Corpo Digest Compilation SIXTH FINAL

Corporation Law Digest Part 6
1. Mindanao Savings and Loan Association, Inc. vs. Willkom

G.R. No. 178618. October 20, 2010
Case Summary:
Corporation Law; Mergers; Ordinarily, in the merger of two or more existing corporations, one of the
corporations survives and continues the combined business, while the rest are dissolved and all their rights,
properties, and liabilities are acquired by the surviving corporation.Ordinarily, in the merger of two or
more existing corporations, one of the corporations survives and continues the combined business, while
the rest are dissolved and all their rights, properties, and liabilities are acquired by the surviving corporation.
Although there is a dissolution of the absorbed or merged corporations, there is no winding up of their
affairs or liquidation of their assets because the surviving corporation automatically acquires all their
rights, privileges, and powers, as well as their liabilities.
Same; Same; The merger does not become effective upon the mere agreement of the constituent
corporationssince a merger or consolidation involves fundamental changes in the corporation, as well as
in the rights of stockholders and creditors, there must be an express provision of law authorizing them.
The merger, however, does not become effective upon the mere agreement of the constituent corporations.
Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights
of stockholders and creditors, there must be an express provision of law authorizing them. The steps
necessary to accomplish a merger or consolidation, as provided for in Sections 76, 77, 78, and 79 of the
Corporation Code, are: (1) The board of each corporation draws up a plan of merger or consolidation.
Such plan must include any amendment, if necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements required in the articles of incorporation of a
corporation. (2) Submission of plan to stockholders or members of each corporation for approval. A
meeting must be called and at least two (2) weeks notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be attached to the notice. Vote of twothirds
of the members or of stockholders representing twothirds of the outstanding capital stock will be needed.
Appraisal rights, when proper, must be respected. (3) Execution of the formal agreement, referred to as
the articles of merger o[r] consolidation, by the corporate officers of each constituent corporation. These
take the place of the articles of incorporation of the consolidated corporation, or amend the articles of
incorporation of the surviving corporation. (4) Submission of said articles of merger or consolidation to
the SEC for approval. (5) If necessary, the SEC shall set a hearing, notifying all corporations concerned
at least two weeks before. (6) Issuance of certificate of merger or consolidation.
Same; Same; Where a party to the merger is a special corporation governed by its own charter, the Code
particularly mandates that a favorable recommendation of the appropriate government agency should first
be obtained.The merger shall only be effective upon the issuance of a certificate of merger by the SEC,
subject to its prior determination that the merger is not inconsistent with the Corporation Code or existing
laws. Where a party to the merger is a special corporation governed by its own charter, the Code
be obtained.
Same; Same; The issuance of the certificate of merger is crucial because not only does it bear out
Securities and Exchange Commissions (SECs) approval but it also marks the moment when the
consequences of a merger take place.In this case, it is undisputed that the articles of merger between
FISLAI and DSLAI were not registered with the SEC due to incomplete documentation. Consequently,
the SEC did not issue the required certificate of merger. Even if it is true that the Monetary Board of
the Central Bank of the Philippines recognized such merger, the fact remains that no certificate was
issued by the SEC. Such merger is still incomplete without the certification. The issuance of the certificate
of merger is crucial because not only does it bear out SECs approval but it also marks the moment
when the consequences of a merger take place. By operation of law, upon the effectivity of the merger,
the absorbed corporation ceases to exist but its rights and properties, as well as liabilities, shall be taken
and deemed transferred to and vested in the surviving corporation.
Same; Same; Where there is no merger between two corporations, for third parties, the two corporations
shall not be considered as one but two separate corporations, and being separate entities, the property of
one cannot be considered the property of the other.There being no merger between FISLAI and DSLAI
(now MSLAI), for third parties such as respondents, the two corporations shall not be considered as one
Kaye Dial| Roger Ranigo| Ferdi Tamaca| Kat Ramirez| Elaine Magabilin|Nek Villardo
but two separate corporations. A corporation is an artificial being created by operation of law. It possesses
the right of succession and such powers, attributes, and properties expressly authorized by law or incident
to its existence. It has a personality separate and distinct from the persons composing it, as well as from
any other legal entity to which it may be related. Being separate entities, the property of one cannot be
considered the property of the other.
FACTS
-The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with the Securities and Exchange Commission (SEC)
under Registry Nos. 34869 and 32388, respectively, primarily engaged in the business of granting loans
and receiving deposits from the general public, and treated as banks.
-Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving
corporation. The articles of merger were not registered with the SEC due to incomplete
documentation. On August 12, 1985, DSLAI changed its corporate name to MSLAI by way of an
amendment to Article 1 of its Articles of Incorporation, but the amendment was approved by the SEC
only on April 3, 1987.
-Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved Board Resolution
No. 86002, assigning its assets in favor of DSLAI which in turn assumed the formers liabilities. The
business of MSLAI, however, failed. Hence, the Monetary Board of the Central Bank of the Philippines
ordered its closure and placed it under receivership per Monetary Board Resolution No. 922 dated August
31, 1990. The Monetary Board found that MSLAIs financial condition was one of insolvency, and for it
to continue in business would involve probable loss to its depositors and creditors. On May 24, 1991,
the Monetary Board ordered the liquidation of MSLAI, with PDIC as its liquidator.
- It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan City, an
action for collection of sum of money against FISLAI. RTC issued a summary decision in favor of Uy,
directing defendants therein (which included FISLAI) to pay the former the sum of P136,801.70, plus
interest until full payment, 25% as attorneys fees, and the costs of suit.
-Sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in Cagayan de Oro City,
and the notice of sale was subsequently published. During the public auction, Willkom was the highest
bidder. A certificate of sale was issued and eventually registered with the Register of Deeds of Cagayan
de Oro City. Upon the expiration of the redemption period, sheriff Bantuas issued the sheriffs definite
deed of sale. New certificates of title covering the subject properties were issued in favor of Willkom.
On September 20, 1994, Willkom sold one of the subject parcels of land to Go.
-On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of Cagayan de Oro
City, a complaint for Annulment of Sheriffs Sale, Cancellation of Title and Reconveyance of Properties
against respondents. MSLAI alleged that the sale on execution of the subject properties was conducted
without notice to it and PDIC; that PDIC only came to know about the sale for the first time while
discharging its mandate of liquidating MSLAIs assets; that the execution of the RTC decision in Civil
Case No. 111697 was illegal and contrary to law and jurisprudence, not only because PDIC was not
notified of the execution sale, but also because the assets of an institution placed under receivership or
liquidation such as MSLAI should be deemed in custodia legis and should be exempt from any order of
garnishment, levy, attachment, or execution.
- In answer, respondents averred that MSLAI had no cause of action against them or the right to recover
the subject properties because MSLAI is a separate and distinct entity from FISLAI. They further contended
that the unofficial merger between FISLAI and DSLAI (now MSLAI) did not take effect considering
that the merging companies did not comply with the formalities and procedure for merger or consolidation
as prescribed by the Corporation Code of the Philippines. Finally, they claimed that FISLAI is still a
SEC registered corporation and could not have been absorbed by petitioner.
ISSUE
WON there is merger between FISLAI and DSLAI (now MSLAI).
RULING
NO.
Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and
continues the combined business, while the rest are dissolved and all their rights, properties, and liabilities
are acquired by the surviving corporation.20 Although there is a dissolution of the absorbed or merged
corporations, there is no winding up of their affairs or liquidation of their assets because the surviving
corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities. The
merger, however, does not become effective upon the mere agreement of the constituent corporations.
Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights
of stockholders and creditors, there must be an express provision of law authorizing them. The steps
necessary to accomplish a merger or consolidation, as provided for in Sections 76,77, 78, and 79 of the
Corporation Code, are:
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of incorporation of the surviving corporation,
or in case of consolidation, all the statements required in the articles of incorporation of a
corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting
must be called and at least two (2) weeks notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be attached to the notice. Vote
of twothirds of the members or of stockholders representing twothirds of the outstanding capital
stock will be needed. Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by
the corporate officers of each constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles of incorporation of the
surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks
before.
(6) Issuance of certificate of merger or consolidation.
Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the SEC,
subject to its prior determination that the merger is not inconsistent with the Corporation Code or existing
laws. Where a party to the merger is a special corporation governed by its own charter, the Code
be obtained.
In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered
with the SEC due to incomplete documentation. Consequently, the SEC did not issue the required certificate
of merger. Even if it is true that the Monetary Board of the Central Bank of the Philippines recognized
such merger, the fact remains that no certificate was issued by the SEC. Such merger is still incomplete
without the certification. The issuance of the certificate of merger is crucial because not only does it bear
out SECs approval but it also marks the moment when the consequences of a merger take place. By
operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights
and properties, as well as liabilities, shall be taken and deemed transferred to and vested in the surviving
corporation.The same rule applies to consolidation which becomes effective not upon mere agreement of
the members but only upon issuance of the certificate of consolidation by the SEC. When the SEC, upon
processing and examining the articles of consolidation, is satisfied that the consolidation of the corporations
is not inconsistent with the provisions of the Corporation Code and existing laws, it issues a certificate
of consolidation which makes the reorganization official. The new consolidated corporation comes into
existence and the constituent corporations are dissolved and cease to exist.
There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as
respondents, the two corporations shall not be considered as one but two separate corporations. A
corporation is an artificial being created by operation of law. It possesses the right of succession
and such powers, attributes, and properties expressly authorized by law or incident to its existence.
It has a personality separate and distinct from the persons composing it, as well as from any other
legal entity to which it may be related. Being separate entities, the property of one cannot be
considered the property of the other.
Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as its assets
and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the Deed of Assignment
wherein FISLAI assigned its assets and properties to DSLAI, and the latter assumed all the liabilities of
the former. As provided in Article 1625 of the Civil Code, an assignment of credit, right or action shall
produce no effect as against third persons, unless it appears in a public instrument, or the instrument is
recorded in the Registry of Property in case the assignment involves real property. The certificates of
title of the subject properties were clean and contained no annotation of the fact of assignment. Respondents
cannot, therefore, be faulted for enforcing their claim against FISLAI on the properties registered under
its name. Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the
execution sale over the properties of FISLAI. With more reason can it not cause the cancellation of the
title to the subject properties of Willkom and Go.
2. Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation

G.R. No. 192398. September 29, 2014.
Case Summary:
Corporations; Merger of Corporations; In a merger of two (2) existing corporations, one of the corporations
survives and continues the business, while the other is dissolved, and all its rights, properties, and liabilities
are acquired by the surviving corporation.It should be emphasized that in the instant case, the transfer
of SPPCs real property to respondent was pursuant to their approved plan of merger. In a merger of
two existing corporations, one of the corporations survives and continues the business, while the other is
dissolved, and all its rights, properties, and liabilities are acquired by the surviving corporation. Although
there is a dissolution of the absorbed or merged corporations, there is no winding up of their affairs or
liquidation of their assets because the surviving corporation automatically acquires all their rights, privileges,
and powers, as well as their liabilities. Here, SPPC ceased to have any legal personality and respondent
PSPC stepped into everything that was SPPCs, pursuant to the law and the terms of their Plan of
Merger. Pertinently, a merger of two corporations produces the following effects, among others: Sec. 80.
Effects of merger or consolidation. x x x x x x x 4. The surviving or the consolidated corporation shall
thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the
constituent corporations; and all property, real or personal, and all receivables due on whatever account,
including subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporations, shall be taken and deemed to be transferred to and
vested in such surviving or consolidated corporation without further act or deed.
Same; Same; Corporations; Merger of Corporations; Republic Act (RA) No. 9243 exempts the transfer of
real property of a corporation, which is a party to the merger or consolidation, to another corporation,
which is also a party to the merger or consolidation, from the payment of documentary stamp tax (DST).
Notably, RA 9243, entitled An Act Rationalizing the Provisions of the Documentary Stamp Tax of the
National Internal Revenue Code of 1997 was enacted and took effect on April 27, 2004 which exempts
the transfer of real property of a corporation, which is a party to the merger or consolidation, to another
corporation, which is also a party to the merger or consolidation, from the payment of documentary stamp
tax.
FACTS
-Respondent Pilipinas Shell Petroleum Corporation (PSPC) is a corporation organized and existing under
the laws of the Philippines and was incorporated to construct, operate and maintain petroleum refineries,
works, plant machinery, equipment dock and harbor facilities and auxiliary works and other facilities of
all kinds and used in or in connection with the manufacture of products of all kinds which are wholly
or partly derived from crude oil.
-On April 27, 1999, respondent entered into a Plan of Merger with its affiliate, Shell Philippine Petroleum
Corporation (SPPC), a corporation organized and existing under the laws of the Philippines. In the Plan
of Merger, it was provided that the entire assets and liabilities of SPPC will be transferred to, and
absorbed by, respondent as the surviving entity. The Securities and Exchange Commission approved the
merger on July 1, 1999.
-On August 10, 1999, respondent paid to the BIR documentary stamp taxes amounting to P524,316.00
on the original issuance of shares of stock of respondent issued in exchange for the surrendered SPPC
shares pursuant to Section 175 of the National Internal Revenue Code of 1997 (NIRC or Tax Code).
-Confirming the tax-free nature of the merger between respondent and SPPC, the BIR, in a ruling dated
October 4, 1999, ruled that pursuant to Section 40(C)(2) and (6)(b) of the NIRC, no gain or loss shall
be recognized, if, in pursuance to a plan of merger or consolidation, a shareholder exchanges stock in a
corporation which is a party to the merger or consolidation solely for the stock of another corporation
which is also a party to the merger or consolidation.
