr. Melian, which is reproduced in the agreed statement of facts and of which the important clauses are these:

1. The corporation "El Hogar Filipino Sociedad Mutua de Construccion y Prestamos," and on its behalf its president, Don Antonio R. Roxas, hereby confers on Don Antonio Melian the office of manager of said association for the period of one year from the date of this contract.

2. Don Antonio Melian accepts said office and undertakes to render the services thereto corresponding for the period of one year, as prescribed by the by-laws of the corporation, without salary.

3. Don Antonio Melian furthermore undertakes to pay for his own account, all the expenses incurred in the organization of the corporation tzTZH3tPY.

4. Don Antonio Melian further undertakes to lend to the corporation, without interest the sum of six thousand pesos (P6,000), Philippine Currency, for the purpose of meeting the expense of rent, office supplies, etcetera, until such time as the association has sufficient funds of its own with which to return this loan: Provided, nevertheless, That the maximum period thereof shall not exceed three (3) years.

5. Don Antonio Melian undertakes that the capital of the association shall amount to the sum of four hundred thousand pesos (P400,000), Philippine currency, par value, during the first year of its duration.

6. In compensation of the studies made and services rendered by Don Antonio Melian for its organization, the expenses incurred by him to that end, and in further consideration of the said loan of six thousand pesos (P6,000), and of the services to be rendered by him as manager, and of the obligation assumed by him that the nominal value of the capital of the association shall reach the sum of four hundred thousand pesos (P400,000) during the first year of its duration, the corporation 'El Hogar Filipino Sociedad Mutua de Construccion y Prestamos' hereby grants him five per centum (5%) of the net profits to be earned by it in each year during the period fixed for the duration of the association by its articles of incorporation; Provided, that this participation in the profits shall be transmitted to the heirs of Señor Melian in the event of his death; And provided further, that the performance of all the obligations assumed by Señor Melian in favor of the association, in accordance with this contract, shall and does constitute a condition precedent to the acquisition by Señor Melian of the right to the said participation in the profits of the association, unless the non-performance of such obligations shall be due to a fortuitous event or force majeure.

In conformity with this agreement there was inserted in section 92 of the by-laws of the association a provision recognizing the rights of Melian, as founder, to 5 per centum of the net profits shown by the annual balance sheet, payment of the same to be made to him or his heirs during the life of the association. It is declared in said article that this portion of the earnings of the association is conceded to him in compensation for the studies, work and contributions made by him for the organization of El Hogar Filipino and the performance on his part of the contract of January 11, 1911, above quoted. During the whole life of the association, thus far, it has complied with the obligations assumed by it in the contract above- mentioned; and during the years 1911 to 1925, inclusive, it paid to him as founder's royalty the sum of P459,011.19, in addition to compensation received from the

association by him in to remuneration of services to the association in various official capacities.

As a seventh cause of action it is alleged in the complaint that this royalty of the founder is "unconscionable, excessive and out of all proportion to the services rendered, besides being contrary to and incompatible with the spirit and purpose of building and loan associations." It is not alleged that the making of this contract was beyond the powers of the association (ultra vires); nor it alleged that it is vitiated by fraud of any kind in its procurement. Nevertheless, it is pretended that in making and observing said contract the respondent committed an offense requiring its dissolution, or, as is otherwise suggested, that the association should be enjoined from performing the agreement rTixhe.

It is our opinion that this contention is entirely without merit. Stated in its true simplicity, the primary question here is whether the making of a (possibly) indiscreet contract is a capital offense in a corporation, — a question which answers itself. No possible doubt exists as to the power of a corporation to contract for services rendered and to be rendered by a promoter in connection with organizing and maintaining the corporation. It is true that contracts with promoters must be characterized by good faith; but could it be said with certainty, in the light of facts existing at the time this contract was made, that the compensation therein provided was excessive? If the amount of the compensation now appears to be a subject of legitimate criticism, this must be due to the extraordinary development of the association in recent years.

If the Melian contract had been clearly ultra vires — which is not charged and is certainly untrue — its continued performance might conceivably be enjoined in such a proceeding as this; but if the defect from which it suffers is mere matter for an action because Melian is not a party. It is rudimentary in law that an action to annul a contract cannot be maintained without joining both the contracting parties as defendants. Moreover, the proper party to bring such an action is either the corporation itself, or some shareholder who has an interest to protect.

The mere fact that the compensation paid under this contract is in excess of what, in the full light of history, may be considered appropriate is not a proper consideration for this court, and supplies no ground for interfering with its performance. In the case of El Hogar Filipino vs. Rafferty (37 Phil., 995), which was before this court nearly ten years ago, this court held that the El Hogar Filipino is contract with Mr. Melian did not affect the association's legal character. The inference is that the contract under consideration was then considered binding, and it occurred to no one that it was invalid. It would be a radical step indeed for a court to attempt to substitute its judgment for the judgment of the contracting parties and to hold, as we are invited to hold under this cause of action, that the making of such a contract as this removes the respondent association from the pale of the law. The majority of the court is of the opinion that our traditional respect for the sanctity of the contract obligation should prevail over the radical and innovating tendencies which find acceptance with some and which, if given full rein, would go far to sink legitimate enterprise in the Islands into the pit of populism and bolshevism. The seventh count is not sustainable.

Eight cause of action. — Under the fourth cause of action we had case where the alleged ground for the revocation of the respondent's charter was based upon the presence in the by-laws of article 10 that was found to be inconsistent with the express provisions of law. Under the eight cause of

action the alleged ground for putting an end to the corporate life of the respondent is found in the presence of other articles in the by-laws, namely, articles 70 and 76, which are alleged to be unlawful but which, as will presently be seen, are entirely valid. Article 70 of the by-laws in effect requires that persons elected to the board of directors must be holders of shares of the paid up value of P5,000 which shall be held as security may be put up in the behalf of any director by some other holder of shares in the amount stated. Article 76 of the by-laws declares that the directors waive their right as shareholders to receive loans from the association.

It is asserted, under the eight cause of action, that article 70 is objectionable in that, under the requirement for security, a poor member, or wage-earner, cannot serve as director, irrespective of other qualifications and that as a matter of fact only men of means actually sit on the board. Article 76 is criticized on the ground that the provision requiring directors to renounce their right to loans unreasonably limits their rights and privileges as members. There is nothing of value in either of theses suggestions. Section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors; and the requirement of security from them for the proper discharge of the duties of their office, in the manner prescribed in article 70, is highly prudent and in conformity with good practice. Article 76, prohibiting directors from making loans to themselves, is of course designed to prevent the possibility of the looting of the corporation by unscrupulous directors. A more discreet provision to insert in the by-laws of a building and loan association would be hard to imagine. Clearly, the eighth cause of action cannot be sustained.

Ninth cause of action. — The specification under this head is in effect that the respondent has abused its franchise in issuing "special" shares. The issuance of these shares is allege to be illegal and inconsistent with the plan and purposes of building and loan associations; and in particular, it is alleged and inconsistent with the plan and purposes of building and loan associations; and in particular, it is alleged that they are, in the main, held by well-to-wage-earners for accumulating their modest savings for the building of homes.In the articles of incorporation we find the special shares described as follows:

"Special" shares shall be issued upon the payment of 80 per cent of their par value in cash, or in monthly dues of P10. The 20 per cent remaining of the par value of such shares shall be completed by the accumulation thereto of their proportionate part of the profits of the corporation. At the end of each quarter the holders of special shares shall be entitled to receive in cash such part of the net profits of the corporation corresponding to the amount on such date paid in by the holders of special shares, on account thereof, as shall be determined by the directors, and at the end of each year the full amount of the net profits available for distribution corresponding to the special shares. The directors shall apply such part as they deem advisable to the amortization of the subscription to capital with respect to shares not fully paid up, and the remainder of the profits, if any, corresponding to such shares, shall be delivered to the holders thereof in accordance with the provision of the by-laws 835liojEF.

