WILSON P. GAMBOA vs.

FINANCE SECRETARY TEVES

G.R. No. 176579, promulgated June 28, 2011
X-----------------------------------------------------------------------------X
CARPIO, J.:
I.

THE FACTS
This is a petition to nullify the sale of shares of stock of
Philippine Telecommunications Investment Corporation (PTIC) by
the government of the Republic of the Philippines, acting through
the Inter-Agency Privatization Council (IPC), to Metro Pacific
Assets Holdings, Inc. (MPAH), an affiliate of First Pacific
Company Limited (First Pacific), a Hong Kong-based investment
management and holding company and a shareholder of the
Philippine Long Distance Telephone Company (PLDT).
The petitioner questioned the sale on the ground that it
also involved an indirect sale of 12 million shares (or about 6.3
percent of the outstanding common shares) of PLDT owned by
PTIC to First Pacific. With the this sale, First Pacifics common
shareholdings in PLDT increased from 30.7 percent to 37
percent, thereby increasing the total common shareholdings of
foreigners in PLDT to about 81.47%. This, according to the
petitioner, violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a
public utility to not more than 40%.

II.

THE ISSUE
Does the term capital in Section 11, Article XII of the
Constitution refer to the total common shares only, or to the total
outstanding capital stock (combined total of common and nonvoting preferred shares) of PLDT, a public utility?

III. THE RULING

[The Court partly granted the petition and held that the
term capital in Section 11, Article XII of the Constitution refers
only to shares of stock entitled to vote in the election of directors
of a public utility, or in the instant case, to the total common
shares of PLDT.]

shares, and not to the total outstanding capital stock comprising

both common and non-voting preferred shares [of PLDT].
xxx

Indisputably, one of the rights of a stockholder is the

right to participate in the control or management of the
corporation. This is exercised through his vote in the election of
directors because it is the board of directors that controls or
manages the corporation. In the absence of provisions in the
articles of incorporation denying voting rights to preferred shares,
preferred shares have the same voting rights as common shares.
However, preferred shareholders are often excluded from any
control, that is, deprived of the right to vote in the election of
directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in
the same manner as bondholders. xxx.
Considering that common shares have voting rights
which translate to control, as opposed to preferred shares which
usually have no voting rights, the term capital in Section 11,
Article XII of the Constitution refers only to common shares.
However, if the preferred shares also have the right to vote in the
election of directors, then the term capital shall include such
preferred shares because the right to participate in the control or
management of the corporation is exercised through the right to
vote in the election of directors. In short, the term capital in
Section 11, Article XII of the Constitution refers only to shares of
stock that can vote in the election of directors.
xxx

Section 11. No franchise, certificate, or any other

form of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is
owned by such citizens; nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than
fifty years. Neither shall any such franchise or right be granted
except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public
utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in its capital, and all
the executive and managing officers of such corporation or
association must be citizens of the Philippines. (Emphasis
supplied)
The term capital in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common

xxx

Mere legal title is insufficient to meet the 60 percent

Filipino-owned capital required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is considered
as non-Philippine national[s].
xxx

Section 11, Article XII (National Economy and

Patrimony) of the 1987 Constitution mandates the Filipinization of
public utilities, to wit:

xxx

xxx

xxx

xxx
To construe broadly the term capital as the total
outstanding capital stock, including both common and nonvoting preferred shares, grossly contravenes the intent and letter
of the Constitution that the State shall develop a self-reliant and
independent national economy effectively controlled by Filipinos.
A broad definition unjustifiably disregards who owns the allimportant voting stock, which necessarily equates to control of the
public utility.
We shall illustrate the glaring anomaly in giving a broad
definition to the term capital. Let us assume that a corporation
has 100 common shares owned by foreigners and 1,000,000
non-voting preferred shares owned by Filipinos, with both classes
of share having a par value of one peso (P1.00) per share. Under
the broad definition of the term capital, such corporation would
be considered compliant with the 40 percent constitutional limit on
foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock
is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the
common shares have voting rights in the election of directors,
even if they hold only 100 shares. The foreigners, with a
minuscule equity of less than 0.001 percent, exercise control over

the public utility. On the other hand, the Filipinos, holding more
than 99.999 percent of the equity, cannot vote in the election of
directors and hence, have no control over the public utility. This
starkly circumvents the intent of the framers of the Constitution,
as well as the clear language of the Constitution, to place the
control of public utilities in the hands of Filipinos. It also renders
illusory the State policy of an independent national
economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in
the real world, and in fact exists in the present case.
xxx

xxx

xxx
[O]nly holders of common shares can vote in the election
of directors [of PLDT], meaning only common shareholders
exercise control over PLDT. Conversely, holders of preferred
shares, who have no voting rights in the election of directors, do
not have any control over PLDT. In fact, under PLDTs Articles of
Incorporation, holders of common shares have voting rights for all
purposes, while holders of preferred shares have no voting right
for any purpose whatsoever.
It must be stressed, and respondents do not dispute,
that foreigners hold a majority of the common shares of PLDT. In
fact, based on PLDTs 2010 General Information Sheet
(GIS), which is a document required to be submitted annually to
the Securities and Exchange Commission, foreigners hold
120,046,690 common shares of PLDT whereas Filipinos hold only
66,750,622 common shares. In other words, foreigners hold
64.27% of the total number of PLDTs common shares, while
Filipinos hold only 35.73%. Since holding a majority of the
common shares equates to control, it is clear that foreigners
exercise control over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign ownership of
public utilities expressly mandated in Section 11, Article XII of the
Constitution.
As shown in PLDTs 2010 GIS, as submitted to the SEC,
the par value of PLDT common shares is P5.00 per share,
whereas the par value of preferred shares is P10.00 per share. In
other words, preferred shares have twice the par value of
common shares but cannot elect directors and have only 1/70 of
the dividends of common shares. Moreover, 99.44% of the
preferred shares are owned by Filipinos while foreigners own only
a minuscule 0.56% of the preferred shares. Worse, preferred
shares constitute 77.85% of the authorized capital stock of PLDT
while common shares constitute only 22.15%. This undeniably
shows that beneficial interest in PLDT is not with the non-voting
preferred shares but with the common shares, blatantly violating
the constitutional requirement of 60 percent Filipino control and
Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipinos in
accordance with the constitutional mandate. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is constitutionally required for
the States grant of authority to operate a public utility. The
undisputed fact that the PLDT preferred shares, 99.44% owned
by Filipinos, are non-voting and earn only 1/70 of the dividends
that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and
Filipino beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting
stock, and earn less than 60 percent of the dividends, of
PLDT. This directly contravenes the express command in Section

11, Article XII of the Constitution that [n]o franchise, certificate, or

any other form of authorization for the operation of a public utility
shall be granted except to x x x corporations x x x organized
under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens x x x.
To repeat, (1) foreigners own 64.27% of the common
shares of PLDT, which class of shares exercises the sole right to
vote in the election of directors, and thus exercise control over
PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus do not
exercise control over PLDT; (3) preferred shares, 99.44% owned
by Filipinos, have no voting rights; (4) preferred shares earn only
1/70 of the dividends that common shares earn; (5) preferred
shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock
of PLDT and common shares only 22.15%. This kind of
ownership and control of a public utility is a mockery of the
Constitution.
Incidentally, the fact that PLDT common shares with a
par value of P5.00 have a current stock market value
of P2,328.00 per share, while PLDT preferred shares with a par
value of P10.00 per share have a current stock market value
ranging from only P10.92 to P11.06 per share, is a glaring
confirmation by the market that control and beneficial ownership
of PLDT rest with the common shares, not with the preferred
shares.
xxx

xxx

xxx
WHEREFORE, we PARTLY GRANT the petition and
rule that the term capital in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common
and non-voting preferred shares). Respondent Chairperson of the
Securities and Exchange Commission is DIRECTED to apply this
definition of the term capital in determining the extent of
allowable foreign ownership in respondent Philippine Long
Distance Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the
appropriate sanctions under the law.

G.R. No. 147590

April 2, 2007

ANTONIO C. CARAG, Petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, ISABEL G.
PANGANIBAN-ORTIGUERRA, as Executive Labor Arbiter,
NAFLU, and MARIVELES APPAREL CORPORATION LABOR
UNION, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari1 assailing the Decision
dated 29 February 20002 and the Resolution dated 27 March
20013 of the Court of Appeals (appellate court) in CA-G.R. SP
Nos. 54404-06. The appellate court affirmed the decision dated

17 June 19944 of Labor Arbiter Isabel Panganiban-Ortiguerra

(Arbiter Ortiguerra) in RAB-III-08-5198-93 and the resolution
dated 5 January 19955 of the National Labor Relations
Commission (NLRC) in NLRC CA No. L-007731-94.
Arbiter Ortiguerra held that Mariveles Apparel Corporation (MAC),
MAC's Chairman of the Board Antonio Carag (Carag), and MAC's
President Armando David (David) (collectively, respondents) are
guilty of illegal closure and are solidarily liable for the separation
pay of MAC's rank and file employees. The NLRC denied the
motion to reduce bond filed by MAC and Carag.
The Facts
National Federation of Labor Unions (NAFLU) and Mariveles
Apparel Corporation Labor Union (MACLU) (collectively,
complainants), on behalf of all of MAC's rank and file employees,
filed a complaint against MAC for illegal dismissal brought about
by its illegal closure of business. In their complaint dated 12
August 1993, complainants alleged the following:
2. Complainant NAFLU is the sole and exclusive
bargaining agent representing all rank and file
employees of [MAC]. That there is an existing valid
Collective Bargaining Agreement (CBA) executed by the
parties and that at the time of the cause of action herein
below discussed happened there was no labor dispute
between the Union and Management except cases
pending in courts filed by one against the other.
3. That on July 8, 1993, without notice of any kind filed in
accordance with pertinent provisions of the Labor Code,
[MAC], for reasons known only by herself [sic] ceased
operations with the intention of completely closing its
shop or factory. Such intentions [sic] was manifested in a
letter, allegedly claimed by [MAC] as its notice filed only
on the same day that the operations closed.
4. That at the time of closure, employees who have
rendered one to two weeks work were not paid their
corresponding salaries/wages, which remain unpaid until
time [sic] of this writing.
5. That there are other benefits than those abovementioned which have been unpaid by [MAC] at the time
it decided to cease operations, benefits gained by the
workers both by and under the CBA and by operations
[sic] of law.
6. That the closure made by [MAC] in the manner and
style done is perce [sic] illegal, and had caused
tremendous prejudice to all of the employees, who
suffered both mental and financial anguish and who in
view thereof merits [sic] award of all damages (actual,
exemplary and moral), [illegible] to set [an] example to
firms who in the future will [illegible] the idea of simply
prematurely closing without complying [with] the basic
requirement of Notice of Closure.6 (Emphasis supplied)

Upon receipt of the records of the case, Arbiter Ortiguerra

summoned the parties to explore options for possible settlement.
The non-appearance of respondents prompted Arbiter Ortiguerra
to declare the case submitted for resolution "based on the extant
pleadings."
In their position paper dated 3 January 1994, complainants
moved to implead Carag and David, as follows:
x x x x In the present case, it is unfortunate for respondents that
the records and evidence clearly demonstrate that the individual
complainants are entitled to the reliefs prayed for in their
complaint. However, any favorable judgment the Honorable Labor
Arbiter may render in favor of herein complainants will go to
naught should the Office fails [sic] to appreciate the glaring fact
that the respondents [sic] corporation is no longer existing as it
suddenly stopped business operation since [sic] 8 July 1993.
Under this given circumstance, the complainants have no option
left but to implead Atty. ANTONIO CARAG, in his official capacity
as Chairman of the Board along with MR. ARMANDO DAVID as
President. Both are also owners of the respondent corporation
with office address at 10th Floor, Gamon Centre, Alfaro Street,
Salcedo Village[,] Makati[,] Metro Manila although they may be
collectively served with summons and other legal processes
through counsel of record Atty. Joshua Pastores of 8th Floor,
Hanston Bldg., Emerald Avenue, Ortigas[,] Pasig, Metro Manila.
This inclusion of individual respondents as party respondents in
the present case is to guarantee the satisfaction of any judgment
award on the basis of Article 212(c) of the Philippine Labor Code,
as amended, which says:
"Employer includes any person acting in the interest of an
employer, directly or indirectly. It does not, however, include any
labor organization or any of its officers or agents except when
acting as employer."
The provision was culled from Section 2, Republic Act 602, the
Minimum Wage Act. If the employer is an artificial person, it must
have an officer who can be presumed to be the employer, being
"the person acting in the interest of the employer." The
corporation is the employer, only in the technical sense. (A.C.
Ransom Labor Union CCLU VS. NLRC, G.R. 69494, June 10,
1986). Where the employer-corporation, AS IN THE PRESENT
CASE, is no longer existing and unable to satisfy the judgment in
favor of the employee, the officer should be held liable for acting
on behalf of the corporation. (Gudez vs. NLRC, G.R. 83023,
March 22, 1990). Also in the recent celebrated case of Camelcraft
Corporation vs. NLRC, G.R. 90634-35 (June 6, 1990), Carmen
contends that she is not liable for the acts of the company,
assuming it had [acted] illegally, because Camelcraft in a distinct
and separate entity with a legal personality of its own. She claims
that she is only an agent of the company carrying out the
decisions of its board of directors, "We do not agree," said the
Supreme Court. "She is, in fact and legal effect, the corporation,
being not only its president and general manager but also its
owner." The responsible officer of an employer can be held
personally liable not to say even criminally liable for nonpayment
of backwages. This is the policy of the law. If it were otherwise,
corporate employers would have devious ways to evade paying

backwages. (A.C. Ransom Labor Union-CCLU V. NLRC, G.R.

