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Mercantile Law

FRIA

Under the Interim Rules, rehabilitation is the process of restoring "the debtor to a position of successful
operation and solvency, if it is shown that its continuance of operation 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 that if it is immediately liquidated." 21 It contemplates a
continuance of corporate life and activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency. 22

In Asiatrust Development Bank v. First Aikka Development, Inc., 23 we said that rehabilitation
proceedings have a two-pronged purpose, namely: (a) to efficiently and equitably distribute the assets
of the insolvent debtor to its creditors; and (b) to provide the debtor with a fresh start, viz.:

Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative purposes. On the one
hand, they attempt to provide for the efficient and equitable distribution of an insolvent debtor's
remaining assets to its creditors; and on the other, to provide debtors with a "fresh start" by relieving
them of the weight of their outstanding debts and permitting them to reorganize their affairs. The
purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby
allow creditors to be paid their claims from its earnings. 24

Consequently, the basic issues in rehabilitation proceedings concern the viability and desirability of
continuing the business operations of the petitioning corporation. The determination of such issues was
to be carried out by the court-appointed rehabilitation receiver, 25 who was Cacho in this case.

Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act (FRIA) of 2010), a law
that is applicable hereto, 26 has defined a corporate debtor as a corporation duly organized and existing
under Philippine laws that has become insolvent. 27 The term insolvent is defined in Republic Act No.
10142 as "the financial condition of a debtor that is generally unable to pay its or his liabilities as they
fall due in the ordinary course of business or has liabilities that are greater than its or his assets." 28 As
such, the contention that rehabilitation becomes inappropriate because of the perceived insolvency of
Basic Polyprinters was incorrect.

||| (Phil. Bank of Communications v. Basic Polyprinters and Packaging Corp., G.R. No. 187581, [October
20, 2014])

A material financial commitment becomes significant in gauging the resolve, determination, earnestness
and good faith of the distressed corporation in financing the proposed rehabilitation plan. 30 This
commitment may include the voluntary undertakings of the stockholders or the would-be investors of
the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property
to guarantee the continued successful operation of the debtor corporation during the period of
rehabilitation. 31

Basic Polyprinters presented financial commitments, as follows:

(a) Additional P10 million working capital to be sourced from the insurance claim;
(b) Conversion of the directors' and shareholders' deposit for future subscription to common stock; 32

(c) Conversion of substituted liabilities, if any, to additional paid-in capital to increase the company's
equity; and

(d) All liabilities (cash advances made by the stockholders) of the company from the officers and
stockholders shall be treated as trade payables. 33

However, these financial commitments were insufficient for the purpose. We explain.

The commitment to add P10,000,000.00 working capital appeared to be doubtful considering that the
insurance claim from which said working capital would be sourced had already been written-off by Basic
Polyprinters's affiliate, Wonder Book Corporation. 34 A claim that has been written-off is considered a
bad debt or a worthless asset, 35 and cannot be deemed a material financial commitment for purposes
of rehabilitation. At any rate, the proposed additional P10,000,000.00 working capital was insufficient to
cover at least half of the shareholders' deficit that amounted to P23,316,044.00 as of June 30, 2006.

We also declared in Wonder Book Corporation v. Philippine Bank of Communications (Wonder Book) 36
that the conversion of all deposits for future subscriptions to common stock and the treatment of all
payables to officers and stockholders as trade payables was hardly constituting material financial
commitments. Such "conversion" of cash advances to trade payables was, in fact, a mere re-
classification of the liability entry and had no effect on the shareholders' deficit. On the other hand, we
cannot determine the effect of the "conversion" of the directors' and shareholders' deposits for future
subscription to common stock and substituted liabilities on the shareholders' deficit because their
amounts were not reflected in the financial statements contained in the rollo.

Basic Polyprinters's rehabilitation plan likewise failed to offer any proposal on how it intended to
address the low demands for their products and the effect of direct competition from stores like SM,
Gaisano, Robinsons, and other malls. Even the P245 million insurance claim that was supposed to cover
the destroyed inventories worth P264 million appears to have been written-off with no probability of
being realized later on.

We observe, too, that Basic Polyprinters's proposal to enter into the dacion en pago to create a source
of "fresh capital" was not feasible because the object thereof would not be its own property but one
belonging to its affiliate, TOL Realty and Development Corporation, a corporation also undergoing
rehabilitation. Moreover, the negotiations (for the return of books and magazines from Basic
Polyprinters's trade creditors) did not partake of a voluntary undertaking because no actual financial
commitments had been made thereon.