The ground for supposing the issuance of the "special" shares to be unlawful is that special shares are not mentioned in the Corporation Law as one of the forms of security which may be issued by the association. In the agreed statement of facts it is said that special shares are issued upon two plans. By the second, the shareholder, upon subscribing, pays in cash P10

for each share taken, and undertakes to pay P10 a month, as dues, until the total so paid in amounts to P160 per share. On December 31, 1925, there were outstanding 20,844 special shares of a total paid value (including accumulations ) of P3,680,162.51. The practice of El Hogar Filipino, since 1915, has been to accumulate to each special share, at the end of the year, one-tenth of the divident declared and to pay the remainder of the divident in cash to the holders of shares. Since the same year dividend have been declared on the special and common shares at the rate of 10 per centum per annum. When the amount paid in upon any special share plus the accumulated dividends accruing to it, amounts to the par value of the share (P200), such share matures and ceases to participate further in the earning. The amount of the par value of the share (P200) is then returned to the shareholder and the share cancelled. Holders of special and ordinary shares participate ratably in the dividends declared and distributed, the part pertaining to each share being computed on the basis of the capital paid in, plus the accumulated dividends pertaining to each share at the end of the year. The total number of shares of El Hogar Filipino outstanding on December 31, 1925, was 125,750, owned by 5,826 shareholders, and dividend into classes as follows:

Preferred shares..................................1,503Special shares.....................................20,884Ordinary shares..................................103,363

The matter of the propriety of the issuance of special shares by El Hogar Filipino has been before this court in two earlier cases, in both of which the question has received the fullest consideration from this court. In El Hogar Filipino vs. Rafferty (37 Phil., 995), it was insisted that the issuance of such shares constituted a departure on the part of the association from the principle of mutuality; and it was claimed by the Collector of Internal Revenue that this rendered the association liable for the income tax to which other corporate entities are subject. It was held that this contention was untenable and that El Hogar Filipino was a legitimate building and loan association notwithstanding the issuance of said shares. In Sevireno vs. El Hogar Filipino (G. R. No. 24926),2 and the related cases of Gervasio Miraflores and Gil Lopes against the same entity, it was asserted by the plaintiffs that the emission of special shares deprived the herein responded of the privileges and immunities of a building and loan association and that as a consequence the loans that had been made to the plaintiffs in those cases were usurious. Upon an elaborate review of the authorities, the court, though divided, adhered to the principle announced in the earlier case and held that the issuance of the special shares did not affect the respondent's character as a building and loan association nor make its loans usurious. In view of the lengthy discussion contained in the decisions above-mentioned, it would appear to be an act of supererogation on our part to go over the same ground again. The discussion will therefore not be repeated, and what is now to be said should be considered supplemental thereto WscxT.

Upon examination of the nature of the special shares in the light of American usage, it will be found that said shares are precisely the same kind of shares that, in some American jurisdictions, are generally known as advance payment shares; in if close attention be paid to the language used in the last sentence of section 178 of the Corporation Law, it will be found that special shares where evidently created for the purpose of meeting the condition cause by the prepayment of dues that is there permitted. The language of this provision is as follow "payment of dues or interest may be made in advance, but the corporation shall not allow interest on such advance payment at a greater rate than six per centum per annum nor for a longer period than one year." In one sort of special shares the dues are

prepaid to the extent of P160 per share; in the other sort prepayment is made in the amount of P10 per share, and the subscribers assume the obligation to pay P10 monthly until P160 shall have been paid.

It will escape notice that the provision quoted say that interest shall not be allowed on the advance payments at a greater rate than six per centum per annum nor for a longer period than one year. The word "interest " as there used must be taken in its true sense of compensation for the used of money loaned, and it not must not be confused with the dues upon which it is contemplated that the interest may be paid. Now, in the absence of any showing to the contrary, we infer that no interest is ever paid by the association in any amount for the advance payments made on these shares; and the reason is to be found in the fact that the participation of the special shares in the earnings of the corporation, in accordance with section 188 of the Corporation Law, sufficiently compensates the shareholder for the advance payments made by him; and no other incentive is necessary to induce inventors to purchase the stock.

It will be observed that the final 20 per centum of the par value of each special share is not paid for by the shareholder with funds out of the pocket. The amount is satisfied by applying a portion of the shareholder's participation in the annual earnings. But as the right of every shareholder to such participation in the earnings is undeniable, the portion thus annually applied is as much the property of the shareholder as if it were in fact taken out of his pocket. It follows that the mission of the special shares does not involve any violation of the principle that the shares must be sold at par.From what has been said it will be seen that there is express authority, even in the very letter of the law, for the emission of advance-payment or "special" shares, and the argument that these shares are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statute has not expressly authorized such shares, yet the association has implied authority to issue them. The complaint consequently fails also as regards the stated in the ninth cause of action.

Tenth cause of action. — Under this head of the complaint it is alleged that the defendant is pursuing a policy of depreciating, at the rate of 10 per centum per annum, the value of the real properties acquired by it at its sales; and it is alleged that this rate is excessive. From the agreed statement it appears that since its organization in 1910 El Hogar Filipino, prior to the end of the year 1925, had made 1,373 loans to its shareholders secured by first mortgages on real estate as well as by the pledge of the shares of the borrowers. In the same period the association has purchased at foreclosure sales the real estate constituting the security for 54 of the aforesaid loans. In making these purchases the association has always bid the full amount due to it from the debtor, after deducting the withdrawal value of the shares pledged as collateral, with the result that in no case has the shareholder been called upon to pay a deficiency judgement on foreclosure.

El Hogar Filipino places real estate so purchased in its inventory at actual cost, as determined by the amount bid on foreclosure sale; and thereafter until sold the book value of such real estate is depreciated at the rate fixed by the directors in accordance with their judgment as to each parcel, the annual average depreciation having varied from nothing to a maximum of 14.138 per cent. The sales thereof, but sales are made for the best prices obtainable, whether greater or less than the book value.

It is alleged in the complaint that depreciation is charged by the association at the rate of 10 per centum per annum. The agreed statement of facts on this point shows that the annual average varies from nothing to a maximum of something over 14 per centum. We are thus left in the dark as to the precise depreciation allowed from year to year. It is not claimed for the Government that the association is without power to allow some depreciation; and it is quite clear that the board of directors possesses a discretion in this matter. There is no positive provision of law prohibiting the association from writing off a reasonable amount for depreciation on its assets for the purpose of determining its real profits; and article 74 of its by-laws expressly authorizes the board of directors to determine each year the amount to be written down upon the expenses of installation and the property of the corporation. There can be no question that the power to adopt such a by-law is embraced within the power to make by-laws for the administration of the corporate affairs of the association and for the management of its business, as well as the care, control and disposition of its property (Act No. 1459, sec. 13 [7]). But the Attorney-General questions the exercise of the direction confided to the board; and it is insisted that the excessive depreciation of the property of the association is objectionable in several respects, but mainly because it tends to increase unduly the reserves of the association, thereby frustrating the right of the shareholders to participate annually and equally in the earnings of the association.

This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in determining the internal policy of a business corporation. If the criticism contained in the brief of the Attorney-General upon the practice of the respondent association with respect to depreciation be well founded, the Legislature should supply the remedy by defining the extent to which depreciation may be allowed by building and loan associations. Certainly this court cannot undertake to control the discretion of the board of directors of the association about an administrative matter as to which they have legitimate power of action. The tenth cause of action is therefore not well founded.

Eleventh and twelfth causes of action. — The same comment is appropriate with respect to the eleventh and twelfth causes of action, which are treated together in the briefs, and will be here combined. The specification in the eleventh cause of action is that the respondent maintains excessive reserve funds, and in the twelfth cause of action that the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 10 per centum, regardless of losses suffered and profits made by the corporation and in contravention of the requirements of section 188 of the Corporation Law. The facts relating to these two counts in the complaint, as set forth in the stipulation, are these:

In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per centum of the net profits earned each year, as shown by the annual balance sheet shall be carried to a reserve fund. The fund so created is called the General Reserve. Article 93 of the by-laws authorizes the directors to carry funds to a special reserve, whenever in their judgment it is advisable to do so, provided that the annual dividend in the year in which funds are carried to special reserve exceeds 8 per centum. It appears to have been the policy of the board of directors for several years past to place in the special reserve any balance in the profit and loss account after the satisfaction of preferential charges and the payment of a dividend of 10 per centum to all special and ordinary shares (with accumulated dividends). As things stood in 1926 the general reserve contained an amount equivalent to about 5 per centum of the paid-in value of shared. This fund

has never been drawn upon for the purpose of maintaining the regular annual dividend; but recourse has been had to the special reserve on three different occasions to make good the amount necessary to pay dividends. It appears that in the last five years the reserves have declined from something over 9 per cent to something over 7.

It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is unnecessary in the case of building and loan associations, and at any rate the keeping of reserves is inconsistent with section 188 of the Corporation Law. Moreover, it is said that the practice of the association in declaring regularly a 10 per cent dividend is in effect a guaranty by the association of a fixed dividend which is contrary to the intention of the statute Ed5jZS1.

Upon careful consideration of the questions involved we find no reason to doubt the right of the respondent to maintain these reserves. It is true that the corporation law does not expressly grant this power, but we think it is to be implied. It is a fact of common observation that all commercial enterprises encounter periods when earnings fall below the average, and the prudent manager makes provision for such contingencies. To regard all surplus as profit is to neglect one of the primary canons of good business practice. Building and loan associations, though among the most solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends, continued over long periods, supplies the surest foundations of public confidence.

The question now under consideration is not new in jurisprudence, for the American courts have been called upon more than once to consider the legality of the maintenance of reserves by institutions of this or similar character.