-The BIR ruled, among others, that no gain or loss shall be recognized by the stockholders of SPPC on
the exchange of their shares of stock of SPPC solely for shares of stock of respondent pursuant to the
Plan of Merger. The BIR, however, stated in said Ruling that:
3. The issuance by PSPC of its own shares of stock to the shareholders of SPPC in exchange for the
surrendered certificates of stock of SPPC shall be subject to the documentary stamp tax (DST) at the rate
of Two Pesos (P2.00) on each Two Hundred Pesos (P200.00), or fractional part thereof, based on the
total par value of the PSPC shares of stock issued pursuant to Section 175 of the Tax Code of 1997.
x x x
6. The exchange of land and improvements by SPPC to PSPC for the latters shares of stock shall be
subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, based on the
consideration contracted to be paid for such realty or its fair market value determined in accordance with
Section 6(E) of the said Code, whichever is higher. x x x
- On May 10, 2000, respondent paid to the BIR the amount of P22,101,407.64 representing documentary
stamp tax on the transfer of real property from SPPC to respondent. Believing that it erroneously paid
documentary stamp tax on its absorption of real property owned by SPPC, respondent filed with petitioner
on September 18, 2000, a formal claim for refund or tax credit of the documentary stamp tax in the
amount of P22,101,407.64.
ISSUE
WON transfer of the properties of SPPC to respondent was not in exchange for the latters shares
of stock but is a legal consequence of the merger and therefore not subject to documentary stamp tax.
RULING. YES
Petitioner points out that the merger between SPPC and respondent resulted in the following: (1) the
issuance by respondent of its own shares of stock to the shareholders of SPPC in exchange for the
surrendered certificates of stock of SPPC and was imposed a documentary stamp tax under Section 175
of the Tax Code in the amount of P524,316.00; and (2) the transfer of SPPCs real properties to
respondent in exchange for the latters shares of stock which was imposed a documentary stamp tax under
Section 196 of the Tax Code in the amount of P22,101,407.64.
Respondent claims that the documentary stamp tax imposed on the second transaction had been erroneously
paid and seeks to claim a refund or tax credit in the amount of P22,101,407.64. Both the CTA and the
CA held that respondent is entitled to refund or tax credit.
It should be emphasized that in the instant case, the transfer of SPPCs real property to respondent was
pursuant to their approved plan of merger. In a merger of two existing corporations, one of the corporations
survives and continues the business, while the other is dissolved, and all its rights, properties, and liabilities
are acquired by the surviving corporation. Although there is a dissolution of the absorbed or merged
corporations, there is no winding up of their affairs or liquidation of their assets because the surviving
corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities.Here,
SPPC ceased to have any legal personality and respondent PSPC stepped into everything that was SPPCs,
pursuant to the law and the terms of their Plan of Merger.
Pertinently, a merger of two corporations produces the following effects, among others:
Sec. 80. Effects of merger or consolidation.x x x x x x x
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including subscriptions to shares and other choses
in action, and all and every other interest of, or belonging to, or due to each constituent corporations,
shall be taken and deemed to be transferred to and vested in such surviving or consolidated
corporation without further act or deed; (Emphasis supplied)
In a merger, the real properties are not deemed sold to the surviving corporation and the latter
could not be considered as purchaser of realty since the real properties subject of the merger
were merely absorbed by the surviving corporation by operation of law and these properties are
deemed automatically transferred to and vested in the surviving corporation without further act or
deed. Therefore, the transfer of real properties to the surviving corporation in pursuance of a
merger is not subject to documentary stamp tax. As stated at the outset, documentary stamp tax is
imposed only on all conveyances, deeds, instruments or writing where realty sold shall be conveyed to a
purchaser or purchasers. The transfer of SPPCs real property to respondent was neither a sale nor was
it a conveyance of real property for a consideration contracted to be paid as contemplated under Section
196 of the Tax Code . Hence, Section 196 of the Tax Code is inapplicable and respondent is not liable
for documentary stamp tax.
3. Bank of Commerce v. RPN, et.al.
Merger is a re-organization of two or more corporations that results in their consolidating into a single
corporation, which is one of the constituent corporations, one disappearing or dissolving and the other surviving.
To put it another way, merger is the absorption of one or more corporations by another existing corporation,
which retains its identity and takes over the rights, privileges, franchises, properties, claims, liabilities and
obligations of the absorbed corporation(s). The absorbing corporation continues its existence while the life or
lives of the other corporation(s) is or are terminated.
"a de facto merger can be pursued by one corporation acquiring all or substantially all of the properties of another
corporation in exchange of shares of stock of the acquiring corporation. The acquiring corporation would end up
with the business enterprise of the target corporation; whereas, the target corporation would end up with basically
its only remaining assets being the shares of stock of the acquiring corporation."
Facts:
In late 2001 the Traders Royal Bank (TRB) proposed to sell to petitioner Bank of Commerce
(Bancommerce) forP10.4 billion its banking business consisting of specified assets and liabilities. Bancommerce
agreed subject to prior Bangko Sentral ng Pilipinas' (BSP's) approval of their Purchase and Assumption (P & A)
Agreement. On November 8, 2001 the BSP approved that agreement subject to the condition that Bancommerce
and TRB would set up an escrow fund of P50 million with another bank to cover TRB liabilities for contingent
claims that may subsequently be adjudged against it, which liabilities were excluded from the purchase. Following
the above approval, on November 9, 2001 Bancommerce entered into a P & A Agreement with TRB and acquired
its specified assets and liabilities, excluding liabilities arising from judicial actions which were to be covered by
the BSP-mandated escrow of P50 million. To comply with the BSP mandate, on December 6, 2001 TRB
placed P50 million in escrow with Metropolitan Bank and Trust Co. (Metrobank) to answer for those claims and
liabilities that were excluded from the P & A Agreement and remained with TRB. Accordingly, the BSP finally
approved such agreement on July 3, 2002. Shortly after or on October 10, 2002, acting in G.R. 138510, Traders
Royal Bank v. Radio Philippines Network (RPN), Inc., this Court ordered TRB to pay respondents RPN,
Intercontinental Broadcasting Corporation, and Banahaw Broadcasting Corporation (collectively, RPN, et al.)
actual damages of P9,790,716.87 plus 12% legal interest and some amounts. Based on this decision, RPN, et
al.filed a motion for execution against TRB before the Regional Trial Court (RTC) of Quezon City. But rather
than pursue a levy in execution of the corresponding amounts on escrow with Metrobank, RPN, et al. filed a
Supplemental Motion for Execution where they described TRB as "now Bank of Commerce" based on the
assumption that TRB had been merged into Bancommerce.
On February 20, 2004, having learned of the supplemental application for execution, Bancommerce filed
its Special Appearance with Opposition to the same questioning the jurisdiction of the RTC over Bancommerce
and denying that there was a merger between TRB and Bancommerce. On August 15, 2005 the RTC issued an
Order granting and issuing the writ of execution to cover any and all assets of TRB, "including those subject of
the merger/consolidation in the guise of a Purchase and Sale Agreement with Bank of Commerce, and/or against
the Escrow Fund established by TRB and Bank of Commerce with the Metropolitan Bank and Trust Company."
This prompted Bancommerce to file a petition for certiorari with the Court of Appeals (CA) in CA-G.R. SP 91258
assailing the RTCs Order. On December 8, 2009 the CA denied the petition. The CA pointed out that the Decision
of the RTC was clear in that Bancommerce was not being made to answer for the liabilities of TRB, but rather the
assets or properties of TRB under its possession and custody.In the same Decision, the CA modified the Decision
of the RTC by deleting the phrase that the P & A Agreement between TRB and Bancommerce is a farce or "a
mere tool to effectuate a merger and/or consolidation between TRB and BANCOM."
On January 8, 2010 RPN, et al. filed with the RTC a motion to cause the issuance of an alias writ of
execution against Bancommerce based on the CA Decision. The RTC granted the motion on February 19, 2010
on the premise that the CA Decision allowed it to execute on the assets that Bancommerce acquired from TRB
under their P & A Agreement. On March 10, 2010 Bancommerce sought reconsideration of the RTC Order
considering that the December 8,2009 CA Decision actually declared that no merger existed between TRB and
Bancommerce. But, since the RTC had already issued the alias writ on March 9, 2010 Bancommerce filed on
March 16, 2010 a motion to quash the same, followed by supplemental Motion on April 29, 2010. On August 18,
2010 the RTC issued the assailed Order denying Bancommerce pleas and, among others, directing the release to
the Sheriff of Bancommerces "garnished monies and shares of stock or their monetary equivalent" and for the
sheriff to pay 25% of the amount "to the respondents counsel representing his attorneys fees and P200,000.00
representing his appearance fees and litigation expenses" and the balance to be paid to the respondents after
deducting court dues.
Aggrieved, Bancommerce immediately elevated the RTC Order to the CA via a petition for certiorari
under Rule 65 to assail the Orders dated February 19, 2010 and August 18, 2010. On November 26, 2010 the CA
dismissed the petition outright for the supposed failure of Bancommerce to file a motion for reconsideration of
the assailed order. The CA denied Bancommerces motion for reconsideration on February 9, 2011, prompting it
to come to this Court.
Issue:
Whether or not there was a merger between TRB and Bancommerce?
Ruling:
None. Merger is a re-organization of two or more corporations that results in their consolidating into a
single corporation, which is one of the constituent corporations, one disappearing or dissolving and the other
surviving. To put it another way, merger is the absorption of one or more corporations by another existing
corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims, liabilities
and obligations of the absorbed corporation(s). The absorbing corporation continues its existence while the life or
lives of the other corporation(s) is or are terminated.
The Corporation Code requires the following steps for merger or consolidation:
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any
amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of consolidation,
all the statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be called
and at least two (2) weeks notice must be sent to all stockholders or members, personally or by registered mail.
A summary of the plan must be attached to the notice. Vote of two-thirds of the members or of stockholders
representing two thirds of the outstanding capital stock will be needed. Appraisal rights, when proper, must be
respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the corporate
officers of each constituent corporation. These take the place of the articles of incorporation of the consolidated
corporation, or amend the articles of incorporation of the surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.
Indubitably, it is clear that no merger took place between Bancommerce and TRB as the
requirements and procedures for a merger were absent. A merger does not become effective upon the mere
agreement of the constituent corporations. All the requirements specified in the law must be complied with in
order for merger to take effect. Section 79 of the Corporation Code further provides that the merger shall be
effective only upon the issuance by the Securities and Exchange Commission (SEC) of a certificate of merger.
Here, Bancommerce and TRB remained separate corporations with distinct corporate personalities. What
happened is that TRB sold and Bancommerce purchased identified recorded assets of TRB in consideration of
Bancommerces assumption of identified recorded liabilities of TRB including booked contingent accounts. There
is no law that prohibits this kind of transaction especially when it is done openly and with appropriate government
approval. Indeed, the dissenting opinions of Justices Jose Catral Mendoza and Marvic Mario Victor F. Leonen are
of the same opinion. In strict sense, no merger or consolidation took place as the records do not show any plan or
articles of merger or consolidation. More importantly, the SEC did not issue any certificate of merger or
consolidation.
The dissenting opinion of Justice Mendoza finds, however, that a "de facto" merger existed between
TRB and Bancommerce considering that (1) the P & A Agreement between them involved substantially all the
assets and liabilities of TRB; (2) in an Ex Parte Petition for Issuance of Writ of Possession filed in a case,
Bancommerce qualified TRB, the petitioner, with the words "now known as Bancommerce;" and (3) the BSP
issued a Circular Letter (series of 2002) advising all banks and non-bank financial intermediaries that the banking
activities and transaction of TRB and Bancommerce were consolidated and that the latter continued the operations
of the former. Xxx In his book, Philippine Corporate Law,2 Dean Cesar Villanueva explained that under the
Corporation Code, "a de facto merger can be pursued by one corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock of the acquiring corporation. The acquiring
corporation would end up with the business enterprise of the target corporation; whereas, the target corporation
would end up with basically its only remaining assets being the shares of stock of the acquiring corporation."
(Emphasis supplied)
No de facto merger took place in the present case simply because the TRB owners did not get in
exchange for the banks assets and liabilities an equivalent value in Bancommerce shares of stock. Bancommerce
and TRB agreed with BSP approval to exclude from the sale the TRBs contingent judicial liabilities, including
those owing to RPN, et al. The Bureau of Internal Revenue (BIR) treated the transaction between the two banks
purely as a sale of specified assets and liabilities when it rendered its opinion on the tax consequences of the
transaction given that there is a difference in tax treatment between a sale and a merger or consolidation.
Bancommerce agreed to assume those liabilities of TRB that are specified in their P & A Agreement.
That agreement specifically excluded TRBs contingent liabilities that the latter might have arising from pending
litigations in court, including the claims of respondent RPN, et al. As already pointed out above, the sale did not
amount to merger or de facto merger of Bancommerce and TRB since the elements required of both were not
present. The evidence in this case fails to show that Bancommerce was a mere continuation of TRB. TRB retained
its separate and distinct identity after the purchase. Although it subsequently changed its name to Traders Royal
Holdings, Inc. such change did not result in its dissolution. "The changing of the name of a corporation is no
more than creation of a corporation than the changing of the name of a natural person is the begetting of a natural
person. The act, in both cases, would seem to be what the language which we use to designate it importsa
change of name and not a change of being." As such, Bancommerce and TRB remained separate corporations. To
protect contingent claims, the BSP directed Bancommerce and TRB to put up P50 million in escrow with another
bank. It was the BSP, not Bancommerce that fixed the amount of the escrow. Consequently, it cannot be said that
the latter bank acted in bad faith with respect to the excluded liabilities. They did not enter into the P & A
Agreement to enable TRB to escape from its liability to creditors with pending court cases. Further, even without
the escrow, TRB continued to be liable to its creditors although under its new name. Parenthetically, the P & A
Agreement shows that Bancommerce acquired greater amount of TRB liabilities than assets. Article II of the P &
A Agreement shows that Bancommerce assumed total liabilities of P10,401,436,000.00 while it received total
assets of only P10,262,154,000.00. This proves the arms length quality of the transaction.