Worthy of note here is that Wonder Book Corporation was a sister company of Basic Polyprinters, being
one of the corporations that had filed the joint petition for suspension of payments and rehabilitation in
SEC Case No. 031-04 adverted to earlier. Both of them submitted identical commitments in their
respective rehabilitation plans. As a result, as the Court observed in Wonder Book, 37 the commitments
by Basic Polyprinters could not be considered as firm assurances that could convince creditors, future
investors and the general public of its financial and operational viability.

Due to the rehabilitation plan being an indispensable requirement in corporate rehabilitation


proceedings, 38 Basic Polyprinters was expected to exert a conscious effort in formulating the same, for
such plan would spell the future not only for itself but also for its creditors and the public in general. The
contents and execution of the rehabilitation plan could not be taken lightly.

||| (Phil. Bank of Communications v. Basic Polyprinters and Packaging Corp., G.R. No. 187581, [October
20, 2014])

ISL

The penalty for the child abuse committed by the petitioner is that prescribed in Section 10 (a) of
Republic Act No. 7610, viz.:

Section 10. Other Acts of Neglect, Abuse, Cruelty or Exploitation and Other Conditions Prejudicial to the
Child's Development.

(a) Any person who shall commit any other acts of child abuse, cruelty or exploitation or to be
responsible for other conditions prejudicial to the child's development including those covered by
Article 59 of Presidential Decree No. 603, as amended, but not covered by the Revised Penal Code, as
amended, shall suffer the penalty of prision mayor in its minimum period.

xxx xxx xxx

The CA revised the penalty fixed by the RTC by imposing the indeterminate penalty of four years, two
months and one day of prision correccional, as minimum, to 10 years and one day of prision mayor, as
the maximum, on the ground that the offense was aggravated by the petitioner being a public
schoolteacher. 23 It cited Section 31 (e) of Republic Act No. 7610, which commands that the penalty
provided in the Act "shall be imposed in its maximum period if the offender is a public officer or
employee." Her being a public schoolteacher was alleged in the information and established by evidence
as well as admitted by her. The revised penalty was erroneous, however, because Section 10 (a) of
Republic Act No. 7610 punishes the crime committed by the petitioner with prision mayor in its
minimum period, whose three periods are six years and one day to six years and eight months, for the
minimum period; six years, eight months and one day to seven years and four months, for the medium
period; and seven years, four months and one day to eight years, for the maximum period. The
maximum of the indeterminate sentence should come from the maximum period, therefore, and the
Court fixes it at seven years, four months and one day of prision mayor. The minimum of the
indeterminate sentence should come from prision correccional in the maximum period, the penalty next
lower than prision mayor in its minimum period, whose range is from four years, two months and one
day to six years. Accordingly, the minimum of the indeterminate sentence is four years, nine months and
11 days, and the maximum is seven years, four months and one day of prision mayor.

||| (Rosaldes v. People, G.R. No. 173988, [October 8, 2014])

STOCK CERTIFICATE

A stock certificate is prima facie evidence that the holder is a shareholder of the corporation, 28 but the
possession of the certificate is not the sole determining factor of one's stock ownership. A certificate of
stock is merely:
. . . the paper representative or tangible evidence of the stock itself and of the various interests therein.
The certificate is not stock in the corporation but is merely evidence of the holder's interest and status
in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of
such ownership. It expresses the contract between the corporation and the stockholder, but it is not
essential to the existence of a share in stock or the creation of the relation of shareholder to the
corporation. 29 (Emphasis supplied.)
To establish their stock ownership, the petitioners actually turned over to the trial court through their
Compliance and Manifestation submitted on April 7, 2010 the various documents showing their
ownership of Abra Valley's shares, 30 specifically: the official receipts of their payments for their
subscriptions of the shares of Abra Valley; and the copies duly certified by the Securities and Exchange
Commission (SEC) stating that Abra Valley had issued shares in favor of the petitioners, such as the
issuance of part of authorized and unissued capital stock; the letter dated June 17, 1987; the secretary's
certificate dated June 17, 1987; and the general information sheet.