In Greeff vs. Equitable Life Assurance Society, the court had under consideration a charter provision of a life insurance company, organized on the mutual plan, in its relation to the power of the company to provide reserves. There the statute provided that "the officers of the company, within sixty days from the expiration of the first five years, from December 31, 1859, and within the first sixty days of every subsequent period of five years, shall cause a balance to be struck of the affairs of the company, which shall exhibit its assets and liabilities, both present and contingent, and also the net surplus, after deducting a sufficient amount to cover all outstanding risks and other obligations. Each policy holder shall be credited with an equitable share of the said surplus."

The court said:

No prudent person would be inclined to take a policy in a company which had so improvidently conducted its affairs that it only retained a fund barely sufficient to pay its present liabilities, and, therefore, was in a condition where any change by the reduction of interest upon, or depreciation in, the value of its securities, or any increase of mortality, would render it insolvent and subject to be placed in the hands of a receiver. The evident purpose of the provisions of the defendant's charter and policy relating to this subject was to vest in the directors of the corporation a discretion to determine the proportion of its surplus which should be dividend each year MLT9SgLze.

In a friendly suit tried in a circuit court of Wisconsin in 1916, entitled Boheman Bldg. and Loan Association vs. Knolt, the court, in commenting on the nature of these reserves, said:

The apparent function of this fund is to insure the stockholders against losses. Its purpose is not unlike that of the various forms of insurance now in such common use. This contribution is as legitimate an item of expense as are the premiums paid on any insurance policy. (See Clarks and Chase, Building and Loan Association, footnote, page 344.)

In commenting on the necessity of such funds, Sundheim says:

It is optional with the association whether to maintain such a fund or not, but justice and good business policy seem to require it. The retiring stockholder must be paid the value of his stock in cash and leave for those remaining a large number of securities and perhaps some real estate purchased to protect the associations interest. How much will be realized on these securities, or real estate, no human foresight can tell. Further, the realizing on these securities may entail considerable litigation and expense. There are many other contingencies which might cause a shrinkage in the association's assets, such as defective titles, undisclosed defalcations on the part of an officer, a miscalculation of assets and liabilities, and many other errors and omissions which must always be reckoned within the conduct of human affairs.

The contingent fund is merely insurance against possible loss. That losses may occur from time to time seems almost inevitable and it is, therefore, inequitable that the remaining stockholders should be compelled to accept all securities at par, so, to say the least, the maintenance of this fund is justified. The association teaches the duty of providing for the proverbial rainy day. Why should it not provide for the hour of adversity? The reserve fund has protected the maturing or withdrawing member during the period of his membership. In case of loss it has or would have reimbursed him and, at all times, it has protected him and given strength and standing to the association. Losses may occur, after his membership ceases, that arose from some mistake or mismanagement committed during the period of his membership, and in fairness and equity the remaining members should have some protection against this. (Sundheim, Law of Building and Loan Association, sec. 53.)

The government insists, we thing, upon an interpretation of section 188 of the Corporation Law that is altogether too strict and literal. From the fact that the statute provides that profits and losses shall be annually apportioned among the shareholders it is argued that all earnings should be distributed without carrying anything to the reserve. But it will be noted that it is provided in the same section that the profits and losses shall be determined by the board of directors: and this means that they shall exercise the usual discretion of good businessmen in allocating a portion of the annual profits to purposes needful to the welfare of the association. The law contemplates the distribution of earnings and losses after other legitimate obligations have been met.

Our conclusion is that the respondent has the power to maintain the reserves criticized in the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper function of the court to arrogate to itself the control of administrative matters which have been confided to the discretion of the board of directors. The causes of action under discussion must be pronounced to be without merit.

Thirteenth cause of action. — The specification under this head is, in effect, that the respondent association has made loans which, to the knowledge of the associations officers were intended to be used by the

borrowers for other purposes than the building of homes. In this connection it appears that, though loans have been made by the association exclusively to its shareholders, no attempt has been made by it to control the borrowers with respect to the use made of the borrowed funds, the association being content to see that the security given for the loan in each case is sufficient. On December 31, 1925, the respondent had five hundred forty-four loans outstanding secured by mortgages upon real estate and by the pledge of the borrowers' shares in an amount sufficient at maturity to amortize the loans. With respect to the nature of the real estate upon which these loans were made it appears that three hundred fifty-one loans were secured by mortgages upon city residences, seven by mortgages upon commercial building in cities, and three mortgages upon unimproved city lots. At the same time one hundred eighty-three of the loans were secured by mortgages upon groves, sugar land, and rice land, with a total area of about 7,558 hectares. From information gathered by the association from voluntary statements of borrowers given at the time of application with respect to the use intended to be made of the borrowed funds, it appears that the amount of P693,200 was borrowed to redeem real property from existing mortgages or pactos de retro, P280,800 to buy real estate, P449,100 to erect buildings, P24,000 to improve and repair buildings, P1,480,900 for agricultural purposes, while the amount of P5,763,700 was borrowed for purposes not disclosed.

Upon these facts an elaborate argument has been constructed in behalf of the plaintiff to the effect that in making loans for other purposes than the building of residential houses the association has illegally departed from its character and made itself amenable to the penalty of dissolution. Aside from being directly opposed to the decision of this court in Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros (47 Phil., 249), this contention finds no substantial support in the prevailing decisions made in American courts; and our attention has not been directed to a single case wherein the dissolution of a building and loan association has been decreed in a quo warranto proceeding because the association allowed its borrowers to use the loans for other purposes than the acquisition of homes.The case principally relied upon for the Government appears to be Pfeister vs. Wheeling Building Association (19 W. Va., 676, 716),which involved the question whether a building and loan association could recover the full amount of a note given to it by a member and secured by a mortgage from a stranger. At the time the case arose there was a statute in force in the State of West Virginia expressly forbidding building and loan associations to use or direct their funds for or to any other object or purpose than the buying of lots or houses or in building and repairing houses, and it was declared that in case the funds should be improperly directed to other objects, the offending association should forfeit all rights and privileges as a corporation. Under the statute so worded the court held that the plaintiff could only recover the amount actually advanced by it with lawful interest and fines, without premium; and judgment was given accordingly. The suggestion in that case that the result would have been the same even in the absence of statute was mere dictum and is not supported by respectable authority.

Reliance is also placed in the plaintiff's brief upon McCauley vs. Building & Saving Association. The statute in force in the State of Tennessee at the time this action arose provided that all loans should be made to the members of the association at open stated meetings and that the money should be lent to the highest bidder. Inconsistently with this provision, there was inserted in the by-laws of the association a provision to the effect

that no loan should be made at a greater premium than 30 per cent, nor at a less premium than 29 7/8 per cent. It was held that this by-law made free and open competition impossible and that it in effect established a fixed premium. It was accordingly held, in the case cited, that an association could not recover such part of the loan as had been applied by it to the satisfaction of a premium of 30 per centum.

We have no criticism to make upon the result reached in either of the two decisions cited, but it is apparent that much of the discussion contained in the opinions in those cases does not reflect the doctrine now prevailing in the United States; and much less are those decisions applicable in this jurisdiction. There is no statute here expressly declaring that loans may be made by these associations solely for the purpose of building homes. On the contrary, the building of homes is mentioned in section 171 of the Corporation Law as only one among several ends which building and loan associations are designed to promote. Furthermore, section 181 of the Corporation Law expressly authorities the Board of directors of the association from time to time to fix the premium to be charged.

In the brief of the plaintiff a number of excerpts from textbooks and decisions have been collated in which the idea is developed that the primary design of building and loan associations should be to help poor people to procure homes of their own. This beneficent end is undoubtedly served by these associations, and it is not to be denied that they have been generally fostered with this end in view. But in this jurisdiction at least the lawmaker has taken care not to limit the activities of building and loan associations in an exclusive manner, and the exercise of the broader powers must in the end approve itself to the business community. Judging from the past history of these institutions it can be truly said that they have done more to encourage thrift, economy and saving among the people at large than any other institution of modern times, not excepting even the saving banks. In this connection Mr. Sundheim, in a late treatise upon the subject of the law of building and loan associations, makes the following comment:

They have grown to such an extent in recent years that they no longer restrict their money to the home buyer, but loan their money to the mere investor or dealer in real estate. They are the holder of large mortgages secured upon farms, factories and other business properties and rows of stores and dwellings. This is not an abuse of their powers or departure from their main purposes, but only a natural and proper expansion along healthy and legitimate lines. (Sundheim, Building and Loan Associations, sec. 7.)

Speaking of the purpose for which loans may be made, the same author adds:

Loans are made for the purpose of purchasing a homestead, or other real estate, or for any lawful purpose or business, but there is no duty or obligation of the association to inquire for what purpose the loan is obtained, or to require any stipulation from the borrower as to what use he will make of the money, or in any manner to supervise or control its disbursement. (Sundheim, Building and Loan Association, sec. 111.)

In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros, this court had before it the question whether a loan made by the respondent association upon the security of a mortgage upon agricultural land, — where the loan was doubtless used for agricultural purposes, — was usurious or not; and the case turned upon the point whether, in making such loans, the association had violated the law and departed from its fundamental purposes. The conclusion of the court was

that the loan was valid and could be lawfully enforced by a nonjudicial foreclosure in conformity with the terms of the contract between the association and the borrowing member. We now find no reason to depart from the conclusion reached in that case, and it is unnecessary to repeat what was then said. The thirteenth cause of action must therefore be pronounced unfounded.