4. BPI v. BPI Employees Union- Davao Chapter- Federation of Unions in BPI Unibank (Aug. 10, 2010)
In legal parlance, however, human beings are never embraced in the term "assets and liabilities." The Corporation
Code does not also mandate the absorption of the employees of the non-surviving corporation by the surviving
corporation in the case of a merger. The rule is that unless expressly assumed, labor contracts such as employment
contracts and collective bargaining agreements are not enforceable against a transferee of an enterprise, labor
contracts being in personam, thus binding only between the parties. A labor contract merely creates an action in
personam and does not create any real right which should be respected by third parties. This conclusion draws its
force from the right of an employer to select his employees and to decide when to engage them as protected under
our Constitution, and the same can only be restricted by law through the exercise of the police power.
Facts:
On March 23, 2000, the Bangko Sentral ng Pilipinas approved the Articles of Merger executed on
January 20, 2000 by and between BPI, herein petitioner, and FEBTC. This Article and Plan of Merger was
approved by the Securities and Exchange Commission on April 7, 2000. Pursuant to the Article and Plan of
Merger, all the assets and liabilities of FEBTC were transferred to and absorbed by BPI as the surviving
corporation. FEBTC employees, including those in its different branches across the country, were hired by
petitioner as its own employees, with their status and tenure recognized and salaries and benefits maintained.
Respondent BPI Employees Union-Davao Chapter - Federation of Unions in BPI Unibank (hereinafter the
"Union," for brevity) is the exclusive bargaining agent of BPIs rank and file employees in Davao City. The former
FEBTC rank-and-file employees in Davao City did not belong to any labor union at the time of the merger. Prior
to the effectivity of the merger, or on March 31, 2000, respondent Union invited said FEBTC employees to a
meeting regarding the Union Shop Clause (Article II, Section 2) of the existing CBA between petitioner BPI and
respondent Union. Article II Section 2. Union Shop - New employees falling within the bargaining unit as defined
in Article I of this Agreement, who may hereafter be regularly employed by the Bank shall, within thirty (30)
days after they become regular employees, join the Union as a condition of their continued employment. It is
understood that membership in good standing in the Union is a condition of their continued employment with the
Bank. (Emphases supplied.)
After the meeting called by the Union, some of the former FEBTC employees joined the Union, while
others refused. Later, however, some of those who initially joined retracted their membership. Respondent Union
then sent notices to the former FEBTC employees who refused to join, as well as those who retracted their
membership, and called them to a hearing regarding the matter. When these former FEBTC employees refused to
attend the hearing, the president of the Union requested BPI to implement the Union Shop Clause of the CBA and
to terminate their employment pursuant thereto. After two months of management inaction on the request,
respondent Union informed petitioner BPI of its decision to refer the issue of the implementation of the Union
Shop Clause of the CBA to the Grievance Committee. However, the issue remained unresolved at this level and
so it was subsequently submitted for voluntary arbitration by the parties. Voluntary Arbitrator Rosalina LetrondoMontejo ruled in favor of petitioner BPIs interpretation that the former FEBTC employees were not covered by
the Union Security Clause of the CBA between the Union and the Bank on the ground that the said employees
were not new employees who were hired and subsequently regularized, but were absorbed employees "by
operation of law" because the "former employees of FEBTC can be considered assets and liabilities of the
absorbed corporation." The Voluntary Arbitrator concluded that the former FEBTC employees could not be
compelled to join the Union, as it was their constitutional right to join or not to join any organization.
Respondent Union filed a Motion for Reconsideration, but the Voluntary Arbitrator denied the same.
Dissatisfied, respondent then appealed the Voluntary Arbitrators decision to the Court of Appeals. In the herein
assailed Decision dated September 30, 2003, the Court of Appeals reversed and set aside the Decision of the
Voluntary Arbitrator. Likewise, the Court of Appeals denied herein petitioners Motion for Reconsideration in a
Resolution dated June 9, 2004. Hence, this petition.
Issue:
Whether or not the former employees of FEBTC can be considered as assets and liabilities of the
absorbed corporation?
Ruling:
No. In legal parlance, however, human beings are never embraced in the term "assets and liabilities."
Moreover, BPIs absorption of former FEBTC employees was neither by operation of law nor by legal
consequence of contract. There was no government regulation or law that compelled the merger of the two banks
or the absorption of the employees of the dissolved corporation by the surviving corporation. Had there been such
law or regulation, the absorption of employees of the non-surviving entities of the merger would have been
mandatory on the surviving corporation. In the present case, the merger was voluntarily entered into by both banks
presumably for some mutually acceptable consideration. In fact, the Corporation Code does not also mandate the
absorption of the employees of the non-surviving corporation by the surviving corporation in the case of a merger.
Section 80 of the Corporation Code provides:
SEC. 80. Effects of merger or consolidation. The merger or consolidation, as provided in the preceding sections
shall have the following effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving
corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the surviving or the
consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers
and shall be subject to all the duties and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent corporations; and all property, real or personal, and all
receivables due on whatever account, including subscriptions to shares and other choses in action, and all and
every other interest of, or belonging to, or due to each constituent corporation, shall be taken and deemed to be
transferred to and vested in such surviving or consolidated corporation without further act or deed; and
5. The surviving or the consolidated corporation shall be responsible and liable for all the liabilities and obligations
of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had
itself incurred such liabilities or obligations; and any claim, action or proceeding pending by or against any of
such constituent corporations may be prosecuted by or against the surviving or consolidated corporation, as the
case may be. Neither the rights of creditors nor any lien upon the property of any of such constituent corporations
shall be impaired by such merger or consolidated.
Significantly, too, the Articles of Merger and Plan of Merger dated April 7, 2000 did not contain any
specific stipulation with respect to the employment contracts of existing personnel of the non-surviving entity
which is FEBTC. Unlike the Voluntary Arbitrator, this Court cannot uphold the reasoning that the general
stipulation regarding transfer of FEBTC assets and liabilities to BPI as set forth in the Articles of Merger
necessarily includes the transfer of all FEBTC employees into the employ of BPI and neither BPI nor the FEBTC
employees allegedly could do anything about it. Even if it is so, it does not follow that the absorbed employees
should not be subject to the terms and conditions of employment obtaining in the surviving corporation.
The rule is that unless expressly assumed, labor contracts such as employment contracts and collective
bargaining agreements are not enforceable against a transferee of an enterprise, labor contracts being in personam,
thus binding only between the parties. A labor contract merely creates an action in personam and does not create
any real right which should be respected by third parties. This conclusion draws its force from the right of an
employer to select his employees and to decide when to engage them as protected under our Constitution, and the
same can only be restricted by law through the exercise of the police power.
Furthermore, this Court believes that it is contrary to public policy to declare the former FEBTC
employees as forming part of the assets or liabilities of FEBTC that were transferred and absorbed by BPI in the
Articles of Merger. Assets and liabilities, in this instance, should be deemed to refer only to property rights and
obligations of FEBTC and do not include the employment contracts of its personnel. A corporation cannot
unilaterally transfer its employees to another employer like chattel. Certainly, if BPI as an employer had the right
to choose who to retain among FEBTCs employees, FEBTC employees had the concomitant right to choose not
to be absorbed by BPI. Even though FEBTC employees had no choice or control over the merger of their employer
with BPI, they had a choice whether or not they would allow themselves to be absorbed by BPI. Certainly nothing
prevented the FEBTCs employees from resigning or retiring and seeking employment elsewhere instead of going
along with the proposed absorption.
Employment is a personal consensual contract and absorption by BPI of a former FEBTC employee
without the consent of the employee is in violation of an individuals freedom to contract. It would have been a
different matter if there was an express provision in the articles of merger that as a condition for the merger, BPI
was being required to assume all the employment contracts of all existing FEBTC employees with the conformity
of the employees. In the absence of such a provision in the articles of merger, then BPI clearly had the business
management decision as to whether or not employ FEBTCs employees. FEBTC employees likewise retained the
prerogative to allow themselves to be absorbed or not; otherwise, that would be tantamount to involuntary
servitude.
There appears to be no dispute that with respect to FEBTC employees that BPI chose not to employ or
FEBTC employees who chose to retire or be separated from employment instead of "being absorbed," BPIs
assumed liability to these employees pursuant to the merger is FEBTCs liability to them in terms of separation
pay, retirement pay or other benefits that may be due them depending on the circumstances.
Xxx That BPI is the same entity as FEBTC after the merger is but a legal fiction intended as a tool to
adjudicate rights and obligations between and among the merged corporations and the persons that deal with them.
Although in a merger it is as if there is no change in the personality of the employer, there is in reality a change
in the situation of the employee. Once an FEBTC employee is absorbed, there are presumably changes in his
condition of employment even if his previous tenure and salary rate is recognized by BPI. It is reasonable to
assume that BPI would have different rules and regulations and company practices than FEBTC and it is
incumbent upon the former FEBTC employees to obey these new rules and adapt to their new environment. Not
the least of the changes in employment condition that the absorbed FEBTC employees must face is the fact that
prior to the merger they were employees of an unorganized establishment and after the merger they became
employees of a unionized company that had an existing collective bargaining agreement with the certified union.
This presupposes that the union who is party to the collective bargaining agreement is the certified union that has,
in the appropriate certification election, been shown to represent a majority of the members of the bargaining unit.
Likewise, with respect to FEBTC employees that BPI chose to employ and who also chose to be
absorbed, then due to BPIs blanket assumption of liabilities and obligations under the articles of merger, BPI was
bound to respect the years of service of these FEBTC employees and to pay the same, or commensurate salaries
and other benefits that these employees previously enjoyed with FEBTC.
Xxx The effect or consequence of BPIs so-called "absorption" of former FEBTC employees should be
limited to what they actually agreed to, i.e. recognition of the FEBTC employees years of service, salary rate and
other benefits with their previous employer. The effect should not be stretched so far as to exempt former FEBTC
employees from the existing CBA terms, company policies and rules which apply to employees similarly situated.
If the Union Shop Clause is valid as to other new regular BPI employees, there is no reason why the same clause
would be a violation of the "absorbed" employees freedom of association.
Reconsidered portion of the decision (October 19, 2011)
Xxx While most of the arguments offered by BPI have already been thoroughly addressed in the August
10, 2010 Decision, we find that a qualification of our ruling is in order only with respect to the interpretation of
the provisions of the Articles of Merger and its implications on the former FEBTC employees security of tenure.
Taking a second look on this point, we have come to agree with Justice Brions view that it is more in
keeping with the dictates of social justice and the State policy of according full protection to labor to deem
employment contracts as automatically assumed by the surviving corporation in a merger, even in the absence of
an express stipulation in the articles of merger or the merger plan. In his dissenting opinion, Justice Brion reasoned
that:
To my mind, due consideration of Section 80 of the Corporation Code, the constitutionally declared
policies on work, labor and employment, and the specific FEBTC-BPI situation i.e., a merger with complete
"body and soul" transfer of all that FEBTC embodied and possessed and where both participating banks were
willing (albeit by deed, not by their written agreement) to provide for the affected human resources by recognizing
10
continuity of employment should point this Court to a declaration that in a complete merger situation where
there is total takeover by one corporation over another and there is silence in the merger agreement on what the
fate of the human resource complement shall be, the latter should not be left in legal limbo and should be properly
provided for, by compelling the surviving entity to absorb these employees. This is what Section 80 of the
Corporation Code commands, as the surviving corporation has the legal obligation to assume all the obligations
and liabilities of the merged constituent corporation.
Not to be forgotten is that the affected employees managed, operated and worked on the transferred assets
and properties as their means of livelihood; they constituted a basic component of their corporation during its
existence. In a merger and consolidation situation, they cannot be treated without consideration of the applicable
constitutional declarations and directives, or, worse, be simply disregarded. If they are so treated, it is up to this
Court to read and interpret the law so that they are treated in accordance with the legal requirements of mergers
and consolidation, read in light of the social justice, economic and social provisions of our Constitution. Hence,
there is a need for the surviving corporation to take responsibility for the affected employees and to absorb them
into its workforce where no appropriate provision for the merged corporation's human resources component is
made in the Merger Plan.
By upholding the automatic assumption of the non-surviving corporations existing employment
contracts by the surviving corporation in a merger, the Court strengthens judicial protection of the right to security
of tenure of employees affected by a merger and avoids confusion regarding the status of their various benefits
which were among the chief objections of our dissenting colleagues. However, nothing in this Resolution shall
impair the right of an employer to terminate the employment of the absorbed employees for a lawful or authorized
cause or the right of such an employee to resign, retire or otherwise sever his employment, whether before or after
the merger, subject to existing contractual obligations. In this manner, Justice Brions theory of automatic
assumption may be reconciled with the majoritys concerns with the successor employers prerogative to choose
its employees and the prohibition against involuntary servitude.
5. MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND NEPOMUCENO
REDOVAN, petitioners, vs. THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN,
MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO and CASTRENSE C. VELOSO,
respondents.
G.R. No. 91889. August 27, 1993
CASE SUMMARY:
Corporation Law; Petitioner corporation is classified as a close corporation and consequently a board resolution
authorizing the sale or mortgage of the subject property is not necessary to bind the Corporation for the action
of its President.In the instant case, petitioner corporation is classified as a close corporation and consequently
a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation
for the action of its president. At any rate, a corporate action taken at a board meeting without proper call or notice
in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection
with the secretary of the corporation after having knowledge of the meeting which, in this case, petitioner Virgilio
Dulay failed to do.