69494, June 10, 1986). If no definite proof exists as to who is the
responsible officer, the president of the corporation who can be
deemed to be its chief operation officer shall be presumed to be
the responsible officer. In Republic Act 602, for example, criminal
responsibility is with the "manager" or in his default, the person
acting as such (Ibid.)7 (Emphasis supplied)
Atty. Joshua L. Pastores (Atty. Pastores), as counsel for
respondents, submitted a position paper dated 21 February 1994
and stated that complainants should not have impleaded Carag
and David because MAC is actually owned by a consortium of
banks. Carag and David own shares in MAC only to qualify them
to serve as MAC's officers.
Without any further proceedings, Arbiter Ortiguerra rendered her
Decision dated 17 June 1994 granting the motion to implead
Carag and David. In the same Decision, Arbiter Ortiguerra
declared Carag and David solidarily liable with MAC to
complainants.
The Ruling of the Labor Arbiter
In her Decision dated 17 June 1994, Arbiter Ortiguerra ruled as
follows:
This is a complaint for illegal dismissal brought about by the
illegal closure and cessation of business filed by NAFLU and
Mariveles Apparel Corporation Labor Union for and in behalf of all
rank and file employees against respondents Mariveles Apparel
Corporation, Antonio Carag and Armando David [who are] its
owners, Chairman of the Board and President, respectively.
This case was originally raffled to the sala of Labor Arbiter Adolfo
V. Creencia. When the latter went on sick leave, his cases were
re-raffled and the instant case was assigned to the sala of the
undersigned. Upon receipt of the record of the case, the parties
were summoned for them to be able to explore options for
settlement. The respondents however did not appear prompting
this Office to submit the case for resolution based on extant
pleadings, thus this decision.
The complainants claim that on July 8, 1993 without notice of any
kind the company ceased its operation as a prelude to a final
closing of the firm. The complainants allege that up to the present
the company has remained closed.
The complainants bewail that at the time of the closure,
employees who have rendered one to two weeks of work were
not given their salaries and the same have remained unpaid.
The complainants aver that respondent company prior to its
closure did not even bother to serve written notice to employees
and to the Department of Labor and Employment at least one
month before the intended date of closure. The respondents did
not even establish that its closure was done in good faith.
Moreover, the respondents did not pay the affected employees
separation pay, the amount of which is provided in the existing

Collective Bargaining Agreement between the complainants and

the respondents.
The complainants pray that they be allowed to implead Atty.
Antonio Carag and Mr. Armando David[,] owners and responsible
officer[s] of respondent company to assure the satisfaction of the
judgment, should a decision favorable to them be rendered. In
support of their claims, the complainants invoked the ruling laid
down by the Supreme Court in the case of A.C. Ransom Labor
Union CCLU vs. NLRC, G.R. No. 69494, June 10, 1986 where it
was held that [a] corporate officer can be held liable for acting on
behalf of the corporation when the latter is no longer in existence
and there are valid claims of workers that must be satisfied.
The complainants pray for the declaration of the illegality of the
closure of respondents' business. Consequently, their
reinstatement must be ordered and their backwages must be
paid. Should reinstatement be not feasible, the complainants pray
that they be paid their separation pay in accordance with the
computation provided for in the CBA. Computations of separation
pay due to individual complainants were adduced in evidence
(Annexes "C" to "C-44", Complainants' Position Paper). The
complainants also pray for the award to them of attorney's fee[s].
The respondents on the other hand by way of controversion
maintain that the present complaint was filed prematurely. The
respondents deny having totally closed and insist that respondent
company is only on a temporary shut-down occasioned by the
pending labor unrest. There being no permanent closure any
claim for separation pay must not be given due course.
Respondents opposed the impleader of Atty. Antonio C. Carag
and Mr. Armando David saying that they are not the owners of
Mariveles Apparel Corporation and they are only minority
stockholders holding qualifying shares. Piercing the veil of
corporate fiction cannot be done in the present case for such
remedy can only be availed of in case of closed or family owned
corporations.
Respondents pray for the dismissal of the present complaint and
the denial of complainants' motion to implead Atty. Antonio C.
Carag and Mr. Armando David as party respondents.
This Office is now called upon to resolve the following issues:
1. Whether or not the respondents are guilty of illegal
closure;
2. Whether or not individual respondents could be held
personally liable; and
3. Whether or not the complainants are entitled to an
award of attorney's fees.
After a judicious and impartial consideration of the record, this
Office is of the firm belief that the complainants must prevail.

The respondents described the cessation of operations in its

premises as a temporary shut-down. While such posturing may
have been initially true, it is not so anymore. The cessation of
operations has clearly exceeded the six months period fixed in
Article 286 of the Labor Code. The temporary shutdown has
ripened into a closure or cessation of operations for causes not
due to serious business losses or financial reverses.
Consequently, the respondents must pay the displaced
employees separation pay in accordance with the computation
prescribed in the CBA, to wit, one month pay for every year of
service. It must be stressed that respondents did not controvert
the verity of the CBA provided computation.
The complainants claim that Atty. Antonio Carag and Mr. Armando
David should be held jointly and severally liable with respondent
corporation. This bid is premised on the belief that the impleader
of the aforesaid officers will guarantee payment of whatever may
be adjudged in complainants' favor by virtue of this case. It is a
basic principle in law that corporations have personality distinct
and separate from the stockholders. This concept is known as
corporate fiction. Normally, officers acting for and in behalf of a
corporation are not held personally liable for the obligation of the
corporation. In instances where corporate officers dismissed
employees in bad faith or wantonly violate labor standard laws or
when the company had already ceased operations and there is
no way by which a judgment in favor of employees could be
satisfied, corporate officers can be held jointly and severally liable
with the company. This Office after a careful consideration of the
factual backdrop of the case is inclined to grant complainants'
prayer for the impleader of Atty. Antonio Carag and Mr. Armando
David, to assure that valid claims of employees would not be
defeated by the closure of respondent company.
The complainants pray for the award to them of moral and
exemplary damages, suffice it to state that they failed to establish
their entitlement to aforesaid reliefs when they did not adduce
persuasive evidence on the matter.
The claim for attorney's fee[s] will be as it is hereby resolved in
complainants' favor. As a consequence of the illegal closure of
respondent company, the complainants were compelled to litigate
to secure benefits due them under pertinent laws. For this
purpose, they secured the services of a counsel to assist them in
the course of the litigation. It is but just and proper to order the
respondents who are responsible for the closure and subsequent
filing of the case to pay attorney's fee[s].
WHEREFORE, premises considered, judgment is hereby
rendered declaring respondents jointly and severally guilty of
illegal closure and they are hereby ordered as follows:
1. To pay complainants separation pay computed on the
basis of one (1) month for every year of service, a
fraction of six (6) months to be considered as one (1)
year in the total amount of P49,101,621.00; and
2. To pay complainants attorney's fee in an amount
equivalent to 10% of the judgment award.

The claims for moral, actual and exemplary damages are

dismissed for lack of evidence.
SO ORDERED.8 (Emphasis supplied)
MAC, Carag, and David, through Atty. Pastores, filed their
Memorandum before the NLRC on 26 August 1994. Carag,
through a separate counsel, filed an appeal dated 30 August
1994 before the NLRC. Carag reiterated the arguments in
respondents' position paper filed before Arbiter Ortiguerra, stating
that:
2.1 While Atty. Antonio C. Carag is the Chairman of the
Board of MAC and Mr. Armando David is the President,
they are not the owners of MAC;
2.2 MAC is owned by a consortium of banks, as
stockholders, and Atty. Antonio C. Carag and Mr.
Armando David are only minority stockholders of the
corporation, owning only qualifying shares;
2.3 MAC is not a family[-]owned corporation, that in case
of a close [sic] corporation, piercing the corporate veil its
[sic] possible to hold the stockholders liable for the
corporation's liabilities;
2.4 MAC is a corporation with a distinct and separate
personality from that of the stockholders; piercing the
corporate veil to hold the stockholders liable for
corporate liabilities is only true [for] close corporations
(family corporations); this is not the prevailing situation in
MAC;
2.5 Atty. Antonio Carag and Mr. Armando David are
professional managers and the extension of shares to
them are just qualifying shares to enable them to occupy
subject position.9
Respondents also filed separate motions to reduce bond.
The Ruling of the NLRC
In a Resolution promulgated on 5 January 1995, the NLRC Third
Division denied the motions to reduce bond. The NLRC stated
that to grant a reduction of bond on the ground that the appeal is
meritorious would be tantamount to ruling on the merits of the
appeal. The dispositive portion of the Resolution of the NLRC
Third Division reads, thus:
PREMISES CONSIDERED, Motions to Reduce Bond for both
respondents are hereby DISMISSED for lack of merit.
Respondents are directed to post cash or surety bond in the
amount of forty eight million one hundred one thousand six
hundred twenty one pesos (P48,101,621.00) within an
unextendible period of fifteen (15) days from receipt hereof.
No further Motions for Reconsideration shall be entertained.

SO ORDERED.10
Respondents filed separate petitions for certiorari before this
Court under Rule 65 of the 1964 Rules of Court. Carag filed his
petition, docketed as G.R. No. 118820, on 13 February 1995. In
the meantime, we granted MAC's prayer for the issuance of a
temporary restraining order to enjoin the NLRC from enforcing
Arbiter Ortiguerra's Decision. On 31 May 1995, we granted
complainants' motion for consolidation of G.R. No. 118820 with
G.R. No. 118839 (MAC v. NLRC, et al.) and G.R. No. 118880
(David v. Arbiter Ortiguerra, et al.). On 12 July 1999, after all the
parties had filed their memoranda, we referred the consolidated
cases to the appellate court in accordance with our decision in St.
Martin Funeral Home v. NLRC.11Respondents filed separate
petitions before the appellate court.
The Ruling of the Appellate Court
On 29 February 2000, the appellate court issued a joint decision
on the separate petitions. The appellate court identified two
issues as essential: (1) whether Arbiter Ortiguerra properly held
Carag and David, in their capacities as corporate officers, jointly
and severally liable with MAC for the money claims of the
employees; and (2) whether the NLRC abused its discretion in
denying the separate motions to reduce bond filed by MAC and
Carag.
The appellate court held that the absence of a formal hearing
before the Labor Arbiter is not a cause for Carag and David to
impute grave abuse of discretion. The appellate court found that
Carag and David, as the most ranking officers of MAC, had a
direct hand at the time in the illegal dismissal of MAC's
employees. The failure of Carag and David to observe the notice
requirement in closing the company shows malice and bad faith,
which justifies their solidary liability with MAC. The appellate court
also found that the circumstances of the present case do not
warrant a reduction of the appeal bond. Thus:
IN VIEW WHEREOF, the petitions are DISMISSED. The decision
of Labor Arbiter Isabel Panganiban-Ortiguerra dated June 17,
1994, and the Resolution dated January 5, 1995, issued by the
National Labor Relations Commission are hereby AFFIRMED. As
a consequence of dismissal, the temporary restraining order
issued on March 2, 1995, by the Third Division of the Supreme
Court is LIFTED. Costs against petitioners.

Despite our 13 August 2001 resolution, Carag filed a second

motion for reconsideration with an omnibus motion for leave to file
a second motion for reconsideration. This Court's First Division
referred the motion to the Court En Banc. In a resolution dated 25
June 2002, the Court En Banc resolved to grant the omnibus
motion for leave to file a second motion for reconsideration,
reinstated the petition, and required respondents to comment on
the petition. On 25 November 2003, the Court En Banc resolved
to suspend the rules to allow the second motion for
reconsideration. This Court's First Division referred the petition to
the Court En Banc on 14 July 2004, and the Court En Banc
accepted the referral on 15 March 2005.
The Issues
Carag questions the appellate court's decision of 29 February
2000 by raising the following issues before this Court:
1. Has petitioner Carag's right to due process been
blatantly violated by holding him personally liable for
over P50 million of the corporation's liability, merely as
board chairman and solely on the basis of the motion to
implead him in midstream of the proceedings as
additional respondent, without affording him the right to
present evidence and in violation of the accepted
procedure prescribed by Rule V of the NLRC Rules of
Procedure, as to render the ruling null and void?
2. Assuming, arguendo, that he had been accorded due
process, is the decision holding him solidarily liable
supported by evidence when the only pleadings (not
evidence) before the Labor Arbiter and that of the Court
of Appeals are the labor union's motion to implead him
as respondent and his opposition
thereto, without position papers, without evidence
submitted, and without hearing on the issue of personal
liability, and even when bad faith or malice, as the only
legal basis for personal liability, was expressly found
absent and wanting by [the] Labor Arbiter, as to render
said decision null and void?
3. Did the NLRC commit grave abuse of discretion in
denying petitioner's motion to reduce appeal bond?14
The Ruling of the Court

SO ORDERED.12 (Emphasis in the original)

We find the petition meritorious.

The appellate court denied respondents' separate motions for

reconsideration.13

On Denial of Due Process to Carag and David

In a resolution dated 20 June 2001, this Court's First Division

denied the petition for Carag's failure to show sufficiently that the
appellate court committed any reversible error to warrant the
exercise of our discretionary appellate jurisdiction. Carag filed a
motion for reconsideration of our resolution denying his petition.
In a resolution dated 13 August 2001, this Court's First Division
denied Carag's reconsideration with finality.