Fourteenth cause of action. — The specification under this head is that the loans made by the defendant for purposes other than building or acquiring homes have been extended in extremely large amounts and to wealthy persons and large companies. In this connection attention is directed to eight loans made at different times in the last several years to different persons or entities, ranging in amounts from P120,000 to P390,000 and to two large loans made to the Roxas Estate and to the Pacific Warehouse Company in the amounts of P1,122,000 and P2,320,000, respectively. In connection with the larger of the two after this loan was made the available funds of El Hogar Filipino were reduced to the point that the association was compelled to take advantage of certain provisions of its by-laws authorizing the postponement of the payment of claims resulting from withdrawals, whereas previously the association had always settled these claims promptly from current funds. At no time was there apparently any delay in the payment of matured shares; but in four or five cases there was as much as ten months delay in the payment of withdrawal applications.

There is little that can be said upon the legal aspects of this cause of action. In so far, as it relates to the purposes for which these loans were made, the matter is covered by what was said above with reference to the thirteenth cause of action; and in so far as it relates to the personality of the borrowers, the question belongs more directly to the discussion under the sixteenth cause of action, which will be found below. The point, then, which remains for consideration here is whether it is a suicidal act on the part of a building and loan association to make loans in large amount. If the loans which are here the subject of criticism had been made upon inadequate security, especially in case of the largest two, the consequences certainly would have been disastrous to the association in the extreme; but no such fact is alleged; and it is to be assumed that none of the ten borrowers have defaulted in their contracts.

Now, it must be admitted that two of these loans at least are of a very large size, considering the average range of financial transaction in this country; and the making of the largest loan was followed, as we have already see, with unpleasant consequences to the association in dealing with current claims. Nevertheless the agreed statement of facts shoes that all of the loan referred to are only ten out of a total of five hundred forty-four outstanding on December 31, 1925; and the average of all the loans taken together is modest enough. It appears that the chief examiner of banks and corporations of the Philippine Treasury, after his examination of El Hogar Filipino at the end of the year 1925, made a report concerning this association as of January 31, 1926, in which he criticized the Pacific Warehouse Company loan as being so large that it temporarily crippled the lending power of the association for some time. This criticism was apparently justified as proper comment on the activities of the association; but the question for use here to decide is whether the making of this and the other large loans constitutes such a misuser of the franchise as would justify us in depriving the association of its corporate life. This question appears to us to be so simple as almost to answer itself. The law states no limit with respect to the size of the loans to be made by the association. That matter is confided to the discretion of the board of directors; and this

court cannot arrogate to itself a control over the discretion of the chosen officials of the company. If it should be thought wise in the future to put a limit upon the amount of loans to be made to a single person or entity, resort should be had to the Legislature; it is not a matter amenable to judicial control. The fourteenth cause of action is therefore obviously without merit.

Fifteenth cause of action. — The criticism here comes back to the supposed misdemeanor of the respondent in maintaining its reserve funds, — a matter already discussed under the eleventh and twelfth causes of action. Under the fifteenth cause of action it is claimed that upon the expiration of the franchise of the association through the effluxion of time, or earlier liquidation of its business, the accumulated reserves and other properties will accrue to the founder, or his heirs, and the then directors of the corporation and to those persons who may at that time to be holders of the ordinary and special shares of the corporation. In this connection we note that article 95 of the by-laws reads as follows:

ART. 95. The funds obtained by the liquidation of the association shall be applied in the first place to the repayment of shares and the balance, if any, shall be distribute in accordance with the system established for the distribution of annual profits.

It will be noted that the cause of action with which we are now concerned is not directed to any positive misdemeanor supposed to have been committed by the association. It has exclusive relation to what may happen some thirty-five years hence when the franchise expires, supposing of course that the corporation should not be reorganized and continued after that date. There is nothing in article 95 of the by-laws which is, in our opinion, subject to criticism. The real point of criticism is that upon the final liquidation of the corporation years hence there may be in existence a reserve fund out of all proportion to the requirements that may then fall upon it in the liquidation of the company. It seems to us that this is matter that may be left to the prevision of the directors or to legislative action if it should be deemed expedient to require the gradual suppression of the reserve funds as the time for dissolution approaches. It is no matter for judicial interference, and much less could the resumption of the franchise on this ground be justified. There is no merit in the fifteenth cause of action.

Sixteenth cause of action. — This part of the complaint assigns as cause of action that various loans now outstanding have been made by the respondent to corporations and partnerships, and that these entities have in some instances subscribed to shares in the respondent for the sole purpose of obtaining such loans. In this connection it appears from the stipulation of facts that of the 5,826 shareholders of El Hogar Filipino, which composed its membership on December 31, 1925, twenty-eight are juridical entities, comprising sixteen corporations and fourteen partnerships; while of the five hundred forty-four loans of the association outstanding on the same date, nine had been made to corporations an five to partnerships. It is also admitted that some of these juridical entities became shareholders merely for the purpose of qualifying themselves to take loans from the association, and the same is said with respect to many natural persons who have taken shares in the association. Nothing is said in the agreed statement of facts on the point whether the corporations and partnerships that have taken loans from the respondent are qualified by law governing their own organization to enter into these contracts with the respondent.

In section 173 of the Corporation Law it is declared that "any person" may become a stockholder in building and loan associations. The word "person" appears to be here used in its general sense, and there is nothing in the context to indicate that the expression is used in the restricted sense of both natural and artificial persons, as indicated in section 2 of the Administrative Code. We would not say that the word "person" or persons," is to be taken in this broad sense in every part of the Corporation Law. For instance, it would seem reasonable to say that the incorporators of a corporation ought to be natural persons, although in section 6 it is said that five or more "persons", although in section 6 it is said that five or more "persons," not exceeding fifteen, may form a private corporation. But the context there, as well as the common sense of the situation, suggests that natural persons are meant. When it is said, however, in section 173, that "any person" may become a stockholder in a building and loan association, no reason is seen why the phrase may not be taken in its proper broad sense of either a natural or artificial person. At any rate the question whether these loans and the attendant subscriptions were properly made involves a consideration of the power of the subscribing corporations and partnerships to own the stock and take the loans; and it is not alleged in the complaint that they were without power in the premises. Of course the mere motive with which subscriptions are made, whether to qualify the stockholders to take a loan or for some other reason, is of no moment in determining whether the subscribers were competent to make the contracts. The result is that we find nothing in the allegations of the sixteenth cause of action, or in the facts developed in connection therewith, that would justify us in granting the relief.

Seventeenth cause of action. — Under the seventeenth cause of action, it is charged that in disposing of real estates purchased by it in the collection of its loans, the defendant has no various occasions sold some of the said real estate on credit, transferring the title thereto to the purchaser; that the properties sold are then mortgaged to the defendant to secure the payment of the purchase price, said amount being considered as a loan, and carried as such in the books of the defendant, and that several such obligations are still outstanding. It is further charged that the persons and entities to which said properties are sold under the condition charged are not members or shareholders nor are they made members or shareholders of the defendant.

This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the discussion is the provision of the Corporation Law requiring loans to be stockholders only and on the security of real estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the respondent sells property acquired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real estate which it acquires in connection with the collection of its loans within five years after receiving title to the same, the law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such sales can of course be made upon terms and conditions approved by the parties; and when the association takes a mortgage to secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising out of a loan. Nor does the fact that it is carried as a loan on the books of the respondent make it a loan on the books of the respondent make it a loan in law. The contention of the Government under this head is untenable.

In conclusion, the respondent is enjoined in the future from administering real property not owned by itself, except as may be permitted to it by contract when a borrowing shareholder defaults in his obligation. In all other respects the complaint is dismissed, without costs.

So ordered.

Avanceña, C. J., Johnson, Villamor and Vila-Real, JJ., concur.

Separate Opinions

MALCOLM, J., with whom concur OSTRAND and JOHNS, JJ., dissenting:

For the second time in the history of the court — so counsel for plaintiff inform us — we must try a corporation for the violation of a law which carries with it a death warrant — so counsel for defendant intimates. That the corporation at bar is wealthy and powerful should neither prejudice us against it nor cause us to cringe before its might. The court has a duty to perform and should perform it with fairness to the corporation and with justice to the public, whose interests are involved. El Hogar Filipino, deserves exactly the same consideration as any other litigant. No more, no less.

The proceeding is one of quo warranto, begun by the Government of the Philippine Islands under authority of section 190-A of the Corporation Law, and of sections 197-216, 519 of the Code of Civil Procedure. The complaint contains seventeen causes of action. To all of them, the defendant has made answer. The facts have been covered by stipulation. The government asks for an order of dissolution. Defendant tenaciously resists xp3vd.