A person becomes a stockholder of a corporation by acquiring a share through either purchase or


subscription. Here, the petitioners acquired their shares in Abra Valley: (1) by subscribing to 36 shares
each from Abra Valley's authorized and unissued capital stock; 35 and (2) by purchasing the
shareholdings of existing stockholders, as borne out by the latter's indorsement on the stock certificates.
36
In determining the validity of the transfer of shares through purchase, we resort to Section 63 of the
Corporation Code, which pertinently provides:
Section 63. Certificate of stock and transfer of shares. . . . Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates indorsed by the owner or
his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation.
In this regard, the Court has instructed in Ponce v. Alsons Cement Corporation 37 that:
. . . [A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-
existent as far as the corporation is concerned. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the purpose of
determining who its shareholders are. It is only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From
this time, the consequent obligation on the part of the corporation to recognize such rights as it is
mandated by law to recognize arises.
Nonetheless, in Lanuza v. Court of Appeals, 38 the Court has underscored that the STB is not the
exclusive evidence of the matters and things that ordinarily are or should be written therein, for parol
evidence may be admitted to supply omissions from the records, or to explain ambiguities, or to
contradict such records, to wit:
. . . [A] stock and transfer book is the book which records the names and addresses of all stockholders
arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been
made, and the date of payment thereof; a statement of every alienation, sale or transfer of stock made,
the date thereof and by and to whom made; and such other entries as may be prescribed by law. A stock
and transfer book is necessary as a measure of precaution, expediency and convenience since it
provides the only certain and accurate method of establishing the various corporate acts and
transactions and of showing the ownership of stock and like matters. However, a stock and transfer
book, like other corporate books and records, is not in any sense a public record, and thus is not
exclusive evidence of the matters and things which ordinarily are or should be written therein. In fact, it
is generally held that the records and minutes of a corporation are not conclusive even against the
corporation but are prima facie evidence only, and may be impeached or even contradicted by other
competent evidence. Thus, parol evidence may be admitted to supply omissions in the records or
explain ambiguities, or to contradict such records. (Emphasis supplied.)
Considering that Abra Valley's STB was not in the possession of the petitioners, or at their disposal, they
could not be reasonably expected or justly compelled to prove that their stock subscriptions and
purchases were recorded therein.
||| (Insigne v. Abra Valley Colleges, Inc., G.R. No. 204089 , [July 29, 2015])

RIGHT TO INSPECT BOOKS

The Corporation Code has granted to all stockholders the right to inspect the corporate books and
records, and in so doing has not required any specific amount of interest for the exercise of the right to
inspect. 15 Ubi lex non distinguit nec nos distinguere debemos. When the law has made no distinction,
we ought not to recognize any distinction. AIDSTE
The petitioner's submission that the respondent's "insignificant holding" of only .001% of the
petitioner's stockholding did not justify the granting of her application for inspection of the corporate
books and records is unwarranted.
Neither could the petitioner arbitrarily deny the respondent's right to inspect the corporate books and
records on the basis that her inspection would be used for a doubtful or dubious reason. Under Section
74, third paragraph, of the Corporation Code, the only time when the demand to examine and copy the
corporation's records and minutes could be refused is when the corporation puts up as a defense to any
action that "the person demanding" had "improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his demand."
The right of the shareholder to inspect the books and records of the petitioner should not be made
subject to the condition of a showing of any particular dispute or of proving any mismanagement or
other occasion rendering an examination proper, but if the right is to be denied, the burden of proof is
upon the corporation to show that the purpose of the shareholder is improper, by way of defense.
According to a recognized commentator: 16
By early English decisions it was formerly held that there must be something more than bare suspicion
of mismanagement or fraud. There must be some particular controversy or question in which the party
applying was interested, and inspection would be granted only so far as necessary for that particular
occasion. By the general rule in the United States, however, shareholders have a right to inspect the
books and papers of the corporation without first showing any particular dispute or proving any
mismanagement or other occasion rendering an examination proper. The privilege, however, is not
absolute and the corporation may show in defense that the applicant is acting from wrongful motives.
In Guthrie v. Harkness, there was involved the right of a shareholder in a national bank to inspect its
books for the purpose of ascertaining whether the business affairs of the bank had been conducted
according to law, and whether, as suspected, the bank was guilty of irregularities. The court said: "The
decisive weight of American authority recognizes the right of the shareholder, for proper purposes and
under reasonable regulations as to place and time, to inspect the books of the corporation of which he is
a member . . . In issuing the writ of mandamus the court will exercise a sound discretion and grant the
right under proper safeguards to protect the interest of all concerned. The writ should not be granted
for speculative purposes or to gratify idle curiosity or to aid a blackmailer, but it may not be denied to
the stockholder who seeks the information for legitimate purposes."
Among the purposes held to justify a demand for inspection are the following: (1) To ascertain the
financial condition of the company or the propriety of dividends; (2) the value of the shares of stock for
sale or investment; (3) whether there has been mismanagement; (4) in anticipation of shareholders'
meetings to obtain a mailing list of shareholders to solicit proxies or influence voting; (5) to obtain
information in aid of litigation with the corporation or its officers as to corporate transactions. Among
the improper purposes which may justify denial of the right of inspection are: (1) Obtaining of
information as to business secrets or to aid a competitor; (2) to secure business "prospects" or
investment or advertising lists; (3) to find technical defects in corporate transactions in order to bring
"strike suits" for purposes of blackmail or extortion. SDAaTC
In general, however, officers and directors have no legal authority to close the office doors against
shareholders for whom they are only agents, and withhold from them the right to inspect the books
which furnishes the most effective method of gaining information which the law has provided, on mere
doubt or suspicion as to the motives of the shareholder. While there is some conflict of authority, when
an inspection by a shareholder is contested, the burden is usually held to be upon the corporation to
establish a probability that the applicant is attempting to gain inspection for a purpose not connected
with his interests as a shareholder, or that his purpose is otherwise improper. The burden is not upon
the petitioner to show the propriety of his examination or that the refusal by the officers or directors
was wrongful, except under statutory provisions.
||| (Terelay Investment and Development Corp. v. Yulo, G.R. No. 160924, [August 5, 2015])