Same; Piercing the veil of corporate fiction; When the corporation is used merely as an alter ego or business
conduit of a person, the law will regard the corporation as the act of that person.It is relevant to note that
although a corporation is an entity which has a personality distinct and separate from its individual stockholders
or members, the veil of corporate fiction may be pierced when it is used to defeat public convenience, justify
wrong, protect fraud or defend crime. The privilege of being treated as an entity distinct and separate from its
stockholders or members is therefore confined to its legitimate uses and is subject to certain limitations to prevent
the commission of fraud or other illegal or unfair act. When the corporation is used merely as an alter ego or
business conduit of a person, the law will regard the corporation as the act of that person. The Supreme Court had
repeatedly disregarded the separate personality of the corporation where the corporate entity was used to annul a
valid contract executed by one of its members.
FACTS:
Petitioner Manuel R. Dulay Enterprises, Inc., a domestic corporation with the following as members of its Board
of Directors: Manuel R. Dulay with 19,960 shares and designated as president, treasurer and general manager;
Atty. Virgilio E. Dulay with 10 shares and designated as vice-president; Linda E. Dulay with 10 shares; Celia
11
Dulay- Mendoza with 10 shares; and Atty. Plaridel C. Jose with 10 shares and designated as secretary, owned a
property 4 covered by TCT No. 17880 and known as Dulay Apartment consisting of sixteen (16) apartment units
on a six hundred eighty-nine (689) square meter lot, more or less, located at Seventh Street (now Buendia
Extension) and F.B. Harrison Street, Pasay City.
On December 23, 1976, Manuel Dulay by virtue of Board Resolution No. 18 of petitioner corporation sold the
subject property to private respondents spouses Maria Theresa and Castrense Veloso in the amount of
P300,000.00 as evidenced by the Deed of Absolute Sale. On December 24, 1976, private respondent Maria
Veloso, without the knowledge of Manuel Dulay, mortgaged the subject property to private respondent Manuel
A. Torres for a loan of P250,000.00 which was duly annotated 10 as Entry No. 68139 in TCT No. 23225.
Upon the failure of private respondent Maria Veloso to pay private respondent Torres, the subject property was
sold on April 5, 1978 to private respondent Torres as the highest bidder in an extrajudicial foreclosure sale as
evidenced by the Certificate of Sheriffs Sale issued on April 20, 1978.
Petitioners contend that the respondent court had acted with grave abuse of discretion when it applied the doctrine
of piercing the veil of corporate entity in the instant case considering that the sale of the subject property between
private respondents spouses Veloso and Manuel Dulay has no binding effect on petitioner corporation as Board
Resolution No. 18 which authorized the sale of the subject property was resolved without the approval of all the
members of the board of directors and said Board Resolution was prepared by a person not designated by the
corporation to be its secretary.
ISSUE:
Whether or not Board Resolution no. 18 authorizing the sale is binding considering there was no approval of all
the members of the Board?
RULING:
In the instant case, petitioner corporation is classified as a close corporation and consequently a board resolution
authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of
its president. At any rate, a corporate action taken at a board meeting without proper call or notice in a close
corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the
secretary of the corporation after having knowledge of the meeting which, in this case, petitioner Virgilio Dulay
failed to do.
It is relevant to note that although a corporation is an entity which has a personality distinct and separate from its
individual stockholders or members, the veil of corporate fiction may be pierced when it is used to defeat public
convenience, justify wrong, protect fraud or defend crime. The privilege of being treated as an entity distinct and
separate from its stockholders or members is therefore confined to its legitimate uses and is subject to certain
limitations to prevent the commission of fraud or other illegal or unfair act. When the corporation is used merely
as an alter ego or business conduit of a person, the law-will regard the corporation as the act of that person. The
Supreme Court had repeatedly disregarded the separate personality of the corporation where the corporate entity
was used to annul a valid contract executed by one of its members.
Petitioners claim that the sale of the subject property by its president, Manuel Dulay, to private respondents
spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed without the knowledge and
consent of the other members of the board of directors cannot be sustained.
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit that he was a signatory
witness to the execution of the post-dated Deed of Absolute Sale of the subject property in favor of private
respondent Torres indicates that he was aware of the transaction executed between his father and private
respondents and had, therefore, adequate knowledge about the sale of the subject property to private respondents.
Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to
private respondents by Manuel Dulay is valid and binding.
WHEREFORE, the petition is DENIED and the decision appealed from is hereby AFFIRMED. SO ORDERED.
12
6. SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs. COURT OF
APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL
DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents
G.R. No. 129459. September 29, 1998.
CASE SUMMARY:
Corporation Law; Sales; The property of the corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express authorization from the corporations board of
directors.A corporation is a juridical person separate and distinct from its stockholders or members.
Accordingly, the property of the corporation is not the property of its stockholders or members and may not be
sold by the stockholders or members without express authorization from the corporations board of directors.
Same; Same; Same; Corporate Treasurers; Unless duly authorized, a treasurer, whose powers are limited, cannot
bind the corporation in a sale of its assets.The Court has also recognized the rule that persons dealing with an
assumed agent, whether the assumed agency be a general or special one, are bound at their peril, if they would
hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in
case either is controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil.
19). Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation in a sale of its
assets.
Same; Same; Same; Same; Selling is obviously foreign to a corporate treasurers function, which generally has
been described as to receive and keep the funds of the corporation, and to disburse them in accordance with the
authority given him by the board or the properly authorized officers.That Nenita Gruenberg is the treasurer
of Motorich does not free petitioner from the responsibility of ascertaining the extent of her authority to represent
the corporation. Petitioner cannot assume that she, by virtue of her position, was authorized to sell the property of
the corporation. Selling is obviously foreign to a corporate treasurers function, which generally has been
described as to receive and keep the funds of the corporation, and to disburse them in accordance with the
authority given him by the board or the properly authorized officers.
Same; Piercing the Veil of Corporate Fiction Doctrine; On equitable considerations, the corporate veil can be
disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience;
confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality,
agency or adjunct of another corporation.True, one of the advantages of a corporate form of business
organization is the limitation of an investors liability to the amount of the investment. This feature flows from
the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily
granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the
veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an
instrumentality, agency or adjunct of another corporation.
Same; Same; Close Corporations; Words and Phrases; Close Corporation, Defined.Petitioner claims that
Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation Code defines a close
corporation as follows: SEC. 96. Definition and Applicability of Title.A close corporation, within the meaning
of this Code, is one whose articles of incorporation provide that: (1) All of the corporations issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not
exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions
on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public
offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code. x x x.
Same; Same; Same; A corporation does not become a close corporation just because a man and his wife owns
99.866% of its subscribed capital stock; So, too, a narrow distribution of ownership does not, by itself, make a
close corporation.The articles of incorporation of Motorich Sales Corporation does not contain any provision
stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor
of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a public offering
of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a close corporation.
13
Motorich does not become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of
its subscribed capital stock. The [m]ere 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 personalities. So, too, a narrow distribution of ownership does not, by itself, make a close corporation.
FACTS:
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s amended complaint alleged that on 14
February 1989, plaintiff-appellant entered into an agreement with defendant- appellee Motorich Sales Corporation
for the transfer to it of a parcel of land identified as Lot 30, Block 1 of the Acropolis Greens Subdivision located
in the District of Murphy, Quezon City, Metro Manila, that defendant-appellee Motorich Sales Corporation
despite repeated demands and in utter disregard of its commitments had refused to execute the Transfer of
Rights/Deed of Assignment which is necessary to transfer the certificate of title; that defendant ACL Development
Corp. is impleaded as a necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the name
of said defendant; while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary party
in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales Corporation; that
on April 6, 1989, defendant ACL Development Corporation and Motorich Sales Corporation entered into a Deed
of Absolute Sale whereby the former transferred to the latter the subject property; that by reason of said transfer,
the Registry of Deeds of Quezon City issued a new title in the name of Motorich Sales Corporation, represented
by defendant-appellee Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No.
3571
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg interposed as
affirmative defense that the President and Chairman of Motorich did not sign the agreement adverted to in par. 3
of the amended complaint; that Mrs. Gruenbergs signature on the agreement is inadequate to bind Motorich. The
other signature, that of Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required; that
plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest
money; that granting, without admitting, the enforceability of the agreement,
ISSUE:
The Court synthesized the issue and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?
RULING:
The petition is devoid of merit.
Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered through its
president, Andres Co, into the disputed Agreement with Respondent Motorich Sales Corporation, which was in
turn allegedly represented by its treasurer, Nenita Lee Gruenberg. Petitioner insists that [w]hen Gruenberg and
Co affixed their signatures on the contract they both consented to be bound by the terms thereof. Ergo, petitioner
contends that the contract is binding on the two corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a lot owned by Motorich
Sales Corporation was purportedly sold. Such contract, however, cannot bind Motorich, because it never
authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the
property of the corporation is not the property of its stockholders or members and may not be sold by the
stockholders or members without express authorization 10 from the corporations board of directors.
In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its treasurer,
to sell the subject parcel of land. Consequently, petitioner had the burden of proving that Nenita Gruenberg was
in fact authorized to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Its
14
offer of evidence before the trial court contained no proof of such authority. It has not shown any provision of
said respondents articles of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed
such power.
Petitioner cannot assume that she, by virtue of her position, was authorized to sell the property of the corporation.
Selling is obviously foreign to a corporate treasurers function, which generally has been described as to receive
and keep the funds of the corporation, and to disburse them in accordance with the authority 17 given him by the
board or the properly authorized officers.
As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation.
But when these officers exceed their authority, their actions cannot bind the corporation, unless it has ratified
such acts or is estopped from disclaiming them.
In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it appear
to any third person that she had the authority, to sell its land or to receive the earnest money. Neither was there
any proof that Motorich ratified, expressly or impliedly, the contract. Petitioner rests its argument on the receipt
which, however, does not prove the fact of ratification. The document is a handwritten one, not a corporate receipt,
and it bears only Nenita Gruenbergs signature. Certainly, this document alone does not prove that her acts were
authorized or ratified by Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of land, we
hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void under Article 1874 of
the Civil Code. Being inexistent and void 24 from the beginning, said contract cannot be ratified.
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is a close
corporation. It adds that, being solely owned by the Spouses Gruenberg, the company can be treated as a close
corporation which can be bound by the acts of its principal stockholder who needs no specific authority. Petitioner
claims that Motorich is a close corporation. The Court is not persuaded. We rule that it is not.
Section 96 of the Corporation Code defines a close corporation as follows:
SEC. 96. Definition and Applicability of Title.A close corporation, within the meaning of this Code, is one
whose articles of incorporation provide that: (1) All of the corporations issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty
(20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code. x x x.
The articles of incorporation of Motorich Sales Corporation does not contain any provision stating that (1) the
number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder
or of the corporation, or (3) listing its stocks in any stock exchange or making a public offering of such stocks is
prohibited. From its articles, it is clear that Respondent Motorich is not a close corporation. Motorich does not
become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital
stock. The [m]ere 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 personalities. So,
too, a narrow distribution of ownership does not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals wherein the Court ruled that x x x
petitioner corporation is classified as a close corporation and, consequently, a board resolution authorizing the
sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president.
But the factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale of real property was
contracted by the president of a close corporation with the knowledge and acquiescence of its board of directors.
In the present case, Motorich is not a close corporation, as previously discussed, and the agreement was entered
into by the corporate treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where an action by a director, who singly is the
controlling stockholder, may be considered as a binding corporate act and a board action as nothing more than a
15
mere formality. The present case, however, is not one of them. As stated by petitioner, Spouses Reynaldo and
Nenita Gruenberg own almost 99.866% of Respondent Motorich. Since Nenita is not the sole controlling
stockholder of Motorich, the aforementioned exception does not apply.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. SO ORDERED.
7. MAJORITY STOCKHOLDERS OF RUBY

INDUSTRIAL CORPORATION,
Petitioners,
G.R. No. 165887
- versus MIGUEL LIM, in his personal capacity as

Stockholder of Ruby Industrial Corporation and
representing the MINORITY STOCKHOLDERS
OF RUBY INDUSTRIAL CORPORATION and
the MANAGEMENT COMMITTEE OF RUBY
INDUSTRIAL CORPORATION,
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - -x
DOCTRINE
The power to issue shares of stock in a corporation is lodged in the board of directors and no stockholders
meeting is required to consider it because additional issuances of shares of stock does not need approval of the
stockholders what isonly required is the board resolution approving the additional issuance of shares. A
stockcorporation is expressly granted the power to issue or sell stocks. The power to issue sharesof stock in a
corporation is lodged in the board of directors and no stockholders meeting isr equired to consider it because
additional issuances of shares of stock does not need approval of the stockholders. What is only required is the
board resolution approving the additional issuance of shares. The corporation shall also file the necessary
application with the SEC to exempt these from the registration requirements under the Revised Securities Act
(now the Securities Regulation Code
Liquidation; Words and Phrases; Liquidation, or the settlement of the affairs of the corporation, consists of
adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment
of claims against it and the payment of its just debts. Liquidation, or the settlement of the affairs of the
corporation, consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the
settlement and adjustment of claims against it and the payment of its just debts. It involves the winding up of the affairs of the
corporation, which means the collection of all assets, the payment of all its creditors, and the distribution of the
remaining assets, if any, among the stockholders thereof in accordance with their contracts, or if there be no special
contract, on the basis of their respective interests.
FACTS:
Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass manufacturing. Reeling
from severe liquidity problems, RUBY filed a petition for suspension of payments with the Securities and
Exchange Commission (SEC). The SEC issued an order declaring RUBY under suspension of payments and
16
enjoining the disposition of its properties pending hearing of the petition, except insofar as necessary in its
ordinary operations, and making payments outside of the necessary or legitimate expenses of its business.