El Hogar de Filipino is a corporation organized as a mutual building and loan association under the provisions of the Corporation Law (Act No. 1459). The law last mentioned, it may recalled, is divided into two parts. Chapter one is entitled "General Provisions." In chapter two is entitled "Special Provisions". In chapter two, section 171 to 190, inclusive, are found the special provisions pertaining to building and loan corporations. Section 171 thereof is indicative of the legislative purpose. It provides:

All corporations whose capital stock is required or is permitted to be paid in by the stockholders in regular, equal, periodical payments and whose purpose is to accumulate the savings of its stockholders, to repay to said stockholder their accumulated savings and profits upon surrender of their stock, to encourage industry, frugality, and home building among its stockholders, and to loan its funds and funds borrowed for the purpose to stockholders on the security of unencumbered real estate and the pledge of shares of capital stock owned by the stockholders as collateral security, shall be known as building and loan corporation, and the words mutual building and loan association shall form part of the name of every such corporation.

The articles of incorporation of El Hogar Filipino show that the purpose of the corporation are: (1) The accumulation of the savings of its shareholders; (2) the return to said shareholders of their accumulated savings and profits upon the surrender and cancellation of their shares; (3) the encouragement of industry, frugality, and home building among its shareholders; (4) the loan of its funds and funds borrowed for the purpose to its shareholders on the security of unencumbered real estate and the pledge of shares of capital stock of the company owned by its shareholders as collateral security; and (5) the borrowing of money upon the credit of the

corporation and the issuance of bonds or other documents evidencing the existence of such obligations. The capital of the corporation is made not to exceed P10,000,000. At the end of 1925 it had 5,826 shareholders holding 125,750 shares, the total paid up value of which was P8,703,602.25.

El Hogar Filipino having been incorporated under Philippine law as a mutual building and loan association, the primary inquiry should naturally be as to the nature, purposes, and operations of mutual building and loan associations.In the case of El Hogar Filipino vs. Rafferty ([1918] 37 Phil., 995),this court had presented the question of whether El Hogar Filipino, as a building and loan association, was relieved from the necessity of paying an income tax. It was held that it was. Mr. Justice Johnson, speaking for the court, said:

A building and loan association is an organization created for the purpose of accumulating a fund by the monthly subscription or saving of its members, to assist them in building or purchasing for themselves dwellings or real estate, by loaning to them the requisite money from the funds of the society. To all particular intent it may be said to be to enable a number of associates to have and invest their savings to mutual advantage, so that, from time to time, any individual among them may receive, out of the accumulation of the pittances which each contributes periodically, a sum, by way of loan, wherewith to build or pay for a home, and ultimately making it absolutely his own by the payment of such small amounts from time to time. (Rhodes vs. Missouri Savings & Loan Co., 173 Ill., 621; 42 L. R. A., 93.)

The same opinion quoted from Endlich on Building Associations, section 7, who was termed a leading authority upon such associations, on the subject of the primary designs and general operation of building associations, the following:

The idea which first gave rise to the institution of building associations, which furnished their ostensible and legitimate raison d'etre, and which secured to them their popularity and their, in many respects, exceptionally favored position before the law, is that of enabling persons belonging to a class whose earning are small, and with whom the slowness of the accumulation discourages the effort, to become by a process of gradual and compulsory savings, either at the end of a certain period, or by anticipation of it, the owners of homesteads. The operation of the scheme may be easily understood tNFVDAI.

The same opinion quoted from Thornton and Blackledge in their work on Building and Loan Associations, at page 6 the following:

Societies, known as building, loan fund, and savings association, are now recognized as important factors in the social and economic development of this country. The controlling idea is the massing of the separate earnings of wage-workers, and the savings of persons of small means, in such a manner as to aid them in procuring homes. It is the organization of thrift and self-help; a practical application of the maxim that in "union there is strength." The effect of such a movement is to dignify the home; to foster morality, and to make thoughtful, wise, and responsible citizens. It is for such reason that the law and the courts, where such associations have been properly conducted, have looked upon them with favor. Whether they shall retain the favorable estimation of legislatures and courts will depend in large measure upon the wise forecast and determined purpose of those who control such institutions. Those departures from the original idea, intended to enhance the profits of investors, without in any degree aiding

those who are endeavoring to build homes, have been, and in the future probably will be, severely censured by the courts.

In the case of Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros ([1925], 47 Phil., 249), the principal issue had to do with the relation of El Hogar Filipino to the Usury Law permitting it to charge a higher rate of interest than persons or entities, charge than similarly organized mutual building and loan associations. Mr. Justice Johns, in a vigorous dissenting opinion, said:

There must be and is valid reason for the exception made in the statute which permits building and loan associations to charge and receive 18 per cent per annum as interest, and which limits all other loans made by any other person, firm or corporation to interest at 12 per cent per annum.

All building and loan associations are founded, and exceptions made in their favor as to the rate of interest, upon the theory that they will enable a person with small means or small income who has a family to support, to build a home in which to live and to improve his property and develop the country. When the exception was made by the Legislature, it was never intended that the El Hogar Filipino or any other corporation, under the guise of a building and loan association, should make a loan upon a sugar plantation of the nature of the one in question.

x x x x x x x x

It will be noted that the exception made in the statute above quoted is for mutual building and loan societies incorporated under the Corporation Act. The use of the word mutual is significant and important. Under the statute, it is not sufficient that the corporation should be a building and loan association. It must be a mutual building and loan association.

In the same dissent, reference was made to the case of El Hogar Filipino vs. Rafferty, supra, and the remarks of Endlich, and Thornton and Blackledge on the purposes of mutual building and loan associations. Fletcher, Cyclopedia of Corporation, volume 1, page 136, was also quoted from as follows:

An incorporated building and loan association is a corporation for the purpose of raising, by periodical subscriptions of members, a stock or fund to assist members by advances or loans, generally on mortgage security, in building or purchasing homes. Such corporations are different from corporations formed for pecuniary profit.

he term (building and loan association) does not generally include corporations unless their purpose is to accumulate funds and lend the same to members to assists them in purchasing or building homes . . . (Cases cited.) It does not include a corporation . . . for the purpose of purchasing and improving real estate and advancing money on mortgages . . . or a corporation merely for the purpose of loaning money.

In the same dissent, reference was made to what Corpus Juris, volume 9, page 920, contains on the subject of the object and purpose of building and loan associations, namely:

As it is sometimes stated in the statutes relating to, and in the charters and constitutions of, building and loan associations, the principal object of a building and loan association is to create a loan fund for the benefit of its borrowing members, the underlying idea being that, by means of the system of small periodical payments provided, people of limited means will be enabled to become the owners of homes, and thrift, economy, and good

citizenship will thereby be promoted. By reason of the favorable results attending the operation of these associations, and their beneficent purposes, they have, especially before they attained their present tremendous growth, been favored and granted special privileges by the various legislatures, such as permission to charge high rates of interest and exemption from taxation. . . ." In lieu of asterisk the next succeeding sentence from Corpus Juris could also have been appropriately used: "However, with the growth of these organizations, evils have crept in, the privileges granted have in many instances been abused by unscrupulous officers, and, in recent years, the courts have been compelled to subject their transactions to closer scrutiny.

Speaking of the purposes for which loans can be made by building and loan associations, Rosenthal, in his work on Building, Loan and Savings Associations, third edition, page 108, says:

In our opinion, the object of building, loan and savings associations is to furnish funds for homes rather than for mercantile or manufacturing improvements. Some of the larger associations have granted loans of this character, and we consider it a dangerous departure from the purposes for which these associations were created shjWv9Y.

Thompson on Building Associations, page 5, 23, 24, 232 and 558, says:

The building association as now existing is a private corporation designed for the accumulation, by the members, of their money, by periodical payments into its treasury, to be invested from time to time in loans to the members upon real estate for home purposes, he building association is a home builder. The member by its system is enabled to acquire a home, and to pay for it he pledges his future savings. . . . It enforces economy, and awakens thoughts of citizenship in its better sense of offering homes. This is the first purpose of these institutions. The language of the Supreme Court of Georgia is timely: "The they have improved our towns by leading to the erection of a number of new buildings, furnished many families with homes of their own, that could not otherwise have possessed the, given a considerable impulse to mechanical enterprise, and in many other ways promoted the prosperity and welfare of the communities where they exist, is undoubtedly true. But whether they will continue to be entitled to the epithet of the "poor man's exchequer," and whether they will, as they promise to do, enable every man to become his own landlord, will depend entirely upon the manner in which they conduct their business . . ."These institutions are well known all over the United States to be depositories of money savings, and investors of those savings in homes for members. The legislature has created them in the interest of good citizenship, to enable the people to save their money and acquire homes and become steady citizens. The ultimate legislative purpose is home-building. If it was merely a depository of savings it would have no strong reason for existence, because the savings banks furnish that; but it goes further, and is designed by law to use those savings in procuring homes for its members. And the courts should promptly curb any disposition to depart from the corporate purposes.