Carag asserts that Arbiter Ortiguerra rendered her Decision of 17

June 1994 without issuing summons on him, without requiring him
to submit his position paper, without setting any hearing, without
giving him notice to present his evidence, and without informing
him that the case had been submitted for decision - in violation of
Sections 2,15 3,16 4,17 5(b),18 and 11(c) 19 of Rule V of The New
Rules of Procedure of the NLRC.20

It is clear from the narration in Arbiter Ortiguerra's Decision that

she only summoned complainants and MAC, and not Carag, to a
conference for possible settlement. In her Decision, Arbiter
Ortiguerra stated that she scheduled the conference "upon
receipt of the record of the case." At the time of the conference,
complainants had not yet submitted their position paper which
contained the motion to implead Carag. Complainants could not
have submitted their position paper before the conference since
procedurally the Arbiter directs the submission of position papers
only after the conference.21 Complainants submitted their position
paper only on 10 January 1994, five months after filing the
complaint. In short, at the time of the conference, Carag was not
yet a party to the case. Thus, Arbiter Ortiguerra could not have
possibly summoned Carag to the conference.
Carag vigorously denied receiving summons to the conference,
and complainants have not produced any order of Arbiter
Ortiguerra summoning Carag to the conference. A thorough
search of the records of this case fails to show any order of
Arbiter Ortiguerra directing Carag to attend the conference.
Clearly, Arbiter Ortiguerra did not summon Carag to the
conference.
When MAC failed to appear at the conference, Arbiter Ortiguerra
declared the case submitted for resolution. In her Decision,
Arbiter Ortiguerra granted complainants' motion to implead Carag
and at the same time, in the same Decision, found Carag
personally liable for the debts of MAC consisting of P49,101,621
in separation pay to complainants. Arbiter Ortiguerra never issued
summons to Carag, never called him to a conference for possible
settlement, never required him to submit a position paper, never
set the case for hearing, never notified him to present his
evidence, and never informed him that the case was submitted for
decision - all in violation of Sections 2, 3, 4, 5(b), and 11(c) of
Rule V of The New Rules of Procedure of the NLRC.
Indisputably, there was utter absence of due process to Carag at
the arbitration level. The procedure adopted by Arbiter Ortiguerra
completely prevented Carag from explaining his side and
presenting his evidence. This alone renders Arbiter Ortiguerra's
Decision a nullity insofar as Carag is concerned. While labor
arbiters are not required to conduct a formal hearing or trial, they
have no license to dispense with the basic requirements of due
process such as affording respondents the opportunity to be
heard. In Habana v. NLRC,22 we held:
The sole issue to be resolved is whether private respondents
OMANFIL and HYUNDAI were denied due process when the
Labor Arbiter decided the case solely on the basis of the position
paper and supporting documents submitted in evidence by
Habana and De Guzman.
We rule in the affirmative. The manner in which this case was
decided by the Labor Arbiter left much to be desired in terms of
respect for the right of private respondents to due process First, there was only one conciliatory conference held in
this case. This was on 10 May 1996. During the
conference, the parties did not discuss at all the

possibility of amicable settlement due to petitioner's

stubborn insistence that private respondents be declared
in default.
Second, the parties agreed to submit their respective
motions - petitioner's motion to declare respondents in
default and private respondents' motion for bill of
particulars - for the consideration of the Labor Arbiter.
The Labor Arbitration Associate, one Ms. Gloria Vivar,
then informed the parties that they would be notified of
the action of the Labor Arbiter on the pending motions.
xxx
Third, since the conference on 10 May 1996 no order or
notice as to what action was taken by the Labor Arbiter
in disposing the pending motions was ever received by
private respondents. They were not declared in default
by the Labor Arbiter nor was petitioner required to submit
a bill of particulars.
Fourth, neither was there any order or notice requiring
private respondents to file their position paper, nor an
order informing the parties that the case was already
submitted for decision. What private respondents
received was the assailed decision adverse to them.
It is clear from the foregoing that there was an utter absence of
opportunity to be heard at the arbitration level, as the procedure
adopted by the Labor Arbiter virtually prevented private
respondents from explaining matters fully and presenting their
side of the controversy. They had no chance whatsoever to at
least acquaint the Labor Arbiter with whatever defenses they
might have to the charge that they illegally dismissed petitioner. In
fact, private respondents presented their position paper and
documentary evidence only for the first time on appeal to the
NLRC.
The essence of due process is that a party be afforded a
reasonable opportunity to be heard and to submit any evidence
he may have in support of his defense. Where, as in this case,
sufficient opportunity to be heard either through oral arguments or
position paper and other pleadings is not accorded a party to a
case, there is undoubtedly a denial of due process.
It is true that Labor Arbiters are not bound by strict rules of
evidence and of procedure. The manner by which Arbiters
dispose of cases before them is concededly a matter of
discretion. However, that discretion must be exercised regularly,
legally and within the confines of due process. They are
mandated to use every reasonable means to ascertain the facts
of each case, speedily, objectively and without regard to
technicalities of law or procedure, all in the interest of justice and
for the purpose of accuracy and correctness in adjudicating the
monetary awards.
In this case, Carag was in a far worse situation. Here, Carag was
not issued summons, not accorded a conciliatory conference, not
ordered to submit a position paper, not accorded a hearing, not

given an opportunity to present his evidence, and not notified that

the case was submitted for resolution. Thus, we hold that Arbiter
Ortiguerra's Decision is void as against Carag for utter absence of
due process. It was error for the NLRC and the Court of Appeals
to uphold Arbiter Ortiguerra's decision as against Carag.
On the Liability of Directors for Corporate Debts
This case also raises this issue: when is a director personally
liable for the debts of the corporation? The rule is that a director is
not personally liable for the debts of the corporation, which has a
separate legal personality of its own. Section 31 of the
Corporation Code lays down the exceptions to the rule, as
follows:
Liability of directors, trustees or officers. - Directors or trustees
who wilfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence or
bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
xxxx
Section 31 makes a director personally liable for corporate debts
if he wilfully and knowingly votes for or assents to patently
unlawful acts of the corporation. Section 31 also makes a director
personally liable if he is guilty of gross negligence or bad faith in
directing the affairs of the corporation.
Complainants did not allege in their complaint that Carag wilfully
and knowingly voted for or assented to any patently unlawful act
of MAC. Complainants did not present any evidence showing that
Carag wilfully and knowingly voted for or assented to any patently
unlawful act of MAC. Neither did Arbiter Ortiguerra make any
finding to this effect in her Decision.
Complainants did not also allege that Carag is guilty of gross
negligence or bad faith in directing the affairs of MAC.
Complainants did not present any evidence showing that Carag is
guilty of gross negligence or bad faith in directing the affairs of
MAC. Neither did Arbiter Ortiguerra make any finding to this effect
in her Decision.
Arbiter Ortiguerra stated in her Decision that:
In instances where corporate officers dismissed employees in bad
faith or wantonly violate labor standard laws or when the
company had already ceased operations and there is no way by
which a judgment in favor of employees could be satisfied,
corporate officers can be held jointly and severally liable with the
company.23
After stating what she believed is the law on the matter, Arbiter
Ortiguerra stopped there and did not make any finding that Carag
is guilty of bad faith or of wanton violation of labor standard laws.

Arbiter Ortiguerra did not specify what act of bad faith Carag
committed, or what particular labor standard laws he violated.
To hold a director personally liable for debts of the corporation,
and thus pierce the veil of corporate fiction, the bad faith or
wrongdoing of the director must be established clearly and
convincingly.24 Bad faith is never presumed.25 Bad faith does not
connote bad judgment or negligence. Bad faith imports a
dishonest purpose. Bad faith means breach of a known duty
through some ill motive or interest. Bad faith partakes of the
nature of fraud.26 In Businessday Information Systems and
Services, Inc. v. NLRC,27 we held:
There is merit in the contention of petitioner Raul Locsin that the
complaint against him should be dismissed. A corporate officer is
not personally liable for the money claims of discharged corporate
employees unless he acted with evident malice and bad faith in
terminating their employment. There is no evidence in this case
that Locsin acted in bad faith or with malice in carrying out the
retrenchment and eventual closure of the company (Garcia vs.
NLRC, 153 SCRA 640), hence, he may not be held personally
and solidarily liable with the company for the satisfaction of the
judgment in favor of the retrenched employees.
Neither does bad faith arise automatically just because a
corporation fails to comply with the notice requirement of labor
laws on company closure or dismissal of employees. The failure
to give notice is not an unlawful act because the law does not
define such failure as unlawful. Such failure to give notice is a
violation of procedural due process but does not amount to an
unlawful or criminal act. Such procedural defect is called illegal
dismissal because it fails to comply with mandatory procedural
requirements, but it is not illegal in the sense that it constitutes an
unlawful or criminal act.
For a wrongdoing to make a director personally liable for debts of
the corporation, the wrongdoing approved or assented to by the
director must be a patently unlawful act. Mere failure to comply
with the notice requirement of labor laws on company closure or
dismissal of employees does not amount to a patently unlawful
act. Patently unlawful acts are those declared unlawful by law
which imposes penalties for commission of such unlawful acts.
There must be a law declaring the act unlawful and penalizing the
act.
An example of a patently unlawful act is violation of Article 287 of
the Labor Code, which states that "[V]iolation of this provision is
hereby declared unlawful and subject to the penal provisions
provided under Article 288 of this Code." Likewise, Article 288 of
the Labor Code on Penal Provisions and Liabilities, provides that
"any violation of the provision of this Code declared unlawful or
penal in nature shall be punished with a fine of not less than One
Thousand Pesos (P1,000.00) nor more than Ten Thousand Pesos
(P10,000.00), or imprisonment of not less than three months nor
more than three years, or both such fine and imprisonment at the
discretion of the court."
In this case, Article 28328 of the Labor Code, requiring a onemonth prior notice to employees and the Department of Labor

and Employment before any permanent closure of a company,

does not state that non-compliance with the notice is an unlawful
act punishable under the Code. There is no provision in any other
Article of the Labor Code declaring failure to give such notice an
unlawful act and providing for its penalty.

%7C2007/jan2007/146667.htm - which the Court of Appeals

cited, does not apply to this case. We quote pertinent portions of
the ruling, thus:

Complainants did not allege or prove, and Arbiter Ortiguerra did

not make any finding, that Carag approved or assented to any
patently unlawful act to which the law attaches a penalty for its
commission. On this score alone, Carag cannot be held
personally liable for the separation pay of complainants.

"Any worker whose employment has been terminated as a

consequence of an unlawful lockout shall be entitled to
reinstatement with full backwages."

This leaves us with Arbiter Ortiguerra's assertion that "when the

company had already ceased operations and there is no way by
which a judgment in favor of employees could be satisfied,
corporate officers can be held jointly and severally liable with the
company." This assertion echoes the complainants' claim that
Carag is personally liable for MAC's debts to complainants "on
the basis of Article 212(e) of the Labor Code, as amended," which
says:

"Any person violating any of the provisions of Article 265 of this

Code shall be punished by a fine of not exceeding five
hundred pesos and/or imprisonment for not less than one (1)
day nor more than six (6) months."

'Employer' includes any person acting in the interest of an

employer, directly or indirectly. The term shall not include any
labor organization or any of its officers or agents except when
acting as employer. (Emphasis supplied)
Indeed, complainants seek to hold Carag personally liable for the
debts of MAC based solely on Article 212(e) of the Labor Code.
This is the specific legal ground cited by complainants, and used
by Arbiter Ortiguerra, in holding Carag personally liable for the
debts of MAC.
We have already ruled in McLeod v. NLRC29 and Spouses Santos
v. NLRC30 that Article 212(e) of the Labor Code, by itself, does not
make a corporate officer personally liable for the debts of the
corporation. The governing law on personal liability of directors for
debts of the corporation is still Section 31 of the Corporation
Code. Thus, we explained in McLeod:
Personal liability of corporate directors, trustees or officers
attaches only when (1) they assent to a patently unlawful act of
the corporation, or when they are guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of
interest resulting in damages to the corporation, its stockholders
or other persons; (2) they consent to the issuance of watered
down stocks or when, having knowledge of such issuance, do not
forthwith file with the corporate secretary their written objection;
(3) they agree to hold themselves personally and solidarily liable
with the corporation; or (4) they are made by specific provision of
law personally answerable for their corporate action.
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df
%7C2007/jan2007/146667.htm xxx
The ruling in A.C. Ransom Labor Union-CCLU v.
NLRC,http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPRE
ME_COURT/Decisions/2007/jan2007.zip%3E9,df

(a) Article 265 of the Labor Code, in part, expressly provides:

Article 273 of the Code provides that:

(b) How can the foregoing provisions be implemented when the

employer is a corporation? The answer is found in Article 212 (c)
of the Labor Code which provides:
"(c) 'Employer' includes any person acting in the interest of an
employer, directly or indirectly. The term shall not include any
labor organization or any of its officers or agents except when
acting as employer."
The foregoing was culled from Section 2 of RA 602, the Minimum
Wage Law. Since RANSOM is an artificial person, it must have an
officer who can be presumed to be the employer, being the
"person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held
personally, not to say even criminally, liable for non-payment of
back wages. That is the policy of the law.
xxxx
(c) If the policy of the law were otherwise, the corporation
employer can have devious ways for evading payment of back
wages. In the instant case, it would appear that RANSOM, in
1969, foreseeing the possibility or probability of payment of
back wages to the 22 strikers, organized ROSARIO to replace
RANSOM, with the latter to be eventually phased out if the 22
strikers win their case. RANSOM actually ceased operations on
May 1, 1973, after the December 19, 1972 Decision of the Court
of Industrial Relations was promulgated against RANSOM.
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df
%7C2007/jan2007/146667.htm - (Emphasis supplied)