The SEC Hearing Panel created the management committee (MANCOM) for RUBY. The MANCOM
was tasked to perform the following functions: (1) undertake the management of RUBY; (2) take custody and
control over all existing assets and liabilities of RUBY; (3) evaluate RUBYs existing assets and liabilities,
earnings and operations; (4) determine the best way to salvage and protect the interest of its investors and creditors;
and (5) study, review and evaluate the proposed rehabilitation plan for RUBY.
Subsequently, two (2) rehabilitation plans were submitted to the SEC: the BENHAR/RUBY
Rehabilitation Plan of the majority stockholders led by Yu Kim Giang, and the Alternative Plan of the minority
stockholders represented by Miguel Lim (Lim).
Under the BENHAR/RUBY Plan, Benhar International, Inc. (BENHAR) -- a domestic corporation
engaged in the importation and sale of vehicle spare parts which is wholly owned by the Yu family and headed
by Henry Yu, who is also a director and majority stockholder of RUBY -- shall lend its P60 million credit line in
China Bank to RUBY, payable within ten (10) years. Moreover, BENHAR shall purchase the credits of RUBYs
creditors and mortgage RUBYs properties to obtain credit facilities for RUBY. Upon approval of the rehabilitation
plan, BENHAR shall control and manage RUBYs operations. For its service, BENHAR shall receive a
management fee equivalent to 7.5% of RUBYs net sales.
The BENHAR/RUBY Plan was opposed by 40% of the stockholders, including Lim, a minority
shareholder of RUBY. ALFC, the biggest unsecured creditor of RUBY and chairman of the management
committee, also objected to the plan as it would transfer RUBYs assets beyond the reach and to the prejudice of
its unsecured creditors.
On the other hand, the Alternative Plan of RUBYs minority stockholders proposed to: (1) pay all RUBYs
creditors without securing any bank loan; (2) run and operate RUBY without charging management fees; (3) buyout the majority shares or sell their shares to the majority stockholders; (4) rehabilitate RUBYs two plants; and
(5) secure a loan at 25% interest, as against the 28% interest charged in the loan under the BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the MANCOM for evaluation.
The SEC Hearing Panel approved the BENHAR/RUBY Plan. The minority stockholders thru Lim
appealed to the SEC En Banc which Order, enjoined the implementation of the BENHAR/RUBY Plan.
Meanwhile, BENHAR paid off Far East Bank & Trust Company (FEBTC), one of RUBYs secured
creditors. By May 30, 1988, FEBTC had already executed a deed of assignment of credit and mortgage rights in
favor of BENHAR. BENHAR likewise paid the other secured creditors who, in turn, assigned their rights in favor
of BENHAR. These acts were done by BENHAR despite the SECs TRO and injunction and even before the SEC
Hearing Panel approved the BENHAR/RUBY Plan on October 28, 1988.
ALFC and Miguel Lim moved to nullify the deeds of assignment executed in favor of BENHAR and cite
the parties thereto in contempt for willful violation of the SEC order enjoining RUBY from disposing its
17
properties and making payments pending the hearing of its petition for suspension of payments. Acting on the
motions, the SEC Hearing Panel nullified the deeds of assignment executed by RUBYs creditors in favor of
BENHAR and declared the parties thereto guilty of indirect contempt. BENHAR and RUBY appealed to the
SEC En Banc which denied their appeal. BENHAR and RUBY joined by Henry Yu and Yu Kim Giang appealed
to the CA The CA affirmed the SEC ruling nullifying the deeds of assignment. .
After the SEC En Banc enjoined the implementation of BENHAR/RUBY Plan, RUBY filed with the
SEC En Banc an ex parte petition to create a new management committee and to approve its revised rehabilitation
plan (Revised BENHAR/RUBY Plan). Under the revised plan, BENHAR shall receive P34.068 million of
the P60.437 Million credit facility to be extended to RUBY, as reimbursement for BENHARs payment to some
of RUBYs creditors. The SEC En Banc directed RUBY to submit its revised rehabilitation plan to its creditors for
comment and approval while the petition for the creation of a new management committee was remanded for
further proceedings to the SEC Hearing Panel. The Alternative Plan of RUBYs minority stockholders was also
forwarded to the hearing panel for evaluation.
RUBYs creditors objected to the Revised BENHAR/RUBY Plan and the creation of a new management
committee. Instead, they endorsed the minority stockholders Alternative Plan.
Notwithstanding the objections of 90% of RUBYs creditors and three members of the MANCOM, the
SEC Hearing Panel approved the Revised BENHAR/RUBY Plan and dissolved the existing management
committee. It also created a new management committee and appointed BENHAR as one of its members.
Bank of the Philippine Islands (BPI), one of RUBYs secured creditors, filed a Motion to Vacate Suspension
Order on grounds that there is no existing management committee and that no decision has been rendered in the case
for more than 16 years already, which is beyond the period mandated by Sec. 3-8 of the Rules of Procedure on
Corporate Recovery. RUBY filed its opposition, asserting that the MANCOM never relinquished its status as the
duly appointed management committee as it resisted the orders of the second and third management committees
subsequently created, which have been nullified by the CA and later this Court. As to the applicability of the cited
rule under the Rules on Corporate Recovery, RUBY pointed out that this case was filed long before the effectivity
of said rules. It also pointed out that the undue delay in the approval of the rehabilitation plan being due to the
numerous appeals taken by the minority stockholders and MANCOM to the CA and this Court, from the SEC
approval of the BENHAR/RUBY Plan. Since there have already been steps taken to finally settle RUBYs obligations
with its creditors, it was contended that the application of the mandatory period under the cited provision would
cause prejudice and injustice to RUBY.
It appears that even earlier during the pendency of the appeals in the CA, BENHAR and RUBY have performed
other acts in pursuance of the BENHAR/RUBY Plan approved by the SEC.
On September 1, 1996, Lim received a Notice of Stockholders Meeting scheduled on September 3,
1996 signed by a certain Mr. Edgardo M. Magtalas, the Designated Secretary of RUBY and stating the matters to
be taken up in said meeting, which include the extension of RUBYs corporate term for another twenty-five (25)
years and election of Directors. At the scheduled stockholders meeting of September 3, 1996, Lim together with
other minority stockholders, appeared in order to put on record their objections on the validity of holding thereof
18
and the matters to be taken therein. Specifically, they questioned the percentage of stockholders present in the
meeting which the majority claimed stood at 74.75% of the outstanding capital stock of RUBY.
The aforesaid stockholders meeting was the subject of the Motion to Cite For Contempt and Supplement to Motion
to Cite For Contempt filed by Lim before the CA where their petitions for review were then pending. Lim argued
that the majority stockholders claimed to have increased their shares to 74.75% by subscribing to the unissued
shares of the authorized capital stock (ACS). Lim pointed out that such move of the majority was in
implementation of the BENHAR/RUBY Plan which calls for capital infusion of P11.814 Million representing the
unissued and unsubscribed portion of the present ACS of P23.7 Million, and the Revised BENHAR/RUBY Plan
which proposed an additional subscription of P30 Million. Since the implementation of both majority plans have
been enjoined by the SEC and CA, the calling of the special stockholders meeting by the majority stockholders
clearly violated the said injunction orders. This circumstance certainly affects the determination of quorum, the
voting requirements for corporate term extension, as well as the election of Directors pursuant to the July 30, 1993
Order and October 15, 1993 Resolution of the SEC enjoining not only the implementation of the revised plan but
also the doing of any act that may render the appeal from the approval of the said plan moot and academic.
The aforementioned capital infusion was taken up by RUBYs board of directors in a special
meeting, approving the Revised BENHAR/RUBY Plan and creating a new management committee to oversee its
implementation. During the said meeting, the board asserted its authority and resolved to take over the
management of RUBYs funds, properties and records and to demand an accounting from the MANCOM which
was ordered dissolved by the SEC.
As reflected in the Minutes of the special board meeting, a representative of the absent directors (Tan Chai, Tomas
Lim, Miguel Lim and Yok Lim) came to submit their letter addressed to the Chairman suggesting that said meeting
be deferred until the September 18, 1991 SEC Order becomes final and executory. The directors present
nevertheless proceeded with the meeting upon their belief that neither appeal nor motion for reconsideration can
stay the SEC order.
The resolution to extend RUBYs corporate term, which was to expire on January 2, 1997, was approved during
the September 3, 1996 stockholders meeting, as recommended by the board of directors composed of Henry Yu
(Chairman), James Yu, David Yukimteng, Harry L. Yu, Yu Kim Giang, Mary L. Yu and Vivian L. Yu. The board
certified that said resolution was approved by stockholders representing two-thirds (2/3) of RUBYs outstanding
capital stock.[ Per Certification[ dated August 31, 1995 issued by Yu Kim Giang as Executive Vice-President of
RUBY, the majority stockholders own 74.75% of RUBYs outstanding capital stock as of October 27, 1991. The
Amended Articles of Incorporation was filed with the SEC on September 24, 1996.
Lim filed a Motion informing the SEC of acts being performed by BENHAR and RUBY through directors who
were illegally elected, despite the pendency of the appeal before this Court questioning the SEC approval of the
BENHAR/RUBY Plan and creation of a new management committee, and after this Court had denied their motion
for. Lim reiterated that before the matter of extension of corporate life can be passed upon by the stockholders, it
is necessary to determine the percentage ownership of the outstanding shares of the corporation. The majority
stockholders claimed that they have increased their shareholdings from 59.828% to 74.75% as a result of the
illegal and invalid stockholders meeting on September 3, 1996. The additional subscription of shares cannot be
done as it implements the BENHAR/RUBY Plan against which an existing injunction is still effective based on
the SEC Order dated January 6, 1989, and which was struck down under the final decision of this Court in G.R.
19
Nos. 124185-87. Hence, the implementation of the new percentage stockholdings of the majority stockholders
and the calling of stockholders meeting and the subsequent resolution approving the extension of corporate life of
RUBY for another twenty-five (25) years, were all done in violation of the decisions of the CA and this Court,
and without compliance with the legal requirements under theCorporation Code. There being no valid extension
of corporate term, RUBYs corporate life had legally ceased. Consequently, Lim moved that the SEC: (1) declare
as null and void the infusion of additional capital made by the majority stockholders and restore the capital
structure of RUBY to its original structure prior to the time injunction was issued; and (2) declare as null and void
the resolution of the majority stockholders extending the corporate life of RUBY for another twenty-five (25)
years.
ISSUE:
Whether or not Corporate Liquidation is applicable?
Our Ruling
The petitions have no merit.
Liquidation, or the settlement of the affairs of the corporation, consists of adjusting the debts and claims,
that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the
payment of its just debts.[69] It involves the winding up of the affairs of the corporation, which means the collection
of all assets, the payment of all its creditors, and the distribution of the remaining assets, if any, among the
stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their
respective interests.[70]
Section 122 of the Corporation Code, which is applicable to the present case, provides:
Since the corporate life of RUBY as stated in its articles of incorporation expired, without a valid
extension having been effected, it was deemed dissolved by such expiration without need of further action on the
part of the corporation or the State.[71] With greater reason then should liquidation ensue considering that the last
paragraph of Sec. 4-9 of the Rules of Procedure on Corporate Recovery mandates the SEC to order the
dissolution and liquidation proceedings under Rule VI. Sec. 6-1, Rule VI likewise authorizes the SEC on motion
or motu proprio, or upon recommendation of the management committee, to order dissolution of the debtor
corporation and the liquidation of its remaining assets, appointing a Liquidator for the purpose, if the continuance
in business of the debtor is no longer feasible or profitable or no longer works to the best interest of the
stockholders, parties-litigants, creditors, or the general public.
It cannot be denied that with the current divisiveness, distrust and antagonism between the majority and minority
stockholders, the long agony and extreme prejudice caused by numerous litigations to the creditors, and the bleak
prospects for business recovery in the light of problems with the local government which are implementing more
restrictions and anti-pollution measures that practically banned the operation of RUBYs glass plant liquidation
becomes the only viable course for RUBY to stave off any further losses and dissipation of its assets. Liquidation
would also ensure an orderly and equitable settlement of all creditors of RUBY, both secured and unsecured.
20
The SECs utter disregard of the rights of the minority in applying the provisions of the Rules of Procedure on
Corporate Recovery is inconsistent with the policy of liberal construction of the said rules to assist the parties in
obtaining a just, expeditious and inexpensive settlement of cases.[72] Petitioners majority stockholders, however,
assert that the findings and conclusions of the SEC on the matter of the dismissal of RUBYs petition are binding
and conclusive upon the CA and this Court. They contend that reviewing courts are not supposed to substitute
their judgment for those made by administrative bodies specifically clothed with authority to pass upon matters
over which they have acquired expertise.[73] Given our foregoing findings clearly showing that the SEC acted
arbitrarily and committed patent errors and grave abuse of discretion, this case falls under the exception to the
general rule.
As we held in Ruby Industrial Corporation v. Court of Appeals:
The settled doctrine is that factual findings of an administrative agency are accorded
respect and, at times, finality for they have acquired the expertise inasmuch as their jurisdiction
is confined to specific matters. Nonetheless, these doctrines do not apply when the board or
official has gone beyond his statutory authority, exercised unconstitutional powers or clearly
acted arbitrarily and without regard to his duty or with grave abuse of discretion. In Leongson
vs. Court of Appeals, we held: once the actuation of the administrative official or administrative
board or agency is tainted by a failure to abide by the command of the law, then it is incumbent
on the courts of justice to set matters right, with this Tribunal having the last say on the matter.