. . But a building association is not an ordinary corporation; in fact, it exercises some extraordinary privileges, particularly in not being amenable to the usury laws. It is created for the declared purposes of accumulating money and lending the accumulation to members to build or acquire homes for themselves. The legislature devised this plan of cooperative accumulations for the purpose of assisting each member to become his own landlord. The state has a selfish motive in the promotion of a building

association, as through its workings it is planting deeply the roots of citizenship. The drifting, thriftless classes are offered a school of economy, and the earnest and economical classes are given an opportunity. There is, then, the formation of a steady, energetic and accumulating citizen. The cares of the state are lessened by decreasing poverty, and its prosperity is increased by growing material wealth. We may clearly conceive, then, that the intention of the legislature in the creation of building associations is, first, to encourage savings; second, to secure homes for the savers.

In the case of Mandlin vs. American Savings and Loan Association ([1896],63 Minn., 358), the court said:

So-called "building societies," operated on the plan of the defendant, have so often become the instrument of oppression and extortion as to call down the censure of some eminent courts. The original purpose of building societies, viz., to enable people of small means to build or buy homes, is entirely wanting.

Such a body" says Follet, J., in Seibel vs. Victoria Building Association (43 Ohio St., 371, p. 373), "exists for the equal benefit of all its members, who are presumed to be persons whose earnings are small, and who seek to use weekly savings in procuring suitable homesteads. Every member is presumed to become after sometime a borrower to the extent of his interest. Building associations are not intended to enable money lenders to obtain extraordinary interest, but they are intended to help in securing homes with the aid of small incomes." (Barry Law of Building Societies, p. 3, sec. 4.)

In case of North American Building Associaton vs. Sutton ([1860], 35 Pa., 463), the court said:

It is well known that the original design of the legislature was to encourage the erection of buildings. The motive for the grant of the franchise was public improvement. But the practical working of the associations formed under the law has not been what was anticipated. Though called "building societies," they are, in truth, only agencies by which a greater than legal interest is obtained from the necessitous and unwary.

In the case of Continental National Building and Loan Association vs. Miller ([1902], 44 Fla., 757), the court said:

When local in their operations and prudently managed they have served a useful purpose enabling the man of small means to build his modest homes or to make a safe and profitable investment of his meager earnings; but when they branch out and forget the original purposes and limitations that have given them this favored position, trouble not infrequently arises.

In the case of St. Joseph and Kansas Loan and Building Association vs. Thompson ([1877], 19 Kansas, 321), the court said:

It was never intended that these corporations, organized as this one was for the purpose of giving to its members through their savings an easy way to discharge encumbrances and to build homes, should loan their funds to others than their own members.

In case of Parker vs. Fulton Loan and Building Association ([1872],46 Ga., 166), the court said:

Whether such a contract though legal upon its face, was, in fact, illegal, would depend upon the object of the association. If it were, in truth, a mere devise to evade the usury laws, then it would depend upon the object of

the association. If it were, in truth, a mere devise to evade the usury laws, then it would be illegal, if in fact more was taken for the use of money than 7 per cent per annum. But if the organization were in fact and bona fide a plan with the real intent and object of accumulating a fund by monthly subscriptions or savings of the members thereof, to assist them in procuring for themselves such real estates as they may deem proper,' then it would not be illegal.

he practical application of the resources of these institutions (building and loan associations) to the building of homes and aiding their members to change their conditions from rent-paying tenants to home-owning citizens has been recognized as a work of vital importance and of the highest helpfulness to the interest of the state and nation. (Rosenthal Cyc. of Building, Loan & Savings Association, p. 73.)

The aim and purpose of a building association is to aid and encourage its members to learn and practice thrift by regular systematic saving, and to provide ways and means so that every family may procure home. (Rosenthal Cyc. of Building, Loan & Savings Association, p. 9.)

The funds of the first associations were applied to aid its members to procure homes. This was in fact the one outstanding feature of the plan and the high purpose for which the association was organized. The wish and desire to own their own home, was, in fact the primary, fundamental inspiration on which the first building association was formed, and has ever continued to be the shining pole star which has guided and directed the progress of these building associations to the present day. The desire to own a home is one of the primary, natural instincts of every real man or woman. An institution organized and operated on a fair and equitable plan which has for its object the gratifying of that desire, is sure to make a strong appeal to all humanity. The constant appeal which building associations have always made to this deep-seated human desire, is the real secret of their great success. (Rosenthal Cyc. of Building, Loan & Savings Association, p. 13.)

A recent president of the United States League of Local Building and Loan Associations said the "Our associations are serving just two classes of customers: receiving the savings of thrifty and farseeing people, and loaning these funds to members who wish to buy or build a home. Never was the need for building or owning a home greater than in the past few years, and as you well know, lack of sufficient funds has been one of our problems."

Building and Loan Associations started as neighborhood clubs in most parts of the country. Neighbors wished to become home owners and began contributing a certain sum monthly to a treasurer. The aggregate of these monthly payments was soon sufficient to buy or build a home for one of the members. The fund was then loaned to one of them, and as other funds accumulated, others could borrow. The joint purposes of thrift and home ownership are inseparable and are of equal importance. There could be no cooperative building and loan association without both. (Clark and Chase Building and Loan Association, p. 4).

The Commissioner of Internal Revenue of the United States in article 515 of his new regulations, outlines the particular associations entitled to exemption, under the Federal Law as follows:

In general, a building and loan association entitled to exemption is one organized pursuant to the laws of any state, territory or the District of Colulmbia, which accumulates funds to be loaned primarily to the

shareholders for the purpose of building or acquiring homes. (Rosenthal Cyc. of Building, Loan & Savings Association, p. 94.)

The authorities could be piled up mountain high. They all disclose that mutual building and loan associations are peculiar and special corporations. They can exercise only such powers as are conferred by the legislative body creating them, either by express terms or by necessary implication. Their basic and essential idea is mutuality. The primary object is to encourage thrift and to assist in home building. "El Hogar Filipino" — or as it is in English "The Filipino Home" — that is the magic thought which attracts small investors. But when pseudo associations branch out and forget the original purposes and limitations that have given them their favored positions, it is incumbent on the judiciary to place them back in their rightful places. We are frank to say that it is these elementary principles, which, in our opinion, the majority have failed to grasp, which have led them into error in the decision of this case ISqZ.

Why are mutual building and loan associations granted special privileges? Why are mutual building and loan associations exempted from taxation, as disclosed in El Hogar Filipino vs. Rafferty, supra? Why are building and loan associations permitted to charge high rates of interest, as disclosed in Lopez and Javelona vs. El Hogar Filipino, and Registrar of Deeds of Occidental Negros, supra? Why? Need answers be given. If so, it is so that mutual building and loan associations may with one hand accept favors rightfully theirs, and with the other hand grasp favors properly belonging to strictly private corporations or loan societies.

El Hogar Filipino has offended against the law of its creation, and has departed from the fundamental purposes of mutual building and loan associations in this:

A. In that it has engaged in business activities entirely foreign to and not reasonably necessary for the purposes for which it was organized, such as the administration of properties and the management of properties not mortgaged;

B. In that it has inserted in article 10 of its by-laws a provision giving the board of directors, by majority vote, the unqualified right to cancel and forfeit shares by merely returning to their owners the amount which may result from the accounting, in violation of the Corporation Law;

C. In that its board of directors has become a permanent and self- perpetuating body, since with the exception of the years 1911, 1912, and 1917, there has been no election of directors and since between 1912 and 1917, and from 1917 until the present, the membership of the board has not been changed, except to fill vacancies which have been filled by the board itself, in violation of the Corporation Law, and of the by-laws of the corporation;

D. In that the directors, instead of serving without pay or for nominal salaries, have been receiving relatively large compensations out of the profits in accordance with article 92 of the by-laws, providing that 5 percent of the annual profits shall be devoted to the compensation of the directors, according to their attendance at the meetings;

E. In that the corporation has been giving to Antonio Melian, its founder, under provisions of article 92 of its by-laws 5 per cent of the yearly net profits, and will continue to do so, for the full fifty-year period of life of the defendant, and under which Mr. Melian has received a total sum of P615,834;

F. In that articles 70 and 76 of its by-laws are contrary to law, since they only permit the election or appointment to the board of directors of persons owning P5,000 worth of paid up shares, which is made a condition precedent to eligibility to the board of directors;

G. In that it has issued so-called special shares, in violation both of the letter and spirit of the Corporation Law;

H. In that it has maintained out of its profits an unnecessarily large reserve fund, classified into general reserve fund and special reserve fund, instead of distributing its profits among its members;

I. In that it has made large loans to persons and companies, such as a loan of P2,320,000 to the Pacific Warehouse Company, which so depleted the funds of the corporation that for sometime it was unable to act on applications for small loans and for the retirement of shares;

J. In that under articles 92 and 95 of the by-laws of the corporation, upon the expiration of its period of life or upon earlier liquidation of its business, the accumulated reserves and other properties will be distributed among and will benefit only its directors and its founder, together with a few other persons;

K. In that its membership is in part composed of corporations, companies, and associations, for instance of sixteen corporations and fourteen partnerships;

L. In that it has disposed of real estate purchased by it in the collection of its loans on credit, thereafter accepting mortgages on the property transferred, in violation of the Corporation Law;

M. And, lastly, in the El Hogar Filipino has failed to carry our and fulfill the main purpose for which it was created, and in consideration of which it has been granted special privileges and exemptions.