Clearly, in A.C. Ransom, RANSOM, through its President,

organized ROSARIO to evade payment of backwages to the 22
strikers. This situation, or anything similar showing malice or bad
faith on the part of Patricio, does not obtain in the present case.
In Santos v. NLRC,
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df
%7C2007/jan2007/146667.htm - the Court held, thus:
It is true, there were various cases when corporate officers were
themselves held by the Court to be personally accountable for the
payment of wages and money claims to its employees. In A.C.
Ransom Labor Union-CCLU vs. NLRC, for instance, the Court
ruled that under the Minimum Wage Law, the responsible officer
of an employer corporation could be held personally liable for
nonpayment of backwages for "(i)f the policy of the law were
otherwise, the corporation employer (would) have devious ways
for evading payment of backwages." In the absence of a clear
identification of the officer directly responsible for failure to pay
the backwages, the Court considered the President of the
corporation as such officer. The case was cited in Chua vs.
NLRC in holding personally liable the vice-president of the
company, being the highest and most ranking official of the
corporation next to the President who was dismissed for the
latter's claim for unpaid wages.
A review of the above exceptional cases would readily disclose
the attendance of facts and circumstances that could rightly
sanction personal liability on the part of the company officer.
In A.C. Ransom, the corporate entity was a family corporation
and execution against it could not be implemented because
of the disposition posthaste of its leviable assets evidently in
order to evade its just and due obligations. The doctrine of
"piercing the veil of corporate fiction" was thus clearly
appropriate. Chua likewise involved another family corporation,
and this time the conflict was between two brothers occupying the
highest ranking positions in the company. There were
incontrovertible facts which pointed to extreme personal animosity
that resulted, evidently in bad faith, in the easing out from the
company of one of the brothers by the other.
The basic rule is still that which can be deduced from the Court's
pronouncement in Sunio vs. National Labor Relations
Commission, thus:
We come now to the personal liability of petitioner, Sunio, who
was made jointly and severally responsible with petitioner
company and CIPI for the payment of the backwages of private
respondents. This is reversible error. The Assistant Regional
Director's Decision failed to disclose the reason why he was
made personally liable. Respondents, however, alleged as
grounds thereof, his being the owner of one-half () interest of
said corporation, and his alleged arbitrary dismissal of private
respondents.
Petitioner Sunio was impleaded in the Complaint in his capacity
as General Manager of petitioner corporation. There appears to
be no evidence on record that he acted maliciously or in bad faith
in terminating the services of private respondents. His act,

therefore, was within the scope of his authority and was a

corporate act.
It is basic that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as
well as from that of any other legal entity to which it may be
related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation
is not of itself sufficient ground for disregarding the separate
corporate personality. Petitioner Sunio, therefore, should not have
been made personally answerable for the payment of private
respondents' back
salaries.http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPR
EME_COURT/Decisions/2007/jan2007.zip%3E9,df
%7C2007/jan2007/146667.htm Thus, the rule is still that the doctrine of piercing the corporate veil
applies only when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. In the
absence of malice, bad faith, or a specific provision of law making
a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities. Neither Article 212[e] nor
Article 273 (now 272) of the Labor Code expressly makes any
corporate officer personally liable for the debts of the corporation.
As this Court ruled in H.L. Carlos Construction, Inc. v. Marina
Properties
Corporation:http://elibrary.supremecourt.gov.ph/DOCUMENTS/S
UPREME_COURT/Decisions/2007/jan2007.zip%3E9,df
%7C2007/jan2007/146667.htm We concur with the CA that these two respondents are not liable.
Section 31 of the Corporation Code (Batas Pambansa Blg. 68)
provides:
"Section 31. Liability of directors, trustees or officers. - Directors
or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith ... shall be liable jointly and severally for
all damages resulting therefrom suffered by the corporation, its
stockholders and other persons."
The personal liability of corporate officers validly attaches only
when (a) they assent to a patently unlawful act of the corporation;
or (b) they are guilty of bad faith or gross negligence in directing
its affairs; or (c) they incur conflict of interest, resulting in
damages to the corporation, its stockholders or other
persons.31 (Boldfacing in the original; boldfacing with
underscoring supplied)
Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court
of Appeals to hold Carag personally liable for the separation pay
owed by MAC to complainants based alone on Article 212(e) of
the Labor Code. Article 212(e) does not state that corporate
officers are personally liable for the unpaid salaries or separation
pay of employees of the corporation. The liability of corporate
officers for corporate debts remains governed by Section 31 of
the Corporation Code.

WHEREFORE, we GRANT the petition. We SET ASIDE the

Decision dated 29 February 2000 and the Resolution dated 27
March 2001 of the Court of Appeals in CA-G.R. SP Nos. 5440406 insofar as petitioner Antonio Carag is concerned.
SO ORDERED.
MEGAN SUGAR CORPORATION,
Petitioner,
-versus-

NFSCs land and sugar mill. During public auction, EPCIB was
the sole bidder and was thus able to buy the entire property and
consolidate the titles in its name. EPCIB then employed the
services of Philippine Industrial Security Agency (PISA) to help it
in its effort to secure the land and the sugar mill.
On September 16, 2002, CIMICO filed with the RTC an
Amended Complaint[7] where it impleaded PISA and EPCIB. As a
result, on September 25, 2002, upon the motion of CIMICO, the
G.R. No. 170352
RTC issued a restraining order, directing EPCIB and PISA to
desist from taking possession over the property in dispute.
Hence, CIMICO was able to continue its possession over the
Present
property.
CARPIO,
On October 3, 2002, CIMICO and petitioner Megan
NACHURA,
Sugar Corporation (MEGAN) entered into a MOA [8] whereby
PERALTA,
MEGAN assumed CIMICOs rights, interests and obligations over
ABAD, and
the property. As a result of the foregoing undertaking, MEGAN
MENDOZA,
started operating the sugar mill on November 18, 2002.

REGIONAL TRIAL COURT OF ILOILO, BRANCH

68, DUMANGAS, ILOILO; NEW FRONTIER SUGAR
CORPORATION and EQUITABLE PCI BANK,
Respondents.

On November 22, 2002, Passi Iloilo Sugar Central, Inc.

Promulgated:
(Passi Sugar) filed with the RTC a Motion for Intervention
claiming to be the vendee of EPCIB. Passi Sugar claimed that it
had entered into a Contract to Sell [9] with EPCIB after the latter
foreclosed NFSCs land and sugar mill.

x----------------------------------------------------------------------------------------x
DECISION
PERALTA, J.:
Before this Court is a petition for review on certiorari,
under Rule 45 of the Rules of Court, seeking to set aside the
August 23, 2004 Decision[2] and October 12, 2005 Resolution[3] of
the Court of Appeals (CA), in CA-G.R. SP No. 75789.
[1]

The facts of the case are as follows:

On July 23, 1993, respondent New Frontier Sugar
Corporation (NFSC) obtained a loan from respondent Equitable
PCI Bank (EPCIB). Said loan was secured by a real estate
mortgage over NFSCs land consisting of ninety-two (92) hectares
located in Passi City, Iloilo, and a chattel mortgage over NFSCs
sugar mill.
On November 17, 2000, because of liquidity problems
and continued indebtedness to EPCIB, NFSC entered into a
Memorandum of Agreement[4] (MOA) with Central Iloilo Milling
Corporation (CIMICO), whereby the latter agreed to take-over the
operation and management of the NFSC raw sugar factory and
facilities for the period covering crop years 2000 to 2003.
On April 19, 2002, NFSC filed a compliant for specific
performance and collection[5] against CIMICO for the latters
failure to pay its obligations under the MOA.
In response, CIMICO filed with the Regional Trial Court
(RTC) of Dumangas, Iloilo, Branch 68, a case against NFSC for
sum of money and/or breach of contract.[6] The case was
docketed as Civil Case No. 02-243.
On May 10, 2002, because of NFSCs failure to pay its
debt, EPCIB instituted extra-judicial foreclosure proceedings over

On November 29, 2002, during the hearing on the

motion for intervention, Atty. Reuben Mikhail Sabig (Atty. Sabig)
appeared before the RTC and entered his appearance as counsel
for MEGAN. Several counsels objected to Atty. Sabigs
appearance since MEGAN was not a party to the proceedings;
however, Atty. Sabig explained to the court that MEGAN had
purchased the interest of CIMICO and manifested that his
statements would bind MEGAN.
On December 10, 2002, EPCIB filed a Motion for
Delivery/Deposit of Mill Shares/Rentals.[10]
On December 11, 2002, Passi Sugar filed a Motion to
Order Deposit of Mill Share Production of MEGAN and/or
CIMICO.[11] On the same day, NFSC filed a Motion to Order
Deposit of Millers Share (37%) or the Lease Consideration under
the MOA between NFSC and CIMICO.[12]
On December 27, 2002, NFSC filed another Motion to
Hold in Escrow Sugar Quedans or Proceeds of Sugar Sales
Equivalent to Millers Shares.[13]
On January 16, 2003, the RTC issued an
Order[14] granting EPCIBs motion for the placement of millers
share in escrow. The dispositive portion of which reads:
WHEREFORE, in view of the
foregoing, the motions to place the mills share
in escrow to the court is hereby GRANTED.
Megan Sugar Corporation or its
director-officer, Mr. Joey Concha, who is
General Manager of Megan, is ordered to
deposit in escrow within five (5) days upon
receipt of this order, the sugar quedans
representing the millers share to the Court
starting from December 19, 2002 and
thereafter, in every Friday of the week pursuant
to the Memorandum of Agreement executed by
plaintiff CIMICO and defendant NFSC.
SO ORDERED. [15]

On January 29, 2003, Atty. Sabig filed an Omnibus

Motion for Reconsideration and Clarification.[16] On February 19,
2003, the RTC issued an Order[17] denying said motion.
On February 27, 2003, EPCIB filed an Urgent ExParte Motion for Execution,[18] which was granted by the RTC in
an Order[19] dated February 28, 2003.
Aggrieved by the orders issued by the RTC, MEGAN
filed before the CA a petition for certiorari,[20] dated March 5, 2003.
In said petition, MEGAN argued mainly on two points; first, that
the RTC erred when it determined that MEGAN was subrogated
to the obligations of CIMICO and; second, that the RTC had no
jurisdiction over MEGAN.
On August 23, 2004, the CA issued a Decision
dismissing MEGANs petition, the dispositive portion of which
reads:
WHEREFORE, premises considered,
the Petition for Certiorari is hereby DENIED
and forthwith DISMISSED for lack of merit.
Cost against petitioner.
SO ORDERED.[21]
In denying MEGANs petition, the CA ruled that since
Atty. Sabig had actively participated before the RTC, MEGAN was
already estopped from assailing the RTCs jurisdiction.
Aggrieved, MEGAN then filed a Motion for
Reconsideration,[22] which was, however, denied by the CA in
Resolution dated October 12, 2005.
Hence, herein petition, with MEGAN raising the following
issues for this Courts consideration, to wit:
I.
WHETHER OR NOT THE PETITIONER IS
ESTOPPED FROM QUESTIONING THE
ASSAILED ORDERS BECAUSE OF THE
ACTS OF ATTY. REUBEN MIKHAIL SABIG.
II.
WHETHER OR NOT THE REGIONAL
TRIAL COURT HAD JURISDICTION TO
ISSUE THE ORDERS DATED JANUARY 16,
2003, FEBRUARY 19, 2003 AND FEBRUARY
28, 2003.[23]
The petition is not meritorious.
MEGAN points out that its board of directors did not
issue a resolution authorizing Atty. Sabig to represent the
corporation before the RTC. It contends that Atty. Sabig was an
unauthorized agent and as such his actions should not bind the
corporation. In addition, MEGAN argues that the counsels of the
different parties were aware of Atty. Sabigs lack of authority
because he declared in court that he was still in the process of
taking over the case and that his voluntary appearance was just
for the hearing of the motion for intervention of Passi Sugar.
Both EPCIB and NFSC, however, claim that MEGAN is
already estopped from assailing the authority of Atty. Sabig. They
contend that Atty. Sabig had actively participated in the
proceedings before the RTC and had even filed a number of
motions asking for affirmative relief. They also point out that Jose
Concha (Concha), who was a member of the Board of Directors
of MEGAN, accompanied Atty. Sabig during the hearing. Lastly,
EPCIB and NFSC contend that all the motions, pleadings and

court orders were sent to the office of MEGAN; yet, despite the
same, MEGAN never repudiated the authority of Atty. Sabig.
After a judicial examination of the records pertinent to
the case at bar, this Court agrees with the finding of the CA that
MEGAN is already estopped from assailing the jurisdiction of the
RTC.
Relevant to the discussion herein is the transcript
surrounding the events of the November 29, 2002 hearing of
Passi Sugars motion for intervention, to wit:
ATTY. ARNOLD LEBRILLA:
Appearing as counsel for defendant
PCI Equitable Bank, your Honor.
ATTY. CORNELIO PANES:
Also appearing as counsel for
defendant
New
Frontier
Sugar
Corporation.
ATTY. ANTONIO SINGSON:
I am appearing, your Honor, as
counsel for Passisugar.
ATTY. REUBEN MIKHAIL SABIG:
Appearing your Honor, for Megan
Sugar, Inc.
ATTY. LEBRILLA: Your Honor, the counsel for
the plaintiff CIMICO
has not yet arrived.
ATTY. SABIG:

Your Honor, we have been

furnished of a copy
of the motion. Ive
talked
to
Atty.
[Leonardo] Jiz and
he informed me that
he cannot attend
this
hearing
because we are in
the
process
of
taking
over
this
case. However, the
Passisugar
had
intervened and we
have
to
appear
because we have
been copy furnished
of the motion, and
also, your Honor,
since the motion will
directly
affect
Megan and we are
appearing in this
hearing despite the
fact that we had not
officially
received
the copy of the
motion. Anyway,
your Honor, since
we are in the
process of taking
over this case, Atty.
Jiz told me that he
cannot
appear
today.

COURT:

Here is the representative

from CIMICO.

ATTY. PANES:

Yes, your Honor, Atty.

Gonzales is here.

the
case
itself,
specifically for the
hearing [on] this
motion. Thats our
appearance
for
today because we
have been served
and we have to
protect
our
interest. We are not
saying that we are
taking over the case
but there is a
hearing
for
the
motion
in
intervention and we
have been served a
copy, thats why we
appear voluntarily.

ATTY. NELIA JESUSA GONZALES:

I am appearing in behalf of the plaintiff
CIMICO, your Honor.
xxxx
COURT:

Shall we tackle first your

motion for intervention?