The majority stockholders eagerness to have the suspension order lifted or vacated by the SEC without any order
for its liquidation evinces a total disregard of the mandate of Sec. 4-9 of the Rules of Procedure on Corporate
Recovery, and their obvious lack of any intent to render an accounting of all funds, properties and details of the
unlawful assignment transactions to the prejudice of RUBY, minority stockholders and the majority of RUBYs
creditors. The majority stockholders and BENHARs conduits must not be allowed to evade the duty to make such
full disclosure and account any money due to RUBY to enable the latter to effect a fair, orderly and equitable
settlement of all its obligations, as well as distribution of any remaining assets after paying all its debtors.
In fine, no error was committed by the CA when it set aside the September 18, 2002 Order of the SEC and declared
the nullity of the acts of majority stockholders in implementing capital infusion through issuance of additional
shares in October 1991, the board resolution approving the extension of RUBYs corporate term for another 25
years, and any illegal assignment of credit executed by RUBYs creditors in favor of third parties and/or conduits
of the controlling stockholders. The CA likewise correctly ordered the delivery of all documents relative to the
said assignment of credits to the MANCOM or the Liquidator, the unwinding of these void deeds of assignment,
and their full accounting by the majority stockholders.
The petitioners majority stockholders and China Bank cannot be permitted to raise any issue again regarding the
validity of any assignment of credit made during the effectivity of the suspension order and before the finality of
the September 18, 2002 Order lifting the same. While China Bank is not precluded from questioning the validity
of the December 20, 1983 suspension order on the basis of res judicata, it is, however, barred from doing so by
the principle of law of the case. We have held that when the validity of an interlocutory order has already been
passed upon on appeal, the Decision of the Court on appeal becomes the law of the case between the same
parties. Law of the case has been defined as the opinion delivered on a former appeal. More specifically, it means
that whatever is once irrevocably established as the controlling legal rule of decision between the same parties in
the same case continues to be the law of the case, whether correct on general principles or not, so long as the facts
on which such decision was predicated continue to be the facts of the case before the court.
21
The unwinding process of all such illegal assignment of RUBYs credits is critical and necessary, in
keeping with good faith and as a matter of fairness and justice to all parties affected, particularly the unsecured
creditors who stands to suffer most if left with nothing of the assets of RUBY, and the minority stockholders who
waged legal battles to defend the interest of RUBY and protect the rights of the minority from the abuses of the
controlling stockholders. As correctly stated by the CA:
Liquidation is imperative because the unsecured creditor must negotiate the amount of
the imputable interest rate on its long unpaid credit, the decision on which assets are to be sold
to liquidate the illegally assigned credits must be made, the other secured credits and the trade
credits must be determined, and most importantly, the restoration of the 40.172% minority
percentage of ownership must be done.[
However, we do not agree that it is the SEC which has the authority to supervise RUBYs liquidation.
In view of the foregoing, the SEC should now be directed to transfer this case to the proper RTC which
shall supervise the liquidation proceedings under Sec. 122 of the Corporation Code. Under Sec. 6 (d) of P.D. 902A, the SEC is empowered, on the basis of the findings and recommendations of the management committee or
rehabilitation receiver, or on its own findings, to determine that the continuance in business of a debtor corporation
under suspension of payment or rehabilitation would not be feasible or profitable nor work to the best interest of
the stockholders, parties-litigants, creditors, or the general public, order the dissolution of such corporation and
its remaining assets liquidated accordingly. As mentioned earlier, the procedure is governed by Rule VI of the
SEC Rules of Procedure on Corporate Recovery.
However, R.A. No. 10142 otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010,
now provides for court proceedings in the rehabilitation or liquidation of debtors, both juridical and natural
persons, in a manner that will ensure or maintain certainty and predictability in commercial affairs, preserve and
maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and
ensure equitable treatment of creditors who are similarly situated. Considering that this case was still pending
when the new law took effect last year, the RTC to which this case will be transferred shall be guided by Sec. 146
of said law.
8. Express Investments vsBayantel
DOCTRINE:
Corporations; liability of corporate officers. Settled is the rule that debts incurred by directors, officers, and
employees acting as corporate agents are not their direct liability but of the corporation they represent, except if
they contractually agree/stipulate or assume to be personally liable for the corporations debts.
Rehabilitation; purpose. Rehabilitation is an attempt to conserve and administer the assets of an insolvent
corporation in the hope of its eventual return from financial stress to solvency. It contemplates the continuance of
corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful
operation and liquidity. The purpose of rehabilitation proceedings is precisely to enable the company to gain a
new lease on life and thereby allow creditors to be paid their claims from its earnings.
Rehabilitation shall be undertaken when it is shown that the continued operation of the corporation is economically
feasible and its creditors can recover, by way of the present value of payments projected in the plan, more, if the
corporation continues as a going concern than if it is immediately liquidated.Express Investments III Private Ltd.
and Export Development Canada Vs. Bayan Telecommunications, Inc., The Bank of New York (as trustee for
holders of the US$200,000,000 13.5% Seniour notes of Bayan Telecommunications, Inc.) and Atty. Remigio A.
Noval (as the Court-appointed Rehabilitation Receiver of Bayantel).
Rehabilitation; priority of secured creditors. The resolution of the issue at hand rests on a determination of whether
secured creditors may enforce preference in payment during rehabilitation by virtue of a contractual agreement.
The principle of equality in equity has been cited as the basis for placing secured and unsecured creditors in equal
footing or in paripassu with each other during rehabilitation. In legal parlance, paripassu is used especially of
22
creditors who, in marshaling assets, are entitled to receive out of the same fund without any precedence over each
other.
Rehabilitation; constitutionality of paripassu treatment. Petitioners submit that the paripassu treatment of claims
offends the Contract Clause under the 1987 Constitution.
Article III, Section 10 of the Constitution mandates that no law impairing the obligation of contracts shall be
passed. Any law which enlarges, abridges, or in any manner changes the intention of the parties, necessarily
impairs the contract itself. And even when the change in the contract is done by indirection, there is impairment
nonetheless.
Rehabilitation; power of Monitoring Committee to manage operations. The management committee or
rehabilitation receiver, board or body shall have the following powers: (1) to take custody of, and control over,
all the existing assets and property of the distressed corporation; (2) to evaluate the existing assets and liabilities,
earnings and operations of the corporation; (3) to determine the best way to salvage and protect the interest of the
investors and creditors; (4) to study, review and evaluate the feasibility of continuing operations and restructure
and rehabilitate such entities if determined to be feasible by the Rehabilitation Court; and (5) it may overrule or
revoke the actions of the previous management and board of directors of the entity or entities under management
notwithstanding any provision of law, articles of incorporation or by-laws to the contrary.
In this case, petitioner neither filed a petition for the appointment of a management committee nor presented
evidence to show that there is imminent danger of dissipation, loss, wastage or destruction of assets or other
properties or paralyzation of business operations of respondent corporation which may be prejudicial to the
interest of the minority stockholders, the creditors or the public. Unless petitioner satisfies these requisites, we
cannot sanction the exercise by the Monitoring Committee of powers that will amount to management of
respondents operations.
FACTS:
Respondent Bayantel is a duly organized domestic corporation engaged in the business of providing
telecommunication services. It is 98.6% owned by Bayan Telecommunications Holdings Corporation (BTHC),
which in turn is 85.4% owned by the Lopez Group of Companies and Benpres Holdings Corporation. On
various dates, Bayantel entered into several credit agreements with Express Investments III Private Ltd. and
Export Development Canada, Asian Finance and Investment Corporation, BayerischeLandesbank and
Clearwater Capital Partners Singapore Pte Ltd., as agent for Credit Industriel et Commercial, Deutsche Bank
AG, Equitable PCI Bank, JP Morgan Chase Bank, Metropolitan Bank and Trust Co., P.T. Bank Negara
Indonesia, TBK, Hong Kong Branch, Rizal Commercial Banking Corporation and Standard Chartered Bank. To
secure said loans, Bayantel executed an Omnibus Agreement. Penned by Judge Rodolfo R. Bonifacio.6 Rollo
(G.R. No. 177270), Vol. I, pp. 47-140. 7 Id. at 12-37. The decision is dated October 27, 2006.
Pursuant to the Omnibus Agreement, Bayantel executed an Assignment Agreement in favor of the
lenders under the Omnibus Agreement. In the Assignment Agreement, Bayantel bound itself to assign, convey
and transfer to the Collateral Agent, several properties as collateral security for the prompt and complete
payment of its obligations to the Omnibus Creditors. In July 1999, Bayantel issued US$200 million worth of
13.5% Senior Notes pursuant to an Indenture dated July 22, 1999 that it entered into with The Bank of New
York.A written agreement under which bonds and debentures are issued, setting forth maturity date, interest
rate, and other termsbefore it defaulted on its obligation. Foreseeing the impossibility of further meeting its
obligations, Bayantelsent, a proposal for the restructuring of its debts to the Bank Creditors and the Holders of
Notes. To facilitate the negotiations between Bayantel and its creditors, an Informal Steering Committee was.
They are holders, as well, of the Notes issued by Bayantel pursuant to the Indenture.
In its initial proposal called the First Term Sheet, Bayantel suggested a 25% write-off of the principal
owing to the Holders of Notes. The Informal Steering Committee rejected the idea, but accepted Bayantels
proposal to pay the restructured debt, paripassu, out of its cash flow. This paripassu or equal treatment of debts,
however, was opposed by the Bank Creditors who invoked their security interest under the Assignment
Agreement. Bayantel continued to pay reduced interest on its debt to the Bank Creditors but stopped paying the
Holders of Notes starting July 17, 2000.
Bayantels total indebtedness had reached US$674 million or P35.928 billion in unpaid principal and
interest,. Out of its total liabilities, Bayantel allegedly owes 43.2% or US$291 million (P15.539 billion) to the
Holders of the Notes. Used especially of creditors who, in marshalling assets, are entitled to receive out of the
same fund without any precedence over each other.
On July 25, 2003, The Bank of New York, as trustee for the Holders of the Notes, wrote Bayantel an
Acceleration Letter declaring immediately due and payable the principal, premium interest, and other monetary
obligations on all outstanding Notes. Then, The Bank of New York filed a petition for the corporate
rehabilitation of Bayantel upon the instructions of the Informal Steering Committee.
23
The Pasig RTC, Branch 158, issued a Stay Orderwhich directed, among others, the suspension of all
claims against Bayantel and required the latters creditors and other interested parties to file a comment or
opposition to the petition. The Rehabilitation Court gave due course to the petition and directed the
Rehabilitation Receiver to submit his recommendations to the court within 120 days from the initial hearing.
Subsequently, negotiations for the restructuring of Bayantels debt reached an impasse when the
Informal Steering Committee insisted on a paripassu treatment of the claims of both secured and unsecured
creditors.
The Rehabilitation Court issued an Order directing the creation of a Monitoring Committee to be
composed of one member each from the group of Omnibus Creditors and unsecured creditors, and a third
member to be chosen by the unanimous vote of the first two members.
Both petitions contest the Rehabilitation Courts Decision for, among others, fixing the level of
Bayantels sustainable debt at US$325 million to be paid in 19 years.
Thereafter, on November 30, 2004, petitioners Express Investments III Private Ltd. and Export
Development Canada along with BayerischeLandesbank (Singapore Branch), Credit Industriel et Commercial,
Deutsche Bank AG, P.T. Bank Negara Indonesia (Persero), TBK, Hong Kong Branch and Rizal Commercial
Banking Corporation filed a Petition for Review which was docketed as CA-G.R. No. 87203 in the Tenth
Division of the Court of Appeals.
The appellate court upheld the Rehabilitation Courts determination of Bayantels sustainable debt at
US$325 million payable in 19 years. It rejected the Receivers proposal to set the sustainable debt at US$370
million payable in 15 years, and the proposal of the Avenue Asia Capital Group to set it at US$471 million
payable in 12 years. The Court of Appeals agreed with the Rehabilitation Court that it is reasonable to adopt a
level of sustainable debt that approximates respondent Bayantels proposal because the latter is in the best
position to determine the level of sustainable debt that it can manage. It found Bayantels proposal more
credible considering that it was prepared using updated financial information with realistic cash flow figures.
This second consolidated petition raises the following issues: (1) whether the Court of Appeals erred in
setting Bayantels sustainable debt at US$325 million, payable in 19 years; (2) whether a debtor may submit a
rehabilitation plan in a creditor-initiated rehabilitation; (3) whether the conversion of debt to equity in excess of
40% of the outstanding capital stock in favor of petitioners violates the constitutional limit on foreign ownership
of a public utility; (4) whether the write-off of respondents penalties and default interest and recomputation of
its past due interest violate the paripassu principle; and (5) whether petitioners are entitled to costs. On February
22, 2007, respondent Bayantel moved for the consolidation of G.R. Nos. 174457-59 with G.R. Nos. 175418-20.
Rehabilitation which purportedly recognize the distinction between the rights of secured and unsecured
creditors. Petitioners warn of dire consequences to the international credit standing of the Philippines, the
financial market, and the influx of foreign investments if the paripassu principle would be upheld. Finally,
petitioners maintain that a Trigger Event had occurred which rendered respondents obligations due and
demandable. Thus, despite their failure to notify respondent of the alleged Events of Default, petitioners believe
that they can rightfully proceed against the securities. For its part, respondent Bayantel reasons that enforcing
preference in payment at this stage of the rehabilitation would only disrupt the progress it has made so far. It
assures petitioners that their security rights are adequately protected in case the collateral assets are disposed.
ISSUE:
whether a debtor may submit a rehabilitation plan in a creditor-initiated rehabilitation
HELD:
Rehabilitation is an attempt to conserve and administer the assets of an insolvent corporation in the hope of its
eventual return from financial stress to solvency.58 It contemplates the continuance of corporate life and activities
in an effort to restore and reinstate the corporation to its former position of successful operation and liquidity. The
purpose of rehabilitation proceedings is precisely to enable the company to gain a new lease on life and thereby
allow creditors to be paid their claims from its earnings.