The foregoing are not trivial or isolated infractions of the law to be brushed away with a wave of the hand. They constitute grave abuses. They disclose El Hogar Filipino as an octopus whose tentacles have reached out to embrace and stifle vital public interests. The court would be entirely justified in peremptorily decreeing the dissolution of the corporation for misuse of its powers.

Section 190-A of the Corporation Law, inserted by section 3 of Act No. 2792, makes it the imperative duty of the court to dissolve a corporation for any violation which it has committed. It is believed, however, that counsel for the defendant is entirely correct in his argument to the effect that the legislature is without power to diminish the jurisdiction of the court, and to direct a particular judgment in a particular case. Rather would we prefer to follow the precedent in the case of the Government of the Philippine Islands vs. Philippine Sugar Estates Development Company ([1918], 38 Phil., 15),wherein in was ordered that the corporation be dissolved and prohibited from continuing to do business in the Philippine Islands unless it complied with the conditions mentioned in the decision.

In amplification of the above suggestion, it must be said that El Hogar Filipino is the possessor of important property rights which should not be disastrously disturbed. It must also be said that a mutual building and loan association properly conducted is an institution which should be encourage in the community. The result should, therefore, be to confine El Hogar Filipino to its legitimate purposes and to force it to eliminate its illegitimate purposes and The government has made out its case, but the defendant

should be permitted a reasonable time to fulfill the conditions laid down in this decision.

ROMUALDEZ, J., dissenting:

I believe that the defendant corporation should be compelled to observe the law and to confine itself to its object and purposes as a building and loan association existing under Act. No. 1459, and that it should be given a reasonable period within which to do so.

I am of this opinion on the ground that, to my mind, said corporation has deviated from the law and its own object and purposes by adopting articles 10, 70, and 76 of its by-laws in permitting the perpetuation of the same directors, and in making loans to persons who are not stockholders and to wealthy persons or companies in extremely large amounts.

Footnotes

149 Phil., 823.

2Promulgated March 31, 1926, not reported.

SECOND DIVISION

G.R. No. 168266 March 15, 2010

CARGILL, INC., Petitioner,vs.

INTRA STRATA ASSURANCE CORPORATION, Respondent.

D E C I S I O N

CARPIO, J.:

The Case

This petition for review[1] assails the 26 May 2005 Decision[2] of the Court of Appeals in CA-G.R. CV No. 48447.

The Facts

Petitioner Cargill, Inc. (petitioner) is a corporation organized and existing under the laws of the State of Delaware, United States of America. Petitioner and Northern Mindanao Corporation (NMC) executed a contract dated 16 August 1989 whereby NMC agreed to sell to petitioner 20,000 to 24,000 metric tons of molasses, to be delivered from 1 January to 30 June 1990 at the price of $44 per metric ton. The contract provides that petitioner would open a Letter of Credit with the Bank of Philippine Islands. Under the “red clause” of the Letter of Credit, NMC was permitted to draw up to $500,000 representing the minimum price of the contract upon presentation of some documents.

The contract was amended three times: first, on 11 January 1990, increasing the purchase price of the molasses to $47.50 per metric ton;[3] second, on 18 June 1990, reducing the quantity of the molasses to 10,500 metric tons and increasing the price to $55 per metric ton;[4] and third, on 22 August 1990, providing for the shipment of 5,250 metric tons of molasses on the last half of December 1990 through the first half of January 1991, and the balance of 5,250 metric tons on the last half of January 1991 through the first half of February 1991.[5] The third amendment also required NMC to put up a performance bond equivalent to $451,500, which represents the value of 10,500 metric tons of molasses computed at $43 per metric ton. The performance bond was intended to guarantee NMC’s performance to deliver the molasses during the prescribed shipment periods according to the terms of the amended contract.

In compliance with the terms of the third amendment of the contract, respondent Intra Strata Assurance Corporation (respondent) issued on 10 October 1990 a performance bond[6] in the sum of P11,287,500 to guarantee NMC’s delivery of the 10,500 tons of molasses, and a surety bond[7] in the sum of P9,978,125 to guarantee the repayment of downpayment as provided in the contract.

NMC was only able to deliver 219.551 metric tons of molasses out of the agreed 10,500 metric tons. Thus, petitioner sent demand letters to respondent claiming payment under the performance and surety bonds. When respondent refused to pay, petitioner filed on 12 April 1991 a complaint[8] for sum of money against NMC and respondent.

Petitioner, NMC, and respondent entered into a compromise agreement,[9] which the trial court approved in its Decision[10] dated 13 December 1991. The compromise agreement provides that NMC would pay petitioner P3,000,000 upon signing of the compromise agreement and would deliver to petitioner 6,991 metric tons of molasses from 16-31 December 1991. However, NMC still failed to comply with its obligation under the compromise agreement. Hence, trial proceeded against respondent.

On 23 November 1994, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of plaintiff [Cargill, Inc.], ordering defendant INTRA STRATA ASSURANCE CORPORATION to solidarily pay plaintiff the total amount of SIXTEEN MILLION NINE HUNDRED NINETY-THREE THOUSAND AND TWO HUNDRED PESOS (P16,993,200.00), Philippine Currency, with interest at the legal rate from October 10, 1990 until fully paid, plus attorney’s fees in the sum of TWO HUNDRED THOUSAND PESOS (P200,000.00), Philippine Currency and the costs of the suit.

The Counterclaim of Intra Strata Assurance Corporation is hereby dismissed for lack of merit.

SO ORDERED.[11]

On appeal, the Court of Appeals reversed the trial court’s decision and dismissed the complaint. Hence, this petition.

The Court of Appeals’ Ruling

The Court of Appeals held that petitioner does not have the capacity to file this suit since it is a foreign corporation doing business in the Philippines without the requisite license. The Court of Appeals held that petitioner’s purchases of molasses were in pursuance of its basic business and not just mere isolated and incidental transactions.

The Issues

Petitioner raises the following issues:

1. Whether petitioner is doing or transacting business in the Philippines in contemplation of the law and established jurisprudence;

2. Whether respondent is estopped from invoking the defense that petitioner has no legal capacity to sue in the Philippines;

3. Whether petitioner is seeking a review of the findings of fact of the Court of Appeals; and

4. Whether the advance payment of $500,000 was released to NMC without the submission of the supporting documents required in the contract and the “red clause” Letter of Credit from which said amount was drawn.[12]

The Ruling of the Court

We find the petition meritorious.

Doing Business in the Philippines and Capacity to Sue

The principal issue in this case is whether petitioner, an unlicensed foreign corporation, has legal capacity to sue before Philippine courts. Under Article 123[13] of the Corporation Code, a foreign corporation must first obtain a license and a certificate from the appropriate government agency before it can transact business in the Philippines. Where a foreign corporation does business in the Philippines without the proper license, it cannot maintain any action or proceeding before Philippine courts as provided under Section 133 of the Corporation Code:

Sec. 133. Doing business without a license. – No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or

administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

Thus, the threshold question in this case is whether petitioner was doing business in the Philippines. The Corporation Code provides no definition for the phrase “doing business.” Nevertheless, Section 1 of Republic Act No. 5455 (RA 5455),[14] provides that:

x x x the phrase “doing business” shall include soliciting orders, purchases, service contracts, opening offices, whether called ‘liaison’ offices or branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totalling one hundred eighty days or more; participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. (Emphasis supplied)

This is also the exact definition provided under Article 44 of the Omnibus Investments Code of 1987.

Republic Act No. 7042 (RA 7042), otherwise known as the Foreign Investments Act of 1991, which repealed Articles 44-56 of Book II of the Omnibus Investments Code of 1987, enumerated not only the acts or activities which constitute “doing business” but also those activities which are not deemed “doing business.” Section 3(d) of RA 7042 states:

[T]he phrase “doing business” shall include “soliciting orders, service contracts, opening offices, whether called ‘liaison’ offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any

domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase ‘doing business’ shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.

Since respondent is relying on Section 133 of the Corporation Code to bar petitioner from maintaining an action in Philippine courts, respondent bears the burden of proving that petitioner’s business activities in the Philippines were not just casual or occasional, but so systematic and regular as to manifest continuity and permanence of activity to constitute doing business in the Philippines. In this case, we find that respondent failed to prove that petitioner’s activities in the Philippines constitute doing business as would prevent it from bringing an action.