ATTY. SINGSON:
ATTY. PANES:

Yes, your Honor.

Yes, your Honor, and I
would like to make a
manifestation
in
relation
to
the
appearance made
by
Atty.
Sabig. Megan
is
not, in anyway, a
party [to] this case
and if he must join,
he can file a motion
for intervention. We
would
like
to
reiterate our stand
that
he
cannot
participate in any
proceeding before
this
Court
particularly in this
case.

COURT:

Yes, that is right.

ATTY. SINGSON:

Yes, your Honor, unless

there
is
a
substitution of the
plaintiff.

ATTY. SABIG:

I understand, your Honor,

that we have been
served a copy of this
motion.

ATTY. PANES:

A service copy of the

motion is only a
notice and it is not,
in anyway, [a] right
for him to appear as
a party.

COURT:

Just

ATTY. SABIG:

a moment, Atty.
Panes. Shall
we
allow Atty. Sabig to
finish first?

This motion directly affects

us and thats why
were
voluntarily
appearing, just for
this hearing on the
motion and not for

ATTY. LEBRILLA: Your Honor, please, for the

defendant, we do
not object to the
appearance of the
counsel for Megan
provided that the
counsel
could
assure
us
that
whatever he says
[all through] in this
proceeding
will
[bind] his client, your
Honor, as he is duly
authorized by the
corporation, under
oath, your Honor,
that whatever he
says here is binding
upon
the
corporation.
ATTY. SABIG:
COURT:

Yes, your Honor.

But I thought all the while
that your motion for
intervention
will
implead Megan.

ATTY. SINGSON: We will not yet implead

them, your Honor.
COURT:

Why will you not implead

them because they
are
now
in
possession of the
mill?

ATTY. SINGSON:

Thats why we want to be

clarified. In
what
capacity is Megan
entering into the
picture? Thats the
point now that we
would like to ask
them. So, whatever
statement youll be
making here will
bind Megan?

ATTY.

SABIG:

Yes,
your
Honor. Specifically
for
the
hearing
because apparently,
we
have
to
voluntarily
appear
since they furnished
us a copy that would
directly affect our
rights.

xxxx
COURT:

Are you saying that you

are appearing now
in
behalf
of
Megan?

ATTY. SABIG:
COURT:

Yes, your Honor.

And whatever statement
you made here will
bind Megan?

ATTY. SABIG:

Yes, your Honor.

xxxx
COURT:

ATTY.

Thats why youre being

asked now what
interest
[does]
Megan have here?
SABIG:

We

are already in
possession of the
mill, your Honor.

ATTY. SINGSON:

You are in possession of

the mill. [On] what
authority are you
in possession, this
Megan group?

ATTY. SABIG:

We have a Memorandum
of
Agreement
which we entered,
your Honor, and
they
transferred
their [referring to
CIMICO] rights to
us.[24]

The doctrine of estoppel is based upon the grounds of

public policy, fair dealing, good faith and justice, and its purpose
is to forbid one to speak against his own act, representations, or
commitments to the injury of one to whom they were directed and
who reasonably relied thereon. The doctrine of estoppel springs
from equitable principles and the equities in the case. It is
designed to aid the law in the administration of justice where
without its aid injustice might result. It has been applied by this
Court wherever and whenever special circumstances of a case so
demand.[25]
Based on the events and circumstances surrounding the
issuance of the assailed orders, this Court rules that MEGAN is
estopped from assailing both the authority of Atty. Sabig and the
jurisdiction of the RTC. While it is true, as claimed by MEGAN,

that Atty. Sabig said in court that he was only appearing for the
hearing of Passi Sugars motion for intervention and not for the
case itself, his subsequent acts, coupled with MEGANs inaction
and negligence to repudiate his authority, effectively bars MEGAN
from assailing the validity of the RTC proceedings under the
principle of estoppel.
In the first place, Atty. Sabig is not a complete stranger
to MEGAN. As a matter of fact, as manifested by EPCIB, Atty.
Sabig and his law firm SABIG SABIG & VINGCO Law Office has
represented MEGAN in other cases[26] where the opposing parties
involved were also CIMICO and EPCIB. As such, contrary to
MEGANs claim, such manifestation is neither immaterial nor
irrelevant,[27] because at the very least, such fact shows that
MEGAN knew Atty. Sabig.
MEGAN can no longer deny the authority of Atty. Sabig
as they have already clothed him with apparent authority to act in
their behalf. It must be remembered that when Atty. Sabig entered
his appearance, he was accompanied by Concha, MEGANs
director and general manager. Concha himself attended several
court hearings, and on December 17, 2002, even sent a
letter[28] to the RTC asking for the status of the case. A corporation
may be held in estoppel from denying as against innocent third
persons the authority of its officers or agents who have been
clothed by it with ostensible or apparent authority.[29]Atty. Sabig
may not have been armed with a board resolution, but the
appearance of Concha made the parties assume that MEGAN
had knowledge of Atty. Sabigs actions and, thus, clothed Atty.
Sabig with apparent authority such that the parties were made to
believe that the proper person and entity to address was Atty.
Sabig. Apparent authority, or what is sometimes referred to as the
"holding out" theory, or doctrine of ostensible agency, imposes
liability, not as the result of the reality of a contractual relationship,
but rather because of the actions of a principal or an employer in
somehow misleading the public into believing that the relationship
or the authority exists.[30]
Like the CA, this Court notes that MEGAN never
repudiated the authority of Atty. Sabig when all the motions,
pleadings and court orders were sent not to the office of Atty.
Sabig but to the office of MEGAN, who in turn, would forward all
of the same to Atty. Sabig, to wit:
x x x All the motions, pleadings and other
notices in the civil case were mailed to Atty.
Reuben Mikhail P. Sabig, Counsel for Megan
Sugar, NFSC Compound, Barangay Man-it,
Passi, Iloilo City which is the address of the
Sugar Central being operated by Megan Sugar.
The said address is not the real office address
of Atty. Sabig. As pointed out by private
respondent Equitable PCI Bank, the office
address of Atty. Sabig is in Bacolod City. All
orders, pleadings or motions filed in Civil Case
02-243 were received in the sugar central being
operated by Megan Central and later forwarded
by Megan Sugar to Atty. Sabig who is based
in Bacolod City. We find it incredible that,
granting that there was no authority given to
said counsel, the record shows that it was
received in the sugar mill operated by Megan
and passed on to Atty. Sabig. At any stage,
petitioner could have repudiated Atty. Sabig
when it received the court pleadings addressed
to Atty. Sabig as their counsel.[31]

One of the instances of estoppel is when the principal

has clothed the agent with indicia of authority as to lead a
reasonably prudent person to believe that the agent actually has
such authority.[32] With the case of MEGAN, it had all the
opportunity to repudiate the authority of Atty. Sabig since all
motions, pleadings and court orders were sent to MEGANs
office. However, MEGAN never questioned the acts of Atty. Sabig
and even took time and effort to forward all the court documents
to him.
To this Courts mind, MEGAN cannot feign knowledge of
the acts of Atty. Sabig, as MEGAN was aware from the very
beginning that CIMICO was involved in an on-going litigation.
Such fact is clearly spelled out in MEGANs MOA with CIMICO, to
wit:
WHEREAS, CIMICO had filed a
2nd Amended Complaint for Sum of Money,
Breach of Contract and Damages with
Preliminary Injunction with a Prayer for a
Writ of Temporary Restraining Order against
the
NEW
FRONTIER
SUGAR
CORPORATION, pending before Branch 68
of the Regional Trial Court, based in
Dumangas, Iloilo, Philippines, entitled
CENTRAL
ILOILO
MILLING
CORPORATION (CIMICO) versus NEW
FRONTIER
SUGAR
CORPORATION
(NFSC), EQUITABLE PCI BANK and
PHILIPPINE
INDUSTRIAL
SECURITY
AGENCY docketed as CIVIL CASE NO. 02243;[33]
Considering that MEGANs rights stemmed from
CIMICO and that MEGAN was only to assume the last crop
period of 2002-2003 under CIMICOs contract with NFSC,[34] it
becomes improbable that MEGAN would just wait idly by for the
final resolution of the case and not send a lawyer to protect its
interest.
In addition, it bears to point out that MEGAN was
negligent when it did not assail the authority of Atty. Sabig within a
reasonable time from the moment when the first adverse order
was issued. To restate, the January 16, 2003 RTC Order directed
MEGAN to deposit a sizable number of sugar quedans. With such
an order that directly affects the disposition of MEGANs assets
and one that involves a substantial amount, it is inconceivable for
Atty. Sabig or for Concha not to inform MEGANs board of such
an order or for one of the directors not to hear of such order thru
other sources. As manifested by NFSC, MEGAN is a family
corporation and Concha is the son-in-law of Eduardo Jose Q.
Miranda (Eduardo), the President of MEGAN. Elizabeth Miranda,
one of the directors, is the daughter of Eduardo. MEGANs
treasurer, Ramon Ortiz is a cousin of the Mirandas.[35] Thus, given
the nature and structure of MEGANs board, it is unimaginable
that not a single director was aware of the January 16, 2003 RTC
Order. However, far from repudiating the authority of Atty. Sabig,
Atty. Sabig even filed a Manifestation[36] that MEGAN will deposit
the quedans, as directed by the RTC, every Friday of the week.

MEGAN on the premise that the same were not covered by the
RTC Orders. Atty. Sabig manifested that 30% of the value of the
quedans will be deposited in court as payment for accrued
rentals. Noteworthy is the fact that Atty. Sabigs motion was
favorably acted upon by the RTC. Like the CA, this Court finds
that estoppel has already set in. It is not right for a party who has
affirmed and invoked the jurisdiction of a court in a particular
matter to secure an affirmative relief to afterwards deny that same
jurisdiction to escape a penalty.[38] The party is barred from such
conduct not because the judgment or order of the court is valid
but because such a practice cannot be tolerated for reasons of
public policy.[39]
Lastly, this Court also notes that on April 2, 2003, Atty.
Sabig again filed an Urgent Ex-Parte Motion[40] asking the RTC to
direct the SRA to release certain quedans not covered by the
RTC Orders. The same was granted by the RTC in an
Order[41] dated April 2, 2003. Curiously, however, Rene Imperial,
the Plant Manager of MEGAN, also signed the April 2, 2003 RTC
Order and agreed to the terms embodied therein. If Atty. Sabig
was not authorized to act in behalf of MEGAN, then why would
MEGANs plant manager sign an official document assuring the
RTC that he would deliver 30% of the value of the quedans earlier
released to MEGAN pursuant to the March 27, 2003 Order?
The rule is that the active participation of the party
against whom the action was brought, coupled with his failure to
object to the jurisdiction of the court or administrative body where
the action is pending, is tantamount to an invocation of that
jurisdiction and a willingness to abide by the resolution of the
case and will bar said party from later on impugning the court or
bodys jurisdiction.[42] Based on the preceding discussion, this
Court holds that MEGANs challenge to Atty. Sabigs authority and
the RTCs jurisdiction was a mere afterthought after having
received an unfavorable decision from the RTC. Certainly, it
would be unjust and inequitable to the other parties if this Court
were to grant such a belated jurisdictional challenge.
WHEREFORE, premises considered, the petition
is DENIED. The August 23, 2004 Decision and October 12,
2005 Resolution of the Court of Appeals, in CA-G.R. SP No.
75789, are AFFIRMED.
SO ORDERED.
JOSE MARCEL PANLILIO, ERLINDA PANLILIO,
NICOLE MORRIS and MARIO T. CRISTOBAL,
Petitioners,

G.R. No. 1
Present:

-versusREGIONAL TRIAL COURT, BRANCH 51, CITY OF

MANILA,represented by HON. PRESIDING JUDGE
ANTONIO M. ROSALES; PEOPLE OF THE
PHILIPPINES; and the SOCIAL SECURITY SYSTEM,
Respondents.