Rehabilitation shall be undertaken when it is shown that the continued operation of the corporation is economically
feasible and its creditors can recover, by way of the present value of payments projected in the plan, more, if the
corporation continues as a going concern than if it is immediately liquidated.
The law governing rehabilitation and suspension of actions for claims against corporations is PD 902-A, as
amended. On December 15, 2000, the Court promulgated A.M. No. 00-8-10-SC or the Interim Rules of Procedure
on Corporate Rehabilitation, which applies to petitions for rehabilitation filed by corporations, partnerships and
associations pursuant to PD 902-A.
24
In January 2004, Republic Act No. 8799 (RA 8799), otherwise known as the Securities Regulation Code, amended
Section 5 of PD 902-A, and transferred to the Regional Trial Courts the jurisdiction of the Securities and Exchange
Commission (SEC) over petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association possesses property to cover all
its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management
of a rehabilitation receiver or a management committee.
In order to effectively exercise such jurisdiction, Section 6(c), PD 902-A empowers the Regional Trial Court to
appoint one or more receivers of the property, real and personal, which is the subject of the pending action before
the Commission whenever necessary in order to preserve the rights of the parties-litigants and/or protect the
interest of the investing public and creditors.
In order to effectively exercise such jurisdiction, Section 6(c), PD 902-A empowers the Regional Trial Court to
appoint one or more receivers of the property, real and personal, which is the subject of the pending action before
the Commission whenever necessary in order to preserve the rights of the parties-litigants and/or protect the
interest of the investing public and creditors.
Under Section 6, Rule 4 of the Interim Rules, if the court finds the petition to be sufficient in form and substance,
it shall issue, not later than five (5) days from the filing of the petition, an Order with the following pertinent
effects:
(a) appointing a Rehabilitation Receiver and fixing his bond;
(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;
(c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties
except in the ordinary course of business;
(d) prohibiting the debtor from making any payment of its liabilities outstanding as at the date of filing of the
petition; x x x
(Emphasis supplied)
The stay order shall be effective from the date of its issuance until the dismissal of the petition or the termination
of the rehabilitation proceedings.61 Under the Interim Rules, the petition shall be dismissed if no rehabilitation
plan is approved by the court upon the lapse of 180 days from the date of the initial hearing. The court may grant
an extension beyond this period only if it appears by convincing and compelling evidence that the debtor may
successfully be rehabilitated. In no instance, however, shall the period for approving or disapproving a
rehabilitation plan exceed 18 months from the date of filing of the petition. 62
On the other hand, Section 27, Rule 4 of the Interim Rules provides when the rehabilitation proceedings is deemed
terminated:
SEC. 27. Termination of Proceedings. In case of the failure of the debtor to submit the rehabilitation plan, or
the disapproval thereof by the court, or the failure of the rehabilitation of the debtor because of failure to achieve
the desired targets or goals as set forth therein, or the failure of the said debtor to perform its obligations under
the said plan, or a determination that the rehabilitation plan may no longer be implemented in accordance with its
terms, conditions, restrictions, or assumptions, the court shall upon motion, motu proprio, or upon the
recommendation of the Rehabilitation Receiver, terminate the proceedings. The proceedings shall also
terminate upon the successful implementation of the rehabilitation plan. (Emphasis supplied)
Hence, unless the petition is dismissed for any reason, the stay order shall be effective until the rehabilitation plan
has been successfully implemented. In the meantime, the debtor is prohibited from paying any of its outstanding
liabilities as of the date of the filing of the petition except those authorized in the plan under Section 24(c), Rule
4 of the Interim Rules.
25
In this case, in an Order dated April 19, 2004, the Rehabilitation Court held that "[t]he creditors of Bayantel,
whether secured or unsecured, should be treated equally and on the same footing or pari passu until the
rehabilitation proceedings is terminated in accordance with the Interim Rules." The court reiterated this
pronouncement in its Decision dated June 28, 2004.
Here, the stipulation in the Assignment Agreement to the effect that respondent Bayantel shall pay petitioners in
full and ahead of other creditors out of its cash flow during rehabilitation directly impinges on the provision of
the approved Rehabilitation Plan that "[t]he creditors of Bayantel, whether secured or unsecured, should be treated
equally and on the same footing or pari passu until the rehabilitation proceedings is terminated in accordance with
the Interim Rules."
In this case, petitioners Express Investments III Private Ltd. And Export Development Canada are concerned, not
so much with the adequacy of the securities offered by respondent, but with the devaluation of such securities
over time. Petitioners fear that the proceeds of respondents collateral would be insufficient to cover their claims
in the event of liquidation.
On this point, suffice it to state that petitioners are not without any remedy to address a deficiency in securities, if
and when it comes about. Under Section 12, Rule 4 of the Interim Rules, a secured creditor may file a motion with
the Rehabilitation Court for the modification or termination of the stay order. If petitioners can show that
arrangements to insure or maintain the property or to make payment or provide additional security therefor is not
feasible, the court shall modify the stay order to allow petitioners to enforce their claim that is, to foreclose the
mortgage and apply the proceeds thereof to their claims. Be that as it may, the court may deny the creditor this
remedy if allowing so would prevent the continuation of the debtor as a going concern or otherwise prevent the
approval and implementation of a rehabilitation plan
9. Ruby Industrial Corporation vs. Court of Appeals

G.R. Nos. 12418587. January 20, 1998.
Same; Same; Corporation Law; Words and Phrases; Rehabilitation 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.
FACTS:
Petitioner Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass
manufacturing, while petitioner Benhar International, Inc. (BENHAR) is a domestic corporation engaged in
importation and sale of vehicle spare parts. BENHAR is wholly-owned by the Yu family and headed by Henry
Yu who is also a director and majority stockholder of RUBY. In 1983, RUBY suffered severe liquidity problems.
Thus, on December 13, 1983, it filed a Petition for Suspension of Payments with the Securities and Exchange
Commission (SEC). On December 20, 1983, the SEC issued an Order declaring RUBY under suspension of
payments. Pending hearing of its petition, the SEC enjoined RUBY from disposing its property, except insofar as
necessary in its ordinary operations. It also enjoined RUBY from making payments outside of the necessary or
legitimate expenses of its business. RUBYs special stockholders meeting, its majority stockholders led by Yu
Kim Giang presented the BENHAR/RUBY Rehabilitation Plan to be submitted to SEC. Under the plan, BENHAR
shall lend its P60 million credit line in China Bank to RUBY, payable within ten (10) years. Moreover, BENHAR
shall purchase the credits of RUBYs creditors and mortgage RUBYs properties to obtain credit facilities for
RUBY. Upon approval of the rehabilitation plan, BENHAR shall control and manage RUBYs operations. For its
service, BENHAR shall receive a management fee equivalent to 7.5% of RUBYs net sales. Some 40% of the
stockholders opposed the BENHAR/RUBY Plan, including private respondent MIGUEL LIM, a minority
shareholder of RUBY. Private respondent Allied Leasing and Finance Corporation, the biggest unsecured creditor
of RUBY and chairman of the management committee, also objected to the plan as it would transfer RUBYs
assets beyond the reach and to the prejudice of its unsecured creditors. Despite the oppositions, the majority
stockholders still submitted the BENHAR/RUBY Plan to the SEC for approval. RUBYs minority stockholders,
represented by private respondent Lim, submitted their own rehabilitation plan (the ALTERNATIVE PLAN) to the
SEC. On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan. it appears that before the
SEC Hearing Panel approved the BENHAR/RUBY Plan on October 28, 1988, BENHAR had already implemented
part of the plan by paying off Far East Bank & Trust Company (FEBTC), one of RUBYs secured creditors. Thus,
by May 30, 1988, FEBTC had already executed a deed of assignment of credit and mortgage rights in favor of
26
BENHAR. Moreover, despite the SEC en bancs TRO and injunction, BENHAR still paid RUBYs other secured
creditors who, in turn, assigned their credits in favor of BENHAR
ISSUE: WON the CA erred in setting aside SECs approval of the Revised BENHAR/RUBY plan and remanded
the case to the SEC for further proceedings.
HELD:
No. Rehabilitation 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. When a distressed company
is placed under rehabilitation, the appointment of a management committee follows to avoid collusion between
the previous management and creditors it might favor, to the prejudice of the other creditors. All assets of a
corporation under rehabilitation receivership are held in trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over another by the expediency of attachment, execution or otherwise.
As between the creditors, the key phrase is equality in equity. Once the corporation threatened by bankruptcy is
taken over by a receiver, all the creditors ought to stand on equal footing. Not any one of them should be paid
ahead of the others. This is precisely the reason for suspending all pending claims against the corporation under
receivership. Parenthetically, BENHAR is a domestic corporation engaged in importing and selling vehicle spare
parts with an authorized capital stock of thirty million pesos. Yet, it offered to lend its credit facility in the amount
of sixty to eighty million pesos to RUBY. It is to be noted that BENHAR is not a lending or financing corporation
and lending its credit facilities, worth more than double its authorized capitalization, is not one of the powers
granted to it under its Articles of Incorporation. Significantly, Henry Yu, a director and a majority stockholder of
RUBY is, at the same time, a stockholder of BENHAR, a corporation owned and controlled by his family. These
circumstances render the deals between BENHAR and RUBY highly irregular.
10. Ang vs. Ang
G.R. No. 201675. June 19, 2013.
Corporation Law; Derivative Suits; Words and Phrases; A derivative suit is an action brought by a stockholder
on behalf of the corporation to enforce corporate rights against the corporations directors, officers or other
insiders.
FACTS:
Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered corporation owned by the Ang family.
Juanito Ang (Juanito) and Roberto Ang (Roberto) are siblings. Anecita Limoco-Ang (Anecita) is Juanitos wife
And Jeannevie is their daughter. Roberto was elected President of SMBI, while Juanito was elected as its Vice
President. Rachel Lu-Ang (Rachel) and Anecita are SMBIs Corporate Secretary and Treasurer, respectively. On
31 July 1995, Nancy Ang (Nancy), the sister of Juanito and Roberto, and her husband, Theodore Ang (Theodore),
agreed to extend a loan to settle the obligations of SMBI and other corporations owned by the Ang family,
specifically Bayshore Aqua Culture Corporation, Oceanside Marine Resources and JR Aqua Venture. Nancy and
Theodore issued a check in the amount of $1,000,000.00 payable to Juanito Ang and/or Anecita Ang and/or
Roberto Ang and/or Rachel Ang. Nancy was a former stockholder of SMBI, but she no longer appears in SMBIs
General Information Sheets as early as 1996. Nancy and Theodore are now currently residing in the United States.
There was no written loan agreement, in view of the close relationship between the parties. Part of the loan was
also used to purchase real properties for SMBI, for Juanito, and for Roberto. On 22 December 2005, SMBI
increased its authorized capital stock to P10,000,000.00. The Certificate of Increase of Capital Stock was signed
by Juanito, Anecita, Roberto, and Rachel as directors of SMBI. Juanito claimed, however, that the increase of
SMBIs capital stock was done in contravention of the Corporation Code. According to Juanito, when he and
Anecita left for Canada: Sps. Roberto and Rachel Ang took over the active management of [SMBI]. Through the
employment of sugar coated words[,] they were able to successfully manipulate the stocks sharings between
themselves at 50-50 under the condition that the procedures mandated by the Corporation Code on increase of
capital stock be strictly observed (valid Board Meeting). No such meeting of the Board to increase capital stock
materialized. It was more of an accommodation to buy peace. Juanito claimed that payments to Nancy and
Theodore ceased sometime after 2006. On 24 November 2008, Nancy and Theodore, through their counsel here
in the Philippines, sent a demand letter to Spouses Juanito L. Ang/Anecita L. Ang and Spouses Roberto L.
Ang/Rachel L. Ang for payment of the principal amounting to $1,000,000.00 plus interest at ten percent (10%)
per annum, for a total of $2,585,577.37 within ten days from receipt of the letter. Roberto and Rachel then sent a
letter to Nancy and Theodores counsel on 5 January 2009, saying that they are not complying with the demand
letter because they have not personally contracted a loan from Nancy and Theodore.
On 8 January 2009, Juanito and Anecita executed a Deed of Acknowledgment and Settlement Agreement
(Settlement Agreement) and an Extrajudicial Real Estate Mortgage (Mortgage). Under the foregoing instruments,
27
Juanito and Anecita admitted that they, together with Roberto and Rachel, obtained a loan from Nancy and
Theodore for $1,000,000.00. A certain Kenneth C. Locsin (Locsin) signed on behalf of Nancy and Theodore,
under a Special Power of Attorney which was not attached as part of the Settlement Agreement or the Mortgage,
nor included in the records of this case. Thereafter, Juanito filed a Stockholder Derivative Suit with prayer for
an exparte Writ of Attachment/Receivership (Complaint) before the RTC Bacolod on 29 January 2009. He
alleged that the intentional and malicious refusal of defendant Sps. Roberto and Rachel Ang to [settle] their 50%
share x x x [of] the total obligation x x x will definitely affect the financial viability of plaintiff SMBI. Juanito
also claimed that he has been illegally excluded from the management and participation in the business of [SMBI
through] force, violence and intimidation and that Rachel and Roberto have seized and carted away SMBIs
records from its office.
ISSUE: WON the derivative suit file by Juanito Ang would prosper.