SEPARATE JURIDICAL PERSONALITY

Given the separate and distinct legal personality of Arc Cuisine, Inc., the Cuencas and Tayactac lacked
the legal personality to claim the damages sustained from the levy of the former's properties. According
to Asset Privatization Trust v. Court of Appeals, 44 even when the foreclosure on the assets of the
corporation was wrongful and done in bad faith the stockholders had no standing to recover for
themselves moral damages; otherwise, they would be appropriating and distributing part of the
corporation's assets prior to the dissolution of the corporation and the liquidation of its debts and
liabilities. Moreover, in Evangelista v. Santos, 45 the Court, resolving whether or not the minority
stockholders had the right to bring an action for damages against the principal officers of the
corporation for their own benefit, said:

As to the second question, the complaint shows that the action is for damages resulting from
mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that
defendant's maladministration has brought about the ruin of the corporation and the consequent loss of
value of its stocks. The injury complained of is thus primarily to the corporation, so that the suit for the
damages claimed should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia
of Corporation pp. 977-980). The stockholders may not directly claim those damages for themselves for
that would result in the appropriation by, and the distribution among them of part of the corporate
assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something
which cannot be legally done in view of section 16 of the Corporation Law, which provides:

No shall corporation shall make or declare any stock or bond dividend or any dividend whatsoever
except from the surplus profits arising from its business, or divide or distribute its capital stock or
property other than actual profits among its members or stockholders until after the payment of its
debts and the termination of its existence by limitation or lawful dissolution.
xxx xxx xxx
In the present case, the plaintiff stockholders have brought the action not for the benefit of the
corporation but for their own benefit, since they ask that the defendant make good the losses
occasioned by his mismanagement and pay to them the value of their respective participation in the
corporate assets on the basis of their respective holdings. Clearly, this cannot be done until all corporate
debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its
charter or by lawful dissolution in view of the provisions of section 16 of the Corporation Law. (Emphasis
ours) DaHcAS

It results that plaintiff's complaint shows no cause of action in their favor so that the lower court did not
err in dismissing the complaint on that ground.

While plaintiffs ask for remedy to which they are not entitled unless the requirement of section 16 of
the Corporation Law be first complied with, we note that the action stated in their complaint is
susceptible of being converted into a derivative suit for the benefit of the corporation by a mere change
in the prayer. Such amendment, however, is not possible now, since the complaint has been filed in the
wrong court, so that the same has to be dismissed. 46

That Maraon knew that Arc Cuisine, Inc. owned the properties levied on attachment but he still
excluded Arc Cuisine, Inc. from his complaint was of no consequence now. The Cuencas and Tayactac
still had no right of action even if the affected properties were then under their custody at the time of
the attachment, considering that their custody was only incidental to the operation of the corporation.

It is true, too, that the Cuencas and Tayactac could bring in behalf of Arc Cuisine, Inc. a proper action to
recover damages resulting from the attachment. Such action would be one directly brought in the name
of the corporation. Yet, that was not true here, for, instead, the Cuencas and Tayactac presented the
claim in their own names.

||| (Stronghold Insurance Co., Inc. v. Cuenca, G.R. No. 173297, [March 6, 2013], 705 PHIL 441-460)