The determination of whether a foreign corporation is doing business in the Philippines must be based on the facts of each case.[15] In the case of Antam Consolidated, Inc. v. CA,[16] in which a foreign corporation filed an action for collection of sum of money against petitioners therein for damages and loss sustained for the latter’s failure to deliver coconut crude oil, the Court emphasized the importance of the element of continuity of commercial activities to constitute doing business in the Philippines. The Court held:

In the case at bar, the transactions entered into by the respondent with the petitioners are not a series of commercial dealings which signify an intent on the part of the respondent to do business in the Philippines but constitute an isolated one which does not fall under the category of “doing business.” The records show that the only reason why the

respondent entered into the second and third transactions with the petitioners was because it wanted to recover the loss it sustained from the failure of the petitioners to deliver the crude coconut oil under the first transaction and in order to give the latter a chance to make good on their obligation. x x x

x x x The three seemingly different transactions were entered into by the parties only in an effort to fulfill the basic agreement and in no way indicate an intent on the part of the respondent to engage in a continuity of transactions with petitioners which will categorize it as a foreign corporation doing business in the Philippines.[17]

Similarly, in this case, petitioner and NMC amended their contract three times to give a chance to NMC to deliver to petitioner the molasses, considering that NMC already received the minimum price of the contract. There is no showing that the transactions between petitioner and NMC signify the intent of petitioner to establish a continuous business or extend its operations in the Philippines.

The Implementing Rules and Regulations of RA 7042 provide under Section 1(f), Rule I, that “doing business” does not include the following acts:

1. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;

2. Having a nominee director or officer to represent its interests in such corporation;

3. Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative's or distributor's own name and account;

4. The publication of a general advertisement through any print or broadcast media;

5. Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;

6. Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export;

7. Collecting information in the Philippines; and

8. Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.

Most of these activities do not bring any direct receipts or profits to the foreign corporation, consistent with the ruling of this Court in National Sugar Trading Corp. v. CA[18] that activities within Philippine jurisdiction that do not create earnings or profits to the foreign corporation do not constitute doing business in the Philippines.[19] In that case, the Court held that it would be inequitable for the National Sugar Trading Corporation, a state-owned corporation, to evade payment of a legitimate indebtedness owing to the foreign corporation on the plea that the latter should have obtained a license first before perfecting a contract with the Philippine government. The Court emphasized that the foreign corporation did not sell sugar and derive income from the Philippines, but merely purchased sugar from the Philippine government and allegedly paid for it in full.

In this case, the contract between petitioner and NMC involved the purchase of molasses by petitioner from NMC. It was NMC, the domestic corporation, which derived income from the transaction and not petitioner. To constitute “doing business,” the activity undertaken in the Philippines should involve profit-making.[20] Besides, under Section 3(d) of RA 7042, “soliciting purchases” has been deleted from the enumeration of acts or activities which constitute “doing business.”

Other factors which support the finding that petitioner is not doing business in the Philippines are: (1) petitioner does not have an office in the Philippines; (2) petitioner imports products from the Philippines through its non-exclusive local broker, whose authority to act on behalf of petitioner is limited to soliciting purchases of products from suppliers engaged in the sugar trade in the Philippines; and (3) the local broker is an independent contractor and not an agent of petitioner.[21]

As explained by the Court in B. Van Zuiden Bros., Ltd. v. GTVL Marketing Industries, Inc.:[22]

An exporter in one country may export its products to many foreign importing countries without performing in the importing countries specific commercial acts that would constitute doing business in the importing countries. The mere act of exporting from one’s own country, without doing any specific commercial act within the territory of the importing country, cannot be deemed as doing business in the importing country. The importing country does not require jurisdiction over the foreign exporter who has not yet performed any specific commercial act within the territory of the importing country. Without jurisdiction over the foreign exporter, the importing country cannot compel the foreign exporter to secure a license to do business in the importing country.

Otherwise, Philippine exporters, by the mere act alone of exporting their products, could be considered by the importing countries to be doing business in those countries. This will require Philippine exporters to secure a business license in every foreign country where they usually export their products, even if they do not perform any specific commercial act within the territory of such importing countries. Such a legal concept will have deleterious effect not only on Philippine exports, but also on global trade.

To be doing or “transacting business in the Philippines” for purposes of Section 133 of the Corporation Code, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis in its own name and for its own account. Actual transaction of business within the Philippine territory is an essential requisite for the Philippines to to acquire jurisdiction over a foreign corporation and thus require the foreign corporation to secure a Philippine business license. If a foreign corporation does not transact such kind of business in the Philippines, even if it exports its products to the Philippines, the Philippines has no jurisdiction to require such foreign corporation

to secure a Philippine business license.[23] (Emphasis supplied)

In the present case, petitioner is a foreign company merely importing molasses from a Philipine exporter. A foreign company that merely imports goods from a Philippine exporter, without opening an office or appointing an agent in the Philippines, is not doing business in the Philippines.

Review of Findings of Fact

The Supreme Court may review the findings of fact of the Court of Appeals which are in conflict with the findings of the trial court.[24] We find that the Court of Appeals’ finding that petitioner was doing business is not supported by evidence.

Furthermore, a review of the records shows that the trial court was correct in holding that the advance payment of $500,000 was released to NMC in accordance with the conditions provided under the “red clause” Letter of Credit from which said amount was drawn. The Head of the International Operations Department of the Bank of Philippine Islands testified that the bank would not have paid the beneficiary if the required documents were not complete. It is a requisite in a documentary credit transaction that the documents should conform to the terms and conditions of the letter of credit; otherwise, the bank will not pay. The Head of the International Operations Department of the Bank of Philippine Islands also testified that they received reimbursement from the issuing bank for the $500,000 withdrawn by NMC.[25] Thus, respondent had no legitimate reason to refuse payment under the performance and surety bonds when NMC failed to perform its part under its contract with petitioner.

WHEREFORE , we GRANT the petition. We REVERSE the Decision dated 26 May 2005 of the Court of Appeals in CA-G.R. CV No. 48447. We REINSTATE the Decision dated 23 November 1994 of the trial court.

SO ORDERED.

--------------------------------------------------------------------------------*Designated additional member per Raffle dated 8 March 2010.

[1]Under Rule 45 of the 1997 Rules of Civil Procedure.

[2]Penned by Associate Justice Roberto A. Barrios with Associate Justices Amelita G. Tolentino and Vicente S. E. Veloso, concurring.

[3] Records, p. 393.

[4] Id. at 394-395.

[5] Id. at 396-397.

[6] Id. at 398.

[7]Id. at 399.

[8]Id. at 1-8.

[9]Id. at 251-254.

[10]Id. at 258-261.

[11] CA rollo, pp. 89-90.

[12]Rollo, pp. 154-155.

[13]Section 123 of the Corporation Code reads:

SEC. 123. Definition and rights of foreign corporations. – For the purpose of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. (Emphasis supplied)

[14]Entitled “AN ACT TO REQUIRE THAT THE MAKING OF INVESTMENTS AND THE DOING OF BUSINESS WITHIN THE PHILIPPINES BY FOREIGNERS OR BUSINESS ORGANIZATIONS OWNED IN WHOLE OR IN PART BY FOREIGNERS SHOULD CONTRIBUTE TO THE SOUND AND BALANCED DEVELOPMENT OF THE NATIONAL ECONOMY ON A SELF SUSTAINING BASIS, AND FOR OTHER PURPOSES.” RA 5455 was approved on 30 September 1968.

[15]Rimbunan Hijau Group of Companies v. Oriental Wood Processing Corporation, G.R. No. 152228, 23 September 2005, 470 SCRA 650; MR Holdings, Ltd. v. Sheriff Bajar, 430 Phil. 443 (2002); Top-Weld Manufacturing, Inc. v. ECED, S.A., IRTI, S.A., Eutectic Corp., 222 Phil. 424 (1985).

[16]227 Phil. 267 (1986).

[17]Id. at 274-275.

[18]316 Phil. 562 (1995).

[19]C. Villanueva, Philippine Corporate Law 801-802 (2001).

[20]Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 471 Phil. 582 (2004).

[21]See Exh. “T” (contract between petitioner and its broker, Agrotex Commodities, Inc.), records, pp. 553-557.

[22]G.R. No. 147905, 28 May 2007, 523 SCRA 233.

[23]Id. at 242-243.

[24]AMA Computer College-East Rizal v. Ignacio, G.R. No. 178520, 23 June 2009, 590 SCRA 633; Producers Bank of the Philippines v. Excelsa Industries, Inc., G.R. No. 152071, 8 May 2009, 587 SCRA 370; Cavile v. Litania-Hong, G.R. No. 179540, 13 March 2009, 581 SCRA 408; Microsoft Corp. v. Maxicorp, Inc., 481 Phil. 550 (2004).

[25]TSN, 14 June 1993, pp. 19-25. The Head of the International Operations Department of the Bank of Philippine Islands further testified that most of the documents supporting the negotiations in 1989 could no longer be found in their files since they only keep current records and at the time she testified, the records before 1991 were already destroyed.