CORONA
CARPIO,
PERALTA,
PEREZ,** a
MENDOZA

Promulgat

February 2
MEGAN had all the opportunity to assail the jurisdiction
of the RTC and yet far from doing so, it even complied with the
RTC Order. With the amount of money involved, it is beyond
belief for MEGAN to claim that it had no knowledge of the events
that transpired. Moreover, it bears to stress that Atty. Sabig even
filed subsequent motions asking for affirmative relief, more
important of which is his March 27, 2003 Urgent ExParte Motion[37] asking the RTC to direct the Sugar Regulatory
Administration (SRA) to release certain quedans in favor of

x -------------------------------------------------------------------------------x
DECISION
PERALTA, J.:
Before this Court is a petition for review
on certiorari[1] under Rule 45 of the Rules of Court, seeking to set
aside the April 27, 2006 Decision[2] and August 2, 2006
Resolution[3] of the Court of the Appeals (CA) in CA-G.R. SP No.
90947.
The facts of the case are as follows:
On October 15, 2004, Jose Marcel Panlilio, Erlinda
Panlilio, Nicole Morris and Marlo Cristobal (petitioners), as
corporate officers of Silahis International Hotel, Inc. (SIHI), filed
with the Regional Trial Court (RTC) of Manila, Branch 24, a
petition for Suspension of Payments and Rehabilitation[4] in SEC
Corp. Case No. 04-111180.
On October 18, 2004, the RTC of Manila, Branch 24,
issued an Order[5] staying all claims against SIHI upon finding the
petition sufficient in form and substance. The pertinent portions
of the Order read:
Finding the petition, together with its
annexes, sufficient in form and substance and
pursuant to Section 6, Rule 4 of the Interim
Rules on Corporate Rehabilitation, the Court
hereby:
xxxx
2) Stays the enforcement of all claims,
whether for money or otherwise and whether
such enforcement is by court action or
otherwise, against the debtor, its guarantors and
sureties not solidarily liable with the debtor.[6]
At the time, however, of the filing of the petition for
rehabilitation, there were a number of criminal charges[7] pending
against petitioners in Branch 51 of the RTC of Manila. These
criminal charges were initiated by respondent Social Security
System (SSS) and involved charges of violations of Section 28 (h)
[8]
of Republic Act 8282, or the Social Security Act of 1997
(SSS law), in relation to Article 315 (1) (b) [9] of the Revised Penal
Code, or Estafa. Consequently, petitioners filed with the RTC of
Manila, Branch 51, a Manifestation and Motion to Suspend
Proceedings.[10] Petitioners argued that the stay order issued by
Branch 24 should also apply to the criminal charges pending in
Branch 51. Petitioners, thus, prayed that Branch 51 suspend its
proceedings until the petition for rehabilitation was finally
resolved.
On December 13, 2004, Branch 51 issued an
Order[11] denying
petitioners
motion
to
suspend
the
proceedings. It ruled that the stay order issued by Branch 24 did
not cover criminal proceedings, to wit:
xxxx
Clearly then, the issue is, whether the
stay order issued by the RTC commercial court,
Branch 24 includes the above-captioned
criminal cases.
The Court shares the view of the
private complainants and the SSS that the said
stay order does not include the prosecution of
criminal
offenses.
Precisely,
the
law
criminalizes the non-remittance of SSS

contributions by an employer to protect the

employees from unscrupulous employers.
Clearly, in these cases, public interest requires
that the said criminal acts be immediately
investigated and prosecuted for the protection
of society.
From the foregoing, the inescapable
conclusion is that the stay order issued by RTC
Branch 24 does not include the abovecaptioned cases which are criminal in nature.[12]
Branch 51 denied the motion for reconsideration filed by
petitioners.
On August 19, 2005, petitioners filed a petition
for certiorari[13] with the CA assailing the Order of Branch 51.
On April 27, 2006, the CA issued a Decision denying the
petition, the dispositive portion of which reads:
WHEREFORE, premises considered,
the Petition is hereby DENIED and is accordingly
DISMISSED. No costs.[14]
The CA discussed that violation of the provisions of the
SSS law was a criminal liability and was, thus, personal to the
offender. As such, the CA held that the criminal proceedings
against the petitioners should not be considered a claim against
the corporation and, consequently, not covered by the stay order
issued by Branch 24.
Petitioners filed a Motion for Reconsideration,[15] which
was, however, denied by the CA in a Resolution dated August 2,
2006.
Hence, herein petition, with petitioners raising a lone
issue for this Courts resolution, to wit:
x x x WHETHER OR NOT THE STAY ORDER
ISSUED BY BRANCH 24, REGIONAL TRIAL
COURT OF MANILA, IN SEC CORP. CASE
NO. 04-111180 COVERS ALSO VIOLATION OF
SSS LAW FOR NON-REMITTANCE OF
PREMIUMS AND VIOLATION OF [ARTICLE] [3]
515 OF THE REVISED PENAL CODE.[16]
The petition is not meritorious.
To begin with, corporate rehabilitation connotes the
restoration of the debtor to a position of successful operation and
solvency, if it is shown that its continued operation is economically
feasible and its creditors can recover more, by way of the present
value of payments projected in the rehabilitation plan, if the
corporation continues as a going concern than if it is immediately
liquidated.[17] It contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency, the purpose
being to enable the company to gain a new lease on life and allow
its creditors to be paid their claims out of its earnings.[18]
A principal feature of corporate rehabilitation is the
suspension of claims against the distressed corporation. Section
6 (c) of Presidential Decree No. 902-A, as amended, provides for
suspension of claims against corporations undergoing
rehabilitation, to wit:

Section 6 (c). x x x
x x x Provided, finally, that upon appointment
of a management committee, rehabilitation
receiver, board or body, pursuant to this
Decree, all
actions
for
claims against
corporations, partnerships or associations
under management or receivership pending
before any court, tribunal, board or body, shall
be suspended accordingly.[19]
In November 21, 2000, this Court En Banc promulgated
the Interim Rules of Procedure on Corporate Rehabilitation,
[20]
Section 6, Rule 4 of which provides a stay order on all claims
against the corporation, thus:
Stay Order. - If the court finds the
petition to be sufficient in form and substance, it
shall, not later than five (5) days from the filing
of the petition, issue an Order x x x; (b) staying
enforcement of all claims, whether for money
or otherwise and whether such enforcement is
by court action or otherwise, against the debtor,
its guarantors and sureties not solidarily liable
with the debtor; x x x[21]
In Finasia Investments and Finance Corporation v. Court
of Appeals,[22] the term "claim" has been construed to refer to
debts or demands of a pecuniary nature, or the assertion to have
money paid. The purpose for suspending actions for claims
against the corporation in a rehabilitation proceeding is to enable
the management committee or rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extrajudicial
interference that might unduly hinder or prevent the rescue of the
debtor company.[23]
The issue to be resolved then is: does the suspension of
all claims as an incident to a corporate rehabilitation also
contemplate the suspension of criminal charges filed against the
corporate officers of the distressed corporation?

others from committing the same or similar

offense, to isolate him from society, to reform
and rehabilitate him or, in general, to maintain
social order. Hence, the criminal prosecution is
designed to promote the public welfare by
punishing offenders and deterring others.
Consequently, the filing of the case
for violation of B.P. Blg. 22 is not a "claim"
that can be enjoined within the purview of
P.D. No. 902-A. True, although conviction of
the accused for the alleged crime could
result in the restitution, reparation or
indemnification of the private offended party
for the damage or injury he sustained by
reason of the felonious act of the accused,
nevertheless, prosecution for violation of
B.P. Blg. 22 is a criminal action.
A criminal action has a dual purpose,
namely, the punishment of the offender and
indemnity to the offended party. The dominant
and primordial objective of the criminal action is
the punishment of the offender. The civil action
is merely incidental to and consequent to the
conviction of the accused. The reason for this is
that criminal actions are primarily intended to
vindicate an outrage against the sovereignty of
the state and to impose the appropriate penalty
for the vindication of the disturbance to the
social order caused by the offender. On the
other hand, the action between the private
complainant and the accused is intended solely
to indemnify the former.[25]
Rosario is at fours with the case at bar. Petitioners are
charged with violations of Section 28 (h) of the SSS law, in
relation to Article 315 (1) (b) of the Revised Penal Code, or
Estafa. The SSS law clearly criminalizes the non-remittance of
SSS contributions by an employer to protect the employees from
unscrupulous employers. Therefore, public interest requires that
the said criminal acts be immediately investigated and prosecuted
for the protection of society.

This Court rules in the negative.

In Rosario v. Co[24] (Rosario), a case of recent vintage,
the issue resolved by this Court was whether or not during the
pendency of rehabilitation proceedings, criminal charges for
violation of Batas Pambansa Bilang 22 should be suspended,
was disposed of as follows:
x x x the gravamen of the offense punished
by B.P. Blg. 22 is the act of making and issuing
a worthless check; that is, a check that is
dishonored upon its presentation for payment. It
is designed to prevent damage to trade,
commerce, and banking caused by worthless
checks. In Lozano v. Martinez, this Court
declared that it is not the nonpayment of an
obligation which the law punishes. The law is
not intended or designed to coerce a debtor to
pay his debt. The thrust of the law is to prohibit,
under pain of penal sanctions, the making and
circulation of worthless checks. Because of its
deleterious effects on the public interest, the
practice is proscribed by the law. The law
punishes the act not as an offense against
property, but an offense against public order.
The prime purpose of the criminal action is to
punish the offender in order to deter him and

The rehabilitation of SIHI and the settlement of claims

against the corporation is not a legal ground for the extinction of
petitioners criminal liabilities. There is no reason why criminal
proceedings should be suspended during corporate rehabilitation,
more so, since the prime purpose of the criminal action is to
punish the offender in order to deter him and others from
committing the same or similar offense, to isolate him from
society, reform and rehabilitate him or, in general, to maintain
social order.[26] As correctly observed in Rosario,[27] it would be
absurd for one who has engaged in criminal conduct could
escape punishment by the mere filing of a petition for
rehabilitation by the corporation of which he is an officer.
The prosecution of the officers of the corporation has no
bearing on the pending rehabilitation of the corporation, especially
since they are charged in their individual capacities. Such being
the case, the purpose of the law for the issuance of the stay order
is not compromised, since the appointed rehabilitation receiver
can still fully discharge his functions as mandated by law. It bears
to stress that the rehabilitation receiver is not charged to defend
the officers of the corporation. If there is anything that the
rehabilitation receiver might be remotely interested in is whether
the court also rules that petitioners are civilly liable. Such a
scenario, however, is not a reason to suspend the criminal
proceedings, because as aptly discussed in Rosario, should the
court prosecuting the officers of the corporation find that an award

or indemnification is warranted, such award would fall under the

category of claims, the execution of which would be subject to the
stay order issued by the rehabilitation court.[28] The penal
sanctions as a consequence of violation of the SSS law, in
relation to the revised penal code can therefore be implemented if
petitioners are found guilty after trial. However, any civil indemnity
awarded as a result of their conviction would be subject to the
stay order issued by the rehabilitation court. Only to this extent
can the order of suspension be considered obligatory upon any
court, tribunal, branch or body where there are pending actions
for claims against the distressed corporation.[29]

Manuel Baviera, petitioner in these cases, was the former head of

the HR Service Delivery and Industrial Relations of Standard
Chartered Bank-Philippines (SCB), one of herein respondents.
SCB is a foreign banking corporation duly licensed to engage in
banking, trust, and other fiduciary business in the Philippines.
Pursuant to Resolution No. 1142 dated December 3, 1992 of the
Monetary Board of the Bangko Sentral ng Pilipinas (BSP), the
conduct of SCBs business in this jurisdiction is subject to the
following conditions:

On a final note, this Court would like to point out that

Congress has recently enacted Republic Act No. 10142, or the
Financial Rehabilitation and Insolvency Act of 2010.[30] Section 18
thereof explicitly provides that criminal actions against the
individual officer of a corporation are not subject to the Stay or
Suspension Order in rehabilitation proceedings, to wit:

1. At the end of a one-year period from the date the SCB

starts its trust functions, at least 25% of its trust accounts
must be for the account of non-residents of the
Philippines and that actual foreign exchange had been
remitted into the Philippines to fund such accounts or
that the establishment of such accounts had reduced the
indebtedness of residents (individuals or corporations or
government agencies) of the Philippines to nonresidents. At the end of the second year, the above ratio
shall be 50%, which ratio must be observed continuously
thereafter;

The Stay or Suspension Order shall not apply:

xxxx
(g) any criminal action against individual
debtor or owner, partner, director or officer of
a debtor shall not be affected by any
proceeding commenced under this Act.
Withal, based on the foregoing discussion, this Court rules
that there is no legal impediment for Branch 51 to proceed with
the cases filed against petitioners.
WHEREFORE, premises considered, the petition
is DENIED. The April 27, 2006 Decision and August 2,
2006 Resolution of the Court of Appeals in CA-G.R. SP No.
90947 are AFFIRMED. The Regional Trial Court of Manila,
Branch 51, is ORDERED to proceed with the criminal cases filed
against petitioners.
SO ORDERED.
G.R. No. 168380

February 8, 2007

MANUEL V. BAVIERA, Petitioner,

vs.
ESPERANZA PAGLINAWAN, in her capacity as Department of
Justice State Prosecutor; LEAH C. TANODRA-ARMAMENTO,
In her capacity as Assistant Chief State Prosecutor and
Chairwoman of Task Force on Business Scam; JOVENCITO
R. ZUNO, in his capacity as Department of Justice Chief
State Prosecutor; STANDARD CHARTERED BANK, PAUL
SIMON MORRIS, AJAY KANWAL, SRIDHAR RAMAN,
MARIVEL GONZALES, CHONA REYES, MARIA ELLEN
VICTOR, and ZENAIDA IGLESIAS, Respondents.
SANDOVAL-GUTIERREZ, J.:
Before us are two consolidated Petitions for Review on Certiorari
assailing the Decisions of the Court of Appeals in CA-G.R. SP No.
873281 and in CA-G.R. SP No. 85078.2
The common factual antecedents of these cases as shown by the
records are:

2. The trust operations of SCB shall be subject to all

existing laws, rules and regulations applicable to trust
services, particularly the creation of a Trust Committee;
and
3. The bank shall inform the appropriate supervising and
examining department of the BSP at the start of its
operations.
Apparently, SCB did not comply with the above conditions.
Instead, as early as 1996, it acted as a stock broker, soliciting
from local residents foreign securities called "GLOBAL THIRD
PARTY MUTUAL FUNDS" (GTPMF), denominated in US dollars.
These securities were not registered with the Securities and
Exchange Commission (SEC). These were then remitted
outwardly to SCB-Hong Kong and SCB-Singapore.
SCBs counsel, Romulo Mabanta Buenaventura Sayoc and Delos
Angeles Law Office, advised the bank to proceed with the selling
of the foreign securities although unregistered with the SEC,
under the guise of a "custodianship agreement;" and should it be
questioned, it shall invoke Section 723 of the General Banking Act
(Republic Act No.337).4 In sum, SCB was able to sell GTPMF
securities worth around P6 billion to some 645 investors.
However, SCBs operations did not remain unchallenged. On July
18, 1997, the Investment Capital Association of the Philippines
(ICAP) filed with the SEC a complaint alleging that SCB violated
the Revised Securities Act,5particularly the provision prohibiting
the selling of securities without prior registration with the SEC;
and that its actions are potentially damaging to the local mutual
fund industry.
In its answer, SCB denied offering and selling securities,
contending that it has been performing a "purely informational
function" without solicitations for any of its investment outlets
abroad; that it has a trust license and the services it renders

under the "Custodianship Agreement" for offshore investments

are authorized by Section 726 of the General Banking Act; that its
clients were the ones who took the initiative to invest in securities;
and it has been acting merely as an agent or "passive order
taker" for them.
On September 2, 1997, the SEC issued a Cease and Desist
Order against SCB, holding that its services violated Sections
4(a)7 and 198 of the Revised Securities Act.
Meantime, the SEC indorsed ICAPs complaint and its supporting
documents to the BSP.
On October 31, 1997, the SEC informed the Secretary of Finance
that it withdrew GTPMF securities from the market and that it will
not sell the same without the necessary clearances from the
regulatory authorities.
Meanwhile, on August 17, 1998, the BSP directed SCB not to
include investments in global mutual funds issued abroad in its
trust investments portfolio without prior registration with the SEC.
On August 31, 1998, SCB sent a letter to the BSP confirming that
it will withdraw third-party fund products which could be directly
purchased by investors.

respondents, with syndicated estafa, docketed as I.S. No. 20031059.