HELD:
No. We uphold the CA Cebus finding that the Complaint is not a derivative suit. A derivative suit is an
action brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporations
directors, officers or other insiders. Under Sections 23 and 36 of the Corporation Code, the directors or officers,
as provided under the bylaws, have the right to decide whether or not a corporation should sue. Since these
directors or officers will never be willing to sue themselves, or impugn their wrongful or fraudulent decisions,
stockholders are permitted by law to bring an action in the name of the corporation to hold these directors and
officers accountable. In derivative suits, the real party in interest is the corporation, while the stockholder is a
mere nominal party. The Complaint failed to show how the acts of Rachel and Roberto resulted in any detriment
to SMBI. The CA Cebu correctly concluded that the loan was not a corporate obligation, but a personal debt of
the Ang brothers and their spouses. The check was issued to Juanito Ang and/or Anecita Ang and/or Roberto
Ang and/or Rachel Ang and not SMBI. The proceeds of the loan were used for payment of the obligations of the
other corporations owned by the Angs as well as the purchase of real properties for the Ang brothers. SMBI was
never a party to the Settlement Agreement or the Mortgage. It was never named as a co-debtor or guarantor of the
loan. Both instruments were executed by Juanito and Anecita in their personal capacity, and not in their capacity
as directors or officers of SMBI. Thus, SMBI is under no legal obligation to satisfy the obligation.
The CA Cebu correctly ruled that the Complaint should be dismissed since it is a nuisance or harassment
suit under Section 1(b) of the Interim Rules. Section 1(b) thereof provides: b) Prohibition against nuisance and
harassment suits.Nuisance and harassment suits are prohibited. In determining whether a suit is a nuisance or
harassment suit, the court shall consider, among others, the following: (1) The extent of the shareholding or
interest of the initiating stockholder or member; (2) Subject matter of the suit; (3) Legal and factual basis of the
complaint; (4) Availability of appraisal rights for the act or acts complained of; and (5) Prejudice or damage to
the corporation, partnership, or association in relation to the relief sought. In case of nuisance or harassment suits,
the court may, motu proprio or upon motion, forthwith dismiss the case.
Records show that Juanito, apart from being Vice President, owns the highest number of shares, equal to
those owned by Roberto. Also, as explained earlier, there appears to be no damage to SMBI if the loan extended
by Nancy and Theodore remains unpaid. The CA-Cebu correctly concluded that a plain reading of the allegations
in the Complaint would readily show that the case x x x was mainly filed [to collect] a debt allegedly extended by
the spouses Theodore and Nancy Ang to [SMBI]. Thus, the aggrieved party is not SMBI x x x but the spouses
Theodore and Nancy Ang, who are not even x x x stockholders.

11. SANTIAGO CUA, JR., SOLOMON S. CUA and EXEQUIEL D. ROBLES, in their capacity as
Directors of PHILIPPINE RACING CLUB, INC., petitioners, vs. MIGUEL OCAMPO TAN, JEMIE U.
TAN and ATTY. BRIGIDO J. DULAY, respondents.
G.R. Nos. 18145556. December 4, 2009.
SANTIAGO CUA, SR., in his capacity as Director of PHILIPPINE RACING CLUB, INC., petitioner, vs.
COURT OF APPEALS, MIGUEL OCAMPO TAN, JEMIE U. TAN, ATTY. BRIGIDO J. DULAY, and
HON. CESAR UNTALAN, Presiding Judge, Makati Regional Trial Court, Br. 149, respondents.
G.R. No. 182008. December 4, 2009.
CASE SUMMARY
28
Derivative Suits; Questions of policy and management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the
board of directors.
A stockholder or member may bring an action in the name of a corporation or association, as the case
may be, provided, that: (1) He was a stockholder or member at the time the acts or transactions subject of the
action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, bylaws,
laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are
available for the act or acts complained of; And (4) the suit is not a nuisance or harassment suit.
Where corporate directors are guilty of a breach of trustnot of mere error of judgment or abuse of
discretionand intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself
and other stockholders and for the benefit of the corporation.
The right to information which includes the right to inspect corporate books and records is a right
personal to each stockholder.
The corporation is the real party in interest in a derivative suit and the suing stockholder is only a nominal
party.
FACTS
PRCI is a corporation organized and established under Philippine laws to conduct business related to
horse track racing and other business connected thereto including public betting, raising horses, and breeding the
same.
Following the trend in the development of properties in the same area, 10 PRCI wished to convert its
Makati property from a racetrack to urban residential and commercial use. PRCI management decided to transfer
its racetrack from Makati to Cavite. PRCI began developing its Cavite property as a racetrack. (Secondary purpose
according to PRCIs AoI is to acquire real properties)
PRCI management decided that it was best to spin off the management and development of the same to
a wholly owned subsidiary, so that PRCI could continue to focus its efforts on pursuing its core business
competence of horse racing. Instead of organizing and establishing a new corporation for the said purpose, PRCI
management opted to acquire another domestic corporation, JTH Davies Holdings, Inc. PRCI entered into a Sale
and Purchase Agreement for the acquisition from JME of 41,928,290 common shares or 95.55% of the outstanding
capital stock of JTH.
On 10 July 2007, respondents Miguel, et al., as minority stockholders of PRCI, filed before the RTC a
Complaint, denominated as a Derivative Suit with prayer for Issuance of TRO/Preliminary Injunction, against the
rest of the directors of PRCI and/or JTH.
The Complaint was based on three causes of action: (1) the approval by the majority directors of PRCI
of the Board Resolutions dated 26 September 2006 and 11 May 2007 with undue haste and deliberate speed,
despite the absence of any disclosure and informationwas not only anomalous and fraudulent, but also
extremely prejudicial and inimical to interest of PRCI, committed in violation of their fiduciary duty as directors
of the said corporation; (2) respondent Solomon, as PRCI President, with the acquiescence of the majority
directors of PRCI, maliciously refused and resisted the request of respondents Miguel, et al., for complete and
adequate information relative to the disputed Board Resolutions, brazenly and unlawfully violating the rights of
the minority stockholders to information and to inspect corporate books and records; and (3) without being
officially and formally nominated, the majority directors of PRCI illegally and unlawfully constituted themselves
as members of the Board of Directors and/or Executive Officers of JTH, rendering all the actions they have taken
as such null and void ab initio. RTC issued a TRO thereof. CA affirmed RTC decision. Respondents questioned
the infirmities of Miguels complaint.
At the crux of the Complaint of respondents Miguel, et al., in Civil Case No. 07610 is their dissent from
the passage by the majority of the PRCI Board of Directors of the disputed resolutions, particularly: (1) the
Resolution dated 26 September 2006, authorizing the acquisition by PRCI of up to 100% of the common shares
of JTH; and (2) the Resolution dated 11 May 2007, approving the propertyforshares exchange between PRCI and
JTH.
ISSUE
Whether or not the derivative suit is properly constituted.
RULING
No. the court reversed the decision and lifted the TRO issued.
29
It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trustnot of
mere error of judgment or abuse of discretionand intracorporate remedy is futile or useless, a stockholder may
institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders.
Considering the claim of respondents Miguel, et al., that its Complaint in Civil Case No. 07610 is not
just a derivative suit, but also an intracorporate action arising from devices or schemes employed by the PRCI
Board of Directors amounting to fraud or misrepresentation. A thorough study of the said Complaint, however,
reveals that the distinction is deceptive. The supposed devices and schemes employed by the PRCI Board of
Directors amounting to fraud or misrepresentation are the very same bases for the derivative suit. They are the
very same acts of the PRCI Board of Directors that have supposedly caused injury to the corporation. From the
very beginning of their Complaint, respondents have alleged that they are filing the same as shareholders, for
and in behalf of the Corporation, in order to redress the wrongs committed against the Corporation and to protect
or vindicate corporate rights, and to prevent wastage and dissipation of corporate funds and assets and the further
commission of illegal acts by the Board of Directors. Although respondents Miguel, et al., also aver that they are
seeking redress for the injuries of the minority stockholders against the wrongdoings of the majority, the rest of
the Complaint does not bear this out, and is utterly lacking any allegation of injury personal to them or a certain
class of stockholders to which they belong.
A corporation, such as PRCI, is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such body. As to its corporate and management decisions,
therefore, the State will generally not interfere with the same. Questions of policy and of management are left to
the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute
their judgment for the judgment of the board of directors. The board is the business manager of the corporation,
and so long as it acts in good faith, its orders are not reviewable by the courts
the Court stresses that the corporation is the real party in interest in a derivative suit, and the suing
stockholder is only a nominal party: An individual stockholder is permitted to institute a derivative suit on behalf
of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials
of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions,
the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. For a
derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation
must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all
other stockholders similarly situated who may wish to join him in the suit. It is a condition sine qua non that the
corporation be impleaded as a party because not only is the corporation an indispensable party, but it is also the
present rule that it must be served with process.
12. SIMNY G. GUY, GERALDINE G. GUY, GLADYS G. YAO, and the HEIRS OF THE LATE
GRACE G. CHEU, petitioners, vs. GILBERT G. GUY, respondent.
G.R. No. 189486. September 5, 2012. *
CASE SUMMARY
In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground for
dismissal since such a defect can be cured by a bill of particulars. However, the same does not apply to intracorporate controversies. In cases governed by the Interim Rules of Procedure on IntraCorporate Controversies a
bill of particulars is a prohibited pleading. It is essential, therefore, for the complaint to show on its face what are
claimed to be the fraudulent corporate acts if the complainant wishes to invoke the courts special commercial
jurisdiction.
In all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated with
particularity to appraise the other party of what he is to be called on to answer, and so that it may be determined
whether the facts and circumstances alleged amount to fraud.
When a stock certificate is endorsed in blank by the owner thereof, it constitutes what is termed as street
certificate, so that upon its face, the holder is entitled to demand its transfer into his name from the issuing
corporation. Such certificate is deemed quasi-negotiable, and as such the transferee thereof is justified in believing
that it belongs to the holder and transferor.
FACTS
With their eldest son, Gaspar G. Guy (Gaspar), having entered the Missionary in spouses Guy put the
future of the Guy group of companies in Gilberts hands. Gilbert G. Guy (Gilbert) practically owned almost 80
percent of the 650,000 subscribed capital stock of GoodGold Realty & Development Corporation. GoodGolds
30
remaining shares were divided among Francisco Guy (Gilberts Father) with 130,000 shares, Simny Guy
(Gilberts Mother), Benjamin Lim and Paulino Delfin Pe, with one share each, respectively.
In 1999, the aging Francisco instructed Benjamin Lim, a nominal shareholder of GoodGold and his
trusted employee to collaborate with Atty. Emmanuel Paras, to redistribute GoodGolds shareholdings evenly
among his children while maintaining a proportionate share for himself and his wife, Simny.
Five years after the redistribution of GGs shares of stock, Gilbert filed with the RTC of Manila, a
Complaint for the to declare the distribution null and void and prayed for injuction against his mother, Simny, and
his sisters.
Gilbert alleged, among others, that no stock certificate ever existed; that his signature at the back of the
spurious Stock Certificate Nos. 004014 which purportedly endorsed the same were forged, and, hence, should be
nullified. It was later withdrawn by Gilbert after the National Bureau of Investigation (NBI) submitted a report to
the RTC of Manila authenticating Gilberts signature in the endorsed certificates.
Gilbert again filed another case, now with the RTC of Mandaluyong alleging the same that he never
signed any document which would justify and support the transfer of his shares to his siblings and that he has in
no way, disposed, alienated, encumbered, assigned or sold any or part of his shares in GoodGold. Gilbert added
that the Amended General Information Sheets (GIS) of GoodGold for the years 2000 to 2004 which his siblings
submitted to the Securities and Exchange Commission (SEC) were spurious as these did not reflect his true shares
in the corporation which supposedly totaled to 595,000 shares; that no valid stockholders annual to 595,000
shares.
Gilberts siblings filed a manifestation claiming that the complaint is a nuisance and harassment suit,
which was granted by the RTC. Hence, a petition for certiorari.
ISSUE
1. Whether or not specific fraudulent allegation is required in an intracorporate suit?
2. May a holder of a street certificate demand its transfer to its name from the issuing corporation?
RULING
1. Yes. Failure to specifically allege the fraudulent acts in intracorporate controversies is indicative of a
harassment or nuisance suit and may be dismissed motu proprio. It did not escape us that Gilbert, instead of
particularly describing the fraudulent acts that he complained of, just made a sweeping denial of the existence of
stock certificates by claiming that such were not necessary, GoodGold being a mere family corporation. 55 As
sweeping and bereft of particulars is his claim that he is unaware of any document signed by him that would
justify and support the transfer of his shares to herein petitioners. 56 Even more telling is the contradiction
between the denial of the existence of stock certificates and the denial of the transfer of his shares of stocks under
his name under the books of the corporations. It is unexplained that while Gilbert questioned the authenticity of
his signatures indorsing the stock certificates, and that of Atty. Emmanuel Paras, the corporate secretary, he did
not put in issue as doubtful the signature of his father which also appeared in the certificate as President of the
corporation. Notably, Gilbert, during the entire controversy that started with his 2004 complaint, failed to rebut
the NBI Report which authenticated all the signatures appearing in the stock certificates.
2. Yes. When a stock certificate is endorsed in blank by the owner thereof, it constitutes what is termed
as street certificate, so that upon its face, the holder is entitled to demand its transfer his name from the issuing
corporation. With Gilberts failure to allege specific acts of fraud in his complaint and his failure to rebut the NBI
report, this Court pronounces, as a consequence thereof, that the signatures appearing on the stock certificates,
including his blank endorsement thereon were authentic. With the stock certificates having been endorsed in blank
by Gilbert, which he himself delivered to his parents, the same can be cancelled and transferred in the names of
herein petitioners.
31

Corpo Digest Compilation SIXTH FINAL

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Corporation Law Digest Part 6

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