For their part, private respondents filed the following as countercharges against petitioner: (1) blackmail and extortion, docketed
as I.S. No. 2003-1059-A; and blackmail and perjury, docketed as
I.S. No. 2003-1278.
On September 29, 2003, petitioner also filed a complaint for
perjury against private respondents Paul Simon Morris and
Marivel Gonzales, docketed as I.S. No. 2003-1278-A.
On December 4, 2003, the SEC issued a Cease and Desist Order
against SCB restraining it from further offering, soliciting, or
otherwise selling its securities to the public until these have been
registered with the SEC.
Subsequently, the SEC and SCB reached an amicable
settlement.1awphi1.net
On January 20, 2004, the SEC lifted its Cease and Desist Order
and approved the P7 million settlement offered by SCB.
Thereupon, SCB made a commitment not to offer or sell
securities without prior compliance with the requirements of the
SEC.

However, notwithstanding its commitment and the BSP directive,

SCB continued to offer and sell GTPMF securities in this country.
This prompted petitioner to enter into an Investment Trust
Agreement with SCB wherein he purchased US$8,000.00 worth
of securities upon the banks promise of 40% return on his
investment and a guarantee that his money is safe. After six (6)
months, however, petitioner learned that the value of his
investment went down to US$7,000.00. He tried to withdraw his
investment but was persuaded by Antonette de los Reyes of SCB
to hold on to it for another six (6) months in view of the possibility
that the market would pick up.

On February 7, 2004, petitioner filed with the DOJ a complaint for

violation of Section 8.19 of the Securities Regulation Code against
private respondents, docketed as I.S. No. 2004-229.

Meanwhile, on November 27, 2000, the BSP found that SCB

failed to comply with its directive of August 17, 1998.
Consequently, it was fined in the amount of P30,000.00.

Meanwhile, in a Resolution11 dated April 4, 2004, the DOJ

dismissed petitioners complaint in I.S. No. 2004-229 (violation of
Securities Regulation Code), holding that it should have been
filed with the SEC.

The trend in the securities market, however, was bearish and the
worth of petitioners investment went down further to only
US$3,000.00.
On October 26, 2001, petitioner learned from Marivel Gonzales,
head of the SCB Legal and Compliance Department, that the
latter had been prohibited by the BSP to sell GPTMF securities.
Petitioner then filed with the BSP a letter-complaint demanding
compensation for his lost investment. But SCB denied his
demand on the ground that his investment is "regular."
On July 15, 2003, petitioner filed with the Department of Justice
(DOJ), represented herein by its prosecutors, public respondents,
a complaint charging the above-named officers and members of
the SCB Board of Directors and other SCB officials, private

On February 23, 2004, the DOJ rendered its Joint

Resolution10 dismissing petitioners complaint for syndicated
estafa in I.S. No. 2003-1059; private respondents complaint for
blackmail and extortion in I.S. No. 2003-1059-A; private
respondents complaint for blackmail and perjury in I.S. No. 20031278; and petitioners complaint for perjury against private
respondents Morris and Gonzales in I.S. No. 2003-1278-A.

Petitioners motions to dismiss his complaints were denied by the

DOJ. Thus, he filed with the Court of Appeals a petition for
certiorari, docketed as CA-G.R. SP No. 85078. He alleged that
the DOJ acted with grave abuse of discretion amounting to lack or
excess of jurisdiction in dismissing his complaint for syndicated
estafa.
He also filed with the Court of Appeals a separate petition for
certiorari assailing the DOJ Resolution dismissing I.S. No. 2004229 for violation of the Securities Regulation Code. This petition
was docketed as CA-G.R. SP No. 87328. Petitioner claimed that
the DOJ acted with grave abuse of discretion tantamount to lack
or excess of jurisdiction in holding that the complaint should have
been filed with the SEC.

On January 7, 2005, the Court of Appeals promulgated its

Decision dismissing the petition.1avvphi1.net It sustained the
ruling of the DOJ that the case should have been filed initially with
the SEC.
Petitioner filed a motion for reconsideration but it was denied in a
Resolution dated May 27, 2005.
Meanwhile, on February 21, 2005, the Court of Appeals rendered
its Decision in CA-G.R. SP No. 85078 (involving petitioners
charges and respondents counter charges) dismissing the
petition on the ground that the purpose of a petition for certiorari
is not to evaluate and weigh the parties evidence but to
determine whether the assailed Resolution of the DOJ was issued
with grave abuse of discretion tantamount to lack of jurisdiction.
Again, petitioner moved for a reconsideration but it was denied in
a Resolution of November 22, 2005.
Hence, the instant petitions for review on certiorari.
For our resolution is the fundamental issue of whether the Court
of Appeals erred in concluding that the DOJ did not commit grave
abuse of discretion in dismissing petitioners complaint in I.S.
2004-229 for violation of Securities Regulation Code and his
complaint in I.S. No. 2003-1059 for syndicated estafa.
G.R. No 168380
Re: I.S. No. 2004-229
For violation of the Securities Regulation Code
Section 53.1 of the Securities Regulation Code provides:
SEC. 53. Investigations, Injunctions and Prosecution of
Offenses.
53. 1. The Commission may, in its discretion, make such
investigation as it deems necessary to determine whether any
person has violated or is about to violate any provision of this
Code, any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency,
other self-regulatory organization, and may require or permit any
person to file with it a statement in writing, under oath or
otherwise, as the Commission shall determine, as to all facts and
circumstances concerning the matter to be investigated. The
Commission may publish information concerning any such
violations and to investigate any fact, condition, practice or matter
which it may deem necessary or proper to aid in the enforcement
of the provisions of this Code, in the prescribing of rules and
regulations thereunder, or in securing information to serve as a
basis for recommending further legislation concerning the matters
to which this Code relates: Provided, however, That any person
requested or subpoenaed to produce documents or testify in any
investigation shall simultaneously be notified in writing of the
purpose of such investigation: Provided, further, That all criminal
complaints for violations of this Code and the implementing
rules and regulations enforced or administered by the

Commission shall be referred to the Department of Justice

for preliminary investigation and prosecution before the
proper court: Provided, furthermore, That in instances where the
law allows independent civil or criminal proceedings of violations
arising from the act, the Commission shall take appropriate action
to implement the same: Provided, finally; That the investigation,
prosecution, and trial of such cases shall be given priority.
The Court of Appeals held that under the above provision, a
criminal complaint for violation of any law or rule administered by
the SEC must first be filed with the latter. If the Commission finds
that there is probable cause, then it should refer the case to the
DOJ. Since petitioner failed to comply with the foregoing
procedural requirement, the DOJ did not gravely abuse its
discretion in dismissing his complaint in I.S. No. 2004-229.
A criminal charge for violation of the Securities Regulation Code
is a specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC.
Under the doctrine of primary jurisdiction, courts will not
determine a controversy involving a question within the
jurisdiction of the administrative tribunal, where the question
demands the exercise of sound administrative discretion requiring
the specialized knowledge and expertise of said administrative
tribunal to determine technical and intricate matters of fact.12 The
Securities Regulation Code is a special law. Its enforcement is
particularly vested in the SEC. Hence, all complaints for any
violation of the Code and its implementing rules and regulations
should be filed with the SEC. Where the complaint is criminal in
nature, the SEC shall indorse the complaint to the DOJ for
preliminary investigation and prosecution as provided in Section
53.1 earlier quoted.
We thus agree with the Court of Appeals that petitioner committed
a fatal procedural lapse when he filed his criminal complaint
directly with the DOJ. Verily, no grave abuse of discretion can be
ascribed to the DOJ in dismissing petitioners complaint.
G.R. No. 170602
Re: I.S. No. 2003-1059 for
Syndicated Estafa
Section 5, Rule 110 of the 2000 Rules of Criminal Procedure, as
amended, provides that all criminal actions, commenced by either
a complaint or an information, shall be prosecuted under the
direction and control of a public prosecutor. This mandate is
founded on the theory that a crime is a breach of the security and
peace of the people at large, an outrage against the very
sovereignty of the State. It follows that a representative of the
State shall direct and control the prosecution of the offense.13 This
representative of the State is the public prosecutor, whom this
Court described in the old case of Suarez v. Platon,14 as:
[T]he representative not of an ordinary party to a controversy, but
of a sovereignty whose obligation to govern impartially is as
compelling as its obligation to govern at all; and whose interest,
therefore, in a criminal prosecution is not that it shall win a case,

but that justice shall be done. As such, he is in a peculiar and very

definite sense a servant of the law, the twofold aim of which is
that guilt shall not escape or innocence suffers.
Concomitant with his authority and power to control the
prosecution of criminal offenses, the public prosecutor is vested
with the discretionary power to determine whether a prima
facie case exists or not.15 This is done through a preliminary
investigation designed to secure the respondent from hasty,
malicious and oppressive prosecution. A preliminary investigation
is essentially an inquiry to determine whether (a) a crime has
been committed; and (b) whether there is probable cause that the
accused is guilty thereof.16 In Pontejos v. Office of the
Ombudsman,17probable cause is defined as such facts and
circumstances that would engender a well-founded belief that a
crime has been committed and that the respondent is probably
guilty thereof and should be held for trial. It is the public
prosecutor who determines during the preliminary investigation
whether probable cause exists. Thus, the decision whether or not
to dismiss the criminal complaint against the accused depends on
the sound discretion of the prosecutor.
Given this latitude and authority granted by law to the
investigating prosecutor, the rule in this jurisdiction is that
courts will not interfere with the conduct of preliminary
investigations or reinvestigations or in the determination of
what constitutes sufficient probable cause for the filing of
the corresponding information against an offender.18 Courts
are not empowered to substitute their own judgment for that of the
executive branch.19 Differently stated, as the matter of whether to
prosecute or not is purely discretionary on his part, courts cannot
compel a public prosecutor to file the corresponding information,
upon a complaint, where he finds the evidence before him
insufficient to warrant the filing of an action in court. In sum, the
prosecutors findings on the existence of probable cause are
not subject to review by the courts, unless these are patently
shown to have been made with grave abuse of discretion.20
Grave abuse of discretion is such capricious and whimsical
exercise of judgment on the part of the public officer concerned
which is equivalent to an excess or lack of jurisdiction. The abuse
of discretion must be as patent and gross as to amount to an
evasion of a positive duty or a virtual refusal to perform a duty
enjoined by law, or to act at all in contemplation of law, as where
the power is exercised in an arbitrary and despotic manner by
reason of passion or hostility.21

accordance with his written instructions. That he lost his

investment is not their fault since it was highly speculative.
Records show that public respondents examined petitioners
evidence with care, well aware of their duty to prevent material
damage to his constitutional right to liberty and fair play.
In Suarez previously cited, this Court made it clear that a public
prosecutors duty is two-fold. On one hand, he is bound by his
oath of office to prosecute persons where the complainants
evidence is ample and sufficient to show prima facie guilt of a
crime. Yet, on the other hand, he is likewise duty-bound to protect
innocent persons from groundless, false, or malicious
prosecution.22
Hence, we hold that the Court of Appeals was correct in
dismissing the petition for review against private respondents and
in concluding that the DOJ did not act with grave abuse of
discretion tantamount to lack or excess of jurisdiction.
On petitioners complaint for violation of the Securities Regulation
Code, suffice it to state that, as aptly declared by the Court of
Appeals, he should have filed it with the SEC, not the DOJ. Again,
there is no indication here that in dismissing petitioners
complaint, the DOJ acted capriciously or arbitrarily.
WHEREFORE, we DENY the petitions and AFFIRM the assailed
Decisions of the Court of Appeals in CA-G.R. SP No. 87328 and
in CA-G.R. SP No. 85078.
Costs against petitioner.
SO ORDERED.
SECURITIES AND EXCHANGE COMMISSION,
Petitioner,

G.R. No. 154131

Present:

versus

PUNO, J., Cha

SANDOVAL-G
CORONA,
AZCUNA, and
GARCIA, JJ.

PERFORMANCE
EXCHANGE CORPORATION,
Respondent.

FOREIGN
Promulgated:
July 20, 2006

In determining whether the DOJ committed grave abuse of

discretion, it is expedient to know if the findings of factof herein
public prosecutors were reached in an arbitrary or despotic
manner.
The Court of Appeals held that petitioners evidence is insufficient
to establish probable cause for syndicatedestafa. There is no
showing from the record that private respondents herein did
induce petitioner by false representations to invest in the GTPMF
securities. Nor did they act as a syndicate to misappropriate his
money for their own benefit. Rather, they invested it in

x -------------------------------------------------------------------------------------- x
DECISION
SANDOVAL-GUTIERREZ, J.:

For our resolution is the Petition for Review on

Certiorari[1] assailing the Decision[2] dated February 11, 2002 and
Resolution dated July 3, 2002 of the Court of Appeals in CA-G.R.
SP No. 65217, entitled Performance Foreign Exchange
Corporation, petitioner, versus Securities and Exchange
Commission, respondent.
The pertinent facts as found by the Court of Appeals are:

Performance Foreign Exchange Corporation, herein

respondent, is a domestic corporation duly registered on June 23,
1998 under Securities and Exchange Commission (SEC)
Registration No. A199808910, with the following purposes:

may file a request for the lifting thereof within

five (5) days from receipt hereof.
SO ORDERED.

Primary Purpose
To operate as a broker/agent between
market participants in transactions involving,
but not limited to, foreign exchange, deposits,
interest rate instruments, fixed income
securities, bonds/bills, repurchased agreements
of fixed income securities, certificate of
deposits, bankers acceptances, bills of
exchange, over-the-counter option of the
aforementioned instruments, Lesser Developed
Countrys (L.D.C.) debt, energy and stock
indexes and all related, similar or derivative
products, other than acting as a broker for the
trading of securities pursuant to the Revised
Securities Act of the Philippines.
Secondary Purpose
To engage in money changer or
exchanging foreign currencies into domestic
currency, Philippine currency or other foreign
currencies into another currencies.
After two years of operation, respondent received a letter
dated November 28, 2000 from the SEC, herein petitioner,
requiring it to appear before the Compliance and Enforcement
Department
(CED)
on
December
14,
2000
for
a clarificatory conference
regarding
its
business
operations. Respondents officers complied and explained
before the CED the nature of their business.
On January 16, 2001, Emilio B. Aquino, Director of CED,
issued a Cease and Desist Order,[3] in CED Case No. 99-2297,
stating that his department conducted an inquiry on respondents
business operations for possible violation of Republic Act (R.A.)
No. 8799 (otherwise known as The Securities Regulation Code);
that the outcome of the inquiry shows that respondent is engaged
in the trading of foreign currency futures contracts in behalf of its
clients without the necessary license; that such transaction can
be deemed as a direct violation of Section 11 of R.A. No.
8799[4] and the related provisions of its Implementing Rules and
Regulations; and that it is imperative to enjoin respondent from
further operating as such to protect the interest of the
public. The dispositive portion of the said Order reads:
WHEREFORE, pursuant to the authority
vested in the Commission, PERFORMANCE
FOREIGN EXCHANGE CORPORATION, its
officers, directors, agents, representatives, and
any and all persons claiming and acting under
their
authority, are
hereby ordered to
immediately CEASE AND DESIST from
further engaging in the solicitation of funds
for foreign currency trading and operating
as
a
foreign
currency
futures
merchant/broker, upon receipt of this Order.
In accordance with the provisions of
Section 64.3[5] of Republic Act 8799, otherwise
known as the Securities Regulation Code, the
parties subject of this Cease and Desist Order

On January 25, 2001, respondent filed with petitioner

SEC a motion[6] praying for the lifting of the Cease and Desist
Order, alleging that: (a) it has not violated any law or regulation
in the conduct of its business; (b) it has been operating in
accordance with the purposes for which it was organized, which
purposes were duly approved by petitioner; (c) it has not engaged
in currency futures contracts trading; and (d) its business involves
spot currency trading which is not a form of currency
futures transaction.
On February 8, 2001, then SEC Chairman Lilia R.
Bautista, in her desire to know with certainty the nature of
respondents
business,
sent
a
letter[7] to
the BangkoSentral ng Pilipinas (BSP), requesting a definitive
statement that respondents business transactions are a form
of financial derivatives and, therefore, can only be undertaken by
banks or non-bank financial intermediaries performing quasibanking functions.
Without waiting for BSPs determination of the
matter, petitioner, the following day (February 9, 2001), issued an
Order[8] denying respondents motion for the lifting of the Cease
and Desist Order and directing that the same stays until
respondent shall have submitted the appropriate
endorsement from the BSP that it can engage infinancial
derivative transactions. The Order states that the contracts
entered into, offered and sold by respondent are in the nature
of commodity futures contracts;[9] and that such contracts may be
considered a form of financial derivatives instruments, the trading
of which is regulated by BSP.
On February 16, 2001, respondent filed a Manifestation
With Urgent Motion[10] praying that, pending determination by the
BSP of the real nature of its business, the implementation of the
February 9, 2001 Order be temporarily suspended to allow it to
continue its operations.
On March 15, 2001, respondent, in compliance with
petitioners February 9, 2001 Order requiring it to submit the
appropriate BSP endorsement, presented before the BSP panel
of officers a summary of its operations and its foreign exchange
spot product.
On April 23, 2001, petitioner issued an Order[11] making the
Cease and Desist Order permanent, thus:
WHEREAS, on February 19, 2001,
PFEC filed with the Commission its
Manifestation
with
Urgent
Motion
to
Temporarily Suspend Implementation of Order
dated 09 February 2001, which Manifestation
was denied
by
the
Commission en
banc during its meeting on February 22, 2001,
and the said denial was conveyed verbally to
the corporation;
WHEREFORE, premises considered,
and pursuant to the authority vested in the
Commission, the Cease and Desist Order is
now
made permanent, and
Performance
Foreign Exchange Corporation is hereby
directed to show cause within thirty (30) days
from receipt of this Order why its certificate of

registration should not be revoked for

violation of the Securities Regulation Code,
and/or PD 902-A specifically on the ground
of serious misrepresentation as to what the
corporation can do or is doing, to the great
prejudice or damage to the general
public. (Underscoring supplied)

We
hope
we
satisfactorily clarified your concerns.

have
Very

truly yours,

On May 4, 2001, respondent filed a motion [12] praying

that the said Order be set aside. Petitioner, however, did not act
on the motion. This prompted respondent to file with petitioner a
notice[13] dated June 14, 2001 that it is withdrawing its motion in
order to seek a more appropriate and speedy remedy.
Feeling the injurious effects of petitioners acts to its
business operations, respondent, on June 20, 2001, filed with the
Court of Appeals a Petition for Certiorari[14] with prayer for a
temporary restraining order and preliminary injunction, docketed
as CA-G.R. SP No. 65217. Respondent alleged, among others,
that petitioner SEC acted without or in excess of its jurisdiction or
with grave abuse of discretion when it issued the Cease and
Desist Order and its subsequent Order making the same
permanent without waiting for the BSPs determination of the real
nature of its business operations; and that petitioners Orders,
issued without any factual basis, violated its (respondents)
fundamental right to due process.
Meanwhile, on August 13, 2001, Amado M. Tetangco,
Jr., then Officer-in-Charge, Office of the Governor, BSP, in answer
to SEC Chairman Lilia Bautistas letter-request of February 8,
2001, stated that respondents business activity does not fall
under the category of futures trading and can not
be classified as financial derivatives transactions, thus:
Dear Ms. Bautista,
This refers to your letter dated
February 8, 2001 requesting for a definitive
statement that the foreign currency leverage
trading engage in by private corporations,
particularly, Performance Foreign Exchange
Corporation (PFEC), is a financial derivatives
transaction and that it can only be undertaken
by banks or non-bank financial intermediaries
performing quasi-banking functions and/or its
subsidiaries/affiliates.
As indicated in your description of the
transactions and the documents submitted, the
foreign currency leverage trading, subject of
your query, is essentially similar in mechanics
to currency future trading, particularly with
respect to the margin requirements, standard
contract size, and daily market-to-market of
open position. However, it does not fall
under
the
category
of
futures
tradingbecause
it
is
not
exchangetraded. Further, we can not classify it as
being financial derivatives transactions as
we consider the transaction as plain currency
margin trading, which by its mechanics, involve
the set-up of margin and non-delivery of the
currencies involved.
In view of the foregoing facts, the
activities of the aforesaid corporation are not
covered by BSP guidelines on derivative
licensing.

(
S
g
d
.
)
AMAND
O M. TETANGCO, JR.[15]

On February 11, 2002, the Court of Appeals rendered a

Decision[16] in favor of respondent, thus:
WHEREFORE, premises considered,
the
instant
petition
is GRANTED and
accordingly,
the
assailed Orders
dated
January
16,
2001, February
9,
2001, February 22, 2001 and April 23, 2001 of
the Securities and Exchange Commission
are SET ASIDE.
SO ORDERED.
The Court of Appeals ruled that petitioner acted with
grave abuse of discretion when it issued its challenged
Orders without a positive factual finding that respondent
violated the Securities Regulation Code.
Petitioner filed a motion for reconsideration but it was
denied by the appellate court in a Resolution[17] dated July 3,
2002.
Hence, the instant Petition for Review on Certiorari.
Petitioner, through the Solicitor General, contends that
the Court of Appeals erred in not applying the rule that factual
findings of quasi-judicial bodies, like the SEC, which have
acquired expertise because their jurisdiction is confined to
specific matters, are generally accorded not only respect but even
finality if such findings are supported by substantial evidence.[18]
In its Comment,[19] respondent counters that the instant
petition utterly lacks merit and should be dismissed.
The issue for our resolution is whether petitioner SEC
acted with grave abuse of discretion in issuing the Cease and
Desist Order and its subsequent Order making it permanent.
Section 64 of R.A. No. 8799, provides:

Sec. 64. Cease and Desist Order.

64.1. The
Commission, after
proper
investigation or verification, motu proprio, or
upon verified complaint by any aggrieved
party, may issue a cease and desist
order without the necessity of a prior hearing if
in its judgment the act or practice, unless
restrained, will operate as a fraud on
investors or is otherwise likely to cause
grave or irreparable injury or prejudice to
the investing public.
x x x. (Underscoring supplied)
Under the above provision, there are two essential
requirements that must be complied with by the SEC before it
may issue a cease and desist order: First, it must conduct proper
investigation or verification; and Second, there must be a finding
that the act or practice, unless restrained, will operate as a fraud
on investors or is otherwise likely to cause grave or irreparable
injury or prejudice to the investing public.
Here, the first requirement is not present. Petitioner
did not conduct proper investigation or verification before it issued
the challenged orders. The clarificatoryconference undertaken
by petitioner regarding respondents business operations cannot
be considered a proper investigation or verification process to
justify the issuance of the Cease and Desist Order. It was merely
an initial stage of such process, considering that after it issued
the said order following the clarificatory conference, petitioner
still soughtverification from the BSP on the nature of
respondents business activity. Its letter to the BSP dated
February 8, 2001 states in part:
The
Securities
and
Exchange
Commission has
been
investigating corporations which engage in
foreign currency trading abroad. The following
illustrates their operations:

Petitioners act of referring the matter to the BSP is

an essential part of the investigation and verification
process. In fact, such referral indicates that petitioner concedes
to the BSPs expertise in determining the nature of respondents
business. It bears stressing, however, that such investigation and
verification, to be proper, must be conducted by petitioner before,
not after, issuing the Cease and Desist Order in question. This,
petitioner utterly failed to do. The issuance of such order even
before it could finish its investigation and verification on
respondents business activity obviously contravenes Section 64
of R.A. No. 8799 earlier quoted.
Worse, when respondent filed a motion praying that the
same order be lifted for being premature, petitioner, in its Order
dated February 9, 2001, even denied the motion despite
its admission therein that it cannot determine certain material
facts involving respondents transactions and, as such, the matter
must be referred to the BSP for determination, thus:
In
the
light
of
the
above
circumstances,
and the
fact
that the
Commission cannot determine whether
such transactions are actually executed in
Singapore
or Hongkong as
alleged, and
whether the foreign currency rates used in
the transactions are verifiable, it is our
position that the same be endorsed to the
BSP.
In view of the foregoing, the cease and
desist order stays against the corporation until
the latter shall be able to submit the appropriate
endorsement
from
the Bangko Sentral ng Pilipinas that
it
can
engage in financial derivative transactions.
SO
supplied)

ORDERED.[21] (Underscoring

xxx
Enclosed are pertinent documents
which were submitted by a corporation showing
how its transactions operate. It is claimed by
the corporation in question that theirs are all
spot transactions and are not covered by
the Bangko Sentral ng Pilipinas. We
understand, however, that in other jurisdiction,
this type of activity can only be done by banks.
Previous
inquiries
from
the Bangko Sentral ng Pilipinas,
specifically
Department of Commercial Banks II, and your
department, Commercial Banks I, lead to
conclude that this kind of trading in foreign
currencies may be a form of financial
derivatives.
May we, therefore, request a
definitive statement that the abovedescribed transactions, and as illustrated in
the attached documents, are a form of
financial derivatives and, therefore, can only
be undertaken by banks, or non-bank
financial intermediaries performing quasibanking
functions
and/or
its
subsidiaries/affiliates.[20] (Underscoring
supplied)

And worst, without waiting for BSPs action, petitioner

proceeded to issue its Order dated April 23, 2001 making the
Cease and Desist Order permanent. In the same Order,
petitioner further directed respondent to show cause x x x why its
certificate of registration should not be revoked for alleged
violation of the Securities Regulation Code and/or Presidential
Decree No. 902-A, specifically on the ground of serious
misrepresentation as to what the corporation can do or is
doing to the great prejudice or damage to the general
public. Obviously, without BSPs determination of the nature of
respondents business, there was no factual and legal basis to
justify the issuance of such order.
Which brings us to the second requirement. Before a
cease and desist order may be issued by the SEC, there must be
a showing that the act or practice sought to be restrained will
operate as a fraud on investors or is likely to cause grave,
irreparable injury or prejudice to the investing public. Such
requirement implies that the act to be restrained has been
determined after conducting the
proper
investigation/verification. In this case, the nature of the act to
be restrained can only be determined after the BSP shall have
submitted its findings to petitioner. However, there is nothing in
the questioned Orders that shows how the public is greatly
prejudiced or damaged by respondents business operation.

In sum, we find no reversible error committed by the

Court of Appeals in rendering its assailed Decision and
Resolution.

WHEREFORE, we DENY the petition. The challenged

Decision and Resolution of the Court of Appeals in CA-G.R. SP
No. 65217 are AFFIRMED.
SO ORDERED.